ASST CIT 20(1), MUMBAI V. ANANT & COMPANY, MUMBAI

ITA 1198/MUM/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7943 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-08-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 12-06-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 09-02-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business expenditure; Proportionate interest; Commercial expediency

Judgement Text

, INCOME TAX APPELLATE TRIBUNALMUMBAI BENCH ES I MUMBAI , , ! BEFORE S.SH.VIJAY PAL RAO,JUDICIAL MEMBER AND RAJEN DRA,ACCOUNTANT MEMBER ./ ITA NO.1198/MUM/2011 ' ' ' ' # # # # / ASSESSMENT YEAR 2007-08 ( $% / APPELLANT) ( &'$% / RESPONDENT) &'! ./ C.O. NO. 142/MUM/2013 ' ' ' ' # # # # / ASSESSMENT YEAR 2007-08 ( $% / APPELLANT) ( &'$% / RESPONDENT) ./ ITA NO.1437/MUM/2011 ' ' ' ' # # # # / ASSESSMENT YEAR 2007-08 ( $% / APPELLANT) ( &'$% / RESPONDENT) ) * / REVENUE BY : AMRITA SINGH '+, '+, '+, '+, * * * * / ASSESSEE BY : SHRI VIJAY MEHTA ' ' ' ' ) )) ) ,- ,- ,- ,- / DATE OF HEARING : 22/07/2014 ./# ) ,- / DATE OF PRONOUNCEMENT : 13/08/2014 PER RAJENDRA,AM ' ' ' ' : ASSESSEE-COMPANT AS WELL AS ASSESSING OFFICER (AO) HAS FILED CROSS APPEALS FOR THE YEAR UNDER CONSIDERATION.ASSESSEE HAS ALSO FILED CROSS OBJECTI ONS. GROUNDS OF APPEAL FILED BY THE ASSESSEE READS AS UNDER: 1. OBJECTION AGAINST CONFIRMING DISALLOWANCE OF INT EREST @11.2% ON AN AMOUNT OF RS.85,40,685/- 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME TAX -31 [HEREIN REFERRED TO AS 'CIT(A)' ] HAS ERRED IN SUSTAINING ADDITION OF INTEREST ON THE INTEREST FRE E LOAN OF RS.85,40,685/- ON THE GROUND THAT INTEREST BEARING FUNDS HAVE BEEN ADVANCED TO GROUP COMPANIES/PARTNERS WITHOUT CHARGING INTEREST. 1.2 THE APPELLANT SUBMITS THAT THE ENTIRE ADVANCE O F RS.2.70 CR. TO ITS SISTER CONCERN AVIK PHARMACEUTICALS LIMITED WAS GIVEN FOR BUSINESS PURP OSE AND OUT OF COMMERCIAL EXPEDIENCY AND HENCE NO DISALLOWANCE OF INTEREST IS CALLED FOR. ACIT-20(1), R. NO. 603, 6TH FLOOR, PIRAMAL CHAMBERS, LALBAUG, MUMBAI-400012 VS M/S. ANANT & COMPANY, 194, ARVIND CHAMBERS, GAURI STUDIO COMPUND, WESTERN EXPRESS HIGHWAY, ANDHERI(E), MUMBAI-69 PAN:AAEFA5909N M/S. ANANT & COMPANY, 194, ARVIND CHAMBERS, GAURI STUDIO COMPUND, WESTERN EXPRESS HIGHWAY, ANDHERI(E), MUMBAI-69 PAN:AAEFA5909N VS ACIT-20(1), R. NO. 603, 6TH FLOOR, PIRAMAL CHAMBERS, LALBAUG, MUMBAI-400012 M/S. ANANT & COMPANY, 194, ARVIND CHAMBERS, GAURI STUDIO COMPUND, WESTERN EXPRESS HIGHWAY, ANDHERI(E), MUMBAI-69 PAN:AAEFA5909N VS ACIT-20(1), R. NO. 603, 6TH FLOOR, PIRAMAL CHAMBERS, LALBAUG, MUMBAI-400012 ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 2 1.3 THE AO HAS FURTHER MISUNDERSTOOD IN COMING TO T HE CONCLUSION THAT APPELLANT WAS NOT HAVING ANY BUSINESS RELATIONSHIP WITH M/S. AVIK PHARMACEUTICAL S LTD. 1.4 THE APPELLANT SUBMITS THAT ONCE THE ADVANCE TO AVIK PHARMACEUTICALS LTD. OF RS.2.7CR IS CONSIDERED FOR THE BUSINESS PURPOSE, IT HAS SUFFICI ENT OWN FUNDS TO ADVANCE TO PARTNERS AND HENCE, NO DISALLOWANCE IS CALLED FOR ON THE DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNTS OF RS.56,06,188/-. 