M/s. S.M. Rolling Works, Pune V. Deputy Commissioner of Income-tax,

ITA 402/PUN/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 9447 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 07-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAWE
• Keywords: Transfer pricing; Rule of consistency; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, PUNE , , , BEFORE SHRI ANIL CHATURVEDI, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO . 402 /PUN/201 5 / ASSESSMENT YEAR : 20 10 - 11 M/S. S.M. ROLLING WORKS, PLOT NO. 12/1, D - 1, BLOCK, MIDC, CHINCHWAD, PUNE 411019 PAN : ABOFS4993B ....... / APPELLANT / V S. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 9, PUNE / RESPONDENT ASSESSEE BY : SHRI KISHOR PHADKE REVENUE BY : S HRI HITENDRA NINAWE / DATE OF HEARING : 25 - 04 - 2017 / DATE OF PRONOUNCEMENT : 17 - 0 5 - 2017 / ORDER PER VIKAS AWASTHY, JM : TH E PRESENT APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) - 6, PUNE DATED 20 - 01 - 2015 FOR THE ASSESSMENT YEAR 2010 - 11. 2 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 2. THE BRIEF FACTS OF THE CASE AS EMANATING FROM RECORDS ARE: THE ASSESSEE IS ENGAGED IN THE BUSINESS OF ENGINEERING GOODS. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER APPEAL ON 26 - 09 - 2010 DECLARING TOTAL INCOME OF ` 1,31,93,700/ - . THE CASE OF ASSESSEE WAS SELECTED FOR SCRUTINY UNDER CASS. ACCORDINGLY, NOTICE U/S. 143(2) O F THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT ) WAS ISSUED TO THE ASSESSEE ON 25 - 08 - 2011. DURING THE COURSE OF SCRUTINY ASSESSMENT , THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS ADVANCED INTEREST FREE AMOUNTS T O ITS SISTER CONCERN I.E. SHRIKANT AUTO ENGINEERING WORKS ` 3,15,35,599/ - AND ANUSAYA AUTO PRESS PARTS LTD. ` 1,55,04,254/ - . AT THE SAME TIME THE ASSESSEE HAS MADE PAYMENT OF INTEREST TO THE BANKS AMOUNTING TO ` 1,52,15,152/ - . THE ASSESSING OFFICER HELD THA T MAKING ADVANCES TO THE SISTER CONCERN IS NORMAL IN BUSINESS TRANSACTIONS. HOWEVER, THE AMOUNTS ADVANCED BY THE ASSESSEE TO ITS SISTER CONCERN ARE ON THE HIGHER SIDE. THE ASSESSING OFFICER DISALLOWED ADVANCE OF ` 2 CRORES GIVEN TO SISTER CONCERNS BEING ON THE HIGHER SIDE AND ACCORDINGLY, DISALLOWED INTEREST OF ` 20 LAKHS ON THE SAID AMOUNT . AGGRIEVED BY THE ASSESSMENT ORDER DATED 06 - 03 - 2013, THE ASSESSEE FILED APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISS IONER OF INCOME TAX (APPEALS) UPHELD THE FINDINGS OF ASSESSING OFFICER AND CONFIRMED THE DISALLOWANCE. NOW, THE ASSESSEE IS IN SECOND APPEAL BEFORE THE TRIBUNAL IMPUGNING THE ORDER OF FIRST APPELLATE AUTHORITY. 3. SHRI KISHOR PHADKE APPEARING ON BEHALF OF THE ASSESSEE SUBMITTED THAT OWN FUNDS OF THE ASSESSEE ARE MUCH MORE THAN THE FUNDS ADVANCED BY THE ASSESSEE TO ITS SISTER CONCERNS. REFERRING TO THE 3 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 BALANCE SHEET AS ON 31 - 03 - 2010 AT PAGE 5 OF THE PAPER BOOK , THE LD. AR POINTED THAT THE CAPITAL ACCOUN T OF THE ASSESSEE SHOWS BALANCE OF ` 13,66,86,841/ - . THE AMOUNT ADVANCED BY ASSESSEE TO ITS SISTER CONCERNS IS APPROXIMATELY ` 4.07 CRORES. THE ASSESSEE CAN EASILY SPARE THAT MUCH OF AMOUNT FROM ITS OWN FUNDS FOR ADVANCING TO THE SISTER CONCERNS. THE LD. AR FURTHER CONTENDED THAT THE LOANS AVAILED BY THE ASSESSEE ARE FOR SPECIFIC PURPOSE SUCH AS BILL DISCOUNTING, LETTER OF CREDIT, TERM LOANS ETC. ALL THESE LOANS ARE CLOSELY MONITORED BY THE LENDING BANKS AND HENCE CANNOT BE DIVERTED FOR ANY OTHER PURPOSE. THE LD. AR SUBMITTED THAT THE CASE OF THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES AND POWER LTD. REPORTED AS 313 ITR 340. 3.1 THE LD. AR SUBMITTED THAT TH E COMMISSIONER OF INCOME TAX (APPEALS) WHILE REJECTING THE CONTENTIONS OF ASSESSEE ON THIS ISSUE HAS ERRED IN OBSERVING THAT THERE IS DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND ADVANCES GIVEN BY THE ASSESSEE TO ASSOCIATED ENTERPRISES THROUGH CASH CREDIT A CCOUNT. MERELY BECAUSE THE ASSESSEE HAS ADVANCED THE AMOUNTS TO ITS SISTER CONCERNS FROM CASH CREDIT ACCOUNT, INFERENCE CANNOT BE DRAWN THAT THE ASSESSEE HAS ADVANCED THE AMOUNTS FROM BORROWED FUNDS. TO SUPPORT HIS SUBMISSIONS THE LD. AR PLACED RELIANCE ON THE FOLLOWING DECISIONS : I . COMMISSIONER OF INCOME TAX VS. MAHANAGAR GAS LTD., 42 TAXMANN.COM 40 (BOMBAY); II . ASHOK BROTHERS VS. INCOME TAX OFFICER, 76 TTJ 427 (HYD. - TRIB.). 4 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 3.2 THE LD. AR CONTENDED THAT THE ASSESSING OFFICER HAS MADE DISALLOWANCE ON ESTIMATION. TH IS ITSELF SHOWS THAT THE ASSESSING OFFICER WAS NOT CONVINCED THAT ANY DISALLOWANCES IS WARRANTED IN THE PRESENT CASE. 4. ON THE OTHER HAND SHRI HITENDRA NINAWE REPRESENTING THE DEPARTMENT VEHEMENTLY SUPPORTING THE FINDINGS OF COMMISSIONER OF INCOME TAX (APPEALS) CONTENDED THAT THE ASSESSEE HAS NOT BEEN ABLE TO SHOW ANY COMMERCIAL EXPEDIENCY FOR ADVANCING LOANS TO ITS SISTER CONCERNS. THE RELIANCE PLACED BY THE ASSESSEE ON THE DECISION IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA) IS MISPLACED AS THE FACTS IN THE PRESENT CASE ARE ENTIRELY DIFFERENT. THE LD. DR IN SUPPORT OF HIS SUBMI SSIONS PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF PUNJAB STAINLESS STEEL INDS. VS. COMMISSIONER OF INCOME TAX REPORTED AS 324 ITR 396. 5. CONTROVERTING THE SUBMISSIONS MADE BY THE LD. DR, THE LD. AR SUBMITTED THAT THE ASSES SEE HAS ADVANCED LOANS TO GROUP CONCERNS AND THE SAID GROUP CONCERNS ARE SUPPLIERS OF THE ASSESSEE. W ITHDRAWAL OF ADVANCES WOULD HAVE HAMPERED SMOOTH FUNCTIONING OF THE ENTIRE GROUP. THE LD. AR POINTED THAT THE ASSESSEE HAD ADVANCED SUMS TO GROUP CONCERN S SINCE LONG . EVEN DURING THE PERIOD RELEVANT TO THE ASSESSMENT YEARS 2008 - 09 AND 2009 - 10 ADVANCES WERE MADE BY THE ASSESSEE TO ITS SISTER CONCERNS, THE ASSESSMENTS FOR THE SAID ASSESSMENT YEARS WERE COMPLETED U/S. 143(3) BUT NO DISALLOWANCE WAS MADE DURI NG THE SAID ASSESSMENT YEARS. THERE HAS BEEN NO SUBSTANTIAL CHANGE IN THE FINANCIAL POSITION DURING THE ASSESSMENT YEAR UNDER APPEAL. THEREFORE, KEEPING IN VIEW THE RULE OF CONSISTENCY , TREATMENT GIVEN IN THE EARLIER 5 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 ASSESSMENT YEAR S, SHOULD BE FOLLOWED IN THE IMPUGNED ASSESSMENT YEAR AND THE DISALLOWANCE MADE SHOULD BE DELETED. 6. W E HAVE HEARD THE SUBMISSIONS MADE BY THE REPRESENTATIVES OF RIVAL SIDES AND HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW . DISALLOWANCE OF INTEREST HAS BEEN MADE IN RESPECT OF ADVANCES MADE BY THE ASSESSEE TO ITS SISTER CONCERNS SHRIKANT AUTO ENGINEERING WORKS ` 3,15,35,599/ - AND ANUSAYA AUTO PRESS PARTS LTD. ` 1,55,04,254/ - . A PERUSAL OF THE ASSESSMENT ORDER REVEAL THAT THE DISALLOWANCE HAS BEEN MADE BY THE ASSESSING OFFICER ON ESTIMATIONS. THE COMMISSIONER OF INCOME TAX (APPEALS) WHILE CONFIRMING THE DISALLOWANCE HAS ADDED ANOTHER DIMENSION TO THE REASONING GIVEN BY ASSESSING OFFICER THAT SINCE THE AMOUNT HAS BEEN ADVANCED FROM CURRENT ACCOUNTING , DI RECT NEXUS IS ESTABLISHED BETWEEN THE LOANS AND AMOUNT ADVANCED BY THE ASSESSEE TO ITS GROUP CONCERNS. 7. A PERUSAL OF THE BALANCE SHEET AS ON 31 - 03 - 2010 PLACED ON RECORD BY THE ASSESSEE AT PAGE 5 OF THE PAPER BOOK SHOWS THAT THE ASSESSEE IS HAVING SUFF ICIENT INTEREST FREE FUNDS OF ITS OWN FOR MAKING ADVANCES OF ` 4.07 CRORES TO SISTER CONCERNS . THE ASSESSEE HAS CAPITAL BALANCE OF MORE THAN ` 13.66 CRORES. TH US, OWN FUNDS AVAILABLE WITH THE ASSESSEE ARE SUFFICIENT TO COVER THE ADVANCES MADE BY THE ASSESS EE. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA) HAS HELD AS UNDER : 16. IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST - FREE FUNDS AVAILABLE. IN OUR OPINION, THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. V. CIT [1997] 224 ITR 627 HAD THE OCCASION TO 6 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. [1982] 134 ITR 219 WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOUL D HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDU CTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.' S CASE [1982] 134 ITR 219 THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTEN TION BEFORE THE HIGH COURT. THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVER DRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERATED OR AVAIL ABLE WITH THE COMPANY, IF THE INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER OF INCOME - TAX (APPEALS) AND THE INCOME - TAX APPELLATE TRIBUNAL. 8. THE COMMISSIONER OF INCOME TAX (APPEALS) HAS OBSERVED THAT SINCE, THE ASSESSEE HAS ADVANCED THE LOANS FROM CURRENT ACCOUNT THIS ESTABLISHES THE NEXUS BETWEEN THE LOANS TAKEN AND THE AMOUNTS ADVANCED BY THE ASSESSEE TO ITS AES. WE ARE OF THE CONSIDERE D VIEW THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN COMING TO SUCH A CONCLUSION . M ERELY BECAUSE THE FUNDS HAVE BEEN ADVANCED BY THE ASSESSEE FROM CURRENT ACCOUNT , NO INFERENCE CAN BE DRAWN THAT THE ASSESSEE HAS UTILIZED BORROWED INTEREST BEA RING FUNDS FOR ADVANCING TO ITS SISTER CONCERNS. 7 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 9. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. MAHANAGAR GAS LTD. (SUPRA) HELD THAT THERE IS NO REQUIREMENT UNDER LAW THAT AN ASSESSEE SHOULD HAVE SEPARATE ACCOUNT IN RESPE CT OF NON - INTEREST BEARING FUNDS FROM THAT OF INTEREST BEARING FUNDS TO ESTABLISH THAT THE INVESTMENTS HAVE BEEN MADE OUT OF ITS OWN FUNDS I.E. NON - INTEREST BEARING FUNDS. 10. THE HYDERABAD BENCH OF THE TRIBUNAL IN THE CASE OF ASHOK BROTHERS VS. INCOME TAX OFFICER (SUPRA) HAS TAKEN A SIMILAR VIEW. THE RELEVANT EXTRACT OF THE FINDINGS OF TRIBUNAL ARE REPRODUCED HERE - IN - BELOW : THUS, IN OUR CONSIDERED OPINION, THE BALANCE SHEET OF THE ASSESSEE AS ON 31ST MARCH, 1998 REVEALS THAT THERE ARE SUFFICIENT INT EREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE TO MATCH THE INTEREST - FREE ADVANCES MADE TO SISTER - CONCERNS LEADING TO A CONCLUSION THAT THE AO IS NOT JUSTIFIED IN DISALLOWING AN AMOUNT OF RS. 4 LAKHS OUT OF INTEREST AMOUNT OF RS. 4,26,750 PAID AND CLAIMED BY THE ASSESSEE. EVEN OTHERWISE, THE INTEREST IN QUESTION IS AGAINST A BANK LOAN, I.E., CASH CREDIT. IT IS WELL KNOWN THAT BANKS GRANT CASH CREDIT FACILITIES ONLY AGAINST STOCKS AND DEBTORS. THIS BEING SO, WHATEVER AMOUNT IS ADVANCED BY THE BANK IS CAREFULLY MONITORED BY THE BANK OFFICIALS AND RELEASED ONLY TO MEET THE LIABILITY TOWARDS DEBTORS AND STOCKS. THIS BEING SO, TO OUR MIND, IT SHOULD NOT BE PROPER TO ATTRIBUTE TO THE ASSESSEE THE ALLEGATION THAT LOAN SANCTIONED BY THE BANK FOR ACQUISITION OF STOCKS OR FINANCING TRADE DEBTORS WAS DIVERTED TO SISTER - CONCERNS THROUGH THE VERY SAME ACCOUNT IN VIOLATION OF CREDIT TERMS WITHOUT ANY PROOF OR COMMENTS FROM THE BANK IN THIS REGARD. THUS, IN OUR CONSIDERED OPINION, THE CLAIM OF THE ASSESSEE FOR INTEREST OF R S. 4,26,750 HAS TO BE ALLOWED IN FULL. THIS GROUND OF THE ASSESSEE SUCCEEDS. 11. THUS, IN VIEW OF THE FACTS OF THE CASE AND THE DECISIONS DISCUSSED ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE COMMISSIONER OF INCOME TAX (APPEALS) HAS ERRED IN CONFIRMING THE ADDITION WITHOUT 8 ITA NO . 402/PUN/2015, A.Y. 2010 - 11 CONSIDERING THE FACT THAT SUFFICIENT OWN INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE TO COVER THE ADVANCES MADE TO SISTER CONCERNS , THE IMPUGNED ORDER IS SET ASIDE AND THE APPEAL OF THE ASSESSEE IS ALLOWED. 12. IN THE RESU LT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 17 TH DAY OF MAY, 201 7 . SD/ - SD/ - ( / ANIL CHATURVEDI ) ( / VIKAS AWASTHY) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE; / DATED : 17 TH MAY, 2017 RK / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 6, PUNE 4. / THE CIT - 5, PUNE 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE. / / // TRUE COPY// / BY ORDER, / ASSISTANT REGISTRAR , , / ITAT, PUNE