M/S. ATE ENTERPARISES P. LTD, Mumbai v. THE ITO RG.2(1)(1), Mumbai

ITA 703/MUM/2005 | 2001-2002
Pronouncement Date: 30-04-2010 | Result: Partly Allowed

Appeal Details

RSA Number 70319914 RSA 2005
Assessee PAN AAACA4481G
Bench Mumbai
Appeal Number ITA 703/MUM/2005
Duration Of Justice 5 year(s) 3 month(s) 1 day(s)
Appellant M/S. ATE ENTERPARISES P. LTD, Mumbai
Respondent THE ITO RG.2(1)(1), Mumbai
Appeal Type Income Tax Appeal
Pronouncement Date 30-04-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted I
Tribunal Order Date 30-04-2010
Date Of Final Hearing 04-03-2010
Next Hearing Date 04-03-2010
Assessment Year 2001-2002
Appeal Filed On 28-01-2005
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL I BENCH MUMBAI. BEFORE S/SHRI S.V.MEHROTRA AM & V. DURGA RAO JM I.T.A. NO. 703/MUM/2005 ASSESSMENT YEAR: 2001-02 A.T.E. ENTERPRISES PRIVATE LIMITED V. THE I.T.O. 2(1)(1) 43 DR. V.B.GANDHI MARG FORT MUMBAI. MUMBAI-21. PA NO. AAACA 4481 G (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI NITESH JOSHI RESPONDENT BY : SHRI NARENDRA SINGH O R D E R PER S.V.MEHROTRA AM THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DATED 30.11.2004 OF LD CIT (A)-II MUMBAI FOR THE ASSESSMENT YEAR 20 01-02. GROUNDS RAISED BY THE ASSESSEE READ AS UNDER:- 1. LD CIT (A) HAS ERRED IN : A) DIRECTING THE AO TO TAX INCOME ELEMENT OF THE SUM O F RS.74 999 RECEIVED FROM MARUDHAR SPG MILLS LTD. ON BEHALF OF ATE MANUFACTU RING CO LTD. AND RS.6 95 533/- RECEIVED FROM VARIOUS CUSTOMERS ON BA HELF OF JOHNSON PUMPS LTD. IN THE CURRENT YEAR. B) CONFIRMING THE ADDITION OF A SUM OF RS.70 829/- OUT OF TOTAL ADVANCE OF RS.16 84 341/- RECEIVED BY THE ASSESSEE BY HOLDING THAT SAID AMOUNT REPRESENTS ADVANCE TOWARDS SERVICE CHARGES AND THE REFORE TAXABLE ON RECEIPT BASIS. 2. LD CIT (A) HAS ERRED IN CONFIRMING DISALLOWANCE OF A SUM OF RS.5 16 847/- BEING REPAIRS TO RENTED PREMISES ON THE GROUND THAT THE ASSESSEE WAS NOT LIABLE TO INCUR SUCH EXPENSES. ITA NO.703/M/05 2 3. LD CIT (A) HAS ERRED IN DIRECTING THE AO TO WORK OUT AVERAGE COST OF BORROWING FOR FUNDS UTILIZED IN THE BUSINESS AND DI RECTING HIM TO DISALLOW INTEREST IF THE INTEREST CHARGED TO THE FOLLOWING PARTIES IS LOWER THAN THE AVERAGE COST OF BORROWING. A. ATE MFG. CO.LTD. B. MOTEX ENGG. CO.LTD. C. HOLTEX ENGG. CO. LTD. 2. FACTS IN BRIEF ARE THAT THE ASSESSEE COMPANY IN THE RELEVANT ASSESSMENT YEAR WAS ENGAGED IN TRADING AND AGENCY BUSINESS IN TEXTILE M ACHINERY ACCESSORIES INVESTMENT AND FINANCING. THE ASSESSEE HAD FILED ITS RETURN OF IN COME DECLARING TOTAL INCOME AT RS.4 58 88 110/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS.5 07 67 930/- INTER ALIA MAKING FOLLOWING DISALLOWANCES:- 1) ADVANCE CHARGEABLE TO TAX BEING TRADING RECEIPT : RS.16 84 341/ 2) REPAIRS AND RENOVATION TO THE RENTED PREMISES : RS.5 16 847/- 3) INTEREST DIFFERENCE : RS.14 21 630/ LD CIT (A) WHILE PARTLY ALLOWING THE ASSESSEES APP EAL CONFIRMED THE AOS ACTION IN RESPECT OF THE AFOREMENTIONED DISALLOWANCES. BEING AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 3. APROPOS GROUND NO1 THE AO NOTICED THAT UNDER TH E HEAD CURRENT LIABILITIES AND PROVISIONS A SUM OF RS.1 69 95 340/- WAS REFLECTE D WHICH INCLUDED RS.16 84 341/- BEING ADVANCE FOR VALUE TO BE GIVEN. HE NOTED THAT THIS ADVANCE WAS TOWARDS SERVICE CHARGES. TAKING NOTE OF THE FACT THAT THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING THE AO REQUIRED THE ASSESSEE TO EXPLAIN WHY THIS ADVANCE SHOULD NOT BE TREATED AS INCOME FROM SERVICE CHARGES. THE ASSESSE E IN ITS REPLY REPRODUCED AT PAGES 5-6 OF THE ASSESSMENT ORDER POINTED OUT THAT TILL THE TIME SERVICES TO BE RENDERED AS REQUIRED ARE NOT COMPLIED WITH THE ADVANCES CANNOT BE TREA TED AS INCOME. IT WAS POINTED OUT THAT SINCE NO SERVICES WERE PERFORMED IN F.Y. ENDED 31.3 .2001 THE SUMS RECEIVED BY THE ASSESSEE WAS HELD IN A MERE FIDUCIARY CAPACITY. TH E ASSESSEE HAD RELIED ON THE DECISION IN THE CASE OF CIT V. PUNJAB TRACTORS CO.OP. MULTIPURP OSE SOCIETY LTD. 234 ITR 105(P&H). THE AO OBSERVED THAT THE DECISION IN THE CASE OF P UNJAB TRACTORS CO.OP. MULTIPURPOSE SOCIETY LTD.(SUPRA) WAS BASICALLY BASED ON MERCANTI LE SYSTEM OF ACCOUNTING WHEREAS THE ITA NO.703/M/05 3 ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. HE RELIED ON THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE OF CIT V. SAN THANAKRISHNAN 256 ITR 187(MAD) WHEREIN IT WAS HELD THAT WHERE THE TAXPAYER RECEIV ED DISCOUNTED INTEREST FOR THE THREE YEARS IN THE YEAR IN WHICH THE GOVERNMENT BOND WAS ISSUED THE ENTIRE INTEREST BECOMES ASSESSABLE IN THE YEAR OF SUCH RECEIPT UNDER CASH S YSTEM OF ACCOUNTING. 4. BEFORE LD CIT (A) IT WAS POINTED OUT THAT OUT O F RS.16 84 341/- RS.7 69 554/- WAS RECEIVED IN EARLIER YEARS THEREFORE COULD NOT BE SUBJECTED TO TAX IN THE CURRENT YEAR. AS REGARDS BALANCE AMOUNT OF RS.9 14 786/- THE ASS ESSEE FURNISHED DETAILS WHICH ARE REPRODUCED AT PAGE 4 OF LD CIT (A)S ORDER. LD CIT (A) AFTER EXAMINING THE NATURE OF ADVANCE DIRECTED THE AO AS UNDER:- I) TO EXCLUDE AN AMOUNT OF RS.7 69 554/- REPRESENTI NG OPENING BALANCE AFTER VERIFICATION. II) TO INCLUDE THE INCOME ELEMENT IN RESPECT OF FOL LOWING ADVANCES: A) SUTLEJ IND. LTD. RS.73 425/- B) MARUDHAR SPN. MILLS LTD. RS.74 999/- C) JOHNSON PUMP INDIA LTD RS.695 533/- AS REGARDS THE FOLLOWING ADVANCES LD CIT (A) AGREE D WITH THE AO TO TAX THE SAME ON RECEIPT BASIS: A) HINDUSTAN TEXTILES LTD. RS. 244/- B) RAMKUMAR MILLS RS. 12 000/- C) L.N.POLYSTERS LTD. RS. 6 226/- D) STOVEE IND. LTD. RS. 42 587/- E) BEEJAY PEE SACKS RS. 2 625/- F) MANIPAL PACKAGING IND. RS. 3 886/- G) VAISHNAVI ROTO TELEE RS. 2 000/- H) MR S.S.KQRKERA RS 1 261/- 5. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT EVEN IN CASH SYSTEM OF ACCOUNTING THE NATURE OF RECEIPT IS TO BE EXAMINED. UNLESS THE IN COME HAS ACCRUED TO THE ASSESSEE AND THE ASSESSEE CAN EXERCISE HIS RIGHT TO SUCH INCOME THE SAME CANNOT BE BROUGHT TO TAX. HE RELIED ON THE DECISION OF THE ITAT DELHI BENCH REP ORTED IN 304 ITR (AT) 295(DELHI) ITA NO.703/M/05 4 WHEREIN IT WAS HELD THAT IN CASE OF ADVOCATE RECOV ERING ADVANCE FEE FROM CLIENTS INCOME ACCRUES ONLY TO THE EXTENT OF SERVICES RENDERED IN YEAR AND THE REMAINING AMOUNT IS TO BE ADJUSTED IN SUBSEQUENT YEAR AND EXCESS AMOUNT TO BE RETURNED IF NO SERVICES RENDERED. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT UNLESS T HE RIGHT TO INCOME HAS ACCRUED THE IMPUGNED AMOUNT CANNOT BE TREATED AS ASSESSEES INC OME. 5.1 LD COUNSEL FOR THE ASSESSEE RELIED ON THE DECIS ION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V. SHANKARANARAYAN CONSTRU CTION CO. 197 ITR 688 (KARNATAKA) WHEREIN THE ASSESSEE RECEIVED CERTAIN AMOUNTS FROM THE KARNATAKA POWER CORPORATION REGARDING WORK EXECUTED IN RESPECT OF CERTAIN PROJE CTS. AFTER DEDUCTING THE COST OF THE MATERIALS SUPPLIED THE ASSESSEE MADE FURTHER DEDUC TION OF EXTRA AMOUNTS RECEIVED AND OFFERED ONLY THE BALANE AS RECEIPTS WHICH COULD BE TAKEN INTO ACCOUNT FOR ARRIVING AT THE PROFITS RESULTING FROM THE CONTRACT ON THE GROUND T HAT THE PAYMENT RECEIVED FROM THE KARNATAKA POWER CORPORATION WAS IN EXCESS OF THE AM OUNT DUE TO THE ASSESSEE ON THE BASIS OF THE ACTUAL WORK DONE BECAUSE THE ASSESSEE RECEIVED EXTRA AMOUNTS ON ACCOUNT OF EXCESS MEASUREMENTS MADE BY THE KARNATAKA POWER COR PORATION. THE ASSESSEE CONTENDED THAT IT WAS THE PRACTICE OF THE CORPORATI ON TO MAKE PAYMENTS IN EXCESS OF WHAT WAS ACTUALLY DUE TO THE ASSESSEE WHICH WERE REALLY IN THE NATURE OF ADVANCES AND FINAL ADJUSTMENTS WERE MADE AT THE END OF THE CONTRACT OR THE ADVANCES WERE KEPT TO BE ADJUSTED IN FUTURE YEARS.. IT WAS HELD THAT THE FACT THAT T HE ASSESSEE HAD MAINTAINED HIS ACCOUNTS ON CASH BASIS WOULD NOT CONVERT EVERY KIND OF RECEIPT AS INCOME UNLESS THE RECEIPT COULD BE HELD TO HAVE ACCRUED AS INCOME BECAUSE THE ASSESSEE ACQUIRED A RIGHT TO RECEIVE THE SAID SUM AS INCOME. 