BMK LABORATORIES PVT. LTD., MUMBAI V. DY.CIT.,-10(3), MUMBAI

ITA 4443/MUM/2011

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 72013 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 6 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2013
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 30-04-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 02-06-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: S S RANA
• Assessee Lawyers: RONAK G DOSHI
• Keywords: Depreciation; Question of law; Commercial expediency
• Section: 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUM BAI , BEFORE SHRI SANJAY ARORA, AM AND DR. S. T. M. PAVAL AN, JM ! I.T.A. NO. 4443/MUM/2011 ( / ASSESSMENT YEAR: 2003-04) BMK LABORATORIES PVT. LTD. PIRAMAL TOWER ANNEXE, GANPATRAO KADAM MARG, LOWER PAREL (W), MUMBAI-400 013 ! VS. DY. CIT, 10(3), MUMBAI ' ! # ./PAN/GIR NO. AAACB 1747 N ( '$ /APPELLANT ) : ( %&'$ / RESPONDENT ) '$' / APPELLANT BY : SHRI RONAK G. DOSHI %&'$(' / RESPONDENT BY : SHRI S. S. RANA ) *(+ / DATE OF HEARING : 23.10.2013 ,-. (+ / DATE OF PRONOUNCEMENT : 31.12.2013 /! O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-22, MUMBAI (CIT(A) FOR SH ORT) DATED 16.03.2011, PARTLY ALLOWING THE ASSESSEES APPEAL CONTESTING ITS ASSES SMENT U/S.143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMEN T YEAR (A.Y.) 2003-04 VIDE ORDER DATED 30.12.2005. 2 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT 2. THE ASSESSEE, A COMPANY INCORPORATED UNDER THE C OMPANIES ACT, 1956, IS IN THE BUSINESS OF MANUFACTURING OF DIAGNOSTIC REAGENTS AS WELL AS BORROWING & LENDING (I.E., FINANCE ACTIVITY). IT MADE NO SALES FOR THE CURRENT YEAR; THE ONLY SOURCE OF INCOME BEING INTEREST INCOME, AT RS.8.56 CRORES. AS IT HAD, AS A GAINST THE SAME, INCURRED INTEREST EXPENDITURE AT RS.8.84 CRORES, BESIDES STAFF COST ( AT RS.18.92 LACS), OTHER EXPENSES (AT RS.11.47 LACS), AND DEPRECIATION, IT RETURNED A NET LOSS FOR THE YEAR AT RS.74.95 LACS. 3. THE FIRST ISSUE CONCERNS THE ALLOWABILITY OF THE GROSS LOSS OF RS.27,97,676/- (I.E., RS.8,84,21,510 - RS.8,56,23,834) INCURRED IN THE FI NANCING ACTIVITY. WHILE NO DETAILS STOOD FURNISHED DURING THE ASSESSMENT PROCEEDINGS, SO THAT THE LOSS, I.E., THE EXCESS OF THE INTEREST EXPENDITURE OVER INTEREST INCOME, CAME TO BE DISALLOWED THEREAT, IN THE REMAND PROCEEDINGS, AS DIRECTED BY THE FIRST APPELLATE AUT HORITY, THE ASSESSEE FURNISHED STATEMENTS LISTING THE RATES AT WHICH INTEREST STOOD CHARGED B Y IT TO VARIOUS BORROWERS (PB PG.20), AS WELL AS THAT CHARGED TO IT BY DIFFERENT BANKER/LEND ERS (PB PG.21). THE RATES EXHIBITED A WIDE VARIATION, EVEN FROM OR QUA THE SAME LENDER, VIZ. AT 8.50% TO 12.45% P.A. (FRO M BANK OF AMERICA) AND 8.75% TO 12.35% P.A. (FROM MOZ AKI FINANCE AND INVESTMENT PVT. LTD.). LIKEWISE FOR THE LENDING RATES CHARGED BY TH E ASSESSEE, VARYING FROM AS LOW AS 3% TO 13% P.A.. HOWEVER, NO COMPARATIVE DATA, I.E., TO MATCH THE BORROWING AND LENDING RATES AT ANY GIVEN POINT OF TIME STOOD FURNISHED, SO AS T O BE ABLE TO DRAW ANY MEANINGFUL COMPARISON. SO, HOWEVER, IT WAS CLEAR THAT THE LEND ING RATE/S WERE LOWER THAN OR UNFAVOURABLE W.R.T. THE BORROWING RATE/S. THE LENDI NG OF MONEY IS GOVERNED BY THE CLAUSES 29 AND 30 OF THE ASSESSEES MEMORANDUM OF A SSOCIATION (MOA). THE SAME FALL UNDER PART III-B THEREOF (PB PGS.13-19), I.E., THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ADVANCEMENT OF THE MAIN OBJECTS. THE SAME, THEREFO RE, CANNOT BE CONSIDERED AS THE ASSESSEES BUSINESS. CONSEQUENTLY, THE INCOME HAS T O BE ASSESSED UNDER CHAPTER IV-E, I.E., UNDER THE HEAD INCOME FROM OTHER SOURCES. T HE SAID FINDINGS OF THE ASSESSING AUTHORITY PER HIS REMAND REPORT (DATED 16.11.2010) WERE CONFRONTED BY THE LD. CIT(A) TO THE ASSESSEE (PB PGS.40-41), WHO HOWEVER DID NOT SU BMIT ANY REPLY. THE ASSESSEE HAD OBTAINED LOANS FROM FINANCIAL INSTITUTIONS, GIVING THE SAME TO ITS SISTER CONCERNS. NO SPECIFIC INTEREST DETAILS HAD BEEN FURNISHED. IN A PARTICULAR CASE (M/S. PYRAMID RETAIL & 3 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT MER PVT. LTD.), THE INTEREST RATE CHARGED WAS AS LO W AS 3% P.A., FOR WHICH AGAIN NO REASON STOOD ADVANCED. THE DISALLOWANCE OF INTEREST WAS, A CCORDINGLY, CONFIRMED. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 4.1 BEFORE US, THE LD. AUTHORIZED REPRESENTATIVE (A R) WOULD DRAW OUR ATTENTION TO THE AUDITED ANNUAL ACCOUNTS FOR THE RELEVANT YEAR, BEIN G F.Y. 2002-03 (WHICH IS THOUGH SANS THE AUDITORS REPORT THEREON) (PB PGS.1-11), AS ALS O THE DETAILS OF THE INTEREST RECEIVED AND PAID (AT PB PGS.20 & 21 RESPECTIVELY) AFORE-REFERRE D. HOW COULD THE ASSESSING OFFICER (A.O.), OR THE REVENUE FOR THAT MATTER, DICTATE WHA T RATE OF INTEREST OUGHT TO BE CHARGED BY THE ASSESSEE, WHICH IS EVEN OTHERWISE VARIABLE, AS WOULD BE SEEN FROM THE RANGE OF RATES AT WHICH THE INTEREST STANDS PAID TO THE BANKS AND/ OR CREDITORS. AS SUCH, TO DISALLOW INTEREST SOLELY ON THE GROUND THAT THE SAME EXCEEDS THE INTEREST RECEIVED ON THE CORRESPONDING LOAN/S IS NOT TENABLE IN LAW. TOWARD THIS PROPOSITION, HE WOULD DRAW OUR ATTENTION TO THE DECISION IN THE CASE OF CIT VS. SAHNI SILK MILLS (P.) LTD. [2002] 253 ITR 294 (DEL.). 4.2 THE LD. DEPARTMENTAL REPRESENTATIVE (DR) WOULD, ON THE OTHER HAND, RELYING ON THE ORDERS OF THE AUTHORITIES BELOW, SUBMIT THAT NO EXPLANATION, MUCH LESS A PLAUSIBLE ONE, HAD BEEN FURNISHED BY THE ASSESSEE IN RESPECT OF TH E LOSS SUSTAINED IN RESPECT OF ITS BORROWING/S AND LENDING/S. 5. WE HAVE HEARD THE PARTIES, AND PERUSED THE MATER IAL ON RECORD. 5.1 WE ARE COMPLETELY UNABLE TO APPRECIATE THE ASSE SSEES CASE. THE REMAND REPORT BY THE A.O. FINDS REPRODUCTION, AS ALSO THE FINDINGS B Y THE FIRST APPELLATE AUTHORITY, AT PARAS 2.3 AND 2.4 OF THE IMPUGNED ORDER RESPECTIVELY. IT IS THESE FINDINGS WHICH THE ASSESSEE AS AN APPELLANT WAS REQUIRED TO ADDRESS. THE A.O. HAS GIVEN A DEFINITE FINDING THAT NO BUSINESS WAS CARRIED OUT AT ANY TIME DURING THE REL EVANT YEAR. THE INTEREST INCOME, THEREFORE, WAS LIABLE TO BE ASSESSED AS INCOME FRO M OTHER SOURCES (I.E., U/S.56) AND, AS SUCH, ONLY INTEREST EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF MAKING OR EARNING THE SAID INCOME, EXIGIBLE TO DEDUCTION THERE-AGAINS T (I.E., U/S.57(III)). THIS FINDING STANDS 4 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT ENDORSED BY THE LD. CIT(A) IN THE APPELLATE PROCEED INGS. THEIR CONCURRENT FINDING REMAINS UN-REPUDIATED AND, IN FACT, UNANSWERED. MER ELY ADVERTING TO THE STATEMENT OF THE ASSESSEES BUSINESS (AT PARA 3 OF THE ASSESSMENT OR DER) WOULD BE OF NO CONSEQUENCE, WHEN THE SAME IS ITSELF A SUBJECT MATTER OF DISPUTE. IN FACT, AS WOULD BE APPARENT FROM THE READING OF THE ASSESSMENT ORDER, THE A.O. CONSIDERE D OR, RATHER, TREATED THE ASSESSEE TO BE ENGAGED IN FINANCING BUSINESS AND, ACCORDINGLY, EFF ECTED THE IMPUGNED DISALLOWANCE U/S.37(1) OF THE ACT WHILE FRAMING THE ASSESSMENT ( REFER PARA 4.1 OF THE ASSESSMENT ORDER). IT IS ONLY SUBSEQUENTLY, ON AN EXAMINATION OF THE ASSESSEES CASE ON MERITS IN THE REMAND PROCEEDINGS, WHEREAT ONLY THE ASSESSEE FURNI SHED THE DETAILS, THAT ON THE BASIS OF THE MATERIAL ADDUCED HE CONCLUDED (VIDE PARA 3(V) O F HIS REMAND REPORT) THE ASSESSEE TO HAVE NOT ENGAGED IN ANY BUSINESS ACTIVITY DURING TH E YEAR AND, FURTHER, OF THE INTEREST RECEIVED BEING ONLY INCOME FROM OTHER SOURCES. NO I MPROVEMENT IN ITS CASE HAVING BEEN MADE BY THE ASSESSEE BEFORE THE FIRST APPELLATE AUT HORITY, THE SAME STOOD CONFIRMED BY HIM. THE VIEW OF THE AUTHORITIES BELOW THAT INFORMS THEIR DECISION, WHICH IS THE FIRST STEP TOWARD ADJUDICATION, HAS TO BE UNDERSTOOD BY READIN G THEIR ORDERS IN THEIR ENTIRETY, RATHER THAN IN A SEGMENTED MANNER. 5.2 CONTINUING FURTHER, WE HAVE SUBJECTED THE MATER IAL ON RECORD TO OUR INDEPENDENT EXAMINATION, TO FIND OURSELVES AS WHOLLY IN AGREEME NT WITH THE VIEW EXPRESSED BY THE REVENUE. THE COMPANY IS INCORPORATED WITH THE OBJEC T OF MANUFACTURING OF PHARMACEUTICAL AND MEDICAL PRODUCTS, DIAGNOSTICS AN D DRUGS, VETERINARY AND BIOLOGICAL PRODUCTS, AND THEIR FORMULATIONS AND PREPARATIONS, AS WELL AS MANUFACTURING OR OTHERWISE DEALING IN GENERIC, DIAGNOSTIC OR PROPRIETARY ARTIC LES (PART III-A OF THE MOA). IT WAS UNDERTAKING MANUFACTURING OF STRIPS (OF GOT/GPT TAB LETS), WHICH STANDS DISCONTINUED SINCE 31.01.1999, I.E., UPON TERMINATION OF ITS AGR EEMENT WITH BOEHRINGER MENNHEIM GMBH (BMG). ITS PRODUCTION CONTINUES TO BE SUSPENDE D SINCE; RATHER, WOULD BE FROM AN EARLIER DATE, AS THE STEPS FOR THE RENEWAL OF AN AR RANGEMENT, WHICH UNDERLIES THE SOLE LINE OF ITS BUSINESS, WOULD BE COMMENCED WELL IN ADVANCE OF ITS EXPIRY DATE. THE COMPANY IS YET TO COMMENCE A NEW BUSINESS. AS APPARENT FROM TH E NOTES TO THE ACCOUNTS, THE SAME WOULD BE A NEW VENTURE OR UNDERTAKING; THE COMPANY HAVING IN FACT SOLD ALMOST ITS ENTIRE 5 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT PLANT AND MACHINERY, BEING LABORATORY EQUIPMENTS AN D ELECTRICAL INSULATION (RS.50.70 LACS OUT OF THE TOTAL VALUE OF RS.52.07 LACS); THE ENTIR E FURNITURE, FITTINGS & OFFICE EQUIPMENT (RS.4.80 LACS) AND MOTOR VEHICLES (RS.2.81 LACS), R ETAINING ONLY LEASE-HOLD LAND AND BUILDING (REFER SCHEDULE 4 (FIXED ASSETS) AND 17 (N OTES TO THE ACCOUNTS) TO THE BALANCE SHEET AS ON 31.03.2003). THE MINIMAL ACTIVITY THE C OMPANY IS UNDERTAKING IS OF PROCESSING CHARGES, WHICH THOUGH IS AT NIL FOR THE CURRENT YEAR. CONSIDERING THAT THE SAME OBTAINS, AT NOMINAL AMOUNTS THOUGH, EVEN UPTO FINAN CIAL YEAR 2004-05, I.E., OVER SIX YEARS AFTER THE DISCONTINUATION OF ITS MANUFACTURING ACTI VITY, THE COMPANY IS YET TO DECIDE ON AND, IN ANY CASE, EMBARK ON A NEW PRODUCT OR LINE O F BUSINESS BY THAT TIME (31.03.2005). THIS ALSO PUTS THE NON-RESPONSE BY THE ASSESSEE TO THE A.O.S REMAND REPORT (DATED 16.11.2010), ON BEING CONFRONTED THERETO BY THE LD. CIT(A), IN PERSPECTIVE. 5.3 THE FIRST QUESTION THAT ARISES IS: WHETHER THE ASSESSEE BORROWED THE FUNDS FOR ITS BUSINESS ? THE ASSESSEE REFERS TO CLAUSES 29 & 30 OF ITS MOA TO IMPRESS OF THE SAME BEING SO. THE SAID CLAUSES READ AS UNDER: 29. TO INVEST ANY MONIES OF THE COMPANY NOT IMMEDI ATELY REQUIRED FOR THE PURPOSE OF ITS BUSINESS IN SUCH INVESTMENTS OR SECURITIES AS MAY BE THOUGHT EXPEDIENT. 30. TO LEND AND ADVANCE MONEY OR GIVE CREDIT ON SUC H TERMS AS MAY SEEM EXPEDIENT TO CUSTOMERS AND OTHERS HAVING DEALI NGS WITH THE COMPANY AND TO GIVE GUARANTEES OR BECOME SURETIES FOR ANY S UCH PERSONS. THE SAME FALL UNDER PART III-B OF THE MOA, TITLED THE OBJECTS INCIDENTAL OR ANCILLARY TO THE ATTAINMENT OF THE MAIN OBJECTS. THE SAME ARE, THUS, ONLY ENABLING OBJECTS, AUTHORIZING THE COMPANY TO ACT OR DO VARIOUS THINGS FOR AND TOWARD UNDERTAKING AND IN ACCOMPLISHING ITS MAIN OBJECTS. THEY ARE, RATHER, M ORE IN NATURE OF POWERS THE COMPANY IS INVESTED WITH IN DOING ITS BUSINESS. THIS IS ALS O ABUNDANTLY CLEAR AND MANIFEST IN THE CLEAR LANGUAGE EMPLOYED THEREIN, AUTHORIZING THE CO MPANY TO INVEST MONIES NOT IMMEDIATELY REQUIRED FOR THE PURPOSE OF ITS BUSINES S, I.E., THE SURPLUS FOR THE TIME BEING (CLAUSE 29) OR TO LEND MONEY TO CUSTOMERS OR OTHERS DEALING WITH THE COMPANY (CLAUSE 30). THE SAID OBJECTS, AS SUCH, CANNOT BE CONSIDERE D AS AUTHORIZING THE COMPANY TO 6 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT UNDERTAKE FINANCING BUSINESS. ON THE CONTRARY, THE VERY NEXT CLAUSE (CL. 31) OF THE MOA (PARA III-B), SPECIFICALLY PROSCRIBES BANKING BUSIN ESS. FINANCING ACTIVITY, IT MAY BE NOTED, IS EVEN OTHERWISE HIGHLY REGULATED, BOTH IN TERMS O F LEGAL FRAMEWORK AS WELL AS REGULATORY FRAMEWORK, UNDER THE AEGIS OF THE COUNTRYS CENTRAL BANK, I.E., RBI, AND THERE IS NOTHING ON RECORD TO SUGGEST OF THE ASSESSEE BEING AN NBFC OR EVEN OTHERWISE HAVING OBTAINED THE NECESSARY APPROVALS. ON THE CONTRARY, AS WE SHA LL PRESENTLY SEE, THE COMPANY HAS NOT PURSUED ANY OBJECT, MUCH LESS IN A REGULAR, ORGAN IZED MANNER; THE COMPANY BEING IN FACT NEGATIVELY CAPITALIZED, ONLY PARKING THE FUNDS AVAILED FOR FINANCING THE WORKING CAPITAL REQUIREMENTS OF ITS PROPOSED BUSINESS. 5.4 WE HAVE ALSO GONE THROUGH THE RELEVANT LENDING AGREEMENT WITH THE BANK OF AMERICA, THE PRINCIPAL LENDER, PROVIDING THE ASSESS EE A FACILITY OF RS.125 CRORES (OUTSTANDING AS ON 31.03.2003 AT RS.122 CRORES OUT OF THE TOTAL BORROWING FROM BANKS AT RS.142 CRORES / PB PGS.21, 26-38) AS WELL AS THE BO ARD OF DIRECTORS RESOLUTION DATED 20.11.2001, AUTHORIZING THE LENDING OF THE COMPANY S FUNDS TO OTHER ASSOCIATE COMPANIES OR BODY CORPORATES (PB PG.24). THE PURPOSE OF THE BANK LENDING IS STATED AS FOR WO RKING CAPITAL AND OTHER GENERAL PURPOSE CORPORATE REQUIREMENTS. THAT IS, FOR ITS TR ADING OPERATIONS OR TO MEET THE DAY TO DAY ESTABLISHMENT COSTS. THE BOARD RESOLUTION ALSO AUTHORIZES PARKING OF THE COMPANYS FUNDS. IN FACT, AS WE OBSERVE, THE COMPANY HAS NO F UNDS WHICH IT COULD CALL AND STATE AS ITS OWN. ITS SHARE CAPITAL, BOTH AT THE BEGINNING AND THE CLOSE OF THE YEAR, IS AT RS.3 LACS, AND THE OPENING AND THE CLOSING BALANCE OF THE PROF IT AND LOSS ACCOUNT AT A DEBIT OF RS.15.61 LACS AND RS.90.56 LACS RESPECTIVELY. THE C OMPANY, THUS, HAS A NEGATIVE CAPITAL AT ALL TIMES DURING THE RELEVANT YEAR AND, THEREFORE, LEAVE ASIDE LIQUID FUNDS, EVEN ITS FIXED ASSETS ARE FINANCED BY BORROWED CAPITAL. FURTHER, I T BEING TRITE THAT THE OBJECTS SPECIFIED IN THE MOA CANNOT BE DETERMINATIVE OF THE MATTER, IN T HE SENSE THAT EVERY ACT OF THE COMPANY COVERED BY THE MEMORANDUM IS NOT NECESSARIL Y DONE IN THE COURSE OF ITS BUSINESS, WHAT IS TO BE SEEN IS BOTH THE OBJECT/S A S WELL AS TO WHETHER THEY ARE ACTUALLY BEING PURSUED. WE HAVE DONE EXACTLY THAT, TO FIND T HAT THE FINANCING ACTIVITY STANDS IN FACT PRECLUDED AND, IN FACT, BEING NOT PURSUED. TO SAY, THEREFORE, THAT THE COMPANY IS FORMED 7 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT FOR AND ACTUALLY ENGAGED IN FINANCING BUSINESS IS F ALLACIOUS . THE LENDING OF THE COMPANY IS ONLY OF ITS SURPLUS FUNDS (ASSUMING ITS BORROWI NGS TO BE A PART OF THE COMPANYS FUNDS), I.E., TILL THE TIME IT FINDS SUITABLE AVENU E/S FOR THEIR USER. WE, ACCORDINGLY, HAVE NO HESITATION IN UPHOLDING THE INTEREST INCOME AS BEIN G ASSESSABLE AS INCOME FROM OTHER SOURCES. 5.5 CONTINUING FURTHER, THE COMPANY HAS NOWHERE BEE N ABLE TO ESTABLISH THAT THE INTEREST RATES AT WHICH THE LOANS ARE GIVEN BY IT R EPRESENT THE PREVAILING MARKET RATES, BEING ITSELF AT WIDE VARIANCE FROM BORROWER TO BORR OWER, THOUGH CONSISTENT THROUGHOUT FOR THE SAME BORROWER. THE SAME WOULD WARRANT AN EXPLAN ATION INASMUCH AS THERE IS THEREFORE NO BASIS TOWARD THE SAID RATES. IT IS ALS O NOT THAT A PARTICULAR LOAN/OR LOAN TRANCHE STANDS WHOLLY LENT TO A PARTICULAR BORROWER (27 IN NUMBER), SO THAT THE SAME STOOD LENT AT THE THEN PREVAILING RATE. THE ASSESSEE ALSO HAS NOT BEEN ABLE TO SHOW THAT EACH TRANCHE OF THE LOAN WAS, AT THE TIME OF ITS RELENDING, SO DONE AT A RATE FETCHING A POSITIVE RETURN, THOUGH VARIABLE ACROSS BORROWERS, AND WHICH RETURN TURNS NEGATIVE OVER TIME ON AN INCREASE IN THE COMPANYS BORROWING RATE SUBSEQUENT LY. THERE IS NO REASON WHY THE ASSESSEE COULD NOT CULL OUT THE RELEVANT DATA/INFOR MATION FROM ITS RECORDS TO JUSTIFY OR SUBSTANTIATE ITS STAND. FURTHER, EVEN ASSUMING SO, I.E., FOR THE SAKE OF ARGUMENT, WE FIND THE ASSESSEES BORROWING TO BE SUBJECT TO ROLL OVER . THE ASSESSEE WOULD, THEREFORE, BE PERFECTLY JUSTIFIED, IN VIEW OF ITS FUNDING ARRANGE MENT, TO REVISE ITS TERMS OF LENDING AND, AS SUCH, CONTINUE TO OPERATE AT A GROSS PROFIT OR A T A NET POSITIVE RETURN. IN FACT, EVEN THE WIDE VARIATIONS IN ITS OWN BORROWING RATES, I.E., A T ANY GIVEN POINT OF TIME, REMAIN UNEXPLAINED. THE FAILURE OF THE COMPANY TO JUSTIFY ITS BEHAVIOR OR PROVE ITS CASE ON FACTS IS TOTAL . THIS WOULD ALSO EXPLAIN OUR EXPRESSING AT THE BEG INNING OF OUR BEING UNABLE TO APPRECIATE THE ASSESSEES CASE. THE REVENUE HAS ONLY, IN THE ABSENCE OF THE REQUIS ITE DETAILS, DISALLOWED THE EXCESS INTEREST PAID BY THE ASSESSEE COMPANY, I.E., OVER THAT REALIZED. IN FACT, AS WOULD BE READILY SEEN, AS AGAINST THE BANK BORROWING OF RS.1 42 CRORES AS ON 31.03.2003, THE CORRESPONDING LENDING IS AT RS.134.17 CRORES, SO TH AT IT IS NOT A CASE THAT THE ENTIRE INTEREST BEARING FUNDS STAND RELENT AT INTEREST, AS WAS THE CASE AT THE BEGINNING OF THE YEAR, WITH 8 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT THERE BEING NEAR IDENTITY BETWEEN THE TWO. A GOOD P ART (RS.6.64 CRORES) OF THE BORROWED FUNDS (AS AT 31.3.2003) ARE BLOCKED IN INTEREST REC EIVABLE. THAT IS, WHILE THE INTEREST TO THE BANK IS PAID AT REGULAR (MONTHLY OR QUARTERLY) INTE RVALS, THAT FROM THE BORROWERS IS NOT RECOVERED, LEADING TO THE FUNDING DEFICIT. RATHER, AS IT WOULD APPEAR TO US, THE INTEREST HAS BEEN REALIZED ONLY FROM THE BORROWERS WHO ARE NO LO NGER SO, I.E., AS ON 31.03.2003. THIS, THUS, ITSELF BECOMES A SOURCE OF LOSS, AS THE INTER EST RATES, WHICH ARE STATED IN PER ANNUM TERMS, WOULD STAND TO WORK TO EFFECTIVELY HIGHER RA TES WHERE RECOVERED PERIODICALLY VIS-A- VIS WHERE IT IS NOT SO. 5.6 COMING NEXT TO THE ASSESSEES RELIANCE ON THE D ECISION IN THE CASE OF SAHNI SILK MILLS (P.) LTD. (SUPRA), THE SAME IS AGAIN COMPLETELY MISPLACED. IN THE FACTS OF THAT CASE, THE ASSESSEE, A MANUFACTURER OF KNITTED FABRICS, CH ARGED INTEREST @ 12% P.A. TO THREE PARTIES TO WHOM ADVANCE WAS MADE BY IT. THE ASSESSE E HAVING BORROWED FUNDS AT 16% P.A., THE REVENUE SOUGHT TO DISALLOW THE DEFICIT OF 4% P.A. THE TRIBUNAL FOUND THAT THE CAPITAL HAD BEEN BORROWED AND USED FOR THE PURPOSE OF BUSINESS. IN THAT EVENT, IT HELD THAT THERE WAS NO OCCASION FOR THE REVENUE TO CONTEND TH AT THE RATE CHARGED WAS NOT REASONABLE. THE HONBLE COURT, IN VIEW OF THE CLEAR FINDINGS BY THE TRIBUNAL, DECLINED TO ADMIT THE REFERENCE INASMUCH AS NO QUESTION OF LAW AROSE. FIRSTLY, A DECISION OR RULING IS AN AUTHORITY ONLY FOR WHAT IT ACTUALLY DECIDES, AND NOT THAT MAY REMOTELY OR EVEN LOGICALLY FLOW FROM I T (REFER: GOODYEAR INDIA LTD. VS. STATE OF HARYANA [1991] 188 ITR 402). THE HONBLE COURT HAD ONLY HEL D THAT NO QUESTION OF LAW, IN THE FACTS AND CIRCUMSTANCES OF THE CASE, GI VEN THE TRIBUNALS FINDING IN THE MATTER, AROSE. IN FACT, EVEN ON MERITS, WE OBSERVE NO CORRE SPONDENCE BETWEEN THE FACTS OF THE SAID CASE WITH OF THAT AT HAND. THE VERY FACT THAT THE B ORROWED CAPITAL WAS DEPLOYED FOR BUSINESS, IMPLYING THAT THE ADVANCES TO THREE PARTI ES WERE FOR BUSINESS PURPOSES, SHOULD BE NORMALLY THE END OF THE MATTER, SO THAT EVEN IF NO INTEREST WAS CHARGED, AS WAS INDEED THE CASE IN THAT CASE FOR THE IMMEDIATELY PRECEDING YEAR, NO DISALLOWANCE COULD BE MADE. THAT COMMERCIAL EXPEDIENCY IS TO BE PROVED IS TRITE LAW. THE BUSINESS PURPOSE IN ADVANCING A SUM IS A BASIC REQUIREMENT TOWARD OR IN THIS REGARD. 9 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT IN THE PRESENT CASE, WE HAVE ON THE CONTRARY FOUND THE ACTIVITY OF BORROWING AND LENDING AS NOT REPRESENTING THE ASSESSEES BUSINESS , BEING IN FACT BARRED FROM BEING SO. FURTHER, RATHER THAN THE ACTIVITY BEING INCOME DRIV EN (WHICH WOULD REQUIRE NECESSARY APPROVALS, OF WHICH THERE IS NO REFERENCE AT ANY ST AGE), SO THAT THE ASSESSEE INCURS THE NECESSARY EXPENDITURE TOWARD THE SAME, I.E., EARNIN G INCOME, THE ASSESSEE HAS AVAILED OF LOANS FOR FINANCING WORKING CAPITAL OF ITS NON EXIS TING BUSINESS; IN FACT, EVEN NOT DECIDING ON IT, AND WHICH (FUNDS), BEING SURPLUS FOR THE TIM E BEING, ARE LENT TO SISTER CONCERNS, WITH A VIEW TO THEREFORE PARK THE SAME. WOULD THE ASSESS EE HAVE DONE SO, IF IT DID NOT HAVE A WHOLE RANGE OF SISTER CONCERNS, OR IS IT A PART OF A SCHEME TO ACT AS A CONDUIT FOR FUNDS FOR THEM, WE WONDER. THOUGH THE BORROWINGS ARE ON SECUR ED LOAN BASIS, WHICH, BEARING A LOWER RISK, ATTRACT A LOWER RATE OF INTEREST, IT YE T RECEIVES A LOWER RATE OF INTEREST ON ITS LENDING, WHICH IS ON UNSECURED BASIS. NO BASIS OR J USTIFICATION FOR THE PAYMENT AT INTEREST RATES, CHARGED OSTENSIBLY AT PREVAILING RATES BY TH E ASSESSEE, IN EXCESS OF THAT CHARGED THERETO, STANDS FURNISHED, WITH IN FACT, THERE BEIN G A DEFICIT IN THE AMOUNT OF BORROWING RELENT AS WELL. THE REVENUE, IN VIEW THEREOF AND TH E ABSENCE OF THE RELEVANT DETAILS, AND ANY EXPLANATION, DISALLOWED THE EXCESS INTEREST, AN D WHICH STANDS CONFIRMED BY US. 5.7 IN VIEW OF THE FOREGOING, TAKING THE ENTIRETY O F THE FACTS AND CIRCUMSTANCES INTO ACCOUNT, WE HAVE NO HESITATION IN CONFIRMING THE IM PUGNED DISALLOWANCE. 6. THIS BRINGS US TO THE NEXT ISSUE ARISING IN THE INSTANT CASE, I.E., THE DISALLOWANCE OF STAMP DUTY, INCURRED AT RS.10 LACS. THE SAME STOOD INCURRED QUA THE LOAN FROM BANK OF AMERICA. THE SAME STOOD DISALLOWED BY THE REVENUE A S THE ASSESSEE HAD NOT CARRIED OUT ANY BUSINESS ACTIVITY DURING THE RELEVANT YEAR; THE RELEVANT PART OF THE IMPUGNED ORDER READING AS UNDER: 3.2 A.O. DURING THE ASSESSMENT PROCEEDINGS NOTED T HAT ASSESSEE HAD INCURRED STAMP DUTY EXPENSES OF RS.10 LACS, ON ACCO UNT OF LOAN TRANSACTIONS WITH SISTER CONCERNS WHICH WERE GIVEN ON UNFAVOURAB LE TERMS. THE SAME WAS DISALLOWED BY THE A.O. BEING NOT WHOLLY AND FUL LY EXPENDED FOR THE PURPOSE OF BUSINESS. DURING THE COURSE OF APPELLATE PROCEEDINGS, IT WAS SUBMITTED THAT THE LOAN WAS OBTAINED FROM BANK OF A MERCIA IS UTILIZED FOR THE BUSINESS OF THE COMPANY ON WHICH RS.10 LACS WAS INCURRED AS STAMP 10 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT DUTY. IN THE REMAND REPORT THE A.O. HAS OBSERVED TH AT AS PER MEMORANDUM OF ASSOCIATION, LENDING OF MONEY WAS NOT THE BUSINE SS OF THE APPELLANT AND HENCE THE AMOUNT BORROWED IS NOT INCURRED WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. APPELLANT HAS NOT OFFERED ANY COMMENTS ON OBSERVATIONS OF A.O. IN VIEW OF THIS, IN MY OPINION THE A.O. HAS RIGHTLY MADE THE DISALLOWANCE WHICH IS UPHELD. WE ARE UNABLE TO SEE AS TO WHAT INFIRMITY ATTENDS T HE REVENUES STAND. WE HAVE, RATHER, ON THE BASIS OF THE EXAMINATION OF THE MATE RIAL ON RECORD, ISSUED OUR INDEPENDENT FINDING/S TO THE SAME EFFECT, I.E., OF THE BORROWIN G AND LENDING ACTIVITY BY THE ASSESSEE AS NOT REPRESENTING OR CONSTITUTING A BUSINESS ACTIVIT Y OR THE ASSESSEES BUSINESS (REFER PARAS 5.3 TO PARA 5.6 OF THIS ORDER). IN FACT, THE LOAN A DVANCED BY THE BANK OF AMERICA IS FOR FUNDING WORKING CAPITAL IN THE MAIN, WHILE NO TRADI NG OR MANUFACTURING ACTIVITY STANDS UNDERTAKEN, FOR AND TOWARD WHICH THE SAID CAPITAL C OULD BE SAID TO HAVE BEEN AVAILED OF. RATHER, WE HAVE OBSERVED THAT THE POSITION CONTINUE S TO OBTAIN EVEN TWO YEARS HENCE, I.E., AS ON 31.03.2005. THE TERMS OF THE LOANS ITSELF PRO VIDE FOR IT BEING SECURED AGAINST INVENTORIES OF RAW MATERIALS, GOODS-IN-PROCESS, FIN ISHED AND SEMI-FINISHED GOODS, APART FROM BOOK DEBTS, ETC., WHICH (DEBTS) NEED TO BE SPE CIFICALLY APPROVED OF BY THE LENDER FOR THE SAME TO BE RECKONED IN COMPUTING THE NECESSARY MARGIN THAT THE ASSESSEE IS REQUIRED TO MAINTAIN QUA THE SAID FACILITY (REFER DEED OF HYPOTHECATION AT P B PGS.30-38). WE HAVE, IN FACT, ALSO OBSERVED A NEGATIVE MARGIN. IN VIEW THEREOF, HOW WE WONDER COULD THE SAME BE CONSIDERED SECURED, WHICH PERHAPS IS ALSO T HE REASON FOR IT BEING CLASSIFIED AS AN UNSECURED LOAN BY THE ASSESSEE IN ITS AUDITED BALAN CE-SHEET, WHILE AT THE SAME TIME CLAIMING EXPENSES ON STAMP DUTY, WHICH IS ONLY TOWA RD THE REGISTRATION OF THE SAID HYPOTHECATION AGREEMENT. WE HAVE ALREADY FOUND THE ASSESSE TO HAVE NOT CARRIED OUT ANY BUSINESS. NO PART OF THE BORROWED CAPITAL COULD, TH EREFORE, BE SAID TO BE AVAILED OF FOR BUSINESS PURPOSES, SO AS TO VALIDATE THE ASSESSEES CLAIM U/S. 37(1) OF THE ACT. QUA SECTION 57(III), THE TERMS OF WHICH ARE RATHER SEV ERELY CONSTRICTED, THE ASSESSEE HAS ABYSMALLY FAILED TO SHOW THAT THE SAME STOOD IN CURRED TOWARD MAKING OR EARNING ANY INCOME. WE IN FACT FOUND THE ACTIVITY TO BE NOT INC OME DRIVEN AT ALL. NO BASIS OR ALGORITHM OR MODEL OF ITS OPERATIONS STOOD FURNISHE D, SO THAT EVEN THE DIRECT EXPENSES BY 11 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT WAY OF INTEREST INCURRED ON THE CORRESPONDING BORRO WED CAPITAL, STOOD CONFIRMED FOR DISALLOWANCE IN PART, I.E., TO THE EXTENT OF THE SH ORT FALL IN THE INTEREST REALIZED, IN THE ABSENCE OF THE REQUISITE DETAILS/FACTS. WE, ACCORDI NGLY, CONFIRM THE IMPUGNED DISALLOWANCE. WE DECIDE ACCORDINGLY. 7. THIS LEAVES US WITH THE ASSESSEES GROUND III, U PHOLDING THE DISALLOWANCE OF THE STAFF EXPENSES TO THE EXTENT OF 50%. THE ASSESSEES STAND WAS OF THE SAME BEING TOWARD THE COMPANYS PROCESSING UNIT, WHICH DID NOT PASS M USTER. THE ASSESSEE HAS DURING THE YEAR DISPOSED OFF ALMOST ITS ENTIRE MACHINERY, BESI DES OTHER FIXED ASSETS, SAVE IMMOVEABLE PROPERTY. EVEN THE RENT ARRANGEMENT, AS IT APPEARS, STANDS DISCONTINUED INASMUCH AS THERE IS NO RENT EXPENSE FOR THE YEAR A S AGAINST RS.58,500/- FOR THE IMMEDIATELY PRECEDING YEAR (SCHEDULE 15 TO THE BALA NCE-SHEET). NO WONDER IT DID NOT GENERATE ANY BUSINESS BY WAY OF PROCESSING, WHICH W OULD PRESUMABLY REQUIRE PLANT AND MACHINERY, NOR ANY EXPLANATION TOWARD THE SAME STAN DS FURNISHED AT ANY STAGE. IN FACT, THE EXPENDITURE UNDER REFERENCE BEING INCURRED FOR THE CURRENT YEAR AT ALMOST THE SAME LEVEL AS FOR THE IMMEDIATELY PRECEDING YEAR, WHEREA T THE PROCESSING WORK UNDERTAKEN WAS AT RS.22.28 LACS, THE SAME APPEAR TO BE INDEPENDENT THEREOF. IN ANY CASE OF THE MATTER, THE DISALLOWANCE IS EFFECTED AT 50%, AND NOT FOR THE TO TAL EXPENSE CLAIMED. WE, ACCORDINGLY, FIND NO REASON FOR INTERFERENCE. WE DECIDE ACCORDIN GLY. 8. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. 0. +12 30+( 0( +456 ORDER PRONOUNCED IN THE OPEN COURT ON DECEMBER 31, 2013 SD/- SD/ - (DR. S. T. M. PAVALAN) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER ) 7* MUMBAI; 8 DATED : 31.12.2013 ! ROSHANI , SR. PS 12 ITA NO. 4443/MUM/2011 (A.Y. 2003-04) BMK LABORATORIES PVT. LTD. VS. DY. CIT ! ' #$%& ' &$ ! COPY OF THE ORDER FORWARDED TO : 1. '$ / THE APPELLANT 2. %&'$ / THE RESPONDENT 3. ) 9+ : ; / THE CIT(A) 4. ) 9+ / CIT - CONCERNED 5. <= >%+?2 ?2. ) 7* / DR, ITAT, MUMBAI 6. > 3@ * ! GUARD FILE ! ( / BY ORDER, )/(* + (DY./ASSTT. REGISTRAR) , ) 7* / ITAT, MUM BAI