M/S. PETROSALV INDIA CO., MUMBAI V. THE ADDL CITRG 18(3),

ITA 7585/MUM/2007

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7717 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 2 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-02-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: K
• Next Hearing Date: 22-12-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 24-12-2007
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ANILKUMAR MISHRA
• Keywords: Depreciation; Proportionate interest; Capital expenditure

Judgement Text

` IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH K MUMBAI BEFORE SMT. P.MADHAVI DEVI, JM & SHRI B.RAMAKOTAIAH, AM I.T.A.NO.7585/MUM/2007 - A.Y 2003-04 M/S PETROSALV INDIA CO., G-7, KAMANWALA CHAMBERS, MOGUL LANE, MAHIM (W), MUMBAI 400 016 PAN NO.AAACP7433P VS. ADDL. COMMISSIONER OF INCOME TAX, RANGE 18(3), MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : MR. VIJAY MEHTA. REVENUE BY : MR. ANIL KUMAR MISHRA. O R D E R PER P.MADHAVI DEVI, JM: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST CI T(A)S ORDER DATED 6/9/2007. 2. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL- 1. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF PROPORTIONATE INTEREST ON LOANS OF RS.154,693 U/S.3 6(1)(III). 2. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF FOREIGN TRAVELING FOR THE PURPOSE OF BUSINESS OF RS .15,075 OUT OF TOTAL EXPENDITURE OF RS.30,150. 3. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER OF RS.999,432 [NET DISALLOWANCE AFTER DEPRECIATION IS RS.899,489 ) OUT OF TOTAL REPAIRS RS.10,59,638 CLAIMED IN PROFIT AND LOSS ACC OUNT BY TREATING THE SAME AS CAPITAL EXPENDITURE. 4. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ADDITION OF RS.6,620 U/S.2(24)(X) R.W.S. 36(1)( VA) ON ACCOUNT OF EMPLOYEES, EMPLOYERS CONTRIBUTION TO ESI C. 5. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCO UNT OF PRIOR PERIOD EXPENSES OF RS.7,595. 6. THE LEARNED CIT[A] HAS ERRED IN LAW AND IN FACTS IN CONFIRMING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER O R S.17,998 2 AND RS.16,765 ON ACCOUNT OF EXPENDITURE INCURRED ON TELEPHONES & VEHICLES RESPECTIVELY. 3. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE DOES NOT WISH TO PRESS GROUNDS OF APPEAL NOS.2, 5 AND 6. THEY ARE ACCORDINGLY REJECTED AS NO T PRESSED. 4. AS REGARDS GROUND NO.1, BRIEF FACTS ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF EXPORTS OF PHARMACEUTICALS AND OTHER GOODS. FOR THE RELEVANT ASSESSMENT YEAR A SSESSEE FILED ITS RETURN OF INCOME DECLARING TOTAL INCOME OF RS.10,17 ,940/-. DURING THE ASSESSMENT PROCEEDINGS U/S.143(3) OF THE ACT, VARIO US DETAILS FOR ASSESSEES CLAIM WERE CALLED FOR. THE AO OBSERVED T HAT THE ASSESSEE HAS MADE LARGE INVESTMENTS BY WAY OF GIVING LOANS A ND ADVANCES TO VARIOUS PARTIES FROM WHOM NO INTEREST HAS BEEN CHAR GED. HE, THEREFORE, OPINED THAT THE ASSESSEE HAD UTILIZED IN TEREST BEARING FUNDS FOR GIVING INTEREST FREE ADVANCES TO VARIOUS PARTIE S INCLUDING FRIENDS AND RELATIVES. HE ASKED ASSESSEE TO SHOW CAUSE AS T O WHY INTEREST CLAIM U/S.36[1][III] SHOULD NOT BE DISALLOWED PROPO RTIONATELY REGARDING THE INTEREST FREE ADVANCES GIVEN TO THE FOLLOWING P ARTIES- 1) KAMANWALA INDS.LTD. RS.10,00,000/- 2) ANITA CHROSTOPER JOHN RS. 2,85,000/- 3) VERONICA PATRICK RS. 2,04,284/- 4) SYNTHETIC COLOUR CHEM LTD. RS. 2,21,000/- RS.16,60,284/- =========== THE ASSESSEE VIDE LETTER DATED 27/2/06 EXPLAINED TH AT THE AMOUNT PAID TO ANITA JOHN WAS AN ADVANCE FOR SUPPLY OF MATERIAL S, BUT THE MATERIALS 3 WERE NOT RECEIVED AND AS THE SAID PERSON HAD LEFT T HE COUNTRY THE AMOUNT WAS NOT RECOVERABLE AND IT WAS WRITTEN OFF D URING THE CURRENT F.Y 05-06. AS REGARDS THE ADVANCE PAID TO KAMANWALA INDS. LTD. ON BEHALF OF VERONICA C.PATRIC, IT WAS AN ADVANCE FOR PURCHASE OF PREMISES BY HER AND THE SAME WAS DEBITED TO HER ACCOUNT IN T HE F.Y 2003-04. AS REGARDS ADVANCE TO VERONICA PATRICK IT WAS SUBMITTE D THAT THIS IS AN AMOUNT GIVEN ON RETURNABLE BASIS FOR A SHORT PERIOD AND HENCE NO INTEREST WAS CHARGED. AS REGARDS THE ADVANCE GIVEN TO SYNTHETIC COLOUR CHEM LTD. IT WAS SUBMITTED THAT THE SAME IS NOT REC OVERABLE FROM THE PARTY AND THE AMOUNT IS DEBITED TO THE CAPITAL ACCO UNT OF THE PARTNERS MR. CHARLES PATRICK RS.1,73,258/- AND ANTONIO DSOU ZA RS.57,750/- IN THE F.Y 04-05. AO WAS HOWEVER NOT CONVINCED WITH TH E REPLY OF THE ASSESSEE AND MADE THE DISALLOWANCE OF PROPORTIONAT E INTEREST U/S.36(1)(III) OF THE INCOME TAX ACT. 5. AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE THE C IT[A] WHO CONFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS I N SECOND APPEAL BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT FUNDS TO MAKE THE INTEREST FREE ADVA NCES AND THIS IS CLEAR FROM THE ANALYSIS MADE BY THE AO AT PARA 4.6 OF PA GE 3 OF THE ASSESSMENT ORDER WHEREIN THE CAPITAL IS SHOWN AS RS .61.22 LAKHS. HE SUBMITTED THAT INTEREST FREE ADVANCES ARE ONLY OF R S.16,60,284/- AND THEREFORE OWN FUNDS WERE MUCH MORE THAN THE INTERES T FREE ADVANCES. HE ALSO DREW OUR ATTENTION TO PAGE-1 OF THE PAPER B OOK BEING BALANCE- 4 SHEET OF THE ASSESSEE COMPANY AS ON 31-3-03 TO SHOW THAT THE ASSESSEE HAD A CAPITAL OF RS.61,22,697.25. THUS, AC CORDING TO HIM, THERE BEING NO DIRECT NEXUS BETWEEN THE INTEREST BE ARING BORROWED FUNDS AND INTEREST FREE ADVANCES, IT HAS TO BE PRES UMED THAT THE ADVANCES ARE OUT OF OWN FUNDS. FOR THIS PURPOSE, HE PLACED RELIANCE UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. 313 ITR 340, WHER EIN IT HAS BEEN HELD THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST FR EE AND OVER DRAFT AND/OR LOANS TAKEN, THEN THE PRESUMPTION TO ARRIVE IS THAT INVESTMENT IS OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAI LABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. SIMILAR VIEW WAS ALSO EXPRESSED BY C BENCH OF THE TRIBUNAL IN THE CASE OF ORIENTAL CONTAINERS LTD., I .T.A.NO.756/MUM/ 08 DATED 16/6/03. 7. THE LD. DR, ON THE OTHER HAND, PLACED RELIANCE UPON THE ORDER OF THE AO AND ALSO THE FOLLOWING DECISIONS- A) CIT VS. H.R.SUGAR FACTORY PVT. LTD.187 ITR 363 [ ALL] B) K. SOMASUNDARAM AND BROTHERS VS. CIT 238 ITR 939 [MAD] C) CIT VS. INDIAN EXPRESS NEWSPAPERS (MADURAI) P. L TD. 238 ITR 70 [MAD] D) CIT VS. V.I.BABY & CO. 254 ITR 248 [MAD] 8. HAVING HEARD BOTH THE PARTIES AND HAVING CONSIDE RED THEIR RIVAL SUBMISSIONS, WE FIND THAT THE DECISIONS RELIED UPON BY THE LD. DR ARE TO THE EFFECT THAT IF THE ASSESSEE HAS INTEREST BEARIN G BORROWED FUNDS AND HAS ADVANCED INTEREST FREE LOANS TO RELATED PARTIES , THEN PROPORTIONATE 5 INTEREST IS TO BE DISALLOWED. BUT THESE DECISIONS A RE OF NON JURISDICTIONAL HIGH COURTS, WHILE THE ASSESSEE HAS PLACED RELIANCE UPON THE DECISION OF THE JURISDICTIONAL HIGH COURT, WHICH IS BINDING ON US. FURTHER, WE FIND THAT THE ASSESSEE HAD THE CAPITAL OF RS.61,22,697/- WHILE THE INTEREST FREE ADVANCES ARE ONLY OF RS.16,60,284/- AND OUT OF THIS AMOUNT ALSO RS.10,00,000/- WAS FOR SUPPLY OF MATERIALS AND NOT AN INTEREST FREE LOAN. THEREFORE, IT IS CLEAR THAT THE OWN FUNDS OF THE ASSESSEE WERE SUFFICIENT TO MEET THE INVESTMENT. RESPECTFULLY FOL LOWING THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF RELIAN CE UTILITIES AND POWER LTD. [CITED SUPRA, THIS GROUND OF APPEAL OF THE ASS ESSEE IS ALLOWED. 9. AS REGARDS GROUND NO.3, BRIEF FACTS ARE THAT THE ASSESSEE HAS CLAIMED REPAIRS AND MAINTENANCE EXPENSES OF RS.10,5 9,628/- IN ITS PROFIT & LOSS ACCOUNT. AO ASKED THE ASSESSEE TO FUR NISH THE DETAILS OF THESE EXPENSES. THE ASSESSEE FURNISHED THE SAME AND AO OBSERVED THAT THESE EXPENSES ARE VENEER PURCHASE RS.21,235/- , BATHROOM FITTING RS.1,30,027/-, WOODEN PLANKET RS.32,786/-, GLASS RS .20,900/- AND LABOUR CHARGES RS.8,15,3L84/-. AO OBSERVED THAT OUT OF THE TOTAL REPAIR AND MAINTENANCE EXPENSES OF RS.10,59,628/- MAJOR PO RTION OF EXPENSES, I.E. 76% IS FOR LABOUR CHARGES. THUS, HE CAME TO THE CONCLUSION THAT ASSESSEE HAS DONE SOME MAJOR RENOVA TION WORK GIVING ENDURING BENEFIT TO THE ASSESSEE. HE, THEREFORE, TR EATED IT AS CAPITAL EXPENDITURE AND ALLOWED DEPRECIATION @ 10% THEREON. AGGRIEVED, ASSESSEE FILED AN APPEAL BEFORE THE CIT[A] , WHO CO NFIRMED THE ORDER OF THE AO AND THE ASSESSEE IS IN SECOND APPEAL BEFO RE US. 6 10. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THA T THE ASSESSEE IS NOT THE OWNER OF THE OFFICE PREMISES, BUT HAS TAKEN IT ON RENT AND REPAIR WORK WAS CARRIED OUT AFTER A LONG PERIOD OF TIME DUE TO WHICH EXPENSES ON LABOUR CHARGES ARE HIGHER. HE SUBMITTED THAT THERE WAS NO ASSET BROUGHT INTO EXISTENCE AND MERELY BECAUSE THE REPAIR WORK WOULD GIVE AN ENDURING BENEFIT TO THE ASSESSEE, THE SAME WOULD NOT AMOUNT TO CAPITAL EXPENDITURE. 11. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW. 12. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS, WE FIND THAT THOUGH THE LABOUR CHARGES ARE TO THE EXTENT OF RS.8,15,384/-, THE MAJOR WORK CARRIED ON BY THE ASSESSEE IS REPAIRS FOR THE MAINTENANCE OF THE OFFICE AND NO NEW ASSET HAS BEEN BROUGHT INTO EXISTENCE. THE REPAIRS CARRIED OUT BY THE ASSE SSEE ARE FOR MAINTAINING ITS OFFICE TO CARRY ON ITS BUSINESS IN A MORE EFFICIENT MANNER AND, THEREFORE, IT HAS TO BE ALLOWED AS REVE NUE EXPENDITURE. IN VIEW OF THE SAME, THIS GROUND OF APPEAL OF THE ASSE SSEE IS ALLOWED. 13. AS REGARDS GROUND NO.4, WE FIND THAT THE AO HAS DISALLOWED THE PAYMENT OF ESIC MADE AFTER THE DUE DATE. THE DISALL OWANCE CONSISTS OF BOTH THE EMPLOYERS AS WELL AS EMPLOYEES CONTRIBUTIO NS. THE AO ADDED THE SAID AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE ON THE BASIS OF ASSESSEES LETTER DATED 27-2-2006. HOWEVER, ASSESSE E PREFERRED AN 7 APPEAL BEFORE THE CIT[A] WHO CONFIRMED THE ORDER O F THE AO. AGGRIEVED, ASSESSEE IS IN APPEAL BEFORE US. 14. WE FIND THAT THE ISSUE OF THE EMPLOYERS CONTRIB UTION TO PF, ESIC ETC., TO BE ALLOWED U/S.43B OF THE ACT IS COVERED I N FAVOUR OF THE ASSESSEE BY THE DECISION OF THE HON'BLE SUPREME COU RT IN THE CASE OF CIT VS. ALOM EXTRUSIONS LTD. REPORTED IN 319 ITR 30 6 WHEREIN IT HAS BEEN HELD THAT IT CAN BE ALLOWED AS DEDUCTION IF TH E SAME IS BEFORE THE DATE OF FILING OF THE RETURN. HOWEVER, AS REGARDS T HE EMPLOYEES CONTRIBUTION IS CONCERNED, WE FIND THAT THIS IS COV ERED AGAINST THE ASSESSEE BY THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF PAMWI TISSUES REPORTED IN 313 ITR 137. THEREFORE , DISALLOWANCE ON ACCOUNT OF EMPLOYEES CONTRIBUTION IS CONFIRMED AND THIS GROUND OF APPEAL IS PARTLY ALLOWED. 15. IN THE RESULT, ASSESSEES APPEAL IS PARTLY ALLO WED. ORDER PRONOUNCED ON THIS 24 TH DAY OF FEBRUARY, 2010. SD/- SD/- (B.RAMAKOTAIAH) (P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 24 TH FEBRUARY, 2010. P/-* 8