Sh. Vineet Maini, Hisar V. ITO, Hisar

ITA 5240/DEL/2016

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 6327 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 01-03-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 05-10-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BEDOBANI CHAUDHURI
• Keywords: Business income; Business expenditure; Earning of tax free income; Proportionate interest; Commercial expediency
• Section: 143(3); 27

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH SMC, NEW DELHI BEFORE SHRI S.V. MEHROTRA, ACCOUNTANT MEMBER ITA NO.5240/DEL/2016 ASSESSMENT YEAR : 2010-11 VINEET MAINI, PROP. M/S MARTIN & BROWN PHARMACEUTICALS, SECTOR 27 -28, HISAR. VS. ITO, WARD- 4, HISAR. PAN : AAXPM 6619 G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI KULDIP KHERA, CA RESPONDENT BY : MS. BEDOBANI CHAUDHURI, SR.DR DATE OF HEARING : 03-03-2017 DATE OF PRONOUNCEMENT : 28-03-2017 O R D E R PER S.V. MEHROTRA, A.M : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 25.07.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS), HISAR, U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT T HE ACT), RELATING TO ASSESSMENT YEAR 2010-11. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FL ED RETURN DECLARING AN INCOME OF RS.9,52,940/-. THE ASSESSING OFFICER NOT ICED FROM PROFIT & LOSS ACCOUNT THAT ASSESSEE HAD CLAIMED EXPENSES OF RS.4, 67,832/- ON ACCOUNT OF PAYMENT OF INTEREST ON BORROWED FUNDS, AS PER FOLLO WING DETAILS :- 2 ITA NO.5240/DEL/2016 UNSECURED LOANS RS.41,89,706/- UNSECURED LOANS RS.83,95,459/- TOTAL INTEREST BEARING FUNDS RS.1,25,85,165/- 3. THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD ADVANCED A SUM OF RS.1,00,88,796/- TO THE FIRM M/S MARTIN AND BROW N BIOSCIENCE, BADDI, WHEREIN HE WAS ONE OF THE PARTNERS. HE NOTED THAT THE ASSESSEE HAD NOT RECEIVED/CHARGED ANY INTEREST ON THE AMOUNT OF ADVA NCE TO THE FIRM. HE ALSO EXAMINED THE ACCOUNT OF DEBTOR AND NOTICED THAT ASS ESSEE WAS HAVING A RUNNING ACCOUNT WITH THIS CONCERN, WHEREIN, NUMEROU S TRANSACTIONS OF ADVANCING LOANS HAD BEEN CARRIED OUT. CLOSING DEBI T BALANCE OF THE ASSESSEE WITH THE FIRM WAS AT RS.1,00,88,796/- AS ON 31.03.2 010. HE REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY INTEREST EQUIVALENT T O THE INTEREST FREE ADVANCES OF RS.1,00,88,796/- TO M/S MARTIN & BROWN BIOSCIENC E MAY NOT BE DISALLOWED IN VIEW OF DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., (2005 ) 156 TAXMAN 257 (P&H). THE ASSESSEE IN ITS REPLY STATED AS UNDER : - ..RESPECTFULLY IT IS SUBMITTED THAT WE HAVE NOT CHARGED ANY INTEREST FROM M/S MARTIN & BROWN BIOSCIENCES BECAUSE SH. VINEET MAINI N IS PARTNER IN THE FIRM HAVING 50% SHARE. THE UNIT IS SETUP IN BADDI AND P ROFIT FROM THE UNIT IS EXEMPT U/S 80-I OF THE INCOME TAX ACT. THE ASSESSEE EARNI NG PROFIT FROM THE UNIT WHICH WAS NOT EXEMPT UNDER INCOME TAX ACT EXCEPT FOR THE DEDUCTION U/S 80-I OF THE INCOME TAX ACT. COPY OF CAPITAL A/C IN M/S MARTIN & BROWN BIOSCIENCES HAS ALREADY BEEN SUBMITTED AND PLACED ON FILE.. 3 ITA NO.5240/DEL/2016 4. AFTER CONSIDERING THE ASSESSEES REPLY, THE ASSE SSING OFFICER CONCLUDED THAT THE FUNDS TO THE EXTENT DIVERTED TO THE PARTNERSHIP CONCERN FREE OF INTEREST WERE NOT REQUIRED BY THE ASSESSEE FOR THE PURPOSES OF ITS BUSINESS AND NO LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED AND INTEREST THEREON WAS NOT ALLOWABLE. HE RELIED ON THE DECISI ON IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. (SUPRA), WHEREIN, IT HAS B EEN HELD THAT IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF DEDUCTION OF INTEREST, IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO SIS TER CONCERNS OR ANY OTHER PERSONS WITHOUT ANY INTEREST, THERE WOULD BE VERY H EAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE ASSESSING OFFI CER TO THE EFFECT THAT IN- SPITE OF PENDING TERM LOANS AND WORKING CAPITAL LOA NS, ON WHICH THE ASSESSEE IS INCURRING LIABILITY TO PAY TAX, THERE WAS JUSTIF ICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT A NY INTEREST AND, ACCORDINGLY, THE ASSESSEE SHOULD BE ALLOWED DEDUCTI ON OF INTEREST BEING PAID ON THE LOANS RAISED BY IT TO THAT EXTENT. AFTER TA KING INTO CONSIDERATION, SECURITIES RECEIVED FROM OTHERS TOTALING TO RS.53,1 4,501/-, THE ASSESSING OFFICER DISALLOWED THE PROPORTIONATE INTEREST AMOUN TING TO RS.2,63,317/-. LD. CIT(A) DISMISSED THE ASSESSEES APPEAL. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND HAS TAKEN FOLL OWING GROUNDS OF APPEAL :- 4 ITA NO.5240/DEL/2016 1. THE ORDER OF THE LEARNED CIT (A) CONFIRMING THE ADDITION IS BAD IN LAW AND AGAINST FACTS. 2. THE LEARNED CIT (A) HAS ERRED IN DISALLOWING INT EREST TO THE TUNE OF RS.263317/-. 3. THE LEARNED CIT (A) HAS ERRED BY NOT CONSIDERING THE JUDGMENT OF HONORABLE SUPREME COURT AND HONORABLE DIFFERENT HIG H COURTS & TRIBUNALS CITED BY THE ASSESSEE. ALTHOUGH NO ADDITION WAS CAL LED FOR IN VIEW OF THE JUDGMENTS OF DIFFERENT COURTS, HOWEVER IF THE CONTE NTION OF LEARNED CIT(A) IS ACCEPTED AND YOUR HONOR ALSO AGREE WITH THE LEARNED CIT (A) REJECTING THE CONTENTION OF THE ASSESSEE, EVEN THEN DISALLOWANCE COMES TO RS.94007/- ONLY AS PER CALCULATION GIVEN BEFORE THE LEARNED CIT (A). T HE LEARNED CIT (A) ERRED IN NOT CONSIDERING THE CALCULATIONS. 4. THE LEARNED C.I.T. (A) HAS ERRED IN RELYING ON T HE JUDGMENT OF ABHISHEK INDUSTRIES WHICH HAS NO RELEVANCE IN THE CASE OF AS SESSEE AS ASSESSEE HAS NOT MADE ANY INTEREST FREE ADVANCES TO ITS SISTER CONCE RN FOR NON BUSINESS PURPOSE. RATHER HE HAS INVESTED FUNDS IN A NEW UNIT AND ALL THE CASES RELIED BY HIM ARE SUPPORTING HIS STAND. THE LEARNED C.I.T. (A) HAS FU RTHER ERRED IN RELYING UPON JUDGMENT OF HONORABLE SUPREME COURT IN THE CASE OF HERO CYCLES (2015) 63 TAXMANN.COM 308 (SC). 5. WE WOULD FURTHER LIKE TO SUBMIT THAT IN THE CASE O F SHENOY & CO. VS. CTO (1985) 155 ITR 178, THE HONORABLE SUPREME COURT HAS HELD THAT THE LAW LAID DOWN BY IT (SC) IS BINDING ON ALL, NOTWITH STANDING THE FACT THAT IT IS AGAINST THE STATE OR A PRIVATE PARTY; IT IS BINDING EVEN ON THOSE WHO WERE NOT PARTIES BEFORE THE COURT. ALSO AS PER ARTICLE 141 O F THE CONSTITUTION OF INDIA THE LAW DECLARED BY THE SUPREME COURT SHALL BE BIND ING ON ALL COURTS WITHIN THE TERRITORY OF INDIA. MOREOVER, CASES DECIDED BY THE JURISDICTIONAL HIGH COURTS ARE ALSO BINDING WITHIN THE STATE. 5. LD. COUNSEL SUBMITTED THAT ASSESSEE HAD INVESTED THE AMOUNT AS CAPITAL TO EARN PROFIT. HE POINTED OUT THAT BUT FO R THE SECTION 80-I OF THE ACT, THE PROFIT WOULD HAVE BEEN TAXABLE IN THE HANDS OF THE ASSESSEE AND, THEREFORE, THE DECISION IN THE CASE OF ABHISHEK IND USTRIES (SUPRA) IS NOT APPLICABLE. HE SUBMITTED THAT ASSESSEE HAD NOT INV ESTED IN THE CAPITAL FOR EARNING EXEMPT INCOME. LD. COUNSEL RELIED ON THE D ECISION IN THE CASE OF 5 ITA NO.5240/DEL/2016 S. A. BUILDERS VS. CIT, 288 ITR 1, WHEREIN, IT HAS BEEN HELD THAT NO INTEREST CAN BE DISALLOWED IN RESPECT OF ADVANCE TO SISTER C ONCERN GIVEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY. LD. DR SUBMITTED THAT TH ERE WAS NO COMMERCIAL EXPEDIENCY. 6. I HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PA RTIES AND HAVE PERUSED THE RECORD OF THE CASE. IN THE SUBMISSIONS FILED BEFORE LD. CIT(A), IT WAS SPECIFICALLY STATED BY ASSESSEE THAT HE HAD STA RTED A UNIT IN PARTNERSHIP UNDER THE NAME AND STYLE OF M/S MARTIN & BROWN BIOS CIENCES IN BADDI, HIMACHAL PRADESH. THE ASSESSEE WAS PARTNER IN THE FIRM HAVING 50% SHARE. THE PROFITS OF THE FIRM WERE EXEMPT FOR A PERIOD OF 5 YEARS U/S 80-I OF THE ACT. THIS PLEA OF ASSESSEE DID NOT FIND FAVOUR WIT H THE LD. CIT(A), WHO OBSERVED IN PARA 5.2 AND 5.3 AS UNDER :- 5.2 IT IS NOT CLEAR FROM THE SUBMISSION OF THE APPELLANT AS TO HOW THE ADVANCES MADE TO M/S MARTIN & BROWN BIOSCIENCES IS IN THE INTEREST OF THE APPELLANT. IT IS ALSO NOT CLEAR AS TO HOW ANY INVES TMENT MADE BY THE APPELLANT IN A SISTER CONCERN IS GOING TO BENEFIT THE APPELLA NT. IT HAS ALSO NOT BEEN CLARIFIED AS TO HOW INTEREST BEARING FUNDS DIVERTED TO ABOVE CONCERN FREE OF INTEREST IS GOING TO BENEFIT THE APPELLANT. IT HAS BEEN CORRECTLY HELD BY THE AO THAT THE FUNDS TO EXTENT DIVERTED TO THE ABOVE CONC ERN FREE OF INTEREST WERE NOT REQUIRED BY THE APPELLANT FOR THE PURPOSES OF ITS B USINESS AND NO LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED AND INTEREST THER E ON IS THEREFORE NOT ALLOWABLE. 5.3 IT IS TO BE EXAMINED, IN VIEW OF THE DECI SION OF THE HONORABLE SUPREME COURT AS TO WHETHER THERE WAS REASONABLE NEXUS OR B USINESS EXIGENCY FOR ADVANCING INTEREST FREE FUNDS OUT OF INTEREST BEARI NG FUNDS. IT HAS BEEN HELD BY THE SUPREME COURT IN THE CASE OF HERO CYCLES PVT. L TD. V. CIT(2015) 63 TAXMANN.COM 308 (SC), QUOTING FROM THE CASE OF SA B UILDERS 288 ITR 1, THAT 6 ITA NO.5240/DEL/2016 'THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN EXP RESSION OF WIDE IMPORT AND INCLUDES AS MUCH EXPENDITURE AS A PRUDENT BUSIN ESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT H AVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT, YET IT IS ALLOWABL E AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMER CIAL EXPEDIENCY. 7. FROM THE ABOVE OBSERVATIONS, IT IS EVIDENT THAT THE CLAIM OF ASSESSEE HAS BEEN REJECTED PRIMARILY BECAUSE ASSESSEE FAILED TO ESTABLISH REASONABLE NEXUS OF BUSINESS EXPEDIENCY FOR ADVANCING INTEREST BEARING FUNDS TO PARTNERSHIP FIRM. HOWEVER, THE FACTUAL POSITION HA S NOT BEEN DISPUTED INASMUCH AS IT IS NOT DISPUTED THAT THE FUNDS WERE INVESTED IN THE CAPITAL OF PARTNERSHIP FIRM AND, THEREFORE, THE PRIMARY INTENT ION OF ASSESSEE WAS TO EARN PROFITS FROM THE FIRM. THE CONTENTION OF ASSESSEE THAT SINCE THE PROFITS FROM FIRM WERE EXEMPT U/S 80-IC, THEREFORE, IT CANNOT BE SAID THAT THE INVESTMENT WAS NOT MADE FOR THE PURPOSES OF EARNING TAXABLE IN COME FROM FIRM IS NOT CORRECT BECAUSE THE MAIN ISSUE TO BE CONSIDERED IN THE PRESENT SCENARIO IS AS TO HOW THE RECEIPTS FROM FIRM WOULD BE TAXABLE IN T HE HANDS OF ASSESSEE. ADMITTEDLY, THE SHARE OF THE PROFITS DERIVED FROM F IRM IS EXEMPT U/S 10(2A) IN THE HANDS OF ASSESSEE AND, THEREFORE, TO THIS EX TENT PROPORTIONATE DISALLOWANCE CAN BE MADE. HOWEVER, INTEREST AND RE MUNERATION FROM FIRM WOULD BE TAXABLE AS BUSINESS INCOME IN THE HANDS OF ASSESSEE AND, THEREFORE, INTEREST PAID ON BORROWED FUNDS IN THIS REGARD CANN OT BE DISALLOWED. THE 7 ITA NO.5240/DEL/2016 TAXABILITY OF INCOME IN THE HANDS OF FIRM IS NOT RE LEVANT WHILE CONSIDERING THE NATURE OF RECEIPT IN THE HANDS OF ASSESSEE. TH EREFORE, THE ASSESSEES CLAIM THAT IT HAD NOT INVESTED THE MONEY TO EARN AN Y EXEMPT INCOME IS NOT CORRECT. THE NATURE OF PROFITS IN THE HANDS OF FIR M CANNOT BE THE DECISIVE FACTOR FOR CONSIDERING THE NATURE OF PROFITS IN THE HANDS OF ASSESSEE. IN VIEW OF ABOVE DISCUSSION, THE ASSESSING OFFICER IS DIREC TED TO RE-COMPUTE THE DISALLOWANCE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 28 TH DAY OF MARCH, 2017. SD/- (S.V. MEHROTRA) ACCOUNTANT MEMBER DATED : 28-03-2017. SUJEET COPY OF ORDER TO: - 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT 4) THE CIT(A) 5) THE DR, I.T.A.T., NEW DELHI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, NEW DELHI