ACIT, Bangalore V. M/s IDS Systems Pvt. Ltd., Bangalore

ITA 908/BANG/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 5655 (ITAT-BANGALORE)
• Duration Of Justice: 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-04-2011
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 24-02-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 16-07-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JACINTA ZIMIK VASHAI
• Assessee Lawyers: V SRINIVASAN
• Keywords: Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI GEORGE GEORGE K., JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.908/BANG/2010 ASSESSMENT YEAR : 2006-07 THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE 11(4), BANGALORE. : APPELLANT VS. M/S. IDS SYSTEMS PVT. LTD., NO.105/3, GLOBE HOUSE, RICHMOND ROAD, BANGALORE. : RESPONDENT APPELLANT BY : SMT. JACINTA ZIMIK VASHAI, ADDL. CIT (DR) RESPONDENT BY : SHRI V. SRINIVASAN, C.A. O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL IS PREFERRED BY THE REVENUE DIRECTED A GAINST THE ORDER OF LD. CIT(A)-I IN ITA NO.164/AC-11(4)/AI/08-09 DAT ED 28.4.2010 FOR THE ASSESSMENT YEAR 2006-07. 2. THE REVENUE HAS RAISED SIX GROUNDS. GROUND NOS. 1, 5 & 6 ARE GENERAL IN NATURE AND DOES NOT SURVIVE FOR ADJUDICA TION. THE ONLY ISSUE WHICH SURVIVES FOR ADJUDICATION ARISING OUT OF GROU ND NOS.2, 3 & 4 IS THAT THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO ITA NO. 908/BANG/10 PAGE 2 OF 6 RS.18,36,000 ON ACCOUNT OF DISALLOWANCE OF INTEREST PAID TO M/S. LORD KRISHNA BANK SINCE THE AMOUNT BORROWED BY THE APPEL LANT WAS GIVEN AS INTEREST FREE SECURITY DEPOSIT TO M/S. ASM TECHNOLO GIES PVT. LTD., THOUGH IT WAS HELD BY THE LD. CIT(A) THAT THERE WAS NO COMMER CIAL EXPEDIENCY IN THE TRANSACTION WITH M/S. ASM TECHNOLOGIES PVT. LTD. OT HER THAN SAVINGS ON ACCOUNT OF RENT PAYMENT TO M/S. ASM TECHNOLOGIES PV T. LTD. 3. THE APPELLANT IS A PRIVATE LIMITED COMPANY ENGAG ED IN THE BUSINESS OF SOFTWARE DEVELOPMENT AND SERVICES. IT FILED ITS RETURN OF INCOME FOR THE A.Y. 2006-07 ON 27.11.06 DECLARING A TAXABLE INCOME OF RS.7,33,680. INITIALLY AFTER THE RETURN BEING PROCESSED U/S. 143 (1) OF THE ACT, THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSMENT WAS CO MPLETED U/S. 143(3) OF THE ACT ON 26.12.2008. 4. THE LD. AO IN HIS ORDER DATED 26.12.2008 DISALLO WED AN AMOUNT OF RS.18,36,000 BEING THE INTEREST PAID BY THE APPELLA NT ON ACCOUNT OF BORROWINGS MADE FROM THE BANK WHICH WAS SUBSEQUENTL Y GIVEN TO M/S. ASM TECHNOLOGIES LTD. AS SECURITY DEPOSIT TO PROVID E OFFICE SPACE FOR ITS USE. IT WAS ALSO NOTED BY THE LD. AO THAT THE APPE LLANT HAD PROVIDED THE BANK WITH COLLATERAL SECURITY FOR THE LOAN OBTAINED BY DEPOSITING THE TITLE DEED OF THE OFFICE PREMISES BELONGING TO M/S. ASM T ECHNOLOGIES LTD.,(THE PREMISES OCCUPIED BY THE APPELLANT IN LIEU OF THE L OAN EXTENDED). LD. AO AFTER A DETAILED EXAMINATION ARRIVED AT A CONCLUSIO N THAT THE APPELLANT DID NOT HAVE ENOUGH MATERIAL TO ESTABLISH THAT IT HAD U TILIZED THE LOAN FOR THE PURPOSE OF ITS BUSINESS AND ALSO COULD NOT FURNISH SUFFICIENT EVIDENCE TO ESTABLISH BUSINESS EXPEDIENCY. ITA NO. 908/BANG/10 PAGE 3 OF 6 5. ON THE MATTER BEING BROUGHT BEFORE THE LD. CIT(A ), THE LD. CIT(A) IN PARA 4.3 AND 4.3.1 OF THE ORDER HELD THERE WAS NO C OMMERCIAL EXPEDIENCY IN THE TRANSACTION. HOWEVER, IN PARA 4.4 HE HELD T HAT THERE WAS SAVINGS IN RENT LEADING TO COMMERCIAL EXPEDIENCY THEREBY DELET ING THE ADDITION OF RS.18.36 LAKHS. THE RELEVANT PARAS OF THE LD. CIT( A)S ORDER IS REPRODUCED HEREINBELOW FOR REFERENCE: 4.3 SUCH IS THE LEGAL EXPOSITION OF THE PRINCIPLES OF COMMERCIAL EXPEDIENCY. IN ORDER TO BRING ANY EXPEN DITURE IN THE AMBIT OF COMMERCIAL EXPEDIENCY OR BUSINESS PRUDE NCE IT HAS TO BE SHOWN INEVITABLY THAT THERE EXISTS SOME CONNE CTION BETWEEN THE EXPENDITURE AND THE BUSINESS PURPOSE OF THE ASS ESSEE. HERE I FIND NO SUCH CONNECTION. AN ANALYSIS OF THE LOAN S ANCTION ORDERS OF LKB SHOW THAT, THOUGH THE LOAN HAS BEEN SANCTION ED IN THE NAME OF THE APPELLANT, THE COLLATERAL SECURITY KEPT FOR SANCTION OF LOAN IS THE LAND AND BUILDING OF ASM LOCATED IN 80/ 2, LUSSANE COURT, RICHMOND ROAD, BANGALORE AND PRIMARY SECURIT Y IS THE RECEIVABLES OF THE APPELLANT. IN OTHER WORDS, IF THE APPELLANT FAILS TO PAY THE LOAN PLUS INTEREST, THE AMOUNT HAS TO BE RECOVERED FROM SALE OF PROPERTY OF ASM AND THUS THE INEVITABLE COR OLLARY, NO STAKE OF THE APPELLANT IN THE LOAN. IT SEEMS TO ME THE APPELLANT HAS ACTED AS A NAMELENDER ONLY, TO ENABLE THE ASM T O OBTAIN THE LOAN OF WHICH IT IS IN DIRE NEED TO USE THE SAME AS ITS WORKING CAPITAL WHICH, PROBABLY ON ITS OWN, COULD NOT HAVE BEEN ABLE TO OBTAIN. 4.3.1 THUS IT IS NOT THE APPELLANT BUT IN ASMS CASE THE PRINCIPLES OF COMMERCIAL EXPEDIENCY FITS IN BECAUSE IT HAS BEEN ABLE TO UTILIZE THE GOOD WILL AND REPUTATION OF THE APPELLANT TO GET THE LOAN (WORKING CAPITAL) OF RS.3 CRORES. HOWEVER , THE APPELLANT IS TRYING TO TAKE ADVANTAGE OF THE SITUATION IN THE SHAPE OF REAPING THE BENEFIT OF DEDUCTION ON ACCOUNT OF INTEREST PAY MENT TO LKB BECAUSE IT HAS NO OTHER GO BUT TO FOLLOW THE ACCEPT ED ACCOUNTING PROCEDURE BECAUSE THE LOAN IS IN ITS NAME. IT IS A LSO STATED TO HAVE THE BENEFIT OF SPACE OF ASM UTILISATION OF WHICH RE SULTED IN 17 TIMES ENHANCEMENT OF ITS TURNOVER. THUS I FIND, EV EN IF THE APPELLANT HAS NO STAKE NOR ANY RISK ELEMENT IN OBTA INING THE LOAN FROM LKB, IT IS PAYING INTEREST OF RS.18.36 LAKHS P ER ANNUM. THE ARGUMENT THAT THE TURNOVER IS INCREASED 17 TIMES BE CAUSE SUCH HUGE ENHANCEMENT CANNOT SOLELY DEPEND UPON ANY SING LE FACTOR. I CONSIDER SUCH ENHANCEMENT IS BY DINT OF MOTIVATION, LABOUR AND KNOWLEDGE OF ITS EMPLOYEES AND NOT DEPENDENT UPON T HE ITA NO. 908/BANG/10 PAGE 4 OF 6 UTILISATION OF SPACE OF 11,000 SQ.FT. THROUGH TWO C ONTRACTS DATED 01-03-2005 AND 01-09-2005. 4.4 THE OTHER ARGUMENT OF A.R. IN THIS REGARD IS SA VINGS ON ACCOUNT OF RENT PAYMENT. THE INTEREST PAYMENT PER MONTH COMES TO RS.1.53 LAKHS. THE APPELLANT HAS CALCULATED THE RENT @ RS.2.1 LAKHS P.M. I.E. @ RS.9 PER SQ.FT. I FIND SUCH ESTI MATION OF RENT IS VERY LESS. IT IS IN RECORD THAT THE APPELLANT IS R UNNING ITS BUSINESS FROM A RENTED PREMISES IN THE SAME LOCALITY IN RICH MOND ROAD. THE RENT SHOWN IS RS.27,500/- FOR 901 SQ.FT. I.E. R S.30/- PER SQ.FT. WHICH IS MUCH MORE THAN RS.9/- ESTIMATED BY THE APP ELLANT IN THIS CASE. THEREFORE, HEREIN I FIND THE APPLICATION OF PRINCIPLES OF COMMERCIAL EXPEDIENCY WHICH ENTITLES THE APPELLANT FOR THE BENEFIT OF ALLOWANCE OF RS.18.36 LAKHS CLAIMED BY I T AS EXPENDITURE ON BORROWED FUNDS. HENCE, ADDITION IS DELETED. APPEAL IS ALLOWED. 6. THE LD. AR SUBMITTED BEFORE US THAT THE APPELLAN T COMPANY AND M/S. ASM TECHNOLOGIES LTD., BELONGS TO THE SAME GROUP. THE APPELLANT COMPANY REQUIRED OFFICE SPACE DUE TO ITS EXPANSION OF BUSINESS. THE GROUP COMPANY M/S. ASM TECHNOLOGIES LTD. HAD THE SP ACE. BOTH THE COMPANIES CAME TO AN AGREEMENT WHEREIN THE APPELLAN T WAS TO PROVIDE INTEREST FREE SECURITY DEPOSIT TO M/S. ASM TECHNOLO GIES LTD. IN LIEU OF THE OFFICE SPACE PROVIDED. REQUISITE DOCUMENTS WERE EX ECUTED (A COPY OF WHICH IS ALSO SUBMITTED BEFORE US IN THE PAPERBOOK) AND THE PREMISES WAS GIVEN IN POSSESSION TO THE APPELLANT. THE LD. AR A RGUED THAT THERE WAS BUSINESS EXPEDIENCY FOR BOTH THE PARTIES CONCERNED IN THE TRANSACTION ON COMMERCIAL TERMS. 7. THE LD. DR VEHEMENTLY ARGUED AGAINST THE SUBMISS IONS MADE BY THE LD. AR. SHE SUBMITTED BEFORE US THAT THE TRANSACTI ON IS NOT GENUINE. THERE WERE NO PROOF THAT THE APPELLANT HAD OCCUPIED THE S PACE PROVIDED BY M/S. ASM TECHNOLOGIES LTD. THE WHOLE TRANSACTION WAS ONLY AN ITA NO. 908/BANG/10 PAGE 5 OF 6 ARRANGEMENT FOR CONVENIENCE. SHE THEREFORE PRAYED THAT THE ORDER OF THE LD. AO BE UPHELD. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. AFTER ANALYZING THE WHOLE ISSUE IN DEARTH, WE ARE OF THE OPINION THAT TO ESTABLISH THE GENUINENESS OF THE TRANSACTION THE MOST IMPORTANT FACTOR WILL BE WHETHER THE APPELLANT HAS UTILIZED THE PREM ISES FOR ITS USE AS CLAIMED. HOWEVER NO MATERIALS WERE BROUGHT BEFORE US TO ESTABLISH THAT THE APPELLANT HAD OCCUPIED THE PREMISES AND CONDUCT ED ITS ACTIVITIES FROM THE PREMISES. WHEN THIS ISSUE WAS RAISED BEFORE TH E LD. AR, IT WAS PRAYED THAT A SHORT TIME MAY BE GRANTED FOR PRODUCING SUFF ICIENT DOCUMENTS TO ESTABLISH THAT THE APPELLANT WAS IN OCCUPATION OF T HE PREMISES DURING THE TENURE OF LOAN AND HAD UTILIZE THE PREMISES FOR ITS BUSINESS. SUBSEQUENTLY ON 3.3.2011 I.E., AFTER THE DATE OF HEARING, THE LD . AR SUBMITTED THE FOLLOWING DOCUMENTS: (A) AFFIDAVIT SWORN BY SRI RABINDRA SRIKANTAN, MANAGING DIRECTOR OF M/S. ASM TECHNOLOGIES LIMITED STATING THAT THE ACCOMMODA TION WAS PROVIDED TO THE RESPONDENT. (B) COPY OF THE BALANCE SHEET, PROFIT AND LOSS ACCOUNT ALONG WITH THE SCHEDULES FOR THE YEAR ENDED 31/03/2006. (C) COPY OF THE BALANCE SHEET, PROFIT AND LOSS ACCOUNT ALONG WITH THE SCHEDULES FOR THE YEAR ENDED 31/03/2005. 9. THE DOCUMENTS SUBMITTED BY THE LD. AR DID NOT CO NCLUSIVELY ESTABLISH THAT THE APPELLANT HAD UTILIZED THE PREMI SES FOR ITS BUSINESS. IT IS CLAIMED THAT THE APPELLANT WAS IN POSSESSION OF 11, 000 SQ.FT. OF OFFICE SPACE WITH INFRASTRUCTURE AND FACILITY TO ACCOMMODATE 80 ENGINEERS. IN SUCH CIRCUMSTANCES, THE APPELLANT SHOULD BE DEFINITELY I N A POSITION TO ESTABLISH ITA NO. 908/BANG/10 PAGE 6 OF 6 THAT IT HAD UTILIZED THE PREMISES BY FURNISHING EVI DENCE FOR PAYMENT OF ELECTRICITY BILL, ETC. FROM ITS BANK ACCOUNT. HOWEV ER IN THE INTEREST OF JUSTICE, WE FIND IT JUST TO GRANT ONE MORE OPPORTUNITY TO TH E APPELLANT TO PRODUCE THE REQUISITE EVIDENCE BEFORE THE LD. CIT (A). THE APP ELLANT MAY PRODUCE ANY EVIDENCE IT DEEMS FIT TO ESTABLISH ITS BONAFIDE CLA IM AND CO-OPERATE WITH THE PROCEEDINGS BEFORE THE REVENUE PROMPTLY. FOR THE A BOVE REASONS, THE ORDER OF THE LD. CIT(A) IS SET ASIDE AND THE CASE I S REMITTED BACK TO THE FILE OF THE LD. CIT(A) FOR FRESH CONSIDERATION ON MERITS . 10. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALL OWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 8 TH DAY OF ARPIL, 2011. SD/- SD/- ( GEORGE GEORGE K. ) (A. MOHAN ALANKAMONY ) JUDICIAL MEMBER ACCOUNTANT MEMBER BANGALORE, DATED, THE 8 TH APRIL, 2011. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. C IT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.