M/s. Yenepoya Resins & Chemicals, Mangalore V. DCIT, Mangalore

ITA 447/BANG/2009

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0610 (ITAT-BANGALORE)
• Duration Of Justice: 4 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2009
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-09-2009
• Assessment Year: 1997-1998
• Appeal Filed On: 12-05-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JACINTA ZIMIK VASHAI
• Keywords: Business expenditure; Proportionate interest
• Section: 234B; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.447/BANG/2009 ASSESSMENT YEAR : 1997-98 M/S. YENEPOYA RESINS & CHEMICALS, ASHOKNAGAR, MANGALORE 575 006. : APPELLANT VS. THE DY. COMMISSIONER OF INCOME-TAX, INVESTIGATION CIRCLE, MANGALORE. : RESPONDENT APPELLANT BY : SHRI S. PARTHASARATHI RESPONDENT BY : SMT. JACINTA ZIMIK VASHAI O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL PREFERRED BY YENEPOYA RESINS & CHEMICA LS - A REGISTERED FIRM - IS DIRECTED AGAINST THE ORDER OF THE CIT(A), BELGAUM, FOR THE ASSESSMENT YEAR 1997-98. 2. THE ASSESSEE FIRM HAS RAISED SIX GROUNDS, OUT OF WHICH, GROUND NOS: 1 & 6 ARE GENERAL IN NATURE AND NOT SPECIFIC AND, T HUS, DO NOT SURVIVE FOR ADJUDICATION. IN THE REMAINING FOUR GROUNDS, THE E SSENCE AND SUBSTANCE OF ITA NO.447/BANG/09 PAGE 2 OF 8 THE ISSUES, FOR THE SAKE OF CLARITY, ARE REFORMULAT ED IN A CONCISE MANNER, AS UNDER: (1) CONFIRMING THE DISALLOWANCE OF RS.10.61 LAKHS BEING INTEREST AND DISCOUNT CHARGES, HOLDING THE CLAIM AS A COLOURABLE DEVICE; & (2) CONFIRMING THE LEVYING OF INTEREST U/S 234B AN D 234C OF THE ACT. 3. THE ASSESSEE FIRM WHO ENGAGED IN THE MANUFACTURE OF RESINS AND CHEMICALS AND ITS FINISHED PRODUCTS WERE MAINLY SUP PLIED TO ITS SISTER CONCERN KANARA WOOD & PLYWOOD PVT. LTD. WHO WERE THE MANUFACTURERS OF PLYWOOD, BOARDS ETC. ON AN EXAMINATION OF ACCOU NTS, THE AO HAD NOTICED THAT THE ASSESSEE, INSTEAD OF DIRECTLY COLL ECTING SALE PROCEEDS FOR THE GOODS SUPPLIED TO ITS SISTER CONCERN, THE ASSES SEE HAD ENTERED INTO AN AGREEMENT WHEREBY THE FIRM HAD USED LETTERS OF CRED IT FROM THE BANK, AVAILED LOANS AGAINST THE SALE BILLS TO THE SISTER CONCERN AND HAD PAID INTEREST THEREON. IT HAD ALSO PAID INTEREST TO FOU R OF ITS SUPPLIER-CREDITORS ON BELATED PAYMENTS. THE AO WAS OF THE VIEW THAT BY A PPLYING SUCH MODUS OPERANDI, THE ASSESSEE FIRM HAD DIVERTED THE BENEFI T IN FAVOUR OF ITS SISTER- CONCERN AND HAD PAID INTEREST TO THE TUNE OF RS.106 1127 [INTEREST RS.340145 + LC DISCOUNTING CHARGES OF RS.720982]. BY APPLYING THE RATIO LAID DOWN BY THE HONBLE APEX COURT IN THE CASE OF MC DOWELL AND CO. LTD. V. CTO REPORTED IN 154 ITR 148, THE AO HAD DISALLOW ED THE SAID SUM. 4. AGITATED, THE ASSESSEE FIRM TOOK UP THE ISSUE WI TH THE LD.CIT (A). AFTER DUE CONSIDERATION OF THE EXHAUSTIVE WRITTEN S UBMISSION OF THE ASSESSEE WHICH WAS COUPLED WITH VARIOUS JUDICIAL PR ECEDENTS, THE ITA NO.447/BANG/09 PAGE 3 OF 8 OBSERVATIONS OF THE LD. CIT(A) CONTAINED IN THE IM PUGNED ORDER, FOR THE SAKE OF CLARITY, ARE SUMMARIZED, AS UNDER: (I) INSTEAD OF COLLECTING THE SALE PROCEEDS FROM ITS SI STER CONCERN FOR THE FINISHED GOODS SUPPLIED, THE ASSESSEE FIRM HAD AVAILED LETTER OF CREDIT FACILITIES FROM THE BANK AGAINST T HE BILLS AND THUS PAID INTEREST AND HAD ALSO PAID INTEREST FOR D ELAYED PAYMENTS OF THE BILLS TO FOUR OF ITS MAIN RAW MATER IAL SUPPLIERS; (II) THUS, THE INTEREST PAYMENT WAS MAINLY ATTRIBUTABLE FOR NOT COLLECTION OF SALE PROCEEDS FROM ITS SISTER CONCERN WITHIN TIME; (III) WHEN THE ASSESSEE FIRM HAD PAID INTEREST ON DELAYED PAYMENT TO ITS CREDITORS, THE SAME YARD-STICK WAS NOT APPL IED FOR THE DELAYED PAYMENT BY ITS SISTER-CONCERN; - THUS, THE AO WAS RIGHT IN HOLDING THAT THE ENTIRE ARRANGEMENT WITH ITS SISTER-CONCERN WHOSE INCOME WA S ENJOYED THE BENEFIT OF DEDUCTION U/S 80HHC; (IV) THE ASSESSEE FIRM HAD TRIED TO GIVE THE WHOLE ARRAN GEMENT UNDER THE GUISE OF BUSINESS EXPEDIENCY FALLING WITH IN THE PURPOSE AND NEXUS TO BUSINESS; (V) ON A CLOSE EXAMINATION OF SUCH AN AGREEMENT REVEALS THAT IT WAS NOTHING BUT SHOULDERING THE INTEREST BURDEN ON ITSELF THEREBY MAKING ITS SISTER-CONCERN TO DERIVE THE BEN EFIT; (VI) HAD THE ASSESSEE FIRM RECEIVED THE TIMELY PAYMENTS FOR ITS FINISHED GOODS FROM ITS SISTER CONCERN, THERE WAS N O OCCASION FOR THE ASSESSEE FIRM TO INDULGE IN AVAILING OF INT EREST BEARING LOANS TO MAKE PAYMENTS TO ITS CREDITORS AND ALSO IN TERESTS FOR DELAYED PAYMENTS? (VII) RELIANCE WAS PLACED ON THE FOLLOWING CASE LAWS: - MC DWELL & CO. V.CTO (1985) 154 ITR 148 (SC); - TRIVENI ENGG. WORKS LTD. V. CIT (1987) 167 ITR 742 (ALL) - CIT V. HARVEYS LTD. (1940) 8 ITR 307 (MAD); - GOVEN BROS. V. CIT 91963) 48 ITR 930 (ALL); ITA NO.447/BANG/09 PAGE 4 OF 8 (VIII) THE HONBLE HIGH COURT OF P & H HI GH COURT IN THE CASE OF S.A.BUILDERS LTD. V. CIT & ANR. REPORTED IN 269 ITR 535 WAS PLEASED TO OBSERVE THAT WHEN THE ASSESSEE HAD DIVERTED ITS BORROWED FUND BY UTILIZING THE OVERDRAFT ACCOUNT TO A SISTER CONCERN WITHOUT CHARGING INTEREST AND THAT ON THE DEBTS ON WHICH TH E AMOUNTS WERE SO ADVANCED, THERE NO CREDIT BALANCE I N THE BANK ACCOUNT OF THE ASSESSEE, DISALLOWANCE OF PROPO RTIONATE INTEREST RELATING TO THE SAID AMOUNT OF THE TOTAL I NTEREST PAID TO THE BANK DESERVED TO BE DISALLOWED (IX) IN THE PRESENT CASE, THE ENTIRE INTEREST BURDEN HAD ARISEN DUE TO NON-RECOVERY OF SALE PROCEEDS WITHIN THE LIMIT O F THE CREDIT PERIOD WHICH NECESSITATED THE ASSESSEE TO OB TAIN LETTER OF CREDIT FACILITY FROM THE BANK WHICH HAD R ESULTED IN INTEREST BURDEN ON THE ASSESSEE AND THEREBY INDIREC TLY MITIGATING THE INTEREST LIABILITY OF THE SISTER CON CERN; (X) CONSIDERING THE OVERALL FACTS AND THE CASE LAW S CITED SUPRA, THE ACTION OF THE AO IS JUSTIFIABLE. 5. AGGRIEVED, THE ASSESSEE FIRM CAME UP WITH THE PR ESENT APPEAL. THE ASSESSEE FIRMS FORCEFUL ARGUMENTS WERE REVOLVED AR OUND THAT THE CIT(A) : (I) OUGHT TO HAVE REFRAINED FROM CONFIRMING THE DISALLO WANCE BEING INTEREST AND DISCOUNT CHARGES CLAIMED, BY RELYING O N THE DECISION OF THE HON'BLE SUPREME COURT REPORTED IN 154 ITR 14 8, HOLDING THAT THE CLAIM AS A COLOURABLE DEVICE WITHOUT APPRE CIATING THE FACT THAT THE TRANSACTION WAS GENUINE AND THE ASSESSEE F IRM PAID THE SAME TO THE BANK AND ITS SUPPLIERS WHO HAD SUPPLIED THE RAW MATERIALS ON INTEREST BEARING CREDITS; (II) ERRED IN CONFIRMING THE DISALLOWANCE WITHOUT APPREC IATING THE FACT THE ASSESSEE FIRM HAD SUPPLIED THE FINISHED PRODUCT S TO ITS SISTER CONCERN UP-TO 180 DAYS CREDIT AND SINCE THE ASSESSE E HAD NO FUNDS TO HONOUR THE BILLS OF THE RAW MATERIAL SUPPLIERS, THE ASSESSEE HAD REQUESTED ITS SISTER-CONCERN TO PEN THE LC AND SUBS EQUENTLY THE DOCUMENTARY BILLS DRAWN UNDER LC WERE DISCOUNTED AN D DISCOUNTING PROCEEDS WERE PAID TO RAW MATERIAL SUPP LIERS; & (III) ERRED IN NOT FULLY ALLOWING THE INTEREST PAYMENTS W ITHOUT APPRECIATING THE FACT THAT THE PAYMENTS WERE MADE F OR THE PURPOSE OF BUSINESS AND DURING THE COURSE OF BUSINESS TRANS ACTIONS AND, ITA NO.447/BANG/09 PAGE 5 OF 8 THEREFORE, THE SAME HAD TO BE ALLOWED U/S 37 OF THE ACT, AS BUSINESS EXPENDITURE. 5.1. TO BUTTRESS HIS ARGUMENTS, THE LD.A.R REITERAT ED WHAT HAS BEEN URGED BEFORE THE CIT (A), THROUGH AN EXHAUSTIVE WRI TTEN SUBMISSION. DURING THE COURSE OF HEARING, THE LD.A.R FURNISHED A PAPER BOOK CONTAINING 1 96 PAGES WHICH CONSISTS OF, INTER ALIA, COPIES OF (I) WRITTEN SUBMISSION FILED BEFORE THE CIT(A), (II) COMPUTATION OF INCOME OF ITS SISTER CONCERN, (III) SUMMARY OF TRANSACTIONS WITH ITS SISTER CONCERN ETC ., 5.2. ON THE OTHER HAND, THE LD. D R URGED THAT THE LD.CIT (A) HAD, AFTER DULY ANALYZING THE ISSUE, CONCURRED WITH THE STAND OF THE AO AND, THEREFORE, PRAYED THAT THE CONCLUSION OF THE LOWER AUTHORITIES REQUIRES TO BE UPHELD. 6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS AND ALSO DULY PERUSED THE RELEVANT RECORDS. THE ASSESSEE FIRMS MAIN CONTENTION WAS THAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR BUSI NESS PURPOSES AS THE INTEREST HAD BEEN PAID TO THE BANK ON THE CAPITAL B ORROWED FOR THE PURPOSE OF BUSINESS AND AS SUCH, ALLOWABLE U/S 36(1)(III) O F THE ACT. ITS FURTHER ARGUMENT CENTRED THAT THE PRIMARY CONDITION FOR ALL OWABILITY OF INTEREST ON BORROWED CAPITAL WAS THAT THE CAPITAL SHOULD HAVE B EEN BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE EXPENDITURE SHALL BE FOR CARRYING ON OF THE BUSINESS AND THE ASSESSEE SHALL INCUR IT IN HIS CAPACITY AS A PERSON CARRYING ON THE BUSINESS. 6.1. THIS WAS COUNTERED BY THE AO THAT (I) THE ASSESSEE FIRM HAD SUPPLIED ITS FINISHED PRODUCT S TO ITS SISTER CONCERN, FOR WHICH, THE ASSESSEE HAD NOT DIRECTLY C OLLETED THE SALE PROCEEDS; ITA NO.447/BANG/09 PAGE 6 OF 8 (II) INSTEAD, IT HAD AVAILED LC FACILITY FROM THE BANK A GAINST THE BILLS AND PAID INTEREST; (III) THE ASSESSEE FIRM HAD ALSO PAID INTEREST TO FOUR OF ITS MAIN SUPPLIERS ON DELAYED PAYMENT OF THE BILLS; (IV) ON A CLOSE LOOK OF THE ISSUE, THE INTEREST PAYMENT WAS MAINLY ATTRIBUTABLE FOR NOT COLLECTING SALE PROCEEDS FROM ITS SISTER CONCERN WITHIN THE TIME; (V) WHEN THE ASSESSEE WAS PAYING INTEREST ON THE DELAYE D PAYMENT TO THE CREDITORS, BUT, IT HAD NOT CHARGED CORRESPONDIN G INTEREST ON DELAYED PAYMENT(S) BY ITS SISTER CONCERN; (VI) THUS, IT IS IMPERATIVE TO NOTE THAT THE ENTIRE ARRA NGEMENT WITH ITS SISTER-CONCERN WAS WITH A VIEW TO PASS ON BENEFIT T O ITS SISTER CONCERN TO AVAIL THE BENEFIT U/S 80-HHC OF THE ACT; & (VII) HAD THE SISTER CONCERN MADE TIMELY PAYMENT FOR ITS PURCHASES FROM THE ASSESSEE FIRM, THERE WAS NO NECESSITY FOR THE A SSESSEE TO GO IN FOR INTEREST BEARING LOANS SPREE? 6.2. ON A DUE CONSIDERATION OF THE ISSUE IN DEP TH, WE ARE OF THE UNANIMOUS VIEW THAT (I) THE ASSESSEE FIRM FOR HAVING SUPPLIED ITS FINISHED PRODUCTS TO ITS SISTER CONCERN FOR WHICH IT HAD NOT INSISTED FOR SA LE PROCEEDS; INSTEAD, IT HAD AVAILED LC AGAINST THE BILLS AND PA ID INTEREST. THIS CANNOT BE CONSIDERED, IN ANY STRETCH OF IMAGINATION , AS A BUSINESS PRUDENCE AND RATHER EXPEDIENCY; (II) NO PRUDENT BUSINESSMAN PAYS INTEREST ON THE PAYMENT TO HIS CREDITORS AND AT THE SAME TIME DOESNT CHARGE CORRE SPONDING INTEREST ON A DELAYED PAYMENT FROM ITS DEBTOR (IN T HE INSTANT CASE SISTER CONCERN); (III) THERE WOULD BE NO TAKERS OF THE ASSESSEES CONCEPT THAT IT HAD TO PAY INTEREST FOR THE PURPOSE OF BUSINESS EXPEDIENCY ; WHERE WAS THE QUESTION OF BUSINESS EXPEDIENCY? WHEN THE ASSE SSEE FIRM HAD RESORTED TO CIRCUMVENT THE PROVISIONS OF THE ACT TO FACILITATE ITS SISTER CONCERN WHEREBY ALLOWING THE INTEREST BURDEN TO REST ON ITS SHOULDERS; ITA NO.447/BANG/09 PAGE 7 OF 8 (IV) IT IS AN UN-DENYING FACT THAT THE DEDUCTIONS PROVID ED FOR UNDER THE PROVISIONS OF S.36 (1) (III) THAT THE AMOUNT OF IN TEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. HOWEVER, IN THE INSTANT CASE, AS REMA RKED BY THE AO, THE ASSESSEE FIRM HAD DELIBERATELY CREATED AN A RTIFICIAL AND COLOURABLE DEVISE FOR REDUCING ITS INCOME OFFERED F OR TAXATION THROUGH AN ARRANGEMENT OF LC AND, THUS, THE DEDUCTI ON CLAIMED BY THE ASSESSEE FIRM ON ACCOUNT OF INTEREST PAID T O BANK(S) AND ALSO ITS CREDITORS ARE NOT ALLOWABLE; THE RULING OF THE HONBLE APEX COURT IN THE CASE OF MC DWELL AND CO. LTD. V CTO REPORTED IN (1985) 154 ITR 148 IS DIRECTLY APPLICABLE TO THE ISSUE ON HAND; THE HONBLE HIGH COURT OF ALLAHABAD IN ITS WISDOM I N THE CASE OF TRIVENI ENGINEERING WORKS LTD. V. CIT (1987 ) 167 ITR 742 HAD HELD THAT WHERE THE BORROWING IS ILLUSORY OR COLOURABLE, THE INTEREST PAID IN RESPECT OF SUCH BO RROWINGS IS NOT ALLOWABLE; MORE STRIKINGLY, THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF S.A.BUILDERS LTD. V. CIT & ANR. REPORTE D IN 269 ITR 535 HAD OBSERVED THAT WHEN THE ASSESSEE HAD DI VERTED ITS BORROWED FUND BY UTILIZING THE OVERDRAFT ACCOUNT TO A SISTER CONCERN WITHOUT CHARGING INTEREST AND THAT ON THE D EBTS ON WHICH THE AMOUNTS WERE SO ADVANCED, THERE WAS NO CR EDIT BALANCE IN THE BANK ACCOUNT OF THE ASSESSEE, THE DI SALLOWANCE OF PROPORTIONATE INTEREST RELATING TO THE SAID AMOU NT OUT OF THE TOTAL INTEREST PAID TO THE BANK DESERVED TO BE DISA LLOWED..; IN THE PRESENT CASE, THE ENTIRE INTEREST BURDEN HAD ARISEN DUE TO NON-RECOVERY OF SALE PROCEEDS FROM ITS SISTER CO NCERN WITHIN THE LIMIT OF THE CREDIT PERIOD WHICH FORCED THE ASS ESSEE FIRM TO OBTAIN LC FACILITY FROM THE BANK WHICH HAD RESULTED IN INTEREST BURDEN ON THE ASSESSEE FIRM. 6.3. TAKING INTO ACCOUNT ALL THE FACTS AND CIRCUMSTANCES OF THE ISSUE AND ALSO HAVING GIVEN DUE WEIGHT-AGE TO THE ASSERTI ON OF THE ASSESSEE FIRM, WE ARE OF THE CONSIDERED VIEW THAT THE STAND OF THE LOWER AUTHORITIES ON THIS COUNT IS FULLY JUSTIFIED WHICH REQUIRES NO INTERFER ENCE AT THIS STAGE. IT IS ORDERED ACCORDINGLY. ITA NO.447/BANG/09 PAGE 8 OF 8 7. THE OTHER GROUND RAISED IS WITH REGARD TO CHARGING OF INTEREST U/S 234B AND 234C OF THE ACT. WE WOULD LIKE TO IMPRESS UPON THE ISSUE THAT CHARGING OF INTEREST IS MANDATORY AND CONSEQUENTIAL IN NATURE. THUS, THIS GROUND IS DISMISSED AS NOT MAINTAINABLE. 8. IN THE RESULT, THE ASSESSEE FIRMS APPEAL IS DISMISSED . PRONOUNCED IN THE OPEN COURT ON THIS 9 TH DAY OF OCTOBER, 2009. SD/- SD/- ( K.P.T. THANGAL ) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 9 TH OCTOBER, 2009. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.