The ACIT,3(1), V. M/s Bagree Fincom Pvt. Ltd.,

ITA 456/IND/2007

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 1490 (ITAT-INDORE)
• Duration Of Justice: 2 year(s) 3 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-11-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 29-10-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 17-08-2007
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V K KARAN
• Keywords: Commercial expediency
• Section: 14A

Judgement Text

PAGE 1 OF 10 IN THE INCOME TAX APPELATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JM AND SHRI M.L. GUSIA, AM ITA NO.456/IND/2007 AY: 2004-05 ACIT-3(1), INDORE ..APPELLANT V/S. M/S. BAGREE FINCOM PVT. LTD., 20/1, NEW PALASIA, INDORE (PAN AAACB 6745 U) ..RESPONDENT CO NO.115/IND/2007 ARISING OUT OF ITA NO.456/IND/2007 AY: 2004-05 M/S. BAGREE FINCOM PVT. LTD., 20/1, NEW PALASIA, INDORE (PAN AAACB 6745 U) ..APPELLANT V/S. ACIT-3(1), INDORE ..RESPONDENT DEPARTMENT BY : SHRI V.K. KARAN, SR. DR ASSESSEE BY : SHRI PRAKASH JAIN, CA ORDER PER JOGINDER SINGH, JM THE REVENUE HAS PREFERRED THIS APPEAL AND CROSS-OBJ ECTION BY THE ASSESSEE FOR AY 2004-05. FIRST WE SHALL TAKE UP THE APPEAL OF THE REVENUE WHEREIN THE ONLY GROUND RAISED IS THAT ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) ERRED IN PAGE 2 OF 10 DELETING THE ADDITION OF RS.8,56,092/- BEING INTERE ST DISALLOWED BY THE ASSESSING OFFICER. DURING HEARING OF THIS APPEAL, WE HAVE HEARD MR. V .K. KARAN, LD. SR. DR AND SHRI PRAKASH JAIN, LD. COUNSEL FOR ASSESSEE. TH E CRUX OF ARGUMENTS ON BEHALF OF THE REVENUE IS THAT SHARES WERE PURCHASED BY THE ASSESSEE ON VARIOUS DATES, ENTIRE LOAN WAS INTEREST FREE, BOTH THE COMPANIES ARE LIABLE TO FILE RETURNS SEPARATELY. THE ASSESSEE WAS HAVING IN TEREST BEARING FUNDS WHICH WERE DIVERTED FOR NON BUSINESS PURPOSES, THEREFORE, THE ENTIRE EXPENSES OF INTEREST WERE RIGHTLY DISALLOWED BY THE ASSESSING O FFICER. IT WAS PLEADED THAT THE CASE IN SA BUILDERS IS NOT APPLICABLE TO THE FA CTS OF THE CASE AS THE ASSESSEE COMPANY IS ELIGIBLE FOR DIVIDEND OF PROFIT OF THE COMPANY TO WHICH INTEREST HAS BEEN ADVANCED. PLEA WAS ALSO RAISED TH AT ASSESSEE CANNOT BE BENEFITED INDIRECTLY OTHER THAN BY WAY OF DIVIDEND UNLESS INTEREST IS CHARGED. STRONG PLEA WAS RAISED THAT THE CASE OF SA BUILDERS CANNOT BE BLINDLY FOLLOWED AS FACTS OF EACH CASE ARE DIFFERENT. OUR ATTENTION WAS ALSO INVITED TO SEC. 10(34) OF THE ACT ALONG WITH SEC. 14A. THE LD. SR. DR PLACED RELIANCE UPON THE DECISION IN 119 TTJ (MUM) (SB) 289, THEREFORE, THE DISALLOWANCE OF INTEREST EXPENSES WAS ARGUED TO BE RIGHTLY MADE BY THE ASSES SING OFFICER. ON THE OTHER HAND, THE LD. COUNSEL FOR ASSESSEE PL EADED THAT HERE IT IS NOT INVESTMENT IN SHARES BUT INTEREST FREE FUNDS GI VEN TO SUBSIDIARY COMPANY, CONSEQUENTLY, IT WAS PLEADED THAT THE ASSESSING OFF ICER IS NOT JUSTIFIED IN DISALLOWING ENTIRE INTEREST EXPENSES. OUR ATTENTION WAS INVITED TO PAGE 33 OF PAGE 3 OF 10 THE PAPER BOOK BY CLAIMING THAT THE AMOUNTS WERE US ED FOR 10 DAYS ONLY. RELIANCE WAS PLACED UPON THE DECISION IN 269 ITR 53 5 (SC) BY FURTHER SUBMITTING THAT DIVIDEND IS RECEIVABLE ON INVESTMEN T MADE IN SHARES AND NOT ON LOAN GIVEN, THEREFORE, SEC. 14A WAS ARGUED TO BE NOT APPLICABLE. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. RE PRESENTATIVES OF BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON THE FIL E. BRIEF FACTS ARE THAT THE ASSESSEE PURCHASED SHARES OF COMPANY NAMELY, MONEEY METALS PVT. LTD. THE ASSESSEE ADVANCED AN AMOUNT OF RS.47,49,508/- AS UN SECURED LOAN TO M/S. MONEEY METALS PVT. LTD. THE ASSESSEE PURCHASED SHAR ES OF M/S. MONEEY METALS PVT. LTD. THROUGH ACQUISITION OF MAJORITY ST AKE IN ITS EQUITY. BOTH COMPANIES ARE SEPARATE ENTITIES AND ARE LIABLE TO F ILE THEIR RETURNS SEPARATELY. THE LD. ASSESSING OFFICER ASKED THE ASSESSEE AS TO WHY NO INTEREST WAS CHARGED FROM M/S. MONEEY METALS PVT. LTD. IN REPLY, IT WAS CLAIMED BY THE ASSESSEE THAT BEING SOLE SUBSIDIARY COMPANY, NO INT EREST WAS CHARGED AS NO SPECIFIC FUND WAS BORROWED FOR LENDING MONEY TO M/S . MONEEY METALS PVT. LTD. FROM THE P & L A/C, IT WAS FOUND THAT RS.6,54,338/- WAS PAID BY THE ASSESSEE DURING AY 2004-05. THE STAND OF THE LD. ASSESSING O FFICER/LD. DR IS THAT THE ASSESSEE ADOPTED COLOURABLE DEVICE BY DEBITING BOGU S INTEREST EXPENSES, THEREFORE, THE INTEREST PAYMENT BY THE ASSESSEE TO THE TUNE OF RS.6,54,386/- TO M/S. MONEEY METALS PVT. LTD. IS NON-GENUINE, CON SEQUENTLY, IT WAS RIGHTLY DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE ASS ESSEE. THE TOTAL ADDITION ON THIS ISSUE WAS TO THE TUNE OF RS.8,56,091/-. ON APPEAL, BY FOLLOWING THE PAGE 4 OF 10 RATIO LAID DOWN BY THE HONBLE APEX COURT IN SA BUI LDERS CASE, THE ADDITION WAS DELETED WHICH IS UNDER CHALLENGE BEFORE THIS TR IBUNAL. BEFORE COMING TO ANY CONCLUSION, WE ARE SUPPOSED TO ANALYSE THE FACT UAL POSITION. THE CLAIM OF THE ASSESSEE IS THAT THE ADVANCES WERE GIVEN OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WHICH ARE AS UNDER: (1) SHARE CAPITAL RS.44,18,690/- (2) RESERVE & SURPLUS RS.72,54,433/- LESS: MISC. EXPENDITURE RS.9,650/- RS.1,16,63,473/- THERE IS NO DISPUTE TO THE FACT THAT DURING ASSESS MENT PROCEEDINGS, THE ASSESSEE FURNISHED THE COPY OF AUDITED BALANCE SHEE T. THE WHOLE DISPUTE IS FIRSTLY WHETHER THE ASSESSEE MADE THE PAYMENT FOR N ON-BUSINESS PURPOSES AND SECONDLY, WHETHER THE ASSESSEE WAS HAVING SUFFI CIENT FUNDS. THERE IS NO DISPUTE TO THE FACT THAT THE ASSESSEE WAS HAVING IN TEREST FREE FUNDS TO THE TUNE OF RS.1,16,63,473/- (SHARE CAPITAL OF RS.44,18 ,690 AND RESERVE & SURPLUS FUND RS.72,54,433). ON CONSIDERATION OF FAC TS AVAILABLE ON RECORD AND THE ARGUMENTS ADVANCED BY THE LD. RESPECTIVE COUNSE L, ADMITTEDLY THE MONEY WAS ADVANCED TO SUBSIDIARY COMPANY. EVEN OTHERWISE, THE TOTAL INTEREST ADVANCED FROM DECEMBER, 2003 TO APRIL, 2004 AT BEST WORKS OUT TO RS.1,26,913/- ON THE BASIS OF INTEREST PAID TO BANK FOR AVAILING CASH CREDIT LIMIT. ONE FACT IS CLEARLY OOZING OUT THAT THE ASSE SSEE WAS HAVING SUFFICIENT INTEREST FREE FUNDS AND THE MONEY WAS ADVANCED FOR BUSINESS/COMMERCIAL PAGE 5 OF 10 EXPEDIENCY. IN VIEW OF THIS FACT, THE DECISION FROM THE HONBLE APEX COURT IN SA BUILDERS SQUARELY APPLICABLE TO THE CASE OF THE ASSESSEE. WE ARE AWARE THAT THE HONBLE P & H HIGH COURT IN THE CASE OF CI T VS. ABHISHEK INDUSTRIES LTD. (286 ITR 1) (P&H) HELD THAT INTEREST TO THE EX TENT RELATING TO SOME SUMS ADVANCED INTEREST FREE TO SISTER CONCERN HAS TO BE DISALLOWED BY FURTHER OPINING THAT THE ONUS IS UPON THE ASSESSEE TO SHOW THAT BORROWINGS WERE USED FOR THE BUSINESS PURPOSES. HOWEVER, THE HONBL E HIGH COURT CAME TO A PARTICULAR CONCLUSION WHEN IT WAS FOUND THAT THE BO RROWED FUNDS WERE UTILISED FOR NON-BUSINESS PURPOSES. THEREFORE, IT CAN BE SAI D THAT EVEN THE DECISION FROM HONBLE P & H HIGH COURT IS NOT AGAINST THE AS SESSEE SPECIALLY WHEN WE HAVE FOUND THAT THE MONEY WAS PAID FOR BUSINESS PUR POSES. THE HONBLE APEX COURT IN 289 ITR 26 (SC) AFFIRMED THE DECISION OF H ONBLE P & H HIGH COURT IN 289 ITR 24, WHEREIN THE HONBLE COURT AGREED WITH T HE FINDING OF THE APPELLATE TRIBUNAL. DURING HEARING OF THIS APPEAL, THE LD. DR INVITED OUR ATTENTION TO A PARTICULAR PORTION/OBSERVATION IN TH E CASE OF SA BUILDERS LTD. (206 CTR 631)(SC) WHEREIN IT HAS BEEN OBSERVED AS U NDER: IT IS MADE CLEAR THAT IT IS NOT THAT IN EVERY CASE, INTEREST BORROWED ON LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. PAGE 6 OF 10 NO DOUBT, SUCH OBSERVATION HAS BEEN MADE BY THE HO NBLE APEX COURT. HOWEVER, THE LD. SR. DR ONLY READ THE PORTION OF TH E ORDER WHICH WAS BENEFICIAL TO THE REVENUE. THE HONBLE APEX COURT H AS QUOTED A INSTANCE WHEREIN IF THE DIRECTOR OF SISTER CONCERN UTILISE T HE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, IN THAT SI TUATION, IT WAS OBSERVED THAT THERE WAS NO COMMERCIAL EXPEDIENCY. THE HONBLE APE X COURT FURTHER OBSERVED AS UNDER: HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSE, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IN VIEW OF THE ABOVE, THE DEPARTMENT IS NOT PERMIT TED TO PICK AND CHOOSE PARTICULAR WORDS BECAUSE THE ORDER IS TO BE READ AS A WHOLE. THE ASSESSEE FURTHER FINDS SUPPORT FROM THE RATIO LAID DOWN IN CIT VS. DALMIA PAGE 7 OF 10 CEMENT (B.) LTD. (254 ITR 377) (DEL); (174 CTR 188) , CIT VS. PANIPAT WOOLEN & GENERAL MILLS LTD. (103 ITR 66) (SC). THE HONBLE APEX COURT WHILE COMING TO A PARTICULAR CONCLUSION OVERRULED THE DECISION I N PHALTON SUGAR WORKS LTD. VS. CIT, (208 ITR 989) (BOM). IN VIEW OF THIS FACT, IT CAN BE SAID THAT INTEREST ON BORROWED FUNDS CANNOT BE DISALLOWED WHEN THE ASS ESSEE HAS PROVED THAT INTEREST FREE LOAN WAS ADVANCED TO SISTER-CONCERN F OR COMMERCIAL EXPEDIENCY, THEREFORE, WHAT IS MORE IMPORTANT TO BE SEEN IS BU SINESS PURPOSES AND WHAT THE SISTER-CONCERN DID WITH THE MONEY, SO ADVANCED. DURING HEARING OF THE APPEAL, ANOTHER PLEA WAS RAI SED BY THE REVENUE THAT THE SCOPE OF SEC. 14A HAS TO BE SEEN BEFORE DE CIDING THE ISSUE. WE HAVE FOUND THAT SEC. 14A DEALS WITH A SITUATION WHILE CO MPUTING THE TOTAL INCOME UNDER THIS CHAPTER WHERE NO DEDUCTION IS ALLOWED IN RESPECT OF EXPENDITURE INCURRED BY THE ASSESSEE IN RELATION TO INCOME WHIC H DOES NOT FORM PART OF TOTAL INCOME UNDER THIS ACT, THEREFORE, WE ARE OF T HE VIEW THAT THE FACTS AND THE ISSUE IN THE PRESENT APPEAL IS DIFFERENT, THERE FORE, THIS SECTION IS NOT RELEVANT. DIVIDEND IS RECEIVABLE ON INVESTMENT MADE IN SHARES AND NOT ON LOAN SO GIVEN, THEREFORE, SEC. 14A IS NOT APPLICABLE. TH E ASSESSING OFFICER MERELY DISALLOWED THE AMOUNT ON THE PLEA THAT IT WAS NOT M ADE FOR BUSINESS EXPEDIENCY WHICH FALLS U/S 36 OF THE ACT. THE WORD FOR THE PURPOSES OF BUSINESS IS WIDER IN SCOPE THAN FOR THE PURPOSE O F EARNING INCOME, PROFIT & GAINS. EVEN THE HONBLE MADRAS HIGH COURT IN K. SO MASUNDARAM & BROS. (238 ITR 939)(MAD) CAME TO A PARTICULAR CONCLUSION THAT WHEN INCOME EARNED BY PAGE 8 OF 10 UTILISING BORROWALS AND DIVERTED FOR NON-BUSINESS P URPOSES THEN IT IS NOT DEDUCTIBLE. BEFORE MAKING DISALLOWANCE OF INTEREST PAID ON BORROWED MONIES ALLEGED TO HAVE ADVANCED TO SISTER-CONCERN, WHAT IS REQUIRED TO BE EXAMINED BY THE ASSESSING OFFICER IS THE EXTENT TO WHICH BEN EFIT OF BORROWED FUNDS IS GRANTED BY WAY OF ALLOWING ADVANCES TO SISTER-CONCE RN. OUR VIEW IS SUPPORTED BY THE DECISION FROM HONBLE DELHI HIGH COURT IN CI T VS. MOTOR GENERAL FINANCE LTD. (272 ITR 550) (DEL). THE ASSESSEE FURT HER GETS SUPPORT FROM THE RATIO LAID DOWN IN CIT VS. RADICO KHETAN LTD. (274 ITR 354) (ALL) AND CIT VS. SOUTH INDIA CORPORATION (AGENCIES) (293 ITR 237)(MA D). THE ISSUE BEFORE US IS ADVANCING OF LOAN TO SUBSIDIARY COMPANY AND THE NATURE OF SEC. 14A IS ALTOGETHER DIFFERENT, CONSEQUENTLY, IT IS NOT APPLI CABLE TO THE FACTS OF THE PRESENT APPEAL. EVEN OTHERWISE, AS CANVASSED BY THE LD. COUNSEL FOR ASSESSEE, THAT THE ASSESSEE WAS HAVING INTEREST FREE LOAN OF RS.160 LACS, SHARES WERE PURCHASED ON DIFFERENT DATES, INTEREST FREE FUNDS W ERE GIVEN TO THE SUBSIDIARY COMPANY, THEREFORE, SEC. 14A IS NOT APPLICABLE. WE HAVE ALSO PERUSED (PAGE 33) THE INTEREST CALCULATION ON DEBIT/CREDIT BALANC E, LEDGER ACCOUNT, CALCULATION OF INTEREST ON THE AMOUNT DUE FROM BAGREE METAL P. LTD., AUDITED ACCOUNTS, COMPUTATION OF INCOME FILED BEFORE THE ASSESSING OF FICER AND FOUND THAT THE INTEREST FREE FUNDS WERE MADE TO THE SUBSIDIARY COM PANY FOR BUSINESS PURPOSES, THEREFORE, THE ASSESSING OFFICER WAS NOT JUSTIFIED TO DISALLOW THE ENTIRE INTEREST EXPENSES. IN VIEW OF THIS FACT AND JUDICIAL PRONOUNCEMENTS, WE PAGE 9 OF 10 HAVE NOT FOUND ANY INFIRMITY IN THE IMPUGNED ORDER. IT IS UPHELD, CONSEQUENTLY, APPEAL OF THE REVENUE IS DISMISSED. IN ITS CROSS-OBJECTION, IT HAS BEEN OBJECTED THAT THE LD. FIRST APPELLATE AUTHORITY IS NOT JUSTIFIED IN UPHOLDING THE DISALLO WANCE OF RS.25,000/- EACH OUT OF TELEPHONE AND CONVEYANCE EXPENSES RESPECTIVELY. THE LD. COUNSEL FOR ASSESSEE ADVANCED HIS ARGUMENTS BY CLAIMING THAT TH ESE ARE ADHOC DISALLOWANCES AND SINCE ASSESSEE IS A PRIVATE LIMIT ED COMPANY, NO SUCH DISALLOWANCE SHOULD HAVE BEEN MADE. ON THE OTHER HA ND, THE LD. DR DEFENDED THE IMPUGNED ORDER. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON THE FIL E. IT IS SEEN THAT THE ASSESSEE CLAIMED RS.2,19,448/- AS TELEPHONE EXPENSE S AND RS.1,52,127/- AS CONVEYANCE EXPENSES. THE ASSESSING OFFICER DISALLOW ED RS.50,000/- OUT OF TELEPHONE EXPENSES AND RS.25,000/- OUT OF CONVEYANC E EXPENSES ON THE PLEA THAT NATURE OF THESE EXPENSES IS NOT VERIFIABLE DUE TO CASH PAYMENT ON THE BASIS OF SELF-MADE VOUCHERS (FOR CONVEYANCE EXPENSE S) AND THE ASSESSEE IS NOT MAINTAINING THE RECORD OF TELEPHONIC CALLS, THE REFORE, PERSONAL USE OF TELEPHONE IS NOT RULED OUT. THERE IS A FURTHER FIND ING THAT SOME OF THE EXPENSES ARE BOGUS WHICH WERE DEBITED IN THE ACCOUN T. ON APPEAL, THE LD. CIT(A) AFFIRMED THE STAND OF THE ASSESSING OFFICER. ADMITTEDLY, THESE ARE ADHOC DISALLOWANCES WHICH ARE GENERALLY NOT PERMITT ED IN THE CASE OF A COMPANY, HOWEVER, DUE TO SPECIFIC FINDING THAT THER E WERE CASH PAYMENTS, PAGE 10 OF 10 SELF-MADE VOUCHERS, DETAILS WERE MISSING, NO RECORD OF TELEPHONIC CALLS, WHICH WERE ABNORMALLY HIGH AND UNEXPLAINED BY THE ASSESSE E, THEREFORE, PERSONAL USE CANNOT BE RULED OUT. HOWEVER, TO PUT AN END TO THE LITIGATION, WE FURTHER REDUCE THE AMOUNT OF TELEPHONE AND CONVEYANCE EXPEN SES TO RS.15,000/- EACH, SUSTAINED BY THE LD. CIT(A), CONSEQUENTLY, TH E CROSS-OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. FINALLY, THE APPEAL OF THE REVENUE IS DISMISSED AN D CROSS-OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20.11.2009. SD/- SD/- (M.L. GUSIA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 20.11.2009 !VYAS! COPY TO: APPELLANT/RESPONDENT/CIT/CIT(A)/DR