CHITRALEKHA, MUMBAI V. ADDL CIT RG 12(1), MUMBAI

ITA 2060/MUM/2010

• Counselvise Citation: 206019914 RSA 2010
• Duration Of Justice: 2 year(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-03-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-02-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 12-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AARSI PRASAD
• Assessee Lawyers: AARTI VISSANJI
• Keywords: Depreciation; Business expenditure; Proportionate interest; Bad and doubtful debts; Commercial expediency
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C MUMBAI BEFORE SHRI B.R. MITTAL (JUDICIAL MEMBER) AND SHRI RAJENDRA SINGH (ACCOUNTANT MEMBER) ITA NOS.2058, 2059 & 2060/MUM/2010 ASSESSMENT YEARS-2004-05 TO 2006-07 M/S. CHITRALEKHA, 62, VAJU KOTAK MARG, FORT, MUMBAI-400 001 PAN-AAAFC 1152B VS. THE ACIT-12(1), AAYAKAR BHAVAN, MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY: SMT. AARTI VISSANJI RESPONDENT BY: SHRI AARSI PRASAD DATE OF HEARING : 28.2.2012 DATE OF PRONOUNCEMENT:16.3.2012 O R D E R PER B.R. MITTAL, JM : THESE THREE APPEALS ARE FILED BY ASSESSEE AGAINST ORDERS OF LD. CIT(A) DT. 16 TH DECEMBER, 2009 FOR ASSESSMENT YEAR 2004-05, TWO SE PARATE ORDERS BOTH DT. 17.12.2009 FOR ASSESSMENT YEARS 2005-06 A ND 2006-07. 2. SINCE MOST OF THE GROUNDS AND FACTS IN THESE APP EALS ARE COMMON, WE HEARD THESE APPEALS TOGETHER AND DISPOSE OFF THE SA ME BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE AND BREVITY. 3. FIRSTLY WE TAKE UP APPEAL FOR ASSESSMENT YEAR 2 004-05 BEING ITA NO. 2058/MUM/2010. 4. THE ONLY GROUND OF APPEAL IS AS TO WHETHER LD. C IT(A) IS JUSTIFIED TO CONFIRM THE ACTION OF ASSESSING OFFICER TO DISALLOW INTEREST EXPENDITURE OF RS. 19,23,152/-. 5. THE RELEVANT FACTS ARE THAT ASSESSEE IS A PARTNE RSHIP FIRM, ENGAGED IN THE BUSINESS OF PUBLICATION OF MAGAZINES AS WELL AS UNDERTAKES COMPOSING ITA NO. 2058 TO 2060/M/10 2 AND PRINTING JOBS ON BEHALF OF OUTSIDERS ON JOB BAS IS. THE ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 1,45 ,92,070/-. 6. THE ASSESSEE COMPANY HAD GIVEN LOAN TO ITS SISTE R CONCERN NAMELY M/S. CHITRALEKHA PRINTERS & PUBLISHERS PVT. LTD. (HEREIN AFTER TO BE REFERRED IN SHORT CPPL). CPPL IS ENGAGED IN THE BUSINESS OF MANUFACT URE OF LARGE DIGITAL FORMAT OUTPUT. THE ASSESSEE COMPANY CHARGED INTERE ST ON ADVANCE @ 12% FROM CPPL UPTO 30 TH SEPTEMBER, 2002 AND THEREAFTER NO INTEREST WAS CHA RGED AND STATED THAT INTEREST WAS NOT CHARGED ON ACCOUNT OF COMMERCIAL COMPULSION, INCLUSIVE OF FINANCIAL STATE OF AFFAIRS OF CPPL. IT WAS STATED THAT CPPL HAD BECOME SICK INDUSTRIAL COMPANY AND THERE W AS TOTAL EROSION OF ITS NET WORTH AND THE BUSINESS ACTIVITIES OF SAID COMP ANY WERE REDUCED. IT IS RELEVANT TO STATE THAT OPENING DEBIT BALANCE TO THE ACCOUNT OF CPPL AS ON 1.4.2003 WAS RS. 1,37,78,940/-. THE ASSESSEE FIRM FURTHER MADE PAYMENTS DURING THE YEAR UNDER CONSIDERATION OF RS. 56,76,89 4/- AND MADE RECOVERIES OF RS. 4,74,967/-. THUS, CLOSING DEBIT BALANCE TO THE ACCOUNT OF CPPL AS ON 31.3.2004 WAS RS. 1,89,80,867/-. IT IS RELEVANT TO STATE THAT ASSESSEE FIRM CLAIMED INTEREST ON BORROWED FUNDS FOR THE FINANCIA L YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION OF RS. 84,71,14 2/-. 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASS ESSEE STATED THAT THE FUNDS BORROWED AT INTEREST HAVE BEEN USED FOR THE P URPOSE OF ITS BUSINESS. IT WAS STATED THAT ASSESSEE FIRM HAD GIVEN GUARANTEE I N SEPTEMBER, 2001 TO THE BANKERS FOR AND ON BEHALF OF CPPL OF TERM LOAN OBTA INED AND FURTHER PAYMENTS WERE MADE DURING THE YEAR TO ENABLE CPPL T O HONOUR SECURED LENDERS INSTALMENTS; THE OUTSTANDING WHEREOF IS ALS O GUARANTEED BY ASSESSEE FIRM. IT WAS STATED THAT ASSESSEE DISCONTINUED AND WAIVED CHARGING OF INTEREST FROM 1.10.2002 ON ACCOUNT OF (A) FINANCIAL SICKNESS OF CPPL (B) APPLICATION OF THEORY OF REAL INCOME AND (C) TOTA L UNCERTAINTY EMBEDDED TO ULTIMATE COLLECTION OF OUTSTANDING AMOUNT. IT WAS SUBMITTED BEFORE AO, THAT BORROWED FUND WAS USED BY ASSESSEE FOR ITS BUSINESS PURPOSES. IT WAS CONTENDED THAT F OR CLAIMING ALLOWANCE OF INTEREST U/S. 36(1)(III) (WRONGLY STATED SECTION 36 (1)(VIII), WHAT IS REQUIRED IS ITA NO. 2058 TO 2060/M/10 3 THAT EXPENDITURE IS INCURRED FOR THE PURPOSE OF BUS INESS AND NOT THAT EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IT IS ALSO NOT NECESSARY TO SHOW THAT MONIES BORROWED WERE UTILIZED FOR A PARTICULAR BRANCH OF BUSINESS. IT WAS CONTENDED THA T GRANTING OF INTEREST FREE ADVANCES TO ASSOCIATE CONCERNS AND OTHERS PER SE CA NNOT RESULT IN DISALLOWANCE OF INTEREST ON THE GROUND THAT INTERES T BEARING BORROWED FUNDS HAVE NOT BEEN UTILIZED FOR THE PURPOSE OF BUSINESS. IT WAS ALSO CONTENDED THAT NET PROFIT FOR THE YEAR BEFORE DEPRECIATION AN D AFTER ALL COSTS AND INTEREST WAS RS. 189 LAKHS APPROXIMATELY. THEREFORE, FUNDS BORROWED AT INTEREST HAVE TO BE CONSIDERED AS UTILIZED FOR THE PURPOSE OF BUS INESS OF ASSESSEE FIRM AND THE ENTIRE INTEREST EXPENDITURE INCURRED DURING THE YEAR OF RS. 84,71,142/- IS RIGHTLY CLAIMED AS ADMISSIBLE DEDUCTION AND HAS TO BE ALLOWED IN ASSESSING THE INCOME OF ASSESSEE FIRM. IT WAS ALSO CONTENDED THA T IF ANY DISALLOWANCE HAVE TO BE MADE, IT COULD BE MADE ONLY IN RESPECT O F TRANSACTIONS OF FURTHER ADVANCE GIVEN BY ASSESSEE TO CPPL IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION AND INTEREST TH EREON COMES TO RS. 2,69,650/-. 8. THE AO CONSIDERED ABOVE SUBMISSIONS OF ASSESSEE VIDE PARAS 4.5 TO 4.7 AND MADE ADDITION OF RS. 19,23,152/- TO THE GRO SS TOTAL INCOME OF ASSESSEE I.E. IN RESPECT OF INTEREST ON THE TOTAL A MOUNT OUTSTANDING AS ON 31.3.2004 ON WHICH NO INTEREST WAS CHARGED BY ASSES SEE FROM CPPL. THE SAID PARA NOS. 4.5 TO 4.7 READ AS UNDER: I HAVE CONSIDERED THE SAID SUBMISSIONS MADE BY THE ASSESSEE AT LENGTH. I DO NOT ACCEPT THE SAID SUBMI SSIONS IN VIEW OF THE FACT THAT NO INTEREST IS CHARGED ON THE AMOU NT OUTSTANDING FROM CPPL BY THE ASSESSEE FOR THE PERIO D COMMENCING FROM 1 ST APRIL, 2003 AND ENDING ON 31 ST MARCH, 2044 AS WELL AS THE FACT THAT THE ASSESSEE HAS BORR OWED FUNDS AT INTEREST BY WAY OF SECURED, UNSECURED LOANS AS W ELL AS PAID INTEREST ON THE FIXED INTEREST BEARING FUNDS BROUGH T IN BY THE PARTNERS. HENCE, THE ASSESSEE WAS DIRECTED TO WORK OUT THE ATTRIBUTABLE PRO-RATA INTEREST ON THE SAID BASIS WH ICH IS QUANTIFIED AT RS. 19,23,152/-. THE SAID AMOUNT IS DISALLOWED OUT OF INTEREST EXPENDITURE INCURRED FOR THE YEAR I N ASSESSING THE ITA NO. 2058 TO 2060/M/10 4 INCOME. FOR THE PURPOSE, RELIANCE IS PLACED ON THE FOLLOWING DECISIONS:- A) K. SOMASUNDARAM & ORS VS CIT 238 ITR 939 (MADRAS) B) ELMER HAVELL ELECTRICS AND ORS VS CIT AND ANOTHER 2 77 ITR 549 (DEL) C) V.I. BABY & CO. 254 ITR 248 (KERALA) D) DOCTOR & CO. 180 ITR 627 (BOM)- THIS CASE IS VERY IMPORTANT BECAUSE BOMBAY HIGH COURT DECISION IN THE CASE OF B OMBAY SAMACHAR (74 ITR 723) AS RELIED UPON BY THE ASSESSE E HAS BEEN DISTINGUISHED. FOR PROVING UTILIZATION OF FUNDS, T HE ASSESSEE HAS SHOWN SUNDRY DEBTORS OF RS. 6.04 CRORES WHICH HAS N OT BEEN ADJUSTED AGAINST THE SUNDRY CREDITORS OF RS. 3.10 C RORES SINCE BOTH ARE INTEREST FREE IN NATURE. 4.6. ALTERNATIVELY, IT IS HELD THAT THE INTEREST RE CEIVABLE FROM CPPL HAD ACCRUED DURING THE PERIOD 1 ST APRIL, 2003 TO 31 ST MARCH, 2004. FOR THIS PROPOSITION, I RELY ON THE BOMBAY HIGH COUR T DECISION IN SMT. MEENABEN VADILAL PAREKH (187 ITR 158), RAMABAI (181 ITR 400 (SC) AND KCP LTD. 245 ITR 421 (SC). THESE CASE LAWS INDICATE THAT GENERALLY ACCRUAL OF INCOME TAKES PLACE IN NOR MAL CIRCUMSTANCES DUE TO A PRE-EXISTING AGREEMENT, IN A SSESSEES CASE INTEREST AT THE BEGINNING OF THE MONTH. ACCRUAL CE ASES ONLY IF BEFORE THE DATE OF ACCRUAL THERE IS SOME ACTION OR EVENT NULLIFYING THE PRE-EXISTING AGREEMENT. THE ASSESSEE HAS NOT B EEN ABLE TO PRODUCE ANY CORRESPONDENCE, MINUTES OF A MEETING, S UIT, OR ANY OTHER PROOF RELATING TO THE PERIOD 1 ST APRIL, 2003 TO 31 ST MARCH, 2004 TO SHOW THAT THERE WAS A STOPPAGE OF ACCRUAL IN THE SAID PERIOD. AS HELD BY BOMBAY HIGH COURT IN THE CASE OF MEENABEN ( SUPRA) EVEN DEATH OF A PERSON DURING THE FINANCIAL YEAR COULD NOT BE CONSTRUED AS A REASON FOR THE STOPPAGE OF ACCRUAL OF SALARY A S PER RE-EXISTING AGREEMENT. 4.7. IN VIEW OF ABOVE, INTEREST FOR THE PERIOD 1 ST APRIL, 2003 TO 31 ST MARCH, 2004, AMOUNTING TO RS. 19,23,152/- IS ADDED TO GROSS TOTAL INCOME. 9. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFORE FI RST APPELLATE AUTHORITY. 10. THE SUBMISSIONS MADE BY ASSESSEE BEFORE LD. CIT (A) ARE STATED IN PARA 2.2 OF IMPUGNED ORDER WHICH IS AS UNDER: IN THE APPEAL PROCEEDINGS, THE APPELLANT HAS MADE T HE SAME SUBMISSIONS AS MADE BEFORE THE AO. IN ADDITION IT HAS RELIED UPON ITA NO. 2058 TO 2060/M/10 5 JUDICIAL DECISION OF HIGH COURT OF ALLAHABAD IN THE MATTER OF CIT VS DHAMPUR SUGAR MILLS LTD. REPORTED IN 145 TAXMAN 533 . RELIANCE WAS PLACED ON ACCOUNTING STANDARD 9(AS9), ISSUED BY THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA ON REVENUE RECOGN ITION. ATTENTION WAS DRAWN TO PARA 9 TITLED AS EFFECT O F UNCERTAINTIES ON REVENUE RECOGNITION TO SUPPORT THE CONDUCT OF THE APPELLANT IN NOT CHARGING INTEREST FROM 10.10.2002, ON ACCOUN T OF FINANCIAL SICKNESS OF THE COMPANY. INTEREST INCOME IF INTERE ST WOULD HAVE BEEN CHARGED TO THE COMPANY WOULD HAVE BEEN ASSESSE D AS INCOME FROM OTHER SOURCES SUBJECT TO DEDUCTION OF ATTRIBUTABLE INTEREST. HENCE, IN ABSENCE OF RECOGNITION OF INTE REST INCOME IS TO BE DEDUCTED, IN ASSESSING TOTAL INCOME. SANCTITY O F THIS PROPOSITION IS ENDORSED BY THE DECISION OF HONBLE APEX COURT IN THE MATTER OF CIT VS RAJENDRA PRASAD MODY IN 115 IT R 519. HENCE, DISALLOWANCE IS UNWARRANTED AND IS TO BE DEL ETED IN ITS ENTIRETY. ALTERNATIVELY AND WITHOUT PREJUDICE TO T HE SAME, NO DISALLOWANCE OF ATTRIBUTABLE INTEREST ON OUTSTANDIN G BALANCE AS OF 1.4.2003 IS TO BE MADE, INTEREST WHEREOF COURSES TO RS. 16,53,470/-. IN OTHER WORDS, DISALLOWANCE OF ATTRIB UTABLE INTEREST BE RESTRICTED TO AMOUNTS ADVANCED DURING THE YEAR U NDER APPEAL ONLY. 11. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION OF ASSESSEE CONFIRMED THE ACTION OF AO VIDE PARA 2.3 WHICH IS AS UNDER: I HAVE CONSIDERED THE SUBMISSIONS MADE FOR THE APP ELLANT AND THE ASSESSMENT ORDER. IT REMAINS A FACT THAT THE AP PELLANT HAS BORROWED FUNDS ON INTEREST AND LOAN WAS ADVANCED BY IT TO ITS SISTER CONCERN FOR WHICH NO INTEREST HAS BEEN CHARG ED ON THE AMOUNT OUTSTANDING. IT HAS BEEN HELD IN THE CASES C ITED BY THE AO THAT FOR CLAIMING DEDUCTION FOR INTEREST ON CAPI TAL BORROWED, IT IS NECESSARY THAT THE CAPITAL SO BORROWED SHOULD NO T ONLY BE INVESTED IN BUSINESS, BUT THE AMOUNT BORROWED CONTI NUES TO REMAIN IN BUSINESS. INTEREST PAID ON CAPITAL BORROW ED TO THE EXTENT OF AMOUNTS DIRECTED COULD NOT BE CLAIMED FOR DEDUCTION AS ITEM OF BUSINESS EXPENDITURE. IN PHALTON SUGAR WOR KS LTD. VS CIT 208 ITR 989, THE JURISDICTIONAL BOMBAY HIGH COURT H AS HELD THAT WHERE AMOUNT WERE ADVANCED BY AN ASSESSEE TO ITS SU BSIDIARY WITHOUT CHARGING INTEREST, INTEREST ON SUCH BORROWE D CAPITAL IS NOT ALLOWABLE. THE AO IS THEREFORE PERFECTLY JUSTIFIED IN MAKING AN ADDITION TO THE EXTENT OF PROPORTIONATE INTEREST CH ARGEABLE FROM SISTER CONCERN. THE ADDITION IS ACCORDINGLY CONFIR MED. HENCE, ASSESSEE IS IN FURTHER APPEAL BEFORE TRIBUN AL. ITA NO. 2058 TO 2060/M/10 6 12. LD. AR REITERATED THE FACTS IN DETAIL WHICH WE HAVE MENTIONED HEREIN ABOVE AND SUBMITTED THAT DISALLOWANCE OF INTEREST I S NOT JUSTIFIED. LD. AR SUBMITTED THAT CASES CITED BY AO AND LD. CIT(A) ARE NOT APPLICABLE TO THE FACTS OF THE CASE OF ASSESSEE. LD. AR SUBMITTED TH AT THERE IS NO DIRECT CO- RELATION BETWEEN BORROWING AND LENDING BY ASSESSEE. THAT ASSESSEE HAD SUFFICIENT PROFITS AND IT SHOULD BE CONSIDERED THAT ADVANCE WAS GIVEN TO CPPL OUT OF IT. LD. AR REFERRED PAGE 16 OF PAPER BOOK WH ICH CONTAIN THE BREAK-UP OF THE CLOSING DEBIT BALANCE TO THE ACCOUNT OF CPPL AS ON 31.3.2004 OF RS. 1,89,80,867/-. LD. AR RELIED ON THE DECISION OF AL LAHABAD HIGH COURT IN THE CASE OF CIT VS DHAMPUR SUGAR MILLS LTD. 145 TAXMAN 533(ALL.) AND SUBMITTED THAT IF NO INTEREST IS CHARGED ON THE ADVANCE GIVEN BY ASSESSEE COMPANY TO ITS SUBSIDIARY ON ACCOUNT OF WEAK FINANCIAL POSITIO N AND DUE TO COMMERCIAL EXPEDIENCY, NO ADDITION ON ACCOUNT OF INTEREST COUL D BE MADE AS INTEREST CANNOT BE SAID TO HAVE ACCRUED. LD. AR ALSO REFERR ED THE DECISION OF HONBLE GUJARAT HIGH COURT IN THE CASE OF SHREE DIGVIJAY CE MENT CO. LTD. VS COMMISSIONER OF INCOME-TAX (GUJ) 138 ITR 45 AND SUB MITTED THAT IF THERE IS NO SPECIFIC FINDING THAT BORROWING IS ATTRIBUTABLE TO NON BUSINESS PURPOSES, NO INTEREST CAN BE DISALLOWED ON THE AMOUNT BORROWED. LD. AR IN HER ALTERNATIVE SUBMISSION SUBMITTED THAT INTEREST AT THE MOST IF A T ALL IS TO BE DISALLOWED IT COULD BE ONLY IN RESPECT OF AMOUNT ADVANCED BY ASSE SSEE IN THE ASSESSMENT YEAR UNDER CONSIDERATION I.E. OF RS. 56,76,894/- AN D ON IT INTEREST COMES TO RS. 2,69,650/-. THUS, NO DISALLOWANCE OF INTEREST CAN BE ATTRIBUTED IN RESPECT OF OPENING BALANCE AS ON 1.4.2003 ON WHICH INTEREST ATTRIBUTABLE IS RS. 16,53,470/-. 13.1. ON THE OTHER HAND, LD. DEPARTMENTAL REPRESENT ATIVE SUPPORTED THE ORDERS OF AUTHORITIES BELOW. LD. DR SUBMITTED THA T ASSESSEE HAS NOT FURNISHED COMPLETE DETAILS OF SOURCES AND APPLICATI ON OF INTEREST BEARING FUND. LD. DR SUBMITTED THAT ON THE ONE HAND ASSESSEE HAS PAID INTEREST TO ITS PARTNERS ON THEIR FUND AND ON THE OTHER HAND NO INT EREST HAS BEEN CHARGED ON THE ADVANCE GIVEN TO ITS SISTER CONCERNS WHEN TWO P ARTNERS OF ASSESSEE FIRM HAVE MAJOR SHARE HOLDING IN CPPL. LD. DR FURTHER S UBMITTED THAT THERE IS NO ITA NO. 2058 TO 2060/M/10 7 DISPUTE TO THE FACT THAT ASSESSEE HAD GIVEN ADVANCE TO ITS SISTER CONCERN NAMELY CPPL OUT OF BORROWED FUND BECAUSE ASSESSEE U SED TO CHARGE INTEREST UPTO 30 TH SEPTEMBER 2002 AND DID NOT CHARGE INTEREST THEREAF TER. LD. DR FURTHER SUBMITTED THAT THE FINANCIAL POSITION OF TH E SISTER CONCERN IS NOT RELEVANT WHILE DECIDING THE ALLOWABILITY OF INTERES T EXPENDITURE ON BORROWED FUNDS UTILIZED FOR BUSINESS PURPOSES. LD. DR SUBMI TTED THAT ASSESSEE HAS ADOPTED TAX AVOIDANCE DEVICE BY NOT CHARGING INTERE ST ON ACCRUAL BASIS TO THE SISTER CONCERN BECAUSE SISTER CONCERN WILL NOT GET ANY BENEFIT OF INTEREST PAYMENT BEING LOSS MAKING ENTITY. HE FURTHER SUBMI TTED THAT IF ASSESSEE FIRM WAS OF THE VIEW THAT RECOVERY OF PRINCIPLE AMOUNT I S IN DOUBTS, THE QUESTION OF GIVING FURTHER ADDITIONAL FUND TO CPPL IN THE ASSES SMENT YEAR UNDER CONSIDERATION DOES NOT ARISE. 13.2. LD. DR RELYING ON THE DECISION OF ALLAHABAD H IGH COURT IN THE CASE OF CIT VS H.R. SUGAR FACTORY (P) LTD 87 CTR 132 SUBMI TTED THAT WHEN ASSESSEE COULD NOT PRODUCE RELEVANT DOCUMENT TO PROVE THAT T HE LOAN AMOUNT WAS USED FOR BUSINESS PURPOSES BY THE ASSESSEE AND INTEREST FREE ADVANCE WAS GIVEN TO ITS SISTER CONCERN NOT OUT OF BORROWED FUND, ADV ERSE INFERENCE HAS TO BE DRAWN AGAINST THE ASSESSEE. HE SUBMITTED THAT IT I S THE DUTY OF ASSESSEE TO PLACE REQUISITE MATERIALS ON RECORD. LD. DR FURTHE R RELIED ON THE DECISION OF ALLAHABAD HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME-TAX VS SARAYA SUGAR MILLS (P.) LTD. (ALL) 201 ITR 181 AND SUBMIT TED IT WAS HELD THAT WHEN PART OF THE LOAN TAKEN BY THE ASSESSEE HAD BEEN DIV ERTED TO ITS DIRECTORS AND OTHER FIRMS IN WHICH THE DIRECTORS WERE SUBSTANTIAL LY INTERESTED, THE INTEREST PAID BY ASSESSEE TO BANK WAS DISALLOWED TO THAT EXT ENT. LD. DR FURTHER PLACED RELIANCE ON THE DECISION OF HONBLE BOMBAY H IGH COURT IN THE CASE OF PHALTAN SUGAR WORKS LTD. VS COMMISSIONER OF WEALTH- TAX (BOM) 208 ITR 989 AND SUBMITTED THAT IT WAS HELD BY THEIR LORDSHIPS T HAT BUSINESS OF SUBSIDIARY COMPANY CANNOT BE CONSIDERED IN LAW AS THE BUSINESS OF THE ASSESSEE AND ACCORDINGLY WHEN THE MONEYS BORROWED WERE UTILIZED FOR BUSINESS OF SUBSIDIARY COMPANY, THE INTEREST ON LOANS BORROWED WAS HELD NOT TO BE ALLOWABLE U/S. 36(1)(III) OF THE I.T. ACT. LD. DR A LSO PLACED RELIANCE ON THE ITA NO. 2058 TO 2060/M/10 8 DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE O F CIT VS DOCTOR & CO. 180 ITR 627 AND SUBMITTED THAT IN THE SAID CASE IT WAS HELD THAT WHERE A PART OF MONEY BORROWED BY ASSESSEE WAS ADVANCED TO SISTE R CONCERNS AT A LOWER RATE THAN RATE OF INTEREST PAYABLE ON BORROWINGS, D ISALLOWANCE OF PROPORTIONATE INTEREST TO THE EXTENT IT WAS DIVERTE D TO SISTER CONCERNS WAS HELD TO BE JUSTIFIED. LD. DR SUBMITTED THAT FACTS OF THE CASE OF ASSESSEE ARE ALSO VERY MUCH SIMILAR TO THE FACTS OF THE CASE CON SIDERED BY MADRAS HIGH COURT IN K. SOMASUNDARAM & BROTHERS VS CIT 238 ITR 939 AND SUBMITTED THAT IN THAT CASE ALSO THE INTEREST ON BORROWED CAPITAL TO THE EXTENT THE AMOUNT WAS GIVEN AS INTEREST-FREE LOANS TO RELATIVES OF PA RTNERS EVEN IF THE AMOUNT WAS INITIALLY USED IN BUSINESS OF ASSESSEE AND WAS LENT ONLY AT A SUBSEQUENT STAGE WAS HELD NOT ENTITLED TO DEDUCTION U/S. 36(1) (III). LD. DR SUBMITTED THAT THE ORDER OF LD. CIT(A) IS JUSTIFIED TO CONFIRM THE ACTION OF AO TO DISALLOW INTEREST ON THE AMOUNT UTILIZED BY ASSESSEE TO ADVA NCE TO ITS SISTER CONCERNS WITHOUT CHARGING OF INTEREST. 14. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD. REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE A LSO GONE THROUGH THE CASES CITED BY LD. REPRESENTATIVES OF BOTH PARTIES IN THE LIGHT OF PROVISIONS OF DEDUCTION U/S. 36(1)(III) OF I.T. ACT. THERE IS NO DISPUTE TO THE FACT THAT ASSESSEE HAD BORROWED FUNDS ON INTEREST AND A PART OF IT WAS ADVANCED BY ASSESSEE TO ITS SISTER CONCERN. THE ASSESSEE CHARG ED INTEREST @ 12% ON THE SAID LOAN ADVANCED UPTO 30 TH SEPTEMBER 2002 AND THEREAFTER NO INTEREST WAS CHARGED. THE PLEA TAKEN BY ASSESSEE IS THAT ITS SI STER CONCERN CPPL HAD BECOME SICK UNIT AND THEREFORE ASSESSEE HAD TAKEN A DECISION DUE TO COMMERCIAL EXPEDIENCY NOT TO CHARGE INTEREST. WE OBSERVE THAT NO SUCH MATERIAL HAS BEEN PLACED ON RECORD THAT ASSESSEE HA D TAKEN COMMERCIAL DECISION BEFORE THE INTEREST ACCRUED NOT TO CHARGE INTEREST ON THE AMOUNT LENT AND ADVANCED BY ASSESSEE TO ITS SISTER CONCERN. WI THOUT GOING INTO THE QUESTION AS TO WHETHER SISTER CONCERN HAD BECOME FI NANCIALLY WEAK OR NOT, IT IS NOT IN DISPUTE THAT ASSESSEE HAS USED INTEREST B EARING LOAN TO GIVE ADVANCE TO ITS SISTER CONCERN. NOT ONLY THIS, ASSESSEE HAS ALSO GIVEN FURTHER ADVANCE ITA NO. 2058 TO 2060/M/10 9 OF RS. 56,76,894/- IN THE ASSESSMENT YEAR UNDER CON SIDERATION ON WHICH ALSO NO INTEREST IS CHARGED. THE ASSESSEE HAS TAKEN PLE A BEFORE AUTHORITIES BELOW AS WELL AS BEFORE US THAT IF INTEREST IS TO BE DISA LLOWED, IT COULD BE DISALLOWED PROPORTIONATELY ATTRIBUTABLE TO THE LOAN ADVANCED B Y ASSESSEE TO CPPL IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 WHICH COMES TO RS. 2,69,650/- AND NO INTEREST ON THE AMOUNT BROUGHT FO RWARD FROM PREVIOUS YEAR I.E. OF RS. 1,37,78,040/- SHOULD BE DISALLOWED. WE DO NOT FIND MERIT IN THE SAID CONTENTION OF LD. AUTHORISED REPRESENTATIVE OF ASSESSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS A FACT THAT ASSESS EE HAS GIVEN INTEREST ON THE CAPITAL OF PARTNERS BUT ASSESSEE HAS NOT CHARGED AN Y INTEREST FROM ITS SISTER CONCERN IN WHICH ITS PARTNERS HAVE MAJORITY STAKE. THEREFORE, WE FIND MERIT IN THE CONTENTION OF LD. DR THAT ASSESSEE HAS ADOPTED TAX AVOIDANCE DEVICE BY NOT CHARGING INTEREST ON ACCRUAL BASIS TO ITS SISTE R CONCERN AS SISTER CONCERN BEING A LOSS MAKING ENTITY WILL NOT GET ANY BENEFIT OF INTEREST. THEREFORE, THE CASES CITED BY LD. AR THAT IT WAS A MIXED FUND AND DEPARTMENT HAS NOT BROUGHT ANY MATERIAL ON RECORD THAT THE INTEREST BE ARING FUND WAS UTILIZED BY ASSESSEE TO GIVE INTEREST FREE LOAN TO ITS SISTER C ONCERN HAS NO MERIT AS IT IS FOR ASSESSEE TO PROVE THAT INTEREST FREE AMOUNT WAS GIV EN AS ADVANCE TO ITS SISTER CONCERN AND NOT INTEREST BEARING FUND WAS UTILIZED. WHEREAS CASES CITED BY LD. DR (SUPRA) AND PARTICULARLY THE DECISION OF BOM BAY HIGH COURT IN THE CASE OF PHALTAN SUGAR WORKS LTD. VS COMMISSIONER OF WEAL TH-TAX (SUPRA) AND THE CASE OF DOCTOR & CO. (SUPRA) SQUARELY APPLY TO THE FACTS OF THE CASE BEFORE US. THE BUSINESS OF SUBSIDIARY COMPANY THAT IT WAS A LO SS MAKING COMPANY AND HENCE ASSESSEE HAS NOT CHARGED INTEREST TO ENABLE T HE SISTER CONCERN CPPL TO CARRY ON ITS BUSINESS CANNOT BE CONSIDERED IN LAW A S THE BUSINESS EXPEDIENCY OF THE ASSESSEE COMPANY. THEREFORE, THE ABOVE CONT ENTION OF LD. AR THAT NO INTEREST WAS CHARGED ON COMMERCIAL EXPEDIENCY IS NO T ACCEPTED. IN VIEW OF ABOVE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). HENCE, WE UPHOLD THE ORDER OF LD. CIT(A) A ND REJECT GROUND OF APPEAL TAKEN BY ASSESSEE FOR ASSESSMENT YEAR 2004-0 5. ITA NO. 2058 TO 2060/M/10 10 15. NOW WE TAKE UP APPEAL FOR ASSESSMENT YEAR 2005- 06 BEING ITA NO. 2059/M/2010. 16. IN GROUND NO. 1.1 READ WITH GROUND NO. 2.1 OF AP PEAL ASSESSEE HAS DISPUTED THE ORDER OF LD. CIT(A) TO DISALLOW INTERE ST EXPENDITURE OF RS. 22,78,146/- AS INTEREST ATTRIBUTABLE ON LOAN DUE FR OM CPPL. 17. AT THE TIME OF HEARING, LD. REPRESENTATIVES OF BOTH PARTIES SUBMITTED THAT FACTS IN ASSESSMENT YEAR 2005-06 ARE IDENTICAL TO GROUND OF APPEAL FOR ASSESSMENT YEAR 2004-05 SAVE AND EXCEPT THAT THE OP ENING BALANCE AS ON 1.4.2003 WAS RS. 1,89,80,867/- AND FURTHER AMOUNT O F RS. 10,02,012/- WAS MADE BY ASSESSEE TO CPPL DURING THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2005-06. THUS, OUTSTANDING BALANCE AS ON 31.3 .2005 WAS RS. 1,99,82,879/-. 18. SINCE WE HAVE DEALT WITH THIS ISSUE AT LENGTH A T PARAS 5-13 ABOVE AND FOLLOWING THE REASONINGS GIVEN IN PARA-14 HEREIN AB OVE, WE UPHOLD THE ORDER OF LD. CIT(A) AND REJECT GROUND NO.1.1 READ WITH GR OUND NO. 2.1 OF APPEAL TAKEN BY ASSESSEE . 19. IN GROUND NO. 1.2 AND 2.1 OF APPEAL , ASSESSEE H AS DISPUTED THE ORDER OF LD. CIT(A) IN CONFIRMING THE DISALLOWANCE OF BAD DEBTS WRITTEN OF RS. 13,67,932/-. 20. WE HAVE HEARD LD. REPRESENTATIVES OF PARTIES AN D HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW. 21. THE ASSESSEE IS IN THE BUSINESS OF PUBLICATION OF MAGAZINES ON VARIOUS MEDIA AS WELL AS UNDERTAKES COMPOSING AND PRINTING JOBS ON BEHALF OF OUTSIDERS ON JOB BASIS. DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSEE INTER ALIA HAS WRITTEN OFF A SUM OF RS. 13 ,67,932/- ON ACCOUNT OF NON- PAYMENT OF INVOICES RAISED FOR ADVERTISEMENT I NSERTED PENDING RECEIPT OF RELEASE ORDERS FROM ADVERTISERS/ADVERTISING AGENCIE S. SINCE SAID AMOUNT WAS NOT RECEIVED BY ASSESSEE, ASSESSEE HAD WRITTEN OFF THE AMOUNT AS BAD DEBT. ITA NO. 2058 TO 2060/M/10 11 DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESS EE MADE FOLLOWING SUBMISSIONS: A) THE ASSESSEE FIRM HAS APPOINTED M/S. ANKUR ADS AS THE SOLE CONCESSIONAIRE TO THE ADVERTISEMENT REVENUE SINCE YEAR 1980. B) THE SAID SOLE CONCESSIONAIRE RENDERS THE REQUIS ITE SERVICES IN CONNECTION WITH OBTAINING OF ADVERTISE MENT INSERTION(S), MANAGING AND PROMOTING THE BUSINESS OF ADVERTISEMENT REVENUE COLLECTIONS OF THE OUTSTANDI NG AND OTHER RELATED SERVICES. C) IN TERMS OF THE UNDERSTANDING REACHED WITH THE SOLE CONCESSIONAIRE, IN THE EVENT OF THERE BEING WRIT E OFF THE IRRECOVERABLE OUTSTANDING AMOUNTS FROM THE ADVER TISING AGENCIES/ADVERTISERS, THE SAID SOLE CONCESSIONAI RE BEARS THE SHORT RECEIPTS RESTRICTED TO THE AMOUNT OF C OMMISSION EARNED ON SUCH VALUE AND THE BALANCE AMOUNT IS T O BE BORNE BY THE ASSESSEE FIRM. D) NORMALLY THE SOLE CONCESSIONAIRE FORWARD THE C OPY OF THE RELEASE ORDERS OBTAINED FROM THE ADVERTISING AGE NCIES/ ADVERTISERS FOR INSERTION OF THE ADVERTISEMENT AND IN FEW CASES, EXCEPTIONS ARE MADE AND THE ADVERTISE MENTS ARE INSERTED IN THE PUBLICATION PUBLISHED BY THE ASSESSEE FIRM WITH FULL KNOWLEDGE THAT THE RELEASE ORDERS HAVE YET TO BE OBTAINED FROM THE ADVERTISING AGENCIES/ADV ERTISERS. E) IN FEW CASES, THE ASSESSEE FIRM RECEIVED THE RE LEASE ORDERS FROM THE ADVERTISING AGENCIES/ADVERTISERS AFTER THE DATE OF INSERTION OF THE ADVERTISEMENT IN THE PU BLICATION PUBLISHED BY THE ASSESSEE FIRM, FOR WHICH PAYMEN T WAS NOT MADE BY THE ADVERTISERS/ADVERTISING AGENCIES . 22. HOWEVER, AO STATED THAT WRITE OFF IS NECESSITAT ED ON ACCOUNT OF DEFICIENCIES OF SOLE CONCESSIONAIRE OF NOT HAVING C OLLECTED RELEASE ORDERS. HENCE, THIS AMOUNT HAS TO BE BORNE BY THE SOLE CONC ESSIONAIRE AND IT CANNOT BE ABSORBED IN THE HANDS OF ASSESSEE FIRM AND THER EFORE DID NOT ACCEPT THE CLAIM OF ASSESSEE. ITA NO. 2058 TO 2060/M/10 12 23. IN THE FIRST APPEAL, LD. CIT(A) HAS CONFIRMED T HE ACTION OF AO ON THE GROUND THAT THIS AMOUNT HAS TO BE BORNE BY THE SOL E CONCESSIONAIRE AND IT CANNOT BE HELD AS BAD DEBT IN THE HANDS OF ASSESSEE FIRM. 24. DURING THE COURSE OF HEARING, LD. AR SUBMITTED THAT THE ABOVE AMOUNT WAS CONSIDERED AS INCOME IN THE PRECEDING ASSESSMEN T YEAR, THE YEAR IN WHICH ADVERTISEMENTS WERE RELEASED BY ASSESSEE. LD . DEPARTMENTAL REPRESENTATIVE DID NOT DISPUTE THE SAID FACT THAT T HIS AMOUNT HAD BEEN CONSIDERED AS INCOME IN THE HANDS OF ASSESSEE IN TH E PRECEDING ASSESSMENT YEAR. IN VIEW OF ABOVE FACTS AND AS PER AMENDED PR OVISIONS OF SEC. 36(1)(VII) W.E.F. 1.4.1989, CLAIM OF BAD DEBT IS TO BE ALLOWED IN THE YEAR IN WHICH SUCH BAD DEBT HAS BEEN WRITTEN OFF AS IRRECOVERABLE IN T HE ACCOUNTS OF ASSESSEE AND THE REQUIREMENT OF ESTABLISHING THAT DEBT HAS B ECOME BAD IS NO MORE NECESSARY. SINCE ASSESSEE HAD TAKEN INTO ACCOUNT T HE SAID AMOUNT AS ITS INCOME IN THE PRECEDING ASSESSMENT YEAR AND IT IS N OT IN DISPUTE THAT THIS AMOUNT WAS OUTSTANDING AS RECOVERABLE BUT HAS NOT BEEN RECEIVED BY ASSESSEE IN THE ASSESSMENT YEAR UNDER CONSIDERATIO N AND ASSESSEE HAS WRITTEN IT OFF FROM ITS BOOKS OF ACCOUNT, WE HOLD THAT ASSESSEE IS ENTITLED TO CLAIM IT AS BAD DEBT AS PER SEC. 36(1)(VII) R.W.S 3 6(2) OF I.T. ACT. THEREFORE, WE ALLOW GROUND NO. 1.2 READ WITH GROUND NO. 2.1 OF GROUND OF APPEAL FOR ASSESSMENT YEAR 2005-06 BY REVERSING THE ORDERS OF AUTHORITIES BELOW. 25. NOW WE TAKE UP APPEAL FOR ASSESSMENT YEAR 2006- 07 BEING ITA NO. 2060/M/2010. 26. IN GROUND NO. 1.1 READ WITH GROUND NO. 2.1, ASSE SSEE HAS DISPUTED THE ORDER OF LD. CIT(A) IN CONFIRMING DISALLOWANCE OF I NTEREST EXPENDITURE OF RS. 23,97,495/-. 27. DURING THE COURSE OF HEARING, LD. REPRESENTATIV ES OF PARTIES SUBMITTED THAT FACTS AND ISSUE IS IDENTICAL TO THE GROUND OF APPEAL FOR ASSESSMENT YEAR 2004-05. CONSIDERING THE SUBMISSION OF LD. REPRESE NTATIVES OF PARTIES AND AFTER CONSIDERING THE ORDERS OF AUTHORITIES BELOW, AS STATED IN PARAS 5 TO 13 ITA NO. 2058 TO 2060/M/10 13 AND REASONS GIVEN IN PARA 14 HEREINABOVE, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). THEREFORE, WE UPHOLD THE ORDER OF LD. CIT(A) AND REJECT GROUND NO.1.1 R.W GROUND NO. 2.1 OF APPEAL TAKEN BY ASSESSEE FOR ASSESSMENT YEAR 2006-07. 28. IN GROUND NO. 1.2 R.W. GROUND NO. 2.2, ASSESSEE HAS DISPUTED ORDER OF LD. CIT(A) TO CONFIRM ACTION OF AO TO DISALLOW BAD DEBT WRITTEN OFF RS. 87,608/- REPRESENTING RECEIVABLES AGAINST ADVERTISE MENTS INSERTED IN PRIOR YEARS WITHOUT OBTAINING RELEASE ORDERS FROM THE ADV ERTISERS/ADVERTISING AGENCIES. 29. LD. REPRESENTATIVES OF PARTIES SUBMITTED THAT F ACTS AND ISSUE IS SIMILAR TO GROUND NO. 1.2 R.W. GROUND NO. 2.2 OF APPEAL FO R ASSESSMENT YEAR 2005- 06. 30. WE HAVE CONSIDERED THE ABOVE SUBMISSION OF LD. REPRESENTATIVES OF PARTIES AND HAVE ALSO PERUSED THE ORDERS OF AUTHORI TIES BELOW. SINCE FACTS ARE IDENTICAL IN RESPECT OF THIS ISSUE FOR ASSESSMENT Y EAR 2005-06 WHICH WE HAVE DISCUSSED IN PARA-21 TO 23 AND FOLLOWING THE REASON INGS GIVEN IN PARA 24 HEREIN ABOVE, WE HOLD THAT ASSESSEE IS ENTITLED FOR DEDUCTION OF SAID AMOUNT OF RS. 87,608/- TOWARDS BAD DEBTS WHICH WAS WRITTEN OFF BY ASSESSEE IN ASSESSMENT YEAR UNDER CONSIDERATION. HENCE, WE ALL OW GROUND NO. 1.2 R.W. GROUND NO. 2.2 OF APPEAL TAKEN BY ASSESSEE FOR ASSE SSMENT YEAR 2006-07. 31. IN GROUND NO. 1.3 READ WITH GROUND NO. 2.3 ASSES SEE HAS DISPUTED ORDER OF LD. CIT(A) IN CONFIRMING DISALLOWANCE OF R S. 7,49,857/- ( WRONGLY STATED IN GROUND OF APPEAL RS. 7,49,887/-) MADE BY AO OUT OF LEGAL AND PROFESSIONAL CHARGES. 32. THE RELEVANT FACTS ARE THAT ASSESSEE CLAIMED EX PENDITURE TOWARDS LEGAL AND PROFESSIONAL CHARGES AGGREGATING TO RS. 7,49,85 7/- IN CONNECTION WITH LEGAL BATTLE INVOLVING THE RETIRED PARTNER VIZ. MRS . RONAK B. KAPADIA. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ASSESSEE VIDE ITS LETTER DT. 6.12.2008 STATED THE FOLLOWING FACTS: ITA NO. 2058 TO 2060/M/10 14 A) UPTO 31 ST JULY, 2004, MRS. RONAK B. KAPADIA WAS ONE OF THE PARTNER OF THE FIRM, IN TERMS OF THE THE N OPERATIVE DEED OF PARTNERSHIP DT. 29.1.2003. B) MR. RONAK B. KAPADIA, RETIRED AS A PARTNER OF T HE FIRM, EFFECTIVE 31 ST JULY, 2004, IN TERMS OF DOCUMENT TITLED AS BROAD TERMS OF UNDERSTANDING REACHED FOR RETIRE MENT OF MR. RONAK B. KAPADIA, AS A PARTNER OF THE ASSESS EE. C) THEREAFTER VIDE COMMUNICATION DT. 31.12.2004, T HE CONTINUING PARTNERS FORWARDED TO THE RETIRED PARTNE RS ENGROSSED DEED OF RETIREMENT RECORDING THE SAID AGR EED TERMS VIDE DOCUMENT OF 31 ST JULY, 2004 AND FORWARDING CHEQUE IN PAYMENT OF BALANCE DUES. D) VIDE LETTER DT. 18 TH FEBRUARY, 2005, THE RETIRED PARTNER, INTIMATED TO THE CONTINUING PARTNERS THAT SINCE THE CONTENT OF THE LETTER IS NOT IN CONFIRMING WITH OUT UNDERSTANDING SHE IS RETURNING THE CHEQUE AND TOOK POSITION THAT SHE CONTINUES TO BE A PARTNER OF THE FIRM. E) VIDE LETTER DT. 25.2.2005 OF KANGA & CO., THE SOLICITORS, THE RETIRED PARTNER DEMANDED FOR DISSOL UTION OF THE FIRM AND INVOKED THE ARBITRATION CLAUSE FORMING PART OF THE OPERATIVE DEED OF PARTNERSHIP FOR REFERRING THE AGREED DISPUTES AND DISSOLUTION OF THE FIRM. F) FURTHER THE RETIRED PARTNER INTIMATED TO THE BANKERS OF THE ASSESSEE NOT TO OPERATE THE ACCOUNTS MAINTAINED WITH EACH OF THEM UNLESS ALL CHEQUES ARE SIGNED BY HER AND THE CONTINUING PARTNERS. THIS RE SULTED IN FREEZING OF OPERATION OF BANK ACCOUNTS. G) FINALLY THE MATTER WAS REFERRED TO THE SOLE ARBITRATION OF MR. JUSTICE (RETD) M.L. PENDSE, WHO AT A LATER STAGE RESIGNED AS ARBITRATOR CONSEQUENT TO IL L HEALTH AND PROLONGED SICKNESS. H) ULTIMATELY THROUGH MEDIATION OF THE RESPECTIVE SOLICITORS OF THE RETIRED PARTNER AND CONTINUING PA RTNERS, THE RETIRED PARTNER ACCEPTED OF HAVING RETIRED AS A PARTNER OF THE ASSESSEE, EFFECTIVE FROM 31.7.2004 S UBJECT TO OTHER AGREED TERMS, DULY RECORDED BY AND BETWEEN THE CONTINUING PARTNERS AND THE RETIRED PARTNERS, IN TH E DEED OF RETIREMENT DT. 10 TH JANUARY, 2008. ITA NO. 2058 TO 2060/M/10 15 33. IT WAS SUBMITTED ON BEHALF OF ASSESSEE THAT RETI RED PARTNER BY HER CONDUCT CREATED ADVERSE EFFECT ON THE OPERATION OF BANK ACCOUNTS WITH CERTAIN BANKS AND CONSEQUENTIALLY IT HAD AN IMPACT ON THE B USINESS OF ASSESSEE. IT WAS CONTENDED THAT ASSESSEE DEFENDED SUIT FOR DISSO LUTION AND PRESERVATION OF ITS BUSINESS. HENCE, CLAIM WAS DUE TO COMMERCIA L EXPEDIENCY. THE AO DID NOT ACCEPT THE SAID EXPENDITURE AS BUSINESS EXPENDI TURE AND DISALLOWED THE SAME. BEING AGGRIEVED, ASSESSEE FILED APPEAL BEFOR E LD. CIT(A). 34. LD. CIT(A) HAS CONFIRMED THE ACTION OF AO ON TH E GROUND THAT THE DISPUTE WAS ESSENTIALLY FOR SETTLEMENT AND ADJUSTME NT OF RIGHTS BETWEEN THE PARTIES AND THE FEES PAID FOR DEFENDING THE SUIT FI LED BY THE OUTGOING PARTNER WAS FOR THE INDIVIDUAL INTERESTS OF THE PARTNERS AN D CANNOT BE TAKEN TO BE THE BUSINESS EXPENDITURE OF ASSESSEE FIRM. HENCE ASSES SEE IS IN FURTHER APPEAL BEFORE THE TRIBUNAL. 35. ON BEHALF OF ASSESSEE, IT WAS CONTENDED THAT TH E EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER IN ITS SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING PROFITS. THAT THE SAID EXPENDI TURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF PRESERVATION OF BUSINESS INTEREST OF ASSESSEE FIRM HENCE IT IS ALLOWABLE. LD. AR RELYIN G ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF BILASRAI JUHARMAL (HUF) VS CIT 141 ITR 915 SUBMITTED THAT IF THERE IS A FIGHT BETWEEN TWO GROU PS AND SUIT FILED BY ONE GROUP AGAINST OTHER GROUP ALLEGING MISMANAGEMENT, M ISAPPROPRIATION, FRAUDULENT ETC., IT WAS HELD THAT LEGAL EXPENSES IN CURRED FOR PRESERVING AND PROTECTING THE ASSETS OF FIRM TO DEFEND THE SUIT TO AVOID APPOINTMENT OF RECEIVER OF ASSETS OF FIRM AND IS ALLOWABLE U/S. 3 7(1) OF THE ACT. LD. AR ALSO REFERRED THE DECISION OF HONBLE PATNA HIGH COURT I N THE CASE OF CIT VS CARD BOARD PRODUCTS 224 ITR 51 AND SUBMITTED THAT LEGAL EXPENSES INCURRED IN DEFENDING A SUIT FILED BY PARTNER FOR DISSOLUTION W AS HELD TO BE THE EXPENDITURE FOR PROTECTION OF FIRMS BUSINESS AND I S ALLOWABLE U/S. 37 OF THE ACT. LD. AR SUBMITTED THAT EXPENDITURE IS ALLOWABL E AS BUSINESS EXPENDITURE AS ASSESSEE INCURRED THE EXPENSES TO DEFEND THE SUI T/TO TAKE LEGAL ACTION INITIATED BY OUTGOING PARTNER, FOR PRESERVATION OF BUSINESS INTEREST OF ASSESSEE ITA NO. 2058 TO 2060/M/10 16 FIRM. ON THE OTHER HAND LD. DEPARTMENTAL REPRESENT ATIVE RELIED ON THE ORDER OF LD. CIT(A). 36. WE HAVE CAREFULLY CONSIDERED THE FACTS OF THE C ASE FOR WHICH ASSESSEE FIRM HAS CLAIMED LEGAL EXPENDITURE OF RS. 7,49,857/ -. THERE IS NO DISPUTE TO THE FACT THAT THE OUTGOING PARTNER MRS. RONAK B. KA PADIA DEMANDED FOR DISSOLUTION OF ASSESSEE FIRM AND INVOKED ARBITRATIO N CLAUSE FOR REFERRING THE DISPUTE AND DISSOLUTION. IT IS ALSO NOT IN DISPUTE THAT THE RETIRED PARTNER INTIMATED TO THE PARTNERS OF ASSESSEE NOT TO OPERAT E ACCOUNTS MAINTAINED AND ACCORDINGLY THIS COULD RESULT IN FREEZING OF OPERA TION OF BANK ACCOUNT AND ULTIMATELY TO EFFECT ADVERSELY THE BUSINESS OF ASSE SSEE FIRM. THE SAID EXPENDITURE HAD BEEN INCURRED TO DEFEND THE ACTION OF OUTGOING PARTNER AND TO CONTINUE TO CARRY ON THE BUSINESS OF ASSESSEE FI RM SMOOTHLY. HENCE, WE AGREE WITH LD. AR THAT THE SAID EXPENDITURE HAD BEE N INCURRED DUE TO COMMERCIAL EXPEDIENCY IN THE INTEREST OF PRESERVING THE BUSINESS OF ASSESSEE FIRM AND TO PREVENT ANY ADVERSE ACTION BY THE OUTGO ING PARTNER. THEREFORE, WE HOLD THAT THE CASE OF ASSESSEE IS SQUARELY COVER ED BY THE DECISION OF HONBLE PATNA HIGH COURT IN THE CASE OF CIT VS CARD BOARD PRODUCTS (SUPRA) AND THE EXPENDITURE INCURRED IS ALLOWABLE DEDUCTION U/S. 37 OF I.T. ACT. ACCORDINGLY, WE ALLOW CLAIM OF ASSESSEE BY REVERSIN G THE ORDERS OF AUTHORITIES BELOW. HENCE GROUND NO. 1.3 READ WITH GROUND NO. 2 .3 OF APPEAL FOR ASSESSMENT YEAR 2006-07 IS ALLOWED. 37. IN THE RESULT, APPEAL OF THE ASSESSEE FOR ASSESS MENT YEAR 2004-05 IS DISMISSED AND WHEREAS APPEALS FOR ASSESSMENT YEARS 2005-06 AND 2006-07 ARE ALLOWED IN PART. ORDER PRONOUNCED ON THIS 16 TH DAY OF MARCH, 2012 SD/- SD/- ( RAJENDRA SINGH) (B.R. MITTAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 16 TH MARCH, 2012 RJ ITA NO. 2058 TO 2060/M/10 17 COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR C BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI