JCIT 16(3), MUMBAI V. SHEETAL MANUFACTURING CO, MUMBAI

ITA 143/MUM/2013

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 4127 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-04-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 30-09-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 04-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: B V JHAVERI
• Keywords: Revenue expenditure; Capital expenditure
• Section: 143(3); 32

Judgement Text

1 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E , MUMBAI , , BEFORE SHRI B R BASKARAN , ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA , JUDICIAL MEMBER ITA NO. 14 3 /MUM/201 3 (ASSESSMENT YEAR 200 9 - 1 0 ) J CIT - 16 ( 3 ), MATRU MANDIR, 2 ND FLOOR, R. NO. 208, TARDEO ROAD, MUMBAI - 400 007 VS M/S SHEETAL MANUFACTURING CO , 1001 PRASAD CHAMBERS, TAT ROAD NO.2, OPERA HOUSE, MUMBAI - 400 004 PAN: A AAF S 8333 A (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI A K NAYAK RESPONDENT BY : SHRI B V JHAVERI /DATE OF HEARING : 12 - 04 - 201 6 /DATE OF PRONOUNCEMENT : 12 - 04 - 2016 ORDER , . : - PER AMIT SHUKLA, J. M. : T HE AFORESAID APPEAL HA S BEEN FILED BY THE REVENUE AGAINST IMPUGNED ORDER DATED 30.10.2012 , PASSED BY CIT(A) - 27 , MUMBAI FOR THE QUANTUM OF ASSESSMENT PASSED UNDER SECTION 143(3) FOR THE AY 200 9 - 1 0 , VIDE WHICH FOLLOWING GROUNDS HAVE BEEN RAISED: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW , THE LD. CIT(A) HAS ERRED IN DELET ING THE DI SALLOWANCE MADE BY THE AO OF RS.58,40,646/ - ON ACCOUNT OF FINANCIAL EXPENSES FOR OBTAINING LOANS IN THE NAMES OF THE PARTNERS FROM DIFFERENT BANKS. 2 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN RELYING UPON THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS ABDUL REHMAN & SONS, WHEREIN THE LOANS RAISED FORM BANK WERE CREDITED TO THE BANKS ACCOUNT IN THE BOOKS OF THE FIRM AND THE INTEREST WAS PAID BY THE FIRM DIRECTLY TO THE BANK WHILE IN THIS CASE THE LOANS G IVEN BY THE PARTNERS ARE CREDITED TO THEIR LOAN ACCOUNTS AND INTEREST IS PAID BY THE PARTNERS THEMSELVES TO THE BANK. ONLY THE LOAN ACCOUNTS OF THE PARTNERS ARE CREDITED WITH THE AMOUNT OF INTEREST PAID BY THEM TO THE BANK. 3. ON THE FACTS AND IN THE CIRC UMSTANCES OF THE CASE, THE CIT(A) ERRED IN HOLDING THAT THE INTEREST PAID BY THE ASSESSEE FIRM ON THE LOANS OBTAINED BY THE PARTNERS FROM BANKS/LIC AND GIVEN TO THE ASSESSEE FIRM DO NOT ATTRACT PROVISIONS OF SECTION 40(B)(IV) OF THE I.T. ACT. 4. ON THE FA CTS AND IN THE CIRCUMSTANCES OF THE CASE, THE CIT(A) ERRED IN HOLDING THAT THE FINANCIAL EXPENSES INCURRED IN RAISING THE LOANS ALSO CONSTITUTE DEDUCTIBLE EXPENDITURE IN THE HANDS OF THE ASSESSEE. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND I N LAW, THE LD. CIT(A) HAS ERRED IN DELETING BRAND DEVELOPMENT OF RS.11,88,206/ - TREATED AS CAPITAL IN NATURE WITHOUT APPRECIATING THE FACT THAT AT PRESENT U/S 32 TRADEMARKS, PATENT RIGHTS ETC ARE DEPRECIABLE ASSETS. 2. AT T HE OUTSET, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT SO FAR AS THE ISSUE RAISED IN GROUND NO. 1 TO 4 ARE CONCERNED, THE SAME ARE COVERED BY THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2008 - 09 , VIDE ORDER DATED 3 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 31.12.2015 IN ITA NO.7612/MUM/2011 AND THE ISSUE RAISED IN GROUND NO.5 IS COVERED BY A SEPARATE ORDER OF THE TRIBUNAL DATED 28.09.2012 IN ITA NO.7170/MUM/2011 FOR THE ASSESSMENT YEAR 2008 - 09. 3. LD. DR THOUGH ADMITTED THAT THESE ISSUES ARE COVERED BY THE EARLIER ORDER OF THE TRIBUNAL, HOWEVER, HE STR ONG LY RELIED UPON THE OBSERVATIONS AND THE FINDINGS OF THE AO . 4. AFTER CONSIDERING THE RELEVANT FINDING GIVEN IN THE IMPUGNED ORDERS, WE FIND THAT SO FAR AS THE FIRST ISSUE IS CONCERNED, THE AO IN THE IMPUGNED ASSESSMENT ORDER HAS NOTED THAT, ASSESSEE HAS CLAIMED INTEREST ON LOAN I.E. ON PARTNERS FINANCE LOAN AMOUNTING TO RS.4,52,54,881/ - AND LOAN PROCESSING CHARGES AMOUNTING TO RS.6,15,521/ - . AT THE SAME, HE ALSO NOTED THAT S IMILAR EXPENSES WERE CLAIMED BY THE ASSESSEE IN THE PRECEDING ASSES SMENT YEAR ALSO I.E. 2008 - 09 , WHEREIN, IT HAS BEEN ADMITTED THAT THESE LOANS WERE GIVEN BY THE PARTNERS TO THE ASSESSEE FIRM THEREFORE AS HELD EARLIER BY THE AO, THE INTEREST PAYMENT TO THE PARTNERS ON SUCH LOANS WERE SUBJECTED TO THE PROVISIONS OF SECTIO N 40(B)(IV) AND ACCORDINGLY, THE EXCESS PAYMENT OF INTEREST BEYOND THE ALLOWABLE LIMIT OF SECTION 40(B)(IV) WAS DISALLOWED. APART FROM THAT, PROCESSING CHARGES WERE ALSO DISALLOWED. THE ASSESSEES CASE BEFORE THE AO HAD BEEN THAT, DURING THE YEAR ENDING ON 31 ST MARCH, 2008, THE ASSESSEE - FIRM HAD BORROWED FUNDS FROM VARIOUS BANKS THROUGH PARTNERS BY MORTGAGING THE IR PERSONAL AND RESIDENTIAL PROPERTIES. THESE LOANS WERE TAKEN PURELY FOR THE WORKING CAPITAL OF THE ASSESSEE FIRM AND, THEREFORE, T HE LOAN AMOUNTS W AS TRANSFERRED BY THE PARTNERS ON THE SAME DAY OR NEXT DAY TO THE BANK ACCOUNT OF FIRM AND ACCORDINGLY, THE BORROWED FUNDS WERE UTILIZED BY THE ASSESSEE - FIRM ONLY FOR THE PURPOSE OF CARRYING ON ITS BUSINESS. MONTHLY INSTALLMENT INCLUDING THE INTEREST PAYMENT ON THE LOAN AMOUNT HAS BEEN PAID BY THE ASSESSEE FIRM DIRECTLY TO THE BANK BECAUSE, THE BORROWED FUNDS 4 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 WERE USED BY THE ASSESSEE - FIRM FOR ITS BUSINESS PURPOSE ONLY. THUS, IT WAS STATED THAT, INTEREST BURDEN IS ON THE ASSESSEE - FIRM. HOW EVER, THE AO NOTED THAT, SIMILAR SUBMISSIONS WERE ALSO MADE BY THE ASSESSEE IN THE EARLIER YEARS ALSO WHEREIN THIS ISSUE HAS BEEN DECIDED IN ACCORDANCE WITH SECTION 40(B) AND ACCORDINGLY, HE MADE THE DISALLOWANCE OF EXCESS INTEREST AFTER DETAILED DISCUSSIO N ON THE S IMILAR LINE, AS WAS DONE IN AY 2008 - 09. THE DETAILED FINDING AND CONCLUSION OF THE AO HAS BEEN ELABORATED IN PARA 5 TO 5.10 ( FROM PAGES 5 TO 10 ) OF THE ASSESSMENT ORDER. 5. THE LD. CIT(A) FOLLOWING THE EARLIER YEARS ORDER OF THE CIT(A) WHICH H AS BEEN CONFIRMED BY THE TRIBUNAL , DECIDED TH I S ISSUE IN FAVOUR OF THE ASSESSEE. THE RELEVANT FINDING OF THE CIT(A) IN THIS REGARD IS REPRODUCED HEREUNDER: DURING THE YEARS ENDED WITH 31 - 03 - 2008 AND 31 - 03 - 2009, PARTNERS OF THE APPELLANT FIRM BORROWED FUNDS FROM VARIOUS BANKS / LIC BY MORTGAGING THE PERSONAL RESIDENTIAL PROPERTIES. THE BORROWED FUNDS WERE IN TURN GIVEN TO THE APPELLANT FIRM, WHICH WERE UTILIZED FOR MEETING THE WORKING CAPITAL REQUIREMENTS. THE FUNDS BORROWED BY THE PARTNERS WERE TRANSFERRED TO THE BANK ACCOUNT OF THE APPELLANT FIRM EITHER ON THE SAME DAY OR NEXT DAY OF OBTAINING LOANS. THE AFORESAID LOANS WERE TRANSFERRED TO THE APPELLANT FIRM BACKED BY AN MOU BETWEEN THE PARTNERS AND THE APPELLANT FIRM ON A BACK - TO - BACK ARRANGEMENT THAT THE LOANS SO ADVANCED SHALL CARRY SAME RATE OF INTEREST WHICH THE LENDING PARTNERS HAVE TO PAY TO THE BANK. THE A0 WAS OF THE OPINION THAT THE LOANS WERE OBTAINED BY THE PARTNERS IN THEIR INDIVIDUAL STATUS AND WERE ADVANCED TO THE PARTNERSHIP FIRM AS EVIDENCED BY THE FACT THAT THESE AMOUNTS ARE CREDITED TO THE LOAN ACCOUNT OF THE PARTNERS IN THE APPELLANTS BOOKS. ACCORDINGLY, THE A.0. HELD THAT THE LOANS ADVANCED BY THE PARTNERS TO THE APPELLANT FIRM AND THE INTEREST PAID THEREON WERE HIT BY THE PROVISIONS OF S ECTION 40(B)(IV) OF THE ACT AND ACCORDINGLY RESTRICTED THE INTEREST PAID BY THE FIRM 12 % PA., RESULTING IN THE DISALLOWANCE OF RS. 58,40.646 / - . IN ADDITION TO THE ABOVE, A0 ALSO DISALLOWED FINANCIAL EXPENSES OF RS. 6 , 15 , 521/ - INCURRED F OR DOCUMENTATION AN D PROCESSING CHARGES FOR RAISING THE IMPUGNED LOANS. APPELLANT'S AR SUBMITTED THAT THE AFORESAID TWO ADDITIONS MADE ON SIMILAR GROUNDS FOR THE A Y. 2008 - 09 WERE DELETED IN APPEAL. IN THIS REGARD I NOTE THAT FOR THE ELABORATE REASONS DISCUSSED IN MY ORDER I N APPEAL NO.CIT(A) - 5 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 27/ACIT16(3)/194/2010 - 11 DATED 24 - 08 - 2011 FOR THE A.Y. 2008 - 09, I HAVE DELETED THE AFORESAID TWO ADDITIONS. THE FACTS BEING SIMILAR FOR THE YEAR UNDER CON SIDERATION ALSO, I DIRECT THE A 0 TO ALLOW INTEREST OF Z 58.40.646/ - PAID TO THE BAN KS AND RS. 6 , 15 , 521/ - BEING THE EXPENSES INCURRED FOR DOCUMENTATION AND PROCESSING CHARGES FOR RAISING THE IMPUGNED LOANS. APPELLANT SUCCEEDS ON GROUND S NO. 1 AND 2 . FOR THE YEAR UNDER CONSIDERATION, APPELLANT CLAIMED BRAND DEVELOPMENT EXPENSES OF RS.2,59,551/ - AND PROFESSIONAL FEES PAID FOR BRAND DEVELOPMENT OF RS.11,88,206/ - WHICH WERE DISALLOWED BY THE AO ON THE GROUND THAT APPELLANT GETS ENDURING BENEFIT ON ACCOUNT OF THESE EXPENSES WHICH ARE IN THE NATURE OF CAPITAL EXPENDITURE. THE AFORESAID T WO ADDITIONS WHICH WERE CONFIRMED BY ME ALSO STAND DELETED BY THE AFORESAID ORDER OF THE HONBLE ITAT FOR THE AY 2008 - 09. RESPECTFULLY FOLLOWING THE HONBLE ITATS ORDER, I DELETE THE ADDITIONS MADE BY THE AO FOR THE YEAR UNDER CONSIDERATION. APPELLANT SUC CEEDS ON THIS ISSUE. WE FIND THAT, T HE TRIBUNAL, IN AY 2008 - 09 HAS DEALT AND DECIDED THIS ISSUE IN THE FOLLOWING MANNER: 4. THE LD. CIT(A) CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE OBSERVED THAT THE MOU WAS ENTERED BETWEEN THE ASSESSEE FIRM A ND ITS PARTNERS FOR RAISING THE LOAN BY MORTGAGING THE PERSONAL PROPERTIES OF THE PARTNERS FOR THE PURPOSE OF BUSINESS REQUIREMENTS OF THE FIRM. SINCE THE ASSESSEE FIRM WAS IN NEED OF FUNDS AND HAS ALREADY REACHED ITS LIMITS TO BORROW IN THE NAME OF THE FI RM, THE MOU WAS SIGNED TO GET THE LOANS IN THE NAME OF PARTNERS AND THEREAFTER THE LOAN AMOUNT WAS TRANSFERRED TO THE BANK ACCOUNT OF THE ASSESSEE FIRM IMMEDIATELY AND WAS UTILIZED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. THE INSTALLMENTS OF PRINCI PLE AND THE INTEREST THEREOF WERE PAID BY THE FIRM DIRECTLY TO THE RESPECTIVE BANKS/LIC. THE INTEREST PAID WAS NOT CLAIMED AS EXPENDITURE IN THE HANDS OF THE PARTNERS. THUS THE INTENTION OF THE ASSESSEE FIRM WAS TO TAKE LOANS FOR THE PURPOSE OF ITS WORKING CAPITAL REQUIREMENT WITH THE HELP OF THE PERSONAL PROPERTIES OF THE PARTNERS AND THE PARTNERS WERE MERELY USED AS CONDUITS TO OBTAIN THE FUNDS. HENCE THE FIRM AS PER THE MOU HAD TO BEAR THE INTEREST AND OTHER EXPENDITURE INCURRED FOR OBTAINING THE LOAN WH ICH WERE ALLOWABLE EXPENSES IN THE HANDS OF THE ASSESSEE FIRM IN FULL AND THAT THE PROVISIONS OF SECTION 40(B)(IV) WERE NOT ATTRACTED IN THIS CASE. HE THEREFORE OBSERVED THAT IN THE CASE OF THE 6 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 ASSESSEE THE SUBSTANCE OF THE TRANSACTION AND THE CONDUCT OF T HE ASSESSEE FIRM AND ITS PARTNERS APPARENTLY REVEAL THAT IT WAS ONLY ONE TRANSACTION I.E. OBTAINING OF LOAN FROM VARIOUS FINANCIAL INSTITUTIONS, BANKS, LIC BY USING THE PARTNERS AS A GO BETWEEN. THE INTEREST PAYMENTS WERE DIRECTLY MADE BY THE ASSESSEE FIRM TO THE RESPECTIVE INSTITUTIONS AND NOT BY THE PARTNERS. THE LOANS WERE TRANSFERRED TO THE BANK ACCOUNT OF THE ASSESSEE FIRM IMMEDIATELY ON OBTAINING THE SAME BY THE PARTNERS AND THEY WERE REFLECTIVE TO BE THE LIABILITIES OF THE ASSESSEE FIRM IN THE AUDITE D ACCOUNTS. THE LD. CIT(A) THEREFORE CONCLUDED THAT THE INTEREST PAID BY THE ASSESSEE FIRM ON THE LOANS OBTAINED BY THE PARTNERS FROM BANKS/LIC AND GIVEN TO THE ASSESSEE FIRM DID NOT ATTRACT THE PROVISIONS OF SECTION 40(B)(IV) OF THE ACT. HE ALSO CONCLUDED THAT THE FINANCIAL EXPENSES INCURRED IN RAISING THE ABOVE LOANS CONSTITUTE DEDUCTABLE EXPENDITURE IN THE HANDS OF ASSESSEE FIRM. HE ACCORDINGLY DELETED THE ADDITIONS MADE BY THE AO IN THIS RESPECT. 5. AFTER HEARING THE LD. REPRESENTATIVES OF THE PARTIE S AND GOING THROUGH THE RECORDS, WE DO NOT FIND ANY INFIRMITY IN THE WELL REASONED ORDER OF THE LD. CIT(A) AND THE SAME IS ACCORDINGLY UPHELD . 6. THUS, CONSISTENT WITH THE VIEW TAKEN IN THE EARLIER YEARS, WHICH IS APPLICABLE MUTATIS MUTANDIS IN THIS YEA R ALSO, WE CONFIRM THE ORDER OF THE CIT(A) AND ACCORDINGLY, GROUNDS NO. 1 TO 4 RAISED BY THE REVENUE ARE DISMISSED. 7. SO FAR AS THE ISSUE RELATING TO GROUND NO.5, WE FIND THAT THIS ISSUE HAS BEEN DECIDED BY THE AO IN THE SIMILAR WAY AS HAS BEEN DONE I.E. IN AY 2008 - 09. THE RELEVANT OF FACT AS DISCUSSED IN THE ASSESSMENT ORDER IS THAT, THE ASSESSEE HAS CLAIMED EXPENSES AMOUNTING TO RS.2,59,551/ - UNDER THE HEAD BRAND DEVELOPMENT AND EXPENSE AMOUNT OF RS.11,88,206/ - UNDER THE HEAD PROFESSIONAL FEES PAID TO M/S SURAAH ASSOCIATES. THESE EXPENSES HAVE BEEN INCURRED FOR DEVELOPING AND PROMOTING THE BRAND KIAH AND RELATED LOGOS. T HE AO HELD THAT , SINCE THESE EXPENSES HAVE BEEN INCURRED FOR THE DEVELOPMENT OF THE BRAND OF THE ASSESSEE AND 7 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 BENEFITS ARE ENDURI NG IN NATURE, THEREFORE, IT HAS TO BE TREATED AS CAPITAL. ACCORDINGLY, HE DISALLOWED THE CLALIM. 8. THE LD. CIT(A) DELETED THE SAID ADDITION ON THE GROUND THAT, THE TRIBUNAL IN AY 2008 - 09 HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE. 9. WE FIND THAT, THE TRIBUNAL HAS DECIDED THIS ISSUE IN AY 2008 - 09 IN FAVOUR OF THE ASSESSEE AFTER OBSERVING AND HOLDING AS UNDER: - WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND ALSO THE CASE LAWS RELIED UPON BY THE LD. COUNSEL FOR THE ASSESSEE. WE FIND THAT THE ASSESSEE HAS NOT CREATED ANY TANGIBLE OR INTANGIBLE ASSETS OF ENDURING NATURE BY INCURRING SUCH BRAND DEVELOPMENT EXPENSES. IN OUR CONSIDERATE VIEW, SUCH EXPENSE IS AN INTEGRAL PART OF THE PROFIT EARNING PROCESS OF THE ASSESSEE FIRM AND NOT FOR AN ACQUISITION OF AN ASSET OR A RIGHT OF PERMANENT IN NATURE. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF EMPIRE JUTE CO. ( SUPRA) AND FINLAY MILLS LTD (SUPRA), THE BRAND DE VELOPMENT EXPENSES INCURRED BY THE ASSESSEE FIRM ARE REVENUE IN NATURE THEREFORE WE DIRECT THE AO TO ALLOW THE SAME. ACCORDINGLY, THE PROFESSIONAL CHARGES PAID TO THE TUNE OF RS.4,47,732/ - ALSO BE ALLOWED AS REVENUE EXPENDITURE. THUS, CONSISTENT WITH T HE VIEW TAKEN IN THE EARLIER YEARS, WE DECIDE THIS ISSUE IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. ACCORDINGLY, SECOND ISSUE IS ALSO DECIDED AGAINST THE DEPARTMENT AND IN FAVOUR OF THE ASSESSEE. 8 M/S SHEETAL MANUFACTURING CO ITA NO. 14 3 /M UM /201 3 10 . IN THE RESULT, APPEAL OF THE REVENUE STANDS D ISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 1 2 TH APRIL, 2016. SD/ - SD/ - ( ) ( ) (B R B ASKARAN ) ( AMIT SHUKLA ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATE: 1 2 TH APRIL, 2016 /COPY TO: - 1 ) / THE APPELLANT. 2 ) / THE RESPONDENT. 3) THE CIT(A) - 27 , MUMBAI. 4 ) THE COMMISSIONER OF INCOME TAX - 16 , MUMBAI. 5 ) , , / THE D.R. E BENCH, MUMBAI. 6 ) \ COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / , ASSTT. REGISTRAR I.T.A.T., MUMBAI *CHAVAN, SR.PS