M/s CRI Ltd., Kolkata V. DCIT, CIR-11(1), KOLKATA, Kolkata

ITA 557/KOL/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1071 (ITAT-KOLKATA)
• Duration Of Justice: 2 year(s) 6 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-11-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2007-2008
• Appeal Filed On: 08-05-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K AGARWAL FCA SHRI SA
• Assessee Lawyers: T VARKEY JUDIC IA L M EMBER
• Keywords: Proportionate interest

Judgement Text

, B , IN THE INCOME TAX APPELLATE TRIBUNAL KOLKATA BENCH B KOLKATA BEFORE SHRI ABY.T VARKEY, JUDICIAL MEMBER AND SHRI WASEEM AHMED, ACCOUNTANT MEMBER ITA NO. 557 / KOL / 2015 ASSESSMENT YEAR :2007-08 M/S CRI LTD. 333, GARIA MAIN ROAD, MAHAMAYATALLA, NR. CHILD SCHOOL, KOLKATA-84 [ PAN NO.AABCC 3552 F ] V/S . DCIT, CIRCLE-11(1), P-7, CHOWRINGHEE SQUARE, KOKATA-69 /APPELLANT .. / RESPONDENT /BY APPELLANT SHRI S.K. AGARWAL, FCA /BY RESPONDENT SHRI SAUARABH KUMAR, ADDL. CIT-DR /DATE OF HEARING 05-10-2017 /DATE OF PRONOUNCEMENT 08-11-2017 / O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:- THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF COMMISSIONER OF INCOME TAX (APPEALS)-20, KOLKATA DA TED 19.02.2015. ASSESSMENT WAS FRAMED BY ITO WARD-45(2), KOLKATA U/ S 143(3)/263 OF THE INCOME TAX ACT, 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 07.01.2013 FOR ASSESSMENT YEAR 2006-07. SHRI S.K. AGARWAL, LD. AUTHORIZED REPRESENTATIVE AP PEARED ON BEHALF OF ASSESSEE AND SHRI SAURABH KUMAR, LD. DEPARTMENTAL R EPRESENTATIVE APPEARED ON BEHALF OF REVENUE. 2. INTER-CONNECTED ISSUE RAISED BY ASSESSEE IS THAT LD. CIT(A) ERRED IN CONFIRMING THE ORDER OF ASSESSING OFFICER BY SUSTAI NING THE ADDITION OF 3,31,501/- ON ACCOUNT OF INTEREST U/S 36(1)(III) O F THE ACT. ITA NO.557/KOL/2015 A.Y. 2007-0 8 M/S CRI LTD. VS. DCIT CIR-11(1), KOL. PAGE 2 3. BRIEFLY STATED FACTS ARE THAT ASSESSEE IS A LIMI TED COMPANY AND ENGAGED IN MANUFACTURING OF BALL PEN, REFILL AND TRADING OF BALL PEN REFILLS AND WIRE. THE ASSESSEE HAS SHOWN CLOSING CAPITAL WORK-IN-PROGRESS FOR 89,77,842/- IN ITS BALANCE-SHEET AS ON 31.03.2007. THE CLOSING CWIP WA S INCLUSIVE OF THE MACHINE IMPORTED DURING THE YEAR FOR 69,40,669/- FROM MIKRON MACHINE TECHNOLOGY (MMT FOR SHORT). AT THE TIME OF PAYMENT TO MMT DATED 19.09.2006 ASSESSEE HAS TO BEAR THE LOSS OF 5,74,807/- ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION. THE PAYMENT TO MMT WAS MADE BY THE ASS ESSEE FROM ITS HSBC BANK ACCOUNT BEARING NO. 031433402001. THUS, THE TO TAL VALUE OF MACHINE FORMING PART OF CWIP COMES TO 75,15,476/- (COST OF MACHINE RS.69,40,669 + 5,74,807/- BEING FOREIGN EXCHANGE FLUCTUATION LOSS) AS THE MACHINE WAS PART OF CAPITAL WORKING-IN-PROGRESS WHICH PROVES THAT IT WA S NOT PUT TO USE DURING THE YEAR. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSM ENT PROCEEDINGS OBSERVED THAT ASSESSEE HAS TAKEN FRESH WORKING CAPI TAL LOAN OF 2.50 CRORES FROM HSBC BANK. THE WORKING CAPITAL LOAN FROM HSBC BANK WAS RECEIVED BY ASSESSEE IN TWO INSTALLMENTS I.E. 1.50 CRORES ON 31 .08 2006 AND 1 CRORE ON 18.11.2006. THE AO FURTHER OBSERVED THE WORKING CAP ITAL LOAN OF 1.50 CRORES WAS TRANSFERRED TO THE CURRENT ACCOUNT OF THE ASSES SEE MAINTAINED WITH HSBC BANK BEING ACCOUNT NO.031433402001. IT WAS ALSO OBS ERVED THAT THERE WAS NO WITHDRAWAL FROM THE CURRENT ACCOUNT OF ASSESSEE AFTER TRANSFERRING THE AMOUNT OF LOAN EXCEPT A PAYMENT TO MMT FOR 75,15,476/- MADE ON 16.09.2006. THUS, AO OPINED THAT THE BORROWED FUND HAS BEEN UTILIZED FOR THE PURPOSE OF ACQUIRING THE MACHINE WHICH HAS NOT BEEN PUT TO USE DURING THE YEAR. THUS, THE DISALLOWANCE NEEDS TO BE MADE OF TH E INTEREST ON THE LOAN AMOUNT USED FOR THE PURCHASE OF MACHINERY AS PER TH E PROVISION OF SECTION 36(1)(III) OF THE ACT. 3.1 THE AO OBSERVED THAT ASSESSEE HAS CLAIMED INTER EST EXPENSE OF 11,02,730/- AGAINST THE WORKING CAPITAL LOAN OF 2.50 CRORES AVAILED FROM THE HSBC BANK DURING THE YEAR. THUS, ACCORDINGLY, AO WO RKED OUT THE AMOUNT OF ITA NO.557/KOL/2015 A.Y. 2007-0 8 M/S CRI LTD. VS. DCIT CIR-11(1), KOL. PAGE 3 PROPORTIONATE INTEREST ON THE AMOUNT UTILIZED IN TH E ACQUISITION OF MACHINE AS DETAILED UNDER:- TOTAL INTEREST PAD X BORROWED CAPITAL UTILIZED FOR ACQUISITION OF ASSET TOTAL BORROWE D CAPITAL = RS11,02,730/- X RS.75,15,476/- = RS.3,31,501/- RS.2,50,0 0,000 THUS, THE AO DISALLOWED THE AMOUNT OF INTEREST EXPE NSE OF 33,1501/- AND ADDED UNDER THE PROVISION OF SEC. 36(1)(III) OF THE ACT AND ADDED TO THE TOTAL INCOME OF ASSESSEE. 4. AGGRIEVED, ASSESSEE PREFERRED AN APPEAL BEFORE L D. CIT(A). THE ASSESSEE BEFORE LD. CIT(A) SUBMITTED THAT THE PAYME NT FOR THE ACQUISITION OF MACHINES WERE MADE OUT OF ITS OWN FUND AND AS SUCH NO BORROWED FUND HAS BEEN UTILIZED EITHER DIRECTLY OR INDIRECTLY FOR THE ACQUISITION OF MACHINE. THEREFORE, NO DISALLOWANCE CAN BE WARRANTED UNDER T HE PROVISION OF SEC. 36(1)(III) OF THE ACT. HOWEVER, LD. CIT(A) DISREGAR DED THE CONTENTION OF ASSESSEE AND CONFIRMED THE ORDER OF AO BY OBSERVING AS UNDER:- I HOWEVER DO NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE. THE ASSESSEE TOOK WORKING CAPITAL LOAN OF RS.1.50 CRORE ON 31.-08-2006 WHICH WAS IMMEDIATELY TRANSFERRED TO ITS CURRENT ACCOUNT WHEREFROM THE PAYMENT WAS MADE ON 16-09-2006 TOWARDS THE ACQUISITION OF P LANT & MACHINERY. THE AO HAS THEREFORE RIGHTLY HELD IN THE IMPUGNED ORDER THAT THE MATERIAL ON RECORD SUGGESTED THAT THE PAYMENT WAS MADE OUT OF T HE WORKING CAPITAL LOAN. UNDER THE CIRCUMSTANCES, THE AO WAS JUSTIFIED IN IN VOKING THE PROVISO TO SECTION 36(1)(III). THE DISALLOWANCE OF INTEREST OF RS.3,31,5011/- AS MADE BY THE AO IN THE I IS CONFIRMED. .. AGGRIEVED BY THE ABOVE FINDING OF LD. CIT(A), THE A SSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 5. LD. AR FOR THE ASSESSEE FILED PAPER BOOK WHICH I S RUNNING PAGES FROM 1 TO 23 AND SUBMITTED THAT ASSESSEE HAS SUFFICIENT OW NED FUND AS EVIDENT FROM THE AUDITED BALANCE SHEET PLACED ON PAGE 12 OF THE PAPER BOOK. THE LD. AR ALSO SUBMITTED THAT BORROWED FUND OF THE ASSESSEE H AS BEEN REDUCED IN COMPARISON TO THE EARLIER YEAR. IN THIS REGARD, LD. AR RELIED ON THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITY POWER 313 ITR 340. ACCORDINGLY IT WAS SUBMITTED THAT IT CAN BE INFERRE D THAT NO BORROWED FUND HAS BEEN UTILIZED IN THE ACQUISITION OF MACHINE. LD. AR IN SUPPORT OF ASSESSEES ITA NO.557/KOL/2015 A.Y. 2007-0 8 M/S CRI LTD. VS. DCIT CIR-11(1), KOL. PAGE 4 CLAIM DREW OUR ATTENTION AT PAGE 12 OF THE PAPER BO OK WHERE THE BALANCE- SHEET OF THE ASSESSEE WAS PLACED. HE FURTHER ARGUED THAT THERE IS NO PROVISION TO UTILIZE WORKING CAPITAL LOAN FOR THE ACQUISITION OF THE MACHINERY AND THEREFORE, NO BORROWED FUND HAS BEEN UTILIZED IN TH E CLOSING WIP. LD. AR BEFORE US ALSO FILED THE BANK SANCTIONED LETTER IN SUPPORT OF ASSESSEES CLAIM WHICH IS PLACED ON RECORD. ON THE OTHER HAND, LD. DR SUBMITTED THAT IN THE INS TANT CASE NO PRESUMPTION CAN BE DRAWN ON THE BASIS THAT ASSESSEE HAS SUFFICI ENT FUND AND THEREFORE NO BORROWED FUND HAS BEEN UTILIZED. IT IS BECAUSE THE AO HAS ESTABLISHED DIRECT NEXUS BETWEEN THE AMOUNT BORROWED FROM THE BANK AND UTILIZED FOR THE PURCHASE OF MACHINERY. LD. DR HEAVILY RELIED ON THE ORDER OF AUTHORITIES BELOW. 6. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THE INSTANT CASE, AO HAS MADE THE DISALLOWANCE OF INTEREST EXPENSE CLAIMED BY ASSESSE E ON THE GROUND THAT PART OF LOAN WAS UTILIZED IN ACQUIRING THE MACHINERY WHI CH HAS NOT BEEN PUT TO USE DURING THE YEAR. AS PER THE AO THE AMOUNT OF PROPOR TIONATE INTEREST PAID ON THE BORROWED FUND UTILIZED ON THE ACQUISITION OF MA CHINERY WHICH HAS NOT BEEN PUT TO USE CANNOT BE ALLOWED AS DEDUCTION IN TERMS OF THE PROVISION OF SEC.36(1)(III) OF THE ACT. THE DISALLOWANCE MADE BY AO WAS SUBSEQUENTLY CONFIRMED BY LD. CIT(A). LD. AR BEFORE US CLAIMED T HAT IT HAD SUFFICIENT FUND AND THEREFORE A PRESUMPTION CAN BE DRAWN THAT NO BO RROWED FUND HAS BEEN UTILIZED IN ACQUISITION OF MACHINERY. LD. AR IN SUP PORT OF ASSESSEES CLAIM RELIED ON THE JUDGMENT OF HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITY (SUPRA) WHEREIN IT WAS HELD AS UNDER :- 10. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN AS SESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE H AD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTERES T-FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMAC EUTICAL WORKS LTD.'S CASE (SUPRA) HAD THE OCCASION TO CONSIDER TH E DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD.'S CASE (SUP RA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAX ES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVE RDRAFT ACCOUNT FOR THE RUNNING ITA NO.557/KOL/2015 A.Y. 2007-0 8 M/S CRI LTD. VS. DCIT CIR-11(1), KOL. PAGE 5 OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPE LLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE AR GUMENT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT THAT T HE 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 CAL CUTTA 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 OVE RDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED T HAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE O VERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO 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 THE RE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THE N A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE S UFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS ESTAB LISHED CONSIDERING THE FINDING OF FACT BOTH BY THE CIT (APPEALS) AND ITAT. WE FURTHER NOTE THAT THERE IS NO AMBIGUITY THAT THE OWNED FUND OF THE ASSESSEE ARE GREATER THAN THE AMOUNT USED IN CWIP FOR THE MA CHINERY. IN SUCH SITUATION THE PRINCIPLES LAID DOWN BY THE BOMBAY HIGH COURT A S DISCUSSED ABOVE ARE DIRECTLY APPLICABLE TO THE INSTANT FACTS OF THE CAS E. FOLLOWING THE SAME WE REVERSE THE ORDER OF LOWER AUTHORITIES. CONSEQUENT LY, THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS THUS ALLOWED. 7. IN THE RESULT, ASSESSEES APPEAL STANDS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 08/ 11/2017 SD/- SD/- (ABY. T. VARKEY) (WASEEM AHMED) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) KOLKATA, *DKP SR.P.S #- 08 / 11 /201 7 / COPY OF ORDER FORWARDED TO:- 1. /APPELLANT-M/S CRI LTD. 333, GARIA MAIN ROAD, MAHAM AYATALLA, NR.CHILD SCHOOL, KOLKATAA-84 2. /RESPONDENT-DCIT, CIRCLE-11(1), P-7, CHOWRINGHEE SQ UARE, KOLKATA-69 3. / 0 / CONCERNED CIT KOLKATA 4. 0- / CIT (A) KOLKATA 5. 3 66/, /, / DR, ITAT, KOLKATA 6. 9 / GUARD FILE. BY ORDER/ , /TRUE COPY/ SR. PRIVATE SECRETARY, HEAD OF OFFICE/DDO /,