Widem Machines Pvt. Ltd., Mumbai V. Income-tax Officer,

ITA 792/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1868 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 11-05-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 21-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ANIL CHAWARE
• Keywords: Source of fund; Wholly owned subsidiary

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A , PUNE , . . , , . . , BEFORE MS. SUSHMA CHOWLA, JM AND SHRI R.K. PANDA, AM . / ITA NO. 792 /PN/201 4 / ASSESSMENT YEAR : 20 0 6 - 0 7 M/S. WIDEM MACHINES PVT. LTD., C/O M.M. POONJIAJI, 42, ANANDILAL PODAR MARG, MUMBAI - 400002 . / APPELLANT PAN: AA ACW2911M PAN: AA ACW2911M VS. THE INCOME TAX OFFICER , WARD 1(4), NASHIK . / RESPONDENT / APPELLANT BY : SHRI HIMANSHU GANDHI / RESPONDENT BY : SHRI ANIL CHAWARE / DATE OF HEARING : 11 . 0 5 .201 6 / DATE OF PRONOUNCEMENT: 13 . 0 5 .201 6 DATE OF HEARING : 11 . 0 5 .201 6 DATE OF PRONOUNCEMENT: 13 . 0 5 .201 6 / ORDER PER SUSHMA CHOWLA, J M : TH IS APPEAL FILED BY THE ASSESSEE IS AGAINST THE ORDER OF CIT (A) - I , NASHIK , DATED 14 . 02 .20 1 4 RELATING TO ASSESSMENT YEAR 20 0 6 - 0 7 AGAINST ORDER PASSED UNDER SECTION 1 4 3(3) R.W.S. 263 OF THE INCOME - TAX ACT , 1961 (IN SHORT THE ACT) . 2 . THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: - 1 . THE LD. CIT(A) ERRED IN DISALLOWING INTEREST OF RS.9,47,974/ - PAID TO DEVELOPMENT CREDIT BANK ON THE LOAN TAKEN FROM DEVELOPMENT CREDIT BANK FROM TIME TO TIME AND BALANCES OUT STANDING OF RS.1,75,82,011/ - AS ON 31/03/2006 I ) THOUGH THE FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS, I ) THOUGH THE FUNDS WERE UTILIZED FOR THE PURPOSE OF BUSINESS, II ) THOUGH THE FUNDS WERE UTILIZED FOR PAYING BACK THE AMOUNT TO THE CREDITORS I.E. HOLDING COMPANY. ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 2 III ) THOUGH THE FUNDS WERE UTILIZED FOR THE PURPOSE OF GIVING MONEY TO THE 4 DIFFERENT PARTIES AND THEREBY THE LD. CIT(A) ERRED IN CONFIRMING THAT THE SAID AMOUNT WAS GIVEN TO THE 4 PARTIES I.E 1) VPI 2) COMFORT COLLERS 3) SS PHARMA AGENCY 4) PANKUDI INVESTMENT FOR NON - BUSINESS PHARMA AGENCY 4) PANKUDI INVESTMENT FOR NON - BUSINESS PURPOSE. IV ) THOUGH THERE IS NO NEXUS BETWEEN THE FUNDS BORROWED AND UTILIZED FOR THE PURPOSE OF GIVING THE FUNDS TO THE 4 PARTIES I.E 1) VPI 2) COMFORT COLLERS 3) SS PHARMA AGENCY 4) PANKUDI INVESTMENT AND THEREBY WRONGLY CONFIRMED THAT THE FUNDS WERE UTILIZED FOR NON - BUSINESS PURPOSE. 2. THE LD. CIT(A) ERRED IN CONFIRMING AND CHARGING THE INTEREST LEVIED U/S 234A, 234B, 234C & 234 D OF THE I. T. ACT, 1961. 3. THE LD. CIT(A) ERRED IN CO - FIRMING AND INITIATING THE PENALTY U/S 271(1)(C) OF THE LT. ACT, 1961. 4. THE ASSESSEE CRA VES LEAVE TO ADD FURTHER GROUNDS OR TO AMEND 4. THE ASSESSEE CRA VES LEAVE TO ADD FURTHER GROUNDS OR TO AMEND OR ALTER THE EXISTING GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. 3. THE ISSUE ARISING IN THE PRESENT APPEAL IS AGAINST DISALLOWANCE UNDER SECTION 36(1)( III) OF THE ACT ON ACCOUNT OF INTEREST AMOUNTIN G TO RS. 9,47,974/ - . BY WAY OF GROUND OF APPEAL NO.2, THE ASSESSEE HAS ALSO RAISED THE ISSUE AGAINST CHARGING OF INTEREST UNDER SECTIONS 234A, 234B, 234C AND 234D OF THE ACT. 4. BRIEFLY, IN THE FACTS OF THE PRESENT CASE, THE ASSESSEE WAS 100% SUBSIDIARY O F HOLDING COMPANY M/S. M.M. POONJIAJI SPICES LTD. (IN SHORT MMPSL) . THE ASSESSEE WAS INCORPORATED IN THE YEAR 1995. THE ASSESSEE CLAIMS THAT ALL ITS FI NANCIAL FUNDS WERE BEING BORNE BY MMPSL, AGAINST WHICH NO INTEREST HAS BEEN CHARGED BY THE SAID HOLDI NG COMPANY TILL OCTOBER, 2005. THE ENTIRE SOURCE OF FUNDS OF ASSESSEE COMPANY WAS FROM THE HOLDING COMPANY. ENTIRE SOURCE OF FUNDS OF ASSESSEE COMPANY WAS FROM THE HOLDING COMPANY. HOWEVER, IN OCTOBER, 2005, THE ASSESSEE AVAILED LOAN OF RS.2 CRORES FROM M/S. DEVELOPMENT CREDIT BANK (IN SHORT DCB) . THE ASSESSEE CLAIMS THAT THE LOAN WAS DISBURSED ON 06.10.2005 AND ON 07.10.2005 ITSELF, MONEY WAS TRANSFERRED TO MMPCL I.E. RS. 20 LAKHS ON 07.10.2005, RS.87,45,000/ - ON 07.10.2005, RS.60 LAKHS ON 27.10.2005 AND RS.15 LAKHS ON 29.11.2005 I.E. OUT OF DISBURSEMENT OF LOAN OF RS.2 CRO RES, RS.1.82 CRORES WAS RETURNED TO MMPSL DISBURSEMENT OF LOAN OF RS.2 CRO RES, RS.1.82 CRORES WAS RETURNED TO MMPSL AND THERE WAS STILL CREDIT BALANCE OF RS.77,39,172/ - I.E. ON THE AMOUNT DUE TO ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 3 MMPSL . THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD GIVEN LOANS TO FOUR CONCERNS I.E. VPI OF RS.74,48,825/ - , COMFORT CO O LERS OF R S. 72,44,724/ - , SS PHARMA AGENCY OF RS. 13,78,823/ - AND PANKUDI INVESTMENT OF RS.55 LAKHS . THE ABOVE SAID AMOUNTS AS PER THE ASSESSING OFFICER WERE INTEREST FREE . FURTHER, DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSEE FURNISHED STATEMENT OF ACC OUNT OF DCB BANK, NARIMAN POINT BRANCH, MUMBAI FOR THE PERIOD FROM 06.10.2005 TO 3 1 . 03 .200 6, WHEREIN THE LOAN RAISED WAS RS.2 CRORES AND THE CLOSING BALANCE AS ON 31.03.2006 WAS RS.1,75,82,011/ - . THE ASSESSING OFFICER IN THIS REGARD OBSERVED THAT WHERE TH E ASSESSEE WAS REPAYING THE LOAN WITH INTEREST AND AT THE SAME TIME, IT HAD NOT PAID INTEREST ON THE ADVANCES GIVEN TO FOUR CONCERNS, THERE WAS DIVERSION OF FUNDS TO THE SISTER CONCERNS. FURTHER, THE ASSESSING OFFICER OBSERVED THAT THE ADVANCE S MADE BY TH E ASSESSEE TO THE SAID CONCERNS COULD NOT BE SAID TO BE FOR BUSINESS PURPOSES AND WHERE THE ASSESSEE COULD NOT ESTABLISH THAT THE BORROWAL OF MONEY FROM DCB BANK WAS FOR BUSINESS PURPOSES AND THE ASSESSEE HAD MONEY FROM DCB BANK WAS FOR BUSINESS PURPOSES AND THE ASSESSEE HAD ADVANCED THE MONEY AS A MEASURE OF COMMERCIAL E XIGENCY , THE INTEREST OF RS. 9,47,974/ - PAID TO THE DCB BANK ON LOAN WAS NOT TO BE ALLOWED AS DEDUCTION IN THE HANDS OF ASSESSEE. 5. THE CIT(A) UPHELD THE ORDER OF ASSESSING OFFICER IN THE ABSENCE OF ASSESSEE HAVING FAILED TO PRODUCE ANY DOCUMENTS WHICH CO ULD PROVE THE BUSINESS NEXUS OF THE ASSESSEE COMPANY WITH THE ABOVE FOUR CONCERNS. WHERE THE ASSESSEE HAD FAILED TO PROVE THAT THE BORROWED FUNDS WERE UTILIZED FOR BUSINESS PURPOSES, THE CIT(A) HELD THAT THE ASSESSING OFFICER WAS JUSTIFIED IN DISALLOWING INTEREST TO THE EXTENT OF RS.9,47,974/ - ON ACCOUNT OF DIVERTING INTEREST BEARING BORROWED FUNDS FOR NON BUSINESS PURPOSE . 6. THE ASSESSEE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 7. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE AFTER TAKING US THROUGH THE FACTUAL ASPECTS OF THE CASE, POINTED OUT THAT THE ADVANCES TO FOUR ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 4 CONCERNS WERE MADE BY THE HOLDING COMPANY WAY BACK IN 1999 TO 2002 AND ONLY IN THIS YEAR, THE AMOUNTS WERE ASSIGNED TO THE ASSESSEE. NO ADVANCE HAD BEEN GIVEN TO THE SAID PARTI ES DURING THE YEAR UNDER CONSIDERATION AND THESE ADVANCES WERE GIVEN IN THE EARLIER YEARS FOR BUSINESS PURPOSES AND AS PER THE DIRECTIONS OF HOLDING COMPANY TO DEVELOP THE BUSINESS OF ASSESSEE. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHE R POINTED OUT THAT THE LOAN RAISED FROM DCB BANK WAS UTILIZED FOR REPAYING THE LIABILITY OF HOLDING COMPANY MMPSL TO THE EXTENT OF RS.1.82 CRORES AND AT THE CLOSE OF ACCOUNTING PERIOD, THERE WAS CREDIT BALANCE OF RS. 77,39,172/ - . IT WAS STRESSED BY THE LEA RNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE THAT WHERE THE AMOUNT OF LOAN HAD BEEN UTILIZED FOR COMMERCIAL E XIGENCY , THEN THERE IS NO MERIT IN DISALLOWING ANY PART OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT. 8. THE LEARNED DEPARTMENTAL REPRESEN TATIVE FOR THE REVENUE PLACED RELIANCE ON THE ORDERS OF AUTHORITIES BELOW. 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. UNDER THE PROVISIONS OF SECTION 36(1) OF THE ACT, IT IS PROVIDED THAT CERTAIN DEDUCTION WOULD BE ALLOWED WHILE COMPU TING INCOME FROM PROFITS AND GAINS OF BUSINESS AND UNDER CLAUSE ( III ) , SUCH DEDUCTION I S ALLOWABLE IN RESPECT OF AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE REQUIREMENT FOR AVAILING THE DEDUCTION O N ACCOUNT OF INTEREST PAID ON BORROWED CAPITAL IS THAT THE SAME SHOULD BE UTILIZED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND WH ERE THE SAME IS NOT SO UTILIZED, THEN SUCH PART OF INTEREST PAID ON BORROWED CAPITAL IS NOT TO BE ALLOWED AS DEDUCTION IN THE HANDS OF ASSESSEE. 10. NOW, COMING THE FACTS OF THE PRESENT CASE. THE ASSESSEE WAS 100% SUBSIDIARY OF HOLDING COMPANY MMPSL. THE ASSESSEE COMPANY CAME INTO EXISTENCE IN THE YEAR 1995 AND WAS ENGAGED IN MANUFACTURING OF MANGO ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 5 PICKLES, LEMON PICKLES AN D OTHERS . THE HOLDING COMPANY WAS PROVIDING LABOUR FOR SUCH ACTIVITIES. IN THE YEAR 1999, ADVANCES WERE GIVEN BY THE HOLDING COMPANY TO VPI FOR EXPORT OF GERKIN IN JV. HOWEVER, SINCE THE JV FAILED, A SUIT WAS FILED BY THE HOLDING COMPANY IN THIS REGARD TO RECOVER THE SAID ADVANCES. THE ASSESSEE WAS ALSO DOING WORK OF JV ON BEHALF OF MMPSL IN 1999 AND THIS AMOUNT WAS TRANSFERRED BACK TO THE ASSESSEE BY THE HOLDING COMPANY IN 2005. FURTHER, IN 1999 ITSELF, THE HOLDING COMPANY TRIED TO DEVELOP COOLER EXPO RT BUSINESS OF THE ASSESSEE AND IN THIS REGARD , GA VE ADVANCES TO COMFORT COOLERS , WHERE THE BUSINESS DID NOT MATERIAL AND THE SAID COMPANY BECAME BANKRUPT AND WOULD UP. ANOTHER ADVANCE WAS GIVEN TO SS PHARMA AGENCY, WHICH WAS IN THE YEAR 2002 IN ORDER TO DEVELOP THE PHARMA TRADING BUSINESS, FOR WHICH AN AGREEMENT WAS ENTERED INTO WITH THE SAID PARTY TO MARKET THEIR PRODUCTS. HOWEVER, THE SAID BUSINESS ALSO COULD NOT TAKE OFF . ANOTHER ADVANCE MADE BY THE HOLDING COMPANY WAS TO PANKHUDI INVESTMENTS WHICH W AS GIVEN AS PER DIRECTIONS OF HOLDING COMPANY. HOWEVER, THE ACCOUNT WAS W AS GIVEN AS PER DIRECTIONS OF HOLDING COMPANY. HOWEVER, THE ACCOUNT WAS CLOSED IN FINANCIAL YEAR 2006 - 07 AND THE BALANCE WAS TRANSFERRED TO THE HOLDING COMPANY. THE ASSESSEE CLAIMS THAT ALL THESE ADVANCES MADE BY THE HOLDING COMPANY ON ITS BEHALF WERE FO R BUSINESS PURPOSES I.E. TO DEVELOP THE BUSINESS OF ASSESSEE. THE ASSESSEE HAD RAISED LOAN OF RS.2 CRORES FROM DCB BANK ON 06.10.2005 AND AT THE DIRECTIONS OF HOLDING COMPANY, HAD PAID RS.55 LAKHS TO PANKHUDI INVESTMENTS AND RS.13,78,823/ - TO SS PHARMA AG ENCY, TO DISCHARGE THE LIABILITY OF HOLDING COMPANY AND REDUCE ITS LIABILITY. THE ASSESSEE BEFORE THE CIT(A) BY WAY OF WRITTEN SUBMISSIONS AND ALSO BEFORE US, POINTED OUT THAT THE SAID AMOUNTS WERE PAID SINCE THE HOLDING COMPANY HAD CREDIT BALANCE AMOUNTI NG TO RS. 77,39,172/ - AND THE LIABILITY TO PAY TO TWO CONCERNS WAS ABOUT RS. 68,78,823/ - . AS PER INSTRUCTIONS OF HOLDING COMPANY, THE WHOLE LIABILITY WAS DISCHARGED BY MAKING BOOKS ENTRIES IN THE ACCOUNT OF TWO CONCERNS AND THE SAME WAS CHARGED AGAINST THE CREDIT BALANCE OF MMPSL. FURTHER, THE REPAYMENT OF RS.1.82 CRORES TO THE HOLDING COMPANY WAS THE REPAYMENT OF ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 6 WORKING CAPITAL RAISED FROM IT. SINCE THE AMOUNT WAS UTILIZED FOR DAY - TO - DAY EXPENSES OF THE ASSESSEE FOR CARRYING ON ITS BUSINESS ACTIVITY, THE AMOUNT RAISED BY THE ASSESSEE AS LOAN WAS IN TURN, UTILIZED FOR THE PURPOSE OF BUSINESS OF ASSESSEE. IN VIEW THEREOF, WHERE THE AMOUNT HAS BEEN RAISED BY WAY OF SECURED LOANS AND UTILIZED BY REPAYING THE AMOUNT DUE TO THE HOLDING COMPANY DOES NOT DIS - ENT ITLE THE CLAIM OF INTEREST EXPENDITURE IN THE HANDS OF ASSESSEE. THE ADVANCES TO TWO PARTIES I.E. VPI AND COMFORT COOLERS WERE EARLIER MADE BY MMPSL IN THE YEAR 1999 FOR THE PURPOSE OF ADVANCEMENT OF BUSINESS INTEREST OF THE ASSESSEE AND MERELY BECAUSE TH E SAID ADVANCES ARE NOW BEING SHOWN BY THE ASSESSEE AS RECOVERABLE FROM THE SAID CONCERN S DOES NOT ESTABLISH THE CASE OF REVENUE THAT THE INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF INTEREST FREE ADVANCES. THE OTHER TWO ADVANCES I.E. TO S S PHARMA AGENCY AND PANKHUDI INVESTMENTS ARE AGAINST THE AMOUNT DUE TO THE HOLDING COMPANY MMPSL AND HAVE TO BE SET OFF AGAINST THE SAID DUE S AND CANNOT BE HELD TO BE ADVANCES MADE BY THE ASSESSEE AS INTEREST FREE ADVANCES. IN THE HELD TO BE ADVANCES MADE BY THE ASSESSEE AS INTEREST FREE ADVANCES. IN THE TOTALITY OF THE ABOVE SA ID FACTS AND CIRCUMSTANCES, WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN DISALLOWING THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE AS BEING UTILIZED FOR MAKING INTEREST FREE ADVANCES. FURTHER, ANOTHER POINT TO BE NOTED THAT THE LOANS TO FOUR CONCERNS WERE GIVEN ON A DATE WHEN THE ASSESSEE HAD NOT RAISED ANY SECURED DEBT. THE SAID LOANS WERE ADVANCED IN EARLIER YEARS AND WERE ADVANCED BY THE HOLDING COMPANY MMPSL. ANOTHER ASPECT OF THE ISSUE RAISED BY REVENUE IS THAT THE ASSESSEE OUT OF SECUR ED DEBT HA D ADVANCED THE MONEY TO MMPSL AND HENCE, IN TURN, HA D ADVANCED TO THE SAID CONCERNS. WE FIND NO MERIT IN THE ORDERS OF AUTHORITIES BELOW IN THIS REGARD, WHERE EVEN AFTER REPAYING THE ABOVE SAID AMOUNT, THERE IS STILL CREDIT BALANCE DUE TO THE HO LDING COMPANY. FURTHER, BALANCE TWO ADVANCES HAVING BEEN MADE BY MMPSL FOR THE ADVANCEMENT OF BUSINESS INTEREST OF ASSESSEE IN THE EARLIER YEARS WE RE FOR COMMERCIAL EXIGENCY AND WHERE THERE IS NEXUS B ETWEEN THE EXPENDITURE INCURRED BY THE ASSESSEE AND ITS BUSINESS, THEN THE ITA NO. 792 /PN/20 1 4 WIDEM MACHINES PVT. LTD. 7 REVENUE CANNOT DISALLOW THE SAME BY SITTING IN THE ARM CHAIR OF BUSINESSMAN. IN THIS REGARD, WE FIND SUPPORT FROM THE RATIO LAID DOWN BY THE HONBLE SUPREME COURT IN HERO CYCLES (P) LTD. VS. CIT IN CIVIL APPEAL NO.514 OF 2008 , JUDGMENT DATED 05.11.2015 , WHEREIN IT WAS HELD THAT WHERE ADVANCE WAS MADE AS BUSINESS EXIGENCY, THEN THERE IS NO MERIT IN THE DISALLOWANCE OF INTEREST RELATABLE TO INTEREST BEARING FUNDS. THE HONBLE SUPREME COURT IN TURN, REL IED ON THE RATIO LAID DOWN BY THE AP EX COURT IN S.A. BUILDERS LTD. VS. CIT AND ANOTHER (2007) 288 ITR 1 (SC). FOLLOWING THE SAME PARITY OF REASONING, WE REVERSE THE ORDER OF CIT(A) AND ALLOW THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE. 1 1 . IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON THIS 13 TH DAY OF MAY , 201 6 . SD/ - SD/ - SD/ - SD/ - ( R.K. PANDA ) ( SUSHMA CHOWLA ) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; DATED : 13 TH MAY , 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE CIT (A) - I , NASHIK ; 4. / THE CIT - I , NASHIK ; 5. , , / DR A , ITAT, PUNE; 6. / GUARD FILE . / BY ORDER , // TRUE COPY // / SR. PRIVATE SECRETARY , / ITAT, PUNE