M/s.Ecoplast Ltd., Valsad V. Dy.Cmmissioner of Income Tax,Valsad Renge, Valsad

ITA 943/AHD/2016

• Counselvise Citation: [2018] 118 COUNSELVISE.COM (IT) 2181 (ITAT-SURAT)
• Duration Of Justice: 2 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Assessment Year: 2012-2013
• Appeal Filed On: 13-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: J K CHANDNANI
• Keywords: Initiation of penalty proceedings; Commercial expediency; Revenue expenditure
• Section: 143(3)

Judgement Text

ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 1 OF 9 , , IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT . . , . . , BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER . . ./I.T.A NO.943/AHD/2016/SRT /ASSESSMENT YEAR : 2012-13 ECOPLAST LTD, S.NO.309, NATIONAL HIGHWAY NO.8, WATER WORKS CROSS ROAD, ABRAMA, VALSAD 396 001. [PAN: AAACE 5030 H] VS. THE DEPUTY COMMISSIONER OF INCOME TAX, VALSAD RANGE, VALSAD 396 001. APPELLANT /RESPONDENT /ASSESSEE BY SHRI TUSHAR P. HEMANI ADV. /REVENUE BY SHRI J.K.CHANDNANI SR.DR / DATE OF HEARING: 12 .0 7 .2018 /PRONOUNCEMENT ON 18 .0 9 . 2018 /O R D E R PER O. P. MEENA, ACCOUTANT MEMBER: 1. THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS), VALSAD (IN SHORT THE CIT (A)) DATED 01.03.2016 PERTAINING TO ASSESSMENT YEAR 2012-13, WHICH IN TURN HAS ARISEN FROM THE ORDER PASSED BY THE DEPUTY COMMISSIONER OF INCOME TAX, VALSAD CIRCLE, VALSAD (IN SHORT THE AO) DATED 17.02.2015 UNDER SECTION 143(3) OF INCOME TAX ACT, 1961 (IN SHORT THE ACT). ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 2 OF 9 2. GROUND NO.1 RELATES TO CONFIRMING OF ADDITION OF RS.4,94,753/- BEING DISALLOWANCE U/S.36(1)(II) OF THE ACT. 3. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE AO NOTED THAT THE ASSESSEE HAS LENT RS.2.05 CRORES ON VARIOUS DATES DURING THE FINANCIAL YEAR UNDER CONSIDERATION TO M/S.SYNERGY FILM PVT. LTD ON A RATE LOWER THAN IN PURSUANCE TO COMPANIES ACT AGAINST WHICH THE ASSESSEE HAS OFFERED INTEREST INCOME OF RS.6,07,288/- BY CHARGING INTEREST @ 6% FOR THE PERIOD FROM 01.04.2011 TO 12.02.2012 AND @ 9.5% FOR THE PERIOD FROM 13.02.2012 TO 31.03.2012. THE ASSESSEE HAS TAKEN LONG TERM AND SHORT TERM LOANS FROM VARIOUS FINANCIAL INSTITUTIONS AND IT HAS LONG TERM BORROWINGS OF RS.1.92 CRORES AND SHORT TERM BORROWING OF RS.9.37 CRORES AND PAID INTEREST EXPENSES OF RS.1.72 CRORES WHICH IS HIGHER THAN AS COMPARED TO PAYMENT OF LAST YEARS INTEREST AT RS.1.12 CRORES. IT IS OBSERVED THAT BANK RATE OF THE BORROWINGS WAS 13%. SINCE THE ASSESSEE IS PAYING INTEREST @ 13% AND CHARGED AVERAGE RATE OF INTEREST @ 7.75% (6 + 9.5 %). THEREFORE, THE AO OBSERVED THAT THE ASSESSEE OUGHT TO HAVE SHOWN INTEREST INCOME @ 13%. ACCORDINGLY, THE AO WORKED OUT INTEREST CHARGEABLE @ 13% AT RS.11,02,024/- AND MADE AN ADDITION OF ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 3 OF 9 RS.4,94,735/- (RS.11,02,024 RS.6,07,288/-) BEING DIFFERENTIAL AMOUNTS. 4. IN APPEAL THE LD.CIT(A) OBSERVED THAT M/S.SYNERGY FILMS PVT. LTD WAS FLOATED AS JVC AGREEMENT DATED 21.08.2007 WITH 5 PARTNERS AND THE APPELLANT BEING ONE OF THEM HAVING 75% OF STAKE. DURING THE YEAR, ONLY TWO PARTNERS HAVE REMAINED WITH 25% STAKE I.E. ASSESSEE AND M/S.KUNAL PLASTIC WITH 25%. IT HAS BEEN CLAIMED THAT MONEY WAS LENT TO SISTER CONCERN AS PER BOARD RESOLUTION AS REQUIRED BY THE JVC AGREEMENT. THE LD.CIT(A) OBSERVED THAT FINANCIAL ACCOUNTS, OF SISTER CONCERNED SHOWING THAT THE COMPANY HAS INCREASED LOSSES FROM RS.57,99,001/- TO RS.91,27,935/- AND TWO OF THE STAKE HOLDERS LEFT WHICH IMPLIES THAT THE SISTER CONCERN WAS NOT HAVING BRIGHT BUSINESS PROSPECTS. THE AUTHORISED REPRESENTATIVE (AR) RELIED ON THE SA BUILDERS DECISION OF HON'BLE SUPREME COURT ON THE PLEA THAT NON INTEREST BORROWING FUNDS WERE AVAILABLE. THE AR ALSO RELIED ON COMMERCIAL EXPEDIENCY BUT HOW THE INDUSTRY PUMPED IN AS LOAN IS NOT BORN OUT FROM THE RECORDS. THEREFORE, LOAN GIVEN ON A CONCESSIONAL RATE TO SISTER CONCERN IS DEVOID OF COMMERCIAL EXPEDIENCY. HENCE, DISALLOWANCE OF INTEREST OF RS.4,94,375/- U/S.36(1)(III) WERE UPHELD. ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 4 OF 9 5. BEING AGGRIEVED, THE ASSESSEE FILED APPEAL BEFORE THIS TRIBUNAL. THE LD.AR SUBMITTED THAT THE AO/CIT(A) FAILED TO APPRECIATE THAT THE AMOUNT LENT OF RS.2.03 CRORES TO SISTER CONCERN WAS INTEREST FREE. THE ASSESSEE HAS INTEREST FREE FUNDS OF RS.16.38 CRORES (BEING CAPITAL OF RS.3 CRORES AND RESERVES AND SURPLUS OF RS.16.38 CRORES). IT WAS STATED THAT WHEN THE ASSESSEE HAS SUBSTANTIAL INTEREST FREE FUNDS, NO DISALLOWANCE OF INTEREST U/S.36(1)(III) IS WARRANTED AS HELD IN THE CASE OF CIT VS. TORRENT POWER LTD. 363 ITR 474 (GUJ), CIT VS. SUJLON ENGERY LTD. 354 ITR 630 (GUJ), CIT VS HITACHI HOME & LIFE SOLUTION (I) LTD. [2014] 41 TAXMANN.COM 540 (GUJ), MUNJAL SALES CORPORATION VS. CIT 298 ITR 298 (SC), CIT VS. RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM). 6. PER CONTRA, THE LD.SR.DR SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND FIND THAT THE MONEY WAS LENT IN PURSUANCE OF JVC AGREEMENT DATED 21.08.2007 AND AS PER BOARD RESOLUTION. IT IS FURTHER NOTICED THAT AMOUNT WAS LEND TO SISTER CONCERN ON WHICH INTEREST @ 6% FOR THE PART PERIOD OF THE YEAR HAS BEEN CHARGED WHICH ESTABLISHED THAT THE MONEY WAS NOT LENT FROM THE INTEREST FREE FUNDS CLAIMED BY THE ASSESSEE AS ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 5 OF 9 AVAILABLE IN THE FORM OF SHARE CAPITAL, RESERVES AND SURPLUS. FURTHER, IT IS A FACT THAT THE ASSESSEE HAD PAID INTEREST @ 13% TO BANK FROM WHICH LONG TERM BORROWINGS OF RS.1.92 CRORES AND SHORT TERM BORROWINGS OF RS.9.37 CRORES HAVE BEEN OBTAINED. THUS, IF THE ASSESSEE HAD INTEREST FREE FUNDS AT HIS DISPOSAL, THEN THERE WAS NO NEED TO BORROW THE LOAN FROM BANKS ON LONG TERM AND SHORT TERM FINANCE. FURTHER, NO SUCH CLAIM WAS MADE DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE FUNDS WERE LENT FROM THE INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE NOR SUCH CLAIM EITHER MADE BEFORE THE CIT(A). IT HAS BEEN CLAIMED THAT THE LOAN AT A CONCESSIONAL RATE OF INTEREST WERE GIVEN TO SISTER CONCERN FOR COMMERCIAL EXPEDIENCY. HOWEVER, WE FIND THAT THE SISTER CONCERN HAS INCREASED ITS LOSSES FROM RS.57.99 LAKHS TO 91.27 LAKHS WHICH MEANS THAT FUTURE PROSPECTS OF SISTER CONCERN WERE NOT SOUND. IT IS FURTHER SEEN THAT THE OTHER PARTNERS HAVE LEFT THE SAID SISTER CONCERN. THEREFORE, THE ASSESSEE HAS FAILED TO ESTABLISH THE LINK WITH INTEREST FREE FUNDS AVAILABLE AND LOANS LENT OUT OF SAID FUNDS TO THE SISTER CONCERNS. FURTHER, THE SHARE CAPITAL RELATES TO THE OLD PERIOD WHICH IMPLIES THAT IT HAS ALREADY BEEN UTILISED FOR THE PURCHASE OF ASSET, HENCE IT CANNOT BE SAID IT WAS AVAILABLE WITH THE ASSESSEE FOR THE MONEY TO BE LENT. THEREFORE, THE CASE LAWS RELIED ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 6 OF 9 ON THE VARIOUS HIGH COURTS ARE NOT APPLICABLE TO THE FACTS OF THE CASE. IN VIEW OF THIS MATTER, THIS GROUND OF APPEAL IS THEREFORE DISMISSED. 8. GROUND NO.2 RELATES TO CONFIRMING THE DISALLOWANCE OF REPAIRS AND MAINTENANCE EXPENSES OF RS.15,89,332/-. 9. THE LD.AR SUBMITTED THAT THE ASSESSEE IS ENGAGED IN THE MANUFACTURING OF PLASTICS. THE EXPENSES OF RS.15,89,322/- WERE INCURRED IN RESPECT OF B & R MAKE POWER PANEL, MOTOR CONTROL, CENTRE PANEL AND OIL RADIATOR ETC. THUS, THE ASSESSEE HAS PAID EXPENSES FOR MACHINERY SPARES AND WHICH HAVE BEEN CONSUMED OR REPLACED WITH WORN OUT SPARE PARTS AND SUCH EXPENSES ARE TREATED AS REPAIRS. THE AR FURTHER REFERRED PAPER BOOK PAGE 130 TO 155 IN WHICH DETAILS OF REPAIRS EXPENDITURE ARE AVAILABLE IN FORMS OF BILL AND INVOICES. THEREFORE, IT WAS CONTENDED THAT SUCH SPARES ARE MERELY FOR REPLACING THE COMPONENT OF THE MAIN MACHINERY WHICH WAS ESSENTIAL FOR SMOOTH FUNCTIONING OF THE MAIN MACHINERY AND SUCH EXPENDITURE DO NOT CREATE ANY ADDITIONAL PRODUCTION CAPACITY. THESE EXPENSES ARE 1.98 % OF THE VALUE OF PLANT AND MACHINERY AT THE END OF THE YEAR AND 0.27 % OF THE TOTAL TURNOVER OF THE BUSINESS. HENCE, THESE EXPENDITURE ARE REVENUE IN NATURE, HENCE, NEEDS TO BE ALLOWED. ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 7 OF 9 10. THE LD.SENIOR DEPARTMENTAL REPRESENTATIVE (SR.DR) HAS PLACED HEAVY RELIANCE ON THE ORDER OF THE CIT(A). 11. WE HAVE CONSIDERED THE FACTS AND HEARD THE RIVAL SUBMISSIONS. WE FIND THAT THE EXPENSES ARE INCURRED IN RESPECT OF PURCHASE OF SPARE PARTS FOR SMOOTH RUNNING OF MAIN MACHINERY AND THIS DOES NOT INCREASE THE PRODUCTION CAPACITY. AS AND WHEN THE MAIN PART OF THE MACHINERY IS WORN OUT THEN THESE SPARE PARTS ARE BEING REPLACED BY THEM. THEREFORE, THESE SPARE PARTS ARE ESSENTIAL FOR SMOOTH FUNCTIONING OF THE MACHINERY. FURTHER, SUCH EXPENDITURE IS 1.9 % OF THE TOTAL VALUE OF PLANT AND MACHINERY AT THE END OF THE YEAR AND ALSO 0.72% OF THE TOTAL TURNOVER. IN VIEW OF THESE FACTS AND CONSIDERING THE NATURE OF PURCHASES OF THE ASSESSEE WHICH ARE MADE FOR THE REPLACEMENT OF MAIN PARTS OF THE MACHINERY ARE IN ANY CASE ARE OF REVENUE EXPENDITURE AS THESE SPARE PARTS OF CANNOT BE INDEPENDENTLY USED FOR PRODUCTION. THEREFORE, IN OUR HUMBLE UNDERSTANDING, THESE EXPENDITURE CANNOT BE TREATED AS CAPITAL IN THE NATURE AS NO PERPETUAL MACHINERY HAS BEEN CAME INTO EXISTENCE. THEREFORE, THE DISALLOWANCE SO MADE IS DELETED, ACCORDINGLY THIS GROUND OF THE APPEAL IS ALLOWED. 12. GROUND NO.3 RELATES TO CONFIRMING THE DISALLOWANCE OF FOREIGN TRAVEL EXPENDITURE OF RS.46,683/-. ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 8 OF 9 13. WE HAVE CONSIDERED THE FACTS AND CIRCUMSTANCES, THE AR SUBMITTED THAT THE AO DISALLOWED 25% OF FOREIGN TRAVEL EXPENDITURE OF RS.46,683/-. CONSIDERING THE SAME AS PERSONAL ELEMENT IN THE EXPENSES, WHICH THE CIT(A) HAS RESTRICTED TO 10% AT RS.46,683/-. IT WAS CONTENDED THAT THERE CANNOT BE ANY PERSONAL ELEMENT IN ANY EXPENSES INCURRED BY THE COMPANY AS HELD BY THE HON'BLE HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGINEERING COMPANY VS. CIT 253 ITR 749 (GUJ). FURTHER, THE ASSESSEE HAS INCURRED SUCH EXPENSES ON FOREIGN TOUR TO MEET MR.WINDMOLLER & HOLSCHER COMPANY IN GERMANY WHICH IS WORLDS LEADING SUPPLIERS OF BLOWN FILM PLANTS. SUCH EXPENDITURE ARE 0.08 % OF TOTAL TURNOVER OF RS.59.71 CRORES, HENCE ALLOWABLE IN-TOTO. 14. WE HAVE HEARD THE RIVAL SUBMISSIONS AND WE FIND THAT THE TOTAL EXPENSES OF RS.4,66,835/- ARE 0.08% OF TOTAL TURNOVER IT HAS BEEN INCURRED FOR GERMANY VISIT IN CONNECTION WITH THE BUSINESS, HENCE THERE CANNOT BE ANY PERSONAL ELEMENT OF EXPENDITURE IN THE CASE OF COMPANY AS HELD BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF SAYAJI IRON AND ENGINEERING COMPANY (SUPRA). THEREFORE, DISALLOWANCE RESTRICTED AT 10% OF RS.46,683/- ARE DIRECTED TO BE DELETED. THIS GROUND OF APPEAL IS THEREFORE ALLOWED. 15. GROUND NO.3 IS GENERAL, HENCE, DISMISSED. ECOPLAST LTD. VS. DCIT, VALSAD RANGE, VALSAD/I.T.A. NO.943/AHD/2016/SRT/A.Y.:2012-13 PAGE 9 OF 9 16. GROUND NO.5 RELATES TO CHARGING OF INTEREST U/S.234ABC WHICH IS CONSEQUENTIAL IN NATURE. 17. GROUND NO.6 RELATES TO INITIATION OF PENALTY PROCEEDINGS U/S.271(1)(C) IS PREMATURE, HENCE, DISMISSED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. 19. THE ORDER PRONOUNCED IN THE OPEN COURT ON 18-09-2018. SD/- SD/- ( . . /C.M. GARG) ( . . / O.P.MEENA) /JUDICIAL MEMBER /ACCOUNTANT MEMBER / SURAT, DATED : 18 TH SEP , 2018/ S.GANGADHARA RAO, SR.PS COPY OF ORDER SENT TO- ASSESSEE/AO/PR. CIT/ CIT (A)/ ITAT (DR)/GUARD FILE OF ITAT. BY ORDER / / TRUE COPY / / ASSISTANT REGISTRAR, SURAT