DCIT-6, Kanpur V. M/S M.Kumar Udyog P Ltd., Kanpur

ITA 289/LKW/2011

• Counselvise Citation: [2014] 120 COUNSELVISE.COM (IT) 7997 (ITAT-LUCKNOW)
• Duration Of Justice: 3 year(s) 6 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-12-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 15-10-2014
• Assessment Year: 2007-2008
• Appeal Filed On: 18-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K GARG SHRI P K KAPOOR
• Keywords: Revenue expenditure

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL LUCKNOW BENCH B, LUCKNOW BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI A.K. GARODIA, ACCOUNTANT MEMBER ITA NOS.289 & 290/LKW/2011 ASSESSMENT YEARS:2007 - 2008 & 2006 - 07 M/S M. KUMAR UDYOG (P) LTD., 13, GANDHI GRAM, G. T. ROAD, KANPUR. PAN:AACCM6302Q VS DY.C.I.T. - 6, KANPUR. (RESPONDENT) (APPELLANT) SHRI O. N. PATHAK, D. R. APPELLANT BY SHRI S. K. GARG, ADVOCATE SHRI P. K. KAPOOR, C.A. RESPONDENT BY 15/10/2014 DATE OF HEARING 1 6 /12/2014 DATE OF PRONOUNCEMENT O R D E R PER A. K. GARODIA, A.M. BOTH THESE APPEALS FILED BY THE REVENUE ARE DIRECTED AGAINST TWO SEPARATE ORDERS PASSED BY LEARNED CIT(A) - II, KANPUR BOTH DATED 17/03/2011 FOR THE ASSESSMENT YEARS 2006 - 07 & 2007 - 08. 2. FIRST WE TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 200 7 - 0 8 I.E. I.T.A. NO.2 89 /LKW/2011. IN THIS APPEAL , THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN ALLOWING THE DISALLOWANCE ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS WITHOUT APPRECIATING THE FACT THAT THE IMPUGNED INVESTMENT IS CAPITAL IN NATURE AND BORROWED FUND HAS BEEN UTILIZED AND INTEREST CLAIMED IN P/L ACCOUNT. 2 2. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT DIFFERED REVENUE EXPENDITURE CLAIMED IN P & L ACCOUNT AS PER SCHEDULE 14 TO THE BALANCE SHEET UNDER THE HEAD MISCELLANEOUS EXPENSES WRITTEN OFF WHICH IMPLIES THAT THE ASSESSEE HAS CLAIMED THE DIFFERENTI AL AMOUNTING TO RS.16,74,379 IN THE P & ACCOUNT. 3. THAT THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR BEING ERRONEOUS, UNJUST AND BAD IN LAW AND ON FACTS DESERVES TO BE VACATED AND THAT THE ORDER OF THE ASSESSING OFFICER BE RESTORED. 3. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). HE ALSO PLACED RELIANCE ON TWO JUDGMENTS OF HON'BLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF CIT VS. PREM HEAVY E NGINEERING WORKS P. LTD. REPORTED IN [2006] 285 ITR 554 (ALL) AND IN THE CASE OF COMMISSIONER OF INCOME - TAX AND ANOTHER VS RADICO KHAITAN LTD. REPORTED IN [2005] 274 ITR 354 (ALL) . 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IN THE PRESENT CASE , THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.9,90,810/ - WAS MADE BY ASSESSING OFFICER ON THE BASIS THAT BORROWED FUNDS WERE USED FOR MAKING INVESTMENT WHICH WAS NOT PUT TO USE IN THE PRESENT YEAR AND THEREFORE, INTEREST IS NOT ALLOWABLE. THE ASS ESSING OFFICER HAS PLACED RELIANCE ON THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF MOHAN STEELS LTD., ALTHOUGH NO CITATION HAS BEEN GIVEN BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER IN RESPECT OF TH I S JUDGMENT FOLLOWED BY HIM. 5. THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) WHO HAS DELETED THE DISALLOWANCE BY MAKING FOLLOWING OBSERVATIONS IN PARA 5 OF HIS ORDER, WHICH IS REPRODUCED BELOW FOR THE SAKE OF READY REFERENCE: - 3 I HAVE CONSIDERED THE FACTS OF THE CASE/F INDING OF THE ASSESSING OFFICER AND WRITTEN SUBMISSIONS FILED BY THE LEARNED ASSESSING OFFICER. THE FACTS ABOUT THE AVAILABILITIES OF SUBSTANTIAL INTEREST FREE FUNDS AVAILABLE WITH THE APPELLANT ARE NOT IN DISPUTE. NO DOUBT, THE LOAN AMOUNT HAS INCREASED D URING THE YEAR AS COMPARED TO THE PRECEDING YEAR BUT IT IS ALSO SEEN THAT DURING THE YEAR UNDER CONSIDERATION, SALES OF THE APPELLANT HAD INCREASED BY 24.58 CRORES AS COMPARED TO LAST YEAR AND IN TERM OF PERCENTAGE, IT WAS 41.86%. THIS INCREASED TURNOVER R EQUIRED INCREASED FUNDS. IN ANY CASE, APART FROM CAPITAL & RESERVES THE APPELLANT DURING THE YEAR ITSELF HAD ADDED RS.3.61 CRORES TO ITS INTEREST FREE KITTY AS PROFITS OF THE YEAR AND THAT WOULD BE SUFFICIENT TO COVER THE INVESTMENT MADE IN THE LAND DURING THE YEAR, WHICH TOTALED TO ONLY RS.2.51 CRORE. THE ASSESSING OFFICER HAS ALSO NOT BROUGHT ANYTHING ON RECORD TO PROVE ANY NEXUS OF SUCH BORROWED FUNDS HAVING BEEN USED IN THE INVESTMENT IN LAND AT DEHRADUN. THE DECISIONS OF ALLAHABAD HIGH COURT CITED BY T HE APPELLANT ARE SQUARELY APPLICABLE TO THE FACTS OF THIS CASE. THE DECISION CITED BY THE LEARNED ASSESSING OFFICER (I.E DECISION IN MOHAN STEELS) IS ON A DIFFERENT FOOTING SINCE IN THAT CASE THE BUSINESS HAD YET TO COMMENCE, WHEREAS IN THE INSTANT CASE TH E APPELLANT HAD AN OLD AND RUNNING BUSINESS. CONSIDERING THE FACTUAL AND LEGAL ASPECTS, I HOLD THAT PART DISALLOWANCES OF INTEREST PAID WAS NOT JUSTIFIED, HENCE THE IMPUGNED DISALLOWANCE IS DELETED AND RELIEF OF RS.980810/ - IS GRANTED. 5.1 FROM THE ABOVE PARA FROM THE ORDER OF CIT(A), WE FIND THAT THE BASIS GIVEN BY CIT(A) FOR DELETING THIS DISALLOWANCE IS THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN INTEREST FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVE AND SURPLUS. HE HAS ALSO OBSERVED THAT THE ASSESSEE WAS HAVING SUFFICIENT PROFIT IN THE PRESENT YEAR TO THE EXTENT OF RS.3.61 CRORE, WHICH IS SUFFICIENT TO COVER THE INVESTMENT MADE DURING THE PRESENT YEAR TO THE EXTENT OF RS.2.51 CRORE. HE HAS ALSO REFERRED TO THE JUDGMENTS CITED BY THE ASSESSEE BEFORE H IM BEING TWO JUDGMENTS OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF PREM HEAVY ENGINEERING WORKS P. LTD. REPORTED IN [2006] 285 ITR 554 (ALL) AND IN THE CASE OF COMMISSIONER OF INCOME - TAX AND ANOTHER VS RADICO 4 KHAITAN LTD. REPORTED IN [2005] 274 ITR 354 (ALL) . REGARDING THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IN THE CASE OF MOHAN STEELS LTD., IT WAS OBSERVED BY CIT(A) THAT THIS JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT IS ON DIFFERENT FOOTING SINCE IN THAT CASE , THE BUSINESS HAS YET TO COMMENCE WHERE AS IN THE PRESENT CASE, THE ASSESSEE HAS OLD BUSINESS. IN OUR CONSIDERED OPINION, THE BASIS OF CIT(A) IS NOT CORRECT. SO FAR THIS ASPECT IS CONCERNED THAT BUSINESS IS NEW OR OLD, AS PER THE AMENDMENT IN SECTION 36(1)(III) WITH EFFECT FROM ASSESSMENT YEAR 2004 - 05, INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EXPANSION OF EXISTING BUSINESS IS NOT ALLOWABLE FOR ANY PERIOD BEGINNING FROM THE DATE ON WHICH THE CAPITAL WAS BORROWED FOR ACQUISITION OF THE ASSET TILL THE DATE ON WHI CH THE A SS ET WAS FIRST PUT TO USE. HENCE, AS PER THIS AMENDMENT WITH EFFECT FROM ASSESSMENT YEAR 2004 - 05, EVEN IN CASE OF EXISTING BUSINESS, INTEREST IS NOT ALLOWABLE FOR THE PERIOD UP TO THE DATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE. REGARDING T HE TWO JUDGMENTS CITED BY LEARNED A.R. OF THE ASSESSEE BEFORE US AND ALSO BEFORE CIT(A) I.E. THE JUDGMENT OF HON'BLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF PREM HEAVY ENGINEERING WORKS P. LTD. REPORTED IN [2006] 285 ITR 554 (ALL) AND IN THE CASE OF C OMMISSIONER OF INCOME - TAX AND ANOTHER VS RADICO KHAITAN LTD. REPORTED IN [2005] 274 ITR 354 (ALL) , WE ARE OF THE CONSIDERED OPINION THAT THESE JUDGMENTS ARE NOT APPLICABLE IN THE PRESENT CASE. IN BOTH THESE CASES , THE ISSUE IN DISPUTE BEFORE HON'BLE ALLAH ABAD HIGH COURT WAS THAT WHERE INTEREST FREE ADVANCES ARE GIVEN BY THE ASSESSEE TO SISTER CONCERN AND SUFFICIENT INTEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE, THEN PRESUMPTION CAN BE DRAWN THAT SUCH INTEREST FREE ADVANCE GIVEN BY THE ASSESSEE WERE O UT OF INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE. IN THE PRESENT CASE, THE ISSUE IS NOT REGARDING GIVING INTEREST FREE ADVANCE TO A SISTER CONCERN. IN THE PRESENT CASE, THE DISPUTE IS REGARDING INVESTMENT IN LAND WHICH IS NOT PUT TO USE AND THEREFORE , THE INTEREST IN THIS 5 REGARD IS NOT ALLOWABLE AS PER THE PROVISO 36(1)(III) OF THE ACT. IT IS ALSO IMPORTANT TO OBSERVE THAT SO FAR THE INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHARE CAPITAL AND RESERVE IS CONCERNED, THE SAME ARE ALR EADY UTILIZED BY THE ASSESSEE BEFORE THE BEGINNING OF THE YEAR BECAUSE AS PER THE BALANCE SHEET OF THE ASSESSEE AVAILABLE ON PAGE NO. 19 OF THE PAPER BOOK, IT IS SEEN THAT AS ON 31/03/2006, THE ASSESSEE WAS HAVING SHARE CAPITAL OF RS.409.10 LAC AND RESERVE AND SURPLUS OF RS.305.77 LAC TOTALING TO RS.714.87 LAC. ON THIS DATE, THE ASSESSEE WAS HAVING FIXED ASSETS NET VALUE OF RS.538.83 LAC AND ASSESSEE WAS ALSO HAVING NET CURRENT ASSETS OF RS.1121.74 LAC. IT MEANS THAT THE ENTIRE INTEREST FREE OWN FUNDS WER E ALREADY LYING USED IN THE BUSINESS OF THE ASSESSEE ITSELF. THEREAFTER, IN THE PRESENT YEAR, THE SECU RED LOAN AND UNSECURED LOAN HAVE GONE UP FROM RS.854.39 LAC AND RS.134.35 LAC RESPECTIVELY TO RS.1464.64 LAC AND RS.280.69 LAC RESPECTIVELY. THE FIXED A SSETS HAVE GONE UP FROM RS.538.82 LAC TO RS.1358.07 LAC. IT MEANS THAT THERE IS SUBSTANTIAL INCREASE IN THE FIXED ASSETS DURING PRESENT YEAR AND AGAINST THAT , THERE IS SUBSTANTIAL INCREASE IN BORROWED FUNDS ALSO. IN THIS MANNER, THE INVESTMENT IN FIXED A SSETS DURING PRESENT YEAR IS HAVING CORRELATION WITH THE INCREASE IN INTEREST BEARING BORROWED FUNDS WHEREAS INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF SHARE CAPITAL AND RESERVE WAS ALREADY UTILIZED IN THE BUSINESS OF THE ASSESSEE BEFOR E BEGINNING OF THE YEAR AND THEREFORE, THIS WAS NOT AVAILABLE WITH THE ASSESSEE FOR MAKING FURTHER INVESTMENT. REGARDING THE PROFIT DURING THE PRESENT YEAR, WE FIND THAT IS NOTED BY THE ASSESSING OFFICER IN THE ASSESSMENT ORDER THAT INVESTMENT IN LAND WAS MADE IN THE MONTH OF JULY, 2006 AND THEREFORE, THE PROFITS CANNOT BE AVAILABLE WITH THE ASSESSEE AT THE TIME OF MAKING INVESTMENT IN LAND. IN THE PRESENT CASE, THERE IS NO CASE OF DRAWING PRESUMPTION THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE O NLY WERE DIVERTED TO OTHER USE, WHICH ARE NOT FOR BUSINESS PURPOSES IN THE FORM OF INTEREST FREE ADVANCE 6 TO RELATIVES/RELATED PARTIES. IN SUCH A SITUATION, THERE MAY BE A PRESUMPTION THAT SUCH INTEREST FREE ADVANCES WERE GIVEN OUT OF INTEREST FREE FUNDS A VAILABLE WITH THE ASSESSEE BUT WHEN INTEREST FREE FUNDS, AVAILABLE WITH THE ASSESSEE, ARE ALREADY USED B Y THE ASSESSEE IN ITS BUSINESS AND THERE IS FURTHER INVESTMENT FOR THE PURPOSE OF BUSINESS ITSELF AND THERE IS CORRESPONDING INCREASE IN THE INTEREST BEARING BORROWED FUNDS, THIS CANNOT BE SAID THAT THE INCREASE IN BORROWED FUNDS IS FOR FINANCING THE EXISTING ASSETS OF THE ASSESSEE COMPANY AND THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE AT EARLIER POINT OF TIME AND WAS USED IN THE BUSINESS IN EARLIER YEAR WAS RELEASED AND USED FOR MAKING INVESTMENT IN LAND. UNDER THIS FACTUAL POSITION , IN OUR CONSIDERED OPINION, THESE TWO JUDGMENTS OF HON'BLE ALLAHABAD HIGH COURT CANNOT BE INVOKED FOR DRAWING SUCH PRE SUMPTI ON THAT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WERE USED FOR ACQUIRING NEW ASSETS , BECAUSE SUCH FUNDS WERE ALREADY USED IN THE BUSINESS OF THE ASSESSEE IN EARLIER YEARS AND HENCE , THE SAME CANNOT AGAIN BE USED FOR MAKING INVESTMENT IN LAND. AS PE R ABOVE DISCUSSION, WE FIND THAT THE ORDER OF CIT(A) ON THIS ISSUE IS NOT SUSTAINABLE AND THEREFORE, WE REVERSE THE ORDER OF CIT(A) AND RESTORE THAT OF THE ASSESSING OFFICER. GROUND NO. 1 IS ALLOWED . 6. REGARDING GROUND NO. 2 , LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT THIS ISSUE WAS DECIDED BY LEARNED CIT(A) ON THE BASIS THAT THIS AMOUNT OF RS.16,74,379/ - WAS NOT DEBITED BY THE ASSESSEE IN THE PROFIT & LOSS ACCOUNT AND THE SAME WAS APPEARING IN THE BALANCE SHEET. AS PER THE BALANCE SHEET OF THE ASSESSEE, WE FIND THAT THIS AMOUNT OF RS.16,74,379.42 IS APPEARING IN THE BALANCE SHEET UNDER THE HEADING MISC . EXPENDITURE (TO THE EXTENT NOT WRITTEN 7 OFF OR ADJUSTED). HENCE, THE ADDITION MADE BY THE ASSESSING OFFICER IS NOT JUSTIFIED AND THEREFORE, WE DECLINE TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE . GROUND NO. 2 IS REJECTED. 8. IN THE RESULT, THE AP PEAL OF THE REVENUE STANDS PARTLY ALLOWED. 9. NOW WE TAKE UP THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2006 - 07 I.E. I.T.A. NO.290/LKW/2011. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLOWING GROUNDS: 1. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT OF INTEREST PAID ON BORROWED FUNDS WITHOUT APPRECIATING THE FACT THAT THE IMPUGNED FUND IS UTILIZED IN PROVIDING INTEREST FREE LOANS TO SISTER CONCERNS. 2. THAT THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION MADE ON ACCOUNT OF PURCHASES MADE FROM M/S MAMTA CORPORATION. 3. THAT THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - II, KANPUR BEING ERRONEOUS, UNJUST AND BAD IN LAW AND ON FACTS DESERVES TO BE VACATED AND THAT THE ORD ER OF THE ASSESSING OFFICER BE RESTORED. 10. LEARNED D. R. OF THE REVENUE SUPPORTED THE ASSESSMENT ORDER WHEREAS LEARNED A. R. OF THE ASSESSEE SUPPORTED THE ORDER OF LEARNED CIT(A). 11. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. WE FIND THAT IN THE PRESENT YEAR , THE DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER IN RESPECT OF INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE TO ITS SISTER CONCERN NAMELY MKU (ARMOURS) PVT. LTD. AND M/S A. R. THERMOSES (P) LTD. THIS DISALLOWANCE WAS DELETED BY CIT(A) BY FO LLOWING TWO JUDGMENTS OF HON'BLE ALLAHABAD HIGH COURT RENDERED IN THE CASE OF PREM HEAVY ENGINEERING WORKS P. LTD. REPORTED IN [2006] 285 ITR 554 (ALL) AND IN THE CASE OF COMMISSIONER OF 8 INCOME - TAX AND ANOTHER VS RADICO KHAITAN LTD. REPORTED IN [2005] 274 ITR 354 (ALL) . SINCE THE ISSUE REGARDING GRANTING INTEREST FREE ADVANCE, WHICH IS LESS THAN INTEREST FREE OWN FUNDS AVAILABLE WITH THE ASSESSEE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THESE TWO JUDGMENTS , WE DO NOT FIND ANY REASON TO INTERFERE IN THE ORDER OF CIT(A) ON THIS ISSUE. 12. IN THE RESULT, THE APPEAL OF THE REVENUE STANDS DISMISSED. 13. IN THE COMBINED RESULT, THE APPEAL FOR ASSESSMENT YEAR 2006 - 07 IS DISMISSED AND APPEAL FOR ASSESSMENT YEAR 2007 - 08 IS PARTLY ALLOWED. (ORDER WAS PRONOU NCED IN THE OPEN COURT ON THE DATE MENTIONED ON THE CAPTION PAGE) SD/. SD/. (SUNIL KUMAR YADAV) ( A. K. GARODIA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 16 /12/2014. *C.L.SINGH COPY OF THE ORDER FORWARDED TO : 1.THE APPELLANT 2.THE RESPONDENT. 3.CONCERNED CIT 4.THE CIT(A) 5.D.R., I.T.A.T., LUCKNOW ASSTT. REGISTRAR