INDUSTRIAL THERMOPLASTICS ( PACKAGING DIVISION), MUMBAI V. ITO 20(1)(3), MUMBAI

ITA 420/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8361 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-02-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: I
• Next Hearing Date: 08-02-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 18-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S K SINGH
• Assessee Lawyers: B V JHAVERI
• Keywords: Unexplained expenditure; Diversion of income; Non-deduction of tax; Revenue expenditure
• Section: 69C; 2

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'I' BENCH, MUMBAI BEFORE SHRI D.K. AGARWAL, JUDICIAL MEMBER AND SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER ITA NO. 420/MUM/2010 (ASSESSMENT YEAR: 2005-06) M/S. INDUSTRIAL THERMOPLASTICS VS. INCOME TAX OFFICER - 20(1)(3) (PACKING DIVISION.), A/47, NANDISHORE ROOM NO. 607, 6TH FLOOR INDUSTRIAL ESTATE, MAHAKALI CAVE RD. PIRAMALCHAMBER S, LALBAUG ANDHERI (E), MUMBAI 400093 PAREL, MUMBAI 400012 PAN - AAAFL 0341 Q APPELLANT RESPONDENT APPELLANT BY: SHRI B.V. JHAVERI RESPONDENT BY: SHRI S.K. SINGH O R D E R PER D.K. AGARWAL, J.M. THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 05.10.2009 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) [CIT(A)] FOR A.Y. 2005-06. 2. BRIEFLY STATED FACTS OF THE CASE ARE THAT THE ASSES SEE FIRM IS ENGAGED IN THE BUSINESS OF JOB WORK IN RESPECT OF PRINTING ON ALUMINIUM FOILS, FIELD RETURN DECLARING AN INCOME OF ` 98,710/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS INTER ALIA OBSERVED BY THE (ASSE SSING OFFICER (A.O.) THAT THE ASSESSEE HAS CLAIMED INTEREST PAYMENT OF ` 10,50,693/- PAID TO M/S MODI FINANCE CORPORATION, WHICH IS SHOWN IN THE TAX AUDIT REPORT AS PERSON COVERED UNDER SECTION 40A(2)(B) OF THE INCOM E TAX ACT, 1961 (THE ACT). THE ASSESSEE WAS ASKED TO JUSTIFY THE INTERES T CLAIM. IN RESPONSE, THE ASSESSEE SUBMITTED THAT THE INTEREST WAS PAID AT 18 % WHICH IS AT THE PREVAILING MARKET RATE AND SUCH PAYMENT IS NOT MADE FOR THE FIRST TIME AND PAID IN THE PAST ALSO, WHICH HAS BEEN ALLOWED. THE A.O., AFTER CONSIDERING ASSESSEES SUBMISSIONS, OBSERVED THAT THE ASSESSEE HAS NOT PAID ANY INTEREST IN THE LAST THREE FINANCIAL YEARS TO THE S AID PARTY AND CREDITED INTEREST COMPONENT TO THE PRINCIPAL AMOUNT OF LOAN AND FURTHER INTEREST ON INTEREST CREDITED YEAR AFTER YEAR. THE FACT THAT TH E LENDER IS COVERED UNDER ITA NO. 420/MUM/2010 2 SECTION 40A(2)(B) AND RELATED TO THE ASSESSEE, THE ACCOUNTING TREATMENT GIVING TO THE LOAN AND INTEREST AND NON PAYMENT OF INTEREST TO THE SAID PARTY AND INSTEAD, CONVERTING THE SAME TO FURTHER LOAN IS NOTHING BUT DIVERSION OF INCOME TO GROUP CONCERN WHERE OTHER FAMILY MEMBERS OF THE ASSESSEE ARE INTERESTED. ASSESSEE WAS THEREFORE, ASKED TO EXPLAI N AS TO WHY THE SAME SHOULD NOT BE TREATED AS DIVERSION OF INCOME. IN RE PLY, IT