JCIT (Asst.) Vs. M/s. Bharath Beedi Works Ltd. (ITAT Bangalore)
Objection of the AO is that borrowing from Directors and shareholders is not for business purpose. The AO has noted that even as per the assessee’s contention, if the assessee had an intention of starting a branch in Orissa, the same appears to have remained on paper because it has not fructified till the date of passing the assessment order. Before us also, it is not shown that it has come into existence.
The AO has also noted that additional outlay which was claimed to have been necessary for opening a branch in Orissa which was according to the assessee’s own version was around Rs. 15 to 20 crores and the assessee during the relevant period had fixed deposits of more than the said amount and therefore, there was no necessity of taking additional funds at interest at more than the market rate even if it is assumed that the assessee had an intention of opening a branch in orissa.
The AO has referred to two judgments as reported in 25 ITR 265 and 5 ITR 734 as per which the term “used for the purposes of business or profession” mean that used for the purpose of enabling the owner to carry on the business or profession and earn profits in the business or profession. Therefore, for the purpose of allowing deduction u/s.36 (1) (iii) in respect of interest on borrowed funds, it has to be looked into that the borrowed funds were used in fact for business purpose and mere intention is not sufficient to allow deduction u/s. 36(1 )(iii) of IT Act.
The ld. CIT(A) has also noted the details of liability side and asset side of assessee as on 31.03.1998 on page no. 10 of its order and as per the same, as against borrowing of Rs. 9.05 crores from Directors/ shareholders of assessee company as on 31.03.1997, there was fixed deposits with banks of Rs. 18.49 crores on that date against unsecured loan from Directors and Shareholders of Rs. 14.26 crores as on 31.03.1998, the fixed deposits with banks as on 31.03.1998 was to the extent of Rs. 23.10 crores.
Hence, it is abundantly clear that the borrowed funds were not used for any business purpose and these were parked with banks as fixed deposit. As per the noting of CIT(A) on page no. 16 of his order, making deposits in banks is permitted by articles and memorandum of association and therefore, the assessee can have the case that the expenditure by way of interest on borrowed money is wholly and exclusively for the purpose of its business.
This is one thing that making deposits in bank is permitted by articles and memorandum of association and this is totally a different thing that making deposits in banks is business of the assessee. Even as per CIT(A) or as per the assessee, this is not the business of the assessee to make deposits in banks and therefore, merely because making deposits in banks is not debarred by articles and memorandum of association of the company, it cannot be said that making deposits in banks in such huge amount by use of the borrowed fund is for business purpose.
The CIT(A) has followed a judgment of Hon’ble Bombay High Court rendered in the case of CIT Vs. Bombay Samachar Ltd. as reported in 974 ITR 723. But we find that this judgment is not applicable in the facts of the present case. In that case, it was held by Hon’ble Bombay High Court that the issue in dispute was regarding allow ability of business expenditure in the facts that the assessee did not charge any interest in respect of debit balances with some concerns.
In para no. 4 of this judgment, it is noted by Hon’ble Bombay High Court that the AO and CIT(A) were incorrect in holding that the balances due from Bombay Chronicle Pvt. Ltd. was in respect of any loans advanced by the assessee to that company. It was noted that the said balance was in respect of the common account between the parties in connection with the expenditure in relation to the business agreed to be incurred in common and allocated in respective shares at the end of the year.
In the same para, this is also noted by the Hon’ble High Court that the capital borrowed by the assessee from the outsiders on the other hand was admittedly used by the assessee for the purpose of business and it was also not disputed that no part of the borrowed capital had been utilized for the purpose of advancing loan either to Messrs. Bombay Chronicle Pvt. Ltd. or to Messrs. Cama Norton & Co. On this basis, it was held that dis allowance of interest expenditure is not justified.
In the present case, the facts are totally different. In the present case, the AO has shown by brining cogent material on record that the borrowing of fund from the Directors and shareholders is not for business purpose because against such borrowing of Rs. 9.05 crores as on 31.03.1997 and Rs. 14.26 crores as on 31.03.1998, assessee was having FD with banks of Rs. 18.49 cores and Rs. 23.10 crores respectively. Under these facts, the interest expenditure on these borrowed funds is not allowable u/s. 36(1)(iii) because the assessee could not establish that the borrowing is for business purpose.
Full Text of the ITAT Order is as follows:-
Out of these five appeals, there is one appeal of revenue for Assessment Year 1998-99 and the remaining four appeals are filed by the assessee in respect of Assessment Years 1998-99, 2000-01, 2001-02 and 2007-08.
2. History of these cases is as follow. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience. All these appeals were earlier disposed of by the Tribunal in the year 2007 against which the matter was carried by the revenue in appeal before Hon’ble Karnataka High Court and as per judgment dated 17.12.2013 in Income Tax Appeal No. 800 of 2007, the matter in respect of Assessment Year 2000-01, has been restored back to Tribunal for fresh decision. Similarly as per judgment of Hon’ble Karnataka High Court dated 17.12.2013 passed in ITA No. 798/2007, the matter in respect of Assessment Year 2001-02 was also restored back to the file of Tribunal for fresh decision. It is also noted in the order sheet entry dated 25.02.2015 that similar issue was considered by Hon’ble Karnataka High Court in ITA No. 2156/2005 in Assessment Year 1998-99 and the matter was remitted back to the Tribunal for fresh consideration. The appeal for Assessment Year 1998-99 was not posted for fresh hearing because the registry was awaiting the remittance of original record for that year from the from High Court. In this manner, the appeals for Assessment Year 1998-99, 2000-01, 2001-02 were pending before the Tribunal since long and the appeal for Assessment Year 2007-08 was filed by the assessee on 11.11.2016. Even after 25.02.2015, these appeals were fixed for hearing on several dates but for one reason or other, hearing could not take place. Thereafter on 02.03.2017, these appeals were heard but the matter was released subsequently as the order could not be passed within 90 days of the hearing. Under these facts and in view of this fact that these appeals are very old appeals, both sides agreed that these appeals may be taken as heard and both sides will file written submissions and on that basis, these appeals may be disposed of after considering written submissions by both sides. Accordingly, both have filed written submissions before us. The same are reproduced herein below. The written submissions filed by ld. AR of assessee are as under.
“Assessee’s Appeal for AY 1998-99, ITA No. 237/01
Ground No. 1 to 7 is relating to Excise duty included in closing stock
It is submitted that CIT(A) erred in confirming the addition made by the Ld. AO to the income of the appellant being excise duty payable on labeled and unlabelled beedies in closing stock without appreciating the submission of the appellant that excise duties were paid before filing the return of income. A copy of same is enclosed as ANNEX URE A. Further, the CIT(A) also failed to appreciate that if the closing stock is increased, the opening stock also has to be revised to avoid distortion in presentation of accounts. Further it is submitted that the process of manufacturing is complete only when the beedies are labeled, packed and cleared from the factory. Incidence of excise duty arises only when the manufactured beedies are cleared from the factory either to market or to duty paid godwn and not before that. Further, it is to be noted that section 43B cannot be invoked unless the specified amounts in the section are provided for in the accounts are outstanding in the balance sheet.
Ground No. 8, 9, 10, 11 & 12
Restricting interest to 18% as against 21%
It is submitted that the AO has disallowed 3% interest p.a. stating that the rate of interest is excessive as compared to interest charged by commercial bank which was estimated at 18% p.a. by the Assessing officer without appreciating that the same was paid as per the board resolution, copy of which is enclosed as ANNEXURE B (page 11). Further, all deposits were brought from earlier year on which interest @ 21% was paid and allowed by the Department and there are no fresh facts or change in situation in allowing interest at lower rate since consistency has to followed by Department. Further it is also submitted that interest charged by commercial bank is not a bench mark to indicate the prevailing interest rate payable on borrowing from non banking sources such as NDFC’s individual lenders etc. Further, it is a well known fact that bank credit is freely not available and it is saddled with prescribed procedures, further commercial banks charge interest on quarterly rest, which works out to be higher rate on annual basis. Further, by considering all the costs attached to bank it works out to be more than 23%. It is also brought to record that deposit received were unsecured and unencumbered and as such expensive procedure of providing security and mortgage of property doesn’t arise. Hence interest of 21% on such deposit was reasonable justified. Even the Income Tax Act itself provides interest on capital @18% p.a. Therefore the interest charged at 21% is reasonable and justified and should be allowed.
We further submit that the Ld A O is not justified in traveling beyond his scope of assessment and assuming the shoes of the management and thereby presuming the need of borrowal and timing of the borrowal that the assesse ought to have followed, without understanding the nature assessee ‘s business. We beg to submit that, The assesse need to have sufficient liquid funds in the form of Bank FD ‘s etc in the business, as major part of the cost is labour/wages payment, yearly procurement of the raw materials, and volatile fluctuations in raw material prices etc. These facts have been completely overlooked by the Ld A O and also Ld. CIT(A) business
Departmental Appeal for the AY 1998-99
Ground No. 2 — Restricting Interest @ 18% when the borrowings are not relating to assessee’s business.
The finding for the above issue is on Page 14, paragraph 12 of CIT(A) order.
It is submitted that interest paid on capital borrowed was for the purpose of business only and the appellant has gone on record to establish the purpose for which the additional amount was borrowed and the same is ought to be allowed u/s 36(1)(iii) of the Act as held by the Hon’ble Supreme Court in the case of S.A. Builders reported in 288 ITR 01(SC), 2006. Further, the AO has not discharged the onus of proving or established the fact that incremental borrowings has been diverted by the appellant to an activity other than activity of the appellant. Further, the CIT(A) only after having satisfied the same the CIT(A) restricted the interest @ 18% as against 21% claimed by the assessee. (paragraph 14, page 17 of CIT(A) order), Department has accepted the same in written submissions and hence Department cannot step into shoes of Assessee.
Ground No .3 — Unexplained cost of Construction.
It is submitted that when the valuation made by DVO and cost of construction as declared by the assessee in his book is meager, the actual cost of construction has to be considered since it is an audited books of accounts and books are audited and not rejected by the AO. Further, the same has been appreciated by the CIT(A) in paragraph 17, page 17 of CIT(A) order. Further we would also like to place reliance on Delhi High Court decision in the case of CIT vs Ambience Developers and Infrastructure Pvt ltd. Copies enclosed
ASSESSEE’S APPEAL FOR AY 2000-2001, ITA NO 3442/04
Ground No. 2 – Restricting interest to 18% as against 21% (same as 1998-99)
Ground No. 3 – 14A
The above ground is not pressed by the assessee
Ground No. 4 and 5 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed
It is submitted that, the appellant runs lorries on hire to take bazaar loads of cargo from various places and collected lorry hire amounts and the income earned on such lorry hire was accepted by the Department as business income. CIT(A) also did not dispute the fact that appellant has carried on the business of running the motor lorries on hire. In preceding years in similar situations the appellant had claimed the depreciation @ 40% which was allowed and hence a copy of the assessment order of the previous year which is 1998-99 and 2006-07 and the same is enclosed as ANNEX URE — D for your reference.
Further, the assessing officer has to follow the consistency in this issue while concluding the assessment as held by various judicial precedences.
(i) ITO vs Sri Dev Enterprise — 192 ITR 165
(ii) CIT vs South India Corporation (Agencies) Ltd — 293 ITR 237
ASSESSEE’S APPEAL FOR AY 2001-2002, ITA NO 3769/04
Ground No. 2, 3 & 4 – Restricting interest to 18% as against 21% (same as 1998-99)
Ground No 5 — Penalty on delay in payment of entry tax The assessee has not pressed the above ground.
Ground No. 6 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed (same as 2000-2001)
ASSESSEE’S APPEAL FOR AY 2007-2008 , ITA NO 1903/2016 Ground No. 1 — Depreciation on Lorries being restricted @ 25% as against 40% claimed by the appellant as per schedule, enclosed
Ground No. 2
Part of arrears of wages disallowed u/s 43 B
The assessing officer has disallowed a sum of Rs 1,99,23,883/- as excess claim of provision u/s 43B of the Act. It is submitted that the arrears of wages were made as per tri- party agreement enclosed which elaborates the method calculating back wages payable to workers who are in service from 1.11.1996 and remaining in service upto 5.10.2006, hence it is a contractual payment as per tri- party agreement and sec 43B does not apply as per the decision of Kolkata Tribunal in the case of Spencer Retail Ltd vs PCIT 2. Further, the agreement does not specify the modus of competition of back wages to such beedi workers who had only worked for part of the year specified in table given below, hence the appellant reasonably estimated a sum of Rs. 42, 55, 235/- as wages payable from such workers who has worked for past 10 yrs and included the same aggregating a sum of Rs. 16,90,98,179/- provided in the account. Hence the arrears of wages is calculated accurately and has become crystallized liability during the year. The table explains the following:
