DCIT, New Delhi V. M/s. Assured Fin-cap (P) Ltd., New Delhi

ITA 1488/DEL/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 4283 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 06-04-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 06-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MRS ANUSHA KHURANA
• Keywords: Opportunity of being heard; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `A: NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA, VICE PRESIDENT AND SHRI C.L.SETHI, JUDICIAL MEMBER. I.T. A. NO.1488/DEL/2010 ASSESSMENT YEAR: 2006-07 DEPUTY COMMISSIONER OF INCOME-TAX, M/S. ASSURED FI N-CAP (P) LTD., CIRCLE 2(1), NEW DELHI. VS. 310, 3 RD FLOOR, MUKUND HOUSE, A-1/2, NANI WALA BAGH, AZADPUR COMMERCIAL COMPLEX, DELHI. PAN: AADCA8714F I.T.A.NO.1829/DEL/2010 ASSESSMENT YEAR : 2006-07 M/S. ASSURED FINCAP PVT. LTD., DY. COMMISSIONER O F I.TAX, 304A, MUKUND HOUSE, VS. CIRCLE2(1), NEW DELHI. AZADPUR COMMERCIAL COMPLEX, NEW DELHI. (APPELLANTS) (RESPONDENTS) DEPARTMENT BY : MRS. ANUSHA KHURANA, SR.DR. ASSESSEE BY : SHRI K. S AMPATH, ADVOCATE. O R D E R PER C.L. SETHI, JUDICIAL MEMBER: THESE ARE CROSS APPEALS, FILED BY THE REVENUE AS WE LL BY THE ASSESSEE, AGAINST THE ORDER DATED 28.01.2010 PASSED BY THE CO MMISSIONER OF INCOME- TAX (APPEALS), PERTAINING TO THE ASSESSMENT YEAR 20 06-07. 2 ITA NO.1488/DEL/2010: 2. WE SHALL FIRST TAKE THE APPEAL FILED BY THE REVE NUE. 3. THE ONLY GROUND RAISED IN THIS APPEAL IS AGAINST THE CIT(A)S ORDER IN DELETING THE ADDITION OF RS.19,42,658/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST ACCRUED ON INTEREST-FREE ADVANC ES MADE TO M/S. ACME CRAFT (P) LTD.. 4. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF SALE AND PURCHASE OF SHARES AND COMMODITIES AND ADVANCING OF LOANS ET C. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO TH AT THE ASSESSEE HAD GIVEN INTEREST-FREE ADVANCE OF RS.2,99,00,000/- TO M/S. ACME CRAFT (P) LTD. WHEREAS THE COMPANY HAD TAKEN LOANS AND ADVANCES O N WHICH, INTEREST AMOUNTING TO RS.5,03,51,745/- HAS BEEN PAID. THE A O, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROPORTIONATE INT EREST PAID SHOULD NOT BE DISALLOWED. THE AO THEN EXAMINED THE FACTS OF THE CASE AND STATED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE INTERE ST-FREE ADVANCE TO M/S. ACME CRAFT (P) LTD. WAS GIVEN FOR THE PURPOSE OF BU SINESS. THE AO FURTHER STATED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT THE LOAN WAS GIVEN OUT OF ITS OWN FUNDS AS THE ASSESSEE FAILED TO FURNISH A CASH-FLOW STATEMENT. THE AO, THEREFORE, DISALLOWED THE INTEREST AMOUNTING TO RS.19,42,658/- CALCULATED @ 10% AS PER THE TRANSACTIONS SHOWN IN T HE LEDGER ACCOUNT OF 3 M/S. ACME CRAFT (P) LTD. AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 5. BEING AGGRIEVED, THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 6. BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT T HE ADVANCE TO M/S. ACME CRAFT (P) LTD. WAS MADE OUT OF COMPANYS OWN F UNDS, AND IN THAT REGARD, THE ASSESSEE HAD DRAWN ATTENTION TO THE BAL ANCE-SHEET ASS ON 31.03.2005 VIS--VIS 31.03.2006. IT WAS, THUS, SUB MITTED BY THE ASSESSEE BEFORE THE LEARNED CIT(A) THAT SINCE THE AMOUNT WAS GIVEN OUT OF OWN FUNDS AND NOT OUT OF INTEREST BEARING FUNDS, THERE WAS NO QUESTION OF DISALLOWING INTEREST EXPENSES. THE ASSESSEE ALSO RELIED UPON V ARIOUS DECISIONS IN SUPPORT THEREOF. 7. AFTER CONSIDERING THE ASSESSEES EXPLANATION AND THE AOS ORDER, THE LEARNED CIT(A) DELETED THE ADDITION BY OBSERVING AS UNDER:- 3.1 I HAVE PERUSED THE FACTS OF THE CASE GROUNDS O F APPEAL, WRITTEN SUBMISSIONS OF THE AR, ASSESSMENT ORDER CAR EFULLY. THE ASSESSEE IS HAVING HIS OWN FUND IN THE FORM OF CAPI TAL AND RESERVE & SURPLUS OF RS.10 CRORES AND ABOVE IN THE BEGINNING OF THE ACCOUNTING YEAR AND END OF THE ACCOUNTING YEAR RELATED TO THIS A.Y. 2006-07. THERE ARE SEVERAL HIGH COURT JU DGMENTS ON THIS ISSUE IN FAVOUR OF THE ASSESSEE. 4. WHEN THE ASSESSEE IS HAVING HIS OWN FUND SUFFICI ENT TO GIVE LOAN TO OTHER ASSESSEE WITHOUT CHARGING ANY IN TEREST, THEN NO INTEREST CAN BE DISALLOWED FROM INTEREST PAID TO OTHER PARTIES ON BORROWED CAPITAL OBTAINED IN THE ACCOUNTING YEAR . IN THE 4 CASE OF MIXED FUND RECEIVED AND PAID OUT OF ONE BAN K ACCOUNT, THERE IS NO NEED TO CORRELATE THE INTEREST FREE FUN D ADVANCED TO OTHER PARTIES IN THE ACCOUNTING YEAR WITH HIS OWN M ONEY AVAILABLE ON THE DATE OF GIVING THE LOAN TO THE OTH ER PARTIES. THOUGH, HIS MONEY MAY BE LOCKED UP IN FIXED ASSETS AND OTHER CURRENT ASSETS DURING THE YEAR, HOWEVER, DUE TO VAR IOUS JUDGEMENTS OF ITATS AND HIGH COURTS, I ALLOW THE ASSESSEES APPEAL ON THIS ISSUE. THE ADDITION OF RS.19,42,658 /- IS HEREBY DELETED. 8. HENCE, THE DEPARTMENT IS IN APPEAL BEFORE US. 9. THE LEARNED DR HAS VEHEMENTLY CONTENDED THAT THE ASSESSEE HAS NOT BEEN ABLE TO PROVE AND ESTABLISH THAT THE INTEREST- FREE ADVANCE TO M/S. ACME CRAFT (P) LTD. WAS MADE OUT OF ASSESSEES OWN FUNDS AND WAS MADE FOR THE PURPOSE OF BUSINESS AND, THEREFORE, THE AO WAS JUST IFIED IN DISALLOWING THE PROPORTIONATE INTEREST ON THE AMOUNT OF ADVANCE GIV EN INTEREST-FREE TO M/S. ACME CRAFT (P) LTD. 10. THE LEARNED COUNSEL FOR THE ASSESSEE HAS SUBMIT TED THAT THE ASSESSEE HAD SUFFICIENT OWN SURPLUS FUNDS DURING THE YEAR UN DER CONSIDERATION, AS WOULD BE EVIDENT FROM THE BALANCE-SHEET FOR THE YEA R ENDED ON 31 ST MARCH, 2006 WHERE, THE PREVIOUS YEARS FIGURE HAS ALSO BEE N GIVEN. HE HAS DRAWN OUR ATTENTION TO THE BALANCE-SHEET OF THE ASSESSEE AS ON 31 ST MARCH, 2006 AND ANNEXURE THERETO. IN THE COURSE OF HEARING OF THIS APPEAL, THE ASSESSEE HAS ALSO FILED A SUMMARY OF FUND-FLOW STATEMENT FOR THE F.Y. 2005-06. IN THE LIGHT OF THE SURPLUS FUND BEING AVAILABLE WITH THE ASSESSEE, THE LEARNED 5 COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE LEARNED CIT(A) HAS RIGHTLY DELETED THE ADDITION. 11. WE HAVE CONSIDERED THE RIVAL CONTENTIONS OF BOT H THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CAS E, WE ARE CONCERNED ABOUT THE QUESTION AS TO WHETHER INTEREST-FREE ADVANCE TO M/S. ACME CRAFT (P) LTD. HAS BEEN GIVEN OUT OF THE ASSESSEES OWN FUNDS AND NOT OUT OF INTEREST BEARING FUNDS. THE TOTAL AMOUNT OF INTEREST-FREE A DVANCE GIVEN TO M/S. ACME CRAFT (P) LTD. IS OF RS.2.99 CRORE. IN THE YE AR UNDER CONSIDERATION, THE ASSESSEE HAS DECLARED INCOME OF RS.3.5 CRORE WH ICH IS MORE THAN THE AMOUNT GIVEN INTEREST-FREE TO M/S. ACME CRAFT (P) L TD. THE ASSESSEE HAS SUBMITTED BEFORE US THE FUND-FLOW STATEMENT FOR THE FINANCIAL YEAR 2005-06 WHICH IS AS UNDER:- SOURCES OF FUNDS AMOUNT (RS. IN LACS) UTILISATION OF FUNDS AMOUNT (RS. IN LACS) PROFIT EARNED DURING THE YEAR (AFTER TAX) REDUCTION IN STOCKS INCREASE IN LIABILITIES. 346.13 328.14 365.62 REPAYMENT OF SECURED LOANS REPAYMENT OF UNSECURED LOANS INCREASE IN CURRENT ASSETS 500.66 399.70 139.53* TOTAL 1,039.89 1,039.89 6 *DETAILS OF INCREASE IN CURRENT ASSETS. UTILISATION OF FUNDS ADVANCE TO ACME CRAFT PVT. LTD. PAYMENT OF ADVANCE TAX/TDS LESS: SOURCES OF FUNDS MONEY RECEIVED FROM DEBTORS REDUCTION IN CASH/BANK BALANCE/OTHER CURRENT ASSETS NET INCREASE AMOUNT (RS. IN LACS) 299.00 109.30 408.30 256.67 12.10 139.53 FROM THIS FUND-FLOW STATEMENT, WE FIND THAT THE ASS ESSEE HAD EARNED PROFIT AFTER TAX RS.346.13 LAKH. THE ASSESSEE HAS ALSO RE DUCED THE STOCKS TO THE EXTENT OF RS.328.14 LAKHS. NON-INTEREST BEARING LIA BILITIES HAVE BEEN INCREASED BY RS.365.62 LAKHS. DURING THE YEAR, THE ASSESSEE HAS MADE REPAYMENT OF INTEREST BEARING SECURED LOAN TO THE E XTENT OF RS.500.66 LAKHS. THE ASSESSEE HAS ALSO MADE REPAYMENT OF UNSECURED L OANS AMOUNTING TO RS.399.70 LAKHS. THUS, THERE WAS AN INCREASE IN TH E CURRENT ASSETS TO THE EXTENT OF RS.139.53 LAKHS. THE DETAILS OF INCREASE IN CURRENT ASSETS HAVE ALSO BEEN GIVEN INCLUDING THE ADVANCE OF RS.299.00 LAKHS GIVEN TO M/S. ACME CRAFT (P) LTD. THE ASSESSEE HAS UTILIZED THE FUNDS OF RS.408.30 LAKHS DURING THE YEAR AND SOURCE OF THIS FUND IS MONEY OF RS.256 .67 LAKHS RECEIVED FROM DEBTORS AND RS.12.10 LAKHS BEING REDUCTION IN CASH AND BANK BALANCE AND 7 OTHER CURRENT ASSETS. THESE FIGURES HAVE BEEN COMP ARED WITH THE BALANCE- SHEET FILED BY THE ASSESSEE. THE ASSESSEE HAD RESE RVE AND SURPLUS AT THE BEGINNING OF THE YEAR TO THE EXTENT OF RS.29,43,210 /- WHICH HAS BEEN INCREASED TO RS.3,75,56,388/-. THE RESERVE AND SUR PLUS AMOUNTING TO RS.3,75,56,388/- AT THE END OF THE YEAR INCLUDES SU RPLUS OF RS.2,99,66,388/- TRANSFERRED FROM PROFIT AND LOSS ACCOUNT. THE UNSE CURED LOAN OF RS.27,48,37,547/- AT THE BEGINNING OF THE YEAR HAS BEEN REDUCED TO RS.23,48,67,488/-. THE SECURED LOAN OF RS.5,00,66, 397/- AT THE BEGINNING OF THE YEAR HAS BEEN REDUCED TO RS. NIL AT THE END OF THE YEAR. FROM THIS, IT IS CLEAR THAT THE ASSESSEE HAS NOT RAISED ANY NEW SECU RED OR UNSECURED LOAN. IN THE COURSE OF HEARING, THE LEARNED DR IN REPLY HAS NOT POINTED OUT ANY DEFECT OF DISCREPANCY IN THE FUND-FLOW STATEMENT FOR THE F .Y. 2005-06 FILED BEFORE US. 12. IN THE LIGHT OF THE DISCUSSION MADE ABOVE, WE A RE, THEREFORE, OF THE CONSIDERED VIEW THAT THE CIT(A) HAS RIGHTLY DELETED THE ADDITION IN THE LIGHT OF THE FACTS THAT THE ASSESSEE WAS HAVING SUFFICIEN T FUND IN THE FORM OF CAPITAL AND RESERVE AND SURPLUS WHICH WAS UTILIZED FOR THE PURPOSE OF MAKING INTEREST-FREE ADVANCE TO M/S. ACME CRAFT (P) LTD. WE, THEREFORE, REJECT THIS GROUND RAISED BY THE REVENUE. ITA NO.1829/DEL/2010 : 8 13. NOW WE SHALL COME TO APPEAL FILED BY THE ASSESS EE. 14. THE ONLY ISSUE INVOLVED IN THE ASSESSEES APPEA L IS REGARDING THE DISALLOWANCE OF RS.17,08,587/- MADE UNDER THE PROVI SION OF SEC. 14A OF THE INCOME-TAX ACT, 1961. 15. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE ASSESSING OFF ICER WORKED OUT THE AMOUNT OF DISALLOWANCE UNDER SEC. 14A BY APPLYING T HE METHOD PRESCRIBED IN RULE 8D OF THE INCOME-TAX RULES. 16. ON APPEAL, THE LEARNED CIT(A) CONFIRMED THE AO S ACTION RELYING ON THE DECISION OF SPECIAL BENCH OF INCOME-TAX APPELLA TE TRIBUNAL, MUMBAI IN THE CASE OF ITO VS. DAGA CAPITAL MANAGEMENT (P) LTD . (2009) 117 ITD 169 (MUM.)(SB). THE CIT(A) FURTHER OBSERVED THAT THERE WAS NO ORDER OF ANY HIGH COURT ON THIS ISSUE IN FAVOUR OF THE ASSESSEE. 17. IN THE COURSE OF HEARING OF THIS APPEAL, THE LE ARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE DECISION OF SPECIAL BEN CH OF ITAT, MUMBAI IN THE CASE OF DAGA CAPITAL MANAGEMENT (P) LTD. (SUPRA ) HAS BEEN OVERRULED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. VS. DCIT (2010) 328 ITR 81. HE, THEREFORE , SUBMITTED THAT THE MATTER MAY GO BACK TO THE ASSESSING OFFICER FOR DEC IDING THE ISSUE IN THE 9 LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. VS. DCIT (2010) 328 IT R 81. 18. THE LEARNED DR ON THE OTHER HAND, MERELY SUPPOR TED THE AOS ORDER. 19. IN THE LIGHT OF THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ BOYCE MANUFACTURING CO. LTD. (SUPRA), IT IS CLEAR THAT RULE 8D SHALL BE APPLICABLE ONLY FROM THE ASSESSMENT YEAR 2 008-09 AND NOT YEARS PRIOR TO THAT. WE ARE CONCERNED WITH THE ASSESSMEN T YEAR 2006-07. THEREFORE, THE METHOD ADOPTED BY THE AO AS WELL AS BY THE CIT(A) IN APPLYING RULE 8D IS NOT JUSTIFIED. HOWEVER, IN ORD ER TO DETERMINE THE EXPENSES INCURRED BY THE ASSESSEE FOR EARNING THE E XEMPTED INCOME, THE MATTER NEEDS TO BE EXAMINED BY THE ASSESSING OFFICE R. WE, THEREFORE, RESTORE THIS MATTER BACK TO THE FILE OF THE AO FOR HIS FRESH ADJUDICATION AFTER PROVIDING REASONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. WE ORDER ACCORDINGLY. 20. IN THE RESULT, THE APPEAL FILED BY THE REVENUE STANDS DISMISSED AND THAT OF THE ASSESSEE IS TREATED TO BE ALLOWED FOR STATIS TICAL PURPOSES. 21. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 8 TH APRIL, 2011. SD/- SD/- (G.E. VEERABHADRAPPA) (C.L. SETHI) VICE PRESIDENT JUDICIAL MEMBER DATED: 8 TH APRIL, 2011. 10 ITA NOS.1488 & 1829/DEL/2010 COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.