PCS Techonology Ltd., Pune V. Deputy Commissioner of Income-tax,

ITA 1810/PUN/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 85015 (ITAT-PUNE)
• Duration Of Justice: 11 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-09-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 08-10-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P S NAIK
• Keywords: Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI G.S. PANNU, ACCOUNTANT MEMBER ITA NO.1810/PN/2013 (A.Y:2010-11) PCS TECHNOLOGY LTD., S.NO.1A, IRANI MARKET COMPOUND, YERAWADA, PUNE 411006 PAN: AABCP0316J APPELLANT VS. DY.CIT, CIRCLE 4, PUNE RESPONDENT APPELLANT BY : SHRI C.H.NANIWADEKAR RESPONDENT BY : SHRI P.S. NAIK DATE OF HEARING : 24.09.2014 DATE OF PRONOUNCEMENT : 24.09.2014 ORDER PER SHAILENDRA KUMAR YADAV : THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-II, PUNE DATED 10.05.2013 FOR A.Y. 2010-11 ON THE FOLLOWING GROUNDS. IN THE FACT AND THE CIRCUMSTANCES OF CASE, AND IN L AW, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS)-II, PU NE, ERRED IN CONFIRMING THE ADDITIONS AND OBSERVATIONS MADE B Y THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IN RESPEC T OF FOLLOWING POINTS. HE ERRED: 1. IN RESPECT OF DISALLOWANCE OF RS.6,26,000/- OU T OF INTEREST PAID: A) IN CONFIRMING THE DISALLOWANCE OF RS.6,26,000 OUT O F INTEREST PAID. B) IN NOT APPRECIATING THAT IN VIEW OF THE POSITION OF THE NET OWNED FUNDS OF THE APPELLANT COMPANY AS ALSO TH E INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS NOT JUSTIFIED. ITA NO.1810/PN/13 PCS TECHNOLOGY LTD C) WITHOUT PREJUDICE TO ABOVE, IN NOT ACCEPTING THAT T HE DISALLOWANCE OUT OF INTEREST OUGHT TO HAVE BEEN MAD E ON A PROPORTIONATE BASIS 2. THE APPELLANT CRAVES LEAVE TO ADD, MODIFY OR WI THDRAW ANY OF THE GROUNDS OF APPEAL AT THE TIME OF HEARING 2. THE ASSESSEE IS A COMPANY ENGAGED IN THE ACTIVIT Y OF MANUFACTURE AND MARKETING OF COMPUTER SYSTEMS WHICH INCLUDES PROVIDING COMPUTERS ON LEASE BASIS, PROVIDING COMPU TER HARDWARE, SOFTWARE MAINTENANCE AND REPAIR SERVICES AND PROVID ING CONSULTANCY SERVICES. THE ASSESSEE FILED THE RETUR N ON 08.09.2009 DECLARING INCOME OF RS.3,84,72,890/- WHICH WAS PROC ESSED U/S.143(1) OF THE ACT AND THE SAME WAS ASSESSED U/S .143(3) OF THE ACT BY THE ASSESSING OFFICER DETERMINING TOTAL INCO ME AT RS.3,90,98,890/-. DURING THE ASSESSMENT PROCEEDING S, THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSEE HA D ADVANCED INTEREST FREE ADVANCES TO M/S. PSC POSITIONING LTD. AMOUNTING TO RS.2,60,00,000/- AND OUT OF THIS RS.2,50,00,000/- W AS RECEIVED BACK FROM THE SAID COMPANY. IT WAS NOTICED THAT TH E ASSESSEE HAD HUGE INTEREST BURDEN AND HAD FAILED TO JUSTIFY THE BUSINESS PURPOSE OF EXPEDIENCY OF THE AMOUNT ADVANCED. THE ASSESSIN G OFFICER THUS, HELD THAT THE ASSESSEE FAILED TO ESTABLISH THAT THE FUNDS WERE UTILIZED FOR THE PURPOSE OF THE BUSINESS AND, THERE FORE, DISALLOWED A SUM OF RS.6,26,000/- BEING 12% OF THE TOTAL ADVANCE S ON A PROPORTIONATE BASIS. 2.1 THE MATTER WAS CARRIED BEFORE FIRST APPELLATE A UTHORITY, WHEREIN THE VARIOUS CONTENTIONS WERE RAISED ON BEHA LF OF THE ASSESSEE. THE CIT(A) HAS UPHELD THE ORDER OF ASSES SING OFFICER FOLLOWING THE DECISION IN ASSESSEES OWN CASE FOR A .Y. 2009-10 VIDE APPELLATE ORDER NO.PN/CIT(A)-II/JCIT R-4/277/2011-1 2 DATED 02.07.2012. ITA NO.1810/PN/13 PCS TECHNOLOGY LTD 2.2 BEFORE US, THE LEARNED AUTHORIZED REPRESENTATIV E HAS POINTED OUT THAT IN A.Y. 2009-10, THE TRIBUNAL HAS DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE BY OBSERVING AS UNDER: 9. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFI CER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE AS SESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BE FORE US. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE H AS ADVANCED INTEREST FREE LOAN OF RS.40,50,000/- TO MR. PRATAP HEGDE AND RS.2,60,00,000/- TO M/S. PCS POSITIONING PVT. LTD. WHEREAS IT HAS INCURRED INTEREST EXPENDITURE OF RS.7,68,38,548 /- ON ACCOUNT OF BORROWED FUNDS. SINCE THE ASSESSEE COUL D NOT ESTABLISH THE COMMERCIAL EXPEDIENCY OF SUCH INTERES T FREE LOAN ADVANCED TO THE ABOVE 2 PARTIES, THE ASSESSING OFFI CER DISALLOWED INTEREST OF RS.36,06,000/- BEING 12% INT EREST ON THE AFORESAID ADVANCES WHICH HAS BEEN UPHELD BY THE CIT(A). IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASS ESSEE THAT SINCE THE TOTAL INTEREST FREE FUNDS, I.E. SHARE CAP ITAL AND INTEREST FREE LOAN FROM DIRECTORS AMOUNTING TO RS.1 28.47 CRORES IS MORE THAN THE INTEREST FREE ADVANCE OF RS.3,00,50,000/- (I.E. 40,50,000 + 2,60,00,000/-), THEREFORE, IN VIEW OF THE DECISION OF HONBLE BOMBAY HIGH COUR T IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., NO AMOUNT OF INTEREST CAN BE DISALLOWED. IT HAS BEEN HELD IN THE AFOREMENTIONED DECISION THAT IF THERE WERE FUNDS AV AILABLE BOTH INTEREST FREE AND OVERDRAFTS AND/OR LOANS TAKE N, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS SHOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. AS HAS ALREADY BEEN NOTED IN THE ORDE R OF THE CIT(A) AT PAGE 3 AND 4, THE ASSESSEE HAD GIVEN THE DETAILS OF INTEREST FREE LOAN FROM DIRECTORS AT RS.57.87 CRORE S AND THE SHAREHOLDERS FUNDS AS ON 31-03-2009 AT RS.70.60 CRO RES (AFTER DEDUCTING THE REVALUATION RESERVE OF RS.7.95 CRORES). THUS, THE TOTAL INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE COMES TO RS.128.47 CRORES WHICH IS MUCH MORE THAN T HE INTEREST FREE ADVANCES GIVEN TO THE 2 PARTIES AMOUN TING TO RS.3,00,50,000/-. 10. WE FIND THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA) HAS OBSER VED AS UNDER : APART FROM THAT WE HAVE NOTED EARLIER THAT BOTH IN THE ORDER OF THE COMMISSIONER OF INCOME-TAX (APPEAL S) AS ALSO THE APPELLATE TRIBUNAL, A CLEAR FINDING IS RECORDED THAT THE ASSESSEE HAD INTEREST-FREE FUNDS OF ITS ITA NO.1810/PN/13 PCS TECHNOLOGY LTD OWN WHICH HAD BEEN GENERATED IN THE COURSE OF THE YEAR COMMENCING FROM APRIL 1, 1999. APART FROM THAT IN TERMS OF THE BALANCE-SHEET THERE WAS A FURTHER AVAILABILITY OF RS. 398.19 CRORES INCLUDING RS. 180 CRORES OF SHARE CAPITAL. IN THIS CONTEXT, IN OUR OPINION, THE FINDING OF FACT RECORDED BY THE COMMISSIONER OF IN COME- TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL AS TO AVAILABILITY OF INTEREST-FREE FUNDS REALLY CANNO T BE FAULTED. 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 INTERES T- FREE FUNDS AVAILABLE. IN OUR OPINION, THE SUPREME C OURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. V. CIT [19 97] 224 ITR 627 HAD THE OCCASION TO CONSIDER THE DECIS ION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. [1982] 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISE N. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHO ULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARAC TER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEV ANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNI NG OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELL ANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORC E, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NO T BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANS WERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.` S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEP OSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN S UCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVER DRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERI AL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HI GH COURT. THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVER DR AFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE IN TEREST- FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS . IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERI NG THE FINDING OF FACT BOTH BY THE COMMISSIONER OF INCOME- TAX (APPEALS) AND THE INCOME-TAX APPELLATE TRIBUNAL. ITA NO.1810/PN/13 PCS TECHNOLOGY LTD 10.1 SINCE IN THE INSTANT CASE THE INTEREST FREE FU NDS AVAILABLE WITH THE ASSESSEE COMPANY AT RS.128.47 CRORES IS MU CH MORE THAN THE INTEREST FREE ADVANCES GIVEN, THEREFORE, R ESPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH C OURT CITED (SUPRA) WE HOLD THAT NO DISALLOWANCE IS WARRANTED I N THE INSTANT CASE. WE ACCORDINGLY SET-ASIDE THE ORDER O F THE CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADD ITION. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. 2.3 NOTHING CONTRARY HAS BEEN BROUGHT TO OUR KNOWLE DGE ON BEHALF OF THE REVENUE. FACTS BEING SIMILAR, SO FOL LOWING THE SAME REASONING THE ASSESSING OFFICER IS DIRECTED TO DELE TE THE DISALLOWANCE OF RS.6,26,000/- OUT OF INTEREST PAID AS DISCUSSED ABOVE. 3. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED AS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT ON THIS THE 24 TH DAY OF SEPTEMBER, 2014. SD/- SD/- (G.S. PANNU) (SHAILENDRA KUMAR YADAV ) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED THE 24 TH SEPTEMBER, 2014 GCVSR COPY TO:- 1) ASSESSEE 2) THE DEPARTMENT 3) THE CIT(A)-II, PUNE 4) THE CIT-II, PUNE 5) THE DR, B BENCH, I.T.A.T., PUNE. 6) GUARD FILE BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, PUNE.