Balaji Electrical Insulator Private Limited, Mehsana V. The Income Tax Officer, Ward-1(1)(2), Ahmedabad

ITA 73/AHD/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 9201 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 2 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-03-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2012-2013
• Appeal Filed On: 09-01-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G C DAXINI
• Keywords: Depreciation; Business expenditure; Proportionate interest; Notional interest
• Section: 143(3); 142(1); 143(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL SMC BENCH, AHMEDABAD BEFORE SHRI PRAMOD KUMAR, VICE PRESIDENT & MS. MADHUMITA ROY, JUDICIAL MEMBER I.T.A. NO.73/AHD/2017 (ASSESSMENT YEAR : 2012-13) BALAJI ELECTRICAL INSULATOR PRIVATE LTD., (PRESENTLY MERGED WITH GOLF CERAMIC LTD.), PLOT NO.731, MEHSANA BECHARAJI HIGHWAY, VILLAGE BALOL, DIST. MEHSANA PIN 384 401. VS. INCOME TAX OFFICER, WARD 1(1)(2), AHMEDABAD. [PAN NO. AACCB 9879 R] ( APPELLANT ) .. ( RESPONDENT ) APPELLANT BY : SHRI SAKAR SHARMA, A.R. RESPONDENT BY : SHRI G. C. DAXINI, SR. D.R. DATE OF HEARING 01.01.2019 DATE OF PRONOUNCEMENT 29.03.2019 O R D E R PER MS. MADHUMITA ROY - JM: THE INSTANT APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER DATED 13.10.2016 PASSED BY THE COMMISSIONER OF INCOME TAX (APPEALS)- 1, AHMEDABAD UNDER SECTION 143(3) R.W.S. 144 OF THE INCOME TAX ACT, 1961 (HERE INAFTER REFERRED AS TO THE ACT) ARISING OUT OF THE ORDER DATED 02.03.2015 PASSED BY THE INCOME TAX OFFICER, WARD 1(1)(2), AHMEDABAD FOR THE ASSESSMENT YEAR 2012-13. 2. THE APPELLANT COMPANY FILED ITS RETURN OF INCOME ON 29.09.2012 DECLARING INCOME AT RS. NIL, WHICH WAS PROCESSED U/S 143(1) OF THE A CT ON 13.05.2013. UPON SCRUTINY ASSESSMENT NOTICE U/S 143(2) DATED 19.09.2013 FOLLO WED BY A NOTICE U/S 142(1) OF THE ACT DATED 09.04.2014 WAS SERVED UPON THE ASSESSEE. PURS UANT TO THE SAID NOTICE, THE APPELLANT DULY FILED THE AUDIT REPORT, RETURN OF INCOME AND O THER PRIMARY DETAILS ON 21.04.2014. ON - 2 - ITA NOS.73/AHD/2017 BALAJI ELECTRICAL INSULATOR PVT. LTD. VS. ITO ASST.YEAR 2012-13 15.09.2014, A QUESTIONNAIRE WAS ALSO SERVED UPON TH E ASSESSEE ALONG WITH A NOTICE U/S 142(1) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE DE TAILS OF THE INTEREST FREE LOANS AND ADVANCES EXTENDED BY THE ASSESSEE COMPANY TO VA RIOUS PARTIES HAVE BEEN SUBMITTED UPON PERUSAL OF WHICH THE AO CAME TO A FINDING THAT THE ASSESSEE DID NOT HAVE ANY BUSINESS TRANSACTION WITH THOSE PARTIES, UNLIKE THE PARTIES WHOM IT HAS EXTENDED BUSINESS ADVANCES DURING THE YEAR UNDER ASSESSMENT. THE APPE LLANT DULY SUBMITTED BEFORE THE LEARNED AO THAT THE FUNDS HAVE BEEN ADVANCED FOR TH E BUSINESS OF THE ASSESSEE COMPANY AND UTILIZED ACCORDINGLY. IT WAS THE CASE OF THE LE ARNED AO THAT THE ASSESSEE HAS DIVERTED THE FUNDS RAISED FOR THE PURPOSE OF BUSINESS TO PRO VIDE ADVANCES TO RELATED PARTIES WITHOUT FULFILLING THE ACTUAL PURPOSE OF SUCH LOANS. THE AS SESSEE WAS NOT IN THE MONEY LENDING BUSINESS TO EARN INTEREST. FURTHER THAT, THE INTERE ST ON BORROWED CAPITAL IS ALLOWED AS A DEDUCTION FROM BUSINESS ONLY IF IT SATISFIES THE CO NDITION THAT THE SAME IS USED FOR THE BUSINESS PURPOSES. WHEN THE BORROWED FUND WAS DIVER TED FOR GIVING INTEREST FREE LOANS, THE PROPORTIONATE INTEREST ATTRIBUTABLE TO SUCH LOA NS COULD BE LEGITIMATELY DISALLOWED. THE FOLLOWING DETAILS OF INTEREST FREE FUND AVAILABLE W ITH THE ASSESSEE PRODUCED BY THE ASSESSEE ON 25.02.2015 WERE ALSO CONSIDERED BY THE LEARNED AO: INTEREST FREE FUNDS AMOUNT IN RS. SHARE CAPITAL 139320000 SHARE APPLICATION 500000 RESERVE AND SURPLUS 25158606 DEFERRED TAX LIABILITY PROV. NET 22132121 DEPRECIATION RESERVES 35395402 NON INTEREST BEARING UNSECURED LOAN 8562459 TOTAL INTEREST FREE FUND A 231068588 INTEREST BEARING FUND SECURED LOAN BANK OD 67756949 TERM LOAN 8744200 DIFFERED PAYMENT (CAR LOANS) 215568 INTEREST BEARING UNSECURED LOAN 30331445 TOTAL B 107048162 - 3 - ITA NOS.73/AHD/2017 BALAJI ELECTRICAL INSULATOR PVT. LTD. VS. ITO ASST.YEAR 2012-13 GROSS FUND EMPLOYED IN BUSINESS 338116750 PERCENTAGE OF INTEREST BEARING FUND 31.66 PERCENTAGE OF NON INTEREST BEARING FUND 68.33 TOTAL INTEREST PAID DURING THE YEAR BANK INTEREST ON OD EXP. 10895287 BANK INTEREST ON TERM LOAN 2202071 INTEREST ON UNSECURED LOAN 4419973 INTEREST ON CAR LOAN 26768 TOTAL INTEREST PAID 17544099 RATE OF INTEREST ON TOTAL FUND EMPLOYED IN BUSINESS 5.19% THE LEARNED AO ULTIMATELY AFTER CONSIDERING THE ABO VE CHART OF INTEREST FUND INCLUDING THE VALUE OF DEPRECIATION RESERVES, INTER EST EXPENSES IN PROPORTION TO THE FUNDS DIVERTED FOR NON BUSINESS PURPOSE DISALLOWED AN AMO UNT OF RS.20,78,380/- U/S 36(I)(III) AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. IN A PPEAL, THE SAME WAS CONFIRMED BY THE LEARNED CIT(A). HENCE, THE INSTANT APPEAL BEFORE US . 3. AT THE TIME OF HEARING OF THE APPEAL, THE LEARNE D ADVOCATE APPEARING FOR THE ASSESSEE SUBMITTED BEFORE US THAT THE APPELLANTS O WN FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF ADVANCES TO VARIOUS PARTIES AND NOT THE BORROWED FUNDS. THE APPELLANT COMPANY HAS HUGE SURPLUS FUNDS AT ITS DISPOSAL. THE COMPANY HAD GIVEN INTEREST FREE LOANS AND ADVANCES OUT OF INTEREST FREE FUNDS WHICH CONSISTS OF CAPITAL FUND, FREE RESERVE, INTEREST FREE UNSECURED LOANS, PROVISIONS FOR DEFER RED TAX LIABILITIES CREATED OUT OF SURPLUS AND ACCUMULATED DEPRECIATION RESERVE CREATED OUT OF PROFIT AND TRADE PAYABLE. DETAILS OF THE SAME WAS ALREADY PROVIDED TO THE LEARNED AO. IT WAS FURTHER CONTENDED THAT THE FUNDS AVAILABLE WITH THE COMPANY AS ON 31.03.2012 W AS OF RS.3723.57 LACS OUT OF WHICH INTEREST FREE ADVANCE OF RS.358.34 LACS I.E. 9.62% OF TOTAL INTEREST FREE FUNDS AVAILABLE WERE GIVEN. THE BALANCE OF RS.3365.23 LACS INTEREST FREE FUNDS WERE USED IN BUSINESS FOR VARIOUS FIXED ASSETS AND MOVABLE CURRENT ASSETS I.E . STOCKS, DEBTORS BALANCE WITH BANK AND CASH AND OTHER ASSETS. IT WAS, THEREFORE, SUBMITTED THAT THE INTEREST BEARING FUNDS WERE - 4 - ITA NOS.73/AHD/2017 BALAJI ELECTRICAL INSULATOR PVT. LTD. VS. ITO ASST.YEAR 2012-13 UTILIZED FOR OTHER SPECIFIC PURPOSE AND ADVANCES GI VEN TO PARTIES WAS OUT OF THE OWN FUNDS OF THE APPELLANT COMPANY. SINCE THE INTEREST ON BOR ROWED FUND IS ALLOWABLE AS BUSINESS EXPENDITURE BY VIRTUE OF INCOME TAX PROVISION U/S 3 6(1)(III) HENCE PAYMENT MADE FOR INTEREST ON BORROWED FUND SHOULD BE ALLOWED AS INTE REST EXPENSES IN ITS TOTALITY AND INTEREST FREE LOANS AND ADVANCES GRANTED OUT OF THE INTEREST FREE OWN FUNDS EVEN NOT USED FOR BUSINESS AND NO ACTUAL INTEREST IS RECEIVED BY THE ASSESSEE THAN NOTIONAL INTEREST ON SUCH FUND CANNOT BE DISALLOWED BY INTEREST EXPENSES . IF THAT BE SO, DISALLOWANCE OF PROPORTIONATE NOTIONAL INTEREST EXPENSES OF RS.20,7 8,380/- ON THE BASIS OF INTEREST FREE ADVANCES I.E. RS.353.34 LACS IS NOT IN TERMS OF LAW AND LIABLE TO BE DELETED. THE LEARNED AR ALSO CONTENDED THAT INTEREST EXPENSES HAS TO BE ALLOWED AS DEDUCTION WHERE INTEREST BEARING FUND ARE ADVANCED WITHOUT INTEREST. IT IS N ECESSARY THAT ADVANCES GIVEN BY THE BUSINESSMAN AT ALL TIMES MUST BE FOR EARNING INTERE ST. THE REASONABLENESS OF THE EXPENDITURE WOULD BE COVERED INTO ONLY FOR THE PURP OSE OF THE DETERMINING WHETHER, IN FACT, THE AMOUNT WAS SPENT. ONCE IT IS ESTABLISHED THAT THE NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS, THE REVENUE CANNOT JUS TIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF A BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE SAID ROLE TO DECIDE HOW MUCH IS A REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IN SUPPORT OF HIS CONTENTION HE RELIED UPON THE JUDGMENT PASSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF DALMIA CEME NT (B) LTD. (2002) 254 ITR 377. ON THE OTHER HAND, LEARNED DR RELIED UPON THE ORDER PASSED BY THE AUTHORITY BELOW. 4. HEARD THE REPRESENTATIVE OF THE RESPECTIVE PARTI ES, PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. IT APPEARS FROM THE RECORD THA T DURING THE APPELLANT PROCEEDING, THE ASSESSEE MADE SUBMISSIONS BEFORE THE LEARNED CIT(A) WHEREFROM IT REVEALS THAT ASSESSEES OWN FUND HAVE BEEN UTILIZED FOR THE PURP OSE OF ADVANCES TO VARIOUS PARTIES. THE ASSESSEE COMPANY HAS HUGE SURPLUS FUNDS AT ITS DISPOSAL. - 5 - ITA NOS.73/AHD/2017 BALAJI ELECTRICAL INSULATOR PVT. LTD. VS. ITO ASST.YEAR 2012-13 THE DETAILS OF THE PARTY WISE ADVANCE AND OWNED FUN DS AS SUBMITTED BY THE ASSESSEE IS AS FOLLOWS: SR. NO. NAME OF THE PARTY AMOUNT IN RS. 1. DINESHCHANDRA A PATEL 14379486.00 2. SHREE BALAJI CORPORATION 70000.00 3. SUBHAUBHAI M. SHAH (REAL ESTATE) 13791000.00 4. SUBHAUBHAI M. SHAH 1093660.00 5. VIBRAT P PATEL (REAL ESTATE) 1000000.00 6. SHREE SHYAM DISTRIBUTORS (REAL ESTATE) 4500000.00 7. SHAKARBHAI CHATURBHAI PATEL (REAL ESTATE) 1000000.00 TOTAL 35834146.00 FOLLOWING DETAILS OF INTEREST FREE FUND CONSISTING OF CAPITAL FUND, FREE RESERVES, INTEREST FREE UNSECURED LOANS, PROVISION FOR DEFERRED TAX LI ABILITIES CREATED OUT OF SURPLUS AND ACCUMULATED DEPRECIATION RESERVE OUT OF THE COMPANY HAD GIVEN INTEREST FREE LOAN AND ADVANCES: FUND AMOUNT SHARE CAPITAL 139320000 SHARE APPLICATION MONEY 500000 RESERVE AND SURPLUS 25158606 INTEREST FREE UNSECURED LOANS 8562459 DEFERRED TAX LIABILITIES NET OF 22132121 DEPRECIATION RESERVE 35395402 TRADE PAYABLE 141288991 TOTAL 372357579 WE HAVE ALSO GONE THROUGH THE OTHER FINANCIAL DETAI LS OF THE ASSESSEE COMPANY. WE FIND SUFFICIENT INTEREST FREE FUND WAS AVAILABLE WITH TH E ASSESSEE OUT OF WHICH INTEREST FREE LOAN AND ADVANCES WERE PROVIDED TO PARTIES. WHETHER THE DECISION AS TO HOW MUCH IS A REASONABLE EXPENDITURE OUGHT TO HAVE BEEN DECIDED B Y THE ASSESSEE COMPANY; THE REVENUE CANNOT QUESTION THAT ONCE THE NEXUS BETWEEN THE EXP ENDITURE AND THE PURPOSE OF BUSINESS - 6 - ITA NOS.73/AHD/2017 BALAJI ELECTRICAL INSULATOR PVT. LTD. VS. ITO ASST.YEAR 2012-13 HAS BEEN ESTABLISHED AS ALREADY DECIDED BY THE NUMB ER OF JUDGMENTS PRONOUNCES BY DIFFERENT LEGAL FORUM INCLUDING THE JUDGMENT PASSED BY THE HONBLE DELHI HIGH COURT IN THE CASE OF CIT-VS-DALMIA CEMENT (P.) LTD. (2002) 2 54 ITR 377. IN THAT VIEW OF THE MATTER, WE DO NOT FIND ANY REA SON FOR DISALLOWANCE U/S 36(1)(III) OF THE ACT AS MADE BY THE AUTHORITIES BELOW. THE AD DITION IS THUS DELETED. 5. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. THIS ORDER PRONOUNCED IN OPEN COURT ON 29/03/2019 SD/- SD/- ( PRAMOD KUMAR ) ( MS. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER AHMEDABAD; DATED 29/03/2019 PRITI YADAV, SR.PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. () / THE CIT(A)-1, AHMEDABAD. 5. , ! ' , #$%% / DR, ITAT, AHMEDABAD 6. &' () / GUARD FILE. / BY ORDER, //TRUE COPY// / ( DY./ASSTT.REGISTRAR) !, #$ / ITAT, AHMEDABAD 1. DATE OF DICTATION 14/02/2019 (DICTATION PAGES 7) 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 15/02/2019 3. OTHER MEMBER 4. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR.P. S./P.S . 5. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 6. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR.P .S./P.S. 7. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 8. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK 9. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER.. 10. DATE OF DESPATCH OF THE ORDER