Shri Satyamurthy Swaminathan, CHENNAI V. ACIT, CHENNAI

ITA 655/CHNY/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51683 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-08-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 01-06-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K E B RENGARAJAN JUNIOR
• Assessee Lawyers: R VIJAYARAGHAVAN
• Keywords: Business income; Cost of acquisition; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BENCH B CHENNAI (BEFORE SHRI U.B.S. BEDI, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER) .. I.T.A. NO. 655/MDS/2010 ASSESSMENT YEAR : 2007-08 SHRI SATYAMURTHY SWAMINATHAN, PROP: M/S VIJI ASSOCIATES, 40/42, WOOD PECKER BUILDING, 7 TH AVENUE, BESANT NAGAR, CHENNAI 600 090. PAN : AVCPS0457N (APPELLANT) V. THE ASSISTANT COMMISSIONER OF INCOME TAX, BUSINESS CIRCLE V, CHENNAI 600 034. (RESPONDENT) APPELLANT BY : SHRI R. VIJAYARAGHAVAN RESPONDENT BY : SHRI K.E.B . RENGARAJAN, JUNIOR STANDING COUNSEL O R D E R PER ABRAHAM P. GEORGE, ACCOUNTANT MEMBER : IN THIS APPEAL FILED BY THE ASSESSEE, SOLE ISSUE R AISED IS REGARDING CONFIRMATION OF A DISALLOWANCE OF ` 6,65,437/- BEING AN INTEREST PAID TO THE BANK FOR A REASON THAT BORROWE D FUNDS WERE DIVERTED TO SISTER CONCERNS. I.T.A. NO. 655/MDS/10 2 2. SHORT FACTS APROPOS ARE THAT ASSESSEE TRADING IN FURNITURE, HAD FILED HIS RETURN FOR THE IMPUGNED ASSESSMENT YEAR A DMITTING AN INCOME OF ` 22,54,074/-. ASSESSEE HAD MADE PURCHASE OF GOODS FROM ONE M/S CONDUIT WORLDWIDE TRADING (INDIA) P. L TD. (CWT) WHEREIN HIS WIFE AND FATHER WERE THE DIRECTORS. SU CH PURCHASES WERE OF THE VALUE OF ` 75.43 LAKHS OUT OF WHICH ASSESSEE HAD EFFECTED PAYMENTS OF 58.22 LAKHS LEAVING A BALANCE OF ` 17.21 LAKHS IN THE CREDIT SIDE OF HIS BALANCE SHEET. ASSESSING OFFICE R FOUND THAT ASSESSEE HAD GIVEN AN ADVANCE OF ` 94.50 LAKHS TO THE SAID CONCERN, OUT OF WHICH ` 42 LAKHS WAS RECEIVED BACK ON 13.9.2006 LEAVING A BALANCE OF ` 52.50 LAKHS OUTSTANDING AT THE END OF RELEVANT PRE VIOUS YEAR. A.O. ALSO FOUND THAT NO INTEREST WAS CHARGED BY THE ASSESSEE ON THE ADVANCE GIVEN BY HIM TO M/S CWT. NEVERTHELE SS, ASSESSING OFFICER NOTED THAT ASSESSEE HAD PAID INTEREST OF ` 13,39,030/- ON HIS OVERDRAFT ACCOUNT WITH M/S KARNATAKA BANK. ARGUMEN T OF THE ASSESSEE WAS THAT HE HAD SUFFICIENT MONEY WITH HIM FOR GIVING LOANS AND HENCE THERE WAS NO DIVERSION OF FUNDS. HOWEVER , THE A.O. WAS NOT IMPRESSED. ACCORDING TO HIM, THROUGH THE PROFI T MARGIN CHARGED BY M/S CWT THE SALES MADE BY IT TO THE ASSESSEE WAS LESS, IT WOULD ONLY GO TO INCREASE THE PROFIT RATES OF THE ASSESSE E. IN SO FAR AS THE I.T.A. NO. 655/MDS/10 3 CLAIM OF THE ASSESSEE THAT LOANS WERE MADE OUT OF F UNDS OF HIS WIFE, THE A.O. WAS OF THE OPINION THAT SUCH FUNDS WERE UT ILIZED FOR MAKING INVESTMENT IN MUTUAL FUNDS. A.O. ALSO NOTED THAT D EBTORS AMOUNTS WERE NEGLIGIBLE. HE, THEREFORE, CAME TO A CONCLUSI ON THAT MONEY LOANED FROM KARNATAKA BANK WAS DIVERTED TO THE SIST ER-CONCERN AND THEREFORE, A PRO RATA DISALLOWANCE OF 9.75% BEING T HE INTEREST CHARGED BY THE KARNATAKA BANK, WAS MADE ON THE ADVA NCE GIVEN BY THE ASSESSEE TO M/S CWT. 3. IN ITS APPEAL BEFORE THE CIT(APPEALS), CONTENTIO N OF THE ASSESSEE WAS THAT M/S CWT, ITS SISTER CONCERN, DID NOT HAVE ANY LOAN FACILITY WITH ANY BANK. ACCORDING TO THE ASSESSEE, SUCH SISTER- CONCERN