ACIT CIR 7(1)1, MUMBAI V. G.R. ENGINEERING P.LTD, MUMBAI

ITA 5428/MUM/2016

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 0091 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Assessment Year: 2011-2012
• Appeal Filed On: 06-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Additional evidence; Wholly owned subsidiary; Tangible material

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, MUMBAI . . , , , , BEFORE SHRI G. S. PANNU , AM AND SHRI AMARJIT SINGH, JM / I .T.A. NO. 5428 / MUM/ 201 6 ( / ASSESSMENT YEAR: 20 11 - 12 ) ASST. COMMISSIONER OF INCOME - TAX, CIRCLE - 7(1)1 ROOM NO.130, 1 ST FLOOR, AAYAKAR BHAVAN, M.K.ROAD, MUMBAI - 400020 / VS. M/S. G. R. ENGINEERING PVT. LTD. 202 - A, POONAM CHAMBERS, DR.ANNIE BESANT ROAD, WORLI, MUMBAI - 400018 ./ ./ PAN/GIR NO. : AAACH 8828 G ( / APPELLANT ) .. ( / RES PONDENT ) / DATE OF HEARING : 08.08 .2017 / DATE OF PRONOUNCEMENT : 31 .0 8 .2017 / O R D E R PER AMARJIT SINGH, J M: THE REVENUE HAS FILED THE PRESENT APPEAL AGAINST THE ORDER DATED 30.06.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS) - 1 3 , MUMBAI [HEREINAFTE R REFERRED TO AS THE CIT(A)] RELEVANT TO THE A.Y. 20 11 - 12 . 2. THE REVENUE HAS RAISED THE FOLLOWING GRO UNDS: - REVENUE BY : SHRI RAJESH KUMAR ASSESSEE BY: SHRI MAYUR R. MAKADIA ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S.36(1)(III) OF THE ACT WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS FAILED TO PROVE THE FACT THAT THE INTEREST FREE ADVAN CES WERE GIVEN OUT OF OWN FUNDS AND NOT FROM THE INTEREST BEARING LOANS TAKEN. 2. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE A.Y.2011 - 12 ON 29.09.2011, DECLARING TOTAL INCOME TO THE TUNE OF RS.62,03,05,109/ - . THE RETURN WAS PROCESSED U/S.143(1) OF THE INCOME TAX ACT, 1961 ( IN SH ORT THE ACT). THEREAFTER, THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT THROUGH C ASS. NOTICE U/S.143(2) OF THE ACT DATED 02.08.2012 WAS ISSUED AND SERVED UPON THE ASSESSEE. THEREAFTER THE NOTICE U/S.142(1) OF THE ACT DATED 22.11.2013 WAS ALSO ISSUED AND SERVED UPON THE ASSESSEE. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS E NGAGED IN THE BUSINESS OF FABRICATION OF MACHINERIES OF PHARMACEUTICAL, CHEMICAL, FERTILIZERS, ATOMIC POWER, REFINERY, DISTILLATION PLANT INDUSTRIES AND WINDMILL POWER GENERATION. THE ASSESSEE HAS SHOWED A TURNOVER OF RS.3,39,91,38,028/ - (EXCLUDING SALES FROM WIND ENERGY AND TRADED ITEMS) DURING THE YEAR. THE ASSESSEE HAS SHOWN A GROSS PROFIT OF RS.1,36,68,14,084/ - WHICH WAS 40.21% OF THE GROSS TURNOVER AND A NET PROFIT OF RS.71,15,61,291/ - WHICH WAS 20.39% OF THE TOTAL TURNOVER. IT WAS NOTICED THAT THE ASSESSEE HAS PAID HUGE INTEREST TO THE TUNE OF RS.1,96,75,343/ - ON THE LOAN TAKEN BY IT, HOWEVER, THE ASSESSEE HAS ADVANCED INTEREST FREE LOAN OF RS.7,51,50,455/ - TO M/S. GREW LTD., DUBAI, A WHOLLY OWNED SUBSIDIARY COMPANY. THEREFORE, THE NOTICE WAS GIVEN AND AFTER RECEIPT OF THE REPLY THE ASSESSING OFFICER WAS OF THE VIEW THAT IN ACCORDANCE WITH SAF E HARBOR RULES (RULE 10TD), THE INTEREST @ 10.5% ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 3 UPON RS.7,51,50,455/ - I.E. RS.78,90,798/ - IS NOT ALLOWABLE IN VIEW OF THE PROVISION U/S.36(1)(III) OF THE ACT. HENCE, THE SAID AMOUNT WAS ADDED TO THE INCOME OF THE ASSESSEE, HENCE, THE ASSESSEE FILED AN APPEAL BEFORE THE CIT(A) WHO ALLOWED THE CLAIM OF THE ASSESSEE, THEREFORE, THE REVENUE HAS FILED THE PRESENT APPEAL BEFORE US. ISSUE NO.1: - 4. UNDER THIS ISSUE, THE REVENUE HAS CHALLENGED THE DELETION OF THE ADDITION MADE U/S.36(1)(III) OF THE ACT TO THE TUNE OF RS.78,90,798/ - . BEFORE GOING FURTHER IT IS NECESSARY TO ADVERT THE FINDING OF THE CIT(A) ON RECORD: - 3.4 DECISION I HAVE CAREFULLY CONSIDERED THE AOS ORDER AND REMAND REPORT AS ALSO THE AR S SUBMISSIONS AND REJOINDER TO THE REMAND REPORT. THE BRIEF UNDISPUTED FACTS ARE THAT THE APPELLANT HAD INVESTED AN AMOUNT OF AED 50,000/ - (ABOUT 0.06 CRORE) TOWARDS INVESTMENT IN ITS SUBSIDIARY VIZ. GREW DUBAI, APART FROM ADVANCING IT A SUM OF AED 64,50,000 (ABOUT 7.51 CRORES) AS AN INTEREST - FREE LOAN FOR MEETING THE WORKING CAPITAL REQUIREMENT OF GREW DUBAI, BOTH THE REMITTANCES HAVING BEEN DO NE DURING FY 2007 - 08. THE AO NOTED THAT THE APPELLANT HAD TAKEN INTEREST - BEARING LOAN FOR MEETING THE WORKING CAPITAL REQUIREMENT OF GREW DUBAI, BOTH THE REMITTANCES HAVING BEEN DONE DURING THE F.Y.2007 - 08. THE AO NOTED THAT THE APPELLANT HAD TAKEN INTER EST - BEARING LOANS TOTALING 49.11 CRORES AND PAID INTEREST OF 1.96 CRORE THEREON. WHILE ACKNOWLEDGING THE RULE 10TD OF THE RULES ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 4 WAS NOT APPLICABLE TO THE ASSESSMENT YEAR UNDER CONSIDERATION, THE AO STILL SOUGHT TO ADOPT THE INTEREST RATE UNDER THAT RULE, FURTHER ADJUSTED IT AND MADE A DISALLOWANCE OF 0.78 CRORE IN TERMS OF SECTION 36(1)(III) OF THE ACT. HERE, IT WOULD BE NOTEWORTHY THAT NO SIMILAR DISALLOWANCE HAS BEEN MADE BY THE AO IN ANY OF THE ASSESSMENT YEARS SINCE THE REMITTANCES TO GREW DUBAI WERE MADE BY THE APPELLANT . THE AR HAS ADVANCED EXTENSIVE ARGUMENTS TO EXPLAIN THE APPELLANTS BUSINESS PLAN AND FILED ADDITIONAL EVIDENCE TO DEMONSTRATE THE SAME. TO MY MIND, RATHER THAN THAT IT IS THE LEGAL DEFENCE MOUNTED BY THE AR WHICH IS CRUCIALLY IMPORTANT, WHEN HE HAS SOU GHT TO RELY ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. (SUPRA). THE RELEVANT EXTRACT OF THIS ORDER IS REPRODUCED HEREWITH. 13. IF THERE BE INTEREST - FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICI ENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST - FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA) HAD THE O CCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 5 PRESUMED THAT THE ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FOR CE, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET TH E ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUS INESS. IT NOTED THAT THE RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVERDRAFT AND / OR LO ANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERATED OR AVAILABLE WITH ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 6 THE COMPANY, IF THE INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CON SIDERING THE FINDING OF THE FACT BOTH BY THE CIT(A) AND TRIBUNAL. FROM A PLAIN READING OF THE ABOVE EXTRACT, IT WOULD BECOME CLEAR THAT THE HONBLE JURISDICTIONAL HIGH COURT HAD HELD THAT IF BOTH INTEREST - FREE AND INTEREST - BEARING FUNDS WERE AVAILABLE TO THE ASSESSEE, THEN A PRESUMPTION WOULD ARISE THAT THE ASSESSEES INVESTMENTS WOULD BE OUT OF ITS INTEREST - FREE FUNDS, PROVIDED THEY WERE SUFFICIENT TO MEET THE INVESTMENT. THE APPELLANTS AUDITED ACCOUNTS FOR FYS 2007 - 08 (VIZ. THE PREVIOUS YEAR RELEVANT T O THE ASSESSMENT YEAR UNDER CONSIDERATION) HAVE BEEN DULY PLACED ON THE APPELLATE RECORD. AS PER THE BALANCE SHEET AS ON 31 ST MARCH 2008 THE APPELLANTS OWN FUNDS AMOUNTED TO 107.58 CRORES, ITS SHARE CAPITAL BEING 27.19 CRORES AND ITS RESERVES AND SURPLUS BEING 80.38 CRORES. THE BALANCE SHEET AS ON 31 ST MARCH 2011 REVEALED THAT THE APPELLANTS OWN FUNDS AMOUNTED TO 155.11 CRORES. ON THE OTHER HAND, THE INTEREST - FREE AD VANCE MADE BY IT TO GREW DUBAI WAS ONLY TO THE TUNE OF 7.51 CRORES. IN THESE CIRCUMSTANCES, NO QUESTION OF DISALLOWANCE OUT OF THE INTEREST PAYMENT MADE ON THE INTEREST - BEARING LOANS WOULD ARISE IN THE APPELLANTS CASE. RESPECTFULLY FOLLOWING THE HONB LE JURISDICTIONAL HIGH COURT, THE ADDITION OF 78,90,798/ - MADE UNDER SECTION 36(1)(III) OF THE ACT IS ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 7 DELETED. THE AO IS SO DIRECTED. GROUND NO.1 IS ACCORDINGLY ALLOWED. 5. ON APPRAISAL OF THE ABOVE SAID FINDING, THE FACTUAL FACTS ARE NOT IN DISPUTE. THE CLAIM OF THE ASSESSEE WAS ALLOWED IN VIEW OF THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LTD. (313 ITR 340). THE ASSESSEE WAS HAVING THE INTEREST - BEARING FUNDS AND INTEREST FREE FUNDS. THE PRESUMPT ION ARISES IN FAVOUR OF THE ASSESSEE THAT THE ASSESSEE THAT ASSESSEE INVESTED THE AMOUNT IN THE SUBSIDIARY COMPANY OUT OF ITS INTEREST FREE FUNDS. PLACING RELIANCE UPON THE SAID DECISION THE CIT(A) HAS DISALLOWED THE INTEREST ASSESSED BY THE ASSESSING OFF ICER UPON THE INTEREST FREE FUNDS TO THE TUNE OF RS.7,51,50,455/ - . NO LAW CONTRARY TO THE SAID LAW PRODUCED . NOTHING TANGIBLE MATERIAL CONTRARY TO THE MATERIAL PRODUCED BEFORE CIT(A) WAS PRODUCED BEFORE US. FIND ING NO DISTINGUISHABLE MATERIAL, W E HAVE ARRIVED AT THIS CONCLUSION THAT THE CIT(A) HAS PASSED THE ORDER JUDICIALLY AND CORRECTLY WHICH IS NOT REQUIRE TO BE INTERFERE WITH AT THIS APPELLATE STAGE. THEREFORE, THIS ISSUE IS DECIDED IN FAVOUR OF THE ASSESSEE AGAINST THE REVENUE. ISSUE NO.2: - 6. IS SUE NO.2 IS FORMAL IN NATURE WHICH NOWHERE REQUIRE ANY ADJUDICATION. 7 . IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS HEREBY ORDERED TO BE DISMISSED . ITA NO. 5428 /M/201 6 A.Y. 2011 - 12 8 ORDER PRONOUNCED IN THE OPEN COURT ON 31.08. 2017 . SD/ - SD/ - ( G.S.PANNU ) (AMARJIT SINGH) / ACCOUNTANT MEMBER / JUDICIAL MEMBER MUMBAI; DATED : 31.08. 2017 MP / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE. / BY ORDER, //TRUE COPY// / / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI