ITO, Gurgaon v. M/s. Ghasi Ram Panna Lal, Gurgaon

ITA 2832/DEL/2009 | 2005-2006
Pronouncement Date: 22-07-2011 | Result: Partly Allowed

Appeal Details

RSA Number 283220114 RSA 2009
Bench Delhi
Appeal Number ITA 2832/DEL/2009
Duration Of Justice 2 year(s) 1 month(s) 11 day(s)
Appellant ITO, Gurgaon
Respondent M/s. Ghasi Ram Panna Lal, Gurgaon
Appeal Type Income Tax Appeal
Pronouncement Date 22-07-2011
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted C
Tribunal Order Date 22-07-2011
Date Of Final Hearing 08-07-2011
Next Hearing Date 08-07-2011
Assessment Year 2005-2006
Appeal Filed On 11-06-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH C DELHI BEFORE SHRI I.P. BANSAL AND SHRI K.G. BANSAL ITA NO. 2832(DEL)/2009 ASSESSMENT YEAR: 2005-06 INCOME-TAX OFFICER M/S GHA SI RAM PANNA LAL WARD-2 GURGAON. VS. AHATA PANN A LAL ROSHANPURA GURGAON. C.O. NO. 263(DEL)/2009 (IN ITA NO. 2832(DEL)/2009) ASSESSMENT YEAR: 2005-06 M/S GHASI RAM PANNA LAL INCOME-TAX OFFICER GURGAON. VS. W ARD-2 GURGAON. (APPELLANT) (RESPONDENT) DEPARTMENT BY : SMT. PRATIMA KAUSHIK SR. DR ASSESSEE BY : SHRI ASHWANI TANEJA ADVOCATE ORDER PER K.G. BANSAL : AM THIS APPEAL OF THE REVENUE AND CROSS OBJECTION OF THE ASSESSEE WERE ARGUED IN A CONSOLIDATED MANNER BY THE LD. SR. DR AND THE LD. COUNSEL FOR THE ASSESSEE. THEREFORE A CONSOLIDATED ORDER IS PASSED. ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 2 1.1 THE FACTS ARE THAT THE ASSESSEE-FIRM FILE D ITS RETURN ON 26.10.2005 DECLARING TOTAL INCOME OF RS. 4 78 070/-. THE RETUR N WAS INITIALLY PROCESSED U/S 143(1)(A) ON 16.03.2006 AND THE REAFTER THE SAME WAS TAKEN UP FOR MAKING REGULAR ASSESSMENT BY ISS UING NOTICES U/S 143(2) AND SECTION 142(1). THE ASSESSEE DEALS IN VARIO US OIL PRODUCTS. IN THE COURSE OF ASSESSMENT TWO IMPORTANT ISSUES AROSE FOR CONSIDERATION WHICH ARE RELEVANT IN THE APPEAL OF THE REVENUE. IT WAS NOTICED THAT THE FIRM BORROWED FUNDS AMOUNTING TO ABOUT RS. 1.19 CRORE AND PAID INTEREST OF RS. 14 27 659/- ON THE BORROWED FUNDS. THE AS SESSEE ALSO PAID INTEREST OF RS. 3 27 000/- ON THE CAPITAL INVESTED BY THE PARTNERS. IT WAS FURTHER NOTICED THAT THE ASSESSEE MADE INVESTMENT FOR EA RNING TAX-FREE INCOME BY WAY OF INTEREST AND FROM BIMA NIVESH POLICIES O F THE LIFE INSURANCE CORPORATION OF INDIA TAKEN IN THE NAMES OF PARTN ERS. THE ASSESSEE WAS REQUIRED TO SHOW CAUSE AS TO WHY INTEREST PAID ON BORROWED FUNDS SHOULD NOT BE ALLOCATED TOWARDS TAX-FREE INCOME EARNED BY IT WITH A VIEW TO MAKE DISALLOWANCE UNDER SECTIONS 36(1)(III) A ND 14A OF THE ACT. THE CASE OF THE ASSESSEE WAS THAT BORROWED FUNDS HAVE NOT BEEN INVESTED FOR EARNING TAX-FREE INCOME AS THE SAME HAVE BEEN U TILIZED FOR THE PURPOSE OF BUSINESS. HOWEVER THE AO DID NOT ACCEPT THIS POSITION. HE DISALLOWED ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 3 INTEREST OF RS. 8 73 706/- ON A PRO-RATA BASIS T HE CALCULATION OF WHICH IS AS UNDER:- (A) SOURCE OF FUNDS RS. 1. FUNDS BORROWED 1 23 85 914.00 2. CAPITAL OF FIRM 34 38 180.00 TOTAL FUNDS 1 58 24 094.00 (A) INTEREST PAID 1. ON FUNDS BORROWED 14 09 270.00 2. ON CAPITAL INVESTED BY PARTNERS 3 03 863.00 TOTAL INTEREST PAID 17 13 133.00 (C) AMOUNT INVESTED FOR NON-BUSINESS PURPOSES 1. LIC POLICIES IN THE NAME OF PARTNERS AND ON THE LIFE OF PARTNERS 46 70 362.00 2. RBI RELIEF BONDS (TAX-FREE) HELD IN THE NAME OF PARTNERS 34 00 000.00 TOTAL: 80 70 362.00 (D) PROPORTIONATE DISALLOWANCE OF INTT. INTT. PAID X AMOUNT FOR NON-BUSINESS PURPOSES TOTAL FUNDS I.E. 17 13 133 X 80 70 362= RS. 8 73 706/- 1 58 24 094 1.2 HE ALSO FOUND THAT CERTAIN EXPENSES WERE CL AIMED AS REVENUE EXPENSES WHICH ACCORDING TO HIM CONSTITUTED CAPI TAL EXPENDITURE. ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 4 THEREFORE THE EXPENDITURE OF RS. 1 33 500/- WAS DISALLOWED THE DETAILS OF WHICH ARE AS UNDER:- (A) 15.01.2005 JAGDAMBA TANKER FABRICATOR FOR RS. 46 800.00 UPGRADATION AND CAPITAL REPAIRS (B) 12.02.2005 JANTA MOTOR SPARES FOR ENGINE OVE RHAUL RS. 40 900.00 (B) 18.02.2005 GURU TEG BAHADUR BODY R S. 45 800.00 REPAIR FOR CABIN TOOL REPAIR TOTAL: RS. 1 33 500.00 1.3 THE AO ALSO DISALLOWED SOME OTHER EXPENSES WHICH FORM THE BASIS OF THE CROSS OBJECTION. WE SHALL COME TO THE DIS CUSSION IN THIS MATTER LATER ON. 2. BEFORE THE LD. CIT(APPEALS) THE CASE OF THE A SSESSEE WAS THAT ANY DISALLOWANCE U/S 14A CAN BE MADE ONLY WHEN IT IS SHOWN THAT THERE IS A PROXIMATE CONNECTION BETWEEN THE BORROWINGS OF FU NDS AND INVESTMENT OF THE FUNDS FOR THE PURPOSE OF EARNING TAX-FREE IN COME. THE AO FAILED TO ESTABLISH SUCH A CONNECTION. THEREFORE HE ALL OWED THE DEDUCTION OF THE INTEREST IN SO FAR AS THE SAME WAS MADE U/S 14A. HOWEVER HE CONFIRMED THE DISALLOWANCE OF INTEREST OF RS. 67 521/- BY ME NTIONING THAT THE ASSESSEE ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 5 HAS FAILED TO PROVE THAT FUNDS WERE ADVANCED T O A SISTER CONCERN WERE IN THE COURSE OF THE BUSINESS OF THE ASSESSEE. IN R ESPECT OF CAPITALIZATION OF THE EXPENDITURE THE LD. CIT(APPEALS) PERUSED THE BILLS AND THEREAFTER SUSTAINED DISALLOWANCE OF RS. 45 800/- RELATING TO THE MANUFACTURE OF A NEW TANKER CABIN. 3. BEFORE US THE LD. DR REFERRED TO THE FINDINGS OF THE AO AND IN PARTICULAR TO THE COMPUTATION OF DISALLOWANCE MA DE BY HIM FROM THE INTEREST EXPENDITURE. THIS COMPUTATION HAS ALREAD Y BEEN REPRODUCED BY US. THEREAFTER HE REFERRED TO THE FINDING OF THE LD. CIT(APPEALS) WHICH HAVE ALSO BEEN SUMMARIZED BY US. IT IS SUBMITTED TH AT THE CAPITAL OF THE ASSESSEE-FIRM AMOUNTED TO RS. 34 38 180/- ONLY WH ILE FUNDS OF ABOUT RS. 1.24 CRORE WERE BORROWED. THESE FIGURES SP EAK BY THEMSELVES THAT BULK OF INVESTMENTS CAME OUT OF THE BORROWED FUN DS. THE BIMA NIVESH POLICIES WERE TAKEN IN THE NAMES OF THE PARTNER S WHICH SHOW THAT THE INVESTMENT WAS MADE FOR BENEFITING THE PARTNERS . THE INCOME FROM THE POLICIES IS ALSO NOT LIABLE TO BE TAXED. FURTHER THE BANK STATEMENT HAS NOT BEEN FILED BEFORE THE AO OR THE LD. CIT(APPEALS) FROM WHICH IT COULD BE ASCERTAINED AS TO HOW THE BORROWED FUNDS OF ABO UT RS. 1.24 CRORE WERE UTILIZED. IN ANY CASE THERE IS AN INHERENT CON TRADICTION IN THE ORDER OF THE ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 6 LD. CIT(A) WHEN THE SAME IS EXAMINED IN THE LIGH T OF FACTS MENTIONED ABOVE. ACCORDINGLY IT WAS AGITATED THAT THE AO WAS RIGHT IN DISALLOWING INTEREST OF RS. 8 73 706/- IN COMPUTING THE INCOM E OF THE ASSESSEE. HOWEVER IN THE ALTERNATIVE IT WAS SUBMITTED T HAT THE QUESTION REGARDING DISALLOWANCE U/S 14A STANDS COVERED BY THE DE CISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. VS. DCIT (2010) 194 TAXMAN 203. THIS DE CISION MAY BE APPLIED TO THE FACTS OF THE CASE. 3.1 IN REPLY THE LD. COUNSEL FOR THE ASSESSEE HA RPED ON THE ISSUE THAT THE AO HAS NOT SHOWN NEXUS BETWEEN BORROWED FUNDS AND INVESTMENT IN TAX-FREE BONDS AND BIMA NIVESH POLICIES. THE A SSESSEE HAD INVESTED ABOUT RS. 34.00 LAKH IN TAX-FREE BONDS OF THE R ESERVE BANK OF INDIA AND ABOUT RS. 46.70 LAKH IN BIMA NIVESH POLICIES IN THE NAMES OF PARTNERS. THESE INVESTMENTS WERE MADE IN THE YEAR 2001. BOTH THE INVESTMENTS MATURED IN FINANCIAL YEAR 2006-07 AND THE FUNDS WERE CREDITED IN THE ACCOUNTS OF THE ASSESSEE-FIRM. IT IS FURTHER SUBMITTED THAT NO DISALLOWANCE HAS BEEN MADE IN PAST FROM THE INT EREST PAID BY THE ASSESSEE EITHER UNDER SECTION 36(1)(III) OR SECT ION 14A. IN REGARD TO NON- APPLICABILITY OF THE PROVISION CONTAINED IN SECTIO N 36(1)(III) RELIANCE HAS ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 7 BEEN PLACED ON THE DECISION IN THE CASE OF CIT V S. SRIDEV ENTERPRISES (1991) 192 ITR 165. IN THIS CASE IT HAS BEEN HELD THAT THE LOAN WAS TAKEN IN PAST AND CARRIED FORWARD TO THIS YEAR. THEREFORE ITS NATURE ETC. COULD NOT BE DIFFERENT IN THIS YEAR FROM THE EARLI ER YEARS. IN PAST THE INTEREST HAD BEEN ALLOWED. THEREFORE INTEREST PA ID ON THE SAME FUNDS IN THIS YEAR CANNOT BE DISALLOWED. COMING TO DISAL LOWANCE U/S 14A RELIANCE WAS PLACED ON A NUMBER OF DECISIONS OF THE TRIB UNAL IN WHICH IT HAS BEEN HELD THAT FOR INVOKING THIS PROVISION IT IS FOR THE AO TO SHOW THE NEXUS BETWEEN THE BORROWED FUNDS AND INVESTMENT MADE FOR EARNING TAX-FREE INCOME. WE NEED NOT GO INTO THE DETAILS OF TH ESE CASES FOR THE REASON THAT HIGH COURT DECISIONS ARE AVAILABLE IN THE M ATTER NOW. WE HAVE ALREADY REFERRED TO THE DECISION OF HONBLE BOM BAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO. LTD. IN THIS CASE IT HAS BEEN HELD THAT THE PROVISIONS CONTAINED IN RULE 8D OF I NCOME-TAX RULES 1962 ARE INTRA VIRES BUT APPLICABLE TO THE PROCEEDI NGS OF ASSESSMENT YEAR 2008- 09 AND ONWARDS. HOWEVER THE AO CAN CONSIDER ALL THE FACTS AND MAKE REASONABLE DISALLOWANCE IN PROCEEDINGS OF EARLIER YEARS ALSO. IN THE CASE OF CIT VS. WINSOME TEXTILE INDUSTRIES LTD. (20 09) 319 ITR 204 (P&H) IT HAS BEEN MENTIONED THAT SECTION 14A CARVES O UT AN EXCEPTION IN RESPECT OF ANY EXPENDITURE WHICH IS RELATABLE TO EARNING OF DIVIDEND INCOME NOT ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 8 SUBJECT TO TAX. SUCH EXPENDITURE HAS TO BE DIS ALLOWED. THEREFORE IT HAS TO BE ASCERTAINED AS TO WHETHER THE ASSESSEE HA D MADE THE INVESTMENT IN PURCHASE OF SHARES OUT OF BORROWED FUNDS OR INV ESTED ITS OWN FUNDS. THE CLAIM OF THE ASSESSEE HAS BEEN THAT NO BORROWED FUND HAS BEEN INVESTED IN PURCHASE OF SHARES. THIS AVERMENT HAS NOT B EEN DISPUTED BY THE AO BUT HE HAD MADE A DISALLOWANCE ON THE GROUND T HAT THE SAID FUNDS WERE AVAILABLE WITH THE ASSESSEE AND BUT FOR THIS INVE STMENT IT WOULD NOT HAVE RAISED LOANS TO THAT EXTENT. THIS FINDING DID NOT FIND FAVOUR WITH THE HONBLE JURISDICTIONAL HIGH COURT. 3.2 IN THE REJOINDER THE LD. DR SUBMITTED THAT T HE COMPUTATION FURNISHED BY THE AO MAKES IT MORE THAN AMPLY CLEAR THAT BORR OWED FUNDS HAVE BEEN INVESTED IN RESERVE BANK OF INDIA BONDS AND BIMA NI VESH POLICIES. AT THIS STAGE THE LD. COUNSEL SUBMITTED THAT HE IS OPEN TO FURTHER VERIFICATION BY THE AO IN THIS MATTER. 3.3 WE HAVE CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS MADE BEFORE US. WE FIND THAT THE ASSESSEE WAS IN POS SESSION OF OWN FUNDS TO THE EXTENT OF RS. 34 38 180/- ONLY. BORROWED FUNDS AM OUNTED TO ABOUT RS. 1.24 CRORE. THE ASSESSEE PAID INTEREST OF ABOUT RS. 14.00 LAKH ON THE BORROWED ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 9 FUNDS. THE INVESTMENTS AMOUNTED TO ABOUT RS. 80. 70 LAKH. THIS CLEARLY SHOWS THAT BORROWED FUNDS HAVE ALSO BEEN USED PAR TLY FOR THE PURPOSE OF EARNING TAX-FREE INCOME. THE ASSESSEE DID NOT FILE BANK STATEMENT OR CASH FLOW STATEMENT TO ASCERTAIN IN AN EXACT MAN NER THE AMOUNT INVESTED BY IT FOR EARNING TAX-FREE INCOME. THEREFORE WE THINK IT FIT TO RESTORE THE MATTER TO THE FILE OF THE AO FOR RECONSIDERATION O F THIS MATTER IN THE LIGHT OF STATUTORY PROVISIONS AND THE DECISIONS OF THE JURISDICTIONAL HIGH COURT AND THE HONBLE BOMBAY HIGH COURT. IN SO FAR A S APPLICABILITY OF SECTION 36(1)(III) IS CONCERNED WE DO NOT FIND ANY FORCE IN THE ASSESSMENT ORDER IN VIEW OF THE DECISION IN THE CASE OF SRI DEV ENTERPRISES (SUPRA). THUS THIS GROUND IS TREATED AS PARTLY ALLOWED. 4. COMING TO CAPITALIZATION OF THE EXPENSES THE EXPENDITURE OF RS. 46 800/- HAD BEEN INCURRED FOR UPGRADATION AND CAPITAL REPAIRS OF THE TANKER. THE AMOUNT WAS PAID TO JAGDMBA TANKER FABR ICATOR. THE FINDING OF THE LD. CIT(APPEALS) IS THAT THE EXPENDITURE WAS INCURRED IN THE MONTHS OF JANUARY AND FEBRUARY AND REPRESENT ROUTINE EXPE NDITURE TO BE INCURRED EVERY SECOND OR THIRD YEAR IN CASE OF A TANKER LORRY. WHILE THE LD. DR RELIED ON THE ORDER OF THE AO THE LD. COUNSEL REL IED ON THE ORDER OF THE LD. CIT(A). ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 10 4.1 WE HAVE CONSIDERED THE FACTS OF THE CASE. WE FIND THAT THE EXPENDITURE DOES NOT BRING INTO EXISTENCE A NE W CAPITAL ASSET. IT ALSO DOES NOT LEAD TO BENEFIT OF ENDURING NATURE TO THE ASSESSEE. THE ASSESSEE WAS ALSO NOT REQUIRED TO DEDUCT TAX AT SOURCE ON PURCHASE OF SPARE PARTS AND REPAIR WORK AS MADE OUT BY THE AO. THEREFORE THE ORDER OF THE LD. CIT(A) IS UPHELD. 5. COMING TO THE CROSS OBJECTION OF THE ASSESSEE GROUND NO. 1 IS THAT THE LD. CIT(APPEALS) ERRED IN CONFIRMING THE DISAL LOWANCE OF INTEREST IN RESPECT OF ADVANCE TO M/S GHASI RAM PANNA LAL &CO. THIS GROUND HAS NOT BEEN PRESSED BEFORE US. THEREFORE THE SAME IS D ISMISSED AS NOT PRESSED. 6. GROUND NO. 2 IS AGAINST THE FINDING OF THE LD . CIT(APPEALS) THAT THE EXPENDITURE OF RS. 45 800/- REPRESENTS CAPITAL EXPE NDITURE. IN THIS CONNECTION IT IS MENTIONED IN THE IMPUGNED ORDER THAT THE BILL FROM GURU TEG BAHADUR BODY BUILDER RELATES TO MANUFACTURE O F A NEW TANKER CABIN. ACCORDINGLY THE EXPENDITURE HAS BEEN HELD TO BE CAPITAL IN NATURE. THE CASE OF THE LD. COUNSEL IS THAT THE CABIN IS A PART AND PARCEL OF THE TANKER. THE CABIN BECOMES UNUSABLE AFTER SOME TIME AND THEREFORE IT HAS TO BE ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 11 MANUFACTURED AGAIN. HOWEVER THE TANKER REMAINS THE TANKER AND NO NEW ASSET COME INTO EXISTENCE. THE LD. DR RELIED O N THE ORDER OF THE LD. CIT(APPEALS). HAVING CONSIDERED THE FACTS WE ARE OF THE VIEW THAT NO NEW ASSET HAS COME INTO EXISTENCE AND THE EXPEN DITURE IS ONLY IN THE NATURE OF REPLACING THE CABIN. THEREFORE THE EX PENDITURE IS REVENUE IN NATURE. ACCORDINGLY THIS GROUND IS ALLOWED. 7. GROUND NO. 3 IS IN RESPECT OF ADDITION OF RS. 20 000/- MADE ON ESTIMATED BASIS REPRESENTING SALE PROCEEDS OF OL D TYRES SPARES SCRAP ETC. AS NO EVIDENCE EXISTS ABOUT ACTUAL SALE OF THESE ITEMS WE ARE OF THE VIEW THAT THE LOWER AUTHORITIES WERE NOT JUSTIFIED I N MAKING ADDITION OF AN ESTIMATED AMOUNT. THUS THIS GROUND IS ALSO ALLOWE D. 8. GROUND NO. 4 IS AGAINST DISALLOWANCE OF 1/6 TH OF THE EXPENDITURE INCURRED AS TELEPHONE EXPENSES MOTOR CAR RUNNI NG EXPENSES AND INSURANCE AND DEPRECIATION OF CAR. THE DISALLOWANC E HAS BEEN MADE AND CONFIRMED ON GROUND THAT PERSONAL USE BY PARTNERS CANNOT BE RULED OUT. HOWEVER THERE IS NO EVIDENCE REGARDING COMPUTATI ON OF THE AMOUNT AT 1/6 TH OF THE EXPENDITURE WHICH ACCORDING TO US IS SLI GHTLY ON THE HIGHER SIDE. ACCORDINGLY IN ABSENCE OF ANY ARGUMENT FRO M EITHER SIDE THE ITANO.2832(DEL)/2009 & C.O.NO. 263(DEL)/2009 12 DISALLOWANCE IS REDUCED TO 1/10 TH OF THE ACTUAL EXPENDITURE OR DISALLOWANCE INCURRED OR CLAIMED UNDER THESE HEADS. 9. IN THE RESULT THE APPEAL OF THE REVENUE IS TR EATED AS PARTLY ALLOWED FOR STATISTICAL PURPOSES AND THE CROSS OBJECTION OF THE ASSESSEE IS PARTLY ALLOWED. THE ORDER WAS PRONOUNCED IN THE OPEN COURT ON 22 JULY 2011. SD/- SD/- (I.P. BANSAL)) (K.G. BANSAL) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE OF ORDER: 22.07.2011. SP SATIA COPY OF THE ORDER FORWARDED TO:- GHASI RAM PANNA LAL GURGAON. ITO WARD-2 GURGAON. CIT CIT(APPEALS) THE DR ITAT NEW DELHI. ASSISTANT REGISTRAR.