ACIT, Bangalore V. M/s Khoday India ltd., Bangalore

ITA 281/BANG/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73386 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-01-2014
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 23-01-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 27-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: PRISCILLA SINGSIT
• Assessee Lawyers: S SUKUMAR
• Keywords: Capital asset

Judgement Text

ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 1 OF 8 IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE C BENCH, BANGALORE BEFORE SHRI GEORGE GEORGE K. JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER ITA NO. 281/BANG/2012 (ASSESSMENT YEAR: 2008-09) ASSTT. COMMISSIONER OF INCOME TAX, CIRCLE 11(5) NO.14/3 5 TH FLOOR, NRUPATHUNGA ROAD, BANGALORE 560001 VS. M/S. KHODAY INDIA LTD., BREWERY HOUSE, 7 TH MILE KANAKPURA ROAD, BANGALORE 560002 PAN: AAACK 6734 C (APPELLANT) (RESPONDENT) DEPARTMENT BY: MS. PRISCILLA SINGSIT, (DR) ASSESSEE BY: SHRI S. SUKUMAR, CA DATE OF HEARING: 23/01/2014 DATE OF PRONOUNCEMENT: 30/01/2014 O R D E R PER GEORGE GEORGE K. J.M. 1. THIS APPEAL FILED BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF THE CIT (A)-I, BANGALORE, DATED 30.11. 2011. THE RELEVANT ASSESSMENT YEAR IS 2008-09. 2. THE REVENUE HAS, IN ITS MEMORANDUM OF APPEAL, RAISED A SOLITARY ISSUE, NAMELY, THAT THE CIT (A) WAS NOT JUSTIFIED IN DELETING THE ADDITION MADE U/S 36(1)(III) OF THE AC T, AMOUNTING TO RS.23,72,716/- BEING DISALLOWANCE OF I NTEREST ON THE AMOUNT BORROWED AND UTILIZED TO MADE ADVANCE FOR THE PURCHASE OF CAPITAL ASSETS. 3. BRIEFLY STATED, THE FACTS OF THE ISSUE ARE AS UNDER: ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 2 OF 8 THE ASSESSEE COMPANY IS IN THE BUSINESS OF MANUFACTURE AND TRADING OF IML, GLASS, PAPER AND ENGINEERING AC TIVITIES, TRADING OF COMPUTERS, SOFTWARE DEVELOPMENT, EMBEDDE D SOFTWARE SOLUTIONS AND CALL CENTRE. DURING THE COURSE OF AS SESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE HAD A DVANCED FOR PURCHASE OF CAPITAL ASSETS AMOUNTS TO THE TUNE OF RS.1,58,18,107/- . AFTER HAVING CONSIDERED THE DET AILS FURNISHED BY THE ASSESSEE, THE AO WAS OF THE VIEW THAT SUBSTA NTIAL AMOUNTS HAVE BEEN PAID TO VARIOUS ENTERPRISES FOR T HE PURCHASE OF CAPITAL GOODS. SIMILAR AMOUNTS OF ADVANCE FOR P URCHASE OF CAPITAL ASSETS HAVE CONTINUED IN THE LAST YEARS ALS O. CONSIDERING THE SAME, AN INTEREST AT 15% ON THOSE ADVANCES FOR CAPITAL GOODS WAS WORKED OUT AT RS.23,72,716/- AND THE SAME WAS D ISALLOWED FROM THE TOTAL INTEREST DEBITED FOR THE YEAR. 4. AGGRIEVED, THE ASSESSEE TOOK UP OF THE ISSUE, AMONG OTHERS, WITH THE CIT (A). AFTER HAVING CONSIDERED THE CONT ENTIONS PUT- FORTH BY THE ASSESSEE, THE CIT (A) HAD DELETED THE DISALLOWANCE OF INTEREST OF RS.23,72,716/-. THE RELEVANT PORTION O F THE FINDING OF THE CIT (A) IS REPRODUCED AS UNDER: 11.3. (ON PAGE 26)THE UNDISPUTED FACT IS THAT INTEREST BEARING BORROWED FUNDS HAD BEEN UTILIZED F OR PURCHASE OF DIFFERENT MACHINERIES LISTED IN PARA 10 OF THE ASSESSMENT ORDER. THE ARGUMENT OF THE AO IS TH AT INTEREST PAID HAD BEEN SPENT ON ACQUISITION OF CAPI TAL ASSETS AND, THEREFORE, HAS TO BE DISALLOWED. THE A .R ON THE OTHER HAND ARGUED THAT THE MACHINERIES ETC., WERE UTILIZED ULTIMATELY FOR THE PURPOSE OF BUSINES S OF MANUFACTURE OF LIQUOR AND, THEREFORE, THE INTEREST PAID HAS TO BE ALLOWED U/S 36(1)(III) OF I.T. ACT EVEN I F SPENT ON ACQUISITION OF MACHINERIES. I FIND STRENGTH AND MERIT IN THE ARGUMENT OF THE A R. FOR SUCH ALLOWAN CE, THREE CONDITIONS MUST GET FULFILLED ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 3 OF 8 (I) FIRSTLY, THE MONEY OR CAPITAL MUST HAS BEEN BORROWED BY THE ASSESSEE (II) SECONDLY, IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS; AND (III) THE ASSESSEE MUST HAVE PAID INTEREST ON THE BORROWED FUND. THE PROVISIONS OF SEC. 36(1)(III) DOES NOT MAKE ANY DISTINCTION BETWEEN CAPITAL BORROWED FOR REVENUE PURPOSE OR CAPITAL PURPOSE. HERE THE AO HAS STOPPE D SHORT OF THE ULTIMATE UTILIZATION OF BORROWED FUND AND, THEREFORE, HAS FAILED TO SEE THAT THE RIVER OF LOAN FUNDS HAD INTERMINGLED WITH THE SEA OF DISTILLERY BUSINES S. 11.4. IN VIEW OF THE ABOVE DISCUSSION, THE ADD ITION IS DELETED 5. AGGRIEVED, THE REVENUE HAS COME UP BEFORE US WI TH THE PRESENT APPEAL. DURING THE COURSE OF HEARING, THE LEARNED D.R SUBMITTED THAT THE CIT (A) HAD ERRED IN ALLOWIN G THE RELIEF WITHOUT APPRECIATING THAT AS PER THE PROVISO TO S. 36(1)(III) OF THE ACT, INTEREST PAID IN RESPECT OF THE CAPITAL BORROW ED FOR ACQUISITION OF CAPITAL ASSET, FROM THE PERIOD BEGI NNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISIT ION OF THE ASSET TILL THE DATE ON WHICH SUCH ASSET WAS FIRST P UT TO USE, SHALL NOT BE ALLOWED AS DEDUCTION. IT WAS, FURTHER, SUBM ITTED THAT THE CIT (A) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAD MADE ADVANCES OUT OF INTEREST BEARING BORROWED CAPI TAL, FOR PURCHASE OF CAPITAL ASSETS AND THAT THE FACTS SUGGE ST THAT THE CAPITAL ASSETS WERE NOT PUT TO USE DURING THE PREVI OUS YEAR UNDER CONSIDERATION. IT WAS, THEREFORE, PLEADED THAT THE ADDITION MADE U/S 36(1)(III) OF THE ACT AMOUNTING TO RS.23.72 LAK HS BY THE AO REQUIRES TO BE RESTORED. 5.1. ON THE OTHER HAND, THE LEARNED AR REIT ERATED MORE OR LESS WHAT HAS BEEN REPRESENTED BEFORE THE FIRST APP ELLATE ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 4 OF 8 AUTHORITY. IN FURTHERANCE, IT WAS SUBMITTED THAT T HE AO HAD ERRONEOUSLY PRESUMED THAT THE ADVANCES WERE MADE DU RING THE YEAR AND ADVANCED OUT OF BORROWED FUNDS. IT WAS, F URTHER, SUBMITTED THAT AS COULD BE SEEN FROM THE DETAILS OF PAYMENTS MADE [DATE-WISE AS WELL AS YEAR-WISE], MOST OF THE ADVANCES WERE MADE IN THE EARLIER YEAR ITSELF AND THAT THE MAJOR ADVANCE OF RS.61.97 LAKHS PAID TO M/S. ANJANEYA SAGAR WAS TOWA RDS PURCHASE OF LAND FOR SUGAR MILL. LIKEWISE, IT WAS SUBMITTED, AN ADVANCE PAID TO ASIAN STEEL WAS FOR PURCHASE OF STE EL AND ADVANCE PAID TO PAHARPUR COOLING WAS FOR INSTALLATI ON OF COOLING TOWER. IT WAS, THEREFORE, SUBMITTED THAT ALL THE A DVANCES MADE WERE FOR THE PURPOSE OF BUSINESS WHICH WERE MADE IN THE EARLIER YEAR. DRAWING THE ATTENTION OF THIS BENCH, THE LEA RNED AR SUBMITTED THAT WITHOUT ESTABLISHING ANY NEXUS THAT THE ABOVE ADVANCES WERE MADE OUT OF THE BORROWED FUNDS, THE A O WENT AHEAD IN DISALLOWING A PART OF INTEREST CLAIMED ON THE PRESUMPTION THAT THOSE ADVANCES WERE MADE OUT OF TH E BORROWED FUNDS. IT WAS URGED THAT SINCE THE ADVANCES WERE PA ID FOR PURCHASE OF ASSETS IN THE COURSE OF BUSINESS AND FO R THE PURPOSE OF BUSINESS, NO DISALLOWANCE OF INTEREST ON THE SAM E WAS CALLED FOR. TO SUBSTANTIATE HIS ARGUMENT, THE LEARNED A R HAD PLACED RELIANCE ON THE FOLLOWING CASE LAWS, NAMELY: (I) RAKIT & COLEMAN OF INDIA LTD V. CIT (1982) 135 ITR 698 (CAL); (II) BRITISH PAINTS (INDIA) LTD V. CIT (1991) 190 ITR 19 6 (CAL); (III) EAST INDIA PHARMACEUTICAL WORKS V. CIT (1997) 224 ITR 627 (SC) (IV) V.M.SALGAOCAR & BROTHERS (P) LTD V. CIT (2000) 243 CTR 383 (SC) & (V) S.A. BUILDERS LTD V. CIT (2007) 288 ITR 1 ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 5 OF 8 6. WE HAVE CAREFULLY CONSIDERED THE SUBMIS SIONS OF BOTH THE PARTIES AND PERUSED THE RELEVANT MATERIALS ON R ECORD AND ALSO THE CASE LAWS ON WHICH THE LEARNED AR PLACED S TRONG RELIANCE. IT WAS A FACT THAT THE ASSESSEE HAD MADE ADVANCES FOR PURCHASE OF CAPITAL ASSETS AS LISTED OUT AT PARAGRA PH 10 OF THE ASSESSMENT ORDER. IT WAS THE STAND OF THE AO THAT SUBSTANTIAL AMOUNTS HAVE BEEN PAID BY THE ASSESSEE TO VARIOUS E NTERPRISES FOR THE PURCHASE OF CAPITAL GOODS AND, THUS, INTERE ST ON SUCH ADVANCES HAD TO BE DISALLOWED. DISPUTING THE AOS VIEW, THE LEARNED AR TOOK A STAND THAT THE MACHINERIES AND OT HER MATERIALS WERE ULTIMATELY UTILIZED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND, THUS, INTEREST PAID ON SUCH B ORROWED FUNDS HAD TO BE ALLOWED U/S 36(1)(III) OF THE ACT EVEN TH OUGH THE FUNDS WERE SPENT ON ACQUISITION OF MACHINERIES ETC. WE FI ND SUBSTANTIAL FORCE AND MERIT IN THE ARGUMENT OF THE LEARNED A.R. TO AVAIL DEDUCTION U/S 36(1)(III) OF THE ACT IN RES PECT OF INTEREST ON BORROWED CAPITAL, AS RIGHTLY HIGHLIGHTED BY THE CIT (A) IN HIS FINDINGS, THE ASSESSEE HAS TO FULFILL THREE CONDITI ONS PRESCRIBED, NAMELY: (A) THAT MONEY (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSESSEE; (B) THAT IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS; & (C) THAT THE ASSESSEE MUST HAVE PAID INTEREST ON THE SA ID AMOUNT AND CLAIMED IT AS A DEDUCTION. 6.1. IN THE PRESENT CASE, ALL THE ABOVE THREE CO NDITIONS PRESCRIBED IN S. 36(1)(III) OF THE ACT HAVE SINCE B EEN FULFILLED, THE AO WAS NOT JUSTIFIED IN DISALLOWING THE INTEREST DE BITED TO P&L A/C BY 15% ON ADHOC BASIS. A DISALLOWANCE CANNOT B E RESORTED TO FOR THE SAKE OF DISALLOWING A PORTION OF THE CLA IM OF AN ASSESSEE WITHOUT ADDUCING A CREDIBLE DOCUMENTARY PR OOF ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 6 OF 8 JUSTIFYING FOR SUCH A DISALLOWANCE. THE AO HAD NOT BROUGHT ON RECORD ANY DOCUMENTARY EVIDENCE TO CONTRADICT THAT THE ASSESSEE HAD FULFILLED THE CONDITIONS CONTAINED IN S. 36(1)( III) OF THE ACT. 6.2. WE SHALL NOW ANALYSE THE JUDICIAL VIEW ON A SIMILAR ISSUE AS UNDER: (I) IN THE CASE OF MADHAV PRASAD JATIA V. CIT (197 9) 118 ITR 200 (SC), THE HONBLE SUPREME COURT HAS HELD AS UND ER: UNDER S. 10(2)(III), THREE CONDITIONS ARE REQUIRED TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDUCTION IN RESPECT OF INTEREST ON BORROWED CAPITA L, NAMELY, (A) THAT MONEY (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSESSEE, (B) THAT IT MUST HAVE BEE N BORROWED FOR THE PURPOSE OF BUSINESS, AND (C) THAT THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT CANNOT BE DISPUTED THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING IN S. 10(2)(III) AND ALSO IN S. 10(2)(XV) IS WIDER IN SCOPE THAN THE EXPRESSION 'FO R THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS' OCCURRING IN S. 12(2) AND, THEREFORE, THE SCOPE FOR ALLOWING A DEDUCTION UNDER S. 10(2)(III) OR S. 10(2 )(XV) WOULD BE MUCH WIDER THAN THE ONE AVAILABLE UNDER S. 12(2).CIT VS. MALAYALAM PLANTATIONS LTD. (1964) 53 ITR 140 (SC) RELIED ON. (II) THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF D & H SECHERON ELECTRODES PVT. LTD V. CIT (1983) 14 2 ITR 528 (MP) HAS RULED AS UNDER: UNDER S. 36(1)(III), TO SUSTAIN A CLAIM FOR DEDUCT ION OF THE AMOUNT OF INTEREST, ALL THAT IS NECESSARY IS TH AT THE CAPITAL MUST HAVE BEEN BORROWED BY THE ASSESSEE; SECONDLY, IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF THE BUSINESS OR PROFESSION OF THE ASSESSEE AND, THIRDLY, THAT THE ASSESSEE SHOULD HAV E PAID THAT AMOUNT BY WAY OF INTEREST. IN THE INSTANT CASE, THE TRIBUNAL HAS NOT GIVEN ANY FINDING HOLDIN G THAT THE CONDITIONS REQUIRED TO BE SATISFIED UNDER S. ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 7 OF 8 36(1)(III) WERE NOT FULFILLED. THE ONLY GROUND, FOR DISALLOWING A PART OF THE INTEREST, GIVEN BY THE TRIBUNAL WAS THAT THE ASSESSEE HAD NOT CHOSEN TO CHARGE INTEREST ON ADVANCES MADE TO THE THREE CONCERNS. THE CONTENTION URGED ON BEHALF OF THE DEPARTMENT, IN THE INSTANT CASE, THAT A PART OF THE CAPITAL BORROWED BY THE ASSESSEE WAS NOT FOR THE PURPOSE OF THE BUSINESS, CANNOT BE CONSIDERED BECAUSE THAT IS NOT THE FINDING OF THE TRIBUNAL. AL L THAT THE TRIBUNAL HAS FOUND IS THAT THE ASSESSEE WA S NOT ENTITLED TO CLAIM DEDUCTION IN RESPECT OF A PAR T OF THE INTEREST, AS THE ASSESSEE HAD NOT CHARGED INTEREST TO THE THREE SISTER CONCERNS, TO WHOM ADVANCES WERE MADE. THIS GROUND CANNOT JUSTIFY DISALLOWANCE OF INTEREST. (III) THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V. INSOTEX (PRIVATE) LTD. (1984) 150 ITR 0195 (KAR) HA S HELD AS UNDER: THE ASSESSEE HAD A RUNNING BUSINESS. THE CAPITAL BORROWED BY THE ASSESSEE WAS ADMITTEDLY USED FOR PURCHASING NEW MACHINERY AND LAND. FOR GIVING THE BENEFIT OF S. 36(1)(III) TO THE ASSESSEE, WHAT IS NECESSARY TO EXAMINE IS WHETHER THE ASSESSEE HAS USED THE BORROWED CAPITAL FOR THE PURPOSE OF BUSINE SS. IF THAT IS FOUND (TO BE) TRUE, THEN, ONE NEED NOT E XAMINE FURTHER AS TO WHETHER THE ASSET PURCHASED FROM BORROWED CAPITAL HAS BEEN IN FACT USED BY THE ASSESSEE.CALICO& DYEING AND PRINTING WORKS VS. CIT (1958) 34 ITR 265 (BOM) : TC15R.907 FOLLOWED; CHALLAPALI SUGAR LTD. VS. CIT 1974 CTR (SC) 309 : (1975) 98 ITR 167 (SC) DISTINGUISHED. (IV) YET ANOTHER JUDGMENT, THE HONBLE JURISDICTIO NAL HIGH COURT IN C.T.DESAI V. CIT (1979) 120 ITR 240 (KAR) RULED THAT - 12. SEC. 36(1)(III) OF THE ACT IS ANALOGOUS TO S. 5(E) OF THE MADRAS ACT AND S. 10(2)(III) AND (IV) OF THE IN DIAN IT ACT, 1922. HENCE, THE ABOVE PRINCIPLE EQUALLY APPLI ES TO THE PRESENT CASE. THERE CAN BE NO DISTINCTION BETWEEN INTEREST PAID ON CAPITAL IF BORROWED BY THE ASSESSEE FOR HIS FILM DISTRIBUTION BUSINESS AND THE INTEREST ON THE CAPITAL FOR THE ACQUISITION OF THE LEASE OF ITA NO.281 OF 2012 KHODAY INDIA LTD BANGALORE PAGE 8 OF 8 THEATRE FOR CARRYING ON THE BUSINESS OF EXHIBITION. BOTH ARE FOR PURPOSES HIS FILM BUSINESS, AND DEDUCTIBLE UNDER S. 36(1)(III) OF THE ACT WHILE COMPUTING HIS PROFITS AND GAINS OF BUSINESS. 6.3. TAKING INTO ACCOUNT THE FACTS AND CIRCUMST ANCES OF THE ISSUE AS DELIBERATED UPON IN THE FORE-GOING PARAGRA PHS AND ALSO IN CONFORMITY WITH THE JUDICIAL VIEWS (SUPRA), WE A RE OF THE VIEW THAT THE CIT (A) WAS JUSTIFIED IN DELETING THE ADDI TION MADE BY THE AO. IT IS ORDERED ACCORDINGLY. 7. IN THE RESULT, THE REVENUES APPEAL IS DISM ISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH JANUARY, 2014. SD/- SD/- (JASON P. BOAZ) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER BANGALORE DATED 30 TH JANUARY, 2014. VNODAN/SPS COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CONCERNED CIT(A) 4. THE CONCERNED CIT 5. THE DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCHES, BANGALORE