1.5 THE APPELLANT THEREFORE PRAYS YOUR HONOUR TO DI RECT THE AO TO DELETE THE ADDITION ON ACCOUNT OF INTEREST CALCULATED @11.2% ON RS.85,40,685/-. THE APPELLANT RESPECTFULLY CRAVES LEAVE TO ADD TO, ALTER OR AMEND ANY OF THE ABOVE GROUNDS OF APPEAL. AO HAS FILED FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE I N DELETING THE ADDITIONS MADE OF RS. 10,12,321/- POUT OF THE REGISTRATION EXPENSES CLAIMED BY THE AS SESSEE TO THE TUNE OF RS. 22,29,255/-. 2. IN LAW AND IN THE CIRCUMSTANCES OF THE CASE IN DELE TING THE ADDITION OF RS. 28,80,360/- OUT OF THE TOTAL ADDITION OF RS. 38,36,917/- U/S 36(1)(III) ON ACCOUNT OF DIVERTING INTEREST BEARING LOANS TO INTEREST FREE LOANS. 3. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(APPEA LS) ON THE ABOVE GROUND TO BE SET ASIDE AND THAT OF THE ASSESSING OFFICER BE RESTORED. 4. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GR OUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. THE GROUNDS OF APPEAL FILED BY THE ASSESSEE FOR THE CROSS OBJECTIONS ARE AS UNDER: I. DISALLOWANCE OUT OF PRODUCT REGISTRATION EXPENSE S AMOUNTING TO RS. 1,64,210/- 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) HEREINAFTER REFERRED TO AS CIT (A) HAS ER RED IN SUSTAINING THE DISALLOWANCE OF RS. 1,64,210 OUT OF THE PRODUCTS DEVELOPMENT EXPENSE OF RS. 10,1 2,231. 1.2 THE APPELLANT HAS NEVER ACCEPTED THAT THE DISAL LOWANCE OF RS 1,64,210 MAY BE SUSTAINED AS MENTIONED IN PARA 3.2.3 , PAGE 6 OF THE CIT (A) ORD ER. 1.3 THE AMOUNT OF RS. 1,64,210 IS AN ALLOWABLE DEDU CTION U/S28/37(1) OF THE INCOME TAX BEING INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. 1.4 WITHOUT PREJUDICE TO THE ABOVE, THE AO HAS ERRE D IN TAKING THE GROUND THAT DISALLOWANCE SHOULD BE SUSTAINED AT RS. 10,12,321 WHEREAS THE NET EXPEN SES POST RECOVERY FROM THE FOREIGN PRINCIPALS WERE ONLY RS. 7,87,010. II. OBJECTION AGAINST CONFIRMING DISALLOWANCE OF IN TEREST @11.2% ON AN AMOUNT OF RS.85,40,685/-. 2.1 WITHOUT PREJUDICE TO THE GROUNDS TAKEN BY THE A PPELLANT, THE LEARNED CIT(A) ERRED IN HOLDING THAT THE NET POSITION OF INTEREST FREE FUNDS' AVAILABLE WITH THE APPELLANT AS ON 31.3.2007, IS TO BE TAKEN INTO CONSIDERATION TO DECIDE WHETHER THE APPELLANT HAS SUFFICIENT INTEREST FREE FUNDS TO GRANT INTERES T FREE LOANS TO ITS GROUP CONCERNS. 2.2 THE LEARNED CIT(A) FAILED IN APPRECIATING THE F ACT THAT THE UNSECURED LOAN OF RS. 1A3,37,000 WAS GIVEN TO THE ASSOCIATE CONCERN DURING THE FY 1996-9 7 AND THE SAME WAS CARRIED FORWARD WITHOUT ANY CHANGE TILL THE END OF THE CAPTIONED ASSESSMENT YEA R, THE POSITION OF INTEREST FREE FUNDS SHOULD BE SEEN AS ON 31.3.1997 AND NOT AS ON 31.03.2007. THE APPELLANT RESPECTFULLY CRAVES LEAVE TO ADD TO, ALTER OR AMEND ANY OF THE ABOVE GROUNDS OF CROSS OBJECTIONS. 2.ASSESSEE-FIRM, ENGAGED IN THE BUSINESS OF INDENTI NG IN PHARMACEUTICALS & CHEMICALS FILED ITS RETURN OF INCOME ON 30.03.2009 DECLARING TOTAL INCO ME OF RS.72.83 LAKHS.AO FINALISED THE ASSESSMENT U/S.143(3) OF THE ACT ON 23.11.2009,DETE RMINING THE INCOME OF THE ASSESSEE AT RS. 1.26 CRORES. 3. THE EFFECTIVE GROUND OF APPEAL IS ABOUT DISALLOWANC E OF INTEREST EXPENDITURE,AMOUNTING TO RS. 38.36 LAKHS.DURING THE ASSESSMENT PROCEEDINGS,THE A O FOUND THAT THE ASSESSEE HAD PAID INTEREST ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 3 OF RS.44.35 LAKHS ON THE LOANS RAISED.ON PERUSAL OF THE BALANCE-SHEET AND NOTES TO ACCOUNTS,HE FURTHER FOUND THAT IT HAD ADVANCED HUGE LOANS TO AS SOCIATE CONCERN WITHOUT CHARGING ANY INTEREST, THAT RS. 2.86 CRORES WERE ADVANCED TO ITS GROUP CON CERNED M/S.AVIK PHARMACEUTICALS LTD.(APL). HE ASKED THE ASSESSEE WHETHER THERE WAS ANY BUSINES S RELATION IN TERMS OF PURCHASE/SALE WITH THE SAID AMOUNT AND WHY THE LOAN WAS ADVANCED WITHOUT C HARGING INTEREST.AS PER THE AO,IT ADMITTED THAT THERE WAS NO BUSINESS RELATION WITH THE APL,TH AT IT WAS IN FINANCIAL TROUBLE,THAT IT WAS A SICK UNIT AND MATTER WAS PENDING BEFORE THE BIFR,THAT NO INTEREST WAS CHARGED FOR THAT REASON.HE FURTHER FOUND THAT PARTNERSCAPITAL ACCOUNTS SHOWED THAT IT HAD A NEGATIVE CAPITAL BALANCE OF RS.56.06 LAKHS AS ON 01.04.2006,THAT THE CLOSING BA LANCE FIGURES HAD CHANGED BECAUSE THE IT HAD CREDITED A GOODWILL RESERVE OF RS. 3.57CRORES,THAT THE GOODWILL WAS CREDITED TO ALL THE PARTNERS ACCOUNTS,THAT NO INTEREST WAS CHARGED FROM THE PART NERS ON THE NEGATIVE CAPITAL BALANCE THOUGH THE ASSESSEE WAS PAYING INTEREST TO THE PARTNERS.HE HEL D THAT THE ONUS WAS ON THE ASSESSEE TO PROVE THAT INTEREST BEARING FUNDS WERE GIVEN AS INTEREST FREE LOAN OUT OF COMMERCIAL EXPEDIENCY, THAT IN THE CASE UNDER CONSIDERATION FULL FACTS WERE NOT AV AILABLE,THAT CORRESPONDING INTEREST HAD TO BE DISALLOWED.FINALLY,HE HELD THAT TOTAL INTEREST FREE LOANS GIVEN TO SISTER CONCERN AND PARTNERS AMOUNTED TO RS.3.42 CRORES. HE ADOPTED THE INTEREST RATE OF 11.2% AND MADE A DISALLOWANCE OF RS.38,36,917/-. 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILED AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS ARGUED THAT THERE WAS COMMERCIAL EXPEDIENCY ABOUT THE TRANS - ACTIONS CARRIED OUT BY THE ASSESSEE WITH ITS ASSOCI ATE CONCERN, THAT LOAN AMOUNTING TO RS.2.70 CRORES AND NOT OF RS. 2.86 CRORES,WAS ADVANCED TO A PL,THAT THE AMOUNT ADVANCED TO APL IN THE YEAR 1997 HAD TWO PARTS,THAT FIRST WAS ON ACCOUNT O F THE BUSINESS TRANSACTION AND THE OTHER ON ACCOUNT OF LOAN TRANSACTION, THAT THE DEBIT BALANCE S AS ON 31.03.2007 ON ACCOUNT OF BUSINESS TRANSACTION WERE OF RS.1.25 CRORES AND 1.53 CRORES RESPECTIVELY, ASSESSEE WAS HAVING ONLY ONE ACCOUNT OF ITS ASSOCIATE CONCERN APL TILL FY 1996-9 7, THAT AT THE END OF THE SAID FY IT BIFURCATED ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 4 THE ACCOUNT INTO TWO SEPARATE ACCOUNTS I.E. PERTAIN ING TO UNSECURED LOAN AND BUSINESS TRANSACTION ACCOUNT, THAT NO INTEREST ON AMOUNT DUE TO APL WAS PAID BY THE ASSESSEE FOR THE AY 1996-97 TO 2001-02 NOR ANY WAS CHARGED ON THE AMOUNTS DUE FOR THE FY 1995-96 AND 2002-03 TO 2006-07, THAT THESE TRANSACTIONS WERE ON ACCOUNT OF DAY TO D AY NORMAL BUSINESS TRANSACTIONS PERTAINING TO GROUP CONCERN, THAT IT WAS A PURE BUSINESS TRANSACT ION AND WAS COMMERCIAL EXPEDIENCY, THAT THE AO COULD NOT STEP INTO SHOOS OF THE ASSESSEE SO AS TO DIRECT IT TO CHARGE INTEREST ON THE AMOUNTS DUE FROM ITS ASSOCIATE CONCERN.REGARDING THE UNSECU RED LOAN TRANSACTIONS OF RS. 1.43 CRORES, IT WAS ARGUED THAT THE SOURCE THEREOF IN THE FY 1996-9 7 WAS OUT OF INTEREST FUNDS AVAILABLE WITH THE ASSESSEE AS ON 31.03.1997 AND NOT OUT OF THE INTERE ST BEARING FUNDS OF THE ASSESSEE, THAT AO WAS NOT JUSTIFIED IN CONCLUDING THAT THE INTEREST FREE LOAN GIVEN TO APL WAS OUT OF INTEREST BEARING FUNDS, THAT THE PROPORTIONATE DISALLOWANCE OF INTER EST WAS CLAIMED IN ITS P&L ACCOUNT. 3.2. AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE,FA A DIRECTED IT TO FURNISH COMPLETE DETAILS OF INTEREST FREE FUNDS/INTEREST BEARING FUNDS AVAILABL E WITH IT AS ON 31.03.1997,COMPLETE LEDGER ACCOUNT SHOWING THE BIFURCATION OF EARLIER ACCOUNT OF APPEARING IN APL ITS BOOKS OF ACCOUNTS. HE FURTHER DIRECTED THE ASSESSEE-FIRM TO CORROBORATE T HE SUBMISSION THAT THE INTEREST FREE LOAN GIVEN TO APL IN 1996-97WAS SOURCED OUT OF INTEREST FREE FUND S.IT WAS ADMITTED BEFORE HIM THAT THE UNSECURED LOAN ACCOUNT WAS BIFURCATED OUT OF THE RE GULAR LEDGER ACCOUNT OF APL IN THE BOOKS OF THE ASSESSEE,THAT THE DIRECT NEXUS OF INTEREST FREE UNSECURED LOAN GIVEN OUT INTEREST FUNDS AVAIL - ABLE WITH THE ASSESSEE COULD NOT BE PROVED.RELYING UPON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIANCE UTILITY AND POWE R LTD.(313 ITR 340),IT SUBMITTED THAT SUFFICIE -NT INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASS ESSEE TO MEET THE INTEREST FREE UNSECURED LOAN GIVEN TO ITS ASSOCIATE CONCERN,THAT AO WAS NOT JUST IFIED IN HOLDING THAT INTEREST FREE LOAN GIVEN TO APL WAS OUT OF INTEREST BEARING FUNDS.TAKING NOTE O F THE SUBMISSION OF THE ASSESSEE AND THE DETAILS FILED BY IT,HE HELD THAT TOTAL AMOUNT DUE F ROM APL AS ON 31.03.2007 WAS OF RS.2.70 CRORES, THAT THE ASSESSEE WAS HAVING TWO ACCOUNTS OF APL,TH AT TILL FY 1996-97 IT WAS HAVING ONLY ONE ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 5 COMBINED ACCOUNT IN ITS BOOKS OF ACCOUNTS,THAT AT T HE END OF THAT YEAR IT BIFURCATED THE ACCOUNT INTO BUSINESS TRANSACTION ACCOUNT AND LOAN ACCOUNT, THAT IN THE BUSINESS TRANSACTION ACCOUNT THERE WERE VARIOUS DEBITE-GROUP ENTRIES PERTAINING TO JOB WORK,LEASING OF PLANT AND MACHINERY AND COMMERCE,THAT IT WAS PAYING AS WELL AS RECEIVING AM OUNTS FROM APL IN THIS REGARD, THAT THE TRANSACTIONS RESULTED INTO DEBIT AS WELL AS CREDIT BALANCES IN THE SAID ACCOUNT FROM TIME TO TIME,THAT THE IT HAD NOT CHARGED INTEREST FROM APL ON THE AMO UNTS DUE FOR THE FY.1996-97,2000-2001,2001- 02,THAT THE AO WAS NOT JUSTIFIED TO HOLD THAT THE P ROPORTIONATE INTEREST ON SUCH DEBIT BALANCE AS ON 31.03.2007 WAS TO BE DISALLOWED,THAT AO HAD WRONGLY PRESUMED THAT SAME WAS SOURCED OUT OF ITS INTEREST BEARING FUNDS.RELYING UPON THE DECISION OF THE HON'BLE APEX COURT DELIVERED IN THE CASE OF S.A.BUILDERS(288ITR1),HE HELD THAT PRINCIPLES OF COMMERCIAL EXPEDIENCY WERE APPLICABLE ON THE TRANSACTIONS IN QUESTION,THAT THE AO WAS NOT JU STIFIED IN DISALLOWING PROPORTIONATE INTEREST PERTAINING TO THE AMOUNT DUE ON BUSINESS ACCOUNT FO R THE RELEVANT AY. FINALLY,HE DELETED THE PROPORTIONATE-INTEREST-DISALLOWANCE MADE BY THE AO. REGARDING THE UNSECURED LOANS OF RS.1.43 CRORES AND DEBIT BALANCE OF PARTNERS CAPITAL ACCOUNT OF RS.56.06 LAKHS,HE HELD THAT ENTIRE UNSECURED LOAN W AS GIVEN DURING THE FY 1996-97,THAT SAME WAS CARRIED FORWARD WITHOUT ANY CHANGE TILL THE END OF RELEVANT AY.,THAT IT HAD INTEREST FREE FUNDS,BEING INTEREST FREE UNSECURED LOANS OF RS.1.3 4 CRORES, THAT THE CREDIT BALANCES IN THE PARTNERS SHARE CAPITAL ACCOUNT AS ON 31.03.1997 WA S OF RS.59.25 LAKHS, THAT IT COULD BE SAID THAT THE INTEREST FREE LOAN(IFL)WAS GIVEN OUT OF SUCH IN TEREST FREE FUNDS AVAILABLE AS ON THE DATE TO THAT EXTENT,THAT DIRECT NEXUS OF ADVANCING THE IFL OUT O F INTEREST FREE FUND(IFF) WAS NOT AVAILABLE. RELYING UPON THE DECISION OF RELIANCE UTILITY AND P OWER LTD.(SUPRA),HE HELD THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE PROPORTIONATE IFF OF R S.1.34 CRORESA AS ON 31.03.1997,THAT FOR DECIDI - NG THE ISSUE BALANCE AS ON 31.03.2007 WAS TO BE CON SIDERED,THAT AVAILABILITY OF FUNDS AS ON 31. 03.1997 WAS NOT MATERIAL,THAT AS PER THE ADMISSION OF ASSESSEE THE IFF ON THE LAST DAY OF AY.2007 WAS 1.14 CRORES,THAT AGAINST THAT IFL OF RS.1.43 CR ORES WAS GIVEN,THAT THE DEBIT BALANCES IN THE ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 6 PARTNERS ACCOUNT WAS OF RS.56.06 LAKHS,THAT IFL AN D DEBIT BALANCES OF RS.1.99 CRORES (RS. 1.43 CRORES+56.06 LAKHS) WERE GIVEN OUT OF 1.14 CRORES.H E DIRECTED THE AO TO CONSI -DER ONLY A SUM OF RS.85.40 LAKHS(1.99 CRORES-1.14 CRORES)AS IFL GIVEN BY THE ASSESSEE TO ITS ASSOCIATE CONCERN AND PARTNERS AND TO WORK OUT THE PROPORTIONATE DISALLOW ANCE AS PER THE PROVISIONS OF SEC.36(1)(III) OF THE ACT.HE FURTHER HELD THAT THERE WAS NO COMMERCIA L EXPEDIENCY OF GIVING SUCH IFL TO ASSOCIATE CONCERN AND PARTNERS,THAT ARGUMENT OF THE ASSESSEE THAT INTEREST PAID BY IT HAD NO DIRECT LINK WITH THE FUNDS GIVEN TO THE PARTNERS OR TO APL,THAT EVEN IN THE YEAR ENDING ON 31.03.2007 THE ASSESSEE HAD FAILED TO PROVE THAT THE IFL GIVEN TO APL WAS D IRECTLY OUT OF IFL AVAILABLE,THAT IT HAD NOT PROVED THE DIRECT NEXUS,THAT IT COULD NOT ESTABLISH THAT IT WAS HAVING SUFFICIENT IFF ON 31.03.2007 TO THE EXTENT OF GIVING IFF/IFL TO THE PARTNERS AND ASSOCIATE CONCERN.THUS,THE FAA PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE. 3.3. BEFORE US,AUTHORISED REPRESENTATIVE(AR) ARGUED THAT THE ASSESSEE HAD SUFFICIENT FUNDS FOR ADVANCING LOAN APL,THAT IT WAS MAINTAINING TWO ACCO UNTS OF APL AND ONE OF THEM WAS BUSINESS ACCOUNT,THAT INTEREST EXPENDITURE ON DEBIT BALANCE OF PARTNERS WAS OUT OF THE IFF AVAILABLE TO THE ASSESSEE,THAT THERE WAS NO JUSTIFICATION FOR PARTIA L CONFIRMATION OF THE DISALLOWANCE MADE BY THE AO UNDER THE HEAD INTEREST EXPENDITURE PAID.HE RELI ED UPON THE CASES OF .HE ALSO REFERRED TO THE PAGE NO. OF THE PAPER BOOK.DEPARTMENTAL REPRESENTAT IVE(DR)STATED THAT THE ASSESSEE ITSELF HAD ADMITTED BEFORE THE AO THAT THE ASSESSEE WAS NOT HA VING ANY BUSINESS RELATION WITH APL,THAT MAINTAINING OF TWO ACCOUNTS WAS NEVER BROUGHT TO TH E NOTICE OF THE ASSESSEE,THAT FAA DID NOT SEEK COMMENTS FROM THE AO IN THIS REGARD,THAT THERE WAS PROOF THAT THE ASSESSEE HAD SUFFICIENT IFF FUND FOR ADVANCING LOAN TO APL, THAT INTEREST EXPEN DITURE DISALLOWED BY THE AO WAS JUSTIFIED CONSIDERING THE FACTS OF THE CASE. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE AND THE AO BOTH HAVE FILED APPEALS WITH RE GARD TO THE INTEREST EXPENDITURE.GROUND NO. AND GROUND NO. 2 OF THE AOS APPEAL ARE INTERLINKED .UNDISPUTED FACTS OF THE CASE ARE THAT AO HAD ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 7 DISALLOWED INTEREST EXPENDITURE OF RS. 38.36 LAKHS, THAT THE ASSESSEE HAD ADVANCED IFL OF RS. 2.70 CRORES TO APL,THAT IT HAD PAID INTEREST TO THE PARTNERS ON THE DEBIT BALANCE,THAT CERTAIN PIECES OF INFORMATION WERE GIVEN BY THE ASSESSEE DURING TH E APPELLATE PROCEEDINGS ONLY,THAT BEFORE THE AO IT WAS ADMITTED THAT IT DID NOT HAVE BUSINESS RE LATION WITH APL,THAT THE AO HAD AGREED WITH THE ASSESSEE THAT THE LOAN GIVEN TO APL WAS BECAUSE OF BUSINESS EXPEDIENCY,THAT THE FAA HAD PARTLY DELETED THE INTEREST EXPENDITURE AND HAD PA RTLY UPHELD THE ORDER OF THE AO.IT IS FACT THAT THE ASSESSEE ITSELF HAD STATED DURING THE ASSESSMENT PR OCEEDINGS THAT THERE WAS NO BUSINESS CONNECTION WITH APL.THE FAA HAS DISCUSSED ABOUT MAINTAINING OF TWO ACCOUNTS SINCE 1997 BY THE ASSESSEE.WE FIND THAT THE SAID FACT IS CONTRARY TO THE SUBMISSION MADE BEFORE THE AO.IF THE FAA HAD FOUND THAT THERE WERE TWO ACCOUNTS,HE SHOULD HA VE CALLED FOR A REMAND REPORT FROM THE AO IN THIS REGARD.BUT,WITHOUT AFFORDING A CHANCE TO THE A O TO REBUT/CONFIRM THE STAND OF THE ASSESSEE,THE FAA HAD GIVEN RELIEF TO THE IT.IN OUR OPINION,MATTE R NEEDS FURTHER VERIFICATION.SO,IN THE INTEREST OF JUSTICE,WE ARE REMITTING BACK THE MATTER TO THE FIL E OF THE AO FOR FRESH ADJUDICATION WITH A DIRECTION TO AFFORD A REASONABLE OPPORTUNITY OF HEA RING TO THE ASSESSEE.THE ASSESSEE WOULD PRODUCE ALL THE NECESSARY DOCUMENTS BEFORE THE AO. AS FAR AS DISALLOWANCE SUSTAINED BY THE FAA IS CONC ERNED,WE FIND THAT HE WAS OF THE OPINION THAT IFF/IFL GIVEN TO APL AND PARTNERS WERE PARTLY OUT O F INTEREST BEARING FUNDS.WE FIND THAT HE HAS GIVEN CERTAIN CALCULATION AS ON 31.03.1997AND 31.03 .2007 FOR PART DISALLOWANCE OF INTEREST EXPEN - DITURE.WE FIND THAT AO DID NOT HAVE BENEFIT OF THE SUBMISSIONS OF THE ASSESSEE MADE DURING APPELLATE PROCEEDINGS.SO, IN THE INTEREST OF JUSTI CE,MATTER OF PART CONFIRMATION IS ALSO RESTORED TO THE FILE OF THE AO FOR FURTHER VERIFICATION.CONSIDE RING THE PECULIAR FACTS AND CIRCUMSTANCES OF THE MATTER THE EFFECTIVE GROUND OF APPEAL FILED BY THE ASSESSEE AND GROUND NO.2 FILED BY THE AO ARE ALLOWED IN THEIR FAVOUR,IN PART. ITA/1198/MUM/2011: 5. FIRST GROUND OF APPEAL IS ABOUT DELETION OF ADDITIO N OF RS.10.12 LAKHS OUT OF THE REGISTRATION ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 8 EXPENSES.DURING THE ASSESSMENT PROCEEDINGS THE AO F OUND THAT THE ASSESSEE HAD CLAIMED REGISTRATION EXPENSES OF RS. 22,29,255/-UNDER THE H EAD REGISTRATION CHARGES AS DEBITED TO ITS P & L ACCOUNT. THE RELEVANT EXPENDITURE IN ITS IMMEDIATEL Y PRECEDING ASSESSMENT YEAR WAS ONLY OF RS.17,800/-, THEREFORE, THE ASSESSEE WAS ASKED TO F URNISH THE DETAILS AS WELL AS TO EXPLAIN THE NATURE OF EXPENSES AS CLAIMED BY IT.IN RESPONSE TO THE SAME,THE ASSESSEE VIDE ITS LETTER DTD. 26.11.2009 SUBMITTED THAT THE IT WAS ENGAGED IN TH E BUSINESS OF A COMMISSION/INDENTING AGENT ON BEHALF OF MAJOR PHARMACEUTICAL COMPANIES SITUATED A BROAD,THAT AS PER THE DRUGS AND COSMETICS ACT,ANY INDIAN COMPANY DESIROUS OF IMPORTING ANY BU LK DRUG OR FORMULATION INTO INDIA HAD TO IMPORT THE SAME FROM A MANUFACTURER APPROVED BY THE OFFICE OF DRUG CONTROLLER GENERAL OF INDIA(DCGI),THAT THE MANUFACTURING SITE AND PRODUCT S IMPORTED WERE TO BE APPROVED BY THE CENTRAL DRUGS STANDARD CONTROL ORGANIZATION OF GOVE RNMENT OF INDIA,THAT ALL THE FOREIGN MANUFACTURERS DID NOT HAVE THEIR OFFICES IN INDIA T HEY WOULD APPOINT AGENTS TO ACT ON THEIR BEHALF, THAT THE ASSESSEE BEING AN INDENTING HOUSE REPRESEN TED MANY FOREIGN DRUGS AND PHARMACEUTICAL COMPANIES IN INDIA AS THEIR AGENT,THAT WITH THE REG ISTRATION OF MANUFACTURER AND AN AGENT THE AGENT WOULD GET EXCLUSIVE RIGHT TO PERMIT OTHER INDIAN BU YERS TO IMPORT THE PRODUCT IN INDIA BY ISSUING FORM NO.10 PRESCRIBED FOR THIS PURPOSE,THAT NO ONE CAN DIRECTLY IMPORT THE MATERIAL WITHOUT GETTING FORM 10 FROM THE AGENT,THAT ENTIRE REGISTRA TION EXPENSES INCURRED BY IT WAS NORMAL BUSINESS EXPENDITURE,THAT IT HAD AVAILED SERVICES OF CONSULT ANTS AND HAD PAID CONSULTANCY CHARGES.AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE,THE AO HELD THAT TILL LAST YEAR, NO SUCH EXPENSES WERE EVEN BORN BY THE ASSESSEE,THAT THERE WAS HUGE INCRE ASE IN EXPENSES FROM 17,800/-TO RS.22.29 LAKHS,THAT THE ASSESSEE WAS NOT PERMANENT AGENT OF THE FOREIGN SUPPLIER,THAT THE AGREEMENT WAS FOR LIMITED PERIOD,THAT THE EXPENDITURE DID NOT APPEAR GENUINE,THAT THE ASSESSEE WAS EARNING INDENTING COMMISSION,THAT THE EXPENSES ON REGISTRATION COULD NOT BE HELD TO BE MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS,THAT ASSESSEE ITSELF AD MITTED THAT EXPENSES ON REGISTRATION WERE REIMBURSED BY THE PRINCIPALS,THAT DURING THE YEAR, ASSESSEE HAD CLAIMED THAT IT HAS WRONGLY ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 9 CREDITED COMMISSION ACCOUNT WITH THE RECEIPTS ON AC COUNT OF REIMBURSEMENT OF EXPENSES,THAT THE NON-PAYMENT ON REGISTRATION EXPENSES WORKS OUT TO R S.10,12,321/-THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING,THAT IT WAS DUTY BO UND TO OFFER THE EXPECTED REIMBURSEMENT OF EXPENSES AS RECEIPT.FINALLY,HE MADE A DISALLOWANCE OF RS.10.12 LAKHS. 5.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE PREFE RRED AN APPEAL BEFORE THE FAA.BEFORE HIM THE ASSESSEE ARGUED THAT THAT THE REGISTRATION FEES FOR PRODUCTS INCURRED BY THE APPELLANT ON BEHALF OF ITS PRINCIPALS,AMOUNTING TO RS.15,88,151/- WERE TO BE REIMBURSED AND THE OTHER INCIDENTAL EXPENSES WERE THE NORMAL BUSINESS EXPENDITURE OF TH E ASSESSEE,THAT THE ASSESSEE HAD CONSULTANTS FEES OF RS.6,22,800/-DURING THE YEAR UNDER CONSIDER ATION,THAT THE ENTIRE PAYMENTS WERE MADE THROUGH ACCOUNT PAYEE CHEQUES ON WHICH TDS AS REQUI RED UNDER THE VARIOUS PROVISIONS OF CHAPTER XVI-B OF THE ACT WAS DEDUCTED,THAT THE EXPENDITURE WAS INCURRED IN CONNECTION WITH THE OBTAINING OF REGISTRATION FORMALITIES DONE ON BEHAL F OF ITS PRINCIPALS,THAT THE EXPENDITURE WAS INCURRED FOR NORMAL WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS,THAT THESE CHARGES WERE INCURRED TO OBTAIN THE REGISTRATION OF THE PRODUCTS OF ITS PRINCIPALS TO BE ELIGIBLE FOR SELLING THOSE PRODUCTS IN INDIA ON WHICH THE ASSESSEE WAS TO GET COMMISSION,THAT THE ASSESSEE DID NOT HAVE THE EXPERTISE TO OBTAIN THE REGISTRATION FORMALITIES TO BE COMPLETED AT DELHI,THAT NECESSITY OF THE INCURRENCE OF THE EXPENDITURE HAD TO BE SEEN AND JU DGED FROM THE BUSINESS MANS POINT OF VIEW AND THE DEPARTMENT COULD NOT DECIDE WHICH EXPENDITU RE THE ASSESSEE SHOULD INCUR AND SHOULD NOT INCUR. 5.2. BEFORE US,THE DR SUPPORTED THE ORDER OF THE AO.AR A DVANCED THE SAME ARGUMENTS THAT WERE AGITATED BEFORE THE FAA AND SUPPORTED THE ORDER OF THE FAA TO THE EXTENT OF DELETION OF ADDITION. FOR THE ADDITION SUSTAINED BY THE FAA,IT HAS RAISED GROUND IN THE CO AND SAME IS BEING DEALT WITH IN SUBSEQUENT PARAGRAPH. 5.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL.WE FIND THAT THE FAA HAD NOT DELETED THE ADDITION OF RS.10.22 LAKHS,AS MENTIONED IN THE GROUND OF APPEAL.WHILE DECIDING THE ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 10 APPEAL THE ISSUE BEFORE HIM WAS THE EXPENDITURE OF RS.7.87 LAKHS ONLY.OUT OF THE TOTAL EXPENDITURE OF RS.22.29 LAKHS,INCURRED BY THE ASSESSEE,THE FORE IGN PRINCIPALS HAD REIMBURSED RS.14.42 LAKHS. WE FIND THAT THE COMMISSION INCOME RECEIVED BY THE ASSESSEE FROM SALE OF PRODUCTS SUPPLIED BY THE FOREIGN SUPPLIERS WAS OFFERED TO TAX BY THE IT. THE FAA HAS GIVEN A CATEGORICAL FINDING THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES.IN OUR OPINION,AN INCREASE IN THE EXPENDITURE CANNOT BE BASIS FOR DISALLOWING IT.WHAT IS TO BE SEEN IS THAT WHETHER OR NOT THE EXPENDITURE WAS INCURRED FOR THE BUSINESS CARRIED O UT BY THE ASSESSEE.WITHOUT REGISTRATION OF THE PRODUCT WITH APPROPRIATE AUTHORITY AT DELHI,IT WAS NOT POSSIBLE FOR THE ASSESSEE TO EARN INCOME. SIMILARLY,PAYMENTS MADE UNDER THE HEADS CONSULTANCY FEES,BANK CHARGES AND OTHER EXPENSES CANNOT BE HELD TO BE NOT INCURRED FOR THE BUSINESS FOR YEAR UNDER APPEAL.ALL THESE EXPENSES HAD DIRECT NEXUS WITH EARNING OF THE INCOME OFFERED FOR TAXATION. GENUINENESS OF THE EXPENDITURE IS NOT IN DOUBT AND THE ASSESSEE HAD ALSO DEDUCTED TAX AT SOURCE ON THOSE PAYMENTS.CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE OF THE O PINION THAT THE FAA WAS JUSTIFIED IN DELETING THE ADDITION OF RS.6.22 LAKHS.THEREFORE,CONFIRMING HIS ORDER WE DECIDE FIRST GROUND OF APPEAL AGAINST THE AO. CROSS OBJECTION/142/MUM/2013: 6. GROUND NO.1 IS ABOUT CONFIRMING THE ADDITION OF RS. 1.64 LAKHS BY THE FAA UNDER THE HEAD REGISTRATION EXPENSES.IN THE EARLIER PART OF OUR OR DER WE HAVE DISCUSSED THE FACTS RELATED WITH THE ISSUE.THE FAA HAD PARTLY ALLOWED THE APPEAL FILED B Y THE ASSESSEE AND OUT OF THE TOTAL AMOUNT OF RS. 7.87 LAKHS,A SUM OF RS.1.64 LAKHS WAS DISALLOWE D.WHILE DECIDING GROUND NO.1 OF THE APPEAL FILED BY THE AO,WE HAVE HELD THAT EXPENDITURE INCUR RED BY THE ASSESSEE UNDER THE HEADS REGISTRATION CHARGES, CONSULTANCY CHARGES AND OTHER CHARGES WERE DIRECTLY RELATED TO THE BUSINESS OF THE ASSESSEE.BANK CHARGES OR OTHER CHARGES CANNO T BE SEPARATED FROM THE ABOVE TWO MAIN ITEMS OF EXPENDITURE.WE FIND THAT WHILE CONFIRMING THE DI SALLOWANCE OF RS.1.64 LAKHS THE FAA HAS NOT GIVEN ANY REASON.THEREFORE,REVERSING HIS ORDER WE D ECIDE FIRST GROUND OF CROSS OBJECTION IN FAVOUR ITA NO.1198 & 1437/MUM/2011, C.O. 142 MUM 2013 M/ S. ANANT & COMPANY 11 OF THE ASSESSEE. 7 .SECOND GROUND IS ABOUT INTEREST EXPENDITURE.AT THE TIME OF HEARING BEFORE US,THE AR STATED THAT THE ISSUE HAD ALREADY BEEN RAISED IN MAIN APPEAL AN D THERE WAS NO NEED TO AGITATE IT IN THE CO. HENCE,THE GROUND IS TREATED AS INFRUCTOUS.CROSS OBJ ECTION,FILED BY THE AO,IS PARTLY ALLOWED. AS A RESULT,CROSS APPEAL FILED BY THE ASSESSEE AND THE AO AND THE CO OF THE ASSESSEE STAND PARTLY ALLOWED. 0,1 '+, - 2 '+, 3 4 ) 5 6 ,$ '+, &'! 7 8 9, : , ;< . ORDER PRONOUNCED IN THE O PEN COURT ON 13TH AUGUST, 2014 . 7 ) ./# 6 :' 13 VXLR ,2014 / ) 5 D SD/- SD/- ( / VIJAY PAL RAO ) ( / RAJENDRA ) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / MUMBAI, :'/ DATE: 13TH AUGUST, 2014 S.K. 7 ) &, F#, 7 ) &, F#, 7 ) &, F#, 7 ) &, F#,/ COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / $% 2. RESPONDENT / &'$% 3. THE CONCERNED CIT(A)/ G H , 4. THE CONCERNED CIT / G H 5. DR I BENCH, ITAT, MUMBAI / I5 &,' , ... 6. GUARD FILE/ 5 0 ', &, ', &, ', &, ', &, //TRUE COPY// 7' / BY ORDER, J/; DY./ASST. REGISTRAR , /ITAT, MUMBAI