ACIT, Circle-3(2), Hyderabad V. M/s Sri Krishna Drugs Ltd, Hyderabad

ITA 1698/HYD/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59196 (ITAT-HYDERABAD)
• Duration Of Justice: 3 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2008-2009
• Appeal Filed On: 30-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V SRINIVAS
• Assessee Lawyers: S RAMA RAO
• Keywords: Depreciation; Proportionate interest; Notional interest; Capital expenditure
• Section: 143(3); 80IB; 37; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A', HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER I.T.A. NO. 1698/HYD/2011 A.Y. 2008-09 ACIT CIRCLE-3(2) HYDERABAD V S. M/S. SRI KRISHNA DRUGS LTD. HYDERABAD PAN: AADCS4050Q APPELLANT RESPONDENT APPELLANT BY: SHRI V. SRINIVAS RESPONDENT BY: SHRI S. RAMA RAO DATE OF HEARING: 18 . 0 1.201 2 DATE OF PRONOUNCEMENT: 25.01.2012 O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-IV, HYDERABAD DATED 29.7.2011 FOR A.Y. 2 008-09. 2. THE FIRST GROUND IN THIS APPEAL IS GENERAL IN NATUR E AND NEEDS NO ADJUDICATION. 3. THE SECOND GROUND RAISED BY THE REVENUE IS AS FOLLO WS: 'THE LEARNED CIT(A) ERRED IN HOLDING THAT UNRECOGNI SED GRATUITY FUND IS ALLOWABLE U/S. 37(1), WHEN THE CAS E IS HIT BY THE PROVISIONS OF SECTION 40A(9) AND ESPECIA LLY WHEN THE ASSESSEE FAILED TO COMPLY WITH THE PROVISI ONS OF SECTION 36(1)(V).' 4. THIS GROUND IS COVERED IN FAVOUR OF THE ASSESSEE IN I.T.A. NO. 198/HYD/2011 IN ASSESSEES OWN CASE AND THE TRIBUNA L VIDE ORDER IN DATED 16 TH DECEMBER, 2011 HELD AS FOLLOWS: '3. AFTER HEARING BOTH THE PARTIES, WE ARE OF THE OPINION THAT SIMILAR ISSUE CAME UP FOR CONSIDERATION IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 IN I.T.A. NO. 349/HYD/2006. THE TRIBUNAL DECIDED THE ISSUE IN I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 2 FAVOUR OF THE ASSESSEE VIDE ITS ORDER DATED 15.2.2008 BY HOLDING AS FOLLOWS: '4. WE HAVE CONSIDERED RIVAL SUBMISSIONS ON EITHER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE GROUP GRATUITY SCHEME WAS NOT RECOGNISED BY THE COMMISSIONER OF INCOME-TAX. THIS FACT IS NOT IN DISPUTE. WE HAVE CAREFULLY GONE THROUGH THE PROVISIONS OF SEC. 36(1)(V) OF THE INCOME-TAX ACT. SEC. 36(1)(V) READS AS FOLLOWS: '36. (1) THE DEDUCTIONS PROVIDED FOR IN THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MATTERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 .... (V) ANY SUM PAID BY THE ASSESSEE AS AN EMPLOYER BY WAY OF CONTRIBUTION TOWARDS AN APPROVED GRATUITY FUND CREATED BY HIM FOR THE EXCLUSIVE BENEFIT OF HIS EMPLOYEES UNDER AN IRREVOCABLE TRUST.' WE HAVE ALSO CAREFULLY GONE THROUGH THE PROVISIONS OF SEC. 37 OF THE INCOME-TAX ACT. SEC. 37 PROVIDES FOR DEDUCTION OF EXPENDITURE NOT BEING IN THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE, BUT LAID OUT AND EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION, WHILE COMPUTING INCOME CHARGEABLE TO TAX. THE MAIN CONTENTION OF THE REVENUE IS THAT UNDER SEC. 36(1)(V), THE PAYMENT MADE BY THE ASSESSEE AS EMPLOYER COULD BE ALLOWED ONLY IN RESPECT OF APPROVED GRATUITY FUND. SINCE THE GROUP GRATUITY SCHEME IS NOT APPROVED BY THE CIT, ACCORDING TO THE REVENUE, IT CANNOT BE ALLOWED. HOWEVER, THE CONTENTION OF THE I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 3 ASSESSEE IS THAT IN VIEW OF THE JUDGEMENT OF THE MADRAS HIGH COURT IN THE CASE OF PREMIER COTTON SPINNING MILLS LTD. (SUPRA) AND THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA), IT HAS TO BE ALLOWED. 5. WE HAVE CAREFULLY GONE THROUGH THE JUDGEMENT OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA). IN THE CASE BEFORE THE JURISDICTIONAL HIGH COURT, THE PROVIDENT FUND WAS NOT APPROVED BY THE CIT. THE ANDHRA PRADESH HIGH COURT AFTER REFERRING TO THE JUDGEMENT OF THE BOMBAY HIGH COURT IN TATA IRON & STEEL CO. LTD. V. D.V. BAPAT, ITO (1975) 101 ITR 292, AND THE JUDGEMENT OF THE SUPREME COURT IN METAL BOX COMPANY OF INDIA LTD. VS. THE WORKMEN (1969) 73 ITR 53, HELD THAT THE AMOUNT PAID TOWARDS AN UNAPPROVED GRATUITY FUND CAN BE DEDUCTED UNDER SEC. 37 OF THE I.T. ACT, THOUGH NOT UNDER SEC. 36(1)(V). IN VIEW OF THIS JUDGEMENT OF THE JURISDICTIONAL HIGH COURT, IN OUR OPINION, EVEN IF ANY PAYMENT IS MADE TO AN UNAPPROVED GRATUITY FUND, IT HAS TO BE ALLOWED UNDER SEC. 37. BY RESPECTFULLY FOLLOWING THE BINDING JUDGEMENT OF ANDHRA PRADESH HIGH COURT IN THE CASE OF WARNER HINDUSTAN LTD. (SUPRA), WE UPHOLD THE ORDER OF THE CIT(A).' IN VIEW OF THE ABOVE DISCUSSION, WE DISMISS THE GROUND TAKEN BY THE REVENUE.' 5. RESPECTFULLY FOLLOWING THE ABOVE ORDER OF THE TRIBU NAL, THIS GROUND OF THE REVENUE IS DISMISSED. 6. GROUND NO. 3 RAISED BY THE REVENUE IS AS FOLLOWS: 'THE LEARNED CIT(A) ERRED IN ALLOWING THE ASSESSEE' S APPEAL WITH REGARD TO DISALLOWANCE OF PROPORTIONATE INTEREST ON THE INVESTMENTS MADE AND LOANS ADVANCED TO ITS SUBSIDIARY.' I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 4 7. THIS GROUND IS COVERED IN FAVOUR OF THE ASSESSEE IN I.T.A. NO. 198/HYD/2011 IN ASSESSEES OWN CASE AND THE TRIBUNA L VIDE ORDER IN DATED 16 TH DECEMBER, 2011 HELD AS FOLLOWS: 'WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS SEEN FROM THE ORD ER OF THE CIT(A) SIMILAR ISSUE CAME UP FOR CONSIDERATION BEFORE THIS TRIBUNAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2002-03 TO 2005-06 WHEREIN THIS ISSUE WAS DECIDED IN FAVOUR OF THE ASSESSEE BY HOLD ING AS FOLLOWS: '6. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. IF THE ASSESSEE DIVERTED I TS INTEREST BEARING FUNDS TO THE SISTER CONCERN FOR AN Y PURPOSE OTHER THAN BUSINESS PURPOSE, THEN THIS IMPUGNED INTEREST TO BE DISALLOWED. IN OTHER WORDS , IF THE ASSESSEE USED THE SISTER CONCERN AS A CONDUI T TO DIVERT INTEREST BEARING FUNDS TO THE PERSONAL ADVANTAGE ANY DIRECTOR OR RELATIVE OF DIRECTORS OF THE ASSESSEE COMPANY, THEN THIS INTEREST TO BE DISALLOWED. THE BURDEN IS ON THE ASSESSEE TO PROVE THAT THE PAYMENT OF INTEREST IS GENUINE. FURTHER, ONCE IT IS BORNE OUT OF THE RECORD THAT THE ASSESSE E HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PA Y INTEREST IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST OR LESS INTEREST WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THAT EXTENT ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED U/S 36(1)(III) OF THE ACT. SUCH BORROWINGS TO THAT EXT ENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE CASH DIVERTED WITHOUT DERIVING ANY BENEFIT OUT OF IT. IN SUCH CIRCUMSTANCES, THE ASSESSEE WILL NOT BE ENTITLED TO CLAIM DEDUCTION OF INTEREST ON THE BORROWINGS TO TH E EXTENT THOSE ARE DIVERTED TO SISTER CONCERNS OR OTH ER PERSONS WITHOUT INTEREST. THE ESTABLISHMENT OF NEXUS OF FUNDS BORROWED VIS-A-VIS THE FUNDS DIVERTE D TOWARDS SISTER CONCERNS ON INTEREST FREE BASIS IS CONCERNED, IN OUR VIEW, THAT THE ONUS OF PROVING T HE NEXUS OF FUNDS AVAILABLE WITH THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER CONCERN WITHOUT INTEREST IS ON THE ASSESSEE. THE PROVISIONS OF SEC . 36(1)(III) OF THE ACT PROVIDES FOR DEDUCTION OF INT EREST ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION HE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISF Y THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAIS ED BY THE ASSESSEE, THE SAME WERE USED FOR BUSINESS I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 5 PURPOSE. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERN AT NO INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFICER TO EFFECT THAT IN SPITE OF HEAVY INTEREST PAYABLE ON FRESH BORROWINGS AND PENDING LOANS ON WHICH THE ASSESSEE INCURRING INTEREST LIABILITY, STILL THERE IS A JUSTIFICATION TO ADVANC E LOANS TO SISTER CONCERNS FOR NON BUSINESS PURPOSE AND ACCORDINGLY, SUCH INTEREST PAYMENT CANNOT BE ALLOWED AS A DEDUCTION. HOWEVER, IN THE PRESENT CASE, AS SEEN FROM FINANCIAL STATEMENT OF ASSESSEE S, THERE IS AVAILABILITY OF OWN FUND AND RESERVE AND SURPLUS IN THE IMPUGNED ASSESSMENT YEARS. THESE FUNDS ARE MORE THAN SUFFICIENT TO MAKE INVESTMENT IN THE SUBSIDIARY COMPANY. THIS CAN BE SEEN FROM THE FOLLOWING TABLE: (A) FINANCIAL YEAR 2000-01 2001-02 20 02-03 (B) FUNDS AVAILABLE FOR UTILIZATION AFTER CONSIDERING THE IMPUGNED INVESTMENT (RS. IN LAKHS) 151.21 135.66 29.27 (C) LOANS FROM BANKS 109.58 84.96 (D) INVESTMENT MADE IN FIXED ASSETS 236.38 179.74 18.94 (E) INVESTMENT MADE IN 195.00 56.35 M/S. SUVISION 7. IN OUR OPINION, THE ASSESSEE USED ITS OWN NON INTEREST BEARING FUNDS AND THERE IS NO COST TO THE ASSESSEE AND IT IS A BUSINESS DECISION TAKEN BY THE ASSESSEE TO MAKE AN INVESTMENT IN SUBSIDIARY COMPANY AND THAT EVEN IF IT IS RESULTED IN NO INCOM E TO THE ASSESSEE, THE NOTIONAL INTEREST CANNOT BE DISALLOWED ON THE REASON THAT THE ASSESSEE SHOULD HAVE USED ITS NON INTEREST BEARING FUNDS FOR THE PURPOSE OF ITS OWN BUSINESS PURPOSE INSTEAD USING BORROWED FUNDS FOR ITS BUSINESS. THE ASSESSING OFFICER CANNOT SIT IN THE ARM CHAIR OF THE BUSINESS MEN AND DECIDE WHAT THE ASSESSEE HAS TO DO TO MAXIMIZE HIS PROFIT. IN OUR OPINION, THE JUDGEMENT RELIED BY THE ASSESSEES COUNSEL IN THE CASE OF M/S SA BUILDER CITED SUPRA SUPPORTS THE ASSESSEES CLAIM. ACCORDINGLY THIS GROUND TAKEN BY THE ASSESSEE IS ALLOWED.' IN VIEW OF THE ABOVE ORDER OF THE TRIBUNAL, THIS IS SUE IS DECIDED AGAINST THE REVENUE AND IN FAVOUR OF THE AS SESSEE.' 8. IN VIEW OF THE ABOVE DECISION OF THE CO-ORDINATE BE NCH ON THIS ISSUE, THE GROUND RAISED BY THE REVENUE IS DIS MISSED. I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 6 9. GROUND NO. 4 RAISED BY THE REVENUE IS AS FOLLOWS: 'THE LEARNED CIT(A) ERRED IN ALLOWING DEPRECIATION ON INTANGIBLE ASSETS.' 10. WITH REFERENCE TO THE ABOVE GROUND, THE LEARNED DR RELIED ON THE ORDER OF THE TRIBUNAL IN THE CASE OF R.G. KESWA NI VS. ACIT (120 TTJ 1081)(MUM) AND REQUESTED THE BENCH TO REFER THE CASE TO SPECIAL BENCH. HOWEVER, IN VIEW OF THE ORDER OF TH E TRIBUNAL IN ASSESSEES OWN CASE CITED SUPRA, WE ARE INCLINED TO DECIDE THE ISSUE IN FAVOUR OF THE ASSESSEE RATHER THAN REFERRI NG THE SAME TO SPECIAL BENCH. FURTHER, WE FEEL IT APPROPRIATE TO MENTION HEREIN THAT THE ORDER OF THE CO-ORDINATE BENCH IN THE CASE OF MICRO INSTRUMENTS CO. LTD. VS. ITO (12 DTR 501) THE TRIBU NAL BENCH OF CHANDIGARH HELD AS FOLLOWS: THE ASSESSEE INITIALLY CLAIMED DEDUCTION UNDER S. 80IB FOR THE IMPUGNED UNIT IN THE ASST. YR. 2001-02 AND THE SAME WAS ALLOWED. IN THIS ASSESSMENT YEAR, I.E., 2 003- 04 THE CLAIM OF THE ASSESSEE WAS IN CONTINUATION OF THE CLAIMS MADE IN THE EARLIER ASSESSMENT YEARS FOR THE IMPUGNED ASSESSMENT YEAR FALLS WITHIN THE NUMBER OF ASSESSMENT YEARS AS SPECIFIED IN THE SECTION IN WHI CH THE CLAIM IS ELIGIBLE. IT IS ALSO A PERTINENT FACT POSITION THAT THE CLAIM ALLOWED TO THE ASSESSEE IN THE INITI AL ASSESSMENT YEAR OF 2001-02 AND THEREAFTER IN THE AS ST. YR. 2002-03 HAS NOT BEEN WITHDRAWN. THERE IS NO CONTRAVENTION FROM THE REVENUE EITHER AT THE STAGE OF THE PROCEEDINGS BEFORE THE LOWER AUTHORITIES OR EVE N BEFORE THE TRIBUNAL. THUS, FACTUALLY SPEAKING THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER S. 80IB STANDS ADMITTED IN THE INITIAL ASSESSMENT YEAR AND ALSO THEREAFTER UP TO THE ASSESSMENT YEAR PRIOR TO THE Y EAR UNDER CONSIDERATION. ON THE FACTUAL MATRIX, THERE IS NO JUSTIFICATION FOR THE AO TO DENY THE CLAIM OF THE ASSESSEE FOR DEDUCTION UNDER S. 80IB. THE IMPLICAT ION OF THE EARLIER ASSESSMENT MADE FOR THE INITIAL ASSESSMENT YEAR UNDER S. 143(3) IS THAT THE ASSESSE E HAS FULFILLED THE CONDITIONS PRESCRIBED IN THE SAID SECTION. THEREAFTER, IT IS NOT OPEN FOR THE AO TO RE- EXAMINE THE ISSUE ALL OVER AGAIN AND COME TO A DIFF ERENT CONCLUSION IN A SUBSEQUENT YEAR WITHOUT JUSTIFYING SUCH DEPARTURE. IN THE ASSESSMENT ORDER, THERE IS NO DISCUSSION BY THE ASSESSING OFFICER ON THIS ASPECT IN SPITE OF THE FACT THAT THE ASSESSEE HAD TAKEN A SPE CIFIC I.T.A. NO. 1698/HYD/2011 M/S. SRI KRISHNA DRUGS LTD. ===================== 7 POSITION BASED ON THE RELIEF ALLOWED IN THE PAST. FURTHER, THE CLAIM ACCEPTED BY THE AO IN THE ASST. YR. 2001-02 AND THEREAFTER IN 2002-03 HAS NOT BEEN DISTURBED. CLEARLY, IN A SUCH A SITUATION, THE ONU S WHICH WAS ON THE REVENUE HAS NOT BEEN DISCHARGED. INSOFAR AS THE JUSTIFICATION FOR THE CLAIMS OF EXEMPTION/TAX RELIEFS ARE CONCERNED THE ONUS IS ON THE ASSESSEE TO ESTABLISH AND JUSTIFY THE CLAIMS. SO, HOWEVER, IN A SITUATION LIKE THE PRESENT SITUATION, THE AO OUGHT TO HAVE JUSTIFIED THIS DEPARTURE FROM THE EARLIER ACCEPTED POSITION WHEREBY SIMILAR CLAIM HAS BEEN ACCEPTED IN THE PAST. IT IS IN THE BACKGROUND THE ONUS WAS ON THE AO TO JUSTIFY THE DENIAL OF DEDUCTI ON UNDER S. 80IB IN VIEW OF THE PAST HISTORY. THEREFO RE, IN THIS BACKGROUND THERE IS NO JUSTIFICATION TO UPHOLD THE STAND OF THE IT AUTHORITIES TO DENY THE CLAIM OF TH E ASSESSEE FOR DEDUCTION UNDER S. 80IB IN RELATION TO THE PROFITS AND GAINS. SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. VS. CIT (1979) 11 CTR (GUJ) 139; (1 980) 123 ITR 669 (GUJ) AND CIT VS. PAUL BROTHERS (1995) 216 ITR 548 (BOM) RELIED ON. 11. IN VIEW OF THE ABOVE DECISION OF THE TRIBUNAL, THIS GROUND OF THE REVENUE IS DISMISSED. 12. IN THE RESULT, APPEAL OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH JANUARY, 2012. SD/ - (ASHA VIJAYARAGHAVAN) JUDICIAL MEMBER SD/ - (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED THE 25 TH JANUARY, 2012 COPY FORWARDED TO: 1. THE ASST. COMMISSIONER OF INCOME - TAX, CIRCLE - 3(2), 7 TH FLOOR, 'B' BLOCK, I.T. TOWERS, A.C. GUARDS, HYDERABAD. 2. M/S. SRI KRISHNA DRUGS LTD., C - 4, INDUSTRIAL AREA, UPPAL, HYDERABAD. 3. THE CIT(A) - IV, HYDERABAD. 4. THE CIT - III, HYDERABAD. 5 . THE DR A BENCH, ITAT, HYDERABAD TPRAO