WAS STATED BY THE ASSESSEE THAT THIS IS AN INDEPENDENT ENTITY. HOWEVE R, THE A.O. IN THE ABSENCE OF ANY MATERIAL ON RECORD TO PROVE THE REAS ONABLENESS AND ITS ALLOWABILITY UNDER THE ACT, TREATED THE AMOUNT OF I NTEREST OF ` 10,50,693/- AS UNEXPLAINED EXPENDITURE WITHIN THE MEANING OF SECTI ON 69C OF THE ACT. WITHOUT PREJUDICE TO THE ABOVE, THE A.O. FURTHER OB SERVED THAT THE ASSESSEE WAS ASKED TO SUBMIT THE DETAILS OF TDS MADE AS REQU IRED UNDER SECTION 194A OF THE ACT ON THE INTEREST PAYMENT OF ` 10,50,693/-. THE ASSESSEE WAS ALSO ASKED TO SHOW CAUSE AS TO WHY THE SAID AMOUNT SHOULD NOT BE DISALLOWED UNDER SECTION 40A(IA) OF THE ACT IN CASE OF NON-COMPLIANCE OF TDS PROVISIONS. IN RESPONSE, THE ASSESSEE FURNISHED DET AILS OF INTEREST CLAIMED BUT NO TDS HAS BEEN MADE AS THE SAID PARTY HAS SUBM ITTED FORM NO. 15H FOR NON-DEDUCTION OF TAX AT SOURCE. THE A.O. OBSERV ED FROM THE COPY OF FORM NO. 15H THAT THE SAID DECLARATION WAS FURNISHED TO THE ASSESSEE BY THE DECLARANT ON 31.03.2005. THE VERIFICATION PART OF T HE SAID FORM IS NOT SIGNED. FURTHER, THE PART OF THE SAID DECLARATION WHICH IS TO BE FILLED IN BY THE PERSON TO WHOM THE DECLARATION IS FURNISHED IS MADE IS FIL LED IN AND SIGNED BY M/S. MODI FINANCE CORPORATION ITSELF AND NOT BY THE ASSE SSEE AS A DEDUCTOR. MOREOVER, THIS PART OF FORM NO. 15H IS FILLED IN ON LY ON 30.06.2005. AS PER SECTION 197 R.W. RELEVANT RULES SUCH DECLARATION RE QUIRED TO BE FURNISHED TO THE CONCERNED CIT BY THE DEDUCTOR WITHIN 7 DAYS OF FROM THE END OF THE MONTH IN WHICH THE DECLARATION IS RECEIVED. ASSESSE E AS A DEDUCTOR DID NOT FURNISH ANY PROOF ON RECORD SO AS TO ESTABLISH THAT THE SAID DECLARATION WAS IN FACT FORWARDED TO THE RESPECTIVE COMMISSIONER OF INCOME TAX. THEREFORE, THE ACT OF THE ASSESSEE AS A DEDUCTOR IN VIOLATION OF SECTION 197 RENDERS THE DECLARATION FILED BY THE DEDUCTEE INVALID. ACCORDIN GLY THE ASSESSEE IS LIABLE FOR DEDUCTION OF TAX AT SOURCE ON THIS INTEREST EXP ENSE OF ` 10,50,693/- WHICH THE ASSESSEE FAILED TO DO SO. THEREFORE, THE A.O. D ISALLOWED THE AMOUNT OF INTEREST WITHIN THE MEANING OF SECTION 40(A)(IA) OF THE ACT. SINCE THE A.O. HAS ITA NO. 420/MUM/2010 3 ALREADY MADE ADDITION OF THE SAID AMOUNT UNDER SECT ION 69C, THEREFORE, HE DID NOT MAKE ANY SEPARATE ADDITION ON THIS ACCOUNT. 3. ON APPEAL, THE LEARNED CIT(A), ON THE ISSUE OF DISA LLOWANCE UNDER SECTION 69C OF THE ACT OBSERVED THAT AS PER PROVISI ONS OF SECTION 36(1)(III), IF THE BORROWED MONEY IS USED FOR BUSINESS PURPOSES TH E INTEREST IS TO BE ALLOWED AS REVENUE EXPENDITURE. THIS EXPENDITURE IS ALLOWED TO THE ASSESSEE FROM YEAR TO YEAR IN ITS EARLIER ASSESSMENT YEARS. THEREFORE, HE HELD THAT THE A.O. WAS NOT JUSTIFIED IN INVOKING PROVISIONS OF SE CTION 69C OF THE ACT WHILE DISALLOWING ASSESSEES CLAIM OF INTEREST. WITH REGA RD TO THE ALTERNATE GROUND FOR MAKING THE DISALLOWANCE UNDER SECTION 40A(IA) O F THE ACT, THE LEARNED CIT(A) OBSERVED THAT M/S. MODI FINANCE CORPORATION TO WHOM THE ASSESSEE HAS PAID INTEREST IS A PRIVATE DISCRETIONARY TRUST HAVING FOUR BENEFICIARIES, VIZ., SHRI VIBHA K. MODI (30%), MASTER DHRUNIT K. M ODI (25%), KALPESH D. MODI (HUF) (25%) AND SHRI DHIRAJLAL L. MODI (HUF) ( 20%) AND ITS INCOME BEFORE ALLOCATION TO THE VARIOUS BENEFICIARIES AS P ER ITS INCOME AND EXPENDITURE ACCOUNT FOR THE RELEVANT ASSESSMENT YEA R IS ` 19,36,127/- AND THE SAID CONCERN IS ASSESSED AS AOP IN ITS TOTAL IN COME BEFORE ALLOCATION TO THE BENEFICIARIES IS MORE THAN THE MINIMUM TAXABLE LIMIT. THEREFORE, THE VERY BASIS OF FILING OF FORM NO. 15H BY M/S. MODI F INANCE CORPORATION IS INCORRECT. THE LEARNED CIT(A), WHILE AGREEING WITH THE ASSESSING OFFICERS VIEWS POINTING OUT VARIOUS DEFECTS AND DEFICIENCIES IN FORM NO. 15H HELD THAT SINCE THE ASSESSEE HAS NOT DEDUCTED THE TAX AT SOURCE AS REQUIRED UNDER SECTION 194A OF THE ACT, THE A.O. WAS JUSTIFI ED IN INVOKING PROVISIONS OF SECTION 40A(IA) OF THE ACT AND ACCORDINGLY HE CO NFIRMED THE DISALLOWANCE MADE BY THE A.O. 4. BEING AGGRIEVED BY THE ORDER OF THE CIT(A) THE ASSE SSEE IS IN APPEAL BEFORE US. 5. GROUND NOS. 1 & 2 READ AS UNDER: - 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT ALLOWING THE INTEREST O R RS.10,50,612/- BY INVOKING THE AMENDED PROVISIONS OF SECTION 40(A) (IA) OF THE I.T. ACT AS NO TDS IS DEDUCTED BY THE APPELLANT ON THE P AYMENT OF INTEREST MADE TO M/S. MODI FINANCE CORPORATION AS F ROM NO.15-H IS NOT SUBMITTED. ITA NO. 420/MUM/2010 4 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LEARNED CIT(A) ERRED IN NOT ACCEPTING THE FACT THAT THE APPELLANT FIRM HAS RECEIVED THE FROM 15-H. 6. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR THE ASSESSEE AT THE OUTSET SUBMITS THAT THERE IS NO DISPUTE THAT THE IN TEREST OF ` 10,50,612/- WAS PAID BY THE ASSESSEE TO M/S. MODI FINANCE CORPORATI ON, A PRIVATE DETERMINATE TRUST, AND IN SUPPORT, THE ASSESSEE HAS ALSO FILED CONFIRMATION OF ACCOUNTS FROM THE SAID TRUST. HE FURTHER SUBMITS THAT M/S. MODI FINANCE CORPORATION HAS FILED ITS RETURN OF INCOME AT NIL I NCOME IN THE STATUS OF AOP ON 10.08.2005 WHEREIN IT WAS MENTIONED THAT THE INC OME IS TO BE SHARED AMONG THE BENEFICIARIES AS UNDER: - 1 VIBHA MODI 30% ` 1,43,6111/- 2 DRUMIL K. MODI 25% ` 1,19,676/- 3 D.L. MODI (HUF) 20% ` 95,740/- 4 K.D. MODI (HUF) 25% `1,19,676/- TOTAL `4,78,703/- ======= IN SUPPORT, HE ALSO PLACED ON RECORD A COPY OF ACKN OWLEDGEMENT OF THE RETURN, STATEMENT OF TOTAL INCOME, INCOME AND EXPEN DITURE ACCOUNT, BALANCE SHEET AS ON 31.03.2005 AND DETAILS OF INTEREST RECE IVED AND PAID OF M/S. MODI FINANCE CORPORATION APPEARING ON PAGE NO. 4 TO 9 OF ASSESSEES PAPER BOOK. HE FURTHER SUBMITS THAT ALL THE BENEFICIARIES , NAMELY, SHRI VIBHA K. MODI, MASTER DRUMIL K. MODI (MINOR) WHOSE INCOME WA S INCLUDED IN THE RETURN OF KALPESH D. MODI, KALPESH D. MODI (HUF) AN D SHRI DHIRAJLAL L. MODI (HUF) HAVE ALSO FILED THEIR INCOME TAX RETURNS SEPARATELY WHEREIN THEY HAVE INCLUDED THE SHARE OF BENEFITS FROM M/S. MODI FINANCE CORPORATION AND HAVE PAID ADVANCE TAX ON THEIR TOTAL INCOME INCLUDI NG THE AMOUNT RECEIVED AS SHARE OF BENEFIT FROM M/S. MODI FINANCE CORPORAT ION AND IN SOME CASES REFUND ON THE EXCESS ADVANCE TAX PAID BY THEM WAS A LSO CLAIMED. IN SUPPORT HE ALSO PLACED ON RECORD A COPY OF THE ACKNOWLEDGEM ENT OF RETURN, STATEMENT OF TOTAL INCOME, BALANCE SHEET AS ON 31.0 3.2005 AND COPY OF CAPITAL ACCOUNT, INCOME AND EXPENDITURE ACCOUNT OF ALL THE FOUR BENEFICIARIES APPEARING ON PAGE NO. 10 TO 32 OF ASSESSEES PAPER BOOK. IN THE LIGHT OF THE ITA NO. 420/MUM/2010 5 ABOVE DOCUMENTARY EVIDENCE HE SUBMITS THAT SINCE TH E BENEFICIARIES HAVE SHOWN THE RESPECTIVE INCOME RECEIVED FROM AOP IN TH EIR INCOME TAX RETURNS AND HAVE PAID DUE TAX THEREON, THEREFORE, THE ASSES SEE HAS MADE DUE COMPLIANCE OF PROVISIONS OF SECTION 194A R.W.S. 197 A OF THE ACT AND, THEREFORE, THE A.O. AND THE LEARNED CIT(A) HAVE ERR ED IN INVOKING THE PROVISIONS OF SECTION 40A(IA) OF THE ACT. HE, THERE FORE, SUBMITS THAT THE ADDITION MADE BY THE A.O. AND SUSTAINED BY THE CIT( A) BE DELETED. IN THE ALTERNATIVE HE SUBMITS THAT SINCE THE ISSUE HAS NOT BEEN EXAMINED IN THE LIGHT OF THE ABOVE SUBMISSIONS DESPITE THE FACT THA T THE ASSESSEE HAS FILED ALL THE RELEVANT MATERIAL APPEARING AT PAGE 65 TO 93 OF THE ASSESSEES PAPER BOOK BEFORE THE LEARNED CIT(A), THEREFORE, IN THE I NTEREST OF JUSTICE THE ISSUE MAY BE SET ASIDE TO THE FILE OF THE A.O. 7. ON THE OTHER HAND THE LEARNED D.R., WHILE RELYING O N THE ORDERS OF THE A.O. AND THE CIT(A), FURTHER SUBMITS THAT THE ASSES SEE HAS TAKEN A NEW PLEA WHICH WAS NOT TAKEN BEFORE THE A.O. AND THE LEARNED CIT(A), THEREFORE HE HAS NO OBJECTION IF THE ISSUE IS SET ASIDE TO THE F ILE OF THE A.O. 8. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE RIVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND T HAT THE FACTS ARE NOT IN DISPUTE INASMUCH AS IT IS ALSO NOT IN DISPUTE THAT AGAINST THE PAYMENT OF INTEREST PAID TO M/S. MODI FINANCE CORPORATION THE ASSESSEE HAS FILED FORM NO. 15H ISSUED BY M/S. MODI FINANCE CORPORATION SHO WING THAT THE INCOME OF THE TRUST IS NOT TAXABLE. WE FURTHER FIND THAT T HE A.O. AFTER POINTING OUT CERTAIN DEFECTS AND DEFICIENCIES IN FORM NO. 15H HE LD THAT THE ACT OF THE ASSESSEE AS A DEDUCTOR IN VIOLATION OF SECTION 197 REQUIRES THE DECLARATION FILED, IF ANY, BY THE DEDUCTEE INVALID. WE FURTHER FIND THAT THE LEARNED CIT(A) ON THE CONTRARY, HELD THAT IT IS NOT ESTABLISHED TH AT THE APPELLANT OR M/S. MODI FINANCE CORPORATION EVER FILED THE SAID DECLAR ATION AS REQUIRED UNDER SECTION 197A(1) OF THE ACT. WE FURTHER FIND THAT TH E ASSESSEE IN THE PAPER BOOK AT PAGE 4 TO 9 HAS FILED COPY OF THE RETURN OF M/S. MODI FINANCE CORPORATION ALONGWITH ITS STATEMENT OF TOTAL INCOME , INCOME AND EXPENDITURE ACCOUNT, BALANCE SHEET AND DETAILS OF I NTEREST AND RENT RECEIVED AND PAID TO SHOW THAT THE INCOME OF M/S. MODI FINAN CE CORPORATION IS NIL. THE REVENUE HAS BROUGHT NO MATERIAL ON RECORD TO SH OW THAT THE INCOME OF ITA NO. 420/MUM/2010 6 M/S. MODI FINANCE CORPORATION IS TAXABLE. WE FURTHE R FIND THAT THE ASSESSEE HAS FILED COPY OF ACKNOWLEDGEMENT OF RETURN, STATEM ENT OF TOTAL INCOME, INCOME AND EXPENDITURE ACCOUNT, BALANCE SHEET AND C OPY OF CAPITAL ACCOUNTS OF ALL THE BENEFICIARIES TO SHOW THAT THEY HAVE PAID TAX ON THEIR INCOME INCLUDING THE INCOME RECEIVED FROM THE AOP. FURTHER, THERE IS NO MATERIAL ON RECORD TO SHOW AS TO WHETHER THE ABOVE EVIDENCES FILED BY THE ASSESSEE HAVE BEEN CONSIDERED BY THE REVENUE AUTHOR ITIES OR AFTER CONSIDERING THE SAME WAS REJECTED. SINCE THERE IS A CONTRADICTION ON THE FACTS, NAMELY, ACCORDING TO THE LEARNED CIT(A) THE TOTAL INCOME OF M/S. MODI FINANCE CORPORATION BEFORE ALLOCATION TO THE BENEFI CIARIES IS MORE THAN THE MINIMUM TAXABLE LIMIT WHEREAS ACCORDING TO THE ASSE SSEE THE SAID AOP HAS FILED ITS RETURN OF NIL INCOME AND HE HAS NOT RECEI VED ANY ORDER WHEREIN THE INCOME SHOWN AS NIL HAS BEEN ASSESSED AS TAXABLE IN COME AND KEEPING IN VIEW THAT THE DEFECTS POINTED OUT BY THE A.O. IN FO RM NO. 15H GIVEN BY THE M/S. MODI FINANCE CORPORATION AND FILED BY THE ASSE SSEE ARE CURABLE DEFECTS AND NO OPPORTUNITY WAS PROVIDED TO THE ASSESSEE TO REMOVE THOSE DEFECTS, THEREFORE, WE ARE OF THE VIEW THAT IN THE INTEREST OF JUSTICE THE MATTER SHOULD GO BACK TO THE FILE OF THE A.O. AND ACCORDINGLY WE SET ASIDE THE ORDERS PASSED BY THE REVENUE AUTHORITIES ON THIS ACCOUNT AND SEND BACK THE MATTER TO THE FILE OF THE A.O. WHO SHALL DECIDE THE SAME AFRESH I N THE LIGHT OF OUR OBSERVATIONS HEREINABOVE AND ACCORDING TO LAW AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARD TO THE ASSESSEE. THE GROUNDS T AKEN BY THE ASSESSEE ARE, THEREFORE, PARTLY ALLOWED FOR STATISTICAL PURP OSES. 9. IN THE RESULT, ASSESSEES APPEAL STANDS PARTLY ALLO WED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH FEBRUARY 2011. SD/- SD/- ( RAJENDRA SINGH ) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 18 TH FEBRUARY 2011 ITA NO. 420/MUM/2010 7 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXX1, MUMBAI 4. THE CIT XX, MUMBAI CITY 5. THE DR, I BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P. ITA NO. 420/MUM/2010 8 S.NO. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 08.02.11 SR. PS/PS 2 DRAFT PLACED BEFORE AUTHOR 08.02.11 SR. PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER AM/AM 5 APPROVED DRAFT COMES TO THE SR. PS/PS SR. PS/PS 6 KEPT FOR PRONOUNCEMENT SR. PS/PS 7 FILE SENT TO BENCH CLERK SR. PS/PS 8 DATE ON WHICH THE FILE GOES TO HEAD CLERK 9 DATE ON WHICH FILE GOES TO A.R. 10 DATE OF DISPATCH OF ORDER