ACIT, Kottayam V. Sri P.A.Jose, Kottayam

ITA 282/COCH/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 2563 (ITAT-COCHIN)
• Duration Of Justice: 3 year(s) 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2013
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 17-10-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 23-04-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SUSAN GEORGE VARGHESE
• Assessee Lawyers: R KRISHNA IYER
• Keywords: Capital asset; Business income; Depreciation; Business expenditure; Proportionate interest; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 80G; 32; 37

Judgement Text

1 ITA NO. 233 & 282/COCH/2010 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKA RAN(AM) I.T.A NO. 233/COCH/2010 (ASSESSMENT YEAR 2007-08) P.A. JOSE VS THE A.C.I.T., CIR.1 PROP OF JOSCO FASHION JEWELLERS KOTTAYAM PAYYAPPALLI HOUSE THIRUVATHUKKAL KOTTAYAM PAN : ACBPA3391B (APPELLANT) (RESPONDENT) I.T.A NO. 282/COCH/2010 (ASSESSMENT YEAR 2007-08) THE A.C.I.T., CIR. VS SHRI P.A. JOSE KOTTAYAM THIRUVATHUKKAL KOTTAYAM (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI R KRISHNA IYER REVENUE BY : SMT. SUSAN GEORGE VARGHESE DATE OF HEARING : 25-03-2013 DATE OF PRONOUNCEMENT : 07-06-2013 2 ITA NO. 233 & 282/COCH/2010 O R D E R PER N.R.S. GANESAN (JM) THE ASSESSEE AND THE REVENUE FILED THE APPEALS AGA INST THE ORDER OF THE CIT(A)-IV, KOCHI DATED 18-02-2010 FOR THE ASSES SMENT YEAR 2007-08. THEREFORE, WE HEARD BOTH THE APPEALS TOGETHER AND D ISPOSE OF THE SAME BY THIS COMMON ORDER. 2. LET US FIRST TAKE THE ASSESSEES APPEAL IN ITA N O.233/COCH/2010. 3. THE FIRST ISSUE ARISES FOR CONSIDERATION IN THE ASSESSEES APPEAL IS DISALLOWANCE OF RS. 15,04,000. 4. SHRI R KRISHNA IYER, THE LD.REPRESENTATIVE FOR T HE ASSESSEE SUBMITTED THAT THE ASSESSEE HAS TAKEN ON LEASE NEW PREMISES A ND INCURRED THE EXPENDITURE FOR SETTING UP A NEW BRANCH. ACCORDING TO THE LD.REPRESENTATIVE, THE LEASE PERIOD IS 15 YEARS. T HE INTERIOR WORK WAS CARRIED OUT ON THE BUILDING. ACCORDING TO THE LD.R EPRESENTATIVE, THE BUILDING BELONGS TO THIRD PARTY AND THE ASSESSEE HAS NO RIGH T OF OWNERSHIP OVER THE PREMISES. THE INTERIOR WORK CARRIED OUT BY THE ASS ESSEE IN A BUILDING 3 ITA NO. 233 & 282/COCH/2010 BELONGING TO THIRD PERSON CANNOT BE TREATED AS CAPI TAL EXPENDITURE. ACCORDING TO THE LD.REPRESENTATIVE, THE EXPENDITURE INCURRED BY THE ASSESSEE IS REQUIRED FOR THE BUSINESS OF THE ASSESS EE. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE INTERIOR WORK CARRIED OU T BY THE ASSESSEE IS PART AND PARCEL OF THE STRUCTURE OF THE BUILDING WHICH B ELONGS TO SOMEBODY ELSE. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE IN TERIOR WORK CANNOT BE DETACHED FROM THE SUPER STRUCTURE AND IT HAS NO VAL UE. THE LD.REPRESENTATIVE PLACED HIS RELIANCE ON THE JUDGME NT OF THE APEX COURT IN THE CASE OF CIT VS MADRAS AUTO SERVICE (P) LTD (199 8) 233 ITR 468 (SC). REFERRING TO EXPLANATION 1 TO SECTION 32(1) OF THE INCOME-TAX ACT, 1961, THE LD.REPRESENTATIVE SUBMITTED THAT CURRENT REPAIRS SHALL NOT INCLUDE ANY EXPENDITURE IN THE NATURE OF CAPITAL. 5. THE LD.REPRESENTATIVE FOR THE ASSESSEE FURTHER S UBMITTED THAT THE INTERIOR WORK, REPAIR, REPLACEMENT IN THE SHOWROOM NEEDS TO BE CARRIED OUT FROM TIME TO TIME. THE WORK CARRIED OUT BY THE ASS ESSEE WILL LAST ONLY FOR 2 TO 3 YEARS. REFERRING TO THE JUDGMENT OF THE KERAL A HIGH COURT IN CIT VS PREMIER COTTON SPINNING MILLS LTD 223 ITR 440 (KER) , THE LD.REPRESENTATIVE SUBMITTED THAT UNLESS AN ASSET WAS BROUGHT INTO EXI STENCE BY INCURRING THE 4 ITA NO. 233 & 282/COCH/2010 EXPENDITURE IT CANNOT BE SAID THAT THE ASSESSEE ACQ UIRED AN ENDURING ADVANTAGE FOR THE BUSINESS. THE LD.REPRESENTATIVE HAS ALSO PLACED RELIANCE ON THE DECISION OF THE HYDERABAD BENCH OF THIS TRIB UNAL IN THE CASE OF CHAYA LAKSHMI CREATIONS PVT LTD (2010) 40 SOT 513 ( HYD). 6. ON THE CONTRARY, SMT. SUSAN GEORGE VARGHESE, THE LD.DR SUBMITTED THAT ADMITTEDLY, THE ASSESSEE TOOK THE PREMISES ON LEASE AND INCURRED EXPENDITURE FOR MAKING IT FIT FOR ESTABLISHING A NE W SHOW ROOM. THIS EXPENDITURE, ACCORDING TO THE LD.DR, EXPANDS THE CA PITAL BASE OF THE ASSESSEE. THE LD.DR FURTHER POINTED OUT THAT THIS IS NOT AN EXPENDITURE INCURRED IN THE COURSE OF BUSINESS ACTIVITY FOR THE PURPOSE OF EARNING PROFIT, BUT FOR THE PURPOSE OF EXPANDING THE PROFIT MAKING APPARATUS WHICH WILL, IN TURN, EXPAND THE CAPITAL BASE OF THE ASSESSEE. THE REFORE, ACCORDING TO THE LD.DR, THE EXPENDITURE INCURRED BY THE ASSESSEE IS FOR THE PURPOSE OF CREATING A CAPITAL ASSET BY ESTABLISHING A NEW SHOW ROOM. ONCE THE EXPENDITURE WAS INCURRED FOR THE FIRST TIME TO ESTA BLISH AND SET UP A SHOW ROOM, ACCORDING TO THE LD.DR, THE EXPENDITURE HAS T O BE TREATED AS CAPITAL IN NATURE. THE LD.DR PLACED HER RELIANCE ON THE JU DGMENT OF THE KARNATAKA HIGH COURT IN THE CASE OF SENAPATHY SYNAMS INSULATI ONS (P) LTD VS CIT 248 5 ITA NO. 233 & 282/COCH/2010 ITR 656 (KAR) 248 ITR 656. THE LD.DR HAS ALSO PLAC ED RELIANCE ON THE JUDGMENT OF THE DELHI HIGH COURT IN MODI SPINNING & WEAVING MILLS CO LTD VS CIT (DEL) 200 ITR 544 AND DELHI CLOTH & GENERAL MILLS CO LTD VS ADDL CIT 160 ITR 857. THE LD.DR FURTHER RELIED UPON THE DEC ISION OF THE BANGALORE BENCH OF THIS TRIBUNAL IN M.N. DASTUR & CO LTD VS D CIT 62 ITD 113 AND MUMBAI BENCH OF THIS TRIBUNAL IN THE CASE OF PRITAM JUICE 124 ITD 237. 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. IT IS NO T IN DISPUTE THAT THE ASSESSEE TOOK THE PREMISES ON LEASE. THE LEASE PER IOD IS 15 YEARS WITH AN OPTION TO EXTEND THE SAME FOR FURTHER PERIOD. THE INTENTION OF THE ASSESSEE IN TAKING THE PREMISES ON LEASE IS TO SET UP A NEW SHOW ROOM IN THE LEASE PREMISES. AFTER TAKING THE PREMISES ON LEASE, THE ASSESSEE INCURRED THE EXPENDITURE IN INTERIOR DECORATION LIKE FALSE CEILI NG, RACKS, CHANGE OF FLOORING, ETC. THE QUESTION ARISES FOR CONSIDERATI ON IS WHEN THE ASSESSEE INCURRED THE EXPENDITURE ON THE LEASED PREMISES FOR THE FIRST TIME TO SET UP THE SHOW ROOM, WHETHER IT HAS TO BE TREATED AS CAPI TAL EXPENDITURE OR REVENUE EXPENDITURE? IT IS WELL SETTLED PRINCIPLES OF LAW THAT ANY EXPENDITURE INCURRED IN THE COURSE OF BUSINESS FOR THE PURPOSE OF EARNING 6 ITA NO. 233 & 282/COCH/2010 PROFIT HAS TO BE TREATED AS REVENUE EXPENDITURE. H OWEVER, IF THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF ACQUISI TION OF A CAPITAL ASSET, THE SAME HAS TO BE TREATED AS CAPITAL IN NATURE. 8. LET US NOW EXAMINE WHETHER THE EXPENDITURE INCUR RED BY THE ASSESSEE FOR THE PURPOSE OF ESTABLISHING A NEW SHOW ROOM IS IN THE COURSE OF EARNING PROFIT / IN THE COURSE OF BUSINESS OR I T IS AN EXPENDITURE FOR ESTABLISHMENT OF A CAPITAL ASSET. SETTING UP OF A NEW SHOW ROOM IS AN EXPANSION OF THE EXISTING BUSINESS. IT INCREASES T HE CAPITAL BASE OF THE ASSESSEE FOR DOING THE BUSINESS. IN OTHER WORDS, T HE ESTABLISHMENT OF A NEW SHOW ROOM EXPANDS THE PROFIT MAKING APPARATUS O F THE ASSESSEE. AS A RESULT OF THIS EXPENDITURE, A NEW SHOW ROOM WHICH I S A CAPITAL ASSET CAME INTO EXISTENCE. THOUGH THE BUILDING BELONGS TO THIR D PARTY, THE ASSESSEE HAD THE BENEFIT OF DOING BUSINESS IN THE NEW SHOW ROOM BY USING THE SAME AS CAPITAL ASSET. IT IS TO BE REMEMBERED THAT LEASE I S ALSO A TRANSACTION IN THE IMMOVABLE PROPERTY. THOUGH THE ENTIRE TITLE ON THE PROPERTY IS NOT TRANSFERRED DURING THE COURSE OF LEASE, AN INTEREST IN THE PROPERTY WAS TRANSFERRED IN FAVOUR OF THE ASSESSEE DURING THE LE ASE PERIOD. THE ASSESSEE WOULD BE IN PHYSICAL POSSESSION OF THE PROPERTY ON PAYMENT OF THE AGREED 7 ITA NO. 233 & 282/COCH/2010 AMOUNT AS LEASE RENT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE EXPENDITURE INCURRED BY THE ASSESSEE RESUL TED IN EXPANSION OF THE CAPITAL BASE OF THE ASSESSEE. IN OTHER WORDS, IT R ESULTED IN EXPANSION OF THE PROFIT MAKING APPARATUS. THEREFORE, THE EXPENDITUR E INCURRED BY THE ASSESSEE FOR INTERIOR DECORATION AND OTHER WORKS ON THE LEASED PREMISES FOR THE FIRST TIME FOR THE PURPOSE OF SETTING UP OF BUS INESS IS NOT IN THE COURSE OF PROFIT EARNING PROCESS, BUT IN THE COURSE OF EST ABLISHING A NEW CAPITAL ASSET / PROFIT EARNING APPARATUS. THEREFORE, THE E XPENDITURE INCURRED BY THE ASSESSEE HAS TO BE TREATED AS CAPITAL IN NATURE . 9. WE HAVE CAREFULLY GONE THROUGH THE DECISION OF T HE HYDERABAD BENCH OF THIS TRIBUNAL IN THE CASE OF CHAYA LAKSHMI CREAT IONS (P) LTD (SUPRA). THE ASSESSEE HAS TAKEN FIVE CINEMA THEATRES IN A THEATR E COMPLEX ON LEASE FROM SATYAM SAYI CORPORATION FOR EXHIBITION OF FEATURE F ILMS. AFTER TAKING THE PREMISES ON LEASE, THE ASSESSEE CARRIED ON THE BUSI NESS OF EXHIBITION OF FILMS. DURING THE LEASE PERIOD THE ASSESSEE INCURR ED EXPENDITURE ON REPAIR OF THEATRE COMPLEX SUCH AS CHANGE OF FLOOR TILES, F ALSE CEILING, LANDSCAPING, CHAIRS, EARTH FILLING WORKS, UNDER GROUND SUMP REPA IRING, DRAINAGE AND CABLE WORKS, WALL PAPER FIXING, DUST OPENING, CARPENTRY, PLUMBING WORKS, FALSE 8 ITA NO. 233 & 282/COCH/2010 CEILING REPAIR, SEAT REPAIR, PEST CONTROL, HOUSE KE EPING MATERIAL, THEATRE CLEANING, CHARGES ON BANDOBUST AND FIXING OF CHAIRS , REPAIRING OF COMPOUND WALL, WATER ROOFING OF CEILING, INTERIOR PAINTING, PAYMENT TO TEMPORARY STAFF, MAINTENANCE OF GENERATOR AND OTHER OFFICE EQUIPMENT S, ETC. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE ON THE GROUND THAT THE MAJOR RENOVATION AND MODERNIZATION OF THE THEATRE COMPLEX WAS DONE. REFERRING TO EXPLANATION 1 TO SECTION 32(1) OF THE ACT, THE A SSESSING OFFICER FOUND THAT THE ASSESSEE HAS INCURRED CAPITAL EXPENDITURE AND A CCORDINGLY ALLOWED DEPRECIATION AT 10%. HOWEVER, THE CIT(A) FOUND THA T THE ASSESSEE HAS INCURRED THE EXPENDITURE FOR THE PURPOSE OF MAINTAI NING THE CINEMA THEATRE IN THE COURSE OF ITS BUSINESS ACTIVITY, THEREFORE, IT IS A REVENUE EXPENDITURE. ON APPEAL BY THE REVENUE, THE HYDERABAD BENCH OF TH IS TRIBUNAL EXAMINED THE SCOPE OF EXPLANATION 1 TO SECTION 32(1) WHICH W AS INTRODUCED BY TAXATION LAWS (AMENDMENT & MISCELLANEOUS PROVISIONS ) ACT, 1986 WITH EFFECT FROM 01-04-1988 AND THE LEGISLATIVE HISTORY OF INTRODUCTION OF EXPLANATION 1 TO SECTION 32(1) AND FOUND THAT THE P OSITION OF LAW AS IT REMAINED AFTER INTRODUCTION OF SECTION 32(1A) WITH EFFECT FROM 01-04-1971 CONTINUED TO BE THE SAME IN RESPECT OF REVENUE EXPE NDITURE INCURRED BY THE ASSESSEE ON THE PREMISES TAKEN ON LEASE. THE H YDERABAD BENCH OF THIS 9 ITA NO. 233 & 282/COCH/2010 TRIBUNAL FURTHER FOUND THAT WHENEVER THE ASSESSEE I NCURRED THE EXPENDITURE IN THE PROCESS OF EARNING OF PROFIT WHI LE CARRYING ON THE BUSINESS IN THE LEASED PREMISES, THE EXPENDITURE HA S TO BE TREATED AS REVENUE EXPENDITURE AND NEITHER SECTION 32(1A) OR E XPLANATION 1 TO SECTION 32 WOULD COME IN THE WAY OF ALLOWING THE SAME AS RE VENUE EXPENDITURE. HOWEVER, IN CASE, THE ASSESSEE INCURRED THE EXPENDI TURE WHICH IS OF A CAPITAL NATURE, THEN, THE ASSESSEE HAS THE BENEFIT OF CLAIMING DEPRECIATION ON SUCH CAPITAL EXPENDITURE IN RELATION TO RENOVATI ON, EXTENSION OR IMPROVEMENT WITH EFFECT FROM 01-04-1971 U/S 32(1A) AND UNDER THE EXPLANATION 1 TO SEC.32 W.E.F. 1.4.1988. THE HYDER ABAD BENCH OF THIS TRIBUNAL PLACED ITS RELIANCE ON THE JUDGMENT OF THE APEX COURT IN EMPIRE JUTE CO. LTD VS CIT (1980) 124 ITR 1 (SC). IN THE CASE BEFORE THE HYDERABAD BENCH OF THIS TRIBUNAL, THE EXPENDITURE WAS INCURRE D IN THE COURSE OF RUNNING THE CINEMA THEATRE. THE TRIBUNAL FOUND THA T AS A RESULT OF THE EXPENDITURE INCURRED BY THE ASSESSEE, THE CINEMA TH EATRE REMAINS A CINEMA THEATRE AND THE SEATING CAPACITY DID NOT INCREASE. THE TRIBUNAL FOUND THAT THE ASSESSEE MIGHT HAVE CARRIED ON THE BUSINESS IN A PROFITABLE MANNER. THEREFORE, THE ASSESSEE HAS NOT OBTAINED ANY ADVANT AGE IN THE CAPITAL FIELD. HOWEVER, IN THE CASE BEFORE US, THE BUSINESS WAS NO T COMMENCED IN THE 10 ITA NO. 233 & 282/COCH/2010 NEW PREMISES. IN THE CASE BEFORE US, THE ASSET WAS NOT AN EXISTING ASSET; NOR WAS THE EXPENDITURE INCURRED FOR MAINTENANCE OF THE EXISTING ASSET. RATHER, IT WAS FOR THE PURPOSE OF ESTABLISHING A NE W ASSET. THEREFORE, THE EXPENDITURE INCURRED FOR THE FIRST TIME IN THE LEAS E PREMISES FOR THE PURPOSE OF ESTABLISHING A NEW SHOW ROOM HAS TO BE TREATED A S CAPITAL EXPENDITURE. HENCE, THE DECISION OF THE HYDERABAD BENCH OF THIS TRIBUNAL IN THE CASE OF CHAYA LAKSHMI CREATIONS (P) LTD (SUPRA) MAY NOT BE OF ANY ASSISTANCE TO THE ASSESSEE. THE MATTER WOULD HAVE BEEN ENTIRELY DIFF ERENT HAD THE ASSESSEE INCURRED SIMILAR KIND OF EXPENDITURE AFTER ESTABLIS HING THE NEW SHOW ROOM AND RUNNING THE BUSINESS FOR 2 3 YEARS. SINCE IT IS AN INITIAL EXPENDITURE FOR ESTABLISHING A SHOW ROOM, THIS TRIBUNAL IS OF T HE CONSIDERED OPINION THAT THE DECISION OF THE HYDERABAD BENCH OF THIS TRIBUNA L IN THE CASE OF CHAYA LAKSHMI CREATIONS (P) LTD MAY NOT BE OF ANY ASSISTA NCE TO THE ASSESSEE. 10. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMEN T OF THE KERALA HIGH COURT IN THE CASE OF PREMIER COTTON SPINNING MILLS LTD (SUPRA). IN THE CASE BEFORE THE KERALA HIGH COURT, THE ASSESSEE COMPANY FORMULATED A SCHEME FOR PROVIDING HOUSES TO ITS EMPLOYEES. THE LAND B ELONGING TO THIRD PARTIES WAS DIVIDED INTO PLOTS AND ALLOTTED TO THE EMPLOYEE S. THE ASSESSEE 11 ITA NO. 233 & 282/COCH/2010 COMPANY MADE ARRANGEMENTS FOR LAYING ROAD, CONSTRUC TION OF WATER TANKS, PUMP SETS, DRAINAGE, DIGGING WELL AND SUCH OTHER WO RK IN THE LAND AFTER ALLOTMENT TO THE EMPLOYEES WHO HAD CONSTRUCTED A BU ILDING IN THE LANDS ALLOTTED TO THEM. THE ASSESSEE CLAIMED THE EXPENDI TURE FOR LAYING THE ROADS, DIGGING WELL, CONSTRUCTION OF WATER TANKS AN D PUMPS, DRAINAGE, ETC. AS REVENUE EXPENDITURE. THE KERALA HIGH COURT FOUN D THAT THE EXPENDITURE INCURRED BY THE ASSESSEE IS FOR THE BENEFIT OF THE EMPLOYEES, WHO PURCHASED THE PROPERTIES AND CONSTRUCTED BUILDING T HEREON. THE LAND DOES NOT BELONG TO THE ASSESSEE. IT DID NOT BRING INTO EXISTENCE AN ENDURING ADVANTAGE TO THE ASSESSEE. THE EXPENDITURE WAS IN THE NATURE OF STAFF WELFARE EXPENDITURE. THE KERALA HIGH COURT FURTHER FOUND THAT THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINES S; THEREFORE, IT WAS DEDUCTIBLE AS BUSINESS EXPENDITURE U/S 37 OF THE AC T. IN THIS CASE BEFORE US, IT IS NOT FOR THE WELFARE OF THE EMPLOYEES; BUT FOR THE PURPOSE OF ESTABLISHING A NEW SHOW ROOM. IN FACT, THE KERALA HIGH COURT EXTRACTED THE OBSERVATIONS MADE BY HOUSE OF LORDS IN ATHERTON V. BRITISH INSULATED AND HELSBY CABLES LTD (1925) 10 TC 155 (HL), WHICH IS A S UNDER: 12 ITA NO. 233 & 282/COCH/2010 WHEN AN EXPENDITURE IS MADE . WITH A VIEW TO BRI NGING INTO EXISTENCE AN ASSET OR AN ADVANTAGE FOR THE END URING BENEFIT OF A TRADE, I THINK THAT THERE IS VERY GOOD REASON (IN THE ABSENCE OF SPECIAL CIRCUMSTANCES LEADING TO AN OPPO SITE CONCLUSION) FOR TREATING SUCH AN EXPENDITURE AS PRO PERLY ATTRIBUTABLE NOT TO REVENUE BUT TO CAPITAL. THIS TRIBUNAL IS OF THE OPINION THAT THIS OBSERVATI ON OF THE HOUSE OF LORDS AS APPROVED BY THE KERALA HIGH COURT IS APPLICABLE TO THE FACTS OF THIS CASE. THE EXPENDITURE INCURRED BY THE ASSESSEE, IN FACT, BROUGHT INTO EXISTENCE A NEW SHOW ROOM WHICH IS AN ADVANTAGE OF ENDURING BEN EFIT TO THE TRADE CARRIED ON BY THE ASSESSEE. THEREFORE, THIS JUDGME NT OF THE KERALA HIGH COURT, IN FACT, SUPPORTS THE CASE OF THE REVENUE. 11. WE FURTHER FIND THAT THE KERALA HIGH COURT HAD AN OCCASION TO CONSIDER AN IDENTICAL SITUATION IN THE CASE OF VEER ARAGHAVAN VS CIT (1967) 64 ITR 63 (KER) HAD AN OCCASION TO CONSIDER AN IDEN TICAL ISSUE. IN THE CASE BEFORE THE KERALA HIGH COURT, THE ASSESSEE INCURRED THE EXPENDITURE FOR RECLAIMING A PIECE OF LAND FOR WHICH LICENCE WAS GR ANTED TO INSTALL A PETROL PUMP BY BURMAH SHELL OIL DISTRIBUTING COMPANY. THE KERALA HIGH COURT FOUND THAT THE EXPENDITURE INCURRED BY THE ASSESSEE FOR FILLING UP THE 13 ITA NO. 233 & 282/COCH/2010 DITCHES AND RAISING THE LAND AND OF CONSTRUCTING A WALL ARE OF CAPITAL IN NATURE, THEREFORE, IT CANNOT BE ALLOWED AS DEDUCTIO N. THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THIS JUDGMENT OF THE KERALA HIGH COURT IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE. 12. IN VIEW OF THE ABOVE, THIS TRIBUNAL DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY. ACCORDINGLY, THE SAM E IS CONFIRMED. 13. THE NEXT GROUND OF APPEAL IS WITH REGARD TO DIS ALLOWANCE OF RS.1 LAKH. 14. SHRI R KRISHNA IYER, THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE INCURRED AN EXPENDITURE OF RS. 7, 20,99,724 TOWARDS ADVERTISEMENT INCLUDING PAYMENT MADE TO TEMPLES, CH URCHES, CLUBS, EDUCATIONAL INSTITUTIONS AND TRADE UNIONS, ETC. AC CORDING TO THE LD.REPRESENTATIVE, THE ASSESSEE WAS ALLOWED ADVERTI SING SPACE BY THE INSTITUTIONS, WHICH RECEIVED CONTRIBUTION FROM THE ASSESSEE. ACCORDING TO THE LD.REPRESENTATIVE, THE EXPENDITURE WAS INCURRED FOR THE PURPOSE OF BUSINESS. THEREFORE, IT IS TO BE ALLOWED. 14 ITA NO. 233 & 282/COCH/2010 15. WE HEARD SMT. VIJAYAPRABHA, THE LD.DR ALSO. AC CORDING TO THE LD.DR, THERE IS AN ELEMENT OF CHARITY IN MAKING CONTRIBUTI ONS TO TEMPLES, CHURCHES AND EDUCATIONAL INSTITUTIONS. THEREFORE, THIS CANN OT BE CONSIDERED AS BUSINESS EXPENDITURE. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE THROUGH THE WRITTEN SUBMISSION FILED BY THE ASSESSE E. IN THE WRITTEN SUBMISSION, THE ASSESSEE CLAIMS THAT THE PRIME MOTI VE FOR CONTRIBUTION IS CHARITY. IF IT IS A CHARITY, IT HAS TO BE CLAIMED U/S 80G IF THE SAME IS APPROVED BY THE RESPECTIVE COMMISSIONER OF INCOME-T AX. HERE, THE ASSESSEE IS CLAIMING BUSINESS EXPENDITURE. IT IS N OT THE CASE OF THE ASSESSEE THAT THE EXPENDITURE WAS INCURRED IN CONNECTION WIT H THE WELFARE OF THE EMPLOYEES. MOREOVER, THE ASSESSEE HAS INCURRED RS. 7,20,99,724 BUT THE ASSESSING OFFICER HAS DISALLOWED ONLY RS.1 LAKH. I N THE ABSENCE OF CLAIM OF THE ASSESSEE THAT THE EXPENDITURE WAS INCURRED FOR BUSINESS PURPOSE OR FOR WELFARE OF THE EMPLOYEES, THIS TRIBUNAL IS OF THE C ONSIDERED OPINION THAT THE CONTRIBUTION MADE BY WAY OF CHARITY CANNOT BE A LLOWED U/S 37 OF THE ACT AS BUSINESS EXPENDITURE. THEREFORE, THIS TRIBU NAL DO NOT FIND ANY 15 ITA NO. 233 & 282/COCH/2010 INFIRMITY IN THE ORDER OF THE LOWER AUTHORITY. ACC ORDINGLY, THE SAME IS CONFIRMED. 17. NOW COMING TO THE REVENUES APPEAL, THE ONLY IS SUE ARISES FOR CONSIDERATION IS DISALLOWANCE OF INTEREST. 18. SMT. SUSAN GEORGE VARGHESE, THE LD.DR SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAS DEBITED A N AMOUNT OF RS.7,14,80,735 TOWARDS INTEREST AND BANK CHARGES AN D INTEREST ON ADVANCE. REFERRING TO THE CHART AT PAGE 8 OF THE ASSESSMENT ORDER, THE LD.DR SUBMITTED THAT ALL ADVANCES ARE PERSONAL NATURE AND THERE IS NO COMMERCIAL EXPEDIENCY IN SUCH ADVANCES. ACCORDING TO THE LD.D R, THE INTEREST BEARING BUSINESS FUNDS HAVE BEEN TRANSFERRED FOR PERSONAL U SE, THEREFORE, THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST ON THE BORROWED FUNDS. ACCORDING TO THE LD.DR, THE INTEREST FREE ADVANCES ARE NOT GIVEN FROM THE CAPITAL OR CURRENT ACCOUNT OF THE PROPRIETOR. IT W AS GIVEN FROM THE BUSINESS FUNDS WHICH WERE BORROWED ON INTEREST. PLACING RE LIANCE ON THE JUDGMENT OF THE KERALA HIGH COURT IN THE CASE OF CIT VS V.I. , BABY & CO (2001) 254 ITR 248 (KER) THE LD.DR SUBMITTED THAT AN ASSESSEE WHO IS NOT HAVING LIQUID 16 ITA NO. 233 & 282/COCH/2010 CASH CANNOT CLAIM THAT IT GAVE INTEREST FREE ADVANC ES TO THE PARTNERS AND OTHERS AND THEN BORROW FUNDS FROM BANK FOR BUSINESS . ACCORDING TO THE LD.DR SUCH BORROWING WILL NOT BE FOR BUSINESS PURPO SE BUT FOR SUPPLEMENTING THE CASH DIVERTED BY THE ASSESSEE FOR NON BUSINESS PURPOSE. THE LD.DR FURTHER SUBMITTED THAT SINCE THE ASSESSEE IS NOT THE BENEFICIARY OF THE LOAN BORROWED, INTEREST CANNOT BE DEDUCTED FROM THE BUSINESS INCOME. 19. ON THE CONTRARY, SHRI KRISHNA IYER, THE LD.REPR ESENTATIVE FOR THE ASSESSEE SUBMITTED THAT IT IS NOT CORRECT TO SAY TH AT INTEREST FREE ADVANCES ARE NOT GIVEN FROM CAPITAL OR CURRENT ACCOUNT. REF ERRING TO THE BALANCE- SHEET WHICH WAS EXTRACTED ON PAGE 9 OF THE ORDER OF THE CIT(A), THE LD.REPRESENTATIVE SUBMITTED THAT OUT OF THE PROPRIE TORS CAPITAL OF RS.27.49 CRORES, AN AMOUNT OF RS.14.18 CRORES WAS INVESTED I N THE FIXED ASSET. A SECURED LOAN OF RS.44.53 CRORES WAS OBTAINED FROM B ANK AND FINANCIAL INSTITUTIONS FOR PURCHASE OF GOLD. ALL THE BORROWE D FUNDS WERE USED FOR PURCHASE OF JEWELLERY WHICH IS STOCK IN TRADE. APA RT FROM SECURED LOAN, THE BALANCE-SHEET DISCLOSES RS.7.64 CRORES OF UNSECURED LOAN ON WHICH NO INTEREST WAS PAID. ACCORDING TO THE LD.REPRESENTAT IVE, THE INTEREST FREE UNSECURED LOAN OF RS.7.64 CRORES AND THE CAPITAL OF RS.27.49 CRORES IS 17 ITA NO. 233 & 282/COCH/2010 AVAILABLE WITH THE ASSESSEE. AFTER TAKING INTO CON SIDERATION ALL THE INVESTMENTS IN FIXED ASSETS TO THE EXTENT OF RS.14. 18 CRORES, ACCORDING TO THE LD.REPRESENTATIVE, THE INTEREST FREE FUNDS AVAI LABLE WITH THE ASSESSEE WAS RS.20.74 CRORES. THE INTEREST FREE ADVANCES GI VEN TO THE RELATIVES ARE ONLY RS.12.14 CRORES WHICH IS FAR BELOW THE INTERES T FREE FUNDS AVAILABLE WITH THE ASSESSEE. THEREFORE, ACCORDING TO THE LD. REPRESENTATIVE, THE BORROWED FUNDS FROM THE BANKS AND FINANCIAL INSTITU TIONS ARE INVESTED ONLY IN JEWELLERY FOR BUSINESS PURPOSE AND IT IS NOT DIV ERTED FOR ANY OTHER PURPOSE. ACCORDING TO THE LD.REPRESENTATIVE, WHAT WAS GIVEN TO THE RELATIVES IS ONLY FROM THE INTEREST FREE FUNDS WHIC H WOULD BE CLEAR FROM THE BALANCE-SHEET OF THE ASSESSEE. THE LD.REPRESENTATI VE FURTHER SUBMITTED THAT INTEREST FREE FUNDS WERE BORROWED ESPECIALLY F OR THE PURPOSE OF PURCHASE OF STOCK IN TRADE AND IN FACT THE BORROWED FUNDS WERE INVESTED IN THE STOCK IN TRADE. THEREFORE, THERE IS NO QUESTIO N OF ANY DISALLOWANCE. THE LD.REPRESENTATIVE PLACED HIS RELIANCE ON THE JU DGMENT OF THE MADRAS HIGH COURT IN THE CASE OF CIT VS SOUTH INDIA CORPOR ATION (AGENCIES) LTD (2007) 290 ITR 217 (MAD); CIT VS SAMBANDHAM SPINNIN G MILLS LTD & ANOTHER (2008) 298 ITR 306 (MAD); AND CIT VS INDIA CARBON LTD (2001) 247 ITR 510 18 ITA NO. 233 & 282/COCH/2010 (GAU); AND CIT VS S.A. BUILDERS 288 ITR 1. FURTHER RELIANCE WAS PLACED ON THE DECISIONS OF THE VARIOUS BENCHES OF THIS TRIBUN AL. 20. REFERRING TO THE JUDGMENT OF THE KERALA HIGH CO URT IN THE CASE OF V.I. BABY & CO (SUPRA), THE LD.REPRESENTATIVE SUBMITTED THAT ON SCRUTINY OF THE ACCOUNTS THERE WAS HUGE DEBIT BALANCES IN THE CAPIT AL ACCOUNT OF THE PARTNERS OF THE FIRM WAS FOUND. THE ASSESSEE DID N OT HAVE CREDIT BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNERS IN THE CASE BEF ORE THE HIGH COURT. WHEN THERE WAS A DEBIT BALANCE IN THE CAPITAL ACCOU NT OF THE PARTNERS, THE HIGH COURT FOUND THAT BORROWED FUNDS WAS ONLY FOR B USINESS PURPOSES, THEREFORE, THE DIVERSION OF FUNDS MADE TO THE RELAT IVES AND THE PARTNERS ARE NOT FOR BUSINESS PURPOSES. IN THE CASE BEFORE THIS TRIBUNAL, ACCORDING TO THE LD.REPRESENTATIVE, THE PROPRIETOR IS HAVING CREDIT BALANCE IN THE CAPITAL ACCOUNT EVEN AFTER TAKING INTO CONSIDERATION THE IN VESTMENT MADE IN THE FIXED ASSETS. THEREFORE, ACCORDING TO THE LD.REPRE SENTATIVE, THIS JUDGMENT OF THE KERALA HIGH COURT MAY NOT BE APPLICABLE TO T HE FACTS OF THE CASE. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EIT HER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE ALSO CAREFULLY GONE 19 ITA NO. 233 & 282/COCH/2010 THROUGH THE JUDGMENT OF THE KERALA HIGH COURT IN TH E CASE OF V.I. BABY & CO (SUPRA). IN THE CASE BEFORE THE KERALA HIGH COURT, THE ASSESSEE, A REGISTERED PARTNERSHIP FIRM WAS DOING BUSINESS IN PIECE GOODS. THE ASSESSEE FIRM BORROWED FUNDS AND PAID INTEREST ON ITS BORROWINGS FROM BANK. THE ASSESSEE TRANSFERRED SIZEABLE AMOUNT TO THE PERSONA L ACCOUNT OF ITS PARTNERS AND ALSO ADVANCED AMOUNTS TO RELATIVES OF THE PARTNERS AND SISTER CONCERNS; HOWEVER, NO INTEREST WAS CHARGED ON SUCH ADVANCES. THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST PAYMENT ON SUCH AMOUNTS SO ADVANCED. ON APPEAL BY THE ASSESSEE, TH E TRIBUNAL FOUND THAT THE DISALLOWANCE WAS NOT PROPER BECAUSE THE PARTNER S AND RELATIVES USED THE FUNDS FOR BUSINESS PURPOSE SUCH AS CONSTRUCTION OF SHOP BUILDING. ON A REFERENCE TO THE HIGH COURT, THE DEPARTMENT CONTEND ED THAT THERE WAS A HUGE DEBIT BALANCE IN THE ACCOUNTS OF THE FIRM IN T HE NAME OF THE PARTNERS, NEAR RELATIVES AND SISTER CONCERN. ON THESE FACTS, THE HIGH COURT FOUND THAT AN ASSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT CAN GIVE INTEREST FREE ADVANCES TO THE PARTNERS AND OTHERS, THEN BORROW FU NDS FROM THE BANK ON INTEREST FOR BUSINESS PURPOSES. FROM THE ABOVE JUD GMENT OF THE KERALA HIGH COURT, IT IS OBVIOUS THAT THERE WAS A NEGATIVE BALANCE IN THE CAPITAL ACCOUNT OF THE PARTNERS. 20 ITA NO. 233 & 282/COCH/2010 22. LET US NOW EXAMINE THE CASE BEFORE US IN THE LI GHT OF THE BALANCE- SHEET EXTRACTED BY THE CIT(A) ON PAGE 9 OF HIS ORDE R. AS RIGHTLY SUBMITTED BY THE LD.REPRESENTATIVE FOR THE ASSESSEE, THE PROP RIETORS CAPITAL IS RS.27.49 CRORES AND UNSECURED LOAN WAS RS.7.64 CROR ES. SUNDRY CREDITORS WERE TO THE EXTENT OF RS.4.10 CRORES. THE TOTAL IN TEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE INCLUDING THE SUNDRY CREDITORS AN D UNSECURED LOAN WERE RS.39.23 CRORES. OUT OF THIS, THE ASSESSEE INVESTE D RS.14.18 CRORES ON THE FURNITURE AND FITTINGS INCLUDING BUILDING. ANOTHER SUM OF RS.0.21 CRORE WAS SHOWN AS INVESTMENT. THEREFORE, THE TOTAL INVESTME NT IS RS.14.39 CRORES IN THE FIXED ASSET. THE ASSESSEE IS SHOWING RS.21.38 CRORES AS DEPOSITS. HOWEVER, THE NATURE OF THE DEPOSITS IS NOT KNOWN FR OM THE MATERIALS AVAILABLE ON RECORD. THEREFORE, IT IS OBVIOUS THAT THE TOTAL UTILIZATION OF THE CAPITAL MAY BE TO THE EXTENT OF RS.35.77 CRORES INC LUDING THE DEPOSIT OF RS.21.38 CRORES. THUS, THE FUNDS AVAILABLE WITH TH E ASSESSEE INCLUDING THE SUNDRY CREDITORS OF RS.4.10 CRORES IS RS.39.23 CROR ES AND THE FUNDS INVESTED BY THE ASSESSEE IS RS.35.77 CRORES. THEREFORE, IT IS NOT KNOWN HOW THE ASSESSEE CLAIMS THAT RS.20.74 CRORES OF INTEREST FR EE FUNDS IS AVAILABLE WITH IT. THE ASSESSEE CLAIMS THAT THE ENTIRE BORROWED F UNDS TO THE EXTENT OF 21 ITA NO. 233 & 282/COCH/2010 RS.76.06 CRORES WAS INVESTED IN THE STOCK IN TRADE. EVEN IF WE TAKE THE DEPOSITS OF RS.21.38 CRORES AS ASSESSEES INVESTMEN T, THE BALANCE AMOUNT CLAIMED BY THE ASSESSEE TO THE EXTENT OF RS.20.74 C RORES AS INTEREST FREE FUNDS MAY NOT BE AVAILABLE. THEREFORE, IT IS NOT K NOWN HOW THE CIT(A) CAME TO THE CONCLUSION THAT THE LOAN OF RS.12.14 CRORES WAS GIVEN TO THE RELATIVES OUT OF THE AVAILABLE INTEREST FREE FUND OF RS.20.74 CRORES. IF THE ASSESSEE DEMONSTRATES THAT SUFFICIENT CAPITAL FUNDS ARE AVAI LABLE, THEN THERE MAY NOT BE ANY DIVERSION OF FUNDS. HOWEVER, IT IS FOR THE ASSESSEE TO DEMONSTRATE THAT SUFFICIENT CAPITAL FUNDS WERE AVAILABLE IN THE BOOKS OF ACCOUNT. THEREFORE, THIS TRIBUNAL IS OF THE CONSIDERED OPINI ON THAT THE ASSESSING OFFICER HAS TO EXAMINE THE SAME WITH REGARD TO THE AVAILABLE FUNDS IN CAPITAL / CURRENT ACCOUNT OF THE PROPRIETOR AND THE NATURE OF DEPOSIT TO THE EXTENT OF RS.21.38 CRORES. ACCORDINGLY, THE ORDERS OF LOW ER AUTHORITIES ARE SET ASIDE AND THE ISSUE OF DISALLOWANCE OF INTEREST ON THE BORROWED FUND IS REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL EXAMINE THE ISSUE WITH REGARD TO THE AVAILABILITY O F FUNDS IN CAPITAL / CURRENT ACCOUNT OF THE PROPRIETOR ON THE BASIS OF THE BOOKS OF ACCOUNT AND OTHER DOCUMENTS AND THEREAFTER DECIDE THE SAME IN ACCORDA NCE WITH LAW AFTER GIVING REASONABLE OPPORTUNITY TO THE ASSESSEE. 22 ITA NO. 233 & 282/COCH/2010 23. IN THE RESULT, APPEAL OF THE ASSESSEE IS DISMIS SED AND THE APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 07 TH JUNE, 2013. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 07 TH JUNE, 2013 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE COMMISSIONER OF INCOME-TAX 4. THE COMMISSIONER OF INCOME-TAX(A) 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH 23 ITA NO. 233 & 282/COCH/2010 1. DATE OF DICTATION : 04-06 2. DATE OF PLACING THE DRAFT ORDER BEFORE THE MEMBER : 05-06 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR.PS : 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER: 5. DATE OF RETURN OF THE ORDER TO PS AFTER APPROVAL : 6. DATE OF PRONOUNCEMENT : 7. DATE ON WHICH THE FILE ALONG WITH THE ORDER SENT TO BC : 8. NO. OF PAGES OF DICTATION PADS ATTACHED TO THE FILE : 19+14 9. NO. OF PAGES OF DRAFT COPY OF THE ORDER ATTACHED TO THE FILE :