S M Auto Engineering Pvt. Ltd., Pune V. Assistant Commissoner of Income-tax,

ITA 2050/PUN/2013

• Counselvise Citation: 205024514 RSA 2013
• Duration Of Justice: 11 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-10-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 26-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P S NAIK
• Keywords: Business expenditure; Proportionate interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NOS.2050 & 2051/PN/2013 (ASSESSMENT YEAR: 2007-08) M/S. S.M. AUTO ENGINEERING PVT. LTD., 12, BHOSALE NAGAR, PUNE 411007 PAN: AACCS9239E . APPELLANT VS. THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE 6, PUNE . RESPONDENT APPELLANT BY : SHRI KISHORE PHADKE RESPONDENT BY : SHRI P.S. NAIK DATE OF HEARING : 30-09-2014 DATE OF PRONOUNCEMENT : 27-10-2014 ORDER PER SUSHMA CHOWLA, JM BOTH THE APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINS T SEPARATE ORDERS OF CIT(A)-III, PUNE BOTH DATED 29.08.201 3 RELATING TO ASSESSMENT YEAR 2007-08 AGAINST ORDER PASSED U/S.143(3 ) OF THE INCOME TAX ACT AND ORDER PASSED UNDER SECTION 143(3) R .W.S. 263 OF THE INCOME-TAX ACT. 2. BOTH THE APPEALS RELATING TO THE SAME ASSESSEE ON D IFFERENT ISSUES WERE HEARD TOGETHER ARE BEING DISPOSED OF BY TH IS CONSOLIDATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ASSESSEE IN ITA NO.2050/PN/2013 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 2 1. THE LEARNED CIT(A)-III, PUNE ERRED IN CONFIRMING DISALLOW ANCE OF EXPENSES OF RS.1,84,000/- INCURRED FOR CREATING CANTE EN BY TREATING THE EXPENDITURE AS ONE LEADING TO ENDURING BENEFIT. THE I-T AUTHORITIES OUGHT TO HAVE APPRECIATED THAT THE CA NTEEN STRUCTURE WAS OF A TEMPORARY NATURE AND THE SAID EX PENDITURE WAS IN THE REVENUE FIELD, AS SUCH, DEDUCTION U/S 37 OF ITA, 1961 . 2. THE APPELLANT CRAVES LEAVE TO ADDITION / MODIFY / AMEN D / DELETE ALL / ANY OF THE GROUNDS OF APPEAL. 4. THE BRIEF FACTS RELATING TO THE ISSUE ARE THAT, DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD CLAIMED EXPENDITUR E UNDER THE HEAD REPAIRS AND MAINTENANCE OF BUILDING AT RS.17,29,821/ -. THE ASSESSING OFFICER ON THE EXAMINATION OF THE DETAILS NOTED TH AT A SUM OF RS.6,44,903/- WAS SPENT ON PAINTING CHARGES OF THE THREE BUILDINGS AND THE BALANCE SUM OF RS.10,84,918/- WAS SPENT ON EXTE NSION ON THE TERRACE FOR ERECTING CANTEEN SHED AT TWO FACTORY SITES. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE SAME WAS NOT IN THE NAT URE OF REVENUE EXPENDITURE AND HENCE, THE SAME WAS CAPITALIZED, BUT DEPR ECIATION @ 10% WAS ALLOWED ON THE SAME. 5. IN APPEAL, THE CIT(A) PERUSED THE BILL OF FABRICATION AND ERECTION OF MS STRUCTURE FOR CANTEEN SHED AND ALSO PERUSED THE BALANCE DETAILS BOOKED UNDER THE HEAD REPAIRS AND MAINTENANCE. THE CIT(A) NOTED THAT THE BILL OF RS.1,84,000/- CONSISTED OF SUNDRY ITEMS SU CH AS BREAKING OF EXISTING RCC COLUMNS ON THE TERRACE FOR THE P ROPOSED CANTEEN AND THEN PROVIDING AND CASTING OF RCC PEDESTALS FOR MS COLUMNS, LABOUR CHARGES, PLASTERS, PAINTING AND FIXING CERAMIC ITEMS, ETC. THE CIT(A) WAS OF THE VIEW THAT THE AMOUNT WAS SPE NT FOR CREATION OF AN ASSET OF ENDURING NATURE. HOWEVER, THE BALANCE EX PENDITURE INCURRED BY THE ASSESSEE WAS HELD TO BE REVENUE IN NAT URE AND A SUM OF RS.1,84,000/- WAS HELD TO BE CAPITAL EXPENDITURE. ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 3 6. THE ASSESSEE IS IN APPEAL AGAINST THE SAID ADDITION OF RS.1,84,000/-. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT THE SAID EXPENDITURE WAS INCU RRED ON TEMPORARY STRUCTURE CONSTRUCTED ON THE FACTORY BUILDING AND HAD NO ENDURING BENEFIT. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVE NUE HOWEVER, PLACED RELIANCE ON THE ORDER OF CIT(A). 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ISSUE ARISING IN THE PRESENT APPEAL IS IN RELATION TO THE EXPENDITU RE OF RS.1,84,000/- WHICH THE ASSESSEE CLAIMED WAS REVENUE IN NATURE. THE ASSESSEE HAS FURNISHED THE COPY OF THE SAID BILL FOR T HE CONSTRUCTION OF TEMPORARY STRUCTURE ON THE TERRACE OF FACTORY BUILDING FOR RUNNING A CANTEEN. THE COPY OF THE SAID BILL IS PLACED A T PAGES 1 TO 3 OF THE PAPER BOOK. THE PERUSAL OF THE SAID BILL REFLECTS THE EXPENSES BEING INCURRED FOR BREAKING THE EXISTING RCC COLUMNS, PROVID ING AND CASTING RCC PEDESTALS FOR MS COLUMNS. FURTHER, THE LABOU R CHARGES HAVE BEEN INCURRED FOR THE FABRICATION AND ERECTION OF MS STRUCTURE FOR THE SAID CANTEEN SHED. IN ADDITION, LABOUR CHARGES HAD B EEN PAID FOR PAINTING THE STRUCTURE, PLASTERING THE PEDESTALS AND FOR FI XING CERAMIC TILES FOR FLOORING AND OTHER MISCELLANEOUS EXPENDITURE. THE P ERUSAL OF THE DETAILS REFLECT THAT THE SAME WERE NOT OF ENDURING BE NEFIT AND WE FIND NO MERIT IN THE ORDER OF CIT(A) IN THIS REGARD IN HOLDING THE EXPENDITURE OF RS.1,84,000/- TO BE CAPITAL IN NATURE. REVER SING THE FINDING OF CIT(A), WE HOLD THAT THE EXPENDITURE INCURRED BY T HE ASSESSEE ON THE TEMPORARY STRUCTURE CONSTRUCTED ON THE TERRACE OF THE ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 4 FACTORY BUILDING FOR PROVIDING CANTEEN FACILITIES WAS TEMPORARY IN NATURE AND WAS NOT OF ENDURING BENEFIT AND THE SAID EXPE NDITURE OF RS.1,84,000/- WAS DULLY ALLOWABLE IN THE HANDS OF THE ASSES SEE. ACCORDINGLY, WE DIRECT THE ASSESSING OFFICER TO ALLOW THE E XPENDITURE OF RS.1,84,000/-. THE GROUND OF APPEAL NO.1 WAS RAISED BY TH E ASSESSEE IS THUS, ALLOWED. 9. THE ASSESSEE IN ITA NO.2051/PN/2013 HAS RAISED THE FOLLOWING GROUNDS OF APPEAL. 1. THE LEARNED CIT(A)-III, PUNE ERRED IN LAW AND ON FACTS IN CONFIRMING THE DISALLOWANCE OF INTEREST ON BORROWINGS OF RS.877,332/- BY ASSUMING DIVERSION OF LOAN FUNDS FOR ACQUISITION OF EQUITY SHARES IN SISTER CONCERN, M/S SM-EBERSPAECH ER EXHAUST PRIVATE LIMITED. 2. THE LEARNED CIT(A)-III AND THE LEARNED AO ERRED IN LAW AND ON FACTS IN NOT APPRECIATING THAT NON-INTEREST BEARING OW N FUNDS WERE USED FOR ACQUISITION OF EQUITY SHARES IN SISTER CONC ERN, M/S SM- EBERSPAECHER EXHAUST PRIVATE LIMITED. 3. THE LEARNED CIT(A)-III AND THE LEARNED AO ERRED IN LAW AND ON FACTS IN DISALLOWING INTEREST OF RS.8,77,332/- WITHOUT APPR ECIATING THE COMMERCIAL EXPEDIENCY IN APPELLANT'S INVESTMENTS IN THE SISTER CONCERN, M/S SM-EBERSPAECHER EXHAUST PRIVATE LIMITED., A JOINT VENTURE COMPANY BETWEEN THE APPELLANT AND A FOREIGN COMPANY FROM GERMANY. CONSIDERING THE PRINCIPLE OF DEEP INTE REST, THE LEARNED I-T AUTHORITIES OUGHT TO HAVE REFRAINED FROM M AKING INTEREST DISALLOWANCE. 4. THE APPELLANT CRAVES LEAVE TO ADD / MODIFY / AMEND / DELETE ALL / ANY OF THE GROUNDS OF APPEAL. 10. THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER PASSED UNDER SECTION 143(3) R.W.S. 263 OF THE ACT. THE AS SESSING OFFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) OF TH E ACT AND THEREAFTER, THE CIT-III, PUNE VIDE ITS ORDER DATED 01.03.2 012 SET ASIDE THE ISSUE OF ALLOWANCE OF INTEREST AS BUSINESS EXPENDITURE, HOLDING THE ORDER PASSED BY ASSESSING OFFICER WAS BOTH ERRONEOUS AN D PREJUDICIAL ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 5 TO THE INTERESTS OF REVENUE. THE ASSESSING OFFICER ASKED THE ASSESSEE TO PRODUCE THE DETAILS OF INVESTMENT OF RS.77,03,000/- AND WAS ALSO SHOW CAUSED AS TO WHY THE PROPORTIONATE INTEREST RELAT ABLE TO SUCH ADVANCES SHOULD NOT BE ADDED TO THE INCOME OF THE ASS ESSEE AS THE SAID ADVANCES WERE NOT UTILIZED FOR BUSINESS PURPOSES. IN REPLY, THE ASSESSEE EXPLAINED THAT IT HAD INVESTED RS.50,00,000/- IN THE EQUITY SHARES OF M/S SM-EBERSPAECHER EXHAUST PRIVATE LIMITED. THE SOURCE OF INVESTMENT WAS CLAIMED TO BE OUT OF PAST EARNINGS OF TH E ASSESSEE COMPANY AND IT WAS ALSO STATED THAT NO LOAN WAS RAISED FOR MAKING THE SAID INVESTMENT DURING THE YEAR. THE ASSESSING OFFICER REJ ECTING THE PLEA OF THE ASSESSEE OF INVESTMENT IN EQUITY SHARES OF TH E SISTER CONCERN, NOTED THAT THE ASSESSEE HAD OBTAINED SECURED LOAN FROM BANKS AT INTEREST RATE OF 12.25% AND FURTHER HAD PAID IN TEREST @ 11.50% ON DEPOSITS TAKEN FROM THE SHAREHOLDERS AND DIREC TORS. THE ASSESSING OFFICER THUS, WORKED OUT THE DISALLOWANCE UNDER S ECTION 36(1)(III) OF THE ACT ON PROPORTIONATE BASIS AT RS.8,77,332/-. THE SAID DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS UPHELD BY T HE CIT(A), AGAINST WHICH THE ASSESSEE IS IN APPEAL. 11. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSE SSEE POINTED OUT THAT THE ASSESSEE DURING THE YEAR HAD MADE INVEST MENT IN THE JOINT VENTURE COMPANY. THE INITIAL CONTRIBUTION TO THE SA ID JOINT VENTURE COMPANY WAS SMALL HOWEVER, BECAUSE OF EXPANSIO N DURING THE YEAR, FURTHER SUM OF RS.50,00,000/- WAS ADVANCED DURIN G THE YEAR. IT WAS POINTED OUT BY THE ASSESSING OFFICER THAT T HERE IS NO MERIT IN DISALLOWANCE OF ANY INTEREST AGAINST THE SAID INVESTMENT AS THE SAID ADVANCES WERE MADE FOR COMMERCIAL EXPEDIENCY AS THE PRO DUCTS DEALT IN BY BOTH THE ASSESSEE AND ITS SISTER CONCERN WERE SA ME AND EVEN ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 6 CUSTOMERS WERE SAME. THE LEARNED AUTHORIZED REPRESENT ATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE ASSESSEE HAD SU FFICIENT OWN FUNDS TO MAKE THE SAID FUNDS AND FUNDS RAISED FROM THE BA NK WERE IN THE NATURE OF TERM LOAN AND CASH CREDIT AND WERE UTILIZED FOR SPECIFIC PURPOSE. FURTHER, RELIANCE WAS PLACED ON THE RATIO LAID D OWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. REPORTED IN (2009) 313 ITR 340 (BOM). 12. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REV ENUE ON THE OTHER HAND, PLACED RELIANCE ON THE ORDER OF CIT(A). 13. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED TH E RECORD. THE ISSUE RAISED IN THE PRESENT APPEAL IS AGAINST THE DIS ALLOWANCE OF INTEREST OF RS.8,77,332/-. THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION HAD MADE CERTAIN INTEREST FREE ADVANCES TO ITS SISTER CONCERN AS ON 01.04.2006. THERE WAS A OPENING ADVANCE OF RS.27,03,000/- AND DURING THE YEAR UNDER CONSIDERATION TH E ASSESSEE ON 09.05.2006 AND ON 12.05.2006 HAD MADE ADVANCES OF RS.25,00,000/- EACH TO THE SAID SISTER CONCERN. THE PLEA OF THE ASSESSEE BEFORE US WAS THAT THE SAID ADVANCES WERE M ADE FOR COMMERCIAL EXPEDIENCY AS THE INVESTMENT WAS MADE BY THE ASSESSEE IN THE PURCHASE OF EQUITY SHARES OF JOINT VENTURE COMPANY, WHICH WAS ENGAGED IN THE SIMILAR LINE OF BUSINESS AS THE ASSESSEE AND HAD SIMILAR CUSTOMERS. THE LEARNED AUTHORIZED REPRESENTATIVE FOR TH E ASSESSEE HAS PLACED ON RECORD THE JV AGREEMENT DATED 23.01.1995 WHICH WAS REVISED ON 31.07.2008 AT PAGES 56 TO 101 OF THE PAPER BOOK. 14. THE SECOND ASPECT RAISED BY THE ASSESSEE WAS THA T IT HAD SUFFICIENT OWN FUNDS WHICH WERE MORE THAN THE INVESTMENTS MADE BY ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 7 THE ASSESSEE. OUR ATTENTION WAS DRAWN TO THE COPY OF BALANCE SHEET AS ON 31.03.2007 PLACED AT PAGE 13 OF THE PAPER BOOK WH EREIN, IT WAS POINTED OUT THAT THE ASSESSEE HAD SUFFICIENT RESERVES A ND SURPLUS TOTALING RS.3,70,16,580/- AND AUTHORIZED CAPITAL OF RS.5 CRO RES AGAINST WHICH THE SECURED LOAN FUNDS WERE RS.3.60 CRORES AND UN SECURED LOAN OF RS.84 LAKHS. THE ASSESSEE HAD SHOWN INVESTMENTS OF RS.1.52 CRORE S IN THE YEAR UNDER CONSIDERATION. THE SECOND PLEA IN THIS REGARD RAISED BY THE ASSESSEE WAS THAT THE SAID SECURED LOANS RAISED FROM THE BANK WERE FOR SPECIFIC PURPOSE AND WERE NOT AVAILABLE TO THE AS SESSEE FOR MAKING THE SAID INVESTMENTS. IN THE TOTALITY OF ABOVE SAID FACTS AND CIRCUMSTANCES, WHERE THE ASSESSEE HAD SUFFICIENT FUNDS AVA ILABLE TO IT, WE FIND NO MERIT IN THE DISALLOWANCE OF INTEREST UNDER SECT ION 36(1)(III) OF THE ACT IN CASE WHERE THE ASSESSEE HAD MADE INTERES T FREE ADVANCES ON THE ONE HAND AND IT PAID INTEREST ON INTEREST BEARING FUNDS ON THE OTHER HAND. THE ASSESSING OFFICER HAD FAILED TO ESTABLISH A NY NEXUS BETWEEN THE INTEREST BEARING FUNDS AND ADVANCES MADE B Y ASSESSEE. IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES, WE HOLD TH AT NO PART OF THE INTEREST EXPENDITURE IS TO BE DISALLOWED BEING ATTRIBU TABLE TO SUCH INTEREST FREE ADVANCES. WE FIND SUPPORT FROM THE RATIO LA ID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIA NCE UTILITIES & POWER LTD. (SUPRA) THAT IN THE ABSENCE OF ANY EVIDENCE FOUND TO SHOW THAT THE INTEREST BEARING FUNDS WERE UTILIZE D FOR MAKING INTEREST FREE ADVANCES, IT CANNOT BE PRESUMED THAT THE INVESTMENTS WERE MADE FROM INTEREST BEARING FUNDS. THE HONBLE BOMB AY HIGH COURT HOWEVER, HELD IF THEREBY INTEREST FREE FUNDS AVAILAB LE TO THE ASSESSEE, SUFFICIENT TO MEET ITS INVESTMENTS THAT THE INVES TMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. FOLLOWING THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V S. RELIANCE ITA NOS.2050 & 2051/PN/2013 S.M. AUTO ENGINEERING PVT. LTD. 8 UTILITIES & POWER LTD. (SUPRA), WE HOLD THAT THERE IS NO MER IT IN MAKING THE SAID DISALLOWANCE OF RS.8,77,332/- AND WE DELETE THE SA ME. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE ALLOWED. 15. IN THE RESULT, BOTH THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 27 TH DAY OF OCTOBER, 2014. SD/- SD/- (G.S. PANNU) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER PUNE, DATED: 27 TH OCTOBER, 2014. GCVSR COPY OF THE ORDER IS FORWARDED TO : - 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-III, PUNE; 4) THE CIT-III, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. BY ORDER //TRUE COPY// ASSISTANT REGISTRAR I.T.A.T., PUNE