ACIT, Faridabad V. M/s Mascot Footcare, Faridabad

ITA 768/DEL/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9850 (ITAT-DELHI)
• Duration Of Justice: 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2009
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 02-07-2009
• Assessment Year: 2004-2005
• Appeal Filed On: 02-03-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: G S SAHOTA
• Keywords: Business expenditure; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `E : NEW DELHI BEFORE SHRI DEEPAK R. SHAH, ACCOUNTANT MEMBER AND SHRI GEORGE MATHAN, JUDICIAL MEMBER I.T.A. NOS.768 & 769/DEL/2009 ASSESSMENT YEARS : 2004-05 & 2005-06 ASSTT. COMMISSIONER OF INCOME-TAX, M/S. MASCOT FOO TCARE, CIRCLE-II, FARIDABAD. VS. PLOT NO.130, SEC.24, FARIDABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI G.S. SAHOTA, SR. DR. RESPONDENT BY : NONE O R D E R PER DEEPAK R. SHAH, ACCOUNTANT MEMBER BOTH THESE APPEALS BY THE REVENUE ARE DIRECTED AGAI NST THE ORDERS OF THE COMMISSIONER OF INCOME-TAX (APPEALS), FARIDABAD , DATED 17 TH DECEMBER, 2008 AND 22 ND DECEMBER, 2008 PERTAINING TO THE ASSESSMENT YEARS 2004-05 & 2005-06 RESPECTIVELY. SINCE COMMON ISSUES ARE INVOLVED IN BOTH THE APPEALS, THEY WERE HEARD TOGETHER AND A RE DISPOSED OF BY THIS COMMON ORDER. 2 2. GROUND NO.1 IN APPEAL FOR BOTH THE APPEALS IS AG AINST THE DISALLOWANCE ON ACCOUNT OF DELAYED PAYMENTS OF CONTRIBUTION TO P ROVIDENT FUND IN RESPECT OF EMPLOYEES CONTRIBUTION. 3. THE ASSESSING OFFICER DISALLOWED THE SAME AS THE AMOUNT WAS NOT PAID WITHIN THE DUE DATE AS PRESCRIBED UNDER SECTIO N 36(1)(VA) OF THE ACT THOUGH PAID WITHIN THE FINANCIAL YEAR ITSELF. THE LEARNED CIT(A) HELD THAT SINCE THE AMOUNT HAS BEEN PAID IN THE FINANCIAL YEA R AND BEFORE DUE DATE OF FILING THE RETURN OF INCOME, THE PAYMENT IS ALLOWAB LE. 4. WE FIND THAT THE AMOUNT IN RESPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND HAS BEEN PAID DURING THE FINANCIAL Y EAR ITSELF AND WITHIN THE GRACE PERIOD PERMISSIBLE UNDER THE RESPECTIVE PROVI DENT FUND RULES. WHEN THE PROVIDENT FUND RULES GRANT A GRACE PERIOD OF 5 DAYS FOR MAKING PAYMENT IN RESPECT OF EMPLOYEES CONTRIBUTION TO PROVIDENT FUND, THE SAME CAN BE SAID TO HAVE BEEN PAID WITHIN THE DUE DATE IN THE RELEVA NT FUND UNDER RULE ISSUED THEREUNDER AND HENCE WITHIN THE TIME LIMIT PRESCRIB ED IN EXPLANATION BELOW SUB-CLAUSE (VA) OF SUB-SECTION (1) OF SECTION 36. ACCORDINGLY, THE AMOUNT WAS RIGHTLY HELD BY THE LEARNED CIT(A). 5. GROUND NO.2 IN APPEAL FOR ASSESSMENT YEAR 2004-0 5 AND GROUND NO.4 IN APPEAL FOR ASSESSMENT YEAR 2005-06 ARE AGAI NST DISALLOWANCE OF INTEREST EXPENDITURE STATED TO BE FOR INVESTMENT IN SHARES AND HENCE 3 DISALLOWABLE IN VIEW OF DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 28 6 ITR 1. 6. THE ASSESSING OFFICER WORKED OUT THE DISALLOWANC E TO FIND THAT THE INVESTMENT VALUING RS.3,76,58,414/- WAS MADE BY THE ASSESSEE IN THE SHARES OF M/S. LAKHANI INDIA LTD. THE ASSESSING OFFICER FO UND THAT INTEREST HAS BEEN PAID ON THE AMOUNT BORROWED BY WAY OF SECURED LOANS FROM BANK. THIS AMOUNTS TO DIVERSION OF BORROWED FUNDS FOR NON-BUSI NESS PURPOSES AND HENCE INTEREST IS NOT ALLOWABLE IN VIEW OF DECISION IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA). BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT THE INVESTMENT IS OUT OF OWN FUNDS AND THERE IS NO NEXUS BETWEEN THE BORR OWED FUNDS AND INVESTMENT IN SHARES. IT WAS ALSO CONTENDED THAT T HE INVESTMENT IN SHARES OF THE COMPANY WITHIN THE GROUP IS FOR BUSINESS PURPOS ES AND THERE IS NO UTILIZATION OF BORROWED FUNDS AS ALLEGED FOR NON-BU SINESS PURPOSES. RELIANCE WAS PLACED ON THE DECISION OF ITAT, DELHI IN ONE OF THE GROUP CASES IN THE CASE OF ACIT VS. LAKHANI MARKETING INC. FOR THE A.Y . 2004-05. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMISSION S HELD AS UNDER:- 11. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. A.R. AND PERUSED THE ORDER OF ASSESSMENT. ON SIMILA R FACTS AND CIRCUMSTANCES, THE A.O. HAD EFFECTED THE ADDITION I N ONE OF THE SISTER CONCERNS OF THE APPELLANT I.E. M/S. LAKHANI MARKETING INC. FOR THE A.Y. 2004-05. THE UNDERSIGNED HAD GIVEN TH E FINDING THEREIN AFTER GOING INTO THE HONBLE SUPREME COURT S DECISION 4 IN THE CASE OF S.A. BUILDERS REPORTED IN 282 ITR 01 (SC) WHEREIN IT HAS BEEN RULED THAT ON ACCOUNT OF COMMER CIAL EXPEDIENCY, WHICH IS THE PREROGATIVE OF AN ASSESSEE , THE END PURPOSE OF THE INVESTMENT ORT DIVERSION OF FUNDS BE ING TO UTILIZE THEM IN THE SISTER CONCERNS FOR BUSINESS PURPOSE PR OMOTING THE ENTIRE BUSINESS AS WHOLE, THE INTEREST SO CLAIMED W AS ALLOWED AS DEDUCTION, AND THE LD. TRIBUNAL HAD UPHELD MY SUCH ORDER IN ITA NO.4526/DEL/2007, A.Y. 2004-05 VIDE ORDER DATED 04.04.2008. IN THE LIGHT OF LD. JURISDICTIONAL TRI BUNALS DECISION, THE MATTER HAVING BEEN FINALLY CLINCHED O N THE IDENTICAL FACTS, THE ADDITION OF RS.36,21,584/- OUT OF TOTAL INTEREST AS ALLEGED USE OF BORROWED FUNDS FOR NON-B USINESS PURPOSES BEING MERITLESS, STANDS DELETED. 7. AFTER CONSIDERING THE SUBMISSIONS OF THE LEARNED DR SHRI G.S. SAHOTA IN ABSENCE OF ANY ONE ON BEHALF OF THE ASSESSEE, WE FIND THAT THE INTEREST HAS BEEN PAID ON THE AMOUNT BORROWED UTILIZED FOR THE P URPOSE OF BUSINESS AND SUCH BORROWED FUNDS ARE NOT UTILIZED FOR INVESTMENT IN SHARES. IN SUCH A SITUATION INTEREST COULD NOT BE DISALLOWED UNDER SE CTION 36(1)(III). IN ABSENCE OF ANY NEXUS BETWEEN THE AMOUNT BORROWED AN D ALLEGED DIVERSION FOR NON-BUSINESS PURPOSES, INTEREST COULD NOT HAVE BEEN DISALLOWED. WE, THEREFORE, CONFIRM THE ORDER OF THE LEARNED CIT(A). 8. GROUND NO.2 IN APPEAL FOR ASSESSMENT YEAR 2005-0 6 IS AGAINST DELETION OF DISALLOWANCE OF RS.8,92,937/- BEING THE COMMISSION PAID TO M/S. LAKHANI MARKETING INC. THE ASSESSING OFFICER FOUND THAT THE TERMS AND CONDITIONS OF AGREEMENT WITH M/S. LAKHANI MARKETING INC. SHOWED THAT THE SAID COMPANY SHALL BE PAID COMMISSION ON THE ORDERS BOOKED BY IT. SINCE 5 THE ORDERS HAVE BEEN PROCURED THROUGH M/S. LAKHANI FOOTCARE (P) LTD., THEREFORE, THE COMMISSION CANNOT BE PAID TO M/S. LA KHANI MARKETING INC. ACCORDINGLY, THE COMMISSION PAID TO M/S. LAKHANI MA RKETING INC. WHICH WAS EXECUTED THROUGH M/S. LAKHANI FOOTCARE (P) LTD. WAS DISALLOWED. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT PAY MENT WAS MADE FOR THE SERVICES RENDERED TO THE ASSESSEE IN PURSUA NCE OF COMMISSION AGREEMENT. AN AGREEMENT WAS ENTERED INTO WITH M/S. LAKHANI MARKETING INC. IN NOVEMBER, 2004. THE AGREEMENT WAS ENTERED I NTO TO INCREASE THE SALES. AS PER THE AGREEMENT M/S. LAKHANI MARKETING INC. WERE TO BEAR ALL THE EXPENSES RELATING TO GODOWN, TELEPHONE, STATION ERY, COMPUTER AND STAFF. THE LEARNED CIT(A) HELD THAT AS PER COMMISSION AGRE EMENT BETWEEN THE ASSESSEE AND M/S. LAKHANI MARKETING INC., M/S. LAKHANI MARKETING INC. WAS APPOINTED AS ASSESSEES INDENTING AGENT AND THE RATE OF COMMISSION WAS 1.5% ON THE SALE OF THE SUPPLIES BY THE ASSESSEE. THUS THE EXPENSES ARE FOR ENHANCING THE SALES. COMMISSION WAS PAID TO M/S. L AKHANI MARKETING INC. AS IT RENDERED SERVICES ON WHICH REQUISITE COMMISSI ON WAS EXPENDED. COMMISSION PAID TO M/S. LAKHANI FOOTCARE LTD. IS IN ADDITION TO COMMISSION PAID TO M/S. LAKHANI MARKETING INC. AS A CONSIGNMENT AGENT. THEREFORE, THE EXPENSES ARE ALLOWABLE AS SUCH. 6 9. THE LEARNED DR SUBMITTED THAT THE SALES HAD BEEN PROCURED THROUGH M/S. LAKHANI FOOTCARE LTD. AND THEREFORE, M/S. LAKH ANI MARKETING INC. WAS NOT AT ALL INVOLVED IN SALES AND HENCE COMMISSION P AID WAS NON-BUSINESS EXPENDITURE. NONE WAS PRESENT ON BEHALF OF THE ASS ESSEE. 10. WE FIND THAT M/S. LAKHANI FOOTCARE LTD. OBTAINE D SALES ORDER AND M/S. LAKHANI MARKETING INC. RENDERED SERVICES AS A CONSI GNMENT AGENT. THEREFORE, DIFFERENT SERVICES WERE RENDERED BY TWO DIFFERENT AGENTS AND HENCE EACH ARE ENTITLED TO COMMISSION FOR RESPECTIV E WORK DONE BY THEM. IN SUCH A SITUATION, EVEN THOUGH THE ORDERS WERE PROCU RED BY M/S. LAKHANI FOOTCARE LTD., SINCE OTHER SERVICES RENDERED BY M/S . LAKHANI MARKETING INC., SUCH EXPENSES CAN BE SAID TO BE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND HENCE ARE ALLOWABLE AS SUCH . 11. GROUND NO.3 IN APPEAL FOR ASSESSMENT YEAR 2005- 06 IS AGAINST DELETION OF ADDITION OF RS.2,97,455/- MADE BY THE A SSESSING OFFICER ON ACCOUNT OF INTEREST ON DEBIT BALANCE OF PARTNERS. 12. THE ASSESSING OFFICER DISALLOWED THE INTEREST U NDER SECTION 36(1)(III) WHEREIN HE FOUND THAT THERE WAS DEBIT BALANCE OF CA PITAL ACCOUNT OF TWO PARTNERS NAMELY MS.SUMAN LAKHANI AND MS. KAMLESH LA KHANI. HE FOUND THAT THE INTEREST WAS BEING PAID ON BORROWED FUNDS. THEREFORE, INTEREST CAN BE DISALLOWED TO THE EXTENT THE FUNDS HAVE BEEN WIT HDRAWN BY THE PARTNERS 7 FOR THEIR PERSONAL PURPOSES. IT WAS EXPLAINED THAT THERE IS OVERALL CREDIT BALANCE OF ALL THE PARTNERS TOGETHER IS IN EXCESS O F RS.616 LACS. NO INTEREST IS CHARGED ON CREDIT BALANCE BY THE PARTNERS. THEREFO RE, NO CHARGE OF INTEREST CAN BE DISALLOWED ON ACCOUNT OF DEBIT BALANCE IN AC COUNT OF SOME OF THE PARTNERS. THE ASSESSING OFFICER APPLYING THE DECIS ION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRI ES LTD., 286 ITR 1, WORKED OUT THE DISALLOWANCE OF INTEREST PERTAINING TO DEBIT BALANCE OF THE ABOVE PARTNERS. BEFORE THE LEARNED CIT(A) IT WAS CONTENDED THAT CON SIDERING ALL THE POSITION OF ALL THE CAPITAL ACCOUNTS OF THE PARTNER S THERE REMAINED CREDIT BALANCE AND THEREFORE, SINCE ON CREDIT BALANCE, NO INTEREST WAS PAID BY THE FIRM, SIMILARLY NO INTEREST WAS CHARGED ON DEBIT OF OTHER PARTNERS. THE DECISION IN THE CASE OF ABHISHEK INDUSTRIES (SUPRA) DOES NOT APPLY TO THE PRESENT SET OF FACTS. THE LEARNED CIT(A) HELD THAT THE ASSESSEE HAS NEITHER ALLOWED INTEREST NOR CHARGED INTEREST ON THE DEBIT BALANCE OF PARTNERS AS SUCH. THE DISALLOWANCE IS WORKED OUT OF THE AMOUNT PAID T O BANKS WHICH IS UNFEASIBLE. ACCORDINGLY DISALLOWANCE IS TO BE DELE TED. 13. THE LEARNED DR SUBMITTED THAT SOME OF THE PARTN ERS HAVE DEBIT BALANCE. THE ASSESSEE ON ONE HAND PAYS INTEREST ON AMOUNT BORROWED AND 8 ON THE OTHER HAND, DOES NOT CHARGE ANY INTEREST ON SUCH DEBIT BALANCE. THEREFORE, THE ADDITION WAS RIGHTLY MADE BY THE ASS ESSING OFFICER. 14. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEARN ED DR AND PERUSED THE ORDERS OF THE AUTHORITIES BELOW. THE DECISION O F HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRI ES (SUPRA) IS APPLIED WHERE THE BORROWED FUNDS HAVE BEEN UTILIZED OR DIVE RTED FOR NON-BUSINESS PURPOSES. HOWEVER, IN THE PRESENT CASE, THE ADDITI ON HAS BEEN MADE BECAUSE ON THE DEBIT BALANCE OF THE PARTNERS NO INTEREST IS CHARGED WITHOUT COMING TO A FINDING THAT THE AMOUNT BORROWED HAS BEEN ALLOWED TO BE WITHDRAWN BY THE PARTNERS. ON THE CONTRARY WE FIND THAT ON THE OVER ALL BALANCE OF THE PARTNERS WHICH IS IN EXCESS OF RS.616 LACS, NO INTEREST IS P AID BY THE ASSESSEE. THE TERMS OF PARTNERSHIP DEED DO NOT MANDATE ANY PAYMEN T OF INTEREST OR CHARGING OF INTEREST ON THE BALANCES OF THE PARTNER S. IN SUCH A SITUATION, THE ASSESSING OFFICER CANNOT DISALLOW INTEREST BY NOTIO NALLY CHARGING INTEREST ON THE PARTNERS DEBIT BALANCES. SO LONG AS THE AMOUN T BORROWED IS UTILIZED FOR THE BUSINESS PURPOSES AND NOT DIVERTED TOWARDS NON- BUSINESS PURPOSES OR FOR THE PERSONAL USE BY THE PARTNERS, NO PART OF THE IN TEREST CAN BE DISALLOWED OR NO AMOUNT BY WAY OF NOTIONAL INTEREST IS BROUGHT TO TAX. THIS GROUND ACCORDINGLY FAILS. 9 15. GROUND NO.5 IN APPEAL FOR ASSESSMENT YEAR 2005- 06 IS AGAINST DELETION OF DISALLOWANCE OF RS.85,666/- AND RS.32,6 93/- ON ACCOUNT OF CAR AND TELEPHONE EXPENSES. THE LEARNED CIT(A) IN THIS REGARD OBSERVED AS UNDER:- 27. I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE LD. A.R. AND PERUSED THE ORDER OF ASSESSMENT. THE A.O. HAS EVIDENTLY MADE THIS DISALLOWANCE ON ADHOC BASIS WIT HOUT BRING OUT ANYTHING ON RECORD WHICH MAY JUSTIFY HIS ACTION . ADHOCISM IS NOT TENABLE IN THE EYES OF LAW AND IT LEADS TO A RBITRARINESS. THE VERY ACTION OF THE A.O. IN RESTRICTING THE EXPE NDITURE ON CAR AND TELEPHONE REVEALS THE BASIC NATURE OF THEIR HAV ING BEEN INCURRED. THE A.O. HAS NOT BROUGHT THEIR NON-GENUI NENESS BY POINTING OUT ANY DEFECT IN THE VOUCHERS OR BOOKS OF ACCOUNT PRODUCED, WHICH ARE STATUTORILY AUDITED. MOREOVER, THE LD. A.R. HAS SUFFICIENTLY JUSTIFIED THE EXPENDITURE WHI CH HAS BEEN INCURRED FOR THE BUSINESS PURPOSE ONLY. THEREFORE, THE A.O.S ACTION IN MAKING SUCH DISALLOWANCES CANNOT BE UPHEL D. HENCE BOTH THE DISALLOWANCES ARE DELETED. 16. THE LEARNED DR SUBMITTED THAT USE OF THE CAR AN D TELEPHONE FOR THE NON-BUSINESS PURPOSES BY THE PARTNERS CANNOT BE RUL ED OUT AND HENCE THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING PART OF SUCH SUM. 17. THERE IS NO FINDING THAT THE CAR AND TELEPHONE USED BY THE PARTNERS FOR THEIR PERSONAL PURPOSES. ON THE CONTRARY IT WAS FO UND THAT NO PARTNER RESIDES IN NOIDA WHERE THE CAR AND TELEPHONE ARE USED. THE REFORE, NO DISALLOWANCE IN THIS REGARD IS CALLED FOR. IT IS ALSO NOTICED T HAT THE EXPENSES ON TELEPHONES ARE IN RESPECT OF TELEPHONES INSTALLED AT OFFICE PR EMISES AND THEREFORE, THERE 10 IS NO PRESUMPTION THAT THE TELEPHONES AT OFFICE WIL L ALSO BE USED FOR PERSONAL PURPOSE. IN SUCH A SITUATION, NO DISALLOWANCE IS CA LLED FOR. 18. IN THE RESULT, BOTH THE APPEALS ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 28 TH AUGUST, 2009. SDD/- SD/- (GEORGE MATHAN) (DEEPAK R. SHAH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 28 TH AUGUST, 2009. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR, ITAT.