THE ITO 9(2)-3, MUMBAI V. M/S. MAGNUM POLYSCAKS LTD, MUMBAI

ITA 3113/MUM/2008

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6195 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Next Hearing Date: 22-11-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 07-05-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: S K SINGH
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I MUMBAI BEFORE SHRI S.V. MEHROTRA (AM) AND SMT. ASHA VIJAYARA GHAVAN (JM) ITA NO. 3113/MUM/2008 ASSESSMENT YEAR- 2003-04 THE INCOME TAX OFFICER 9(2)-3, AAYAKAR BHAVAN, MUMBAI-400 020 M/S. MAGNUM POLYSACKS LTD., 112-A, MAGNUM HOUSE, ALMEIDA ROAD, BANDRA(W), MUMBAI-400 050 PAN-AACCM 5049A (APPELLANT) VS. (RESPONDENT) APPELLANT BY: SHRI VISHWAS MEHENDALE RESPONDENT BY: SHRI S.K. SINGH O R D E R PER ASHA VIJAYARAGHAVAN (JM) THIS APPEAL PREFERRED BY THE REVENUE IS DIRECTED AG AINST THE ORDER DATED 4.2.2008 PASSED BY THE LD. CIT(A)-IX FOR THE ASSESSMENT YEAR 2003-04 2. THE ONLY GROUND RAISED BY THE REVENUE IS THAT TH E LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 19,00,000/- BEING I NTEREST ATTRIBUTABLE TO AMOUNTS ADVANCED AS INTEREST FREE LOANS TO THE SIST ER CONCERN AND GROUP COMPANIES. 3. THE APPELLANT IS ENGAGED IN TRADING AND BROKING BUSINESS DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICE R NOTICED THAT THE APPELLANT HAD DEBITED AN AMOUNT OF RS 19 LACS TO TH E P/L ACCOUNT UNDER THE HEAD INTEREST AND FINANCE CHARGE PAID. THE A PPELLANT WAS THEREFORE ASKED TO EXPLAIN AS TO WHY THE SAID INTER EST SHOULD NOT BE DISALLOWED IN VIEW OF THE FACT THAT INTEREST FREE L OAN WERE ADVANCED TO ITA NO. 3113/M/08 2 VARIOUS COMPANIES. AFTER EXAMINING THE EXPLANATION OF THE ASSESSEE THE A.O. DISALLOWED RS. 19 LAKHS OF THE INTEREST FINANC E CHARGES, WITH THE FOLLOWING OBSERVATIONS: (I) ALL THE CONCERNS TO WHOM ADVANCES ARE GIVEN ARE CON TROLLED BY THE SAME GROUP OF PEOPLE. (II) THE BUSINESS PURPOSE HAS NOT BEEN PROVED BY ANY DOCUMENTARY EVIDENCE (III) NO EVIDENCE WAS PRODUCED FOR THE COMPLETION OF THE TRANSACTIONS AS CLAIMED BY US IN THE AFORESAID SUBM ISSIONS (IV) THE PARTIES TO WHOM LOANS ARE GIVEN APPEAR TO BE CL OSELY CONNECTED TO THE ASSESSEE COMPANY (V) THE APPELLANT HAS NOT BEEN ABLE TO ESTABLISH THE AL LEGED INTEREST BEARING LOANS OF M/S. MARVEL INTEREST LTD IS USED FOR BUSINESS PURPOSES (VI) THE METHOD OF ACCOUNTING FOLLOWED BY THE APPELLANT IS ERRONEOUS. (VII) THE AO RELYING ON THE JUDGMENTS OF THE HONBLE COUR TS HAS DISALLOWED THE INTEREST OF RS. 19,00,000/- 4. AGGRIEVED THE ASSESSEE FILED AN APPEAL BEFORE TH E LD. CIT(A). BEFORE THE LD. CIT(A) THE LEARNED COUNSEL FOR THE ASSESSE E HAS EXPLAINED THAT THE INTEREST WAS PAID ON UNSECURED LOANS OBTAINED F ROM M/S MARVEL INDUSTRIES LTD IN EARLIER YEARS. REGARDING THE INT EREST FREE ADVANCES GIVEN TO OTHER CONCERNS, IT IS SUBMITTED THAT NO IN TEREST WAS CHARGED AS THE ADVANCES WERE GIVEN PURELY FOR THE BUSINESS PUR POSE AND HENCE, THERE WAS NO QUESTION OF CHARGING ANY INTEREST THER EON. IT IS ALSO SUBMITTED THAT ALL THE ADVANCES EXCEPT TO M/S VIVMU M EXPORT TRADE PVT. LTD (REFERRED TO SL.NO.6 OF ANNEXURE A ) WERE GI VEN DURING THE EARLIER YEARS AND HAVE BEEN ACCEPTED AS BUSINESS ADVANCES D URING RELEVANT YEARS AND THE TRANSACTIONS HAVE ACTUALLY MATERIALI ZED DURING SUBSEQUENT YEARS. HENCE, THERE SHOULD NOT BE ANY DO UBT ABOUT THE BUSINESS PURPOSES BEHIND THE SAID TRANSACTION. 5. IT IS FURTHER CONTENDED THAT THE ASSESSEE HAS AL SO RECEIVED VARIOUS INTEREST FREE ADVANCES AND IT HAD HUGE AMOUNT OF SU NDRY CREDITORS ITA NO. 3113/M/08 3 WHICH WERE ALMOST EQUAL TO THE INTEREST FREE BUSINE SS ADVANCES (SCHEDULE I OF THE AUDITED ACCOUNTS). THUS, IT IS A PART OF THE ASSESSEES BUSINESS TO RECEIVE ADVANCES FROM CREDITORS AND GIVE ADVANCE S TO THE CUSTOMERS FOR BUSINESS PURPOSE. REGARDING THE AMOUNT ADVANCED TO GULHAR TRADING & INVESTMENT PVT. LTD. RS. 8,09,584/- MEADOWS FINVE ST PVT. LTD RS. 83,92,615- NIJUNJ PROPERTIES PVT. LTD RS. 31,99,172 /- MODELE FURNITURE PVT. LTD RS 41,75,524/- IT IS SUBMITTED THAT THE SA ME WERE FOR PURCHASING SHARES THROUGH THESE PARTIES DURING THE EARLIER YEARS. THE DEAL FOR PURCHASE OF SHARES COULD NOT BE COMPLETED AND THE PAYMENTS REMAINED AS ADVANCES AGAINST THE DEAL WHICH COULD N OT BE COMPLETED. SINCE THESE ADVANCES WERE MADE PURELY FOR BUSINESS OBJECT, NO INTEREST WAS CHARGED ON THESE ADVANCES. 6. AS REGARDS THE ADVANCES OF RS. 2,50,000/- WHICH WAS MADE TO MR. KIRIT SALOT, BROKER FOR GETTING EXPORT ORDER FOR P LASTIC ITEMS. THE DEAL WAS NOT EXECUTED NOR THE ADVANCE WAS CLAIMED AS REF UND. FURTHER, THE ADVANCE MADE TO VIVMUM EXPORTRADE PVT. LTD OF RS 32 ,07,585/- HAS BEEN PAID FOR PURCHASE ITEMS TO BE EXPORTED WHICH W AS MATERIALIZED DURING THE P.Y. 7. THE ASSESSEE FURTHER EXPLAINED THAT IN RESPECT OF GULHAR TRADING & INVESTMENTS PVT. LTD THE DEAL OF SHARES COULD NO T BE COMPLETED FOR WHICH ADVANCE WAS GIVEN NOR HE HAS THE CAPACITY TO RETURN THE MONEY BACK TO THE COMPANY, HENCE THE COMPANY HAS NO OPTIO N, BUT TO WRITE OFF THE SAME IN THE BOOKS IN THE A.Y. 2004-05. 8. IN RESPECT OF MEADOWS FINVEST PVT. LTD., IT IS SUBMITTED THAT THE SAID PARTY HAS COMPLETED THEIR COMMITMENTS IN A.Y. 2004-05 TO GIVE CERTAIN SHARES FOR WHICH ADVANCE WAS GIVEN AFTER GI VING SOME DISCOUNT OF RS. 6,66,162/- AS FULL IN THE VALUE OF SHARES, HENC E COMPANY HAS GIVEN EFFECT OF INVESTMENT IN SHARES IN A.Y. 2004-05 AND WRITTEN OFF RS. 6,66,162/- THE AMOUNT OF DISCOUNT GIVEN TO RESPECTI VE PARTIES. THE ITA NO. 3113/M/08 4 ADVANCE WAS GIVEN TO NIKUNJ PROPERTIES PVT. LTD FOR PURCHASE OF ALLOTMENT OF RESIDENTIAL PROPERTIES. THE SAID ALLOTMENT IS I N THE NAME OF THE SAID PARTY. THE SAID RESIDENTIAL PROJECT IS STILL UNDER PROGRESS, HOWEVER, IN THE BOOKS OF ACCOUNTS FOR A.Y. 2004-05, THE COMPANY HAS GIVEN EFFECT OF ALLOTMENT MONEY OF RS. 8,30,000/- THE AMOUNT GIVEN TO DEVELOPER BY THE SAID PARTY AND WOULD GIVEN EFFECT OF REMAINING ADVA NCES ONCE PROJECT WOULD COMPLETE AND TRANSFER THE SAME TO THE APPELLA NT COMPANY. IN RESPECT OF MODELE FURNITURE PVT. LTD IT IS SUBMITTE D THAT THE SAID PARTY IS UNABLE TO COMPLETE THE DEAL IF SHARES FOR WHICH ADV ANCES WERE GIVEN, HOWEVER., THE SAID PARTY HAS AGREED TO TAKE OVER TH E LIABILITIES OF THE COMPANY FOR THE SAME AMOUNT TO WHOM THE COMPANY HA S TO PAY ULTIMATELY. HENCE IN THE AY 2004-05 THE COMPANY HA S TRANSFERRED THE LIABILITIES OF RS 41,75,524/- IN THE ACCOUNT OF THE SAID PARTY AND SQUARE UP THE ACCOUNT. 9. THUS, IT IS THE ASSESSEES CONTENTION THAT THE A FORESAID ADVANCES WERE GIVEN FOR SPECIFIC PURPOSES AND EFFECT WOULD B E GIVEN UPON FULFILLMENT OF DEAL IN SUCCEEDING YEAR. IT IS SUBMI TTED THAT AO HAS RELIED UPON SOME OF THE JUDGEMENTS OF THE HIGHER COURTS. THE SAME MAY BE APPLICABLE TO THE CASE WHERE THE INTEREST FREE ADVA NCES ARE GIVEN FOR THE BUSINESS PURPOSE AND THE SAID FACT WAS ALSO ACCEPTE D BY THE AO WHILE COMPLETING THE ASSESSMENT U/S 143(3) FOR THE A.Y. 2001-02. 10. RELIANCE IS PLACED ON HONBLE GUJARAT HIGH COU RT JUDGMENT IN THE CASE OF CIT VS MOTILAL HIRABAI SPINNING & WEAVING C O. LTD (113 ITR 173 GUJ) WHEREIN THE HONBLE COURT HAS HELD THAT THE AC TIVITY OF ADVANCING MONIES TO VARIOUS PARTIES WAS A SORT OF AN ORGANIZE D ACTIVITY UNDERTAKEN BY THE ASSESSEE COMPANY AND THAT THEREFORE ITS INC OME WAS LIABLE TO BE TAXED AS PROFITS AND GAINS OF BUSINESS AND NOT AS INCOME FROM OTHER SOURCES. THEREFORE THE APPELLANT RELYING ON THE AB OVE JUDGMENT HAS CONTENDED THAT NO INTEREST HAS BEEN CHARGED ON THES E ADVANCES. ITA NO. 3113/M/08 5 11. IT IS SUBMITTED THAT THE ASSESSEE HAD SUFFICIEN T INTEREST FREE FUND IN THE FORM OF SUNDRY CREDITORS AS ON 31.3.2003 WHICH COULD BE SAID TO BE UTILIZED FOR THE PURPOSE OF MAKING INTEREST FREE AD VANCES FOR THE PURPOSE OF BUSINESS. BESIDES THIS INTEREST FREE SUNDRY CRED ITORS AS ON 31.3.2003 WERE ALMOST EQUAL TO THE INTEREST FREE BUSINESS ADV ANCES. 12. THE LD. CIT(A) ALLOWED THE ASSESSEES APPEAL BY OBSERVING AS UNDER: I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS OF TH E CASE, APPELLANTS SUBMISSION AND THE AOS CONTENTION AS W ELL. THERE IS FORCE IN THE APPELLANTS CONTENTION THAT NO INTERES T WAS CHARGED AS THE ADVANCES WERE GIVEN PURELY FOR THE BUSINESS PUR POSE AND HENCE THERE WAS NO QUESTION OF CHARGING ANY INTEREST THER EON. I FIND THAT ALL SUCH ADVANCES EXCEPT M/S VIVMUM EXPORT TRADE PV T. LTD WERE GIVEN DURING THE EARLIER YEARS AND HAVE BEEN ACCEPT ED AS BUSINESS ADVANCES DURING THE RELEVANT YEARS AND ALL SUCH TR ANSACTIONS HAVE ACTUALLY MATERIALIZED DURING THE SUBSEQUENT YEARS. SINCE, THERE IS NO CHANGE IN THE FACTS OF THE CASE, THEREFORE I DONT FIND ANY JUSTIFICATION IN AOS ACTION WHO HAS CHANGED ITS VIEW DURING THE YEAR UNDER CONSIDERATION. BESIDES THIS IT IS ALSO OBSERVED TH AT THE APPELLANT HAS ALSO RECEIVED VARIOUS INTEREST FREE ADVANCES WH ICH WERE ALMOST EQUAL TO INTEREST FREE BUSINESS ADVANCES. SO FAR A S ADVANCE MADE TO VIVMUM EXPORT TRADE PVT. LTD IS CONCERNED IT IS OBSERVED THAT IT WAS PAID FOR PURCHASE OF ITEMS TO BE EXPORTED WHICH WAS MATERIALIZED DURING THE PREVIOUS YEAR. AS PER THE M EMORANDUM AND ARTICLES OF ASSOCIATION ONE OF THE OBJECT INCIDENTA L TO THE MAIN OBJECT IS TO RECEIVE ADVANCE FROM CREDITORS AND GIVE ADVAN CES TO THE CUSTOMERS FOR BUSINESS PURPOSE, WHICH IS ALSO AN OR GANIZED ACTIVITY UNDERTAKEN BY THE APPELLANT COMPANY FROM THE EARLIE R YEARS, THEREFORE, I AM OF THE CONSIDERED VIEW THAT THE ADV ANCES HAVE BEEN GIVEN FOR BUSINESS PURPOSE. THEREFORE, THE DISALLO WANCES MADE BY THE AO AMOUNTING TO RS. 19 LACS IS HEREBY DELETED. 13. AGGRIEVED THE REVENUE IS ON APPEAL. WE FIND TH AT THE LD. CIT(A) HAS FOUND IT AS A FACT THAT ALL THE ADVANCES HAVE B EEN GIVEN FOR THE PURPOSE OF BUSINESS. FURTHER EXCEPT FOR THE ADVANCE TO MS. VIVMUM EXPORT TRADE PVT. LTD, ALL THE OTHER ADVANCES WERE MADE IN THE EARLIER YEARS AND NO DISALLOWANCE INTEREST HAS BEEN MADE IN RESPECT OF THOSE ITA NO. 3113/M/08 6 LOANS/ ADVANCES IN THE EARLIER YEARS. THE LD.CIT(A) FOUND THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS TO PROV IDE THESE INTEREST FREE ADVANCES. NOTHING HAS BEEN BROUGHT FORTH IN THE HEA RING BEFORE US TO REBUT THESE FINDINGS. IN THE CIRCUMSTANCES WE UPHOL D THE FINDINGS OF FACT BY THE LD. CIT(A) AND CONFIRM THE DELETION OF DISAL LOWANCE OF INTEREST OF RS. 19 LAKHS AS NOT BEING RELATABLE TO INTEREST FRE E ADVANCES GIVEN BY THE ASSESSEE. 14. IN THE RESULT THE APPEAL FILED BY THE REVENUE I S DISMISSED. ORDER PRONOUNCED ON THIS 30 TH DAY OF NOVEMBER, 2010 SD/- SD/- (S.V.MEHROTRA) (ASHA VI JAYARAGHAVAN) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED 30 TH NOVEMBER, 2010 RJ COPY TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT-CONCERNED 4. THE CIT(A)-CONCERNED 5. THE DR I BENCH TRUE COPY BY ORDER ASSTT. REGISTRAR, I.T.A.T, MUMBAI ITA NO. 3113/M/08 7 DATE INITIALS 1 DRAFT DICTATED ON: 24.11.2010 SR. PS/PS 2. DRAFT PLACED BEFORE AUTHOR: 25.11.2010 ______ SR. PS/PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER: _________ ______ JM/AM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER: _________ ______ JM/AM 5. APPROVED DRAFT COMES TO THE SR. PS/PS: _________ ______ SR. PS/PS 6. KEPT FOR PRONOUNCEMENT ON: _________ ______ SR. PS/PS 7. FILE SENT TO THE BENCH CLERK: _________ ______ SR. PS/PS 8. DATE ON WHICH FILE GOES TO THE HEAD CLERK: _________ ______ 9. DATE OF DISPATCH OF ORDER: _________ ______