SAMARPAN FABRICATORS P.LTD, MUMBAI V. ACIT 2(3), MUMBAI

ITA 543/MUM/2015

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 2689 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-07-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2005-2006
• Appeal Filed On: 23-01-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHARTI SINGH
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SM C BENCH , MUMBAI BEFORE SRI MAHAVIR SINGH, J UDICIAL MEMBER ITA NO .543 /MUM/2015 (A.Y.: 2005 - 06 ) M/S. SAMARPAN FABRICATORS PVT. LTD., C/O. JAYESH SANGHRAJKA & CO., 405 - 408, HIND RAJASTHAN CENTER, D. S. PHALKE ROAD, DADAR (E), MUMBAI 400 014 VS. THE ASST. COMMISSIONER OF INCOME TAX - 2 (3), MUMBAI PAN: AABCS 9672 C APPELLANT .. RESPONDENT APPELLANT BY .. SHRI HARSHVARDHAN DATER SHRI MANGAV SHUKLA, ARS RESPONDENT BY .. MS. BHARTI SINGH, DR DATE OF HEARING 26 - 07 - 2016 DATE OF PRONOUNCEMENT 26 - 07 - 2016 O R D E R PER MAHAVIR SINGH , JM : THIS APPEAL BY THE ASSESSEE IS ARISING OU T OF THE ORDER OF THE CIT (A) - 6, MUMBAI PASSED IN APPEAL NO.CIT (A) - 6/IT.3 & 04 /SET ASIDE/RG.2 (3)/2014 - 15 DATED 24 - 10 - 2014. ASSESSMENT WA S FRAMED BY THE ITO 2(3) - 1, MUMBAI FOR ASSESSMENT YEAR 2005 - 06 VIDE HIS ORDER DATED 12 - 12 - 2007 PASSED U/S 143(3) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT). 2. THE ONLY ISSUE IN THIS APPEAL OF THE ASSESSEE IS AGAINST THE ORDER OF THE CIT (A) CONF IRMING THE ADDITION MADE BY THE AO ON ACCOUNT OF DISALLOWANCE OF INTEREST EXPENSES FOR THE REASON THAT THE ASSESSEE HAS ADVANCED INTEREST - FREE ADVANCES TO ITS SUBSIDIARIES OUT OF INTEREST BEARING FUNDS. 3 . I HAVE HEARD THE RIVAL CONTENTIONS AND HAVE ALSO GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. T HE LEARNED COUNSEL FOR THE ASSESSEE BEFORE ME STATED THAT THE AO HAS DISALLOWED INTEREST PAYMENT TO THE TUNE OF RS.9,39,149/ - FOR THE REASON THAT INTEREST BEARING FUNDS ARE ADVANCED AS INTEREST FREE L OANS TO ITS SUBSIDIARIES. THE CIT (A) PARTLY DELETED THE ADDITION AFTER AVERAGING THE ADVANCES AND INTEREST FREE FUNDS AVAILABLE BY OBSERVING IN PARA 3.6 OF HIS ORDER AS UNDER: - 3.6 THE APPELLANT HAS NOT SUBMITTED ANY FUND FLOW STATEMENT ALONG WITH COPIES OF BANK STATEMENTS TO DIRECTLY ESTABLISH THAT LOANS AND ADVANCES GIVEN ARE DIRECTLY FROM OUT OF ITS OWN FUNDS. IN THESE CIRCUMSTANCES, THEREFORE, IT CANNOT BE ACCEPTED THAT THE WHOLE OF THE LOANS AND ADVANCES TO ITA NO. 543 /MUM/20 1 5 2 SUBSIDIARIES AND SISTER CONCERNS ARE FROM O UT OF OWN FUNDS. HENCE ONE WILL HAVE TO COMPUTE THE INTEREST EXPENDITURE CORRESPONDING TO INTEREST - FREE LOANS AND ADVANCES GIVEN TO SUBSIDIARIES AND SISTER CONCERNS ON A PROPORTIONATE BASIS IN THE CASE OF THE APPELLANT, THE SHARE CAPITAL AND RESERVES AND S URPLUS IN THE BEGINNING AND THE END OF THE YEAR ARE RS. 1,52,54,586/ - AND RS.1,53,79,725/ - RESPECTIVELY AND THE AVERAGE COMES TO RS.1,53,17,157/ - . THE INTEREST BEARING BORROWINGS AT THE BEGINNING AND END OF THE YEAR ARE RS.1,28,90,142/ - AND RS.99,54,156/ - R ESPECTIVELY AND THE AVERAGE COMES TO RS.1,14,22,149/ - . IT INDICATES THAT OWN FUNDS ON AN AVERAGE DURING THE YEAR WERE 48% AND THE BORROWED FUNDS WERE 42%. THE LOANS AND ADVANCES TO SUBSIDIARIES/SISTER CONCERNS AT THE BEGINNING AND END OF THE YEAR ARE RS.1, 58,27,669/ - AND RS.1,12,80,671/ - RESPECTIVELY. THE AVERAGE AMOUNT OF LOANS AND ADVANCES IS RS.1,35,54,170/ - . OUT OF THIS AMOUNT, 42% I. E. RS.56,92,751/ - SHALL BE DEEMED TO HAVE COME FROM INTEREST - BEARING BORROWED FUNDS, THE INTEREST THEREON @12% WOULD BE RS.6,83,130/ - , WHICH IN MY OPINION SHOULD BE DISALLOWED AND THE BALANCE AMOUNT OF RS.2,58,019/ - (OUT OF RS.9,39,149/ - ) SHOULD BE DELETED. THE CIT (A) RESTRICTED THE ADDITION TO RS.6,83,130/ - . AGGRIEVED THE ASSESSEE IS NOW IN SECOND APPEAL BEFORE THE TRI BUNAL. 4. I FIND FROM THE FACTS OF THE CASE THAT THE ASSESSEE HAS TAKEN INTEREST BEARING LOANS FROM FAMILY MEMBERS AND ALSO CANARA BANK AND PAID INTEREST TO THE TUNE OF RS.9,39,149/ - AND CLAIMED THE SAME AS EXPENDITURE. ON VERIFICATION OF THE BALANCE SHE ET THE AO FOUND THAT THE ASSESSEE COMPANY HAS GIVEN INTEREST FREE ADVANCES TO THE TUNE OF RS.1,12,80,671/ - TO THE FOLLOWING 3 PARTIES: - 1. M/S. SELECT PACKAGING MACHINERY PVT. LTD. RS.73,08,351/ - 2. M/S. SAMARPAN CONVERTERS PVT. LTD. RS.12,04,421/ - 3. M/S. NEELKANTH SPARES AND SERVICES PVT. LTD. RS. 4,88,090/ - 5 . THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE ME STATED T HAT THE ISSUE IS NOW COVERED BY THE DECISION OF T HE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES & POWER LT D. (2009) 178 TAXMAN 135 (BOM.), WHEREIN THE PRESUMPTION THAT WHEN INTEREST FREE FUNDS ARE AVAILABLE TO THE ASSESSEE SUFFICIENTLY TO MAKE INTEREST FREE ADVANCES, NO DISALLOWANCE CAN BE MADE IN REGARD TO INTEREST PAYMENT. THE RELEVANT PORTION OF THE JUDGMEN T OF THE HONBLE BOMBAY HIGH COURT READS AS UNDER: 10. IF THERE IS INTEREST - FREE FUND AVAILABLE TO AN ASSESSEE SUFFICIENT 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 INT EREST - FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT ITA NO. 543 /MUM/20 1 5 3 IN EAST INDIA PHARMACEUTICAL WORKS LTD.S CASE (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD.S CASE (SUPRA) WHERE A SIMILAR ISSUE HAD A RISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN 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 DEDUCTION. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, 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 OF INDIA LTD.S CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CAS E 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 BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTE NTION BEFORE THE HIGH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST - FREE FUND GENERATED OR AVAILAB LE WITH THE COMPANY, IF THE INTEREST - FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS IN THIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT (APPEALS) AND ITAT . 6. IN THE PRESENT CASE BEFORE ME, I FIND THAT THE ASS ESSEE IS HAVING INTEREST FREE FUNDS AVAILABLE AT RS.1,58,27,669/ - AS AGAINST THE ADVANCE OF RS.1,12,80,671/ - . THIS FACT HAS ALSO BEEN NOTED BY THE CIT (A) BUT, HE WENT ON AVERAGING WHICH WOULD DISTORT THE RESULT . IN TERMS OF THE ABOVE, I ALLOW THE ISSUE IN FAVOUR OF THE ASSESSEE. 7 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. O RDER PRONOUNCED IN THE OPEN COURT ON 26 /07 / 201 6 . SD/ - ( MAHAVIR SINGH ) JUDICIAL MEMBER MUMBAI , DATED 26 /7 / 201 6 LAKSHMIKANTA DEKA/SR.PS ITA NO. 543 /MUM/20 1 5 4 COPY OF THE ORDER FORWARDED TO : BY ORDE R, ASSISTANT REGISTRAR ITAT, MUMBAI DATE INITIAL DICTATION PAD ATTACHED WITH THE DRAFT ORDER YES 1. DRAFT DICTATED ON 26 - 07 - 16 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 27 - 07 - 16 S R.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. AM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. FILE SENT TO THE BENCH CLERK SR.PS 8. DATE ON WHICH FILE GOES TO THE AR 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK. 10. DATE OF DISPATCH OF ORDER. 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT ( A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY//