ACIT, Ludhiana V. M/s Kudu Industries, Ludhiana

ITA 1252/CHANDI/2012

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 68602 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-12-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 20-11-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 29-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: J S NAGAR
• Keywords: Fair market value; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE SHRI T.R.SOOD ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.1212/CHD/2012 ASSESSMENT YEAR : 2009-10 M/S KUDU INDUSTRIES, VS THE J.C.I.T. (OSD), PLOT NO. 273-74, CIRCLE 1, G.T.ROAD, LUDHIANA. DHANDARI KALAN, LUDHIANA. PAN : AAHFK-9436B & ITA NO. 1252/CHD/2012 ASSESSMENT YEAR 2009-10 THE A.C.I.T., VS M/S KUDU INDUSTRIES, CIRCLE 1, PLOT NO. 274, LUDHIANA. G.T.ROAD, DHANDARI KALAN, LUDHIANA. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHWANI KUMAR RESPONDENT BY : SHRI J.S.NAGAR DATE OF HEARING : 20.11.2013 DATE OF PRONOUNCEMENT : 23.12.2013 O R D E R PER SUSHMA CHOWLA, JM THE CROSS APPEALS BY THE ASSESSEE AND THE REVENUE A RE DIRECTED AGAINST THE ORDER OF THE CIT(APPEALS)-I, LUDHIANA D ATED 06.09.2012 RELATING TO ASSESSMENT YEARS 2009-10 AGAINST THE OR DER PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 ( 'THE A CT' FOR SHORT). 2 2. BOTH THE APPEALS WERE HEARD TOGETHER AND ARE BEI NG DISPOSED BY THE CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THAT ORDER PASSED UNDER SECTION 250(6) OF THE I NCOME TAX ACT,1961 BY THE LD. CIT(APPEALS)-I LUDHIANA IS AGAI NST LAW AND FACTS ON THE FILE IN AS MUCH AS HE WAS NOT JUSTIFIED TO ARBITRARILY UPHOLD THE DISALLOWANCE OF RS. 1,52,309/- OUT OF INTEREST ACCOUNT ON THE GROUND TH AT THE SAME REQUIRED TO BE CAPITALIZED AS THE MACHINERY HA D NOT BEEN PUT TO USE. 2. THAT HE WAS FURTHER NOT JUSTIFIED TO ARBITRARILY UPHOLD THE DISALLOWANCE OF RS. 43,53,601/- OUT OF INTEREST ACCOUNT BY RESORT TO PROVISIONS OF SECTION 36(1)(II I). 4. THE REVENUE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL : 1. THAT THE LD. CIT(APPEALS) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 18,00,000/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF EXCESS SALARY PAID TO SHRI R.S.SALUJA, WHO IS FATHER OF ONE OF THE PARTNE R AND COVERED UNDER SECTION 40A(2)(B) OF THE I.T.ACT, 196 1. 2. THAT THE ORDER OF THE LD. CIT(APPEALS) BE SET AS IDE AND THAT OF ASSESSING OFFICER BE RESTORED. 5. THE APPEAL FILED BY THE ASSESSEE IS DELAYED BY T WO DAYS. 6. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT BECAU SE OF CALCULATION ERROR, THERE WAS A DELAY OF TWO DAYS IN FURNISHING THE PRESENT APPEAL BEFORE THE TRIBUNAL. IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES AND DELAY IS OF ONLY TWO DAYS, WE CONDONE THE SAME AND ADJUDICATE THE ISSUE RAISED IN THE SAID APPEAL. 7. THE GROUND NO. 1 RAISED BY THE ASSESSEE IS NOT P RESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 8. THE ISSUE IN GROUND NO. 2 RAISED BY THE ASSESSEE IS AGAINST DISALLOWANCE OF INTEREST UNDER THE PROVISIONS OF SE CTION 36(1)(III) OF THE ACT. 3 9. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY WAS ENGAGED IN THE MANUFACTURE, TRADING, JOB WORK OF YA RN AND FABRIC. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD MADE INTEREST FREE ADVANCE TO SHRI RAJ ESH KUMAR, SMT.RITU SALUJA AND M/S SHIV NARAIN INVESTMENT PVT.LTD. THE ASSESSEE WAS SHOW CAUSED TO JUSTIFY THE ADVANCES GIVEN AS TRADE ADVAN CES TO THE SAID PERSONS. IN REPLY, THE ASSESSEE SUBMITTED THAT INT EREST FREE ADVANCES WERE GIVEN TO VARIOUS PARTIES, WHICH INCLUDED ADVAN CES TO SUPPLIERS, ADVANCES TO EMPLOYEES, PRE-PAID INSURANCE AND OTHER ADVANCES EXCEPT THE ADVANCE TO M/S SHIV NARAIN INVESTMENT PVT. LTD. AND SMT. RITU SALUJA WHICH WERE ADVANCES ON WHICH NO INTEREST WAS CHARGE D. ALL THE OTHER ADVANCES WERE CLAIMED TO HAVE BEEN GIVEN IN NORMAL COURSE OF BUSINESS FOR BUSINESS CONSIDERATION AND THE ADVANCES TO M/S SHIV NARAIN INVESTMENT PVT. LTD. AND SMT. RITU SALUJA WERE GIVE N FOR THEIR TEMPORARY REQUIREMENT AND SHRI RAJESH KUMAR WAS AN EMPLOYEE T O WHOM THE ADVANCE WAS GIVEN. THE ASSESSING OFFICER APPLYING THE RATIO LAID DOWN BY THE HON'BLE PUNJAB & HARYANA HIGH COURT IN THE C ASE OF CIT VS ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H) HELD THAT THE INTEREST CORRESPONDING TO THE INTEREST FREE ADVANCES MADE FO R NON-BUSINESS PURPOSES WAS TO BE DISALLOWED ON PROPORTIONATE BASI S AS THE FUNDS OF THE ASSESSEE WERE UNDER COMMON KITTY AND IT WAS NOT POS SIBLE TO SEPARATE THE BORROWED FUNDS FROM OWN FUNDS. DISALLOWANCE OF INT EREST ACCRUED ON THE INTEREST FREE ADVANCE TO SMT. RITU SALUJA AND M/S S HIV NARAIN INVESTMENT PVT. LTD. WAS MADE BY THE ASSESSING OFFICER AT RS. 43,53,601/- AS PER THE TABULATED DETAILS UNDER PARA 6 OF THE ASSESSMENT OR DER. 10. THE CIT(APPEALS) UPHELD THE SAID DISALLOWANCE I N VIEW OF THE RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS 4 ABHISHEK INDUSTRIES LTD. (SUPRA). THE ASSESSEE IS IN APPEAL AGAINST THE SAID ADDITION. 11. THE LD. AR FOR THE ASSESSEE POINTED OUT THAT TH E TOTAL INVESTMENT/CAPITAL OF THE PARTNERS WAS RS. 50.62 CR ON WHICH NO INTEREST WAS BEING PAID AND FURTHER THE INTEREST ON TERM LOA N WAS UTILIZED FOR SPECIFIC PURPOSE AND IN VIEW THEREOF, THERE WAS NO MERIT IN THE SAID DISALLOWANCE OF INTEREST BEING ATTRIBUTABLE TO INTE REST FREE ADVANCES. 12. THE LD. DR FOR THE REVENUE POINTED OUT THAT THE ADVANCE HAD BEEN MADE FOR NON-BUSINESS PURPOSES AND AS SUCH THE RATI O LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN CIT VS ABHISHEK INDUS TRIES LTD. (SUPRA) WAS APPLICABLE. 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPEAL IS IN RELATION TO THE INTEREST EXPENDITURE RELATABLE TO THE INTEREST FREE ADVANCES MADE BY THE ASSESSEE. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE O N THE ONE HAND HAD DEBITED INTEREST EXPENDITURE AND ON THE OTHER HAND, HAD MADE INTEREST FREE ADVANCES TO MRS. RITU SALUJA AND M/S SHIV NARA IN INVESTMENT PVT. LTD. AS PER THE REPLY DATED 09.12.2011 FILED BY TH E ASSESSEE BEFORE THE ASSESSING OFFICER, THE SAID ADVANCES WERE MADE TO T HE SAID PARTIES FOR THEIR TEMPORARY REQUIREMENTS. THE ISSUE ARISING IN THE PRESENT APPEAL IS IN RELATION TO THE ALLOWANCE OF THE INTEREST EXPEND ITURE IN THE HANDS OF THE ASSESSEE BEING ATTRIBUTABLE TO THE INTEREST FRE E ADVANCES MADE BY THE ASSESSEE. THE PLEA OF THE ASSESSEE AGAINST THE SAI D DISALLOWANCE IS THAT THE INTEREST EXPENDITURE BOOKED DURING THE YEAR ON TERM LOAN IS UTILIZED FOR SPECIFIC PURPOSE AND ALSO FURTHER IT HAD INTERE ST FREE FUNDS AVAILABLE WITH IT BY WAY OF CAPITAL CONTRIBUTION BY THE PARTN ERS TOTALING RS. 50.62 CR. IN VIEW THEREOF, IT WAS PLEADED BY T HE LD. AR FOR THE 5 ASSESSEE THAT IN SUCH CASES, AVERAGE COST OF DEBT T O THE ASSESSEE BE APPLIED TO WORK OUT THE DISALLOWANCE, IF ANY. 14. THE HON'BLE PUNJAB & HARYANA HIGH COURT IN CIT VS ABHISHEK INDUSTRIES LTD. (SUPRA) HAVE LAID DOWN THE RATIO TH AT IN CASES OF MIXED FUNDS AVAILABLE WITH THE ASSESSEE AND WHERE INTERES T FREE ADVANCES HAVE BEEN MADE OUT OF SUCH MIXED FUNDS, DISALLOWANCE OF INTEREST RELATABLE TO SUCH INTEREST FREE ADVANCES IS WARRANTED. HOWEVER, ON THE PERUSAL OF THE SAID JUDGEMENT IT IS APPARENT THAT IT IS SILENT ON THE RATE OF INTEREST TO BE APPLIED IN CASES WHERE THE ASSESSEE HAS MIXED FUNDS AVAILABLE WITH IT. IN THE FACTS AND CIRCUMSTANCES OF THE CASE WE FIND MER IT IN THE PLEA OF THE ASSESSEE THAT WHERE MIXED FUNDS ARE DIVERTED TOWARD S INTEREST FREE ADVANCES, THEN THE DISALLOWANCE IF ANY, SHOULD BE M ADE UPTO THE LEVEL OF AVERAGE COST OF DEBT TO THE ASSESSEE. 15. WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE MUMBAI BENCH OF TRIBUNAL IN DCIT VS MTZ POLYFILMS LTD. (SUPRA) WHEREIN IT HAS BEEN PROPOSED THAT FOR DISALLOWING INTEREST UNDER SECTIO N 36(1)(III), THE TOTAL FUNDS I.E. OWNED FUNDS AND BORROWED FUNDS, SHOULD H AVE BEEN CONSIDERED FOR WORKING OUT THE DISALLOWANCE OF INTEREST. FOLL OWING THE ABOVESAID PROPOSITION, WE DIRECT THE ASSESSING OFFICER TO REC OMPUTE THE DISALLOWANCE UNDER SECTION 36(1)(III) OF THE ACT BY ADOPTING THE AVERAGE COST OF DEBT FOR THE YEAR UNDER APPEAL AND APPLYING THE SAME TO THE INTEREST FREE ADVANCES MADE BY THE ASSESSEE. REASO NABLE OPPORTUNITY OF HEARING SHALL BE AFFORDED TO THE ASSESSEE BY THE AS SESSING OFFICER. THE GROUND OF APPEAL NO. 2 RAISED BY THE ASSESSEE IS TH US, ALLOWED FOR STATISTICAL PURPOSES. 16. THE ONLY ISSUE RAISED BY THE REVENUE IN THE CRO SS APPEAL IS AGAINST THE ALLOWANCE OF SALARY PAID TO SHRI G.S. SALUJA, F ATHER OF ONE OF THE 6 PARTNERS, WHICH WAS DISALLOWED BY THE ASSESSING OFF ICER IN VIEW OF THE PERSON BEING COVERED UNDER SECTION 40A(2)(B) OF THE ACT. 17. THE FACTS RELATING TO THE ISSUE ARE THAT THE AS SESSEE HAD PAID A SUM OF RS. 24 LACS TO SHRI R.S.SALUJA AS SALARY WHO WAS THE FATHER OF ONE OF THE PARTNERS. THE TOTAL SALARY EXPENDITURE OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION WAS RS. 51,10,016/-. THE ASSES SEE WAS ASKED TO JUSTIFY THE PAYMENT OF THE SALARY TO SHRI R.S.SALUJ A AS HE WAS A PERSON COVERED UNDER SECTION 40A(2)(B) OF THE ACT. THE REP LY OF THE ASSESSEE BEFORE THE ASSESSING OFFICER IS REPRODUCED UNDER PA RA 5 OF THE ASSESSMENT ORDER IN WHICH IT WAS POINTED OUT THAT T HE SAID SHRI R.S.SALUJA WAS ENGAGED IN THE BUSINESS OF HOSIERY P RODUCTS AND KNITTED FABRICS FOR THE PAST 40 YEARS AND OVER THE YEARS HE HAD MASTERED THE SKILLS OF YARN MANUFACTURING, DYEING TO MANUFACTURE OF DYED KNITTED CLOTH AND GARMENTS. HE WAS LOOKING AFTER THE COMPL ETE FUNCTIONING OF PRODUCTION, PLANNING OF YARN AND FABRIC DYEING AND WAS RESPONSIBLE FOR ACHIEVING SALE TARGET OF RS. 48 CRORES FOR THE YEAR UNDER CONSIDERATION. THE TOTAL TURNOVER OF THE GROUP I.E. R.S.SALUJA GRO UP WAS OVER 1000 CRORES. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE PAYMENT OF SALARY OF SHRI R.S.SALUJA WAS FAMILY ARRANGEMENT TO REDUCE THE PROFITS OF THE FIRM. IT WAS FURTHER OBSERVED BY ASSESSING OFF ICER THAT SHRI R.S.SALUJA MAY BE VERY COMPETENT AND EXPERIENCED AS MENTIONED IN THE REPLY OF THE ASSESSEE, BUT THE PAYMENT OF THE SALAR Y TO HIM HAS TO BE ON THE BASIS OF COMMERCIAL EXPEDIENCY AND IN A MERE FA MILY ARRANGEMENT TO TAKE OUT FUNDS AS PER DISCRETION. THE ASSESSING OFFICER, PLACING RELIANCE ON VARIOUS JUDICIAL PRONOUNCEMENTS IN THIS REGARD, ALLOWED SALARY EXPENDITURE OF RS. 50,000/- PER MONTH AND THE BALANCE SALARY OF 7 RS. 18 LACS WAS DISALLOWED UNDER SECTION 40A(2)(A) OF THE ACT. 18. THE CIT(APPEALS) VIDE PARA 7 HELD AS UNDER : 7. I HAVE CONSIDERED THE BASIS OF AO'S CONCLUSION AND THE ARGUMENTS OF THE AR DURING ASSESSMENT AS WELL AS AP PELLATE PROCEEDINGS. IN ORDER TO HOLD THAT THERE WAS AN ELEMENT OF UNREASONABLENE SS IN REMUNERATING SH. R.S. SALUJA BY THE FIRM, THE IMPORTANT THING TO FIND OUT IS WHETHER SH. SALUJA IS BEING TAXED AT LOWER RATE THEN THAT OF THE APPELLAN T FIRM. THE AR OF THE APPELLANT HAS CLEARLY BROUGHT ON RECORD THAT BOTH T HE ASSESSEE FIRMS AS WELL AS SH. R.S. SALUJA ARE IN THE SAME TAX BRACKET AND THERE IS NO PURPOSE SERVED BY DEBITING UNREASONABLE SALARY. THIS BEING SO, THE BASIC THRUST IN THE AO'S CONCLUSION IS FOUND LACKING. SECONDLY IT HAS NOT BE EN DENIED THAT SH. R.S. SALUJA HAS BEEN THE PROMOTER OF SEL GROUP OF CONCER NS AND THE APPELLANT FIRM HAPPENS TO BE A NEW ACQUISITION OF THE GROUP A ND THEREFORE WOULD LOGICALLY REQUIRE THE ENORMOUS EXPERIENCE AND EXPER TISE OF SH. R.S. SALUJA TO TAKE THE BUSINESS OF THE FIRM TO GREATER HEIGHTS. IN THIS SCENARIO REMUNERATION OF THE KEY PERSONNEL COULD SURELY BE D ISPROPORTIONATE IN THE SHORT RUN, BUT SUCH AMOUNTS HAVE TO BE ABSORBED SO AS TO REAP THE BENEFITS ACCRUING FROM THE EXPERIENCE OF SUCH PERSONNEL. IN THE ABSENCE OF ANY MOTIVE OF TAX PLANNING/TAX ADVANTAGE, THE AO CAN NOT SUBST ITUTE THE WISDOM OF THE PARTNERS OF THE FIRM TO HOLD THAT THE SALARY WAS EX CESSIVE/UNREASONABLE. AS SUCH THE DISALLOWANCE MADE BY THE AO IS DIRECTED TO BE DELETED. 19. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE LD. DR FOR THE REVENUE HAS FAILED TO CONTROVERT THE FINDINGS OF THE CIT(APPEALS) THAT THERE WAS ANY MOTIVE OF TAX PLANN ING OR TAX ADVANTAGE. FURTHER, IN ANY CASE, UNDER THE PROVISI ONS OF SECTION 40A(2)(A) OF THE ACT, WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS MADE TO A SPECIFIED PER SON AS REFERRED TO IN CLAUSE (B) OF THAT SECTION, THEN WHAT HAS TO BE SEE N IS WHETHER THE SAID EXPENSES IS EXCESSIVE OR UNREASONABLE WITH REGARD T O THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHIC H THE PAYMENT IS MADE. THE REASONABLENESS OF THE EXPENDITURE HAS TO BE SEE N VIS--VIS THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF T HE ASSESSEE OR THE BENEFITS DERIVED OR ACCRUING TO THE ASSESSEE. WHER EVER THE EXPENDITURE IS FOUND TO BE UNREASONABLE, THEN SO MUCH OF THE EX PENDITURE AS IS CONSIDERED TO BE EXCESSIVE OR UNREASONABLE, SHALL N OT BE ALLOWED AS A DEDUCTION BY THE ASSESSING OFFICER UNDER THE SAID P ROVISIONS OF THE ACT. 8 FROM THE PERUSAL OF THE ASSESSMENT ORDER, WE FIND T HAT THE ASSESSING OFFICER EXCEPT FOR DOUBTING GENUINENESS OF THE SAID EXPENDITURE, HAS NOT GIVEN A FINDING THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE, HAVING REGARD TO THE FAIR MARKET VALUE OF GOODS, SE RVICES OR FACILITIES PROVIDED. THE EXCESSIVENESS OR UNREASONABLENESS OF THE EXPENDITURE CANNOT BE SEEN APART FROM THE MARKET CONDITIONS WHI LE INVOKING THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. IN VIE W THEREOF, WE UPHOLD THE ORDER OF CIT(APPEALS) AND DISMISS GROUND NO. 1 RAISED BY THE REVENUE. 19. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED AND APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD DECEMBER,2013. SD/- SD/- ( T.R.SOOD) (SUSHMA CHO WLA) ACCOUNTANT MEMBER JUD ICIAL MEMBER DATED: 23 RD DECEMBER,2013 POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT, DR ASSISTANT REGISTRAR ITAT,CHD.