M/S. PETROCON INDIA LTD ( NOW AMALGAMATED WITH M/S. VIDEOCON INDUSTRIES LTD), MUMBAI v. THE ACIT CEN CIR-17 & 28, MUMBAI

ITA 6462/MUM/2007 | 2003-2004
Pronouncement Date: 29-07-2011 | Result: Allowed

Appeal Details

RSA Number 646219914 RSA 2007
Assessee PAN AAACV1513G
Bench Mumbai
Appeal Number ITA 6462/MUM/2007
Duration Of Justice 3 year(s) 9 month(s) 6 day(s)
Appellant M/S. PETROCON INDIA LTD ( NOW AMALGAMATED WITH M/S. VIDEOCON INDUSTRIES LTD), MUMBAI
Respondent THE ACIT CEN CIR-17 & 28, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 29-07-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 29-07-2011
Date Of Final Hearing 04-07-2011
Next Hearing Date 04-07-2011
Assessment Year 2003-2004
Appeal Filed On 23-10-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'C' BENCH MUMBAI BEFORE SHRI D.K. AGARWAL JUDICIAL MEMBER AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 6462/MUM/2007 (ASSESSMENT YEAR: 2003-04) M/S. PETROCON INDIA LTD. ACIT CENTRAL CIRCLE 17 & 28 ( AMALGAMATED WITH M/S. VIDEOCON INDUSTRIES LTD.) MUMBAI 17TH FLOOR C-WING MITTTAL COURT VS. NARIMAN POINT MUMBAI 400021 PAN - AAACV 1513 G APPELLANT RESPONDENT ITA NO. 6832/MUM/2007 (ASSESSMENT YEAR: 2003-04) JCIT (OSD) RANGE-3(3) M/S. PETROCON INDIA LTD. ROOM NO. 609 6TH FLOOR ( AMALGAMATED WITH M/S. VIDEOCON INDUSTRIES LTD.) AAYAKAR BHAVAN M.K. ROAD VS. 17TH FLOOR C-WING MITTTAL COURT MUMBAI 400020 NARIMAN POINT MUMBAI 400021 PAN - AAACV 1513 G APPELLANT RESPONDENT ASSESSEE BY: SHRI SHAILESH S. SHAH REVENUE BY: SHRI PAWAN VED DATE OF HEARING: 04.07.2011 DATE OF PRONOUNCEMENT: 29.07.2011 O R D E R PER B. RAMAKOTAIAH A.M. THESE ARE CROSS APPEALS BY ASSESSEE AND REVENUE AGA INST THE ORDER OF THE CIT(A) CENTRAL IV MUMBAI DATED 24.09.2007. 2. BRIEFLY STATED ASSESSEE IS MAINLY ENGAGED IN THE BU SINESS OF EXPLORATION AND EXTRACTION OF OIL AND GAS AND IS AL SO DOING BUSINESS IN FINANCE AND INVESTMENT IN VARIOUS SHARES SECURITIE S BONDS AND DEBENTURES. ASSESSEE FILED RETURN OF INCOME DECLARING TOTAL INC OME AT NIL AFTER ADJUSTING BROUGHT FORWARD LOSSES. THE INCOME WAS COMPUTED UND ER SECTION 115JB ON THE BOOK PROFIT OF ` 20 77 64 039/-. IN THE COURSE OF SCRUTINY ASSESSMEN T THE A.O. DISALLOWED INTEREST UNDER SECTION 36(1)(III) O UT OF THE TOTAL INTEREST ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 2 CLAIM. IN MAKING THE DISALLOWANCES THE A.O. CONSIDE RED VARIOUS PARAMETERS AND THE FIRST DISALLOWANCE OF ` 31 44 677/- WAS ON DIFFERENTIAL RATE OF INTEREST ARRIVED AT BY TAKING THE AVERAGE RATE PAID TO THE A VERAGE RATE CHARTED ON CERTAIN ADVANCES WITH THE GROUP CONCERNS. SIMILARLY AN AMOUNT OF ` 3 38 355/- WAS DISALLOWED ON TWO INTER-CORPORATE DE POSITS GIVEN ON THE LAST DAY OF THE FINANCIAL YEAR AND NOT CHARGED INTEREST. AN AMOUNT OF ` 15 96 76 260/- WAS DISALLOWED AS INTEREST COST ON ICD ADVANCES TO VARIOUS CONCERNS ON WHICH NO INTEREST WAS CHARGED. THIS AMO UNT WAS ARRIVED AT @15.91% PAID BY THE ASSESSEE ON AN AVERAGE RATE ON ADVANCE OF ` 100.36 CRORES. ONE MORE DISALLOWED AMOUNT WAS OF ` 12 28 14 747/- AT THE SAME RATE OF 15.91% ON ADVANCES GIVEN TO FOUR GROUP COMP ANIES ON WHICH NO INTEREST WAS CHARGED. THUS THESE DISALLOWANCES AMO UNTING TO ` 28 59 74 069/- UNDER SECTION 36(1)(III) WAS CONTEST ED BEFORE THE CIT(A). 3. THE CIT(A) ADMITTED ADDITIONAL EVIDENCE AND SENT TH E MATTER ON REMAND TO EXAMINE THE CONTENTIONS THAT ASSESSEE HAS OWN FUNDS TO ADVANCE SOME OF THE ADVANCES ARE FOR PURCHASE OF PROPERTY A ND SOME INVESTMENTS ON ICDS WAS GIVEN TO NON-GROUP CONCERNS WHICH HAVE BEC OME BAD HENCE NO INTEREST COULD BE CHARGED AND OTHER CONTENTIONS ON FACTS. AFTER CONSIDERING ASSESSEES SUBMISSIONS AND THE REMAND REPORT THE C IT(A) DELETED DISALLOWANCE OF DIFFERENTIAL RATE OF INTEREST IN IT S ENTIRETY. OUT OF THE PROPORTIONATE INTEREST OF ` 16 00 14 645/- DISALLOWED ON INTER CORPORATE DEPOSITS THE CIT(A) DELETED THE AMOUNTS EXCEPT AN E XPENDITURE OF ` 9 73 298/- STATED TO BE ADVANCED ONLY DURING THE YE AR ON THE PROPORTIONATE INTEREST GIVEN TO THE GROUP CONCERNS. ON ADVANCES F OR PURCHASE OF PROPERTY HE DELETED THE DISALLOWANCE TO AN EXTENT OF ` 7 90 53 499/- WHEREAS HE HAS UPHELD THE DISALLOWANCE TO THE EXTENT OF ` 4 37 60 748/-. ASSESSEE IN ITA NO. 6462/MUM/2007 HAS RAISED TWO GROUNDS ON THE AMOUNTS CONFIRMED BY THE CIT(A) WHEREAS REVENUE HAS RAISED THREE GROUNDS ON THE AMOUNTS DELETED BY THE CIT(A). SINCE THESE ISSUES ARE INTERCONNECTE D THEY ARE DISCUSSED AND DECIDED BY THIS ORDER. 4. ASSESSEE HAS CONTESTED IN GROUND NO 1 THE CONFIRMAT ION OF INTEREST DISALLOWANCE TO THE EXTENT OF PROPORTIONATE INTERES T DISALLOWED ON AMOUNTS ADVANCES ONLY DURING THE YEAR TO AN EXTENT OF ` 9 72 298/- UNDER SECTION ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 3 36(1)(III). THIS GROUND NO. 1 IN ASSESSEES APPEAL WAS NOT PRESSED AND THEREFORE TREATED AS WITHDRAWN. 5. THE OTHER GROUND RAISED IN ASSESSEES APPEAL IS WIT H REFERENCE TO THE DISALLOWANCE OF PROPORTIONATE INTEREST OF ` 4 37 60 738/- IN RESPECT OF ADVANCES GIVEN TO TWO PARTIES FOR PURCHASE OF PROPE RTY. THE CORRESPONDING GROUND IN REVENUE APPEAL IS GROUND NO. 3 ON THE PRO PORTIONATE INTEREST DELETED BY THE CIT(A). THESE GROUNDS ARE CONSIDERED TOGETHER. 6. THE ISSUE ARISING OUT OF THESE GROUNDS WAS THAT ASS ESSEES BALANCE SHEET INDICATED THE FOLLOWING ADVANCES TO THE PARTI ES: - VIDEOCON PROPERTIES LIMITED ` 34 82 38 138/- VIDECON INTERNATIONAL LIMITED ` 13 78 17 415/- VIDECON LEASING & INDL. FINANCE LTD. ` 13 72 34 427/- BALI PROPERTIES & INVESTMENTS PVT. LTD. ` 14 86 44 319/- 7. IN THE COURSE OF AN ENQUIRY ASSESSEE WAS ASKED TO E XPLAIN THE NATURE OF ADVANCESTO THESE COMPANIES. ASSESSEE SUBMITTED T HAT THESE AMOUNTS WERE ADVANCED TO THE GROUP COMPANIES FOR PURCHASE O F PROPERTY AND ACCORDINGLY THESE ADVANCES ARE FOR THE PURPOSE OF BUSINESS. THE A.O. HELD THAT THE SOURCE OF ENTIRE FUNDS FOR THE PURPOSE OF THESE ADVANCES TO OTHERS WAS ONLY BORROWED FUNDS AND HE TREATED THE ENTIRE A MOUNT AS DIVERSION OF INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSES. T HE A.O. WORKED OUT THE DISALLOWANCE OF INTEREST BY APPLYING THE AVERAGE RA TE OF BORROWING AT 15.91% WHICH CAME TO ` 12 28 14 747/-. 8. BEFORE THE CIT(A) ASSESSEE VIDE VARIOUS LETTERS FI LED SUBMITTED THAT THESE ADVANCES WERE PAID FOR PURCHASE OF PROPERTY F OR ITS OWN USE AND HENCE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE REASONS FOR ADVANCING THE AMOUNT I.E. PURCHASE OF PROPERTY WHY THE PROPERTY COULD NOT BE PURCHASED STEPS TAKEN FOR PURCHASING THE PROPER TY AND SUBSEQUENT COURT CASES WERE ALL EXPLAINED IN DETAIL AND WERE E XTRACTED BY THE CIT(A) IN PARA 7.2 OF HIS ORDER. IT WAS SUBMITTED THAT THE TR ANSACTIONS WITH VIDEOCON PROPERTIES LTD. AND BALI PROPERTIES DID NOT MATERIA LISE AS THE PROPERTIES WERE SUBJECT MATTER OF DISPUTE. WITH REFERENCE TO THE OT HER TWO ADVANCES IT WAS SUBMITTED THAT ASSESSEE HAS GIVEN ADVANCE FOR PURCH ASE OF PROPERTY AT ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 4 VIDEOCON TOWERS IN DELHI TO VIDEOCON LEASING & INDU STRIAL FINANCE LTD. AND ANOTHER ADVANCE TO VIDEOCON INTERNATIONAL FOR PURCH ASE OF PROPERTY AT LOWER PAREL MUMBAI. THE PROPERTIES WERE TO BE FORMERLY T RANSFERRED TO ASSESSEE COMPANY BUT IN THE MEANTIME THE COMPANIES DECIDED T O MERGE/AMALGAMATE WITH VIDEOCON INDUSTRIES WITH WHICH ASSESSEE COMPA NY ALSO SUBSEQUENTLY GOT MERGED. THEREFORE THE PROPERTIES WERE NOT TRAN SFERRED BUT THE AMOUNTS WERE ADJUSTED IN THE BOOKS OF ACCOUNT IN THE FINANC IAL YEAR 2004-05. IT WAS SUBMITTED THAT THE FUNDS WERE ADVANCED FOR BUSINESS PURPOSES ONLY. THESE CONTENTIONS WERE REMANDED TO THE A.O. AND AFTER OBT AINING THE REMAND REPORT THE CIT(A) GAVE PARTIAL RELIEF BY DISCUSSING THE ISSUE AS UNDER: - 7.14 AFTER CONSIDERING THE SUBMISSIONS OF THE AR THE FACTS OF THE CASE AND THE ADDITIONAL DOCUMENTS FILED I AGREE WI TH THE CONTENTION OF THE AR AND ALSO ON PERUSAL OF THE BALANCE SHEET THAT BORROWING BY WAY OF FRESH TERM LOAN OF ` 100 CRORES TAKEN FROM THE ICICI BANK FOR THE BUSINESS PURPOSE DURING THE YEAR HAS BEEN UTILI ZED IN THE APPELLANTS BUSINESS OF EXPLORATION AND EXTRACTION OF OIL AND GAS AS THERE ARE ADDITIONS TO FIXED ASSETS OF RS.11.16 CRO RES REDUCTION OF CURRENT LIABILITIES OF RS.34 69 CRORES AND REPAYMEN T OF NON CONVERTIBLE DEBENTURES OF RS.125.84 CRORES DURING THE YEAR. THUS IT IS EVIDENT THAT THE LOANS RAISED DURING THE YEAR HA VE BEEN USED FOR ITS BUSINESS PURPOSE. WITH REGARD TO ADVANCES MADE FOR PURCHASE OF PROPER TIES THE APPELLANT HAS SUBMITTED THE EVIDENCES IN FORM OF MO US WITH THE PARTIES. FROM THE SAID MOUS IT IS CLEAR THAT THE FU NDS WERE GIVEN AS ADVANCES FOR ACQUISITION OF PROPERTIES AT VARIOUS L OCATIONS. IN THE REMAND REPORT THE AO HAS STATED THAT SINCE THE APPE LLANT IS NOT IN THE BUSINESS OF INVESTMENT IN PROPERTIES THE SAID ADVAN CES ARE FOR NON- BUSINESS PURPOSES AND HENCE DISALLOWANCES ON THE SA ME SHOULD BE UPHELD. HOWEVER I AM AFRAID THE APPELLANT HAS NOT WHERE STATED THAT IT WAS CARRYING ON OR WANTED TO RUN BUSINESS IN PRO PERTIES. IT IS THE CASE OF THE APPELLANT THAT IT WANTED TO PURCHASE PR OPERTIES AT VARIOUS LOCATIONS FOR SMOOTH AND EFFICIENT RUNNING OF ITS E XISTING BUSINESS. I AGREE WITH THE CONTENTIONS OF THE APPELLANT THAT FO R THE PURPOSE OF EXISTING BUSINESS IF THE BORROWED FUNDS ARE USED FO R THE BUSINESS PURPOSES IT IS IMMATERIAL WHETHER THE SAME IS USED FOR CAPITAL EXPENDITURE OR A REVENUE EXPENDITURE. SECTION 36(1) (III) OF THE INCOME TAX ACT 1961 INTERALIA LAYS DOWN THAT THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF T HE BUSINESS SHALL BE ALLOWED AS DEDUCTION. THE ABOVE IS SUPPORTED BY THE DECISIONS REFERRED TO IN PARA 6.10 UNDER GROUND OF APPEAL NO. 3. 7.15 IT IS SEEN THAT M/S. VIDEOCON PROPERTIES LTD. AND M/S. BALI PROPERTIES & MANAGEMENT PVT. LTD. ARE ENGAGED IN TH E BUSINESS OF REAL ESTATE CONSTRUCTION AND DEVELOPMENT. HENCE TH E TRANSACTION TO ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 5 ACQUIRE PREMISES FROM THEM WOULD BE UNDER IN THE NO RMAL COURSE OF BUSINESS OF THE APPELLANT AS WELL AS THOSE TWO PART IES. THE ADVANCES GIVEN TO THESE TWO PARTIES FOR ACQUISITION OF PROPE RTIES FOR THE APPELLANTS BUSINESS NEEDS IN TERMS OF MOUS WITH TH OSE PARTIES WOULD BE TREATED AS A MEASURE OF COMMERCIAL EXPEDIE NCY AND FOR THE PURPOSE OF ITS BUSINESS. HOWEVER THE SAME CANNOT B E SAID IN RESPECT OF THE ADVANCES GIVEN TO M/S. VIDEOCON INTERNATIONA L LTD. AND M/S. VIDEOCON LEASING & INDUSTRIAL FINANCE LTD. AS THEY ARE NOT ENGAGED IN THE BUSINESS OF REAL ESTATE CONSTRUCTION AND DE VELOPMENT. FURTHER IT HAS NOT BEEN SHOWN AS TO WHETHER THEY HAD ANY SU RPLUS PREMISES WHICH WERE NOT REQUIRED FOR THEIR OWN BUSINESS. THE ADVANCES HAVE ALSO BEEN REFUNDED WITHOUT THE TRANSACTIONS GETTING COMPLETED AND HENCE IT CAN NOT BE SAID THAT THE INTEREST FREE ADV ANCES WERE GIVEN BY THE APPELLANT AS A MEASURE OF COMMERCIAL EXPEDIENCY . 7.16 HENCE THE PAYMENT OF ADVANCES FOR PURCHASE OF PROPERTIES TO M/S. VIDEOCON PROPERTIES LTD. & M/S. BALI PROPERTIE S & INVESTMENTS PVT. LTD. ARE HELD TO BE FOR THE PURPOSE OF BUSINES S AND CANNOT BE SAID TO BE FOR NON-BUSINESS PURPOSES AS HELD BY THE ASSESSING OFFICER. ACCORDINGLY THE DISALLOWANCE OF PROPORTIO NATE INTEREST @ 15.91% ON ADVANCES MADE FOR PURCHASE OF PROPERTIES TO THESE TWO PARITIES IS DELETED. THE APPELLANT GETS RELIEF OF R S.7 90 53 999/-. THE DISALLOWANCE OF PROPORTIONATE INTEREST IN RESPECT O F ADVANCE GIVEN TO OTHER TWO PARTIES NAMELY M/S. VIDEOCON INTERNATIONA L LTD. & M/S. VIDEOCON LEASING & INDUSTRIAL FINANCE LTD. AMOUNTIN G TO RS.4 37 60 748/- IS UPHELD. ACCORDINGLY THE GROUND OF APPEAL NO. 4 IS PARTLY ALLOWED. 9. THE LEARNED A.R. SUBMITTED THAT THERE WAS EVIDENCE ON RECORD THAT THE AMOUNTS WERE ADVANCED FOR PURCHASE OF PROPERTY AND THE CIT(A) HAS GIVEN A FINDING IN PARA 7.14 THAT THE LOANS RAISED DURING T HE YEAR HAVE BEEN USED FOR BUSINESS PURPOSES ONLY AND THEREFORE THE QUESTION O F DISALLOWING INTEREST ON ADVANCE AMOUNT FOR PURCHASE OF PROPERTY DOES NOT AR ISE AS THE ENTIRE LOAN OBTAINED ON WHICH INTEREST WAS PAID WAS FOR THE PUR POSE OF BUSINESS. FURTHER IT WAS SUBMITTED THAT THE CIT(A) ALSO AGREE D WITH THE CONTENTION THAT FOR THE PURPOSE OF EXISTING BUSINESS WHETHER B ORROWED FUNDS ARE USED FOR BUSINESS PURPOSES IT IS IMMATERIAL WHETHER THE SAME IS USED FOR CAPITAL OR REVENUE EXPENDITURE. IT WAS FURTHER SUBMITTED TH AT ASSESSEE ADVANCED MONEYS FOR PURCHASE OF PROPERTIES AND THE CIT(A) AC CEPTED THAT TWO COMPANIES WHICH ARE IN THE BUSINESS OF REAL ESTATE CONSTRUCTION AND DEVELOPMENT HAVE BEEN ACCEPTED AS ADVANCE FOR BUSIN ESS PURPOSES WHEREAS THE ASSESSEE ALSO ADVANCED AMOUNTS FOR PURCHASE OF PROPERTIES OWNED BY M/S. VIDEOCON INTERNATIONAL AND VIDEOCON LEASING & INDUSTRIAL FINANCE LTD. ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 6 WHICH ALSO SHOULD BE CONSIDERED FOR BUSINESS ONLY. IT CANNOT BE CONSIDERED AS NON-BUSINESS PURPOSES AS THESE TWO COMPANIES ULT IMATELY WERE MERGED LATER WITH VIDEOCON INDUSTRIES AND ASSESSEE COMPAN Y ALSO MERGED WITH THE VIDEOCON INDUSTRIES SUBSEQUENTLY. THEREFORE THE PR OPERTIES BECAME THE PROPERTY OF VIDEOCON INDUSTRIES AND NECESSARY ENTRI ES HAVE BEEN MADE WITHOUT TRANSFERRING THE PROPERTY AS SUCH BUT ACQUI RING THE OWNERSHIP BY WAY OF MERGER/AMALGAMATION. IT WAS FURTHER SUBMITTE D THAT THE A.O. HAS NOT MADE ANY SUCH DISALLOWANCE IN LATER YEAR. 10. THE LEARNED D.R. HOWEVER WHILE SUPPORTING THE DIS ALLOWANCES CONFIRMED BY THE CIT(A) SUBMITTED THAT THE CIT(A) E RRED IN DELETING THE AMOUNTS JUST BECAUSE TWO COMPANIES ARE IN THE BUSIN ESS OF REAL ESTATE WITHOUT ESTABLISHING COMMERCIAL EXPEDIENCY. HE REFE RRED TO THE FINDINGS GIVEN BY THE CIT(A) IN PARA 7.15 TO SUBMIT THAT NOT HING WAS BROUGHT ON RECORD TO EXPLAIN THAT THEY HAD ANY SURPLUS FUNDS A ND ADVANCES HAVE BEEN REFUNDED WITHOUT TRANSACTIONS GETTING COMPLETED. TH EREFORE THE CIT(A) ERRED IN GRANTING RELIEF TO ASSESSEE WHICH WAS CONTESTED BY REVENUE IN THE GROUNDS. THE DR SUPPORTED THE ORDER OF THE CIT(A) T O THE EXTENT OF CONFIRMATION OF DISALLOWANCES. 11. WE HAVE CONSIDERED THE ISSUE. WE ARE UNABLE TO AGRE E WITH THE REASONS OF THE CIT(A) TO THE EXTENT OF CONFIRMING T HE DISALLOWANCES ON THE TWO PROPERTIES. CIT(A) GIVES A FINDING IN PARA 7.15 THAT ASSESSEE HAS BORROWED BY WAY OF FRESH TERM LOAN OF ` 100 CRORES TAKEN FROM ICICI BANK WHICH WAS UTILISED FOR BUSINESS OF EXPLORATION AND EXTRACTION OF OIL AND GAS. HE ALSO GIVES A FINDING THAT THE LOAN RAISED DURING THE YEAR HAVE BEEN USED FOR ITS BUSINESS PURPOSES. HAVING GIVEN A FINDING T HAT THE LOANS RAISED DURING THE YEAR HAVE BEEN USED FOR BUSINESS PURPOSE S WE ARE UNABLE TO UNDERSTAND HOW HE COULD CONFIRM DISALLOWANCE OF INT EREST FOR DIVERSION OF FUNDS. IT IS ON RECORD THAT ASSESSEE HAS ADVANCED F UNDS TO THE GROUP CONCERNS FOR PURCHASE OF PROPERTY AND AS EXPLAINED BY THE ASSESSEE THE PROPERTIES SUPPOSED TO BE PURCHASED FROM VIDEOCON P ROPERTIES LTD. AND BALI PROPERTIES & INVESTMENT PVT. LTD. HAVE GONE IN FOR DISPUTES AND ACCORDINGLY THE TRANSACTIONS COULD NOT BE FINALISED. THE CIT(A) ALSO HOLDS THAT THE TRANSACTIONS ARE FOR BUSINESS PURPOSES. THEREFORE W E AGREE WITH THE FINDINGS ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 7 THAT THE ADVANCES TO THE ABOVE TWO COMPANIES ARE FO R THE PURPOSE OF BUSINESS SO THE QUESTION OF DISALLOWANCE UNDER SEC TION 36(1)(III) DOES NOT ARISE. ACCORDINGLY REVENUE GROUND NO. 3 CONTESTING THE ORDER OF THE CIT(A) HAS TO BE REJECTED. 12. COMING TO GROUND NO. 2 OF ASSESSEE ON CONFIRMATION OF DISALLOWANCES WE HAVE EXAMINED THE RECORD AND NOTICED THAT ADVANC ES ARE GIVEN FOR PURCHASE OF PROPERTIES TO GROUP CONCERNS AND ULTIMA TELY HAVE MERGED WITH VIDEOCON INDUSTRIES WHICH IS THE PRESENT OWNER. TH EREFORE THERE IS NO NEED FOR TRANSFER OF TITLE BY WAY OF REGISTRATION. SINCE THE COMPANIES TO WHICH THE ADVANCES WERE GIVEN HAVE MERGED WITH VIDEOCON INDUS TRIES BY WAY OF VARIOUS RESOLUTIONS/ORDERS OF THE COURT ASSESSEE D ID NOT TRANSFER THE PROPERTY BUT ENTRIES WERE MADE TO SET OFF THE ACCOU NTS. THIS CANNOT BE TAKEN AS A REFUND OF THE ADVANCE WITHOUT TRANSACTIONS BE ING COMPLETED AS NOTICED BY THE CIT(A). IT IS NOT THE CASE OF ADVANCE BEING REFUNDED BUT A CASE OF ADJUSTING IN THE BOOKS CONSEQUENT TO THE MERGER OF THE COMPANY WITH VIDEOCON INDUSTRIES. THERE IS NO DISPUTE WITH REFER ENCE TO ADVANCING THE FUNDS FOR PURCHASE OF PROPERTY AND FURTHER THERE IS A FINDING BY THE CIT(A) THAT THE AMOUNTS BORROWED DURING THE YEAR HAVE BEEN UTILISED FOR BUSINESS PURPOSES. IN A WAY THE DISALLOWANCE RESULTED IN BRI NGING TO TAX INTEREST ON NOTIONAL BASIS WHICH ALSO CAN NOT BE DONE. IN VIEW OF THESE FINDINGS WE ARE OF THE OPINION THAT THERE IS NO NEED FOR DISALLOWAN CE OF PROPORTIONATE INTEREST IN RESPECT OF ADVANCES GIVEN TO OTHER PARTIES NAME LY VIDEOCON INTERNATIONAL LTD. AND VIDEOCON LEASING & INDUSTRIAL FINANCE LTD. CONSEQUENTLY THE A.O. IS DIRECTED TO ALLOW THE AMOUNT OF ` 4 37 60 748/- CONFIRMED BY THE CIT(A). ASSESSEES GROUND IS ACCORDINGLY ALLOWED. 13. IN THE REVENUE APPEAL THERE ARE TWO MORE GROUNDS. G ROUND NO. 1 PERTAIN TO DISALLOWANCE OF INTEREST BEING DIFFERENT IAL INTEREST AT 2.91% ON THE ICDS GIVEN TO TWO PARTIES BRIGGS TRADING CO. PVT. LTD. AND PRAJATMA TRADING CO. PVT. LTD. 14. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O . NOTICED THAT THE ASSESSEE HAS ADVANCED FUNDS BY WAY OF ICDS @ 13% TO THESE TWO PARTIES. ASSESSEE HAS ACCOUNTED FOR THE INTEREST @ 13% PER A NNUM. THE A.O. ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 8 OBSERVED THAT THE COST OF BORROWING WAS @ 15.91% BY DIVIDING THE TOTAL INTEREST DEBITED IN THE P & L ACCOUNT BY THE AMOUNT OF TOTAL BORROWINGS AND ARRIVED AT THE DIFFERENTIAL RATE OF INTEREST 2.91%. HE ACCORDINGLY DISALLOWED AN AMOUNT OF ` 31 44 677/- AS NOT FOR THE PURPOSE OF BORROWING AND ALSO INVOKED SECTION 40A(2)(B) AS THESE ARE GROUP CONCER NS. ASSESSEE SUBMITTED BEFORE THE CIT(A) AS UNDER: - A) THE RATE OF INTEREST CHARGED IS AS PER THE NORM AL RATE PREVAILING AT THE TIME OF ADVANCING THE LOANS. B) THE SAID FUNDS WERE ADVANCED TO THE PARTIES FOR A V ERY SHORT PERIOD OF 2 WEEKS AND WERE REPAYABLE ON DEMAND. IT WAS AT THE APPELLANTS CONVENIENCE THE SAID MONEY COULD BE CAL LED BACK AT ANY TIME. INTEREST RATE FOR SUCH SHORT TERM FUNDING WAS ACCORDINGLY CHARGED AT THE RATE PREVAILING IN THE M ARKET. C) THAT EVEN THE APPELLANT IS PAYING INTEREST @ 13% ON SHORT TERM LOANS. THE APPELLANT COMPANY HAS OBTAINED THE LOANS @13% P.A. FROM IDBI BANK LTD. AND FROM UTI BANK LTD. AS THE MARKET RATE OF INTEREST PREVALENT AT THAT TIME WAS 13% P.A. THE OTHER LOANS TAKEN FROM BANKS AND FINANCIAL INSTITUTIONS IN EARL IER YEARS CARRY INTEREST RATE OF 14% AS THAT WAS THE RATE PREVALENT AT THAT TIME. HENCE THE SAID RATE IS REASONABLE AND AS PER THE M ARKET TRENDS. D) THE AVERAGE RATE OF INTEREST OF 15.91% ARRIVED AT B Y THE AO IS NOT CORRECT AS MAJORITY OF LOANS TAKEN BY APPELLANT AND OUTSTANDING AS AT 31.03.2003 ARE TAKEN ON INTEREST AND THE RATE OF 13% AND 14% PER ANNUM. THE AO HAS WORKED OUT THE AVERAGE RATE OF INTEREST SIMPLY BY DIVIDING TOTAL INTEREST AND FINANCE CHARGES PAID BY THE LOAN OUTSTANDING AT THE END OF THE YEAR WITHOUT CONSIDERING THE REPAYMENTS OF LOAN DURING T HE YEAR. FURTHER HE SHOULD HAVE REDUCED THE BANK CHARGES AN D COMMISSION INCLUDED IN THE AMOUNT OF INTEREST AND F INANCE CHARGES DEBITED TO PROFIT AND LOSS ACCOUNT. E) THE SUM AND SUBSTANCE OF THE APPELLANTS SUBMISSIONS IS THAT THE CHARGING OF INTEREST @13% ON SUCH ICD FOR VERY SHORT PERIOD AND ON LOANS REPAYABLE ON DEMAND IS COMPARABLE WITH THE INTEREST PAID ON FUNDS FOR SHORT PERIODS. THEREFORE ANY INTEREST CHARGED OR WORKED OUT AT THIS RATE ON ANY DISALLOWA NCE WOULD TANTAMOUNT TO CHARGING OF NOTIONAL INTEREST. F) FURTHER IT IS SUBMITTED BY THE AR THAT THE PROVISI ONS OF SECTION 40A(2)(B) ARE NOT ATTACHED AS NONE OF THE DIRECTORS OR ASSOCIATES OF THE APPELLANT COMPANY ARE THE DIRECTORS AND/OR S HAREHOLDERS OF THESE TWO COMPANIES. 15. IT WAS FURTHER SUBMITTED THAT PROVISIONS OF SECTION 40A(2)(B) WAS NOT ATTRACTED AS NONE OF THE DIRECTORS ARE ASSOCIATED W ITH ASSESSEE COMPANY OR ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 9 DIRECTORS OR SHAREHOLDERS OF THESE TWO COMPANIES. T HE CIT(A) DELETED THE SAME BY STATING AS UNDER: - 5.4 I HAVE CAREFULLY CONSIDERED THE SUBMISSIONS OF THE APPELLANTS AR AND THE FACTS OF THE CASE. CONSIDERING THE FACT THAT THE FUNDS WERE GIVEN FOR A VERY SHORT PERIOD AND THE LOANS WERE RE PAYABLE ON DEMAND AND EVEN THE APPELLANT IS PAYING INTEREST @1 3% ON FUNDS BORROWED FOR SHORT PERIODS THE INTEREST CHARGED AT 13% IS REASONABLE. FURTHER FROM THE LIST OF DIRECTORS AND SHAREHOLDER S OF THESE TWO CONCERNS IT IS SEEN THAT THESE TWO CONCERNS ARE NO T SISTER OR ASSOCIATE CONCERNS OF THE APPELLANT AND HENCE SECTION 40A(2)( B) IS NOT ATTRACTED. HENCE THERE IS NO JUSTIFICATION IN MAKING ADDITION OR DISALLOWANCE OF PROPORTIONATE INTEREST ON THESE TWO ICDS. 16. AFTER HEARING THE RIVAL PARTIES AND EXAMINING THE F ACTS OF THE CASE WE DO NOT SEE ANY REASON TO INTERFERE WITH THE ORDER O F THE CIT(A). THE A.O. HAS NOT MADE OUT ANY CASE WHY THE DIFFERENTIAL RATE OF INTEREST SHOULD BE DISALLOWED. FIRST OF ALL ARRIVING AT THE COST OF I NTEREST AT 15.91% IS NOT CORRECT AS THE METHOD ADOPTED IS FLAWED. THE A.O. S HOULD HAVE EXAMINED AT WHAT RATE FUNDS WERE BORROWED SO AS TO SEE WHETHER THE INTEREST CHARGED WAS HIGH OR LOW. ADOPTING AVERAGE RATE OF INTEREST ON THE TOTAL INTEREST PAID TO THE TOTAL AMOUNT BORROWED AS PER BALANCE SHEET O N THE LAST DAY IS NOT CORRECT AS THE FUNDS MAY BE BORROWED IN BETWEEN FOR A SHORT PERIOD OR THEY CAN BE LOAN TAKEN AT THE FAG END OF THE YEAR WITHOU T PAYING ANY INTEREST FOR THE WHOLE YEAR. THEREFORE METHODOLOGY ADOPTED BY T HE A.O. IN ARRIVING AT THE COST OF BORROWALS @ 15.91% ITSELF IS NOT CORREC T. FURTHER THE A.O. CANNOT JUDGE THE BUSINESS DECISIONS OF THE ASSESSEE UNLESS THEY ARE CONSIDERED TO BE MALAFIDE WITH THE VIEW TO AVOID TAX. IT IS ASSES SEES EXPLANATION THAT ASSESSEE WAS PAYING INTEREST AT 13% ON SHORT LOANS AND HAS OBTAINED LOANS AT 13% PER ANNUM FROM IDBI BANK THE UTI BANK AT TH E MARKET RATE AND THEY WERE ALSO ADVANCED ON THE SAME RATE. SINCE THE FUNDS WERE ALSO ADVANCED FOR SHORT PERIODS DEPENDING ON THE DEMAND THE RATE OF INTEREST WAS FIXED. IN OUR VIEW AO HAS NOT MADE OUT ANY CASE FOR DISALLOWANCE AND THE FINDING OF THE CIT(A) CANNOT BE FAULTED. THEREF ORE REVENUE GROUND RAISED IN THIS REGARD IS REJECTED. 17. GROUND NO. 2 IN REVENUE APPEAL IS WITH REFERENCE TO THE DISALLOWANCE OF PROPORTIONATE INTEREST OF ` 15 90 42 347/- ON INTER CORPORATE DEPOSITS. ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 10 18. THE A.O. MADE DISALLOWANCE OF PROPORTIONATE INTERES T IN RESPECT OF 13 COMPANIES ON WHICH NO INTEREST WAS RECEIVED BY THE ASSESSEE DURING THE YEAR HOLDING THAT THE ADVANCES/INVESTMENTS ARE FOR NON-BUSINESS PURPOSES. THE DISALLOWANCE WAS CALCULATED AT THE SAME RATE OF 15.91% ARRIVED AT ON AVERAGE COST BASIS. THE MATTER WAS CARRIED TO THE C IT(A) AND FOLLOWING WERE THE SUBMISSIONS OF ASSESSEE SUMMARISED BY THE CIT(A ) IN PARA 6.3: - THE INTER CORPORATE DEPOSITS 9ICSS) AND LOANS WE RE GIVEN IN THE ORDINARY COURSE OF ITS FINANCING BUSINESS AND INTER EST WAS NOT RECOGNIZED OR CHARGED AS THOSE LOANS WERE DOUBTFUL OR RECOVERY. THESE ICDS ARE OPENING BALANCES AND WERE ADVANCED I N EARLIER YEARS EXCEPT AT SR.NO. (X) TO (XII) ABOVE. NO DISAL LOWANCE OF PROPORTIONATE INTEREST WAS MADE IN ANY OF THE EARLI ER ASSESSMENT YEARS 2000-01 TO 2002-03 WHERE ASSESSMEN TS WERE COMPLETED U/S. 143(3) AND THESE ICDS/ADVANCES HAVE BEEN ACCEPTED AS ADVANCE IN THE ORDINARY COURSE OF ITS B USINESS AND FOR BUSINESS PURPOSES. THAT NONE OF THE ABOVE PARTIES TO WHOM ICDS WERE GI VEN ARE GROUP CONCERNS OF THE APPELLANT OR ARE COVERED U/S. 40A(2)(B). THE REMARKS MADE BY THE A.O. THAT THE INTEREST BEAR ING FUNDS WERE DIVERTED FOR NON-BUSINESS PURPOSES IS ONLY A P RESUMPTION WITHOUT ANY BASIS OR MATERIAL ON RECORD AND THE REL IANCE PLACED BY HIM ON DECISIONS STATED IN PARA 4.16 OF HIS ORDE R ARE MISPLACED AND ARE NOT APPLICABLE TO THE FACTS OF TH E PRESENT CASE. IT IS SUBMITTED BY THE A.R. THAT VARIOUS ICDS WERE GIVEN IN EARLIER YEARS/PERIOD AS A PART OF FINANCING ACTIVIT Y AND THE COMPANY IS RECEIVING INTEREST ON SUCH ICDS AND IS B EING ASSESSED AS BUSINESS INCOME. HOWEVER OVER A PERIOD SOME OF THEM BECAME NON PERFORMING ASSETS. AS PER GENERALLY ACCEPTED ACCOUNTING POLICY THE REVENUE/INCOME IS RECOGNIZED IN THE BOOKS WHEN THERE IS REASONABLE CERTAINTY THAT THE INCOME WILL BE REALIZED DURING THE COURSE OF THE BUSINESS. IN THE PRESENT CASE THE APPELLANT WAS DOUBTFUL OF THE RECOVERABILITY OF LOANS AS WELL AS THE INTEREST ACCRUED ON THESE LOANS AND HENCE NO INTEREST WAS RECOGNIZED/CHARGED AS THE SAME WOULD ADD TO DOUBTFU L RECOVERABLES. IT WAS THEREFORE CONTENDED THAT THE M ONEYS WERE ADVANCED AS ICDS ONLY FOR THE PURPOSE OF BUSINESS A ND DURING THE COURSE OF FINANCING BUSINESS AND CANNOT BE CAL LED TO BE FOR NON BUSINESS PURPOSES AND AS SUCH THE DISALLOWANCE OF PROPORTIONATE INTEREST IS REQUIRED TO BE DELETED. 19. IN ADDITION TO THE ABOVE ITS WAS ALSO THE SUBMISSI ON THAT SECTION 36(1)(III) DOES NOT PROHIBIT ALLOWANCE OF INTEREST PAID ON MONEYS BORROWED WHICH ARE UNREMUNERATIVE AND JUST BECAUSE NO INTERE ST INCOME WAS EARNED ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 11 IT CANNOT BE STATED THAT FUNDS WERE NOT UTILISED FO R BUSINESS PURPOSES. IT WAS FURTHER SUBMITTED THAT A.O. CANNOT BRING TO TAX THE NOTIONAL INTEREST BY WAY OF DISALLOWING THE INTEREST ON THE BASIS OF THE ADVANCES WHICH ARE NOT YIELDING INTEREST INCOME. 20. THE CIT(A) ADMITTED ADDITIONAL EVIDENCE SUBMITTED I N THIS BEHALF INCLUDING THE ACCOUNT COPIES OF THE EARLIER YEARS A ND REMITTED THE MATTER TO THE A.O. FOR EXAMINATION. AFTER CONSIDERING THE REM AND REPORT AND ALSO ASSESSEES EXPLANATION AND THE FACT THAT INTEREST W AS CHARGED IN EARLIER YEARS THE CIT(A) DELETED THE ADDITION EXCEPT A SMALL AMOU NT OF ` 9 72 298/- (GROUND BY THE ASSESSEE WAS WITHDRAWN ON THIS AMOUN T). AFTER CONSIDERING THE FACTS ON RECORD AND SUBMISSIONS OF THE ASSESSEE AND THE REMAND REPORT THE CIT(A) HELD THAT THE A.O. PRESUMED THAT THE ICD S WERE MADE TO GROUP CONCERNS AND WERE FOR NON-BUSINESS PURPOSES. HE AF TER EXAMINING THE EVIDENCE ON RECORD AND FACT THAT ICDS WERE GIVEN IN EARLIER YEARS ON WHICH INTEREST INCOME WAS ACCOUNTED FOR AND TAXED AS BUSI NESS INCOME DISCUSSED THESE IN PARA 6.13. HE STATED THAT THESE ADVANCES H AVE BECOME NON- PERFORMING ASSETS OF THE COMPANY ON WHICH NO INTERE ST CAN BE REALISED AND HENCE NO NOTIONAL INTEREST INCOME WAS CREDITED OR R ECOGNISED IN THE BOOKS OF THE ASSESSEE. HE ACCORDINGLY HELD THAT THERE IS NO CASE FOR DISALLOWING ANY AMOUNT EXCEPT ON THE TWO COMPANIES FOR WHICH ADVANC ES WERE GIVEN DURING THE YEAR. HIS FINDING IN PARA 6.15 IS AS UNDER: - 6.15. IN VIEW OF THE ABOVE THE ACTION OF THE AO I N DISALLOWING THE PROPORTIONATE INTEREST ON THE SAID ICDS GIVEN IN EA RLIER YEARS IS NOT TENABLE. THE MONEYS WERE ADVANCED ONLY FOR THE PURP OSE OF BUSINESS AND DURING THE COURSE OF FINANCING BUSINESS AND CA NNOT BE CALLED TO BE FOR NON BUSINESS PURPOSE AND AS SUCH THE DISALLO WANCE OF PROPORTIONATE INTEREST IS REQUIRED TO BE DELETED. H OWEVER THOSE ICDS TO PARTIES AT SR.NO. (X) TO (XII) ABOVE WHICH WERE GIVEN DURING THIS YEAR ONLY CANNOT BE SAID TO HAVE BECOME BAD DURING THE YEAR ITSELF AND NO EVIDENCE THEREOF AS TO HOW THE PARTIES HAVE DEFAULTED OR THAT THE FINANCIAL POSITIONS OF THESE PARTIES HAVE BECOM E BAD HAVE BEEN BROUGHT ON RECORD AND HENCE THE DISALLOWANCE OF PRO PORTIONATE INTEREST @15.91% IN RESPECT OF THESE THREE PARTIES WHICH AMOUNTS TO RS.9 72 298 IS UPHELD. 21. AFTER HEARING THE RIVAL PARTIES AND CONSIDERING THE EVIDENCES PLACED ON RECORD LEGAL PRINCIPLES DISCUSSED AND ON THE FACTS OF THE CASE WE SEE NO ITA NOS. 6462 & 6832/MUM/2007 M/S. PETROCON INDIA LTD. 12 REASON TO DIFFER FROM THE FINDINGS OF THE CIT(A). I T IS ON RECORD THAT ASSESSEE HAS ADVANCED ICDS TO NON-GROUP COMPANIES IN EARLIER YEARS. IT IS ALSO ON RECORD THAT THESE COMPANIES HAVE BECOME DEFUNCT/NON -PERFORMING. THEREFORE ASSESSEE COULD NOT REALISE ANY INTEREST. IT IS ALSO ON RECORD THAT SOME OF THE INTEREST LEVIED FOR EARLIER PERIOD WERE REVERSED LATER THE DETAILS OF WHICH WERE PLACED BEFORE THE A.O. AND THE CIT(A) . IN VIEW OF THIS SINCE THE ASSESSEE IS IN THE BUSINESS OF FINANCING WHETHE R THE ICDS ARE MADE AS PART OF BUSINESS OR INVESTMENT THE FACT THAT IT I S PART OF BUSINESS ACTIVITY CANNOT BE DENIED. FURTHER IT IS ALSO A FINDING THAT THE FUNDS BORROWED THIS YEAR HAVE NOT BEEN ADVANCED FOR ANY NON-BUSINESS PU RPOSES. IT WAS SUBMITTED THAT THERE WERE NO SUCH DISALLOWANCES IN EARLIER YEARS ON THE ICD ADVANCES. IN VIEW OF THIS FACTUAL POSITION WE SEE NO REASON TO DISALLOW ANY AMOUNT AS WAS DONE BY THE A.O. WE UPHOLD THE ORDER OF THE CIT(A) AND REJECT THE GROUND RAISED BY THE REVENUE. 22. IN THE RESULT ASSESSEES APPEAL IN ITA NO. 6462/MU M/2007 IS ALLOWED AND REVENUES APPEAL IN ITA NO. 6832/MUM/2007 IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JULY 2011. SD/- SD/- (D.K. AGARWAL) (B. RAMAKOTAIAH) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI DATED: 29 TH JULY 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) CENTRAL-IV MUMBAI 4. THE CIT CENTRAL-II MUMBAI CITY 5. THE DR C BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.