Sikhwal Chemicals, PALI V. ITO, PALI

ITA 89/JODH/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 78231 (ITAT-JODHPUR)
• Duration Of Justice: 2 year(s) 4 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2008-2009
• Appeal Filed On: 21-02-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: N A JOSHI
• Assessee Lawyers: N R MERTIA
• Keywords: Capital asset; Notional interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELALTE TRIBUNAL : JODHPUR BENCH : JODHPUR BEFORE SHRI HARI OM MARATHA, JUDICIAL MEMBER AND SHRI N.K. SAINI, ACCOUNTANT MEMBER. ITA NO. 89 /J U/2012 (A.Y. 200 8 - 09 ) M/S. SIKHWAL CHEMICALS , VS. THE ITO , WARD 3, VILLAGE SAMOKHI, TEHSIL NIMAJ, PALI. JAITARAN, PALI , MARWAR . PAN NO. AACFS 7866 A (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI N.R. MERTIA. DEPARTMENT BY : SHRI N.A. JOSHI - D.R. DATE OF HEARING : 01 / 0 5 /201 4 . DATE OF PRONOUNCEMENT : 17/ 0 7 /201 4 . O R D E R PER N.K. SAINI, A.M TH IS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 22 /12 /2011 OF L D . CIT(A), J ODHPUR . THE GROUND S RAISED IN THIS APPEAL READ AS UNDER : - 1. THAT LEARNED LOWER AUTHORITIES HAS ERRED IN DISALLOWING INTEREST OF RS. 5,21,400/ - UNDER SECTION 36(1)(III) OF THE I.T. ACT WHICH IS BAD IN LAW AND BAD ON THE FACTS. 2 2. THAT LOWER AUTHORITIES HAS WRONGLY CALCULATED THE UTILIZATION AND SOURCE OF THE FUND, WHICH IS ALSO BAD IN LAW AND BAD ON THE FACTS. 3. THAT ASSESSEE CRAVES LIBERTY TO ADD, AMEND, ALTER, MODIFY, DELETE ANY GROUNDS OF APPEAL ON OR BEFORE THE DATE OF HEARING. 2 FACTS OF THE CASE , IN BRIEF, ARE THAT THE ASSESSEE FILED THE RETURN OF INCOME ON 26/09/2008 DECLARING TOTAL INCOME OF RS. 53,320/ - WHICH WAS PROCESSED U/S 143(1) OF THE I.T. ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT IN SHORT) ON 22/05/2009. THEREAFTER, CASE WAS SELE C TED FOR SCRUTINY. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD ADVANCED RS. 43,45,000/ - TO M/S. JAITARAN CHEMICALS P. LTD. THE EXPLANATION OF THE ASSESSEE WAS THAT THE ADVANCE WAS GIVEN FOR CAPITAL ASSET OF M/S. JAITARAN CHEMICALS P. LTD. , BUT UNFORTUNATELY THE SAID DEAL WAS NOT MATERIALIZE D AND THAT THE PAYMENT WAS ACTUALLY FOR PURE COMMERCIAL EXPEDIENCY. THE ASSESSING OFFICER , HOWEVER, DID NOT FIND MERIT IN THE SUBMISSIONS OF THE ASSESSEE BY OBSERVING TH A T COPIES OF TH E ACCOUNTS DID NOT SUGGEST THAT THE LENDING WERE OUT OF NON - INTEREST BEARING BORROWINGS. HE WAS OF THE VIEW THAT THE FUND GIVEN TO M/S. JAITARAN CHEMICALS P. LTD. WAS VERY MUCH RELATABLE TO THE INTEREST BEARING BORROWINGS. THE ASSESSING OFFICER POINTED OUT THAT THE BUSINESS ASSETS OF THE ASSESSEE WERE AT RS. 80,43,927/ - WHEREAS THE TOTAL INTEREST BEARING FUND S WERE AMOUNTING TO RS. 1,26,72,724/ - . HE WAS 3 OF THE VIEW THAT TH E INTEREST BEARING BORROWINGS WERE GIVEN TO M/S. JAITARAN CHEMICALS P. LTD. AS INTEREST FREE ADVANCE . THE ASSESSEE CLAIMED BEFORE THE ASSESSING OFFICER THAT THE PURCHASE S WERE BEING MADE FROM M/S. JAITARAN CHEMICALS P. LTD. , HOWEVER, THE ASSESSING OFFICER DID NOT ACCEPT THE SAID CLAIM AND WORKED OUT THE INTEREST @ 12% ON RS. 43,45,000/ - WHICH CAME TO RS. 5,21,400/ - . THE SAID AMOUNT WAS DISALLOWED. 3. BEING AGGRIEVED, THE ASSESSEE CARRIED THE MATTE R TO THE LD. CIT(A) AND SUBMITTED THAT THE ASSESSEE INTEND ED TO EXPAND THE PRODUCTION CAPACITY OF THE FIRM WHEREAS M/S. JAITARAN CHEMICALS P. LTD. WAS A SICK AND DEFUNCT COMPANY AND ALL THE ASSETS OF THE SAID COMPANY WERE SEIZED BY RFC DUE TO DEFAULT IN REPAYMENT OF LOAN. IT WAS FURTHER SUBMITTED THAT THE RFC WAIVED THE INTEREST ON TERM LOAN SUBJECT TO CONDITION THAT THE TOTAL DUE PRINCIPAL AMOUNT SHOULD BE DEPOSITED WITHIN THE TIME PRESCRIBED AND THE ASSESSEE AGREED TO SUPPORT THE COMPANY IN CONSIDERAT ION OF THE ACQUISITION OF THE CAPITAL ASSET EITHER ON LEASE OR FOR THE PURPOSE OF EXPANSION OF THE PRODUCTION CAPACITY. IT WAS CONTENDED THAT THE ASSESSEE HAD DIRECTLY PAID TO RFC AS PER SETTLEMENT SCHEME ON BEHALF OF THE COMPANY AND PAID THE SUM ON THE B USINESS EXPEDIENCY AND 4 THAT THE ASSESSEE WOULD OBTAIN THE EXTRA PRODUCTION CAPACITY FOR CONTINUE D SUPPLY . IT WAS FURTHER STATED THAT THE ASSESSING OFFICER WAS UNDER WRONG PRESUMPTION THAT THE ASSESSEE HAD DIVERTED THE INTEREST BEARING FUND TO SISTER CONCERN WITHOUT INTEREST WHEREAS THIS FUND WAS GIVEN UNDER COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF THE EXPANSION OF THE PRODUCTION CAPACITY OF THE ASSESSEE FIRM. THEREFORE, THE INTEREST PAID ON THE BORROWINGS WAS ALLOWABLE EXPENDITURE U/S 36(1)(III) OF T HE ACT. 4. THE LEARNED CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, SUSTAINED THE DISALLOWANCE BY OBSERVING IN PARA 5.3 OF THE IMPUGNED ORDER WHICH READS AS UNDER: - 5.3 I HAVE CONSIDERED THE ORDER OF THE ASSESSING OFFICER AND SUBMISSION OF THE APPELLANT AND I FIND THAT IN THE APPEAL THE MAIN ISSUE IS REGARDING TO UTILIZATION OF THE INTEREST BEARING FUND TOWARD INTEREST FREE BORROWINGS. THE APPELLANT HAS SUBMITTED TH A T THE ADVANCE WAS FOR THE BUSINESS PURPOSE AND ADVANCE WAS MADE TO HIS SIS TER CONCERN AS A MAJOR OF COMMERCIAL EXPEDIENCY. THE ASSESSING OFFICER HAS DISALLOWED THE INTEREST PAYMENT PROPORTIONATELY ON THE BASIS OF DIVERSION OF INTEREST FREE FUND. THE APPELLANT WAS FAILED TO EXPLAIN THAT THE ABOVE AMOUNT WAS FROM NON INTEREST BE A RING BORROWINGS. NO SUCH CALCULATION WAS PROVIDED TO THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS CALCULATED THE INTEREST BEARING FUND AS PER RECORD WHICH WAS RS. 83,43,972/ - , WHEREAS THE TOTAL INTEREST BEARING FUND WITH THE ASSESSEE WAS RS. 1,26,72 ,274/ - . SO, HE CONCLUDED THAT THE INTEREST BEARING BORROWING WAS GIVEN TO M/S. JAITARAN CHEMICALS P. LTD. AS INTEREST FREE ADVANCE. THE TOTAL OF INTEREST BEARING FUND WAS RS. 1,26,72,274/ - . THE APPELLANT HAS RELIED THE DECISION OF HON'BLE SUPREME COURT IN CASE OF S.A. BUILDERS LTD. VS. CIT REPORTED IN 206 CTR 631, WHERE IT IS HELD THAT INTEREST 5 ON BORROWING FUNDS CANNOT BE DISALLOWED IF THE ASSESSEE HAS ADVANCE D INTEREST FREE LOAN TO A SISTER CONCERN AS MA JOR OF COMMERCIAL EXPEDIENCY. THE FACTS OF THE ABOVE CASE IS NOT APPLICABLE IN THE PRESENT CASE BEING THE APPELLANT FAILED TO PROVE THAT THERE IS ANY COMMERCIAL EXPEDIENCY AND BUSINESS PUR POSE. SINCE THE APPELLANT COULD NOT PROVE THE COMMERCIAL EXPEDIENC Y AND BUSINESS PURPOSE OF THE ABOVE, SO THE FACTS OF CASES RELIED ARE NOT APPLICABLE IN THIS CASE . UNDER SEC. 36(1)(III) , AMOUNTS DIVERTED NOT BEING USED FOR THE PURPOSES OF THE BUSINESS, INTEREST RELATING TO THE PORTION DIVERTED CANNOT BE TREATED AS AN I TEM OF PERMISSIBLE DEDUCTION IN THE COMPUTATION OF INCOME . IF A BUSINESS FOR WHICH THE INTEREST PAID IS CLAIMED AS A DEDUCTION HAS NO T BENEFITED DURING THE YEAR FROM THE CAPITAL BORROWED, BY SUCH BORROWED AMOUNT BEING USED IN THE BUSINESS, SUCH INTEREST CANN OT BE REGARDED AS EXPENDITURE FOR THE PURPOSES OF THE BUSINESS . FROM THE ABOVE FACTS, IT IS CLEAR THAT THE APPELLANT HAS UTILIZED INTEREST BEARING FUND TOWARDS THE INTEREST FREE ADVANCE AND THERE IS CLEAR NEXUS BETWEEN THE INTEREST BE A RING BORROWING AND THAT OF THE INTEREST FREE ADVANCE. SO THE ASSESSING OFFICER IS JUSTIFIED TO CALCULATE 12% ON AMOUNT OF RS. 43,45,000 / - (INTEREST FR EE ADVANCE) WHICH COMES TO RS. 5,21,400/ - . NOW THE ASSESSEE IS IN APPEAL. 5. LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND FURTHER SUBMITTED THAT THE ASSESSEE WANTED TO EXPAND ITS BUSINESS AND FOR THAT PURPOSE, AGREED TO SUPPORT THE SICK COMPANY M/S. JAITARAN CHEMICALS P. LTD. IN CONSIDERATION OF ACQUISITION OF CAPITAL ASSETS OF THE SAID COMPANY AND FOR THAT PU R POSE , THE ASSESSEE DIRECTLY PAID TO RFC AS PER SETTLEMENT SCH EME ON BEHALF OF THE SAID COMPANY. THEREFORE, ADVANCE GIVEN WAS RELATING TO THE ASSETS WHICH WERE TO BE TAKEN OVER BY THE ASSESSEE, SO THERE WAS A BUSINESS 6 EXPE D I ENCY . I T WAS ALSO STA TED THAT INTEREST BEARING FUNDS WERE NOT DIVERTED , T HEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF NOTIONAL INTEREST WAS NOT JUSTIFIED. 6 . IN HIS RIVAL SUBMISSIONS, LEARNED D.R. STRONGLY SUPPORTED THE IMPUGNED ORDER PASSED BY THE LD. CIT(A) AND REITERATED THE OBSERVATIONS MADE IN PARA 5.3 OF THE IMPUGNED ORDER. 7 . WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND CAREFULLY GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. IN THE PRESENT CASE , THIS CONTENTION OF THE ASSESSEE THAT A SUM OF RS.43,45,000/ - WAS GIVEN TO THE RAJAS THAN FINANCIAL CORPORATION ON BEHALF OF M/S. JAITARAN CHEMICALS P. LTD. A SICK AND DEFUNCT COMPANY WAS NOT REBUTTED . THE SAID PAYMENT WAS MADE BECAUSE THE ASSESSEE WANTED TO ACQUIRE THE ASSETS WHICH WERE NEEDED FOR EXPANSION OF ITS PRODUCTION CAPACITY, THEREFORE, THERE WAS A COMMERCIAL EXPEDIENCY AND THE ADVANCE WAS GIVEN TO ACQUIRE THE CAPITAL ASSETS TO OBTAI N THE EXTRA PRODUCTION CAPACITY. S O , BY KEEPING IN VIEW THE ABOVE FACTS, WE ARE OF THE VIEW THAT THERE WAS NO DIVERS I O N OF FUNDS FOR NON - BUSINESS PURPOSES AS SUCH THE NOTIONAL INTEREST DISALLOWED BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT(A) WAS NOT JUSTIFIED. 7 T HEREFORE, THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND SUSTAINED BY THE LD. CIT(A) IS DELETED . 8 . IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ( ORDER PRONOUNCED IN THE COURT ON 17 TH JULY , 201 4) . SD/ - SD/ - ( HARI OM MARATHA ) (N.K.SAINI) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 17 TH JULY , 201 4 . VR/ - COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE LD. CIT 4. THE CIT(A) 5. THE D.R ASSISTANT REGISTRAR, ITAT, JODHPUR .