THE INCOME TAX OFFICER-3(3)-3, MUMBAI v. M/S. SURAJ DIAMOND CONSULTANCIES P.LTD., MUMBAI

ITA 2120/MUM/2008 | 2004-2005
Pronouncement Date: 29-09-2011 | Result: Partly Allowed

Appeal Details

RSA Number 212019914 RSA 2008
Assessee PAN AAACS9779H
Bench Mumbai
Appeal Number ITA 2120/MUM/2008
Duration Of Justice 3 year(s) 6 month(s) 1 day(s)
Appellant THE INCOME TAX OFFICER-3(3)-3, MUMBAI
Respondent M/S. SURAJ DIAMOND CONSULTANCIES P.LTD., MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-09-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 29-09-2011
Date Of Final Hearing 29-06-2011
Next Hearing Date 29-06-2011
Assessment Year 2004-2005
Appeal Filed On 28-03-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH MUMBAI. BEFORE SHRI PRAMOD KUMAR ACCOUNTANT MEMBER AND SHRI V.DURGA RAO JUDICIAL MEMBER I.T.A NO.2120/ MUM/2008 ASSESSMENT YEAR: 2004-05 INCOME TAX OFFICER 3(3)-3 .. APPELLANT AAYAKAR BHAVAN M.K. ROAD MUMBAI. VS SURAJ DIAMOND CONSULTANCIES P. LTD. .. RESPONDE N T SURAJ HOUSE 73/C CROSS ROAD MIDC MAROL MUMBAI-21. PA NO.AAACS 9779 H APPEARANCES: S.K.SINGH FOR THE APPELLANT F.V.IRANI & RAJESH SHAH FOR THE RESPONDENT DATE OF HEARING : 29..6..2011 DATE OF PRONOUNCEMENT : 29 -09-2011 O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL THE ASSESSING OFFICER HAS CALLE D INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 27 TH DECEMBER 2007 IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX ACT 1961 F OR THE ASSESSMENT YEAR 2004-05. 2. IN GROUND NO.1 THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: I.T.A NO.2120/ MUM/2008 ASSESSMENT YEAR: 2004-05 2 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD CIT(A) ERRED IN DELETING AMOUNT OF RS.17 59 189 BEIN G THE INTEREST ADDED BY THE AO ON INTEREST FREE ADVANCES MADE TO GRO UP CONCERN WITHOUT APPRECIATING THAT THE ASSESSEE COMPANY HAD NOT ENTERED INTO BUSINESS TRANSACTION WITH ITS SISTER CONCERNS AND NATURE OF BUSINESS EXPEDIENCY WAS NOT PROVED BEYOND DOUBT BEFORE THE AO . 3. BRIEFLY STATED RELEVANT MATERIAL FACTS ARE LIKE T HIS. THE ASSESSEE IS ENGAGED IN THE BUSINESS AS MANUFACTURER AND DEALER IN PRECIOUS AND SEMI PRECIOUS STONES AND DIAMONDS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E ASSESSING OFFICER NOTICED THAT WHILE THE ASSESSEE HAS PAID INTEREST OF RS.45 15 680 ON BANK LOANS THE ASSESSEE HAS ALSO ADVANCED INTEREST FREE AMOUNT OF RS.4 91 500 TO A SISTER CONCERN BY THE NAME OF M/S. DIADEM INVESTMENTS & FINANCE PVT LTD. ON THESE FACTS THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST WHIC H WORKED OUT TO RS.17 59 189 AS HAVING BEEN DIVERTED FOR NON BUSINESS U SE. AGGRIEVED ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A)AND C ONTENDED THAT SINCE ADVANCE WAS GIVEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY INTEREST PAID RELATING TO THE SAID AMOUNT COULD NOT BE DISALLOWED. UPHOLDING THE CONTENTIONS OF THE ASSESSEE THE CIT(A) DELETED THE IMPUGNED DISALLOWANCE AND OBSERVED AS FOLLOWS: I HAVE CONSIDERED THE FACTS IN THIS REGARD AND ARGUME NTS OF THE APPELLANT. THERE IS NO DOUBT THAT IF AN INTEREST FREE ADVANCE HA S BEEN GIVEN FOR THE PURPOSE OF TRADE OR COMMERCIAL EXPEDIENCY OUT OF BOR ROWED FUNDS THE CORRESPONDING INTEREST IS AN ALLOWABLE BUSINESS EXPENDITU RE. THE APPELLANT STATES THAT THEY HAD TRADE DEALING WITH THE SAID SISTER CONCERN IN EARLIER YEARS AS WELL AS IN THE SUCCEEDING YEAR. DURING THE YEAR ADVANCE WAS GIVEN FOR THE PURPOSE OF TRADE ON 7.7.2003. WHEN THE TRADE COULD N OT TAKE PLACE THE ADVANCE WAS RECEIVED BACK ON 31.7.03. IT IS ALSO STATED THAT T HE ADVANCE OF THE SAID FUND WAS A BUSINESS DECISION OF MANAGEMENT. THESE FACTS S TATED BY THE APPELLANT ARE ALSO VERIFIABLE FROM THE RECORDS THE R ATIO OF THE SUPREME COURT JUDGMENT IN THE CASE OF M/S. S.A. BUILDERS LTD. 288 I TR 1 ALSO SUPPORT THE ARGUMENTS OF THE APPELLANT THAT THE INTEREST IS ALLOWA BLE IF THE ADVANCE HAS BEEN GIVEN FOR THE PURPOSE OF TRADE. HONBLE SUPREM E COURT IN THIS CASE HAS CLARIFIED THE LEGAL POSITION 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 SHOULD BE A LLOWED AS A DEDUCTION U/S. 36(1)(III) OF THE I.T.ACT 1961 ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND I NCLUDES SUCH EXPENDITURE AS I.T.A NO.2120/ MUM/2008 ASSESSMENT YEAR: 2004-05 3 A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUS INESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED 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 EXPRESSION USED IS FOR THE PURPOSE OF THE BUSINESS. FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VO LUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMATERIAL IF A TH IRD PARTY ALSO BENEFITS THEREBY. 4. THE ASSESSING OFFICER IS AGGRIEVED AND IS IN APPEAL B EFORE US. 5. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD WE SEE NO REASONS TO DISTURB WELL REASONED CONC LUSIONS ARRIVED AT BY THE CIT(A) PARTICULARLY AS LEARNED DEPARTMENTAL REPRE SENTATIVE DID NOT REALLY DISPUTE FACTUAL ELEMENTS EMBEDDED IN THE CONCLUSIONS ARRIVED A T BY THE CIT (A) WITH REGARD TO THE BUSINESS EXPEDIENCY OF THE ASSESSEE. WE HAVE ALSO TAKE N NOTE OF LEARNED COUNSELS ARGUMENT THAT ASSESSEES STAND TO THE EFFECT THA T ADVANCES WERE MADE FOR THE PURPOSE OF IMPORT OF ROUGH DIAMONDS AND SIMPLY B ECAUSE IMPORTS COULD NOT BE EFFECTED THE NATURE OF ADVANCES WOULD NOT CHANGE HAS REMAINED UNCONTROVERTED BY THE REVENUE. IN ANY CASE AS HELD BY HONBLE SUPREM E COURT IN THE CASE OF S.A. BUILDERS (SUPRA) THE EXPRESSION COMMERCIAL EXPEDIENC Y IS OF WIDE IMPORT AND EVEN ADVANCES FOR THE PURPOSE OF BUSINESS OF THE SISTER CONCER N ARE REQUIRED TO BE TREATED AS FOR BUSINESS PURPOSES. THE ASSESSING OFFICER WAS THUS CLEAR LY IN ERROR IN RESORTING TO THE DISALLOWANCE ON THE SHORT GROUND THAT WHILE TH E ASSESSEE HAS BORROWED THE MONEY ON INTEREST IT HAS GIVEN AN INTEREST FREE ADVAN CE TO THE SISTER CONCERN. THAT APPROACH CERTAINLY CONSTITUTE A VERY SUPERFICIAL VIEW OF THE MATTER AND THE CIT(A) WAS JUSTIFIED IN REVERSING THE DISALLOWANCE SO MADE BY T HE ASSESSING OFFICER. WE APPROVE THE CONCLUSIONS ARRIVED AT BY THE CIT(A) AND DECLINE TO INTERFERE IN THE MATTER. 6. GROUND NO.1 IS THUS DISMISSED. 7. IN GROUND NO.2 THE ASSESSING OFFICER HAS RAISED THE FOLLOWING GRIEVANCE: 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LD CIT(A) ERRED IN DELETING AMOUNT OF RS.1 05 78 350 BE ING THE PROFIT ON I.T.A NO.2120/ MUM/2008 ASSESSMENT YEAR: 2004-05 4 SALE OF SHARES AND ASSETS ADDED BY THE AO TO THE BOOK PRO FIT U/S.115JB WITHOUT APPRECIATING THAT THE DECISION ON THE JURISDI CTIONAL HIGH COURT IN THE CASE OF VEEKAYLAL INVESTMENT CO. PVT.LTD IS AP PLICABLE IN THE PRESENT CASE. 8. LEARNED REPRESENTATIVES FAIRLY AGREE THAT THE ISSUE IS NOW COVERED AGAINST THE ASSESSEE BY HONBLE KERALA HIGH COURT JUDGMENT IN THE C ASE OF N. J. JOSE AND CO. (P.) LTD. V. ASSISTANT COMMISSIONER OF INCOME-TAX 321 ITR 132(KER). LEARNED COUNSEL HOWEVER RELIES UPON A SERIES OF DECISIONS OF TH IS TRIBUNAL WHICH HAS DECIDED THIS ISSUE IN FAVOUR OF THE ASSESSEE AND SUBMITS TH AT HE WOULD LIKE TO KEEP THE ISSUE ALIVE. RESPECTFULLY FOLLOWING THE JUDGMENT OF THE HONBLE KERALA HIGH COURT IN THE CASE OF N. J. JOSE AND CO. (P.) LTD.(SUPRA) WE UPHOLD THE GRIEVANCE OF THE ASSESSING OFFICER AND REVERSE THE ORDER OF T HE CIT(A) ON THIS ISSUE. 9. GROUND NO.2 IS THUS ALLOWED. 10. IN THE RESULT APPEAL OF THE REVENUE IS PARTLY AL LOWED. PRONOUNCED IN THE OPEN COURT ON 29 TH SEPTEMBER 2011 SD/- ( V. DURGA RAO) JUDICIAL MEMBER SD/- (PRAMOD KUMAR) ACCOUNTANT MEMBER MUMBAI DATED 29 TH SEPTEMBER 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS) XXXII MUMBAI 4. COMMISSIONER OF INCOME TAX 3 MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH J MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI