TaxTMI 
TaxTMI 
2013 (2) TMI 66
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....dvances/loans on a sum of Rs.3,27,82,401/- u/s. 36(i)(ii) and u/s. 40A(2) of the Income Tax Act, 1961 for the reasons given in his/her order dated 30-3-2010. 2. The Ld. CIT(A) had failed to appreciate the decision of the jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. which is squarely applicable in the case of the Appellant Company. 3. The Appellant craves leave to add to, amend alter or vary the aforesaid grounds and/or adduce further evidence before at the time of hearing." Assessee's Grounds for A.Y 2006-07: "1. The Ld. CIT(A) seriously erred in law and on the facts and in the circumstances of the case in arbitrarily confirming the disallowance of interest expenditure attributable to non business, interest free advances/loans on a sum of Rs.3,44,61,226/- u/s. 36(i)(ii) and u/s. 40A(2) of the Income Tax Act, 1961 for the reasons given in his/her order dated 17- 3-2011. 2. The ld. CIT(A) had failed to appreciate the decision of the jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. which is squarely applicable in the case of t....
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....for the sake of convenience the facts for assessment year 2005-06 will be referred and decision taken will be applicable to both the years. 3.1 During the course of assessment proceedings the AO noticed that assessee had claimed interest expenses to the tune of Rs.4,59,54,419/-. Such interest pertained to the secured and unsecured loans taken by the assessee. The groups and pattern as on 31/3/2004 and 31/3/2005 as reflected in the balance sheet have been compiled by the AO in para 3.1 of the assessment order as under: Particulars Schedule As at 31.3.2005 (Rs.) As at 31.3.2004 (Rs.) SOURCE OF FUNDS Shareholders funds A 89,464,440 89,464,440 Share Capital Advance against Share 3,100,000 3,100,000 Application Money Loan Funds B 86,521,931 140,148,484 Secured Loans Unsecured Loans C 91,959,521 76,796,024 Total 271,045,892 309,508,948 APPLICATION OF FUNDS D 273,101,036 276,272,686 Fixed Assets 182,011,350 156,584,089 Gross Block 91,089,686 119,688,597 ....
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....11/2004 and 14/01/2005 respectively. The total cost of production of those film was Rs.13.24 crores. The said amount remained invested in those films till the date of release and even after release for the realization on account of overseas market carried the burden of interest. The assessee suffered heavy loss in the film "Ailan" which resulted in blockage of funds and more burden of interest. The assessee acquired distribution rights of Rs.26.14 crores realizing from sale of distribution rights came after certain period of time and the funds were blocked. Thus it was pleaded that no part of the interest is disallowable. However, the AO did not accept the submission of the assessee as according to AO the assessee could not explain the allowability of the said interest despite opportunity having been given to the assessee. Referring to the inability to explain allowability and also certain specific audit observations the AO disallowed the entire interest of Rs.4,59,54,419/- by applying the provisions of section 36(1)(iii) as well 40A(2) of the Act. 3.4 Before Ld. CIT(A) one of the contentions for allowability of the interest expenditure was that sufficient own funds were availab....
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.... 5,17,61,226/- 4.1 He submitted that assessee has advanced these interest free amounts out of interest free funds available with the assessee. Ld. AR has enclosed copies of the assessment order from A.Y 2000-01 to assessment year 2004- 05 and submitted that in none of these assessments which are framed under section 143(3) of the Act any disallowance has been made with regard to interest He submitted that funds available with the assessee almost remain same. Ld. AR has also prepared the chart regarding availability of interest free funds in respect of assessment year 2004-05, 2005-6 and 2006-07 which are reproduced below: Statement showing the free reserves available as on 31/03/2004. TOTAL FREE RESERVES: Particulars Schedules Amount (Rs.) As at 31/3/2004 (Rs.) Share Capital A 89,464,440 Advance against Share application money 3,100,000 Creditors J 199,218,854 Advance from Customer/Distributors J 375,733,860 Less: Advances on which interest Paid 95,300,000 Interest free advances 280,433,860 280,433,860 &nbs....
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....reciation reserve and, therefore, no disallowance would be made and this contention of the assessee was accepted by the Ld. CIT(A) and the order of Ld. CIT(A) was confirmed by the Tribunal on the ground that assessee had interest free funds in the shape of share capital reserves and surplus and depreciation reserve amounting to Rs.398.19 cores. In the said case revenue had argued before High Court that shareholders funds were utilized for the purpose of fixed assets and this argument of the revenue was rejected and it was held that in view of the decision of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd., 134 ITR 219 and also in view of the decision of Hon'ble Supreme Court in the case of East India Pharmaceutical Company Ltd. vs. CIT, 224 ITR 624 that if there are funds available, both interest free and overdraft / or loans taken, then presumption would arise that investment would be out of interest free funds generated or available with the company, if interest free funds were sufficient to meet the investment. Finding that the presumption was established in that case on account of being available a sum of Rs.398.19 lacs, therefore, CIT as well as Tribunal w....
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....he said properties are also Mortgaged to the bank towards loan facilities provided to the Company. The amount outstanding as on 31st March,2006 is Rs.51,761,226 [Previous year Rs.4,82,82,401]. The Maximum balance due from them was Rs.51,807,309 [previous year Rs.4,90,09,941/-]" Ld. A.R submitted that working of the amount mentioned in these notes has already been submitted from A.Y 1998-99 to 2006-07 at pages 48 to 51 of the paper book. 4.5 Concluding the arguments it was submitted by Ld. A.R that in view of consistent stand taken by the revenue in respect of A.Y 1998-99 till 2003-04, no disallowance should have been made. For this contention Ld. A.R placed reliance on the decision of Hon'ble Karnataka High Court in the case of CIT vs. Sridev Enterprises, 192 ITR 165 (Kar), wherein it has been held that in case where in the previous assessment years assessee's claim regarding interest on borrowed capital was allowed, it will not be equitable for the revenue to take different stand in respect of the amounts which were the subject matter of previous years assessment, consistency and definiteness of approach being necessary. Consequently, in view of aforementioned decision of Hon'b....
