THAKRAL COMPUTERS P. LTD, MUMBAI V. DCIT 7(3), MUMBAI

ITA 807/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 48994 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 3 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 29-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 06-02-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D SONGATE
• Assessee Lawyers: VIPUL JOSHI
• Keywords: Business expenditure; Assessment record
• Section: 43B

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH E, MUMBAI BEFORE SHRI P.M.JAGTAP, ACCOUNTANT MEMBER & SMT. ASHA VIJAYRAGHAVAN, JUDICIAL MEMBER. I.T.A. NO. 807/MUM/2009. ASSESS MENT YEAR : 2005-06 M/S THAKRAL COMPUTERS P. LTD., DY. COMMISSIONER OF INCOME-TAX, PREMISES NO. 7, ATAR HOUSE, VS. 7(3), MUMBAI. GROUND FLOOR, 87, DR. ANNIE BESANT ROAD, WORLI NAKA, MUMBAI-400018. PAN AAACT1899F APPELLANT. RESPONDENT. APPELLANT BY : SHR I VIPUL JOSHI. RESPONDENT BY : SHRI D. SONGATE. O R D E R PER P.M. JAGTAP, A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF THE LEARNED CIT(APPEALS)-7, MUMBAI DATED 17-11-2008. 2. THE ISSUE RAISED IN GROUND NO.1 RELATES TO THE D ISALLOWANCE OF RS.13.80 LAKHS MADE BY THE AO OUT OF INTEREST EXPENSES AND CONFIRM ED BY THE LEARNED CIT(APPEALS). 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF TRADING IN COMPUTERS, COMPONENTS, WATCH ES, DVRS ETC. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED B Y IT ON 28-10-2005 DECLARING A 2 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. TOTAL LOSS OF RS.2,67,95,620/-. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS GIVEN LOANS AND ADVANCES TO THE EXTENT OF RS.1.38 CRORES TO THE OTHER GROUP COMPANIES FREE OF INTEREST. HE ALSO NOTICED THAT THE ASSESSEE WAS INCURRING INTEREST EXPENDITURE ON OVER DRAFT AND BORROWED FUNDS. HE, THEREFORE, DISALLOWED THE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE TO THE EXTENT OF RS.13.80 LAKHS BEING THE INTEREST AT THE RATE OF 10% ATTRIBUTABLE TO THE INTEREST FREE LOANS AND ADVANCES GIVEN TO THE OTHER GROUP COMPANIES HOLDING THAT THE SAME WAS NOT INCURRED BY THE ASSESSEE WHOLLY AN D EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS. ON APPEAL, THE LEARNED CIT(APPEALS ) CONFIRMED THE DISALLOWANCE MADE BY THE AO OUT OF INTEREST EXPENDITURE HOLDING THAT HAD THE ASSESSEE COMPANY NOT ADVANCED INTEREST FREE FUNDS TO ITS GROUP COMPA NIES, THERE WOULD NOT HAVE BEEN ANY REQUIREMENT TO BORROW FUNDS TO THE EXTENT OF RS .1.38 CRORES AND TO PAY INTEREST THEREON. HE ALSO HELD THAT THERE WAS FAILURE ON THE PART OF THE ASSESSEE TO PROVE THAT THERE WAS NO NEXUS BETWEEN THE INTEREST BEARING BOR ROWED FUNDS AND THE INTEREST FREE ADVANCES MADE TO THE GROUP COMPANIES. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED COUNSEL FOR THE ASS ESSEE HAS INVITED OUR ATTENTION TO THE COPY OF A BALANCE SHEET OF THE ASSESSEE COMPANY AS ON 31-03-2005 PLACED AT PAGE NO. 19 OF THE PAPER BOOK WHICH CLEARLY SHOWS T HAT THE ASSESSEE COMPANY HAD AT THE RELEVANT TIME OWN FUNDS TO THE EXTENT OF RS. 15.21 CRORES IN THE FORM OF SHARE CAPITAL AND ALSO OTHER INTEREST FREE FUNDS IN THE F ORM OF UNSECURED LOANS TO THE EXTENT OF RS.29.35 CRORES. THE SECURED LOANS ON WHI CH INTEREST WAS PAID BY THE ASSESSEE COMPANY ON THE OTHER HAND WERE ONLY TO THE EXTENT OF RS.2.62 CRORES WHICH WERE ENTIRELY UTILIZED BY THE ASSESSEE COMPAN Y FOR THE PURPOSE OF ITS BUSINESS BY INVESTING THE SAME IN THE FIXED ASSETS AS WELL AS WORKING CAPITAL. THE ASSESSEE COMPANY THUS HAD SUFFICIENT OWN FUNDS AND INTEREST FREE FUNDS TO ADVANCE 3 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. A SUM OF RS.1.38 CRORES TO THE OTHER GROUP CONCERNS AND THE ENTIRE INTEREST BEARING SECURED LOANS HAVING BEEN UTILIZED BY IT FOR THE PU RPOSE OF ITS BUSINESS, WE ARE OF THE VIEW THAT THE ENTIRE INTEREST EXPENDITURE INCUR RED BY THE ASSESSEE WAS AN ALLOWABLE BUSINESS EXPENDITURE AND THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) OUT OF INTERE ST EXPENDITURE IS NOT SUSTAINABLE. IN THAT VIEW OF THE MATTER, WE DELETE THE SAID DISALLOWANCE AND ALLOW GROUND NO.1 OF THE ASSESSEES APPEAL. 5. THE NEXT ISSUE RAISED BY THE ASSESSEE IN GROUND NO.2 RELATES TO THE ADDITION OF RS.1,04,27,544/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APPEALS) ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION GAINS. 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS NOT PROVIDED FOR EXCHANGE FLUCTUAT ION GAINS OF RS.5,18,208/- ON THE UNSECURED LOAN TAKEN FROM THAKRAL CORPORATION ( H.K.) LTD. AND SIMILAR GAIN OF RS.99,09,336/- ON THE CREDITORS CONVERTED INTO FORE IGN EXCHANGE. ACCORDING TO THE AO, THE SAID AMOUNTS AGGREGATING TO RS.1,04,27,544/ - WAS CHARGEABLE TO TAX IN THE HANDS OF THE ASSESSEE COMPANY AND ACCORDINGLY THE S AME WAS ADDED BY HIM TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, THE LEARNE D CIT(APPEALS) CONFIRMED THE SAID ADDITION MADE BY THE AO RELYING INTER ALIA ON THE DECISION OF DELHI BENCH OF ITAT IN THE CASE OF SILICON GRAPHICS SYSTEMS (I) L T. VS. ACIT 106 TTJ 1153 (DEL). 7. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. AS POINTED OUT BY THE LEARNED C OUNSEL FOR THE ASSESSEE FROM THE ORDER OF THE AO FOR ASSESSMENT YEAR 2004-05 PLACED AT PAGE NO. 35 TO 39 OF THE PAPER BOOK, THE ASSESSEE ACTUALLY HAD SUFFERED A LO SS OF RS.20,86,923/- DUE TO FLUCTUATION IN FOREIGN EXCHANGE GAINS IN RESPECT OF THE SAME LIABILITY AND THE SAME 4 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. WAS DISALLOWED BY THE AO. AS SUBMITTED BY THE LEARN ED COUNSEL FOR THE ASSESSEE, THE ASSESSEE HAS NOT CHALLENGED THE SAID DISALLOWAN CE MADE BY THE AO IN ASSESSMENT YEAR 2004-05. MOREOVER IN THE CASE OF CI T VS. WOODWARD GOVERNOR INDIA (P) LTD. 312 ITR 254, THE HONBLE SUPREME COU RT HAS HELD THAT IF THE GAIN DUE TO FLUCTUATION IN FOREIGN EXCHANGE RATES IS ON CAPITAL ACCOUNT, THE SAME IS NOT CHARGEABLE TO TAX. IT IS ALSO OBSERVED THAT A SIMIL AR ISSUE HAS BEEN RESTORED BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1999-2000 VIDE ITS ORDER DATED 11-7-2006 PASSED IN ITA NO. 3685/MUM/2004 FOR DECID ING THE SAME AFRESH AS PER THE DIRECTIONS GIVEN IN THE SAID ORDER. ACCORDINGLY , WE SET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO DECIDE THE SAME AFRESH I N THE LIGHT OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF WOODWARD GOVER NOR INDIA (P) LTD.(SUPRA) AS WELL AS THE DIRECTIONS GIVEN BY THE TRIBUNAL ON A SIMILAR ISSUE IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 1999-2000. GROUND NO.2 OF THE ASSESSEES APPEAL IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURP OSES. 8. THE NEXT ISSUE RAISED BY THE ASSESSEE IN GROUND NO. 3 RELATES TO THE ADDITION OF RS.43,41,435/- MADE BY THE AO AND CONFIRMED BY T HE LEARNED CIT(APPEALS) UNDER THE HEAD DISCREPANCY ON ACCOUNT OF WRITE BAC K OF INTEREST PROVISION. 9. OUT OF THE INTEREST AMOUNT WRITTEN BACK, THE ASS ESSEE COMPANY HAD REDUCED A SUM OF RS.2,37,72,993/- FROM THE TOTAL INCOME ON TH E GROUND THAT INTEREST EXPENDITURE TO THAT EXTENT WAS ALREADY DISALLOWED IN THE EARLIER YEARS I.E. ASSESSMENT YEARS 2003-04 AND 2004-05 U/S 43B. ON VE RIFICATION OF THE RELEVANT RECORDS, THE AO, HOWEVER, FOUND THAT THE ASSESSEE H AD DISALLOWED INTEREST PROVISION TO THE EXTENT OF RS.78,80,878/- IN ASSESS MENT YEAR 2003-04 AND RS.1,15,50,680/- IN ASSESSMENT YEAR 2004-05 AGGREGA TING TO RS.1,94,31,558/-. HE, THEREFORE, ADDED THE DIFFERENCE AMOUNT OF RS.43,41, 435/- (RS.2,37,72,993 - 5 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. RS.1,94,31,558) TO THE TOTAL INCOME OF THE ASSESSEE . THE LEARNED CIT(APPEALS) CONFIRMED THE SAID ADDITION ON THE SAME BASIS AS GI VEN BY THE AO. 10. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. THE LEARNED COUNSEL FOR THE ASS ESSEE HAS SUBMITTED THAT BANK INTEREST WRITTEN BACK AMOUNTING TO RS.2,37,72,993/- WAS ACTUALLY RELATED TO THREE YEARS I.E. ASSESSMENT YEARS 2002-03, 2003-04 AND 20 04-05 WHEREIN THE SAME WAS DISALLOWED U/S 43B. HE SUBMITTED THAT THE ASSESSEE, HOWEVER, MENTIONED ONLY TWO YEARS I.E. ASSESSMENT YEARS 2003-04 AND 2004-05 IN THE NOTE GIVEN ALONG WITH COMPUTATION OF TOTAL INCOME WHICH HAS RESULTED IN T HE IMPUGNED ADDITION ON ACCOUNT OF INTEREST TO THE EXTENT OF RS.43,41,435/- WHICH ACTUALLY REPRESENTS INTEREST PROVISION DISALLOWED U/S 43B IN ASSESSMENT YEAR 2002-03. HE HAS URGED THAT THIS MATTER MAY, THEREFORE, BE RESTORED TO THE FILE OF THE AO TO ALLOW THE APPROPRIATE RELIEF TO THE ASSESSEE AFTER NECESSARY VERIFICATION FROM THE ASSESSMENT RECORDS OF ASSESSMENT YEAR 2002-03. ACCORDINGLY THI S ISSUE IS RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE STAND OF THE ASSESSEE FROM THE RELEVANT RECORDS AND TO ALLOW APPROPRIATE RELIEF TO THE ASSESSEE ON THE BASIS OF SUCH VERIFICATION. GROUND NO. 3 IS ACCORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. 11. THE NEXT ISSUE RAISED IN GROUND NO. 4 RELATES T O THE DISALLOWANCE OF 10% MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APP EALS) OUT OF VARIOUS EXPENSES. 12. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSEE WAS CALLED UPON BY THE AO TO PRODUCE RELEVANT DETAILS AND DOCUMENTS TO SUPPORT AND SUBSTANTIATE ITS CLAIM FOR EXPENSES CLAIMED UNDER THE VARIOUS HE ADS SUCH AS ADMINISTRATION, CONVEYANCE, TRAVELLING, ADVERTISEMENT AND SALES PRO MOTION, OVERRIDING COMMISSION, STAFF WELFARE, PRINTING & STATIONERY AN D POSTAGE & TELEGRAM. THE 6 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. ASSESSEE, HOWEVER, FAILED TO PRODUCE THE SAME AND T HE AO, THEREFORE, MADE A DISALLOWANCE OF 25% OF THE TOTAL EXPENSES CLAIMED B Y THE ASSESSEE UNDER THESE HEADS. BEFORE THE LEARNED CIT(APPEALS) IT WAS SUBM ITTED ON BEHALF OF THE ASSESSEE THAT THE DISALLOWANCE OF 25% MADE BY THE AO IN THE YEAR UNDER CONSIDERATION WAS EXCESSIVE KEEPING IN VIEW THAT A SIMILAR DISALLOWAN CE TO THE EXTENT OF 10% ONLY WAS MADE IN THE IMMEDIATELY PRECEDING YEAR. THE LEA RNED CIT(APPEALS) ACCEPTED THIS SUBMISSION OF THE ASSESSEE AND RESTRICTED THE DISALLOWANCE OF 25% MADE BY THE AO TO THE EXTENT OF 10%. 13. AFTER HAVING CONSIDERED THE RIVAL SUBMISSIONS A ND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE DISALLOWANCE S USTAINED BY THE LEARNED CIT(APPEALS) TO THE EXTENT OF 10% OUT OF THE TOTAL EXPENSES CLAIMED BY THE ASSESSEE UNDER THE VARIOUS HEADS IS QUITE FAIR AND REASONABLE IN THE FACTS AND CIRCUMSTANCES OF THE CASE INCLUDING ESPECIALLY THE FACT THAT THE ASSESSEE HAS FAILED TO PRODUCE THE RELEVANT DETAILS AND DOCUMENTS IN OR DER TO SUPPORT AND SUBSTANTIATE ITS CLAIM FOR THE SAID EXPENSES. THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE IS, THEREFORE, UPHELD AND GROUND NO. 4 OF THE ASSESSEES APPEAL IS DISMISSED. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED ON THIS 27 TH DAY OF MAY, 2011. SD/- SD/- (ASHA VIJAYRAGHAVAN) (P.M. JA GTAP) JUDICIAL MEMBER ACCO UNTANT MEMBER MUMBAI, DATED: 27 TH MAY, 2011. WAKODE 7 ITA NO. 807/MUM/2009 ASSTT. YEAR : 2005-06. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, E-BENCH. (TRUE COPY) BY ORD ER ASSTT. R EGISTRAR, ITAT, MUMBAI BEN CHES, MUMBA I.