ASST CIT CEN CIR 15 & 16, MUMBAI V. J B DIAMONDS, MUMBAI

ITA 3996/MUM/2012

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 8080 (ITAT-MUMBAI)
• Duration Of Justice: 5 year(s) 6 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-12-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 21-05-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 07-06-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AARJU GARODIA

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH, MUMBAI BEFORE SHRI SAKTIJIT DEY , JUDICIAL MEMBER AND SHRI N.K. PRADHAN , ACCOUNTANT MEMBER ITA N O. 3996/MUM/2012 ( ASSESSMENT YEAR : 2007 08 ) ASST . CIT , CENT CIR 15 & 16 R.NO.401, 4 TH FLOOR AAYAKARBHAVAN M.K.ROAD, MUMBAI 400 020 . APPELLANT V/S M/S. J.B. DIAMONDS 406, PRASAD CHAMBERS, OPERA HOUSE MUMBAI 400 004 PAN: AAAFJ0200B . RESPONDENT APPELLANT BY : MS. AARJU GARODIA RESPONDENT BY : S HRI ANUJ KISNADWALA DATE OF HEARING 13.12.2017 DATE OF ORDER 15.12.2017 O R D E R PER SAKTIJIT DEY, J.M. THIS IS AN APPEAL FILED BY THE DEPARTMENT AGAINST ORDER DATED 01/03/2012 OF LD. COMMISSIONER OF INCOME TAX (APPEALS) 39, MUMBAI FOR THE ASSESSMENT YEAR 2007 08. 2 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS 2. THE ISSUE RAISED IN THE GROUNDS PERTAINS TO DELETION OF ADDITIONS MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENDITURE. 3. BRIEFLY THE FACTS ARE , THE ASSESSEE A PARTNERSHIP FIRM IS ENGAGED IN THE BUSINESS OF IMPORT, EXPORT AND MANUFACTURING OF DIAMOND . IT ALSO GENERATES POWER THROUGH WIND MILLS. FOR THE ASSESSMENT YEAR UNDER DISPUTE, ASSESSEE FILED ITS RETURN OF INCOME ON 23.10.2007 DECLARING INCOME OF RS.27,01,23,171 / . DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE H AS ADVANCED INTEREST FREE LOANS TO NUMBER OF PERSONS AGGREGATING TO RS.2,32,90,000/ . FURTHER , THE ASSESSING OFFICER OBSERVED , THE ASSESSEE HAS AVAILED LOAN FROM BANKS AND FINANCIAL INSTITUTIONS ON WHICH IT IS PAYING INTEREST WHICH HAS BEEN CLAIMED AS DEDUCTION. HE THEREFORE, CALLED UPON THE ASSESSEE TO EXPLAIN WHY INTEREST EXPENDITURE SHOULD NOT BE DISALLOWED ON ACCOUNT OF ADVAN CEMENT OF INTEREST FREE LOANS. 4. IN REPLY TO THE QUERY RAISED BY THE ASSESSING OFFICER, THE ASSESSEE JUSTIFIED CLAIMING INTEREST EXPENDITURE BY STATING THAT INTEREST FREE ADVANCES WERE FOR BUSINESS PURPOSE. FURTHER , IT WAS SUBMITTED , THE ASSESSEE WAS HA VING SUFFICIENT INTEREST FREE FUND S AVAILABLE WITH IT TO MAKE THE INTEREST FREE ADVANCES. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND EXAMINING THE MATERIAL ON RECORD , 3 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS THE ASSESSING OFFICER OBSERVED THAT THE INTEREST FREE ADVANCE TO M/S. CREATI ON JEWELLERY MANUFACTURING PVT. LTD., WAS NOT FOR BUSINESS PURPOSE AS THE ASSESSEE COULD NOT JUSTIFY HOW IT IS RELEVANT FOR HIS BUSINESS. 5. FURTHER , THE ASSESSING OFFICER OBSERVED , IN RESPECT OF OTHER INTEREST FREE LOANS AND ADVANCES ALSO THE ASSESSEE COUL D NOT FURNISH NECESSARY DETAILS TO SHOW THAT THEY WERE ADVANCED FOR BUSINESS PURPOSE OF THE ASSESSEE. THE ASSESSING OFFICER THEREFORE, HELD THAT THE INTEREST PAID ON THE CAPITAL BORROWED CANNOT BE ALLOWED FULLY UNDER SECTION.36(1)(III) AS THE ASSESSEE ADVA NCED INTEREST FREE LOANS .H OWEVER, CONSIDERING THE FACT THAT THE ASSESSEE WAS HAVING MIXED FUNDS COMPRISING OF BORROWED AND INTEREST FREE FUND ,T HE ASSESSING OFFICER CONCLUDED THAT THE AVERAGE INTEREST COST WILL WORK OUT TO 5.75% PER ANNUM. APPLYING THE SAID INTEREST RATE TO THE INTEREST FREE LOANS AND ADVANCES, THE ASSESSING OFFICER WORKED OUT THE DISALLOWANCE OUT OF INTEREST EXPENDITURE AT RS.13,39,175/ . FURTHER, THE ASSESSING OFFICER NOTICED THAT , THOUGH , IN THE PRECEDING ASSESSMENT YEARS THE ASSESSEE HAS CAPITALIZED THE INTEREST COST ON THE BORROWED FUNDS UTILIZED FOR SETTING UP THE FACTORY, HOWEVER, IN THE IMPUGNED ASSESSMENT YEAR HE HAS NOT DONE SO. THEREFORE, HE CALLED 4 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS UPON THE ASSESSEE WHY THE INTEREST COST ON THE BORROWINGS FOR CONSTRUCTION OF THE FACTORY PREMISES SHOULD NOT BE CAPITALIZED. 6 . IN RESPONSE, THE ASSESSEE SUBMITTED THAT SINCE THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT TO UT ILIZE IN THE CONSTRUCTION OF THE FACTORY PREMISES , THERE IS NO NEED TO CAPITALIZE THE INTEREST COST .T HE ASSESSING OFFICER HOWEVER, DID NOT FIND MERIT IN THE SUB MISSION S OF THE ASSESSEE AND HELD THAT SINCE , THE ASSESSEE WAS HAVING MIXED FUND S, UTILIZATION O F BORROWED FUNDS IN CONSTRUCTION OF FACTORY PREMISES CANNOT BE RULED OUT. ACCORDINGLY , APPLYING INTEREST COST OF 5.75%, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF RS .50,97,179/ . 7 . BEING AGGRIEVED OF THE DISALLOWANCE S MADE BY THE ASSESSING OFFICER, AS SESSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY.CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND EXAMINING THE FACTS ON RECORD, LD. COMMISSIONER (APPEALS) FOUND THAT AS PER THE BALANCE SHEET OF THE ASSESSEE FOR THE RELEVANT FINANCIAL YEAR, IT W AS HAVING SUFFICIENT INTEREST FREE SURPLUS FUND AVAILABLE WITH IT. H E FOUND THAT IN THE RELEVANT FINANCIAL YEAR, THE ASSESSEE WAS HAVING AN AMOUNT OF RS.198.09 CRORES IN THE CAPITAL ACCOUNT OF THE PARTNERS AS ON 0 1.04.1996 AND CLOSINGBALANCE OF RS.224.61 CRORES. FURTHER HE FOUND 5 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS THAT IN THE RELEVANT FINANCIAL YEAR ITSELF, THERE IS AN INCREASE OF RS. 26 CRORES IN THE PARTNERS CAPITAL ACCOUNT , WHEREAS , INTEREST FREE LOAN ADVANCED DURING THE YEAR WAS ONLY RS .10 LAKHS. HE NOTICED THAT OUT OF THE CREDIT BALANCE OF RS . 224.61 CRORES AN AMOUNT OF RS .2,50,00,000/ IS TOWARDS FIXED CAPITAL AND REMAINING RS. 222.11 CRORE S WAS IN CURRENT ACCOUNT AND THE PARTNERS WERE NOT PAID ANY INTEREST . HE NOTICED THAT COMPARED TO HUGE INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE, THE INTEREST FREE ADVANCES WERE TO THE TUNE OF RS .2.32 CRORES AND INVESTMENT ON CONSTRUCTION OF FACTORY PREMISES WAS TO THE TUNE OF RS. 9.21 CRORES . THEREFORE, FOLLOWING THE R ATIO LAID DOWN BY THE HON'BLE BOMBAY COURT IN CASE OF CIT V/S. RELI ANCE UTILITIES AND POWER LTD., 313 ITR 340, LEARNED HE DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OUT OF INTEREST COST. AS FAR AS INTEREST COST RELATING TO CONSTRUCTION OF FACTORY PREMISES , THE LEARNED CIT(A) ALSO OBSERVED THAT THE BORROWED FUN DS WERE NOT AVAILED SPECIFICALLY F OR THE PURPOSE OF FACTORY PREMISES, RATHER , THEY WERE AVAILED EXCLUSIVELY FOR EXPORT OF DIAMONDS AS PRE S HIPMENT CREDIT AND PACKING CREDIT. HE THEREFORE, HELD THAT THE INTEREST COST IS ALLOWABLE UNDER SECTION.36(1)(III). 6 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS 8. WHILE THE LD. DEPARTMENTAL REPRESENTATIVE RELIED UPON THE OBSERVATIONS OF THE ASSESSING OFFICER, LEARNED AUTHORISED REPRESENTATIVE RE ITERATED THE STAND TAKEN BEFORE THE DEPARTMENTAL AUTHORIT IES . 8. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSED MATER IALS ON RECORD. AS COULD BE SEEN FROM THE FACTS ON RECORD, THE ASSESSING OFFICER DISALLOWED A PART OF INTEREST COST ON THE REASONING THAT THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS TO VARIOUS PERSONS AND HAS NOT CAPITALIZED THE INTEREST COST FOR CONSTRU CTION OF FACTORY PREMISES. THE SPECIFIC CONTENTION OF THE ASSESSEE RIGHT FROM THE ASSESSMENT STAGE IS , IT HAD SUFFICIENT INTEREST FREE FUND AVAILABLE WITH IT TO MAKE INTEREST FREE ADVANCES AS WELL AS UTILIZE IN CONSTRUCTION OF FACTORY PREMISES. IT IS RELEV ANT TO NOTE , THE ASSESSING OFFICER HAS NOT DISPUTED THE FACT THAT THE ASSESSEE WAS HAVING INTEREST FREE FUNDS AVAILABLE WITH IT AS HE HAS RECORDED THAT THE ASSESSEE WAS HAVING MIXED FUNDS. HOWEVER, PRESUMING THAT A PART OF INTEREST BEARING FUND WAS UTILIZE D FOR INTEREST FREE LOANS AND CONSTRUCTION OF FACTORY PREMISES HE HAS MADE THE IMPUGNED DISALLOWANCE. NOTABLY, MAJOR PART OF THE INTEREST FREE LOANS ARE CONTINUING FROM THE PRECEDING ASSESSMENT YEARS AND ONLY AN AMOUNT OF RS .10,00,000/ HAS BEEN ADVANCED TO ONE PERSON IN THE IMPUGNED ASSESSMENT YEAR. IT IS ALSO ESTABLISHED ON RECORD THAT THE 7 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS ASSESSEE WAS HAVING HUGE INTEREST FREE FUND AVAILABLE WITH IT NOT ONLY TAKE CARE OF THE INTEREST FREE LOANS BUT ALSO THE AMOUNT SPENT IN CONSTRUCTION OF FACTORY PREMISES . IT IS ALSO RELEVANT TO OBSERVE , LEARNED CIT(A) HAS RECORDED A CATEGORICAL FINDING OF FACT THAT THE BORROWED FUNDS WERE EXCLUSIVELY UTILIZED FOR EXPORT OF DIAMONDS. THEREFORE, WHEN THE ASSESSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AVAILABLE WITH IT TO TAKE CARE OF THE INTEREST FREE LOANS AND CONSTRUCTION OF FACTORY PREMISES, NO DISALLOWANCE OUT OF INTEREST EXPENDITURE CAN BE MADE IN VIEW OF THE R ATIO LAID DOWN BY THE HON'BLE JURISDICTION H IGH C OURT IN CASE OF R ELIANCE U T ILITIES A ND P OWER L TD. (SUPRA). MORE SO, WHEN THE ASSESSING OFFICER HAS FAILED TO ESTABLISH A DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE INTEREST FREE ADVANCES AND CONSTRUCTION OF FACTORY PREMISES. 10. IN VIEW OF THE AFORESAID, WE UPHOLD THE ORDER OF THE LEARNED FIRST APPELLATE AUTHORITY BY DISMISSING THE GROUNDS RAISED. 11. IN THE RESULT, DEPARTMENTA L APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15.12.2017 SD/ - SD/ - SD/ - N.K. PRADHAN ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED: 15.12.2017 8 ITA NO.3996/MUMBAI/2012 M/S. J.B.DIAMONDS COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; (5) THE DR, ITAT, MUMBAI; (6) GUARD FILE . TRUE COPY BY ORDER KARUNA SR. PRIVATE SECRETARY (DY./ ASSTT.REGISTRAR) ITAT, MUMBAI