WAS SELLING SUBSTANTIAL PART OF ITS GOODS T O THE ASSESSEE. PROFIT MARGIN CHARGED BY THE SISTER CONCERN ON SUCH SALES WERE NOMINAL. ACCORDING TO ASSESSEE, M/S CWT WAS HOLDIN G TRADE MARK REGISTRATION FOR THE BRAND NAME WOODPECKER AND AS SESSEE WAS USING SUCH BRAND NAME, WHICH CLEARLY ESTABLISHED A BUSINESS RELATION. ARGUMENT OF THE ASSESSEE WAS THAT MONEY LENT TO SISTER- CONCERN WAS FOR COMMERCIAL EXPEDIENCY AND DISALLOWA NCE WAS NOT CALLED FOR. RELIANCE WAS PLACED ON THE DECISION OF HON'BLE APEX I.T.A. NO. 655/MDS/10 4 COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT (288 ITR 1). ASSESSEE ALSO SUBMITTED A COPY OF CERTIFICATE OF TRADE MARK REGISTRATION FOR THE BRAND NAME WOODPECKER BY M/S CWT IN SUPPORT OF IT S ARGUMENT THAT THERE WAS A CLEAR ESTABLISHED BUSINESS RELATIO N BETWEEN THE ASSESSEE-COMPANY AND M/S CWT. HOWEVER, LD. CIT(APP EALS) WAS NOT IMPRESSED. ACCORDING TO HIM, SUCH ACTION OF TH E ASSESSEE COULD NOT BE ACCEPTED AS COVERED BY THE DECISION OF HON'B LE APEX COURT IN S.A. BUILDERS LTD. (SUPRA). HE WAS OF THE OPINION THAT THE DECISION OF HON'BLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD . (SUPRA) WAS NOT APPLICABLE, THUS CONFIRMED THE ACTION OF THE A.O. 4. NOW BEFORE US, LEARNED A.R., STRONGLY ASSAILING THE ORDERS OF THE AUTHORITIES BELOW, SUBMITTED THAT THERE WAS A C LOSE BUSINESS CONNECTION BETWEEN ASSESSEE AND M/S CWT. PLACING R ELIANCE ON PAPER-BOOK PAGE 1, LEARNED A.R. SUBMITTED THAT M/S CWT WAS HOLDING TRADE MARK REGISTRATION OF THE TRADE NAME WOODPECKER WHICH WAS BEING USED BY THE ASSESSEE. FURTHER, AS PER THE LEARNED A.R., THE AMOUNT OF INTEREST PAID BY THE ASSESSEE O N LOAN WAS NEGLIGIBLE VIS--VIS ITS TURNOVER AND MAJOR PART OF ITS PURCHASE WERE FROM M/S CWT. RELYING ON PAPER-BOOK PAGE 4, LEARNE D A.R. I.T.A. NO. 655/MDS/10 5 SUBMITTED THAT M/S CWT WAS NOT HAVING ANY OVERDRAFT ACCOUNT FROM ANY BANK. FURTHER, AS PER THE LEARNED A.R., IF ASS ESSEE HAD NOT GIVEN ADVANCE TO M/S CWT, THEN CWT WOULD HAVE TAKEN LOANS AND PAID INTEREST THEREON WHICH WOULD HAVE RESULTED IN INFLA TION IN ITS SALE PRICES THEREBY AFFECTING THE PURCHASE COST OF THE A SSESSEE. AS PER THE LEARNED A.R., ASSESSEE HAD SUFFICIENT PROFIT WH ICH CAME TO ` 13,39,162/- AND THIS BY ITSELF WOULD SHOW THAT LOAN S GIVEN TO M/S CWT DID NOT HAVE ANY DETRIMENTAL EFFECT ON ITS WORKING. IN ANY CASE, ACCORDING TO HIM, THE MAJOR PART OF THE PURCHASES M ADE BY THE ASSESSEE WERE SOURCED FROM M/S CWT, AND THIS BY ITS ELF ESTABLISHED CLEAR BUSINESS RELATIONSHIP. 5. PER CONTRA, LEARNED D.R. SUBMITTED THAT COMMERCI AL EXPEDIENCY COULD NOT BE PROVED BY THE ASSESSEE AND THEREFORE, THE DECISION IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) WOULD NOT BE APPLICABLE TO THIS CASE. ACCORDING TO HIM, THE LOANS WERE NOT JUSTIFI ED AND INTEREST WAS, THEREFORE, RIGHTLY DISALLOWED. 6. WE HAVE PERUSED THE ORDERS AND HEARD THE RIVAL C ONTENTIONS. THERE IS NO DISPUTE THAT THE ASSESSEE HAD CLOSE REL ATIONSHIP WITH M/S CWT IN WHICH ASSESSEES WIFE AND FATHER WERE DIRECT ORS. THERE IS I.T.A. NO. 655/MDS/10 6 ALSO NO DISPUTE THAT M/S CWT WAS IMPORTING FURNITUR E AND IT WAS SELLING SUBSTANTIAL PART OF SUCH IMPORT THROUGH ASS ESSEE. THERE IS ALSO NO DISPUTE THAT THE TRADE MARK WOODPECKER WA S HELD BY M/S CWT AND WAS BEING USED BY THE ASSESSEE. IN OTHER W ORDS, ASSESSEE WAS SELLING ITS FURNITURE UNDER THE TRADE MARK WOODPECKER AND SUCH TRADE MARK WAS OWNED BY ITS S ISTER-CONCERN M/S CWT. THE A.O. HIMSELF HAD NOTED THAT ASSESSEE HAD EFFECTED PURCHASES OF ` 75.43 LAKHS FROM M/S CWT. TOTAL PURCHASES OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR CAME TO ` 97,28,983.66 AS IT APPEARS FROM SCHEDULE 8 TO PROFIT AND LOSS ACCOUNT PLACED AT PAPER- BOOK PAGE 14. THIS BEING SO, UNDISPUTEDLY, SUBSTAN TIAL PART OF ASSESSEES PURCHASES WERE FROM M/S CWT. IF WE LOOK AT SALES OF M/S CWT AS APPEARING IN ITS PROFIT AND LOSS ACCOUNT PLA CED AT PAPER-BOOK PAGE 3, IT CAME TO ` 1,06,71,997/- FOR THE RELEVANT PREVIOUS YEAR. SO, BETWEEN 70 AND 75% OF THE TOTAL SALES WERE EFFECTED TO THE ASSESSEE BY M/S CWT. IN OUR OPINION, THESE ASPECTS CLEARLY ESTABLISH A BUSINESS RELATION BETWEEN THE TWO COMPANIES. IN TH E CASE OF S.A. BUILDERS LTD. (SUPRA), RELIED ON BY THE LEARNED A.R ., IT WAS HELD BY HON'BLE APEX COURT IN PARAS 31 AND 32 AS UNDER:- I.T.A. NO. 655/MDS/10 7 31. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH C OURT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 174 CTR (DEL) 188 : (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLISHE D THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLA IM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIM IZE ITS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOUL D ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STAT ED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER- CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDI ENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT WAS ADVAN CED FOR EARNING PROFITS. 32. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPI NION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOW ED IF THE ASSESSEE ADVANCES IT TO A SISTER-CONCERN. IT ALL D EPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FO R INSTANCE, IF THE DIRECTORS OF THE SISTER-CONCERN UTILIZE THE AMO UNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OB VIOUSLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEA SURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL EXPEDIE NCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED H ERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSES SEE WOULD, IN OUR OPINION, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOAN. I.T.A. NO. 655/MDS/10 8 IN THE CASE BEFORE US, THERE IS NO FINDING BY THE R EVENUE THAT AMOUNTS GIVEN AS LOANS TO THE SISTER-CONCERN WERE U TILIZED BY ITS DIRECTORS FOR ANY OF THEIR PERSONAL BENEFIT. ON TH E OTHER HAND, THE SAID COMPANY, NAMELY, M/S CWT HAD CLOSED ITS OVERDR AFT WITH INDIAN BANK DURING THE RELEVANT PREVIOUS YEAR, AS CLEAR FR OM SCHEDULE 2 TO THE BALANCE SHEET PLACED AT PAPER-BOOK PAGE 4. IN OUR OPINION, COMMERCIAL EXPEDIENCY IS CLEARLY DEMONSTRATED FOR T HE LOANS GIVEN BY THE ASSESSEE TO M/S CWT. HENCE, DISALLOWANCE OF PR O RATA INTEREST WAS NOT WARRANTED. SUCH DISALLOWANCE STANDS DELETE D. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. THE ORDER WAS PRONOUNCED IN THE COURT ON 5 TH AUGUST, 2011. SD/- SD/- (U.B.S. BEDI) (ABRAHAM P. GEORGE) JUDICIAL MEMBER ACCOUNTANT MEMBER CHENNAI, DATED THE 5 TH AUGUST, 2011. KRI. COPY TO: (1) APPELLANT (2) RESPONDENT (3) CIT(A)-VIII, CHENNAI (4) CIT-VI, CHENNAI (5) D.R. (6) GUARD FILE