HINDUSTAN EXPORT & IMPORT CORPORATION P. LTD, MUMBAI v. ACIT RG 1(1), MUMBAI

ITA 1447/MUM/2009 | 2005-2006
Pronouncement Date: 16-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 144719914 RSA 2009
Assessee PAN NAACH1112M
Bench Mumbai
Appeal Number ITA 1447/MUM/2009
Duration Of Justice 2 year(s) 6 month(s) 14 day(s)
Appellant HINDUSTAN EXPORT & IMPORT CORPORATION P. LTD, MUMBAI
Respondent ACIT RG 1(1), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 16-09-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted H
Tribunal Order Date 16-09-2011
Date Of Final Hearing 08-09-2011
Next Hearing Date 08-09-2011
Assessment Year 2005-2006
Appeal Filed On 03-03-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH H MUMBAI BEFORE SHRI R.V. EASWAR PRESIDENT AND SHRI P.M. JAGTAP ACCOUNTANT MEMBER I.T.A. NO. 1447/MUM/2009. ASSESSMENT YEAR : 2005-06. HINDUSTAN EXPORTS & IMPORT ASSTT. COMMISSIONER OF CORPORATION PVT. LTD. VS. INCOME TAX ANAND BHAVAN 348 DR. D.N. ROAD RANGE-1(1) MUMBAI. MUMBIA 400001. PAN AACH 1112M. APPELLANT. RESPONDENT. APPELLANT BY : MS. HEENA JOSHI. RESPONDENT BY : SHRI V.V. SHASTRI.. DATE OF HEARING : 08-09-2011 DATE OF PRONOUNCEMENT : 16-09-2011. O R D E R. PER P.M. JAGTAP A.M. : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF LEARNED CIT(APPEALS)-I MUMBAI DATED 07-01-2009. 2. THE ISSUE RAISED IN GROUND NO. 1 RELATES TO THE DISALLOWANCE OF RS.4 28 735/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APP EALS) OUT OF INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE U/S 40A(2)(B). 3. THE ASSESSEE IN THE PRESENT CASE IS A COMPANY WH ICH IS ENGAGED IN THE BUSINESS OF PROVIDING FINANCIAL AND OTHER SERVICES. THE RETURN OF INCOME FOR THE YEAR UNDER CONSIDERATION WAS FILED BY IT ON 30-10-2 005 DECLARING TOTAL INCOME OF RS.91 30 761/-. DURING THE COURSE OF ASSESSMENT PRO CEEDINGS IT WAS NOTICED BY THE 2 ITA NO. 1447/MUM/2009 ASSESSMENT YEAR : 2005-06. AO THAT THE ASSESSEE HAS PAID INTEREST AT THE RATE OF 15% PER ANNUM ON THE SECURED LOANS TAKEN BY IT FROM DIRECTORS AND SHAREHOLDERS W HEREAS AT THE SAME TIME THE ASSESSEE WAS CHARGING INTEREST AT THE RATE OF 14% P ER ANNUM ON THE LOANS GIVEN TO M/S GROVER VINEYARDS LTD. HE THEREFORE HELD THAT INTEREST PAID BY THE ASSESSEE COMPANY TO ITS DIRECTORS AND SHAREHOLDERS AT THE RA TE OF 15% PER ANNUM WAS EXCESSIVE AND UNREASONABLE AND TAKING THE RATE OF S UCH INTEREST AT 14% PER ANNUM TO BE THE PREVAILING MARKET RATE HE DISALLOWED THE EXCESS INTEREST TO THE EXTENT OF RS.4 28 735/- BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B). ON APPEAL THE LEARNED CIT(APPEALS) CONFIRMED THE DISALLOWANCE OBS ERVING THAT THERE WAS NO LEGITIMATE NEED TO JUSTIFY THE PAYMENT OF INTEREST AT A HIGHER RATE OF 15% BY THE ASSESSEE COMPANY TO ITS DIRECTORS AND SHAREHOLDERS AND NO SPECIFIC BENEFIT HAD BEEN RECEIVED BY THE ASSESSEE BY MAKING SUCH EXCESS PAYMENT. 4. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT A SIMILAR I SSUE HAD COME UP FOR CONSIDERATION IN THE CASE OF THE ASSESSEE BEFORE THE TRIBUNAL FOR THE IMMEDIATELY PRECEDING YEAR I.E. ASSESSMENT YEAR 2004-05 AND VIDE ITS ORDER DAT ED 24-09-2010 PASSED IN ITA NO. 5331/MUM/2008 THE COORDINATE BENCH OF THIS TRI BUNAL DELETED THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE LE ARNED CIT(APPEALS) OUT OF INTEREST EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) FOR THE FOLLOWING REASONS GIVEN IN PARAGRAPH NO. 2.2 : WE HAVE PERUSED THE RECORDS AND CONSIDERED THE MA TTER CAREFULLY. THE DISPUTE IS REGARDING DISALLOWANCE OF INTEREST UNDER SECTION 40A(2)(B). THE ASSESSEE HAD BORROWED UNSECURED LOAN FROM DIRECTORS AND SHARE HOLDERS @ 15% AND HAD GIVEN LOANS AND ADVANCES TO THE SISTER CONCERN I.E. M/S GVL @ 14%. THE ISSUE IS WHETHER INTEREST EXPENDITURE ON A CCOUNT OF PAYMENT TO DIRECTORS AND SHARE HOLDERS CAN BE SAID TO BE EXCES SIVE COMPARED TO MARKET VALUE AND DISALLOWANCE CAN BE MADE UNDER SECTION 40 A(2)(B). THE AUTHORITIES BELOW HAVE CONSIDERED THE INTEREST PAYM ENT @ 15% AS EXCESSIVE 3 ITA NO. 1447/MUM/2009 ASSESSMENT YEAR : 2005-06. ONLY ON THE BASIS OF INTEREST CHARGED BY THE ASSESS EE FROM THE SISTER CONCERN. THERE IS NO OTHER MATERIAL PLACED ON RECORD TO SHOW INTEREST RATE IN THE MARKET IN PRIVATE BORROWING WAS ONLY 14%. THE INTER EST CHARGED BY THE ASSESSEE FROM THE SISTER CONCERN CANNOT BE TRUE IND ICATOR OF MARKET RATE. MAY BE THE ASSESSEE WAS CHARGING THE INTEREST FROM SIST ER CONCERN AT CONCESSIONAL RATE BECAUSE THE LOANS HAD BEEN ADVANCED ON COMMERC IAL EXPEDIENCY AS HELD BY THE TRIBUNAL IN ASSESSEES OWN CASE IN ASSESSMEN T YEARS 2001-02 AND 2002-03 (SUPRA). THEREFORE ON THE FACTS OF THE CASE AND ON THE BASIS OF MATERIAL PLACED ON RECORD WE ARE UNABLE TO HOLD THA T INTEREST PAYMENT @ 15% TO DIRECTORS AND SHARE HOLDERS WAS EXCESSIVE CO MPARED TO MARKET VALUE. WE ARE THEREFORE UNABLE TO SUSTAIN THE DISALLOWANCE MADE BY THE AO AND CONFIRMED BY THE CIT(A). THE ORDER OF CIT(A) IS ACC ORDINGLY SET ASIDE AND THE ADDITION IS DELETED. 5. AS THE ISSUE INVOLVED IN THE YEAR UNDER CONSIDER ATION AS WELL AS ALL THE MATERIAL FACTS RELEVANT THERETO ARE SIMILAR TO THAT OF ASSESSMENT YEAR 2004-05 WE RESPECTFULLY FOLLOW THE ORDER OF THE TRIBUNAL DATED 24-09-2010 (SUPRA) AND DIRECT THE AO TO DELETE THE DISALLOWANCE MADE OUT OF INTER EST EXPENDITURE U/S 40A(2)(B) IN THE YEAR UNDER CONSIDERATION. GROUND NO.1 IS AC CORDINGLY ALLOWED. 6. THE ISSUE RAISED IN GROUND NO.2 RELATES TO THE D ISALLOWANCE MADE BY THE AO AND SUSTAINED BY THE LEARNED CIT(APPEALS) OUT OF IN TEREST EXPENDITURE U/S 14A. 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS MADE TOTAL INVESTMENT OF RS.2 61 96 175/- IN SHARES AND MUTUAL FUNDS. SINCE THE INCOME FROM SUCH SHARES AND MUTUAL FUNDS IN THE FORM OF LONG TERM CAPITAL GAINS AND DIVIDEND WAS EXEMPT FROM TAX THE AO HELD THAT INTEREST EXPENDITURE TO THE EXTENT ATTRIBUTABLE TO THE BORRO WED FUNDS UTILIZED FOR MAKING INVESTMENT IN SHARES AND MUTUAL FUNDS WAS LIABLE TO BE DISALLOWED AS PER THE PROVISIONS OF SECTION 14A. ACCORDINGLY SUCH INTERES T WORKED OUT AT RS.18 12 756/- WAS DISALLOWED BY HIM U/S 14A. ON APPEAL THE LEARN ED CIT(APPEALS) UPHELD THE ACTION OF THE AO IN MAKING THE DISALLOWANCE OUT OF INTEREST EXPENDITURE INCURRED IN RELATION TO EXEMPT INCOME U/S 14A IN PRINCIPLE. REL YING ON THE DECISION OF SPECIAL 4 ITA NO. 1447/MUM/2009 ASSESSMENT YEAR : 2005-06. BENCH OF ITAT IN THE CASE OF DAGA CAPITAL MANAGEMEN T (P) LTD. REPORTED IN 117 ITD 169(MUM.)(S.B.) HE HOWEVER DIRECTED THE AO T O RECOMPUTE THE DISALLOWANCE TO BE MADE U/S 14A BY APPLYING RULE 8D OF THE INCOME TAX RULES 1962. 8. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE ISSUE INVOLVED IN T HIS GROUND RAISED BY THE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF HONBLE BOMB AY HIGH COURT IN THE CASE OF DCIT VS. GODREJ AND BOYCE MFG. CO. LTD. 328 ITR 81 WHEREIN IT WAS HELD THAT RULE 8D IS APPLICABLE ONLY FROM ASSESSMENT YEAR 200 8-09 AND PRIOR TO ASSESSMENT YEAR 2008-09 THE QUANTUM OF DISALLOWANCE TO BE MAD E U/S 14A HAS TO BE DETERMINED BY ADOPTING SOME REASONABLE METHOD. KEEP ING IN VIEW THE SAID DECISION OF HONBLE JURISDICTIONAL HIGH COURT WE S ET ASIDE THE IMPUGNED ORDER OF THE LEARNED CIT(APPEALS) ON THIS ISSUE AND RESTORE THE MATTER TO THE FILE OF THE AO WITH A DIRECTION TO DETERMINE THE QUANTUM OF DISALL OWANCE OF EXPENSES TO BE MADE U/S 14A BY ADOPTING SOME REASONABLE METHOD. GROUND NO. 2 IS ACCORDINGLY TREATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES. 9. THE ISSUE RAISED IN GROUND NO.3 RELATES TO THE D ISALLOWANCE OF RS.9 59 113/- MADE BY THE AO AND CONFIRMED BY THE LEARNED CIT(APP EALS) ON ACCOUNT OF ASSESSEES CLAIM FOR BAD DEBTS. 10. IN THE PROFIT & LOSS ACCOUNT FILED ALONG WITH I TS RETURN OF INCOME A SUM OF RS.9 59 113/- WAS DEBITED BY THE ASSESSEE ON ACCOUN T OF BAD DEBTS WRITTEN OFF. THE SAID DEBT REPRESENTED AMOUNT GIVEN BY THE ASSESSEE UNDER BILL DISCOUNTING SCHEME. SINCE THIS AMOUNT OF RS.9 59 113/- WAS NOT INCLUDED IN COMPUTING THE INCOME OF THE ASSESSEE FOR THE YEAR UNDER CONSIDERATION OR FO R ANY EARLIER YEAR THE AO HELD THAT THE CONDITION PRESCRIBED U/S 36(2)(I) WAS NOT SATISFIED. HE THEREFORE 5 ITA NO. 1447/MUM/2009 ASSESSMENT YEAR : 2005-06. DISALLOWED THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF BAD DEBTS WRITTEN OFF. ON APPEAL THE LEARNED CIT(APPEALS) CONFIRMED THE SAID DISALLOWANCE FOR THE SAME REASON AS GIVEN BY THE AO. 11. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES A ND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. IT IS OBSERVED THAT A SIMILAR I SSUE HAD COME UP FOR CONSIDERATION BEFORE THE SPECIAL BENCH OF THIS TRIBUNAL IN THE CA SE OF DCIT VS. SREYAS MORKHIYA 40 SOT 432 (MUM.) (S.B.) AND IT WAS HELD BY THE TRI BUNAL IN THE SAID CASE THAT THE AMOUNT RECEIVABLE BY THE ASSESSEE WHO IS A SHARE B ROKER FROM HIS CLIENTS AGAINST TRANSACTION OF PURCHASE OF SHARES ON THEIR BEHALF C ONSTITUTED A DEBT WHICH IS A TRADING DEBT. IT WAS HELD THAT THE BROKERAGE INCOME /COMMISSION ARISING FROM SUCH TRANSACTION VERY MUCH FORMED PART OF THE DEBT AND W HEN THE AMOUNT OF SUCH BROKERAGE/COMMISSION HAD BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE FOR THE RELEVANT PREVIOUS YEAR OR ANY EARLIER YEAR IT SATISFIED THE CONDITION STIPULATED IN SECTION 36(2)(1) AND THE AS SESSEE WAS ENTITLED TO DEDUCTION U/S 36(1)(VII) BY WAY OF BAD DEBTS AFTER HAVING WR ITTEN OFF THE SAID DEBTS FROM HIS BOOKS OF ACCOUNT AS IRRECOVERABLE. IN OUR OPINION THE RATIO OF THE DECISION OF SPECIAL BENCH OF ITAT IN THE CASE OF SREYAS S. MORK HIYA (SUPRA) IS DIRECTLY APPLICABLE IN THE CASE OF THE ASSESSEE AS THE AMOUN T RECEIVABLE BY THE ASSESSEE AGAINST TRANSACTION OF BILL DISCOUNTING CONSTITUTED ITS TRADING DEBT AND AS CLAIMED BY THE LEARNED COUNSEL FOR THE ASSESSEE BEFORE US THE INCOME IN THE FORM OF BILL DISCOUNTING CHARGES ARISING FROM SUCH TRANSACTION A ND FORMING PART OF THE TRADING DEBT HAVING BEEN TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE EARLIER YEAR THE CONDITION STIPULATED IN SECTI ON 36(2)(I) WAS SATISFIED AND THE ASSESSEE WAS ENTITLED FOR DEDUCTION U/S 36(1)(VII). WE THEREFORE DIRECT THE AO TO ALLOW THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON AC COUNT OF BAD DEBTS AFTER VERIFYING FROM THE RELEVANT RECORD THAT THE CORRESP ONDING INCOME IN THE FORM OF BILL 6 ITA NO. 1447/MUM/2009 ASSESSMENT YEAR : 2005-06. DISCOUNTING CHARGES ARISING FROM THE RELEVANT TRANS ACTION WAS TAKEN INTO ACCOUNT IN COMPUTATION OF INCOME OF THE ASSESSEE OF THE EARLIE R YEAR. GROUND NO. 3 IS ACCORDINGLY TREATED AS ALLOWED. 12. IN THE RESULT THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED ON THIS 16 TH DAY OF SEPT. 2011. SD/- SD/- (R.V. EASWAR) (P.M. J AGTAP) PRESIDENT. ACC OUNTANT MEMBER MUMBAI DATED: 16 TH SEPT. 2011. COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR H-BENCH. (TRUE COPY ) BY ORDER ASSTT. REGISTRAR ITAT MUMBAI BENCHES MUMBAI. WAKODE