The DCIT, Circle-5, Ahmedabad V. Narmada Fintrade Limited, Ahmedabad

ITA 929/AHD/2010

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 0267 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 10 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 11-01-2013
• Assessment Year: 2003-2004
• Appeal Filed On: 29-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAHUL KUMAR
• Assessee Lawyers: SUNIL H TALATI
• Keywords: Business expenditure; Opportunity of being heard; Bad and doubtful debts; Commercial expediency
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD A BENCH BEFORE: SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI ANIL CHATURVEDI, ACCOUNTANT ME MBER ITA NO.929/AHD/ 2010 A.Y.2003-04 DY. CIT. CIRCLE-5, AHMEDABAD APPELLANT VS. M/S NARMADA FINTRADE LTD. 2 ND FLOOR, C.U. SHAH CHAMBERS ASHRAM ROAD, AHMEDABAD PAN-AABCN7035N RESPONDENT DEPARTMENT BY : SHRI RAHUL KUMAR, SR. D.R. ASSESSEE BY : SHRI SUNIL H. TALATI, A.R. DATE OF HEARING : 11.01.2013 DATE OF PRONOUNCEMENT : 15.02.2013 / ORDER PER : ANIL CHATURVEDI, ACCOUNTANT MEMBER THIS IS REVENUES APPEAL AGAINST THE ORDER OF LD. C IT(A)-XI, AHMEDABAD DATED 21.01.2010. 2. THE FACTS, AS CULLED OUT FROM THE ORDER OF THE A SSESSMENT ARE AS UNDER:- IN THE PRESENT CASE THE ORIGINAL ASSESSMENT WAS CO MPUTED U/S 143(3) OF THE ACT ON 31.01.2006 AND THE TOTAL LOSS WAS DETERM INED AT RS.17,93,202/- AS AGAINST RETURN LOSS OF RS.27,34,582/- AFTER DISALLO WING INTEREST EXPENDITURE U/S 36(1)(II) OF RS.9,41,280/-. AGAINST THE ORDER OF THE A.O. ASSESSEE PREFERRED APPEAL BEFORE CIT(A). CIT(A) VIDE ITS OR DER DATED 19.09.2006 GRANTED RELIEF OF RS.9,41,280/- TO THE ASSESSEE. A GAINST THE AFORESAID ORDER OF CIT(A) REVENUE PREFERRED APPEAL BEFORE THE ITAT. HONBLE ITAT VIDE ITS ORDER IN ITA NO.2565/AHD/2006 DATED 04.05.2007 OPIN ED THAT QUESTION OF ITA NO.929/AHD/ 2010 A.Y.2003-04 2 ALLOWING INTEREST FREE FINANCE TO SUBSIDIARY COMPAN Y COULD FALL WITHIN THE AMBIT OF ASSESSEES BUSINESS EXPEDIENCY AND THEREFORE TO VERIFY THE CORRECTNESS OF THE FACTS, THE MATTER WAS RESTORED TO THE FILE OF T HE A.O. FOR RE-ADJUDICATION AFTER VERIFYING THE ASSESSEES CLAIM THAT THE INTER EST FREE FUNDS WERE GIVEN FOR REVIVAL OF SUBSIDIARY COMPANY AS WELL AS KEEPING IN VIEW OF THE DECISION OF S.A. BUILDERS LTD. [288 ITR (SC)]. PURSUANT TO THE DIRECTION OF HONBLE ITAT, A.O., VIDE ORDER DATED 19.11.2008 PASSED U/S 143(3) READ WITH SECTION 254 OF THE ACT CONFIRMED THE ADDITION MADE EARLIER BY HOLD ING AS UNDER:- 3.2 THE SUBMISSION OF THE ASSESSEE IS CONSIDERED. ON PERUSAL OF RECORDS, IT IS SEEN THAT THE ASSESSEE WAS FORMERLY KNOWN AS KANORIA CAPITAL SERVICES LTD. THE ASSESSEE TOOK LOANS FROM ACCURA FOAM PVT. LTD. ON WHICH THE ASSESSEE PAID INTEREST. THE BORROWED FUNDS WERE GIVEN BY ASSESSEE COMPANY TO KANHAIYA TRADERS & INVESTMENTS PVT. LTD., WHICH IS 100 PER CENT SUBSID IARY COMPANY. THE FUNDS SO RECEIVED BY KANHAIYA TRADERS & INVESTM ENTS PVT. LTD. WERE USED FOR ACQUIRING DEBTORS OF KANORIA DYECHEM LTD. ALL THE THREE ENTITIES ARE RELATED CONCERNS OF THE ASSESSEE . LATER ON, KANHAIYA TRADERS & INVESTMENTS PVT. LTD. WAS MERGED WITH ACURA FOAM PVT. LTD. AND THE FUNDS GIVEN BY ASSESSEE COMP ANY WERE INTRA-ADJUSTED. THE NET EFFECT OF THE TRANSACTION WAS THAT THE ASSESSEE COMPANY CLAIMED INTEREST ON FUNDS WHICH WA S UTILIZED BY THE SUBSIDIARY COMPANY IN ACQUISITION OF DEBTORS OF KANORIA DYECHEM LTD. ON PERUSAL OF PROFIT & LOSS ACCOUNT O F THE ASSESSEE COMPANY, IT IS SEEN THAT THE ASSESSEE COMPANY HAS C LAIMED BAD DEBTS OF RS.8744119/- IN RESPECT OF BORROWINGS MADE BY ASSESSEE COMPANY TO KANORIA DYECHEM LTD. THIS MEANS THAT TH E ASSESSEE COMPANY WAS KNOWING THAT THE INVESTMENT BY ITS 100 PER CENT SUBSIDIARY COMPANY IN ACQUISITION OF DEBTORS OF KAN ORIA DYECHEM WAS A MISADVENTURE BECAUSE THE ASSESSEE COMPANY ITS ELF HAD WRITTEN OFF SUBSTANTIAL AMOUNT OWED BY KANORIA DYEC HEM AS BAD DEBT. SINCE KANHAIYA TRADING & INV. PVT. LTD. IS A 100 PER CENT SUBSIDIARY COMPANY OF THE ASSESSEE AND KANORIA DYEC HEM LTD. IS ALSO A RELATED CONCERN OF THE ASSESSEE, THE ASSESSE E COMPANY WAS AWARE OF THE FACT THAT PUMPING OF MONEY BY ITS SUBS IDIARY COMPANY IN THE AFFAIRS OF KANORIA DYECHEM WAS NOT GOING TO YIELD ANY POSITIVE RESULTS. AND HENCE, THEREFORE, THIS TRANS ACTION CANNOT BE SAID TO BE A TRANSACTION ENTERED INTO ON ACCOUNT OF COMMERCIAL EXPEDIENCY. THIS IS SO, BECAUSE, IN ADDITION TO DR AINING OF BORROWED FUNDS IN TO NON-VIABLE UNIT, I.E. KANORIA DYECHEM, THE ASSESSEE ALSO CLAIMED HUGE BAD DEBTS ON ACCOUNT OF TRANSACTION OF BORROWINGS ENTERED INTO WITH KANORIA DYECHEM. BY THE SERIES O F TRANSACTIONS, ITA NO.929/AHD/ 2010 A.Y.2003-04 3 AS MENTIONED ABOVE, THE NET EFFECT OF BORROWAL WAS THAT THE ASSESSEE GOT AWAY WITH HUGE BAD DEBT CLAIM AS WELL AS INTEREST CLAIM ON BORROWED FUNDS IN THE FORM OF INTEREST PAI D TO ACURA FOAM PVT. LTD. THUS, THE SERIES OF TRANSACTIONS SMACKS OF COLOURABLE DEVICE IN ORDER TO HOODWINK THE REVENUE BY MAKING B AD DEBT CLAIM AS WELL AS INTEREST CLAIM ONBORROWED FUNDS UTILIZED FOR MAKING INVESTMENT IN AN ENTITY IN RESPECT OF WHICH THE ASS ESSEE IS CLAIMING SIMULTANEOUSLY HUGE BAD DEBT. 3.3 IT IS PERTINENT TO NOTE THAT THE ISSUE REGARDIN G USAGE OF BORROWED FUNDS FOR UTILIZATION OF NON-INTEREST BEAR ING FUNDS GIVEN TO SMT. KAHINI KANODIA HAS NOT BEEN DEALT WITH EITHER BY ITAT OR CIT(A) IN THE RESPECTIVE APPEAL ORDERS. CONSIDERIN G THIS FACT AS WELL AS THE DISCUSSION MADE IN THE PRECEDING PARAS OF THIS ORDER, THE INTEREST DISALLOWANCE OF RS.9,41,280/- MADE VID E ASSESSMENT ORDER U/S 143(3) DATED 31.01.2006 IS AGAIN MADE IN THIS ASSESSMENT ORDER. HENCE, NO RELIEF IS GIVEN TO THE ASSESSEE. PENALTY PROCEEDINGS U/S 271(1)(C) ARE INITIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 3. AGAINST THE AFORESAID ORDER OF THE A.O. THE ASSE SSEE CARRIED THE MATTER BEFORE CIT(A). CIT(A) VIDE ITS ORDER DATED 21.01.2 010 ALLOWED THE APPEAL OF THE ASSESSEE BY HOLDING AS UNDER:- 4.1 IN THE ASSESSMENT ORDER DATED 31-01-2006 U/S 1 43(3), DISALLOWANCE OF INTEREST WAS MADE ON THE GROUND THA T INTEREST- BEARING FUNDS WERE UTILIZED FOR NON-BUSINESS PURPOS E OF GIVING INTEREST FREE ADVANCE TO KANORIYA TRADERS & INVESTO RS PVT. LTD. (HEREINAFTER REFERRED TO AS KTIPL). CIT(A) ALLOWED THE APPEAL. ITAT VIDE ORDER DATED 04-05-2007 RESTORED THE MATTE R BACK TO A.O. WITH A DIRECTION TO VERIFY THE ASSESSEES CLAI M THAT THE INTEREST FEE FUNDS WERE GIVEN FOR REVIVAL OF SUBSIDIARY COMP ANY, AS THE ASSESSMENT ORDER WAS SILENT ON THE RELEVANT FACTS. 4.1.2 IN THE CONSEQUENTIAL ASSESSMENT PROCEEDINGS, APPELLANT CONTENDED THAT THE INTEREST-FREE ADVANCES TO 100% S UBSIDIARY COMPANY KTIPL WERE FOR REVIVAL OF ITS BUSINESS AN D LATER ON THE SAID SUBSIDIARY GOT MERGED WITH THE APPELLANT COMPA NY AND HENCE THE ADVANCES WERE OUT OF COMMERCIAL EXPEDIENCY. IN THE IMPUGNED ASSESSMENT DATED 19.11.2008, A.O. HELD THE TRANSACT ION TO BE COLOURABLE AND HENCE WAS NOT OUT OF COMMERCIAL EXPE DIENCY. HOWEVER, NO FINDING WAS GIVEN ON WHETHER THE ADVANC E TO SUBSIDIARY WAS FOR ITS REVIVAL OR NOT. THE CONTENT IONS OF THE APPELLANT THAT THE BUSINESS OF THE SUBSIDIARY GOT R EVIVED AND THE ADVANCES GOT FULLY RECOVERED (CONSEQUENT ON MERGER) REMAIN UNCONTROVERTED. ITAT, IN ITS ORDER AT PARA 5.1 OBS ERVED THAT ITA NO.929/AHD/ 2010 A.Y.2003-04 4 ALLOWING INTEREST FREE FINANCE TO SUBSIDIARY COMP ANY COULD FALL WITHIN THE AMBIT OF ASSESSEES BUSINESS EXPEDIENCY . 4.1.3 KEEPING IN VIEW THE ABOVE FACTS, WRITTEN SUBM ISSIONS FILED AND IN THE LIGHT OF S.CS DECISION IN THE CASE OF S.A. BUILDERS LTD. V. CIT (288 ITR 1), I HOLD THAT DISALLOWANCE OF INTEREST I N THE INSTANT CASE IS NOT JUSTIFIED. ACCORDINGLY, THE SAID DISALLOWAN CE IS DELETED. THIS GROUND OF APPEAL IS ALLOWED. AGAINST THE AFORESAID ORDER OF CIT(A) REVENUE IS IN APPEAL BEFORE US. 4. BEFORE US THE LD. D.R. SUBMITTED THAT THE ASSESS EE TOOK LOAN FROM ONE OF ITS ASSOCIATED COMPANIES (ACCURA FOAM PVT. LTD.) ON WHICH IT PAID INTEREST. THE BORROWED FUNDS WERE IN TURN LENT ITS 100% SUBSI DIARY (KANHAIYA TREADERS & INVESTMENT PVT. LTD.) WHICH IN TURN WAS USED FOR ACQUIRING DEBTORS OF ANOTHER ASSOCIATED COMPANY (KANORIYA DYECHEM LTD.). LATER ON KANHAIYA TREADERS MERGED WITH ACCURA FOAM PVT. LTD. AND THE FUNDS GIVEN BY ASSESSEE WERE INTRA-ADJUSTED. HE FURTHER SUBMITTED THAT ASS ESSEE CLAIMED BAD DEBT OF RS.87,44,119/- WITH RESPECT TO DEBTORS OF KANORIYA DYECHEM LTD. HE THUS SUBMITTED THAT A.O. CONCLUDED THAT THE NET EFFECT O F THE TRANSACTIONS WAS THAT ASSESSEE CLAIMED INTEREST PAYMENT AND ALSO BAD DEBT S WHICH WAS IN THE NATURE OF COLOURABLE DEVISE. HE FURTHER SUBMITTED T HAT THE FINDING OF LD. CIT(A) IS VAGUE IN NATURE. HE THUS SUBMITTED THAT ASSESSEE HAS NOT MADE OUT A CASE OF COMMERCIAL EXPEDIENCY AND IT SEEMS TO BE AN AFTE RTHOUGHT. HE, THEREFORE, URGED THAT THE ORDER OF THE A.O. IN TREATING THE IN TEREST AS NOT A BUSINESS EXPENDITURE BE UPHELD. 5. LD. A.R. SUBMITTED THAT THE ASSESSEE IS AN INVES TMENT COMPANY ENGAGED IN THE BUSINESS OF INVESTMENTS AND GIVING L OANS AND ADVANCES. HE SUBMITTED THAT KANHAIYA TRADERS & INVESTMENTS PVT. LTD. HAD ACQUIRED CREDITORS FROM KANORIA DYCHEM LTD. UNDER ITS ACTIVI TIES OF INVESTMENT AND TO ITA NO.929/AHD/ 2010 A.Y.2003-04 5 PAY ALL SUCH CREDITORS KANHAIYA TRADERS & INVESTMEN TS PVT. LTD. REQUIRED FUNDS. THE ASSESSEE MADE ADVANCE FROM TIME TO TIME TO ENABLE KANHAIYA TRADERS & INVESTMENTS PVT. LTD. TO DISCHARGE ITS LI ABILITY TO THE CREDITORS. THE ASSESSEE HAD MADE PAYMENT ON AGGREGATE AMOUNT TO RS .1,25,62,000/- FROM TIME TO TIME TO KANHAIYA TRADERS & INVESTMENTS PVT. LTD. TO DISCHARGE ITS LIABILITY. HE THEREFORE SUBMITTED THAT THE MONIES WERE ADVANCED TO SUBSIDIARY COMPANY OUT OF COMMERCIAL EXPEDIENCY TO ENABLE THE SUBSIDIARY COMPANY TO CARRY ON ITS BUSINESS. HE THEREFORE SUBMITTED THAT THE DECISION TO ADVANCE MONEY WAS OUT OF COMMERCIAL EXPEDIENCY AND IT WAS W ITH THE INTENTION TO SAFEGUARD THE BUSINESS INTEREST OF THE ASSESSEE. LD . A.R. SUBMITTED THAT ON RESTORING THE MATTER TO THE FILE OF A.O. HONBLE IT AT WAS OF THE VIEW THAT THE ALLOWING OF INTEREST FREE FINANCE TO SUBSIDIARY COM PANY COULD DEFINITELY FALL WITHIN THE AMBIT OF ASSESSEES BUSINESS EXPEDIENCY AND THE MATTER WAS REMITTED TO THE FILE OF THE A.O. TO VERIFY AS TO WH ETHER THE INTEREST FREE FUNDS WERE GIVEN FOR REVIVAL OF SUBSIDIARY COMPANY IN VIE W OF THE APEX COURT DECISION IN THE CASE OF S.A. BUILDERS. HE THUS SU PPORTED THE ORDER OF CIT(A). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. CIT(A), IN THE SECOND ROUND VIDE ORDER DAT ED 21.01.2010, WHILE DELETING THE ADDITION, HELD THAT THE A.O. HAS NOT G IVEN ANY FINDING AS TO WHETHER THE ADVANCE TO SUBSIDIARY WAS FOR ITS REVIV AL OR NOT. HE HAS FURTHER HELD THAT THE CONTENTION OF THE ASSESSEE THAT THE B USINESS OF SUBSIDIARY GOT REVIVED AND THE ADVANCES GOT FULLY RECOVERED (CONSE QUENT TO MERGER) REMAINED UNCONTROVERTED. THE COORDINATE BENCH OF IT AT VIDE ITS ORDER IN ITA NO.2565/AHD/2006 DATED 04.05.2007 HAS OBSERVED THAT ALLOWING INTEREST FREE ITA NO.929/AHD/ 2010 A.Y.2003-04 6 FINANCE TO SUBSIDIARY COMPANY COULD FALL WITHIN THE AMBIT OF ASSESSEES BUSINESS EXPEDIENCY. THE FINDINGS OF THE CO-ORDINAT E BENCH ARE AS UNDER:- 5.1 IN VIEW OF ABOVE DISCUSSION, WE ARE OF THE OPI NION THAT THE QUESTION OF ALLOWING INTEREST-FREE FINANCE TO SUBSI DIARY COMPANY DEFINITELY COULD FALL WITHIN THE AMBIT OF ASSESSEE BUSINESS EXPEDIENCY AND, THEREFORE, IT IS VERY NECESSARY TO VERIFY THE CORRECTNESS OF THE FACTS. CONSEQUENTLY, WE RESTORE THIS ISSUE INVOLVED IN THIS APPEAL BEACK TO THE FILE OF ASSESS ING OFFICER WITH THE DIRECTIONS THAT THE ASSESSEES CLAIM MAYBE DECIDED AFRESH IN ACCORDANCE WITH LAW AND AFTER VERIFYING THE ASSESSE ES CLAIM THAT THE INTEREST-FREE FUNDS WERE GIVEN FOR REVIVAL OF S UBSIDIARY- COMPANY AS WELL AS KEEPING IN VIEW OF DECISION IN T HE CASE OF S.A. BUILDERS LTD. (SURA). THE ASSESSEE WILL BE ALLOWED AN OPPORTUNITY OF BEING HEARD. 6. IN THE RESULT THE APPEAL OF THE REVENUE IS TREAT ED AS ALLOWED FOR STATISTICAL PURPOSES. 7. THE AFORESAID FINDING OF CIT(A) COULD NOT BE CON TROVERTED BY THE REVENUE BY BRINGING ANY CONTRARY MATERIAL ON RECORD . CIT(A) WHILE DELETING THE ADDITION HAS ALSO RELIED ON THE DECISION OF THE APEX COURT IN THE CASE OF S.A. BUILDERS PVT. LTD. VS. CIT, 288 ITR 1. WHEREIN THE HONBLE APEX COURT HAS HELD AS UNDER:- IN ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORRO WED BY THE ASSESSEE TO GIVE AN INTEREST FREE LOAN TO A SISTER CONCERN (E.G., A SUBSIDIARY OF THE ASSESSEE) SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961, ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEA SURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. TH E EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRE D ON GROUNDS OF COMMERCIAL EXPEDIENCY. DECISIONS RELATING TO SECTION 37 WILL ALSO BE APPLI CABLE TO SECTION 36(1)(III) BECAUSE IN SECTION 37 ALSO THE EXPRESSIO N USED IS FOR THE PURPOSE OF THE BUSINESS. FOR THE PURPOSE OF BUSI NESS INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXP EDIENCY, AND IT IS IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. ITA NO.929/AHD/ 2010 A.Y.2003-04 7 IN VIEW OF THE AFORESAID FACTS, WE FIND NO REASON TO INTERFERE WITH THE ORDER OF CIT(A) AND THUS UPHELD HIS ORDER ON THIS COUNT. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN OPEN COURT ON 15.02.2013 SD/- SD/- (G.C. GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER N.K. CHAUDHARY, SR. P.S. COPY OF THE ORDER FORWARDED TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS) 5. THE DR, AHMEDABAD 6. THE GUARD FILE BY ORDER AR,ITAT,AHMEDABAD 1. DATE OF DICTATION 17.01.2013 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 17.01.2013 OTHER MEMBER 17.01.2013 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P .S./P.S. . 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE D ICTATING MEMBER FOR PRONOUNCEMENT 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT RE GISTRAR FOR SIGNATURE ON THE ORDER . 9. DATE OF DESPATCH OF THE ORDER. .