LUCID COLLOIDS LTD, MUMBAI V. ACIT 6(3), MUMBAI

ITA 1951/MUM/2010

• Counselvise Citation: 195119914 RSA 2010
• Duration Of Justice: 1 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 12-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ALEXANDER CHANDY
• Keywords: Business income; Source of fund; Proportionate interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'A' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 2753/MUM/2009 ITA NO. 1951/MUM/2010 (ASSESSMENT YEARS: 2004-05 & 2006-07) M/S. LUCID COLLOIDS LTD. INCOME TAX OFFICER - 6(3)( 3) 401-A, NAVHBARAT ESTATE AAYAKAR BHAVAN, M.K. ROAD ZAKARIA BUNDER ROAD VS. MUMBAI 400020 SEWARI (W), MUMBAI 400015 PAN - AAACI 2673 B APPELLANT RESPONDENT APPELLANT BY: MS. AARTI VISSANJI RESPONDENT BY: SHRI ALEXANDER CHANDY DATE OF HEARING: 20.10.2011 DATE OF PRONOUNCEMENT: 31.10.2011 O R D E R PER B. RAMAKOTAIAH, A.M. THESE APPEALS ARE BY THE ASSESSEE AGAINST THE ORDER S OF THE CIT(A) XXVI, MUMBAI PERTAINING TO ASSESSMENT YEARS 2004-05 AND 2006-07 DATED 07.01.2009 AND 07.12.2009 RESPECTIVELY. 2. THE ISSUE IN BOTH THE APPEALS IS WITH REFERENCE TO DISALLOWING PROPORTIONATE INTEREST PAID ON THE AMOUNTS INVESTED IN SUBSIDIARY COMPANIES INVOKING PROVISIONS OF SECTION 14A. 3. BRIEFLY STATED, ASSESSEE INVESTED AN AMOUNT OF ` 6.80 CRORES UPTO A.Y. 2004-05 AND ` 8 CRORES BY A.Y. 2006-07 IN THE JOINT VENTURE COMPA NY WITH M/S. TAIYO KAGAKU CO. LTD., JAPAN. THE JOINT VENTUR E COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF HYDROCOLLOIDS, ETC. AND PURCHASES RAW MATERIAL FROM ASSESSEE COMPANY. THEREFORE ASSESSEE S CONTENTION IS THAT THE AMOUNT INVESTED IN M/S. TAIYO KAGAKU CO. LTD. IN VA RIOUS ASSESSMENT YEARS IS FOR THE PURPOSE OF BUSINESS AND AS SUCH THE PRIN CIPLES ESTABLISHED BY THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. S.A. B UILDERS LTD. 288 ITR 1 ITA NO. 2753 & 1951/MUM/2009 M/S. LUCID COLLOIDS LTD. 2 WOULD APPLY TO THE FACTS OF THE CASE. FURTHER IT WA S SUBMITTED THAT ASSESSEE HAS ITS OWN FUNDS FOR INVESTING IN THE JOINT VENTUR E COMPANY AND THERE IS NO BORROWAL SO AS TO DISALLOW THE INTEREST UNDER SECTI ON 36(1)(III). IT WAS FURTHER CONTENDED THAT ASSESSEE HAS NOT EARNED ANY EXEMPT I NCOME DURING THE YEAR. THEREFORE, INVOKING PROVISIONS OF SECTION 14A DOES NOT ARISE. HOWEVER, THE A.O. HELD THAT THERE IS A COMMON POOL OF FUNDS AND ASSESSEE HAS NOT ESTABLISHED THAT NO BORROWED FUNDS WERE INVESTED IN THE JOINT VENTURE COMPANY, DISALLOWED PROPORTIONATE INTEREST AND MADE DISALLOWANCE OF ` 14,59,348/- IN A.Y. 2004-05 AND ` 20,76,794/- IN A.Y. 2006-07. THE CIT(A) CONFIRMED THESE DISALLOWANCES. 4. REFERRING TO THE PAPER BOOK PLACED ON RECORD AND TH E FACTS SUBMITTED BEFORE THE A.O. AND THE CIT(A), IT WAS CONTENDED BY THE LEARNED COUNSEL THAT ASSESSEE HAD ITS OWN FUNDS TO AN EXTENT OF ` 58.13 CRORES INCLUDING ` 25.77 CRORES AS RESERVES. IT WAS FURTHER SUBMITTED THAT T HERE WAS NO UNSECURED LOANS TAKEN DURING THE YEAR AND ALL THE SECURED LOA NS ARE FOR THE PURPOSE OF BUSINESS REQUIREMENTS. THE LEARNED COUNSEL FURTHER PLACED ON RECORD THE INTEREST EXPENSES CLAIMED IN 2006-07 AS UNDER: - INTEREST PAID ON TERM LOANS ` 26,90,091/- INTEREST ON PACKING CREDIT ` 36,95,945/- INTEREST ON PACKING CREDIT IN FOREIGN CURRENCY ` 36,84,692/- INTEREST OF FOREIGN CURRENCY BILL DISCOUNTING ` 11,96,845/- INTEREST ON CASH CREDIT ` 45,61,344/- TOTAL ` 1,58,28,917/- ============ 5. IT WAS SUBMITTED THAT MOST OF THE AMOUNTS WERE PAID FOR TAKING BILL DISCOUNTING, TERMS LOANS AND CASH CREDIT FOR WORKIN G CAPITAL REQUIREMENTS AND NONE OF THESE AMOUNTS WERE DIVERTED FOR INVESTM ENT IN JOINT VENTURE COMPANY. IT WAS FURTHER SUBMITTED THAT THE ORIGINAL INVESTMENT WAS MADE IN A.Y. 2002-03 TO SOME EXTENT AND INTEREST CLAIM IN T HAT YEAR WAS FULLY ALLOWED. NOT ONLY THAT IN A.Y. 2005-06 THE INTEREST CLAIM WAS ALSO ALLOWED CONSEQUENT TO THE ORDER OF THE CIT(A), WHICH WAS AC CEPTED AND NOT CONTESTED. IT WAS THE SUBMISSION THAT THE AMOUNTS W ERE INVESTED IN JOINT VENTURE COMPANY WHICH RESULTED IN BUSINESS TO ASSES SEE COMPANY. IT WAS ITA NO. 2753 & 1951/MUM/2009 M/S. LUCID COLLOIDS LTD. 3 FURTHER SUBMITTED THAT M/S. TAIYO LUCID PVT. LTD. P ROCURES ITS ENTIRE RAW MATERIAL FROM THE ASSESSEE COMPANY. THE TOTAL SALES MADE BY THE ASSESSEE COMPANY TO M/S. TAIYO LUCID PVT. LTD. ARE AS UNDER: - FINANCIAL YEAR SALE TO TAIYO LUCID PVT. LTD. 2004-05 ` 19,73.86,074/- 2005-06 ` 3,30,20,136/- 2006-07 ` 4,02,28,875/- 2007-08 ` 8,86,41,000/- IT WAS SUBMITTED THAT FACTS REVEAL THAT BY INVESTIN G AND SETTING UP A JOINT VENTURE COMPANY, THE ASSESSEE COMPANY HAS DIRECTLY INCREASED THEIR SALES. THEREFORE, THE TAXABILITY OF INTEREST PAID ON THE B ORROWINGS MADE FOR THE PURPOSE OF EXPANSION OF BUSINESS HAS TO BE ALLOWED UNDER SECTION 36(1)(III) AND SECTION 14A HAS NO ROLE TO PLAY. 6. THE LEARNED D.R., HOWEVER, SUBMITTED THAT THE CIT(A ) CONFIRMED THE ORDER INVOKING RULE 8D AND, THEREFORE THE DECISION IS TO BE UPHELD. 7. WE HAVE CONSIDERED THE ISSUE. AS FAR AS INVOKING OF RULE 8D FOR THE IMPUGNED ASSESSMENT YEAR IS CONCERNED THE DECISION OF THE SPECIAL BENCH RELIED UPON BY THE CIT(A) IN THE CASE OF DAGA CAPIT AL MANAGEMENT PVT. LTD. 26 SOT 603 WAS NOT APPROVED BY THE HON'BLE BOMBAY H IGH COURT IN THE CASE OF GODREJ & BOYCE LTD. MFG. CO. VS. DCIT 328 I TR 81. THEREFORE, INVOKING RULE 8D DOES NOT ARISE. SINCE THE SOME OF THE SUBMISSIONS MADE ABOUT NON-DIVERSION OF BORROWED FUNDS TO THE SUBSID IARY COMPANY WAS NOT EXAMINED BY THE A.O. AND FURTHER AS SEEN FROM THE I NTEREST PAID THESE PAYMENTS SEEMS TO BE FOR SPECIFIC LOANS OBTAINED, IN THE INTEREST OF JUSTICE WE ARE OF THE OPINION THAT THE FACTUAL ASPECTS REGARDI NG THE CLAIM OF INTEREST BY ASSESSEE REQUIRE EXAMINATION. IN CASE ASSESSEE HAS BORROWED FUNDS FOR SPECIFIC PURPOSES OF PACKING CREDIT, BILL DISCOUNTI NG IN THE COURSE OF ITS BUSINESS, THE QUESTION OF DISALLOWANCE UNDER SECTIO N 36(1)(III) DOES NOT ARISE UNLESS IT IS ESTABLISHED THAT THE BORROWED FUNDS AR E DIVERTED FOR INVESTMENT IN SUBSIDIARY COMPANIES. THIS ASPECT WAS NOT EXAMINED BY THE A.O. AT ALL. AMOUNTS CANNOT BE DISALLOWED ON PROPORTIONATE BASIS UNLESS THE FACTS ARE EXAMINED. IT IS ALSO ONE OF THE CONTENTIONS THAT TH E INVESTMENTS IN SUBSIDIARY ITA NO. 2753 & 1951/MUM/2009 M/S. LUCID COLLOIDS LTD. 4 COMPANY IS FOR THE PURPOSE OF BUSINESS. THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LT D. 313 ITR 340 HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OV ER DRAFT THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT OF INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY AND I F THE INTEREST FREE FUNDS ARE SUFFICIENT TO MEET THE INVESTMENT THERE IS NO N EED FOR DISALLOWING ANY INTEREST. WITHOUT EXAMINING THE FACTS OF DIVERSION OF BORROWED FUNDS, THE LEGAL PRINCIPLE CAN NOT BE APPLIED. IN VIEW OF THIS , THE MATTER REGARDING DISALLOWANCE UNDER SECTION 36(1)(III)/14A IN BOTH T HE YEARS IS RESTORED TO THE FILE OF THE A.O. TO EXAMINE THE FACTS AND DECIDE AC CORDINGLY. THE A.O. IS ALSO DIRECTED TO KEEP IN MIND THE YEARS OF INVESTMENT MA DE BY ASSESSEE, SOURCE OF FUND AND THE ORDERS OF THE CIT(A)/ITAT IN THE RESPE CTIVE YEARS AND DECIDE THE ISSUE ACCORDINGLY. GROUNDS ARE TREATED ALLOWED FOR STATISTICAL PURPOSES. 8. IN THE RESULT, APPEALS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST OCTOBER 2011. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI, DATED: 31 ST OCTOBER 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXVI, MUMBAI 4. THE CIT VI, MUMBAI CITY 5. THE DR, A BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.