M/s Asia Pacific Commodities Ltd., Tadepallegudem V. The Addl. CIT, Range, Rajahmundry

ITA 383/VIZ/2009

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 2884 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 1 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-08-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 07-04-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 10-07-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Keywords: Business expenditure; Proportionate interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO.383/VIZAG/2009 ASSESSMENT YEAR : 2006-07 ASIA PACIFIC COMMODITIES LTD TADEPALLIGUDEM AD. CIT, RAJAHMUNDRY RANGE RAJAHMUNDRY (APPELLANT) VS. (RESPONDENT) PAN NO.AADCA 6269K APPELLANT BY: SHRI C. SUBRAHMANYAM, CA RESPONDENT BY: SHRI D.S. SUNDER SINGH, DR ORDER PER SHRI S.K. YADAV, JUDICIAL MEMBER:- THIS APPEAL IS PREFERRED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) ON VARIOUS GROUNDS BUT THEY ALL RELATE TO DI SALLOWANCE OF THE PROPORTIONATE INTEREST EXPENDITURE OF RS.7,02,544/- RELATABLE TO INTEREST FREE ADVANCES TO M/S. AUJASYA POWER PROJECTS PVT. LTD. 2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND DOCUMENTS PLACED ON RE CORD. THE FACTS BORNE OUT FROM THE RECORD ARE THAT DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT INTEREST FREE ADVANCES OF RS. 64,76,760/- HAS BEEN MADE TO A SUBSIDIARY CONCERN WITHOUT CHARGING INTEREST W HILE AT THE SAME TIME THE ASSESSEE HAS DEBITED INTEREST EXPENDITURE ON FUNDS BORROWED FROM THE BANK. WHEN SHOW CAUSED AS TO WHY PROPORTIONATE INTEREST E XPENDITURE RELATABLE TO THE INTEREST FREE ADVANCES TO A SUBSIDIARY COMPANY SHOULD NOT BE DISALLOWED FROM THE TOTAL INTEREST EXPENDITURE CLAIMED DURING THE YEAR, IT WAS EXPLAINED ON BEHALF OF THE ASSESSEE THAT THE ASSESSEE HAS FLO ATED A SUBSIDARY COMPANY BY THE NAME OF M/S. AUJASYA POWER PROJECTS PVT. LTD . AND AN AMOUNT OF RS.64,76,760/- WAS ADVANCED TO SUCH SUBSIDIARY COMP ANY TOWARDS PURCHASE OF LAND AND SETTING UP OF POWER PROJECT AND THAT TH E MONEY SO ADVANCED WOULD BE CONVERTED INTO SHARE CAPITAL AS AND WHEN P OWER PROJECT BECOME 2 OPERATIONAL AND AS SUCH NO PROPORTIONATE INTEREST E XPENDITURE IS DISALLOWABLE IN THE LIGHT OF THE JUDGEMENT OF THE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT(A) AND ANOTHER 288 ITR 1. THE A.O. WA S NOT CONVINCED WITH THE EXPLANATIONS OF THE ASSESSEES AND HE DISALLOWED THE PROPORTIONATE INTEREST EXPENDITURE AT THE RATE OF 11%. ACCORDINGLY, THE D ISALLOWANCE WAS WORKED OUT AT RS.7,02,544/-. THE ASSESSEE PREFERRED AN A PPEAL BEFORE THE CIT(A) BUT DID NOT FIND FAVOUR WITH HIM. 3. NOW THE ASSESSEE IS BEFORE US AND PLACED A HEAVY RELIANCE UPON THE JUDGEMENT OF THE APEX COURT IN THE CASE OF S.A. BUI LDERS LTD. VS. CIT(A) AND ANOTHER (SUPRA). IN ORDER TO PROVE THAT MAJORITY S HARE HOLDINGS IN SUBSIDIARY COMPANY I.E. M/S. AUJASYA POWER PROJECTS PVT. LTD. BELONGS TO ASSESSEE, THE LD. COUNSEL FOR THE ASSESSEE INVITED OUR ATTENTION TO THE SHARE CAPITAL SHOWN IN BALANCE SHEET AND THE CAPITAL ACCOUNT OF M/S. AU JASYA POWER PROJECTS PVT. LTD., WHEREFROM IT IS CLEAR THAT OUT OF TOTAL SHARE CAPITAL OF RS.23,76,760/-, THE ASSESSEE HELD FOR RS.18,51,760/-. MOREOVER, TH E REVENUE HAS NOT RAISED ANY DISPUTE ABOUT THE HOLDING OF SUBSIDIARY COMPANY . THE LD. COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT SINCE THE ASSES SEE HAS A MAJOR STAKE IN ITS SUBSIDIARY COMPANY, IT IS HIS BUSINESS OR COMME RCIAL RESPONSIBILITY TO SET IT UP AND FOR ITS SETTING UP HE WAS FORCED TO MAKE THE INVESTMENTS. HE HAS ALSO INVITED OUR ATTENTION TO THE JUDGEMENT OF THE PUNJA B & HARYANA HIGH COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT & ANOTHER RE PORTED AT 269 ITR 535 WHICH WAS LATER ON REVERSED BY THE APEX COURT, WITH THE SUBMISSION THAT THE FACTS OF THAT CASE ARE ALMOST SIMILAR TO THE PRESEN T CASE. IN THAT CASE ALSO THE ASSESSEE HAS ADVANCED A SUBSTANTIAL AMOUNT BY U TILIZING OVER DRAFT ACCOUNTS TO ITS SUBSIDIARY COMPANY. THOUGH THE ASS ESSEE HAD NO MATERIAL ON RECORD TO SHOW THAT ASSESSEE HAD DERIVED A BUSINESS BENEFIT BY ADVANCING THE INTEREST FREE AMOUNT TO ITS SISTER CONCERN, YET IT WAS CONSIDERED BY THE APEX COURT THAT THE INTEREST FREE LOAN TO ITS SISTE R CONCERN WAS GIVEN AS A MEASURE OF COMMERCIAL EXIGENCY. IN THIS REGARD, HE HAS INVITED OUR ATTENTION TO PARA 23,28 & 32 OF THE JUDGEMENT OF THE APEX COU RT IN THE CASE OF S.A. BUILDERS LTD. THE LD. COUNSEL FOR THE ASSESSEE FUR THER CONTENDED THAT THE ASSESSEES CASE IS FULLY COVERED BY THE AFORESAID J UDGEMENT OF THE APEX COURT. 3 4. THE LD. D.R. BESIDES PLACING A RELIANCE UPON THE ORDER OF THE CIT(A) HAS CONTENDED THAT THE BORROWED FUND WAS DIVERTED T O ITS SISTER CONCERN WITHOUT ANY INTEREST AND ALSO FOR NO COMMERCIAL EXI GENCIES. THEREFORE, THE REVENUE AUTHORITIES WERE JUSTIFIED IN MAKING A DISA LLOWANCE OF PROPORTIONATE INTEREST. 5. HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CA REFUL PERUSAL OF RECORD, WE FIND THAT UNDISPUTEDLY THE SUBSIDIARY CO NCERN IS A WHOLLY OWNED BY THE ASSESSEES AND HE HAS DIVERTED HIS BORROWED FUND S FOR ITS SETTING UP. THOUGH THE ASSESSEE HAS CONTENDED THAT SUBSIDIARY C ONCERN IS A POWER PROJECT OF WHICH THE POWER CAN BE USED BY THE ASSES SEES FOR ITS BUSINESS PURPOSE, BUT NO EVIDENCE IS PLACED IN THIS REGARD. HOWEVER, WE HAVE CAREFULLY EXAMINED THE JUDGEMENT OF THE APEX COURT IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) IN WHICH THEY HAVE HELD THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INC LUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUS INESS. THE EXPENDITURES MAY HAVE NOT BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GRO UNDS OF COMMERCIAL EXPEDIENCY. IN PARA 28, THEIR LORDSHIP HAVE FURTHE R HELD THAT, IT IS TRUE THAT BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT HAD BEEN ADVANCED AS INTEREST FREE LO AN TO ITS SISTER CONCERN. HOWEVER, IN OUR OPINION THAT FACT IS NOT REALLY REL EVANT. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUCH AMOUNT TO ITS SI STER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCIES. IN ITS PARA N O.32 THEIR LORDSHIP FURTHER HELD THAT THOUGH IT IS NOT THEIR OPINION TH AT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADV ANCED IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACT AND CIRCUMSTANC ES OF THE RESPECTIVE CASE. THE FACTS OF THE CASE ARE ALMOST IDENTICAL WITH THE FACTS OF THE PRESENT CASE AS IS EVIDENT FROM THE JUDGEMENT OF THE PUNJAB & HA RYANA HIGH COURT. IN THAT CASE ALSO, THE ASSESSEE COULD NOT PLACE ANY MA TERIAL ON RECORD TO SHOW THAT ASSESSEE HAS DERIVED ANY BUSINESS BENEFIT BY A DVANCING THE INTEREST FREE AMOUNTS TO ITS SISTER CONCERN. SIMILAR IS THE POSI TION IN THE INSTANT CASE. BUT HERE THE ASSESSEE HAS CONTENDED THAT IT ADVANCED A SUBSTANTIAL AMOUNT TO ITS SISTER CONCERN WITH THE OBJECT THAT AFTER ITS SETTI NG UP, THE POWER GENERATED 4 CAN BE USED FOR HIS BUSINESS. THUS THE PRESENT CAS E IS ON BETTER FOOTINGS. THEREFORE, WE ARE OF THE VIEW THAT THE IMPUGNED ISS UE IS SQUARELY COVERED BY THE AFORESAID JUDGEMENTS OF THE APEX COURT IN FAVOU R OF THE ASSESSEE. WE THEREFORE, FOLLOWING THE SAME SET ASIDE THE ORDER O F THE CIT(A) AND DELETE THE ADDITIONS MADE BY THE REVENUE AUTHORITIES ON ACCOUN T OF DISALLOWANCE OF PROPORTIONATE INTEREST. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLO WED. PRONOUNCED IN THE OPEN COURT ON 19.8.2010 SD/- SD/- (BR BASKARAN) (SUNIL KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM, DATED 19 TH AUGUST, 2010 COPY TO 1 M/S. ASIA PACIFIC COMMODITIES LIMITED, PRATIPADU, TANUKU ROAD, TADEPALLIGUDEM, WEST GODAVARI DISTRICT. 2 ADDL. CIT, RAJAHMUNDRY RANGE, RAJAHMUNDRY 3 THE CIT, RAJAHMUNDRY 4 THE CIT(A), RAJAHMUNDRY 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM