AASHIMA CHEMICAL & DYECHEM P.LTD, MUMBAI V. DCIT 8(1), MUMBAI

ITA 4316/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 8700 (ITAT-MUMBAI)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-01-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 22-06-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Business income; Depreciation; Source of fund
• Section: 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES H, MUMBAI BEFORE S/SHRI AMIT SHUKLA, JM & ASHWANI TANEJA, AM ITA NO.4316/MUM/2016 ASSESSMENT YEAR:2011-12 AASHIMA CHEMICAL &DYECHEM P. LTD., (AMALGAMATED WITH DUSHKRITIMULTITRADING P LTD.) SRI SAI BUSINESS CENTRE, CHS HUKMIL LANE, N M JOSHI MARG, LOWER PAREL, MUMBAI- 400 011 PAN AADCA4497M VS. DCIT 8(1) MUMBAI (APPELLANT) (RESPONDENT) APPELLANT BY : S/SHRI MADHUR AGRAWAL & MANI JAIN RESPONDENT BY :SHRI RAHUL RAMAN DATE OF HEARING :17.01.2017 DATE OF PRONOUNCEMENT :17 .01.2017 O R D E R PER AMIT SHUKLA, JUDICIAL MEMBER THE AFORESAID APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST IMPUGNED ORDER DATED 15.03.2016, PASSED BYLD. CIT(AP PEALS)-3, THANE,FOR ASSESSMENT PASSED U/S. 144 R.W.S. 145(3) OF THE INCOME TAX ACT, 1961 FOR A.Y. 2003-04.IN THE APPEAL MEMO THE ASS ESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE HON. CIT (APPEAL)-3 ERRED IN CONFIRMING THE LD. AOS ACTION OF INVOKING PROVISIONS OF S.145(3) OF THE AC T FOR REJECTING APPELLANTS BOOKS OF ACCOUNTS AND FURTHER IN MAKING THE ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 2 ARBITRARY ESTIMATE AND DISALLOWANCES UNDER SECTION 144 OF THE ACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE HON. CIT (APPEAL) 3 HAS ERRED IN TREAT ING THE INTEREST INCOME OF RS.16,22,79,443/- AS INCOME FROM OTHER SOURCES INSTEAD OF BUSINESS INCOME AS CLAIMED BY TH E APPELLANTS. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE HON. CIT (APPEAL) 3 HAS ERRED IN CONFI RMING THE DISALLOWANCE OF THE INTEREST EXPENSES OF RS. 16,70, 331,580/- WITHOUT CONSIDERING THEIR SUBMISSIONS AND ARGUMENTS IN THIS REGARD. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE HON. CIT (APPEAL) 3 HAS ERRED IN NOT C ONSIDERING THE FACTS THAT THERE WAS A NEXUS BETWEEN THE BORROW ED FUNDS AND THE ADVANCES GIVEN THEREFROM AND THEREFORE, ALT ERNATELY, THE INTEREST EXPENSES SHOULD HAVE BEEN ALLOWED AS D EDUCTION AGAINST THE INTEREST INCOME. 5. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE HON. CIT (APPEAL)-3 ERRED IN DISALLOWING APPELLANTS CLAIM FOR DEDUCTION OF ADMINISTRATIVE EXPENSES OF RS.4,29,558/- AND DEPRECIATION OF RS.1,494/- IN SPI TE OF THE SUBMISSION OF THE DETAILED FACTS AND LEGAL POSITION IN THAT REGARD. 6. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW THE HON. CIT (APPEAL)-3 HAS ERRED CONFIRMING LD. AOS ARBITRARY ACTION OF ENHANCING APPELLANTS INCOME BY RS.5,52,969/- TO RS.17,09,303/- I.E. ESTIMATING NET INCOME @1% OF THE TOTAL SALES OF RS.17,09,30,322/- AS AGAI NST THE ACTUAL NET PROFIT OF RS.5,52,969/- BESIDES THESE, THE ASSESSEE HAS ALSO RAISED FOLLOWING ADDITIONAL GROUND: 1. THE ASSESSMENT ORDER DATED 26 TH MARCH, 2014 PASSED ON A NON-EXISTING PERSON IS INVALID AND BAD IN LAW. ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 3 2. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE, SHRI MADHUR AGARWAL, FIRST ADDRESSED ON THE ISSUE OF MERITS WHICH HAS BEEN RAISED VIDE GROUND NOS. 2 TO 4. EXPLAINING THE BRIEF FACTS AN D THE BACKGROUND OF THE CASE, HE SUBMITTED THAT THE ASSESSEE COMPANY HAS SHOWN INTEREST INCOME OF RS.16,22,79,443/-, WHICH WAS TREATE D AS BUSINESS INCOME BY THE ASSESSEE ON THE GROUND THAT, IN VIEW OF THE PRESS RELEASE NO. 1998-99/1269, DATED 08.04.1999 ISSUED BY RBI,IF THE INTEREST INCOME IS MORE THAN 50% OF THE GROSS RECEIPTS O F THE BUSINESS OF THE COMPANY, THEN IT NEED NOT BE REQUIRED TO REGISTER AS AN NBFC WITH THE RESERVE BANK OF INDIA. AS AN ALTERNATIVE, IT WAS CONTENDED THAT IF THE ASSESSEES INCOME IS TREATED AS INCOME FRO M OTHER SOURCES U/S. 56, THEN THE INTEREST EXPENDITURE DIRECTLY ATTRIBUTABLE FOR EARNING OF SUCH AN INCOME SHOULD BE ALLOWED AS DEDUCTION U/S . 57(III). HOWEVER, THE LD. AO HAS REJECTED THE ASSESSEES S FIR ST CONTENTION ON THE GROUND THAT THE PRESS RELEASE DOES NOT IPSO FACTO GIVE LICENSE TO THE ASSESSEE COMPANY TO BE DEEMED NBFC, RATHER SECTION 4 OF THE BOMBAY MONEYLENDERS ACT, 1946 PROVIDES THAT, NO PER SON CAN CARRY OUT THE BUSINESS OF MONEY LENDING WITHOUT A LICENSE. T HUS, HE HELD THAT INTEREST INCOME SHOULD BE TAXED AS INCOME FROM OTHE R SOURCES. REGARDING ASSESSEES CLAIM OF INTEREST EXPENDITURE OF RS.6,70,71,580/- AO HELD THAT ASSESSEE COULD NOT PROVE THE NEXUS OF ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 4 THIS EXPENDITURE WITH THE INTEREST INCOME OF RS.16,22,76 ,094/-. THE RELEVANT OBSERVATIONS OF THE AO IN THIS REGARD READ AS UNDER: 5.3 VIDE LETTER DATED 19.03.2014, THE ASSESSEE HAS FURNISHED A CHART OF SECURED AND UNSECURED LOANS TA KEN BY THE ASSESSEE COMPANY ALONG WITH THE INTEREST WORKIN G AND LEDGER ACCOUNTS FOR A.Y. 2011-12. BY THE SAID LETT ER, THE ASSESSEE HAS ALSO FURNISHED DETAILED CHART OF LOANS & ADVANCES GIVEN BY THE ASSESSEE COMPANY ALONG WITH I NTEREST WORKING AND LEDGER ACCOUNTS FOR A.Y. 2011-12. FROM THESE DETAILS, IT IS SEEN THAT THE ASSESSEE HAS RAISED IN TEREST-BEARING SECURED LOANS OF RS. 100 CRORES DURING THE YEAR F ORM SICOM LIMITED AND ALSO RAISED INTEREST-BEARING UNSECURED LOANS OF RS.205.99 CRORES FROM 5 DIFFERENT COMPANIES DURING THE YEAR. IN ADDITION, THE ASSESSEE HAS ALSO RAISED INTEREST- FREE LOANS TOTALLING RS.9,60,00,000/- FROM 3 DIFFERENT COMPANI ES DURING THE YEAR. DURING THE YEAR, THE ASSESSEE HAS PAID I NTEREST OF RS.7,03,35,618/- TO SICOM LIMITED AND ALSO PAID FUR THER INTEREST TO OTHER PRIVATE PARTIES ON THE LOANS OBTA INED FROM THEM. HOWEVER, FROM THESE LEDGER ACCOUNTS, DETAILS OF LOANS TAKEN AND LOANS ADVANCED VIS-A-VIS BANK STATEMENT F ILED BY THE ASSESSEE COMPANY ARE TOTALLY FUNGIBLE IN NATURE AND THAT IT CANNOT BE SAID HERE THAT THE FUNDS SO RAISED ARE DI VERTED FULLY TOWARDS ADVANCING LOANS TO PARTIES AND, THUS, THE E XPENDITURE SO INCURRED CANNOT BE SAID TO HAVE BEEN INCURRED WH OLLY AND EXCLUSIVELY IN CONNECTION WITH THE INCOME EARNED ON LOANS & ADVANCES GIVEN. FOR CLAIMING DEDUCTION U/S. 57(III ) OF THE ACT, THERE HAS TO BE DIRECT NEXUS OF EXPENDITURE SO INCU RRED WITH THE INCOME SO EARNED I.E. IT HAS TO HAVE ARISEN DIR ECTLY FROM THE SAID SOURCE BUT HERE IN THE INSTANT CASE, THE ASSES SEE HAS NOT BEEN ABLE TO SUBSTANTIATE THE DIRECT NEXUS OF ITS I NTEREST EXPENDITURE WITH ITS INTEREST INCOME AND, THEREFORE , THE ASSESSEES ALTERNATE PLEA OF ALLOWING THE INTEREST EXPENDITURE U/S. 57(III) OF THE ACT IS FOUND TO BE NOT TENABLE. ACCORDINGLY, THE INTEREST EXPENDITURE OF RS.16,70,31,580/- IS HE REBY DISALLOWED IN ACCORDANCE WITH THE PROVISION OF SECT ION 57(III) OF THE ACT. A COPY OF LETTER DATED 19.03.2014 WITH AN NEXURES ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 5 THERETO IS HEREBY MADE AS A PART OF THE PRESENT ORD ER AND ANNEXED HERETO. 3. BEFORE THE LD. CIT(A), IT WAS POINTED OUT THAT THE ASSESSEE HAD ENCLOSED THE ENTIRE DETAILS OF MONEY TAKEN FROM SECURE D AND UNSECURED LOANS AND ALSO THE DETAILS OF LOANS AND A DVANCES GIVEN TO VARIOUS PARTIES ALONG WITH THEIR NAMES, PAN, OPENING B ALANCES, TRANSACTION DURING THE YEAR, INTEREST PAID/RECEIVED AND TDS DEDUCTED. IT WAS STATED BEFORE HIM THAT THE AO HAD ALSO VERIFIED GENUINENESS AND CREDIT WORTHINESS OF THE PARTIES FROM WHOM THE ASSE SSEE HAD TAKEN LOANS, WHICH IS EVIDENT FROM DETAILS INCORPORATED AT PAGE 18 OF THE APPELLATE ORDER. IT WAS ALSO POINTED OUT THAT THERE W AS A DIRECT NEXUS BETWEEN THE SOURCE OF FUND AS SHOWN IN THE BALA NCE SHEET, LOAN TAKEN AND APPLICATION OF FUNDS. THUS, THERE WAS A DIRE CT NEXUS OF INTEREST EXPENDITURE FOR THE EARNING OF INTEREST INCOME. HOWEVER, THE LEARNED CIT(A) TOO CONFIRMED THE ACTION OF THE AO. 4. BEFORE US, SHRI MADHUR AGRAWAL, FIRST OF ALL DRE W OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE COMPANY TO POINT OUT THAT THE ASSESSEE HAD FUNDS IN THE FORM OF:-I) SHARE APPLICA TION MONEY OF RS. 21.77 CRORES;II) SECURED LOANS OF RS. 100 CRORES; A ND III) UNSECURED LOANS OF RS.111.80 CRORES. OUT OF THESE FUNDS THE ASSE SSEE HAS GIVEN LOANS AND ADVANCES OF RS.222.9 CRORES TO VARIOUS PAR TIES. THUS, THERE WAS A DIRECT NEXUS OF UTILIZATION OF FUND FOR GIVING ADVANCES TO VARIOUS ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 6 PARTIES FROM WHOM THE ASSESSEE HAD EARNED INTEREST INCO ME AND ALSO PAID INTEREST ON LOANS. HENCE, U/S. 57(III) SUCH AN INTEREST SHOULD BE ALLOWED. 5. ON THE OTHER HAND, LEARNED DR STRONGLY RELIED UPON THE ORDERS OF THE AO AND CIT(A). 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE RELEVANT FINDINGS GIVEN IN THE IMPUGNED ORDERS AS WEL L AS MATERIAL REFERRED TO BEFORE US. SO FAR AS ALLOWBILITY OF INTER EST EXPENDITURE OF RS.16,70,71,580/- U/S. 57(III) IS CONCERNED, WHICH HAS BEEN RAISED VIDE GROUND NO.3, WE FIND FROM THE PERUSAL OF THE BAL ANCE SHEET THAT ASSESSEE HAD FOLLOWING SOURCES OF FUND AND CORRESPO NDING APPLICATION OF FUNDS, WHICH FOR THE SAKE OF READY REFERENCE IS R EPRODUCED HERE UNDER:- PARTICULARS AS ON 31.03.2011 (RS. IN CRORES) AS ON 31.03.2010 (RS. IN CRORES) SOURCE OF FUNDS SHARE CAPITAL 0.01 0.01 SHARE APPLICATION MONEY 21.77 21.77 SECURED LOAN 100.00 75.00 UNSECURED LOAN 111.80 37.88 CURRENT LIABILITIES 0.22 0.34 TOTAL 233.80 135.00 APPLICATION OF FUNDS FIXED ASSETS 0.01 - INVESTMENTS 0.10 0.10 ASH& BANK BALANCE 2.22 0.10 OTHER CURRENT ASSETS 0.90 0.67 LOANS & ADVANCES 222.9 126.87 PROFIT & LOSS A/C (DR.) 7.68 7.27 TOTAL 233.80 135.00 ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 7 FROM THE PERUSAL OF THE ABOVE SOURCES AND APPLICATION OF FUNDS, IT IS QUITE EVIDENT THAT THE ASSESSEES FUNDS HAVE BEEN MOSTLY UTILIZED FOR LOANS AND ADVANCES TO VARIOUS PARTIES FROM WHERE THE A SSESSEE HAS EARNED INTEREST INCOME OF RS.16,22,79,443/-. THE ASS ESSEE HAS ALSO PAID INTEREST ON SECURED AND UNSECURED LOANS. ONCE THE FUNDS HAVE BEEN UTILISED FOR GIVING LOANS AND ADVANCES TO THE PA RTIES ON WHICH INTEREST INCOME HAS BEEN EARNED,THEN OSTENSIBLY COST OF FUNDS IN THE FORM OF INTEREST PAYMENT HAS A DIRECT NEXUS WITH THE EARN ING OF SUCH AN INCOME. WE ARE UNABLE TO APPRECIATE THE BLANKET OB SERVATION OF THE AO THAT FUNDS LYING WITH THE ASSESSEE WARE NOT IDENTIFIA BLE AND THE ASSESSEE IS UNABLE TO PROVE THE NEXUS. ONCE, BOTH THE A VAILABILITY AND APPLICATION OF FUNDS ARE EVIDENT FROM THE BALANCE SHEE T, THEN THERE IS APPARENTLY DIRECT NEXUS BETWEEN EARNING OF INCOME FRO M DEPLOYMENT OF FUNDS AND EXPENSES INCURRED ON COST OF FUNDS. ACC ORDINGLY, THE ASSESSEE IS ELIGIBLE FOR CLAIM OF INTEREST EXPENDITUR E OF RS.16,70,31,580/- U/S. 57(III) AND THE SAME IS DIRE CTED TO BE ALLOWED. 7. IN VIEW OF OUR FINDING AS ABOVE, WE ARE NOT ADJUD ICATING GROUND NO.2, AS THE LD COUNSEL SUBMITTED THAT THIS ISSUE WILL B E PURELY AN ACADEMIC EXERCISE.ACCORDINGLY, GROUND NOS. 3 AND 4 ARE ALLOWED AND GROUND NO. 2 IS TREATED AS INFRUCTUOUS. 8. REGARDING THE SECOND ISSUE, WHICH HAS BEEN RAISE D VIDE GROUND NOS. 1, 5 AND 6, LEARNED COUNSEL BEFORE US SUBMITTED THAT THE ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 8 ASSESSEE IS ENGAGED IN THE BUSINESS OF PURCHASE AND SALE OF FABRICS, WHICH IS EVIDENT FROM THE PROFIT & LOSS ACCOUNT OF THE A SSESSEE WHICH HAS BEEN REPRODUCED AT PAGE 2 OF THE ASSESSMENT ORDER. IN THE TRADING ACCOUNT, THE ASSESSEE HAS SHOWN SALE AT RS.17.09 CRORE S AND PURCHASE OF RS.16.98 CRORES AND IN THE PROFIT AND LOS S ACCOUNT, THE ASSESSEE HAD SHOWN RETURNED LOSS OF RS.40,26,855/-. HOWEVER, THE AO REJECTED THE BOOKS OF ACCOUNT AND TRADING ACCOUNT ON THE GROUND THAT THE SUMMONS AND NOTICES ISSUED TO VARIOUS PARTIES FR OM WHOM THE ASSESSEE HAD MADE PURCHASES AND SALES, SOME OF TH EM HAVE NOT RESPONDED. BASED ON THIS PRELIMINARY INFORMATION THE AO HELD THAT THE ASSESSEES BOOKS OF ACCOUNT ARE NOT RELIABLE AND H E TREATED THE ENTIRE DIFFERENCE BETWEEN THE SALE AND PURCHASE FOR S UMS AGGREGATING TO RS.11,56,334/- AS INCOME OF THE ASSESSEE. THE LEAR NED CIT(A), TOO HAS UPHELD THE ACTION OF THE AO, HOWEVER, HE ESTIMATED THE INCOME OF THE ASSESSEE @1% OF THE SALES. MR.MADHUR AGRAWAL POIN TED OUT THATSUCH AN ACTION OF THE LEARNED CIT(A) HAS LED TO EN HANCEMENT OF INCOME BY RS.5,52,969/-, AS NOW THE INCOME HAS BEEN ESTIMATED AT RS.17,09,303/- INSTEAD OF RS.11,56,334/-. SUCH AN E NHANCEMENT HAS BEEN MADE WITHOUT CONFRONTING OR ANY NOTICE TO THE ASSES SEE AND, THEREFORE, THE DIFFERENCE AMOUNT ON ACCOUNT OF ENHANCEM ENT CANNOT BE SUSTAINED IN VIEW OF PROVISIONS OF SECTION 251(2). ON MERITS ALSO HE MADE HIS ELABORATE SUBMISSIONS. THE LEARNED DR, ON TH E OTHER HAND, RELIED UPON THE ORDERS OF THE LD. CIT(A). ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 9 9. AFTER CONSIDERING THE RIVAL SUBMISSIONS ON THE LIMI TED ISSUE OF ENHANCEMENT, WE FIND THAT THE ADDITION OF RS.11,56,334 /-, WHICH WAS MADE BY THE AO ON ACCOUNT OF DIFFERENCE BETWEEN SALE AND PURCHASE, NOW STANDS ENHANCED TO RS. 17,09,303/- BY THE LD. CIT( A) BY TAKING 1% PROFIT ON THE SALES FIGURE. SUCH AN ENHANCEMENT BY THE LD. CIT(A) ADMITTEDLY IS WITHOUT COMPLYING THE MANDATORY REQUIREME NT OF SUBSECTION (2) OF SECTION 251 WHICH PROVIDES THAT ENHAN CEMENT OF INCOME BY FIRST APPELLATE AUTHORITY CANNOT BE MADE WITH OUT GIVING NOTICE TO THE ASSESSEE. CONSEQUENTLY, SUCH AN ENHANCEM ENT OF INCOME CANNOT BE SUSTAINED. ACCORDINGLY, WE DIRECT THE DELETIO N OF ENHANCED AMOUNT OF RS.5,52,969/- AND THUS, GROUND NO. 6 IS ALL OWED. 10. BEFORE US, THE ISSUE RAISED IN GROUND NO. 5 HAS NOT BEEN PRESSED AND HENCE, THE SAME IS DISMISSED AS NOT PRESSED. 11. AS ADMITTED BY THE LD. COUNSEL THE ISSUE RAISED I N GROUND NO.1 IS BEING KEPT OPEN AS NO ARGUMENTS HAVE BEEN MADE BY BOTH THE PARTIES. ACCORDINGLY, THE SAME IS DISMISSED AS INFRUC TUOUS. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS17 TH DAY OF JANUARY 2017 SD/- SD/- (ASHWANITANEJA) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED: 19 TH JANUARY, 2017. SA ITA NO.4316/MUM/2016 AASHIMA CHEMICALS AND DYECHEM PRIVATE LTD. 10 COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE C I T(A), MUMBAI. 4. THE C I T 5. DR, H BENCH, ITAT, MUMBAI BY ORDER, //TRUE COPY// (ASSISTANTREGISTRAR) INCOME TAX APPELLATE TRIBUNAL, MUMBAI