Captronic Systems Private Limited , Bangalore V. The Deputy Commissioner of Income Tax Circle-2(1)(1), Bangalore

ITA 159/BANG/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7612 (ITAT-BANGALORE)
• Duration Of Justice: 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-09-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2013-2014
• Appeal Filed On: 18-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PADMA MEENAKSHI JT BENGALURU
• Assessee Lawyers: BHARADWAJ SESHADRI
• Keywords: Commercial expediency
• Section: 143(3); 142(1); 14A; 37(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI MANJUNATHA G, ACCOUNTANT MEMBER ITA NO.159/BANG/2017 ASSESSMENT YEAR : 2013-14 CAPTRONIC SYSTEMS PVT. LTD., PLOT NO.3, VICTORIAN MEADOWS, AIRPORT VARTHUR ROAD, MUNEKOLALU VILLAGE, MARATHAHALLI, BENGALURU 560 037. PAN: AACCC 3173H VS. THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 2(1)(1), BENGALURU. APPELLANT RESPONDENT APPELLANT BY : SHRI BHARADWAJ SESHADRI, CA RESPONDENT BY : SMT. PADMA MEENAKSHI, JT.CIT(DR)(ITAT) BENGALURU DATE OF HEARING : 07.09.2017 DATE OF PRONOUNCEMENT : 08.09.2017 O R D E R PER MANJUNATHA G., ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE CIT(APPEALS), BENGALURU-2, BENGALURU DATED 06.1 0.2016 AND IT PERTAINS TO ASSESSMENT YEAR 2013-14. ITA NO.159/BANG/2017 PAGE 2 OF 8 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS EE COMPANY ENGAGED IN THE BUSINESS OF DESIGNING, DEVELOPING, INSTALLIN G AND COMMISSIONING OF AUTOMATED TEST EQUIPMENT FILED ITS RETURN OF INCOME FOR THE AY 2013-14 ON 28.11.2013 DECLARING TOTAL INCOME OF RS.45,96,890. THE CASE WAS SELECTED FOR SCRUTINY BY CASS. STATUTORY NOTICES U/S. 143(2 ) & 142(1) OF THE INCOME- TAX ACT, 1961 [THE ACT] WERE ISSUED CALLING FOR D ETAILS. IN RESPONSE TO THE NOTICES, THE AR OF THE ASSESSEE APPEARED FROM TIME TO TIME AND FURNISHED THE DETAILS AS CALLED FOR. 3. THE ASSESSMENT WAS COMPLETED U/S. 143(3) ON 07.1 2.2015 DETERMINING THE TOTAL INCOME OF RS.83,28,142 INTER ALIA MAKING ADDITIONS TOWARDS DISALLOWANCES U/S. 14A R.W. RULE 8D, DISALL OWANCE OF INTEREST EXPENDITURE U/S. 37 AND DISALLOWANCE OF PROVISION F OR WARRANTY. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). 4. BEFORE THE CIT(APPEALS), THE ASSESSEE HAD CHALL ENGED THE ADDITIONS MADE BY THE AO TOWARDS DISALLOWANCE U/S. 14A R.W. RULE 8D AND DISALLOWANCE OF INTEREST U/S. 37 OF THE ACT. THE C IT(APPEALS) FOR THE DETAILED REASONS RECORDED IN THE APPELLATE ORDER DA TED 06.10.2016 PARTLY ALLOWED THE APPEAL FILED BY THE ASSESSEE WHEREIN HE DELETED THE ADDITIONS MADE BY THE AO TOWARDS DISALLOWANCE OF EXPENDITURE U/S. 14A R.W. RULE 8D AND CONFIRMED THE ADDITIONS MADE BY THE AO TOWARDS INTEREST U/S. 36(1)(III) ITA NO.159/BANG/2017 PAGE 3 OF 8 / 37(1) OF THE ACT. AGGRIEVED BY THE ORDER OF CIT( APPEALS), THE ASSESSEE IS IN APPEAL BEFORE US. 5. THE LD. AR FOR THE ASSESSEE SUBMITTED THAT THE L D. CIT(APPEALS) ERRED IN UPHOLDING THE DISALLOWANCE OF INTEREST EXP ENDITURE MADE BY THE AO WITHOUT APPRECIATING THE FACT THAT LOANS TO SUBSIDI ARIES WERE PROVED TO HAVE BEEN MADE OUT OF OWN FUNDS AND TO BE COMMERCIALLY E XPEDIENT. THE LD. AR REFERRING TO THE PAPERBOOK FILED SUBMITTED THAT ASSESSEE IS HAVING SUFFICIENT OWN FUNDS IN THE FORM OF SHARE CAPITAL T O EXPLAIN THE SOURCES FOR ADVANCES TO THE SUBSIDIARY COMPANIES. NO INTEREST BEARING FUND HAS BEEN DIVERTED TO ADVANCE FUNDS TO SUBSIDIARIES, THEREFOR E, THE AO WAS INCORRECT IN DISALLOWING INTEREST US/. 36(1)(III) / 37(1) OF THE ACT. THE LD. AR FURTHER SUBMITTED THAT THE ADVANCES TO SUBSIDIARIES ARE NOR MAL BUSINESS TRANSACTIONS AND ADVANCED IN THE NORMAL COURSE OF B USINESS, THEREFORE, THE SAME CANNOT BE CONSIDERED AS DIVERSION OF INTEREST BEARING FUNDS TO THE SUBSIDIARIES WITHOUT ANY INTEREST. IN SUPPORT OF H IS ARGUMENTS, HE RELIED UPON THE DECISIONS OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT (2007) 288 ITR 1 (SC) AND THE HONBLE HIGH COURT OF BOMBAY IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM) . THE ASSESSEE ALSO RELIED UPON THE DECISION OF TH E ITAT BANGALORE BENCH IN ITA NO.949/BANG/2015 IN THE CASE OF M/S. GRAMEEN KOOTA FINANCIAL SERVICES PVT. LTD. ITA NO.159/BANG/2017 PAGE 4 OF 8 6. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE ASSESSEE HAS NOT SUBSTANTIATED ITS CLAIM THAT ADVANCES TO SUBSIDIARI ES ARE OUT OF ITS OWN FUND AND NO INTEREST BEARING FUND HAS BEEN DIVERTED. T HE LD. DR FURTHER SUBMITTED IT IS CLEAR FROM THE FACT THAT ASSESSEE I S HAVING LONG TERM BORROWINGS OF RS.2,01,85,779 AND SHORT TERM BORROWI NGS OF RS.3,85,00,917. THOUGH THE ASSESSEE CLAIMS TO HAVE OWN FUNDS TO EST ABLISH SOURCES FOR ADVANCES GIVEN TO SUBSIDIARIES, THE ASSESSEE COULD HAVE USED OWN FUNDS AS ITS WORKING CAPITAL OR ELSE CLOSED THE LONG TERM BORROWINGS SO THAT INTEREST EXPENDITURE WOULD HAVE BEEN REDUCED. AS R EGARDS COMMERCIAL EXPEDIENCY, THOUGH ASSESSEE CLAIMS THE ADVANCES ARE IN THE NATURE OF NORMAL BUSINESS TRANSACTIONS BETWEEN THE HOLDING CO MPANY AND SUBSIDIARY COMPANIES, BUT FAILED TO SHOW THE COMMERCIAL EXPEDI ENCY IN MAKING INTEREST FREE ADVANCES TO ITS SUBSIDIARIES. THEREF ORE, ADVANCING INTEREST FREE ADVANCES TO SUBSIDIARIES IS NOT ACCORDING TO C OMMERCIAL EXPEDIENCY AND HENCE THE AO HAS RIGHTLY DISALLOWED INTEREST EX PENDITURE U/S. 36(1)(III) / 37 OF THE ACT AND HIS ORDER SHOULD BE UPHELD. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE AO DISALLOWED INTEREST EXPENDITURE U/S. 36(1)(III) / 37(1) OF THE ACT PROPORTIONATELY TOWARDS INTEREST PAID ON LO ANS ON THE GROUND THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS TO ITS SUBSIDIARY COMPANIES WITHOUT CHARGING ANY INTEREST. ACCORDING TO THE AO, THE ASSESSEE IS HAVING HUGE BORROWINGS IN THE FORM OF S ECURED AND UNSECURED LOANS AND DIVERTED ITS FUNDS TO THE SUBSIDIARIES WI THOUT CHARGING ANY ITA NO.159/BANG/2017 PAGE 5 OF 8 INTEREST. THE AO FURTHER WAS OF THE OPINION THAT T HE ASSESSEE THOUGH CLAIMS THESE ADVANCES ARE NORMAL BUSINESS TRANSACTI ONS BETWEEN THE HOLDING COMPANY AND SUBSIDIARY COMPANY AND COMING W ITHIN THE PURVIEW OF COMMERCIAL EXPEDIENCY, BUT FAILED TO ESTABLISH ANY LINK BETWEEN THE ADVANCES AND COMMERCIAL EXPEDIENCY. THEREFORE, HE OPINED THAT THE ASSESSEE HAS DIVERTED ITS INTEREST BEARING FUNDS TO THE SUBSIDIARIES WITHOUT CHARGING ANY INTEREST AND HENCE DISALLOWED INTEREST EXPENDITURE PROPORTIONATELY U/S. 36(1)(III)/37(1) OF THE ACT. 8. IT IS THE CONTENTION OF THE ASSESSEE THAT ITS BO RROWINGS TO SUBSIDIARY COMPANIES ARE NORMAL COMMERCIAL TRANSACTIONS BETWEE N A HOLDING COMPANY AND SUBSIDIARY COMPANY AND THE LOANS ARE EX TENDED IN THE NORMAL COURSE OF BUSINESS, THEREFORE, THE SAME CANN OT BE CONSIDERED AS DIVERSION OF INTEREST BEARING FUNDS TO SUBSIDIARIES . THE ASSESSEE FURTHER CONTENDED THAT IT HAS ITS OWN INTEREST FREE FUNDS I N THE FORM OF SHARE CAPITAL TO EXPLAIN LOANS GIVEN TO SUBSIDIARIES WHICH IS EVI DENT FROM THE FACT THAT DURING THE FINANCIAL YEAR ITS SHARE CAPITAL HAS BEE N INCREASED WHICH IS SUFFICIENT TO EXPLAIN THE ADVANCES GIVEN TO THE SUB SIDIARIES. THE ASSESSEE FURTHER CONTENDED THAT ALTHOUGH IT HAS BORROWED LON G TERM AND SHORT TERM BORROWINGS FROM BANKS AND FINANCIAL INSTITUTIONS DU RING THE FINANCIAL YEAR, ITS BORROWINGS HAVE BEEN SUBSTANTIALLY REDUCED WHIC H CLEARLY SHOWS THAT ASSESSEE IS HAVING SUFFICIENT FUNDS TO MEET ITS REP AYMENT OBLIGATIONS AS WELL AS ADVANCES GIVEN TO SUBSIDIARIES. ITA NO.159/BANG/2017 PAGE 6 OF 8 9. HAVING HEARD BOTH THE SIDES, WE FIND FORCE IN TH E ARGUMENT OF THE ASSESSEE FOR THE REASON THAT ALL ADVANCES GIVEN TO SUBSIDIARY COMPANIES CANNOT BE CONSIDERED AS DIVERSION OF INTEREST BEARI NG FUNDS. WE FURTHER OBSERVE THAT THE ASSESSEE HAS SUFFICIENT INTEREST F REE FUNDS IN THE FORM OF SHARE CAPITAL TO EXPLAIN THE ADVANCES GIVEN TO ITS SUBSIDIARIES. THOUGH ASSESSEE IS HAVING BORROWINGS FROM BANKS AND FINANC IAL INSTITUTIONS, DURING THE FINANCIAL YEAR ITS BORROWINGS HAVE SUBSTANTIALL Y COME DOWN. THEREFORE, FROM THE ABOVE FACTS, IT IS CLEARLY EVIDENT THAT TH E ASSESSEE HAS NOT DIVERTED ITS INTEREST BEARING FUNDS TO ITS SUBSIDIARIES. W E FURTHER OBSERVE THAT IF THERE ARE FUNDS AVAILABLE, BOTH INTEREST FREE FUNDS AND INTEREST BEARING FUNDS, THEN THE PRESUMPTION WOULD ARISE THAT ITS AD VANCES WOULD BE OUT OF INTEREST FREE ADVANCES GENERATED OR AVAILABLE WITH THE ASSESSEE, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE ADV ANCES GIVEN TO THE SUBSIDIARIES. THIS PROPOSITION IS FURTHER SUPPORTE D BY THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM) , WHEREIN IT WAS CATEGORICALLY HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FRE E AND INTEREST BEARING, THEN THE PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD B E OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY. THE RELEVANT OBSERVATIONS OF THE HONBLE HIGH COURT ARE REPRODUC ED BELOW:- 16. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE. IN OUR OPINION, THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LT D. V. CIT ITA NO.159/BANG/2017 PAGE 7 OF 8 [1997] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD . [1982] 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE TH E SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUM ED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT A CCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME C OURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSI DERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER I T DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLC OMBERS OF INDIA LTD.' S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SU FFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PRO FITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNIN G OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, T HERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE, THEREFORE, WO ULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OV ER DRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT IN VESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFIC IENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTAB LISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISS IONER OF INCOME-TAX (APPEALS) AND THE INCOME-TAX APPELLATE T RIBUNAL. 10. IN THIS CASE, ON PERUSAL OF FACTS AVAILABLE ON RECORD, WE FIND THAT THE ASSESSEE HAS DEMONSTRATED WITH EVIDENCE THAT IT HAS SUFFICIENT INTEREST FREE FUNDS TO COVER THE ADVANCES GIVEN TO ITS SUBSIDIARI ES. THEREFORE, CONSIDERING THE FACTS AND ALSO RELYING UPON THE JUD GMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. (SUPRA) , WE ARE OF THE VIEW THAT THE AO HAS ERRED IN DISALLO WING INTEREST EXPENDITURE U/S. 36(1)(III) / 37(1) OF THE ACT TOWARDS ADVANCES GIVEN TO ASSESSEES ITA NO.159/BANG/2017 PAGE 8 OF 8 SUBSIDIARIES COMPANIES. THEREFORE, WE DIRECT THE A O TO DELETE THE ADDITIONS MADE TOWARDS DISALLOWANCE OF INTEREST EXP ENDITURE U/S. 36(1)(III) / 37(1) OF THE ACT. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF SEPTEMBER, 2017. SD/- SD/- ( VIJAY PAL RAO ) ( MANJUNATHA G .) JUDICIAL MEMBER A CCOUNTANT MEMBER BANGALORE, DATED, THE 8 TH SEPTEMBER, 2017. / D ESAI S MURTHY / COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.