ACIT, Faridabad v. M/s Laksons Footwear P. Ltd., Faridabad

ITA 3361/DEL/2011 | 2003-2004
Pronouncement Date: 30-03-2012 | Result: Allowed

Appeal Details

RSA Number 336120114 RSA 2011
Assessee PAN AAACL3114B
Bench Delhi
Appeal Number ITA 3361/DEL/2011
Duration Of Justice 9 month(s) 1 day(s)
Appellant ACIT, Faridabad
Respondent M/s Laksons Footwear P. Ltd., Faridabad
Appeal Type Income Tax Appeal
Pronouncement Date 30-03-2012
Appeal Filed By Department
Order Result Allowed
Bench Allotted D
Tribunal Order Date 30-03-2012
Date Of Final Hearing 04-01-2012
Next Hearing Date 04-01-2012
Assessment Year 2003-2004
Appeal Filed On 28-06-2011
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `D: NEW DELHI BEFORE SHRI RAJPAL YADAV JUDICIAL MEMBER AND SHRI K.D. RANJAN ACCOUNTANT MEMBER I.T. A. NOS.3361 & 3362/DEL/2011 ASSESSMENT YEARS : 2003-04 & 2004-05 ASSTT. COMMISSIONER OF INCOME-TAX M/S. LAKSON FOO TWEAR PVT.LTD. CIRCLE-II FARIDABAD. VS. PLOT NO.130 SECTOR-24 FARIDABAD. PAN: AAACL3114B (APPELLANT) (RESPONDEN T) APPELLANT BY: MS. Y. KAKKAR SR. DR. RESPONDENT BY: SHRI M.K. MADAN CA. O R D E R PER K.D. RANJAN ACCOUNTAT MEMBER: THESE APPEALS BY THE REVENUE FOR ASSESSMENT YEARS 2 003-04 AND 2004-05 ARISE OUT OF SEPARATE ORDERS OF THE COMMISS IONER OF INCOME-TAX (APPEALS) FARIDABAD. THESE APPEALS WERE HEARD TOG ETHER AND FOR THE SAKE OF CONVENIENCE ARE DISPOSED OF BY THIS COMMON ORDER. 2. THE ONLY ISSUE FOR CONSIDERATION WHICH IS COMMON IN BOTH THE APPEALS RELATES TO DELETING THE ADDITION OF RS.37 19 562/- IN A.Y. 2003-04 AND RS.32 22 796/- IN A.Y. 2004-05 DISALLOWED BY THE A SSESSING OFFICER UNDER SEC. 36(1)(III) OF THE INCOME-TAX ACT 1961 (THE AC T). 2 3. THE BRIEF FACTS OF THE CASE ARE THAT THE RETURN OF INCOME DECLARING INCOME OF RS.30 45 590/- WAS FILED BY THE ASSESSEE ON 27.11.2003. THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF TRAD ING OF FOOTWEAR WHICH ARE MAINLY PURCHASED FROM THE DIFFERENT GROUP COMPA NIES OF LAKHANI GROUP AND SOLD TO RETAILERS. THE ASSESSMENT U/S 143(3) O F THE ACT WAS COMPLETED ON 29.03.2006 DETERMINING TOTAL INCOME AT RS.73 93 730/- AFTER MAKING ADDITION OF RS.37 19 562/- ON ACCOUNT OF DISALLOWAN CE OF INTEREST U/S 36(1)(III) OF THE ACT. THE DISALLOWANCE OF INTERE ST WAS MADE ON THE GROUND THAT THE ASSESSEE COMPANY HAD MADE INVESTMENT OF RS .6.04 CRORES IN THE EQUITY SHARES OF A GROUP CONCERN LAKHANI INDIA LTD. OUT OF INTEREST BEARING FUNDS WHICH WERE NOT USED FOR BUSINESS PURPOSES. T HE ASSESSEE PREFERRED AN APPEAL AGAINST THE ASSESSMENT ORDER AND THE LD. CIT (APPEALS) FARIDABAD VIDE ORDER DATED 26.09.2007 IN APPEAL NO.37/2006-08 DELETED THE ADDITION OF RS.37 19 562/-. THE ORDER OF LD. CIT(A) WAS CHALLE NGED BY THE DEPARTMENT AND THE ITAT BENCH D NEW DELHI VIDE ORDER DATED 16.04.2009 IN APPEAL ITA NO.2233/DEL/2007 SET ASIDE THE ISSUE OF DISALLO WANCE OF INTEREST BACK TO THE AO TO DECIDE THE ASPECT OF COMMERCIAL EXPEDIENC Y AFRESH AFTER ALLOWING AN OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. DUR ING THE COURSE OF ASSESSMENT PROCEEDINGS PURSUANT TO THE AFORESAID OR DER OF ITAT THE ASSESSEE CONTENDED THAT THE INVESTMENT IN SHARES OF LAKHANI INDIA LTD. WAS 3 MADE OUT OF COMMERCIAL EXPEDIENCY; AND TO PROMOTE A ND PROTECT ITS OWN BUSINESS INTERESTS AS IT WAS MAKING PURCHASES FROM LAKHANI INDIA LTD. THE RELIANCE WAS ALSO PLACED ON SEVERAL JUDICIAL RULING S INCLUDING THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS (288 ITR 1). THE AO HAS HOWEVER HELD THAT THE ASSESSEE IS ONE OF THE DEALERS OF LAKHANI INDIA LTD. WHO IS MAKING SALES TO ASSESSEE AND MANY OTHER DEALERS. IT WAS NOT A CASE WHERE THE SAID COMPANY HAD IMPOSED ANY CONDITI ON THAT THE SALES WOULD BE MADE ONLY TO THOSE DEALERS WHO MADE SOME I NVESTMENT IN ITS SHARES. THE AO HAS ALSO DISTINGUISHED THE DECISION IN THE CASE OF S.A. BUILDERS ON THE REASONING THAT THE ASPECT OF COMMER CIAL EXPEDIENCY IN MAKING INVESTMENT IN THE SHARES OF SISTER CONCERN C ANNOT BE COMPARED WITH THE COMMERCIAL EXPEDIENCY IN GIVING INTEREST FREE A DVANCES TO THE SISTER CONCERN AS WAS IN THE CASE OF S.A. BUILDERS. CONSE QUENTLY THE AO HAS DISALLOWED THE INTEREST OF RS.37 19 562/- AFTER FOL LOWING THE EARLIER ASSESSMENT ORDER. AGGRIEVED BY THE ORDER OF THE AO THE ASSESSEE FILED THE APPEAL BEFORE THE LEARNED CIT(A). 4. BEFORE THE CIT(A) IT WAS SUBMITTED THAT TH E ASSESSEE MADE PURCHASES FROM ASSOCIATE CONCERN. THE ASSESSEE MADE INVESTME NTS IN SHARES OF LAKHANI INDIA LTD. FOR THE PURPOSE OF COMMERCIAL EX PEDIENCY. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE EARNED PROFIT OF RS.1 96 32 826/- 4 IN THE LAST THREE YEARS. THERE WAS BUSINESS RELATI ONSHIP BETWEEN THE ASSESSEE AND ASSOCIATE CONCERN. IT IS NOT NECESSARY THAT TH ERE HAS TO BE A MANDATORY CONDITION FOR THE INVESTMENT TO BE CATEGORIZED AS C OMMERCIAL EXPEDIENCY. IT WAS CONTENDED THAT IN A CASE WHERE THE BUSINESS REL ATIONSHIP WAS THERE COMMERCIAL EXPEDIENCY WOULD BE THERE. IT WAS ALSO SUBMITTED THAT IN THE CASE OF ANOTHER GROUP CONCERN M/S. LAKHANI MARKETIN G INC. ENGAGED IN THE SIMILAR BUSINESS OF SELLING AND MARKETING OF GOODS MANUFACTURED BY VARIOUS LAKHANI GROUP CONCERNS ITAT DELHI BENCH IN ITA NO S.3784/DEL/2004 & 3782/DEL/2004 FOR A.Y. 2000-01 AND 2001-02 RESPECTI VELY HAS UPHELD THE ORDERS OF THE CIT(A) DELETING THE ADDITION MADE ON SIMILAR GROUND. THE HONBLE PUNJAB & HARYANA HIGH COURT HAS DISMISSED T HE REVENUES APPEAL IN SAID CASE OF SISTER CONCERN WHEREIN THE HIGH COU RT HAS HELD THAT THERE WAS A COMMERCIAL EXPEDIENCY ONCE THERE WAS A BUSINESS C ONNECTION. SINCE THE FACTS OF THE CASE WERE IDENTICAL TO THAT OF M/S. LA KHANI MARKETING INC. IT WAS PLEADED BY THE ASSESSEE THAT INTEREST PAID ON BORRO WED FUNDS SHOULD BE ALLOWED ON PRINCIPLE OF COMMERCIAL EXPEDIENCY. 5. THE LEARNED CIT(A) REFERRED TO THE ORDER PASSED BY HIS PREDECESSOR DELETING THE ADDITION VIDE ORDER DATED 26.02.2007 I N APPEAL NO.37/2006-07 . HE ALSO OBSERVED THAT IN ASSESSMENT YEARS 2006-07 A ND 2007-08 ADDITIONS WERE MADE IN THE CONTEXT OF PROVISIONS OF SEC. 14A OF THE ACT. IN THOSE 5 YEARS HE HAD DECIDED THE APPEALS IN FAVOUR OF THE A SSESSEE. THE LEARNED CIT(A) FURTHER NOTED THAT SINCE THE ASSESSMENT ORDE RS PASSED FOR THOSE YEARS WERE SILENT AS TO THE YEARS AND QUANTUM OF INVESTME NTS MADE IN THE SHARES OF LAKHANI INDIA LTD. OVER VARIOUS YEARS HE TABULATED THE DETAILS IN RESPECT OF INVESTMENTS IN SHARES VIS--VIS AVAILABILITY OF RES ERVES AND SURPLUS INTEREST- FREE FUNDS AND INTEREST-BEARING FUNDS. FROM THE TA BLE SO REPRODUCED IN PARA 6.1 OF HIS ORDER THE LEARNED CIT(A) INFERRED THAT THE ENTIRE INVESTMENTS IN SHARES WAS NOT MADE OUT OF BORROWED FUNDS. THE INV ESTMENT IN SHARES WAS MADE FROM A.Y. 1994-95 TO 2002-03. THE ASSESSEE HA D ACCUMULATED RESERVES/SURPLUS TO THE EXTENT OF RS.2.21 CRORE AND SHARE CAPITAL OF RS.9 00 000/- UPTO 31 ST MARCH 2003. THEREFORE INVESTMENT IN SHARES TO T HE EXTENT OF RS. 2.3 CRORES COULD BE INFERRED TO HAVE BEEN MADE OUT OF RESERVES/SURPLUS AND SHARE CAPITAL. HE FURTHER NOTE D THAT INVESTMENT OF RS.2.96 CRORE IN ASSESSMENT YEAR 2000-01 WAS POSSIB LE ONLY THROUGH INTEREST-BEARING UNSECURED LOANS OF RS. 3 CORES. 6. THE LEARNED CIT(A) THEREAFTER EXAMINED THE PRINC IPLE OF COMMERCIAL EXPEDIENCY PROPOUNDED BY THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS. CIT (2007) 158 TAXMAN 74 (SC) WHEREIN IT HAS BEEN HELD THAT EVEN IF THERE WAS NEXUS OF BORROWED FUNDS WITH THE FUNDS ADVANCED INTEREST- FREE THE MEASURE OF COMMERCIAL EXPEDIENCY HAS TO B E NECESSARILY LOOKED 6 INTO BEFORE MAKING DISALLOWANCE OF INTEREST ON BORR OWED FUNDS. HE ALSO REFERRED TO SUBSEQUENT DECISION OF HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT 298 ITR 298 WHER EIN IT HAS BEEN HELD THAT NO DISALLOWANCE OF INTEREST ON BORROWED FUNDS COULD BE MADE WHEN INTEREST-FREE ADVANCES ARE ESTABLISHED TO BE OUT OF CAPITAL OR PROFITS OF THE ASSESSEE DURING THE YEAR. THEREFORE ESTABLISHMENT OF NEXUS OF BORROWED FUNDS WITH THE FUNDS ADVANCED INTEREST FREE OR INVE STED IN ASSETS GENERATING INCOME WHICH DOES NOT FORM PART OF TOTAL INCOME WAS AND REMAINED A CONDITION PRECEDENT TO DISALLOW INTEREST PAID ON BO RROWED FUNDS. WHETHER THERE WAS AN ELEMENT OF COMMERCIAL EXPEDIENCY OR NO T IT WAS A SUBSEQUENT MATTER TO BE DECIDED IN VIEW OF THE DECISION IN THE CASE OF S.A. BUILDERS. THE LEARNED CIT(A) ALSO RELIED ON THE DECISION OF I TAT DELHI BENCH IN THE CASE OF LAKHANI MARKETING INC. (SUPRA) WHEREIN THE DECISION OF CIT(A) DELETING THE ADDITION WAS UPHELD. HE ALSO REFERRED TO THE DECISION OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S. LAKHANI MARKETING INC. IN ITA NO.3 OF 2009 WHEREIN REVENUE S APPEAL IN THE CASE OF LAKHANI MARKETING INC. WAS DISMISSED ON THE PRIN CIPLE OF COMMERCIAL EXPEDIENCY. THE LEARNED CIT(A) AFTER CONSIDERING T HE FACTS OF THE CASE AND ALSO DECISION OF ITAT IN THE CASE OF LAKHANI MARKET ING INC. DIRECTED THE ASSESSING OFFICER TO DELETE THE ADDITION IN BOTH TH E YEARS. 7 7. BEFORE US THE LEARNED AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUBMITTED THAT ITAT VIDE ORDER DATED 16.04.2009 SET ASIDE THE MATTER TO THE FILE OF THE AO WITH THE DIRECTION TO EXAMINE AS TO WHETHER THE PRINCIPLE OF COMMERCIAL EXPEDIENCY WAS SATISFIED. THE LEARNED A R OF THE ASSESSEE FURTHER SUBMITTED THAT THE REVENUE HAS PREFERRED AP PEAL AGAINST THE DECISION OF ITAT WHEREIN IT HAS BEEN HELD THAT EXTENDING TH E INTEREST-FREE LOAN WAS A MATTER OF COMMERCIAL EXPEDIENCY FOR THE ASSESSEE. THEREFORE THE ASSESSEES CASE IS COVERED BY THE DECISION OF HONBLE HIGH COU RT IN THE CASE OF THE ASSESSEE. ON THE OTHER HAND THE LEARNED SR. DEPAR TMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE AO. 8. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. THE LEARNED CIT(A) IN PARA 6. 1 OF HIS ORDER HAS TABULATED THE DETAILS OF PURCHASE OF SHARES OF LAKH ANI INDIA LTD. IN VARIOUS YEARS STARTING FROM F.Y.1994-95. THE ASSESSEE PURC HASED 1 20 610 SHARES FOR A SUM OF RS.10 85 500/- IN F.Y. 1994-95. THE A SSESSEE AGAIN ACQUIRED SHARES 1 48 830 IN 1999-2000 FOR A SUM OF RS.98 89 388/-. THE ASSESSEE ACQUIRED 2 72 655 SHARES FOR RS.2 96 63 476/- IN 20 00-01; 1 27 876 SHARES VALUING RS.1 44 08 092/- IN 2001-02; AND 48 596 SHA RES FOR RS.55 16 424/- IN 2002-03. THE ASSESSEE SOLD 11 195 SHARES FOR RS .1 50 250/- IN THE YEAR 1998-99 AND 37 956 SHARES FOR RS.22 51 416/- IN THE YEAR 2003-04. FROM 8 ABOVE DETAILS IT IS EVIDENT THAT THE ASSESSEE HAS S OLD SHARES IN TWO YEARS WHEREAS THE ASSESSEE HAS BEEN PURCHASING SHARES AT MARKET PRICE IN OTHER YEARS. IF THE SHARES WERE HELD FOR THE PURPOSE OF GETTING DEALERSHIP FROM LAKHANI INDIA LTD. THERE WAS NO NEED TO SELL THE S HARES IN 1998-99 AND 2003-04. THE ASSESSEE HAS BEEN PURCHASING SHARES A T MARKET PRICE. IT IS NOT THE CASE THAT IF THE ASSESSEE HAD NOT PURCHASED SHA RES THE DEALERSHIP OR DISTRIBUTORSHIP OF LAKHANI INDIA WOULD HAVE GONE IN SOMEBODYS HANDS. THE ASSESSEE IS A GROUP CONCERN OF LAKHANI INDIA. THE LEARNED CIT(A) WHILE EXAMINING THE AVAILABILITY OF FUNDS HAS NOT LOOKED INTO THESE FACTS. THE LEARNED CIT(A) HAS ALSO PRESUMED THAT RESERVES AND SURPLUS WERE READILY AVAILABLE FOR INVESTMENT. FROM THE BALANCE-SHEET I T IS DIFFICULT TO ASCERTAIN THAT RESERVES AND SURPLUS WERE ACTUALLY IN THE FORM OF LIQUID CASH OR DEPOSITS IN THE BANK. THE RESERVES AND SURPLUS COULD EITHER BE IN FORM OF CASH IN HAND OR CASH IN BANK OR SUNDRY DEBTORS OR ANY OTHER ASSE T. UNLESS THE ASSESSEE EXHIBITS THE NEXUS BETWEEN THE INVESTMENT AND AVAIL ABILITY OF FUNDS FOR INVESTMENT AS PER BOOKS OF ACCOUNT IT CANNOT BE SA ID THAT THE MONEY HAS FLOWN OUT OF RESERVES AND SURPLUS FOR THE PURPOSE O F INVESTMENT. THE ASSESSEE BELONGS TO THE GROUP OF LAKHANI INDIA LTD. IT IS ALSO NOT KNOWN THAT AT THE TIME OF INVESTMENT IN SHARES WHO WERE THE D IRECTORS OF THE ASSESSEE COMPANY. IT IS ALSO NOT KNOWN WHETHER THE SHARES W ERE PURCHASED FROM THE 9 MARKET OR WERE ALLOTTED BY M/S. LAKHANI INDIA. IN THE ABSENCE OF ALL THESE DETAILS IN OUR CONSIDERED OPINION THE PRINCIPLE O F COMMERCIAL EXPEDIENCY CANNOT BE APPLIED. THE CONTENTION OF THE ASSESSEE THAT THERE SHOULD BE SOME BUSINESS RELATIONSHIP TO ESTABLISH THE PRINCIPLE OF COMMERCIAL EXPEDIENCY IN OUR CONSIDERED OPINION IS NOT CORRECT. THE ASSESS EE HAS BUSINESS RELATIONSHIP WITH ALL PERSONS WITH WHOM TRADING IS MADE. BUSINESS RELATIONSHIP CAN BE SAID TO EXIST EVEN WITH THE PER SONS FROM WHOM FUNDS ARE BORROWED. HENCE THE PRINCIPLE OF COMMERCIAL EXIGEN CY CANNOT BE BLINDLY APPLIED IN THE CASE OF PERSONS WITH WHOM THE ASSESS EE HAS SOME BUSINESS RELATIONSHIP. THE ASSESSEE HAS TO DEMONSTRATE THE PURPOSE FOR WHICH HE WAS MAKING THE INVESTMENT IN THE SHARES OF ASSOCIATE CO NCERN; WHETHER IT IS FOR GETTING DISTRIBUTORSHIP OR EARNING DIVIDEND INCOME OR FOR CONTROLLING INTERESTS. THE ASSESSEE HAD BORROWED MONEY FOR ITS OWN PURPOSE BUT HAS BEEN INVESTING IT IN SHARES. PRIMA FACIE IT APPEAR S TO BE DIVERSION OF FUNDS FOR ACQUISITION OF SHARES. IT IS NOT A CASE OF DEP OSIT OF MONEY WITH LAKHANI INDIA FOR THE PURPOSE OF SECURING BUSINESS OF DISTR IBUTORSHIP. WHAT WAS THE POSITION IN THE VERY FIRST YEAR WHEN BUSINESS OF DI STRIBUTORSHIP WAS ASSIGNED TO ASSESSEE IS NOT KNOWN. IF THERE WAS NO CONDITI ON IN THE VERY FIRST YEAR OR IN SUBSEQUENT YEARS THE AMOUNTS INVESTED IN VARIOU S YEARS IN SHARES OF LAKHANI INDIA LTD. CANNOT BE TREATED AS ASSESSEES COMPULSION TO MAKE 10 INVESTMENT IN SHARES WITHIN THE MEANING OF `COMMERC IAL EXPEDIENCY. THE LEARNED CIT(A)/AO HAS NOT EXAMINED THIS ASPECT OF T HE CASE ALSO. SINCE THE ISSUE HAS NOT BEEN EXAMINED EITHER BY THE ASSESSING OFFICER OR THE LEARNED CIT(A) WE FEEL IT PROPER TO SET ASIDE THE MATTER T O THE FILE OF THE ASSESSING OFFICER WITH THE DIRECTIONS TO EXAMINE THE ISSUE IN THE LIGHT OF OUR AFORESAID OBSERVATIONS AND DECIDE IT AFRESH AFTER AFFORDING T HE ASSESSEE A REASONABLE OPPORTUNITY OF BEING HEARD. 9. IN THE RESULT BOTH THE APPEALS FILED BY THE REV ENUE ARE ALLOWED FOR STATISTICAL PURPOSES. 10. THIS DECISION IS PRONOUNCED IN THE OPEN COURT O N 30 TH MARCH 2012. SD/- SD/- (RAJPAL YADAV) (K.D. RANJAN) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 30 TH MARCH 2012. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR ITAT.