ACIT, Faridabad V. M/s Lakhani Marketing Inc., Faridabad

ITA 2300/DEL/2011

• Counselvise Citation: 230020114 RSA 2011
• Duration Of Justice: 4 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-09-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SALIL MISHRA
• Assessee Lawyers: GAU RAV MADAN
• Keywords: Earning of tax free income; Question of law; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (DELHI BENCH D DELHI) BEFORE SHRI G.E. VEERABHADRAPPA, HONBLE VICE PRESIDENT AND SHRI A.D. JAIN, JUDICIAL MEMBER ITA NO. 2300(DEL)2011 ASSESSMENT YEAR: 2006-07 ASSTT.COMMISSIONER OF INCOME TAX, M/S. LAKHA NI MARKETING INC. CIRCLE II, FARIDABAD. V. PLOT 131, SEC. 24, FARIDABAD. (APPELLANT) (RESPONDE NT) APPELLANT BY: SHRI SALIL MISHRA, DR RESPONDENT BY: SHRI GAU RAV MADAN, CA ORDER PER A.D. JAIN, J.M . THIS IS DEPARTMENTS APPEAL FOR THE ASSESSMENT YEAR 2006-07 AGAINST THE ORDER DATED 14.2.2011 OF THE COMMISSIONER OF IN COME TAX(APPEALS), FARIDABAD WHEREBY HE DELETED THE DISALLOWANCE MADE BY THE AO, CONCERNING INTEREST LIABILITY OF ` 28,10,154/-. 2. THE DEPARTMENT HAS TAKEN THE FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE DISAL LOWANCE MADE BY THE ASSESSING OFFICER OF INTEREST LIABILITY AMOUNTING T O ` 28,10,154/- BY INVOKING PROVISIONS OF SECTION 14A OF THE INCOME TA X ACT, 1961 TAKING A VIEW CONTRARY TO JUDGMENTS PRONOUNCED BY VARIOUS COURTS (I) 286 ITA 2300(DEL)2011 2 ITR 1(P&H), (II) 105 ITD 669 (ITAT MUMBAI G BENCH ),(III) 89 ITD 44 (ITAT CALCUTTA-C BENCH), (IV) 97 ITJ 493 (ITAT M UMBAI BENCH), (V) 91 ITD 311 (ITAT HYDERABAD B BENCH), WHEN THE DIVIDEND INCOME FROM SHARES OF M/S. LAKHANI INDIA LTD. ARE N OT FORMING PART OF THE TOTAL INCOME BY VIRTUE OF SECTION 10(33) OF TH E INCOME TAX ACT AND WHEN THE FINANCIAL BURDEN INCURRED BY THE ASSESSEE FOR ACQUIRING THESE SHARES WOULD HAVE BEEN PROPORTIONATELY DISALL OWED BY INVOKING PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) HAS ERRED ON FACTS AND IN LAW IN DELETING THE DISALLOWA NCE OF INTEREST LIABILITY AMOUNTING TO ` 28,10,154/- BY INVOKING SECTION 14A OF THE INCOME TAX ACT, 1961 IN CONTRAVENTION OF HONBLE PU NJAB AND HARYANA HIGH COURT JUDGMENT IN THE CASE OF ABHISHEK INDUSTRIES LTD. REPORTED IN 286 ITR 1(P&H) AS PER WHICH NO NEXUS IS REQUIRED TO BE PROVED. 3. THE ASSESSEE HAD TAKEN LOAN FROM BANK. INTEREST OF ` 28,10,154/- WAS PAID THEREON. THE ASSESSEE HAD ALSO PAID INTEREST @ 12% ON THE CAPITAL OF PARTNERS AND 10% INTEREST ON SECURITIES. THE AO A SKED THE ASSESSEE TO SHOW CAUSE AS TO WHY THE ENTIRE AMOUNT OF INTEREST BE NO T DISALLOWED IN VIEW OF THE PROVISIONS OF SECTION 14A OF THE I.T. ACT, SIN CE THE INVESTMENT IN SHARES WAS MUCH IN EXCESS OF THE LOAN TAKEN FROM BANK AND THE INCOME FROM SUCH INVESTMENT WAS EXEMPT. 4. THE ASSESSEE CONTENDED THAT THE DISALLOWANCE MAD E IN THE CASE OF ANOTHER GROUP CONCERN, NAMELY, LAKSONS FOOTWEAR PVT . LTD. IN ASSESSMENT YEARS 2003-04 AND 2004-05, ON THE SAME ISSUE, HAD B EEN DELETED BY THE CIT(A), SINCE INVESTMENT IN SHARES OF LAKHANI INDIA LTD. WERE MADE OUT OF ITA 2300(DEL)2011 3 COMMERCIAL EXPEDIENCY AND ITS CASE WAS COVERED BY T HE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT, 206 CTR 631(SC). 5. HOWEVER, INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT, THE AO DISALLOWED THE ENTIRE INTEREST OF ` 28,10,154/- FOR THE REASON THAT IN THE CASE OF THE SISTER CONCERN OF THE ASSESSEE IN THE EARLIE R YEARS, THE DECISION OF THE CIT(A) HAD NOT BEEN ACCEPTED BY THE DEPARTMENT AND THAT FURTHER APPEAL HAD BEEN PREFERRED BEFORE THE TRIBUNAL. IT WAS ALSO OB SERVED THAT THE MATTER WAS COVERED BY THE DECISION OF THE HONBLE PUNJAB & HAR YANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD., 188 ITR 1 (P&H) . IT WAS ALSO HELD THAT NO NEXUS OF INTEREST BEARING FUNDS WAS REQUIRED TO BE ESTABLISHED WITH THE INVESTMENT IN SHARE CAPITAL AS THE EXPENDITURE INCU RRED IN EARNING EXEMPT INCOME HAS NOT TO BE CONNECTED ONLY DIRECTLY WITH THE EARNING OF EXEMPT INCOME, BUT INDIRECTLY ALSO. 6. BY VIRTUE OF THE IMPUGNED ORDER, THE LD. CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO. THIS IS WHAT BRING TH E DEPARTMENT IN APPEAL BEFORE US. 7. CHALLENGING THE IMPUGNED ORDER, THE LD. DR HAS C ONTENDED THAT THE LD. CIT(A) HAS ERRED IN DELETING THE DISALLOWANCE CORRE CTLY MADE BY THE AO; THAT IN DOING SO, THE LD. CIT(A) HAS FAILED TO APPR ECIATE THAT THE DIVIDEND ITA 2300(DEL)2011 4 INCOME FROM SHARES IN M/S. LAKHANI INDIA LTD. WOULD FORM PART OF THE TOTAL INCOME, BY VIRTUE OF SECTION 10(33) OF THE ACT; THA T THE LD. CIT(A) HAS ALSO FAILED TO TAKE INTO CONSIDERATION THE FACT THAT TH E FINANCIAL BURDEN INCURRED BY THE ASSESSEE FOR ACQUIRING THE SHARES WOULD HAVE BEEN PROPORTIONATELY DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 14 A OF THE ACT; THAT THE LD. CIT(A) HAS WRONGLY NOT GONE BY ABHISHEK INDUSTRIE S LTD., 286 ITR 1(P&H), ACCORDING TO WHICH, NO NEXUS IS REQUIRED TO BE PROVED. 8. THE LEARNED COUNSEL FOR THE ASSESSEE, ON THE OTH ER HAND, HAS PLACED STRONG RELIANCE ON THE IMPUGNED ORDER. IT HAS BEEN CONTENDED THAT THE DISALLOWANCE WAS MADE ON THE GROUND THAT THE ASSESS EE HAD USED THE LOAN AMOUNT FOR MAKING INVESTMENT AND THE ENTIRE MONEY I N A BUSINESS ENTITY COMES IN A COMMON KITTY; THAT THE AO HAD ALSO RELIE D ON ABHISHEK INDUSTRIES LTD.(SUPRA) RENDERED BY THE HONBLE PU NJAB & HARYANA HIGH COURT; THAT HOWEVER, THE MATTER HAS BEEN COVERED BY S.A. BUILDERS V. CIT (SUPRA) RENDERED BY THE HONBLE SUPREME COURT AND N OT BY ABHISHEK INDUSTRIES LTD.(SUPRA) OF THE PUNJAB & HARYANA HIG H COURT; THAT THE AO FAILED TO CONSIDER THAT THE ASSESSEE FIRM PROVIDES THE SERVICES FOR MARKETING AND SALES OF LAKHANI INDIA LTD. AND TO THE OTHER GR OUP COMPANIES; THAT IT IS FOR THESE SERVICES THAT THE ASSESSEE RECEIVES SERVI CE CHARGES FROM LAKHANI INDIA LTD.; THAT MOREOVER, THE DEPARTMENTS APPEAL STANDS DISMISSED BY THE ITA 2300(DEL)2011 5 HONBLE PUNJAB & HARYANA HIGH COURT; THAT WHILE DOI NG SO, IT HAS BEEN HELD THAT THERE IS COMMERCIAL EXPEDIENCY ONCE THERE IS A BUSINESS CON NECTION AND AS SUCH NO DISALLOWANCE IS CALLED FOR; THAT IT REMA INS UNDISPUTED THAT THE COMPANY (LAKHANI) WAS ONE OF THE SISTER CONCERNS, F OR WHICH THE ASSESSEE WAS THE MARKETING AGENCY; THAT THE GROUP COMPANIES OF THE ASSESSEE WERE MANUFACTURING VARIOUS TYPES OF SHOES, CHAPPALS AND FOOTWEAR OF DIFFERENT TYPES AND THAT THE MARKETING AND SALES THEREOF WERE BEING CONDUCTED THROUGH A SINGLE COMPANY FOR BETTER MANAGEMENT OF T HE SALE OF THE PRODUCTS OF ALL THE GROUP COMPANIES INCLUDING LAKHANI INDIA LTD.; THAT FURTHER, THE ASSESSEE HAD NOT MADE ANY SPECIFIC BORROWINGS FOR T HE SAID PURPOSE; THAT THE AO HAD ALSO ADMITTED THAT THE PAYMENTS HAD BEEN MAD E FROM THE COMMON KITTY, WHEREIN THE PROFITS OF THE COMPANY WERE ALSO DEPOSITED; THAT THE ASSESSEE HAD EARNED PROFITS DURING THE YEAR UNDER C ONSIDERATION AND ALSO, IN THE EARLIER YEAR, WHEN THE INVESTMENTS WERE MADE; T HAT THE INVESTMENT WAS MADE IN LAKHANI, A CONCERN WITHIN THE GROUP, FOR CO MMERCIAL EXPEDIENCY, FOR UTILIZING THE BORROWED FUNDS; THAT ALSO, IN THE CASE OF LAKSONS FOOTWEAR PVT. LTD., FOR ASSESSMENT YEARS 2003-04 TO 2005-06, THE DISALLOWANCE HAD BEEN DELETED; THAT WHERE THE ASSESSEE HAD NOT MADE ANY SPECIFIC BORROWING, NO DISALLOWANCE HAD BEEN MADE U/S 14A OF THE ACT, A S HELD IN CIT V. HERO CYCLES LTD., 189 TAXMAN 50(P&H), AND ONLY ACTUAL E XPENDITURE INCURRED ITA 2300(DEL)2011 6 NEEDS BE DISALLOWED; AND THAT IT WAS ON CONSIDERIN G ALL THESE FACTORS, THAT THE LD. CIT(A) HAD CORRECTLY DELETED THE DISALLOWANCE W RONGLY MADE; AND THAT THERE BEING NO FORCE THEREIN, THE APPEAL FILED BY T HE DEPARTMENT BE ORDERED TO BE DISMISSED. 9. WE HAVE HEARD THE PARTIES AND HAVE PERUSED THE M ATERIAL ON RECORD. IT REMAINS UNDISPUTED THAT THE ASSESSEE DID NOT MAKE A NY SPECIFIC BORROWING FOR MAKING INVESTMENTS. AS PER HERO CYCLES LTD. (SUPRA), IN SUCH A CASE, NO DISALLOWANCE CAN BE MADE. AS HELD BY THE HONB LE JURISDICTIONAL HIGH COURT, IT IS ONLY ACTUAL EXPENDITURE INCURRED, WHIC H CAN BE DISALLOWED. 10. THE ASSESSEE HAD PURCHASED GOODS WORTH ` 3.97 CRORES FROM LAKHANI INDIA LTD. AS EVIDENT FROM THE ACCOUNT OF LAKHANI I NDIA LTD. IN ITS BOOKS FOR THE F.Y. 2005-06. ABHISHEK INDUSTRIES LTD.(SUPRA ), AS NOTED BY THE LD. CIT(A), WAS PASSED FOLLOWING THE HIGH COURT DECISIO N IN S.A. BUILDERS V. CIT, 269 ITR 535 (P&H). S.A. BUILDERS V. CIT O F THE HONBLE PUNJAB & HARYANA HIGH COURT WAS LATER SET ASIDE BY THE HON BLE SUPREME COURT, OBSERVING THAT ONCE IT IS ESTABLISHED THAT THERE WA S NEXUS BETWEEN EXPENDITURE AND THE PURPOSE OF BUSINESS, THE REVENU E CANNOT JUSTIFY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESS MAN AN D ASSUME THE ROLE TO DECIDE THE REASONABLENESS OF THE EXPENDITURE, HAVING REGAR D TO THE CIRCUMSTANCES OF THE CASE. ITA 2300(DEL)2011 7 11. IN THE PRESENT CASE, NO NEXUS OF THE BORROWED F UNDS OF INVESTMENT OF SHARES OF LAKHANI INDIA LTD. WAS EVER ESTABLISHED B Y THE AO NOR WAS ANY ENQUIRY CARRIED OUT AS TO WHEN AND TO WHAT EXTENT I NVESTMENT WAS MADE IN THE SHARES OF LAKHANI INDIA LTD. VIS--VIS THE AVAI LABILITY OF RESERVES AND SURPLUS, INTEREST FREE FUNDS AND INTEREST BEARING F UNDS. IT THUS COULD NOT BE INFERRED THAT THE INVESTMENT HAD BEEN MADE OUT OF B ORROWED FUNDS. THE TRIBUNAL, IN THE ASSESSEES CASE FOR ASSESSMENT YEA RS 2000-01 AND 2001-02, HAD DELETED THE DISALLOWANCE, MAKING SIMILAR OBSERV ATIONS TO THE EFFECT THAT THE AO HAD NOT ESTABLISHED ANY NEXUS BETWEEN THE IN VESTED FUNDS AND THE INTEREST BEARING FUNDS. THE BALANCE SHEET OF THE ASSESSEE SHOWED THE INVESTMENT IN SHARES TO HAVE BEEN MADE IN ASSESSMEN T YEARS 1995-96, 1998- 99 AND 1999-2000, FROM WHICH, IT WAS CLEAR THAT THE INVESTMENT IN SHARES HAD NOT BEEN MADE BY UTILIZING INTEREST BEARING FUNDS, WHICH FACT HAS BEEN CONSIDERED BY THE TRIBUNAL WHILE DELETING THE DISAL LOWANCE FOR THE EARLIER YEARS. NOT ONLY THIS, THE TRIBUNAL ORDER HAS SINCE BEEN UPHELD BY THE HONBLE HIGH COURT, AS NOTED BY THE LD. CIT(A). A COPY OF THE HIGH COURT ORDER DATED 3.3.09, IN ITA NO. 3 OF 2009 HAS BEEN PLACED BEFORE US. THEREIN, TWO SUBSTANTIAL QUESTIONS OF LAW, AS FOLLO WS, WERE RAISED BEFORE THE HONBLE HIGH COURT:- ITA 2300(DEL)2011 8 1. WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONBLE ITAT WAS RIGHT IN LAW IN HOLDING THAT THE ACTUAL DA TE OF PAYMENT IS WITHIN THE GRACE PERIOD PERMISSIBLE UNDER THE EMPLO YEES PROVIDENT FUND SCHEME, 1952, ESPECIALLY WHEN THE INCOME TAX A CT, 1961 DOES NOT TALK ABOUT THE GRACE PERIOD FOR MAKING PAYMENTS IN RELEVANT FUNDS AND IT TALKS ONLY ABOUT THE DUE DATE BY WHICH THE ASSESSEE IS REQUIRED TO MAKE THE PAYMENTS IN RELEVANT FUNDS? 2. WHETHER, ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE HONBLE ITAT WAS RIGHT IN LAW IN UPHOLDING THE ORDER OF THE LD. CIT(A) IN DELETING THE DISALLOWANCE OF ` 5,36,120/- ON ACCOUNT OF INTEREST FREE ADVANCES GIVEN TO ITS SISTER CONCERNS, ESPECIALLY W HEN THE ONUS IS ON THE ASSESSEE TO PROVE COMMERCIAL EXPEDIENCY BEHIN D GIVING INTEREST FREE LOANS AND AS TO WHICH PARTICULAR FUND WAS UTIL IZED BY IT TO MAKE ADVANCES TO THE SISTER CONCERN AND THE ASSESSEE HAS FAILED TO PROVE IT, AND THE HONBLE ITAT WAS SIMPLY HELD THAT INTEREST FREE LOANS WERE GIVEN TO SISTER CONCERNS WHICH ARE INTO THE SAME BU SINESS, NO SPECIFIC DETAILS HAVE BEEN GIVEN IN THIS REGARD AND HAS PASS ED A GENERAL AND NON-SPEAKING ORDER? 12. HOWEVER, NOTICE OF MOTION WAS ISSUED BY THE HON BLE HIGH COURT ONLY QUA THE FIRST ISSUE, BY OBSERVING AS FOLLOWS:- IN THE BACKGROUND OF THE CONCLUSIONS DRAWN BY US H EREINABOVE, ONLY THE FIRST SUBSTANTIAL QUESTION OF LAW NOTICED AT TH E HANDS OF THE LEARNED COUNSEL FOR THE APPELLANT ARISES FOR DETERMINATION. IT IS THE CONTENTION OF THE LEARNED COUNSEL FOR THE APPELLANT THAT THE A FORESAID ISSUE IS SUBJECT MATTER OF CONSIDERATION IN ANOTHER APPEAL, NAMELY, ITA NO. 874 OF 2008 (WHICH HAS ALREADY BEEN ADMITTED). NOTICE OF MOTION FOR 21.3.2009. DASTI ONLY. ITA 2300(DEL)2011 9 13. FROM THE ABOVE, IT IS AMPLY CLEAR THAT THE DEPA RTMENTS CHALLENGE WITH REGARD TO THE DISALLOWANCE ON ACCOUNT OF INTEREST F REE ADVANCES WAS NOT EVEN ADMITTED FOR HEARING BY THE HONBLE HIGH COURT. 14. IN VIEW OF THE ABOVE, FINDING NO MERIT THEREIN, THE GRIEVANCE SOUGHT TO BE RAISED BY THE DEPARTMENT IS REJECTED. 15. IN THE RESULT, THE APPEAL FILED BY THE DEPARTME NT IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09.09.2011. SD/- SD/- (G.E. VEERABHADRAPPA) (A.D. JAIN) VICE PRESIDENT JUDICIAL MEMBER DATED: 09.09.2011 *RM COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR TRUE COPY BY ORDER DEPUTY REGISTRAR