M/s Vivimed Labs Ltd, Hyderabad V. DCIT, Hyderabad

ITA 211/HYD/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 66541 (ITAT-HYDERABAD)
• Duration Of Justice: 2 year(s) 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-11-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 11-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMISHA S GUPT
• Assessee Lawyers: M MURALI MOHAN RAO
• Keywords: Business income; Proportionate interest; Wholly owned subsidiary
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER ITA NO. 211/HYD/2010 ASSESSMENT YEAR: 2006-07 M/S VIVIMED LABS LTD., APPELLANT HYDERABAD. (PAN/GIR NO. AAACV6060A/V-298) VS. DY. COMMISSIONER OF INCOME-TAX, RESPONDENT CENTRAL CIRCLE 3(3), HYDERABAD. APPELLANT BY : SHRI M. MURALI MOHAN RAO RESPONDENT BY : SMT. AMISHA S. GUPT DATE OF HEARING : 20/11/2012 DATE OF PRONOUNCEMENT : 27/11/ 2012 ORDER PER ASHA VIJAYARAGHAVAN, J.M.: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER OF THE CIT(A)-IV, HYDERABAD, DATED 15/12/201 2 FOR THE ASSESSMENT YEAR 2006-07. 2. BRIEFLY THE FACTS OF THE CASE ARE THAT THE ASSES SEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF SPECIALITY CHEM ICALS. FOR THE AY 2006-07, THE ASSESSEE HAD FILED ITS RETURN OF INCOM E DECLARING A TOTAL INCOME OF RS. 6,10,66,421/-, WHICH WAS PROCES SED U/S 143(1) OF THE IT ACT. SUBSEQUENTLY, THE CASE WAS SELECTED FOR SCRUTINY AND ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 2 THE ASSESSMENT HAD BEEN COMPLETED U/S 143(3) BY THE AO BY MAKING THE FOLLOWING DISALLOWANCES: 1. DISALLOWANCE U/S 36(1)(VA) OF RS. 8,61,225/- 2. DISALLOWANCE U/S 40(A)(IA) OF RS. 1,50,729/-. 3. DISALLOWANCE OF PROPORTIONATE INTEREST INCOME OF RS. 6,00,000/-. 3. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN AP PEAL BEFORE THE CIT(A). 4. AS REGARDS THE DISALLOWANCE U/S 36(1)(V) OF RS. 8,61,225/-, THE AR OF THE ASSESSEE CONTENDED BEFORE THE CIT(A) THAT THE ASSESSEE HAD ALREADY FURNISHED COMPLETE DETAILS OF PF & ESI, AND THE AO HAS NOT CONSIDERED WHILE COMPLETING THE ASSESSMENT. 5. THE CIT(A) OBSERVED THAT FROM THE ASSESSMENT ORD ER IT IS SEEN THAT THE DISALLOWANCE WAS MADE AS THE AO FOUND THAT THE PF PAYMENT OF RS. 8,54,070/- HAD BEEN MADE BELATEDLY, BESIDES ESI PAYMENT OF RS. 7,155/- WAS ALSO BELATEDLY PAID. TH E CIT(A) FURTHER OBSERVED THAT THE AR OF THE ASSESSEE ONLY CONTENDED THAT THE ASSESSEE HAD FURNISHED FULL DETAILS OF PF AND ESI, BUT, THE SAME WERE NOT CONSIDERED BY THE AO. THE CIT(A) HELD THAT THE AR OF THE ASSESSEE FAILED TO FURNISH ANY JUSTIFICATION AS TO HOW THE SAID BELATED PAYMENTS WERE TO BE ALLOWED. ACCORDINGLY, T HE CIT(A) UPHELD THE DISALLOWANCE MADE BY THE AO. 6. AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 3 7. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SHRI P. MURALI MOHAN RAO RELIED UPON THE DECISION IN THE CASE OF C IT VS. SABARI ENTERPRISES, [2008] 298 ITR 141 (KAR.) AND THE DECI SION IN THE CASE OF CIT VS. AIMIL LTD. [2010] 188 TAXMAN 265 (DELHI) . 8. ON THE OTHER HAND, THE LEARNED DR. SMT. AMISH S. GUPT PLACED RELIANCE ON THE ORDERS OF THE AUTHORITIES BELOW. 9. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS GONE THROUGH THE ORDERS OF TH E AUTHORITIES BELOW AS ALSO THE DECISIONS CITED. THE HONBLE DELH I HIGH COURT IN THE CASE OF CIT VS. AIMIL LTD. (SUPRA), ON WHICH RE LIANCE PLACED BY THE LEARNED COUNSEL FOR THE ASSESSEE, HELD AS UNDER : IF THE EMPLOYEES CONTRIBUTION IS NOT DEPOSITED BY T HE DUE DATE PRESCRIBED UNDER THE RELEVANT ACTS AND IS DEPOSITED LATE, THE EMPLOYER NOT ONLY PAYS INTEREST ON DELAYED PAYMENT BUT CAN INCUR PENALTIES ALSO, FOR WHICH SPECIFIC PROVISIONS ARE MADE IN THE PF CT AS WELL AS IN THE ESI ACT. THEREFORE, THE ACT PERMITS THE EMPLOYER TO MAKE THE DEPOSIT WITH SOME DELAY, S UBJECT THE AFORESAID CONSEQUENCES. IN SO FAR AS THE INCOME-TAX ACT IS CONCERNED, THE ASSESSEE CAN GET THE BENEFIT IF THE ACTUAL PAYMENT IS MADE BEFORE THE RETURN IS FILED, AS PER THE PRINCIPLE LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. VINAY CEMENT LTD., [2007] 213 CTR (SC) 268. 10. THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SABARI ENTERPRISES (SUPRA) HELD THAT CONTRIBUTIONS MADE BY THE ASSESSEE TO PF AND ESI ARE ALLOWABLE DEDUCTION EVEN THOUGH M ADE BEYOND STIPULATED PERIOD AS CONTEMPLATED UNDER MANDATORY P ROVISIONS OF SECTION 36(1)(VA), READ WITH SECTION 2(24)(X), PROV IDED SUCH CONTRIBUTIONS ARE PAID BY THE ASSESSEE ON OR BEFORE DUE DATE FOR FURNISHING RETURN OF INCOME AS PER SECTION 139(1) O F THE IT ACT. ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 4 11. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN IN T HE SAID DECISIONS, WE REMIT THE ISSUE TO THE FILE OF THE AO TO VERIFY THE ACTUAL DATE OF PAYMENT, ETC. AND DECIDE THE ISSUE IN THE LIGHT OF THE ABOVE DECISIONS. THUS, THIS GROUND IS ALLOWED FOR STATIS TICAL PURPOSES. 12. NEXT ISSUE IS WITH RESPECT TO THE DISALLOWANCE OF RS. 1,50,729/- U/S 40A(IA) OF THE IT ACT. 13. THE AO MADE THE SAID DISALLOWANCE ON THE GROUND THAT THE ASSESSEE HAD NOT DEDUCTED TAX ON PROFESSIONAL FEE TO THAT EXTENT. ON APPEAL, THE CIT(A) HELD THAT DURING THE APPELLAT E PROCEEDINGS ALSO NO JUSTIFICATION REGARDING ALLOWABILITY OF SUC H EXPENDITURE WAS FURNISHED BY THE ASSESSEE AND, HENCE, HE CONFIRMED THE ACTION OF THE AO. 14. ON FURTHER APPEAL BEFORE US, THE LEARNED COUNSE L FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE ASSESSEE HAS ALREADY FURNISHED ALL THE DETAILS, WHICH HAVE BEEN DEMANDED BY THE AO AND THE ASSESSEE HAS PAID THE ENTIRE AMOUNT. HE, THEREF ORE, PLEADED THAT THE MATTER MAY BE REMITTED TO THE FILE OF THE AO FOR VERIFICATION. 15. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE REMIT THE ISSUE TO THE FILE OF THE AO WITH A DIRECT ION TO VERIFY WHETHER THE ASSESSEE HAD PRODUCED ALL THE DETAILS I N SUPPORT OF ITS CLAIM AND DECIDE THE ISSUE IN ACCORDANCE WITH LAW. 16. THE LAST ISSUE IS WITH REGARD TO THE PROPORTION ATE DISALLOWANCE OF INTEREST EXPENSES OF RS. 6,00,000/-. ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 5 17. THE AO NOTED THAT THE ASSESSEE HAD INVESTED RS. 50,00,000/-IN THE SHARE CAPITAL OF M/S CREATIVE HEALTH CARE PVT. LTD. IN ORDER TO EARN DIVIDEND INCOME, WHICH IS EXEMPT FROM TAX AND SINCE THE ASSESSEE HAD BORROWED FUNDS AND WAS PAYING INTEREST THEREON, THE INTEREST ATTRIBUTABLE TO THE INVESTMENTS MADE IN SH ARES TO EARN DIVIDEND INCOME IS EXEMPT. THEREFORE, HE WAS OF THE VIEW THAT THE PROPORTIONATE INTEREST ON THE INVESTMENT MADE NEEDS TO BE DISALLOWED FROM THE INTEREST DEBITED TO THE P&L A/C . RELYING ON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE O F CIT VS. VI BABI & CO., 254 ITR 248, THE AO HELD THAT THE PROPORTION ATE INTEREST ON INVESTMENT MADE TO EARN DIVIDEND INCOME IS NOT ALLO WABLE FROM THE INTEREST PAID AS PER P&L A/C. HE WORKED OUT THE PR OPORTIONATE INTEREST @ 12% ON THE TOTAL INVESTMENT MADE OF RS. 50,00,000/- AT RS. 6.00 LAKHS AND DISALLOWED THE SAME FROM INTERES T PAYABLE AND ADDED TO THE TOTAL INCOME. 18. ON APPEAL, BEFORE THE CIT(A), THE AR OF THE ASS ESSEE SUBMITTED THAT THE DETAILS DEMANDED BY THE AO IN TH IS REGARD HAD BEEN FURNISHED AND FURTHER SUBMITTED THAT M/S CREAT IVE HEALTH CARE PVT. LTD. IS A 100% SUBSIDIARY COMPANY OF THE ASSES SEE AND, THEREFORE, THE AOS VIEW WAS NOT CORRECT. 19. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESS EE, THE CIT(A) HELD THAT THE ASSESSEE HAD NOT ESTABLISHED THAT THE RE WAS ANY BUSINESS EXPEDIENCY INVOLVED IN THE INVESTMENT IN T HE SHARE CAPITAL OF M/S CREATIVE HEALTH CARE PVT. LTD., AS LAID DOWN IN THE DECISION OF APEX COURT IN THE CASE OF SA BUILDERS VS. CIT, 288 ITR 1. HE FURTHER HELD THAT THE RATIO OF THE DECISION OF HONBLE KERA LA HIGH COURT IN ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 6 CIT VS. VI BABI & CO. (SUPRA) HAD BEEN RIGHTLY APPL IED BY THE AO. ACCORDINGLY, THE CIT(A) UPHELD THE DISALLOWANCE OF INTEREST OF RS. 6,00,000/- MADE BY THE AO. 20. ON FURTHER APPEAL BEFORE US, THE LEARNED COUNSE L FOR THE ASSESSEE RELIED UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. , [2009] 178 TAXMAN 135 (BOM.) AND THE DECISION OF THE ITAT, MUM BAI IN THE CASE OF MID-DAY MULTIMEDIA LTD. VS. DCIT IN ITA NOS . 2630/MUM/2010 & 2726/MUM/2010 VIDE ORDER DATED 22 ND JULY, 2011. 21. ON THE OTHER HAND, THE LEARNED DR HAS RELIED UP ON THE DECISION OF THE JURISDICTIONAL BENCH OF ITAT, HYDERABAD IN T HE CASE OF M/S SURYAVAMSHI SPINNING MILLS LTD. IN ITA NO. 1173/H/2 009 & OTHERS, ORDER DATED 31/01/2011. 22. WE HAVE HEARD THE ARGUMENTS OF BOTH THE PARTIES AND PERUSED THE RECORD AS WELL AS DECISIONS CITED. THE COORDINA TE BENCH IN THE CASE OF SURYAVAMSHI SPINNING MILLS LTD. (SUPRA) HEL D AS FOLLOWS: 9. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIALS ON RECORD AND CAREFULLY GONE THROUGH THE CASE LAW CITED BY THE PA RTIES. THE MAIN PLEA OF THE ASSESSEE'S COUNSEL HEREIN IS THAT M/S SVTL AS BECOME A SICK CO MPANY, AS SUCH INTEREST WAS NOT CHARGED. THE CONTENTION OF THE DEPARTMENT IS THAT T HE ASSESSEE CANNOT FORESEE THE SICKNESS OF SVTL AND THEREBY CANNOT TAKE A PLEA THAT IT HAS NOT CHARGED THE INTEREST. IF THE SVTL GOING TO BECOME SICK UNIT, THEN IT WILL VERY MUCH C LAIM THE SAME AS BAD DEBT. WE FIND FORCE IN THE ARGUMENT OF THE DEPARTMENTAL REPRESENT ATIVE. THE SEC.36(1)(III) OF THE IT ACT PROVIDES FOR DEDUCTION OF INTEREST ON LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION, THE ONUS WILL B E ON THE ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS WERE RAISED B Y THE ASSESSEE WAS USED FOR THE PURPOSE OF BUSINESS. IF IN THE PROCESS OF EXAMINATI ON OF SUCH DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO SISTER C ONCERNS OR ANY OTHER PERSON WITHOUT ANY INTEREST, THERE SHOULD BE VERY ONUS ON THE ASSE SSEE TO DISCHARGE BEFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF BORROWING LO ANS ON WHICH THE ASSESSEE IS INCURRING ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 7 LIABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LOAN TO ITS SISTER CONCERN/SUBSIDIARY COMPANY WITHOUT ANY INTEREST AND ACCORDINGLY, THE ASSESSEE SHOULD BE ALLOW DEDUCTION OF INTEREST BEING PAID ON BORROWED FUNDS TO THAT EXTENT. IF THE ASSESSEE'S FUNDS ARE USED TO LEND TO SUBSIDIARY WITHOUT ANY IN TEREST THEN THE INTEREST PAYABLE BY ASSESSEE ON ITS FUNDS CANNOT BE ALLOWED FULLY. THE ONE MORE CONTENTION OF THE ASSESSEE'S COUNSEL IS THAT THE ASSESSEE IS HAVING ITS OWN FUND S ON WHICH NO PAYMENT OF INTEREST. IN OUR OPINION, THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. MONIES ARE RECEIVED AS SHARE CAPITAL OR AS TERM LOAN OR WORKIN G CAPITAL LOAN OR AS INTERNAL ACCRUALS DO NOT HAVE A DIFFERENT COLOUR. WHATEVER THE RECEIP TS IN THE BUSINESS, HAVE THE COLOURS OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATI ON. THE ONLY THING SUFFICIENT IS TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT OF AMOUNT LEND TO SUBSIDIARY COMPANY WITHOUT CARRYING ANY INTEREST WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR INTEREST BEARING DEBTS TO BE REPAID. IN CASE, THE A SSESSEE HAD A SURPLUS WHICH ACCORDING TO IT COULD NOT BE REPAID IMMEDIATELY, IT WOULD EIT HER BE REQUIRED TO BE CIRCULATED AND UTILIZED FOR THE PURPOSE OF BUSINESS OR TO BE INVES TED IN A MANNER IN WHICH IT GENERATES INCOME AND NOT DIVERTED TOWARDS SUBSIDIARY FREE OF INTEREST. OTHERWISE IT AMOUNTS TO NOT PRESENTING THE TRUE AND CORRECT INCOME OF THE ASSES SEE AND THE SUBSIDIARY COMPANY WOULD BE ENJOYING THE BENEFIT AT THE COST OF ASSESSEE. IN OUR OPINION, INTEREST INCURRED BY THE ASSESSEE TO THE EXTENT AMOUNTS ARE DIVERTED TO SUBS IDIARY COMPANY ON INTEREST FREE BASIS ON WHATEVER REASON MAY BE ARE TO BE DISALLOWED. IF THERE IS ANY CHANCE OF RECOVERABILITY, THEN THERE IS A PROVISION IN THE ACT TO CLAIM THE S AME AS BAD DEBT. VARIOUS CASE LAW RELIED BY THE ASSESSEE'S COUNSEL IS OF NO RELEVANCE TO THE FACTS OF THE PRESENT CASE. IN VIEW OF THIS, WE ARE OF THE OPINION THAT CIT(A) NOT JUSTIFI ED IN DELETING THE DISALLOWANCE PROPORTIONATE INTEREST ON THE LOAN ADVANCED TO THE SISTER CONCERN. THIS GROUND OF APPEAL OF THE REVENUE IS ALLOWED. 23. SINCE THE ISSUE IS IDENTICAL TO THAT OF THE CAS E M/S SURYAVAMSHI SPINNING MILLS LTD. (SUPRA) DECIDED BY THE COORDINA TE BENCH, RESPECTFULLY FOLLOWING THE SAME WE SET ASIDE THE OR DER OF THE CIT(A) AND RESTORE THE ISSUE TO THE FILE OF THE ASSESSING OFFICER TO DECIDE THE SAME IN THE LIGHT OF THE SAID DECISION OF THE C OORDINATE BENCH IN THE CASE OF M/S SURYAVAMSHI SPINNING MILLS LTD.(SUP RA). THIS GROUND OF APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 211/HYD/2010 M/S VIVIMED LABS LTD. 8 24. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 27/11/2012. SD/- SD/- (CHANDRA POOJARI) (ASHA VIJAYARAGH AVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R HYDERABAD, DATED: 27 TH NOVEMBER, 2012. KV COPY TO:- 1) M/S VIVMED LABS LTD., C/O P. MURALI & CO., CAS, 6-3 - 655/2/3, 1 ST FLOOR, SOMAJIGUDA, HYDERABAD. 2) DCIT, CENTRAL CIRCLE 3(3), HYDERABAD. 3) THE CIT (A)-IV, HYDERABAD 4) THE CIT-III, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.