Case Law Details
IN THE ITAT COCHIN BENCH
Poabs Rock Products (P.) Ltd.
V/s.
Deputy Commissioner of Income-tax
IT APPEAL NOS. 574 TO 575 AND 618 TO 619 (COCH.) OF 2010
[ASSESSMENT YEARS 2006-07 TO 2007-08]
APRIL 3, 2012
ORDER
N.R.S. Ganesan, Judicial Memebr
Both the assessee and the revenue filed the appeals for assessment years 2006-07 and 2007-08. Since common issues arise for consideration in these appeals we heard them together and are disposed of by this common order.
Assessee’s appeals
2. The first issue for the assessment year 2006-07 is disallowance of Rs. 1,01,448 towards interest.
3. Shri Cherry P Kurien, the ld. representative for the assessee submitted that the assessee has not availed any interest bearing working capital loan. The loan availed by the assessee was for the purpose of acquisition of specific asset. According to the ld. representative, the term loan availed by the assessee was in fact utilized for the purpose of acquisition of the specific asset. According to the ld. representative, the assessee has transferred some funds to the group concerns. This transfer was not out of finance availed by the assessee. According to the ld. representative, the funds generated during the year under consideration were transferred to the group concern. The ld. representative further submitted that the borrowed funds were not diverted. Therefore, the assessing officer is not justified in estimating the interest at 12%.
4. On the contrary, Shri T.J. Vincent, the ld. DR submitted that the assessee has made interest free advance to Poabs Organics Pvt Ltd. The assessee has not indicated the purpose for which the loan was advanced or the commercial expediency which necessitated advance of funds by the assessee. The assessing officer found that there was no commercial expediency in advancing the funds by the assessee to group concern. Therefore, the interest payable on such funds was disallowed.
5. We have considered rival submissions on either side and also perused the material available on record. It is not in dispute that the assessee transferred funds to group concern. The only contention of the assessee is that the borrowed funds were not diverted. The funds generated in the course of business activity alone are diverted to group concern. Therefore, the assessee claims that no part of the interest could be disallowed while computing the taxable income. The fact remains is that the assessee borrowed funds for the purpose of business and paying interest. When the assessee borrowed funds and paying interest for the purpose of acquisition of asset it cannot claim that the funds generated out of the business was diverted to group concern. The fact remains is that even though there was profit from the business the same was diverted to group concern and the assessee borrowed funds for the purpose of acquiring the asset. Therefore, it is for the assessee to establish the commercial expediency in diverting the funds to group concern. No commercial expediency was explained by the assessee either before the lower authorities or before this Tribunal. It is also not known for what purpose the funds were transferred to group concern. The matter would be entirely different if the assessee explained the purpose for which the funds were transferred to group concern. If the funds were transferred for business of the group concern, then it may come within the meaning of commercial expediency. In the absence of any explanation of the assessee, this Tribunal is of the opinion that when the funds were diverted and the assessee paid interest on the borrowed funds, the proportionate interest relatable to funds transferred to group concern has to be disallowed. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly the same is confirmed.
6. The next ground of appeal is with regard to sales promotion expenditure. During the course of hearing, the ld. representative for the assessee very fairly submitted that the assessee is not pressing this ground of appeal. In view of the above submission of the ld. representative for the assessee, the ground of appeal relating to sales promotion expenditure is disallowed, as not pressed.
7. Now coming to the appeal for assessment year 2007-08, the first ground of appeal is with regard to addition of Rs. 1 lakh towards the amount outstanding in the name of Poabs Battery Containers (P) Ltd, a sister concern of the assessee.
8. Shri Cherry P Kurien, the ld. representative for the assessee submitted that an amount of Rs. 1 lakh was outstanding from the sister concern Poabs Battery Containers (P) Ltd for the last three years. The assessing officer came to the conclusion that since three years’ period has been expired, the liability was barred by limitation. Therefore, it was added back to the total income of the assessee. Referring to the judgment of the Apex Court in CIT v. Sugauli Sugar Works (P) Ltd [1999] 236 ITR 518/102 Taxman 713, the ld. representative submitted that expiry of limitation period under Limitation Act cannot extinguish the debt but it will prevent the creditor from enforcing the debt. Therefore, section 41(1) of the Act has no application at all.
9. We heard the ld. DR Shri T.J. Vincent also. The ld. DR placed has placed his reliance on the observation made by the Commissioner of Income-tax(A).
10. We have considered the rival submissions on either side and also perused the material available on record. The assessing officer added the outstanding amount in the name of sister concern since three years’ period has been expired. No doubt, for recovery of any amount the limitation provided under the Limitation Act is three years. The three years’ period is only to enforce the recovery of the debt through court of law. However, it will not extinguish the debt. We have carefully gone through the judgment of the Apex Court in the case of Sugauli Sugar Works (P.) Ltd (supra). In the case before the Apex Court, the assessee transferred certain advances and deposits out of the suspense account to capital reserve. The Income-tax Officer came to the conclusion that the liability had come to an end since the creditor has not taken any steps to recover the amount. On these facts, the Apex Court, after considering the provisions of section 41(1) found that the principle that the expiry of period of limitation prescribed under the Limitation Act cannot extinguish the debt but it will only prevent the creditor from enforcing the debt. Therefore, the provisions of section 41(1) are not applicable. In view of the judgment of the Apex Court, the provisions of section 41(1) are not applicable to the facts of the case on hand. Therefore, the assessing officer is not justified in adding back the amount of Rs. l lakh to the total income of the assessee. Accordingly, by respectfully following the judgment of the Apex Court in Sugauli Sugar Works (P.) Ltd. (supra) we set aside the orders of authorities below and direct the assessing officer to delete the addition of Rs. 1 lakh.
11. The next ground of appeal is with regard to sales promotion expenditure. During the course of hearing, the ld. representative for the assessee very fairly submitted that the assessee is not pressing this ground of appeal. In view of the above submission of the ld. representative for the assessee, the ground of appeal relating to sales promotion expenditure is disallowed, as not pressed.
Revenue’s appeal
12. Now coming to the departmental appeal, the only issue arises for consideration in the appeals for assessment years 2006-07 and 2007-08 is with regard to deduction u/s 80IB for extracting granite from granite hills and crushing granite boulders.
13. The ld. DR submitted that extracting granite from granite hills cannot be considered to be a manufacturing activity. Referring to the definition introduced by Finance Act, 2009, the ld. DR submitted that no distinct article or object was created by crushing granite boulders into small pieces and the character of the original article does not change so as to amount to manufacturing activity.
14. On the contrary, the ld. representative for the assessee submitted that the definition of “manufacture” was introduced by Finance Act, 2009. The assessment years under consideration are 2006-07 and 2007-08, therefore, the definition introduced by Finance Act, 2009 is not applicable to the facts of the case. For the earlier assessment year, this Tribunal had an occasion to consider the very claim of the assessee and this Tribunal found that the activity of the assessee is manufacture and entitled for deduction u/s 80IB of the Act.
15. We have considered the rival submissions on either side and perused the orders of the lower authorities. As rightly submitted by the ld. representative for the assessee, the Tribunal had an occasion to consider the very same issue in the assessee’s own case and found that the activity of the assessee amounts to manufacture. This Tribunal has placed its reliance on its earlier decision in Panachayil Industries (ITA Nos 336, 337 & 338/Coch/2002) dated 01-01-2004. Since the activity of the assessee was considered by the co-ordinate bench of this Tribunal and held to be manufacturing activity entitled for deduction u/s 80IB, for the sake of consistency, following earlier order of this Tribunal in assessee’s own case we hold that the assessee is entitled for deduction u/s 80IB of the Act. Moreover, as rightly submitted by the ld. representative for the assessee, the new definition introduced by Finance Act, 2007 is not applicable to the assessment years under consideration. Therefore, the decision of the co-ordinate bench in assessee’s own case for assessment year 2001-02 in ITA No. 495/Coch/2004 is applicable to the case of the assessee. By following the order of this Tribunal in the assessee’s own case for the assessment year 2001-02 we uphold the order of Commissioner of Income-tax(A).
16. In the result, ITA No.574/Coch/2010 is dismissed, ITA No.575/Coch/2010 is partly allowed and ITA Nos 618 & 619/Coch/2010 are dismissed.
