M/s. RL Exports International, New Delhi V. DCIT, New Delhi

ITA 625/DEL/2013

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 6998 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 10-12-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 01-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V R SONBHADRA
• Keywords: Business expenditure; Commercial expediency
• Section: 143(3)

Judgement Text

1 ITA NO. 62 5/DEL/2013 IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH: F NEW DELHI BEFORE SHRI N.K. SAINI, ACCOUNTANT ME MBER & SMT. BEENA PILLAI, JUDICIAL MEMBER I.T.A .NO.-625/DEL /2013 (ASSESSMENT YEAR-2008- 09) RL EXPORTS INTERNATIONAL, 118, ANSAL BHAWAN, K.G. MARG, NEW DELHI. AAAFR7212B VS DCIT, CENT. CIRCLE 12, NEW DELHI. APPELLANT BY SH. ASHWANI KUMAR, CA RESPONDENT BY SH. V.R. SONBHADRA, SR. DR ORDER PER BEENA PILLAI, JUDICIAL MEMBER : THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINS T THE ORDER OF THE LD. CIT(A)-XXXI, VIDE ORDER DATED 11/12/2012 FO R AY 2008-09 ON THE FOLLOWING GROUNDS OF APPEAL: THAT THE ORDER DATED 11.12.2012 PASSED U/S 250 O F THE IT ACT, 1961 BY THE LD. CIT(APPEALS)-XXXI, NEW DELH I IS AGAINST LAW AND FACTS ON THE FILE IN AS MUCH AS HE WAS NOT JUSTIFIED IN UPHOLDING THE ACTION OF THE ASSESSING OFFICER IN MAKING ADDITION OF RS. 3,25,338/- FOR DISALLOWANCE OF EXCESS OF INTEREST PAID OVER INTEREST RECEIVED ON U NSECURED LOANS TAKEN AND ADVANCES GIVEN BY THE APPELLANT FIR M. 2. BRIEF FACTS OF THE CASE ARE AS UNDER: DATE OF HEARING 15.12.2015 DATE OF PRONOUNCEMENT 11.02.2016 2 ITA NO. 62 5/DEL/2013 THE ASSESSEE FILED ITS RETURN OF INCOME DECLARING L OSS OF RS. 5,06,811/- ON 15/09/2008. THE CASE WAS SELECTED FO R SCRUTINY AND NOTICES U/S 143(2) OF THE ACT WERE ISSUED. LD. AO COMPLETED THE ASSESSMENT U/S 143(3) MAKING FOLLOWING DISALLOW ANCES: I) DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 3,25,3 38/- II) DISALLOWANCE OF RS. 50,000/- UNDER THE HEAD PETROL , VEHICLE MAINTENANCE AND REPAIRS. 3. AGGRIEVED BY THE ORDER OF THE LD. AO THE ASSESSE E FILED AN APPEAL BEFORE THE LD. CIT(A). 4. BEFORE THE LD. CIT(A) THE ASSESSEE CONTENDED THA T FROM THE FINANCIAL POSITIONS OF THE ASSESSEE, IT IS VERY CLE AR THAT THE SUBSTANTIAL FUNDS WERE AVAILABLE WITH THE ASSESSEE BY WAY OF PARTNERS CAPITAL TO THE TUNE OF RS. 3.02 CRORES ON WHICH NO INTEREST WAS PAID/PAYABLE AND TO WHICH NO COVENANTS WERE ATT ACHED. THE ASSESSEE, THEREFORE, CONTENDED THAT IT WAS UNJUSTIF IED BY THE LD. AO TO CONCLUDE THAT UNSECURED LOANS ON WHICH INTEREST HAVE BEEN PAID AT A HIGHER RATE HAD BEEN DIVERTED TO GIVE LOANS AN D ADVANCES AT A LOW RATE OF INTEREST. THE LD. CIT(A), HOWEVER, DID NOT AGREE WITH THE ARGUMENTS OF THE ASSESSEE AND HELD THAT SINCE NO NE XUS HAS BEEN ESTABLISHED BETWEEN THE UNSECURED LOANS AND ADVANCE S MADE BY THE ASSESSEE THE AO WAS CORRECT IN MAKING DISALLOWA NCE TO AN EXTENT OF RS. 3,25,338/- BEING THE DIFFERENCE IN IN TEREST. 5. AGGRIEVED BY THE ORDER OF THE LD. CIT(A) THE ASS ESSEE IS BEFORE US. 6. WE HAVE PERUSED THE ORDER OF THE AUTHORITIES BEL OW OF THE PAPER BOOK FILED BEFORE US. THE FINANCIAL POSITION OF THE ASSESSEE 3 ITA NO. 62 5/DEL/2013 AS PER THE BALANCE SHEET DATED 31/03/2008 IS SUMMAR IZED HEREIN BELOW: LIABILITIES SCH. AMOUNT ASSETS SCH. AMOUNT CAPITAL A/C A 30,283,158.81 FIXED ASSETS E 2,466 ,014.92 SECURED LOANS B 968,100.00 CURRENT ASSETS F 43,371,947.84 LOANS & ADVANCES UNSECURED LOANS C 14,875,272.00 EXPORT DIVISION 4 ,422,052.93 CURRENT LIABILITIES D 3,809,448.88 AND PROVISIONS DEFERRED TAX LIABILITY 324,036.00 NOTES TO ACCOUNTS G TOTAL ------------------------- TOTAL ------ ----------------- 50,260,015.69 50,260,015.69 6.1. A REVIEW OF FINANCIAL POSITION OF THE ASSESSEE FIRM AS AT 31.03.2008 SUMMARIZED ABOVE WOULD REVEAL THAT IN AD DITION OF BORROWED FUNDS (BOTH SECURED AND UNSECURED, IT ALSO HAD SUBSTANTIAL OWNED FUNDS BY WAY OF PARTNERS CAPITAL TO THE TUNE OF MORE THAN RS. 3.02 CRORES ON WHICH NO INTEREST WAS PAID/PAYABLE AND TO WHICH NO COVENANTS WERE ATTACHED. ACCORDING LY IT WOULD NOT BE CORRECT TO CONCLUDE THAT UNSECURED LOANS ON WHIC H INTEREST HAD BEEN PAID AT A HIGHER RATE HAD BEEN DIVERTED TO GIV E LOANS AND ADVANCES AT A LOWER RATE OF INTEREST RATE. 7. THE LD. AR SUBMITTED THAT THE ACT OF RECEIVING L OANS AND GIVING ADVANCES ARE TWO ENTIRELY INDEPENDENT AND UNRELATED TRANSACTIONS WITH NO INTERCONNECTION WHATSOEVER OF ANY FORM OR N ATURE BETWEEN THEM. THE LD. AR SUBMITTED THAT THE RATE OF INTERE ST AND OTHER TERMS, CONDITIONS AND COVENANTS ARE NEGOTIATED AND DETERMINED BY AN ENTIRELY DIFFERENT SET OF PARAMETERS AND CIRCUMS TANCES. LD. AR FURTHER SUBMITTED THAT MERELY BECAUSE INTEREST ON U NSECURED LOAN BEARS A HIGHER RATE AND THAT ON LOANS GRANTED BEARS A LOWER RATE 4 ITA NO. 62 5/DEL/2013 CANNOT LEAD TO THE DISALLOWANCE OF THE DIFFERENTIAL , MORE SO IN THE ABSENCE OF ANY DIRECT AND IMMEDIATE NEXUS BETWEEN T HE TWO TRANSACTIONS. HE SUBMITTED THAT IN VIEW OF THE ABO VE ARGUMENTS NO DISALLOWANCE OF THE INTEREST DIFFERENTIAL IS CALLED FOR. 8. THE LD. AR HAS PLACED HIS RELIANCE ON THE JUDGME NT OF THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES PV T. LTD. VS. CIT IN CIVIL APPEAL NO. 514 OF 2008 VIDE ORDER DATED 15 .11.2015. 9. WE OBSERVED FROM THE ARGUMENTS AS WELL AS THE SU BMISSIONS OF THE LD. AR THAT THE AO HAS ADDED THE DIFFERENCE IN THE INTEREST PAID BY THE ASSESSEE ON THE LOANS TAKEN AND INTEREST REC EIVED BY THE ASSESSEE ON THE ADVANCES GIVEN. THE ASSESSEE HAS A DVANCED LOAN AT A LESSER RATE VIZ-A-VIZ THE RATE AT WHICH THE IN TEREST HAS BEEN PAID ON THE LOANS TAKEN. FURTHER IT IS CLEAR FROM THE BALANCE SHEET FOR THE FINANCIAL YEAR THAT ASSESSEE IS HAVING A CA PITAL OF 3.07 CRORES. THE ASSUMPTION MADE BY THE AO THAT THE LOW ADVANCES GIVEN BY THE ASSESSEE AT A LESSER RATE IS FROM THE LOANS TAKEN BY THE ASSESSEE AT A HIGHER RATE. FURTHER EVEN IF THE AO HAD TO MAKE ADDITION IT SHOULD HAVE BEEN THE DIFFERENCE IN THE RATE OF INTEREST RATHER THAN THE DIFFERENCE IN THE INTEREST PAID AND INTEREST RECEIVED BY THE ASSESSEE ON THE RESPECTIVE LOANS AND ADVANCE S. THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES (SUPRA) HA S DEALT WITH THE EXPRESSION COMMERCIAL EXPEDIENCY. AS DEFINED IN THE CASE OF S.A. BUILDERS VS. CIT REPORTED IN 2007 (288 ITR 1) (SC) IN THE FOLLOWING MANNER: 26. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE 5 ITA NO. 62 5/DEL/2013 PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET I T IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER I N SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNI NG PROFITS VIDE CIT VS. MALAYALAM PLANTATIONS LTD. [1 964 53 ITR 140 (SC)], CIT VS. BIRLA COTTON SPINNING & WEAVING MILLS LTD. [1971 82 ITR 166 (SC)], ETC. 10. FURTHER THE HONBLE SUPREME COURT IN THE CASE O F HERO CYCLES (SUPRA) HAS OBSERVED AS UNDER: IN THE PROCESS, THE COURT ALSO AGREED THAT THE VI EW TAKEN BY THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (B.) LTD. [2002 (254) ITR 377], WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS ESTABLISHED THA T THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-C HAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT THE INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POI NT BUT THAT OF A PRUDENT BUSINESSMAN. 11. IN THE PRESENT CASE, WE OBSERVE THAT NO NEXUS H AS BEEN PROVED BY THE AUTHORITIES BELOW BETWEEN THE INTEREST BEARI NG FUNDS AND INTEREST AND THE ADVANCES MADE BY THE ASSESSEE AT L OWER RATE OF INTEREST WHICH HAS BEEN MADE IN THE ORDINARY COURSE OF BUSINESS. 6 ITA NO. 62 5/DEL/2013 IT IS ALSO SEEN THAT THESE ADVANCES DO NOT REPRESEN T ANY DIVERSION OF FUNDS FOR THE ALLEGED NON BUSINESS PURPOSES AND CORRESPONDINGLY NO PART OF THE INTEREST COULD BE DI SALLOWED. MOREOVER THE LD. AR HAD SUBMITTED THAT ALL THE ADVA NCES HAVE BEEN GRANTED IN THE ORDINARY COURSE OF THE BUSINESS TO M EET ITS COMMERCIAL NEEDS AND SATISFY THE CENANTS OF COMMERC IAL EXPEDIENCY. FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF HERO CYCLES (SUPRA), SA BUILDERS (SU PRA) AND THE DISCUSSIONS ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE LD. AO WAS NOT JUSTIFIED IN MAKING SUCH DISALLOWANCE. ACC ORDINGLY, THE GROUND RAISED BY THE ASSESSEE STANDS ALLOWED. 12. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS, THEREFORE, ALLOWED. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 11.02.2016 SD/- SD/- (N.K. SAINI) (BEENA PILLAI) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 11.2.2016 *KAVITA, P.S. COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(APPEALS) 5. DR: ITAT ASSISTANT REGISTRAR ITAT NEW DELHI 7 ITA NO. 62 5/DEL/2013 DATE 1. DRAFT DICTATED ON 21.12.15 2. DRAFT PLACED BEFORE AUTHOR 28.12.15 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. 5. APPROVED DRAFT COMES TO THE SR.PS/PS 11.2.16 6. KEPT FOR PRONOUNCEMENT ON 11.2.16 7. FILE SENT TO THE BENCH CLERK 11.2.16 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.