M/s. Associated Electrical Agencies, CHENNAI V. ITO, CHENNAI

ITA 892/CHNY/2012

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 96507 (ITAT-CHENNAI)
• Duration Of Justice: 3 year(s) 7 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-12-2015
• Appeal Filed By: Assessee
• Bench Allotted: C
• Next Hearing Date: 24-11-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 20-04-2012
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH
• Assessee Lawyers: S SRIDHAR
• Keywords: Business expenditure; Earning of tax free income
• Section: 14A

Judgement Text

, , IN THE INCOME - TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . , BEFORE SHRI CHANDRA POOJARI , ACCOUNTANT MEMBER & SHRI DUVVURU RL REDDY , JUDICIAL MEMBER ./ I.T.A.NO. 892/MDS/2012 / ASSESSMENT YEAR :200 7 - 0 8 M/S. ASSOCIATED ELECTRICAL AGENCIES, POTTIPATTI PLAZA, IIND FLOOR, NUNGAMBAKKAM HIGH ROAD, CHENNAI 600 034. [PAN: A A BFA3270B ] VS. THE INCOME TAX OFFICER , WA RD XV(1) , CHENNAI 600 034. ( / APPELLANT ) ( / RESPONDENT ) / APPELLANT BY : SHRI S. SRIDHAR , ADVOCATE / RESPONDENT BY : SHRI A. V. SREEKANTH , J CIT / DATE OF HEARING : 24 . 1 1 .201 5 / DATE OF P RONOUNCEMENT : 11 . 1 2 .201 5 / O R D E R PER DUVVURU RL REDDY , JUDICIAL MEMBER : TH IS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX ( APPEALS ) XII , CHENNAI , D ATED 15 . 0 2 .20 1 2 RELEVANT TO THE ASSESSMENT YEAR 200 7 - 0 8 . THE FIRST EFFECTIVE GROUND RAISED IN THE APPEAL OF THE ASSESSEE IS RELATING TO DISALLOWANCE OF INTEREST PAYMENTS OF .32,38,939/ - AND THE SECOND GROUND IS WITH REGARD TO DISALLOWANCE OF 5% OF EXPENS ES RELATABLE TO EARNING OF EXEMPT INCOME. I.T.A. NO . 892 /M/ 12 2 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF TRADING IN BATTERY TORCHES AND FLUORESCENT LAMPS AND FILED ITS RETURN ADMITTING NIL INCOME. THE RETURN FILED BY THE ASSESSEE WAS PROCESSED UNDER SECTION 143(1) OF THE INCOME TAX ACT, 1961 [ ACT IN SHORT] . THE CASE OF THE ASSESSEE WAS TAKEN UP FOR SCRUTINY AND NOTICE UNDER SECTION 143(2) OF THE ACT WAS ISSUED. AFTER PERUSING THE BOOKS OF ACCOUNT, BANK STATEMENT AND OTHER DETAILS WIT H BILLS/VOUCHERS, WHILE EXAMINING THE INTEREST AND FINANCE CHARGES, THE ASSESSING OFFICER HAS OBSERVED THAT IN THE EARLIER YEARS, THE ASSESSEE HAD OCC FACILITY WITH BANK OF BARODA AND THE INTEREST AND FINANCE CHARGES DEBITED TO THE PROFIT AND LOSS ACCOUNT INCLUDE THE OCC INTEREST AND THE SAME WAS DISALLOWED. THE EARLIER YEAR DISALLOWANCE WAS CONFIRMED BY THE LD. CIT(A). DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS SWITCHED OVER FROM BANK OF BARODA OCC TO HDFC OCC FACILITY AND THE CORRESPONDING INTEREST DEBITED IN THE P & L ACCOUNT WAS .32,38,939/ - . IN VIEW OF THE DECISION OF THE LD. CIT(A) IN THE EARLIER ASSESSMENT YEAR, THE ASSESSING OFFICER MADE DISALLOWANCE OF .32,38,939/ - FOR YEAR UNDER CONSIDERATION. 3. ON APPEAL BEFORE THE LD. CIT(A) , THE AR OF THE ASSESSEE HAS SUBMITTED THAT THE LOANS AND ADVANCES MADE ARE AS PER THE BUSINESS REQUIREMENTS, HOWEVER, HE COULD NOT SUBSTANTIATE THE SAME. THEREFORE, THE LD. CIT(A) BY FOLLOWING THE DECISION IN THE CASE OF K. SOMASUNDARAM & BROS I.T.A. NO . 892 /M/ 12 3 V. CIT 238 ITR 939 (MAD) , CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER. 4. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AND THE LD. COUNSEL FOR THE ASSESSEE HAS SUBMITTED THAT THE LD. CIT(A) HAS WRONGLY SUSTAINED THE DISALLOWANCE OF THE CLAI M OF THE INTEREST PAYMENTS OF .32,38,939/ - WITHOUT ASSIGNING PROPER REASONS AND JUSTIFICATION. 5. ON THE OTHER HAND, THE LD. DR STRONGLY SUPPORTED THE ORDERS OF AUTHORITIES BELOW. 6. WE HAVE HEARD BOTH SIDES, PERUSED THE MATERIALS ON RECORD AND GONE THROUGH THE ORDERS OF AUTHORITIES BELOW. THE ASSESSEE HAD OCC FACILITY WITH BANK OF BARODA IN THE EARLIER YEARS AND DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE SWITCHED OVER FROM BANK OF BARODA OCC TO HDFC OCC AND THE INTEREST AND FINANCE CHARGE S DEBITED TO THE PROFIT AND LOSS ACCOUNT INCLUDE THE OCC INTEREST. THEREFORE, THE CORRESPONDING INTEREST DEBITED IN THE P & L ACCOUNT OF .32,38,939/ - WAS DISALLOWED BY THE ASSESSING OFFICER. ON APPEAL, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE BY FOLLOWING THE DECISION OF THE HON BLE JURISDICTIONAL HIGH COURT IN THE CASE OF K. SOMASUNDARAM & BROS V. CIT (SUPRA) , WHEREIN THE HON BLE HIGH CO URT HAS OBSERVED AND HELD AS UNDER: IN CASES WHERE DIVERSION OCCURS IMMEDIATELY AFTER THE BORROWING AND THE BORROWED AMOUNTS ARE NOT INVESTED IN THE BUSINESS AT ALL, BUT DIVERTED I.T.A. NO . 892 /M/ 12 4 FOR OTHER PURPOSES, THERE CAN BE NO DOUBT THAT INTEREST PAID ON SUCH BORROWE D AMOUNTS ARE NOT ALLOWABLE. THE POSTPONEMENT OF DIVERSION, IN CASES WHERE SUCH DIVERSION IS FOUND TO BE CLEARLY ESTABLISHED FROM THE FACTS ON RECORD, DOES NOT ENTITLE THE ASSESSEE TO CLAIM THE BENEFIT OF DEDUCTION ON INTEREST PAID ON THE AMOUNTS BORROWED BUT NOT PRESENTLY USED IN ITS BUSINESS DIVERTED FOR OTHER PURPOSES. THE TIME AT WHICH THE DIVERSION TAKES PLACE IS NOT THE ONLY RELEVANT CRITERION. IT IS THE FACT OF THE DIVERSION WHICH IS MATERIAL AND ONCE IT HAS BEEN SHOWN THAT THERE HAS BEEN DIVERSION O F INTEREST ON THE AMOUNT BORROWED, BUT SUBSEQUENTLY DIVERTED WOULD NOT QUALIFY FOR DEDUCTION. ANY VIEW TO THE CONTRARY WOULD NOT IN THE LEAST SUBSERVE THE OBJECT OF THE PROVISION, BUT IT WOULD ONLY OPEN THE GATES FOR THE ASSESSEES TO BORROW MERRILY AND A FTER OSTENSIBLY USING IT IN THE BUSINESS FOR A SHORT PERIOD AT A SUBSEQUENT POINT OF TIME DIVERT THE FUNDS IN WHOLE OR PART, FOR NON - BUSINESS PURPOSES AND CONTINUE TO CLAIM THE INTEREST ON THE BORROWING AS A DEDUCTIBLE ITEM OF EXPENDITURE. THE OBJECTS OF T HE SECTION WOULD NOT IN ANY WAY BE ADVANCED BY THE ADOPTION OF SUCH A VIEW. IF A BUSINESS FOR WHICH THE INTEREST PAID IS CLAIMED AS A DEDUCTION HAS NOT BENEFITED DURING THE YEAR FROM THE CAPITAL BORROWED BY SUCH BORROWED AMOUNT BEING USED IN THE BUSINESS, SUCH INTEREST CANNOT BE REGARDED AS AN EXPENDITURE FOR THE PURPOSES OF THE BUSINESS. THE ASSESSEE MAY NOT EVEN WHILE USING BORROWED FUNDS FOR ITS PERSONAL PURPOSES AND NOT BUSINESS PURPOSES CLAIM DEDUCTION OF THE INTEREST PAID ON THE BORROWING. IN CASES, WHERE THE DIVERSION TAKES PLACE AFTER THE BORROWED MONIES HAD BEEN INITIALLY INVESTED IN THE BUSINESS, SUCH DIVERSION MUST BE CLEARLY ESTABLISHED AND SHOULD NOT BE A MATTER OF MERE SPECULATION. IN THIS CASE, THE FACTS ARE SUFFICIENTLY CLEAR TO WARRANT THE FINDING THAT THERE HAS BEEN A DIVERSION, IT IS THE ASSESSEE'S OWN CASE THAT THE AMOUNTS LENT AS ADVANCES WITHOUT INTEREST ARE NEARLY THREE TIMES THE AMOUNT OF CAPITAL LYING TO THE CREDIT OF THE PARTNERS IN THE FIRM. THE AMOUNT SO LENT, ACCORDING TO THE AS SESSEE, CAME OUT OF THE CONTRACT EARNINGS. THE AMOUNT BORROWED, ACCORDING TO THE ASSESSEE WAS INVESTED IN THE EXECUTION OF THE CONTRACTS. IT IS CLEAR, THEREFORE, THAT THE ASSESSEE HAD INVESTED THE BORROWED FUNDS IN THE EXECUTION OF THE CONTRACTS, HAD RECOU PED THE MONEY SO INVESTED PRESUMABLY WITH PROFITS AS WELL ON EXECUTING THE CONTRACT. THE AMOUNT REALISED ON THE EXECUTION THUS, INCLUDED THE AMOUNT WHICH THE ASSESSEE HAD BORROWED AND INVESTED. WHEN THE ASSESSEE DECIDED TO LEND A SUBSTANTIAL PART OF THOSE FUNDS INTEREST - FREE TO THE RELATIVES OF THE PARTNERS, IT WAS CLEARLY NOT A BUSINESS PURPOSE. THE ASSESSEE CLEARLY DIVERTED THE FUNDS WHICH HAD BEEN BORROWED, HAD BEEN INVESTED IN THE CONTRACT WORK, AFTER THE INVESTMENT WAS RECOVERED AND WAS AVAILABLE EITHE R FOR THE PURPOSES OF THE BUSINESS OR BY WAY OF REPAYMENT OF THE LOAN. THE ASSESSEE DID NEITHER, BUT CHOSE TO DIVERT THE MONEY FOR NON - BUSINESS PURPOSES. AFTER SUCH DIVERSION, THE INTEREST PAID ON THE CAPITAL BORROWING TO THE EXTENT OF THE AMOUNTS DIVERTED CAN NO LONGER BE AN ITEM OF EXPENDITURE WHICH CAN BE CLAIMED FOR DEDUCTION AS AN ITEM OF I.T.A. NO . 892 /M/ 12 5 BUSINESS EXPENDITURE, IF THE AMOUNTS DIVERTED WAS SUBSEQUENTLY BROUGHT BACK INTO THE BUSINESS AND UTILISED IN THE BUSINESS, THE ASSESSEE COULD THEREAFTER CLAIM THE IN TEREST PAID AS A DEDUCTION. BUT SO LONG AS THE DIVERSION CONTINUES THE ASSESSEE WOULD BE DISENTITLED. 7. THE ASSESSEE IS NOT ENTITLED TO CLAIM THE INTEREST EXPENDITURE ON THE BORROWED FUNDS, IF IT WAS DIVERTED FOR NON - BUSINESS PURPOSE AND UTILIZED FOR G IVING INTEREST - FREE ADVANCE TO PARTNERS/SISTER CONCERN. THE LD. CIT(A) HAS OBSERVED THAT THE TOTAL AMOUNT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS HARDLY .3.04 CRORES [PARTNERS CAPITAL + CURRENT ACCOUNT] PLUS .0.35 CRORES BY WAY OF CURRENT LIABILITIES, WHEREAS, THE ASSESSEE HAS ADVANCED INTEREST FREE LOANS/ADVANCES TO THE TUNE OF .32.38 CRORES AND MAJORITY OF THE SAID LOANS/ADVANCES ARE TO THE PARTNERS, RELATED PERSONS/SISTER CONCERNS. WE FIND THAT IN VIEW OF THE ABOVE DECISION OF THE HON BLE HIGH COURT, THE LD. CIT(A) HAS RIGHTLY CONFIRMED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND WE FIND NO INFIRMITY IN THE ORDER PASSED BY THE LD. CIT(A). THUS, THE GROUND RAISED BY THE ASSESSEE IS DISMISSED. 8. THE NEXT ISSUE RAISED IN THE APPEAL OF THE ASSESSEE IS WITH REGARD TO DISALLOWANCE OF EXPENSES RELATABLE TO EARNING OF EXEMPT INCOME. DURING THE COURSE OF FIRST APPELLATE PROCEEDINGS, THE LD. C I T(A) HA S NOTICED THAT THE ASSESSEE S INCOME INCLUDED EXEMPTED INCOME AND THE ASSESSEE H AS NOT SEGREGATED AND EXCLUDED ANY EXPENDITURE PERTAINING TO THE EXEMPTED INCOME. ACCORDINGLY, THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE PROVISIONS OF SECTION 14A SHOULD NOT BE INVOKED AND THE EXPENSES INCURRED I.T.A. NO . 892 /M/ 12 6 WHILE EARNING THE EXEMPTED INCOME BE DISALLOWED. BEFORE THE LD. CIT(A), THE ASSESSEE HAS, BY RELYING THE DECISION IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. V. DCIT 328 ITR 81 (BOM), SUBMITTED THAT RULE 8D IS APPLI CABLE FOR ASSESSMENT YEAR 2008 - 09 AND ONWARDS AND NOT RETROSPECTIVELY AND MOREOVER, THE ASSESSMENT YEAR UNDER CONSIDERATION IS 2007 - 08, RULE 8 D IS NOT APPLICABLE. AFTER EXAMINING THE PROFIT AND LOSS ACCOUNT, BALANCE SHEET, ETC. AND BY FOLLOWING THE DECISI ON OF THE TRIBUNAL IN THE CASE OF IND BANK MERCHANT SECURITIES LTD. IN I.T.A. NO. 420/(MDS)/98 DATED 14.04.2004, THE LD. CIT(A) WORKED OUT THE REASONABLE EXPENSES ATTRIBUTABLE TO EARNING TAX FREE DIVIDENDS TO THE EXTENT OF .1,40,700/ - , BEING 5% OF THE DIVIDENDS OF .28,14,000/ - AND ENHANCED THE ASSESSMENT. 9. AGGRIEVED, THE ASSESSEE IS IN APPEAL. BY RELYING THE ORDER OF THE TRIBUNAL IN ASSESSEE S OWN CASE FOR EARLIER ASSESSMENT YEAR IN I.T.A. NO. 407/MDS/2012 DATED 09.05 .2013, THE DISALLOWANCE MADE AT THE RATE OF 5% IS ON HIGHER SIDE AND PRAYED THAT THE DISALLOWANCE MAY BE RESTRICTED TO 2%. 10. ON THE OTHER HAND, THE LD. DR SUPPORTED THE ORDER PASSED BY THE LD. CIT(A). 11. AFTER HEARING BOTH SIDES, WE FIND THAT THE C OORDINATE BENCH OF THE TRIBUNAL, IN ASSESSEE S OWN CASE FOR THE ASSESSMENT YEAR 2005 - 06 IN I.T.A. NO. 407/MDS/2012 (SUPRA), HAS OBSERVED AS UNDER: I.T.A. NO . 892 /M/ 12 7 9. NOW, WE COME TO THE SECOND ISSUE OF DISALLOWANCE U/S 14A (SUPRA). THE ASSESSEE S EXEMPT INCOME BY WAY OF DIVIDEND IS OF .28,14,000/ - AND DISALLOWANCE HAS BEEN MADE AT THE RATE OF 5% OF TOTALING .1,40,700/ - . THE CONTENTION OF THE ASSESSEE IS THAT DISALLOWANCE IS EXCESSIVE. IN SUPPORT, IT CITES CASE LAW OF HON BLE JURISDICTIONAL HIGH COURT DATED 15.10.2012 I N TAX CASE NO. 2621 OF 2006 TITLED AS M/S. SIMPSON & CO. LTD. V. DCIT, CHENNAI CONFIRMING SUCH DISALLOWANCE AT THE RATE OF 2%. THOUGH THE REVENUE SUPPORTS THE DISALLOWANCE @ 5% OF THE DIVIDEND AMOUNT, HOWEVER, GUIDED BY THE ABOVE SAID CASE LAW, WE MODIFY I T @ 2% OF THE EXEMPT INCOME. 12. IN VIEW OF THE ABOVE FINDINGS OF THE COORDINATE BENCH OF THE TRIBUNAL, WE ALSO DIRECT THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE OF EARNING OF EXEMPT INCOME @ 2% OF THE DIVIDEND AMOUNT ONLY. ACCORDINGLY, THE GRO UND RAISED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 13. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES . ORDER PRONOUNCED ON THE 11 TH DECEMBER , 2015 AT CHENNAI. SD/ - SD/ - ( CHANDRA POOJA RI ) ACCOUNTANT MEMBER ( DUVVURU RL REDDY ) JUDICIAL MEMBER CHENNAI, DATED, THE 11 .1 2 .201 5 VM/ - / COPY TO: 1. / APPELLANT , 2. / RESPONDENT , 3. ( ) / CIT(A) , 4. / CIT , 5. / DR & 6. / GF.