DANMET CHEMICALS P. LTD, MUMBAI V. ITO 6(2)(2), MUMBAI

ITA 6856/MUM/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 3476 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 29 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-08-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2003-2004
• Appeal Filed On: 27-11-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: SANJAY R PARIKH
• Keywords: Maximum Marginal Rate; Fair market value
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES D, MUMBAI BEFORE SHRI SAKTIJIT DEY(JUDICIAL MEMBER) AND SHRI N.K. PRADHAN (ACCOUNTANT MEMBER) ITA NO. 6856 /MUM/2013 ASSESSMENT YEAR: 2003-04 ITA NO. 6857 /MUM/2013 ASSESSMENT YEAR: 2004-05 M/S DANMET CHEMICALS P. LTD. VS. ITO 6(2)(2) 9, BUSSA IND ESTATE, CENTURY BAZAR R.NO. 562, AAY AKAR BHAVAN LANE, PRABHADEVI MUMBAI MUMBAI 400025 PAN NO. AAACD1891K (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI. SANJAY R. PARIKH RESPONDENT BY : SMT. AMRITA SINGH DATE OF HEARING : 11/08/201 6 DATE OF PRONOUNCEMENT : 26/08/2016 ORDER PER N.K. PRADHAN, A.M THE APPEALS HAVE BEEN FILED BY THE ASSESSEE. BOTH T HE APPEALS ARE TAKEN TOGETHER FOR A DECISION AS THEY ADDRESS A COM MON ISSUE. THE RELEVANT ASSESSMENT YEARS ARE 2003-04 & 2004-05. THE APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A) 12 MUMBAI, AND A RISE OUT OF THE ASSESSMENT COMPLETED BY THE ASSESSING OFFICE (AO) U/S 143(3) R EAD WITH SECTION 147OF THE INCOME TAX ACT 1961 (HEREINAFTER THE ACT). 2. THE ONLY GROUND OF APPEAL RAISED BY THE APPELLAN T IS THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT THE INVESTMENT IN SHAR ES OF BHARAT BIJLEE LTD. WAS NOT FOR THE PURPOSE OF BUSINESS, WHILE CONFIRMING T HE DISALLOWANCE OF INTEREST OF RS. 8,79,999/- FOR ASSESSMENT YEAR 2003-04 AND R S. 8,54,836/- FOR ASSESSMENT YEAR 2004-05 U/S 40A(2)(B) OF THE ACT. 3. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDIN GS FOUND THAT THE ASSESSEE COMPANY HAD RAISED A LOAN OF RS. 55,00,000 /- FROM ITS DIRECTORS / SHAREHOLDERS AND HAD UTILIZED THE SAID AMOUNT TO PU RCHASE THE SHARES BHARAT BIJLEE LTD WHEREIN THE SAME DIRECTORS HAD SUBSTANTI AL INTEREST . HE DISALLOWED INTEREST EXPENDITURE OF RS. 8,79,999/- IN ASSESSMEN T YEAR 2003-04 AND RS. 8,54,836/- IN ASSESSMENT YEAR 2004-05 U/S 40A(2)(B ) OF THE ACT. 4. THE LEARNED CIT(A) CAME TO A FINDING THAT THE AS SESSEE HAD BORROWED FUNDS FROM THE BANKS ON SECURITY OF STOCKS AND DEBT ORS @ 13.5%. IT HAD BORROWED RS. 55,00,000/- FROM ITS DIRECTORS AND PAI D INTEREST THEREON@ 16%. THE BORROWINGS MADE FROM THE DIRECTORS WERE UTILIZE D FOR MAKING INVESTMENT IN SHARES OF BHARAT BIJLEE LTD. WHEREIN THE ASSESSE ES DIRECTORS HAD SUBSTANTIAL INTEREST. HE HELD THE INTEREST EXPENDITURE IS NOT A LLOWABLE U/S 36(1)(III). HE ALSO HELD THAT THE DISALLOWANCE MADE BY THE AO OF THE SA ID INTEREST EXPENDITURE U/S 40A(2)(B) IS JUSTIFIABLE. 5. THE LEARNED COUNSEL OF THE ASSESSEE RELIED ON TH E JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT [2007] 288 ITR 1 (SC). HE ALSO REFERRED TO THE ARTICLES OF AGREEMENT BE TWEEN THE ASSESSEE AND BHARAT BIJLEE LTD. SPECIFIC REFERENCE WAS MADE BY HIM TO CLAUSE (C) OF THE ABOVE AGREEMENT. HE ALSO REFERRED TO THE MEMOR ANDUM OF LOAN SANCTION FROM THE UNITED WESTERN BANK LTD., SATARA WHEREIN THE RATE OF INTEREST HAS BEEN FIXED AT 13.5%. HE REFERRED TO PA RA 17 OF HIS SUBMISSION DATED 02/09/2013 BEFORE THE LEARNED CIT(A) WHEREIN HE HAD SUBMITTED THAT THE DIRECTORS/SHAREHOLDERS ARE ALL ASSESSED TO TAX AND ARE PAYING TAX AT THE MAXIMUM MARGINAL RATE OF TAX @ 30% PLUS SURCHARGE. HE HAD FILED COPIES OF COMPUTATION OF THEIR INCOME BEFORE THE LEARNED CIT( A). RELIANCE WAS ALSO PLACED BY HIM ON THE DECISION IN THE CASE OF BHARTI AIRTEL LTD. VS. ACIT [2010] 48 DTR (MUM)(TRIB) 416 WHEREIN THE ASSESSEE WAS PAYING INTEREST @ 14% TO BANK AND @ 7 TO 18% TO ITS SISTER CONCERN. THE AO H AS DISALLOWED INTEREST PAID OVER 12%. THE TRIBUNAL HELD INTER ALIA THAT IN ABSENCE OF ANY MATERIAL TO SHOW THAT THE PAYMENT OF INTEREST MADE BY THE ASSESSEE I S IN EXCESS OF FAIR MARKET VALUE, 18% RATE OF INTEREST WAS REASONABLE. THE LEARNED COUNSEL ALSO RELIED ON THE JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. INDO SAUDI SERVICES (TRAVEL) P. LTD . (2009) 310 ITR 306 (BOM) WHEREIN IT HAS BEEN HELD THAT UNDER BOARD CIRCULAR NO. 6-P DATED JULY 1968, NO DISALLOWANCE WAS TO BE MADE UNDER SECTION 40A(2)IN RESPECT OF PAYMENT MADE TO THE RELATIVES A ND SISTER CONCERN WHERE THERE WAS NO ATTEMPT TO EVADE TAX. 6. THE LEARNED DR STRONGLY SUPPORTED THE ORDER PASS ED BY THE LEARNED CIT(A). 7. WE HAVE CAREFULLY CONSIDERED THE MATTER AND ALSO PERUSED THE MATERIALS ON RECORD PLACED BEFORE US. IN S.A. BUILDERS (SUPRA) , THEIR LORDSHIPS OBSERVED THE FOLLOWING: ..... THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CL AIM TO PUT ITSELF IN THE ARMCHAIR 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. NO BUSINESSMAN CAN BE CO MPELLED TO MAXIMIZE HIS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN T HE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIE S MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDE NT BUSINESSMAN ..... IN THE INSTANT APPEAL, THE ASSESSEE IS IN THE BUSIN ESS OF MANUFACTURING AND TRADING IN ELECTRICAL AND INDUSTRIAL CHEMICALS. WE FIND THAT AS PER CLAUSE (C) OF THE RTICLES OF AGREEMENT, THE ASSES SEE SHALL MANUFACTURE AND SELL TO BHARAT BIJLEE LTD. ELECTRICAL/ELECTRONI C AND INDUSTRIAL PRODUCTS FOR DISTRIBUTION IN INDIA. ONE HAS TO SEE THE TRANS FER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMME RCIAL EXPEDIENCY. WE FIND THAT THE CASE OF THE ASSESSEE WITH REGARD TO S ECTION 36(1)(III) IS SQUARELY COVERED BY THE DECISION IN THE ABOVE CASE. 7.1 ALSO THE CASE OF THE ASSESSEE WITH REGARD TO SE CTION 40A (2) IS COVERED BY THE JUDGEMENT OF THE HONBLE BOMBAY HIGH COURT I N THE CASE OF INDO SAUDI SERVICES (TRAVEL) P. LTD . (SUPRA) AS THE DIRECTORS / SHAREHOLDERS ARE ALL ASSESSED TO TAX AND HAVE PAID TAX AT THE MAXIMUM MA RGINAL RATE @ 30% PLUS SURCHARGE. 7.2 NOW WE SHALL CONSIDER THE FINDING OF THE LEARNE D CIT(A) FOR A.Y. 2004-05 THAT INTEREST OF RS. 8,54,836/- WAS OTHERWISE DISAL LOWABLE U/S 14A. WE HAVE GONE THROUGH THE ASSESSMENT FOR THE ABOVE YEAR AND FIND THAT THE AO HAS NOT MENTIONED ANYTHING ABOUT DISALLOWANCE OF INTERE ST UNDER SECTION 14A. BEFORE APPLYING THE PROVISIONS OF SEC.14A OF THE AC T, THE AO HAS TO RECORD A SATISFACTION THAT HAVING REGARD TO THE ACCOUNTS OF THE ASSESSEE, THE CLAIM IS NOT CORRECT. THOUGH THE AFORESAID CONDITIONS ENSHRI NED IN SEC. 14A(2) WAS BROUGHT INTO THE STATUTE BY FINANCE ACT, 2006 W.E.F . 1 ST APRIL 2007, HOWEVER , IT HAS BEEN HELD IN JUDICIAL PRECEDENTS, SUCH CONDITIO N WILL APPLY EVEN IN RESPECT OF EARLIER ASSESSMENT YEARS. THUS, RECORDIN G OF SATISFACTION BY THE AO IS A MANDATORY REQUIREMENT. THIS IS ABSENT IN PRESE NT CASE. THEREFORE THE ISSUE OF DISALLOWANCE U/S 14A IN A.Y. 2004-05 DOES NOT AR ISE. 7.3 IN VIEW OF THE ABOVE FACTUAL MATRIX AND LEGAL POSITION, THE DISALLOWANCES OF RS. 8,79,999/- FOR A.Y. 2003-04 AN D RS. 8,54,836/- FOR A.Y. 2004- 05, MADE BY THE AO AND UPHELD BY THE LEARNED CIT(A) ARE DELETED. 8. IN THE RESULT, THE APPEALS FILED BY THE ASSESSEE ARE ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT 26/08/2016 SD/- SD/- (SAKTIJIT DEY) (N.K. PRADHAN) JUDICIAL MEMBER ACCOUNTANT MEMB ER MUMBAI; DATED: 26/08/2016 AG(ON TOUR) COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A)- 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT. REGISTRAR) ITAT, MUMBAI