MOHIT DIAMONDS P. LTD, MUMBAI V. DCIT 5(2), MUMBAI

ITA 427/MUM/2010

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6185 (ITAT-MUMBAI)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 23-11-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 18-01-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Additional evidence; Commercial expediency
• Section: 54; 56

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI B BENCH BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER & SHRI T.R.SOOD, ACCOUNTANT MEMBER I.T.A.NO.427/MUM/2010 - A.Y 2006-07 MOHIT DIAMONDS PVT. LTD., MEHTA BHAVAN, 5 TH FLOOR, 311, NEW CHARNI ROAD, MUMBAI 400 004. PAN: VS. (APPELLANT) (RESPONDENT) APPELLANT BY : RESPONDENT BY : O R D E R PER T.R.SOOD, AM: IN THIS APPEAL VARIOUS GROUNDS HAVE BEEN RAISED, B UT AT THE TIME OF HEARING, LD. COUNSEL OF THE ASSESSEE SUBMITTED T HAT ONLY TWO DISPUTES ARE INVOLVED WHICH ARE AS UNDER: 1. CONFIRMATION OF DISALLOWANCE OF INTEREST AMOUNTING TO ` `` ` .6,02,871/- AND FURTHER ENHANCEMENT OF THE SAME DIS ALLOWANCE TO ` `` ` .33,54,651/-; AND 2. DISALLOWANCE OF EXPENSES AMOUNTING TO ` `` ` .5,66,566 U/S.14A. 2. GROUND 1 : AFTER HEARING BOTH THE PARTIES, WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAD CERTAIN INTEREST BEARING BORROWINGS. OUT OF THIS ASSESSEE HAD INVEST ED SOME OF THE FUNDS IN THE SHARE OF SUBSIDIARY COMPANY AND HAD GI VEN CERTAIN INTEREST FREE LOANS TO SISTER CONCERN AND OTHERS. HE OBSERVED THAT ASSESSEE HAS NOT BEEN ABLE TO PROVE THAT INTEREST F REE ADVANCES WERE 2 GIVEN FROM INTEREST FREE FUNDS. HE RELIED ON CERTAI N DECISIONS AND ULTIMATELY WORKED OUT THE DISALLOWANCE BY THE FOR MULA INVESTMENT IN SUBSIDIARY X FINANCE COST INTEREST BEARING BORROWED FUND 3. ON APPEAL, IT WAS SUBMITTED THAT THE ASSESSEE HA D ADVANCED LOANS TO THREE SISTER CONCERNS AND SUCH LOANS WERE ADVANCED OUT OF THE INTEREST FREE FUNDS AS THE NET INCREASE IN THE LOAN S TO THE SISTER CONCERN WAS ` `` ` .3,92,74,219/- WHEREAS THE CURRENT YEARS PROFIT IT SELF WAS ` `` ` .6,83,23,100/-. RELIANCE WAS ALSO PLACED ON THE DEC ISION OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS L TD. VS. CIT 288 ITR 1. THE LD. CIT[A] DECIDED THE ISSUE VIDE PARA 2.4 W HICH IS AS UNDER: 2.4 I HAVE CONSIDERED THE FACTS OF THE CASE. IT I S TRUE THAT THE INTEREST FREE FUNDS OF THE APPELLANT IN THE FORM OF SHARE CAPITAL AND RESERVES ARE THE TUNE OF RS.67,85,76,914/-. IN ADDITIONS TO THIS THE APPELLA NT HAS INTEREST FREE UNSECURED LOANS AMOUNTING TO RS.1,05,42,410/-. THE APPELLANT HAD GIVEN INTEREST FREE ADVANCES TO THREE CONCERNS AND CLOSIN G BALANCE AT THE END OF THE YEAR IS RS.10,13,71,550/-. THE ASSESSING OFFICER AS ERRONEOUSLY TAKEN THIS FIGURE AT RS.6,83,81,558/-. THERE ARE NUMEROUS INST ANCES OF APPELLANT WITH ASSOCIATE CONCERNS IN THE CURRENT YEAR FOR GIVING A ND TAKING LOANS. THE APPELLANT CLAIMED THAT IT HAS ATTACHED CASH FLOW ST ATEMENT ALONG WITH WRITTEN SUBMISSIONS DATED 08.09.2009, BUT NO SUCH STATEMENT WAS ATTACHED. THE APPELLANT HAS PAID FINANCE COST OF RS.3,82,84,828/- ON SECURED LOANS OF RS.82,90,04,004/- (ASSESSING OFFICER WRONGLY MENTIO NED THIS AMOUNT AT RS.81,75,674/-). IN THE APPELLANT ASSESSMENT PROCEE DING ALSO THE APPELLANT COULD NOT FILE EVIDENCE THAT ALL BORROWED FUNDS FOR THE PURPOSE OF BUSINESS. SINCE THE APPELLANT IS CLAIMING THAT ITS FINANCE CO ST OF RS.3,832,84,828/- SHOULD BE ALLOWED AS DEDUCTION UNDER SECTION 36 (1) (III) OF THE INCOME TAX ACT, IT IS FOR THE APPELLANT TO ESTABLISH THAT IT HAS US ED THE ENTIRE BORROWED FUNDS FOR THE PURPOSE OF BUSINESS. RELIANCE IS PLACED ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF SUDARAM FASTERNERS LIMITE D 149 ITR 773 WHEREIN IT WAS HELD THAT DEDUCTION UNDER SECTION 36(1)(III) CAN BE DISALLOWED EVEN IF ONE OF THE THREE CONDITIONS IS NOT FULFILLED, WHICH ARE (I) THAT THERE SHOULD BE BORROWING OF CAPITAL, (II) INTEREST SHOULD BE PAID ON SUCH CAPITAL AND (III) SUCH CAPITAL SHOULD BE USED FOR THE PURPOSE OF BUSINESS. THE APPELLANT HAD CLAIMED THAT IT HAS ADVANCED LOANS TO SISTER CONCER NS ON ACCOUNT OF COMMERCIAL EXPEDIENCY BUT THE APPELLANT HAS NOT EXP LAINED WHAT WAS THE COMMERCIAL EXPEDIENCY INVOLVED IN GIVING INTEREST FREE LOANS TO SISTER CONCERNS. THE APPELLANT FILED NO EVIDENCE THAT ITS ASSOCIATE CONCERNS WERE IN DIRE NEED OF FUNDS AND THEY COULD NOT HAVE ARRANGED FUNDS ON THEIR OWN AND 3 THEREFORE APPELLANT HAS TO COME TO THEIR AID. THE A PPELLANT ALSO FILED ON EVIDENCE THAT ITS SISTER CONCERNS WERE NOT IN A POS ITION TO PAY INTEREST TO THE APPELLANT. ON GOING THROUGH THE COPY OF ACCOUNT OF THESE COMPANIES AS APPEARING IN THE ACCOUNT OF THE APPELLANT COMPANY, IT IS FOUND THAT THE APPELLANT IS CONTINUOUSLY DIVERTING ITS MONEY TO M/ S.MOHIT JEWELLERY PVT. LIMITED. IT IS FURTHER SEEN THAT AMOUNT PAID TO MOH IT JEWELLERY ALONE IS EXCEEDING THE PROFITS OF THE APPELLANT IS CONTINUOU SLY DIVERTING ITS MONEY TO M/S. MOHIT JEWELLERY PVT. LIMITED. IT IS FURTHER SE EN THAT AMOUNT PAID TO MOHIT JEWELLERY ALONE IS EXCEEDING THE PROFITS OF T HE APPELLANT AFTER PAYMENT OF TAXES. THUS THE APPELLANT CAN NOT CLAIM THAT ITS CURRENT YEAR PROFIT IS MORE THAN THE NET INCREASE IN ADVANCES. FURTHER SECURED LOANS OF THE APPELLANT INCREASED FROM RS.77,62,14,347/- TO RS.82,90,04,004 /-. THE APPELLANT HAS FAILED TO ESTABLISH THAT BORROWED FUNDS WERE NOT US ED TO GIVE ADVANCES TO SISTER CONCERNS. DURING THE COURSE OF APPELLANT PRO CEEDING, THE APPELLANT FILED DETAILS OF INTEREST THAT IS REQUIRED TO THE D ISALLOWED. THE TOTAL OF THE SAME 33,54,651/-. ACCORDINGLY, DISALLOWANCE OF RS.3 3,54,651/- WAS REQUIRED TO BE MADE WHEREAS THE ASSESSING OFFICER HAS DISALL OWED ONLY RS.6,02,871/-. ACCORDINGLY THE INCOME OF THE APPELLANT IS REQUIRED TO BE ENHANCED BY RS.27,51,780/-. THE APPELLANT WAS GIVEN NOTICE FOR ENHANCEMENT ON 06.11.2009 AND THE APPELLANT WAS REQUIRED TO FILE S UBMISSIONS BY 16.11.2005. THE APPELLANT HAS NOT FILED ANY SUBMISS ION AGAINST THE ENHANCEMENT AND IS ONLY CONTESTING THE DISALLOWANCE ON HIS MERIT. IN VIEW OF THESE FATS INCOME OF THE APPELLANT IS ENHANCED BY R S.27,51,780/- ON THIS ACCOUNT. THIS GROUND OF APPEAL IS NOT ALLOWED AND I NCOME IS ENHANCED. 4. BEFORE US, AN APPLICATION DATED 22/11/2010 HAS B EEN FILED FOR ADMISSION OF ADDITIONAL EVIDENCE AND THE FOLLOWING DOCUMENTS ARE SOUGHT TO BE ADMITTED- PARTICULARS PAGE NO . DETAILS OF SUBSIDIARY COMPANIES MOHIT JEWELLERY PVT.LTD. (I) COMPUTATION OF INCOME FOR THE YEAR ENDING ON 31 ST MARCH, 2006 46 (II) PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING ON 3 1 ST MARCH, 2006 47 (III) ASSESSMENT ORDER U/S.143(3) DATED 31-12-2008 FOR THE A.Y 2006-07 48-49 (IV) LETTER DATED 15 TH FEBRUARY, 2007 FOR ISSUE OF PREFERENCE SHARES BY CONVERTING THE OUTSTANDING UNSECURED LOAN 50 (V) ORDER OF THE BOMBAY HIGH COURT DATED 20 TH FEBRUARY, 2009 APPROVING THE AMALGAMATION OF MOHIT DIAMONDS PVT. LTD. WITH MOHIT JEWELLERY PVT. LTD. 51-55 4 M/S MOHIRA JEWELLERY PVT. LTD. (I) STATEMENT OF INCOME FOR THE YEAR ENDING ON 31 ST MARCH, 2007 54 (II) SCHEDULE OF BROUGHT FORWARD LOSSES 55 (III) PROFIT & LOSS ACCOUNT FOR THE YEAR ENDING ON 31 ST MARCH, 2006 56 (IV) ASSESSMENT ORDER U/S.143(3) DATED 11/12/2009 F OR THE A.Y 2007-08 57-58 IT WAS CONTENDED THAT THE AO HAS NOT PROPERLY EXAMI NED THE ISSUE AND BEFORE THE CIT[A] RELIANCE WAS PLACED ON THE DECISI ON OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS [SUPRA]. FOR EXAMINING THE COMMERCIAL EXPEDIENCY, RELIANCE HAS TO BE PLACED ON THE DOCUMENTS NOW BEING FILED AND THAT IS WHY SAME ARE SOUGHT TO BE ADMITTED. MOREOVER, SOME OF THE LOANS GIVEN TO MAHIRA DIAMOND JEWELLERS PVT. LTD. WERE CONVERTED INTO PREFERENCE SHARES AND THAT COMPANY GOT AMALGAMATED WITH THE ASSESSEE COMPANY FOR WHICH ORD ER OF THE BOMBAY HIGH COURT IS SOUGHT TO BE ADMITTED. THE OTH ER DOCUMENTS ARE STATEMENT OF INCOME, PROFIT & LOSS ACCOUNT, AND ASS ESSMENT ORDER OF MAHIRA DIAMOND JEWELLERS PVT. LTD., WHICH WILL SHOW THE COMMERCIAL EXPEDIENCY OF THE LOANS. BEFORE US, LD. COUNSEL OF THE ASSESSEE AGAIN PRAYED THAT IN THE INTERESTS OF JUSTICE, THESE DOCU MENTS MAY BE ADMITTED. 5. ON THE OTHER HAND, LD. DR SUBMITTED THAT IF THE BENCH WISHES TO ADMIT SUCH DOCUMENTS, THEN THE DOCUMENTS HAVE TO BE SENT BACK TO THE AO FOR RE-EXAMINATION OF THE SAME. 5 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND FIN D THAT THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS [SUPRA] HAS CLEARLY HELD THAT IF THERE WAS BUSINESS EXPEDIENCY IN GIVIN G FUNDS TO THE SUBSIDIARY COMPANY, THEN INTEREST ON BORROWINGS FOR SUCH PURPOSE COULD NOT BE DISALLOWED. THEREFORE, IT IS NECESSARY TO FIND OUT WHETHER ANY EXPEDIENCY WAS THERE AND WE ARE OF THE VIEW THA T IN THE INTERESTS OF JUSTICE THESE DOCUMENTS HAVE TO BE ADMITTED. ACC ORDINGLY, WE ADMIT THE DOCUMENTS STATED IN THE APPLICATION DATED 22/11 /2010 AS ADDITIONAL EVIDENCE. 7. THE LD. COUNSEL OF THE ASSESSEE ALSO ARGUED THAT THE ASSESSEE COMPANY HAD CERTAIN INTEREST FREE FUNDS AND, THEREF ORE, A PRESUMPTION HAS TO BE THAT INTEREST FREE LOANS WERE GIVEN OUT O F SUCH INTEREST FREE FUNDS AND THIS VIEW HAS ALREADY BEEN CONFIRMED BY T HE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER CO. LTD. VS. CIT 313 ITR 340. HE ALSO REFERRED TO THE DECISI ON OF THE CO-ORDINATE BENCH IN THE CASE OF ION EXCHANGE (INDIA) LTD. VS. I TO, I.T.A.NO.4190/M/2005 [COPY OF THE DECISION FILED ON RECORD] WHEREIN THIS POSITION WAS ACCEPTED. 8. ON THE OTHER HAND, LD. DR REITERATED THAT IN VIE W OF THE ADDITIONAL DOCUMENTS MATTER HAS TO BE REMANDED BACK TO THE FILE OF THE AO FOR EXAMINATION OF THE FRESH DOCUMENTS. 6 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFUL LY AND FIND THAT IN THE CASE OF RELIANCE UTILITIES AND POWER CO. LTD . VS. ITO [SUPRA], THE HON'BLE BOMBAY HIGH COURT HELD AS UNDER: HELD, DISMISSING THE APPEAL, THAT IF THERE WERE FUN DS AVAILABLE BOTH INTEREST- FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESU MPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE S UFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTA BLISHED CONSIDERING THE FINDING OF FACT BY THE COMMISSIONER (APPEALS) AND T HE TRIBUNAL. THE INTEREST WAS DEDUCTIBLE. THEREFORE, AS FAR AS GRANTING OF LOANS IS CONCERNED , IT HAS TO BE PRESUMED THAT SUCH LOANS WERE GIVEN OUT OF INTEREST FREE FUNDS IF ASSESSEE HAS SUCH INTEREST FREE FUNDS. FURTHER, LOA NS GIVEN TO THE SUBSIDIARY COMPANY HAVE ALSO TO BE RE-EXAMINED AS T O WHETHER BUSINESS EXPEDIENCY WAS INVOLVED IN THE LIGHT OF TH E DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS [ SUPRA]. AT THE SAME TIME, AS FAR AS INVESTMENTS IN SHARES ARE CONCERNED , IT WAS HELD IN THE CASE OF ION EXCHANGE [SUPRA] AS UNDER: 44. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREF ULLY AND FIND THAT THE AO HAS BASICALLY INVOKED SEC.14A. IT HAS ALREADY BE EN HELD BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE (43 DTR 171) THAT SEC.14A IS APPLICABLE TO ALL HEADS OF INCOME. FURTH ER, THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF CHEM INVESTMENT LTD. VS . ITO [121 ITD 318] HAS HELD THAT EVEN IF NO INCOME IS THERE FROM SHARES, T HE INTEREST IS TO BE DISALLOWED. HOWEVER, AT THE SAME TIME THE HON'BLE H IGH COURT IN THE CASE OF GODREJ & BOYCE [SUPRA] HAS FURTHER HELD THAT RULE 8 D IS NOT OF RETROSPECTIVE NATURE AND, THEREFORE, ONLY REASONABLE DISALLOWANCE CAN BE MADE. THEREFORE, IN THE INTEREST OF JUSTICE WE SET ASIDE THE ORDER O F THE LD. CIT[A] AND REMIT THE MATTER BACK TO THE FILE OF THE AO FOR RE-EXAMINATIO N OF THE ISSUE IN THE LIGHT OF THE RECENT DECISION OF THE HON'BLE BOMBAY HIGH COUR T IN THE CASE OF GODREJ & BOYCE. THEREFORE, IN VIEW OF THESE OBSERVATIONS OF THE HON 'BLE HIGH COURT AND HON'BLE SUPREME COURT AND ALSO IN THE LIGHT OF FRES H DOCUMENTS WHICH 7 HAVE BEEN ADMITTED BY US, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE SAME BACK TO THE FILE OF THE AO WITH A DIRECTION TO RE- EXAMINE THE ISSUE IN THE LIGHT OF THE DECISION OF T HE HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS [SUPRA] AND HON'B LE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. VS . DCIT [43 DTR 171] AS WELL AS RELIANCE UTILITIES AND POWER CO. LT D. [SUPRA]. 10. GROUND NO.2 : AFTER CONSIDERING THE RIVAL SUBMISSIONS AND AS AGREED BY BOTH THE PARTIES THAT THE ISSUE SHOULD BE REMANDED TO THE FILE OF THE AO TO BE DECIDED IN THE LIGHT OF THE DE CISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG . CO.LTD. VS. DCIT [43 DTR 171]. THEREFORE, IN THE INTERESTS OF J USTICE, WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND REMIT THE MATTER BA CK TO THE FILE OF THE AO TO DECIDE THE ISSUE IN THE LIGHT OF THE DECISION OF THE HON'BLE HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO.LTD. VS . DCIT [SUPRA]. 11. IN THE RESULT, APPEAL IS ALLOWED FOR STATISTICA L PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF NOVEMBER, 2010. SD/- SD/- (N.V.VASUDEVAN) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 30 TH NOVEMBER, 2010. P/-*