M/s.Mascot Industries, Kannur V. The DCIT, Kannur

ITA 295/COCH/2013

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 73847 (ITAT-COCHIN)
• Duration Of Justice: 8 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 02-12-2013
• Assessment Year: 2006-2007
• Appeal Filed On: 13-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K K JOHN
• Assessee Lawyers: V MOHANAN
• Keywords: Depreciation; Proportionate interest; Retrospective amendment; Cost of acquisition; Revenue expenditure; Capital expenditure
• Section: 143(3); 148; 6

Judgement Text

ITA NO. 295/ COCH/ 2013 1 IN THE INCOME TAX AP P EL LA TE T R IBUNAL COCHIN BENCH , COCHIN BEFORE S/SH RI N.R.S. GANESAN, JM & B. R. BASKARAN, AM ITA NO. 295 /COCH/ 2013 (ASST YEAR 2006 - 07 ) M/S MASCOT INDUSTRIES AZHIKODE PO KANNUR DIST KERALA VS THE DY COMMR OF INCOME TAX CIRCLE 1, KANNUR ( APPELLANT) (RESPONDENT) PAN NO. AAIFM4767E ASSESSEE BY SRI V MOHANAN , C.A. REVENUE BY SRI K K JOHN, SR DR DATE OF HEARING 4 TH DEC 2013 DATE OF PRONOUNCEMENT 17 TH , JAN 201 4 OR D ER PER B.R. BASKARAN, AM: THE APPEAL FILED BY THE ASSESSEE I S DIRECTED AGAINST THE ORDER DATED 28.3.2013 PASSED BY THE LD CIT(A) AND IT RELATES TO THE AY 2006 - 07. THE GROUNDS URG ED BY THE ASSESSEE GIVE RISE TO THE FOLLOWING TWO ISSUES: I) THE VALIDITY OF REOPENING OF THE ASSESSMENT; II) INTEREST DISALLOWED ON FUNDS DIVER TED FOR NON BUSINESS PURPOSES. 2 THE FACTS RELATING TO THE FACTS ARE STATED IN BRIEF: THE ASSESSMENT IN THE HANDS OF THE ASSESSEE WAS ORIGINALLY COMPLETED US 143(3) OF THE ACT ON 29.12.2008. SUBSEQUENTLY, THE ASSESSMENT WAS REOPENED BY ISSUING NOTICE U/S 148 ON 6 TH NOV 2009 BY THE AO ON NOTICING THAT THE ASSESSEE HAS DEBITED CAPITAL EXPENDITURE, VIZ., PURCHASE COST OF A YURVEDIC VESSELS AND F OLDING S TOOLS IN THE TRADING ACCOUNT WHICH WERE NOT ALLOWABLE AS REVENUE EXPENDITURE. HOWEVER, DU RING THE COURSE OF RE ASSESSMENT PROCEEDINGS, THE AO FOUND THAT THE ASSESSEE HAS TREATED ABOVE ITEMS AS ITS TRADING STOCK AND HAS SALE PROCEEDS THEREOF WAS INCLUDED IN THE SALES ITA NO. 295/ COCH/ 2013 2 ACCOUNT. A CCORDINGLY, THE AO FOUND THAT THE CLAIM FOR DEDUCTION OF PURCHASE COST OF AYURVEDIC VE SSELS AND FOLDING STOOLS I S CORRECT . HOWEVER, THE AO NOTICED THAT T HE ASSESSEE HAS GIVEN A SUM OF RS.47,52,000/ - AS INTEREST FREE LOANS AND ADVANCES TO VARIOUS PERSONS . THE AO ALSO NOTICED THAT THE ASSESSEE HAS AVAILED LOANS AND INTEREST PAID THERE ON W AS CLAIMED AS DEDUCTION. THE AO NOTICED THAT THE ASSESSEE WAS PAYING INTEREST ON LOANS TAKEN BY IT @ 7.5%. ACCORDINGLY, THE AO COMPUTED THE INTEREST @ 7.5% ON THE AMOUNT OF RS. 47,52,000/ - REFERRED ABOVE , WHICH WORKED OUT TO RS.3,56,400/ - , AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER BEFORE THE LD CIT(A). THE LD CIT(A) UPHELD THE VALIDITY OF THE REOPENING OF THE ASSESSMENT BY PLACING RELIANCE ON EXPLANATION 3 TO SECTION 147, WHICH WAS INSERTED BY THE FINANCE ACT 2009 WITH RETROSPECTIVE EFFECT FROM 1.4.1989. HE HAS ALSO UPHELD THE DISALLOWANCE OF INTEREST BY PLACING RELIANCE ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF V . I . BABY & CO (254 ITR 248 (KER) ) . AGGRIEVED, THE ASSESSEE HAS FLED THIS APPEAL BEFORE US. 3. ON MERITS OF ADDITION , THE LD AR SUBMITTED THAT THE ASSESSEE HAS GOT INTEREST FREE FUNDS TO THE TUNE OF RS.632.91 LACS IN THE FORM OF PARTNERS CAPITAL ACCOUNT. HE SUBMITTED THAT AMOUNTS BORROWED FROM OUTSIDERS WERE O NLY RS 180.65 LACS. HE SUBMITTED THAT T HE TOTAL ASSETS CREATED OUT OF OWN FUNDS AND LOAN FUNDS WAS RS.868.41 LAKHS AND HENCE THE BORROWED FUNDS FORM A SMALL PERCENTAGE OF TOTAL FUNDS AVAILABLE WITH THE FIRM. HE SUBMITTED THAT THE ASSESSEE HAS OBTAINED LO ANS FROM BANK AND FINANCIAL INSTITUTIONS FOR SPECIFIC PURPOSES AND HENCE THERE IS NO POSSIBILITY OF MAKING ANY DIVERSION. THE LD AR SUBMITTED THAT THE AO ADOPTED INTEREST RATE AT 7.5%, WHICH IS APPLICABLE TO PACKING CREDIT LOANS, FOR THE PURPOSE OF COMPUT ING INTEREST ON THE ALLEGED DIVERSION. HE SUBMITTED THAT THE PACKING CREDIT LOAN IS GIVEN BY BANKS AGAINST EXPORT ORDERS. THE ASSESSEE IS REQUIRED TO UTILIZE THE SAID LOAN ONLY FOR PURCHASING MATERIALS AND ITA NO. 295/ COCH/ 2013 3 MEETING OTHER EXPENSES R E QUIRED FOR PRODUCING THE PRODUCTS THAT ARE GOING TO BE EXPORTED. HE SUBMITTED THAT THE AO HAS IDENTIFIED A SUM OF RS.47.52 LACS AS FUNDS DIVERTED OUT OF BORROWED FUNDS FOR NON BUSINESS PURPOSES. OUT OF THE ABOVE, THE AMOUNT INVESTED IN CANARA BANK BOND S AND THE AMOUNTS GIVEN TO IL & FS ARE OUT OF BUSINESS CONSIDERATION S AND HENCE, THEY CANNOT BE CONSIDERED AS DIVERSION OF FUNDS . IN RESPECT OF OTHER AMOUNTS, THE AO HAS NOT PROVED THE NEXUS BETWEEN BORROWED FUND S AND THE ALLEGED DIVERSION OF BORROWED FUNDS . HE SUBMITTED THAT T HE LD CIT(A) HAS PLACED RELIANCE ON THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF V.I. BABY & CO (254 ITR 248). THE LD A.R SUBMITTED THAT IN THE CASE F V.I. BABY & CO., THE ASSESSEE THEREIN (A PARTNERSHIP FIRM) AVAILED HUGE LOANS AND THE PARTNE RS WITHDREW THE SAME, WHICH IS EVIDENCED BY THE FACT THAT THE PARTNERSS CAPITAL ACCOUNT SHOWED DEBIT BALANCES . HOWEVER, IN THE INSTANT CASE, THE PARTNERS ARE HAVING HUGE CREDIT BALANCES AND HENCE THE RATIO OF SAID DECISION CANNOT BE TAKEN SUPPORT OF BY T HE TAX AUTHORITIES. 3.1 ON THE CONTRARY, THE LD D R PLACED HEAVY RELIANCE ON THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS V.I. BABY & CO (254 ITR 248 (KER)) AND CONTENDED THAT THE AO WAS JUSTIFIED IN MAKING THE IMPUGNED DISA LLOWANCE. 4. WE HAVE HEARD RIVAL CONTENTIONS AND CAREFULLY PERUSED THE RECORD. THE ASSESSEE HAS FILED A COPY OF FINANCIAL STATEMENTS FOR THE YEAR ENDING 31.3.2006. A PERUSAL OF THE SAME WOULD SHOW THAT THE ASSESSEE FIRM IS HAVING A CAPITAL BALANCE O F RS.632.91 LAKHS AND RESERVE FUND S OF RS. 1.65 LAKHS. THE LOANS AND BORROWINGS STAND AT RS.203.15 LAKHS. ACCORDING TO THE LD A.R, TH E LOANS TAKEN FROM OUTSIDERS WERE ONLY RS.180.65 LAKHS AND THE REMAINING AMOUNT OF LOAN WAS TAKEN FROM PARTNERS ONLY. AS SUBMITTED BY LD A.R, THE TOTAL ASSETS AS ON 31.3.2006 STAND AT RS.868.41 LAKHS AND HENCE THE LOAN FUNDS CONSTITUTE ONLY 20% AND BALANCE 80% REPRESENTS PARTNERS FUNDS, I.E., OWN FUNDS. THE NET PROFIT EARNED DURING THE YEAR UNDER CONSIDERATION AS ITA NO. 295/ COCH/ 2013 4 PER THE P ROFIT AND LOSS ACCOUNT WAS RS.41.20 LAKHS , WITHOUT INCLUDING DEPRECIATION, INTEREST AND SALARY PAID TO THE PARTNERS . 4.1 ACCORDING TO THE ASSESSING OFFICER, THE FUNDS DIVERTED FOR NON - BUSINESS PURPOSES WERE RS.47.52 LAKHS. HOWE VER A CCORDING TO T HE ASSESSEE, AN AMOUNT OF RS.5.02 LAKHS GIVEN TO M/S IL & FS , WHICH IS INCLUDED IN THE ABOVE SAID AMOUNT OF RS.47.52 LAKHS , REPRESENTS ADVANCE GIVEN TO THAT FINANCIAL INSTITUTION FOR THE PURPOSE OF PREPARATION OF PROJECT FOR EXPANSION OF ASSESSEES BUSINES S. FURTHER IT WAS SUBMITTED THAT THE INVESTMENT OF RS.2.00 LAKHS MADE IN CANARA BANK BOND IS OUT OF BUSINESS EXIGENCY. IF WE REDUCE THE ABOVE SAID TWO AMOUNTS, THE INTEREST FREE ADVANCES GIVEN TO VARIOUS PARTIES WORK OUT TO ABOUT RS.40 .00 LAKHS. NOW THE QUESTION THAT ARISES IS WHETHER THE ABOVE SAID AMOUNT OF RS.4 0 .00 LAKHS WAS GIVEN OUT OF BORROWED FUNDS OR FROM OWN FUNDS. 4.2 WE HAVE ALREADY NOTICED THAT THE ASSESSEE HAS GENERATED A SUM OF RS.41.20 LAKHS AS NET PROFIT. IF WE INCLUDE DEPRECIATI ON WRITTEN OFF, INTEREST AND SALARY PAID TO THE PARTNERS, THE NET PROFIT AMOUNT WOULD GO TO RS.76.76 LAKHS, WHICH IS LESS THAN THE AMOUNT OF RS.4 0 .00 LAKHS CLAIMED TO HAVE BEEN GIVEN FREE OF INTEREST. BESIDES THE ABOVE, THE ASSESSEE IS HAVING OWN FUNDS TO THE TUNE OF RS.634.56 LAKHS (CAPITAL OF RS.632.91 LAKHS PLUS RESERVES OF RS.1.65 LAKHS). THUS, IT IS SEEN THAT THE ASSESSEE IS HAVING HUGE INTEREST FREE FUNDS WITH IT. 4.3 FURTHER, ACCORDING TO THE ASSESSEE, THE LOANS HAVE BEEN OBTAINED BY IT FR OM THE BANKS AND FINANCIAL INSTITUTIONS FOR SPECIFIC PURPOSES. ACCORDING TO THE ASSESSEE THE ASSESSEE HAVE AVAILED PACKING CREDIT LOANS, WHICH IS GIVEN AGAINST EXPORT ORDERS IN ORDER TO ENABLE THE ASSESSEE TO PRODUCE GOODS THAT ARE REQUIRED TO BE EXPORTED . THUS, ACCORDING TO THE ASSESSEE, ITA NO. 295/ COCH/ 2013 5 THERE WAS NO SCOPE FOR DIVERSION OF BORROWED FUNDS. THE ABOVE SAID CONTENTION OF THE ASSESSEE WAS NOT CONTROVERTED BY THE REVENUE. 4.4 THE LD CIT(A) AND THE LD D.R HAVE PLACED RELIANCE ON THE DECISION RENDERED B Y THE HONBLE KERALA HIGH COURT I N THE CASE OF V.I. BABY & CO. (SUPRA). HOWEVER , AS SUBMITTED BY THE ASSESSEE, IN THE CASE OF V.I. BABY & CO., THE PARTNERS ACCOUNT WERE HAVING DEBIT BALANCES, MEANING THEREBY THE PARTNERS HAVE WITHDRAWN LOAN FUNDS FOR THEI R PERSONAL PURPOSES. IT WAS CONTENDED BEFORE THE HONBLE HIGH COURT THAT THE PARTNERS HAVE WITHDRAWN FUNDS FROM THE AVAILABLE CASH BALANCES AND THE SAID CONTENTION WAS REJECTED BY THE HIGH COURT. IT IS PERTINENT TO NOTE THAT, UNDER DOUBLE ENTRY ACCOUNTI NG SYSTEM, THE CASH BALANCE (ASSET) IS REPRESENTED BY A LIABILITY (LOAN OR CAPITAL). IN THE CASE OF V.I. BABY & CO., (SUPRA), THE PARTNERS ACCOUNT SHOWED DEBIT BALANCE, MEANING THEREBY THERE WAS NO CAPITAL BALANCE. HENCE ONLY LIABILITY AVAILABLE IN THAT CASE WAS LOAN LIABILITIES AND IT WAS REPRESENTED BY CASH BALANCE IN THE ASSET SIDE OF THE BALANCE SHEET . HENCE, WITHDRAWAL OF CASH BALANCE WOULD ONLY MEAN THAT THE LOAN FUNDS HAVE BEEN WITHDRAWN. HENCE IN THE CASE OF V.I. BABY & CO., THE DIVERSION OF FUNDS WAS CLEARLY ESTABLISHED. IN VIEW OF THE FINANCIAL POSITION DISCUSSED ABOVE, IN OUR VIEW, THE DECISION RENDERED BY HONBLE KERALA HIGH COURT IN THE CASE OF V.I. BABY & CO., (SUPRA) CANNOT BE TAKEN SUPPORT OF BY THE REVENUE. 4.5 IN VIEW OF THE FOREGOING DISCUSSION S, WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE THAT IT HAS USED ONLY ITS OWN FUNDS FOR GIVING INTEREST FREE FUNDS. I N OUR VIEW, THE AO HAS FAILED TO ESTABLISH ABOUT THE DIVERSION OF BORROWED FUNDS FOR NON - BUSINESS PURPOSES. ACCORD INGLY, WE DO NOT FIND ANY REASON TO MAKE DISALLOWANCE OF PROPORTIONATE INTEREST EXPENDITURE. WE NOTICE THAT THE LD CIT(A) HAS UPHELD THE DISALLOWANCE BY FOLLOWING THE DECISION OF HONBLE JURISDICTIONAL ITA NO. 295/ COCH/ 2013 6 KERALA HIGH COURT IN THE CASE OF V.I. BABY & CO. (SUP RA). WE HAVE ALREADY NOTICED THAT THE RATIO OF THE SAID DECISION CANNOT BE APPLIED TO THE FACTS OF THE INSTANT CASE. ACCORDINGLY, WE ARE UNABLE TO AGREE WITH THE DECISION RENDERED BY LD CIT(A) ON THIS ISSUE. ACCORDINGLY, WE SET ASIDE THE ORDER OF LD CIT (A) ON THIS ISSUE AND DIRECT THE AO TO DELETE THE DISALLOWANCE OF INTEREST EXPENDITURE. 5. BOTH THE PARTIES ADVANCED THEIR ARGUMENTS ON THE LEGAL ISSUE RELATING TO THE VALIDITY OF RE - OPENING ASSESSMENTS AND VALIDITY OF THE ADDITION MADE. SINCE, WE HA VE DELETED THE DISALLOWANCE ON MERITS, WE DO NOT FIND IT NECESSARY TO ADJUDICATE THE SAID LEGAL ISSUE AS IT WOULD BE ACADEMIC IN NATURE. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 17 TH DAY OF JAN 2014 . SD/ - SD/ - (N.R.S. GANESAN) ( B.R. BASKARAN ) JUDICIAL MEMBER ACCOUNTANT MEMBER COCHIN: DATED 17 TH , JAN 201 4 RAJ* ITA NO. 295/ COCH/ 2013 7 C OPY TO: 1. APPELLANT M/S MASCOT INDUSTRIES, AZHIKODE, PO, KANNUR DIST 2. RESPONDENT DY COMMR OF INCOME TAX, CIRCLE 1, KANNUR 3. CIT( A) 4. CIT , CALICUT 5. DR 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR ITAT, COCHIN