TaxTMI 
TaxTMI 
2010 (9) TMI 942
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..... 66,96,373/- made on account of reduction of interest from Virtuous Finance Limited. 3 The Ld. CIT(A) has erred in law and on facts in deleting the disallowance of Rs. 16,72,521/- made on account of interest on interest free godown deposit to Dadha Pharma Pvt. Ltd. 4 The Ld. CIT(A) has erred in law and on facts in allowing interest on advances to M/s Antriksh Pharma & M/s Dukan amounting to Rs. 31,18,143/-. 5 The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 86,560/- made on account of interest on advance to Dadha & Co. 6 The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 1,00,987/- made on account of interest free advance to Pradeep Dadha Agency. 7 The Ld. CIT(A) has erred in law and on facts in deleting the addition of Rs. 13,87,275/- made on account of interest in respect of advance to individual. 8 On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer 9 It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent. ITA No. ....
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....s of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer 5. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent. ITA No.2180/Ahd/2005 [AY 2002-2003] 1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of Rs. 844/- on account (of differential interest made u/s 36(l)(iii). The assessee paid higher interest to the banks whereas charged less interest from the Finance Companies belonging to its own group companies. 2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in deleting the addition of interest of Rs. 12,23,482/-. The assessee advanced loans to M/s Virtuous Finance Ltd. @ 12% whereas paid higher interest to the banks. 3. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of Rs. 2,29,43,683/-made out of interest paid on the over due bills for purchases. The assessee purchased goods from its associated concern, M/s Sun Pharmaceutical Industries Ltd., and paid interest at the ....
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....flected collusive nature of payment of excessive amount in the face of M/s SPIL being entitled to deduction of 100% profits u/s 80IB, thus resulting in overall avoidance of tax by an arrangement between the assessee and its associate concern. 2(b) The learned CIT(A) failed to appreciate that it was a colourable arrangement and the AO was entitled to lift the corporate veil and pierce the arrangement as settled in the case of Mc Dowell and Co. Ltd. vs. CTO 154 ITR 148, 171 (SC) and reiterated in the case of Union of India vs. Azadi Bachao Andolan 263 ITR 706 (SC). 3. On the facts and in the circumstances of the case, the ld. CIT(A) ought to have upheld the order of the Assessing Officer 4. It is, therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent. Since similar grounds are involved in these five appeals, these were heard simultaneously for the sake of convenience and are being disposed of through this common order. 2. Adverting first to ground no.1 in the appeals for the AY 1999-2000 to 2003-04, facts ,in brief, as per relevant orders for the AY 1999-2000 are that return decla....
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.... already deleted a similar addition in the AY 1998-99. However, the AO did not accept the submissions of the assessee, inter alia ,on the ground that the assessee entered into a device to reduce their tax liability when it had made fresh borrowings @ 18% pa and paid interest @17.85% to bank while advancing funds to group concerns at lower rates and no commercial expediency was involved while advancing such funds at lower rates. Accordingly, the AO concluded differential interest expense was not incurred wholly and necessarily for the purpose of assessee's own business; rather the assessee had incurred the liability for the benefit of its associate concerns. Therefore, the AO disallowed the following amount of differential interest cost: Rate of Interest Interest recovered Bank Rate Born by assessee Disallowed differential 12% Rs. 2,86,176 17.85% 4,25,687 1,39,511 11% Rs. 12,79,419 " 26,76,148 7,96,729 3. Like wise, the AO disallowed an amount of Rs. 2,03,792 /- calculated on page 6 of the assessment order for the AY 2000-01 and Rs. 3,26,683/- in the AY 2001-02 as mentioned on page 5 of the assessment order. Simil....
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.... to the facts and circumstances of the case, we find that the assessee was having interest free funds of Rs. 13 Crores and in addition to that interest free security deposit of Rs. 11,58,000 with the assessee. We find that the assessee had frequent transactions with the above parties. In the case of CFI v. Radico Khaitan Ltd (274 ITR 354), Hon'ble Allahabad High Court has held - "that in view of the findings recorded by the Tribunal that the assessee-company had sufficient funds other than the borrowed money for giving the amount in question as loan to its sister concern, which finding had not been specifically challenged in -the present appeal, the conditions of section 36(1)(iii) of the Act had been complied with and, therefore, the assessee-company was entitled to full allowance of the amount of interest paid by it on borrowed capital." The finding recorded by the CIT(A) that -"It is also a fact that the Assessee Company has got substantial interest free own funds out of which the advances are made. It is not a case that interest bearing borrowed funds has been diverted to the group concerns interest free or on lower charge of interest or for the purpose ot....
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....ons and for the benefit of the assessee, the rate of interest charged at 14% was more than reasonable. The assessee pointed out that since they had large interest free funds of their own, there was no reason to disallow any portion of interest. However, the AO did not accept the submissions of the assessee and disallowed an amount of Rs..66,96,000/- ,computed in the following manner :- Rate of Interest Interest recovered Interest rate Born by assessee Disallowed differential 14% 24350448 17.85% 31046821 66,96,373 " 8.1 Like wise an amount of Rs. 25,90,363/- was disallowed in the AY 2000-01 ,Rs. 8,38,036/- in the AY 2001-02 & Rs. 12,23,482/- in the AY 2002-03. 9. On appeal, the ld. CIT(A) deleted the disallowance in the AY 1999-2000 in the following terms: "8 This issue has been dealt with at great length by my predecessor while disposing the Appeal of the block assessment order of SPIL, I have perused the appellate order and find no reason to differ from the conclusions reached by my predecessor. I have also carefully considered the contentions of the Assessing Officer, the Appellant and the facts on record it is to be noted that VFL is ....
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....sallowing Rs. 66,96.373/- out of interest. He is directed to delete the addition made." 9.1 Following his own order for the AY 1999-2000, the ld. CIT(A) deleted the disallowance in the AYs 2000-01 to 2002-03 also. 10. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). At the outset, both the parties agreed that issue is squarely covered in favour of the assessee by the decision dated 31-05-2007 of the ITAT in the assessee's own case in IT(SS)A No.95/Ahd/2001 for the block period. 11. We have heard both the parties and gone through the facts of the case as also the decision of the ITAT. We find that while adjudicating a similar issue in their order dated 31-05-2007 in the assessee's own case in IT(SS)A No.95/Ahd/2001 in appeal against block assessment, the Tribunal held as under:- "33. We have carefully considered the submissions of the parties alongwith the order of the tax authorities and the case laws cited before us. We noted that the main reason for the disallowance was that as per the Assessing Officer the" reduction in interest was carried out as an after thought with a view to reduce the income of the Assessee in view o....
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....own findings in the block assessment order, wherein disallowance of interest in relation to Interest free deposit of Rs. 3 crore of Dadha Pharma P. Ltd. had been made for the period upto 7-12-98, the AO disallowed interest of Rs. 16,72,521/- for the period 8-12-98 to 31-3-99 ,there being no change in the nature and purpose of these advances. 12.1 For similar reasons, the AO disallowed an amount of Rs. 39,75,075/- in the AY 2000-01. 13. On appeal, the learned CIT(A) deleted the disallowance in the AY 1999-2000 in the light of decision of his predecessor in appeal against block assessment in the following terms:- "18 I have carefully considered the submissions of the Appellant in light of the block assessment order and the order of my predecessor on this issue. I agree with the conclusion reached by my predecessor having regard to the overall facts and circumstances of the case The interest free deposit appears to have been given for the purpose of the business and has to be considered after taking into account the overall benefits accruing to the Appellant in which case it would be reasonable and for the purpose of business. 19 It is also noted that the appel....
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....as in respect of a godown having approximately floor area of 10,000 sq. feet to be constructed on a plot of area 28,800 sq. feet situated at no. 268, Lloyds Road, being the immovable property belonging to M/s. Dadha Pharma Pvt. Ltd. According to the lease agreement, the said godown was to be constructed before 31.12.98 and let out on a monthly rent of Rs. 8,000/- per month. The period of lease was 36 months with effect from 1.2.98. 18 During the course of block assessment proceedings, the Assessing Officer observed that in order to enable the Dadhas to purchase the shares- held by TIDCO in TDPL, a modus operandi of transferring funds on account of loans, advances, security deposits, etc. were utilized by the group concerns of Sun Pharma Group. The Assessee had given interest free security deposits in respect of the lease of godown on 20.03.1998 amounting to Rs. 2.5 crores and on 25.03.98 amounting to Rs. 50 lacs. The deposit of Rs. 2.5 crores given to the lessor was transferred on the same day to Shri Mohanchand Dadha's Account (HUF) which in turn, was 'transferred back to M/s. Aditya Medisales as repayment of advances which were given to Shri Mohanchand Dadha (HUF....
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....dings. As per the Assessing Officer this fact also clearly established that the agreement was a colourable device to transfer funds to Dadha Pharma Pvt. Ltd. for the purpose other than that stated in the agreement dated 01.01.98. The Assessing Officer disallowed Rs. 3831637/- out of the interest expenditure claimed by the Assessee holding that interest bearing funds have been diverted for non business purposes. 20 The Assessee went in appeal against the above disallowance of interest and the Commissioner of Income Tax (Appeals) deleted the addition on the above ground by making the following observations (pages 36 to 40) "46. / have considered the arguments advanced by the Assessing Officer as well as by the appellant. It is observed that the turn over of the appellant increased substantially. Once the turnover has increased, need to have a better & bigger warehouse cannot be ruled out. If advances are made towards this purpose, the advances may be treated as used for the purpose of the business unless contrary is proved. The appellant has filed papers reflecting appointment of consultants and developers by Dadha Pharma Pvt. Ltd. & reasons for non development. How....
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.... distributor of M/s. IL was also going to be benefited a lot as its turnover was going to be creased substantially, if its principal's turnover increased to that extent. rn order to acquire the said company, M/s. SPIL, the appellant and other group-companies started giving substantial amounts of interest free advances to the members of Dadha group in order to enable them to purchase 25% of shares held by the TIDCO and also has advanced/sale proceeds against their own shares @ Rs. 290 per share. There is a dispute between the appellant and the Assessing Officer in respect of treatment of interest free advances. Where as the appellant alternatively contended that the advances were given to keep liquidity with the Dadha group in order to enable them to purchase the shares and after amalgamation may not sell their own shares which were converted into the shares of SPIL at the ratio of 4:1, the Assessing Officer contended that the seized material showed that the shares were sold by Dadha @ Rs. 290 per share prior to the amalgamation which was completed in February, 1998 and was with effect from 1.4.1997. It was contended by the appellant that the SPIL group kept control of the share....
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....interest In my view, the first part i.e. the device of giving advance is not very relevant. What is crucial to the issue is whether the amount of Rs. 3 crores advanced by the appellant was used for the purpose of its business. What is more important is the use and not the device while examining the business purpose. The Assessing Officer has treated both colorable device used for the purpose of business and colorable device used to evade the tax on equal footing. Where as the colorable device to evade the tax is not permissible, there may not be any objection to the Assessing Officer for adoption of colorable device by the appellant for the purpose of business, if the said device does not violate the law. A device treated by the Assessing Officer as colorable may be a necessity for the appellant's business. There cannot be any grievance to the department if the appellant adopt colorable device to promote its business interest. If the Dadha's wanted to have advance from the appellant in a particular manner and that keeps them in good humour which is necessary for the appellant to promote its business, in that case if the appellant gives advances according to that requirement....
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....for the purpose of business. In my view, there is no difference between the two as the end use of advance is the same and both were used for the purpose of appellant's business. In the last paragraph of page 39 of the assessment order, the Assessing Officer himself stated that various seized material clearly prove that the amount of Rs. 3 crore was being appropriated by Dadha's against the receivable consideration for their share holding. This finding keeps it at par with the advance given by the appellant to the members of Dadha group directly. I therefore hold that the advances of Rs. 3 crore was given for the purpose of business and no interest attributable to the said advance can be disallowed by the Assessing Officer. I direct the Assessing Officer to delete the disallowance of Rs. 38,31,637/-. 48. The appellant has taken another alternative contention that it has sufficient interest free funds at its disposal which were used to give the said deposit of Rs. 3 crore and therefore no interest on borrowed funds can be disallowed by the Assessing Officer. In the letter dated 24.4.2001 the Assessing Officer contended that the assessee may be asked to prove the nexu....
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....lcutta High Court the case of Shaw Wallace and Company 165 CTR 489 which held that expenditure already disclosed in the books of accounts cannot be treated as undisclosed income under Chapter XIV B of the Act. It is observed that during the search incriminating material was found which created suspicion about the use of amount given by the appellant for the purpose other than shown in the regular books of accounts. Though the real purpose for giving advance on the basis of the said seized material is also held as given for the purpose of business, still the same gives jurisdiction to the Assessing Officer to examine the said evidences in block assessment proceedings Under Chapter XIV B of the Act. Therefore this ground of appeal is rejected. However, as on merit it is held that the interest attributable to the advance of Rs. 3 crore cannot be disallowed, the Assessing Officer is directed to delete the addition of Rs. 38,31,637/-." 21 The Ld. DR relied strongly on the order of the Assessing and submitted was clearly visible that the deposit placed was used by the shareholders of TDPL to discharge the liability in respect of the loans and advances taken by r~ from the Assess....
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....mprising of capital, reserves and interest free deposits received from stockists and customers. The interest free funds at the disposal of the Assessee were more than sufficient for providing the interest free deposit. Further during the period in which the deposits have been given, there is no increase in the total borrowings of the Assessee. Further no part of borrowings had been diverted for giving the said deposit. It had sufficient interest free funds at its disposal which were used (e the said deposit of Rs. 3 crore and therefore no interest on borrowed can be disallowed by the Assessing Officer. The A.R. further contended that the Assessing Officer has not been able to establish whether any interest bearing funds were diverted to non business purposes. The A.R. submitted that the balance sheets for "assessment year 1997-98 and 1998-99, the reserves and surplus exceeded Rs. 20 crore. He further submitted that since the funds were given out of a common pool, it was not possible to establish any direct nexus. The A.R. relied on the following decisions in which it has been held that in the absence of direct nexus between the interest free advances and interestbearing loan, inter....
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....diency cannot be doubted in the case of the Assessee, we find no reason to interfere with the order of the CIT (A) and accordingly we confirm the order of the C1T(A) on this issue. This ground of appeal of the revenue is thus dismissed" 15.1 Since the facts obtaining in the years under consideration are undisputedly similar to the facts obtaining in the block assessment period, we have no hesitation in upholding the findings of the learned CIT(A) in the light of the aforesaid decision of the ITAT in the assessee's own case in IT(SS)A No.95/Ahd/2001. Therefore, ground no.3 in the appeals for the AY 1999-2000 & AY 2000-01 is dismissed. 16. Ground No.4 relates to disallowance of interest of Rs. 31,18,143/-. on advances to M/s Antriksh Pharma & M/s Dukan in the AY 1999-2000 while ground no. 2 in the appeal for the AY 2000-01 relates to disallowance of Rs. 44,96,980/- on account of interest on advances to M/s Dukan Relying upon his own findings in the block assessment order, wherein disallowance of interest in relation to advances to M/s Antriksh Pharma & M/s Dukan had been made for the period upto 7-12-98, the AO disallowed interest of Rs. 16,47,312 in relation to M/s Du....
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....issue is squarely covered in favour of the assessee by the decision dated 31-05-2007 of the ITAT in the assessee's own case in IT(SS)A No.95/Ahd/2001 for the block period. 19. We have heard both the parties and gone through the facts of the case as also the decision of the ITAT. We find that while adjudicating a similar issue in their order dated 31-05-2007 in the assessee's own case in IT(SS)A No.95/Ahd/2001, the Tribunal held as under:- "25. Ground No. 3 relates to giving interest free advances to M/s Antariksh Fnarma and M/s. Dukan. The facts relating to this grounds are that SPIL had appointed the two parties as their sole distributors for the territories of Tamilnadu and Karnataka respectively. Both these parties were related to the Dadhas .ho were instrumental in the amalgamation of TDPL with SPIL. The entire scheme of amalgamation and the contentions of the Department in respect of the amalgamation have already been mentioned hereinabove. 26 During block assessment proceedings, the Assessing Officer disallowed Merest expense claimed by the Assessee u/s 36 (1) (iii) to the extent of interest free advances given by the Assessee to M/s Antariksh Pharma and ....
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....case of the Assessing Officer that the appellant, by giving more advances than required to the said concerns against purchases, used a colorable device to transfer its funds to Dadhaas group with the sole purpose of transfer of funds for acquisition by SPIL of the shareholding of Dadha's in TDPL. The appellant contended that it being totally dependent on SPIL, gave advances to the said two concerns against purchases and therefore the advances were given for the purpose of business. I am inclined to accept the said contentions of the appellant as it has no option but to follow the advice of SPIL and therefore in my view the advances given to the said concerns were for the purpose of business. Besides, even if the Assessing Officer's contention is accepted, in that case, the end use of the advances was the purchase of the shares of TDPL of Dadha's by SPIL which has been again in the interest of SPIL and consequently the appellant. Even, the Assessing Officer himself stated that the amounts advanced by the appellant to the individual members of Dadha group may be treated as used for the purpose of business as the same were given in order to enable SPIL to acquire the share....
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....2 28. We have carefully considered the rival submissions. We find that the main reason for disallowance is that while interest was paid by the Assessee to its suppliers, the Assessee did not charge interest to the two parties. We find force in the contention of the Assessee that on account of amalgamation of TDPL with SPIL the Assessee would experience growth in its turnover and operations. Subsequent events and the figures of turnover of the. Assessee vindicate this point in favour of the Assessee. On any such acquisition of business / amalgamation the acquirer would be keen to ensure that there is smooth integration of business across the entire line which include distribution channel also. In such circumstances as the sole distributor of SPIL. the action of the Assessee in appointing the said firms as its distributor for the southern regions, at the behest of SPIL would be governed by business expediency. The Assessee has also demonstrated by documentary evidence before the lower authorities that the distribution had in fact happened through the said firms. The said firms had the necessary trade and other registrations for carrying on the said activity. The Assessing Of....
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....unded and the same was credited on 31-03-2000. iii. Interest of Rs. 344219/- was debited to its account on 31-3-2000 @ 12% for the year 1999-2000. The interest was computed for the entire period beginning from 31-01-99. iv. Interest was recovered in two installments of Rs. 72728/- and 268491/- respectively on 31-01-00 and 16-10-2000. 20.1 As regards advance to Pradeep Dadha Agency, the assessee submitted that i. Advances of Rs. 35 lacs was given on 31-01-1999. ii. Amount was refunded and the same was credited on 14-03-2000. iii. Interest of Rs. 400439/- was debited to its account on 31-3-2000 @ 12% for the year 1999-2000. The interest was computed for the entire period beginning from 31-01-99. iv. Interest was fully recovered on 16-10-2000. 20.2 The assessee further pleaded that since the advances given to Dadhas were wholly for the purposes of business of the assessee ,there was no question of any disallowance. Inter alia, the assessee relied upon the decision of the CIT(A) in block appeal. However, the AO did not accept the submissions of the assessee on the ground that the assessee did not adduce any evidence regarding ....
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....herefore, ground nos.5 & 6 in the appeals for the AY 1999-2000 & 2000-01 are dismissed. 25. Ground no..7 in the appeal for the AY 1999-2000 & ground no.4 in the appeal for the AY 2000-01 relate to disallowance of Rs. 13,87,275/- & Rs. 7,25,066/- respectively on account of interest in respect of advance to certain individuals. The AO noticed that the assessee made advances to Shri S.M. Dadha & M Maherchand Dadha in order to enable them to acquire the shares held by the other co-promoters of M/s TDPL namely M/s. TIDCO. The assessee explained that they intended to get the shares held by the Dadha as security along with thee voting rights on those shares. During the block assessment proceedings , no disallowance on account interest attributable to these advances was made. Subsequently, the AO noticed that the shares were never transferred in the company's name and even though the assessee company had charged interest (c) 18% from Shri S.M. Dadha, no interest was charged from M.Maharehand Dadha. Since the assessee did not adduce any cogent explanation, distinguishing the case of Shri. S.M Dadha from Shri M. Maherchand Dadha, the AO added amount of Rs. 13,87,275/- to the total income ....
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..../- respectively being interest paid to SPIL @ 21% pa on overdue balances resulting from purchases. The AO noticed during the course of assessment proceedings in the AY 2002-03 that the assessee paid interest on overdue supplier bills of Sun Pharmaceutical Industries Ltd. @ 21% p.a. and paid interest on borrowed funds from banks @15.5% pa while it charged interest from the advances given to the Finance Companies of the Sun Group @12% pa. To a query by the AO, the assessee submitted that a. they were authorized dealer of all products of M/s. SPIL in domestic market and are supposed to make on the spot payment to M/s. SPIL; b. the rate of interest depended upon the overall interest rate prevailing in the market, business opportunities provided by M/s.SPIL to the assessee. c. M/s. SPIL is in dictating position as far as business of M/s. Aditya Medisales Ltd. was concerned. d. market rate of unsecured borrowings is very high. e. the A.O cannot sit on the judgment over business decisions taken by the assessee. f. the interest expenditure of the assessee becomes the income of M/s. SPIL and there is no loss of revenue. 29.1 However ,....
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....ture of Sundry Debtors and inventory, to meet its growing business needs. Hence the commercial justification of going in for Suppliers credit can not be questioned. Coming now to the interest rate charged, I see tremendous force in the arguments of the appellant. The rate of interest has to be viewed in the overall circumstances of the case. Different type of fund will have different cost. Even the weightage need to be given for availability of the same and security etc. Commercial matters are best left to judgment of businessmen to decide. No interference is ordinarily called for unless the Assessing Officer has valid reasons to support his contention that the interest rate is malafide. My predecessor had earlier similar addition of Rs. 56,63,331/- in A.Y. 1997-98, though made under section 40A(2) of the Act, wherein he had examined the addition on account of interest otherwise. It was clearly held therein that the Assessing Officer was not justified in drawing adverse inference on this point Section 36(l)(iii) of the Act relates to deduction on account of "the amount of interest paid on capital borrowed for the purposes of the business or profession". In this case the Assessing O....
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....e Act. The assessee was facing dearth of finance and the rate of the market borrowings varied in the range of 24% p.a. to 30% p.a. As such, there is no cause for inferring the rate of 24% p.a. as excessive, so as to invoke (a) of the Act, particularly when there was no taxation motivation involved. Aggrieved, the Revenue is in appeal. 7 Before us, the Ld. D.R. relied on the order of the A.O. The AR on the other hand, relied in support of his case, on the decision in the case of Birla Gwalior Pvt. Ltd, vs. CIT, 44 ITR 747 (MP). Further, while arguing the case, he took us through the rectification application filed by the assessee (on 18-02-2000), i.e., immediately after passing the assessment Order, seeking rectification of the finding by the AO i.e., of SPIL being an entity covered u/s. 40A(2)(b) of the Act and which was stated by him stands undisposed to date. 8. We have heard the parties, and perused the material on record. 8.1 We find that the assessee has firstly contested the applicability of s. 40A(2)(b) in its case, contending that the same is not an entity covered by the said section. It is not clear from the record whether the said contention sto....
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....h in the turnover of the company and the assessee having already borrowed huge amount of funds from the bank, chose to pay interest to its creditors. Since the interest has been paid wholly and exclusively for the purposes of the business while both the assessee and SPIL were liable to tax at the same rates, therefore the arrangement could not be said to for reducing the tax liability. Accordingly, the ld. CIT(A) concluded that the reasonableness of the expenditure could not be doubted. As pointed out by the Hon'ble Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 , once it is established that there was nexus between the expenditure and the purpose of the business , the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The Income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of ....