KAYAGEE LOPAREX INDIA P.LTD, MUMBAI V. ACIT (OSD) 8(1), MUMBAI

ITA 7745/MUM/2012

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 2837 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 10 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 08-04-2015
• Assessment Year: 2008-2009
• Appeal Filed On: 28-12-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: R A DHYANI
• Assessee Lawyers: N JAYENDRA
• Keywords: Business income
• Section: 80IB

Judgement Text

, ' INCOME TAX APPELLATE TRIBUNAL,MUMBAI- A,BENCH , , BEFORE S/SH. RAJENDRA,ACCOUNTANT MEMBER & AMIT SHUKLA,JUDICIAL MEMBER /.ITA NO.7745 & 7746//MUM/2012, /ASSESSMENT YEARS-2008-09 & 2009-10 KAYGEE LOPAREX INDIA PVT. LTD. B-28 VEERA IND. ESTATE,BHUKHANVALA CHAMBERS,OFF LINK ROAD, ANDHERI (W),MUMBAI 400 053 PAN: AAACK3962A VS ACIT(OSD) 8(1), MUMBAI ( / ASSESSEE) ( / RESPONDENT) /ASSESSEE BY : SHRI N. JAYENDRA / REVENUE BY : SHRI R.A. DHYANI / DATE OF HEARING :2 0-10-2015 / DATE OF PRONOUNCEMENT : 28 -10-2015 , 1961 1961 1961 1961 254 254 254 254( (( (1 11 1) )) ) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) PER RAJENDRA, AM - CHALLENGING THE ORDERS DTD.23.10.2012AND 29.10.2012 OF THE CIT(A)-17,MUMBAI,THE ASSESSEE HAS FILED APPEALS FOR THE ABOVEMENTIONED TWO ASSESS MENT YEARS (AYS).DURING THE COURSE OF HEARING BEFORE US THE AUTHORISED REPRESENTATIVE(AR) FAIRLY CONCEDED THAT GROUND NO.2 AND 3 ARE COVERED AGAINST THE ASSESSEE BY THE DECISIONS O F THE HONBLE SUPREME COURT. HENCE, BOTH THE GROUNDS STAND DISMISSED. ITA NO.7745/MUM/2012-AY 2008-09: ASSESSEE-COMPANY ENGAGED IN THE BUSINESS OF MANUFAC TURING OF SILICON COATED PAPERS AND FILMS,FILED ITS RETURN OF INCOME ON 25.09.2008,DECL ARING INCOME OF RS.3.13 CRORES.THE ASSESSING OFFICER(AO)COMPLETED THE ASSESSMENT ON 21 .11.2011U/S.143(3) OF THE ACT,DETERMI- NING THE INCOME OF THE ASSESSEE AT RS.3.35 CRORES. 2. FIRST GROUND DEALS WITH CONFIRMING THE DISALLOWANCE OF RS .13.75LACS.DURING THE ASSESSMENT PROCEEDINGS,THE AO FOUND THE ASSESSEE HAD PAID COMM ISSION OF RS.13,75,133/-TO LOPREX H K LTD.(LHKL)IN FOREIGN CURRENCY,THAT LHKL WAS HOLDING COMPANY OF THE ASSESSEE.HE DIRECTED IT TO FILE DOCUMENTARY EVIDENCES WITH REGARD TO COM MISSION PAID.VIDE ITS LETTER,DATED 19.10. 2011,THE ASSESSEE FURNISHED DETAILS ABOUT THE COMMI SSION PAYMENT ALONG WITH THE COPY OF AGREEMENT ENTERED INTO ASSESSEE KAYGEE LOPAREX H K LTD.THE AO, AFTER CONSIDERING THE AGREEMENT,OBSERVED IT WAS EFFECTIVE RETROSPE -CTIVE LY WITH EFFECT FROM 01.06.2006,THAT THE ASSESSEE HAD TO PAY 5% OF NET INVOICED VALUE OF THE PRODUCTS BY 20 TH DAY OF THE MONTH,THAT THE COMMISSION PAYABLE BY THE ASSESSEE TO ITS AE RELATE D TO SALES EFFECTED IN OCTOBER AND DECEMBER 2006.HE HELD THAT THE COMMISSION EXPENDITU RE,CLAIMED BY THE ASSESSEE,DID NOT PERTAIN TO THE AY UNDER CONSIDERATION,THAT THE ASSE SSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING,THAT THERE WAS NO CHANGE IN THE METHOD O F ACCOUNTING,THAT THE ASSESSEE WAS AWARE THAT THE COMMISSION WAS PAYABLE TO THE HOLDING COMP ANY,THAT IT DID NOT DEDUCT TAX AT SOURCE AS PER THE PROVISIONS OF THE ACT, THAT THE AMOUNT I N QUESTION WAS PRIOR PERIOD EXPENSE. FINALLY,HE MADE AN ADDITION OF RS.13.75 LACS TO THE TOTAL INCOME OF THE ASSESSEE. 3 .AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILE D AN APPEAL BEFORE THE FIRST APPELLATE AUTHORITY(FAA).BEFORE HIM,IT WAS CONTENDED THAT THE OLD AGREEMENT WITH REGARD TO THE COMMISSION PAYMENT WAS ENTERED INTO ON 01.06.2006, THAT IT WAS REVISED ON 01.01.2007,THAT 2 ITA /7745 & 77 46//MUM/2012 KAYGEE LOPAREX INDIA PVT LTD. AS PER THE NEW AGREEMENT THE COMMISSION WAS TO BE P AID ONLY AFTER THE RECEIPT OF THE SALES PROCEEDS,THAT AS PER THE EARLIER AGREEMENT COMMISSI ON WAS TO BE PAID WHEN THE BILLS WERE GENERATED WITHOUT WAITING FOR THE RECEIPT OF PAYMEN T,THAT THE NEW CLAUSE WAS EFFECTIVE FROM THE YEAR UNDER APPEAL ONLY,THAT THE SERVICES WERE R ENDERED OUTSIDE INDIA, THAT TDS WAS NOT TO BE DEDUCTED FOR SUCH PAYMENTS.THE ASSESSEE RELIED U PON THE CASES OF GODRA ELECTRIC CO.LTD. (225ITR746) AND DDIT (INTL. TAX) VS. SHERTON INT. I NC OF 2012. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ORDER OF THE AO,THE FAA HELD THE ASSESSEE HAD APPOINTED LHKL TO RENDER SERVICES,THAT DURING THE YEAR THE AGENT HAD PROCURED ORDERS FROM AUSTRALIA,THAT THE MATERIAL WAS DESPATC HED FROM DECEMBER 7, 2006 TO JUNE 18, 2007,THAT COMMISSION AT A FLAT RATE OF 5%WAS TO BE GIVEN TO THE AGENT FOR PROCURING THE ORDER, THAT THE AUSTRALIAN PARTY MADE PAYMENT TO THE ASSES SEE FROM 16.03.2007 TO 20.09.2007, THAT THE COMMISSION WAS DUE TO THE AGENT FROM 20.04.2007 TO 20.10.2007,THAT SAME WAS PAID FROM 25.05.2007 TO 14.04.2008, THAT THE ASSESSEE HAD DEB ITED TOTAL EXPENSES OF RS.14.83 LACS ON ACCOUNT OF COMMISSION AND BROKERAGE,THAT FOR THE EA RLIER YEAR THE SAID AMOUNT WAS RS.3.57 LACS ONLY,THAT IN THE DETAILS OF TRANSACTIONS WITH LHKL THE AMOUNT OF COMMISSION PAID HAS NOT BEEN CERTIFIED BY THE AUDITORS,THAT THE NEW AGR EEMENT WAS NOT EXECUTED ON THE STAMP PAPER NOR WAS IT FRAMED OR REGISTERED,THAT THE TERM S OF AGREEMENT HAD BEEN CHANGED SO THAT THE PAYMENT OF COMMISSION COULD BE ALLOWED,THAT THE ASSESSEE WAS FOLLOWING ACCRUAL SYSTEM OF ACCOUNTING,THAT IT HAD TO BOOK THE COMMISSION ON THE DATE OF RAISING THE INVOICE, THAT IT HAD DEFERRED THE COMMISSION FROM THE DATE OF INVOICE TO THE DATE OF RECEIPT OF SALE PROCEEDS, THAT IT HAD NOT DISCLOSED THE COMMISSION PAYMENT AS REQU IRED BY THE AUDIT REPORT. FINALLY, HE UPHELD THE ORDER OF THE AO. 4. DURING THE COURSE OF HEARING BEFORE US,THE AR ARGUE D THAT THE ASSESSEE HAD ENTERED INTO A NEW AGREEMENT,THAT CERTAIN CLAUSES WERE MODIFIED,TH AT THE CONCLUSION DRAWN BY THE FAA WAS FACTUALLY INCORRECT.HE REFERRED TO PAGE NO.9 AND PA GE NO.3 OF THE PAPER-BOOK. DEPARTMENTAL REPRESENTATIVE (DR) SUPPORTED THE ORDER OF THE FAA. 5. WE HAVE HEARD THE RIVAL SUBMISSION AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE AGREEMENT GOVERNING THE COMMISSION WAS CHANGED DURI NG THE YEAR UNDER APPEAL,THAT THE COMMISSION WAS TO BE PAID AFTER THE RECEIPT OF THE SALE PROCEEDS AS PER THE NEW AGREEMENT, THAT THE ASSESSEE HAD FILED DETAILS OF FOREIGN COMM ISSION FOR THE YEAR UNDER CONSIDERATION AS PER THE REVISED AGREEMENT,THAT THE DETAILS ARE AVAI LABLE AT PAGE NO.9 OF THE PAPER-BOOK.A PERUSAL OF THE DETAILS CLEARLY SHOW THE FULL FOREIG N COMMISSION EXPENSES FOR THE YEAR UNDER APPEAL AND LEAD TO THE CONCLUSION THAT THE ASSESSEE HAD CORRECTLY MADE A CLAIM ABOUT IT.IN OUR OPINION,THE SAID EXPENDITURE CANNOT BE TREATED AS P RIOR PERIOD EXPENSES.IN OUR OPINION,IT IS NOT NECESSARY THAT AGREEMENT SHOULD BE REGISTERED TO BE A VALID AGREEMENT.WE DO NOT FIND ANY THING ILLEGAL OR WRONG IN THE METHOD ADOPTED BY THE ASSESSEE FOR THE YEAR UNDER APPEAL,SO, WE ARE REVERSING THE ORDER OF THE FAA AND DECIDING THE GROUND NO.1 IN FAVOUR OF THE ASSESSEE. ITA NO. 7746/MUM/2012 AY 2009-10 6 .THE FIRST GROUND OF APPEAL IS ABOUT ADDITION OF RS .22.05 LACS ON ACCOUNT OF NETTING OFF OF INTEREST.DURING THE ASSESSMENT PROCEEDINGS,THE AO F OUND THAT THE ASSESSEEHAD RECEIVED INTEREST OF RS.22.05 LACS ON TEMPORARY INVESTMENT B Y WAY OF FIXED DEPOSITS, THAT IT HAD NETTED IT OFF AGAINST THE INTEREST PAID OF RS.55.39 LACS O N THE TERM LOANS AND BANK CHARGES, THAT THE NET INTEREST PAYMENT OF RS.37.19 LACS HAD BEEN CAPI TALISED UNDER THE HEAD CURRENT WORK IN PROGRESS.HE DIRECTED THE ASSESSEE TO EXPLAIN AS TO WHY THE INTEREST RECEIVED SHOULD NOT BE TAXED UNDER THE HEAD INCOME FROM OTHER SOURCES.TH E ASSESSEE RELIED ON ACCOUNTING 3 ITA /7745 & 77 46//MUM/2012 KAYGEE LOPAREX INDIA PVT LTD. STANDARD (AS)-16 AND CONTENDED THAT IT HAD FOLLOWED CORRECT METHOD OF ACCOUNTING, THAT AS PER THE AS-16 ONLY NET AMOUNT WAS TO BE CAPITALISED .THE AO RELYING UPON THE DECISION OF THE HONBLE SUPREME COURT DELIVERED IN THE CASE OF TUTI CORIN ALKALINE CHEMICALS & FERTILIZERS LTD.(227ITR172),HELD THAT INTEREST HAD TO BE TREATE D AS INCOME FROM OTHER SOURCES. HE ALSO DISALLOWED THE NETTING OFF OF THE INTEREST. 7. AGGRIEVED BY THE ORDER,THE ASSESSEE PREFERRED APPEA L BEFORE FAA.BEFORE HIM,IT WAS STATED THAT THE ASSESSEE HAD DECIDED TO EXPAND THE CAPACIT Y AND A TERM LOAN OF RS.10.50 CRORES WAS TAKEN FROM CITIBANK,THAT DUE TO THE DELAY IN THE PR OJECT THE FUNDS WERE KEPT IN FIXED DEPOSIT WITH THE SAME BANK,THAT THE INTEREST RECEIVED BY IT WAS INEXTRICABLY LINKED TO THE EXPANSION PROJECT,THAT AFTER NETTING THE BALANCE AMOUNT WAS C APITALISED,THAT THE FACTS OF THE CASE OF TUTICORIN (SUPRA),WERE DIFFERENT AND NOT APPLICABLE TO THE FACTS UNDER CONSIDERATION.IT RELIED UPON THE CASE OF BOKARO STEEL LTD.(236 ITR 315) AND INDIAN OIL PANIPAT POWER CONSORTIUM LTD.(315ITR255),KARNAL CO-OPERATIVE SUGAR LTD.(234I TR2). AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A ND THE ASSESSMENT ORDER,THE FAA HELD THAT IN THE CASE OF LOVESH JAIN(5TAXMAN26),THE TRIBUNAL HAD HELD THAT IF THE FUNDS FOR THE BUSINESS WERE PARKED FOR SAFE KEEPING THE INTEREST RESULTING THERE FROM COULD NOT ASSUME THE CHARACTER OF BUSINESS INCOME,THAT IT WOULD FALL UND ER THE HEAD INCOME FROM OTHER SOURCES. HE FURTHER REFERRED TO THE CASE OF NATIONAL COMMODI TY AND DERIVATIVES (ITA 2923/MUM/2010 DATED 26.08.2011) AND HELD ASSESSEE WAS NOT ENGAGED IN THE BUSINESS OF MONEY LENDING, THAT THE INTEREST EARNED ON PARKING OF SURPLUS FUNDS WOU LD CONSTITUTE INCOME FROM OTHER SOURCES AND NOT BUSINESS.UPHOLDING THE ORDER OF THE AO, THE FAA DISMISSED THE GROUND RAISED BY THE ASSESSEE. 8. BEFORE US,THE AR STATED THAT THE ASSESSEE HAD TAKEN TERM LOAN FROM CITIBANK, THAT TO FREEZE INTEREST RATE IT HAD DEPOSITED THE MONEY WITH THE B ANK AFTER TAKING DISBURSEMENT, THE INTEREST EARNED ON THE DEPOSIT WAS OFFERED FOR TAXATION, THA T IT HAD CONSIDERED ONLY THE NET INTEREST WHILE PREPARING THE PROFIT AND LOSS ACCOUNT, THAT A FTER NETTING OFF OF BALANCE OF THE INTEREST WAS CAPITALIZED.HE REFERRED TO PAGE NOS. 1,5 & 9 OF THE PAPER-BOOK AND RELIED UPON THE CASES THAT WERE ADVANCED BEFORE THE FAA.THE DR SUPPORTED THE O RDER OF THE FAA. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL BEFORE US.WE FIND THAT THE ASSESSEE HAD NETTED OFF THE INTEREST AND MADE NECES SARY ENTRIES IN THE BOOKS OF ACCOUNT,THAT REMAINING INTEREST WAS CAPITALISED AS STIPULATED BY AS-16,THAT THE LOAN TAKEN BY IT WAS A TERM LOAN,THAT IT COULD NOT BE USED FOR ANY OTHER PURPOS E EXCEPT FOR THE OBJECT IT WAS TAKEN,THAT DUE TO DELAY IN COMMISSIONING THE PLANT IT HAD PARKED T HE LOAN MONEY WITH THE BANK.IN OUR OPINION,INTEREST EARNED BY IT WAS DIRECTLY LINKED W ITH THE BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE,SAME COULD NOT BE TAXED UNDER THE HEAD I NCOME FROM OTHER SOURCES.WE WOULD LIKE TO REFER TO THE CASE OF BOKARO STEEL OF THE HO NBLE APEX COURT(SUPRA),WHEREIN THE COURT HAS HELD AS UNDER:- IN CASE MONEY IS BORROWED BY A NEWLY STARTED COMPAN Y WHICH IS IN THE PROCESS OF CONSTRUCTING AND ERECTING ITS PLANT, THE INTEREST I NCURRED BEFORE THE COMMENCEMENT OF PRODUCTION ON SUCH BORROWED MONEY CAN BE CAPITALISE D AND ADDED TO THE COST OF THE FIXED ASSETS CREATED AS A RESULT OF SUCH EXPENDITURE. BY THE SAME REASONING IF THE ASSESSEE RECEIVES ANY AMOUNTS WHICH ARE INEXTRICABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY,SUCH RECEIPTS WILL GO TO REDUCE THE COST OF ITS ASSETS. THESE ARE RECEIPTS OF A CAPITAL NATURE AND CANNOT BE TAXED AS INCOME. AS THE INTEREST RECEIVED BY THE ASSESSEE IS INEXTRI CABLY LINKED WITH THE PROCESS OF SETTING UP ITS PLANT AND MACHINERY,SO IN OUR OPINION TREATMENT GIV EN BY THE ASSESSEE IN ITS BOOKS OF 4 ITA /7745 & 77 46//MUM/2012 KAYGEE LOPAREX INDIA PVT LTD. ACCOUNTS TO THE INTEREST INCOME IS AS PER THE PROVI SIONS OF ACT.RESPECTFULLY FOLLOWING THE ABOVE DECISION OF THE HONBLE APEX COURT,WE ARE REV ERSING THE ORDER OF FAA.GROUND NO.1 IS DECIDED IN FAVOUR OF THE ASSESSEE. THE SECOND GROUND IS ABOUT DEDUCTION CLAIMED U/S.SE CTION 80IB OF THE ACT.THE AR CONCEDED THAT THE ISSUE STANDS DECIDED AGAINST THE ASSESSEE. WE FIND THAT SIMILAR ISSUE HAD ARISEN IN THE PREVIOUS ASSESSMENT YEAR ALSO. FOLLOWING THE ORDER OF THE EARLIER YEAR, GROUND NO.2 IS DECIDED AGAINST THE ASSESSEE. AS A RESULT, APPEAL FILED BY THE ASSESSEE FOR BOTH THE ASSESSMENT YEARS STAND PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 28 TH OCTOBER,2015. 28 TH ,2015 SD/- SD/- ( /AMIT SHUKLA) ( / RAJENDRA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER /MUMBAI, /DATE: 28.10.2015 . . . JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. APPELLANT / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR A BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.