M/s Lakhani Rubber Udyog Ltd., Faridabad V. Addl. CIT, Faridabad

ITA 1781/DEL/2011

• Counselvise Citation: 178120114 RSA 2011
• Duration Of Justice: 1 year(s) 8 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 17-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 13-04-2011

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: D NEW DELHI BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI A. N. PAHUJA, ACCOUNTANT MEMBER I.T.A. NO. 1781/DEL/2011 ASSESSMENT YEAR: 2005-06 M/S. LAKHANI RUBBER UDYOG LTD. VS. ACIT, PLOT NO. 131, SECTOR 24 RANGE II, FARIDABAD. FARIDABAD. PAN: AAACL3111E (APPELLANT) (RESPONDENT) ITA NO. 2569 & 2570/DEL/2011 ASSESSMENT YEARS : 2005-2006 & 2006-07 ACIT VS. M/S. LAKHANI RUBBER UDYOG LTD. RANGE-II PLOT NO. 131, SECTOR 24 FARIDABAD. FARIDABAD. (APPELLANT) (RESPONDEN T) ASSESSEE BY : SH. R. N. BAHL, CA. REVENUE BY : MS. SUMANA SEN, SR. DR. HEARING ON : 17/10/2012 ORDER PRONOUNCED ON THE DATE : ORDER PER RAJPAL YADAV, JM : IN ASSESSMENT YEAR 2005-06, REVENUE AND ASSESSEE AR E IN CROSS APPEALS AGAINST THE ORDER OF LD. CIT (A) DATED 25.2.2011. I N ASSESSMENT YEAR 2006-07 ITA NO. 1781 & 2569 & 2570/DEL/2011 2 THE REVENUE ALONE IS IN APPEAL AGAINST THE ORDER OF LD. CIT (A) DATED 25.2.2011. THE ISSUES INVOLVED IN ALL THE THREE APP EALS ARE COMMON THEREFORE, WE HEARD THEM TOGETHER AND DEEM IT APPRO PRIATE TO DISPOSE OFF THEM BY THIS COMMON ORDER. 2. FIRST WE TAKE THE APPEAL OF ASSESSEE I.E. ITA NO. 1 781, THE ASSESSEE HAS RAISED TWO GROUNDS OF APPEAL, WHEREBY IT HAS PL EADED THAT THE LD. CIT (A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OF RS.1,35 ,590/- OUT OF CAR EXPENSES AND A SUM OF RS.32,720/- OUT OF TELEPHONE EXPENSES ON THE GROUND THAT TO THIS EXTENT THESE FACILITIES MUST HAVE BEEN USED FOR PERSONAL PURPOSE BY THE DIRECTORS. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I S A COMPANY IT HAS FILED ITS RETURN OF INCOME ON 30 TH DEC. 2005 FOR A.Y. 2005-06, DECLARING AN INCOME OF RS.1,00,22,575/- DURING THE COURSE OF AS SESSMENT PROCEEDING ON SCRUTINY OF ACCOUNTS, IT REVEALS TO THE ASSESSING O FFICER THAT ASSESSEE HAS INCURRED A SUM OF RS.282873/- ON MAINTENANCE OF THE CARS AND CLAIMED DEPRECIATION OF RS.1073062/-. ACCORDING TO THE LD. ASSESSING OFFICER, ASSESSEE HAS FAILED TO PRODUCE LOG BOOK IN ORDER TO PROVE THAT THE CARS HAVE BEEN USED EXCLUSIVELY FOR THE PURPOSE OF THE BUSINE SS. HE OBSERVED THAT POSSIBILITY OF PERSONAL USER OF THE CARS BY THE DIR ECTORS CANNOT BE RULED OUT. THEREFORE, ON AN AD HOC BASIS HE DISALLOWED 1/10 OF THE TOTAL EXPENDITURE, ITA NO. 1781 & 2569 & 2570/DEL/2011 3 WHICH COMES TO RS.1,35,590/-. ON SIMILAR ANALOGY, H E DISALLOWED 1/8 OF THE TELEPHONE EXPENSES AND MADE DISALLOWANCE OF RS.32,7 20/-. 4. APPEAL TO THE CIT (A) DID NOT BRING ANY RELIEF TO T HE ASSESSEE. 5. BEFORE US. LD. COUNSEL FOR THE ASSESSEE SUBMITTED T HAT IN CASE OF A COMPANY, THERE CANNOT BE ANY PERSONAL USER, THE COM PANY IS A SEPARATE AND DISTINCT ENTITY. THE EXPENSES ARE CLAIMED IN THE HA NDS OF THE COMPANY, IF DIRECTORS HAVE USED THESE FACILITIES FOR PERSONAL P URPOSE THEN FRINGE BENEFIT BE WORKED OUT IN THEIR HANDS. THE LD. COUNSEL FOR T HE ASSESSEE RELIED UPON DECISION OF HONBLE GUJARAT HIGH COURT, IN THE CASE OF SAYAJI IRON AND ENGINEERING CO. VS. CIT REPORTED IN 253 ITR 749. 6. ON THE OTHER HAND LD. DR RELIED UPON ORDERS OF THE AUTHORITIES BELOW. 7. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. THE HONBLE GUJARAT HIGH COURT, I N THE CASE OF SAYAJI IRON HAS OBSERVED THAT COMPANY, IS A DISTINCT ASSESSABLE ENTITY AS PER THE DEFINITION OF PERSON, PROVIDE IN SECTION 2(31) OF THE INCOME TAX ACT. THE HONBLE COURT FURTHER OBSERVED THAT IT CANNOT BE ST ATED THAT WHEN THE VEHICLES ARE USED OF THE DIRECTORS, EVEN IF THEY A RE PERSONALLY USED BY THE DIRECTORS, THE VEHICLES ARE USED FOR PERSONAL USE . THE LIMITED CO. IS INANIMATE PERSON AND THERE CANNOT BE ANYTHING PERSO NAL ABOUT SUCH AN ENTITY. THERE CAN BE NO DISALLOWANCE FOR PERSONAL USE OF TH E CARS BY THE DIRECTORS. ITA NO. 1781 & 2569 & 2570/DEL/2011 4 THEY ARE TO BE CONSIDERED AS USED FOR THE PURPOSE O F THE BUSINESS. RESPECTFULLY FOLLOWING THE DECISION OF HONBLE GUJA RAT HIGH COURT AND THE DECISIONS OF ITAT DELHI IN THE CASE OF DCIT VS. HAR YANA OXYGEN LTD. 76 ITD 32. WE ALLOW BOTH THE GROUNDS OF APPEALS RAISED BY THE ASSESSEE AND DELETE THE DISALLOWANCE. 8. IN RESULT APPEAL OF THE ASSESSEE IS ALLOWED. 9. NOW WE TAKE THE APPEALS OF THE DEPARTMENT IN BOTH T HE ASSESSMENT YEARS. THE GROUNDS ON APPEAL TAKEN BY THE REVENUE I N BOTH YEARS ARE NOT IN CONSONANCE WITH RULE 8 OF ITAT RULES, THEY ARE DESC RIPTATIVE AND ARGUMENTATIVE IN NATURE. IN ASSESSMENT YEAR 2006-07 THE REVENUE HAS RAISED ONLY ONE GRIEVANCE WHICH IS COMMON WITH THE FIRST F OLD OF GRIEVANCE RAISED BY THE ASSESSEE IN A.Y. 2005-06. IN THIS GRIEVANCE THE REVENUE HAS PLEADED THAT LD. CIT (A) HAS ERRED IN DELETING THE DISALLOW ANCES OF RS.8.55 LACS AND 8.61 LACS IN A.YS. 2005-06 AND 2006-07 RESPECTIVELY WHICH WERE MADE BY THE ASSESSING OFFICER WITH THE AID OF SECTION 14A O F THE IT ACT, 1961. 10. THE FACTS ON THIS ISSUE FOR BOTH THE ASSESSMENT YEA RS ARE COMMON, THEREFORE, FOR THE FACILITY OF REFERENCE, MAINLY WE ARE TAKING UP THE FACTS FROM AY 2005-06. THE BRIEF FACTS OF THE CASE ARE THAT DU RING THE SCRUTINY OF THE ACCOUNTS, IT REVEALED TO THE ASSESSING OFFICER THAT ASSESSEE HAD RECEIVED ITA NO. 1781 & 2569 & 2570/DEL/2011 5 DIVIDEND OF RS.21 LACS, FROM THE INVESTMENT MADE IN THE VARIOUS SISTER CONCERNS OF THE GROUP NAMELY: (A) LAKHANI SHOE COMPANY PVT. LTD. (B) LAKHANI FOOTCARE PVT. LTD. (C) LAKHANI DETERGENT & SOAP PVT. LTD. (D) LAKHANI INDIA LTD. 11. ACCORDING TO THE ASSESSING OFFICER THIS DIVIDEND WA S RECEIVED ON ACCOUNT OF INVESTMENT OF RS.15.51 LAC MADE BY THE A SSESSEE IN THESE COMPANIES. THE ASSESSING OFFICER FURTHER OBSERVED T HAT ASSESSEE COMPANY HAS MADE AN INVESTMENT OF RS.2,23,72,972/- WITH THE FIRMS NAMELY, MASCOT UDYOG AND MASCOT FOOTWEAR, WHERE ASSESSEE IS A PART NER. IT RECEIVED SHARE OF PROFIT AT RS.74,36,94/- FROM THESE TWO FIRMS, WH ICH ACCORDING TO THE ASSESSING OFFICER IS EXEMPT FROM TAXATION. HE CONFR ONTED THE ASSESSEE AS TO WHY DISALLOWANCE U/S 14A BE NOT MADE. IN RESPONSE T O THE QUERY OF AO IT WAS CONTENDED BY THE ASSESSEE THAT IT HAS NOT USED ANY BORROWED FUNDS FOR INVESTMENT, WHATEVER INVESTMENT WAS MADE WITH THE C OMPANIES THESE WERE ALREADY WITHDRAWN BY THE ASSESSEE, THE AMOUNTS LYIN G WITH THE COMPANIES ARE ONLY ACCUMULATED DIVIDEND FROM EARLIER INVESTME NT. SIMILARLY IN THE FIRM ACCUMULATED SHARE OF PROFIT IS LYING. THE ASSESSEE HAS SUBMITTED THE COMPLETE DETAILS IN TABULATED FORM. ITA NO. 1781 & 2569 & 2570/DEL/2011 6 12. ON THE SAME ANALOGY ASSESSMENT WAS MADE FOR AY 2006 -07, THE ASSESSING OFFICER HAS WORKED OUT A DISALLOWANCE OF RS.8.55 LAC IN AY 2005- 06 AND RS.8.61 LAC IN AY 2006-07. 13. ON APPEAL LD. CIT (A) FOUND AS A MATTER OF FACT THA T NO INVESTMENT WAS MADE BY THE ASSESSEE OUT OF THE BORROWED FUNDS. THEREFORE, ACCORDING TO THE CIT (A) NO DISALLOWANCE CAN BE MADE U/S 14A OF THE IT ACT. THE LD. CIT (A) FURTHER FOLLOWED ORDER OF THE ITAT IN THE CASE OF A SISTER CONCERNS NAMELY M/S LAKHANI MARKETING INC FOR AY 2000-01 AND 2001-02. 14. THE LD. DR RELIED UPON THE ORDER OF THE ASSESSING O FFICER IN BOTH THE ASSESSMENT YEARS. ON THE OTHER HAND LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT IN F.Y. 1988 TILL F.Y. 2004, THE ASSESSEE HAS MADE AN INVESTMENT IN MASCOT FOOTCARE AT RS.30 LACS. IT HAS WITHDRAWN A S UM OF RS.57.50 LACS. SIMILARLY, IN MASCOT UDYOG THE TOTAL INVESTMENT MAD E BY THE ASSESSEE IS 31.50 LACS AND IT HAS WITHDRAWN 35 LACS OVER A PERI OD. THUS NO INVESTMENT ARE LEFT WITH THESE CONCERNS, THE SHARE OF PROFIT A CCUMULATED OVER A PERIOD IS LYING WITH THESE FIRMS ON WHICH IT GOT SHARE OF PRO FIT. THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT IN THE COMPANY, ASS ESSEE HAS MADE INVESTMENT ORIGINALLY AT 15.51 LACS. THE DETAILS SH OWING THE INVESTMENT RIGHT FROM AY 1986 UPTO 1993-94 AND 1988 UPTO 2004 - 05 H AVE BEEN PLACED ON PAGES NO. 4, 5 AND 6 OF THE PAPER BOOK. ON THE STRE NGTH OF THESE DETAILS THE ITA NO. 1781 & 2569 & 2570/DEL/2011 7 LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT RESERVE AND SURPLUS OF THE ASSESSEE WITH THE DIFFERENT SISTER CONCERNS (COMPAN Y) AS ON 31.3.1986 WAS 1,698,073 IT KEPT ON INCREASING AND AS ON 31 ST MARCH 1993, IT WAS 20,320,678. ACCORDING TO LD. COUNSEL FOR THE ASSESS EE, IT HAS NOT BORROWED ANY FUNDS ON WHICH INTEREST WAS PAID AND THAT AMOUN T WAS USED FOR THE PURPOSE OF THE INVESTMENT. WHATEVER INTEREST EXPENS ES CONSIDERED BY THE ASSESSING OFFICER ARE CONCERNED, THEY ARE PERTAININ G TO THE LOANS WHICH WERE RAISED FOR THE PURPOSE OF THE BUSINESS. THE ASSESSE E HAS ALSO PLACED ON RECORD COPY OF THE BANK STATEMENT AND ALSO POINT OU T THAT ALL ITS PROFITS ARE BEING DEPOSITED IN THIS COMMON A/C. HE FURTHER RELI ED UPON ORDER OF THE CO ORDINATE BENCH IN THE CASE OF SISTER CONCERNS NAMEL Y M/S LAKHANI MARKETING INC. WHERE SIMILAR ISSUE WAS CONSIDERED. 15. WE HAVE DULY CONSIDERED THE RIVAL CONTENTIONS AND G ONE THROUGH THE RECORD CAREFULLY. A BARE PERUSAL OF SECTION 14A WOU LD REVEAL THAT BEFORE MAKING ANY DISALLOWANCE UNDER THIS SECTION, THERE M UST BE INCOME TAXABLE UNDER THE ACT, THAT INCOME MUST NOT FORM PART OF TH E TOTAL INCOME UNDER THE ACT AND THERE MUST BE AN EXPENDITURE INCURRED BY TH E ASSESSEE WHICH HAS A RELATION TO THE INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME UNDER THE ACT. THE GRIEVANCE OF THE ASSESSING OFFICER IS THAT ASSESSEE HAS EARNED DIVIDEND INCOME AND PROFIT FROM THE FIRM AS PARTNER BY MAKING INVESTMENT. ITA NO. 1781 & 2569 & 2570/DEL/2011 8 IT HAS ALSO BORROWED FUNDS TO THE EXTENT OF RS.9853 8062/- ON WHICH INTEREST EXPENDITURE OF RS.76.41 LAC WAS INCURRED. THUS EXPE NDITURE RELATABLE TO TAX FREE INCOME DESERVES TO BE DISALLOWED. AFTER CONSID ERING THE ALLEGED DIVIDEND INCOME, INTEREST EXPENDITURE AND THE INVES TMENT OF THE ASSESSEE HE WORKED OUT A DISALLOWANCE OF RS.8.55 LACS IN AY 200 5-06 AND 8.61 LACS IN AY 2006-07. THE LD. COUNSEL FOR THE ASSESSEE TOOK U S THROUGH THE DETAILS OF INVESTMENT IN THE COMPANIES AS WELL AS IN THE TWO F IRMS WHERE ASSESSEE IS A PARTNER. THE DETAILS OF INVESTMENT IN THE FIRMS ARE PLACED IN A TABULAR FORM ON PAGE NO. 4 OF THE PAPER BOOK. THE INVESTMENT OF RS. 1 LACS WAS MADE FIRST TIME IN 1986-87 IN LAKHANI FOOTCARE P. LTD. SIMILAR LY, RS.2,10,000/- WAS INVESTED IN LAKHANI SHOE COMPANY P. LTD. THIS INVES TMENT, CONTINUED IN THESE COMPANIES, FURTHER INVESTMENT OF RS.2 LAC WAS MADE IN 1993-94 IN LAKHANI INDIA LTD. ON PAGE 17, ASSESSEE HAS PLACED ON RECORD A COMPREHENSIVE CHART SHOWING HOW THE INVESTMENT WAS MADE IN THESE COMPANIES. ON THE STRENGTH OF THESE DETAILS, LD. FI RST APPELLATE AUTHORITY HAS RECORDED THAT THESE INVESTMENTS WERE MADE OUT OF IN TERNAL ACCRUALS THEY ARE NOT INTEREST BEARING INVESTMENT ON WHICH IT CAN BE SAID THAT ASSESSEE HAS BORNE INTEREST EXPENDITURE. THE LD. COUNSEL FOR THE ASSESSEE ALSO POINT OUT THAT WHATEVER ORIGINAL INVESTMENT WAS MADE IN THE P ARTNERSHIP FIRMS THESE WERE WITHDRAWN BY THE ASSESSEE. THE AMOUNTS REMAINE D WITH THE FIRM IS THE ITA NO. 1781 & 2569 & 2570/DEL/2011 9 ACCUMULATED SHARE OF PROFIT OVER A PERIOD OF TIMES. CONSIDERING THESE DETAILS, WE ARE OF THE OPINION THAT NO DISALLOWANCE DESERVES TO BE MADE U/S 14A IN THESE TWO ASSESSMENT YEARS, LD. CIT (A) HAS RIGHTLY DELETED THE DISALLOWANCE ACCORDINGLY THE FIRST FOLD OF GRIEVANCE RAISED BY T HE REVENUE IS REJECTED. 16. IN A.Y. 2005-06 THERE IS ONE MORE ISSUE RAISED BY T HE REVENUE, WHEREIN IT HAS PLEADED THAT LD. CIT (A) HAS ERRED I N DELETING THE INTEREST LIABILITY OF RS.1,34,774/- WHICH WAS ADDED BY THE A SSESSING OFFICER WITH THE HELP OF PROVISO APPENDED TO SECTION 36 (1) (III) OF THE IT ACT. 17. THE BRIEF FACTS OF THE CASE ARE THAT SIDCUL HAD ALL OTTED AN INDUSTRIAL PLOT TO THE ASSESSEE AT HARIDWAR. IT HAS MADE A PAY MENT OF RS.4,21,050/- ON 31 ST AUGUST 2004 AND RS.17,04,250/- ON 16.10.2004. THE ASSESSEE HAS FURTHER PURCHASED A MACHINERY OF RS.5 LACS ON 1 ST OCTOBER 2004 FOR THIS INDUSTRIAL PLOT. ACCORDING TO THE ASSESSING OFFICER , ASSESSEE IS HAVING A CC ACCOUNT BEARING NUMBER 3006 WITH BANK OF INDIA. THE PAYMENTS HAVE BEEN MADE FROM THIS ACCOUNT TOWARDS THE COST OF LAND AS WELL AS COST OF MACHINERY. ACCORDING TO THE ASSESSING OFFICER THERE WAS AN OVERDRAFT LEADING TO DEBIT BALANCE ON THE DATES OF THE ABOVE PAYMENTS. THIS PLOT AS WELL AS MACHINERY WERE NOT PUT TO USE BEFORE THE EN D OF THE ACCOUNTING PERIOD, HENCE AS PER THE PROVISO APPENDED TO SECTIO N 36 (1) (III) THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXTENSION ITA NO. 1781 & 2569 & 2570/DEL/2011 10 OF EXISTING BUSINESS HAS TO BE CAPITALIZED FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF ASSETS TILL THE DAT E ON WHICH SUCH ASSET WAS FIRST PUT TO USE. THE DEDUCTION OF SUCH INTEREST LI ABILITY WOULD NOT BE ALLOWED AS A DEDUCTION. THE LD. AO HARBOURED BELIEF THAT AS SESSEE MUST HAVE INCURRED INTEREST EXPENDITURE, BECAUSE THERE WAS A DEBIT BAL ANCE ON THE DATES OF PAYMENT IN THE ABOVE CC ACCOUNT. ACCORDINGLY HE DIS ALLOWED A SUM OF RS.1,34,774/- AND MADE ADDITION IN THE INCOME OF TH E ASSESSEE. 18. ON APPEAL IT WAS POINTED OUT TO THE LD. CIT (A) THA T A SUM OF RS.9 LAC WAS DEPOSITED ON 31 ST AUGUST, 2004 BEFORE MAKING THE PAYMENT FOR THE PURCHASE OF PLOT, SIMILARLY A SUM OF RS.27 LAC WAS DEPOSITED ON 16.10.2004, BEFORE MAKING THE PAYMENT OF RS.1704250/-. SIMILARL Y A SUM OF RS.24.98 LAC WAS DEPOSITED ON 1 ST OCTOBER 2004. ACCORDING TO THE ASSESSEE, IT HAS AN INCOME OF RS.1 CRORE FROM THE BUSINESS, ALL THESE P ROFITS WERE DEPOSITED IN THE CC ACCOUNT FROM WHERE PAYMENTS WERE MADE. LD. C IT (A) WAS SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AND HELD THAT INTEREST BEARING FUNDS WERE NOT USED BY THE ASSESSEE FOR ACQUIRING THE CAPITAL ASSET. 19. WITH THE ASSISTANCE OF LD. REPRESENTATIVE, WE HAVE GONE THROUGH THE RECORD CAREFUL. THE ASSESSEE HAS PLACED ON RECORD C OPY OF THE CC ACCOUNT AND DEMONSTRATED THAT DEBIT BALANCE WAS NOT ON ACCO UNT OF PURCHASE OF THE ASSETS. IT HAS A PROFIT OF MORE THAN RS. 1 CRORE WH ICH WAS ALSO DEPOSITED IN ITA NO. 1781 & 2569 & 2570/DEL/2011 11 THIS ACCOUNT DURING THE YEAR. THUS IT HAS SUFFICIEN T SURPLUS FUNDS WHICH CAN ENABLE IT TO ACQUIRE THE CAPITAL ASSET. LD. FIRST A PPELLATE AUTHORITY HAS CONSIDERED ALL THESE ASPECTS BEFORE DELETING THE DI SALLOWANCE, THEREFORE, WE DO NOT SEE ANY REASON TO INTERFERE IN THE ORDER OF THE LD. CIT (A). 20. IN THE RESULT BOTH THE APPEALS OF REVENUE ARE DISMI SSED AND THAT OF ASSESSEE IS ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 14/12/ 2012 SD/- SD/- ( A. N. PAHUJA ) (RAJPA L YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 14/12/2012 *AK VERMA* COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT(APPEALS) 2. 4. DR: ITAT ASSISTANT REGISTRAR