LAKHANI SHOEE CO. PVT. LTD, V. ACIT, Alwar

ITA 38/JPR/2016

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5096 (ITAT-JAIPUR)
• Duration Of Justice: 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 06-01-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: R A VERMA
• Assessee Lawyers: S C VASUDEVA
• Keywords: Depreciation; Question of law; Notional interest; Commercial expediency
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH , - MH - TSU U;KF;D LNL; ,OA JH FOE FLAG ;KNO] YS[KK LNL; DS LE{K BEFORE: SHRI A.D. JAIN, JM & SHRI VIKRAM SINGH YADA V, AM VK;DJ VIHY LA- @ ITA NO. 38/JP/2016 FU/KZKJ.K O'K Z @ ASSESSMENT YEARS : 2011-12 M/S LAKHANI SHOE CO. PVT. LTD., PLOT NO. 130, SECTOR-24, FARIDABAD. CUKE VS. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-2, ALWAR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO.: AAACL 2991 A VIHYKFKHZ@ AP PELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ L S@ ASSESSEE BY : SHRI S.C. VASUDEVA (CA) JKTLO DH VKSJ LS @ REVENUE BY : SHRI R.A. VERMA (ADDL.CIT) LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 14/09/2016 MN?KKS'K.KK DH RKJH[ K@ DATE OF PRONOUNCEMENT : 15/09/2016 VKNS'K@ ORDER PER: A.D. JAIN, J.M. THIS IS ASSESSEES APPEAL FOR A.Y. 2011-12 FILED AG AINST THE ORDER DATED 13/10/2015 PASSED BY THE LD. CIT(A), ALWAR. THE SOLE GROUND TAKEN BY THE ASSESSEE IS AS UNDER:- 1 (A) THAT THE LEARNED CIT(A) HAD MISDIRECTED HIMSE LF IN CONFIRMING THE ADDITION MADE BY THE LEARNED ASSESSING OFFICER AMOUNTING TO RS. 50,93,997/- OUT OF INTEREST PAYMENT ON LOANS ON THE ALLEGED CONTENTION THAT INTEREST BEARING FUNDS HAVE BEEN ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 2 USED FOR INVESTMENT IN M/S MASCOT FOOTCARE AND M/S MASCOT UDYOG. (B) WITHOUT PREJUDICE TO ABOVE, THE LD. CIT(A) WAS NO T JUSTIFIED IN STATING THAT THE INVESTMENT MADE IN M/ S MASCOT FOOTCARE AND M/S MASCOT UDYOG WAS RS. 3,34,80,424/- AND RS. 1,45,76,154/- RESPECTIVELY, WHICH IS IN ACTUAL THE CAPITAL BALANCE OF THE APPELLANT IN THE SAID CONCERNS AS ON 31/3/2011. THE ACTUAL AMOUNT OF INVESTMENT WAS RS. 60,00,000/- AND RS. 45,00,000/- RESPECTIVELY AND THE DIFFERENCE IS ON ACCOUNT OF SHARE OF PROFIT AND INTEREST AMOUNT FROM THE SAID CONCERNS. 2. WHILE MAKING THE DISALLOWANCE, THE ASSESSING OFFI CER OBSERVED AS FOLLOWS:- 4.1 ON PERUSAL OF THE AUDITED BALANCE SHEET OF THE ASSESSEE COMPANY, IT WAS GATHERED THAT THE ASSESSEE COMPANY H AS INVESTED RS. 3,34,80,424/- IN M/S MASCOT FOOTCARE, NOIDA AND RS. 1,45,76,154/- IN M/S MASCOT UDHYOG, NOIDA. THE ASSESSEE HAD SHOWN A PROFIT OF RS. 6,72,343/- FROM THE ABOVE TWO FIRMS UNDER THE HEAD OTHER INCOME IN SCHED ULE-8 OF THE PROFIT AND LOSS ACCOUNT. 4.2 THE DIRECTORS OF THE ASSESSEE COMPANY ARE MRS. K AMLESH LAKHANI, MR. K.C. LAKHANI AND MR. GUNJAN LAKHANI. T HE DIRECTORS OF THE ASSESSEE COMPANY ARE ALSO PARTNERS IN THE ABOVE MENTIONED TWO FIRMS I.E. M/S MASCOT FOOTCARE, NOIDA AND M/S MASCOT UDHYOG, NOIDA. ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 3 4.3 THE AGGREGATE RATE OF RETURN FROM THE INVESTMENT OF THE ASSESSEE COMPANY IN THE ABOVE TWO FIRMS IS 1.40%. O N THE OTHER HAND, THE ASSESSEE IS PAYING INTEREST TO PUNJ AB NATIONAL BANK (PNB) AND ICICI BANK @ 12%. HENCE ON O NE SIDE THE ASSESSEE HAD INVESTED HUGE AMOUNTS IN THE FIRMS (IN WHICH DIRECTORS OF THE FIRM ARE PARTNERS) AT A VERY LOW RATE OF RETURN, ON THE OTHER HAND, THE ASSESSEE COM PANY IS HAVING LOANS ON WHICH IT IS PAYING INTEREST @ 12% WHI CH IS VERY MUCH HIGHER THAN THE RATE OF RETURN FROM THESE INVESTMENTS. 4.4 IF THE ASSESSEE WOULD NOT HAVE MADE THE ABOVE IN VESTMENT HE WOULD HAVE SAVED THE AMOUNT OF INTEREST PAID ON UNSECURED LOAN AND BANK LOAN TO THE EXTENT OF 10.60 % I.E. 12%-1.40% OF THE INVESTMENT MADE WHICH COMES TO RS. 50,93,997/- (10.40% OF RS. 4,80,56,578/-). HENCE TH E INVESTMENT MADE BY THE ASSESSEE COMPANY WAS NOT REASONABLE AND IT WAS DETORIATING TO THE INTEREST OF COMPANY, THEREFORE, IT IS NOT ALLOWABLE. 4.5 THE ASSESSEE COMPANY VIDE ORDER SHEET ENTRY DATE D 20.01.2014 WAS ASKED TO SHOW CAUSE AS UNDER:- AS PER SCHEDULE-5 OF BALANCE SHEET YOU HAVE INVEST ED AN AMOUNT OF RS.33480424/- IN M/S. MASCOT FOOT CARE, N OIDA AND RS.14575154/- IN M/S. MASCOT UDHYOG, NOIDA AS CAPIT AL CONTRIBUTION OUT OF INTEREST BEARING FUNDS. THE RAT E OF RETURN FROM ABOVE TWO INVESTMENTS IS BELOW 2% AND THE RATE OF PAYMENT OF INTEREST ON BANK LOANS IS 12%. SHOW CAUS E AS TO WHY ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 4 THE DIFFERENCE AMOUNT OF INTEREST SHOULD NOT BE DIS ALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE AS THE SAME HAS NOT BEEN USED FOR THE PURPOSE OF THE BUSINESS OF THE COMPANY RESULTING IN MIS-UTILIZATION OF INTEREST BEARING FUNDS OF COMPAN Y. 4.6 THE ASSESSEE COMPANY FILED ITS REPLY ON 30.01.20 14 ON THIS ISSUE WHICH IS PRODUCED AS UNDER:- IN CONNECTION WITH THE ABOVE ASSESSMENT YEAR AND Q UERIES RAISED AT THE TIME OF LAST HEARING, WE BEG TO REPLY AS UNDER:- PLEASE NOTE THAT THE INVESTMENT IN CAPITAL OF M/S. MASCOT FOOT CARE WAS MADE AS UNDER:- 1. 1988-1989 RS.5,00,000/- 2. 1998-1999 RS.25,00,000/- 3. 1999-2000 RS.30,00,000/- SIMILARLY INVESTMENT IN CAPITAL OF M/S. MASCOT UDH YOG WAS MADE AS UNDER:- A) 1988-1999 RS.5,00,000/- B) 1999-2000 RS.40,00,000/- AFTER ADDING THE PROFIT YEAR BY YEAR AND INTEREST, THE CAPITAL IN M/S. MASCOT FOOTCARE BECOME RS.33480423.56 AND I N M/S. MASCOT UDHYOG RS.14576154.59 SO IT IS INCORREC T THAT THE COMPANY HAS INVESTED RS.33480423.56 IN M/S. MAS COT FOOTCATE AND RS.14576154.59 IN M/S. MASCOT UDHYOG. THIS IS THE OUTSTANDING FIGURE APPEARING AS ON 31.03.201 1 WHICH COMPRISES ORIGINAL INVESTMENT UPTO DATE. SHARE OF P ROFIT AND INTEREST. INVESTMENT IN THE ABOVE FIRMS WERE MADE NOT OUT OF BORROWED FUNDS BUT ONLY OUT OF INTERNAL ACCRUALS. THE ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 5 INTERNAL ACCRUALS OF M/S. LAKHANI SHOE CO.(P) LIMIT ED WHEN THE INVESTMENT WAS MADE IN M/S. MASCOT FOOTCARE WAS A S UNDER:- YEAR NET PROFIT DEPRECIATION TOTAL INTERNAL ACCRUALS INVESTMENT MADE IN M.F. 1988 - 1989 2109885 638684 2748569 500000 1998 - 1999 12322055 2546355 14868410 2500000 1999 - 2000 8232621 2796978 11029599 3000000 THE ASSESSMENT OF THE COMPANY IS BEING MADE ALMOST REGULARLY U/S 143(3) OF THE INCOME TAX ACT AND BASED ON THE ABOVE FACTS THE DEPARTMENT HAS NEVER MADE ADDIT ION ON THIS ACCOUNT. YOU ARE, THEREFORE, REQUESTED NOT TO MAKE ANY ADDITION ON THIS ACCOUNT. SIMILARLY WHEN THE INVESTMENT WAS MADE IN M/S. MASCOT UDYOG, INTERNAL ACCRUALS OF THE COMPANY WERE AS UNDE R:- YEAR NET PROFIT DEPRECIATION TOTAL INTERNAL ACCRUALS INVESTMENT MADE IN M.U. 1988 - 1989 2109885 638684 2748569 500000/ - 1999 - 2000 8232621 2796978 11029599 4000000/ - MOREOVER THE ASSESSMENT OF THE COMPANY IS BEING MAD E ALMOST REGULARLY U/S 143(3) OF THE INCOME TAX ACT AN D BASED ON THE ABOVE FACTS THE DEPARTMENT HAS NEVER M ADE ADDITION ON THIS ACCOUNT. YOU ARE, THEREFORE, REQUE STED NOT TO MAKE ANY ADDITION ON THIS ACCOUNT ON THE BASIS O F WRONG FACTS. WE ARE ALSO ENCLOSING DETAILS OF INVESTMENT MADE BY THE COMPANY AND STATUS OF CAPITAL IN EACH YEAR WILL SHOW THAT ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 6 THE PRESENT OUTSTANDING IS ON ACCOUNT OF APART FROM ORIGINAL INVESTMENT SHARE OF PROFIT IN EACH YEAR AND INTERES T WHENEVER THE COMPANY RECEIVED. 4.7 THE REPLY OF THE ASSESSEE WAS CAREFULLY CONSIDERE D AND NOT FOUND TO BE ACCEPTABLE DUE TO THE FOLLOWING REASONS: - 4.7.1 THE BUSINESS OF THE ASSESSEE COMPANY IS MANUFACTURING OF HAWAI CHAPPAL TO EARN PROFIT FROM SUCH ACTIVITIES. INVESTMENT IN SOME OTHER FIRM IS NOT THE PART OF BUSINESS OF THE ASSESSEE, AND THERE IS NO PROFIT TO THE BUSINESS OF THE ASSESSEE FROM SUCH INVESTMENT. THEREFORE, THE AMOUNT OF CAPITAL OF THE ASSESSEE COMPANY REMAINED INVESTED IN THE ABOVE PARTNERSHIP FIRMS IS NOT REASONABLE AND IT SHOULD HAVE BEEN WITHDRAWN. 4.7.2 DURING THE YEAR UNDER CONSIDERATION THE ASSES SEE COMPANY HAS TAKEN LOAN FROM PNB WHICH HAS BEEN SHOWN IN THE BALANCE SHEET UNDER SECURED LOANS. THE LOAN WAS SANCTIONED ON 03.02.2010 AND THE RATE OF INTEREST ON THIS LOAN IS 12%. THE ASSETS OF THE ASSESSEE COMPANY WERE ALSO HYPOTHECATED/MORTGAGED FOR THE AFOREMENTIONED LOAN. IF THE ASSESSEE WOULD HAVE WITHDRAWAN ITS CAPITAL FOR THE FIRMS M/S. MASCOT FOOTCARE, NOIDA AND M/S MASCOT UDHYOG, NOIDA THE NEED OF TAKING LOAN IN THE COMPANY WOULD NOT HAVE RISED, AND ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 7 LIABILITY OF INTEREST TO BANK WOULD HAVE BEEN AVOIDED. 4.7.3 ON PERUSAL OF THE PARTNERSHIP DEEDS IT WAS FOU ND THAT THE ASSESSEE COMPANY IS HAVING 10% SHARE IN THE PROFITS OF BOTH THE FIRMS I.E. M/S. MASCOT FOOTCARE, NOIDA AND M/S MASCOT UDHYOG, NOIDA BUT THE CAPITAL CONTRIBUTION OF THE ASSESSEE COMPANY IN BOTH THE FIRMS IS VERY HIGH AS COMPARED TO OTHER PARTNERS WHO ARE HAVING LARGER SHARE IN THE PROFITS OF THE FIRMS. 4.7.4. MOST OF THE CAPITAL IN M/S. MASCOT FOOTCARE AND M/S MASCOT UDHYOG IS FROM THE ASSESSEE COMPANY. FURTHERMORE, DURING THE YEAR UNDER CONSIDERATION THERE WAS NO BUSINESS AT ALL IN M/S. MASCOT UDHYOG, THEREFORE, IT IS NOT JUSTIFIABLE AS TO WHY THE ASSESSEE COMPANY IS KEEPING IT FUNDA IDLE AND TAKING INTEREST BEARING FUNDS FROM THE BANKS, EVEN THE ASSESSEE IS NOT RECEIVING INTEREST ON CAPITAL FROM THE AFOREMENTIONED TWO FIRMS. 4.7.5 IT IS ALSO WORTHWHILE TO MENTION HERE THAT THE PARTNERS HAVING LESS CAPITAL ARE TAKING MOST OF THE PROFITS AS THEIR PROFIT SHARING RATIO IS MORE. EVEN FEW PARTNERS HAVE DEBIT BALANCES OF THE CAPITAL ACCOUNT ARE TAKING THE MAJOR PART OF SHARE OF PROFI T, WHICH CLEARLY INDICATES THAT THE MODUS OPERANDI OF ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 8 THE COMPANY IS SUCH THAT IT IS INTENTIONALLY CAUSIN G LOSS TO ITSELF. 4.8 IN VIEW OF ABOVE DISCUSSION AND CAREFULLY CONSID ERING THE REPLY OF THE ASSESSEE. AN AMOUNT OF RS.5093997/- IS ADDED TO THE INCOME OF BY WAY OF DISALLOWANCE OF INTEREST O N UNNEEDED LOANS, AS IT IS CLEAR THAT IF THE ASSESSEE WOULD NOT HAVE KEPT THE CAPITAL INVESTED THERE WOULD HAVE NO REQUIREMENT OF THE LOANS. 4.9 SINCE THE ASSESSEE HAS FURNISHED INACCURATE PAR TICULARS OF INCOME PENALTY U/S 271 (1)(C) OF THE ACT WILL BE INI TIATED SEPARATELY. 3. THE LD. CIT(A) CONFIRMED THE ASSESSMENT ORDER BY HOLDING AS FOLLOWS: 4.3 I HAVE PERUSED THE ASSESSMENT ORDER AS WELL AS SUBMISSIONS MADE BY THE APPELLANT AND FIND THAT A DISALLOWANCE OF RS.5093997/- OUT OF THE INTEREST PAYMENTS MADE BY T HE APPELLANT ON LOANS HAS BEEN MADE BY THE AO ON THE GROUND THAT INTEREST BEARING FUNDS HAVE NOT BEEN USED FOR THE PURPOSE OF THE BUSINESS. THE AO HAS STATED THAT AN AMOUNT OF RS.3. 34 CRORES STANDS INVESTED AS CAPITAL IN M/S. MASCOT FOOTCARE AND AMOUNT OF RS.1.45 CRORES STANDS INVESTED AS CAPITAL IN M/S. M ASCOT FOOTCARE AND AMOUNT OF RS.1.45 CRORES STANDS INVEST ED AS CAPITAL IN M/S. MASCOT UDHYOG. THE PROFITS EARNED ON THE IN VESTMENT MADE BY THE COMPANY IS ONLY 1.40% AND THE RATE OF I NTEREST PAID BY THE APPELLANT AT 12% IS MUCH HIGHER AND THEREFOR E A DISALLOWANCE @ 10.60% ON THE INTEREST PAID ON UNSEC URED AND ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 9 BANK LOAN HAS BEEN MADE BY THE AO WHICH COMES TO RS.5093997/- (10.60% OF RS.48056578/-). 4.4 THE APPELLANT HAS STATED THAT AN INVESTMENT OF RS.60 LACS HAS BEEN MADE IN M/S. MASCOT FOOTCARE AND AN INVESTMENT OF RS.45 LACS WAS MADE IN M/S. MASCOT UDHYOG BY THE APPELLAN T DURING 1998-2000. THE REMAINING BALANCE REPRESENTS INVESTM ENTS OUT OF INTERNAL ACCRUAL AND NOT OUT OF BORROWED FUNDS. THE REFORE, THERE IS NO JUSTIFICATION IN MAKING THE DISALLOWANCE OUT OF INTEREST PAYMENTS MADE BY THE COMPANY. 4.5 HAVING CONSIDERED THE SUBMISSIONS MADE BY THE A PPELLANT AND EVIDENCE AVAILABLE ON RECORD, I FIND THAT THE CONCE RNS IN WHICH THE APPELLANT COMPANY HAS MADE SUBSTANTIAL INVESTMENT F ALL WITHIN THE AMBIT OF SPECIFIED PERSONS AS DEFINED IN THE PROVIS IONS OF SECTION 40A(2)(B) OF THE IT ACT. THE DIRECTORS/SHARE HOLDER S OF THE COMPANY ARE HAVING SUBSTANTIAL INTEREST IN THE ABOV E MENTIONED FIRMS, IN WHICH THE APPELLANT COMPANY HAS INVESTED SUBSTANTIAL AMOUNTS AS CAPITAL + ACCUMULATED PROFITS OVER THE Y EARS. 4.6 THE APPELLANT HAS MERELY REITERATED THE SUBMISS IONS FILED BEFORE THE AO AND HAS NOT BEEN ABLE TO PRODUCE ANY EVIDENC E SO AS TO CONTROVERT THE FINDINGS GIVEN BY THE AO. FURTHER, O N EXAMINATION OF THESE FACTS, I DO NOT FIND ANY ARGUMENT OR JUSTI FICATION BEING GIVEN BY THE APPELLANT FOR OBTAINING HUGE LOANS AND THEIR UTILIZATION FOR THE PURPOSES OF THE BUSINESS OF THE COMPANY. MO REOVER, THERE IS NO JUSTIFICATION FOR PAYMENT OF INTEREST ON LOAN S, WHEREAS THE FUNDS OF THE COMPANY HAVE BEEN PARKED IN OTHER CONC ERNS WHERE RELATED PERSONS ARE HOLDING SUBSTANTIAL INTEREST. H ONBLE KERALA HIGH COURT HAS HELD IN THE CASE OF CIT V/S ACCELERA TED FREEZE DRYING PVT. LTD. 324 ITR 316 THAT INTEREST PAID IS NOT DEDUCTIBLE-AS ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 10 MONEY WAS GIVEN TO SISTER CONCERN WITHOUT INTEREST. FURTHER, HONBLE ALLAHABAD HIGH COURT HAS IN THE CASE OF CIT V/S SAHU ENTERPRISES PVT. LTD. 352 ITR 008 HAS HELD THAT ONU S IS ON ASSESSEE TO PROVE UTILIZATION OF BORROWED FUNDS FOR THE PURPOSES OF BUSINESS. INTEREST WAS HELD NOT ALLOWABLE U/S 36 (1)(III) OF THE IT ACT. 4.7 IT IS NOT DENIED BY THE APPELLANT THAT THE PERC ENTAGE OF SHARE OF PROFITS BEING GIVEN TO THE COMPANY IS DISPROPORTION ATE TO THE AMOUNT OF INVESTMENT MADE VIS-A-VIS THE PERCENTAGE OF SHARE OF PROFITS AND THE INVESTMENT MADE BY OTHER PERSONS (W HO ARE SHARE HOLDERS/ DIRECTORS OF THE APPELLANT COMPANY). THE A PPELLANT HAS NOT BEEN ABLE TO CONTROVERT THAT THE INTEREST PAYME NTS MADE ARE JUSTIFIABLE IN VIEW OF THE UTILIZATION OF THE FUNDS . FURTHER, I FIND THAT THIS ISSUE HAS ALREADY BEEN CONSIDERED BY THE UNDER SIGNED IN THE CASE OF THE APPELLANT FOR A.Y. 2010-11 IN APPEAL NO .51/2013-14 VIDE ORDER DATED 14.08.2014. 4.8 SINCE THERE IS NO CHANGE IN THE FACTS OF THE CA SE, THEREFORE, FOLLOWING THE ORDER PASSED FOR THE PRECEDING YEAR, I UPHOLD THE ACTION OF THE AO IN MAKING THE DISALLOWANCE AND CON FIRM THE ADDITION OF RS.50,93,997/- OUT OF THE INTEREST PAYM ENTS ON LOANS CLAIMED BY THE COMPANY. 4. THE LD. COUNSEL FOR THE ASSESSEE HAS CONTENDED TH AT THE ISSUE UNDER CONSIDERATION STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE ORDER DATED 18/03/2016 (APB 54 TO 65) PASSED BY THE TRIBUNAL IN THE ASSESSEES OWN CASE FOR THE IMMEDIATELY PRECEDING AS SESSMENT YEAR, I.E., A.Y. 2010-11, IN ITA NO. 724/JP/2014. ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 11 5. PER CONTRA, THE LD. SR. DR HAS PLACED STRONG REL IANCE ON THE IMPUGNED ORDER. 6. HAVING CONSIDERED THE RIVAL CONTENTIONS OF BOTH THE PARTIES IN THE LIGHT OF THE MATERIAL PLACED ON THE RECORD, IT IS S EEN THAT FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR, I.E., A.Y. 2 010-11, THIS VERY ISSUE OF DISALLOWANCE OF INTEREST WAS BEFORE THE TRIBU NAL. THE TRIBUNAL, VIDE ORDER DATED 18/3/2016, HAS DECIDED THE MATTER IN FAVOUR OF THE ASSESSEE AS FOLLOWS:- 4.1. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH T HE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. THE ON LY POINT RAISED IN THE APPEAL IN THE AFORESAID MATTER IS WITH REGARD TO THE DISALLOWANCE OF RS 48,85,314/-OUT OF INTEREST O F RS 1,91,99648/-PAID BY THE APPELLANT TO THE BANK AS WEL L AS TO THE OTHER PARTIES. IT WAS CONTENDED BY THE LD AR FOR THE ASSESSEE THAT THE INVESTMENTS IN THE PARTNERSHIP FI RM WERE NOT MADE IN THE YEAR UNDER CONSIDERATION AND WERE MA DE IN EARLIER YEARS. IN FACT THE DETAIL HAS BEEN PROVIDED TO THE ASSESSING OFFICER IN THE FOLLOWING MANNER: M/S MASCOT FOOTCARE M/S MASCOT UDYOG YEAR AMOUNT YEAR AMOUNT 1988-89 500000/* 1988-89* 500,000 1998-99 25,00,000 1999-2000 40,00,000 1999-2000 30,00,000 ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 12 *AS PER ASSESSEE SHOULD BE RS 125000/ 89 AND RS 375000/ IN 1989-90 *AS PER THE ASSESSEE IT SHOULD HAVE BEEN1989-90 IT WAS THEREAFTER SUBMITTED THAT THE CAPITAL INITIAL LY CONTRIBUTED HAS INCREASED ON ACCOUNT OF THE SHARE P ROFIT AND INTEREST ACCRUING TO THE ASSESSEE. IT WAS SUBMITTED THAT NO BORROWED FUNDS WERE UTILIZED DURING THOSE YEARS FOR M AKING THE INVESTMENT IN THE ABOVE SAID CONCERNS. 4.2. THE LD. D/R FOR THE REVENUE HAS SUBMITTED THAT THE INVESTMENT IN THESE CONCERNS WERE NOT PART OF THE BU SINESS OF THE ASSESSEE COMPANY AND THERE IS NO PROFIT TO T HE BUSINESS OF THAT THE ASSESSEE FROM SUCH INVESTMENT. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS TAK EN A LOAN FROM THE PUNJAB NATIONAL BANK AT THE RATE OF 1 2% AND IT WAS SUBMITTED THAT IF THE ASSESSEE COMPANY HAS WITHDRAWN THE INVESTMENT FROM THESE CONCERNS THEN THE RE WAS NO NECESSITY TO TAKE THE LOAN FROM THE PUNJAB NA TIONAL BANK. IT WAS ALSO HIGHLIGHTED THAT THE SHARE IN THE PROFIT OF THE ASSESSEE IS ONLY 10% WHEREAS A CAPITAL CONSIDER ATION IS VERY HIGH IN COMPARISON TO THE OTHER PARTNERS OF TH E FIRM. 4.3. THE LD D/R FURTHER SUBMITTED THAT M/S MASCOT UD YOG IS NOT DOING ANY BUSINESS AND THE CAPITAL OF THE ASSESSEE IS LYING BLOCKED AND NO STEPS HAVE BEEN TAKEN BY THE ASSESSE E TO ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 13 RECALL THE CAPITAL INVESTMENT MADE BY IT. THE ASSESS EE NOT RECALLING THE INVESTMENT FROM M/S MASCOT UDYOG AND TAKING LOAN FROM PUNJAB NATIONAL BANK, CLEARLY SHOWS THAT T HE COMMERCIAL INTEREST OF THE ASSESSEE HAS BEEN COMPRO MISED BY THE ASSESSEE. IT WAS SUBMITTED ON BEHALF OF THE R EVENUE THAT THE M/S MASCOT UDYOG HAD INVESTED THE MAJOR AM OUNT IN EQUITY SHARES OF M/S LAKHANI INDIA LTD. THUS LD DR, EMPHASISED THAT THE MONEY OF THE ASSESSEE HAS BEEN ROOTED FOR THE PURCHASE OF EQUITY SHARES OF M/S LAK HANI INDIA LTD . THEREAFTER IT WAS SUBMITTED THAT THERE WA S NO JUSTIFICATION FOR PAYMENT OF INTEREST ON LOANS TAKE N FROM THE RELATED PERSONS AND BANKS. 4.4. IN OUR VIEW, THE ADMITTED POSITION AS EMERGES F ROM THE RECORD IS THAT THE ASSESSEE HAS MADE INVESTMENTS IN M/S MASCOT FOOTCARE AND M/S MASCOT UDYOG PRIOR TO THE ASSESSMENT YEAR 1999-2000 AND THE SAID INVESTMENT M ADE BY THE ASSESSEE IN THOSE YEARS HAVE INCREASED MANY FOLDS ON ACCOUNT OF THE PROFIT, INTEREST ETC. TO THE TUNE OF RS 47,38,4234/-. MOREOVER IT IS ALSO AN ADMITTED POSIT ION THAT OUT OF THE SAID AVAILABLE FUNDS, THE SAID CONCERNS HAD INVESTED IN MS LAKHANI INDIA LTD. THE ASSESSMENT YE AR IN WHICH THE INVESTMENTS WERE MADE IN THE EQUITY SHARE O F M/S LAKHANI INDIA LTD, BY M/S MASCOT UDYOG WERE AS UNDER :- 1995-96 RS 24378150 1996-97 RS 351110 ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 14 2001-02 RS 237144 TOTAL RS 24966404 THUS IT IS CLEAR THAT NO INVESTMENT WERE MADE IN M/S LAKHANI INDIA LTD IN THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER HAD FAILED TO PROVE THE NEXUS BET WEEN THE INTEREST PAID TO THE RELATED PARTIES AND BANKERS AN D THE INVESTMENT MADE BY THE ASSESSEE IN THE CURRENT ASSE SSMENT YEAR. NO NEW INVESTMENTS WERE MADE BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. 4.5. IN OUR VIEW THE ASSESSEE WAS ABLE TO ESTABLISH T HAT HE HAD INCURRED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFORE THERE IS NO JUSTI FICATION FOR THE REVENUE TO DISALLOWANCE THE INTEREST COMPONE NT. THE REVENUE CANNOT CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN AND DECIDE HOW MUCH IS REASONABLE EXPENDITURE. THE REVENUE IS REQUIRED TO EXAMINE THE ISSUE FROM THE PERSPECTIVE OF THE PRUDENT BUSINESSMEN RAT HER FROM ITS OWN ANGLE. REVENUE AUTHORITIES HAVE FAILED TO BRING ON RECORD ANY COGENT EVIDENCE AND MATERIAL TO SHOW T HAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOS ES OF INVESTMENT AND WERE NOT USED FOR THE BUSINESS PURPOS ES. IT WOULD BE RELEVANT TO REPRODUCE BELOW THE FINDING RECO RDED BY THE ASSESSING OFFICER IN PARAGRAPH 4.3 TO THE FO LLOWING EFFECT: 4.3 THE AGGREGATE RATE OF RETURN FROM THE INVESTME NT OF THE ASSESSEE COMPANY IN THE ABOVE TWO FIRMS IS 1.69% . ON ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 15 THE OTHER THAN THE ASSESSEE IS PAYING THE INTEREST ON UNSECURED LOAN FROM SHRI GUNJAN LAKHANI @12% AND INT EREST TO PUNJAB NATIONAL BANK @ 12%. HENCE ON ONE SIDE THE ASSESSEE HAD INVESTED HUGE AMOUNTS IN THE FIRMS ( I N WHICH DIRECTORS OF THE FIRMS ARE PARTNERS) AT THE VERY LO W RATE OF RETURN, ON THE OTHER HAND THE ASSESSEE COMPANY IS H AVING LOANS ON WHICH IT IS PAYING INTEREST@ 12% WHICH IS VE RY MUCH HIGHER THAN THE RATE OF RETURN FROM THESE INVE STMENT IN OUR VIEW THE AUTHORITIES BELOW HAVE FAILED TO BRIN G ON RECORD ANY MATERIAL WHICH SHOWS THAT THE BORROWED FUND S HAVE NOT BEEN USED FOR THE PURPOSES OF BUSINESS. IN THE LIGHT OF THE ABOVE THE APPEAL OF THE ASSESSEE IS REQUIRED TO BE ALLOWED AS NO FRESH INVESTMENT HAS BEEN MADE IN THE YEAR UNDER CONSIDERATION AND FURTHER NO LOAN AMOUNT WAS U SED FOR THAT PURPOSES. 4.6. OUR VIEW IS ALSO SUPPORTED BY THE JUDGMENT OF H ONBLE SUPREME COURT IN THE MATTER OF HERO CYCLE LTD. VS. CIT, 63 TAXMAN.COM 308 WHEREIN IT IS HELD AS UNDER :- 12. INSOFAR AS LOANS TO THE SISTER CONCERN/SUBSIDIARY COMPANY ARE CONCERNED, LAW IN THIS BEHALF IS RECAPITULATED BY T HIS COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT (APPEALS) [2007 (288) ITR 1/158 TAXMAN 74 ]. AFTER TAKING NOTE OF AND DISCUSSING ON THE SCOPE OF COMMERCIAL EXPEDIENCY, THE COURT SUMMED UP THE LEGA L POSITION IN THE FOLLOWING MANNER: '26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDI TURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUS INESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER AN Y LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS E XPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIE NCY. ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 16 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979 (118) ITR 200 (SC) ], IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENTIMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EXPEDIENCY, THE INTEREST THERE ON COULD NOT HAVE BEEN ALLOWED UNDER SECTION 36(1)(III) OF T HE ACT. IN MADHAV PRASAD 'S CASE [ 1979 (118) ITR 200 (SC) ], THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIE W TO COMMEMORATE THE MEMORY OF THE ASSESSEE'S DECEASED HUSBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED, IT WAS HELD BY THIS COURT THAT THE INTEREST ON THE BORROWE D FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT B E SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA 'S CASE [ 1979 (118) ITR 200 (SC) ] IS THAT THE BORROWED FUND ADVANCED TO A THIRD PARTY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF TH E ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHE R THE AMOUNT ADVANCED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER I N SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING PRO FITS' VIDE CIT V. MALAYALAM PLANTATIONS LTD. [ 1964 53 ITR 140 (SC) , CIT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [ 1971 82 ITR 166 (SC) ], ETC.' 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIE W TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (P.) LTD. [2002] 254 ITR 377/121 TAXMAN 706 WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS ESTABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSA RILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNO T JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINES SMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT THE IN COME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIE S MUST NOT ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 17 LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT TH AT OF A PRUDENT BUSINESSMAN. FURTHER, THE HONBLE JURISDICTIONAL HIGH COURT IN T HE MATTER OF CIT VS. RAM KISHAN VERMA HAS HELD AS UNDER :- 13. TAKING INTO CONSIDERATION THE FACT AS NOTICED HERE INABOVE, IN OUR VIEW AS WELL, WHEN THERE WAS NO AGREEMENT TO CH ARGE INTEREST FROM THE PERSONS, TO WHOM THE ASSESSEE ADVANCED SHO RT TERM LOAN/ADVANCE, THE AO COULD NOT DISALLOW PART OF THE INTEREST. IT IS ALSO AN ADMITTED FACT, AS OBSERVED BY THE TRIBUNAL, THAT THE AO .VAS NOT ABLE TO PIN POINTEDLY COME TO A DEFINITE CONCLU SION THAT HOW INTEREST BEARING LOANS HAD BEEN DIVERTED TOWARDS IN TEREST FREE ADVANCES AND SINCE THE AO WAS NOT ABLE TO PROVE NEX US BETWEEN INTEREST BEARING LOANS VIS-A-VIS INTEREST FREE LOAN S/ADVANCES, THEREFORE, IN OUR VIEW AS WELL, ONCE THE AO WAS NOT ABLE TO COME TO A DEFINITE CONCLUSION AS TO NEXUS HAVING BEEN ESTAB LISHED ABOUT INTEREST BEARING LOANS HAVING BEEN DIVERTED TOWARDS INTEREST FREE LOANS/ADVANCES, AND SUCH BEING A FINDING OF FACT BA SED ON APPRECIATION OF EVIDENCE, IN OUR VIEW NO SUBSTANTIA L QUESTION OF LAW ARISE ON THIS QUESTION AS WELL. IT CAN BE OBSERVED THAT THIS COURT IN SIMILAR CIRCUMSTANCES AND ON IDENTICAL FACTS, WHEN THE CAPITAL OF THE PARTNERS/PROPRIETOR BEING MORE THAN THE INTEREST FR EE SHORT TERM ADVANCES, HAS IN THE CASE OF CIT V. VIJAY SOLVEX LTD. [2015] 59 TAXMANN.COM 294 (RAJ.) WHILE RELYING ON THE JUDGMENT RENDERED IN (A) S.A. BUILDERS LTD. V. CIT (APPEALS) [2007] 288 ITR 1/158 TAXMAN 74 (SC) ; (B), MUNJAL SALES CORPN. V. CIT [2008] 298 ITR 298/168 TAXMAN 43 (SC) ; (C), CIT V. RADICO KHAITAN LTD. [2005] 274 ITR 354/142 TAXMAN 681 (ALL.) ; (D), CIT V. DALMIA CEMENT (P.) LTD. [2002] 254 ITR 377/121 TAXMAN 706 (DELHI) ; (E), CIT V. BRITANNIA INDUSTRIES LTD. [2006] 280 ITR 525/[2005] 148 TAXMAN 654 (CAL.) AND (F) CIT V. MOTOR SALES LTD. [2008] 304 ITR 123 (ALL.) , HELD AS UNDER: '16. IN VIEW OF THE AUTHORITATIVE PRONOUNCEMENT OF THE APEX COURT AND OTHER JUDGMENTS REFERRED SUPRA , IN OUR VIEW, THE ASSESSEE ADMITTEDLY HAD ITS OWN FUNDS, AS REFERRED TO EARLIER, AND ADMITTEDLY SUCH FUNDS/RESERVES BEING SUBSTANTIA LLY HIGHER THAN, EVEN OTHERWISE, THE ADVANCES TO THE DE BTORS, NO NOTIONAL INTEREST OR HYPOTHETICAL INTEREST COULD HA VE BEEN DISALLOWED ON SUCH FACTS. THE REVENUE HAS FAILED TO PROVE ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 18 NEXUS. IN OUR VIEW, THE ITAT HAS CORRECTLY APPRECIA TED THE FACTS AND LAW.' SIMILAR VIEWS HAVE BEEN EXPRESSED BY HONBLE MADRAS HIGH COURT IN THE MATTER OF CIT VS. PREMIER POLY SACKS PV T. LTD., 321 ITR 450 (MAD). 5. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. 7. THE FACTS IN THE YEAR UNDER CONSIDERATION ARE NOT ANY DIFFERENT FROM THOSE IN A.Y. 2010-11. EVEN THE LD. CIT(A) HAS OBSERVED IN THE IMPUGNED ORDER, INTER ALIA, THAT THE ISSUE HAD BEEN CONSIDERED BY HIM IN HIS ORDER DATED 14/8/2014, IN THE ASSESSEES CASE F OR A.Y. 2010-11. IT WAS THE SAID ORDER OF THE LD. CIT(A) FOR A.Y. 2010-1 1, AGAINST WHICH THE ASSESSEES APPEAL WAS ALLOWED BY THE TRIBUNAL VIDE I TS AFORESAID ORDER DATED 18/3/2016. 8. THEREFORE, RESPECTFULLY FOLLOWING THE TRIBUNAL ORDE R (SUPRA), IN THE ASSESSEE OWN CASE FOR A.Y. 2010-11, THE DISALLOWANCE MADE FOR THE YEAR UNDER CONSIDERATION IS DELETED. 9. WE HOLD THAT NO NEXUS BETWEEN THE BORROWED FUNDS I N THE INVESTMENTS MADE HAVING BEEN PROVED AND THE BORROWEL HAVING BEEN MADE FOR BUSINESS PURPOSES, THE INTEREST THEREON IS ALLOWABLE U/S 36(1)(III) OF THE ACT. TOO, AS PER RECORD, THE ASSES SEE IS A PARTNER IN M/S ITA 38/JP/2016_ M/S LAKHANI SHOE CO. PVT. LTD. VS ACIT 19 MASCOT FOOTCARE, NOIDA AND M/S MASCOT UDHYOG, NOIDA , WHERE THE ASSESSEE MADE CAPITAL CONTRIBUTION OUT OF ITS OWN I NTERNAL ACCRUALS, WHICH CONTRIBUTIONS HAVE GROWN OVER TIME DUE TO SHARE OF PROFIT AND INTEREST ON CAPITAL. 10. IN VIEW OF THE ABOVE, THE GRIEVANCE OF THE ASSES SEE IS FOUND TO BE JUSTIFIED AND IS ACCEPTED AS SUCH AND THE ORDER UND ER APPEAL IS CANCELLED. 11. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 15/09/2016. SD/- SD/- FOE FLAG ;KNO , - MH TSU (VIKRAM SINGH YADAV) (A.D. JAIN) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 15 TH SEPTEMBER, 2016 * RANJAN VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S LAKHANI SHOE CO. PVT. LTD., FARID ABAD. 2. IZR;FKHZ@ THE RESPONDENT- THE ACIT, CIRCLE-2, ALWAR. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDR@ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 38/JP/2016) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR