DCIT, Bangalore V. M/s Dynamatic Technologies Ltd., Bangalore

ITA 879/BANG/2010

• Counselvise Citation: 87921114 RSA 2010
• Duration Of Justice: 1 year(s) 11 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 25-06-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 08-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: SARAVANAN B JT
• Assessee Lawyers: S SUKUMAR
• Keywords: Commercial expediency
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI N. BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI N.V. VASUDEVAN, JUDICIAL MEMBER ITA NO.879/BANG/2010 ASSESSMENT YEAR : 2005-06 THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. VS. M/S. DYNAMATIC TECHNOLOGIES LTD., NO.11, DYNAMATIC PARK, PEENYA INDUSTRIAL AREA, BANGALORE 560 068. PAN: AAACD 5004E APPELLANT RESPONDENT APPELLANT BY : SHRI SARAVANAN, B., JT. CIT(DR) RESPONDENT BY : SHRI S. SUKUMAR, ADVOCATE DATE OF HEARING : 25.06.2012 DATE OF PRONOUNCEMENT : 29.06.2012 O R D E R PER N.V. VASUDEVAN, JUDICIAL MEMBER THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER DATED 09.04.2010 OF THE CIT(APPEALS)-I, BANGALORE RELATING TO ASSESSMEN T YEAR 2005-06. 2. GROUNDS NO. 1, 4 & 5 ARE GENERAL AND DO NOT REQU IRE ANY SPECIFIC ADJUDICATION. GROUNDS NO.2 & 3 RAISED BY THE REVEN UE READS AS FOLLOWS:- ITA NO.879/BANG/2010 PAGE 2 OF 9 2. THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING THE ADDITION MADE BY THE ASSESSING OFFICER ON ACCOUNT O F DISALLOWANCE OF INTEREST AMOUNTING TO RS.6,65,673/- BEING THE DIFFERENCE OF INTEREST CHARGED AT ONLY 5% ON THE AD VANCE MADE TO THE SISTER CONCERN AND THE INTEREST CALCULATED AT T HE RATE OF 8.51% PAYABLE ON BORROWED FUNDS, ONLY ON THE GROUND THAT ADVANCE WAS MADE IN THE USUAL COURSE OF BUSINESS. 3. THE LEARNED CIT(APPEALS) HAS ERRED IN DELETING T HE ADDITION OF RS.34,02,550/- MADE BY THE A.O., U/S. 1 4A OF THE I.T. ACT ON ACCOUNT OF DISALLOWANCE OF INTEREST PAID ON BORROWED FUNDS UTILIZED FOR MAKING INTEREST FREE ADVANCE TO THE SUBSIDIARY COMPANY, WITHOUT EXAMINING THE RELEVANT FACTS IN DE TAIL. 3. THE ASSESSEE IS A COMPANY ENGAGED IN THE MANUFAC TURE OF HYDRAULIC GEAR PUMP AND ALUMINIUM CASTINGS. IN TH E COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) NOTICED T HAT THE ASSESSEE HAD ADVANCED LOANS TO M/S. GREEN EARTH BIOTECHNOLOGY LT D. (GEBL), A SISTER COMPANY OF THE ASSESSEE A SUM OF RS.1,82,57,027. T HE ABOVE SAID SUM WAS APPEARING AS LOAN ADVANCED AS ON 31.03.2004 AND THE SAME CONTINUED TO EXIST AS ON 31.03.2005. IN OTHER WORD S, THERE WAS NO REPAYMENT OF THE LOAN OR FRESH LOANS GIVEN TO THE S ISTER CONCERN DURING THE PREVIOUS YEAR RELEVANT TO AY 05-06. THE AO ALSO NO TICED THAT THE ASSESSEE HAD BORROWED LOANS TOTALING TO RS.3208.10 LAKHS FRO M VARIOUS FINANCIAL INSTITUTIONS. THE ASSESSEE HAD PAID INTEREST ON SU CH BORROWINGS @ 8.51%. IN RESPECT OF THE OUTSTANDING FROM GEBL, THE ASSESS EE CHARGED INTEREST ONLY @ 5% PER ANNUM. THE AO CALLED UPON THE ASSESS EE TO SHOW CAUSE AS TO WHY THE DIFFERENCE OF INTEREST VIZ., 3.51% SH OULD NOT BE DISALLOWED AND BROUGHT TO TAX. 4. IN REPLY, THE ASSESSEE POINTED OUT THAT THE ADVA NCE TO SISTER CONCERN WAS OWING TO COMMERCIAL EXPEDIENCY. IN THIS REGARD , THE ASSESSEE ITA NO.879/BANG/2010 PAGE 3 OF 9 SUBMITTED THAT THE SISTER CONCERN WAS IN THE BUSINE SS OF BIO-ENGINEERING AND THAT THE ASSESSEE EMBARKED UPON FARM RESEARCH T HROUGH ITS SUBSIDIARY SO THAT THE ASSESSEE CAN GET BIOTECHNOLOGY RELATED BUSINESS. THE AO, HOWEVER, HELD THAT THERE WAS NO DIRECT BUSINESS REL ATION BETWEEN THE ASSESSEE AND ITS SISTER CONCERN, THEREFORE THE PLEA OF COMMERCIAL EXPEDIENCY CANNOT BE ACCEPTED. THE AO BY ADOPTING WEIGHTED AVERAGE RATE OF INTEREST PAID BY THE ASSESSEE COMPUTED A SU M OF RS.6,65,673 BEING THE DIFFERENCE OF INTEREST I.E., INTEREST PAID BY T HE ASSESSEE TO THE FINANCIAL INSTITUTION ON ITS BORROWINGS AND THE INTEREST CHAR GED BY IT ON ADVANCE GIVEN TO THE SISTER CONCERN AND ADDED THE SAME TO THE TOT AL INCOME OF THE ASSESSEE. 5. THE AO ALSO NOTICED THAT THE ASSESSEE HAD INVEST ED A SUM OF RS.1,99,99,300 FOR PURCHASE OF SHARES IN ONE OF ITS SUBSIDIARY COMPANY, M/S. JKM RESEARCH FARM LTD. IT IS NOT IN DISPUTE T HAT THE INVESTMENT HAD BEEN MADE IN THE EARLIER YEARS AND AS ON 01.04.2005 A SUM OF RS. 1,99,83,661 WAS SHOWN AS ADVANCE TO THE SISTER CONC ERN. AS ON 31.03.2005 THE SAME WAS RS.1,82,12,553. IN OTHER W ORDS THERE WAS NO MONEY ADVANCED TO THE SUBSIDIARY COMPANY DURING THE PREVIOUS YEAR RELEVANT TO AY 05-06. THE AO WAS OF THE VIEW THAT THE BORROWED FUNDS ON WHICH INTEREST WAS PAID HAD BEEN UTILIZED FOR MAKIN G INVESTMENTS IN THE SUBSIDIARY COMPANY. 6. WHEN CONFRONTED, THE ASSESSEE SUBMITTED THAT THE INVESTMENT IN THE SUBSIDIARY COMPANY WAS MADE OUT OF ITS OWN FUNDS AN D BORROWED FUNDS ON WHICH INTEREST WAS PAID WAS NOT UTILIZED. IT WAS FURTHER PLEADED THAT THE INVESTMENT IN THE SUBSIDIARY WAS OWING TO COMMERCIA L EXPEDIENCY AS THE ITA NO.879/BANG/2010 PAGE 4 OF 9 SUBSIDIARY WAS FORMED WITH THE BUSINESS PLAN TO ENA BLE THE ASSESSEE TO ENTER BIOTECHNOLOGY BUSINESS. THE ASSESSEE ALSO SU BMITTED THAT THE AMOUNT WAS GIVEN AS ADVANCE TO THE SUBSIDIARY AND W AS NOT UTILIZED BY ISSUING SHARES. 7. THE AO CALLED UPON THE ASSESSEE TO PROVE AS TO H OW THE INVESTMENTS IN THE SUBSIDIARY WERE OUT OF ITS OWN S OURCES. THE ASSESSEE EXPLAINED THAT THE INVESTMENTS IN QUESTION WERE MAD E OVER THE PERIOD OF TIME AND IT IS NOT POSSIBLE TO WORK OUT THE SOURCES FOR SUCH INVESTMENTS MADE IN THE SUBSIDIARY COMPANY. THEREUPON, THE AO OBSERVED AS FOLLOWS:- II. FROM THE STATEMENTS FILED ALONGWITH THE RETUR N OF INCOME IT IS CLEAR THAT THE SHARE CAPITAL AND THE RESERVES AN D SURPLUS AVAILABLE WITH THE ASSESSEE COMPANY WERE NOT DIRECT LY UTILIZED FOR THE PURPOSES OF INVESTMENTS MADE IN THE SUBSIDIARY COMPANIES, AS THE ASSETS HELD BY THE COMPANY WERE MORE THAN THE P AID-UP SHARE CAPITAL AND THE RESERVES AND SURPLUS AVAILABLE AS O N 31.03.2004. III. IT IS ALSO SEEN THAT THE ASSESSEE COMPANY HAD HUGE BORROWED LOANS TO THE EXTENT OF RS.15,27,28,740/- A S ON 31.03.2004 AND RS.14,53,17,525/- AS ON 31.03.2005. SIMILARLY THE UNSECURED LOANS HELD BY THE ASSESSEE COMPANY WERE T O THE TUNE OF RS.5,17,06.031 AND RS.6,40,60,391 FOR THE PERIOD EN DED 31.03.2004 AND 31.03.2005 RESPECTIVELY. FROM THESE HUGE SECURED BORROWED LOANS AND UNSECURED LOANS IT IS VE RY CLEAR THAT THE ASSESSEE COMPANY DID NOT HAVE SUFFICIENT FUNDS FOR INVESTMENTS IN ITS SUBSIDIARY CONCERNS. IV. ON THE ASSET SIDE OF THE BALANCE SHEET THE MAJ OR ITEMS OF THE ADVANCES SHOWN UNDER THE HEAD ARE LOANS AND ADV ANCES OF RS.7,63,17,230/- AND RS.8,45,92,135/- AS ON 31.03.2 004 AND 31.03.2005 RESPECTIVELY. THESE ARE THE MAJOR LOANS AND ADVANCES GIVEN BY THE ASSESSEE FOR BUSINESS PURPOSES. HOWEV ER UNDER THE HEAD INVESTMENTS IT HAS SHOWN A SUM OF RS.7,86,06,2 53/- CONSISTING OF MAJOR INVESTMENTS MADE WITH ITS SUBSI DIARY CONCERN M/S. JKM DAERIM AUTOMOTIVE LTD. TO THE TUNE OF RS.5,83,99,300/- AND M/S. JKM RESEARCH FARM LTD. RS.1,99,99,300/-. FROM THESE STATEMENTS IT IS VERY CLEAR THAT THE ASSESSEE COMPANY HAD BORROWED LOANS WHICH WERE INVE STED IN ITS ITA NO.879/BANG/2010 PAGE 5 OF 9 SUBSIDIARY COMPANY AND NOT OUT OF THE PAID-UP CAPIT AL AND THE RESERVED AND SURPLUS. 8. THEREAFTER, THE AO DISALLOWED THE INTEREST EXPEN SES, WHICH WAS CALCULATED AT 8.5% OF THE AMOUNT ADVANCED BY THE AS SESSEE TO THE SISTER CONCERN ON THE OUTSTANDING AS ON 01.04.2004. A SUM OF RS. 34,02,550 WAS THUS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. TH E ADDITION WAS MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT VIZ., THE EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING TA X FREE INCOME. THE BASIS FOR INVOKING SECTION 14A WAS THAT BORROWED FU NDS WERE USED TO BUY SHARES OF THE SUBSIDIARY FOR THE PURPOSE OF EARNING DIVIDEND INCOME WHICH WAS TAX FREE AND THEREFORE, THE EXPENDITURE IN THE FORM OF INTEREST WAS INCURRED FOR THE PURPOSE OF EARNING TAX FREE INCOME . 9. AGGRIEVED BY THE AFORESAID ADDITION MADE BY THE AO, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE CIT(APPEALS). AS FA R AS THE DISALLOWANCE OF INTEREST OF RS.6,65,673 IS CONCERNED, THE LD. CIT(A ) ACCEPTED THE PLEA OF THE ASSESSEE THAT INTEREST FREE LOANS WERE GIVEN TO THE SISTER CONCERN OWING TO COMMERCIAL EXPEDIENCY. AS FAR AS THE ADDITION M ADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT I S CONCERNED, THE LD. CIT(A) ACCEPTED THAT THE ADVANCES WERE GIVEN TO SIS TER CONCERN OWING TO COMMERCIAL EXPEDIENCY AND THAT THERE WAS NO MATERIA L ON RECORD TO SUGGEST THAT THE BORROWED FUNDS WERE USED FOR MAKIN G INVESTMENTS IN THE SISTER CONCERN. 10. AGGRIEVED BY THE RELIEF GRANTED BY THE LD. CIT( A), THE REVENUE HAS PREFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. THE LD. DR ON THE ISSUE ITA NO.879/BANG/2010 PAGE 6 OF 9 OF DISALLOWANCE OF INTEREST ON LOANS TO GEBL SUBMIT TED THAT THERE WAS NO EVIDENCE ON RECORD TO SHOW ANY COMMERCIAL EXPEDIENC Y WHICH PROMPTED THE ASSESSEE TO GIVE LOANS TO THE SISTER CONCERN AT A CONCESSIONAL RATE OF INTEREST. HE ALSO RELIED UPON THE DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. V. CIT 286 ITR 1 (P&H) FOR THE PROPOSITION THAT IT IS FOR THE ASSESSEE TO SHOW THAT BORROWED FUNDS WERE USED FOR THE PURPOSE OF BUSINESS TO CLAI M DEDUCTION U/S. 36(1)(III) OF THE ACT AND THAT DIRECT NEXUS OF BORR OWED FUNDS BEING DIVERTED FOR NON-BUSINESS PURPOSE NEED NOT BE ESTABLISHED BY THE REVENUE. HIS SUBMISSION WAS THAT IN THE ABSENCE OF PROOF OF COMM ERCIAL EXPEDIENCY FOR GIVING LOANS AT A CONCESSIONAL RATE OF INTEREST, TH ERE WAS NO OCCASION FOR THE LD. CIT(A) TO APPLY THE RATIO OF THE HONBLE SU PREME COURT IN THE CASE OF S.A. BUILDERS V. CIT 288 ITR 1 (SC) . 11. ON THE DISALLOWANCE MADE BY THE AO U/S. 14A OF THE ACT, THE LD. DR SUBMITTED THAT THE VERY FACT THAT BORROWED FUNDS WE RE UTILIZED FOR MAKING INVESTMENTS IN SHARES IS ENOUGH TO JUSTIFY THE DISA LLOWANCE U/S. 14A OF THE ACT AND IT IS NOT NECESSARY THAT EXEMPT DIVIDEND IN COME SHOULD HAVE BEEN RECEIVED DURING THE PREVIOUS YEAR FROM SUCH INVESTM ENTS. IN THIS REGARD, RELIANCE WAS PLACED ON THE DECISION OF THE DELHI BE NCH OF ITAT IN THE CASE OF RELAXO FOOTWEARS LTD. V. ADDL. CIT (2012) 50 SOT 10 2 (DELHI) WHEREIN IT WAS LAID DOWN THAT EVEN IN THE ABSENCE O F INCOME WHICH IS NOT INCLUDIBLE IN THE TOTAL INCOME, PROVISIONS OF SECTI ON 14A OF THE ACT CAN STILL BE INVOKED TO DISALLOW EXPENDITURE RELATABLE TO INC OME NOT INCLUDIBLE IN THE TOTAL INCOME. ITA NO.879/BANG/2010 PAGE 7 OF 9 12. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS FAR AS THE DISALLOWANCE OF INTEREST EXPENDITURE ON LOANS GIVEN TO GEBL IS CONCERNED, THE LOANS HAD BEEN GIVEN IN THE PAST AND THEY HAVE BEEN ACCEPTED AS OWING TO COMMERCIAL EXPEDIENCY OR OUT OF OWN FUNDS AND NO INTEREST DISALLOWANCE WAS MADE IN THE PAST. SIMILAR SUBMIS SIONS WERE MADE WITH REGARD TO THE DISALLOWANCE U/S. 14A OF THE ACT ALSO . FURTHER RELIANCE WAS PLACED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. 313 ITR 340 (BOM) WHEREIN IT HAS BEEN LAID DOWN THAT THE OVERALL AVAILABILITY OF FUNDS SH OULD BE SEEN. IN THIS REGARD, THE LD. COUNSEL FOR THE ASSESSEE DREW OUR A TTENTION TO THE FUND POSITION OF THE ASSESSEE AS ON 01.04.2004 AND 31.03 .2005 AS UNDER:- TRANSACTIONS AND DUES FROM SUBSIDIARY OPENING 01.04.04 CLOSING 31.03.05 (RS. IN LAKHS) FUND POSITION OF THE ASSESSE INTEREST FREE FUNDS PAID UP SHARE CAPITAL 659.36 419.35 RESERVES & SURPLUS 1,148.66 1,593.74 TOTAL 1,808.02 2,013.09 WORKING CAPITAL BORROWING 793.21 1,440.57 IT WAS THE SUBMISSION THAT THERE WAS SUFFICIENT INT EREST FREE FUNDS AVAILABLE TO JUSTIFY INVESTMENT IN THE SUBSIDIARY AND CONCESS IONAL LOANS TO THE SISTER CONCERN. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. FROM A PERUSAL OF THE ORDER OF THE AO AND THE CIT(APPEALS), IT IS CLEAR T HAT THE LOAN TO THE SISTER CONCERN AT CONCESSIONAL RATE OF INTEREST AS WELL AS THE INVESTMENT IN THE SUBSIDIARY HAD NOT TAKEN PLACE DURING THE PREVIOUS YEAR. AS RIGHTLY ITA NO.879/BANG/2010 PAGE 8 OF 9 CONTENDED ON BEHALF OF THE ASSESSEE, THE REVENUE HA S ACCEPTED THE FACT THAT THE LOAN TO THE SISTER CONCERN AT CONCESSIONAL RATE OF INTEREST AND THE INVESTMENT IN THE SUBSIDIARY WERE EITHER OUT OF OWN FUNDS OR WERE OWING TO COMMERCIAL EXPEDIENCY. EVEN OTHERWISE, WE FIND THA T THE INVESTMENT IN THE SUBSIDIARY WAS ONLY IN THE NATURE OF AN ADVANCE FOR THE PURCHASE OF SHARES. SHARES HAD NOT BEEN ACTUALLY ALLOTTED AND THIS FACT IS CLEAR FROM THE SUBMISSION OF THE ASSESSEE BEFORE THE AO, WHICH IS RECORDED AT LAST PARAGRAPH OF PAGE 5 AND 1 ST PARAGRAPH OF PAGE 6 OF THE ASSESSMENT ORDER. IN SUCH CIRCUMSTANCES, IT CANNOT BE SAID THAT THE I NTEREST FREE LOANS ARE INVESTMENTS IN THE SUBSIDIARY FOR THE PURPOSE OF EA RNING INCOME WHICH WILL NOT FORM PART OF TOTAL INCOME UNDER THE ACT SO AS T O JUSTIFY INVOKING SECTION 14A OF THE ACT. WE ARE, HOWEVER, OF THE VIEW THAT THE PLEA OF COMMERCIAL EXPEDIENCY THOUGH HAS BEEN PLEADED BY THE ASSESSEE, BUT HAS NOT BEEN PROPERLY EXAMINED BY THE REVENUE AUTHORITIES. THE ASSESSEE HAD PLEADED THAT JMK RESEARCH FARM LTD. IN WHICH THE ASSESSEE H AD MADE ADVANCES FOR PURCHASE OF SHARES, WAS CLAIMED BY THE ASSESSEE TO BE A SUBSIDIARY COMPANY, WHICH HAD THE FACILITY FOR TESTING AND VAL IDATING PRODUCTS DEVELOPED FOR THE ASSESSEES CUSTOMER. HOWEVER, IN THE CASE OF GEBL, THE ASSESSEES PLEA OF COMMERCIAL EXPEDIENCY HAS BE EN QUITE VAGUE. WE ARE ALSO OF THE VIEW THAT THE LD. CIT(A) WHILE DELE TING THE ADDITION MADE BY THE AO ON ACCOUNT OF INTEREST DISALLOWANCE IN THE C ASE OF GEBL, HAS MERELY STATED THAT THE ADVANCES WERE GIVEN IN THE N ORMAL COURSE OF BUSINESS. IN THE REMAND REPORT BEFORE THE CIT(A) O N THE ASPECT OF DISALLOWANCE U/S. 14A OF THE ACT, THE AO HAS NOT SU BMITTED ANYTHING REGARDING COMMERCIAL EXPEDIENCY. IN THESE CIRCUMST ANCES, WE HOLD THAT ITA NO.879/BANG/2010 PAGE 9 OF 9 THE DISALLOWANCE U/S. 14A OF THE ACT CANNOT BE SUST AINED. IT HAS BEEN SHOWN THAT THE PROVISIONS OF SECTION 14A ARE NOT AP PLICABLE AS THERE WAS NO PURCHASE OF SHARES. THE DISALLOWANCE, IF AT ALL, C AN BE SUSTAINED ONLY U/S. 36(1)(III) OF THE ACT AND SINCE WE HAVE ALREADY FOU ND THAT THERE WAS COMMERCIAL EXPEDIENCY IN GIVING THE ADVANCE BY THE ASSESSEE TO ITS SUBSIDIARY, EVEN ON THIS BASIS THE DISALLOWANCE CAN NOT BE SUSTAINED. 14. AS FAR AS LOANS TO THE SISTER CONCERN GEBL AT C ONCESSIONAL RATE OF INTEREST IS CONCERNED, WE ARE OF THE VIEW THAT IT W OULD BE JUST AND APPROPRIATE TO DIRECT THE ASSESSING OFFICER TO EXAM INE THE AVAILABILITY OF OVERALL FUNDS IN THE LIGHT OF THE DECISION OF THE H ONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES & POWER LTD. ( SUPRA). 15. THUS, THE APPEAL OF THE REVENUE IS TREATED AS P ARTLY ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 29 TH DAY OF JUNE, 2012. SD/- SD/- ( N. BARATHVAJA SANKAR ) ( N.V. VASU DEVAN ) VICE PRESIDENT JUDICIAL MEMB ER BANGALORE, DATED, THE 29 TH JUNE , 2012. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY ITAT, BANGALORE.