DCIT, Circle-3(2), Hyderabad, Hyderabad V. M/s Suryavanshi Spinning Mills Limited, Secunderabad

ITA 1548/HYD/2014

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 98630 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-10-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 07-10-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B KURMI NAIDU
• Assessee Lawyers: V SIVA KUMAR
• Keywords: Business income; Proportionate interest; Commercial expediency
• Section: 6; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT. P.MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1548/HYD/2014 (ASSESSMENT YEARS 2006-07) DY. COMMISSIONER OF INCOME - TAX, CIRCLE 3(2), HYDERABAD V/S M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD. (PAN - AADCS 8020 J ) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI B.KURMI NAIDU DR RESPONDENT BY : SHRI V.SIVA KUMAR DATE OF HEARING 21. 10.2015 DATE OF PRONOUNCEMENT 28.10.2015 O R D E R PER B.RAMAKOTAIAH, ACCOUNTANT MEMBER : THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDE RS OF THE COMMISSIONER OF INCOME-TAX (APPEALS) IV, HYDERABAD DATED 11.7.2014 ON THE ISSUE OF DELETION OF DISALLOWANCE OF INTERES T OF RS.23,04,880. 2. REVENUE HAS RAISED THE FOLLOWING GROUNDS- 1. . 2. THE LEARNED CIT(A) FAILED TO APPRECIATE THE FACT THAT THE LOANS BORROWED BY THE ASSESSEE ARE FOR THE BUSINESS OF THE SISTER CONCERN AND NOT FOR ITS OWN BUSINESS AND HENCE THREE IS NO COMMERCIAL EXPEDIENCY AS SUCH TO THE ASSESSEE. 3. THE LEARNED CIT(A) HAS NOT APPRECIATED THE FACT THAT THE HON'BLE ITAT B-BENCH HYDERABAD IN ASSESSEES OWN CAS E IN ITA NO.1173/HYD/2009 DATED 31/03/2011 FOR THE ASSESSMENT YEAR 2003-04 UPHELD THE DISALLOWANCE OF INTEREST UNDER SIMILAR CONDITIONS. 4. . ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 2 3. BRIEFLY STATED, THE ASSESSING OFFICER MADE THE DISALLOWANCE OF INTEREST OF RS.23,04,880 OUT OF THE INTEREST CL AIMED BY THE ASSESSEE DURING THE YEAR. ASSESSEE HAD GIVEN AN INTEREST FR EE LOAN OF RS.255 LAKHS TO ITS SUBSIDIARY, SURVAYAVANSHI TEXTILES LTD . (STL). IT WAS SUBMITTED THAT STL HAS BEEN SET UP IN 1994 AND IT H AD SUFFERED CONTINUOUS LOSSES AND THAT IN VIEW OF EROSION OF IT S NET WEALTH, A REFERENCE HAD BEEN MADE TO BIFR UNDER CASE NO.69/20 03 AND THAT MONIES WERE ADVANCED TO SUPPORT THE ASSESSEES SUBS IDIARY FOR COMMERCIAL USE. THE ASSESSEE RELIED ON THE RATIO L AID DOWN BY THE SUPREME COURT IN SA BUILDERS LTD. V/S. CIT (288 ITR 1) AND MUNJAL SALES CORP. V/S. CIT (298 ITR 298). THE ASSESSING OFFICER DID NOT AGREE AND NOTED AS UNDER:- IN SUPPORT OF ITS CONTENTION THE ASSESSEE PLACED RELIANCE ON THE DECISION IN THE CASES OF SA BUILDERS LTD. V /S. CIT (288 ITR 1) AND MUNJAL SALES CORP. V/S. CIT(298 ITR 298). WIT H DUE RESPECT TO THE DECISIONS MENTIONED IN THE ABOVE CAS ES, IT IS TO BE STATED THAT THE ASSESSEES CASE IS QUITE DISTING UISHABLE. AS PER THE STATEMENT OF COMPUTATION OF TOTAL INCOME TH E ASSESSEE HAS SET OFF C/F LOSS OF RS.12,61,35,000/- AND QUANT IFIED THE LOSSES TO BE C/F TO THE SUBSEQUENT YEARS AT RS.35,24 ,17,163/-. IT IS ALSO NOT ESTABLISHED THAT THE ADVANCE TO SIST ER CONCERN WAS MADE AS A MEASURE OF COMMERCIAL EXPEDIENCY OF THE ASSESSEE. AS CAN BE SEEN FROM THE FINANCIAL STATEMENTS, THE A SSESSEE HAD EFFECTED SALES OF RS.3.12 CRORES TO M/S. SURYAVANSH I TEXTILES LTD. AS AGAINST THE TOTAL SALE OF THE ASSESSEE AT RS .231.84 CRORES AND THE PURCHASES FROM M/S. SURYAVANSHI TEXT ILES AMOUNTED TO RS.7.41 CRORES AS AGAINST THE TOTAL PURC HASE OF FINISHED GOODS OF THE ASSESSEE AT RS.63.61 CRORES. I N FACT SRUYAVANSHI TEXTILES LTD. HAS RETURNED A PROFIT OF RD.81,88,810/- FOR THE PERIOD RELATING TO THE ASSESS MENT YEAR 2006-07. IT IS EVIDENT FROM THE ABOVE THAT ADVANCING MONEY W ITHOUT RECEIPT OF INTEREST TO M/S. SURYAVANSHI TEXTILES LI MITED, WHILE ITSELF PAYING INTEREST ON BORROWED FUNDS IS BY NO MEANS COMMERCIAL EXPEDIENCY. IT IS FURTHER MENTIONED IN T HE JUDGMENT OF THE APEX COURT THAT IT DOES NOT MEAN TH AT INTEREST ON BORROWED FUNDS ADVANCED TO SUBSIDIARY CONCERNS A LWAYS TO BE ALLOWED BUT IT COULD DEPEND UPON THE FACTS AND CIRCUMSTANCES OF THE CASES. SURYAVANSHI TEXTILES L IMITED IS NOT ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 3 A SUBSIDIARY OF THE ASSESSEE DURING THE PREVIOUS YE AR RELEVANT TO THE ASST. YEAR 2006-07 AND THE FACTS AND CIRCUMS TANCES OF THE CASE DO NOT ENTITLE THE ASSESSEE FOR SUCH DEDUC TION. THE ASSESSEE ADVANCED RS.196.16 LAKHS TO SURVAYAVAS NSHI TEXTILES LIMITED. THE INTEREST THAT IS BEING PAID BY THE ASSESSEE IS 11.75%. THEREFORE, THE INTEREST ON RS.196.16 LAKHS WORKS OUT TO RS.23,04,880/- AND THE SAME IS DISALLOWED. 4. ASSESSEE CONTESTED THE ABOVE DISALLOWANCE BEFO RE THE LEARNED CIT(A) AND RELIED ON THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE OF SA BUILDERS (SUPRA). THE LEAR NED CIT(A) ACCEPTED THE ASSESSEES CONTENTION AND DELETED THE DISALLOWA NCE MADE BY THE ASSESSING OFFICER FOR THE FOLLOWING REASONS- 5.4. I HAVE CONSIDERED THE FACTS ON RECORD AND T HE SUBMISSIONS OF THE AR. IN THE CASE OF S.A. BUILDER S LTD., THE SUPREME COURT EMPHASIZED THAT THE MATTER OF ALLOWAB ILITY OF INTEREST WAS REQUIRED TO BE EXAMINED FROM THE POIN T OF VIEW OF COMMERCIAL EXPEDIENCY. WHILE DOING SO, THE SUPREME COURT MADE THE FOLLOWING SPECIFIC OBSERVATIONS WHICH ARE RELEVANT TO THE FACTS OF THE APPELLANTS CASE: WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINIO N THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALL OWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT A LL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPE CTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE F OR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVAN CED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MA NY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BYTE EH SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INT EREST ON ITS BORROWED LOANS. THESE OBSERVATIONS ARE RELEVANT BECAUSE THE ADVANCE S HAVE BEEN GIVEN BY THE APPELLANT TO ITS SUBSIDIARY WHICH HAD BECOME A SICK COMPANY AND WHICH UTILISED THE ADVANCES FOR ITS BUSINESS ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 4 PURPOSES. RESPECTFULLY FOLLOWING THE DECISIONS OF T HE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD., THE DISALL OWANCE OF INTEREST IS DIRECTED TO BE DELETED. 5. REVENUE IN THIS APPEAL IS CONTENDING THAT THE ITAT IN AN EARLIER ASSESSMENT YEAR, VIZ. 2003-04 HAS UPHELD TH E DISALLOWANCE OF INTEREST UNDER SIMILAR CONDITIONS. 6. THE LEARNED COUNSEL IN REPLY HOWEVER, SUBMITT ED THAT THE ASSESSEE HAS ORIGINALLY ADVANCED FUNDS WAY BACK IN 1996-97 AND 1997-98 AND NO DISALLOWANCE WAS MADE IN THE INITIAL YEARS. HE HAS FURTHER SUBMITTED THAT FOLLOWING THE VIEW TAKEN IN ASSESSMENT YEAR 2003-04 BY THE CIT(A), THE LEARNED CIT(A) ALLOWED T HE ASSESSEES CONTENTIONS IN ASSESSMENT YEAR 2004-05 AND THE REVE NUE HAS NOT PREFERRED ANY APPEAL FOR THAT YEAR. IN VIEW OF THI S, IT IS SUBMITTED THAT THE ORDER OF THE CIT(A) IS JUSTIFIED ON THE FACTS O F THE CASE. THE LEARNED COUNSEL ALSO RELIED ON THE CASES CITED SUPR A AND ALSO PLACED ON RECORD, THE DECISION OF THE COORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF SSPDL LTD. V/S. DY. CIT CIRCLE 3(2), HYDERABAD ( 2013)33- TAXMANN.COM.447(HYDERABAD-TRIB) FOR THE PROPOSITION THAT IN THE ABSENCE OF CLEAR CUT NEXUS BETWEEN THE AMOUNT ADVAN CED TO SISTER CONCERN AND THE INTEREST INCURRED ON BORROWINGS, N OTIONAL INTEREST CANNOT BE DISALLOWED ON THE GROUND OF NON-UTILISATI ON OF FUNDS FOR PURPOSES OF BUSINESS. 7. LEARNED DEPARTMENTAL REPRESENTATIVE, IN REPLY SUBMITTED THAT THE ITAT HAS CONSIDERED SIMILAR FACTS IN THE A SSESSMENT YEAR 2005-06 AND CONFIRMED THE DISALLOWANCE FOLLOWING TH E ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2003-04. ACCORDINGLY, HE SUBMITTED THAT THE ORDER OF THE CIT (A) REQUIRES TO BE SET ASIDE. ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 5 8. WE HAVE CONSIDERED THE ISSUE AND EXAMINED THE ORDERS PLACED ON RECORD. COORDINATE BENCH OF THIS TRIBUNA L IN ASSESSMENT YEAR 2003-04 ON REVENUES APPEAL, HAS REVERSED THE ORDER OF THE CIT(A), BY STATING AS UNDER- 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS ON RECORD AND CAREFULLY GONE THROUGH THE CASE LAWS CITED BY THE PARTIES. THE MAIN PLEA OF THE ASS ESSEES COUNSEL HEREIN IS THAT M/S SVTL AS BECOME A SICK CO MPANY, AS SUCH INTEREST WAS NOT CHARGED. THE CONTENTION OF THE DEPARTMENT IS THAT THE ASSESSEE CANNOT FORESEE THE SICKNESS OF SVTL AND THEREBY C A NNOT TAKE A PL E A THAT IT HAS NOT CHARG E D THE INT E R E ST . I F TH E SVTL GOING TO BECOME S I CK UNIT , THEN IT WILL VERY MUCH CL A IM TH E S AME A S BAD DEBT. WE FIND FORCE IN THE ARGUMENT OF THE DEP A RTMEN T AL REPRESENT A TIV E . THE S E C.36(1)(III) OF THE IT ACT PROVIDES FOR DEDU C TION OF INTEREST ON LOANS R A ISED FOR BUSINESS PURPOSES . ONCE THE ASSESSE E CLAIMS A NY SU C H D E DU C TION , THE ONUS WILL B E ON THE ASSESSEE TO S A T I SF Y TH E A SS E SSING OFFICER THAT WHATEVER LEANS WERE RAISED BY TH E ASSESS E E W A S US E D FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAMINATION OF SUCH DEDUCTION , IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS T O SISTER CONCERNS OR AN Y OTHER PERSON WITHOUT ANY INTEREST , THERE SHOULD B E V ER Y ONUS ON THE ASSESSEE TO DISCHARGE BEFORE THE ASSESSING OFFIC E R TO T H E EFFECT THAT IN SPITE OF BORROWING LOANS ON WHICH THE ASSESSEE IS INCURRIN G LIABILITY TO PAY INTEREST , THERE WAS JUSTIFICATION TO ADVANCE LOAN TO ITS SISTER C ONCERN / SUBSIDIARY COMPANY WITHOUT ANY INTEREST AND ACCORDINGL Y , THE ASSESSEE SHOULD BE A LLOW DEDUCTION OF INTEREST BEING PAID ON BORROWED FUNDS TO TH A T EX T ENT. IF THE ASSESSEE'S FUNDS ARE USED TO LEND TO S UBSIDI A R Y W ITHOUT ANY INTEREST TH E N THE INTEREST PAYABLE BY ASSESSEE ON ITS FUNDS C A NNOT B E ALLOWED FULL Y . THE ONE MORE CONTENTION OF THE ASSESSE E'S C OUNS E L I S TH A T TH E ASSESSEE IS HAVING ITS OWN FUNDS ON WHICH NO PA Y MENT O F I NT E R E ST. IN OUR OPINION , TH E ENTIRE MONEY IN A BUSINESS ENTIT Y COME S IN A COMMON KITTY MONIE S ARE R EC EIVED A S SHAR E C A PITAL OR AS TERM LOAN OR WORKING CAPITAL LOAN OR AS INTERNAL ACCRUALS DO NOT HAVE DI FFERENT COLOUR. WHATEVER THE RECEIPTS IN THE BUSINESS, HAVE THE COLOURS OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. THE ONLY THING SUFFI C I E NT IS T O DIS ALLO W TH E INT E REST PAID ON TH E BORROWIN G T O THE EXT E NT OF A MOUNT L E ND T O S U B SI D I A R Y CO MP A N Y WITHOU T C A RR Y IN G AN Y INT E R E ST W O ULD B E TH AT T H E A SSES SE E H A S SOM E LOAN S OR IN TE REST B E ARIN G DEBTS TO BE R E P A ID. IN CASE , T H E AS S E SS EE H A D A SURPLUS WHICH A C C ORDING T O IT C OUL D N O T B E IMMED I A TEL Y , I T W OULD E ITH E R B E REQUIRED T O B E C IR C UL A T E D A ND U TILI Z E D F OR THE PURPOSE OF BUSINESS OR TO B E INVESTED IN A MANNER IN WHI C H IT GE NERATES INCOM E A ND NOT DIVE R TED TO W ARDS ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 6 SUBSIDIAR Y FREE OF I N TER EST . O T HERWISE IT AMOUNTS TO NOT PR E SEN T IN G THE TRUE AND CORRECT INCOM E OF TH E A SS E SSEE AND THE SUBSIDIARY COMPANY WOULD BE ENJO Y ING THE BENEFIT AT TH E COST OF ASSESSEE . IN OUR OPINION , INTEREST INCURRED BY THE ASS E SSE E TO T HE EXTENT AMOUNTS ARE DIVERTED TO SUBSIDI A R Y COMPANY ON INTEREST FREE B ASIS ON WHATEVER REASON MAY BE ARE TO BE D I SALLOWED. IF THER E IS A NY C H A NCE OF RECOV E RABILITY , THEN THERE IS A PROVISION IN THE ACT TO CL A IM THE S A ME AS B A D DEBT. VARIOUS CASE LAW RELIED BY THE ASSESSEE ' S COUNSEL IS OF NO RELEVANC E T O T HE FACTS OF THE PRESENT CASE. IN VIEW OF THIS, WE A RE OF THE OPINION TH A T CIT(A) NOT JUSTIFIED IN DELETING THE DISALLOWANCE PROPORTIONATE INTEREST ON TH E LOAN ADVANCED TO THE SISTER CONCERN. THIS GROUND OF APPEAL OF T HE REVENUE IS ALLOWED. CONSEQUENTLY, THE ORDER OF THE CIT(A) PLACED ON REC ORD BY THE ASSESSEE FOR ASSESSMENT YEAR 2004-05 CANNOT HAVE AN Y VALIDITY, AS THE CIT(A) FOR THAT YEAR HAS FOLLOWED HIS ORDER FOR ASSESSMENT YEAR 2003-04. IN THE ASSESSMENT YEAR 2005-06, COORDINA TE BENCH OF THIS TRIBUNAL HAS FOLLOWED THE DECISION IN ASSESSEES OW N CASE FOR ASSESSMENT YEAR 2003-04 AND HAS REJECTED THE ASSES SEES APPEAL FOR THAT YEAR, FACTS BEING IDENTICAL TO THE FACTS OF TH E ABOVE MENTIONED YEAR IN ASSESSEES OWN CASE. IN VIEW OF THIS, WE H AVE NO OPTION THAN TO FOLLOW THE COORDINATE BENCH DECISION, EVEN THOUG H THE LEARNED COUNSEL TRIED TO JUSTIFY ON THE BASIS OF COMMERCIAL EXPEDIENCY. IN VIEW OF THE ORDER OF THE COORDINATE BENCH OF THE TRIBUNA L IN ASSESSMENT YEAR 2003-04 EXTRACTED ABOVE, FOLLOWED IN ASSESSME NT YEAR 2005-06, WE HOLD THAT THE CIT(A) IS NOT JUSTIFIED IN ALLOWIN G THE INTEREST TO THE ASSESSEE. ACCORDINGLY, THE ORDER OF THE CIT(A) IS S ET ASIDE AND THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IS RESTO RED. 9. IN THE RESULT, REVENUES APPEAL IS ALLOWED. ITA NO.1548/HYD/2014 M/S. SURYAVANSHI SPINNING MILLS LTD., SECUNDERABAD 7 ORDER PRONOUNCED IN THE COURT ON 28 TH OCTOBER, 2015 SD/- SD/- (P.MADHAVI DEVI ) (B.RAMAKOTAIAH) JUDICIAL MEMBER. ACCOUNTANT MEMBER. DT/- 28 TH OCTOBER, 2015 COPY FORWARDED TO: 1. M/S. SURYAVANSHI SPINNING MILLS LTD., 105, 6 TH FLOOR, SURYA TOWERS, S.P. ROAD, SECUNDERABAD 2. D Y. COMMISSIONER OF INCOME - TAX CIRCLE 3(2) , HYDERABAD 3. COMMISSIONER OF INCOME-TAX(APPEALS) IV HYDERABAD 4. PR. COMMISSIONER OF INCOME - TAX III , HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD B.V.S.