M/S. RPG LIFE SCIENCES LTD, MUMBAI V. THE ACIT RG 7(2), MUMBAI

ITA 4215/MUM/2006

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1137 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Next Hearing Date: 15-06-2010
• Assessment Year: 2003-2004
• Appeal Filed On: 17-07-2006
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SRIVASTAVA
• Assessee Lawyers: DILIP S DAMLE
• Keywords: Capital asset; Depreciation; Business expenditure; Rule of consistency; Wholly owned subsidiary; Commercial expediency; Capital expenditure
• Section: 192; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I : MUMBAI BEFORE SHRI D.K. AGARWAL, (JM) AND SHRI A.L. GEHLO T ,(AM) ITA NO.4215/MUM/2006 ASSESSMENT YEAR : 2003-04 ITA NO.654/MUM/2008 ASSESSMENT YEAR : 2004-05 M/S. RPG LIFE SCIENCE LIMITED CEAT MAHAL 463, DR. ANNIE BESANT ROAD WORLI MUMBAI-400 030. ..( APPELLANT ) P.A. NO. (AABCR 5446 H) VS. ASSTT. COMMISSIONER OF INCOME TAX -7(2) 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD MUMBAI-400 020. ..( RESPONDENT ) APPELLANT BY : SHRI DILIP S. DAMLE RESPONDENT BY : SHRI AJA Y KUMAR SRIVASTAVA O R D E R PER D.K. AGARWAL (JM). THESE TWO APPEALS PREFERRED BY THE ASSESSEE ARE DIRECTED AGAINST THE SEPARATE ORDERS DATED 12.5.2006 AND 8.10. 2007 PASSED BY THE LD. CIT(A) FOR THE ASSESSMENT YEARS 2003-04 AND 2004 -05 RESPECTIVELY. SINCE FACTS ARE IDENTICAL AND ISSUES INVOLVE D ARE COMMON, BOTH THESE APPEALS ARE DISPOSED OF BY THIS COMMON ORDER FOR THE SAKE OF CONVENIENCE. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 2 2. BRIEFLY STATED FACTS OF THE CASE EXTRACTED FROM ITA NO.4215/MUM/2006 FOR ASSESSMENT YEAR 2003-04 ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF PHARMACEUTICAL PRODUCTS. THE RETURN WAS FILED DECLARING A LOSS OF RS.32,27,02,166/-. HOWEVER, THE ASSESSMENT WAS COMPLETED A T A LOSS OF RS.19,61,57,050/- INCLUDING THE DISALLOWANCE OF INT EREST EXPENDITURE OF RS.10,55,96,048/-, VIDE ORDER DATED 19.12.2005 PA SSED U/S.143(3) OF THE INCOME TAX ACT, 1961(THE ACT). ON APPEAL THE L D. CIT(A) ON THE ISSUE OF DISALLOWANCE OF INTEREST DIRECTED THE ASSESSING OFF ICER TO FOLLOW HIS APPELLATE ORDER FOR ASSESSMENT YEAR 2002-03 AND ACCORD INGLY PARTLY ALLOWED THE APPEAL. 3. BEING AGGRIEVED BY THE ORDER OF THE LD. CIT(A) T HE ASSESSEE IS IN APPEAL BEFORE US. 4. GROUND NO.I IS AGAINST THE SUSTENANCE OF DISALLOWANCE OF INTEREST EXPENDITURE RS.4,05,46,000/-. HOWEVER, AT THE TIME O F HEARING THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THERE IS A TYPOGRAPHI CAL ERROR IN MENTIONING THE SAID FIGURE OF RS.4,05,46,000/-. IN F ACT, IT SHOULD BE READ AS RS.6,34,75,000/-. 5. THE BRIEF FACTS OF THE ABOVE ISSUE ARE THAT DURING T HE COURSE OF ASSESSMENT PROCEEDING THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS MADE INTEREST FREE ADVANCE OF RS.82,49,69,127/ - TO ITS ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 3 SUBSIDIARY COMPANY M/S. INSTANT TRADING AND INVESTMENT CO. LTD. THE ASSESSEE WAS CALLED UPON TO SUBMIT EXPLANATION AS TO WHY PROPORTIONATE DISALLOWANCE SHOULD NOT BE MADE OUT OF I TS CLAIM OF INTEREST. THE ASSESSEE MADE HIS SUBMISSION REGARDING LIA BILITY OF INTEREST CLAIMED AND JUSTIFYING THE INTEREST FREE ADVAN CES TO ITS SUBSIDIARY COMPANY. HOWEVER, THE ASSESSING OFFICER WAS OF T HE VIEW THAT THE SAME CANNOT BE ACCEPTED FOR THE REASONS THAT TH E ASSESSEE HAS RAISED LOANS OF RS.1,48,42,31,000/- ON WHICH INTEREST @ 12.8% AMOUNTING TO RS.18,98,89,000/- WAS PAID, THE ADVANCE G IVEN TO ITS SUBSIDIARY COMPANY OF RS.82,49,69,127/-, THEREFORE, IS NOT FOR THE PURPOSE OF BUSINESS. THE ASSESSEE HAS NOT FURNISHED PROOF T HAT THE INTEREST FREE ADVANCE GIVEN TO ITS SUBSIDIARY CONCERN IS OUT OF INTEREST FREE FUNDS. THEREFORE, IT IS CLEAR THAT INTEREST BEARIN G FUNDS HAVE BEEN DIVERTED TOWARDS NON- INTEREST BEARING INVESTMENT. THE ASSESSING OFFICER WHILE OBSERVING THAT SIMILAR DISALLOWANCE WAS MAD E IN 2001-02 HAS BEEN UPHELD BY THE LD. CIT(A), MADE PROPORTIONAT E DISALLOWANCE OF RS.10,55,96,048/- CALCULATED @ 12.8% ON THE INTEREST FR EE ADVANCE GIVEN AND ADDED TO THE INCOME OF THE ASSESSEE . ON APPE AL, THE LD. CIT(A), FOLLOWING THE APPELLATE ORDER FOR THE ASSESSMEN T YEAR 2002-03 DATED 31.10.2005 DIRECTED THE ASSESSING OFFICER TO FOLLOW THE SAME FOR THE YEAR UNDER CONSIDERATION. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 4 6. AT THE TIME OF HEARING THE LD. COUNSEL FOR THE AS SESSEE AT THE OUTSET SUBMITS THAT THE IMPUGNED ISSUE IS DIRECTLY COVERED IN FAVOUR OF THE ASSESSEE BY THE ORDER OF THE TRIBUNAL IN ASSESSEE'S OWN CASE IN M/S. RPG LIFE SCIENCES LIMITED VS. ACIT IN ITA NO.3999 T O 4001/MUM/05 FOR ASSESSMENT YEARS 1999-00 TO 2001-02 AND ITA NO.612/MUM/06 FOR ASSESSMENT YEAR 2002-03 DATED 28.10.2 009 WHEREIN THE TRIBUNAL ON THE IDENTICAL FACTS AND CIRCUMSTA NCES OF THE CASE DELETED THE DISALLOWANCE IN RESPECT OF THE INTEREST F REE ADVANCES GIVEN TO ITS 100% SUBSIDIARY COMPANY. HE ALSO PLACED ON RE CORD THE COPY OF THE SAID ORDER OF THE TRIBUNAL. AT THIS STAGE T HE LD. COUNSEL FOR THE ASSESSEE HAS FILED A CHART SHOWING THE POSITION OF OWN FUNDS AND LOAN GIVEN TO THE SUBSIDIARY COMPANY, WHICH IS REPRODUCED AS UNDER:- AY 2001-02 A.Y 2002-03 A.Y 2003-04 2004-05 SHARE CAPITAL 124479 124479 124479 124479 RESERVE & SURPLUS 945399 809301 536644 454820 NET OWNED FUNDS 1069878 933780 661123 579299 TOTAL LOAN FUNDS * 1606953 1510914 1484231 1258279 LOAN GIVEN TO WOS 496945 825919 824969 767636 INTEREST (DR) TO P &L A/C 214242 205941 189889 19 5885 * INCLUDES DEFERRED LIABILITY 4775 1155 7. HE FURTHER SUBMITTED THAT THE OUTSTANDING LOAN TO WHOLLY OWNED SUBSIDIARY AS ON 31.03.2003 & 31.3.2004 WAS RS.82.49 CROR ES & RS. 76.76 CRORES RESPECTIVELY. THE OUTSTANDING LOAN AS ON 3 1.03.2001 & 31.03.2002 WAS RS. 49.69 CRORES AND RS. 82.59 CRORES RESPE CTIVELY. IN A.Y. 2002-03 THE AO AND THE LD.CIT(A) HAD ACCEPTED THAT THE INCREMENTAL LOAN OF RS. 32.90 CRORES WAS GRANTED OUT OF SALE PROCEEDS ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 5 OF AGRO CHEMICALS DIVISION AND IT WAS NOT PAID OUT OF BORROWED FUNDS. THE DISALLOWANCE IN A.Y. 2001-02 & 2002-03 WAS THEREFO RE MADE BY THE LD.CIT(A) WITH REFERENCE TO OUTSTANDING LOAN AMOU NT OF RS. 49.69 CRORES BEING THE OUTSTANDING LOAN AMOUNT AS ON 31.03.20 01. HE FURTHER SUBMITS THAT IN THE APPEAL FOR THE A.Y 2003-0 4 THE CIT(A) FOLLOWED HIS OWN ORDER FOR A.Y 2002-03 AND DIRECTED THE A.O TO MAKE THE DISALLOWANCE OF INTEREST WITH REFERENCE TO THE SAID OUTSTANDING LOAN AMOUNT OF 31.03.2001 I.E. RS. 49.69 CRORES. AGAINST THI S DIRECTION OF THE LD.CIT(A) THE REVENUE IS NOT IN APPEAL. HE FURTH ER SUBMITS THAT IN A.Y 2004-05 OUTSTANDING LOAN AMOUNT CAME DOWN TO RS. 7 6.76 CRORES AND IN THE ASSESSMENT ORDER THE AO HIMSELF MADE THE DISAL LOWANCE WITH REFERENCE TO LOAN AMOUNT OF RS. 43.96 CRORES AS HE ACCEPTED THAT THE LOAN GRANTED IN A.Y 2002-03 WAS OUT OF SALE PROCEE DS OF THE BUSINESS DIVISION. HE FURTHER SUBMITS THAT IN A.Y 2003-04 & 2004-05 NO FRESH LOANS WERE GRANTED TO WHOLLY OWNED SUBSIDIARY, BUT IN FACT THERE WAS A REDUCTION IN THE LOAN. HE FURTHER SUBMITS T HAT IN APPEAL FOR A.Y 2001-02 AND 2002-03 THE TRIBUNAL NOTED THAT ASSE SSEES NET OWNED FUNDS WERE RS. 106.98 & RS. 93.38 CRORES RESPECTIVEL Y WHICH WERE IN EXCESS OF LOANS GRANTED TO WHOLLY OWNED SUBSIDIA RY. THE TRIBUNAL HELD THAT SINCE ASSESSEES OWNED FUNDS WERE SUFFICI ENT TO GRANT INTEREST FREE LOANS, NO INTEREST COULD BE DISALLOW ED AND ENTIRE DISALLOWANCE AS CONFIRMED BY LD.CIT(A) WAS DELETED. IN THE ASST. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 6 YEARS 2003-04 & 2004-05 NO FRESH LOANS HAVE BEEN GIVEN . HE FURTHER SUBMITS THAT WHEN IN THE YEARS OF GRANTING LOANS THE TR IBUNAL HAS RECORDED A FINDING THAT ASSESSEES OWN FUNDS WERE SUFFICIEN T TO GRANT INTEREST-FREE LOANS AND DISALLOWANCE OF INTEREST WAS DEL ETED, IN THE LATTER YEARS WHEN NO FRESH LOANS ARE GRANTED; INTEREST DISALLOWANCE CAN NOT BE MADE. THIS PROPOSITION FINDS SUPPORT IN THE CA SE OF CIT VS. SRIDEV ENTERPRISES (192 ITR 165){KARNATAKA}. HE FURTH ER SUBMITS THAT IN THE ASST YEARS 2003-04 & 2004-05 THE ASSESSEE INCURRE D SUBSTANTIAL LOSSES CONSEQUENTIAL TO WHICH THE ASSESSEES NET-OW NED FUNDS CAME DOWN FROM RS. 93.38 CRORES AS ON 31.03.2002 T O RS. 66.11 CRORES AS ON 31.03.2003 AND RS. 57.93 CRORES AS ON 31.03.2 004. HOWEVER, IT WILL BE NOTED THAT EVEN THOUGH THE OWN F UNDS DECREASED, THE LOANS TAKEN BY THE ASSESSEE DID NOT CORRESPONDINGLY I NCREASE. THE LOANS TAKEN AS ON 31.03.2002 WERE RS. 151.09 CRORES WHER EAS ON 31.03.2003 & 31.03.2004 THE LOAN LIABILITY CAME DOWN TO RS. 148.42 CRORES AND RS.125.83 CRORES RESPECTIVELY. THERE HAS BEEN R EDUCTION IN THE LOAN LIABILITIES IN THE YEARS UNDER CONSIDERATION. IT WILL ALSO BE NOTED THAT THERE HAS BEEN PROGRESSIVE REDUCTION IN THE INTEREST PAYMENT FROM A.Y 2001-02. IT WILL THEREFORE BE APP RECIATED THAT NO NEW LOANS WERE TAKEN BY THE ASSESSEE IN A.Y 2003-04 & 2 004-05 RESPECTIVELY. AS SUCH THERE IS NO REASON FOR UPHOLDING DISALLOWANCE OF INTEREST AS MADE IN A.Y 2003-04 & 2004-05 AND HENCE TH E ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 7 DISALLOWANCE OF INTEREST SUSTAINED BY THE LD. CIT(A) BE DELETED. THE RELIANCE WAS ALSO PLACED IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009)313 ITR 340(BOM.) AND S.A. BUILDERS LTD. VS. CI T(A) (2007)288 ITR 1 (SC). 8. ON THE OTHER HAND THE LD. DR SUBMITS THAT IT HAS BE EN INTERALIA OBSERVED BY THE ASSESSING OFFICER THAT THE ASSESSEE HAS NOT FU RNISHED PROOF THAT THE INTEREST FREE ADVANCE GIVEN TO ITS SUBSI DIARY CONCERNS IS OUT OF INTEREST BEARING FUNDS, THEREFORE, THE LD. CIT (A) WAS FULLY JUSTIFIED IN UPHOLDING THE DISALLOWANCE MADE BY THE ASSE SSING OFFICER. HE FURTHER SUBMITS THAT IN THE ABSENCE OF SUCH DETAILS THE ORDER OF THE TRIBUNAL IN THE ASSESSEE'S OWN CASE RELIED ON BY THE ASSESSEE IS DISTINGUISHABLE AND NOT APPLICABLE TO THE FACTS OF THE P RESENT CASE. HE FURTHER SUBMITS THAT SINCE THE ASSESSEE HAS DIVERTED ITS INTE REST BEARING FUNDS TO ITS SUBSIDIARY COMPANY WITHOUT INTEREST, THEREFORE, THE INTEREST PAID ON THE CAPITAL BORROWINGS TO THE EXT ENT OF AMOUNT DIVERTED COULD NO LONGER BE AN ITEM OF EXPENDITURE W HICH COULD BE CLAIMED FOR DEDUCTION AS AN ITEM OF BUSINESS EXPENDITURE AND FOR THIS PROPOSITION THE RELIANCE WAS ALSO PLACED IN K. SOMASUNDAR AM AND BROTHERS VS. CIT (1999) 238 ITR 939(MAD.). HE THEREFO RE, SUBMITS THAT THE DISALLOWANCE SUSTAINED BY THE LD. CIT(A) BE U PHELD. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 8 9. IN THE REJOINDER, THE LD. COUNSEL FOR THE ASSESSEE SUB MITS THAT SINCE THE TRIBUNAL HAS DELETED THE DISALLOWANCE OF SUCH IN TEREST FOR THE ASSESSMENT YEARS 1999-00 TO 2002-03, AND AFTER GIVING TH E APPEAL EFFECT OF THAT ORDER OF THE TRIBUNAL THERE REMAINS NO ADDITION AND HENCE, ON OPENING DEBIT BALANCE NO DISALLOWANCE OF INTE REST COULD BE MADE. FURTHER DURING THE ASSESSMENT YEARS UNDER CONSIDERA TION THE ASSESSEE HAS NOT MADE ANY ADVANCE, HENCE, THE ADDITION SUST AINED BY THE LD.CIT(A) IS LIABLE TO BE DELETED AND FOR THIS PR OPOSITION THE RELIANCE WAS ALSO PLACED IN SRIDEV ENTERPRISES(SUPRA). THE RELIA NCE WAS ALSO PLACED IN VEECUMSEES VS. CIT (1996) 220 ITR 185(SC). 10. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THERE IS NO DISPUTE THAT IN THE PRECEDING ASSESSMENT YEARS THE INTEREST FREE LOAN WAS GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY COMPANY M/S. INSTA NT TRADING AND CO. LTD. IT IS ALSO NOT IN DISPUTE THAT DURING THE IMPUGNED ASSESSMENT YEARS 2003-04 AND 2004-05 THE LOAN GIVEN TO T HE SAID SUBSIDIARY COMPANY HAS BEEN REDUCED TO RS.8,24,969/- FOR ASSESSMENT YEAR 2003-04 AND RS.7,67,636/- FOR ASSESSMENT YE AR 2004-05 FROM RS.8,25,919/- OF ASSESSMENT YEAR 2002-03 AN D THUS THERE WAS REDUCTION IN THE AMOUNT OF LOAN GIVEN TO SUB SIDIARY COMPANY AND NO FRESH LOAN DURING THE ASSESSMENT YEARS UNDER CONSID ERATION WAS GIVEN TO THE SUBSIDIARY COMPANY. WE FURTHER FIND THAT FOR THE ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 9 ASSESSMENT YEARS 1999-00 TO 2002-03 ONE OF THE ARGUMENTS TAKEN BY THE ASSESSEE BEFORE THE TRIBUNAL WAS AS UNDER [EXTRACTED F ROM PARA- 14 OF ITAT ORDER, DATED 28.10.2009 (SUPRA)]: 14. THE LD COUNSEL OF THE ASSESSEE STATED THAT THE AO HIMSELF HAS RECORDED IN HIS ORDER THAT IT IS DIFFIC ULT TO CO- RELATE WHICH FUNDS HAVE BEEN USED FOR WHICH PURPOSE ; MEANING THEREBY, THERE IS NO DISPUTE THAT THE ASSES SEE HAD ITS OWN FUNDS. FOLLOWING DETAILED SUBMISSION HAVE BEEN MADE BY THE LEARNED COUNSEL FOR THE ASSESSEE:- IN THIS REGARD IT IS SUBMITTED THAT THE AUTHORITIES BELOW DID NOT APPRECIATE FACTS OF THE CASE IN PROPE R PERSPECTIVE. THE LOAN IN QUESTION WAS GRANTED TO WOS IN WHICH ASSESSEE HAD 100% BENEFICIAL INTEREST PROFIT & LOSS OF WOS WAS ENTIRELY TO THE ASSESSEES A/C. THOUGH WOS WAS A SEPARATE, LEGAL ENTITY THERE WAS COMPLETE UNANIMITY OF ECONOMIC INTEREST AS THE ASSESSEE EXERCISED COMPLETE CONTROL OVER THE ECONOMIC ACTIVITIES OF WOS AND THEREFORE IT COULD BE SAID THAT GRANTING OF LOAN TO WOS WAS FOR BUSINESS PURPOSE OF THE ASSESSEE. THIS PROPOSITION IS LAID DOWN BY SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT [288 ITR 1]. 11. THE TRIBUNAL AFTER CONSIDERING THE FACTS AND CIRCUMST ANCES OF THE CASE HAS DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFI CER VIDE PARA 15, 16 AND 29 OF ITS ORDER AS UNDER: 15. AFTER CONSIDERING THE SUBMISSIONS AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT THE ASSESSEE DESER VES TO SUCCEED IN THIS GROUND. FROM THE CHART FILED, IT IS AMPLY PROVED THAT THE ASSESSEE HAD ITS OWN FUNDS FOR GIVI NG INTEREST FREE ADVANCES TO ITS 100% SUBSIDIARY COMPA NY. THE OWN FUNDS ARE MUCH MORE THAN THE INTEREST FREE ADVANCES GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY. I T IS A MATTER OF FACT THAT ON A LATER STAGE THE AMOUNTS GI VEN TO ITS SUBSIDIARY HAVE BEEN RECOVERED BY THE ASSESSEE. IT IS ALSO CATEGORICALLY MENTIONED THAT OWN FUNDS ARE AVA ILABLE WITH THE ASSESSEE ON WHICH, NO INTEREST WAS PAID. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 10 THEREFORE, IN VIEW OF THESE FACTS AND CIRCUMSTANCES , THE ISSUE IS TO BE DECIDED IN FAVOUR OF THE ASSESSEE. T HE HONBLE BOMBAY HIGH COURT HAVE CLEARLY HELD THAT WHER E MIXED FUNDS ARE AVAILABLE WITH THE ASSESSEE THEN IN TEREST FREE ADVANCES GIVEN OUT OF ITS OWN FUNDS CANNOT BE CONSIDERED FOR THE PURPOSE OF DISALLOWANCE OF INTER EST. 15.1 SECONDLY, THE HONBLE SUPREME COURT HAS SET THE ISSUE AT REST BY WHICH IT HAS BEEN HELD THAT THE LO ANS GIVEN TO SUBSIDIARY COMPANY FOR BUSINESS PURPOSES I S TO BE TREATED AS USED BY THE ASSESSEE FOR ITS OWN BUSI NESS PURPOSES AND THEREFORE, NO INTEREST CAN BE DISALLOW ED. 15.2 WE HAVE ALSO CONSIDERED VARIOUS OTHER CASE LAW S RELIED UPON BY THE LEARNED A.R., WHICH ARE DISCUSSE D ABOVE WHILE INCORPORATING THE SUBMISSIONS FILED BY THE LEARNED A.R. WE FIND THAT THOSE DECISIONS ARE ALSO IN FAVOUR OF THE ASSESSEE. 16. IN VIEW OF THESE FACTS, WE ALLOW THE ISSUE IN F AVOUR OF THE ASSESSEE AND DIRECT THE AO TO DELETE THE DISALLOWANCE IN RESPECT TO THE INTEREST FREE ADVANC ES GIVEN TO ITS 100% SUBSIDIARY COMPANY. 29. THE ISSUE IS SIMILAR TO THE ISSUE INVOLVED FOR AY 1999-00 AS FOR AY 1999-00 ALSO THE AO DISALLOWED INTEREST EXPENDITURE IN RESPECT TO INTEREST FREE AD VANCES GIVEN TO THE 100% SUBSIDIARY COMPANY OF THE ASSESSE E. WE HAVE ALREADY DISPOSED OFF THIS ISSUE IN FAVOUR O F THE ASSESSEE WHILE DECIDING THE APPEAL FOR AY 1999-00 A BOVE. ON THE SAME REASONING WE ALLOW THIS GROUND IN FAVOU R OF THE ASSESSEE FOR THESE YEARS ALSO. 12. IN S.A. BUILDERS (SUPRA), IT HAS BEEN OBSERVED AN D HELD (AT PLACITUM 22, 23, 32, 35,36 ) AS UNDER : IN OUR OPINION, THE HIGH COURT IN THE IMPUGNED JUDGMENT, AS WELL AS THE TRIBUNAL AND THE INCOME-TA X AUTHORITIES HAVE APPROACHED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, THE ASSESSEE BORROWED THE FUND FROM THE BANK AND LENT SOME OF IT TO ITS SISTER CONCERN (A SUBSIDIARY) AS INTEREST FREE LOAN. THE TEST, IN OUR OPINION, IN SUCH A CASE IS REALLY WHET HER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. IN OUR OPINION, THE DECISIONS RELATING TO SECTION 3 7 OF THE ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 11 ACT WILL ALSO BE APPLICABLE TO SECTION 36(1)(III) B ECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS FOR THE PUR POSE OF BUSINESS. IT HAS BEEN CONSISTENTLY HELD IN THE DECISIONS RELATING TO SECTION 37 THAT THE EXPRESSIO N FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUN TARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WAS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT H AD BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCER N. HOWEVER, IN OUR OPINION, THAT FACT IS NOT REALLY REL EVANT. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED S UCH AMOUNT TO ITS SISTER CONCERN AS A MEASURE OF COMMER CIAL EXPEDIENCY. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COUR T IN CIT V. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 T HAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITS ELF),THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN T HE ARM- CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT. THE INCOME-TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD AC T. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM TH EIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. A S ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER O F THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT O F VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS . WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLO WED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT AL L DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPE CTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE F OR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCE D TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MA NY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 12 COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY F OR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INT EREST ON ITS BORROWED LOANS. 13. IN RELIANCE UTILITIES AND POWER LTD. (SUPRA), IT HAS BEEN OBSERVED AND HELD (HEADNOTE): HELD, DISMISSING THE APPEAL, THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR L OANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTME NTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED O R AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CA SE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTEREST WAS DEDUCTIBLE. 14. IN K. SOMASUNDARAM AND BROTHERS (SUPRA), IT HAS BEE N HELD (HEADNOTE): HELD, THAT THE AMOUNT LENT, ACCORDING TO THE ASSESSEE, CAME OUT OF THE CONTRACT EARNINGS. THE AMOUNT BORRO WED, ACCORDING TO THE ASSESSEE, WAS INVESTED IN THE EXEC UTION OF THE CONTRACTS. IT WAS CLEAR, THEREFORE, THAT THE ASSESSEE HAD INVESTED THE BORROWED FUNDS IN THE EXECUTION OF THE CONTRACTS, HAD RECOUPED THE MONEY SO INVESTED PRESUMABLY WITH PROFITS AS WELL ON EXECUTING THE CO NTRACT. THE AMOUNT REALISED ON THE EXECUTION THUS INCLUDED THE AMOUNT WHICH THE ASSESSEE HAD BORROWED AND INVESTED . WHEN THE ASSESSEE DECIDED TO LEND A SUBSTANTIAL PAR T OF THOSE FUNDS INTEREST-FREE TO THE RELATIVES OF THE P ARTNERS, IT WAS CLEARLY NOT A BUSINESS PURPOSE. THE ASSESSEE CLEARLY DIVERTED THE FUNDS WHICH HAD BEEN BORROWED. AFTER SUCH DIVERSION, THE INTEREST PAID ON THE CAPITAL BO RROWING TO THE EXTENT OF THE AMOUNTS DIVERTED COULD NO LONG ER BE AN ITEM OF EXPENDITURE WHICH COULD BE CLAIMED FOR DEDUCTION AS AN ITEM OF BUSINESS EXPENDITURE. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 13 15. THERE IS NO QUARREL ON THE RATIO LAID DOWN IN TH E ABOVE NOTED CASE OF K. SOMASUNDARAM AND BROTHERS. HOWEVER, IN THE CASE BEFORE US IT IS NOBODYS CASE THAT THE INTEREST FREE ADVANCE WA S MADE WHEN IT RECEIVED SUBSTANTIAL SALE PROCEEDS (IN THE CITED CASE CONTRACT RECEIPTS). IT IS ALSO NOT THE CASE THAT THE INTEREST FREE ADVANCE WA S GIVEN TO THE DIRECTORS OF THE SISTER CONCERN FOR THEIR PERSONAL BENEFIT S. AS A MATTER OF FACT IT IS THE CONSISTENT STAND OF THE ASSESSEE THAT THE LOAN IN QUESTION WAS GRANTED TO THE SUBSIDIARY COMPANY IN WHICH THE ASSESSEE HAD 100% BENEFICIAL INTEREST, PROFIT AND LOSS OF THE SA ID COMPANY WAS ENTIRELY TO THE ASSESSEE'S ACCOUNT. THIS BEING SO, THE DECISI ON RELIED ON BY THE LD DR IN K. SOMASUNDARAMS CASE IS DISTINGUISH ABLE AND NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 16. IN SRIDEV ENTERPRISES (1991) 59 TAXMAN 439 (KAR. ); (1991) 192 ITR 165 (KAR.)(SUPRA), IT HAS BEEN OBSERVED AND HELD (HEADNOTE): HELD, THAT THE AMOUNT DUE FROM N ON THE FIRST DAY OF THE ACCOUNTING YEAR WAS THE AMOUNT THAT STOOD OUTSTANDI NG ON THE LAST DAY OF THE PREVIOUS ACCOUNTING YEAR AND , THEREFORE, ITS NATURE AND STATUS COULD NOT BE DIFFE RENT FROM ITS NATURE AND STATUS AS ON THE LAST DAY OF TH E PREVIOUS YEAR. REGARDING PAST YEARS, THE ASSESSEE'S CLAIMS FOR DEDUCTION WERE ALLOWED IN RESPECT OF THE SUMS ADVANCED DURING THOSE YEARS. THIS COULD BE ONLY ON THE ASSUMPTION THAT THOSE ADVANCES WERE NOT OUT OF BORR OWED FUNDS OF THE ASSESSEE. THIS FINDING DURING THE PREV IOUS YEARS WAS THE VERY BASIS OF THE DEDUCTIONS PERMITTE D DURING THE PAST YEARS. IT WOULD NOT BE EQUITABLE TO PERMIT THE REVENUE TO TAKE A DIFFERENT STAND NOW IN RESPEC T OF THE AMOUNTS WHICH WERE THE SUBJECT-MATTER OF PREVIO US YEARS' ASSESSMENTS. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 14 17. IN THE ASSESSMENT YEARS UNDER CONSIDERATION, UNDISPUTED LY THE ASSESSEES OWN FUNDS HAVE BEEN DECREASED AND THE LOANS TAKEN BY THE ASSESSEE ARE ALSO REDUCED I.E. THE LOANS TAKEN AS ON 31.3. 2002 WERE RS. 151.09 CRORES WHEREAS AS ON 31.3.2003 AND 31.3.2004, THE LOAN LIABILITY CAME DOWN TO RS. 148.42 CRORES AND RS.125.83 CR ORES RESPECTIVELY. FURTHER THERE IS A REDUCTION IN THE LOAN LIABILITY AS WELL AS INTEREST PAYMENT. IN THE PAST YEARS, THE TRIBUNAL HA S ALLOWED THE CLAIM OF INTEREST ON THE GROUND THAT THE ASSESSEE HAD OWN FUNDS FOR GIVING INTEREST-FREE ADVANCES TO ITS 100% SUBSIDIARY COMPA NY. FURTHER THE OWN FUNDS ARE MUCH MORE THAN ITS INTEREST FREE ADV ANCE GIVEN BY THE ASSESSEE TO ITS SUBSIDIARY. MERELY BECAUSE FOR THE ASSESSME NT YEARS UNDER CONSIDERATION THE ASSESSEES OWN FUNDS CAME DOWN AS AGAINST THE OLD ADVANCE TO THE SUBSIDIARY COMPANY DOE S NOT MEAN THAT THE NATURE AND STATUS OF THE LOAN TO SUBSIDIARY COMPANY IS DIFFERENT FROM THE PAST ASSESSMENT YEARS. THIS BEING SO AND IN THE IN THE ABSENCE OF ANY CONTRARY MATERIAL PLACED ON RECORD BY THE REVENUE TO SHOW THAT THE ASSESSEE HAS NO BENEFICIAL INTEREST IN THE SU BSIDIARY COMPANY OR THE LOAN WAS NOT GIVEN FOR BUSINESS PURPOSES AS A MEASURE OF COMMERCIAL EXPEDIENCY OR THE LOAN WAS GIVEN F OR THE PERSONAL BENEFIT OF THE DIRECTORS, WE, RESPECTFULLY FOLL OWING THE RATIO OF THE ABOVE DECISIONS INCLUDING DECISION IN SRIDEV ENTERPR ISES (SUPRA) AND KEEPING IN VIEW THE RULE OF CONSISTENCY HOLD THAT T HE ASSESSEE IS ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 15 ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOAN S AND THE LD. CIT(A) WAS NOT JUSTIFIED IN SUSTAINING THE DISALLOWANCE OF INTEREST . THE GROUNDS TAKEN BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 18. THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE RELATES TO IN NOT ALLOWING DEPRECIATION WITH REFERENCE TO TECHNICAL KNOW- HOW PAYMENT OF RS.2,52,09,490/-, HELD TO BE CAPITAL EXPENDITURE BY T HE TRIBUNAL IN ASSESSMENT YEAR 1999-00. 19. THE LD. COUNSEL FOR THE ASSESSEE SUBMITS THAT THE ADDI TIONAL GROUND RAISED BY THE ASSESSEE IS A LEGAL GROUND, THEREFOR E, IN VIEW OF THE DECISION OF THE TRIBUNAL IN ASSESSEE'S OWN CASE FOR THE ASSESSMENT YEARS 1999-00 TO 2002-03 SUPRA, WHEREIN THE TRIBUNAL HAS ADMITTED THE ADDITIONAL GROUND AS A LEGAL GROUND, THE ADDI TIONAL GROUND RAISED BY THE ASSESSEE BE ADMITTED AND ON MERITS THE RELIANCE WA S ALSO PLACED ON PARA-40 OF THE ORDER OF THE TRIBUNAL, SUPRA , WHEREIN THE TRIBUNAL ON THE SIMILAR FACTS AND CIRCUMSTANCES OF THE CA SE, DIRECTED THE ASSESSING OFFICER TO ALLOW DEPRECIATION ON THE TECHNICA L KNOW-HOW. HE THEREFORE, SUBMITS THAT DEPRECIATION ON THE SAME B E ALLOWED. 