The DCITCrcle-1(1),, Baroda v. Anigo Brushes Pvt.Ltd.,, Baroda

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI MAHAVIR SINGH JUDICIAL MEMBER AND SHRI D. C. AGRAWAL ACCOUNTANT MEMBER ITA NO.134 & 158/AHD/2008 ASSESSMENT YEAR :2004-05 DATE OF HEARING:6.5.10 DRAFTED:7.5.10 DY. COMMISSIONER OF INCOME-TAX CIRCLE-1(1) BARODA JEWEL CONSUMER CARE PVT. LTD. (FOR AND ON BEHALF OF AMIGO BRUSHES PVT. LTD) SUBHAAG B- 15/16 RAMIN PARIK OLD PARDA ROAD BARODA 390 020 PAN NO.AABCA6891Q V/S . V/S . ANIGO BRUSHES PVT. LTD. PLOT NO.212 VILLAGE LUNA TAL PADRA DIST. BARODA PAN NO.AABCA6891M ASSTT. COMMISSIONER OF INCOME-TAX CIRCLE-1(1) BARODA (APPELLANT) .. (RESPONDENT) ASSESSEE BY :- SHRI S.N.SOPARKAR AR REVENUE BY:- SHRI ABHIJETKUMAR NOBKHADH SR-DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THESE CROSS-APPEALS ARE ARISING OUT OF THE ORDER O F COMMISSIONER OF INCOME- TAX (APPEALS)-VI BARODA IN APPEAL NO.CAB/VI-172/07 -08 DATED 11-10-2007. THE ASSESSMENT WAS FRAMED BY THE ACIT CIRCLE-1(1) BARO DA U/S.143(3) OF INCOME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT) VI DE HIS ORDER DATED 24-11-2006 FOR ASSESSMENT YEAR 2004-05. ITA NO.134 & 158/AHD/2008 A.Y. 2004-05 DCIT CIR-1(1) BRD V. ANIGO BRUSHES PVT. LTD. PAGE 2 2. THE FIRST COMMON ISSUE IN THESE CROSS APPEALS OF THE REVENUE AS WELL AS ASSESSEE IS AGAINST THE ORDER OF CIT(A) IN RESTRICT ING THE DISALLOWANCE PROPORTIONATE TO THE COST OF INTEREST FREE FUND PLACED BY THE ASS ESSEE-COMPANY WITH M/S. AMIGO SECURITIES PVT. LTD. ON WEIGHTED AVERAGE BASIS. FO R THIS THE REVENUE HAS RAISED FOLLOWING THREE GROUNDS :- ITA NO.134/AHD./2008 . 1. ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CAS E AND IN LAW THE LD. CIT(A) ERRED IN HOLDING THAT THE AMOUNT OF R.3 84 15 000/- (OP. BAL) + R.15 80 184/- PAID DURING THE YEAR) WAS PARKED WITH THE ASSOCIATE CONCERN M/S. DENTA BRUSH PVT. LTD. FOR PURCHASE OF BLISTER MACHINE T HEREBY ASSUMING COMMERCIAL EXPEDIENCY OF THE TRANSACTION AND DELETI NG THE DISALLOWANCE OF INTEREST MADE ON ACCOUNT OF DIVERSION OF THIS FUND WHEN THE ASSESSEE HAD FAILED TO ADDUCE ANY EVIDENCE WHATSOEVER IN REGARD TO PURCHASE OF BLISTER MACHINE DURING THE YEAR OR EVEN SUBSEQUENTLY EITHE R FROM OR THROUGH THE AID ASSOCIATE CONCERN. 2. THE LD. CIT(A) FAILED TO APPRECIATE THAT BEFORE THE ASSESSING OFFICER THE ASSESSEE HAD TAKEN A VAGUE PLEA TO THE EFFECT THAT THE AMOUNT WAS GIVEN A FINANCIAL SUPPORT TO ENABLE M/S. DENTA BRUSH PVT. L TD. TO PROCURE SPECIALIZED MACHINE REQUIRED BY THE ASSESSEE WHEN NOTHING PREV ENTED THE ASSESSEE FROM ACQUIRING SUCH MACHINE DIRECTLY FROM THE SUPPL IER AND THE TRANSACTION OF GRANTING INTEREST-FREE FUND FOR SUCH A LONG PERIOD NOT TO THE SUPPLIER OF THE MACHINERY BUT TO A THIRD PERSON PURCHASE PURPORTEDL Y AS FINANCIAL SUPPORT TO ENABLE HIM TO PROCURE THE MACHINERY IS CONTRARY TO NORMAL BUSINESS PRACTICE. 3. THE LD. CIT(A) FAILED TO APPRECIATE THAT THE FAC TS BEING IN THE SPECIAL KNOWLEDGE OF THE ASSESSEE THE ONUS U/S.36(1)(III) BY VIRTUE OF SECTION 106 BY THE INDIAN EVIDENCE ACT WAS ON THE ASSESSEE TO PRO VE THAT ALL THE BORROWINGS WERE USED FOR THE PURPOSES OF THE BUSINESS AND THAT THE PARKING OF INTEREST- FREE FUNDS WITH THE ASSOCIATE CONCERN WAS FOR BUSIN ESS PURPOSES AS SETTLED IN THE CASE OF CIT VS ABHISHEK INDUSTRIES LTD. 286 ITR 01 (P&H). AND ASSESSEE HAS RAISED GROUND NO.1 AS UNDER:- ITA NO.158/AHD/2008. 1. THE LEARNED CIT(A)-VI BARODA HAS ERRED IN LAW AND FACTS IN DIRECTING THE ASSESSING OFFICER TO DISALLOW INTEREST PROPORTIONAT E TO INTEREST COST OF INTEREST FREE FUNDS PLACED BY THE COMPANY WITH M/S. AMIGO SE CURITIES PVT. LTD. ON WEIGHTED AVERAGE BASIS. THE HON. CIT(A)-VI HAS FAILED TO APPRECIATE THE FAC T THAT THE INTEREST FREE ADVANCES WERE MADE BY THE COMPANY TO M/S. AMIGO SEC URITIES PVT. LTD. PURELY OUT OF BUSINESS CONSIDERATIONS AS A MEASURE OF COMMERCIAL ITA NO.134 & 158/AHD/2008 A.Y. 2004-05 DCIT CIR-1(1) BRD V. ANIGO BRUSHES PVT. LTD. PAGE 3 EXPEDIENCY PURSUANT TO THE MEMORANDUM OF UNDERSTAND ING EXECUTED BY THE COMPANY WITH M/S. AMIGO SECURITIES PVT. LTD. SO AS TO ENABLE THE COMPANY TO ACQUIRE OFFICER SPACE ON RENTAL BASIS AND ALSO H AVE AN OPTION TO CONVERT THE SAID INTEREST FREE ADVANCES INTO PURCHASE CONSI DERATION AND ACQUIRE A OWNERSHIP RIGHT IN SUCH PROPERTY AND ALSO 0TRHE FAC T THAT INTEREST FREE FUNDS AVAILABLE WITH THE COMPANY WERE FAR IS EXCESS OF TH E INTEREST FREE ADVANCES GIVEN BY THE COMPANY. 3. THE BRIEF FACTS LEADING TO THE ABOVE COMMON ISSU E ARE THAT THE ASSESSING OFFICER NOTICED FROM THE ACCOUNTS OF THE ASSESSEE-C OMPANY DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT THE INTEREST INCOME OF THE ASSESSEE IS REDUCED TO RS.15 571/- AS AGAINST RS.53 28 410/- IN THE IMMEDI ATE PRECEDING YEAR. THE ASSESSING OFFICER NOTICED THAT AMIGO SECURITY PVT. LTD. WAS TO PROVIDE OFFICE PREMISES TO SISTER CONCERN UNIDENT BRUSHES PVT. LTD . JEWAL BRUSHES PVT. LTD. AND AMIGO BRUSHES PVT. LTD. FOR THIS PURPOSE THERE THR EE USER PROVIDED INTEREST FREE DEPOSIT AND FOR WHICH ASSESSEES SHARE WAS RS.1 CRO RE. FURTHER ADVANCE TO DENTA BRUSH PVT. LTD. WAS ALSO TREATED AS INTEREST FREE A DVANCE FOR NON-BUSINESS PURPOSES AS THE SERVICES WERE PROVIDED AT NORMAL CHARGES AND NOT AT A CONCESSIONAL RATE SO AS TO JUSTIFY INTEREST FREE ADVANCES. THE ASSESSING OFFICER CONSIDERED THE CONTENTIONS OF THE ASSESSEE THAT SUFFICIENT SHARE C APITAL AND RESERVES WERE AVAILABLE WAS ALSO COUNTED BY ASSESSING OFFICER BY SAYING THA T AS AGAINST THE SHARE CAPITAL AND RESERVES AGGREGATING TO RS.2.19 CRORES AS ON 31 -03-2004 THE INVESTMENT IN FIXED ASSETS ALONG WAS RS.8.85 CRORES AND THAT THE TOTAL INTEREST BEARING FUNDS OF THE ASSESSEE WERE RS.6.57 CRORE AS ON 31-03-2004. ACCOR DINGLY IT IS EXPRESSED BY ASSESSING OFFICER THAT THE ASSESSEE HAD FAILED TO E STABLISH THAT INTEREST FREE ADVANCES WERE GIVEN OUT OF ITS OWN INTEREST FREE FU NDS. ADMITTING THE ASSESSEES EXPLANATION FOR RS.1 CRORE OUT OF THE TOTAL INTERES T FREE ADVANCES OF RS.3 84 40 000/- THE BALANCE OF INTEREST FREE ADVANCES OF RS.2 84 40 000 WAS TREATED AS FOR NON- BUSINESS PURPOSE AND IN PROPORTIONATE TO THE TOTAL LOAN FUND THE INTEREST CLAIMED TO THE EXTENT OF RS.25 51 850/- WAS DISALLOWED. AGGRI EVED ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) AS REGARDS TO INTEREST FR EE DEPOSITS WITH M/S. AMIGO SECURITIES PVT. LTD. HELD NOT TO BE FOR THE PURPOSE OF BUSINESS EXPEDIENCY BY GIVING FOLLOWING FINDING OF HIS APPELLATE ORDER IN PARA-5.3 :- 5.3 I HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS. PRIOR TO A.Y. 2004-05 APPELLANT WAS CHARGING INTEREST ON INTEREST-CORPORA TE DEPOSITS WITH SISTER ITA NO.134 & 158/AHD/2008 A.Y. 2004-05 DCIT CIR-1(1) BRD V. ANIGO BRUSHES PVT. LTD. PAGE 4 CONCERN. FROM 1.4.2003 IT IS CLAIMED THAT DEPOSIT W ITH AMIGO SECURITIES WERE CONVERTED INTO ADVANCES FOR PURPOSE OF SECURING FUL LY FURNISHED OFFICE ACCOMMODATION FOR THE APPELLANT. A PERUSAL OF AGREE MENT WITH AMIGO SECURITIES HOWEVER DOES NOT REFER TO AUTOMATIC CONV ERSION OF EXISTING DEPOSITS INTO ADVANCES. MOREOVER DURING THE PERIOD APRIL 2 003 TO OCTOBER 2003 AMIGO SECURITIES HAS IN FACT RETURNED MAJORITY OF F UNDS TO APPELLANT COMPANY. IN CASE THE PURPOSE OF PLACING DEPOSITS WITH SISTER CONCERN WAS TO UTILIZE IT FOR CONSTRUCTION OF OFFICE PREMISES FOR APPELLANTS BUS INESS THE SAID OSTENSIBLE PURPOSE DOES NOT APPEAR TO BE SERVED AT LEAST DURIN G F.Y. 2003-04. FROM AVAILABLE DETAILS IT SEEM MORE LIKELY THAT BUSINES S DECISION TO HIRE PREMISES FROM SISTER CONCERN WAS REACHED MUCH LATER THAN APP ARENT DATE OF AGREEMENT WITH AMIGO SECURITIES I.E. 1.4.2003. IN MY HUMBLE V IEW FOR A.Y. 2004-05 INTEREST FREE DEPOSITS WITH AMIGO SECURITIES CANNOT BE HELD TO BE FOR BUSINESS EXPEDIENCY. THEREFORE RELIANCE ON DECISION OF S.A. BUILDERS LTD. VS. CIT 288 ITR 001 (SC) IS MISPLACED AS APPELLANT COULD NOT PROVE THAT INT EREST FREE FUNDS DURING THE YEAR WERE INTENDED FOR BUSINESS PU RPOSES. 4. IN REGARD TO PLACEMENT OF FUNDS OF DENTA BRUSH P VT. LTD THE CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE OF BUSINESS COMMERCI AL EXPEDIENCY BY GIVING FOLLOWING FINDING OF HIS APPELLATE ORDER IN PARA-3.3 :- IN REGARD TO PLACEMENT OF FUNDS WITH DENTABRUSH PV T. LTD. IT IS OBSERVED THAT APPELLANT COMPANY IS IN THE BUSINESS OF MANUFACTURI NG OF TOOTH BRUSHES AND THAT ADVANCE TO DENTA BRUSH PVT. LTD. FOR PURCHASE OF BLISTER MACHINES AND TO SUB-SERVES EVIDENTLY THE MAIN BUSINESS OF THE APPEL LANT AND THEREFORE THE COMMERCIAL EXPEDIENCY HAS BEEN CLEARLY INDICATED NO T ONLY IN APPELLANT PROCEEDINGS BUT ALSO BEFORE ASSESSING OFFICER. IN M Y VIEW THEREFORE IN THE LIGHT OF JUDGEMENT OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS CIT 288 ITR 1(SC) THE APPELLANT HAS CLEARLY ESTABLISHED THE PURPOSE FOR WHICH THE MONEY WAS ADVANCED. AGGRIEVED AGAINST THE SUSTENANCE OF DISALLOWANCE A SSESSEE CAME IN SECOND APPEAL AND AGAINST THE DELETION REVENUE CAME IN APPEAL. 5. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE THR OUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE HAVE ALSO PERUSED THE CASE RECORDS INCLUDING THE ASSESSMENT ORDER AS WELL AS THE ORDER OF CIT(A). WE FIND THAT THE ASSESSEE HAS GIVEN INTEREST FREE INTER-CORPORATE DEPOSITS DURING THE YEAR AS UNDER:- ITA NO.134 & 158/AHD/2008 A.Y. 2004-05 DCIT CIR-1(1) BRD V. ANIGO BRUSHES PVT. LTD. PAGE 5 NAME OF THE PARTY OPENING BALANCE FURTHER GIVEN (NET) REPAID CLOSING BALANCE AMIGO SECURITIES PVT. LTD. 1 69 82 464 NIL 1 69 57 464 25 000 DENTABRUSH PVT. LTD. 3 68 34 816 15 80 184 NIL 3 84 15 000 TOTAL 3 84 40 000 WE FIND THAT THE MAIN ARGUMENTS OF THE LD. COUNSEL FOR THE ASSESSEE WAS THAT DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE-COMPANY E NTERED INTO MEMORANDUM OF UNDERSTANDING (MOU IN SHORT) WITH AMIGO SECURITIES PVT. LTD. FOR UTILIZATION OF OFFICE SPACE AND OTHER FACILITIES. IN TURN THE ASSESSEE-C OMPANY PROVIDED INTEREST FREE DEPOSIT TO AMIGO SECURITIES PVT. LTD. FOR FINANCING INSTRUCTION AS PER THE TERMS AND CONDITIONS OF MOU. THE RELEVANT TERMS AND CONDITION S AS NARRATED BEFORE US AS UNDER:- I) ASPL SHALL CONSTRUCT THE PREMISES ON A PRE-FIXE D SCHEDULE AND HAVING PRE- FIXED SPECIFICATION II) ON COMPLETION OF THE CONSTRUCTION ASPL SHALL A LLOT 7 000 SQ. FT. OF SPACE IN THE SAID PREMISES ON A PRIORITY BASIS. BROADLY SPEAKING THE ASSESSEE-COMPANY WILL TAKE PR EMISES ON LEASE ON PRE-FIXED MONTHLY RENTAL OF RS.24/- PER SQ. FT. WHICH WOULD BE INCLUSIVE OF RENT & CHARGES FOR THE FURNITURE AND FIXTURES. THE ASSESSEE COMPANY HAS TO GIVE INTEREST FREE LOAN OF RS.1 CRORE AND A FLOATING OF ADVANCE OF RS.1.5 CROR ES FOR ENABLING ASPL TO FINANCE THE CONSTRUCTION OF THESE PREMISES. THERE WAS ANOT HER CONDITION / OPTION WITH THE ASSESSEE IN THE SAID AGREEMENT TO PURCHASE THE PREM ISES WITHIN THE SPECIFIED PERIOD AND THAT ALSO AT THE SOLE DISCRETION OF THE ASSESSE E. IN VIEW OF THESE FACTS WE ARE OF THE CONSIDERED VIEW THAT THE AMOUNT ADVANCED FOR OB TAINING THE PREMISES ON LEASE AND WAS FOR THE PURPOSES OF BUSINESS EXPEDIENCY. A CCORDINGLY THE DECISION OF HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS V. CIT(A) (2007) 288 ITR 1 (SC) WILL SQUARELY APPLY. ACCORDINGLY WE REVERSE THE FINDIN GS OF LOWER AUTHORITIES AND THIS ISSUE IS ALLOWED IN FAVOUR OF THE ASSESSEE. 6. AS REGARDS TO PLACEMENT OF FUNDS WITH DENTA BRUS H PVT. LTD. WE FIND THAT THE ASSESSEE-COMPANY IS IN THE SAME LINE OF BUSINESS I. E. MANUFACTURING OF TOOTH BRUSHES AND ADVANCE TO DENTA BRUSH PVT. LTD. FOR PU RCHASE OF BLUSTER MACHINE IS ITA NO.134 & 158/AHD/2008 A.Y. 2004-05 DCIT CIR-1(1) BRD V. ANIGO BRUSHES PVT. LTD. PAGE 6 MAINLY A BUSINESS TRANSACTION AND THERE IS COMMERCI AL EXPEDIENCY AS HELD BY CIT(A). THE REVENUE COULD NOT ADDUCE ANYTHING AGAI NST THIS FINDING. ACCORDINGLY WE UPHOLD THE ORDER OF CIT(A) AND THIS ISSUE OF REV ENUES APPEAL IS DISMISSED. 7. IN THE RESULT APPEAL OF THE ASSESSEE IS ALLOWED AN D THAT OF THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 14/05/2010 SD/- SD/- (D.C.AGRAWAL) (MAHAVIR SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD DATED : 14/05/2010 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- VI BARODA 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD