VIL International Ltd., CHENNAI V. DCIT, CHENNAI

ITA 1467/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9154 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 05-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 29-05-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K N DHANDA
• Assessee Lawyers: B S PU RSHOTHAM
• Keywords: Capital asset; Business expenditure

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , . !'# ! , % !& BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ./ ITA NO.1467/MDS/2014 ( )( / ASSESSMENT YEAR : 2006-07 M/S VIL INTERNATIONAL LTD., C/O SHRI B.S. PURSHOTHAM, CHARTERED ACCOUNTANT, 23-A, NORTH BOAG ROAD, 3 RD FLOOR, 3D PIONEER HOMES, T. NAGAR, CHENNAI - 600 017. PAN : AABCV 2233 L V. THE DEPUTY COMMISSIONER OF INCOME TAX, COMPANY CIRCLE III(4), CHENNAI - 600 034. (+,/ APPELLANT) (-.+,/ RESPONDENT) +, / 0 / APPELLANT BY : SHRI B.S. PURSHOTHAM, CA -.+, / 0 / RESPONDENT BY : SHRI K.N. DHANDAPANI, JCIT 1 / 2% / DATE OF HEARING : 05.05.2016 3') / 2% / DATE OF PRONOUNCEMENT : 09.06.2016 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) III, CHE NNAI, DATED 08.01.2014 AND PERTAINS TO ASSESSMENT YEAR 2006-07. 2 I.T.A. NO.1467/MDS/14 2. THE FIRST ISSUE ARISES FOR CONSIDERATION IS WITH REGARD TO DISALLOWANCE OF ` 17,10,926/- BEING THE INTEREST ON BORROWED FUNDS. 3. SHRI B.S. PURSHOTHAM, THE LD. REPRESENTATIVE FOR THE ASSESSEE, SUBMITTED THAT THE ASSESSEE HAD ADVANCED A SUM OF ` 1 CRORE TO M/S VASAVI HOTELS & PROPERTIES PVT. LTD. THE ASSESSEE HAS ALSO SUFFERED A CHIT LOSS OF ` 2,59,882/-. THE ASSESSEE EXPLAINED BEFORE THE ASSESSING OFFICER THAT THE NET WORTH OF THE ASSESSEE-COMPANY WAS ` 193.61 LAKHS AND THE SHARE CAPITAL OF THE ASSESSEE-COMPANY WAS ` 1.16 LAKHS. THE RESERVE AND SURPLUS OF THE ASSESSEE-COMPANY WAS TO THE EXTENT OF ` 33.61 LAKHS. THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THE NET WORTH OF THE COMPANY WAS MORE THAN THE MONEY ADVANCED TO M/S VAS AVI HOTELS & PROPERTIES PVT. LTD. SINCE THE ASSESSEE-COMPANY HAD SUFFICIENT FUNDS IN THE FORM OF CAPITAL, SHARE APPLICATION MON EY, RESERVE AND SURPLUS, THE LOAN ADVANCED TO SISTER CONCERN WAS NO T OUT OF BORROWED FUNDS. THE LD. REPRESENTATIVE FURTHER SUB MITTED THAT THE LOAN OF ` 1 CRORE TO M/S VASAVI HOTELS & PROPERTIES PVT. LTD. WAS, IN FACT, ADVANCED IN THE EARLIER ASSESSMENT YEAR. THE REFORE, THERE WAS NO NEXUS BETWEEN MONEY BORROWED DURING THE YEAR UND ER CONSIDERATION AND THE LOAN ADVANCED TO M/S VASAVI H OTELS & 3 I.T.A. NO.1467/MDS/14 PROPERTIES PVT. LTD. IN THE EARLIER ASSESSMENT YEAR . ACCORDING TO THE LD. REPRESENTATIVE, IT IS NOT THE CASE OF THE REVEN UE THAT THE MONEY ADVANCED TO M/S VASAVI HOTELS & PROPERTIES PVT. LTD . WAS OUT OF THE BORROWED FUNDS. IN VIEW OF THE ABOVE, ACCORDING TO THE LD. REPRESENTATIVE, THE CIT(APPEALS) IS NOT JUSTIFIED I N CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER. 4. SHRI B.S. PURSHOTHAM, THE LD. REPRESENTATIVE FOR THE ASSESSEE, FURTHER SUBMITTED THAT THE ASSESSING OFFI CER HAS ALSO DISALLOWED CHIT LOSS TO THE EXTENT OF ` 2,59,882/-. ACCORDING TO THE LD. REPRESENTATIVE, THE CHIT LOSS WAS INCURRED DURI NG THE COURSE OF ASSESSEES BUSINESS, THEREFORE, THERE WAS NO JUSTIF ICATION IN DISALLOWING THE CHIT LOSS CLAIMED BY THE ASSESSEE. REFERRING TO THE CBDT CIRCULAR IN INSTRUCTION NO.1175 DATED 16.05.19 78 AND 25.03.1992, THE LD. REPRESENTATIVE SUBMITTED THAT C HIT LOSS HAS TO BE CONSIDERED AS BUSINESS LOSS. ACCORDING TO THE LD. REPRESENTATIVE, THIS CIRCULAR OF CBDT IS BINDING ON THE ASSESSING O FFICER. BOTH THE AUTHORITIES BELOW HAD NO OCCASION TO CONSIDER THE C IRCULAR OF THE CBDT. 5. ON THE CONTRARY, SHRI K.N. DHANDAPANI, THE LD. D EPARTMENTAL REPRESENTATIVE, SUBMITTED THAT THE ASSESSEE CLAIMED THAT IT HAD 4 I.T.A. NO.1467/MDS/14 SUFFICIENT MONEY IN THE FORM OF CAPITAL, RESERVE AN D SURPLUS, ETC. PLACING RELIANCE ON THE JUDGEMENT OF MADRAS HIGH CO URT IN K. SOMASUNDARAM & BROS. V. CIT (1999) 238 ITR 939, THE LD. D.R. POINTED OUT THAT IF THE ASSESSEE BORROWED FUNDS FOR THE PURPOSE OF BUSINESS OR PROFESSION, THE INTEREST ON SUCH BORROW ED FUNDS CAN BE ALLOWED UNDER SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961 (IN SHORT 'THE ACT'). THE OBJECT OF SECTION 36(1)(III) OF TH E ACT IS NOT TO ENABLE THE ASSESSEE TO MAKE A LARGE BORROWING AND CREATE A LIABILITY FOR PAYMENT OF INTEREST THEREON NOT ONLY IN THE YEAR IN WHICH THE BORROWING WAS MADE, BUT THE SUBSEQUENT YEARS AS WEL L, KEEP THE LOAN OUTSTANDING AND THEREAFTER DIVERT THE AMOUNT B ORROWED BY TAKING IT OUT OF THE BUSINESS. ACCORDING TO THE LD . D.R., IF THE ASSESSEE HAD SUFFICIENT FUNDS, THEN THERE MAY NOT B E NECESSITY TO BORROW LOAN FOR THE PURPOSE OF BUSINESS. IN VIEW O F THE JUDGEMENT OF MADRAS HIGH COURT IN K. SOMASUNDARAM & BROS. (SU PRA), BY ADVANCING THE AVAILABLE FUNDS TO OTHER COMPANIES, T HE ASSESSEE CANNOT GO ON BORROWING FUNDS FOR THE PURPOSE OF BUS INESS. ACCORDING TO THE LD. D.R., THE PAYMENT OF INTEREST ON THE AMOUNT BORROWED, WHICH IS NOT USED FOR THE PURPOSE OF BUSI NESS, CANNOT BE CONSTRUED AS BUSINESS EXPENDITURE. SECTION 36(1)(I II) OF THE ACT, ACCORDING TO THE LD. D.R., CANNOT BE CONSTRUED AS E NABLING THE 5 I.T.A. NO.1467/MDS/14 ASSESSEE TO BURDEN THE BUSINESS WITH INTEREST EVEN WHILE TAKING THE AMOUNT INITIALLY BORROWED FOR THE BUSINESS, BUT SUB SEQUENTLY TAKEN OUT OF THE BUSINESS BY DIVERTING IT AS INTEREST-FRE E LOAN TO RELATIVES OF THE PARTNERS. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FROM THE ORDER OF THE ASSESSING OFFICER IT APPEARS THAT THE ASSESS EE HAS ADVANCED FUNDS TO VARIOUS PERSONS WITHOUT CHARGING INTEREST. HOWEVER, THE ASSESSEE CLAIMS PAYMENT OF INTEREST IN THE PROFIT & LOSS ACCOUNT. THE ASSESSEE CLARIFIED BEFORE THE ASSESSING OFFICER THAT THE NET WORTH OF THE ASSESSEE-COMPANY WAS ` 193.61 LAKHS, WHICH INCLUDES SHARE CAPITAL OF ` 1,60,00,000/- AND RESERVES AND SURPLUS OF ` 33.61 LAKHS. THE ASSESSEE CLARIFIED THAT THE AMOUNT ADVA NCED TO VARIOUS PERSONS DOES NOT EXCEED THE NET WORTH OF THE ASSESS EE-COMPANY. IT IS NOT KNOWN WHETHER THE NET WORTH OF THE COMPANY W AS IN THE FORM OF LIQUID CASH OR IN THE FORM OF CAPITAL ASSET. IT IS NOT KNOWN FROM THE ORDERS OF THE LOWER AUTHORITIES THE EXTENT OF LIQUI D CASH AVAILABLE WITH THE ASSESSEE ON THE DATE OF LOAN ADVANCED. TH E ASSESSEE CLAIMS THAT A SUM OF ` 1 CRORE WAS ADVANCED TO M/S VASAVI HOTELS AND PROPERTIES PVT. LTD. THE ASSESSEE FURTHER CLAI MS THAT THE 6 I.T.A. NO.1467/MDS/14 ADVANCE MADE TO THE SISTER CONCERN WAS NOT OUT OF T HE BORROWED FUNDS. IT IS NOT KNOWN HOW M/S VASAVI HOTELS AND P ROPERTIES PVT. LTD. IS A SISTER CONCERN OF THE ASSESSEE. THE SHAR EHOLDING PATTERN OF THE ASSESSEE-COMPANY AND M/S VASAVI HOTELS AND P ROPERTIES PVT. LTD. IS NOT AVAILABLE ON RECORD. THEREFORE, T HIS TRIBUNAL IS UNABLE TO APPRECIATE THE CONTENTION OF THE ASSESSEE THAT THE ADVANCE WAS MADE TO SISTER CONCERN. IN THE ABSENCE OF ANY MATERIAL AVAILABLE ON RECORD WITH REGARD TO AVAILAB ILITY OF LIQUID CASH ON THE DATE OF PAYMENT OF ADVANCE TO M/S VASAVI HOT ELS AND PROPERTIES PVT. LTD. AND THE SHAREHOLDING PATTERN O F THE ASSESSEE- COMPANY AND M/S VASAVI HOTELS AND PROPERTIES PVT. L TD., THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE MATT ER NEEDS TO BE RECONSIDERED BY THE ASSESSING OFFICER. IN OTHER WO RDS, THE ASSESSING OFFICER HAS TO RECONSIDER THE AVAILABLE L IQUID CASH ON THE DATE OF PAYMENT OF ADVANCE MADE TO M/S VASAVI HOTEL S AND PROPERTIES PVT. LTD. AND ALSO CONSIDER THE SHAREHOL DING PATTERN OF THE ASSESSEE-COMPANY AND M/S VASAVI HOTELS AND PROP ERTIES PVT. LTD. AND THEREAFTER DECIDE THE ISSUE IN ACCORDANCE WITH LAW. ACCORDINGLY, THE ORDERS OF THE LOWER AUTHORITIES AR E SET ASIDE AND THE ISSUE OF DISALLOWANCE OF INTEREST TO THE EXTENT OF ` 17,10,926/- IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING 7 I.T.A. NO.1467/MDS/14 OFFICER SHALL RECONSIDER THE ISSUE AFRESH ON THE BA SIS OF THE MATERIAL THAT MAY BE FILED BY THE ASSESSEE BEFORE HIM. 7. THE NEXT ISSUE ARISES FOR CONSIDERATION IS WITH REGARD TO DISALLOWANCE OF CHIT LOSS. 8. THE MAIN CONTENTION OF THE ASSESSEE BEFORE THE T RIBUNAL IS THAT THE CBDT CIRCULAR WAS NOT CONSIDERED BY BOTH T HE AUTHORITIES BELOW. SINCE THE MAIN ISSUE OF DISALLOWANCE OF INT EREST ON BORROWED FUNDS WAS REMITTED BACK TO THE FILE OF ASS ESSING OFFICER, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE DISALLOWANCE OF CHIT LOSS ALSO NEEDS TO BE RECONSIDERED BY THE ASSE SSING OFFICER IN THE LIGHT OF THE CIRCULAR ISSUED BY THE CBDT. ACCO RDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE. IN RESPECT OF THE ISSUE REGARDING CHIT LOSS ALSO, THE MATTER IS REMITTED BA CK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REC ONSIDER THE MATERIAL THAT MAY BE FILED BY THE ASSESSEE, IN ACCO RDANCE WITH LAW, AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE . 9. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSE. 8 I.T.A. NO.1467/MDS/14 ORDER PRONOUNCED ON 9 TH JUNE, 2016 AT CHENNAI. SD/- SD/- (. !'# ! ) ( . . . ) (A. MOHAN ALANKAMONY) (N.R.S. GANESAN) % / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 5 /DATED, THE 9 TH JUNE, 2016. KRI. / -267 87)2 /COPY TO: 1. +, /APPELLANT 2. -.+, /RESPONDENT 3. 1 92 () /CIT(A)-III, CHENNAI-34 4. 1 92 /CIT, CHENNAI-III, CHENNAI-34 5. 7: -2 /DR 6. ;( < /GF.