DCIT, New Delhi V. M/s Milk Food Ltd., New Delhi

ITA 1690/DEL/2013

• Counselvise Citation: [2015] 120 COUNSELVISE.COM (IT) 8841 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 12-01-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 22-03-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: P DAM KANUNJNA
• Keywords: Business expenditure; Commercial expediency
• Section: 40A(3); 143(3)

Judgement Text

ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 1 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES E NEW DELHI BEFORE SHRI G.D. AGRAWAL, VICE PRESIDENT AND SHRI CHANDRAMOHAN GARG, JUDICIAL MEMBER ITA NO. 1690/DEL/2013 ASSTT. YEAR: 2005-06 DY.COMMISSIONER OF INCOME TAX, VS MILK FO OD LTD., CIRCLE 6(1), 5 TH FLOOR, BHANDARI HOUSE, NEW DELHI. 91, NEHRU PLACE, NEW DELHI-110019 (PAN: AAACM5913B) (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI R.S. SINGHVI, CA RESPONDENT BY: SHRI P.DAM KANUNJNA, SR. DR O R D E R PER CHANDRAMOHAN GARG, J.M. THIS APPEAL HAS BEEN PREFERRED BY THE REVENUE AGAI NST THE ORDER OF THE CIT(A)-IX, NEW DELHI DATED 9.01.2013 IN APPEAL NO. 102/2007-08 FOR AY 2005-06. 2. GROUND NO. 4, 5 AND 6 ARE GENERAL IN NATURE WHIC H NEED NO ADJUDICATION. REMAINING GROUND NO. 1, 2 AND 3 READ AS UNDER:- 1. WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE C ASE, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE O F INTEREST EXPENSES AMOUNTING TO RS,28,21,698/- BY HOLDING THA T THE ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 2 ASSESSEE WAS HAVING ADEQUATE INTEREST FREE FUNDS AT ITS DISPOSAL? 2. WHETHER THE FACTS AND CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT (A) ERRED IN DELETING THE DISA LLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS.28,21,698/-BY REL YING UPON THE JUDGMENT OF HON'BLE DELHI HIGH COURT IN BHARTI TELEVENTURES 331 ITR 502 EVEN THE ASSESSEE FAILED T O PROVE ITS COMMERCIAL EXPENDIENCY AND CIT (A) ALSO HELD THAT T HERE WAS NO COMMERCIAL EXPEDIENCY? 3. WHETHER THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT (A) ERRED IN NOT CONSIDERING THE DE CISION IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 IT R 1 IN WHICH THE HON'BLE PUNJAB AND HARYANA HIGH COURT HAS HELD THAT THE ONUS OF ESTABLISHING THE NEXUS BETWEEN THE INTEREST FREE FUNDS AND ADVANCES IS ON THE ASSESSEE AND RECE IPTS FROM ALL SOURCES GO IN COMMON KITTY?' 3. BRIEFLY STATED THE FACTS GIVING RISE TO THIS APP EAL ARE THAT THE RETURN OF INCOME FOR AY 2005-06 WAS FILED ON 31.10.2005 DECLA RING NIL INCOME AND THE SAME WAS PROCESSED U/S 143(1) OF THE INCOME TAX ACT , 1961. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND A STATUTORY NOTI CE U/S 143(2) WAS ISSUED AND DULY SERVED ON THE ASSESSEE. THE ASSESSMENT WAS CO MPLETED U/S 143(3) OF THE ACT VIDE ASSESSMENT ORDER DATED 26.12.2007 AT A LOS S OF RS.1,43,62,014 BY MAKING DISALLOWANCES PERTAINING TO DIVIDEND INCOME, INTEREST, DISALLOWANCES U/S 40A(3) OF THE ACT, TOTAL AMOUNTING TO RS.28,96,322. THE AGGRIEVED ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(A) WHICH WAS PAR TLY ALLOWED ON THE ISSUE OF DISALLOWING OF INTEREST PAID ON BORROWED CAPITAL AM OUNTING TO RS.28,34,723/-. NOW, THE AGGRIEVED REVENUE IS BEFORE THIS TRIBUNAL ON THE GROUNDS AS REPRODUCED HEREINABOVE. ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 3 4. APROPOS ALL GROUNDS OF THE REVENUE, WE HAVE HEAR D ARGUMENTS OF BOTH THE SIDES AND CAREFULLY PERUSED THE RELEVANT MATERIAL P LACED ON RECORD BEFORE US. LD. DR SUBMITTED THAT THE CIT(A) HAS ERRED IN DELET ING THE DISALLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS,28,21,698/- BY HO LDING THAT THE ASSESSEE WAS HAVING ADEQUATE INTEREST FREE FUNDS AT ITS DISPOSAL . LD. DR FURTHER CONTENDED THAT THE LEARNED CIT (A) ERRED IN DELETING THE DISA LLOWANCE OF INTEREST EXPENSES AMOUNTING TO RS.28,21,698/- BY RELYING UPON THE JUD GMENT OF HON'BLE DELHI HIGH COURT IN BHARTI TELEVENTURES 331 ITR 502, EVEN THE ASSESSEE FAILED TO PROVE ITS COMMERCIAL EXPENDIENCY AND CIT (A) ALSO H ELD THAT THERE WAS NO COMMERCIAL EXPEDIENCY FOR MAKING PAYMENT OF HUGE IN TEREST EXPENSES. LD. DR FURTHER CONTENDED THAT THE LEARNED CIT (A) DID NOT CONSIDER THE DECISION IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 IN WHICH THE HON'BLE PUNJAB AND HARYANA HIGH COURT HAS HELD THAT THE ONUS OF ES TABLISHING THE NEXUS BETWEEN THE INTEREST FREE FUNDS AND ADVANCES IS ON THE ASSESSEE AND RECEIPTS FROM ALL SOURCES GO IN COMMON KITTY. LD. DR FINALL Y CONTENDED THAT THE IMPUGNED ORDER MAY BE SET ASIDE BY RESTORING THAT O F THE AO ON THIS ISSUE. 5. LD. AR DRAWING OUR ATTENTION TOWARDS PARA NO. 3. 4 TO 3.7 OF THE IMPUGNED ORDER SUBMITTED THAT THE CIT(A) WAS NOT JUSTIFIED I N DIRECTING THE AO TO CALCULATE AND DISALLOW INTEREST U/S 37(1)(III) OF T HE ACT MENTIONED THEREIN ON THE SUMS THAT WERE ADVANCED OUT OF BORROWED FUNDS AND W ERE ENUMERATED AT SL. NO. 6 TO 10 OF TABLE MENTIONED IN PARA 3.3 OF THE IMPUG NED ORDER. LD. AR ALSO ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 4 PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS S.A. BUILDERS LTD. 288 ITR 1 (SC) AND SU BMITTED THAT INTEREST ON BORROWED CAPITAL AND LAND TO SISTER CONCERN WITHOUT CHARGING INTEREST IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS LENT TO SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. 6. ON CAREFUL CONSIDERATION OF ABOVE SUBMISSIONS AN D PERUSAL OF THE RATIO OF THE CITATION RELIED BY BOTH THE PARTIES, FROM BARE READING OF THE ASSESSMENT ORDER DATED 26.12.2007, WE NOTE THAT THE AO MADE DISALLOW ANCE OF RS.28,34,723 FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL HI GH COURT OF DELHI IN THE CASE OF ELMER HAVELL ELECTRICS (2005) 277 ITR 549 (DELH I) AND DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF MOTOR GENERAL FINAN CE LTD. 272 ITR 550(DEL) WHEREIN IT WAS HELD THAT IF ASSESSEE HAS TAKEN LOAN S WITH INTEREST AND HAD ADVANCED FUNDS BY DIVERSION OR OTHERWISE TO ITS SIS TER CONCERN FREE OF INTEREST, THEN DEDUCTION OF INTEREST PAID ON BORROWED CAPITAL IS TO BE DISALLOWED. WE FURTHER NOTE THAT IN THE CASE OF CIT VS S.A. BUILDE RS LTD. (SUPRA) AS RELIED BY LD. AR, IN THE SUBSEQUENT DECISION HONBLE JURISDICTION AL HIGH COURT OF DELHI HAS HELD THAT IN ORDER TO DECIDE WHETHER INTEREST ON F UNDS BORROWED BY THE ASSESSEE TO GIVE INTEREST FREE LOAN TO A SISTER CONCERN SHOU LD BE ALLOWED AS DEDUCTION U/S 36(1)(III) OF THE ACT, ONE HAS TO INQUIRE WHETHER T HE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIAL EXPEDIENCY. TH EIR LORDSHIPS FURTHER HELD THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 5 INCLUDES SUCH EXPENDITURE AS PRUDENT BUSINESSMAN IN CURRED FOR THE PURPOSE OF BUSINESS. IT WAS ALSO HELD THAT EVEN IF THE EXPEND ITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS A LLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED ON THE GROUNDS OF C OMMERCIAL EXPEDIENCY. 7. TURNING TO THE FACTUAL MATRIX OF THE PRESENT CAS E, WE OBSERVE THAT THE CIT(A) WENT ON TO DISCUSS IN PARA 3.3 THE LOANS ADV ANCED TO M/S TRIPLEFAST INVESTMENT PVT. LTD. AND AFTER DETAILED DELIBERATIO NS, THE CIT(A) DIRECTED THE AO TO CALCULATE AND DISALLOW INTEREST U/S 36(1)(III ) OF THE ACT AT THE RATE MENTIONED ON THE SUMS WHICH WERE ADVANCED OUT OF BO RROWED FUNDS. THE RELEVANT OPERATIVE PART OF THE IMPUGNED ORDER READS AS UNDER:- 3.4 ON GOING THROUGH THE BANK STATEMENT OF THE TW O ACCOUNTS, HDFC ACCOUNT AND STATE BANK OF PATIALA AC COUNT, FROM WHERE FUNDS HAVE BEEN DIVERTED TO THE SUBSIDIA RY CONCERN IT IS SEEN THAT SOME FUNDS HAVE BEEN DIVERTED OUT O F THE BORROWED FUNDS. THIS HAS BEEN TABULATED ABOVE. ON T HESE BORROWED FUNDS THE APPELLANT IS PAYING INTEREST. TH ESE FUNDS WERE BORROWED FROM STATE BANK OF PATIALA FOR THE PU RPOSE STATED IN THE LOAN DOCUMENT 'FOR SHORING UP THE NET WORKING CAPITAL AND REPAYMENT OF EXISTING SHORT TERM LOAN O F HDFC BANK'. THESE FUNDS HAVE BEEN DIVERTED, FROM CREDIT BALANCES IN THE STATE BANK OF PATIALA ACCOUNT, FUNDS HAVE BE EN DIVERTED FOR NON BUSINESS PURPOSES TO ITS SUBSIDIARY COMPANY AND ARE NOT REALLY USED FOR THE STATED PURPOSE. 3.5 THE APPELLANT'S CONTENTION THAT THE ADVANCES W ERE FOR THE SUBSIDIARY COMPANY TO PUT UP A BUSINESS PLANT H AS NOT BEEN SUBSTANTIATED BY ANY DOCUMENTS. WITHOUT SUCH SUPPOR TING EVIDENCE A BALD STATEMENT CARRIES NO WEIGHT. THE AP PELLANT HAS NOT MADE OUT A CASE THAT THE SUMS WERE ADVANCED FOR 'COMMERCIAL EXPEDIENCY'. ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 6 3.6 ALL THE JUDGMENTS QUOTED BY THE APPELLANT AND T HE AO HAVE REPEATEDLY STATED THAT THE ISSUE OF DISALLOWANCE U/ S 36(1)(III) IS ONE THAT HAS TO BE DETERMINED ON THE FACTS OF EACH CASE. AS DISCUSSED ABOVE IT IS SEEN THAT THE APPELLANT HAS D IVERTED BORROWED FUNDS AND ADVANCED IT TO ITS SUBSIDIARY AT SERIAL NOS. 6 TO 10 OF THE TABLE GIVEN ABOVE. 3.7 AO IS DIRECTED TO CALCULATE AND DISALLOW INTERE ST U/S 36(1)(III), AT THE RATE MENTIONED, ON THE SUMS THAT ARE ADVANCED OUT OF BORROWED FUNDS AND ARE ENUMERATED A T SERIAL NO. 6 TO 10 ABOVE. 8. WE ALSO OBSERVE THAT THE AO HAS NOT DISPUTED TH E FACT THAT THE ASSESSEE COMPANY MADE INTEREST FREE ADVANCE TO M/S TRIPLEFAS T INVESTMENT PVT. LTD. (ITS SUBSIDIARY COMPANY) FOR THE PURPOSE OF PUTTING UP T HE BUSINESS PLANT AND AS SUCH THESE ADVANCES WERE MADE FOR THE PURPOSE OF BU SINESS SO AS TO DEVELOP AND PROMOTE THE ASSESSEES OWN BUSINESS. IN THIS SITUA TION, FROM THE TABLE GIVEN IN PARA 3.3 OF THE IMPUGNED ORDER, WE OBSERVE THAT THE ASSESSEE ADVANCED LOANS TO ITS SUBSIDIARY COMPANY I.E. M/S TRIPLEFAST INVESTME NT PVT. LTD. OUT OF OWN FUNDS AND A PART OF LOAN WAS GIVEN FROM BORROWED FUNDS FO R WHICH THE CIT(A) HAS DIRECTED THE AO TO DISALLOW THE CLAIM OF THE ASSESS EE TOWARDS INTEREST EXPENDITURE. WE ARE UNABLE TO SEE ANY AMBIGUITY OR INFIRMITY IN THE IMPUGNED ORDER AND WE UPHOLD THE SAME AS THE CIT(A) HAS RIGH TLY UNDERSTOOD AND FOLLOWED THE DECISIONS OF HONBLE SUPREME COURT OF INDIA IN THE CASE OF CIT VS S.A. BUILDERS LTD. (SUPRA) AND HON'BLE DELHI HIGH C OURT IN BHARTI TELEVENTURES (SUPRA). ACCORDINGLY, GROUND NO. 1, 2 AND 3 OF THE REVENUE BEING DEVOID OF MERITS ARE DISMISSED. ITA NO.1690/DEL/2013 ASSTT. YEAR: 2005-06 7 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 27.01.2015. SD/- SD/- (G.D. AGRAWAL) (CHANDRAMOHAN GARG) VICE PRESIDENT JUDICIAL MEMBER DT. 27TH JANUARY, 2015 GS COPY FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. C.I.T.(A) 4. C.I.T. 5. DR BY ORDER AS STT. REGISTRAR