M/s Modern Pesticides Supply Pvt. Ltd., Chandigarh V. DCIT, Chandigarh

ITA 780/CHANDI/2011

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51465 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-09-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 05-08-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: B M KHANNA
• Keywords: Capital asset; Depreciation; Business expenditure; Revenue expenditure

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH A CHANDIGARH BEFORE SHRI H.L.KARWA, VICE PRESIDENT AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 780/CHD/2011 ASSESSMENT YEAR: 2007-08 M/S MODERN PESTICIDES V DY.CIT, CIRCLE 1(1), SUPPLY PVT.LTD., CHANDIGARH. SCO 82-83, SECTOR 8-C, CHANDIGARH. PAN: AAACM-9678-F (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI B.M.KHANNA RESPONDENT BY : SHRI N.K.SAINI DATE OF HEARING : 20.09.2011 DATE OF PRONOUNCEMENT : ORDER PER MEHAR SINGH, AM THE ASSESSEE HAS FILED APPEAL AGAINST THE ORDER OF THE CIT(A) DATED 04.06.2011 PASSED U/S 250(6) OF THE IN COME-TAX ACT,1961 (IN SHORT 'THE ACT'). THE APPEAL PERTAINS TO THE ASSESSMENT YEAR 2007-08 WHEREIN THE ASSESSEE HAS RA ISED FOUR GROUNDS OF APPEAL WHICH ARE REPRODUCED HEREUND ER : 1. THAT THE LD. CIT(A) HAS FAILED TO APPRECIATE TH E FACTS AND CIRCUMSTANCES OF THE CASE AND HAS THEREBY ERRED IN DENYING CAPITALIZATION OF INTEREST TOWARDS THE COST OF FLAT. 2. THAT THE LD. CIT(A) HAS ERRED IN DISALLOWING INTEREST PAID ON LOAN TAKEN FOR BUILDING WHICH WAS BEING USED FOR GODOWN PURPOSES. 3. THAT THE LD. CIT-A HAS ERRED IN SUSTAINING DISALLOWANCE U/S 40(A)(2)(H) ON ACCOUNT OF EXCESS 2 INTEREST PAID TO THE DIRECTORS, A QUESTION OF FACT WHICH IS TOTALLY INCORRECT. 4. THAT THE LD CIT(A) HAS ERRED IN SUSTAINING ADDITION OF RS.189191/- ON ACCOUNT OF BUSINESS PROMOTION EXPENSES INCURRED THROUGH THE CREDIT CARD OF THE DIRECTORS FOR BUSINESS PURPOSES. 2. IN GROUND NO.1, THE ASSESSEE CONTENDED THAT THE CIT(A) FAILED TO APPRECIATE THE FACTS AND CIRCUMSTANCES OF THE CASE AND ERRED IN DENYING CAPITALIZATION OF INTEREST TOW ARDS THE COST. THE AO ON APPRECIATION OF THE EVIDENCES FILE D BY THE ASSESSEE DISALLOWED AN AMOUNT OF RS.89612/- CLAIMED BY THE ASSESSEE AS EXPENSE IN RESPECT OF INTEREST PAID. L D. AR CONTENDED THAT IT IS AN EXPENSE ELIGIBLE FOR DEDUCT ION OR IT SHOULD BE ALLOWED TO BE CAPITALIZED. 3. LD. DR ON THE OTHER HAND, RELIED UPON THE ORDE R PASSED BY THE AO AS WELL AS THE CIT(A). 4. LD. CIT(A) GAVE CATEGORICAL FINDING AFTER EVALUA TING THE SUBMISSION MADE BEFORE HIM BY THE ASSESSEE. IN THIS CASE, THE ASSESSEE PAID INTEREST OF RS.89612/- TO HDFC ON LOANS PROCURED FOR MAKING AN ADVANCE FOR THE PURCHASE OF PLOT AT ZIRAKPUR. THE POSSESSION OF THE FLAT WAS NOT TAKEN BY THE ASSESSEE, NOR THE SAID FLAT WAS REFLECTED IN THE CH ART OF FIXED ASSETS PREPARED FOR THE ASSESSMENT YEAR UNDER REFER ENCE. SUCH ADVANCE MADE FOR THE PURCHASE OF THE FLAT, WAS SHOWN IN THE BALANCE SHEET, AS AN ADVANCE. THE LD. CIT(A), UPHELD THE FINDINGS OF THE AO AND CONFIRMED THE ADDITION OF RS .89612/-. 3 5. WE HAVE CAREFULLY PERUSED THE RIVAL SUBMISSIONS AND THE RELEVANT RECORDS INCLUDING THE PAPER BOOK FILED BY THE ASSESSEE. THE ASSESSEE HAD DISCLOSED THE SAID ADVA NCE IN THE BALANCE-SHEET PREPARED FOR THE PERIOD UNDER REFEREN CE. THE ASSESSEE IS NOT IN POSSESSION OF THE FLAT AND MAKIN G AN ADVANCE IS THE FIRST STEP FOR ACQUISITION OF THE SA ID ASSET. IN THE ABSENCE OF EXISTENCE OF SUCH ASSET, THE QUESTIO N OF CAPITALIZATION OF THE IMPUGNED INTEREST DOES NOT AR ISE. THE FINDINGS OF THE LD. CIT(A) THAT INTEREST IS IN RESP ECT OF ADVANCING MONEY FOR THE PURCHASING OF CAPITAL ASSET , CANNOT BE FAULTED WITH. ACCORDINGLY, WE ARE OF THE CONSID ERED OPINION HAVING REGARD TO THE LEGAL FACTUAL POSITION OF THE CASE, THAT THERE IS NO GROUND TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). HENCE THIS GROUND OF APPEAL OF THE ASSESSEE IS DISMISSED. 6. IN GROUND NO.2, IT WAS CONTENDED BY THE ASSESSEE THAT THE CIT(A) ERRED IN DISALLOWING THE INTEREST PAID O N LOAN TAKEN FOR BUILDING WHICH WAS BEING USED FOR GODOWN PURPOS ES. THE ASSESSEE HAD TAKEN LOAN FROM M/S G.E. COUNTRY WIDE FOR THE CONSTRUCTION OF BUILDING FOR GODOWN AND CLAIMED AN INTEREST OF RS.3,84,657/- AS AN EXPENDITURE. THE AO WAS OF THE OPINION THAT THE SAID INTEREST PAID ON LOAN TAKEN F OR THE CONSTRUCTION OF THE GODOWN IS REQUIRED TO BE CAPITA LIZED AND CANNOT BE ALLOWED AS AN EXPENDITURE. CONSEQUENTLY, THE AO CAPITALIZED INTEREST EXPENDITURE AND ALLOWED DEPREC IATION OF RS.38,464/-. THEREFORE, THE DIFFERENCE OF INTEREST PAID AND DEPRECIATION I.E. RS.3,46,129/- (RS.3,84,657/- - 38 ,465/-) WAS ADDED TO THE INCOME OF THE ASSESSEE. LD. CIT(A ) 4 CONFIRMED THE FINDINGS OF THE AO AND CATEGORICALLY HELD THAT THE PLEA, THAT INTEREST SHOULD BE ALLOWED AS AN EXP ENDITURE U/S 36(1)(III) OF THE ACT IS NOT CORRECT. THE LD. C IT(A) FOUND THAT THE AO RIGHTLY CAPITALIZED THE INTEREST PAID A ND ALLOWED DEPRECIATION. 7. IN THE COURSE OF PRESENT APPELLATE PROCEEDINGS, LD. AR PLACED RELIANCE ON THE DECISION REPORTED IN BOMBAY STEAM NAVIGATION CO. PVT.LTD. V CIT, 56 ITR 52 (S.C.) AND CONTENDED THAT THE INTEREST EXPENDITURE IS PERMISSIBLE U/S 36 (1)(III) OF THE ACT. THE HEAD-NOTE OF THE RATIO OF THE HON'BLE SUPREME COURT IS REPRODUCED HEREUNDER : BUSINESS EXPENDITURE-INTEREST-COMPANY TAKING OVER ASSETS AND ALLOTTING SHARES FOR PART OF PRICE-INTER EST ON BALANCE OF PRICE-WHETHER INTEREST ON BORROWED CAPITAL-WHETHER BUSINESS EXPENDITURE CAPITAL MEANING OF INDIAN INCOME-TAX ACT,1922, S. 10(2)(III)(XV). 8. LD. DR PLACED RELIANCE ON THE ASSESSMENT ORDER A S WELL AS THE ORDER PASSED BY THE CIT(A). 9. WE HAVE CAREFULLY HEARD THE RIVAL SUBMISSIONS, C ASE LAWS RELIED BY THE ASSESSEE INCLUDING PAPER BOOK. A BAR E PERUSAL OF THE PROVISION OF SECTION 36(1)(III) CLEARLY REVE ALS THAT EXPENDITURE INCURRED ON ACQUISITION OF CAPITAL ASSE T CANNOT BE ALLOWED AS REVENUE EXPENDITURE. IN THIS CONTEXT , A REFERENCE IS MADE TO THE PROVISO UNDER SECTION 36(1 ) SUB- CLAUSE (III) OF THE ACT. THE AO HAS ALLOWED DEPREC IATION IN RESPECT OF THE SAID ASSET AND THIS ACTION OF THE AO WAS CONFIRMED BY THE CIT(A). 5 10. WE HAVE CAREFULLY GONE THROUGH THE CASE-LAWS CI TED BY THE ASSESSEE IN THE CASE OF BOMBAY STEAM NAVIGATION CO. PVT. LTD. (SUPRA) AND FOUND THAT THE FACTS OF THE CASE R ELIED UPON BY THE ASSESSEE ARE DIFFERENT AND DISTINGUISHABLE. IN VIEW OF THE ABOVE DISCUSSION, THE FINDINGS OF THE LD. CIT(A ) ARE UPHELD AND CONSEQUENTLY, THIS GROUND OF APPEAL OF THE ASSE SSEE IS DISMISSED. 11. IN GROUND NO.3, IT HAS BEEN CONTENDED BY THE AS SESSEE THAT CIT(A) ERRED IN SUSTAINING THE DISALLOWANCE U/ S 40(A)(2)(H) ON ACCOUNT OF EXCESS INTEREST PAID TO T HE DIRECTORS. IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOT ICED THAT THE ASSESSEE HAD PAID VARYING RATE OF INTEREST FROM 8.5% TO 18.69% TO ITS DIRECTORS IN RESPECT OF THE LOANS RAI SED BY DIRECTORS. THE AO HELD THAT THE COMPANY PAID HIGHE R INTEREST TO ITS DIRECTORS AND HENCE DISALLOWANCE ON ACCOUNT OF SUCH INTEREST HAS BEEN WORKED OUT BY THE AO AT RS.78,569 /-. IN THE COURSE OF ASSESSMENT PROCEEDINGS BEFORE THE CIT (A), THE ASSESSEE IN ITS SUBMISSION ADMITTED THAT SLIGHTLY H IGHER RATES OF INTEREST WAS ALLOWED TO THE DIRECTORS AND FAMILY MEMBERS AS THERE IS NO ELEMENT OF ANY SECURITY BEING OFFERE D FOR OBTAINING SUCH LOAN. THE SUBMISSION FILED BY THE A SSESSEE BEFORE THE CIT(A) IS REPRODUCED HEREUNDER : THE ACTION OF AO IS UNJUSTIFIED AS INTEREST ON MON EY BORROWED FROM DIRECTORS EVEN AT SLIGHTLY HIGHER RAT ES AS ALLOWABLE WHEN MONEY IS BORROWED FROM DIRECTORS AND FAMILY MEMBERS. THERE IS NO ELEMENT OF ANY SECURITY BEING OFFERED FOR OBTAINING LOAN WHEN TAKE N FROM DIRECTORS. THE DIRECTORS HAVE PAID THE TAX ON THE INTEREST RECEIVED. IN FACT, THE DIRECTORS HAVE 6 BORROWED MONEY FROM THE BANK AND ADVANCED THE SAME AS LOAN TO COMPANY IN THEIR PERSONAL CAPACITY. THE DIRECTORS HAVE CHARGED THE COMPANY THE SAME AMOUNT OF INTEREST AS PAID THEM TO THE BANK. NO UNREASONABLE OR EXCESSIVE INTEREST HAS BEEN PAID BY THE COMPANY TO ITS DIRECTORS AND FAMILY MEMBERS. THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO. 12. BEFORE US, SIMILAR SUBMISSION WAS FILED BY THE LD. AR WHEREAS THE DR PLACED RELIANCE ON THE ORDER PASSE D BY THE CIT(A). 13. WE HAVE CAREFULLY PERUSED THE FACTUAL POSITION OF THE CASE AND THE RELEVANT RECORDS INCLUDING THE PAPER B OOK FILED BY THE ASSESSEE. A BARE PERUSAL OF THE SUBMISSION REPRODUCED ABOVE, FILED BY THE ASSESSEE BEFORE THE CIT(A) REVEALS THAT THE FACTUM OF MAKING PAYMENT OF INTERE ST AT HIGHER RATE TO THE DIRECTOR AND ITS FAMILY MEMBERS IN RESPECT OF LOANS RAISED FROM THEM HAD BEEN ADMITTED BY THE ASSESSEE. THE JUSTIFICATION FILED BY THE ASSESSEE IS NOT A PL AUSIBLE EXPLANATION AND NO BUSINESS EXPEDIENCY HAS BEEN DEMONSTRATED BY THE ASSESSEE IN PROCURING LOAN AT A HIGHER RATE. HAVING REGARD TO THE ABOVE DISCUSSION, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) AND HENCE, THE FINDINGS OF THE LD. CIT(A) ARE UPHELD. THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS DISMISSED. 14. IN GROUND NO.4, ASSESSEE CONTENDED THAT CIT(A) ERRED IN SUSTAINING AN ADDITION OF RS.1,89,191/- ON ACCOUNT OF BUSINESS PROMOTION EXPENSES INCURRED THROUGH CREDIT CARD OF THE DIRECTORS FOR BUSINESS PURPOSE. THE ASSESSEE D EBITED AN 7 AMOUNT OF RS.11,49,689/- UNDER THE HEAD BUSINESS PROMOTION EXPENSES IN THE PROFIT & LOSS ACCOUNT. THE AO DISALLOWED RS.2,39,191/- TREATING IT AN EXPENDITURE ON PERSONAL ACCOUNT OF THE DIRECTORS. THE LD. CIT(A), ON APPRECIATION OF THE SUBMISSIONS FILED BY THE ASSESS EE, JUSTIFIED THE ADDITION MADE BY THE AO, GAVE RELIEF TO THE ASSESSEE TO THE TUNE OF RS.50,000/-. 15. BEFORE US, LD. AR CONTENDED THAT HAVING REGAR D TO THE QUANTUM OF SALE, THE EXPENDITURE ON BUSINESS PROMOT ION STANDS JUSTIFIED. IT WAS ALSO CONTENDED BY THE LD. AR THAT CREDIT CARD IS ISSUED BY THE BANKS NOT IN THE NAME OF THE COMPANY BUT IN THE NAME OF DIRECTORS. THE DIRECTOR S MADE THE IMPUGNED EXPENDITURE FOR THE PURPOSE OF BUSINES S, HENCE THE SAME SHOULD BE ALLOWED. LD. AR PLACED RELIANCE ON THE ORDERS OF THE CIT(A). 16. WE HAVE CAREFULLY PERUSED THE RIVAL SUBMISSIONS , RELEVANT RECORDS INCLUDING THE PAPER BOOK. THESE E XPENSES HAD BEEN INCURRED ON ACCOUNT OF FOOD AND OTHER PETT Y ITEMS. IT IS A FACT THAT THE EXPENDITURE HAD BEEN INCURRED THROUGH THE PERSONAL CREDIT CARDS OF THE DIRECTORS. A BARE PERUSAL OF THE PAGES 54 TO 60 OF THE ASSESSEE'S PAPER BOOK REV EALS THAT THE IMPUGNED EXPENDITURE WAS INCURRED ON FOODING (C OST OF FOODING WITH COMPANYS GUESTS). IT IS SEEN THAT CE RTAIN BILLS CONTAIN THE DETAILS AS HOTEL BILLS FOR COMPANYS GU ESTS. HAVING REGARD TO THE NATURE OF EXPENSES INCURRED BY THE ASSESSEE AS WELL AS THE NATURE OF EVIDENCES FILED B Y THE ASSESSEE, TO JUSTIFY ADMISSIBILITY OF SUCH EXPENSES , NO 8 INFIRMITY IS FOUND IN THE FINDINGS OF THE LD. CIT(A ). HOWEVER, HAVING REGARD TO THE BUSINESS EXPEDIENCY AS HIGHLIG HTED BY THE LD. AR, WE ARE OF THE CONSIDERED OPINION THAT A FURTHER RELIEF OF RS.50,000/- IS JUSTIFIED IN THE PRESENT C ASE, WITH A VIEW TO MEET THE ENDS OF JUSTICE. ACCORDINGLY, THE ASSESSEE GETS A RELIEF OF RS.50,000/-. THE FINDINGS OF THE LD. CIT(A) ARE CONFIRMED SUBJECT TO THE ABOVE RELIEF. 17. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 23 RD SEPTEMBER,2011. SD/- SD/- (H.L.KARWA) (MEHAR SINGH) VICE PRESIDENT ACCOUNTANT MEMBER DATED: 23 RD SEPT.,2011 POONAM COPY TO: 1. THE APPELLANT, 2. THE RESPONDENT, 3. THE CIT(A), 4. THE CIT 5. THE D.R, INCOME-TAX DEPARTMENT, CHANDIGARH ASSISTANT REGISTRAR, ITAT, CHANDIGARH