CHITRALEKHA, MUMBAI V. A.C.I.T.- 12(1), MUMBAI

ITA 6363/MUM/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9541 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 12-11-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 15-09-2011
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: H R SHAH
• Keywords: Business expenditure; Proportionate interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH C, MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 6363/MUM/2011 (ASSESSMENT YEAR: 2008-09) M/S CHITRALEKHA 62, VAJU KOTAK MARG, FORT, MUMBAI -400 101 PAN AAAFC 1152 B VS ACIT 12(1) AAYKAR BHAVAN, M.K. ROAD, MUMBAI 400 020 (APPELLANT) (RESPONDENT) APPELLANT BY : MS. H.R. SHAH RESPONDENT BY : MS. NEERAJA PRADHAN DATE OF HEARING: 12.11.2012 DATE OF PRONOUNCEMENT: 30.11.2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL HAS BEEN FILED THE ASSESSEE AGAINST THE ORDER OF CIT(A) 23, MUMBAI, DATED 08.07.2011, WHERE THE SOLITARY ISSUE IS WITH REGARD TO DISALLOWANCE OF INTEREST EXPENDITURE OF RS. 23,97,944. 2. THE ASSESSEE IS A FIRM, ENGAGED IN THE BUSINESS OF PUBLIC ATION OF MAGAZINES ON VARIOUS MEDIA AND ACTING AS FINANCIERS FOR PRO DUCTION AND TELECAST OF SERIALS, AS WELL AS COMPOSING JOBS ON BEHALF OF OUTSIDERS ON JOB WORK. 3. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE DEBIT ED RS. 1,08,11,479 AS INTEREST PAID ON BORROWED FUNDS. IN THE COU RSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS CALLED UPON TO FURNISH THE DETAILS WITH REGARD TO INTEREST EXPENDITURE. THE ASSESSEE SUBMITTED M/S CHITRALEKHA ITA NO. 6363/MUM/2011 2 THAT ON NON CHARGING OF INTEREST FROM 01.10.2002, ON OUTST ANDING BALANCES DUE FROM CHITRALEKHA PRINTERS & PUBLISHERS PVT. LT D., A SISTER CONCERN, A CONSTANT ISSUE, HAS BEEN THERE, WHICH HAD BEE N RESULTING TO DISALLOWANCE OF PART OF THE INTEREST EXPENDITURE UPTO ASSE SSMENT YEAR 2007-08. THE ASSESSEE WAS ASKED TO JUSTIFY THE NON CH ARGING OF INTEREST FROM ITS GROUP CONCERN ON THE AMOUNT OUTSTAND ING AGAINST THE COMPANY. IN RESPONSE TO THE QUERY RAISED BY THE AO, T HE ASSESSEE SUBMITTED. (A) FOR THE YEAR, THE TOTAL INTEREST COST INCURRED IS RS.12052530/-, ON LOANS AND DEPOSITS OBTAINED FOR THE PURPOSE OF BUSINESS O F THE ASSESSEE FIRM. (B) LOANS OBTAINED AND DEPOSITS HELD BY THE ASSESSE E FIRM ON WHICH INTEREST COST IS INCURRED ARE BORROWED FOR THE PURP OSE OF BUSINESS OF THE ASSESSEE FIRM. (C) THE ASSESSEE FIRM HAS TO RECOVER RS.199 LACS AS OF 31.3.2006, BEING THE AMOUNT WHICH WAS OUTSTANDING AS OF 31.3.2005. HENCE DURING THE YEAR UNDER ASSESSMENT, O FURTHER MOUNT IS PAID BY THE ASSESSEE FIRM TO THE COMPANY. (D) THE ASSESSEE FIRM HAD GRANTED BEARING LOAN TO THE COMPANY AND ACCORDINGLY INTEREST @ 12% P.A. WAS CHARGED UP TO 3 .9.2002, ON THE THEN OUTSTANDING BALANCE. (E) THE COMPANY WAS PROMOTED BY THE TWO PARTNERS OF THE ASSESSEE FIRM AND WAS ENGAGED IN THE BUSINESS OF MANUFACTURE OF L ARGE FORMAT OUTPUT. (F) THE COMPANY BECAME SICK INDUSTRIAL COMPANY AND THERE WAS TOTAL EROSION OF NET WORTH AS OF 31.3.2003 AND THEN EVEN AS OF 31.3.2008. XEROX COPY OF EACH OF THE AUDITED ACCOUNTS OF THE COMPANY A OF 31.3.2003/08, IS ALREADY SUBMITTED IN THE COURSE OF ASSESSMENT PROCE EDINGS FOR THE AY 2006-07 AND HENCE, THE SAME IS ON RECORD. THERE IS NO BUSIN ESS ACTIVITY IN THE HANDS OF THE COMPANY. (G) THE ASSESSEE FIRM HAS ALSO GIVEN PERSONAL GUARA NTEE TO THE BANK (A SECURED LENDER) FOR GRANTING TERM LOAN TO THE COMPA NY FOR ACQUIRING MACHINERIES. THE SAID TERM LOAN IS NOT ENTIRELY RE- PAID, AS OF DATE. (H) THE ASSESSEE FIRM HAS NOT BORROWED FUNDS AT INT EREST FOR THE PURPOSE OF GRANTING LOAN TO THE COMPANY. (I) THE ASSESSEE FIRM DISCONTINUED AND WAIVED CHARG ING OF INTEREST TO THE COMPANY EFFECTIVE 1 ST OCTOBER, 2002 ON THE OUTSTANDING LOAN AMOUNT ON AC COUNT OF THE FOLLOWING FACTUAL ASPECTS. I) FINANCIAL SICKNESS OF THE COMPANY. II) UNCERTAINTIES EMBEDDED TO ULTIMATE COLLECTION OF OU TSTANDING AMOUNT. III) APPLICATION OF REAL INCOME THEORY. IN VIEW OF THE FACTS SUBMITTED ABOVE, IT IS SUBMITT ED THAT, IN LAW, IT CAN NOT BE SAID THAT FUNDS BORROWED AT INTEREST HAVE NO T BEEN UTILIZED BY THE ASSESSEE FIRM FOR THE PURPOSE OF ITS BUSINESS AND T HAT BEING SO, NO DISALLOWANCE IS WARRANTED OUT OF INTEREST COST FOR THE YEAR OF ATTRIBUTABLE INTEREST COST ON THE OUTSTANDING BALANCE DUE FROM T HE COMPANY IN ASSESSING THE INCOME OF THE ASSESSEE FIRM FOR THE YEAR. FURTHER O N ACCOUNT OF FINANCIAL SICKNESS OF THE COMPANY THE QUESTION OF CHARGING IN TEREST DOES NOT ARISE. 4. THIS SUBMISSION DID NOT FIND FAVOR WITH THE AO, WHO ADDED BACK RS. 23,97,944, BEING INTEREST DUE FROM THE GROUP COMPANY, OBSERVIN G, M/S CHITRALEKHA ITA NO. 6363/MUM/2011 3 I HAVE CAREFULLY, CONSIDERED THE SUBMISSIONS OF TH E ASSESSEE. ON THE FOLLOWING REASONING, I SO NOT ACCEPT THE SAID SUBMI SSIONS AND ACCORDINGLY, IN MY OPINION, THE EXPENDITURE ATTRIBUTABLE TO INTERES T CONSEQUENT TO NON-CHARGING OF INTEREST ON THE AMOUNT DUE FROM THE SAID COMPANY IS TO BE DISALLOWED IN ASSESSING INCOME FOR THE YEAR : (A) THERE ARE BORROWED FUNDS AT INTEREST; (B) INTEREST IS ALSO PAID ON THE BALANCES STANDING TO T HE CREDIT OF THE PARTNERS CAPITAL ACCOUNT; (C) THE ASSESSEE HAS NOT ESTABLISHED DIRECT NEXUS OF TH E SOURCE OF INTEREST FREE FUNDS FROM WHICH THE LOAN UNDER REFERENCE IS G RANTED. THE ACTION OF THE ASSESSEE OF NOT CHARGING INTEREST FOR THE YEAR, IN MY OPINION, ESTABLISHES WITHOUT ANY DOUBT THAT THE CON DITION ENUMERATED U/S 36(1)(III) OF THE I.T. ACT. FOR ALLOWANCE OF INTERE ST ON BORROWED FUNDS IS NOT SATISFIED AS GRANTING OF INTEREST FREE LOANS CANNOT BE CONSIDERED AS UTILIZED OF FUNDS BORROWED AT INTEREST FOR THE PURPOSE OF THE B USINESS OF THE ASSESSEE. ACCORDINGLY, THE ATTRIBUTABLE INTEREST OF RS. 23,97 ,944/- IS DISALLOWED AND ADDED TO TOTAL INCOME. 5. THE ASSESSEE APPROACHED THE CIT(A) ON THIS ISSUE, WHO RELIED ON THE DECISION OF THE CIT(A) ORDER DATED 17.12.2009 IN ASSESS MENT YEAR 2007-08, WHEREIN, IT WAS HELD, THE FACTS AND CIRCUMSTANCES REMAIN THE SAME AS IN THE ASSESSMENT YEAR 2006-07, IN RESPECT OF WHICH IN APPEAL ORDER D ATED 17/12/2009 FOLLOWED IN APPEAL FOR A.Y. 2007-08 THE UNDERSIGNED HAD HELD . IT REMAINS A FACT THAT THE APPELLANT HAS BORROWED FUNDS ON INTEREST AND LOAN WAS ADVANCED BY IT TO ITS SISTER CONCERN FOR W HICH NO INTEREST HAD BEEN CHARGED ON THE AMOUNT OUTSTANDING. IT HAS BEEN HELD IN K. SOMADUNDARAM & OTHERS V/S CIT 238 ITR 939 (MAD), ELMER HAVELL ELEC TRICS & OTHERS CIT 277 ITR 549 (DEL), V I BABY & CO. 254 ITR 248 (KER), DOCTOR & CO. 180 ITR 627 (BOM) THAT FOR CLAIMING DEDUCTION FOR INTEREST ON CAPITA L BORROWED, IT IS NECESSARY THAT THE CAPITAL SO BORROWED CONTINUES TO REMAIN IN BUSI NESS. INTEREST PAID ON CAPITAL BORROWED TO THE EXTENT OF AMOUNTS DIRECTED COULD NOT BE CLAIMED FOR DEDUCTION AS ITEM OF BUSINESS EXPENDITURE. IN PHALT ON SUGAR WORKS LTD. V/S CIT 208 ITR 989, THE JURISDICTIONAL BOMBAY HIGH COU RT HAS HELD THAT WHERE AMOUNT WERE ADVANCED BY AN ASSESSEE TO ITS SUBSIDIA RY WITHOUT CHARGING INTERESTS, INTEREST ON SUCH BORROWED CAPITAL IS NOT ALLOWABLE. THE ASSESSING OFFICER IS THEREFORE PERFECTLY JUSTIFIED IN MAKING AN ADDITION TO THE EXTENT OF PROPORTIONATE INTEREST CHARGEABLE FROM SISTER CONCE RN. THE ADDITION IS ACCORDINGLY CONFIRMED. THE ALTERNATE SUBMISSIONS ARE ALSO NOT ACCEPTABLE AS THE APPELLANTS CONTENTIONS ARE CONJECTURES BASED ON A HYPOTHETICAL SITUATION. 6. THE CIT(A), RELYING OF THE DECISION OF HIS PREDECESSOR, DATED 17.12.2009, SUSTAINED THE ORDER OF THE AO. 7. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 8. BEFORE US, THE AR POINTED OUT THAT THE ISSUE IN QUESTIO N HAS BEEN DECIDED AGAINST THE ASSESSEE IN ASSESSMENT YEARS 2004-05 TO M/S CHITRALEKHA ITA NO. 6363/MUM/2011 4 2006-07 BY THE COORDINATE BENCH IN MUMBAI IN ITA NOS. 20 58 TO 2060 OF 2010, WHEREIN IT WAS HELD, WE HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF LD . REPRESENTATIVES OF PARTIES AND ORDERS OF AUTHORITIES BELOW. WE HAVE ALSO GONE THROUGH THE CASES CITED BY THE LD REPRESENTATIVES OF BOTH PARTIES IN THE LIGHT OF PROVISIONS OF DEDUCTION U/S 36(1)(III) OF I.T. ACT. THERE IS NO D ISPUTE TO THE FACT THAT ASSESSEE HAD BORROWED FUNDS ON INTEREST AND A PART OF IT WAS ADVANCED BY ASSESSEE TO ITS SISTER CONCERN. THE ASSESSEE CHARGED INTEREST @ 12% ON THE SAID LOAN ADVANCED UPTO 30 TH SEPTEMBER, 2002 AND THEREAFTER NO INTEREST WAS CHA RGED. THE PLEA TAKEN BY ASSESSEE IS THAT ITS SISTER CONCE RN CPPL HAD BECOME SICK UNIT AND THEREFORE ASSESSEE HAD TAKEN A DECISION DU E TO COMMERCIAL EXPEDIENCY NOT TO CHARGE INTEREST. WE OBSERVED THAT NO SUCH MATERIAL HAS BEEN PLACED ON RECORD THAT ASSESSEE HAD TAKEN COMMERCIAL DECISION BEFORE THE INTEREST ACCRUED NOT TO CHARGE INTEREST ON THE AMOU NT LENT AND ADVANCE BY ASSESSEE TO ITS SISTER CONCERN. WITHOUT GOING INTO THE QUESTION AS TO WHETHER SISTER CONCERN HAD BECOME FINANCIALLY WEAK OR NOT, IT IS NOT IN DISPUTE THAT ASSESSEE HAS USED INTEREST BEARING LOAN TO GIVE ADV ANCE TO ITS SISTER CONCERN. NOT ONLY THIS, ASSESSEE HAS ALSO GIVEN FURTHER ADVA NCE OF RS. 56,76,894/- IN THE ASSESSMENT YEAR UNDER CONSIDERATION ON WHICH AL SO NO INTEREST IS CHARGED. THE ASSESSEE HAS TAKEN PLEA BEFORE AUTHORITIES BELO W AS WELL AS BEFORE US THAT IF INTEREST IS TO BE DISALLOWED, IT COULD BE DISALL OWED PROPORTIONATELY ATTRIBUTABLE TO THE LOAN ADVANCED BY ASSESSEE TO CP PL IN THE FINANCIAL YEAR RELEVANT TO ASSESSMENT YEAR 2004-05 WHICH COMES TO RS. 2,69,650/- AND NO INTEREST ON THE AMOUNT BROUGHT FORWARD FROM PREVIOU S YEAR I.E. OF RS.1,37,78,040/- SHOULD BE DISALLOWED. WE DO NOT FI ND MERIT IN THE SAID CONTENTION OF LD. AUTHORIZED REPRESENTATIVE OF ASSE SSEE IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IT IS A FACT THAT ASSESS EE HAS GIVEN INTEREST ON THE CAPITAL OF PARTNERS BUT ASSESSEE HAS NOT CHARGED AN Y INTEREST FROM ITS SISTER CONCERN IN WHICH ITS PARTNERS HAVE MAJORITY STAKE. THEREFORE, WE FIND MERIT IN THE CONTENTION OF LD. DR THAT ASSESSEE HAS ADOPTED TAX AVOIDANCE DEVICE BY NOT CHARGING INTEREST ON ACCRUAL BASIS TO ITS SISTE R CONCERN AS SISTER CONCERN BEING LOSS MAKING ENTITY WILL NOT GET ANY BENEFIT O F INTEREST. THEREFORE, THE CASES CITED BY LD.AR THAT IT WAS A MIXED FUND AND D EPARTMENT HAS NOT BROUGHT ANY MATERIAL ON RECORD THAT THE INTEREST BEARING FU ND WAS UTILIZED BY ASSESSEE TO GIVE INTEREST FREE LOAN TO ITS SISTER CONCERN HA S NO MERIT AS IT IS FOR ASSESSEE TO PROVE THAT INTEREST FREE AMOUNT WAS GIVEN AS ADV ANCE TO ITS SISTER CONCERN AND NOT INTEREST BEARING FUND WAS UTILIZED. WHEREAS CASES CITED BY LD. DR (SUPRA) AND PARTICULARLY THE DECISION OF BOMBAY HIG H COURT IN THE CASE OF PHALTAN SUGAR WORKS LTD. VS COMMISSIONER OF WEALTH- TAX (SUPRA) AND THE CASE OF DOCTOR & CO. (SUPRA) SQUARELY APPLY TO THE FACTS OF THE CASE BEFORE US. THE BUSINESS OF SUBSIDIARY COMPANY THAT IT WAS A LOSS M AKING COMPANY AND HENCE ASSESSEE HAS NOT CHARGED INTEREST TO ENABLE THE SIS TER CONCERN CPPL TO CARRY ON ITS BUSINESS CANNOT BE CONSIDERED IN LAW AS THE BUS INESS EXPEDIENCY OF THE ASSESSEE COMPANY. THEREFORE, THE ABOVE CONTENTION O F LD.AR THAT NO INTEREST WAS CHARGED ON COMMERCIAL EXPEDIENCY IS NOT ACCEPTE D. IN VIEW OF ABOVE FACTS, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORD ER OF LD.CIT(A). HENCE, WE UPLOAD THE ORDER OF LD.CIT(A) AND REJECT GROUND OF APPEAL TAKEN BY ASSESSEE FOR ASSESSMENT YEAR 2004-05. 9. SINCE THE FACTS AND THE ISSUE IS IDENTICAL AS THAT IN ASS ESSMENT YEARS 2004-05 TO 2006-07, RESPECTFULLY FOLLOWING THE DECISI ON IN ITAS M/S CHITRALEKHA ITA NO. 6363/MUM/2011 5 NO. 2058 TO 2060/MUM/2010. WE SUSTAIN THE DISALLOWANCE A ND REJECT THE GROUND. 8. THE AR DID NOT ARGUE GROUNDS TAKEN IN 1(II) & 1(III), WHICH W ERE WITHOUT PREJUDICE TO THE MAIN GROUND NO. 1(I). HENCE THESE ARE REJECTED AS NOT PROSECUTED. 10. GROUND NO. 2 & 3 ARE GENERAL. 11. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 30/11/2012. SD/- (RAJENDRA SINGH) ACCOUTANT MEMBER SD/- (VIVEK VARMA) JUDICIAL MEMBER MUMBAI, DATE: 30/11/2012 COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A)- 22 , MUMBAI. 4) THE CIT 10, MUMBAI, 5) THE D.R. C BENCH, MUMBAI. 6) COPY TO GUARD FILE. BY ORDER / / TRUE COPY / / ASSTT. REGISTRAR I.T.A.T., MUMBAI RASIKA