20. ON THE OTHER HAND THE LD. DR SUBMITS THAT SINCE TH E FACTS HAVE NOT BEEN EXAMINED BY THE ASSESSING OFFICER, THEREFORE, I N THE INTEREST OF JUSTICE THE ISSUE MAY BE RESTORED BACK TO THE FILE OF THE ASSESSING OFFICER. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 16 21. WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THERE IS NO DISPUTE THAT THE TRIBUNAL FOR THE ASSESSMENT YEARS 2000- 01 TO 2002- 03 HAS ADMITTED THE SIMILAR ADDITIONAL GROUND AS A LEG AL GROUND AND HAS HELD VIDE PARA-40 OF ITS ORDER AS UNDER :- 40. AFTER CONSIDERING THE RIVAL SUBMISSIONS, WE AR E OF THE CONSIDERED VIEW THAT THE ASSESSEE DESERVES TO SUCCEED IN THIS ADDITIONAL GROUND RAISED FOR ALL TH ESE THREE YEARS. THE AO HAS HIMSELF ALLOWED DEPRECIATION ON T HE AMOUNT PAID ON ACCOUNT OF TECHNICAL KNOW-HOW FOR AY 1999-00. THE AMOUNT OF DEPRECIATION ALLOWED FOR AY 1999-00 HAS NOT BEEN WITHDRAWN BY THE AO; THEREFORE , IN OUR CONSIDERED VIEW, THERE IS NO JUSTIFICATION IN N OT ALLOWING THE DEPRECIATION IN SUBSEQUENT YEARS. THE AO HIMSELF HAS TREATED THE PAYMENT ON ACCOUNT OF TECHN ICAL KNOW-HOW ON CAPITAL ASSET AND AS PER AMENDED PROVISIONS OF LAW; THE DEPRECIATION IS ALLOWABLE ON THE CAPITAL ASSET IN THE FORM OF TECHNICAL KNOW-HOW. ACCORDINGLY, WE DIRECT THE AO TO ALLOW DEPRECIATION FOR THE SUBSEQUENT YEARS ALSO WHICH ARE UNDER APPEAL BEFORE THE TRIBUNAL. 22. IN THE ABSENCE OF ANY DISTINGUISHING FEATURE BROUGH T ON RECORD BY THE REVENUE AND KEEPING IN VIEW THE RULE OF CONSIST ENCY WE RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL SUPRA , DIRECT THE ASSESSING OFFICER TO ALLOW DEPRECIATION FOR THE IMPUGNED ASSESSMENT YEAR ALSO ON THE AMOUNT OF TECHNICAL KNOW-HOW PAYMENT ACCORDING TO LAW. THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE IS, T HEREFORE, ALLOWED. ITA NO.654/M/08 (A.Y.2004-05)(ASSESSEE'S APPEAL): ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 17 23. AT THE TIME OF HEARING IT HAS BEEN AGREED BY BOT H THE PARTIES THAT THE FACTS AND THE GROUNDS INCLUDING THE ADDITIONAL GROUND TAKEN IN THE PRESENT APPEAL ARE THE SAME AS IN THE ASSESSEE'S APPEA L FOR ASSESSMENT YEAR 2003-04, THEREFORE, THE PLEA TAKEN BY T HEM IN THE SAID APPEAL BE CONSIDERED WHILE DECIDING THE PRESENT AP PEAL. 24. AFTER HEARING THE RIVAL PARTIES AND PERUSING THE MATERIAL AVAILABLE ON RECORD AND IN THE ABSENCE OF ANY DISTINGU ISHING FEATURE BROUGHT ON RECORD BY THE PARTIES WE DIRECT THE ASSESSING OFFICER TO FOLLOW OUR FINDING RECORDED IN PARA -17 AND 21 OF T HIS ORDER AND ALLOW THE CLAIM OF THE ASSESSEE ON BOTH THE ISSUES. WE HOLD AND O RDER ACCORDINGLY.THE GROUNDS INCLUDING THE ADDITIONAL GROUND TAKEN BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 25. IN THE RESULT, ASSESSEE'S APPEALS STAND ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9.7.2010. SD/- SD/- (A.L. GEHLOT) ( D.K. AGARWAL ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 9.7.2010. JV. ITA NO.4215 & 654/M/06 & 08 A.Y:03-04 & 04-05 18 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI. DETAILS DATE INITIALS DESIGNATION 1 DRAFT DICTATED ON 16.6.10 SR.PS/PS 2 DRAFT PLACED BEFORE AUTHOR 17.6.10 SR.PS/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS/PS 6. KEPT FOR PRONOUNCEMENT ON 9.7.10 SR.PS/PS 7. FILE SENT TO THE BENCH CLERK 12.7.10 SR.PS/PS 8 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER