ASSIT. COMMISSIONER OF INCOME TAX - 16(3), MUMBAI V. SHEETAL MANUFACTURING CO., MUMBAI

ITA 7612/MUM/2011

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1774 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 04-09-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 11-11-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G N MAKWANA
• Assessee Lawyers: B V JHAVERI

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH E, MUMBAI BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA NO.7612/M/2011 ASSESSMENT YEAR: 2008-09 ACIT-16(3), MATRU MANDIR, 2 ND FLOOR, R.NO.206, TARDEO ROAD, MUMBAI 400 007 VS. M/S. SHEETAL MANUFACTURING CO., 1001, PRASAD CHAMBERS, TATA ROAD NO.2, OPERA HOUSE, MUMBAI 400 004 PAN: AAAFS 8333A (APPELLANT) (RESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI B.V. JHAVERI, A.R. REVENUE BY : SHRI G.N. MAKWANA, D.R. DATE OF HEARING : 06.10.2015 DATE OF PRONOUNCEMENT : 31.12.2015 O R D E R PER SANJAY GARG, JUDICIAL MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE REVEN UE AGAINST THE ORDER DATED 24.08.2011 OF THE COMMISSIONER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS THE CIT(A)] RELEVANT TO ASSESSMENT Y EAR 2008-09. 2. THE REVENUE HAS TAKEN FOLLOWING GROUNDS OF APPEA L: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. C 11(A) ERRED IN DELETING THE DISALLOWANCE MADE BY THE A.O. OF RS .14,71,363/- ON ACCOUNT OF INTEREST U/S. 40(B)(IV) OF THE I.T.ACT, RS.5,17, 473/- ON ACCOUNT OF INTEREST ON LIC LOANS AND RS.20,82,504/- ON ACCOUNT OF FINAN CIAL EXPENSES FOR OBTAINING LOANS IN THE NAMES OF THE PARTNERS FROM D IFFERENT BANKS. 2. ON THE FACTS AND CIRCUMSTANCES THE CASE, THE CIT (A) ERRED IN RELYING UPON THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE C ASE OF CIT VS. ABDUL REHMAN & SONS, WHEREIN THE LOANS RAISED FROM BANK W ERE CREDITED TO THE BANK'S ACCOUNT IN THE BOOKS OF THE FIRM AND THE INT EREST WAS PAID BY THE FIRM DIRECTLY TO THE BANK WHILE IN THIS CASE THE LOANS G IVEN BY THE PARTNERS ARE CREDITED TO THEIR LOAN ACCOUNTS AND INTEREST IS PAI D BY THE PARTNERS THEMSELVES TO THE BANK. ONLY THE LOAN ACCOUNTS OF T HE PARTNERS ARE CREDITED WITH THE AMOUNT OF INTEREST PAID BY THEM TO THE BAN K. ITA NO.7612/M/2011 M/S. SHEETAL MANUFACTURING CO. 2 3. ON THE FACTS AND CIRCUMSTANCES THE CASE, THE CIT (A) ERRED IN HOLDING THE INTEREST PAID BY THE ASSESSEE FIRM ON THE LOANS OBT AINED BY THE PARTNERS FROM BANKS/LIC AND GIVEN TO THE ASSESSEE FIRM DO NO T ATTRACT PROVISIONS OF SECTION 40 (B) (IV) OF THE I.T. ACT. 4. ON THE FACTS AND CIRCUMSTANCES THE CASE, THE CIT (A) ERRED IN HOLDING THAT THE FINANCIAL EXPENSES INCURRED IN RAISING THE LOANS AL SO CONSTITUTE DEDUCTIBLE EXPENDITURE IN THE HANDS OF THE ASSESSEE. 5. THE APPELLANT CRAVES LEAVE TO AMEND OR ALTER ANY GROUND OR ADD A NEW GROUND WHICH MAY BE NECESSARY. THE APPELLANT PRAYS THAT THE ORDER OF THE CIT(A) ON THE ABOVE GROUNDS BE SET THAT OF THE ASSESSING OFFICER RESTORED. 3. THE BRIEF FACTS OF THE CASE ARE THAT DURING THE YEAR UNDER CONSIDERATION, THE PARTNERS OF THE ASSESSEE FIRM BORROWED FUNDS FR OM VARIOUS BANKS BY MORTGAGING THEIR PERSONAL RESIDENTIAL PROPERTIES. T HE BORROWED FUNDS WERE IN TURN GIVEN TO THE ASSESSEE FIRM AND WERE UTILIZED F OR MEETING THE WORKING CAPITAL REQUIREMENTS OF THE ASSESSEE FIRM BY TRANSF ERRING THE LOANS AMOUNTS EITHER ON THE SAME DAY OR NEXT DAY OF OBTAINING THE LOANS BY THE PARTNERS TO THE BANK ACCOUNT OF THE FIRM. IN THE SIMILAR MANNER LOA NS WERE OBTAINED AND TRANSFERRED TO THE ASSESSEE FIRM BY THE PARTNERS, B Y PLEDGING THEIR PERSONAL LIC POLICIES, WHICH WERE ALSO UTILIZED FOR MEETING THE WORKING CAPITAL REQUIREMENT OF THE ASSESSEE FIRM. THE INTEREST PAID TO THE BANK S WAS AT RS.14,71,363/- AND TO THE LIC WAS AT RS.5174731- IN THIS REGARD. THAT APART, FINANCIAL EXPENSES IN THE FORM OF DOCUMENTATION AND PROCESSING CHARGES AN D OTHER RELATED EXPENSES WERE INCURRED TO THE TUNE OF RS.20,82,504/- FOR RAI SING THESE LOANS FROM THE BANKS. THE ASSESSING OFFICER (HEREINAFTER REFERRED TO AS THE AO) IN HIS ASSESSMENT ORDER NOTED THAT THE LOANS TAKEN BY THE PARTNERS FROM VARIOUS BANKS AND THE LIC WERE GIVEN IN TURN TO THE ASSESSEE FIRM AS LOANS BY THE PARTNERS. THE AO ALSO OBSERVED THAT THE MOU ENTERED INTO IN T HIS REGARD BETWEEN THE FIRM AND THE PARTNERS ESTABLISHED THAT THE LOANS WE RE GIVEN BY THE PARTNERS TO THE FIRM AND THAT THE LOANS SO ADVANCED WOULD CARRY SAME RATE OF INTEREST WHICH THE LENDING PARTNERS WOULD HAVE TO PAY TO THE BANK AND FURTHER THAT THESE LOANS WERE TO BE CREDITED TO THE PARTNERS LOAN ACCOUNT. T HE AO ALSO NOTED THAT THE ITA NO.7612/M/2011 M/S. SHEETAL MANUFACTURING CO. 3 ASSESSEE HAD BEEN CREDITING THE LOAN ACCOUNT OF THE PARTNERS FOR THE PAYMENTS MADE BY THEM TOWARDS INTEREST PAID TO THE BANKS. CO NSIDERING ALL THESE FACTS, THE AO CAME TO THE CONCLUSION THAT THE LOANS WERE O BTAINED BY THE PARTNERS IN THEIR INDIVIDUAL STATUS AND THE SAID LOANS WERE ADV ANCED TO THE ASSESSEE FIRM, RESULTING IN TWO INDEPENDENT TRANSACTIONS. THEREFOR E, THE AO HELD THAT THE LOANS ADVANCED BY THE PARTNERS TO THE ASSESSEE FIRM AND THE INTEREST PAID THEREON WERE HIT BY THE PROVISIONS OF SECTION 40(B) (IV) OF THE ACT AND ACCORDINGLY RESTRICTED THE INTEREST PAID BY THE ASS ESSEE FIRM AT 12% P.A., RESULTING IN THE DISALLOWANCE OF RS.1471363/-. SIM ILARLY, THE AO ALSO HELD THAT THE INTEREST PAID TOWARDS LIC LOAN AMOUNTING TO RS. 5,17,473/- WAS ALSO HIT BY THE PROVISIONS OF SECTION 40(B)(IV). THE AO ALSO HE LD THAT THE FINANCIAL EXPENSES INCURRED BY THE PARTNERS BY WAY OF DOCUMEN TATION AND PROCESSING CHARGES FOR RAISING THE FUNDS FROM THE BANKS WAS NO T ALLOWABLE EXPENDITURE IN THE HANDS OF THE ASSESSEE FIRM. BEING AGGRIEVED BY THE ABOVE ADDITIONS MADE BY THE AO, THE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 4. THE LD. CIT(A) CONSIDERING THE FACTS AND CIRCUMS TANCES OF THE CASE OBSERVED THAT THE MOU WAS ENTERED BETWEEN THE ASSE SSEE FIRM AND ITS PARTNERS FOR RAISING THE LOAN BY MORTGAGING THE PERSONAL PRO PERTIES OF THE PARTNERS FOR THE PURPOSE OF BUSINESS REQUIREMENTS OF THE FIRM. S INCE THE ASSESSEE FIRM WAS IN NEED OF FUNDS AND HAS ALREADY REACHED ITS LIMITS TO BORROW IN THE NAME OF THE FIRM, THE MOU WAS SIGNED TO GET THE LOANS IN THE NA ME OF PARTNERS AND THEREAFTER THE LOAN AMOUNT WAS TRANSFERRED TO THE B ANK ACCOUNT OF THE ASSESSEE FIRM IMMEDIATELY AND WAS UTILIZED BY THE ASSESSEE F OR THE PURPOSE OF ITS BUSINESS. THE INSTALLMENTS OF PRINCIPLE AND THE INT EREST THEREOF WERE PAID BY THE FIRM DIRECTLY TO THE RESPECTIVE BANKS/LIC. THE INTE REST PAID WAS NOT CLAIMED AS EXPENDITURE IN THE HANDS OF THE PARTNERS. THUS THE INTENTION OF THE ASSESSEE FIRM WAS TO TAKE LOANS FOR THE PURPOSE OF ITS WORKING CA PITAL REQUIREMENT WITH THE HELP OF THE PERSONAL PROPERTIES OF THE PARTNERS AND THE PARTNERS WERE MERELY USED AS CONDUITS TO OBTAIN THE FUNDS. HENCE THE FIR M AS PER THE MOU HAD TO BEAR THE INTEREST AND OTHER EXPENDITURE INCURRED FO R OBTAINING THE LOAN WHICH ITA NO.7612/M/2011 M/S. SHEETAL MANUFACTURING CO. 4 WERE ALLOWABLE EXPENSES IN THE HANDS OF THE ASSESSE E FIRM IN FULL AND THAT THE PROVISIONS OF SECTION 40(B)(IV) WERE NOT ATTRACTED IN THIS CASE. HE THEREFORE OBSERVED THAT IN THE CASE OF THE ASSESSEE THE SUBST ANCE OF THE TRANSACTION AND THE CONDUCT OF THE ASSESSEE FIRM AND ITS PARTNERS A PPARENTLY REVEAL THAT IT WAS ONLY ONE TRANSACTION I.E. OBTAINING OF LOAN FROM VA RIOUS FINANCIAL INSTITUTIONS, BANKS, LIC BY USING THE PARTNERS AS A GO BETWEEN. THE INTEREST PAYMENTS WERE DIRECTLY MADE BY THE ASSESSEE FIRM TO THE RESPECTIV E INSTITUTIONS AND NOT BY THE PARTNERS. THE LOANS WERE TRANSFERRED TO THE BANK A CCOUNT OF THE ASSESSEE FIRM IMMEDIATELY ON OBTAINING THE SAME BY THE PARTNERS A ND THEY WERE REFLECTIVE TO BE THE LIABILITIES OF THE ASSESSEE FIRM IN THE AUDI TED ACCOUNTS. THE LD. CIT(A) THEREFORE CONCLUDED THAT THE INTEREST PAID BY THE A SSESSEE FIRM ON THE LOANS OBTAINED BY THE PARTNERS FROM BANKS/LIC AND GIVEN T O THE ASSESSEE FIRM DID NOT ATTRACT THE PROVISIONS OF SECTION 40(B)(IV) OF THE ACT. HE ALSO CONCLUDED THAT THE FINANCIAL EXPENSES INCURRED IN RAISING THE ABOV E LOANS CONSTITUTE DEDUCTABLE EXPENDITURE IN THE HANDS OF ASSESSEE FIRM. HE ACCO RDINGLY DELETED THE ADDITIONS MADE BY THE AO IN THIS RESPECT. 5. AFTER HEARING THE LD. REPRESENTATIVES OF THE PAR TIES AND GOING THROUGH THE RECORDS, WE DO NOT FIND ANY INFIRMITY IN THE WE LL REASONED ORDER OF THE LD. CIT(A) AND THE SAME IS ACCORDINGLY UPHELD. 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS HERE BY DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31.12.2015. SD/- SD/- (N.K. BILLAIYA) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 31.12.2015. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI ITA NO.7612/M/2011 M/S. SHEETAL MANUFACTURING CO. 5 THE DR CONCERNED BENCH //TRUE COPY// [ BY ORD ER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.