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....deleted the entire interest disallowed by the AO and has wrongly restricted the same pertaining to interest only on an amount of Rs.3,27,82,401/- advanced by the assessee to its related persons as interest free advances. Thus it was pleaded by Ld. DR that grounds of appeal raised by the revenue should be allowed and grounds raised by the assessee should be dismissed. 5.3 In the rejoinder Ld. AR submitted that the decision relied upon by Ld. DR will not be applicable to the facts of the present case as in those decisions it has not been shown that the assessee was having own funds in the shape of share capital etc. He submitted that in the present case assessee had demonstrated that it had sufficient funds. He further submitted that though it has been held by Hon'ble Supreme Court in the case of Radhasaoumi Satsang (supra) that principle of res-judicata is not applicable to income tax proceedings but at the same time it has been held that what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as the fact one way or the other and parties have allowed that position to be sustain....
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....this respect for both the years are deserve to dismissed and are dismissed. 6.1 Now the question remains only with respect to sustained disallowance against which the assessee is aggrieved . It is the case of the assessee that in the presence of sufficient own funds, Ld. CIT(A) was not justified in sustaining the retained disallowance. It has been submitted by the assessee that free reserve available with it in respect of assessment year 2004-05, 2005-06 and 2006-07 was under: Assessment Year Amount.(Rs) 2004-05 53,78,44,099/- 2005-06 46,41,35,593/- 2006-07 32,13,27,067/- Against these amounts the interest free advances are only to the tune of Rs.3,58,90,863/-, Rs.4,82,82,401/- and Rs.5,17,61,226/- for assessment year 2004-05, 2005-06 and 2006-07 respectively. These interest free advances, are in any case less than the share capital and share application money owned by the assessee. Here the arguments of Ld. A.R is that share capital and advance against share application money are to be considered as own funds and these are sufficient to meet the amount advanced by the assessee as interest free to its associate concerns. This contention is supported by....
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....submits that the assessee company had generated sufficient interest-free fund of its own which it utilized for its business, including investment in sister concerns and consequently no fault could be found with the order of the CIT(A) and/or the Tribunal. It was further submitted that once monies are available it is for the assessee to take a business decision for application of funds. The submission is that where there are both borrowed funds as also interest-free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal) 204 : (1982) 134 ITR 219 (Cal). It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. CIT (1997) 139 CTR (SC) 372 : (1997) 224 ITR 627 (SC). 8. We have heard learned counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs. 172 crores was utilised for the ....
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....aft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal 11. Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed." 6.3 If the facts of the present case are considered in the light of the aforementioned decision of Hon'ble Jurisdictional High Court then for the years under consideration share capital and advance against share application money for both the years will be a sum of Rs.9,25,64,440/- which in any case exceeds mu....
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....ivision, details of purchase and sale of video rights and other copy rights. The AO also recorded statements of director of the assessee company, who explained that if right purchased during the year is sold fully or partly, the entire cost of purchase right is written off against the sale and no part of cost of acquisition is taken to the closing stock as long as any part of the bundle of rights is sold during the year. However, if the right purchased was not sold at all during the year, such purchase cost was not claimed and was taken to closing stock of intangible assets. It was submitted that assessee has been following such method consistently for many years and such method is also as per Rule 9B of the Income tax Rules,1962. It was further explained that the depreciation was also claimed on the intangible assets. The AO being of the view that assessee was claiming 100% of the cost of video rights / other copy rights even in a case where small portion of the total bundle of rights was sold and even when small portion of the total period of rights were sold. The AO being of the view that only proportionate expenditure can be claimed, but he found that it is difficult to quantif....
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....ect on brought forward cost based on his arguments that his opening stock of such rights was brought forward from earlier years and he has also not considered the issue of allowability to carry forward such un-recouped costs to the later years which will have an impact on the income of the assessee for earlier years as well as subsequent years. He further observed that in trading account, the disturbing of opening and closing stock figures in one year are not independent of earlier and later assessment years and the impact of income of those years. The effect of change of opening and closing stock in one year would theoretically be revenue neutral as it would effect the revenues and consequently the income of earlier or later assessment years also. Taking the example he observed that the unrealized amount of rights to be taken as closing stock in assessment year 2005-06 would have to be taken as opening stock in the succeeding assessment year i.e. A.Y 2006-07. It would, therefore, go towards reducing the income already declared in that year and tax liability on that account be reduced. Consequently, the effect would be revenue neutral. He also observed that AO has not given any rea....
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....as not valued the pendancy of rights as its closing stock, therefore, the cost to the extent it could be allowed should be restricted to the sale receipts on partial sale of total bundle of rights. Therefore, the AO after reducing the revenue received by the assessee against those rights has added the balance amount to the income of the assessee. Against such action of AO, Ld. CIT(A) has observed that this action of AO has disturbed the method of accounting adopted by the assessee in earlier years as well as subsequent years. The consistent method adopted by the assessee has been disturbed without adequate reasons and without giving any credit for adjustment to be carried out in respect of opening as well as closing stock of such rights. We find force in the observation of Ld. CIT(A) that without properly valuing the opening as well as closing stock of the assessee, the AO could not adopt such course of action. The portion of bundle of rights which were standing on 1st Day of the relevant accounting year has not been taken into consideration, similarly closing stock has not been valued probably on account of difficulty to be faced in this respect. If assessee was adopting the consi....