SANGHAVI EXPORTS INTERNAITONAL P.LTD, MUMBAI V. ADDL CIT RG 5(3), MUMBAI

ITA 453/MUM/2013

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 92604 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 4 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-05-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 22-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 15-01-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N V NADKARNI
• Assessee Lawyers: B V JHAVERI
• Keywords: Depreciation; Proportionate interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI B.R BASKARAN, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER ITA NO. 453/MUM/2013 ASSESSMENT YEAR: 2008-09 SANGHAVI EXPORTS INTERNATIONAL PVT. LTD., 502, PRASAD CHAMBERS, MAMA PARMANAND MARG, OPERA HOUSE, MUMBAI-400 004 PAN:AAKCS7350N VS. A DDL. CIT RANGE - 5 (3) ROOM NO. 521, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI-20 (APPELLANT) (RESPON DENT) ASSESSEE BY : SHRI B.V.JHAVERI REVEN UE BY : SMT. N.V.NADKARNI DATE OF HEARING : 22 .0 4 .2015 DATE OF PRONOUNCEMENT : 29 .05 .2015 O R D E R PER AMIT SHUKLA, JM: THIS APPEAL HAS BEEN PREFERRED BY THE ASSESSEE AGA INST THE IMPUGNED ORDER DATED 17.10.12, PASSED BY THE LD.CIT (A)-9, MUMBAI FOR THE QUANTUM OF ASSESSMENT U/S 143(3) OF THE ACT, F OR THE A.Y. 2008-09, ON FOLLOWING GROUND: THE HONBLE COMMISSIONER OF INCOME-TAX(APPEALS)-9 MUMBAI [CIT(A)] HAS ERRED IN LAW AND FACTS IN CONFIRMING THE DISALL OWANCE OF INTEREST OF `. 8,37,261/- UNDER SECTION 36(1)(III) OF THE INCOME T AX ACT, 1961 (THE ACT) ITA NO. 453/MUM/2013 2 WITHOUT APPRECIATING THE FACT THAT THE INTEREST FRE E LOAN WAS GIVEN TO SUBSIDIARY COMPANY FOR THEIR BUSINESS PURPOSE. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E-COMPANY WAS A PARTNER IN PARTNERSHIP FIRM, M/S SANGHAVI STAR, HAV ING 93% OF SHARE IN THE PROFIT & LOSSES OF THE FIRM, PRIOR TO 18.01.200 8. WITH EFFECT FROM 18.01.2008, M/S SANGHAVI STAR WAS CONVERTED INTO PR IVATE LTD. COMPANY AS PER PART IX OF THE COMPANIES ACT, 1956 AND ACCOR DINGLY, IT WAS NAMED AS M/S SANGHAVI STAR RETAIL PVT. LTD. THE ASS ESSEE WAS ISSUED 93% OF THE SHARE CAPITAL OF THE SAID NEWLY INCORPOR ATED COMPANY AND ACCORDINGLY IN 93000 SHARES OF RS. 10 ISSUED TO THE ASSESSEE AND THE BALANCE AMOUNT IN THE CURRENT ACCOUNT OF THE ASSESS EE WAS TREATED AS INTEREST FREE LOAN AS ON 31.03.2008 BY M/S SANGHAVI STAR RETAIL PVT. LTD. THE ASSESSEE HAD CLAIMED INTEREST FREE LOAN IN THE MONTH OF FEBRUARY AND MARCH, 2008 AGGREGATING TO RS. 14.45 CRORES OUT OF WHICH RS. 5 CRORE WERE REFUNDED ON 25.03.2008. AS ON 31.03.2008 THE OUTSTANDING LOAN OF RS. 9.45 CRORE WAS SHOWN IN THE NAME OF M/S SANGHAVI STAR RETAIL PVT. LTD. ALL THESE DETAILS ARE AVAILABLE F ROM THE REPLY SUBMITTED BY ASSESSEE BEFORE THE AO. IN RESPONSE TO SHOW CAUS E NOTICE BY THE AO AS TO WHY INTEREST PAID SHOULD NOT BE DISALLOWED ON ACCOUNT OF INTEREST FREE LOAN GIVEN TO THE SISTER CONCERN, THE ASSESSEE SUBMITTED THAT THE BORROWED SECURED LOAN FROM VARIOUS BANKS WERE TAKEN IN FORM OF ITA NO. 453/MUM/2013 3 PACKING CREDIT AND POST SHIPMENT CREDIT. THE FORMER LOAN WAS OBTAINED FOR IMPORTS OF RAW-MATERIAL, MANUFACTURING PROCESS; WAREHOUSING AND OTHER FINANCIAL COST OF THE BUSINESS AGAINST THE EX PORT ORDER AND THE POST SHIPMENT CREDIT LOAN WAS OBTAINED AGAINST THE EXPOR T OF FINISH GOOD AFTER PRODUCING THE EXPORT INVOICE AND OTHER RELEVANT DOC UMENTS. NO OTHER SECURED LOAN HAS BEEN TAKEN BY THE ASSESSEE DURING THE SAID PERIOD. RELIANCE WAS PLACED ON VARIOUS DECISIONS AS HAS BEE N INCORPORATED BY AO AT PAGE 3 TO 5 OF THE ASSESSMENT YEAR. HOWEVER, ASSESSING OFFICER HELD THAT THERE APPEARS TO BE NO COMMERCIAL EXPEDIE NCY IN INVESTING A HUGE AMOUNT WITHOUT ANY INTEREST RECEIPT WITH THE S UBSIDIARY COMPANY, PARTICULARLY WHEN THE ASSESSEE HAD TO BORROW RS. 47 1 CRORES AND PAY INTEREST OF RS. 36.97 CRORES. SECONDLY, HAD THE ASS ESSEE NOT GIVEN THE INTEREST FREE LOAN, IT WOULD HAVE HAD MUCH MORE FUN DS AT ITS DISPOSAL WHICH COULD HAVE REDUCED ITS INTEREST BURDEN. HE AL SO REFERRED AND RELIED UPON VARIOUS DECISIONS WHICH HAVE BEEN INCORPORATED FORM PAGES 6 TO 8 OF THE ASSESSMENT ORDER. THEREAFTER, HE WORKED OUT THE PROPORTIONATE INTEREST AS PER THE WORKING GIVEN AS PAGE 9 OF THE ASSESSMENT ORDER AND MADE ADDITION OF RS. 8,37,261/-. 3. THE LD. CIT(A) CONFIRMED THE SAID DISALLOWANCE O N THE GROUND THAT THERE WAS NO BUSINESS NECESSITY OR COMMERCIAL EXPED IENCY FOR GIVEN ITA NO. 453/MUM/2013 4 INTEREST FREE FUNDS TO ITS SUBSIDIARY CONCERNED. SE CONDLY, THE ASSESSEE HAD FAILED TO PROVE THAT INTEREST FREE FUND WAS ADV ANCED FROM THE SURPLUS FUNDS OR FROM RESERVES AND SURPLUS. THE ASS ESSEE HAS FAILED TO FURNISH THE NEXUS BETWEEN INTEREST FREE FUNDS, RESE RVE AND SURPLUS AVAILABLE WITH IT TO ADVANCE INTEREST FREE LOAN TO SUBSIDIARY COMPANY. ACCORDINGLY, HE CONFIRMED THE DISALLOWANCE MADE U/S . 36(1)(III). 4. BEFORE US, THE LD. COUNSEL DREW OUR ATTENTION B ALANCE OF THE ASSESSEE AS AT 31.03.2008. FROM THE BALANCE SHEET H E POINTED OUT THE SHARE CAPITAL, RESERVE AND SURPLUS AGGREGATED TO RS . 221.40 CRORE WHEREAS THE INTEREST FREE ADVANCE TO THE SUBSIDIARY WAS RS. 14.45 CRORES. THUS, HUGE INTEREST FREE FUNDS WAS AVAILABL E WITH THE ASSESSEE WHICH WAS FAR IN EXCESS OF THE INTEREST FREE FUNDS GIVEN. FURTHER, THE ASSESSEE HAD BORROWED INTEREST FREE FUNDS FROM DIRE CTORS, SHAREHOLDERS AND RELATIVES AGGREGATING TO RS. 30.07 CRORES. ACCO RDINGLY, NO DISALLOWANCE COULD HAVE BEEN MADE IN THE CASE OF TH E ASSESSEE. IN SUPPORT OF HIS CONTENTION HE RELIED UPON THE DECISI ON OF HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. REL IANCE UTILITIES AND POWER LTD., (2009) 313 ITR 340 AND THE DECISION OF CIT VS. HDFC BANK LTD., ORDER DATED 23 RD JULY 2014 IN ITA NO. 330 OF 2012. BESIDES THIS, OTHER DECISIONS OF ITAT, MUMBAI BENCH, WERE ALSO RE LIED UPON. HE ITA NO. 453/MUM/2013 5 FURTHER SUBMITTED THAT AS AGAINST THE BORROWED FUND S OF RS. 471.03 CRORES, THE ASSESSEE-COMPANY HAD INVENTORIES (STOCK -IN-TRADE) OF 323.02 CRORES AND SUNDRY DEBTOR OF RS. 564.32 CRORE S. THE SUNDRY CREDITORS WERE ONLY 251.75 CRORES. THUS, THE NET AM OUNT INVESTED IN THE BUSINESS WAS RS. 635.59 CRORES. HE FURTHER DREW OUR ATTENTION TO CASH FLOW STATEMENT TO SHOW THAT THE ASSESSEE-COMPANY HA D RECEIVED SHARE PREMIUM AGGREGATING TO RS. 169.80 CRORES AND IT HAD GENERATED NET CASH FLOW OF RS. 4.65 CRORES. THE NET PROFIT AFTER DEPRECIATION TAX AND INTEREST WAS AT RS. 27.56 CRORES. IN SUCH A CIRCUMS TANCE NO DISALLOWANCE WAS CALLED FOR. LASTLY, HE SUBMITTED THAT OUT OF RS . 440.96 CRORES, RS. 433.98 CRORES ARE PACKING CREDIT AND POST SHIPMENT CREDIT FACILITIES. FOREIGN CURRENCY TERM LOAN OF RS. 6.92 CRORES WAS F OR MACHINERY, SOFTWARE AND CONSUMABLE PURCHASE IN FOREIGN CURRENC Y. ACCORDINGLY, ON THESE FACTS, IT CANNOT BE SAID THAT ASSESSEE HAS DI VERTED INTEREST BEARING BORROWED FUNDS FOR MAKING THE INTEREST FREE ADVANCE . 5. ON THE OTHER HAND, LD. DR STRONGLY RELIED UPON T HE ORDER OF THE AO AS WELL AS THE CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT MATERIAL ON RECORD. THE DISALLOWANCE OF INTEREST OF RS. 8,37,261/-, U/S. 36(1)(III) HAS BEEN MADE ON THE GROUND THAT ASSESSE E HAS GIVEN INTEREST ITA NO. 453/MUM/2013 6 FREE LOAN/ADVANCE TO SUBSIDIARY/SISTER CONCERN FOR RS. 14.45 CRORES WHICH AS ON 31.03.2008 STOOD AT 9.45 CRORES. THE SA ID LOAN HAS BEEN PRESUMED BY THE AO AS WELL AS CIT(A) THAT IT HAS BE EN ADVANCED FROM THE INTEREST BEARING BORROWED FUNDS. FROM THE PERUS AL OF THE RECORDS AND THE SUBMISSION OF THE ASSESSEE, WE FIND THAT FI RST OF ALL, THE ASSESSEE HAS GIVEN THE DETAILS OF UTILIZATION OF LO AN FOR THE BUSINESS PURPOSE. THIS PROPOSITION OF THE ASSESSEE HAD NOT B EEN REBUTTED BY EITHER OF THE AUTHORITIES ON ANY COGENT MATERIAL. I F THE ASSESSEE HAS CLAIMED INTEREST ON THE LOAN BORROWED FOR THE BUSIN ESS PURPOSE, THEN NO DISALLOWANCE CAN BE MADE. THIS IS EVIDENT FROM THE FACT THAT APPROXIMATELY RS. 434 CRORES ARE ON ACCOUNT OF PACK ING CREDIT AND POST SHIPMENT CREDIT FACILITIES. THE ASSESSEE HAS HUGE I NVENTORIES AND SUNDRY DEBTORS WHICH ITSELF EXCEEDS MORE THAN THE BORROWED FUNDS. THUS, THE ENTIRE LOAN STANDS UTILIZED FOR THE BUSINESS AS PER THE BALANCE-SHEET. ON THIS GROUND ALONE NO DISALLOWANCE IS CALLED FOR. FU RTHER, WE AGREE WITH THE CONTENTION OF THE LD. COUNSEL THAT ASSESSEE HAD SURPLUS INTEREST FREE FUNDS IN THE FORM OF RESERVE AND SURPLUS, NET PROFI T AND SHARE PREMIUM RECEIPT, WHICH ARE IN FAR EXCESS OF ADVANCE GIVEN T O THE SUBSIDIARY. UNDER THESE FACTS, IT CAN BE SAFELY PRESUMED THAT A DVANCE HAS BEEN GIVEN FROM SUCH INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE, IN VIEW OF THE RATIO LAID DOWN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE ITA NO. 453/MUM/2013 7 AFORESAID DECISION RELIED UPON BY THE LD. COUNSEL. ACCORDINGLY, THE DISALLOWANCE OF RS. 8,37,261/- IS DELETED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED . ORDER PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF MAY, 2015. SD/- SD/- (B.R. BASKARAN) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 29.05.2015 SHARWAN P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR E BENCH // TRUE COPY// BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.