DCIT CIR 2(2), MUMBAI V. KAYTEE CORPORATION LTD, MUMBAI

ITA 2468/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2386 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 19-03-2015
• Assessment Year: 2005-2006
• Appeal Filed On: 12-04-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K KARDA M
• Keywords: Business income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH A, MUMBAI BEORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) THE ACIT, CIRCLE 2(2), AAYKAR BHAVAN, ROOM NO.545, 5 TH FLOOR, MK ROAD, MUMBAI 400020 ... APPELLANT VS. M/S.KAYTEE CORPORATION PVT. LTD. MALHOTRA HOUSE, 2 ND FLOOR, OPP. GPO, FORT, MUMBAI 400 001 PAN: AAACK1732E .... RESPONDENT APPELLANT BY : SHRI A.K.KARDAM RESPONDENT BY : MS. AARTI VISSANJI DATE OF HEARING : 01/10/2015 DATE OF PRONOUNCEMENT : 20/11/2015 ORDER PER G.S. PANNU,AM: THE CAPTIONED APPEAL BY THE ASSESSEE IS DIRECT ED AGAINST THE ORDER OF THE CIT(A)-5, MUMBAI DATED 13/01/2012, PE RTAINING TO THE ASSESSMENT YEAR 2005-06, WHICH IN TURN HAS ARISEN FROM AN ORDER PASSED BY THE ASSESSING OFFICER DATED 28/07/2012 UNDER SECTION 143(3)OF THE INCOME TAX ACT, 1961 (IN SHORT THE AC T) . 2 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) 2. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOW ING TWO GROUNDS OF APPEAL:- 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DISALLOWING THE ADDITION MADE ON ACCOUNT O F SAMPLING EXPENSES BY HOLDING IT THAT THE AA DID NOT BRING ANYTHING ON RE CORD TO PROVE THAT THE EXPENSES ARE BOGUS, INFLATED AND NOT LAID OUT FOR BUSINESS PURPOSE AND LD. CIT(A) IGNORED THE FACT THAT ASSESSEE FAILED TO GIV E ANY EVIDENCE OR ANY DETAILS OF THE SAMPLING EXPENSES AT THE TIME OF FRA MING OF ASSESSMENT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING DISALLOWANCE OF RS. 16,44, 647/- FOR INTEREST ATTRIBUTABLE FOR INVESTMENT . IN SHARES AND FAILED TO APPRECIATE THAT ABOVE DISALLOWANCE IS ALMOST IN THE NATURE OF DISALLOWANC E U/S 14A AND NOT IN THE NATURE OF DIVERSION OF INTEREST FREE FUNDS WHICH LD . CIT(A) MISINTERPRETED. 3. IN SO FAR AS THE FIRST ISSUE IS CONCERNED, THE S AME ARISES FROM THE ACTION OF THE ASSESSING OFFICER IN DISALLOWING AN A MOUNT OF RS.35,04,272/- OUT OF SAMPLING EXPENSES. THE RESPO NDENT-ASSESSEE IS ENGAGED IN THE BUSINESS OF BOTH TRADING AND MANUFAC TURING OF GARMENTS AND HOSIERY, WHICH ARE MAINLY EXPORTED. IN THE YEAR UNDER CONSIDERATION, THE ASSESSING OFFICER NOTICED THAT S AMPLING EXPENSES INCURRED BY THE ASSESSEE WAS RS.2,10,65,583/- AS AG AINST RS.1,89,25,795/- IN THE IMMEDIATELY PRECEDING YEAR, ALTHOUGH THE SALES DURING THE YEAR HAD DECLINED TO RS.68.00 CRORES AS AGAINST RS.73.00 CRORES OF THE PRECEDING YEAR. ON BEING ASKED TO EX PLAIN THE INCREASED SAMPLING EXPENSES, ASSESSEE CONTENDED THAT HAVING R EGARD TO THE NATURE OF BUSINESS, ASSESSEE WAS REQUIRED TO KEEP MAKING INNOVATIVE DESIGNS, PATTERNS, COLOURS, ETC., WHICH ARE SENT TO THE CUSTOMERS, WHO ARE SITUATED IN VARIOUS PARTS OF THE WORLD FOR APP ROVAL. THE REQUISITE DETAILS WERE ALSO FURNISHED, HOWEVER, THE ASSESSING OFFICER WAS NOT SATISFIED. IT WAS OBSERVED BY THE ASSESSING OFFICE R THAT THOUGH ASSESSEE HAD FURNISHED DETAILS OF EXPENDITURE BUT NO EVIDENC E OR DETAIL IN 3 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) RESPECT OF THE DESPATCH OF THE SAMPLES OR NAMES OF THE PARTIES WERE GIVEN AND IT WAS NOT EXPLAINED WHETHER THE PARTIES TO WHOM SAMPLES WERE GIVEN, PURCHASED ANY GOODS FROM THE ASSESSEE . ACCORDINGLY, THE ASSESSING OFFICER RESTRICTED THE EXPENSES TO 2.58% OF THE TOTAL SALES (WHICH WAS THE RATIO OF SAMPLING EXPENSES IN THE IM MEDIATELY PRECEDING YEAR) AND ACCORDINGLY, A SUM OF RS.35,04,272/- WAS DISALLOWED. 4. BEFORE CIT(A), THE ASSESSEE POINTED OUT THAT 99% OF ITS TOTAL SALES WERE BY WAY OF EXPORTS AND THE SALES WERE NOT MADE TO ANY RELATED PARTY. THEREFORE, THE EXPENDITURE ON SAMPLING COUL D NOT BE DISALLOWED AND IT WAS ALSO POINTED OUT THAT NO SUCH DISALLOWAN CE WAS MADE IN THE PAST OR IN THE SUBSEQUENT YEARS. THE CIT(A) NOTED THE SUBMISSIONS PUT- FORTH BY THE ASSESSEE AND HAS DELETED THE ADDITION ON THE GROUND THAT THERE WAS NO MATERIAL BROUGHT ON RECORD BY THE ASSE SSING OFFICER TO PROVE THAT THE EXPENSES UNDER THE HEAD SAMPLING WERE EITHER BOGUS OR INFLATED OR WERE NOT INCURRED FOR THE BUSIN ESS PURPOSES. AGAINST THE AFORESAID DECISION, THE REVENUE IS IN APPEAL BE FORE US. 5. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE APPEARING FOR THE REVENUE REITERATED THE OBJECTION TAKEN BY THE ASSESSING OFFICER, WHICH IS TO THE EFFECT THAT DURING THE ASSESSMENT PROCEEDINGS ASSESSEE HAD FAILED TO PROVIDE ANY EVIDENCE OR DETAILS OF SA MPLING EXPENSES. 6. LD. REPRESENTATIVE FOR THE RESPONDENT-ASSESSEE J USTIFIED THE DECISION OF THE CIT(A) AND HAS REFERRED TO THE DETA ILED SUBMISSIONS MADE BEFORE THE CIT(A), A COPY OF WHICH HAS BEEN PL ACED ON RECORD. LD. 4 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) REPRESENTATIVE FOR THE ASSESSEE ALSO POINTED OUT TH AT REQUISITE DETAILS OF SAMPLING EXPENSES WERE FURNISHED TO THE ASSESSIN G OFFICER AND IT WAS ALSO POINTED OUT THAT THERE WAS NO SUCH DISALLOWANC E EITHER IN THE PAST OR IN THE SUBSEQUENT YEARS. LD. REPRESENTATIVE FOR THE ASSESSEE HAD REFERRED TO A CHART SHOWING THE TURNOVER AND SAMPLE EXPENSES INCURRED FOR THE LAST 10 YEARS TO POINT OUT THAT THE RATIO O F SAMPLING EXPENSES OVER TURNOVER CANNOT BE STATIC AND IT VARIES, HAVIN G REGARD TO ASSESSEES NATURE OF BUSINESS. IN ANY CASE, IT IS ARGUED THAT THERE IS NO MATERIAL TO DOUBT THE SAMPLE EXPENSES CLAIMED BY THE ASSESSEE. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS. THE INCURRENCE OF SAMPLING EXPENSES IN THE COURSE OF A SSESSEES BUSINESS IS NOT THE SUBJECT MATTER OF DISPUTE BECAUSE THE ASSES SING OFFICER HAS NOT MADE WHOLESALE DISALLOWANCE BUT HAS MADE ONLY A PAR TIAL DISALLOWANCE. THE ASSESSING OFFICER WAS NOT CONVINCED WITH THE LE VEL OF SAMPLING EXPENSE INCURRED VIS-A-VIS THE AMOUNT INCURRED IN T HE PRECEDING ASSESSMENT YEAR. IN OUR CONSIDERED OPINION, THE VA RIATION IN THE LEVEL OF EXPENSES, VIS-A-VIS AN EARLIER YEAR CAN BE A GROUND TO FURTHER INVESTIGATE THE MATTER, BUT THE SAME BY ITSELF CANNOT BE A GROU ND TO DISALLOW ANY EXPENDITURE, SPECIALLY, WITHOUT BRINGING ON RECORD ANY INFIRMITY OR FALSITY IN THE CLAIM MADE BY THE ASSESSEE. IN THE PRESENT CASE, IN OUR VIEW, THE CIT(A) MADE NO MISTAKE IN DELETING THE DI SALLOWANCE OF RS.35,04,272/- MADE BY THE ASSESSING OFFICER , WHIC H WAS ESSENTIALLY AN ADHOC DISALLOWANCE BEREFT OF ANY FACTUAL SUPPORT. THUS, ON THIS ASPECT WE AFFIRM THE ORDER OF CIT(A) AND REVENUE FAILS. 5 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) 8. THE NEXT GROUND IN THE APPEAL OF THE REVENUE REL ATES TO A DISALLOWANCE OF RS.16,44,647/- MADE BY THE ASSESSIN G OFFICER ON ACCOUNT OF INTEREST EXPENDITURE UNDER SECTION 36(1) (III) OF THE ACT. IN THIS CONTEXT , BRIEF FACTS ARE THAT THE ASSESSING O FFICER NOTED THAT THE ASSESSEE HAD MADE INVESTMENT IN SHARES OF RS.64,74, 625/- AND HAD ALSO GIVEN INTEREST FREE LOANS TO ITS SISTER CONCERNS, N AMELY, M/S. PREMIER KNIT PROCESSORS PVT. LTD. RS. 4,49,43,996/- AND M /S. KAYTEE APEX LTD. RS.83,41,385/-. THE ASSESSING OFFICER ALSO NOTICED THAT ASSESSEE HAD DEBITED INTEREST EXPENDITURE OF RS.1,21,01,211/- IN ITS PROFIT & LOSS ACCOUNT. THE ASSESSING OFFICER DISALLOWED THE INTE REST PROPORTIONATE TO THE AFORESAID AMOUNT AND QUANTIFIED THE AMOUNT AT R S.16,34,647/- BY INVOKING SECTION 36(1)(III) OF THE ACT. 9. BEFORE CIT(A), ASSESSEE ASSAILED THE DISALLOWANC E OUT OF INTEREST EXPENDITURE ON FACTS AND IN LAW. WITH RESPECT TO T HE INTEREST FREE ADVANCES MADE TO THE SISTER CONCERNS, THE CIT(A) H AS UPHELD ASSESSEES ASSERTION THAT THE SAME WERE TRADE ADVANCES AND, TH EREFORE, NO INTEREST COULD BE DISALLOWED AS SUCH ADVANCES INVOLVED COMME RCIAL EXPEDIENCY. IN COMING TO SUCH CONCLUSION THE CIT(A) HAS RELIED UPON THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT, 288 ITR 1(SC). FURTHER, CIT(A) ALSO NOTED THAT ASSESSEE HA D SUFFICIENT OWN INTEREST FREE FUNDS TO COVER THE IMPUGNED ADVANCES AND, THEREFORE, NO DISALLOWANCE WAS CALLED FOR HAVING REGARD TO THE JU DGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RE LIANCE UTILITIES & POWER LTD., 313 ITR 340(BOM). AGAINST SUCH DECISIO N OF THE CIT(A), THE REVENUE IS IN APPEAL BEFORE US. 6 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) 10. BEFORE US, LD. DEPARTMENTAL REPRESENTATIVE APPE ARING FOR THE REVENUE HAS ASSAILED THE ORDER OF THE CIT(A) BY M ERELY REITERATING THE STAND OF THE ASSESSING OFFICER TO THE EFFECT THAT THE ASSESSEE-COMPANY WAS HAVING A COMMON KITTY OF FUNDS, BOTH INTEREST FREE AS WELL AS INTEREST BEARING, AND THEREFORE, INTEREST EXPENDITU RE PROPORTIONATE TO THE IMPUGNED AMOUNT WAS LIABLE TO BE DISALLOWED UND ER SECTION 36(1)(III) OF THE ACT. 11. ON THE OTHER HAND, LD. REPRESENTATIVE FOR THE A SSESSEE HAS DEFENDED THE ORDER OF THE CIT(A). AT THE OUTSET LD . REPRESENTATIVE FOR THE ASSESSEE REFERRED TO THE GROUND OF APPEAL RAISE D BY THE REVENUE WHICH REFERS TO THE INTEREST ATTRIBUTABLE FOR INV ESTMENT IN SHARES, WHEREAS THE DISALLOWANCE OF RS.16,34,647/- (ASSAILE D IN THE GROUND OF APPEAL) COMPRISES OF INTEREST ATTRIBUTABLE NOT ONL Y TO THE INVESTMENT IN SHARES BUT ALSO TO THE INTEREST FREE ADVANCES MADE BY THE ASSESSEE TO ITS SISTER CONCERNS, AND IN THIS CONTEXT, SHE HAS R EFERRED TO PARA-5.1 OF THE ASSESSMENT ORDER. BE THAT AS IT MAY, THE LD. R EPRESENTATIVE FOR THE ASSESSEE HAS REFERRED TO THE DETAILS PLACED IN THE PAPER BOOK TO SUBSTANTIATE THE FINDINGS OF THE CIT(A) THAT ADVANC ES TO THE SISTER CONCERNS WERE TRADE ADVANCES AND FURTHER, THAT ASS ESSEE HAD SUFFICIENT RESERVES & SURPLUS, SHARE CAPITAL AND INTEREST FREE ADVANCES TO COVER THE IMPUGNED INTEREST FREE ADVANCES TO THE SISTER C ONCERNS. 12. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. HAVING PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND ALS O THE WRITTEN SUBMISSIONS MADE BY THE ASSESSEE TO THE CIT(A), IT IS QUITE CLEAR THAT THE FACTUAL FINDINGS OF THE CIT(A) ARE BORNE OUT OF REC ORD. THE ANNUAL FINANCIAL STATEMENTS OF THE ASSESSEE, A COPY OF WH ICH HAS BEEN PLACED 7 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) AT PAGES 1 TO 35 OF THE PAPER BOOK, CLEARLY BRING O UT THE NATURE OF THE ADVANCES TO THE SISTER CONCERNS, BEING TRADE ADVAN CES. THE ASSESSEE- COMPANY HAD POINTED OUT BEFORE THE CIT(A) THAT TH E AMOUNT ADVANCED TO M/S. PREMIER KNIT PROCESSORS PVT. LTD. WAS FOR PURCHASING YARN OF REQUISITE QUALITY AND GETTING GARMENTS MANUFACTURE D AT VARIOUS FACTORIES AT TIRUPUR FOR SUPPLYING TO THE ASSESSEE. IT WAS ALSO POINTED OUT THAT THE SAID CONCERN WAS PROVIDING DYEING SERVICES TO THE ASSESSEE. IT WAS POINTED OUT THAT DUE TO SUCH ARRA NGEMENT, ASSESSEES JOB ORDERS GOT PRIORITY FROM M/S. PREMIER KNIT PROC ESSORS PVT. LTD. AND, THEREFORE, THERE WAS A MEASURE OF COMMERCIAL EXPED IENCY IN MAKING SUCH ADVANCES. FURTHER, WITH REGARD TO THE ADVANCE OF RS.83,41,385/- TO M/S. KAYTEE APEX LTD., IT WAS EXPLAINED THAT T HE AMOUNT WAS ADVANCED FOR SETTING-UP STITCHING FACILITY AT TIRU PUR, WHICH WAS EXCLUSIVELY PROVIDED TO THE ASSESSEE. THEREFORE, SUCH LOAN WAS FOR THE ULTIMATE ADVANCEMENT OF THE ASSESSEES BUSINESS OPE RATIONS AS IT FACILITATED TIMELY DELIVERY AND QUALITY OF PRODUCTS , WHICH WAS CRUCIAL FOR MEETING THE EXPORT OBLIGATIONS. THESE ASPECTS HAVE BEEN APPRECIATED BY THE CIT(A), AND IN OUR VIEW, THERE IS NO COGENT MATERIAL BEFORE US, WHICH WOULD REQUIRE US TO DISTRACT FROM ULTIMATE FI NDING OF THE CIT(A). 12.1 WITH REGARD TO THE INVESTMENT IN SHARES OF RS. 64,74,625/-, THE LD. REPRESENTATIVE FOR THE ASSESSEE EXPLAINED THAT ALL INVESTMENTS EXCEPT TO THE EXTENT OF RS.50,000/-, WERE MADE IN THE PAST YEARS AND THERE WAS NO DISALLOWANCE OUT OF INTEREST EXPENDITU RE IN THE PAST YEARS. ON THIS ASPECT ALSO, WE FIND NO REASON TO INTERFERE WITH THE DECISION OF THE CIT(A) IN DELETING THE DISALLOWANCE, AS NO NEXU S CAN BE ESTABLISHED 8 ITA NO. 2468/MUM/2012 (ASSESSMENT YEAR : 2005-06) BETWEEN THE INTEREST BEARING FUNDS AND THE INVESTME NT IN SHARES. THUS, ON THIS ASPECT ALSO THE ORDER OF THE CIT(A) I S AFFIRMED. 13. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20/11/2015. SD/- SD/- (RAM LAL NEGI) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT ME MBER MUMBAI, DATED 20/11/2015 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT , 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI VM , SR. PS