The ITO, Ward-1(1), Baroda V. M/s. Aromix Pvt.Ltd., Mumbai

ITA 3255/AHD/2009

• Counselvise Citation: 325520514 RSA 2009
• Duration Of Justice: 1 year(s) 10 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-11-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-10-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALOK JOHRI
• Keywords: Fair market value
• Section: 143(3)

Judgement Text

, , , , , , . .. .' ' ' ' ' ' ' ' , # # # # $ $ $ $ IN THE INCOME TAX APPELLATE TRIBUNAL : B BENCH : AHMEDABAD BEFORE HONBLE SHRI BHAVNESH SAINI, J.M. & HONBLE SHRI A.MOHAN ALANKAMONY, A.M.) . ITA NO. 3255/AHD./2009 : %&- 2006-2007 I.T.O., WARD-1(1), BARODA VS- M/S. AROMIX PVT. LTD., BARODA (PAN : AACCA 9438K) ()* /APPELLANT) ( +,)* /RESPONDENT ) )* - . / APPELLANT BY : SHRI ALOK JOHRI, CIT, D.R. +,)* - . / RESPONDENT BY : SHRI TUSHAR P. HEMANI /0 - 12# / DATE OF HEARING : 05/10/2011 3'% - 12# / DATE OF PRONOUNCEMENT : 04/11/2011 / ORDER PER SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER : THIS APPEAL IS FILED BY THE REVENUE, AGGRIEVED WIT H THE ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS)-I, BARODA IN AP PEAL NO.CAB-I/122/08-09 DATED 22.09.2009 FOR THE ASSESSMENT YEAR 2006-2007 PASSED UNDER SECTION 250 R.W.S.143(3) OF THE I.T. ACT, 1961. 2. THE REVENUE HAS RAISED THREE GROUNDS IN ITS APP EAL WHEREIN GROUND NOS.2 AND 3 ARE GENERAL IN NATURE AND DO NOT REQUIRE ADJUDICATI ON. GROUND NO.1 IS REPRODUCED HEREINBELOW. 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(APPEALS) ERRED IN DELETING THE ADDITION U/S.40A (2)(B) OF RS.26,49,272/- MADE ON ACCOUNT OF THE EXCESS PAYMENT OF INTEREST T O THE ASSOCIATE CONCERNS OF THE ASSESSEE. 3. THE ASSESSEE IS A RESIDENT COMPANY, ORIGINALLY I N THE BUSINESS OF MANUFACTURING OF INDUSTRIAL FRAGRANCE. HOWEVER, DURING THE PREVIO US YEAR, THE ASSESSEE HAS SHOWN ITS BUSINESS AS FINANCIAL AND OTHER RELEVANT SERVICES. THE ASSESSEE FILED ITS RETURN OF ITA NO. 3255-AHD-09 2 INCOME ON 27.12.2006, WHICH WAS PROCESSED UNDER SEC TION 143(1) OF THE ACT. SUBSEQUENTLY, THE CASE WAS TAKEN UP FOR SCRUTINY AS SESSMENT AND THE ASSESSMENT WAS COMPLETED UNDER SECTION 143(3) OF THE ACT ON 14.11. 2008. ON VERIFICATION OF BALANCE SHEET AND THE DETAILS FURNISHED BY THE ASSESSEE, TH E LD. AO OBSERVED THAT THE ASSESSEE HAS OBTAINED UNSECURED LOANS AMOUNTING TO RS.5,88,0 0,865/- FROM M/S.SAI FRAGRANCE & FLAVOURS PVT. LTD. AND ZEST AROMAS P. LTD. THE AS SESSEE HAS ALSO MADE INTEREST PAYMENT OF RS.50,67,283/- TO THE ABOVE TWO COMPANIE S @ 9 AND 10% . FURTHER, ON VERIFICATION, IT WAS FOUND THAT M/S. SAI FRAGRANCE & FLAVOURS P. LTD. AND ZEST AROMAS P. LTD. WERE SHAREHOLDERS OF THE ASSESSEE COMPANY. FROM THESE FACTS, THE LD. AO CAME TO A CONCLUSION THAT THE ASSESSEE HAS MADE INTEREST PAYMENT OF RS.50,67,283/- TO THE PERSONS SPECIFIED IN THE PROVISIONS OF SECTION 40A( 2)(B) OF THE ACT. IT WAS ALSO OBSERVED THAT THE ASSESSEE HAD A BANK DEPOSIT AMOUN TING TO RS.5,13,67,177/- AS ON 31.03.2006, MAKING IT OBVIOUS THAT THE AMOUNT OBTAI NED AS LOAN FROM THE TWO COMPANIES MENTIONED ABOVE WERE DEPOSITED IN THE BAN K. THE ASSESSEE HAS ALSO RECEIVED AN AMOUNT OF RS.23,12,098/- AS INTEREST FR OM THE BANK ON THESE FDRS. THE RATE OF INTEREST PAID BY THE BANK TO THE ASSESSEE O N THE DEPOSITS WAS 4.5%. THUS, THE INTEREST EARNED ON THE BANK DEPOSITS WAS MUCH LOWER THAN THE RATE AT WHICH THE ASSESSEE HAS MADE INTEREST PAYMENT TOWARDS UNSECURE D LOAN TO THE TWO ASSOCIATE COMPANIES ATTRACTING THE PROVISIONS OF SECTION 40A( 2)(B) OF THE I.T. ACT. THE ASSESSEE EXPLAINED TO THE AO THAT TO MAKE UP THE DEFICIT OF INTEREST PAID TO THE ASSOCIATE PERSONS AND INTEREST RECEIVED ON BANK FIXED DEPOSITS, THE A SSESSEE HAD MADE AGREEMENT WITH M/S. DEEGEE SOFTWARE PVT. LTD. BY CREATING A THIRD PARTY CHARGE ON THE BANK FDR OF THE ASSESSEE IN FAVOUR OF M/S. DSPL FOR WHICH, M/S. DEEGEE SOFTWARE PVT. LTD. OFFERED TO PAY THE DIFFERENTIAL INTEREST. THE ASSES SEE HAD ALSO EXPLAINED THAT THE TRANSACTION WAS MADE AS A PRUDENT BUSINESSMAN. HOWE VER, THE LD. AO MADE AN ADDITION OF RS.26,49,272/-, BEING THE DIFFERENTIAL INTEREST SUPPLIED BY THE ASSESSEE WITH THE FOLLOWING OBSERVATIONS: I) THE ASSESSEE AS WELL AS THE AUDITOR OF THE COMPA NY HAS NOT DISCLOSED THE CRUCIAL INFORMATION THAT THE ASSESSEE HAD PAID INTEREST TO PERSONS ATTRACTED BY THE PROVISIONS OF SECTION 40A( 2)(B) OF THE ACT. ITA NO. 3255-AHD-09 3 II) THE ASSESSEE HAS OBTAINED THE FUNDS FROM THE T WO ASSOCIATE CONCERNS AND KEPT THE SAME IN THE BANK FIXED DEPOSI TS, EARNING LOWER INTEREST THAN WHAT WAS PAID TO THE ASSOCIATE CONCER NS. III) THERE IS NO DIRECT NEXUS BETWEEN THE FUNDS REC EIVED AS UNSECURED LOAN AND THE ASSESSEES ACTION OF CREATING CHARGE O N FDRS IN FAVOUR OF DEEGEE SOFTWARE PVT. LTD. THEREFORE, THE INCOME EAR NED, SUBSEQUENTLY BY CREATING CHARGE, COUPLED WITH THE INTEREST EARNE D OUT OF FDRS, IS NOT A FAIR MARKET VALUE. 4. THE ASSESSEE CARRIED THE MATTER BEFORE THE LD. C IT(A). THE LD. CIT(A), AFTER ANALYZING THE ISSUE, ARRIVED AT A FINDING THAT THE INTEREST PAYMENT TO THE TWO COMPANIES VIZ. M/S. SAI FRAGRANCE & FLAVOURS P. LTD. AND ZEST AROMAS P. LTD. WERE NOT TO ASSOCIATE COMPANIES AS PROVIDED UNDER SECTION 40A(2 )(B) OF THE ACT AND FURTHER, THE ASSESSEE HAD GAINED .25% TO 1.25% FROM THE TWO TRAN SACTIONS OF BORROWING AND LENDING AND THEREFORE, DELETED THE ADDITION MADE BY THE LD. A.O. THE RELEVANT PARA OF THE LD. CIT(A)S ORDER IS REPRODUCED HEREINBELOW FO R REFERENCE. 6. I HAVE CONSIDERED THE SUBMISSIONS OF THE ID. A .R. AND THE FACTS OF THE CASE. THERE ARE TWO ASPECTS TO THE MATTER. THE FIRST IS W HETHER THE PROVISIONS OF SECTION 40A(2)(B) WOULD BE APPLICABLE AT ALL ON THE FACTS OF THE CASE. THE SECOND ASPECT IS THE SUBSTANTIVE ONE WITH REGARD TO THE FACT AS TO WHETHER EXCESSIVE PAYMENT OF INTEREST WAS MADE. TAKING UP T HE FIRST ASPECT, IT IS SEEN THAT SECTION 40A(2)(B) PROHIBITS EXPENDITURE WHICH IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OR THE LEGIT IMATE NEEDS OF THE BUSINESS OR THE BENEFIT DERIVED/ACCRUING THEREFROM. HOWEVER, TH E RESTRICTIONS WOULD APPLY ONLY IN THE CASE OF TRANSACTIONS BETWEEN PERSONS SP ECIFIED IN SECTION 40A(2)(B). IN THE CASE OF A COMPANY, THE PROVISIONS OF SECTION 40A(2)(B)(IV) & (VI) WOULD BE APPLICABLE. AS PER THE PROVISIONS OF THESE TWO S UB-CLAUSES, THE TRANSACTIONS ARE HIT IF THE ASSESSEE HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OF THE SPECIFIED PERSON OR THE SPECIFIED PERSON HAS A SUBSTANTIAL IN TEREST IN THE BUSINESS OF THE ASSESSEE. IT IS NOTEWORTHY THAT HAVING ANY INTEREST WOULD NOT BE SUFFICIENT TO ATTRACT THE PROVISIONS; THE INTEREST MUST BE A SUBS TANTIAL INTEREST. IN THE EXPLANATION BELOW SECTION 40A(2) SUBSTANTIAL INTERE ST HAD BEEN DEFINED, IN THE CASE OF A COMPANY, TO MEAN THE BENEFICIAL OWNER OF SHARES CARRYING NOT LESS THAN 20% OF THE VOTING POWER. IN THE INSTANT CASE, SFF AND ZAPL ARE JOINT SHAREHOLDERS ALONG WITH ONE OF THE DIRECTORS, SHRI B.J. SHAH. THE COMBINED SHAREHOLDING OF M/S SSF & ZAPL COMES TO 0.01799% OF THE VOTING POWER (TOTAL 9 SHARES OUT OF 50,020 SHARES). HENCE IT IS QUITE E VIDENT THAT NEITHER SFF NOR ITA NO. 3255-AHD-09 4 ZAPL WAS A SPECIFIED PERSON IN TERMS OF SEC. 40A(2) (B). ON THIS ACCOUNT ALONE, THE DISALLOWANCE CANNOT BE SUSTAINED. 6.1 MOREOVER, LOOKING AT THE SECOND ASPECT ALSO, IT IS SEEN FROM THE GUARANTEE AGREEMENT ENTERED INTO BETWEEN DSPL AND THE ASSESSE E THAT THE AGREEMENT PROVIDED AS UNDER:- 'THE BORROWER SHALL PAY TO THE GUARANTOR ON HALF YE ARLY BASIS DIFFERENTIAL INTEREST PAYMENT BASED ON THE INTEREST PAYABLE @ 10.25% PA ON THE FIXED DEPOSIT AMOUNT CHARGED TO BANK FOR FINANCIAL ASSISTANCE MINUS INTEREST ACCRUED, PAYABLE OR PAID BY BANK ON SUCH. DEPOSIT KEPT WITH BANK AND ENSURE THAT AROMIX SHALL GET AT LEAST MINIMUM RETURN OF 10.25% PER ANNUM (HALF YEARLY PAY ABLE) FROM BOTH SOURCES TOGETHER (I.E. INTEREST FROM BANK AS W ELL AS DIFFERENTIAL INTEREST FROM BORROWER) DURING THE PERIOD TILL BORR OWER ENJOY SUCH FACILITIES FROM BANK AND CHARGE ON BANK BE RELEASED ON FIXED DEPOSIT OF GUARANTOR. THE SAID AMOUNT, OF DIFFERENTIAL INTE REST BE SUBJECT TO TAX DEDUCTED AT SOURCE PER APPLICABLE PROVISION OF INCO ME TAX ACT FROM TIME TO TIME. THE DIFFERENTIAL INTEREST PAYMENT AND MINIMUM RETUR N BE PAID TO GUARANTOR UNTIL OTHERWISE DECIDED BETWEEN PARTIES T O AGREEMENT IN WRITING FOR CHANGE BASED ON CHARGEABLE INTEREST ON THIRD PARTY BORROWING AND INTEREST PAYABLE ON TERM OR OTHER REL EVANT FIXED DEPOSIT FROM TIME TO TIME. ' 5. THE LD. D.R. STOUTLY ARGUED BEFORE US THAT THE A SSESSEE HAD PAID INTEREST ON ITS BORROWING @ 9 AND 10% AND DEPOSITED THE BORROWED FU ND IN BANK FIXED DEPOSIT EARNING INTEREST OF 4.5%. BY THIS ACT OF THE ASSESS EE, THE ASSESSEE HAD INCURRED A LOSS BY MAKING EXCESS PAYMENT TO ASSOCIATE PERSONS COVERED UNDER SECTION 40A(2)(B) OF THE ACT. IT WAS, THEREFORE, PRAYED THAT THE ORDER OF TH E LD. A.O. MAY BE SUSTAINED. 6. THE LD. A.R. RELIED UPON THE ORDER OF THE LD. CI T(A) AND CONTENDED THAT THE ADDITION HAS TO BE DELETED IN THE LIGHT OF THE FIND ING OF THE LD. CIT(A) THAT THE PAYMENT MADE BY THE ASSESSEE TOWARDS INTEREST WERE NOT RELA TED TO ASSOCIATE CONCERNS AS COVERED UNDER SECTION 40A(2)(B) OF THE ACT. MOREOVE R, THE ASSESSEE HAS WISELY MADE A BUSINESS TRANSACTION WITH M/S. DEEGEE SOFTWARE PVT. LTD., EARNING INTEREST AND THEREBY MADE A NET GAIN ON THE TRANSACTION TO THE EXTENT OF .25% TO 1.25%. THE LD. A.R. HUMBLY SUBMITTED THAT THE ORDER OF THE LD. CIT(A) M AY BE SUSTAINED. ITA NO. 3255-AHD-09 5 7. WE HAVE HEARD RIVAL SUBMISSIONS AND CAREFULLY PE RUSED THE MATERIALS FROM THE RECORD. AT THE OUTSET, WE MUST SAY THAT THE FINDING S OF THE LD. CIT(A) WITH RESPECT TO THE PAYMENT OF INTEREST MADE BY THE ASSESSEE TO THE TWO COMPANIES VIZ. M/S. SAI FRAGRANCE & FLAVOURS P. LTD. AND ZEST AROMAS P. LTD . WERE NOT RELATED TO THE ASSOCIATE CONCERNS, THE REVENUE HAS NOT COME OUT WITH SUFFICI ENT MATERIALS BEFORE US TO DISPROVE THE SAME. FURTHER IT IS APPARENT THAT, WHEN THE WHO LE TRANSACTION IS VIEWED, THE ASSESSEE HAS ONLY GAINED FROM ITS ACTIVITY OF BORRO WING AND FURNISHING BANK GUARANTEE. THE REVENUE HAS NOT COME BEFORE US WITH ANY DOCUMEN TARY EVIDENCE TO PROVE CONTRARY TO THE FINDING OF THE LD. CIT(A). THEREFOR E, FROM THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE LEFT WITH NO OTHER OPTION OTHER THAN TO CONFIRM THE ORDER OF THE LD. CIT(A). IT IS ORDERED ACCORDINGLY. 8. IN THE RESULT, THE APPEAL FILED BY THE REVENUE I S DISMISSED. 4 - 3'% 5 & 04 / 11 /2011 ' 6 - 70 8 THIS ORDER PRONOUNCED IN COURT ON 04/11/2011. SD/- SD/- (BHAVNESH SAINI) (A.MOHAN ALANKAMO NY) JUDICIAL MEMBER ACCOUNTANT M EMBER DATED : 04/11/2011 - -- - +19 +19 +19 +19 :9%1& :9%1& :9%1& :9%1&- -- - 1. )* 2. +,)* 3. 1 /> 4. />- - 5. 97 +1 , , 8 6. 7B C4 , D/ F , 8 TALUKDAR/ SR. P.S.