6. LD D.R. SUBMITTED THAT THE ASSESSEE WAS FOLLOWIN G CASH SYSTEM OF ACCOUNTING AND THEREFORE WHEN THE ASSESSEE RECEIVED THE AMOUNT T OWARDS SERVICES TO BE PERFORMED IN FUTURE ALSO THE SAME IS TO BE BROUGHT TO TAX. LD D.R. SUBMITTED THAT IF ASSESSEES CONTENTION IS TO BE ACCEPTED THEN WHY NOT IN A CASE WHERE SERVICES ARE RENDERED AND AMOUNT NOT RECEIVED THEN THE SAME SHOULD ALSO BE TREATED AS ASSESSEES INCOME BECAUSE RIGHT TO RECEIVE THE INCOME HAS ACCRUED. LD D.R. S UBMITTED THAT THIS IS CORRECT ONLY IN ITA NO.703/M/05 5 MERCANTILE SYSTEM OF ACCOUNTING AND NOT IN CASH SYS TEM OF ACCOUNTING WHERE THE INCOME IS TO BE ASSESSED ON RECEIPT BASIS. HE RELIED ON T HE FOLLOWING DECISIONS:- I) TURNER MORRISON & CO LTD. V. CIT 23 ITR 152(SC ) II) 166 CTR 203 III) CIT V. A.R.SANTHANAKRISHNAN AND ANOTHER [200 2)256 ITR 187(MAD) IV) CIT V. SHAIK MOHAMED ROWTHER SHIPPING AND AGENCIES (P)LTD. [2000)246 ITR 161 (MAD) 7. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE RECORD OF THE CASE. SECTION 4 DEALS WITH CHARGE OF INCOME TAX. AS PER SUB-SECTION(2) OF SECTION 4 IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTION(1) INCOME T AX IS TO BE DEDUCTED IN ADVANCE. INCOME TAX IS TO BE CHARGED AT THE RATE OR RATES FI XED FOR THE YEAR BY THE ANNUAL FINANCE ACT. UNDER THIS SECTION THE SUBJECT OF CHARGE IS THE INCOME OF THE PREVIOUS YEAR. THUS IT IS EVIDENT THAT MERE RECEIPT OF AMOUNT IS NOT TAXAB LE UNLESS THE SAME OR THE PART EMBEDDED IN THAT RECEIPT PARTAKES THE CHARACTER OF INCOME. SECTION 5 DETERMINES THE SCOPE OF TOTAL INCOME DEPENDING UPON RESIDENTIAL STATUS OF THE ASS ESSEE. IT PRESCRIBES THE GAMUT OF TOTAL INCOME OF AN ASSESSEE. AS PER THIS SECTION PROFITS ARE CHARGEABLE WHEN IT ACCRUES ARISE OR ARE RECEIVED. IN THE CASE OF SASSOON & CO LTD. V CIT 26 ITR 27(SC) THE PRINCIPLE LAID DOWN WAS THAT INCOME CAN BE HELD TO ACCRUE ONL Y WHEN THE ASSESSEE ACQUIRED A RIGHT TO RECEIVE THAT INCOME. MERELY BECAUSE AN AMOUNT HAS BEEN ENTERED INTO IN ASSESSEES BOOKS IS NOT CONCLUSIVE PROOF THAT INCOME HAS ACCR UED. SECTION 145 DEALS WITH METHOD OF ACCOUNTING AND IS A PROCEDURAL SECTION. THIS SE CTION CANNOT BE RESORTED TO FOR TAXING A PARTICULAR RECEIPT UNLESS THE RECEIPTS COME WITHIN SECTION 4 R.W. S.5 PARTAKING CHARACTER OF INCOME. THE ASSESSEE HAS TO EXERCISE HIS CHOICE RE GARDING METHOD OF ACCOUNTING TO BE FOLLOWED FOR RECORDING THE INCOME. IF THE ASSESSEE HAS ADOPTED THE MERCANTILE SYSTEM OF ACCOUNTING THEN THE TAXABILITY EVENT OF INCOME WILL ARISE THE MOMENT IT ACCRUES IRRESPECTIVE OF RECEIPT. HOWEVER WHEN ACCOUNTS AR E MAINTAINED ON CASH BASIS INCOME WOULD BE CHARGEABLE THE MOMENT IT IS RECEIVED IRRES PECTIVE OF THE FACT WHETHER THE SOURCE OR FROM WHICH IT WAS RECEIVED EXIST OR NOT. BUT I T IS ULTIMATELY THE INCOME WHICH IS TAXABLE AND NOT THE WHOLE AMOUNT IRRESPECTIVE OF TH E METHOD OF ACCOUNTING WHICHEVER IS FOLLOWED. IF AN ASSESSEE MAY BE REQUIRED TO REF UND THE AMOUNT THEN IT CANNOT BE TREATED AS ASSESSEES INCOME IN THAT PARTICULAR YEAR. UNLE SS THE ASSESSEE CAN EXERCISE HIS ENTIRE RIGHTS OVER A PARTICULAR RECEIPT IT CANNOT BE SAID THAT INCOME HAS ACCRUED IN HIS ITA NO.703/M/05 6 FAVOUR. NO OTHER PERSON SHOULD HAVE ANY CHARGE OVER THAT RECEIPT. THE DOMINION OVER THE AMOUNT SHOULD BE OF ASSESSEE. NOW LET US CONSIDER THE VARIOUS CASE LAWS RELIED UPON BY LD D.R. 7.1. CIT V. SHAIKH MOHAMED ROWTHER SHIPPING AND AGENCIE S (P)LTD- IN THIS CASE THE ASSESSEE A PRIVATE LIMITED COMPANY PERFORMED SERVICES FOR ITS PRINCIPALS AND GOT INCOME BY WAY OF COMMISSION. TH E ASSESSEE TOOK ADVANCES FROM THE PRINCIPALS AND THEN SUBMITTED BILLS FOR PA YMENT AND ONLY AFTER THE BILLS WERE PASSED THE AMOUNTS WERE TREATED AS INCOME AND TILL THEN THE AMOUNTS RECEIVED AS ADVANCES WERE SHOWN ONLY AS ADVANCES. IT WAS HELD THAT THE ASSESSEE COMPANY RECEIVED THE AMOUNTS AS REMUNERATION FOR TH E WORK DONE AND THE INCOME RECEIVED BY THE ASSESSEE ACCRUED AS INCOME FOR THAT YEAR. THE ASSESSEE RECEIVED 90 PER CENT OF THE BILL AMOUNT WHICH WAS HELD THAT INCOME ACCRUED TO THE ASSESSEE IRRESPECTIVE OF THE PASSING OF THE BILL. 7.2. CIT V. A.R.SANTHANAKRISHNAN AND ANOTHER - IN THIS CASE IT WAS HELD THAT DISCOUNTED INTEREST RECEIVED IN THE FIRST YEAR OF GOVERNMENT BOND WHICH IS SPREAD OVER THREE YEARS WAS TAXABLE IN THE YEAR OF RECEIPT ONLY. 7.3. TURNER MORRISON & CO LTD. V. CIT 23 ITR 152(SC) - IN THIS CASE THE SALE PROCEEDS WERE COLLECTED BY AN AGENT ON BEHALF OF THEIR PRINCIPAL AND CREDITED TO THE ACCOUNT KEPT IN THEIR OWN NAME. AFTER DEDUC TING THE EXPENSES INCLUDING THEIR COMMISSION THE BALANCE WAS REMITTED TO THE P RINCIPAL. IT WAS HELD THAT WHEN THE GROSS SALE PROCEEDS WERE RECEIVED BY THE AGENTS THEY NECESSARILY RECEIVED WHATEVER INCOME PROFITS AND GAINS WERE LYING DORMA NT OR HIDDEN OR OTHERWISE EMBEDDED IN THEM. THUS IN SUM AND SUBSTANCE IT W AS HELD THAT ON RECEIPT OF SALE PROCEEDS BY THE AGENT INCOME HAD ACCRUED TO THEM. 8. IN ALL THE ABOVE CASES SINCE THERE WAS NO DISPU TE THAT IMPUGNED AMOUNTS HAD INCOME CHARACTER THEREFORE THEY WERE HELD TO BE T AXABLE ON RECEIPT BASIS AS THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. ITA NO.703/M/05 7 9. IN THE PRESENT CASE ADMITTEDLY SERVICES WERE N OT PERFORMED IN THE CURRENT YEAR. TILL THE PERFORMANCE OF SERVICES THE ASSESSEE COUL D NOT EXERCISE HIS DOMINION OVER THE RECEIPT. THEREFORE THE IMPUGNED AMOUNTS SHOULD HA VE BEEN TAXED IN THE YEAR IN WHICH SERVICES WERE RENDERED. LD D.R.S SUBMISSION THAT IN A REVERSE CASE THE AMOUNT SHOULD BE BROUGHT TO TAX ON THE SAME ANALOGY OF REASONING IS DEVOID OF ANY MERIT BECAUSE WE ARE CONSIDERING THE ISSUE OF TAXING SUCH AMOUNTS WHICH HAVE ACTUALLY BEEN RECEIVED SINCE THE ASSESSEE WAS FOLLOWING CASH SYSTEM OF ACCOUNTING. GROUND NO.1 IS ALLOWED. 10. APROPOS GROUND NO.2 BRIEF FACTS ARE THAT THE A O NOTICED THAT THE REPAIRS OF BUILDING INCLUDED A SUM OF RS.5 16 847/- ON ACCOUNT OF REPAIRS AND FLOORING AT BASEMENT ON 1.6.2000 AT ANDHERI OFFICE BUILDING AT BHAGWATI HOUSE A-19 C.T.S. NO.689 VEERA DESAI ROAD ANDHERI(W) MUMBAI. THE AO REQUIRED TH E ASSESSEE TO EXPLAIN WHY THESE AMOUNTS SHOULD NOT BE DISALLOWED AS THE REPAIRS WER E TO BE CARRIED OUT BY LICENSOR ONLY. THE ASSESSEE POINTED OUT THAT AS PER THE AGREEMENT ENTERED INTO WITH PRAT TRADING & INVESTMENT PVT LTD. FOR LEASE OF THE ABOVE PREMISE S ALL EXPENDITURE INCURRED FOR THE PURPOSE OF MAINTAINING THE PREMISES IN A GOOD AND P ROPER CONDITION WERE TO BE BORNE BY THE LICENSEE WHO IN THIS CASE WAS THE ASSESSEE COMP ANY. THE AO EXAMINED THIS AGREEMENT AND NOTED THAT NOWHERE IN CLAUSE 14 OF TH E LEAVE AND LICENCE AGREEMENT DATED 15.3/2000 IT WAS MENTIONED THAT THE REPAIR EXPENSES WERE TO BE BORNE BY THE ASSESSEE. HE ALSO OBSERVED THAT EVEN OTHERWISE THE EXPENSES WER E CAPITAL IN NATURE AND THEREFORE NOT ALLOWABLE. HE ACCORDINGLY DISALLOWED RS.5 16 847 /-. 11. BEFORE LD CIT (A) IT WAS SUBMITTED THAT AS PER CLAUSE 11 OF THE AGREEMENT THE ASSESSEE WAS REQUIRED TO MAINTAIN THE PREMISES IN G OOD AND PROPER CONDITION AT ITS OWN COST AND EXPENSES AND CLAUSE 14 HAD WRONGLY BEEN QU OTED. IT WAS FURTHER SUBMITTED THAT THE REPAIR EXPENSES INCURRED WERE OF ROUTINE AND MI NOR EXPENSES AND WERE IN THE NATURE OF MAINTENANCE EXPENSES. THE ASSESSEE RELIED ON T HE DECISION IN THE CASE OF NILA ITA NO.703/M/05 8 PRODUCTS LTD V CIT 148 ITR 99 WHEREIN IT WAS HEL D THAT EXPENSES INCURRED ON RENTED PREMISES FOR RENOVATION AND ALTERATION IS REVENUE E XPENDITURE AS THE ASSESSEE DID NOT ACQUIRE ANY CAPITAL ASSET. RELIANCE WAS PLACED ON THE DECISION IN THE CASE OF GIRDHARIDAS & SONS V CIT 105 ITR 339. IN THE ALTERNATIVE IT WAS ARGUED THAT THE AO BE DIRECTED TO ALLOW THE DEPRECIATION. AFTER CONSIDERING THE ASSE SSEES SUBMISSIONS LD CIT (A) WAS OF THE OPINION THAT THE AO WAS JUSTIFIED IN TREATING T HE EXPENDITURE AS CAPITAL IN NATURE. HOWEVER HE DIRECTED THE AO TO ALLOW DEPRECIATION A T APPROPRIATE RATE AS PER PROVISIONS OF EXPLANATION 1 TO SECTION 32. BEING AGGRIEVED T HE ASSESSEE IS IN APPEAL BEFORE US. 12. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE PREMISES WAS TAKEN ON LEASE IN 1997 FROM THE ASSOCIATED CONCERN NAMELY PRAT TRADI NG & INVESTMENT PVT LTD AND ALSO POINTED OUT THAT AS PER CLAUSE 14 OF THE AGREEMENT THE ASSESSEE WAS REQUIRED TO MAINTAIN THE PREMISES IN GOOD AND PROPER CONDITION ON ITS OW N COST AND EXPENSES. HE SUBMITTED THAT THE EXPENSES INCURRED WERE OF ROUTINE NATURE AND MINOR EXPENSES FOR THE PURPOSE OF MAINTENANCE ONLY. HE REFERRED TO THE LEASE AGREEME NT DATED 26.11.1997 CONTAINED FROM PAGES 4 TO 15 OF PB AND POINTED OUT THAT AS PER FI RST COVENANT THE PROPERTY WAS TAKEN ON LEASE FOR A PERIOD OF TWO YEARS W.E.F. 1.12.1997 T O 30.11.1999. THE LEASE WAS FURTHER RENEWED FOR A PERIOD OF TWO YEARS FROM 1.12.1999 TO 30.11.2001 VIDE LETTER DATED 30.3.1999 CONTAINED AT PAGE 2 OF PB. LD COUNSEL FO R THE ASSESSEE REFERRED TO THE UNREPORTED DECISION OF THE HONBLE BOMBAY HIGH COUR T IN THE CASE OF CIT V. THE DAVID MILLS LTD.(REF. NO.17 OF 1950) WHEREIN IT WAS HEL D THAT THE REPLACEMENT OF UPPER LAYER FLOORING WHICH WAS A WOODEN LAYER BY WOODEN BOARDS WAS IN THE NATURE OF CURRENT REPAIRS ONLY. THIS WAS ONLY IN THE NATURE OF MAINTAINING A ND PRESERVING THE ASSET WHICH WAS POSSESSED BY THE ASSESSEE. LD COUNSEL FURTHER REFER RED TO THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CASE CIT V AYESHA HOSPITAL S PVT.LTD. [2006] 282 ITR 266 (MAD) WHEREIN THE FACTS WERE THAT THE ASSESSEE CO MPANY RUN A HOSPITAL IN LEASED PREMISES. THE AO DISALLOWED THE EXPENSES CLAIMED B Y THE ASSESSEE UNDER THE HEAD REPAIRS AND MAINTENANCE ON THE GROUND THAT THE SA ME WERE CAPITAL IN NATURE. THE HONBLE MADRAS HIGH COURT HELD THAT A SUM OF RS.1 8 5 557/- SPENT TOWARDS PAINTING RE- LAYING OF THE DAMAGED FLOORS PARTITIONS ETC WAS OF REVENUE CHARACTER. HE ALSO RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN TH E CASE OF CIT V HIDE CONSULTANCY ITA NO.703/M/05 9 PVT LTD AND ANOTHER [2002] 258 ITR 380(BOM) WHERE IN THE HONBLE HIGH COURT HELD THAT A SUM OF RS.9 20 436/- SPENT FOR CONVERSION OF GODOWN TAKEN ON LEASE INTO OFFICE PREMISES BY REPLACING EXISTING ROOF WITH THAT OF CE MENT SHEETS REPLACEMENT OF FLOOR WITH THAT OF MARBLE PLASTERING OF WALLS AND CONSTRUCTIO N OF BATHROOMS AND W.C. ETC WAS ALLOWABLE DEDUCTION. THE HONBLE HIGH COURT HELD T HAT SINCE THE ASSETS CREATED BY SPENDING THE SAID AMOUNTS DID NOT BELONG TO THE ASS ESSEE BUT THE ASSESSEE GOT THE BUSINESS ADVANTAGE OF USING MODERN BUSINESS PREMISES AT A LO W RENT THUS SAVING CONSIDERABLE REVENUE EXPENDITURE FOR A CONSIDERABLE LONG PERIOD THE EXPENDITURE SHOULD BE LOOKED UPON AS REVENUE EXPENDITURE. 13. LD D.R. SUBMITTED THAT THIS EXPENDITURE WAS PUR ELY IN THE CAPITAL FIELD AS IT BROUGHT OUT ENDURING ADVANTAGE TO THE ASSESSEE. HE RELIED ON THE DECISION OF THE MUMBAI TRIBUNAL IN THE CASE OF LIVING ROOM DESIGNERS V ITO [2009] 34 SOT 34 (MUM) WHEREIN IT WAS HELD THAT SINCE EXPENDITURE INCURRED ON RENO VATION HAD GIVEN THE ASSESSEE AN ENDURING BENEFIT AND OWNERSHIP OF RENOVATED ITEMS W OULD NOT PER SE BECOME PROPERTY OF LESSOR AND MOREOVER ASSESSEE HAD NOT PLACED ANY MAT ERIAL ON RECORD TO SHOW THAT LUMPSUM PAYMENT IN FORM OF RENOVATION EXPENSES HAD BENEFITED IT IN THE FORM OF REDUCTION IN REVENUE EXPENDITURE OVER A PERIOD OF Y EARS BY VIRTUE OF LOW RENTALS OR OTHERWISE EXPENDITURE IN QUESTION WAS RIGHTLY CONS IDERED AS CAPITAL EXPENDITURE. 14. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD OF THE CASE. THE LEAVE AND LICENSE AGREEMENT WAS ENTERED INTO ON 26.11.1997 W.E.F. 1.12.1997 TO 30.11.1997. CLAUSE 14 OF THE SAID AGREEMENT READS AS UNDER:- THE LICENSEE SHALL MAINTAIN THE SAID PREMISES THROU GHOUT THE LICENCE PERIOD AND EXTENSION THEREOF IN GOOD AND PROPER CON DITION AT ITS OWN COST AND EXPENSES USUAL WEAR AND TEAR AND LOSS OR DAMAG E BY FIRE FLOOD EARTHQUAKE ACCIDENT IRRESISTIBLE FORCE OR ACT OF GOD EXCEPTED. THIS AGREEMENT WAS RENEWED FOR A FURTHER PERIOD OF TWO YEARS VIDE LETTER DATED 30.3.1999 ON SAME TERMS AND CONDITIONS. THEREFORE THE AOS OBSERVATION THAT THE ASSESSEE WAS NOT REQUIRED TO INCUR THE EXPENDITURE AS THERE WAS NO CLAUSE IN THE AGREEMENT FOR SUCH RENOVATION/MAJOR REPAIRS IS NOT CORRECT. HOWEVER HE HAS ALSO POINTED OUT THAT THE ITA NO.703/M/05 10 EXPENSES WERE IN ANY CASE CAPITAL IN NATURE. THE AO HAS NOTED THAT THE ASSESSEE HAD INTER ALIA INCURRED FOLLOWING EXPENSES WHICH IN H IS OPINION WERE OF CAPITAL IN NATURE: I) ANCHOR MARINE PLYWOOD : RS.1 30 364 2.44 X 1.22 X 19 MM 2.44 X 1.22 X 6 MM (LANDMARK AGENCY) 2.44 X 1.22 X 9 MM II) M.S.FLATS BAR (4X10) : RS.1 63 195 (50X10) III) M.S.BRIGHT BAR : RS. 32 592 IV) M.S.ROUNDS : RS. 35 325 V) M.D.F.BOARDS : RS. 17 225 VI) BASEMENT FLOORING (RAJNI R.MODI) : RS. 54 3 40 THERE CANNOT BE ANY DISPUTE THAT THESE EXPENSES BRO UGHT ENDURING BENEFIT AND WERE IN THE CAPITAL FIELD ONLY. NOTHING HAS BEEN BROUGHT ON RE CORD TO SUGGEST THAT BECAUSE OF THESE EXPENSES BEING BORNE BY THE ASSESSEE THERE WAS ANY REDUCTION IN THE RENTS BEING PAID BY IT. IN THE CASE OF LIVING ROOM DESIGNERS(SUPRA) T HE TRIBUNAL AFTER ELABORATING CONSIDERING THE VARIOUS CASE LAWS INCLUDING CIT V. HEDE CONSULTANCY (P)LTD. 127 TAXMAN 597 (BOM) OBSERVED IN PARA 17 AS UNDER: AS COULD BE NOTICED FROM THE ABOVE REFERRED JUDGMEN TS IN ORDER TO CLAIM DEDUCTION OF AN EXPENDITURE WHICH OTHERWISE GIVES E NDURING ADVANTAGE THE ONUS IS ON ASSESSEE TO PROVE THAT THE OWNERSHIP OF THE PROPERTY EVEN DURING SUBSISTENCE OF LEASE VESTS WITH THE LESSOR AND THE ASSESSE ENJOYED THE BENEFIT OF REDUCED LICENSE FEE. THEREFORE THE BASIC TEST IS THAT LESSEE SHOULD ES TABLISH THAT BY INCURRING EXPENDITURE IN CAPITAL FIELD IT ENJOYED REDUCTION IN THE FORM OF LICENSE FEE WHICH IS OF REVENUE IN NATURE. APPLYING THE TEST LAID DOWN IN THE CASE OF LIVING R OOM DESIGNERS (SUPRA) WE UPHOLD THE FINDINGS OF LD CIT (A). HOWEVER THE AO WILL ALLOW DEPRECIATION AS PER LAW. THIS GROUND IS DISMISSED. 15. APROPOS GROUND NO.2 FACTS ARE THAT THE AO NOTI CED FROM THE DETAILS FILED IN RESPECT OF LOANS AND ADVANCES OF RS.3 21 98 492/- G IVEN BY THE ASSESSEE MOSTLY TO ITS ASSOCIATED CONCERNS THAT THE RATE OF INTEREST CHAR GED ON THE LOANS AND ADVANCES WERE LOW ITA NO.703/M/05 11 IN COMPARISON TO THE RATE OF INTEREST PAID BY THE A SSESSEE ON THE LOANS TAKEN. HE NOTED THAT THE ASSESSEE HAD PAID INTEREST TO THE EXTENT O F RS.1 16 52 208/- WHEREAS IT HAD RECEIVED THE INTEREST OF RS.32 67 685/- ON THE LOAN S AND ADVANCES GIVEN BY IT. HE NOTED THAT THE ASSESSEE HAD INTER ALIA GIVEN THE FOLLOW ING LOANS:- I) A.T.E MANUFACTURING CO.LTD. : RS.63 16 333 -DO- : RS.18 96 000 II) MOTEX ENGG. CO. LTD. : RS.40 00 000 III) HOLTEX ENGG CO. P.LTD. : RS.17 86 159 THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY T HE DIFFERENCE IN THE RATE OF INTEREST SHOULD NOT BE DISALLOWED FROM THE INTEREST CLAIMED . THE ASSESSEES SUBMISSIONS HAVE BEEN REPRODUCED AT PAGE 14 OF THE ASSESSMENT ORDER IN WHICH IT WAS INTER ALIA SUBMITTED THAT MAINLY THE LOANS WERE GIVEN IN EARLI ER YEARS AND NO DISALLOWANCE HAS BEEN MADE. FURTHER IT WAS POINTED OUT AS UNDER:- CAPITAL AND RESERVES OF THE ASSESSEE AS ON 31.3.20 00 ARE AT RS.14 70 84 442/- AND AS ON 31.3.2001 ARE AT RS.18 60 75 431/-. THUS ASSESSEES OWN FUNDS FAR EXCEED LOANS GRANTED BY TH E ASSESSEE. FURTHER THERE IS NO NEXUS BETWEEN THE AMOUNT BORROWED FROM ICIC TERM LOAN NAB TRADING & INVESTMENT PVT LTD. AND VITEX TRADING AN D INVESTMENTS PVT LTD. (TO WHOM INTEREST AT RATES VARYING FROM 15 TO 18% IS PAID) AND THE LOANS GIVEN TO PARTIES AT RATES OF INTEREST VARYING FROM 9 TO 16.5%. THE AO NOTED FROM THE TAX AUDIT REPORT THAT THE ASS ESSEE WAS INTER ALIA CARRYING ON TRADING AND AGENCY BUSINESS IN TEXTILE MACHINERY A CCESSORIES INVESTMENT AND FINANCING. HE OBSERVED THAT IN THE BUSINESS OF FINANCING NO P RUDENT BUSINESS MAN WOULD CARRY OUT THE BUSINESS IN THE MANNER IN WHICH THE ASSESSEE WAS TAKING THE LOANS AT HIGHER RATE AND GIVING AT LOWER RATE OF INTEREST. HE CONCLUDED THA T IT WAS MAINLY DIVERTING THE INCOME BY WAY OF INTEREST TO ITS ASSOCIATED CONCERNS. HE FUR THER OBSERVED THAT THERE IS NO QUESTION OF ANY NEXUS BEING ESTABLISHED BECAUSE THE MAIN POINT WAS AS TO WHY THE INTEREST CHARGED AT LOW RATE FROM THE ASSOCIATED CONCERNS THOUGH TAKEN AT HIGHER RATE FROM OTHERS. HE DID NOT ACCEPT THE ASSESSEES CONTENTION THAT IT HAD SUFFIC IENT FUNDS ON THE GROUND THAT IF THAT WAS SO THERE WAS NO NECESSITY OF TAKING LOANS. HE AFT ER CONSIDERING THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MC DOWEL AND C O. LTD. V CTO 154 ITR 148(SC) DISALLOWED THE DIFFERENTIAL INTEREST OF RS.14 21 63 0/- IN RESPECT OF FIVE PARTIES WHICH ARE AS UNDER:- ITA NO.703/M/05 12 SR.NO. LOANS ADVANCED TO CO.(PARTIES) LOAN AMOUNT RAE OF INTEREST CHARGED RATE OF DIFFERENCE DIFFERENCE OF INTEREST 1. MAGANPLAST TECHNOLOGIES (I) P.LTD. 8000000 14% 3% 240000 2. A.T.E.MAFG.CO. -DO- 6316333 1896000 10% 13% 7% 4% 442143 75840 3. NEGRAWAL TEXTILES P.LTD. 1000000 13% 4% 40000 4. MOTEX ENGG. CO. LTD. 4000000 9% 8% 320000 5. HOLTEX ENGG. CO. P.LTD. 1786159 NIL 17% 303647 TOTAL 1421630 16. LD CIT (A) AFTER CONSIDERING THE DETAILED SUBMISSI ONS OF THE ASSESSEE DELETED THE DISALLOWANCE IN RESPECT OF MAGANPLAST TECHNOLOGIES (I) P.LTD. AND NEGRAWAL TEXTILES P.LTD. AS REGARDS OTHER THREE PARTIES LD CIT (A) OBSERVED AS UNDER HOWEVER IN ASSESSEES CASE IT IS SEEN THAT THE A SSESSEE HAD SUBSTANTIAL FUNDS OF ITS OWN ON WHICH NO INTEREST IS PAID BY IT. SINCE THE ASSESSEE IS HAVING COMMON POOL OF FUNDS IT WOULD BE REASONABLE TO ASSUME THAT BOTH INTEREST FREE AND INTEREST BEARING FUNDS WERE UTILIZED FOR MAKING THESE ADVANC ES TO RELATED CONCERNS. THE AO IS DIRECTED TO WORK OUT THE AVERAGE COST OF BORR OWING OF FUNDS UTILIZED IN BUSINESS. IF THE INTEREST FROM THESE PARTIES HAS B EEN CHARGED AT A RATE LOWER THAN THE AVERAGE COST OF BORROWING ONLY THE DIFFERENCE MAY BE DISALLOWED. 17. LD COUNSEL FOR THE ASSESSEE SUBMITTED THAT AS F AR AS LOAN TO A.T.E MFG. CO. :LTD. AND HALTEX ENGG. CO. IS CONCERNED SAME HAD BEEN GI VEN IN PAST AND NO DISALLOWANCE HAD BEEN MADE. ONLY LOAN TO M/S. MONTEX ENGG CO. L TD. OF RS.40 LAKHS HAD BEEN GIVEN DURING THE YEAR. HE REFERRED TO PAGE 44 OF PB WHE REIN SUBMISSIONS MADE BEFORE LD CIT (A) IN THIS REGARD ARE CONTAINED AND POINTED OUT TH AT THE ASSESSEES CAPITAL AND RESERVE AS ON 31.3.2000 WERE AT RS.14 70 84 442/- AND AS ON 3 1.3.2001 WERE RS.18 60 75 431/. FURTHER CASH PROFITS FOR THE YEAR (PROFITS ATER TA X BUT BEFORE DEPRECIATION) WERE AT RS.5.08 CRORES. HE THEREFORE SUBMITTED THAT THE ASSESSEE ;S OWN FUNDS FAR EXCEEDED THE LOANS GRANTED BY THE ASSESSEE AND THEREFORE NO DISALLOW ANCE IS CALLED FOR IN VIEW OF THE ITA NO.703/M/05 13 DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MUNJAL SALES CORPORATION V CIT 298 ITR 298 (SC) WHEREIN IT HAS BEEN INTER ALIA HELD THAT ONCE IT IS FOUND THAT INTEREST FREE LOANS GRANTED BY THE ASSESSEE TO ITS SISTER C ONCERN WERE OUT OF OWN FUNDS AND THE INTEREST PAID THEREON HAD NOT EXCEEDED THE RATE PRE SCRIBED U/S.40(B)(IV) THE ASSESSEE WAS ENTITLED TO DEDUCTION U/S.36(1)(III) R.W.S. 40(B)(I V). 18. LD D.R. RELIED ON THE DECISION OF THE HONBLE P &H HIGH COURT IN THE CASE OF CIT V ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H). HE SU BMITTED THAT THE DECISION IN THE CASE OF MANJULA SALES CORPORATION (SUPRA) WAS RENDERED W ITH REFERENCE TO SECTION 40(B)(IV) AND NOT SPECIFICALLY WITH REFERENCE TO SECTION 36(1 )(III). LD D.R. REFERRED TO PAGE 301 OF THE DECISION AND POINTED OUT THAT ON BEHALF OF REVE NUE IT WAS ARGUED THAT EVEN IF THE ASSESSEE ESTABLISHES ITS CLAIM FOR DEDUCTION U/S.36 (I)(III) IT HAS STILL TO PROVE THAT IT IS NOT DISENTITLED FOR DEDUCTION U/S.40(B)(IV). THEREFORE HE SUBMITTED THAT THE MAIN ISSUE BEFORE THE HONBLE SUPREME COURT WAS WITH REFERENCE TO SEC TION 40(B)(IV) AND NOT WITH REFERENCE TO SECTION 36(1)(III). ON THE CONTRARY I N THE CASE OF ABHISHEK INDUSTRIES (SUPRA) THE HONBLE HIGH COURT HELD THAT IN CASE OF MIXED F UNDS THE INFERENCE WAS THAT ADVANCES WERE FROM BORROWED FUNDS AND FOR NON-BUSINESS PURPO SES AND THE ONUS IS ON THE ASSESSEE TO PROVE THE CONTRARY. THE ONUS IS NOT ON THE REVE NUE TO SHOW THE NEXUS BETWEEN BORROWINGS AND ADVANCES. MERELY BECAUSE ADVANCES B Y THE COMPANY ARE COVERED BY OWN FUNDS OF SHARE CAPITAL OR OUT OF MIXED FUNDS IS NO T SUFFICIENT TO DISCHARGE THE ONUS. 19. LD COUNSEL FOR THE ASSESSEE IN HIS REJOINDER RELIED ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UT ILITIES AND POWER LTD. [2009] 313 ITR 340 (BOM) WHEREIN IT WAS HELD THAT IF THERE W ERE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND/OR LOANS TAKEN THEN A PRESUMPTIO N WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAI LABLE WITH THE COMPANY IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 20. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PE RUSED THE RECORD OF THE CASE. THERE IS NO DISPUTE THAT THE ASSESSEE HAD MIXED POO L OF FUNDS AND UNDER SUCH CIRCUMSTANCES AS PER THE DECISION OF THE HONBLE B OMBAY HIGH COURT IN THE CASE OF ITA NO.703/M/05 14 RELIANCE UTILITIES AND POWER LTD (SUPRA) THE PRESU MPTION WOULD BE THAT THE OWN FUNDS HAD BEEN UTILIZED FOR GIVING THE LOAN TO SISTER CON CERNS AT A LOWER RATE. AS FAR AS THE DECISION IN THE CASE OF MANJULA SALES CORPORATION ( SUPRA) IS CONCERNED WE FIND THAT THE SAME HAS BEEN DELIVERED MAINLY WITH REFERENCE TO TH E PROVISIONS OF SECTION 40(B). IN THAT CASE THE ISSUE WAS AS TO HOW THE PROVISIONS OF SEC TION 40(B) WERE APPLICABLE KEEPING IN VIEW THE LIMITATION PRESCRIBED THEREON WITH REFEREN CE TO SECTION 36(1)(III). THE HONBLE SUPREME COURT AT PAGE 303 INTER ALIA OBSERVED AS UNDER:- IN OTHER WORDS EVERY ASSESSEE INCLUDING A FIRM HA S TO ESTABLISH IN THE FIRST INSTANCE ITS RIGHT TO CLAIM DEDUCTION UNDER ONE OF THE SECTIONS BETWEEN SECTIONS 30 TO 38 AND IN THE CASE OF THE FIRM IF IT CLAIMS S PECIAL DEDUCTION IT HAS ALSO TO PROVE THAT IT IS NOT DISENTITLED TO CLAIM DEDUCTION BY REASON OF APPLICABILITY OF SECTION 40(B)(IV). THEREFORE IN THE PRESENT CASE THE ASSESSEE WAS REQUIRED TO ESTABLISH IN THE FIRST INSTANCE THAT IT WAS ENTITLE D TO CLAIM DEDUCTION UNDER SECTION 36(1)(III) AND THAT IT WAS NOT DISENTITLED TO CLAIM SUCH DEDUCTION ON ACCOUNT OF APPLICABILITY OF SECTION 40(B)(IV). 21 ON THE ISSUE OF ALLOWABILITY OF DEDUCTION U/S.36 (1)(III) THE HONBLE SUPREME COURT CONSIDERED THE FINDINGS OF THE TRIBUNAL AND INTER ALIA OBSERVED AS UNDER:- ONE ASPECT NEEDS TO BE MENTIONED DURING THE ASSESS MENT YEAR 1995-96 APART FROM THE LOAN GIVEN IN AUGUST/SEPTEMBER 1991 THE ASSESSEE ADVANCED INTEREST FREE LOAN TO ITS SISTER CONCERN A MOUNTING TO RS.5LAKHS. ACCORDING TO THE TRIBUNAL THERE WAS NOTHING ON REC ORD TO SHOW THAT THE LOANS WERE GIVEN TO THE SISTER CONCERN BY THE ASSES SEE FIRM OUT OF ITS OWN FUNDS AND THEREFORE IT WAS NOT ENTITLED TO CLAIM DEDUCTION UNDER SECTION 36(1)(III). THIS FINDING IS ERRONEOUS. THE OPENIN G BALANCE AS ON APRIL 1 1994 WAS RS.1.91 CRORES WHEREAS THE LOAN GIVEN TO THE SISTER CONCERN WAS A SMALL AMOUNT OF RS.5 LAKHS. IN OUR VIEW THE PRO FITS EARNED BY THE ASSESSEE DURING THE RELEVANT YEAR WERE SUFFICIENT T O COVER THE IMPUGNED LOAN OF RS.5 LAKHS. THUS IN PRINCIPLE THE HONBLE SUPREME COURT AGREE D THAT IF THE LOAN WAS GIVEN OUT OF INTEREST FREE FUNDS TO SISTER CONCERNS THEN NO DIS ALLOWANCE IS CALLED FOR U/S.36(1)(III). 22 THE HONBLE BOMBAY HIGH COURT IN THE CASE OF REL IANCE UTILITIES AND POWER LTD(SUPRA) INTER ALIA HELD AS UNDER:- THE PRINCIPLES THEREFORE WOULD BE THAT IF THERE A RE FUNDS AVAILABLE BOTH INTEREST FREE AND OVER DRAFT AND/OR LOANS TAKEN TH EN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR ITA NO.703/M/05 15 AVAILABLE WITH THE COMPANY IF THE INTEREST FREE F UNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 23. IN THE PRESENT CASE ADMITTEDLY OUT OF LOANS A ND ADVANCES AGGREGATING TO RS.3 21 98 492/- THE ASSESSEE HAD GIVEN RS.40 LAKH S TO MOTEX ENGG. CO.LTD. DURING THE YEAR. THE ASSESSEES CAPITAL AND RESERVE WERE AT R S.18 60 75 431/- AS ON 31.3.2001 AND THE CASH PROFITS EARNED DURING THE YEAR WERE AT RS. 5.08 CRORES. THEREFORE IN VIEW OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F MANJULA SALES CORPORATION (SUPRA) AND THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RE LIANCE UTILITIES AND POWER LTD (SUPRA) IT CAN BE REASONABLY CONCLUDED THAT THE LO ANS AND ADVANCES GIVEN TO SISTER CONCERNS WERE OUT OF OWN FUNDS. ACCORDINGLY NO DI SALLOWANCE WAS CALLED FOR. GROUND NO.2 IS ACCORDINGLY ALLOWED. 24. IN THE RESULT APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED ON 30 TH APRIL 2010 SD/- (V. DURGA RAO) (JUDICIAL MEMBER) SD/- (S.V. MEHROTRA) (ACCOUNTANTMEMBER) MUMBAI DATED 30 TH APRIL 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS)-II MUMBAI 4. COMMISSIONER OF INCOME TAX CITY-II MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH I MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI