M/s. Matrix Cellular International Services Ltd., New Delhi V. DCIT, New Delhi

ITA 5681/DEL/2015

• Counselvise Citation: [2018] 123 COUNSELVISE.COM (IT) 8297 (ITAT-DELHI)
• Duration Of Justice: 2 year(s) 11 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-10-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Assessment Year: 2010-2011
• Appeal Filed On: 07-10-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SHEFALI SWAROOP
• Assessee Lawyers: A K KHANNA
• Keywords: Transfer pricing; International transaction; Proportionate interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: E NEW DELHI BEFORE SHRI R.S. SYAL, HONBLE VICE PRESID ENT & SMT. BEENA A. PILLAI, JUDICIAL MEMBER ITA NO. 5681/DEL/2015 ( ASSESSMENT YEAR: 2010-11) MATRIX CELLULAR INTERNATIONAL SERVICES LTD. 7-KHULLAR FARMS, MANDI RAOD, MEHRAULI, NEW DELHI. AAECM5169M VS DCIT CIRCLE 16(2) C.R. BUILDING, NEW DELHI. APPELLANT RESPONDENT ASSESSEE BY SH. A.K. KHANNA, CA REVENUE BY MS. SHEFALI SWAROOP, CIT (DR) ORDER PER SMT. BEENA A. PILLAI, J.M. PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST FINAL ASSESSMENT ORDER PASSED BY LD. DCIT, CIRCLE 16 (2), NEW DELHI FOR ASSESSMENT YEAR 2010-11 ON THE FOLLOWING GROUNDS OF APPEAL: 1. IN THE ASSESSMENT PROCEEDING, THE ASSESSEE HAD CONTENDED THAT NO DISALLOWANCE U/S 36(1)(III) CAN B E MADE FOR INTEREST OF RS. 36,55,636/- ON ADVANCE OF RS. 1,16,83,080/- TO MRS. URVASHI KAUR ON THE GROUND TH AT THIS AMOUNT HAS BEEN PAID OUT OF INTEREST FREE DEBENTURE S OF RS. 50 CRORES ISSUED BY THE COMPANY, WHICH CAN BE VERIFIED FROM THE FINANCIALS OF THE COMPANY. THE A O DIDNT CONSIDER THE SUBMISSION OF THE ASSESSEE. DATE OF HEARING 01.10.2018 DATE OF PRONOUNCEMENT 03.10.2018 2 ITA NO. 5681/DEL/2015 2. MRS. URVASHI KAUR IS IN THE BUSINESS OF FASHION DES IGNING AND THE ADVANCE WAS PAID TO HER FOR DESIGNING, MAKI NG AND SUPPLYING OF UNIFORM FOR THE EMPLOYEES OF THE COMPANY. BUT DUE TO HIGH FINANCIAL LOSSES BY THE C OMPANY AND DUE TO DOWN TERM OF THE INDIAN AND GLOBAL ECONO MY, IT WAS DECIDED TO SAVE ON THE EXPENSES OF UNIFORM. THEREFORE, THE IDEA OF UNIFORM WAS SET ASIDE. IF T HE ADVANCE WAS FOR BUSINESS PURPOSE, THEN SECTION 36(1 )(III) OF INCOME TAX ACT, 1961 DOES NOT EMPOWERS THE AO TO DISALLOW INTEREST PAID BY THE COMPANY. 3. THE ASSESSING OFFICER DISALLOWED INTEREST OF RS. 36,55,636/- ON THE WRONG GROUND THAT DRP VIDE ORDER DATED 16.12.2014 HAD QUANTIFIED THE DISALLOWANCE OF RS. 36,55,636/-, WHICH IS AGAINST THE FACT OF THE CASE. THE DRP HAD DIRECTED THE ASSESSING OFFICER TO COMPUTE DISALLOWANCE ON PROPORTIONATE BASIS AND HAD NOT QUANTIFIED ANY DISALLOWANCE IN ITS ORDER. 4. THE ASSESSING OFFICER IN ORDER U/S 143(3) OF I.T. A CT WRONGLY CALCULATED DISALLOWANCE OF INTEREST OF RS. 36,55,636/- ON ADVANCE OF RS. 1,16,83,080/- TAKING SECURED LOAN OF RS. 11,45,27,582/- INSTEAD OF CORRE CT LOAN OF RS. 25,72,25,496/- WHICH CONSIST OF SECURED LOAN OF RS. 23,84,01,829/- AND UNSECURED LOAN FROM BANK & NBFC OF RS. 1,88,23,667/-. AS APPEARING IN SCHEDULE C & D OF THE FINANCIALS. SO AMOUNT DISALLOWED AS INTEREST BY LD. DY. CIT IS BAD IN LAW AND WE, THEREFORE, PRAY YOUR HONOUR TO DELETE T HE DISALLOWANCE MADE OF RS. 36,55,636/-. 2. BRIEF FACTS OF THE CASE ARE AS UNDER : ASSESSEE IS A COMPANY ENGAGED IN THE BUSINESS OF TELECOMMUNICATION AND OTHER RELATED SERVICES. RETUR N FOR YEAR UNDER CONSIDERATION WAS FILED ON 27/09/10, DECLARIN G TOTAL INCOME OF RS.1,31,944/-. THE CASE WAS SELECTED FOR SCRUTIN Y AND NOTICE UNDER SECTION 143 (2) WAS ISSUED ON ASSESSEE. IN RE SPONSE TO 3 ITA NO. 5681/DEL/2015 NOTICES ISSUED, ASSESSEE FILED REQUIRED DOCUMENTS A S CALLED FOR BY LD. AO. LD. AO OBSERVED THAT ASSESSEE HAD ENTERED INTO INTERNATIONAL TRANSACTION, BECAUSE OF WHICH REFEREN CE WAS MADE TO TRANSFER PRICING OFFICER. APART FROM MAKING ADJUSTM ENT IN TRANSFER PRICING ISSUES, LD.AO OBSERVED THAT ASSESSEE HAS IN CURRED FINANCIAL EXPENSES OF RS.3,58,33,289/- IN THE FORM OF INTEREST PAYMENT TO BANK, DURING FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR UNDER CONSIDERATION. LD. AO OBSERVED THAT ASSE SSEE HAS EXTENDED INTEREST FREE ADVANCES OF RS.1,16,83,080/- TO MRS. URVASHI KAUR, WIFE OF DIRECTOR OF ASSESSEE. LD. AO FURTHER OBSERVED THAT MRS. URVASHI KAUR WAS A SHAREHOLDER WITH ASSES SEE, HOLDING 15, 00, 000 SHARES DURING ASSESSMENT YEAR 2010-11 A ND, THEREFORE, LD. AO TERMED IT TO BE RELATED PARTY TRA NSACTION, UNDER SECTION 40A(2)(B) OF THE ACT. LD. AO, ACCORDINGLY, SHOW-CAUSED ASSESSEE TO EXPLAIN DETAILS OF ADVANCES GIVEN IN SU BSEQUENT ASSESSMENT YEAR. IN REPLY TO SHOW CAUSE, ASSESSEE VIDE LETTER DATED 24/02/14 SUBMITTED THAT MRS. URVASHI KAUR WAS A FASHION DESIGNER AND ADVANCE WAS GIVEN TO HER SINCE ASSESSE E WAS PLANNING FOR A COMMON UNIFORM FOR ALL STAFF. LATER ON, AS ASSESSEE WAS IN LOSSES, IDEA OF COMMON UNIFORM WAS DROPPED A ND MONEY PAID TO MRS. URVASHI KAUR WAS RECOVERED IN SUBSEQUE NT ASSESSMENT YEAR. LD. AO DISAGREEING WITH EXPLANATI ON OFFERED BY ASSESSEE, MADE DISALLOWANCE OF RS.1,16,83,080/-. 3. AGGRIEVED BY ORDER OF LD. AO, ASSESSEE RAISED OB JECTIONS BEFORE DRP. DRP DECIDED THE ISSUE, BY OBSERVING AS UNDER: 15.0. FINDING: 4 ITA NO. 5681/DEL/2015 DRP HAS DULY CONSIDERED ARGUMENTS OF THE ASSESSEE. THE PANEL HAS NOTED THAT THE AO IN HIS DRAFT ASSESSMENT ORDER HAS SOUGHT TO DISALLOW PROPORTIONATE INTEREST UNDER SECTION 36 (1) (III) OF THE ACT BUT HAS DISALLOWED THE ENTI RE ADVANCE GIVEN BY ASSESSEE TO MRS. URVASHI KAUR. THE PANEL, THEREFORE, DIRECT THE AO TO COMPUTE DISALLOWANCE OF INTEREST ON PROPORTIONATE BASIS. THE OBJECTION IS ACCORDINGL Y DISPOSED OF. 4. LD. AO THEN WHILE PASSING FINAL ASSESSMENT ORDER COMPUTED PROPORTIONATE DISALLOWANCE ON ADVANCE AT RS.36, 55, 636/-. 5. AGGRIEVED BY FINAL ASSESSMENT ORDER, ASSESSEE FI LED APPEAL BEFORE US. 6. THE ONLY ISSUE RAISED BY ASSESSEE IS IN RESPECT OF THE DISALLOWANCE MADE BY LD. AO UNDER SECTION 36 (1) (I II) OF THE ACT. WE ARE, THEREFORE, DISPOSING OF ALL THE GROUNDS OF APPEAL TOGETHER AS UNDER: LD.AR SUBMITTED THAT ASSESSEE WAS HAVING SUBSTANTIA L FUNDS WHICH CAN BE SEEN FROM AUDITED BALANCE SHEET. REFERRING T O PAGE 63 OF APPEAL SET, LD.AR SUBMITTED THAT ASSESSEE HAD SURPL US INTEREST FREE FUNDS IN THE FORM OF SHARE PREMIUM, RECEIVED DURING THE YEAR, ON CONVERSION OF 3,50,00,000 DEBENTURE EQUITY SHARES A T PREMIUM OF RS.139.70 PER SHARE. LD. AR THEREAFTER REFERRED TO SCHEDULE B AND D AT PAGE 65 OF APPEAL SET WHEREIN THE DETAILS OF I NTEREST RATE DEBENTURES AND TOTAL INTEREST-FREE FUNDS AS ON 31/0 3/09 AND 31/03/10 HAS BEEN MENTIONED. LD. AR SUBMITTED THAT ASSESSEE HAD TAKEN INTEREST-BEARING LOAN OF RS.23,84,01,829/ - AS PER SCHEDULE C OF BALANCE SHEET AND HAD GIVEN INTEREST- FREE ADVANCE OF 5 ITA NO. 5681/DEL/2015 RS.1,16,83,083/- TO MRS. URVASHI KAUR. HE SUBMITTED THAT AT ALL POINT OF TIME ASSESSEE HAD ADEQUATE NON-INTEREST-BE ARING FUNDS BY WAY OF SHARE CAPITAL AND RESERVES. ON THE CONTRARY LD. DR RELIED UPON THE DECISION OF AUTHORITIES BELOW. SHE SUBMITTED THAT SECTION 36(1) (III) RELAT ES TO THE AMOUNT OF INTEREST PAID ON CAPITAL BORROWED FOR THE PURPOS E OF BUSINESS, PROFESSION AND NOT FOR ADVANCING INTEREST-FREE AMOU NTS TO RELATED PARTIES. 7. WE HAVE PERUSED THE SUBMISSIONS ADVANCED BY BOTH THE SIDES AND THE LIGHT OF THE RECORDS PLACED BEFORE US. 8. ADMITTEDLY INTEREST-FREE FUNDS HAVE BEEN ADVANCE D TO RELATED PARTY BY ASSESSEE. HOWEVER, ON PERUSAL OF BALANCE S HEET AND SCHEDULE TO BALANCE SHEET, IT IS OBSERVED THAT ASSE SSEE HAD ADEQUATE NON-INTEREST-BEARING FUNDS BY WAY OF SHARE CAPITAL AND RESERVE, WHICH WAS MORE THAN ADVANCE PAID TO MRS. U RVASHI KAUR, AMOUNTING TO RS.1,16,83,070/-. NO DOUBT ASSESSEE W AS MAINTAINING BANK ACCOUNT WITH MIXED COMMON FUNDS, I N WHICH ALL DEPOSITS AND WITHDRAWALS WERE MADE, LD. AO HAS NOT MADE ANY SPECIFIC INSTANCE IN RESPECT OF DIRECT NEXUS BETWEE N BORROWED FUNDS AND THE ADVANCES MADE BY ASSESSEE TO MRS. URV ASHI KAUR. IT IS OBSERVED THAT ASSESSING OFFICER HAS MADE GENERAL OBSERVATION WITHOUT VERIFYING THE SOURCE ESTABLISHED BY ASSESSE E. BEFORE US ASSESSEE EXPLAINED THE SOURCE OF ADVANCE MADE TO MR S. URVASHI KAUR WHICH COULD NOT BE LINKED TO BORROWED FUNDS, S INCE ASSESSEE HAD SUFFICIENT CAPITAL AT THE RELEVANT PERIOD OF TI ME. THUS, IN OUR 6 ITA NO. 5681/DEL/2015 CONSIDERED OPINION AT THE RELEVANT PERIOD OF TIME A SSESSEE WAS HAVING ADEQUATE NON-INTEREST-BEARING FIND BY WAY OF SHARE CAPITAL AND RESERVE WHICH IS REFLECTED FROM THE BALANCE SHE ET AS WELL AS THE NOTES TO AUDITED ACCOUNT. WE ARE, THEREFORE, OF THE CONSIDERED OPINION THAT THE ENTIRE ADDITION MADE BY LD. AO DES ERVES TO BE DELETED. ACCORDINGLY GROUNDS RAISED BY ASSESSEE STA NDS ALLOWED. 9. IN THE RESULT APPEAL FILED BY ASSESSEE STANDS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 03/10/2018 SD/- SD/- (R.S. SYAL) (BEENA A. PILLAI ) VICE PRESIDENT JUD ICIAL MEMBER DATED: 03.10.2018 *KAVITA ARORA COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT TRUE COPY ASSISTANT REGISTRAR ITAT NEW DELHI 7 ITA NO. 5681/DEL/2015 DATE OF DICTATION 03.10.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 03.10.2018 DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE OTHER MEMBER 03.10.2018 DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P S/PS 03.10.2018 DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 03.10.2018 DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. PS/PS 03.10.2018 DATE ON WHICH THE FINAL ORDER IS UPLOADED ON THE WE BSITE OF ITAT 04.10.2018 DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 04.1 0.2018 DATE ON WHICH THE FILE GOES TO THE HEAD CLERK THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER DATE OF DISPATCH OF THE ORDER