The DCIT, Bharuch Circle, Bharuch V. Euphoric Pharmaceuticals Pvt. Ltd., Bharuch

ITA 1983/AHD/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2027 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-02-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 18-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 08-06-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S SONAYAVANSHI SRDR
• Keywords: Business expenditure; Question of law; Commercial expediency
• Section: 43B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI MAHAVIR SINGH, JUDICIAL MEMBER AND SHRI A.N.PHAUJA, ACCOUNTANT MEMBER ITA NO.1983/AHD/2010 ASSESSMENT YEAR:2006-07 DATE OF HEARING:18.2.11 DRAFTED:21.2.11 DY. COMMISSIONER OF INCOME-TAX, BHARUCH CIRCLE, BHARUCH V/S. EUPHORIC PHARMACEUTICALS PVT. LTD., A-1,/173, GIDC IND. ESTATE, ANKLESHWAR, DIST. BHARUCH PAN NO.AAACE4962A (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI G.S. SONAYAVANSHI, SR-DR RESPONDENT BY:- NONE O R D E R PER BENCH:- THIS APPEAL BY THE REVENUE IS ARISING OUT OF THE O RDER OF COMMISSIONER OF INCOME-TAX(APPEALS)-VI, BARODA IN APPEAL NO.CAB/VI- 437/08-09 DATED 19-03-2010. THE ASSESSMENT WAS FRAMED BY THE DCIT, BHARUCH CIRC LE U/S.143(3) OF THE INCOME- TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) VIDE HIS ORDER DATED 29-12-2008 FOR THE ASSESSMENT YEAR 2006-07. 2. THE FIRST ISSUE IN THIS APPEAL OF REVENUE IS AGA INST THE ORDER OF CIT(A) IN DELETING THE ADDITION MADE BY ASSESSING OFFICER ON ACCOUNT OF PF AND ESIC. FOR THIS, REVENUE HAS RAISED THE FOLLOWING GROUND NO.1 :- 1(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE DISALLOWANCE OF RS.1,7 8,440/- BEING EMPLOYEES CONTRIBUTION TO PROVIDENT FUND AND ESIC PAID AFTER DUE DATE AS PER SECTION 36(1)(VA) R.W.S. 2(24(X) AS WELL AS 43B(B) OF THE A CT. ITA 1983/AHD/2010 A.Y. 2006-07 DCIT BHARUCH CIR V. EUPHORIC PHARMACEUTICALS P. LTD. PAGE 2 3. WE FIND THAT FROM THE ASSESSMENT ORDER THAT PF A ND ESIC PAYMENTS ARE MADE WITHIN THE DUE DATES OF FILING OF RETURN OF RE LEVANT ASSESSMENT YEAR AS IS EVIDENT FROM THE CHART GIVEN IN ASSESSMENT YEAR AT PAGE-2 . WE FIND THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE AS THE P AYMENTS OF THESE CONTRIBUTION ARE MADE WITHIN THE DUE DATE OF FILLING OF RETURN O F INCOME AS NOTED BY THE ASSESSING OFFICER IN HIS ASSESSMENT ORDER AND HONBLE DELHI H IGH COURT IN THE CASE OF CIT V. P.M. ELECTRONICS LTD. (2008) 220 CTR 635 (DEL), WHEREIN THE ISSUE HAS BE EN DISCUSSED IN PARA-4 AS UNDER:- 4. ON 27 TH NOV., 1998 THE ASSESSEE HAD FILED A RETURN OF INCO ME DECLARING A LOSS OF RS.8,92,888. ON 11 TH MAY, 1999 THE RETURN WAS PROCESSED UNDER S. 143(1)(A) OF THE ACT. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY. ACCORDINGLY, A NOTICE DT. 27 TH SEPT., 1999 UNDER S. 143(2) OF THE ACT WAS ISSUED TO THE ASSESSEE. IN RESPONSE TO THE NOTICE A ND ON EXAMINATION OF THE DETAILS SUBMITTED BY THE ASSESSEE WITH RESPECT TO P ROVIDENT FUND PAYMENTS MADE BOTH ON ACCOUNT OF EMPLOYERS AND EMPLOYEES S HARE REVEALED THAT PAYMENTS IN THE SUM OF RS.17,94,042 WERE LATE AS PE R THE PROVISIONS OF S. 36(1)(VA) R.W S. 2(24)(X) AND S. 43B. CONSEQUENTLY , THE AO DISALLOWED THE DEDUCTION AND ADDED A SUM OF RS.17,94,042 TOWARDS E PF CONTRIBUTION. AND SUBSEQUENTLY DECIDE THIS ISSUE IN PARA-10 TO 14 OF HON'BLE DELHI HIGH COURT, WHICH READ AS UNDER:- 10. IN VIEW OF THE ABOVE, IT IS QUITE EVIDENT THAT THE SPECIAL LEAVE PETITION WAS DISMISSED BY A SPEAKING ORDER AND WHILE DOING SO TH E SUPREME COURT HAD NOTICED THE FACT THAT THE MATTER IN APPEAL BEFORE I T PERTAINS TO A PERIOD PRIOR TO THE AMENDMENT BROUGHT ABOUT IN S. 43B OF THE ACT. T HE AFORESAID POSITION AS REGARDS THE STATE OF THE LAW FOR A PERIOD PRIOR TO THE AMENDMENT TO S. 43B HAS BEEN NOTICED BY A DIVISION BENCH OF THIS COURT IN DHARMENDRA SHARMA (SUPRA). APPLYING THE RATIO OF THE DECISION OF THE SUPREME COURT IN VINAY CEMENT (SUPRA) A DIVISION BENCH OF THIS COURT DISMISSED T HE APPEALS OF THE REVENUE. IN THE PASSING WE MAY ALSO NOTE THAT A DIV ISION BENCH OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS. NEXUS COMPUTER (P) LTD. BY A JUDGMENT DT. 19 TH AUG., 2008, PASSED IN TAX CASE (APPEAL) NO.1192/20 08 [REPORTED AT (2008) 219 CTR (MAD.) 54 ED.] DISCUS SED THE IMPACT OF BOTH THE DISMISSAL OF THE SPECIAL LEAVE PETITION IN THE CASE OF GEORGE WILLIAMSON (ASSAM) LTD. (SUPRA) AND VINAY CEMENT (SUPRA) AS WELL AS A CONTRARY VIEW OF THE DIVISION BENCH OF ITS OWN COURT IN SYNERGY FINANCIAL EXCHANGE (SUPRA). THE DIVISION BENCH OF THE MADRAS HIGH COURT HAS EXP LAINED THE EFFECT OF THE DISMISSAL OF A SPECIAL LEAVE PETITION BY A SPEAKING ORDER BY RELYING UPON THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF KUNHAYAMMED & ORS.VS. STATE OF KERALA & ANR. (2000) 162 CTR (SC) 97: 119 STC 505 AT P. 526 IN P ARA 40 AND NOTED THE FOLLOWING OBSERVATIONS : IF THE ORDER REFUSING LEAVE TO APPEAL IS A SPEAKIN G ORDER, I.E., GIVES REASONS FOR REFUSING THE GRANT OF LEAVE, THEN THE O RDER HAS TWO IMPLICATIONS. FIRSTLY, THE STATEMENT OF LAW CONTAIN ED IN THE ORDER IS A DECLARATION OF LAW BY THE SUPREME COURT WITHIN THE MEANING OF ART. 141 ITA 1983/AHD/2010 A.Y. 2006-07 DCIT BHARUCH CIR V. EUPHORIC PHARMACEUTICALS P. LTD. PAGE 3 OF THE CONSTITUTION. SECONDLY, OTHER THAN THE DECLA RATION OF LAW, WHATEVER IS STATED IN THE ORDER ARE THE FINDINGS RE CORDED BY THE SUPREME COURT WHICH WOULD BIND THE PARTIES THERETO AND ALSO THE COURT. TRIBUNAL OR AUTHORITY IN ANY PROCEEDINGS SUB SEQUENT THERETO BY WAY OF JUDICIAL DISCIPLINE, THE SUPREME COURT BEING THE APEX COURT OF THE COUNTRY. BUT, THIS DOES NOT AMOUNT TO SAYING TH AT THE ORDER OF THE COURT. TRIBUNAL OR AUTHORITY BELOW HAS STOOD MERGED IN THE ORDER OF THE SUPREME COURT REJECTING SPECIAL LEAVE PETITION OR T HAT THE ORDER OF THE SUPREME COURT IS THE ONLY ORDER BINDING AS RES JUDICATA IN SUBSEQUENT PROCEEDINGS BETWEEN THE PARTIES. 11. UPON NOTING THE OBSERVATIONS OF THE SUPREME COU RT IN KUNHAYAMMED & ORS. (SUPRA) THE DIVISION BENCH OF THE MADRAS HIGH COUR T IN THE CASE OF NEXUS COMPUTER (P) LTD. (SUPRA) CAME TO THE CONCLUSION THAT THE VIEW TAKEN BY THE SUPREME COURT IN VINAY CEMENT (SUPRA) WOULD BIND THE HIGH COURT AS IT WAS LAW DECLARED BY THE SUPREME COURT UNDER ART. 141 OF THE CONSTITUTION. 12. WE ARE IN RESPECTFUL AGREEMENT WITH THE REASONI NG OF THE MADRAS HIGH COURT IN NEXUS COMPUTER (P) LTD. (SUPRA). JUDICIAL DISCIPLINE REQUIRES US TO FOLLOW THE VIEW OF THE SUPREME COURT IN VINAY CEMEN T (SUPRA) AS ALSO THE VIEW OF THE DIVISION BENCH OF THIS COURT IN DHARMEN DRA SHARMA (SUPRA). 13. IN THESE CIRCUMSTANCES, WE RESPECTFULLY DISAGRE E WITH THE APPROACH ADOPTED BY A DIVISION BENCH OF THE BOMBAY HIGH COUR T IN PAMWI TISSUES LTD. (SUPRA). 14. IN THESE CIRCUMSTANCES INDICATED ABOVE, WE ARE OF THE OPINION THAT NO SUBSTANTIAL QUESTION OF LAW ARISES FOR OUR CONSIDER ATION IN THE PRESENT APPEAL. THE APPEAL IS, THUS, DISMISSED. 4. WE FIND THAT THE HON'BLE DELHI HIGH COURT IN THE CASE OF P.M. ELECTRONICS LTD. (SUPRA) HAS DECIDED THIS ISSUE OF PAYMENT OF EMPLOY EES CONTRIBUTION TOWARDS PROVIDENT FUND AFTER CONSIDERING THE DECISION OF HO N'BLE APEX COURT IN THE CASE OF VINAY CEMENT (SUPRA) AND ALSO DISTINGUISHED THE CASE LAW REFERRED BY TH E LD. DR OF BOMBAY HIGH COURT IN PAMWI TISSUES LTD. (SUPRA) . ACCORDINGLY, FOLLOWING DELHI HIGH COURT IN P.M. ELECTRONICS LTD. (SUPRA), WE ALLOW THE CLAIM OF THE ASSESSEE. ACCORDINGLY THIS ISSUE OF THE REVENUES APPEAL IS D ISMISSED. 5. THE NEXT ISSUE IN THIS APPEAL OF REVENUE IS AGAI NST THE ORDER OF CIT(A) IN DELETING THE ADDITION BEING INTEREST CHARGE ON BORR OWED FUNDS DIVERTED FOR NON- BUSINESS PURPOSES. FOR THIS, REVENUE HAS RAISED THE FOLLOWING EFFECTIVE GROUND NO.2(I) & 2(II) :- 2.(I) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS.64,04,9 56/- BEING INTEREST CHARGED ITA 1983/AHD/2010 A.Y. 2006-07 DCIT BHARUCH CIR V. EUPHORIC PHARMACEUTICALS P. LTD. PAGE 4 ON THE BORROWED FUNDS DIVERTED FOR NON-BUSINESS PUR POSES TO ITS SISTER CONCERNS. 2(II). THE CIT(A) FAILED TO APPRECIATE THE LEGAL PR INCIPLE, THAT ONUS U/S.36(1)(III) LIES ON THE ASSESSEE TO PROVE THAT EACH LOAN IS USE D FOR THE PURPOSES OF ITS BUSINESS, AS SETTLED IN THE CASE OF KISHANCHAND CHELLARAM VS. CIT 114, ITR 654 (BOM) , R.DALMIYA VS. CIT 133 ITR 169 (DEL) , CIT VS. M.S. VENKATESHWARAN 222 ITR 163 (MAD) , K. SOMASUNDARAM & BROTHERS CIT 238 939 (MAD) AND CIT VS. MOTOR GENERAL FINANCE LTD. 254 ITR 449 (DEL) WHICH WAS CONFIRMED IN PRINCIPLES BY THE SUPREME CO URT IN THE CASE OF MOTOR GENERAL FINANCE VS CIT 267 ITR 381 (SC). 6. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSEES SISTER CONCERN EUPHORIC LABORATORY PVT. LTD. WAS EXCLUSIVELY MAKIN G SALES ON BEHALF OF ASSESSEE IN EARLIER YEAR AND COMMISSION WAS PAID TO THEM. THE O PENING BALANCE OF THE ABOVE SAID PARTY WAS AT RS.3,10,95,028/- AND DURING THE Y EAR UNDER CONSIDERATION ASSESSEE HAS MADE SALES AMOUNTING TO RS.1,69,13,870 /- AND RECEIVED AT RS.2,43,34,795/- TOWARDS COLLECTION CHARGES ON ACCO UNT OF SALES. THE ASSESSING OFFICER FOUND NO REASON FOR NOT RECEIVING THAT AMOU NT COLLECTED ON SALES COLLECTION. ACCORDINGLY, HE CHARGED INTEREST ON OUTSTANDING BAL ANCE IN THE ACCOUNT OF M/S. INDIAN ANTIBIOTICS PVT. LTD. AT RS.64,04,956/- AND ADDED TO THE RETURN OF INCOME OF THE ASSESSEE. AGGRIEVED, ASSESSEE PREFERRED APPEAL BEFO RE CIT(A) AND CIT(A) DELETED THE ADDITION BY GIVING FOLLOWING FINDINGS IN PARA-7.3 OF HIS APPELLATE ORDER:- 7.3 I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A .R., THE FACTS OF THE CASE AND THE JUDICIAL DECISIONS RELIED ON BY THE APPELLA NT. IN MY OPINION, THE ASSESSING OFFICER WHILE MAKING THE ADDITION DID NOT DULY CONSIDER THE MOST VITAL ASPECTS OF THE MATTER, NAMELY, THAT THE ADVAN CES WERE ADMITTEDLY IN THE INTEREST OF THE BUSINESS OF THE APPELLANT, THAT INT EREST, EVEN IF CHARGED, WAS UNLIKELY TO BE RECOVERED AND THAT HYPOTHETICAL INCO ME CANNOT BE CHARGED TO TAX. CONSIDERING THESE ASPECTS OF THE MATTER, IT IS CLEAR THAT THE ADDITION ON THIS GROUND IS NOT JUSTIFIED AND IS ACCORDINGLY DEL ETED. NOW, AGGRIEVED, REVENUE CAME IN APPEAL BEFORE TRIBU NAL. 7. WE HAVE HEARD THE LD.SR-DR AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND THAT THE SISTER CONCERN TO WHO M FUNDS ARE TRANSFERRED ARE EXCLUSIVELY ENGAGED IN PROMOTING SALES OF THE ASSES SEES PRODUCTS. FURTHER, THESE CONCERNS WERE CONTINUOUSLY INCURRING LOSSES ON INAD EQUATE MARGIN ALLOWED TO THEM BY THE ASSESSEE AND ASSESSEE HAD TO FINANCE VARIOUS BUSINESS EXPENSES OF THE CONCERNS IN THE INTEREST OF ASSESSEES OWN BUSINESS . THERE WAS NO QUESTION OF ITA 1983/AHD/2010 A.Y. 2006-07 DCIT BHARUCH CIR V. EUPHORIC PHARMACEUTICALS P. LTD. PAGE 5 CHARGING INTEREST TO THEM AS THE ADVANCES WERE FOR ASSESSEES OWN BUSINESS INTEREST. THE ASSESSEE CONTENTED THAT EVEN OTHERWIS E BOTH THESE CONCERNS HAD NO FUNDS OR BUSINESS ACTIVITY FROM WHICH THEY COULD RE PAY THE ADVANCES, LET ALONE INTEREST THEREON. FURTHER CONTENTION OF THE ASSESSE E IS THAT THERE IS COMMERCIAL JUSTIFICATION FOR THE ADVANCES GIVEN AND HENCE DISA LLOWANCE OF INTEREST ON ACCOUNT OF DIVERSION OF FUNDS IS NOT JUSTIFIED AS PER DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT AND ANOTHER (2007) 288 ITR 1 (SC), WHEREIN THE RELEVANT OBSERVATIONS ARE AS UNDER:- IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIB UNAL AND OTHER INCOME TAX AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER W ORDS, THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHE R THE INTEREST FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDI ARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRES SION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCU RRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXP ENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COUR T IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 254 ITR 377THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-C HAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME T HE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRC UMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT . THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUS INESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BO RROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDI ENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR E ARNING PROFITS. 8. WE FIND THAT THE DISALLOWANCE IS NOT JUSTIFIED IN VIEW OF THE FACT THAT THE SAID SISTER CONCERNS TO WHOM FUNDS ARE TRANSFERRED ARE E XCLUSIVELY ENGAGED IN PROMOTING SALES OF THE ASSESSEES PRODUCTS. FURTHER, THESE CO NCERNS WERE CONTINUOUSLY INCURRING LOSSES ON ACCOUNT OF INADEQUATE MARGIN AL LOWED TO THEM BY THE ASSESSEE. HENCE, ASSESSEE HAD TO FINANCE VARIOUS BUSINESS EXP ENSES OF THESE CONCERNS ON THE INTEREST OF ASSESSEES OWN BUSINESS. HENCE, THE RE WAS NO QUESTION OF CHARGING ITA 1983/AHD/2010 A.Y. 2006-07 DCIT BHARUCH CIR V. EUPHORIC PHARMACEUTICALS P. LTD. PAGE 6 INTEREST TO THEM AS THE ADVANCES WERE FOR ASSESSEE S OWN BUSINESS INTEREST. WE FIND THAT THERE IS COMMERCIAL JUSTIFICATION FOR THE ADVA NCES GIVEN AND HENCE DISALLOWANCE OF INTEREST ON ACCOUNT OF DIVERSION OF FUNDS IS NOT JUSTIFIED AS PER DECISION OF SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) 9 . IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 22/02/2011 SD/- SD/- (A.N.PHAUJA) (MAHAVIR SI NGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 22/02/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-VI, BARODA 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD