W H BRADY & CO LTD, MUMBAI V. ACIT 2 (3)(1), MUMBAI

ITA 7328/MUM/2019

• Counselvise Citation: [2021] 104 COUNSELVISE.COM (IT) 7502 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-11-2021
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: G
• Assessment Year: 2014-2015
• Appeal Filed On: 28-11-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Wholly owned subsidiary; Commercial expediency; Capital expenditure; TDS; Set aside
• Section: 142(1); 115JB; 143(1); 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL (VIRTUAL COURT) “G” BENCH, MUMBAI BEFORE SHRI MAHAVIR SINGH, HON'BLE VICE PRESIDENT AND SHRI S. RIFAUR RAHMAN, HON'BLE ACCOUNTANT MEMBER ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., Brady House, 4 th Floor 12/14 Veer Nariman Road Fort, Mumbai - 400001 PAN: AAACW0913B v. ACIT- Circle -3(2)(1) Room No. 552, Aayakar Bhavan M.K. Road, Mumbai - 400020 (Appellant) (Respondent) Assessee by : Shri R.C. Jain Department by : Shri Ambuselvam Date of Hearing : 07.09.2021 Date of Pronouncement : 26.11.2021 O R D E R PER S. RIFAUR RAHMAN (AM) 1. This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)–6, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 27.09.2019 for the A.Y. 2014-15. 2. Brief facts of the case are that, assessee filed its return of income on 28.11.2014 declaring total income at ₹.2,27,75,200/- and book profits 2 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., u/s. 115JB of Income-tax Act, 1961 (in short “Act”) at ₹.4,26,40,993/-. The return was processed u/s. 143(1) of the Act. The case was selected for scrutiny under CASS and notices u/s. 143(2) and u/s. 142(1) of the Act were issued and served on the assessee along with detailed questionnaire. In response, Ld. AR of the assessee attended and filed the relevant information as called for. 3. The assessee is engaged in dealing in Trading of Engineering, Textile Machinery and Spare Parts, Renting of Property and Distributor of Subsidiary Company’s Products. The Assessing Officer completed the assessment by making the following disallowances: a. Unreported sales of ₹.1,26,922/- b. Undisclosed interest income of ₹.2,18,988/- and c. Disallowance of interest paid of ₹.1,11,48,728/-. 4. With regard to interest disallowance, Assessing Officer observed that assessee had taken loan of ₹.11 Crores where assessee has hypothecated future rent receivable invested the same in immovable property and interest of ₹.103,47,759/- paid considering the fact that investment is being paid for capital assets, the interest expenditure is treated as capital in nature. Accordingly, he added back the above said interest to the total income of the assessee. Further he observed that 3 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., assessee had taken loan of Rs.2,74,67,264/- for renovation of Brady House, 4 th Floor and utilized the above loan to enhance the value of physical assets and creating enduring benefit. He observed that assessee has suomoto disallowed the interest paid of ₹.6,27,928/- in respect of structural repairs of Brady House and added back to the business income. The interest paid of ₹.8,00,969/- is also treated as capital expenditure and accordingly he disallowed the interest paid and added back to the income of the assessee. 5. Aggrieved assessee preferred an appeal before the Ld.CIT(A) and assessee filed grounds of appeal and detailed submissions before the Ld.CIT(A). The Ld.CIT(A) remanded the issue to the Assessing Officer and after considering the remand report and submissions of the assessee Ld.CIT(A) sustained the disallowance of interest with the following observations: - “6.6 I have carefully considered the facts of the case, discussion of the AO in the assessment order and remand report, oral contentions and written submissions of the appellant and material available on record. It is seen from the assessment order that the AO has made a disallowance of interest paid by the assessee of Rs.8,00,969/-. Such disallowance has been made by the AO as part of the interest paid attributable to the term loan taken by the assessee for renovation of their office at 4 th floor, Brady House. It is seen from the facts submitted by the assessee that the assessee has taken term loan for the purposes of additions to the fixed assets totalling to Rs.2.75 crores and has utilized such term loan for the purposes of additions to the 4" floor and additions to the Furniture 4 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., & Fixtures, AC, Computer, Office Equipment and Electrical Installations. Such additions have been carried out in the period pertaining to A.Y.2010-11 and A.Y.2011-12. Under such facts when the term loan has been utilized for addition to the fixed assets and such assets have been utilized for business in the period under consideration, the interest paid on the loan to create such fixed business assets would be allowable u/s.36(1)(iii) of the Act as there is no dispute to the aspect that in the year under consideration, such assets have ‘been put to business use by the assessee. It is further stated that the term loan may be utilized for purchase/addition to fixed assets i.e. capital purpose or for working capital i.e. revenue purpose. However, the interest paid thereon would be revenue in nature even if the term loan has been used for purchase/addition to fixed assets and if such assets have been put to use for business purposes. Accordingly, the addition made by the AO treating the interest of Rs.8,00,969/- as capital expenditure in nature is not found to be justifiable and is therefore directed to be deleted. 6.6.1 AO has also made a disallowance of Rs.1,03,47,759/- towards the interest paid treating the same as capital in nature. The AO has treated such expenditure to be capital in nature in the assessment order. However, during the course of the appeal, directions were issued u/.250(4) as has been mentioned hereinabove at para 6.3. The consequent report of the AO has been reproduced at para 6.4 above, When the facts in its totality are seen, it emerges out that the assessee has obtained a loan of Rs.11 crores from Bank of Baroda on Lease Rent Discounting (LRD) facilities against future rent receivable from leave and license. It is further the fact that this amount of loan taken was given by the assessee to its subsidiary company, Brady Morris Engineering Ltd. (BME) during the financial years 2011-12 and 2012-13. An amount of Rs.7,10,00,000/- and Rs.3,90,00,000/- were given to the BME by the assessee in F.Y.2011- 12 and 2012-13 respectively. The assessee has claimed deduction of the commensurating interest on these amounts in its profit and loss account. The contention of the assessee is that they had given such money to the BME as advances to suppliers to purchase material to enable them for speedy production of goods which were subsequently purchased by the assessee for its trading operations. It has accordingly been contended that a capital of Rs.11 crores was borrowed which was used for the assessee’s business purpose and consequently interest was paid which is allowable u/s.36(1)(iii) of the Act. In regard to such contentions and submissions of the assesee, it is seen from the remand report of the AO and not disputed by the assessee that they have made purchases from BME during the F.Y.2011-12 and 2012-13 only to the tune of Rs. 7 to 8 crores and the position remains similar in the year under 5 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., consideration. However, it is seen from the final accounts of BME that as on 31.03.2013, such amounts lying with the BME and payable to assessee was Rs 13.07 crores and as on 31.03.2014, this amount increased to Rs.13.43 crores. It is further stated that the assessee is holding only 79.92% shares in BME and as such it is not the case that BME is 100% subsidiary of the assessee company. An amount which far exceeds the total purchases done during the year and continues to be at that level right in the beginning of the year as well as towards the end of the year, in the vicinity of Rs.13 odd crores, cannot be treated to be advances given by the assessee towards the future purchases to be made. In a normal parlance, the trade advances in any case would not exceed the total quantum of purchases and then too such advances cannot remain with the seller beyond the peak value of the purchases affected during the year, However, in the facts of the case, it is seen that while the total purchases done at multiple times are in the vicinity of 7 to 8 crores and continuous receivable by the assessee of the amount given to BME remained at a figure higher than Rs.13 crores throughout the year. Such facts neither can justify the business purposes nor the commercial expediency. It is clearly an amount given by the assessee company which has been utilized as loan. By borrowing such loan by the assessee on Lease Rent Discounting facilities from the bank and transferring such loan directly to BME which is not the wholly owned subsidiary of the assessee and wherein the amount far exceeds the amount of peak value of purchases as well as total purchases during the year, cannot be treated to be for the purposes of business of the assessee or can be justified on the basis of concept of commercial expediency. The assessee has further contended that such interest in their case have been allowed in A.Y.2012-13 and 2013-14 u/s.36(1)(iii) of the Act. In respect of such submissions of the assessee, it is stated that simply because the interest on the borrowed sum of Rs.11 crores from the Bank under the LDR facility has been allowed in earlier two years, would not make its case anyways stronger when the facts in the year under consideration as also the law does not support its claim so made. In view of such facts and circumstances of the case and discussion hereinabove, the contentions and submissions of the assessee are not found to be acceptable and are therefore, rejected. The disallowance made by the AO to the tune of Rs.1,03,47,759/- is therefore confirmed as the same has not been found to be allowable in the facts and circumstances of the case u/s.36(1)(iii) of the Act. 6.6.2 This ground of appeal is accordingly, partly allowed.” 6 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., 6. With regard to other disallowance he has remitted the issue back to the file of the Assessing Officer for further verification with direction including other issues raised by the assessee. 7. Aggrieved assessee preferred an appeal before us raising following grounds in its appeal: - “DISALLOWANCE OF INTEREST OF Rs. 1,03,47,759/ UNDER SECTION36(1)(iii): (a) On the facts and circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) {CIT (A)} erred in confirming the disallowance of Rs. 1,03,47,759/- made by the Assessing Officer under Section 36 (1)(iii) of the Income-tax Act, 1961 in respect of interest paid to Bank on borrowings taken by the appellant and utilized for the purpose of its business in so far the same was advanced to the appellant's subsidiary for its business, and the appellant satisfied all the conditions prescribed under section 36(1)(iii) for allowance of such interest as business deduction. (b) The Ld. CIT(A) erred in holding that the loan taken by the appellant and its utilization for the purpose of its business by giving advances for the furtherance of the subsidiary's business for manufacturing the goods by the subsidiary and subsequent sale by the appellant of such goods was not to be treated for the purpose of appellant's business and not justified on the basis of concept of commercial expediency. (c) The Ld. CIT(A) erred in confirming the disallowance of interest on the ground that the appellant is holding 79.92% only in the subsidiary and not 100%, which cannot be a ground for confirming the disallowance of interest under section 36 (1)(iii) of the Act. (d) The decision taken by the Id. CIT(A) is vitiated by the fact that the AO has disallowed the said interest on the ground that the loan was taken for acquiring capital asset while the confirmation of such disallowance by the CIT(A) was that the advances were not made to a 100% subsidiary and the purchases made by the appellant from the subsidiary were lower than the amount of advances paid. 7 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., (e) The Ld. CIT(A) erred in not appreciating that such interest was duly allowed in earlier two preceding years in scrutiny assessments and there were no any compelling circumstances to take a different view in this year to disallow the said interest, which is against the principles of consistency. (f) The Ld. CIT(A) erred in not appreciating that the AO in remand report confirmed that the loan borrowed by the appellant from bank was not used for any capital asset as alleged by the original AO while disallowing the interest but used for advancing the same to its subsidiary for its business purpose and the appellant had business relationship with the subsidiary for purchase of goods which were sold by the appellant during the course of business. (g) In confirming the disallowance of interest in any event, the Ld. CIT (Appeals) did not appreciate that during the year no fresh borrowings were made by the appellant which were utilized for advancing to its subsidiary. Ground No. 2 SENDING BACK THE GROUNDS O FAPPEAL: (a) The Id. CIT (Appeals) erred in sending back to AO the following grounds of appeal before him reading as under both on facts and in law as under: “2. The AO erred in assessing Rs. 1,26,922/- as undisclosed sales without appreciating the material on record. 2.1 The AO did not appreciate that the sales to the extent of Rs.76,406/- pertained to the year under appeal while Rs.50,516/- pertained to the year under appeal while Rs.50,516/- pertained to Assessment year 2013-14. 2.2 The action of the Assessing Officer in assessing the above amount as undisclosed sales. shows total non application of mind. 3. The AO erred in bringing to tax interest on fixed deposits from Bank of Baroda of Rs. 2,18,988/- which was duly accounted in Books of Accounts and also matched ‘adidem’ with the information in 26AS. 3.1 The AO on account of non application of mind added the above aforesaid amount as undisclosed amount. 3.2 The AO if at all, any addition was warranted the same could have been restricted to Rs. 38,045/- and the necessary credit for TDS of Rs. 3805/- ought to have been given. 8 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., 4. The AO erred in not giving credit for Dividend Distribution tax paid of Rs. 6,50,059/- for which request was made t him vide letter dated 8" August, 2016 read with letter dated 229 January, 2016. 5. The AO erred in making adjustments to the Book Profits u/s 115JB of the Act in respect of the amount of unreported sales and undisclosed interest income aggregating to Rs. 3,45,910/being the amount added while computing the income under the normal provisos of the Act. 6. The AO while computing the tax under the normal provisions of the Act erred in not allowing, brought forward MAT credit as per law despite the direction given by him in the order under appeal. 7. The AO erred in levying interest u/s 234A of Rs. 24,126/- in total regard of the fact that the return was filed in time in accordance with the provisions of the Act.” (b) In so doing, the Id. CIT (Appeals) did not appreciate that all the material and evidence for adjudication of these grounds were not only placed on record with him but also available to the AO which were totally ignored by him while sending back all these grounds of appeal to the AO. (c) The Id. CIT (Appeals) did not appreciate that based on material and evidence on record, he ought to have exercised his appellate powers to dispose of the grounds of appeal on merit by applying the law to the facts on record rather than sending back to the AO. (d) The Id. CIT (Appeals) further failed to appreciate, that in case he wanted the AO to examine the facts, he ought to have called for a remand report along with remand report called by him vide his order dt 13-14-2017 to AO in respect of Ground No. 1. (e) Further in doing so, the Ld. CIT (Appeals) did not appreciate that his action in sending back all these grounds to the AO, would result in multiplicity of Proceedings, resulting in unnecessary waste of time, money and energy in pursuing the set aside proceedings.” 8. At the time of hearing, Ld. AR brought to our notice facts relating to interest disallowance and submitted that assessee has remitted the funds to its sister concern with whom assessee has regular business 9 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., transactions and also it is important to notice that concern is subsidiary of the assessee company wherein assessee holds substantial portion of shares, even though not 100%. Further he submitted that the assessee has utilized the funds borrowed from the bank only for the purpose of business and assessee has direct business connection with the subsidiary company from where assessee buys goods and also has huge interest in that subsidiary company. It is wrong on the part of the Ld.CIT(A) coming to the conclusion there is no business expediency in these transactions. With regard to other disallowance made by the Assessing Officer it is submitted that Ld.CIT(A) remitted the issue to the file of the Assessing Officer with direction, even though all the material and evidences for adjudication of these issues were already placed on record and also filed before the Assessing Officer. Instead of remitting the issue back to the Assessing Officer for verification he should have exercised the appellate powers to dispose off the grounds of appeal on merits or he could have called for remand report from Assessing Officer. Therefore, he prayed that suitable direction may be given. 9. On the other hand, Ld.DR relied on the orders passed by the lower authorities and fully relied on the findings of the Ld.CIT(A). With regard 10 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., to other grounds he prayed that these issues may be remitted back to the Ld.CIT(A) for fresh consideration. 10. Considered the rival submissions and material placed on record, we observed from the record that assessee has taken loan from bank and remitted the same to its subsidiary which is not a 100% subsidiary but based on the records submitted before us we observed that assessee buys goods from the subsidiary company over the years. We also noticed that Ld.CIT(A) observed that during the Financial Year 2011-12 and 2012-13 assessee has remitted ₹.7.1 Crores and ₹.3.9 Crores respectively and claimed the interest on these amounts in its Profit and Loss Account. He also noticed that assessee has paid these amounts as advance to suppliers to purchase the material to enable BME for speedy production of goods. In remand proceedings the Assessing Officer also not disputed the fact that assessee has purchased from BME (i.e. subsidiary) during the Financial Year 2011-12 and 2012-13 to the extent of ₹.7 to ₹.8 Crores and the position remains same in the year under consideration. It is also fact on record that Ld.CIT(A) verified the financial accounts of the subsidiary as on 31.03.2013 and observed that there is amount outstanding to the extent of ₹.13.07 Crores due from the subsidiary company and the same 11 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., was increased to ₹.13.43 Crores as on 31.03.2014. In our considered view it is a fact on record that there is a business connection with the subsidiary company from where assessee buys regularly goods from them. It clearly indicates that there is a business connection between the two companies and it is in the interest of the assessee to make sure that the other subsidiary company function efficiently and it is promptly supplies portion of the production to the assessee. It is irrelevant whether assessee held 100% shares of the subsidiary or less, as long as it holds control and substantial portion of shares and has control over the management of the subsidiary then it can be considered as the funds were diverted by the assessee for the business purpose and it is business expediency to control the other subsidiary company. Therefore, in our considered view the interest claim by the assessee is within the provisions of section 36(1)(iii) of the Act. Accordingly, the interest claimed by the assessee is allowed. 11. With regard to other grounds of appeal which the Ld.CIT(A) has not disposed the appeal but remitted back to the Assessing Officer, however, he has given clear direction to the Assessing Officer. Still, as submitted by Ld. AR, all the relevant information to dispose the appeal was available 12 ITA NO. 7328/MUM/2019 (A.Y: 2014-15) M/s. W.H. Brady & Co. Ltd., with the Ld.CIT(A). Therefore, we are inclined to remit this issue back to the file of the Ld.CIT(A) to decide the issue after giving opportunity to assessee of being heard. Accordingly, ground raised by the assessee is allowed for statistical purpose. 12. In the result, appeal of the assessee is partly allowed. Order pronounced on 26.11.2021 as per Rule 34(4) of ITAT Rules by placing the pronouncement list in the notice board. Sd/- Sd/- (MAHAVIR SINGH) (S. RIFAUR RAHMAN) VICE PRESIDENT ACCOUNTANT MEMBER Mumbai / Dated 26.11.2021 Giridhar, Sr.PS Copy of the Order forwarded to: 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy// BY ORDER (Asstt. Registrar) ITAT, Mum