DCIT 4(1), MUMBAI V. EMTEX INDUSTRIES (I) LTD, MUMBAI

ITA 5559/MUM/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 1740 (ITAT-MUMBAI)
• Duration Of Justice: 8 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-06-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: I
• Assessment Year: 2003-2004
• Appeal Filed On: 09-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AJAY KUMAR SRIVASTAVA
• Assessee Lawyers: JAIDEV
• Keywords: Proportionate interest
• Section: 43B; 37(1); 145; 144

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH I, MUMBAI BEFORE SHRI D.K. AGARWAL, J.M AND SHRI A.L. GEHLOT , A.M. ITA NO. 5559/M/2009 ASSESSMENT YEAR: 2003-04 DY. COMMISSIONER OF INCOME-TAX, APPELLANT 4(1), 6TH FLOOR, ROOM NO. 640 AAYAKAR BHAVAN, MUMBAI 20 VS. M/S EMTEX INDUSTRIES (I) LTD., RESPONDENT 413G, BASANTWADI, KALBADEVI ROAD, MUMBAI -2. APPELLANT BY : MR. AJAY KUMAR SRIVASTAVA RESPONDENT BY : MR. JAIDEV ORDER PER A.L. GEHLOT, A.M.: THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAIN ST THE ORDER OF CIT(A)-IV, MUMBAI, PASSED ON 20.07.2009 FOR TH E ASSESSMENT YEAR 2003-04 WHEREIN THE REVENUE HAS RAISED THE FOL LOWING GROUNDS OF APPEAL:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 19,98,76,377/- BEING INTEREST PAID WITHOUT APPRECIA TING THE FACT THAT THE AO DISALLOWED THE INTEREST AND THE SA ME WAS NOT PROVIDED IN THE BOOKS OF ACCOUNTS AND NO DEBITED TO PROFIT & LOSS A/C, HOWEVER, THE ASSESSEE CLAIMED THE SAME IN COMPUTATION OF INCOME. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 78,09,009/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUAT ION LOSS WITHOUT APPRECIATING THE FACT THAT THE AUDITOR HAS CERTIFIED THAT THE ASSESSEE COMPANY HAS NOT COMPLIED WITH ACCOUNTI NG STANDARD ON ACCOUNT OF EFFECT OF CHANGES IN FOREIGN EXCHANGE RATE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(A) ERRED IN HOLDING THAT DELAYED P AYMENT OF P.F. CONTRIBUTION MADE WITHIN A GRACE PERIOD IS ALL OWABLE DEDUCTION WITHOUT APPRECIATING THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. THIRANI & CO. (1993) 68 TAXMAN (CAL.). ITA NO. 5559/MUM/09 M/S EMTEX INDUSTRIES (I) LTD. 2 4. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND I N LAW, THE IMPUGNED ORDER OF THE LD. CIT(A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE AO BE RESTORED. 2. BRIEFLY THE FACTS RELATING TO GROUND NOS. 1 & 2 ARE THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICE D THAT THE ASSESSEE IS CARRYING ON THE BUSINESS OF MANUFACTURI NG AND PROCESSING OF COTTON AND SYNTHETIC FABRICS AND MANU FACTURING OF PHARMACEUTICAL CHEMICALS. THE AO FURTHER NOTICED TH AT THE ASSESSEE HAS CLAIMED INTEREST TO BANK OF RS. 90,98, 76,377/- AND EXCHANGE FLUCTUATION LOSS OF RS. 78,09,009/-. IT WA S STATED THAT THE COMPANY HAD NOT PROVIDED INTEREST PAYABLE TO FINANC IAL INSTITUTIONS, BANKS AND OTHERS AMOUNTING TO RS. 35 ,90,95,171/- OUT OF WHICH RS. 15,92,18,794/- IS INTEREST PAYABLE TO FINANCIAL INSTITUTIONS AND OTHERS COVERED U/S 43B OF THE ACT, WHICH WILL BE CLAIMED AS DEDUCTION ON PAYMENT BASIS AND THE BALAN CE INTEREST OF RS. 19,98,76,377/-, WHICH IS NOT COVERED U/S 43B IS ALSO CLAIMED AS DEDUCTION DURING THE YEAR. THE AO WAS OF THE VI EW THAT THE ASSESSEE DID NOT FOLLOW THE MERCANTILE SYSTEM OF AC COUNTING. THE ASSESSEE COMPANY COULD NOT MAKE A CLAIM WITHOUT MAK ING PROVISION IN THE BOOKS OF ACCOUNTS AND THE RATIO OF THE DECISION IN THE CASE OF M/S KEDARNATH JUTE MFG. CO. LTD. VS. CI T, 82 ITR 363 (SC) DOES NOT APPLY SINCE THE ASSESSEE HAS NOT FOLL OWED MERCANTILE SYSTEM OF ACCOUNTING. THE AO MADE THE ADDITION OF R S. 19,98,76,377/- ON ACCOUNT OF INTEREST AND RS. 78,09 ,009/- ON ACCOUNT OF FLUCTUATION LOSS. THE AO FURTHER NOTICE D THAT THE ASSESSEE HAD DIVERTED INTEREST BEARING FUNDS TO NON -BUSINESS PURPOSES. THE AO DISALLOWED PROPORTIONATE INTEREST. THE CIT(A) HELD THAT ALLOWABILITY OF INTEREST DEPENDS ON THE P AYMENT OF INTEREST IS FOR THE PURPOSE OF BUSINESS OR NOT. THE CIT(A) AFTER CONSIDERING THE DIVERSION OF BORROWED FUNDS TO NON BUSINESS PURPOSES, ENHANCED THE DISALLOWANCE AMOUNT TO RS. 19,09,76,299/- OBSERVING AS UNDER:- IT IS SEEN THAT ADVANCE TO STAFFS, ADVOCATE FEE AND INSURANCE CHARGES ARE FOR THE PURPOSE OF BUSINESS AND OF OTHE R ADVANCES ARE NOT FOR THE PURPOSE OF BUSINESS, EXCLUDING THES E THREE ITEMS, THE TOTAL ADVANCES NOT FOR THE PURPOSE OF BU SINESS COME TO RS. 56187290 (531319 +10000+29480)= 55625491/- ITA NO. 5559/MUM/09 M/S EMTEX INDUSTRIES (I) LTD. 3 VIDE LATTER DATED DECEMBER 17, 2008, PARA 3 THE APP ELLANT SUBMITTED THAT IT IS PAYING INTEREST TO THE BANKS A ND FINANCIAL INSTITUTIONS WHICH IS RANGING FROM 15% TO 17% PER A NNUM AND THIS RATE OF INTEREST IS FLUCTUATING YEAR TO YEAR. THE 16% OF RS. 5,56,25,491/- I.E. 89,00,078/- IS THEREFORE CAN REA SONABLY BE CONSIDERED TO BE INTEREST PAID WHICH IS NOT FOR THE PURPOSE OF BUSINESS. THUS THE DISALLOWANCE OF RS. 29,17,000/- IS ENHANCED TO RS. 89,00,078/-. BUT THE CLAIM OF INTER EST AS PER GROUND 1 WHICH IS ACCRUED, AND IN OTHERWISE NOT DIS ALLOWABLE UNDER SECTION 43B IS REQUIRED TO BE ALLOWED. THE SA ME AMOUNTS TO RS. 19,98,76,377/- - 89,00,078 = 19,09,7 6,299/-. THUS, THE AO IS DIRECTED TO ALLOW INTEREST OF RS. 19,09,76,299/-. THE FIRST PART OF GROUND 1 AND GROU ND 2 IS THUS DECIDED ACCORDINGLY. 3. THE CIT(A) ALSO DIRECTED THE AO TO ALLOW THE FOR EIGN EXCHANGE LOSS OF RS. 7,80,90,009/-FOLLOWING THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF CIT VS. WOODWARD GOVER NOR IND. LTD. 312 ITR 254 (SC). 4. THE LEARNED DR HAS RELIED UPON THE ORDER OF AO A ND SUBMITTED THAT THE ASSESSEE DID NOT FOLLOW MERCANTI LE SYSTEM OF ACCOUNTING AND THE ASSESSEE VIOLATED SECTION 145, A CCOUNTING STANDARDS-11 AND THE PROVISIONS OF THE COMPANIES AC T. AS REGARDS ALLOWABILITY OF FOREIGN EXCHANGE FLUCTUATION LOSS, THE LEARNED DR SUBMITTED THAT IN PRINCIPLE THERE IS NO DISPUTE THA T IT IS ALLOWABLE EXPENSES BUT WHEN THE ASSESSEE DID NOT FOLLOW THE M ERCANTILE SYSTEM OF ACCOUNTING AFTER CONSIDERING SECTION 145 OF THE ACT, AS- 11 AND THE PROVISIONS OF COMPANIES ACT AND ALSO THE CLAIM WHICH HAS NOT BEEN ACCOUNTED FOR IN THE BOOKS OF ACCOUNT ON THE BASIS OF MERCANTILE SYSTEM OF ACCOUNTING IS DISALLOWABLE. 5. THE LEARNED AR, ON THE OTHER HAND, RELIED UPON T HE ORDER OF CIT(A). 6. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSED THE RECORD. WE ARE NOT IN AGREEMENT WITH TH E SUBMISSION OF THE LEARNED DR THAT IF THE ASSESSEE IS NOT FOLLO WED MERCANTILE SYSTEM OF ACCOUNTING THE INTEREST EXPENDITURE CLAIM OF THE ASSESSEE IS TO BE DISALLOWED. WHEN THE ASSESSEE DID NOT FOLL OW MERCANTILE ITA NO. 5559/MUM/09 M/S EMTEX INDUSTRIES (I) LTD. 4 SYSTEM OF ACCOUNTING, THE AO IS EMPOWERED TO REJECT THE BOOKS OF ACCOUNT U/S 145 OF THE ACT AND AFTER REJECTING BOOK S OF ACCOUNT, THE AO IS REQUIRED TO BE MADE ASSESSMENT U/S 144 OF THE ACT. BUT THIS IS NOT THE CASE OF AO. HOWEVER, THE ALLOWABILI TY OF INTEREST EXPENDITURE IS TO BE SEEN IN THE LIGHT OF SECTION 3 6(1)(III) OF THE ACT, WHICH IS THAT THE AMOUNT OF INTEREST PAID IN RESPEC T OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS TO BE ALLOWED. IN THE CASE UNDER CONSIDERATION, THERE IS NO DISPUT E THAT THERE WERE BORROWED FUNDS AND THE ASSESSEE HAS PAID INTEREST O N THE BORROWED FUNDS USED FOR THE PURPOSE OF BUSINESS. SOME FUNDS WHICH WERE NOT USED FOR THE PURPOSE OF BUSINESS WERE TAKEN CARE OF AND CONSIDERED BY THE CIT(A) AND DISALLOWED PROPORTIONATE INTEREST EXPENDITURE. WHEN THE ASSESSEE SATISFIES THE CONDITIONS LAID DOW N IN SECTION 36(1)(III) AND SECTION 37(1) OF THE ACT, WE ARE OF THE VIEW THAT THE ASSESSEE HAS ENTITLED TO CLAIM THE EXPENDITURE FOR COMPUTATION OF INCOME FROM BUSINESS. THE ALLOWBILITY OF EXPENDITUR E DOES NOT DEPEND ON THE SYSTEM OF ACCOUNTING FOLLOWED BY THE ASSESSEE AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF M/ S KEDARNATH JUTE MFG. CO. LTD. VS. CIT, 82 ITR 363 (SC). IN THE LIGHT OF THE ABOVE DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN T HE ORDER OF CIT(A) ON THESE COUNTS. THEREFORE, GROUND NOS. 1 & 2 OF TH E REVENUE ARE DISMISSED. 7. AS REGARDS GROUND NO. 3 IN RESPECT OF PF/ESIC, THE AO DISALLOWED RS. 231957/- AND RS. 6457/- BEING LATE P AYMENT OF EMPLOYEES CONTRIBUTION TOWARDS PF AND ESIC U/S 2(24 )(X) R.W.S 36(I)(A) AND U/S 43B RESPECTIVELY. THE CIT(A) DIREC TED THE AO TO ALLOW DEDUCTION FOR PAYMENT MADE UPTO THE GRACE PER IOD OBSERVING THAT THERE ARE LARGE NUMBER OF DECISIONS OF VARIOUS COURTS AND ITAT WHEREIN IT HAS BEEN HELD THAT PAYMENT OF EMPLOYEES CONTRIBUTION TOWARDS PF IS DISALLOWABLE ONLY THE PAYMENT IS MADE BEYOND THE GRACE PERIOD. 8. AFTER HEARING THE LEARNED REPRESENTATIVES OF THE PARTIES AND PERUSING THE RECORD AND IN THE LIGHT OF VARIOUS DE CISIONS INCLUDING THE JUDGMENT OF THE CIT VS. ALOM EXTRUSIONS LTD. [2 009] 319 ITR ITA NO. 5559/MUM/09 M/S EMTEX INDUSTRIES (I) LTD. 5 306 (SC), WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF CIT(A) AND THE SAME IS HEREBY CONFIRMED ON THIS ISSUE. 9. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. PRONOUNCED IN OPEN COURT ON THIS 11 TH DAY OF JUNE, 2010. SD/- SD/- (D.K. AGARWAL) (A.L. GEHLO T) JUDICIAL MEMBER ACCOUNTAN T MEMBER DATED: 11 TH JUNE, 2010. COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, I BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI. KV S.NO. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 9.6.10 SR.P.S./P.S 2. DRAFT PLACED BEFORE AUTHOR 10.6.10 SR.P.S/PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM/AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER JM/AM 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S./P.S 6. KEPT FOR PRONOUNCEMENT ON SR. P.S./P.S. 7. FILE SENT TO THE BENCH CLERK SR.P.S./P.S 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER