Income Tax Appellate Tribunal - Mumbai
Kewal Kiran Clothing P. Ltd, Mumbai vs Department Of Income Tax on 4 July, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH 'A' BENCH
BEFORE SHRI G.E.VEERABHADRAPPA (PRESIDENT) AND
SHRI B.R.MITTAL(JUDICIAL MEMBER)
ITA No.44/Mum/2009
Assessment Year: 2005 -06
DCIT 9(2), Kewal Kiran Clothing Pvt Ltd.,
Aayakar Bhavan, M.K. Road, 101, Synthofine Indl. Estate,
Mumbai. Behind Virwani Indl. Estate, Goregaon(E),
Vs. Mumbai-63
PA No.AAACK 3402 H
(Appellant) (Respondent)
ITA No.7141/Mum/2008
Assessment Year: 2005 -06
Kewal Kiran Clothing Pvt Ltd., DCIT 9(2),
101, Synthofine Indl. Estate, Aayakar Bhavan, M.K. Road,
Behind Virwani Indl. Estate, Mumbai.
Goregaon(E), Vs.
Mumbai-63
PA No.AAACK 3402 H
(Appellant) (Respondent)
Assessee by : Shri Mrudul D. Inamdar
Revenue by: Shri C.G.K. Nair
Date of hearing: 4.7.2012
Date of pronouncement: 25. 7.2012
ORDER
Per B.R.Mittal, JM:
These cross appeals are filed by the department and the assessee against order dated 17.10.2008 of ld CIT(A)-IX, Mumbai.
2. Firstly, we take up the appeal of department being I.T.A.No.44/M/2009. The grounds raised by the department are as under:
2 ITA No.44/Mum/2009 ITA No.7141/Mum/2008Assessment Year: 2005 -06 "1. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in allowing deduction u/s.80IB on duty draw back without appreciating the ratio of decision of the Hon'ble apex court in the case of Sterling Food ltd., 237 ITR 579 (SC).
2. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in allowing deduction u/s. 80IB on duty draw back by erroneously following the decision in the case of DCIT vs. Elec. SGS (p)Ltd., 10 SOT 178(Del) which has been delivered with reference to the profits and gains from the business of industrial undertaking whereas as per section 80IB(3) of the I.T.Act the deduction has to be allowed from profits and gains derived from industrial undertaking and, therefore, the facts of the assessee's case are squarely covered by the facts in the case of Sterling Food Ltd., 237 ITR 579(SC).
3. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in allowing further deduction u/s. 80IB of Rs.22,03,525 holding that no disallowance u/s.80IB could be made on the basis of allocation of expenditure between the Daman Unit & Mumbai Unit since separate books of account were maintained for both the units without appreciating that the assessee has not allocated common expenses like auditor's remuneration, interest on unsecured loan, tour and traveling etc, whereas the benefit of these expenses were reaped by both the units including Daman unit.
4. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in deleting the disallowance of Rs.1,06,637 (246249-139612) on account of employee's contribution of PF made beyond the due date prescribed for crediting the contribution to the employees account under the P.F.Act."
3. In respect of Ground Nos.1 & 2 of appeal, relevant facts are that assessee has two units one at Mumbai and another at Daman. The unit at Daman is eligible for deduction u/s.80IB of the Act. In the assessment year under consideration, assessee received duty draw back of Rs.14,40,763. The assessee claimed deduction on the said amount @ 30% u/s. 80IB of the Act. The AO stated that said benefit has not been derived by the assessee directly from the business of the industrial undertaking and disallowed the claim of deduction u/s. 80IB of the Act on the amount of duty draw back. Being aggrieved, assessee filed appeal before ld CIT(A).
4. Ld CIT(A) held that the benefit of duty draw back has direct nexus with the industrial undertaking and, accordingly, allowed deduction u/s. 80IB of the Act. Hence, department is in appeal before the Tribunal.
3 ITA No.44/Mum/2009 ITA No.7141/Mum/2008Assessment Year: 2005 -06
5. At the time of hearing, ld D.R. submitted that the issue is squarely covered by the decision of Hon'ble Supreme Court in the case of Sterling Food ltd., 237 ITR 579 (SC), wherein, Their Lordships have held while considering the provisions of section 80 HH of the Act that profit from sale of import entitlements are not profits from industrial undertaking. The benefit of import entitlements are granted by Central Government under an Export Promotion Scheme. Therefore, the source of import entitlements could not be said to be the industrial undertaking of the assessee. The nexus is not direct but is only incidental. He submitted that the disallowance made by the AO is justified. Ld A.R. in his submissions conceded that the issue is covered by the aforesaid decision of Hon'ble Apex Court (supra).
6. In view of above submissions of ld representatives of parties and considering the decision of Hon'ble apex court in the case of Sterling Food Ltd (supra), we reverse the order of ld CIT(A) and confirmed the action of AO. Hence, ground Nos.1 & 2 of the apepal taken by department is allowed.
7. In respect of ground No.3 of appeal, relevant facts are that assessee claimed deduction u/s.80IB of the Act in respect of Daman Unit and no such deduction is claimed in respect of Mumbai Unit. The AO asked the assessee to furnish basis of allocation of common expenses/facilities between Mumbai Unit and Daman Unit. The assessee submitted before the AO as under:
"During the year under consideration the assessee (i.e."a") has maintained two sets of books of account, one for Mumbai unit and another for Daman Units. The Mumbai Unit is in the activity of job work of stitching garments. The Daman unit is in the activity of manufacturing readymade garments. The books of a/c are separately maintained at both the units on independent basis. Mumbai unit has stitched nearly 9,42,732 pieces as well as Daman unit has manufactured and sold 3,76,642 readymade garments. Mumbai unit is confined only to one activity while Daman unit is having multiple activities to manufacture the readymade garments. There is no comparison between the two units, nor there is any common activity between the units."
8. The AO did not accept above submission of the assessee. AO stated that assessee has claimed expenses under the heads "legal, professional fees and consultancy charges, auditor's remuneration, auditor's remuneration for taxation, trade 4 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 mark charges, tour and traveling, interest on unsecured loans". That corresponding benefits are not just restricted to either Mumbai unit or to Daman Unit but to the business as a whole. AO has stated that it is not possible to exactly quantify the benefits arising from these expenses separately for Mumbai unit and Daman Unit. Therefore, the expenses are required to be allocated between Mumbai unit and Daman Unit. The AO invoked provisions of section 145(3) of the Act and stated that he is not satisfied about correctness and completeness of accounts of the assessee. He has stated that the allocation of expenses between Mumbai unit and Daman unit can be based on the reasonable criterion of respective turnover. The AO has stated that the turnover of Daman unit is Rs.19,70,53,476 which is 73.43% of the total turnover of Rs.26,83,66,257 and, accordingly, allocated the expenses. The details of the said allocation made by the AO to Daman unit are given at pages 2 & 3 of the assessment order which is as under:
Sr.No. Head of expenses Total Attributable Allocated by Difference expenditure to Daman assessee in unit @ the 73.43% accounts
1. Legal, professional 21,75,163 15,97,158 8,26,120 7,71,038 fees and consultancy charges
2. Auditor's 82,650 60,687 - 60,687 remuneration
3. Auditor's 99,100 72,769 - 72,769 remuneration for taxation
4. Trademark charges 3,85,165 2,82,815 - 2,82,815
5. Tour & traveling 7,75,023 5,69,078 1,03,414 4,65,664
6. Int. on unsecured 77,52,059 56,92,110 - 56,92,110 loan Total: 73,45,083
9. The AO stated that assessee has under-allocated expenses aggregating to Rs.73,45,083 and thereby assessee has claimed excessive deduction u/s. 80IB of the Act. The AO disallowed the deduction on Rs.73,45,083 calculated @ 30% which comes to Rs.22,03,525. Being aggrieved, assessee filed appeal before ld CIT(A).
5 ITA No.44/Mum/2009 ITA No.7141/Mum/2008Assessment Year: 2005 -06
10. On behalf of assessee, it was contended that assessee maintains separate books of account for both units and expenses are debited to respective units by maintaining separate bank accounts. It was contended that assessee genuinely debited the expenses of the individual units on the factual basis. It was also contended that Mumbai unit is only a job work unit which undertakes the job of stitching the garments. However, Daman unit is the manufacture of ready made garments, which requires to go through not less than 28 steps of manufacturing activities as compared to stitching portion is just 8 steps of the total product. It was contended that Mumbai unit income is out of labour charges received, while Daman unit income is out of sale of ready made garments. Hence, there cannot be any comparison of units on the basis of turnover.
11. Ld CIT(A) after considering submission of assessee held that there is no justification for allocating expenses on the basis of turnover and directed the AO to allow deduction as claimed by the assessee. Hence, department is in appeal before the Tribunal.
12. At the time of hearing, ld D.R. submitted that issue is squarely covered by the decision of ITAT Mumbai in the case of Nitco Tiles Ltd vs. DCIT, 30 SOT 47 (Mum), wherein, it was held that all the expenses of business whether direct or indirect; project specific or common; or head office expenses had to be considered for computation of profits and gains of an eligible business. Further the devices adopted to reduce or inflate the profits and gains of an eligible business, the only source of income should be rejected in view of the overriding provisions of section 80-IA(5) of the Act. Ld D.R. submitted that in the said case the Tribunal upheld the action of the AO to allocate the expenses between head office in Mumbai and eligible business at Silvasa, which enjoyed the provisions of section 80IB of the Act on the basis of their turnover while computing the profits and gains of the eligible business of Silvasa Unit.
13. On the other hand, ld A.R. made his submissions on the lines of submissions made before authorities below. He submitted that assessee debited to Daman Unit the expenditure concerning it while arriving at profits and gains of the said unit. He 6 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 submitted that at the most the auditor's fee could be allocated on 50% basis to Daman Unit and Mumbai unit.
14. We have considered submissions of ld representatives of parties and orders of authorities below. We have also considered cases cited before us.
15. We observe that AO has specifically pointed out the heads of expenses for which the total expenditure has been incurred by the assessee. The AO has stated the amount of expenditure, which has been allocated by the assessee to its Daman Unit, and assessee has not given any basis for allocating such expenses, details given hereinabove, to Daman Unit. Therefore, The AO has adopted the expenditure for each of the unit on the basis of turnover and after deducting the actual expenditure allocated by the assessee; he arrived at aggregate amount of Rs.73,45,083, details given hereinabove, and has stated that assessee has under allocated the expenditure to inflate profits and gains of eligible unit. During the course of hearing, ld A.R. could not give details on the basis of which it has allocated the expenditure under the heads, as mentioned hereinabove, to its Daman Unit. There is no dispute to the fact that while computing profits and gains of an eligible business, all the direct as well as indirect expenses have to be considered for computation of profits and gains of eligible unit to claim deduction as per section 80IA of the Act. If excessive expenditure is considered in respect of unit which is not eligible for deduction u/s. 80IA of the Act, it will be unfair as profit and gains of a unit which is not eligible for deduction will be understated and on the other hand the profits and gains of eligible unit/ business will be inflated to get more deduction u/s.80IA of the Act. ITAT, Mumbai Bench in the case of Nitco Tiles Ltd (supra) considered similar issue and vide its head note, in regard to allocation of expenses to the eligible unit and the unit which is not eligible for deduction u/s. 80IB/80IA of the Act observed as under:
"Further, for determination of the allowable revenue expenses for the purposes of computing the profits and gains of the eligible business of the instant assessee, all the provisions relating to the head of income "Profits and gains from business or profession" would apply without any mutation. In other words, all the direct as well as indirect expenses had to be adjusted from the profit and gains of the eligible business. Further, on finding that the sub-section(5) refers 7 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 to phrases i.e. "the profits and gains of an eligible business to which provisions of sub-section(1) apply... shall be computed as if such eligible business was the only source of income of the assessee", one should interpret and understand them by the meaning that the standalone unit has to be given to such eligible business. In other words, "as if such eligible business was the only source of income" shall mean that the alleged indirect expenditure or common or head office expenses were incurred for such eligible business, the only source of income of the assessee. Consequently, all the indirect expenses or common expenses have to be considered for the said computation. Thus, the provisions of section 80IB(1) convincingly advocate for the allocation of indirect expenses towards the Silvasa Unit as well."
15.1 In the case before us, there is no dispute to the fact that the total turnover of the eligible unit i.e. Daman Unit is 73.43%. Considering the decision of coordinate bench of ITAT in the case of Nitco Tiles Ltd (supra), we are of the considered view that it is fair and reasonable to allocate the expenses between the units on the basis of turnover in the absence of any contrary facts brought on record before us. Hence, we hold that AO has rightly allocated the expenses between the units on the basis of turnover. Hence, we uphold the action of AO by reversing order of ld CIT(A). Hence, Ground No.3 of department is allowed.
16. In respect of Ground No.4, we observe that ld CIT(A) has held that employees contribution which is covered under section 36(va) is to be allowed as deduction if the deposits are made within due date/grace period. We are of the considered view that there is no infirmity in the order of ld CIT(A) to give above direction to the AO that if the payment is made within grace period, from the due date of payment, it has to be considered to be paid within time and no disallowance is to be called for. Hence, we uphold the order of ld CIT(A) by rejecting ground No.4 taken by department.
17. Now we take up appeal filed by assessee being I.T.A.No7141/M/2008.
18. Grounds raised by the assessee are as under:
"1. On the facts and in the circumstances of the case and in law, ld CIT(A) erred in holding that the sale of quota Rs.25,000 interest on unsecured loans Rs.5,79,469, exchange rate fluctuation Rs.3,549 and scrap sales Rs.1,465 are not eligible to claim deduction u/s. 80IB of the I.T.Act.8 ITA No.44/Mum/2009 ITA No.7141/Mum/2008
Assessment Year: 2005 -06
2. On the facts and in the circumstances of the case and in law, ld AO erred in disallowing interest expenses of Rs.43,59,984 out of total interest exp0enses of Rs.87,19,968."
19. In respect of Ground No.1 of appeal, ld A.R. submitted that said ground is not pressed for. Hence, Ground No.1 taken by assessee is rejected.
20. In respect of Ground No.2 of appeal of the assessee, relevant facts are that assessee claimed deduction of interest aggregating to Rs.87,19,968. The total borrowed funds as on 31.3.2005 amounted to Rs.15,18,41,892. The AO has stated that as per balance sheet filed by the assessee, the application of the funds shows the following:
"Loans and advances - Rs.9,79,72,071
Cash & bank balane - Rs.3,05,46,228
Total: Rs.12,85,18,299"
21. The AO considered that aforesaid amount is partly used for business purposes and partly used for non-business purposes. Therefore, AO allowed 50% of the interest expenses i.e. Rs.43,59,984 as deduction and treated the balance 50% i.e. Rs.43,59,984 attributable to non-business application of funds and disallowed the same. Being aggrieved, assessee filed appeal before ld CIT(A).
22. On behalf of assessee, it was contended that assessee had its own capital as on 31.3.2005 of Rs.1,00,00,000 as share capital and Rs.7,85,17,242 as reserve and surplus. It was contended that assessee procured secured loans of Rs.5.42 crores against lien on fixed deposits with banks. It was contended that assessee introduced unsecured loans for the business purposes of Rs.9.75 crores and thus overall total fund of the assessee is Rs.18.60 crores against the unsecured loan of Rs.5.42 crores. It was contended that the total application of fund is for the business purpose and there is no fund which is diverted for the personal use of the assessee. It was further submitted before ld CIT(A) that assessee, during the year, paid Rs.2.28 crores to M/s. Korner Stone Retails Ltd., for purchase of shares to get control of 76% shares of the company. By virtue of purchasing stake in the company and becoming holding company, the 9 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 assessee started a new diversified business activity and thus it is purely a business venture and cannot be attributed to non-business purpose. It was also submitted that assessee paid Rs.1.95 crores to M/s. Kewal Kiran Enterprises to take over the running business of the firm and the payment was made to acquire assets and business of the firm. Thus, the total disallowance made by the AO of Rs.43,59,984 is based on assumptions, presumptions and surmises. Ld CIT(A) considered submissions of the assesse and vide para 6.3 of the impugned order, confirmed the action of AO. The said para reads as under:
"I have carefully considered the appellant's submission as well as the aO's contention. It is a admitted fat that the appellant has paid Rs.2.28 crores to M/s. Korner Stone Retails Ltd., for purchase of shre and to get control of 76% stake in the said company. Besides this, the appellant ahs also paid Rs.1.95 crores to M/s. Kewal Kiran Enterprises to take over the business of the firm. The payment was made to acquire factory building at Vapi & Daman, WIP of the firm, stock of raw material, furniture and fixture, industrial plot, flat No.203 and for transfer of other property. Thus, it may be seen that the payment has been made to acquire controlling interest in a company/firm. The Hon'ble Bombay High Court in the case of CIT vs. Amritaben R Shan, 238 ITR 777 has held that a tax payer borrowing money to acquire controlling interest in a company would not be entitled to deduction of interest on borrowings. The Hon'ble Bombay High Court in the case of Chinal and Co. Pvt.Ltd., vs CIT, 206 ITR 616 has held expenses incurred to protect investment was held to be not admissible as business expenditure. Thus, from the details filed by the appellant, it can be seen that the fund has been utilized to acquire controlling interest of the said company/firm. Besides this, it is also observed that the appellant's own fund i.e. share capital and reserve and surplus is only Rs.8.85 crores as against borrowed fund of Rs.15.17 crores. Out of the total application of fund of Rs.12.85 crores, a sum of Rs.5.65 crores has been utilized for giving loans to other (Rs.1.42 crores), Rs.2.28 crores(advance paid for purchase of shares of Korner Stone Retails Ltd., Rs.1.95 crores advance paid for purchase of assets of M/s. Kewal Kiran Enterprise). Thus, it can be seen that the appellant company has definitely utilized its borrowed fund for the purpose of non-business purpose and therefore, the disallowance made by the AO on account of interest for utilization of fund for non-business purpose is confirmed. This ground of appeal stands dismissed."
Hence, assessee is in appeal before the Tribunal.
23. During the course of hearing, ld A.R. made his submissions in respect of availability of funds in line of the submissions made before ld CIT(A) as mentioned hereinabove. He further referred pages 24 & 25 of PB and submitted that assessee 10 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 made payment of Rs.1.95 crores to M/s. Kewal Kiran Enterprise and Rs.2.28 crores to M/s. Korner Stone Retails Ltd., on 28.3.2005 and if at all interest is to be disallowed, it could be only for four days and not for the entire period. Ld A.R. also referred page 26 of PB and submitted that assessee paid Rs.1,42,54,113 to others and also charged interest from two parties, namely, Rajat Textiles @ 14% to whom loan aggregating to Rs.1,05,52,113 was given and P.M.Shah & Co., of Rs.1,00,000 from whom interest @ 12% was charged. He submitted that disallowance of interest of Rs.43,59,984 is not justified.
24. On the other hand, ld D.R. supported the orders of authorities below.
25. We have considered submissions of ld representatives of parties and orders of authorities below and also relevant pages of PB (supra). There is no dispute to the fact that Hon'ble Bombay High Court has held in the case of CIT vs. Amritaben R Shan(supra) that a tax payer borrowing money to acquire controlling interest in a company would not be entitled to deduction of interest. Further Hon'ble Bombay High Court in the case of Chinal and Co. Pvt.Ltd., vs CIT, (supra) has held expenses incurred to protect investment was not admissible as business expenditure. At the time of hearing, ld A.R. also did not controvert above decisions of Hon'ble Jurisdictional High Court. We observe that assessee paid a sum of Rs.2.28 crores to acquire purchase of shares of Korner Stone Retails Ltd., and also paid Rs.1.95 crores to take over the running business of Kewal Kiran Enterprises. Thus, amount to that extent has been paid by the assessee to acquire capital assets and as such, borrowing money used to acquire controlling interest in the above firm by purchase of shares and/or by acquiring assets could not be allowed as deduction. However, there is force in the submissions of ld A.R. that the said amount was paid by the assessee only on 28.3.2005 and as such, interest only for four days on the above amount could be disallowed. Further, we observe that assessee has given loan to others aggregating to Rs.1.42 crores, break-up of which is given at page 26 of PB. We observe that assessee has charged interest as per said chart on the loan aggregating to Rs.1,15,52,113 and as such, for the balance amount of Rs.27 lakhs, no interest has been charged. Accordingly, interest is to be disallowed only relating to loan of Rs.27 lakhs, which has been given to others, on which, no interest 11 ITA No.44/Mum/2009 ITA No.7141/Mum/2008 Assessment Year: 2005 -06 has been charged by the assessee. The assessee has not contended that the said loans to others have been given for any business purposes. In the absence of any facts on record that assessee has used its own fund for giving above advances, we hold that interest is to be disallowed only for four days in respect of sum of Rs.2.28 crores and Rs.1.95 crores and also interest on the balance amount of Rs.27 lakhs, loans given to others. In view of above, we set aside the orders of authorities below and restore the issue to the file of the AO to make disallowance of interest only in respect above amount as indicted above. Hence, ground No.2 of appeal is allowed in part.
26. In the result, appeal of the revenue as well as assessee is allowed in part.
Pronounced in the open court on 25th July, 2012
Sd/- Sd/-
(G.E.VEERABHADRAPPA) (B.R. MITTAL)
PRESIDENT JUDICIAL MEMBER
Mumbai, Dated 25th July , 2012
Parida
Copy to:
1. The appellant
2. The respondent
3. Commissioner of Income Tax (Appeals),IX, Mumbai
4. Commissioner of Income Tax, IX, Mumbai
5. Departmental Representative, Bench 'A' Mumbai
//TRUE COPY// BY ORDER
ASSTT. REGISTRAR, ITAT, MUMBAI