Aurangabad Electricals Ltd, Pune V. Addl CIT Rg-8, Pune

ITA 388/PUN/2012

• Counselvise Citation: 38824514 RSA 2012
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2005-2006
• Appeal Filed On: 27-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MUKESH VERMA; ANN KAPTHUAMA
• Keywords: Earning of tax free income; Question of law; Bad and doubtful debts; Capital receipt; Capital expenditure
• Section: 14A

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 388/PN/2012 (ASSTT.YEAR : 2005-06) AURANAGABAD ELECTRICALS LTD., C/O. SHARAD SHAH & CO. CHARTERED ACCOUNTANTS, GOKULNAGAR-B, 1184/4, FERGUSSION ROAD, PUNE 411 044. PAN NO.AACCA2867L .. APPELLANT VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE-8, PUNE. .. RESPONDENT ITA NO. 756/PN/2010 (ASSTT.YEAR : 2005-06) DY. COMMISSIONER OF INCOME TAX, CIRCLE-8, PUNE. .. APPELLANT VS. AURANGABAD ELECTRICALS PVT. LTD., PUNE .. RESPOND ENT ITA NO. 1269/PN/2010 (ASSTT.YEAR : 2006-07) AURANGABAD ELECTRICALS PVT. LTD., PUNE .. APPELLA NT VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE-, PUNE. .. RESPONDENT ITA NO. 1301/PN/2010 (ASSTT.YEAR : 2006-07) DY. COMMISSIONER OF INCOME TAX, CIRCLE-8, PUNE. .. APPELLANT VS. AURANGABAD ELECTRICALS PVT. LTD., PUNE .. RESPOND ENT REVENUE BY : SRI MUKESH VERMA & MS. ANN KAPTHUAMA ASSESSEE BY : SRI SHARAD SHAH DATE OF HEARING : 03-05-2012 DATE OF PRONOUNCEMENT : 30 -05-2012 2 ORDER PER R.K. PANDA, AM THE ABOVE CROSS APPEALS FOR ASSESSMENT YEAR 2005-06 & 2006-07 ARE DIRECTED AGAINST THE SEPARATE ORDERS DATED 17-02-20 10 AND 23-07-2010 OF THE CIT(A) -V, PUNE FOR THE ASSESSMENT YEAR 2005-06 AND 2006-07 RESPECTIVELY. FOR THE SAKE OF CONVENIENCE, THE ABOVE CROSS APPEAL S WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. ITA NO. 388/PN/2012 : (BY ASSESSEE FOR A.Y. 2005-06) THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE RE ADS AS UNDER : (1) THE LEARNED AO ERRED (AND HONBLE CIT(A) ERRED IN UPHOLDING THE CONTENTION OF THE LEARNED A.O.) IN MAKING ADDITION OF RS. 57,19,206/- U/S.41(1). 2. AFTER HEARING BOTH THE SIDES WE FIND THE AO FOLL OWING THE ORDER FOR ASSESSMENT YEAR 2004-05 MADE ADDITION OF RS. 57,19, 206/- BEING DISCOUNT ALLOWED BY THE STATE GOVERNMENT ON EARLY REPAYMENT OF DEFERRED SALES TAX, LOAN HOLDING THE SAME TO BE INCOME OF THE ASSESSEE FOR T HE YEAR AND NOT A CAPITAL RECEIPT AS CLAIMED BY THE ASSESSEE. IN APPEAL, TH E LEARNED CIT(A) FOLLOWING THE ORDER OF HIS PREDECESSOR ON THIS ISSUE FOR ASSESSME NT YEAR 2004-05 UPHELD THE ACTION OF THE AO. WE FIND THE TRIBUNAL IN ASSESSEE S OWN CASE IN ITA 3 NO.1384/PN/2007 FOR THE ASSESSMENT YEAR 2004-05 HA S DELETED THE ADDITION BY HOLDING AS UNDER : WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY . IT WAS A COMMON GROUND BETWEEN THE PARTIES THAT IDENTICAL ISSUE HAS BEEN ADJUDICATED BY THE LARGER BENCH OF TRIBUNAL IN THE CASE OF SUZLER INDIA LTD. 42 SOT 457 (MUM) (SB), A COPY OF WHICH HAS BEEN PLACED ON RECO RD. AS PER THE SPECIAL BENCH, THE DIFFERENCE BETWEEN THE PAYMENT M ADE AGAINST THE FUTURE LIABILITY ON ACCOUNT OF DEFERRED SALES-TAX I S A CAPITAL RECEIPT AND COULD NOT BE TREATED AS A REMISSION OF CESSATION OF LIABILITY ASSESSABLE UNDER SECTION 41(1)(1) OF THE ACT. AS A RESULT THE REOF, THE ADDITION OF RS. 67,34,793/- MADE BY THE ASSESSING OFFICER IN THE IN STANT CASE BY INVOKING THE PROVISIONS OF SECTION 41(1) OF THE ACT IS UNTEN ABLE. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE COMMISSIONER OF INCOME T AX (APPEALS) AND DIRECT THE ASSESSING OFFICER TO DELETE THE ADDITION OF RS. 67,34,793/- MADE UNDER SECTION 41(1) OF THE ACT. THUS, ON THIS GROU ND ASSESSEE SUCCEEDS. 3. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBU NAL IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 2004-05 AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LEARNED DR THE GROUND RAISED BY THE ASSESSEE IS ALLOWED. ITA NO. 756/PN/2010 (BY REVENUE) : GROUNDS APPEAL NOS. 1 AND 2 FILED BY THE REVENUE RE AD AS UNDER : 1. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT AN AMOUNT O F RS. 8,20,390/- ON ACCOUNT OF DEBIT BALANCE WRITTEN OFF BY THE ASSESSE E IS AN ALLOWABLE EXPENSES ESPECIALLY WHEN HIS PREDECESSOR HAD HOLD O THERWISE I.E., IN FAVOUR OF REVENUE ON THE SAME ISSUE IN THE A.Y. 200 4-05. 4 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD CIT(A) WAS JUSTIFIED IN DELETING ADDITION OF RS. 8,20,390/- DONE ON ACCOUNT OF DEBIT BALANCE WRITTEN OFF ON RECONCILIAT ION IN THE CASE OF BAJAJ AUTO LTD., WITHOUT GIVING AN OPPORTUNITY TO THE AO ON THIS ISSUE. 2. FACTS OF THE CASE, IN BRIEF, ARE THAT DURING TH E COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASSESSEE HAS DED UCTED AN AMOUNT OF RS. 8,44,835/- AS SUNDRY BALANCE WRITTEN OFF. IT WAS S UBMITTED BY THE ASSESSEE THAT AN AMOUNT OF RS. 8,20,390/- HAS BEEN WRITTEN OFF B Y PLANT-III AS PER ACCOUNT RECONCILIATION OF CUSTOMER ACCOUNT OF M/S. BAJAJ AU TO LTD. UPTO 31-03-2000. HOWEVER, NO EXPLANATION WAS OFFERED FOR THE REMAINI NG DEBIT BALANCE. ACCORDING TO THE AO, THE ASSESSEE DID NOT FILE ANY DETAILS REGARDING THE RECONCILIATION WITH M/S. BAJAJ AUTO LTD. THE ASSE SSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO WHY THESE EXPENSES HAVE BEEN WRITTEN OFF AND HOW HE UNILATERALLY ARRIVED AT THIS FIGURE WITHOUT ANY CONFIRMATION FRO M M/S. BAJAJ AUTO LTD. THEREFORE, THE AO FOLLOWING THE ORDER OF HIS PREDEC ESSOR FOR ASSESSMENT YEAR 2004-05 DISALLOWED THE ENTIRE AMOUNT OF RS. 8,44,83 5/-. 3. IN THE APPEAL, THE LEARNED CIT(A) DELETED AN AMO UNT OF 8,20,390/- OUT OF THE ABOVE BY HOLDING AS UNDER : 9. AT THE OUTSET IT MAY BE MENTIONED THAT A SIMILAR IS SUE HAD ARISEN BEFORE MY PREDECESSOR FOR A.Y. 2004-05 AND THE CLAI M WAS DISALLOWED. THE RELEVANT PORTION OF THE ORDER OF THE LEARNED CI T(A) IS REPRODUCED BELOW : 5 AFTER CAREFUL CONSIDERATION, I AM NOT INCLINED TO ACCEPT THE CONTENTION OF THE APPELLANT. FIRSTLY, THE APPELLANT HAS FAILED T O ESTABLISH THE CONNECTION OF THIS EXPENDITURE WITH THE CURRENT YEA R. SECONDLY, EVEN IF ONE TRIES TO EXAMINE THE ALLOWABILITY OF THIS AMOUN T AS BAD DEBTS WRITTEN OFF, IT REMAINS TO BE ESTABLISHED THAT THE AMOUNTS REPRESENTING THESE SUNDRY BALANCES WERE TAKEN INTO ACCOUNT IN COMPUTIN G THE INCOME OF THE APPELLANT IN ANY ASSESSMENT YEAR. UNDER THESE CIRC UMSTANCES, THE AMOUNT OF RS. 1,20,951/- DOES NOT APPEAR TO QUALIFY FOR DEDUCTION. ACCORDINGLY, THE DISALLOWANCE OF RS. 1,20,951/- IS CONFIRMED. 10. IN RESPECT OF THE ASSESSMENT YEAR UNDER CONSIDE RATION, HOWEVER, THE LEARNED AUTHORISED REPRESENTATIVE SUBMITTED THA T OUT OF RS. 8,44,835/- A TOTAL OF RS. 8,20,390/- PERTAINED TO A CCOUNT RECONCILIATION BETWEEN THE APPELLANT COMPANY AND M/S. BAJAJ AUTO L TD. IN VIEW OF THIS, IN EXERCISE OF POWERS OF CIT(APPEALS) UNDER SECTION 250(4) AS EXPLAINED BY THE HONBLE BOMBAY HIGH COURT IN THE CASE OF SMT . PRABHAVATI S. SHAH 231 ITR 1 (BOM), THE APPELLANTS WERE ASKED TO SUBMIT RECONCILIATION OF ACCOUNT CONFIRMED BY M/S. BAJAJ A UTO LTD. THE APPELLANTS HAVE DONE THE NEEDFUL VIDE THEIR SUBMISS IONS DATED 12-02- 2010. FROM THE DEBTOR RECONCILIATION ISSUED BY M/S . BAJAJ AUTO LTD, IT IS SEEN THAT AN AMOUNT OF RS. 8,20,390.03 HAS BEEN ATT RIBUTED TO OPENING BALANCE DIFFERENCE OF 1999-2000, 2000-2001 WRITTTEN OFF IN 2004-05. IN VIEW OF AND THE EVIDE NCE SUBMITTED AND CONSIDERING THE EXPLANATION GIVEN BY THE LEARNE D AR OF THE APPELLANT, THE CLAIM OF SUNDRY DEBIT BALANCES WRITTEN OFF DURING THE YEAR IS ALLOW ED TO THE EXTENT OF RS. 8,20,390.03. 4. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US. 5. THE LEARNED DR SUBMITTED THAT IN THE ASSESSMENT YEAR 2004-05 THE ISSUE WAS DECIDED IN FAVOUR OF THE DEPARTMENT BY THE LEAR NED CIT(A). HOWEVER, THE LD. CIT(A) HAS DEVIATED FROM THE ORDER OF HIS PREDE CESSOR AND ALLOWED THE CLAIM OF THE ASSESSEE, WHICH IS NOT JUSTIFIED. 6 5.1 THE LEARNED COUNSEL FOR THE ASSESSEE ON THE OTH ER HAND REFERRING TO THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR TH E ASSESSMENT YEAR 2004-05 SUBMITTED THAT THE ISSUE HAS BEEN DECIDED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL. FURTHER, IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF TRF LTD. VS. CIT REPOR TED IN 323 ITR 397, AFTER 01-04-1989 THE ASSESSEE HAS ONLY TO ESTABLISH THAT THE DEBT HAS BEEN WRITTEN OFF. HE ACCORDINGLY SUBMITTED THAT THE ISSUE STANDS FULL Y COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE TRIBUNAL IN ASSESSE ES OWN CASE AND THE DECISION OF THE HONBLE SUPREME COURT. 6. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE LD. CIT(A) AND THE PAP ER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS RELIED ON BY THE LEARNED COUNSEL FOR THE ASSESSEE. AT THE OUTSET, W E FIND ADDITION OF AN AMOUNT OF RS. 1,20,951/- MADE ON ACCOUNT OF SUNDRY DEBIT B ALANCE WRITTEN OFF IN THE ASSESSMENT YEAR 2004-05 WAS UPHELD BY THE CIT(A). WHEN THE MATTER TRAVELLED TO THE TRIBUNAL, WE FIND THE TRIBUNAL VIDE ORDER DA TED 30-03-2011 DELETED THE ADDITION BY HOLDING AS UNDER : HAVING CONSIDERED THE RIVAL SUBMISSIONS, IN OUR VI EW, THE LOWER AUTHORITIES HAVE UNJUSTIFIABLY MADE THE IMPUGNED AD DITION. THE ASSESSEE HAS CLEARLY POINTED OUT THAT THE IMPUGNED CLAIM IS ON ACCOUNT OF SMALL BALANCES, WHICH WERE OUTSTANDING FROM THE VARIOUS CUSTOMERS ON ACCOUNT OF REJECTIONS, COUNTING SHORTAGE ETC., SIN CE THE AMOUNTS WERE NOT RECOVERED, THE SAME HAVE BEEN WRITTEN OFF AS IRRECO VERABLE. THERE IS NO 7 DISPUTE THAT THE AMOUNTS HAVE INDEED BEEN WRITTEN O FF AS IRRECOVERABLE, AND THE OTHER FACTUAL ASPECTS BROUGHT OUT BY THE A SSESSEE ARE ALSO NOT NEGATED. THEREFORE, IN OUR CONSIDERED OPINION, THE LOWER AUTHORITIES WERE NOT JUSTIFIED IN REJECTING THE CLAIM OF THE AS SESSEE KEEPING IN MIND THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CA SE OF TRF LTD. (SUPRA). THE ORDER OF THE COMMISSIONER OF INCOME-T AX (APPEALS) IS ACCORDINGLY SET-ASIDE AND THE ASSESSING OFFICER IS DIRECTED TO DELETE THE IMPUGNED ADDITION. 7. FURTHER, IN VIEW OF THE DECISION OF HONBLE SUPR EME COURT IN THE CASE OF TRF LTD. (SUPRA) AFTER 01-04-1989 THE ASSESSEE HAS ONLY TO ESTABLISH THAT THE DEBT WAS WRITTEN OFF. SINCE IN THE INSTANT CASE, T HE DEBT ADMITTEDLY HAS BEEN WRITTEN OFF BY THE ASSESSEE IN THE PROFIT AND LOSS ACCOUNT, THEREFORE, RESPECTFULLY FOLLOWING THE DECISION OF THE TRIBUNAL IN ASSESSEE S OWN CASE AND IN ABSENCE OF ANY CONTRARY MATERIAL BROUGHT TO OUR NOTICE BY THE LEARNED DR AGAINST THE FINDINGS GIVEN BY THE CIT(A) AS WELL AS THE ORDER O F THE TRIBUNAL IN ASSESSEES OWN CASE WE FIND NO INFIRMITY IN THE ORDER OF THE C IT(A) DELETING THE ADDITION. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY DIS MISSED. 8. GROUNDS OF APPEAL NO. 3 BY THE REVENUE READS AS UNDER : 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE GUARANT EE COMMISSION OF RS. 16,57,657/- PAID TO THE DIRECTORS OF THE COMPANY IS AN ALLOWABLE EXPENSES ESPECIALLY WHEN THE DELHI HIGH COURT IN TH E CASE REPORTED IN 234 ITR 447 DECIDED THIS ISSUE IN FAVOUR OF THE REV ENUE. 9. FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO NOT ED FROM THE PROFIT AND LOSS ACCOUNT THAT THE ASSESSEE HAS PAID GUARANTEE COMMI SSION OF RS. 16,57,657/- TO 8 THE DIRECTORS. ON BEING QUESTIONED BY THE AO, IT W AS SUBMITTED THAT THE DIRECTORS HAVE GIVEN THEIR PERSONAL GUARANTEE FOR T HE LOANS BORROWED BY THE COMPANY FROM BANK FOR WHICH THE COMPANY HAS DECIDED TO PAY COMMISSION. A COPY OF THE BOARD RESOLUTION WAS ALSO SUBMITTED ACC ORDING TO WHICH THE BASIS FOR CALCULATION OF GUARANTEE COMMISSION WAS 0.25% O F THE LOAN OUTSTANDING AS ON 31-03-2004. 10. THE AO NOTICED FROM THE BALANCE SHEET AS ON 31- 03-2004 THAT THE TERM LOAN OUTSTANDING WAS RS. 33.15 CRORES. HOWEVER, NO GUARANTEE COMMISSION WAS PAID DURING ASSESSMENT YEAR 2004-05 EVEN THOUGH SUBSTANTIAL LOAN WAS OUTSTANDING AS ON 31-03-2003. THE AO THEREFORE AGA IN CONFRONTED THE ASSESSEE REGARDING THE ALLOWABILITY OF THE CLAIM WHICH ACCO RDING TO HIM WAS EXCESSIVE. THE ASSESSEE GAVE DETAILED REASONS FOR GIVING SUCH COMMISSION AND ALSO RELIED ON THE DECISION OF HONBLE ALLAHABAD HIGH COURT IN THE CASE OF L.H. SUGAR FACTORIES AND OIL MILLS PVT. LTD. REPORTED IN 118 I TR 985 WHEREIN IT HAS BEEN HELD THAT NO PART OF THE GUARANTEE COMMISSION PAID TO DIRECTORS CAN BE DISALLOWED AS EXCESSIVE OR UNREASONABLE. 10.1 HOWEVER, THE AO WAS NOT SATISFIED WITH THE EXP LANATION GIVEN BY THE ASSESSEE. ACCORDING TO HIM DIRECTORS ARE ALWAYS RE SPONSIBLE FOR ANY LOAN TAKEN BY THE COMPANY. THERE IS NOTHING SPECIAL THAT THE DIRECTORS HAVE DONE SO AS TO ALLOW SUCH HEAVY COMMISSION. FURTHER, THE FINANCIA L HEALTH OF THE COMPANY IS 9 ALSO VERY SOUND. RELYING ON THE DECISION OF HONBL E DELHI HIGH COURT IN THE CASE OF M/S. TRIVENI ENGINEERING WORKS VS ITO REPO RTED IN 234 ITR 437 THE AO DISALLOWED THE GUARANTEE COMMISSION OF RS. 16,57 ,657/- 11. BEFORE CIT(A), THE ASSESSEE DISTINGUISHED THE D ECISION OF M/S. TRIVENI ENGINEERING WORKS. IT WAS SUBMITTED THAT IN THE CA SE OF M/S. TRIVENI ENGINEERING WORKS THE GUARANTEE COMMISSION WAS GIVE N @ 2% AND WAS PAID ONLY TO ONE OF THE DIRECTOR AND THE OTHER DIRECTOR WAS NOT GIVEN ANY COMMISSION ALTHOUGH HE ALSO STOOD AS A GUARANTOR. IN THE CASE OF THE ASSESSEE THE GUARANTEE COMMISSION WAS 0.25% AND COMMISSION W AS GIVEN TO BOTH THE DIRECTORS WHO STOOD AS GUARANTOR. THE ASSESSEE AL SO RELIED ON VARIOUS OTHER DECISIONS. 12. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE , THE LEARNED CIT(A) DELETED THE ABOVE BY HOLDING AS UNDER : 17. I HAVE GIVEN CAREFUL CONSIDERATION TO THE MATTER. IN MY VIEW, THE APPELLANTS HAVE MADE A CONVINCING CASE FOR THE ALLO WANCE OF THE SAID AMOUNT. I AM IN AGREEMENT WITH THE LEARNED AR OF T HE APPELLANTS THAT THE MERE FACT THAT A BENEFIT ON ALLOWANCE HAS NOT BEEN PAID OR ALLOWED TO THE DIRECTORS OF A COMPANY IN EARLIER YEARS, BUT IS ALL OWED IN A SUBSEQUENT YEAR WHEN THE COMPANY IS IN BETTER ECONOMIC HEALTH DOES NOT IPSO FACTO MAKE THE PAYMENT EXCESSIVE ON UNREASONABLE. THE AO HAS AT TWO PLACES IN HIS ORDER MENTIONED THAT THE COMMISSION IS VERY HEAVY. HOWEVER, AS THE LEARNED AR OF APPELLANT POINTED IN HIS WRITTEN AND ORAL SUBMISSIONS, THE COMMISSION HAS BEEN WORKED OUT AT 0.25% ONLY AS AGAINST A RATE OF 2% OF THE LIMIT OF CASH CREDIT IN THE CASE OF M/S. TRIVENI ENGINEERING WORKS WHICH HAS BEEN RELIED BY THE AO IN MAKING THE DISALLOWANCE. THE LEARNED AR OF THE APPELLANTS HAVE ALSO DISTINGUISHE D THE FACTS OF THE 10 APPELLANTS CASE FROM THAT OF TRIVENI ENGINEERING W ORKS IN AS MUCH AS COMMISSION WAS GIVEN SELECTIVELY TO ONE GUARANTOR O NLY IN THAT CASE UNLIKE IN THE APPELLANTS CASE. FURTHER UPON PERUS AL OF THE DECISION OF THE HONBLE DELHI HIGH COURT IN THAT CASE, I FIND T HAT THE SAME DOES NOT LAY DOWN AS A MATTER OF RULE THAT GUARANTEE COMMISS ION IS NOT AN ALLOWABLE DEDUCTION. IN FACT THE HONBLE COURT DEC LINED TO ANSWER THE REFERENCE MADE BY THE TRIBUNAL ON THE GROUND THAT T HE SAME DID NOT RAISE ANY QUESTION OF LAW BUT MERELY CHALLENGED FINDINGS OF FACT MADE BY THE TRIBUNAL. ACCORDINGLY, THE SAID JUDGMENT COULD ONL Y HAVE BEEN RELIED UPON BY THE AO TO THE EXTENT THAT ALLOWABILITY OF S UCH GUARANTEE COMMISSION IS QUESTION OF FACT TO BE DECIDED BASED ON FACTS AND CIRCUMSTANCES OF EACH CASE. ON THE OTHER HAND, THE DECISION OF THE HONBLE HIGH COURT OF ALLAHABAD IN L.H. SUGAR FACTO RIES 118 ITR 985 (ALLAHABAD) CITED BY THE APPELLANT IN MY VIEW, SUPP ORTS THE APPELLANTS CASE. THE RELEVANT PORTION OF THAT JUDGMENT IS REP RODUCED BELOW : IN RELATION TO THE FIRST QUESTION, THE MATERIAL FA CTS ARE THAT THE ASSESSEE HAD PAID GUARANTEE COMMISSION AMOUNTING TO RS. 1,49 ,884/- TO ITS DIRECTORS AND SUBSTANTIAL SHAREHOLDERS AS COMPENSAT ION FOR GIVING PERSONAL SECURITY AGAINST THE CASH CREDIT AGREEMENT S WITH THE COMPANYS BANKERS. THE COMMISSION PAID TO THESE PERSONS WAS AT THE RATE OF 10 PERCENT OF THE INTEREST PAYABLE TO THE BANKERS. TH E I.T.O. DISALLOWED THE ENTIRE CLAIM UNDER CL.(C) OF SECTION 40 OF THE I.T. ACT ON THE FINDING THAT THIS EXPENDITURE WAS REMUNERATION, BENEFIT OR AMENI TY PAID TO A DIRECTOR OF SHAREHOLDER AND WAS AN UNREASONABLE FIGURE UNREL ATED TO THE LEGITIMATE BUSINESS NEEDS OF THE COMPANY AND THE BE NEFIT DERIVED BY IT THERE FROM. THIS VIEW WAS UPHELD BY THE AAC, WHO A LLOWED THE CLAIM TO THE EXTENT OF 50 PER CENT. BOTH SIDES WENT UP TO T HE TRIBUNAL. THE TRIBUNAL HELD : IN OUR VIEW THERE WAS NO JUSTIFICATION FOR DISALLOW ING ANY PART OF THE GUARANTEE COMMISSION PAID BY THE COMPANY TO ITS DIRECTORS OR SUBSTANTIAL SHAREHOLDERS. THE COMMERCIAL JUSTIFICA TION FOR GIVING GUARANTEE BY THE DIRECTORS TO THE BANKS CANNOT BE G AINSAID. THE BANKS INSISTED ON IT AND THE DIRECTORS AND THE SUBSTANTIA L SHAREHOLDERS HAD TO MAKE ALLOWANCE FOR IT. THERE IS NO BASIS FOR THE A SSUMPTION OF THE ITO THAT THE GUARANTEE WAS DEMANDED BY THE BANKS AS A K IND OF HOSTAGE FROM THE DIRECTORS. ON THE OTHER HAND, THE GUARANTEE DE MANDED WAS AN ADDITIONAL SECURITY IN CASE OF THE ASSETS OF THE PR IVATE LIMITED COMPANY OR PUBLIC LIMITED COMPANY ARE LOST DUE TO VICISSITUDES OF BUSINESS. THE PERSONAL GUARANTEE BY THE DIRECTORS IN EFFECT PLEDG ES THEIR PERSONAL ASSETS AGAINST SUCH CONTINGENCY. IT IS A PART OF BANKING W ISDOM TO INSIST ON THIS KIND OF SECURITY. WHEN THE PRIVATE LIMITED COMPANY GETS THIS ASSISTANCE 11 FROM ITS DIRECTORS, IT IS BUT COMMERCIALLY PROPER T HAT THE DIRECTORS SHOULD BE COMPENSATED FOR THE RISK THAT THEY ARE RUNNING. IT IS CLEAR FROM THE REPORT OF SYNTHETICS AND CHEMICALS THAT ALTHOUGH IN THAT CASE THE DIRECTORS WERE NOT PAID THE GUARANTEE COMMISSION, T HE BANK CLARIFIED THAT IF SUCH A GUARANTEE WAS NOT GIVEN THE RATE OF INTEREST WOULD BE INCREASED AND THERE WOULD BE RESTRICTIVE COVENANTS IN THE LOAN AGREEMENT. IN OTHER WORDS, WHAT THE COMPANY LOSES BY WAY OF GU ARANTEE COMMISSION, IT WOULD GAIN BY SAVING OF INTEREST AND AVOIDANCE O F RESTRICTIVE COVENANTS. THE PAYMENT OF GUARANTEE COMMISSION WAS, THEREFORE, COMMERCIALLY JUSTIFIED. IN REGARD TO THE RATE THERE HAS BEEN NO CHANGE IN THE RATE. ON THE OTHER HAND, THE VOLUME OF THE COMPANYS BUSINES S HAS INCREASED AND THERE IS A PREPONDERANCE OF LOANS IN ITS STRUCTURE OF LIABILITIES. THE PAYMENT, THEREFORE, COULD NOT BE CALLED IN QUESTION AS BEING INFLUENCED BY ANY EXTRA-COMMERCIAL CONSIDERATIONS AND IT MUST BE TAKEN THAT IT PASSED ALL THE TEST LAID DOWN IN SECTION 40(C). WE, THERE FORE, DIRECT THAT THE WHOLE OF THE GUARANTEE COMMISSION SHALL BE ALLOWED . IT IS THUS APPARENT THAT THE DIRECTORS AND SHAREHOL DERS STOOD PERSONAL SECURITY HAVING REGARD TO THE LEGITIMATE B USINESS NEEDS OF THE COMPANY. THE COMPENSATION PAID WAS AT THE RATE OF 10 PER CENT OF THE INTEREST PAYABLE TO BANKERS. IT WAS NOT EXCESSIVE. ON FACTS, THE TESTS LAID DOWN UNDER CL.(C) OF SECTION 40 ARE SATISFIED. WE ARE IN AGREEMENT WITH THE TRIBUNAL THAT THE ASSESSEE WAS ENTITLED TO THIS DEDUCTION. THE FIRST QUESTION IS HENCE LIABLE TO BE ANSWERED IN FAVOUR O F THE ASSESSEE. 18. THE LEARNED AR OF THE APPELLANT HAS FURTHER SUB MITTED THE FACT THAT THE COMPANY WAS IN THE PROCESS OF CONVERTING ITSELF INTO A PUBLIC COMPANY FROM THE POSITION OF BEING ESSENTIALLY A FA MILY CONCERN WAS ALSO INSTRUMENTAL IN THE DECISION TO ALLOW GUARANTEE COM MISSION TO THE DIRECTORS. CONSIDERING THE FACTS IN THEIR TOTALITY , THE WRITTEN AND ORAL ARGUMENTS BY THE LEARNED AR OF THE APPELLANT THE SU PPORTING DOCUMENTS AS WELL AS THE DECISION OF HONBLE ALLAHABAD HIGH C OURT IN L.H. SUGAR FACTORIES MENTIONED SUPRA, I HOLD THAT GUARANTEE CO MMISSION WAS NOT EXCESSIVE AND WAS AN ALLOWABLE DEDUCTION IN THE INS TANT CASE. 13. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE RE VENUE IS IN APPEAL BEFORE US. 14. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER B OOK FILED ON BEHALF OF THE 12 ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS CITED BEFORE US. WE FIND THE AO DISALLOWED THE GUARANTEE COMMISSION ON THE GROUND THAT THE SAME IS EXCESSIVE OR UNREASONABLE WITH REGARD TO THE LE GITIMATE BUSINESS NEEDS OF THE ASSESSEE COMPANY . FOR THIS PURPOSITION HE RE LIED ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF TRIVENI ENG INEERING WORKS (SUPRA). WE FIND BEFORE LEARNED CIT(A) THE ASSESSEE RELIED O N THE DECISION IN THE CASE OF L.H. SUGAR FACTORIES AND OIL MILLS (SUPRA) APART FR OM RELYING ON THE FOLLOWING DECISIONS : 1. INSPECTING ASST. CIT VS. AYURVED SEVASHRAM LTD. , 14 TTJ (JP) 36. 2. CIT VS. METALIZING EQUIPMENTS CO. P. LTD., 92 T TJ (JD) 3. RAVIKANT RULA VS. ITO 17 TTJ 382 (MAD) WE FIND THE LEARNED CIT(A) FOLLOWING THE DECISION O F HONBLE ALLAHABAD HIGH COURT IN THE CASE OF L.H. SUGAR FACTORIES (SUPRA) DELETED THE ADDITION. IN OUR OPINION, THE ORDER PASSED BY THE LEARNED CIT(A) DEL ETING THE DISALLOWANCE OF GUARANTEE COMMISSION IS A REASONED ONE UNDER THE FA CTS AND CIRCUMSTANCES OF THE CASE. THE LEARNED DR COULD NOT CONTROVERT THE FINDINGS GIVEN BY THE LEARNED CIT(A). UNDER THESE CIRCUMSTANCES, WE FIND NO INF IRMITY IN THE ORDER OF THE CIT(A). ACCORDINGLY THE SAME IS UPHELD. THE GROUN D RAISED BY THE REVENUE IS ACCORDINGLY DISMISSED. 13 ITA NO. 1269/PN/2010 (BY ASSESSEE-A.Y. 2006-07) 1. THE GROUND OF APPEAL NO. 1(I) & (II) BY THE AS SESSEE READS AS UNDER.. 1 (I) THE LEARNED A.O. ERRED [AND HON.CIT(A) ER RED IN UPHOLDING] IN DISREGARDING THE FACT THAT THE INCOME TAX DEPARTMEN T ITSELF HAS TREATED THE SALES TAX LIABILITY AS HAVING BEEN FULLY PAID I N TERMS OF VARIOUS CIRCULARS ISSUED BY CBDT. (II) THE LEARNED A.O. ERRED [AND HON.CIT(A) ERRE D IN UPHOLDING] IN CONSIDERING THAT THE DISCOUNT (THAT IS, THE DIFFERE NCE BETWEEN THE BOOK LIABILITY AND THE PAYMENT MADE ON THE BASIS OF NET PRESENT VALUE METHOD) GIVEN BY THE GOVERNMENT OF MAHARASHTRA IN RESPECT O F SALES TAX DEFERRAL AMOUNTING TO RS.2,95,01,776/- IS CHARGEABLE TO TAX UNDER SECTION 41(1). 2. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUND BY THE ASSESSEE IS IDENTICAL TO GROUND OF APPEAL NO. 1 IN ITA NO. 388/ PN/12. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE ASSE SSEE HAS BEEN UPHELD. FOLLOWING THE SAME RATIO, THE GROUND APPEAL NO. 1 B Y THE ASSESSEE IS ALLOWED. 3. IN GROUND APPEAL NO. 2, THE ASSESSEE HAS CHALLEN GED THE ORDER OF THE CIT(A) IN DELETING THE DISALLOWANCE OF SHARE ISSUES EXPENSES AMOUNTING RS. 18,94,491/- UNDER SECTION 35D. 4. AT THE TIME OF HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE FAIRLY CONCEDED THAT THE ISSUE STANDS DECIDED AGAINST THE ASSESSEE BY THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF BROOK BOND IND IA LTD. REPORTED IN 225 ITR 798. IN VIEW OF THE ABOVE SUBMISSION BY THE LE ARNED COUNSEL FOR THE ASSESSEE, THE GROUND OF APPEAL NO. 2 RAISED BY THE ASSESSEE IS DISMISSED. 14 ITA NO. 1301//N/2010 (BY REVENUE- A.Y. 2006-07) : GROUND APPEAL NO. 1 BY THE REVENUE READS AS UNDER : WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD CIT(A) WAS JUSTIFIED IN HOLDING THAT THE GUARANTEE COMMISSION OF RS. 36,90,903/- PAID TO THE DIRECTORS OF THE COMPANY IS AN ALLOWABLE EXPENSE ESPECIALLY WHEN THE DELHI HIGH COURT IN THE CASE RE PORTED IN 234 ITR 447 HAS DECIDED THE ISSUE IN FAVOUR OF REVENUE. 2. AFTER HEARING BOTH THE SIDES, WE FIND THE ABOVE GROUND RAISED BY THE REVENUE IS IDENTICAL TO GROUND OF APPEAL NO. 3 BY R EVENUE IN ITA NO. 756/PN/2010. WE HAVE ALREADY DECIDED THE ISSUE AND THE GROUND RAISED BY THE REVENUE HAS BEEN DISMISSED. FOLLOWING THE SAME RAT IO, THE ABOVE GROUND RAISED BY THE REVENUE IS DISMISSED. 3. GROUNDS OF APPEALS NOS. 2 AND 3 BY THE REVENUE READS AS UNDER : 2. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD CIT(A) WAS JUSTIFIED IN OBVIATING THE APPLICABIL ITY OF CLAUSE (II) OF SUB-RULE(2) OF RULE 8(D) OF THE I.T. ACT, BY HOLDIN G THAT NO INTEREST WAS COVERED BY RULE 8(D), DESPITE THERE BEING ENTRIES I N THE ACCOUNT SCHEDULES 3 AND 4 PERTAINING TO UNSECURED LOANS, CA SH CREDIT LOANS AND OVERDRAFTS LOANS ON WHICH INTEREST HAD BEEN INCURRE D BY THE ASSESSEE. 3. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CA SE AND IN LAW THE LD CIT(A) ERRED IN TAKING INTO CONSIDERATION THAT T HE FUNDS OF THE ASSESSEE ARE FROM A COMMON POOL AND THERE WAS NO EX CLUSIVELY PERTAINING TO CAPITAL EXPENDITURE ON PURCHASE OF EQ UIPMENT. 4. AFTER HEARING BOTH THE SIDES, WE FIND THE ASSESS EE RECEIVED DIVIDEND INCOME OF RS. 3,56,032/- WHICH IT CLAIMED AS EXEMPT . THE AO NOTED THAT THE ASSESSEE HAS MADE INVESTMENT IN SHARES AND SECURIT IES TO THE EXTENT OF RS. 15 87,07,300/-. FROM THE BALANCE SHEET AS ON 31-03-20 06 HE OBSERVED THAT THE ASSESSEE HAS AN OUTSTANDING LOAN OF RS. 115.91 CROR ES ON WHICH IT HAS PAID INTEREST TO THE TUNE OF RS. 5.85 CRORES. THEREFORE , ACCORDING TO THE ASSESSING OFFICER INTEREST ATTRIBUTABLE TO THE FUNDS UTILISED FOR MAKING INVESTMENT TO EARN THE TAX FREE DIVIDEND CANNOT BE ALLOWED AS DEDUCTIO N WITHIN THE MEANING OF PROVISIONS OF SECTION 14A . HE, THEREFORE, DISALLOW ED AN AMOUNT OF RS. 4,39,315/- BEING PROPORTIONATE BUSINESS FUNDS UTILI SED FOR EARNING EXEMPT INCOME AND NOT EXCLUSIVELY UTILISED FOR THE PURPOSE OF BUSINESS. 5. IN APPEAL, THE LEARNED CIT(A) FOLLOWING THE DEC ISION OF SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF DAGA CAPITAL MANAGEMENT PVT. LTD., REPORTED IN 117 ITD 169 (SPECIAL BENCH) DIRECTED THE AO TO MAKE DISALLOWANCE ONLY TO THE EXTENT PROVIDED IN CLAUSE 3 OF SUB RULE (2) OF RULE 8(D). AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE REVENUE IS IN APPEAL BEFOR E US. 6. AFTER HEARING BOTH THE SIDES, WE FIND THE CO-ORD INATE BENCHES OF THE TRIBUNAL ARE RESTORING THE ISSUE TO THE FILE OF THE AO FOR MAKING REASONABLE DISALLOWANCE UNDER SECTION 14A R.W. RULE 8D IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & B OYCE MANUFACTURING COMPANY LTD., VS. DCIT REPORTED IN 328 ITR 81. RE SPECTFULLY FOLLOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE CITED SUPRA, WE RESTORE THE ISSUE TO THE FILE OF THE AO WITH DIRECTION TO DECID E THE ISSUE AFRESH AND IN 16 ACCORDANCE WITH THE AFTER GIVING DUE OPPORTUNITY O F BEING HEARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. 7. IN THE RESULT, THE ITA NO. 388/PN/2012 FILED BY THE ASSESSEE IS ALLOWED. ITA NO. 1269/PN/2010 FILED BY THE ASSESSEE IS PARTL Y-ALLOWED. ITA NO.756/PN/2010 FILED BY THE REVENUE IS DISMISSED AN D ITA NO. 1301/PN/2010 FILED BY THE REVENUE IS PARTLY-ALLOWED FOR STATISTI CAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 30 TH MAY 2012. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R .K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: 30 TH MAY 2012 SATISH/ASHWINI COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT- V, PUNE 4. ADDL. CIT, RANGE-8 PUNE 5. CIT CONCERNED 6. THE D.R, A BENCH,PUNE 7. GUARD FILE BY ORDER PRIVATE SECRETARY, ITAT, PUNE BENCH, PUNE