Mc Creade Software (Asia) Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 214/BANG/2011

• Counselvise Citation: 21421114 RSA 2011
• Duration Of Justice: 1 year(s) 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-07-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 27-06-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 01-03-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K AMBASTHA CITIDR
• Assessee Lawyers: VISHNU MOORTHY
• Keywords: Business income; Corroborative evidences; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.214/BANG/2011 ASSESSMENT YEAR : 2006-07 MC CREADE SOFTWARE (ASIA) PVT. LTD., # 811, 23 RD MAIN, 12 TH A CROSS, 2 ND PHASE, J.P. NAGAR, BANGALORE 560 078. PAN : AAACM 1978R VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 12(1), BANGALORE. APPELLANT RESPONDENT APPELLANT BY : SHRI VISHNU MOORTHY, C.A. RESPONDENT BY : SHRI S.K. AMBASTHA, CIT-I(DR) DATE OF HEARING : 27.06.2012 DATE OF PRONOUNCEMENT : 04.07.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE ASSESSEE IS AGAINST THE ORDER DATED 08.11.2010 OF THE CIT(APPEALS)-III, BANGALORE FOR THE ASSESSME NT YEAR 2006-07. 2. THE MODIFIED GROUNDS OF APPEAL WERE FILED AT THE TIME OF HEARING. GROUND NO.1 RAISED THEREIN WAS NOT PRESSED AND THE SAME IS DISMISSED AS NOT PRESSED. ITA NO.214/BANG/2011 PAGE 2 OF 9 3. GROUND NOS.2 & 3 OF THE MODIFIED GROUNDS OF APPE AL READ AS UNDER:- 2. INTEREST DISALLOWANCE: THE LEARNED OFFICERS BELO W HAVE ERRED IN ADDING BACK INTEREST PAID ON THE LOAN BORROWED FOR THE PURPOSE OF PURCHASE OF PROPERTIES, CARS, BANK C HARGES AND FOREIGN BILL DISCOUNTING CHARGES BY CONTENDING THAT THE APPELLANT HAS AVAILED LOAN AND UTILISED THE SAME FOR ADVANCIN G TO THE DIRECTOR, WHEREAS THE ADVANCES GIVEN TO THE DIRECTO R IS OUT OF SURPLUS FUNDS AND THE LOAN FROM THE BANK HAS BEEN B ORROWED FOR THESE SPECIFIC BUSINESS PURPOSES AND ARE CLEARLY ID ENTIFIABLE AND HENCE, ALLOWABLE. THE FOLLOWING ARE THE SPECIFIC LO ANS AND INTEREST THEREON WHICH WERE DISALLOWED. SL. NO. PARTICULARS AMOUNT OF INTEREST 1. INTEREST ON EXPORT PACKING CREDIT 3,27,024 2. INTEREST ON FOREIGN BILLS DISCOUNT 3,70,547 3. INTEREST ON CAR LOAN 1,09,488 4. INTEREST ON HOME LOAN 11,81,716 5. INTEREST ON MORTGAGE LOAN 1,39,501 6. INTEREST ON TERM LOAN 4,537 7. BANK CHARGES 1,96,671 TOTAL 23,29,484 3. WITHOUT PREJUDICE TO THE OTHER GROUNDS REGARDIN G ALLOWABILITY OF INTEREST EXPENDITURE, IT IS SUBMITTED THAT THE O FFICERS BELOW HAVE ERRED IN DISALLOWING A SUM OF RS.23,29,484.00 THOUGH THE APPELLANT HAD CLAIMED INTEREST OF RS. 11,47,768/- A FTER DISALLOWING INTEREST PERTAINING TO THE PROPERTY TRA NSACTIONS AMOUNTING TO RS. 11,81,716.00 OUT OF THE TOTAL INTE REST AS BELOW: SL. NO. PARTICULARS AMOUNT OF INTEREST 1. INTEREST ON EXPORT PACKING CREDIT 3,27,024 2. INTEREST ON FOREIGN BILLS DISCOUNT 3,70,547 3. INTEREST ON CAR LOAN 1,09,488 4. INTEREST ON HOME LOAN 11,81,716 5. INTEREST ON MORTGAGE LOAN 1,39,501 6. INTEREST ON TERM LOAN 4,537 7. BANK CHARGES 1,96,671 TOTAL 23,29,484 ITA NO.214/BANG/2011 PAGE 3 OF 9 4. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE ADVANCED INTEREST FREE LOANS OF RS.4,49,33,493 TO ITS MANAGING DIRECT OR SMT.SOUNDARYA RAGHU. THE ASSESSEE HAD CLAIMED INTEREST EXPENDITU RE OF RS.23,29,484 ON FUNDS BORROWED FOR THE PURPOSE OF BUSINESS. THE AO WAS OF THE VIEW THAT BORROWED FUNDS HAVE BEEN USED FOR GIVING INTER EST FREE LOANS TO THE MANAGING DIRECTOR AND NOT USED FOR THE PURPOSE OF B USINESS AND THEREFORE INTEREST EXPENDITURE WHICH WAS CLAIMED AS DEDUCTION BY THE ASSESSEE CANNOT BE ALLOWED U/S.36(1)(III) OF THE INCOME TAX ACT, 1961 (THE ACT). IN REPLY, THE ASSESSEE POINTED OUT AND GAVE A BREAK-UP OF THE INTEREST EXPENDITURE AND SUBMITTED THAT THE BORROWINGS WERE FOR SPECIFIED PURPOSE AND THEREFORE COULD NOT HAVE BEEN GIVEN AS INTEREST FREE LOANS TO THE MANAGING DIRECTOR. THESE DETAILS HAVE ALREADY BEE N GIVEN IN THE MODIFIED GROUNDS OF APPEAL REPRODUCED HEREINABOVE. THE ASSE SSEE ALSO POINTED OUT THAT THE LOAN TO SMT.SOUNDARYA RAGHU AS ON 31.3 .2005 STOOD AT RS.3,76,83,576 AND AS ON 31.3.2006 THE SAME STOOD H IGHER AT RS.4,49,33,494/-. IT WAS POINTED OUT THAT FOR THE ASSESSMENT YEAR 2005-06, NO INTEREST HAS BEEN DISALLOWED BECAUSE THERE WAS N O NEXUS BETWEEN THE BORROWED FUNDS AND THE ADVANCES MADE. PRESUMING THA T THERE WAS DIVERSION DURING THE PREVIOUS YEAR WHAT COULD HAVE BEEN DISALLOWED WAS ONLY THE AMOUNT ADVANCED DURING THE YEAR BEING THE DIFFERENCE BETWEEN THE OPENING AND THE CLOSING BALANCE AND NOT THE ENT IRE AMOUNT. THE ASSESSEE ALSO POINTED OUT THAT DURING THE PREVIOUS YEAR RESERVES & SURPLUS, ACCUMULATED PROFITS HAD RISEN FROM RS.5,66 ,28,324/- AS ON 31.03.2005 TO RS.11,59,32,765/- AS ON 31.03.2006. THE INCREASE IS TO THE EXTENT OF RS.6 CRORES AND THE ADVANCE CONSIDERED BY THE ASSESSING OFFICER ITA NO.214/BANG/2011 PAGE 4 OF 9 AS DIVERSION HAVE GONE UP BY AROUND RS.85 LAKHS ONL Y. THE ASSESSEE THUS SUBMITTED THAT THE DISALLOWANCE CANNOT BE SUSTAINED ON ANY BASIS. 5. THE AO, WITHOUT GIVING ANY FINDING THAT BORROWE D FUNDS ON WHICH INTEREST WAS PAID WERE GIVEN AS INTEREST FREE LOAN TO THE MANAGING DIRECTOR, DISALLOWED INTEREST EXPENDITURE BY OBSERVING THAT THE ASSESSEE SHOULD HAVE CHARGED INTEREST FROM THE MANAGING DIRECTOR FO R THE ADVANCES GRANTED TO THE MANAGING DIRECTOR AS THE COMPANY PAID INTERE ST ON LOANS TAKEN. THE AO FURTHER OBSERVED THAT HAD THIS MONEY NOT BEEN AD VANCED TO THE MANAGING DIRECTOR, IT WOULD HAVE BEEN AVAILABLE TO THE ASSESSEE COMPANY FOR ITS BUSINESS PURPOSES AND TO THAT EXTENT IT MAY NOT HAVE BEEN NECESSARY TO BORROW LOANS FROM BANKS. THE AO HOWEV ER RESTRICTED THE DISALLOWANCE ONLY TO THE EXTENT OF RS.3,29,484/- WH ICH WAS THE AMOUNT DEBITED TO THE PROFIT AND LOSS ACCOUNT. HENCE, THE AMOUNT OF INTEREST OF RS.23,29,484/- WAS ADDED TO THE TOTAL INCOME RETURN ED BY THE ASSESSEE. 6. ON APPEAL BY THE ASSESSEE, THE CIT(APPEALS) CONF IRMED THE ORDER OF THE ASSESSING OFFICER, GIVING RISE TO GROUNDS NO.2 & 3 BY THE ASSESSEE BEFORE THE TRIBUNAL. 7. AT THE OUTSET, IT WAS SUBMITTED BY THE LD. COUNS EL FOR THE ASSESSEE THAT THE INTEREST EXPENSES WERE IN RESPECT OF SPECI FIC LOANS AND COULD NOT HAVE BEEN USED FOR GIVING INTEREST FREE LOANS TO TH E MANAGING DIRECTOR. APART FROM THE ABOVE, IT WAS POINTED OUT THAT IN TH E COMPUTATION OF TOTAL INCOME, THE ASSESSEE HAD HIMSELF ADDED A SUM OF RS. 11,81,716 WHICH IS INTEREST ON HOME LOAN TO THE PROFIT AS PER PROFIT A ND LOSS ACCOUNT, WHILE COMPUTING INCOME FROM BUSINESS AND CLAIMED THE SAME AS DEDUCTION FROM INCOME UNDER THE HEAD INCOME FROM HOUSE PROPERTY. THAT DEDUCTION WAS ITA NO.214/BANG/2011 PAGE 5 OF 9 DISALLOWED. IT WAS THEREFORE SUBMITTED THAT IN ANY EVENT, THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.11,81,716 CANNOT BE SUSTAINED. 8. THE LD. DR RELIED ON THE ORDER OF THE LD. CIT(AP PEALS). 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. THE A O HAS NOT GIVEN ANY FINDING THAT THE INTEREST FREE LOANS WERE GIVEN OUT OF THE BORROWED FUNDS ON WHICH INTEREST WAS PAID. THE AO HAS NOT EXAMINE D THE AVAILABILITY OF SURPLUS FUNDS WITH THE ASSESSEE WHICH CAN JUSTIFY I NTEREST FREE LOANS TO THE MANAGING DIRECTOR. THE AO HAS PROCEEDED ON THE BAS IS THAT THE ASSESSEE NEED NOT HAVE BORROWED MONEY FROM BANKS AND FINANCI AL INSTITUTIONS AND COULD HAVE USED THE INTEREST FREE LOAN GIVEN TO THE MANAGING DIRECTOR INSTEAD OF BORROWING FUNDS AND PAYING INTEREST. IN OUR VIEW, THIS CANNOT BE A BASIS FOR MAKING DISALLOWANCE OF INTEREST EXPENSE S. WE ACCEPT THE SUBMISSION OF THE ASSESSEE THAT THE LOANS HAVING BE EN BORROWED FOR SPECIFIC PURPOSES, COULD NOT HAVE BEEN GIVEN AS INT EREST FREE LOANS TO THE MANAGING DIRECTOR. IN OTHER WORDS, THE ASSESSEE HA S ESTABLISHED THAT BORROWED FUNDS ON WHICH INTEREST WAS PAID HAD BEEN UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THEREFORE, TH E DISALLOWANCE OF INTEREST MADE BY THE REVENUE AUTHORITIES IS DIRECTE D TO BE DELETED. 10. MODIFIED GROUND NOS. 4 & 5 READS AS FOLLOWS:- 4. THE LEARNED OFFICERS BELOW HAVE ERRED IN TREAT ING FOREIGN BUSINESS TRAVELLING EXPENDITURE AS PERSONAL EXPENDI TURE. THE LEARNED OFFICERS BELOW HAVE FAILED TO APPRECIATE TH AT THE APPELLANT IS SOFTWARE DEVELOPMENT COMPANY WHERE FOREIGN TRAVE L IS PART AND PARCEL OF THE BUSINESS AND THE ENTIRE CLIENTELE OF THE APPELLANT COMPANY ARE FROM ABROAD AND IT IS EXTREMELY REQUIRE D FOR THE COMPANY OFFICIALS TO TRAVEL ABROAD FOR VARIOUS PURP OSE. THE LEARNED AO DISALLOWED A SUM OF RS.14,74,280/- UNDER THIS HEAD ITA NO.214/BANG/2011 PAGE 6 OF 9 AND THE LEARNED CIT-APPEALS REDUCED THIS DISALLOWAN CE TO RS.11,05,710/-. 5. THE LEARNED OFFICERS BELOW HAVE ERRED IN ADDING BACK THE BUSINESS PROMOTION AND TOUR AND TRAVEL EXPENDITURE ON THE GROUND THAT ORIGINAL VOUCHERS AND PROOF FOR EXPENDITURE WA S NOT PRODUCED, WHEREAS THE LEARNED OFFICERS BELOW DID NO T CALL FOR SUCH VOUCHERS AND ALSO DID NOT PROVIDE SUFFICIENT T IME AND OPPORTUNITY FOR THE APPELLANT TO PRODUCE THE RELEVA NT DOCUMENTS. THE LEARNED AO DISALLOWED A SUM OF RS.6,04,270/- UN DER THIS HEAD AND THE LEARNED CIT-APPEALS REDUCED THIS DISAL LOWANCE TO RS.4,53,203/-. 11. THE ASSESSEE INCURRED EXPENDITURE OF RS.14,74 ,280 TOWARDS FOREIGN TRAVEL WHICH WAS DISALLOWED BY THE AO FOR W ANT OF SUFFICIENT PROOF LIKE DETAILS OF PERSON WHO TRAVELLED, COPIES OF PAS SPORT, PURPOSE OF THE VISIT, BUSINESS INCOME RELATABLE TO SUCH TRAVEL ETC. 12. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT IT H AD INCOME FROM EXPORTS AND FOREIGN TRAVEL WAS NECESSARY TO EARN SU CH INCOME. THE ASSESSEE GAVE DETAILS OF THE TRAVEL EXPENSES INCURR ED. THE CIT(A) WAS OF THE VIEW THAT THE DETAILS SUBMITTED WERE NOT FULLY VERIFIABLE AND NOT SUPPORTED BY PROPER VOUCHERS. HE WAS OF THE VIEW T HAT 25% OF THE DISALLOWANCE MADE BY THE AO SHOULD BE DELETED. ACC ORDINGLY ADDITION MADE BY THE AO WAS RESTRICTED TO RS.11,05,710/-. S TILL AGGRIEVED, THE ASSESSEE HAS RAISED GROUND NO.4 BEFORE THE TRIBUNAL . 13. THE AO ALSO DISALLOWED A SUM OF RS.6,04,270/- O UT OF THE EXPENDITURE CLAIMED BY THE ASSESSEE TO HAVE BEEN IN CURRED TOWARDS BUSINESS PROMOTION AND TOUR AND TRAVEL EXPENDITURE FOR THE REASONS THAT ORIGINAL VOUCHERS AND PROOF OF EXPENDITURE WERE NOT PRODUCED. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT IT INCURRED TH E AMOUNTS OF ITA NO.214/BANG/2011 PAGE 7 OF 9 RS.5,73,245/- TOWARDS BUSINESS PROMOTION AND RS.8,2 2,607/- TOWARDS TOUR AND TRAVELLING DURING THE YEAR. IT WAS NOTICED BY T HE AO THAT SOME OF THESE EXPENSES ARE INCURRED THROUGH CREDIT CARDS. THESE E XPENSES WERE DISALLOWED BY THE AO FOR WANT OF SUFFICIENT PROOF. 14. BEFORE CIT(A), THE ASSESSEE SUBMITTED THAT IT H AD INCURRED A SUM OF RS.6,04,270/- TOWARDS BUSINESS PROMOTION AND TOUR A ND TRAVEL EXPENSES, WHICH HAS BEEN DISALLOWED BY THE LEARNED ASSESSING OFFICER ON THE GROUND THAT THE ORIGINAL VOUCHERS AND PROOF FOR EXPENDITUR E WAS NOT PRODUCED. THE ASSESSEE THAT THE LEARNED ASSESSING OFFICER DID NOT PROVIDE SUFFICIENT TIME AND OPPORTUNITY FOR THE ASSESSEE TO PRODUCE THE REL EVANT DOCUMENTS AND CONCLUDED THAT THE EXPENDITURE WAS PERSONAL EXPENDI TURE AND DISALLOWED THE SAME. THE ASSESSEE FURTHER SUBMITTED THAT EXPE NDITURE INCURRED AND PROVED TO BE FOR THE PURPOSE OF BUSINESS ACTIVITIES OF THE ASSESSE CANNOT BE DISALLOWED. IT WAS ARGUED THAT THE REASONABLENESS A ND COMMERCIAL EXPEDIENCY ARE THE PREROGATIVE OF THE ASSESSEE. THE ASSESSEE ALSO GAVE DETAILS OF THE EXPENDITURES INCURRED BY IT. 15. THE LD. CIT(APPEALS) ALLOWED A PARTIAL RELIEF O F 25% OF THE TOTAL EXPENDITURE BY OBSERVING AS FOLLOWS;- 10.2. I HAVE GONE THROUGH THE SUPPORTING EVID ENCES SUBMITTED BY THE APPELLANT AND FIND THAT THE SAME CANNOT BE V ERIFIED FULLY AS TO ITS REQUIREMENT FOR BUSINESS PURPOSES ETC. HENC E, 1 ALLOW 25% OF THIS TOTAL EXPENDITURE AS ALLOWABLE. ACCORDINGLY , THE DISALLOWANCE MADE BY THE AO UNDER THE HEADS AMOUNTI NG TO RS.4,53,203/- IS SUSTAINED. RELIANCE IS ALSO PLACED ON THE FOLLOWING JUDICIAL PRECEDENTS: CIT VS. SHAHIBAG ENTREPRENEURS (P) LTD., 215 1TR 81 0 (GUJ.) WHEREIN THE COURT HAS (HELD) THAT BEFORE AN ASSESSE E CAN BECOME ENTITLED TO AN ALLOWANCE U/S 37(1), HE MUST SATISFY THE DEPARTMENT OF THE PURPOSE FOR WHICH THE AMOUNT IS SPENT. ITA NO.214/BANG/2011 PAGE 8 OF 9 L.H. SUGAR FACTORY AND OIL MILLS PVT. LTD. VS CIT 1 25 ITR 293 (SC) - WHERE AN ASSESSEE CLAIMS A DEDUCTION THE ONU S IS ON HIM TO BRING ALL MATERIAL FACTS ON RECORD TO SUBSTANTIA TE HIS CLAIM. THEREFORE, THE APPELLANT GETS A RELIEF OF RS.151,06 7/- UNDER THIS HEAD. 16. AGGRIEVED BY THE ORDER OF THE CIT(A), THE ASSE SSEE HAS RAISED GR.NO.5 BEFORE THE TRIBUNAL. WE HAVE PERUSED THE D ETAILS OF THE FOREIGN TRAVEL EXPENSES THE DETAILS OF WHICH ARE GIVEN AT P AGE-73 OF THE PAPER BOOK. IT IS SEEN THAT THE PAYMENTS HAVE ALL BEEN M ADE THROUGH CHEQUES. THE DETAILS OF THE PERSON WHO TRAVELLED AND THE PUR POSE OF THE TRAVEL HAVE ALL NOT BEEN GIVEN BY THE ASSESSEE. CONSIDERING TH E NATURE OF THE BUSINESS OF THE ASSESSEE, WE ARE OF THE VIEW THAT FOREIGN TR AVEL IS A NECESSARY INCIDENT OF THE BUSINESS OF THE ASSESSEE. AT THE S AME TIME THE INABILITY OF THE ASSESSEE TO PRODUCE BILLS AND PURPOSE OF FOREIG N TRAVEL, CALLS FOR SOME DISALLOWANCE. WE ARE OF THE VIEW THAT IT WOULD BE JUST AND FAIR TO DISALLOW 50% OF THE EXPENSES CLAIMED BY THE ASSESSEE. ACCOR DINGLY THE DISALLOWANCE IS DIRECTED TO BE RESTRICTED TO 50% OF RS.14,74,280/-. AS FAR AS GR.NO.6 IS CONCERNED, THE DETAILS OF THE BUSINES S PROMOTION EXPENSES ARE GIVEN AT PAGE-74. THE DETAILS OF TOUR AND TRAV EL EXPENSES ARE NOT AVAILABLE. THE REQUIRED SUPPORTING EVIDENCE WAS NO T FILED EVEN BEFORE US. NOR ANY EXPLANATION GIVEN REGARDING THE NECESSITY A ND BUSINESS PURPOSE OF THESE EXPENSES. IN THESE CIRCUMSTANCES, WE ARE OF THE VIEW THAT NO FURTHER RELIEF CAN BE GIVEN. GR.NO.6 IS THEREFORE DISMISSE D. ITA NO.214/BANG/2011 PAGE 9 OF 9 17. IN THE RESULT, THE APPEAL BY THE ASSESSEE IS PA RTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 4 TH DAY OF JULY, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDICIAL MEMB ER BANGALORE, DATED, THE 4 TH JULY , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.