ACIT, Ludhiana V. M/s Impact Agencies (P) Ltd., Ludhiana

ITA 35/CHANDI/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86122 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-01-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 24-12-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 12-01-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: MANJIT SINGH
• Assessee Lawyers: S R CHHABRA
• Keywords: Business expenditure; Earning of tax free income; Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI T.R. SOOD, ACCOUNTANT MEMBER ITA NO. 35/CHD/2012 ASSESSMENT YEAR: 2008-09 THE ACIT, VS M/S IMPACT AGENCIES (P) LTD., CIRCLE V. LUDHIANA LUDHIANA PAN NO.AAACI4730N C.O. NO. 10/CHD/2012 (IN ITA NO. 35/CHD/2012) ASSESSMENT YEAR: 2008-09 M/S IMPACT AGENCIES (P) LTD., VS THE ACIT, CIRCLE- V, LUDHIANA LUDHIANA PAN NO.AAACI4730N (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MANJIT SINGH RESPONDENT BY : SHRI S.R. CHHABRA & SHRI AMARJIT K AMBOJ DATE OF HEARING : 24.12.2014 DATE OF PRONOUNCEMENT : 12.1.2015 ORDER PER T.R.SOOD, A.M. THE APPEAL FILED BY THE REVENUE AND CROSS OBJECTION BY THE ASSESSEE ARE DIRECTED AGAINST THE ORDER DATED 15.11.2011 OF CIT( A)-II, LUDHIANA. 2. IN THIS APPEAL THE REVENUE HAS RAISED THE FOLLOW ING GROUNDS:- 1.(A) THAT THE LD. CIT(A)-II, LUDHIANA, ON FACTS AS WELL AS IN LAW HAS ERRED IN DELETING DISALLOWANCE OF RS. 28,87 ,950/- OUT OF TOTAL DISALLOWANCE OF RS. 37,80,968/- MADE U/S 1 4-A OF THE I.T. ACT, 1961 READ WITH RULE 8D OF I.T. RULES. (B) THAT THE LD.CIT(A), HAS FAILED TO APPRECIATE THA T CLAUSE 2(II) OF RULE 8D ENVISAGES COMPUTATION OF DISALLOWA BLE THE AMOUNT ON THE BASIS OF GROSS INTEREST PAID, AS THIS IS THE 2 AMOUNT, WHICH IS NOT ATTRIBUTABLE TO ANY PARTICULAR INCOME OR RECEIPT. 2. THAT THE ORDER OF THE CIT(A)-II, LUDHIANA BE SET ASIDE AND THAT OF THE A.O. BE RESTORED. AND IN THE CROSS OBJECTION FILED BY THE ASSESSEE FO LLOWING GROUNDS HAVE BEEN RAISED:- 1. THAT THE LD. COMMISSIONER OF INCOME TAX (APPEAL) -II, LUDHIANA HAS ERRED IN LAW AND ON THE FACTS OF THE CASE:- A) BY SUSTAINING PART DISALLOWANCE OF RS. 13,46,704/-, OUT OF TOTAL DISALLOWANCE OF RS. 19,23,864/-, MADE OUT OF INTERE ST EXPENSES PAID ON ACCOUNT OF INTEREST CHARGED @10% ON ADVANCE MADE TO SISTER/ASSOCIATE CONCERN AGAINST INTEREST PAID @15% (AVERAGE RATE) ON UNSECURED LOANS AND THEREBY ALLOWED ONLY P ART RELIEF OF RS. 5,77,160/-. B) BY SUSTAINING PART DISALLOWANCE OF RS. 44,463/- OUT OF TOTAL DISALLOWANCE OF RS. 1,33,363/-, OUT OF REVENUE BUSI NESS EXPENSES CHARGED UNDER THE HEAD OF MISCELLANEOUS EXPENSES, O NLY ON ADHOC BASIS AND THEREBY ALLOWED ONLY PART RELIEF OF RS. 88,900/- C) BY SUSTAINING PART DISALLOWANCE OF RS. 8,93,018/- OUT OF TOTAL DISALLOWANCE OF RS. 37,80,968/- MADE U/S 14A OF THE INCOME TAX ACT, 1961 ON ACCOUNT OF EXPENDITURE IN RELATION TO THE INVESTMENTS MADE IN THE SHARES OF OTHER GROUP COMPA NIES AND THEREBY ARBITRARILY UPHELD THE APPLICATION OF RULE 8D OF THE INCOME TAX RULES, 1962. 3. FIRST WE SHALL TAKE UP THE REVENUES APPEAL AS W ELL AS GROUND 1 (C ) IN THE CROSS OBJECTION. 4. THE BRIEF FACTS OF THE CASE ARE THAT DURING ASSE SSMENT PROCEEDINGS ASSESSING OFFICER NOTICED THAT ASSESSEE HAD MADE IN VESTMENT IN SHARES, 3 THEREFORE, HE INVOKED THE PROVISIONS OF SECTION 14A READ WITH RULE 8D AND MADE DISALLOWANCE OF RS. 37,80,968/-. 5. ON APPEAL, IT WAS MAINLY SUBMITTED THAT ASSESSEE HAS ITSELF MADE DISALLOWANCE IN THE COMPUTATION AND REFERENCE WAS M ADE TO THE EARLIER ORDERS. IT WAS FURTHER SUBMITTED THAT DURING THE YEAR UNDER CONSIDERATION ALSO THE ASSESSEE HAS ITSELF DISALLOWED A SUM OF RS. 3,80,65 7/-. THEREAFTER, A REFERENCE WAS MADE TO THE FUNDS POSITION AND RELIANCE WAS ALS O PLACED ON VARIOUS CASE LAWS. 6. THE LD. CIT(A) AFTER CONSIDERING THESE SUBMISSIO NS REDUCED THE DISALLOWANCE BECAUSE HE OBSERVED THAT IN EARLIER YE ARS ALSO THE DISALLOWANCE WAS MADE FOR LOWER AMOUNT AND FURTHER ASSESSING OFFICER HAD ALREADY DISALLOWED PART OF THE INTEREST BECAUSE FUND HAVE BEEN DIVERTE D TO THE SISTER CONCERN. 7. BOTH THE PARTIES WERE HEARD. 8. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND FORCE IN THE SUBMISSIONS LD. COUNSEL FOR THE ASSESSEE THAT IF THERE WAS NO I NCOME THEN DISALLOWANCE U/S 14A CANNOT BE MADE IN VIEW OF THE DECISION OF HON'B LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS LAKHANI MARKETING INCL. , FARIDABAD ITA 970 OF 2008 DATED 2.4.2014 WHEREIN IT IS CLEARLY HELD THAT IF THERE IS NO EXEMPT INCOME DURING THE YEAR, THEN NO DISALLOWANCE CAN BE MADE U /S 14A. HOWEVER, AT THE SAME TIME THE ASSESSEE HAD HIMSELF DISALLOWED A SUM OF RS. 3,80,657/-. WE SET AIDE THE ORDER OF LD. CIT(A) AND REMAND THE MATTER BACK TO THE FILE OF ASSESSING OFFICER TO VERIFY IF THERE IS ANY EXEMPT INCOME, TH EN DISALLOWANCE SHOULD BE RESTRICTED TO THE DISALLOWANCE MADE BY THE ASSESSEE ITSELF. HOWEVER, IF THERE IS AN EXEMPT INCOME, THEN DISALLOWANCE SHOULD BE MADE AS PER RULE 8D READ WITH SECTION 14A. THUS, APPEAL OF THE REVENUE IS ALLOWE D FOR STATISTICAL PURPOSES. 9. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. 4 10. C.O. NO. 10/CHD/2012 11. GROUND NO.1 (A) : AFTER HEARING BOTH THE PARTIE S WE FIND THAT DURING ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT ASSESSEE HAS GIVEN ADVANCES AMOUNTING TO RS. 72,50,000/- AND RS. 79 LAKHS TO M/ S IMPACT PROJECTS (P) LTD. ON WHICH INTEREST @ 10% WAS CHARGED. IT WAS OBSERVE D BY THE ASSESSING OFFICER THAT ASSESSEE HAD BORROWED FUNDS AND INTEREST HAD B EEN PAID IN THE RANGE OF 13 TO 16.2%. HE ALSO REFERRED TO THE DECISION OF HON'B LE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS ABHISHEK INDUSTRIES 286 ITR 1 AND DISALLOWED INTEREST @ 5% I.E. DIFFERENCE BETWEEN THE RANGE OF INTEREST CHARGED AND AVERAGE INTEREST PAID BY THE ASSESSEE. 12. ON APPEAL, LD. CIT(A) DECIDED THE ISSUE VIDE PA RA 5 WHICH IS AS UNDER:- 5. I HAVE CONSIDERED THE SUBMISSIONS CAREFULLY. AT THE VERY OUTSET, THE LD. A.R. HAS SUBMITTED THAT THE ADVANCE S TO THE SISTER CONCERNS WERE MADE OUT OF CASH CREDIT ACCOUN T WITH THE BANK ON WHICH THE COMPANY PAID INTEREST @ 13.5%. CO PY OF BANK STATEMENT FOR THE PERIOD 01.04.2007 TO 04.04.2 007 AND 17.03.2008 TO 20.03.2008 OF THE FINANCIAL YEAR 2007 -08 WERE FURNISHED SHOWING THE RATE OF INTEREST CHARGED BY T HE BANK @ 13.5% P.A. SO IF ANY DISALLOWANCE WAS TO BE MADE BY THE A.O., THE SAME SHOULD NOT HAVE EXCEEDED @ 3.5% AGAINST 5% MADE BY THE A.O. THE LD. A.R. HAS MADE THIS SUBMISSION A S AN ALTERNATIVE PLEA VIS--VIS DETAILED ARGUMENTS MADE IN HIS WRITTEN SUBMISSIONS REPRODUCED ABOVE. 13. BEFORE US LD. COUNSEL FOR THE ASSESSEE SUBMITTE D THAT FUNDS WERE GIVEN TO THE SISTER CONCERN WHERE ASSESSEE HAS SUBSTANTIAL BUSINESS INTEREST, THEREFORE, THE SAME SHOULD BE CONSIDERED AS BUSINESS EXPEDIENC Y AND NO DISALLOWANCE SHOULD HAVE BEEN MADE. IN THIS REGARD HE RELIED ON THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS 288 ITR 1. 14. ON THE OTHER HAND LD. DR SUPPORTED THE ORDER OF CIT(A). 5 15. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS CIT (SUP RA) HAD MADE THE FOLLOWING OBSERVATIONS:- 26. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN E XPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HA VE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIE NCY.. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE |TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANCED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY . 36. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPI NION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND C IRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADV ANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID T O BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OT HER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIA RY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSID IARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSE S, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. 16. FROM THE ABOVE IT BECOMES CLEAR THAT BUSINESS E XPEDIENCY HAS TO BE EXAMINED. MERELY BECAUSE ANOTHER CONCERN TO WHOM F UNDS HAVE BEEN GIVEN IS A SISTER CONCERN, DOES NOT PROVE BUSINESS EXPEDIENCY. IN FACT IN THE CASE OF S.A. BUILDERS LTD. VS CIT (SUPRA) THE HON'BLE COURT HAS REMANDED THE MATTER FOR EXAMINATION AS COMMERCIAL EXPEDIENCY. COMMERCIAL EX PEDIENCY CONNOTES WHERE A PARTICULAR THING IS DONE WHICH IS COMMERCI ALLY BENEFICIAL TO THE ASSESSEE FOR EXAMPLE IF ASSESSEE BUY GOODS AND GET S CREDIT OF A LONGER PERIOD 6 THAN THE NORMAL PERIOD OR GETS A DISCOUNT WHICH IS LARGER THAN THE NORMAL DISCOUNT OR ANY OTHER THING. IT CANNOT BE SAID THA T FUNDS HAVE BEEN GIVEN TO THE SISTER CONCERN AND, THEREFORE, THERE IS COMMERCIAL EXPEDIENCY BECAUSE ASSESSEE AND OTHER SISTER CONCERNS ARE SEPARATE ASSESSEES UN DER THE INCOME-TAX ACT. SINCE NO COMMERCIAL EXPEDIENCY HAS BEEN SHOWN TO US , WE CONFIRM THE ORDER OF LD. CIT(A) AND, THEREFORE, THIS CROSS OBJECTION IS REJECTED. 19. GROUND NO. 1 (B) : AFTER HEARING BOTH THE PARTI ES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER NOTICE D THAT ASSESSEE HAS INCURRED MISC. EXPENSES AMOUNTING TO RS. 1,56,498/-. THE BRE AK UP OF THE EXPENSES SHOWS EXPENSES INCURRED ON SHAGUN, TRANSPORT AND SHOW ROO M EXPENSES AS PER THE DETAILS FOUND BY THE ASSESSING OFFICER, WHICH IS AS UNDER:- 1. SHAGUN EXPENSE RS. 17,000/- 2. MISC EXPENSE RS. 60,268/- 3. SHOWROOM EXPENSE RS. 56,095/- TOTAL RS. 1,33,363/- 20. THE ASSESSING OFFICER WAS OF THE VIEW THAT THES E EXPENSES ARE NOT FOR BUSINESS PURPOSES AND DISALLOWED THE SAME. 21. ON APPEAL, COMPLETE DETAILS OF EXPENSES WERE FI LED BEFORE THE CIT(A). THE LD. CIT(A) AFTER EXAMINING THESE DETAILS RESTRICTED THE DISALLOWANCE TO 1/3 RD OF SUCH EXPENSES AND CONFIRMED THE DISALLOWANCE OF RS. 44,463/-. 22. BEFORE US, LD. COUNSEL FOR THE ASSESSEE SUBMITT ED THAT COMPLETE DETAILS WERE FILED AND THE EXPENSES ARE RELATED TO THE BUSI NESS ONLY. IN ANY ASSESSEE THIS IS AN ADDITION HOC DISALLOWANCE WHICH IS NOT P ERMITTED UNDER THE LAW. 23. ON THE OTHER HAND LD. DR STRONGLY SUPPORTED TH E ORDER OF CIT(A). 7 24. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT DISALLOWANCE HAS BEEN MADE ON ADHOC BASIS WHICH IS NOT PERMISSIBLE U NDER THE LAW. HOWEVER, AT THE SAME TIME DETAILS OF EXPENSES DO NOT MENTION TH E DETAILS CLEARLY AND GENERALLY IT IS MENTIONED THAT CASH PAID AND THEN N AME OF THE PERSON HAD BEEN MENTIONED, THEREFORE, ELEMENT OF PERSONAL EXPENSES CANNOT BE RULED OUT. CONSIDERING ALL THESE FACTS, WE SET ASIDE THE ORDER OF LD. CIT(A) AND RESTRICT THE DISALLOWANCE TO RS. 25,000/-. 25. IN THE RESULT, CROSS OBJECTION IS PARTLY ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 12.01.2015 SD/- SD/- (BHAVNESH SAINI) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 12 TH JANUARY, 2015 RKK COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR