Deejay Chemical Industries Pvt.Ltd., Ahmedabad V. The ACIT.,(OSD)Range-1, Ahmedabad

ITA 442/AHD/2009

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1673 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-03-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 21-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 10-02-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K JHA SRDR
• Assessee Lawyers: S N SOPARKAR SRAR
• Keywords: Bad and doubtful debts; Notional interest
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH B AHMEDABAD BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER, AND SHRI D.C. AGRAWAL, ACCOUNTANT MEMBER ITA NO.442/AHD/2009 ASSESSMENT YEAR :2005-06 DATE OF HEARING:21.3.11 DRAFTED; 23.3.11 DEEJAY CHEMICAL INDUSTRIES PVT. LTD, ACI PREMISES, OPP. VIJAY MILLS, NARODA ROAD, AHMEDABAD PAN NO. AAACD5359A V/S . ACIT (OSD), RANGE-1, AHMEDABAD (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S.N.SOPARKAR, SR-AR & SMT. URVASHI SHODHAN, AR RESPONDENT BY:- SHRI S.K. JHA, SR-DR O R D E R PER D.C. AGRAWAL, ACCOUNTANT MEMBER:- THIS APPEAL IS FILED BY ASSESSEE RAISING FOLLOWING GROUNDS:- 1. THE LD. CIT(A) HAS GROSSLY ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.1,02,575/- MADE BY AO OF INTERES T RECEIVABLE CLAIMED BY THE APPELLANT AS BAD DEBT U/S.36(1)(VII) OF THE ACT IGNORING THE FACT THAT THE APPELLANT HAS FULFILLED ALL THE C ONDITIONS TO SUBSTANTIATE THE CLAIM OF DEBT HAVING GONE BAD WITH NO POSSIBILI TY OF RECOVERY OF THE SAME. LD. CIT(A) OUGHT TO HAVE ALLOWED THE CLAIM OF THE APPELLANT. 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACTS IN CONFIRMING DISALLOWANCE OF INTEREST EXPENSE OF RS.1,20,134/- A ND ADMINISTRATIVE EXPENSE OF RS.4,27,020/- FOR EARNING OF EXEMPTED IN COME MADE BY AO U/S.14A OF THE ACT. BOTH THE LOWER AUTHORITIES HAVE ERRED IN NOT APPRECIATING THE FACT THAT THERE BEING NO NEXUS BET WEEN THE FUNDS BORROWED FOR THE BUSINESS AND INVESTMENT IN MUTUAL FUNDS; PROVISIONS OF SECTION 14A WERE NOT AT ALL APPLICABLE TO THE FACTS OF THE CASE. LD. ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 2 CIT(A) OUGHT TO HAVE DELETED THE DISALLOWANCE OF TH E INTEREST EXPENDITURE. 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ADDITION OF RS.4,14,034/- MADE BY AO ON NOTIONAL INTEREST CALCU LATED BY APPLYING AN AVERAGE RATE OF 13.5% ON INTEREST FREE ADVANCES GIVEN BY THE APPELLANT OUT OF THE INTEREST FREE FUNDS AVAILABLE. BOTH THE LOWER AUTHORITIES HAVE GROSSLY ERRED IN MISINTERPRETING T HE PRINCIPLES LAID DOWN BY THE APEX COURT IN RESPECT OF ADVANCES MADE FROM THE INTEREST FREE FUNDS AVAILABLE TO THE SISTER CONCERNS. LD. CIT(A) OUGHT TO HAVE CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AN D QUASHED THE ADDITION MADE BY A.O. 4. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING LEVY OF INTEREST UNDER SECTION 234A, 234B, 234C AND 234D OF THE ACT. 5. INITIATION OF PENALTY U/S.271(1) OF THE ACT IS NOT JUSTIFIED. 3. THE FACTS OF THE CASE ARE THAT ASSESSEE IS ENGAG ED IN THE MANUFACTURING OF VARIOUS CHEMICALS AND DYE-STUFFS S UCH AS SOLUBILISED VAT DYES-PASKOSOLA, STABILIZED AZOICDS-PARKOFAST ETC. U SED IN TEXTILE PROCESSING. 4. THE FIRST ISSUE PERTAINS TO ADDITION IN RESPECT OF BAD DEBTS. THE ASSESSING OFFICER FOUND FROM THE PROFIT AND LOSS AC COUNT THAT ASSESSEE HAS CLAIMED RS.1,02,575/- BEING INTEREST RECEIVABLE WRI TTEN OFF. THE ASSESSEE EXPLAINED THAT THIS INTEREST PERTAINS TO ASSESSMENT YEAR 1996-97 ON LOAN GIVEN TO ASHNI FINANCE LTD. AND SAID LOAN HAS BEEN FOUND DOUBTFUL FOR RECOVERY. SINCE MANY YEARS THE PRINCIPAL AMOUNT WAS FOUND DOU BTFUL INTEREST WAS FURTHER CONSIDERED DOUBTFUL. IT WAS CHARGED IN ASSESSMENT Y EAR 1996-97 BUT NOW WRITTEN OFF IN THE ASSESSMENT YEAR 2004-05. THE ASS ESSING OFFICER DISALLOWED THE CLAIM ON THE GROUND THAT ONCE LOAN IS SHOWN OUT STANDING THE INTEREST PORTION SHOULD NOT BE WRITTEN OFF. THE ASSESSEE COU LD NOT PRODUCE ANY DOCUMENTARY EVIDENCE TO SHOW THAT RECOVERY OF THE A MOUNT OF INTEREST THEREON WAS PERSUADED FOR RECOVERY. 5. THE LD. CIT(APPEALS) UPHELD AND CONFIRMED THE AD DITION FOR SIMILAR REASONS. ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 3 6. BEFORE US LD. AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE LOAN AS WELL AS INTEREST WAS OUTSTANDING A GAINST ASHNI FINANCE LTD. THAT CONCERN IS IN LIQUIDATION AND IS NEITHER WHOLL Y NOR PARTLY CONTROLLED NOR MANAGED BY ASSESSEE. IT IS NOT ASSOCIATE CONCERN OF ASSESSEE. ALL THE CONDITIONS MENTIONED IN SECTION 36(1)(VII) OF THE A CT R.W.S SECTION 36(2) FOR ALLOWABILITY OF BAD DEBTS ARE SATISFIED. THE HONBL E SUPREME COURT IN THE CASE OF TRF LIMITED V. CIT (2010) 323 ITR 397 (SC) HAS HELD THAT IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DE BT IN FACT HAS TO BE IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRIT TEN OFF AS IRRECOVERABLE IN THE ACCOUNT OF THE ASSESSEE. 7. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND SUPPORTED THE ORDERS OF LD. ASSESSING OFFICER AS WELL AS LD. CIT( A). 8. AFTER CONSIDERING THE RIVAL SUBMISSION WE ARE OF THE VIEW THAT AUTHORITIES BELOW WERE NOT JUSTIFIED IN MAKING THE ADDITION. IT IS BECAUSE ASSESSEE HAS LIBERTY TO PARTLY WRITE OFF A SUM PENDING AGAINST A DEBTOR. HE HAS TO HIMSELF JUDGE THE RECOVERABILITY OF WHOLE OR PART OF THE SU M. EVEN IF PART OF ITS DEBT IS CONSIDERED IRRECOVERABLE AGAINST A DEBTOR, HE CAN W RITE OF THE SAME AND IN VIEW OF THE DECISION OF HONBLE APEX COURT IN THE C ASE OF TRF LIMITED (SUPRA) THE CLAIM HAS TO BE ALLOWED SUBJECT TO THE CONDITIO NS THAT IT MUST HAVE BEEN CREDITED TO PROFIT AND LOSS ACCOUNT IN AN EARLIER Y EAR. AS A RESULT, THE CLAIM OF ASSESSEE IS ALLOWED. THIS GROUND OF ASSESSEES APPE AL IS ALLOWED. 9. GROUND NO.2 RELATES TO DISALLOWANCE OF INTEREST EXPENSES OF RS.1,20,134/- AND ADMINISTRATIVE EXPENSE OF RS.4,27 ,020/- U/S. 14A OF THE ACT AS IT WAS CONSIDERED RELATED TO EXEMPTED INCOME. THE ASSESSING OFFICER DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOUND T HAT ASSESSEE HAS MADE INVESTMENT OF RS.60,49,305/- AS ON 31-03-2005 IN AS SETS INCOME THEREFROM IS EXEMPT U/SS.10(33) AND 10(35). IT HAS ALSO TAKEN A LOAN OF RS.58,67,781/- ON WHICH IT HAS PAID INTEREST AMOUNTING TO RS.5,34,993 /-. THUS, THERE IS A ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 4 DIVERSION OF INTEREST BEARING FUNDS INTO INVESTMENT WHOSE INCOME IS EXEMPT. HE ACCORDINGLY DECIDED TO DISALLOW CERTAIN EXPENSE U/S.14A OF THE ACT. IN RESPONSE TO SHOW CAUSE NOTICE IT WAS SUBMITTED TO A SSESSING OFFICER THAT ONUS OF PROVING NEXUS OF EXPENDITURE WITH DIVIDEND INCOME IS ON THE DEPARTMENT. FURTHER, ASSESSEE HAD NET WORTH OF RS.2 48.51 LAKH COMPRISING OF SHARE CAPITAL AND RESERVE. A LOAN OF RS.58 LAKH WAS ALSO TAKEN FROM DIRECTORS/ SHAREHOLDERS/ASSOCIATE COMPANIES. THIS INTEREST FR EE CAPITAL WAS WITH ASSESSE FOR MORE THAN 10 TO 15 YEARS WHEREAS INVES TMENT IN UNITS AND SHARES HAVE BEEN MADE IN LAST 3 TO 5 YEARS AS AND WHEN SUP PRESS SURPLUS FUNDS WERE AVAILABLE. THUS, ACCORDING TO ASSESSEE, THERE IS NO NEXUS BETWEEN THE RECEIPT OF FUNDS ON WHICH INTEREST WAS PAID AND INV ESTMENT IN MUTUAL FUNDS. THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATIO N OF ASSESSEE AND HELD THAT PRO RATA DISALLOWANCE OF EXPENSE ATTRIBUTABLE TO INVESTMENT IN EXEMPTED ASSET IS CALLED FOR. HE ACCORDINGLY DISALLOWED PRO RATA INTEREST OF RS.1,20,134/- AND PRO RATA ADMINISTRATIVE EXPENSES OF RS.4,27,020 /-. THE LD. CIT(APPEALS) CONFIRMED THE ADDITION FOR SAME REASONS. 10. BEFORE US LD. AUTHORIZED REPRESENTATIVE FOR ASS ESSEE SUBMITTED THAT SUCH DISALLOWANCE IS NOT CALLED FOR BECAUSE THE A. O. FAILED TO ESTABLISH NEXUS BETWEEN INVESTMENT OF INTEREST BEARING FUNDS INTO M UTUAL FUNDS. SECONDLY, ASSESSEE HAD SUBSTANTIAL SHAREHOLDING AND RESERVE A ND SURPLUS AMOUNTING TO RS.248 LAKH OUT OF WHICH ASSESSEE COULD EASILY MAKE INVESTMENT IN MUTUAL FUNDS. FURTHER, HE REFERRED TO PAGE 63 OF ITS PAPER BOOK, WHEREIN IT IS SHOWN THAT INVESTMENT IN MUTUAL FUNDS INCOME WHEREFROM WA S EXEMPTED WAS RS.54,09,171/- AT THE END OF EARLIER FINANCIAL YEA R AND NOW SUCH INVESTMENT IS ONLY RS.66,49,305/-. THUS, FRESH INVESTMENT THIS YEAR WAS ONLY RS.12.40 LAKH. OLD INVESTMENT IS CONTINUING SINCE FINANCIAL YEAR 1989-90 AND HAS BEEN SLOWLY AND SLOWLY INCREASING. IT WAS NOT A CASE THA T ENTIRE INVESTMENT WAS MADE THIS YEAR ONLY. IN EARLIER YEAR NO SUCH DISALL OWANCE HAS BEEN MADE THEREFORE IT IS A NO CASE FOR MAKING DISALLOWANCE T HIS YEAR ALSO. ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 5 11. AGAIN THIS LD. DEPARTMENTAL REPRESENTATIVE SUPP ORTED THE ORDERS OF LD. ASSESSING OFFICER AND LD. CIT(A). 12. WE HAVE CONSIDERED RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IN OUR CONSIDERED VIEW THE ADDITION MADE BY ASSESSING OFFICER IS UNCALLED FOR. THE REASONS ARE THAT FOR INVOKING SEC TION 14A FOR DISALLOWING A PART OF THE EXPENDITURE OR WHOLE OF IT, IT IS NECES SARY THAT PROXIMITY BETWEEN EXPENDITURE AND EXEMPTED INCOME IS SHOWN. SUCH NEXU S IS A CONDITION PRECEDENT FOR MAKING DISALLOWANCE UNDER THAT SECTIO N. NO SUCH NEXUS HAS BEEN ESTABLISHED BY ASSESSING OFFICER. ON THE OTHE R HAND, LD. AR HAS BEEN ABLE TO SHOW THAT ASSESSEE HAD SUFFICIENT CAPITAL A ND RESERVE & SURPLUS. IT CANNOT BE INFERRED THAT ASSESSEE HAD MADE INVESTMEN T IN MUTUAL FUNDS OUT OF BORROWED CAPITAL. ON THE OTHER HAND THIS YEAR ASSES SEE HAS MADE INVESTMENT OF RS.12.40 LAKH ONLY WHICH IS COVERED BY EXISTING RESERVE & SURPLUS. IN VIEW OF THIS, THERE IS NO CASE FOR MAKING ANY ADDITION W HICH IS DELETED. THIS GROUND OF ASSESSEES APPEAL IS ALLOWED. 13. THE LAST GROUND RELATES TO CONFIRMING NOTIONAL INTEREST CALCULATED BY APPLYING AVERAGE RATE OF 13.5% ON INTEREST FREE ADV ANCE GIVEN BY ASSESSEE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ASSESSI NG OFFICER FOUND THAT ASSESSEE HAD SECURED UNSECURED LOAN TO THE EXTENT O F RS.58.67 LAKH ON WHICH INTEREST OF RS.5,54,993/- HAS BEEN PAID. IT HAD GIV EN LOAN TO FOLLOWING PERSONS FROM WHOM NO INTEREST IS CHARGED:- (1) ATMARAM MANEKLAL IND. LTD. RS. 36,56,397 (2) SHAH CORPORATION RS. 10,00,000 (3) SUNRISE CHEMICALS RS. 5,35,775 (4) KANORIA DYE CHEM LTD. RS. 5,37,632 (5) CHROMA INTERNATIONAL RS. 10,00,926 (6) DWITI IMPEX RS. 6,05,001 (7) MERCURY FORGING & CASTING LTD. RS. 12,90,000 (8) MHS EXPORTS RS. 6,20,000 ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 6 (9) ASHNI FINANCE LTD. RS. 10,00,000 (10) KAMLA FERRO ALLOYS LTD. RS. 50,000 SINCE THE ASSESSEE HAS BEEN PAYING INTEREST ON LOAN TO THE EXTENT OF RS.5.54 LAKH THE ASSESSING OFFICER CONSIDERED THAT ASSESSEE OUGHT TO HAVE CHARGED INTEREST ON THE LOAN OF RS.1.02 CRORES ADVANCED TO SISTER CONCERN, ALLEGEDLY, FREE OF INTEREST. HE ACCORDINGLY CALCULATED DISALLO WANCE AT RS.4,14,034/-. 14. THE LD. CIT(A) CONFIRMED THE SAME FOLLOWING THE SAME REASONS AS ADOPTED BY ASSESSING OFFICER. 15. AGAINST THIS AUTHORIZED REPRESENTATIVE FOR ASSE SSEE SUBMITTED THAT ASSESSEE HAD SUFFICIENT CAPITAL AND RESERVE & SURPL US TO THE EXTENT OF RS.248 LAKH OUT OF WHICH HE COULD GIVE INTEREST FREE ADVAN CE TO SISTER CONCERNS. HE SUBMITTED THAT ON ONE HAND THE ASSESSING OFFICER IN FERRED THAT INTEREST BEARING LOAN OF RS.58.67 LAKHS HAVE BEEN UTILIZED FOR MAKIN G INVESTMENT IN MUTUAL FUNDS AND ON THE OTHER HAND HE ALSO SAYS THAT SUCH INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR INTEREST FREE ADVANCES. IN F ACT THE ASSESSEE HAD RECOVERED EARLIER INTEREST @ 18% TO 21% ON THIS ADV ANCE UNTIL THEY BECAME STICKY AND DOUBTFUL AND NO INTEREST CAN BE SAID TO ACCRUE TO THE ASSESSEE NOTIONALLY IF THE ADVANCES HAVE BECOME STICKY. HE S UBMITTED THAT ASSESSEE HAD SUFFICIENT FUNDS AND THEY WERE GIVEN ON FOR BUS INESS PURPOSES AND PRINCIPLE LAID DOWN BY HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT AND ANOTHER (2007) 288 ITR 1 (SC) WOULD APPLY. ACCORDING TO IT, IF INTEREST FREE ADVANCES ARE GIVEN BUT FOR BUSINESS P URPOSE THEN NO PART OF INTEREST PAID ON INTEREST BEARING BORROWED FUNDS CO ULD BE DISALLOWED. HE ALSO REFERRED TO THE JUDGMENT OF HONBLE SUPREME COURT I N THE CASE OF MUNJAL SALES CORPORATION V. CIT (2008) 298 ITR 298 (SC), WHEREIN IT IS HELD THAT IF ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS THEN IT HAS TO BE INFERRED THAT INTEREST FREE ADVANCES ARE GIVEN OUT OF SUCH INTERE ST FREE FUNDS. ITA NO.442/AHD/2009 A.Y. 2005-06 DEEJAY CHEMICAL INDS. PVT. LTD. V. ACIT (OSD) RNG-1 A BD P AGE 7 16. LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HA ND SUPPORTED THE ORDERS OF LD. ASSESSING OFFICER AND LD. CIT(A). 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORDS. IN OUR CONSIDERED VIEW THAT THERE IS NO CASE FOR MAKIN G ANY ADDITION BECAUSE THE ASSESSEE HAD SUFFICIENT INTEREST FREE CAPITAL AND R ESERVE. ASSESSING OFFICER HAS NOT ESTABLISHED THE NEXUS BETWEEN INTEREST BEAR ING FUNDS AND INTEREST FREE ADVANCES GIVEN BY ASSESSEE. THE ADVANCES WERE NOT G IVEN DURING THIS YEAR BUT THEY WERE OUTSTANDING SINCE EARLIER YEARS AND T HEY HAD BECOME STICKY. NO DISALLOWANCE OF INTEREST HAS BEEN MADE IN EARLIER Y EARS. IT IS NOT DENIED THAT INTEREST FREE ADVANCES ARE GIVEN FOR BUSINESS PURPO SES. THEREFORE ONCE ADVANCES ARE GIVEN FOR BUSINESS PURPOSES AND NO DIS ALLOWANCE HAS BEEN MADE IN EARLIER YEARS THEN NO DISALLOWANCE CAN NOT BE MADE THIS YEAR ALSO. ACCORDINGLY, THE ADDITION SO MADE BY LD. ASSESSING OFFICER AND CONFIRMED BY LD. CIT(A) IS DELETED. 18. IN THE RESULT, APPEAL FILED BY ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 31/03/2011 SD/- SD/- (BHAVNESH SAINI) (D.C. AGRAWAL) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AHMEDABAD, DATED : 31/03/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-VI, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD