Writers And Publishers Limited, Bhopal vs Department Of Income Tax on 10 October, 2006

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Income Tax Appellate Tribunal - Indore

Writers And Publishers Limited, Bhopal vs Department Of Income Tax on 10 October, 2006

                                   1




        INCOME TAX APPELLATE TRIBUNAL
            INDORE BENCH, INDORE

     BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
                          And
        SHRI R.C. SHARMA, ACCOUNTANT MEMBER

                   ITA Nos. 409 to 411/Ind/2012
                A.Ys. 2005-06, 2006-07 and 2008-09
                       ITA No. 277/Ind/2011
                            A.Y. 2007-08


Asstt. Commissioner of Income Tax 3(1)
Bhopal                                            ::   Appellant

Vs

M/s. Writers and Publishers Ltd.
Bhopal
PAN - AACW 1376J                                  ::   Respondent


                     CO Nos. 97 and 98/Ind/2012
          (Arising out of ITA Nos. 409 and 410/Ind/2012)
                     A.Ys. 2005-06 & 2006-07

M/s. Writers and Publishers Ltd.
Bhopal                                            ::   Objector

Vs

Asstt. Commissioner of Income Tax 3(1)
Bhopal                                            ::   Respondent
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      Department by            Shri V.K. Karan
      Respondent by            Shri S.S. Deshpande


      Date of hearing          11.03.2013
      Date of pronouncement    05.04.2013


                           O R D E R

PER R.C. SHARMA, ACCOUNTANT MEMBER

These are the appeals filed by the revenue and cross objection by the assessee against the order of the learned CIT(A) for the A.Ys. 2005-06, 2006-07, 2007-08 and 2008-09 in the matter of order passed u/s 143(3)/147 of the Act. ITA No. 409/Ind/11 & CO No. 97/Ind/2011 (A.Y. 2005-06)

2. Rival contentions have been heard and record perused. The facts, in brief, are that the assessee is a private limited company engaged in the business of publishing a daily newspaper in Hindi named Dainik Bhaskar. During the course of assessment, the Assessing Officer disallowed the assessee's claim for additional depreciation under the provisions of section 32(1)(iia) of the Act. The Assessing Officer rejected the claim after assigning the following reasons :-

"According to the first reason to not allow additional depreciation of Rs.1,91,12,918/- @ 15% on Rs.12,74,19,454/- being purchased of new plant of machinery for its new unit at Baroda Under the provisions of section 32(1)(iia), an additional depreciation @ Rs. 15% was admissible subject to following conditions :-

(a) A new industrial undertaking during any previous year on which such undertaking begun to manufacture or produce any article or thing on or after 01.04.2002.

(b) Any industrial undertaking existing before 01.04.02 during any previous year in which it achieves the substantial expansion by way of increase on installed capacity by nor less then 10%.

It is further provided that no deduction shall be allowed under clause (a) or (b) of the first proviso unless the assessee furnishes the details of machinery or plant and increases the installed capacity of production on such form as prescribed under rule 5A (form 3AA) along with 4 the return of income and report of CA that the deduction has been correctly claimed on accordance with the provisions of clause.

In this connection it is stated that the assessee company was not entitled for deduction of additional depreciation for the following reasons.

1. The Assessee company was in existent before 01.04.02 It installed a new unit at Baroda during A.Y. 2005-06 on which additional depreciation was claimed. Thus it was mandatory to file a report in from 3AA certifying that assessee has expended its installed capacity by not less than 10% and also the details of machineries purchased in prescribed form, along with the return.

It was observed that assessee filed only a certificate of CA without enclosing the details of machinery purchased and certificate of expansion of capacity.

The submission of report of CA in form 3AA along with its annexures and certificates was mandatory to file along with the return. The assessee had not complied with the provisions of the act it was not entitled to such claim. 5

2. As per annexure-B and C, of CA report on form 3CD, the CA has certified that the PF of employees on respect of its unit at Bhopal, Indore, Noida, Udaipur, Chandigarh, Bikaner, Jodhpur, Bilaspur, Hissar, Raipur, Panipat, Ahemdabad, Surat, Jaipur, Kota were paid. No where PF contribution of employee working as Baroda unit (New unit) was deducted and paid to the appropriate authority. Thus Baroda unit of assessee had not started the works during A.Y. 2005-06.Hence plants and machineries were not put to use by the assessee during the year under consideration.

Even otherwise also, the assessee has expanded its business by installing plant and machinery at Baroda. There is no new undertaking setup by the assessee company. The new unit at Baroda is nothing but expansion of existing facilities by the assessee. New unit established can not be treated as new undertaking as defined in Income Tax Act. In this condition assessee has to file a report in the prescribed form giving details that 10 % or more installed capacity has increased which infact was not filed alongwith the return of income filed 6 for the year though the same is mandatory. During the course\of assessment proceedings also the said required mandatory details were not submitted. Hence, also such additional depreciation is not allowable to the assessee. Thus additional depreciation of Rs.1,91,12,918/- is not allowable to the assessee"

3. By the impugned order, the CIT(A) deleted the disallowance of additional depreciation after having the following observations :-

"2.3 I have carefully examined the issue. On examination it is found that the appellant had set up a new undertaking at Baroda. It is found that form no. 3AA was filed alongwith the return of income. Form no. 3AA signed by auditors M/s Krishna Gupta and Co., Chartered Accountants and annexure thereto gives the necessary details as required in the legal provision. The new undertaking had started publication on 12.9.2004. The delay in getting the provident fund registration does not negate the fact that the new undertaking had started publication of news paper from 12.9.2004. Hence there is no doubt that business has commenced on that date. The 7 A.O.s finding that Baroda unit is extension of existing facility is not factually correct. The facts of the case as discussed above clearly show that Baroda undertaking is a new undertaking hence is entitled for additional depreciation @15% as per section 32(1)(iia). The A.O. is directed to allow additional depreciation of Rs. 1,91,12,918/- This ground of appeal is allowed."

4. Against the above order of the learned CIT(A), the Revenue is in appeal before us.

5. We have considered the rival contentions and find from record that new undertaking of the assessee at Baroda started publication on 12.9.2004. Additional depreciation claimed u/s 32(1)(iia) of the Act was disallowed by the Assessing Officer on the plea that the assessee unit was in existence before 1.4.2002 and it has installed new unit during the A.Y. 2005-06, accordingly it was mandatory to file report in Form No.3AA certifying that the assessee has expanded its installed capacity by not less than 10% and also the details of machineries purchased in the prescribed form. The CIT(A) 8 has recorded a categorical finding to the effect that Form No. 3AA along with return of income was filed in respect of new undertaking set up at Baroda. It was further observed that Form No. 3AA was signed by the auditors, M/s Krishna Gupta & Company, CA, and annexures thereto give necessary details as required in the legal provision. A categorical finding has also been recorded that new unit has started publication on 12.9.2004 and delay in getting the provident fund registration does not negate the fact that new undertaking has started publication of newspaper from 12.9.2004. Accordingly, a finding was recorded to the fact that the business had commenced on that date. The CIT(A) also observed that the observation of the Assessing Officer to the effect that Baroda undertaking is extension of the existing unit is not factually correct. From record we find that Baroda undertaking is a new undertaking. The detailed findings recorded by the CIT(A) at para 2.3 have not been controverted by the Revenue by bringing any positive material on record, accordingly, we do not find any infirmity in the order of the 9 learned CIT(A0 in allowing the claim of additional depreciation at 15% u/s 32(1)(iia) of the Act.

6. The Assessing Officer also disallowed deduction u/s 35D in respect of pre-operative expenses. The relevant observations of the Assessing Officer are as under :-

"For the A.Y. 2005-06 assessee has claimed preoperative expenses w/ff at Rs. 1,05,84,741/- which is in excess of allowable limit of Rs. 58,60,010/- . Hence, the assessee has claimed excess pre- operative expenses to the tune of 15/5th (1058474 - 5860010) i.e. Rs. 47,24,731/- is disallowed and added to the income of the assessee."

7. By the impugned order, the CIT confirmed that disallowance against which the assessee has filed cross objection.

8. We have considered the rival contentions and find from record that the Assessing Officer has disallowed the assessee's claim of deduction u/s 35D of the Act in respect of 10 pre-operative expenses. In the course of assessment, the Assessing Officer found that the excess claim of pre-operative expenses has been filed to the tune of Rs. 47,24,731/-. The finding so recorded by the Assessing Officer has been confirmed by the CIT(A). Nothing was brought on record by the learned counsel for the assessee to persuade us to deviate from the finding recorded by the Assessing Officer to the effect that the assessee has claimed excess pre-operative expenses to the tune of Rs. 47,24,731/-. Accordingly, the ground taken by the assessee is dismissed.

9. In the result, both the appeals of the Revenue and the cross objection filed by the assessee is dismissed. A.Y. 2006-07

10. In this year the Assessing Officer has made the addition on account of interest income as per the certificate of TDS filed along with the return. The addition was made on account of income shown via TDS claimed on printing job charges, advertisement receipts, commission and rent receipts.

11. Rival contentions have been heard and record perused. The facts of the case in brief are that the appellant company filed a scheme of arrangement with the Hon'ble High Court of Gujarat at Ahmedabad. As per this scheme the publishing business of the appellant company was to be demerged in a resulting company viz D.B. Corps Ltd. This scheme of arrangement was submitted in the company petition no. 127 of 2006 connected with company application no. 268 of 2006. The Hon'ble High Court of Gujarat has passed order on the petition on 10.10.2006. In the High Court's order the demerger and transfer of publishing business of the appellant company to the resulting company is allowed with effect from the appointed date i.e. 1.4.2005. During the pendency of the petition for demerger the appellant continued conducting the business of publication. Since the company was continuing the business the TDS were deducted by various payers against the payments made to the company. After approval of the scheme of demerger the publishing business stands transferred to M/s D.B. Corp Ltd. w.e.f. 1.4.2005. After 12 passing of the order by the Hon'ble High Court the D.B. Corp Ltd. has filed return of income on the publishing business run by the appellant after 1.4.2005 on their behalf and have paid taxes on their return income. The appellant company claim that since the publishing business stands transferred to D.B. Corp Ltd. w.e.f. 1.4.2005 the income from publishing business stands transferred to the said company. It submitted application for refund of TDS. The A.O. held that the appellant has wrongly omitted to show the income from publishing business in their hands. After giving these findings he made addition of Rs.3,91,93,326/- on account of interest income and of Rs.22,63,93,527/- on account of publishing business.

12. Before the CIT(A), the contention of the assessee was as under :-

"3.1.1The Appellant alongwith D. B. Corp Limited ('DB Corp') had filed a scheme of arrangement before the Hon'ble High Court of Gujarat at Ahmedabad for demerger of entire 13 publishing business of the Appellant to DB Corp effective from the appointed date i.e. 1 April 2005.

3.1.2 The said demerger was approved by the Hon'ble Gujarat High Court vide its order dated 10 October 2006. The copy of the said order is enclosed as Annexure 2. 3.1.3 The scheme of arrangement provides that the entire publishing business of the Appellant be transferred as a going concern to DB Corp effective from the appointed date i.e. 1 April 2005. The said scheme also provided for transfer of all assets, liabilities, incomes and expenses relating to the publishing business to DB Corp.

3.1.4 Further, as per the scheme, during the intervening period ie between the appointed date (1 April 2005) and the date of the court order (10 October 2006), the Appellant would be deemed to carry on the business activities relating to the publishing business for and on behalf of DB Corp and in trust for DB Corp. Also, after the appointed date, all incomes/ profits and expenses/ losses relating to the publishing business are considered as that of DB Corp.

3.1.5 The relevant extracts of the scheme of arrangement are reproduced below for ready reference:

4. With effect from the appointed date and subject to the provisions of the scheme, the undertaking of the publishing business of the demerged company, as defined in clause 1.9, shall subject to the provisions of this clause in relation to the mode of vesting and pursuant to Section 394(1) of the Act, and without any further act or deed, be transferred to and vested in and/ or deemed to be transferred to and vested in the resulting company, as a going concern, in accordance with Section 2(19AA) of the Income Tax Act, 1961 ........

9. During the period between the appointed date and the effective date:

(a) The demerged company shall be deemed to carry on and to have carried on its business and activities in relation to the publishing business and shall stand possessed of all assets and properties of the publishing business as defied in clause 1.9, and referred to in clause 4 above, in trust for the resulting company

(b) Any income or profit accruing or arising to the demerged company in relation to the publishing business and all costs, charges, expenses and losses incurred by the demerged 15 company in relation to the publishing business shall for all purposes be treated as the income, profits, costs, charges, expenses and losses, as the case may be, of the resulting company 10.1 As and from the date of acceptance of this scheme by the board of directors of the demerged company and the board of directors of the resulting company and till the effective date, the demerged company:

(c) shall be deemed to have been carrying on all business and activities relating to publishing business and stand possesses of all the estate, assets, rights, title, interest and authorities of the publishing business for and on account of and in trust for, the resulting company, and shall ensure that all the profits accruing to the demerged company or losses arising or incurred by it (including effect of taxes, if any, thereon), relating to the publishing business shall for all purposes, be treated as the profits, taxes or losses as the case may be, of the resulting company.

3.1.6 Accordingly, all incomes and expenses relating to the publishing business of the Appellant from 1April 2005 were considered as income and expenses of DB Corp and duly incorporated in the financial statements of DB Corp as well as 16 considered at the time of computation of total income of DB Corp for the subject AY.

3.1.7 Further, the above principle is also upheld in the case of Marshall Sons & Co. (India) Ltd vs. Income Tax Officer (1997) (223 ITR 809), wherein the Hon'ble Supreme Court held that when the scheme of arrangement provides that during the intervening period (i.e. between the appointed date and the date of court order), the business activities are to be carried out in trust for and on behalf of the resulting company, then all the incomes and expenses for the said intervening period needs to be considered as that of the resulting company. The relevant extract of the said decision is reproduced below for ready reference:

"....... During the period the proceedings are pending before the Court, both the amalgamating units, i.e., the Transferor Company and the Transferee Company may carry on business, as has happened in this case but normally provision is made for this aspect also in the scheme of amalgamation. ................ The business carried on by the Transferor Company (Subsidiary Company) should be deemed to have been carried on for and on behalf of the Transferee Company. 17 This is the necessary and the logical consequence of the Court sanctioning the scheme of amalgamation as presented to it....."

3.1.8 However, all the TDS certificates which were issued to the Appellant during the intervening period (ie for the period 1 April 2005 to 31 March 2006) for the publishing business were issued in the name of the Appellant and hence claimed by the Appellant in its return of income. Accordingly, though the TDS credit was claimed by the Appellant, the corresponding income pertaining to the publishing business was reflected in the books of D B Corp.

3.1.9 Accordingly, it is respectfully submitted that the entire income pertaining to the TDS certificates has been duly offered to tax and there is no loss of revenue to the exchequer/ department.

3.1.10 The learned AO in the reassessment order has disregarded the modus operandi of the scheme of arrangement and made an addition of the following amounts to the total income of the Appellant on the basis that the corresponding income to the TDS certificates has not been offered to tax by the Appellant.

- Rs 39,193,326 on account of short recording of 'interest income' and

- .....Rs 226,393,527 on account of short recording of 'contractor receipts', 'advertisement receipts', 'rent receipts' and 'commission receipts' The above amounts represent nothing but the difference between the income as shown by the TDS certificates and income as claimed by the Appellant in its Profit and Loss Account. The said difference is the income relating to the publishing division and offered to tax by DB Corp. The calculation for the same is as under:

Sr. Particulars of Amount as Amount Addition (Rs) No. additions per TDS offered to (A - B) certificates tax by the (Rs) Appellant (A) (Rs) (B) i Interest income 54,762,165 15,568,839 39,193,326 ii Other receipts 307,351,770 80,958,243 226,393,527 Total 266,451,726 Further, it is respectfully submitted that no TDS credit is claimed by DB Corp in its return of income. The same is evident from the computation of total income and the acknowledgement of income tax return filed which are enclosed as Annexure 5. 19

3.1.11 Further, all incomes and expenses relating to the publishing business were correctly recorded by DB Corp in its books of accounts. The same is evident from the audited accounts of the Appellant and DB Corp, which are enclosed as Annexure 4. In this regard, note II(1)(c) to the notes to accounts of the audited financial statements of DB Corp and the Appellant is reproduced as under:-

Under the scheme of arrangement, from the appointed date i.e. from 1 April 2005, Writers and Publishers Limited carried on business and activities for the benefit of and in trust for the company and thus, all the profits/ incomes or losses/ expenditures accruing or arising to Writers and Publishers Ltd. Pertaining to publishing and wind energy businesses shall be treated as profits/ losses or incomes/ expenditures of the company. The scheme has accordingly been given effect to in these accounts. 3.1.12 The break-up of total income for the subject AY as recorded by the Appellant and DB Corp are as under:

Particulars Total income Income of the Account head Income of DB Corp Account head (Rs) Appellant under which the (Rs) under which the (Rs) income is income is included included in the in the Profit and Profit and Loss Loss account of D account of the Corp Appellant Contractor 242,820,447 59,968,904 Printing Job 182,851,543 Advertising Incom receipts Charges (Included in Advertising Income of Rs. 352.96 Crores) Advertising 85,915,237 NIL NA 85,915,237(Included Advertising Incom receipts in Advertising Income of Rs.

3529628967) Rent receipts 1,200,000 1,200,000 Rent Receipts NIL NA Commission 2,036,295 117,709 Miscellaneous 1,918,586 Miscellaneous Income Income 3.1.13 enclosed as Annexure 5:

Advertisement income for Rs. 3529628967/- shown in Audited Financial Statement of DB Corp Limited.

Miscellaneous income includes commission income for Rs. 16186781/- shown in Audited Financial Statement of DB Corp Limited. Interest income for Rs. 63673571/- shown in Audited Financial Statement of DB Corp Limited.

All the above income has been offered for tax by the DB Corp Limited. [Copy of acknowledgement of Return of Income and computation of income is enclosed as Annexure 4].

3.1.14 Further, it is respectfully submitted that, by once again adding back the above income to the total income of the Appellant would result in double taxation of the same income.

3.1.15 As evident from the above, the income which the learned AO has added to the total income of the Appellant, as income escaping tax, has already been offered to tax by DB Corp.

3.1.16 Accordingly, it is respectfully submitted that the addition made by the learned AO to the total income of the Appellant on account of interest income and other receipts should be entirely deleted."

13. After considering the above submissions, the CIT(A) deleted the addition after having the following observations :-

"2.3 On examination it is found that the publishing business of the appellant company stands transferred to M/s D.B. Corp Ltd. w.e.f. 1.4.2005. In the order passed on scheme of arrangement the Hon'ble High Court has given clear direction that the publishing business of the appellant company shall stand transferred to the resulting company on the appointed date i.e. 1.4.2005. The two companies have adopted accounts according to the High Court's order. The resulting company has declared income from publishing business including interest income in its return of income of assessment year 2006-07 and has paid taxes thereon. The impugned addition of income on account of income from publishing business in hands of the appellant company is not valid in view of the High Court's order. It is also clear that the interest income of Rs. 39193326/- is 22 also income of the publishing business. It is therefore held that the addition of Rs.39193326/- on account of interest income of the publishing business and of Rs. 22,63,93,527/- on account of business income of publishing business is invalid hence the same are deleted. "

14. The contention of the learned counsel for the assessee before us was as under :-

" With effect from Ist April, 2005 there was a de-merger of the company and the business of publishing was transferred to the resulting company M/s DB Corp. The said transfer of business was confirmed by the Hon'ble Gujarat High Court vide its order dated 01.10.2006, giving the effect as from. 01.04.2005(PA5 - 67 of PB). Clause Nos.9 & 10 (P. 60 & 61 of PB) of the said scheme states that, the business and the property shall be deemed to have been held by the demerged company and the business and the property would be conducted in Trust for the resulting company and Clause No. 10 further provides that the demerged company shall be deemed to carry on the publishing business relating to the publishing company as from 01.4.2005 and shall ensure that all profits accruing to the demerged company or losses arising relating to 23 the publishing business shall be treated as the profits, taxes or losses of the resultant company. Thus, it would be seen that all the assets and liabilities regarding the publishing business were transferred in Oct, 2006 but the business was carried out by the assessee under the trust and all the profits arising out of the business was transferred to the resultant company. After considering the Scheme of Demerger, the orders were passed by the ld.AO accepting the claim of the assessee but making the additions on account of disallowance of interest. The additions was deleted by the CIT(A) and the Hon Tribunal sustained a very minor addition.

The assessment was reopened by the ld. A.O. on the ground that the assessee has not shown the income of interest and the printing job on which the TDS was made by different persons and as such to that extent the income has escaped the assessment. It was submitted before the ld. A.O. that the assessee was carrying on the publishing business as a Trustee for the resultant company under a Scheme of Demerger which was approved by the Hon. Gujarat High Court. It was further submitted that the TDS was made by different persons from the assessee~s receipts in the name of the assessee, but under the 24 scheme, the said income was transferred to the resultant company and they have offered this income as their income in the P & L A/c. and in the returns filed by them. The ld. AO did not accept the plea of the assessee and held that since the TDS is made from the company, the receipts shall be treated as the receipts of the company.

In appeal, the CIT(A) accepted the plea of the assessee and after verifying the facts that the income which is transferred to the resultant company has been shown as an income by the company in its P & L Ale. and in its return and the due taxes have been paid by the company.

It is humbly submitted that the assessee was carrying on the business on behalf of the resultant company. and all income. was transferred to them. However, the assessee has claimed the TDS since it was deducted and paid in the name of the assessee. The income has been offered by the resultant company and as such the same could not have been taxed in the hands of the assessee. Taxing the same would amount to a double taxation and disobeying the order of the Hon. Gujarat High Court. "

15. Rival contentions have been heard and record perused. In the A.Y. 2006-07 the addition was made by the Assessing Officer on account of interest income found as per TDS certificate and also on account of printing and job work receipts, advertisement receipts, commission and rent receipts shown in the TDS certificate filed along with the return of income. The Assessing Officer found that the income shown under these heads did not commensurate with the TDS certificates filed by the assessee along with the return of income, accordingly, difference of income declared in the books vis-à-vis amounts shown in the TDS certificate was added to the assessee's income. We find that publishing business of the assessee stands transferred to B.P. Corp Limited with effect from 1.4.2005 as per the order passed by the Hon'ble High Court. The assessee has filed a petition in the form of scheme of arrangement and the Hon'ble High Court has given a clear direction that publishing business of the assessee shall stand transferred to the limited company on the appointed date i.e. 1.4.2005. After 1.4.2005 the 26 resulting company i.e. B.P. Corp Limited declared income from publishing business including interest income in its return of income of the A.Y. 2006-07 and also paid taxes thereon. Since the publishing business of the assessee has been transferred to B.P. Corp Limited with effect from 1.4.2005, there was no reason for showing income of publishing business including the interest in the assessee's hands otherwise it amounts to showing the same income in the hands of two different assessees. The CIT(A) also recorded a finding to the effect that the interest income of Rs. 3,91,93,326/- was the income of publishing business which stood transferred to B.D. Corp Limited with effect from 1.4.2005. A detailed finding has been recorded by the CIT(A) at page 2.3 of his appellate order and this finding is as per the material on record which has not been controverted by bringing any positive material by the department, accordingly we do not find any reason to interfere with the order of the CIT(A) in deleting the addition on account of interest income and publishing business income in the nature of printing job 27 charges, advertisement receipts, commission and rent receipts, in the hands of the assessee.

16. In the cross objection, the assessee is aggrieved for upholding the Assessing Officer's action regarding reopening of assessment u/s 147. From record we find that the original assessment was framed u/s 143(3) on 30.12.2008. We find that after recording reasons, the Assessing Officer issued notice u/s 148. As per the reasons recorded, the Assessing Officer has reason to believe that income chargeable to tax of (Rs. 3,91,93,326/- + Rs. 22,63,93,527/- + 8,64,873/-) = Rs. 26,64,51,726/- has escaped assessment for a.Y. 2006-07 within the meaning of section 147 and it is a fit case for reopen as per the provisions of section 147 and notice u/s 148 is being issued.

17. As per the reasons recorded, the Assessing Officer found that the income chargeable to tax under the head "contract receipts, income from printing and job charges"

escaped assessment. As per the reasons recorded which have 28 been reproduced by the Assessing Officer at page 1 of the assessment order, we find that there was sufficient reason for the Assessing Officer to believe that the income of the assessee has escaped assessment. Accordingly, we do not find any infirmity in the order of the learned CIT(A) in upholding the reopening of assessment.

A.Y. 2007-08

18. While framing the assessment, the Assessing Officer made disallowance of interest amounting to Rs.6.30 crores on account of interest paid to D.B. Corp Limited. The AO in the assessment order has noted that the assessee had taken a loan of Rs. 70.00 Crores in A.Y. 2006-07 from its sister concern M/s DB Corp Ltd. And paid interest @ 9% of Rs. 6.30 Crores on this loan during the current assessment year. The A.O. stated that the aforesaid loan cannot be held to be taken for business purposes and that genuineness of the loan could \ \ \ not be established as the assessee failed to prove that the loan was for business purpose. The assessee has given 29 interest free loans to the tune of Rs. 73.80 crores to related concerns and whereas claiming interest of Rs. 6.30 Crores on loan of Rs. 70.00 crores to another related concern M/s DB Corp Ltd. The assessee, through journal entry passed on 31.03.2006, it received loan of Rs. 70 crores from DB Corp. Ltd. The Assessing Officer further stated that loan of Rs. 70.00 crores was given as share application money which cannot be said as spent for business purposes. Therefore the A.O. disallowed interest paid amounting to Rs.6.30 crores on the said loan from M/s DB Corp Ltd.

19. The contention of the assessee before the CIT(A) was as under :-

"FACTUAL MATRIX:

1. The appellant is a Private Limited company and its accounts are Audited by a firm of Chartered Accountants as required by the relevant provision of the Companies Act 1956.

2. The appellant company has filed its Return of Income for AY 2007-08 on 04.10.2007 declaring therein total income at Nil.

3. During the year before the previous year relevant to 30 assessment year under consideration i.e. AY 06-07, company has undergone into demerger of its publishing business into DB Corp Limited. Therefore all the assets and liabilities pertaining to publishing business have been transferred to resulting company in pursuance to a scheme of arrangement between the company and DB Corp Limited and respective shareholders under section 391 and 394 read with section 100 to 103 and other applicable provisions of the companies Act 1956 as approved by the H'ble High Court (Order of demerger is enclosed for your ready references). To give effect of the scheme of demerger all the assets and liabilities pertaining to publishing business has to be transferred to the resulting company and accordingly company has transferred all the assets and liabilities to M/s DB Corp Limited. In result of this an amount of Rs. 70 Crores was appearing in the books of the assessee company as liability to be payable to M/s D B Corp Limited on which interest has been paid for Rs. 6.30 Crores only during the year under consideration

4. The Appellant company, during the previous year relevant to the assessment year under consideration, has paid Rs. 633.43 lacs 31 including the interest paid to Rs. 630 Lacs to DB Corp Limited on its loan of Rs. 70 Crores taken in earlier years @ 9% per annum and also received interest to the tune of Rs.241. 71 Lacs and net interest expenses charged to profit and loss for Rs. Rs. 391. 71 lacs. against the disallowance made by the Ld AO for Rs. 630.00 Lacs. 4.1 The ledger copy of interest paid amounting to Rs. 630 Lacs @ 9% p.a. to DB Corp Limited on its loan of Rs. 70 Crores appeared as opening balance in the books of assessee.

4.2 The ledger copy of interest paidfor Rs. 301898/- to Bank on OD against FDRs and other loan during the year under consideration. 4.3 The ledger copy of interest of Rs. 24070/- paid on public deposits during the year under consideration.

4.4 The ledger copy of interest of Rs. 17316/- paid to Intec Securities on loan taken for DGSet.

4.5 The ledger copy of interest received from Bank for Rs.

2,32,83,901/- on FDRs during the year.

4.6 The ledger copy of interest received for Rs.8,83,904/- from other parties.

4. 7 The ledger copy of interest received from Intec Securities for Rs. 3,960/- on its deposits during the year.

GROUNDS OF APPEAL:

The only grounds of appeal relates to unlawful disallowance of interest paid for Rs. 630 lacs to DB Corp Limited during the year. APPELLANT CASE:

The Learned assessing officer has disallowed interest expense of Rs. 6,30,00,000/- in the assessment year under consideration and added back to the income of assessee on the following conclusion derived by the Ld. AO:

1. "It has not been proved by the assessee whether the loan was for business purpose.

2. Assessee has given interest free loans to the tune of Rs. 73.80 Crores to related concerns and paying interest of Rs. 6.30 Crores on the loan of Rs. 70 Crores.

3. As no Bank statement was submitted the only conclusion derived from the submission of the assessee is that as per journal entry on 31.03.2006. Writers and Publishers received loan of Rs. 70 Crores from DB Corporation Limited and on 31.03.2006 Rs. 70.00 Crores was given as share application money which can not be said as spent for the business purpose.

4. Assessee can not take a plea that in AY 06-07 the relevant 33 documents were produced before then A 0 as in that assessment year also assessee has submitted only a journal entry.

5. The way assessee has concealed the particulars of loan it seems there may be more issues related to loan which could get expose at the time of assessment. "

First of all we would like to give point wise submission on the conclusion drawn by the Ld AO as under:

1. Ld. AO. conclusion: "It has not been proved by the assessee whether the loan was for business purpose.

Our Submission: The Ld AO findings that the loan was not for business purposes can not be considered in the context in which the LD AO has quoted as the assessee company has not taken any loan during the year under consideration at all including the loan from DB Corp Limited. However the assessee company has paid back, during the year under consideration, the loan taken in earlier years including the repayment of Rs. 2.67 Crores to DB Corp Ltd. When the loan has not been taken at all by the assessee company than how the conclusion derived by the Ld AO that loan was not takenfor business purposes?

2. Ld. AO conclusion: Assessee has given interest free loans to the tune of Rs. 73.80 Crores to related concerns and paying interest of Rs. 6.30 Crores on the loan of Rs. 70 Crores.

Our Submission: Similarly, the assessee company has not granted any loan during the year under consideration to related concern, however the Ld AO talked about Rs. 73.8 crores loan given to related concern is not loan at all but the share application money pending for allotment which subsequently allotted as shares of that particular company. And investing in shares is a matter of business which any company / assessee can take during the course of its business. Therefore there is no relation to paying share application money to Bhaskar Multinet Limited and having loan from DB Corp Limited. Both are entirely different transaction and do not have any nexus between them as the Ld AO has concluded.

3. Ld. AO conclusion.As no Bank statement was submitted the only conclusion derived from the submission of the assessee is that as per journal entry on 31.03.2006. Writers and Publishers received loan of Rs. 70 Crores from DB Corporation Limited and on 31.03.2006 Rs. 70.00 Crores was given as share application money which can not be said as spent for the business purpose.

Our Submission: There can not be bank statement where one can established that these are entries in Bank by which loan have been taken. We have repeatedly explain that this loan is an outcome of de- merger scheme by which assessee company is having certain amount of credit balance of its demerged entity (resulting entity) i.e. DB Corp 35 Limited and submitted scheme of demerger as approved by the High Court of Gujarat. But the Ld AO without understanding the fact of case repeatedly asking bank statement to see the entries of loan taken from DB Corp Limited, that too the transaction not related to the year under consideration. The conclusion as derived by the Ld AO not only bad in law but also without understanding the transaction and fact of the case.

4. Ld. AO conclusion: Assessee can not take a plea that in AY 06-07 the relevant documents were produced before then AO as in that assessment year also assessee has submitted only a journal entry. Our Submission: There is no need to take a plea as mentioned by the Ld AO the fact of the transaction is that, when the company has demerged its publishing business to the resulting entity and will have to record resulting debit/ credit balance of demerged entity by way of. During the year before previous year relevant to assessment year under consideration, company has undergone into demerger of its publishing business into DB Corp Limited.

Therefore all the assets and liabilities pertaining to publishing business have been transferred to resulting company in pursuance to a scheme of arrangement between the company and DB Corp Limited and respective shareholders under section 391 and 394 read with section 100 to 103 and other applicable provisions of the companies 36 Act 1956 as approved by the H'ble High Court (Order of demerger is enclosed for your ready references). To give effect of the scheme of demerger all the assets and liabilities pertaining to publishing business has to be transferred to the resulting company and accordingly company has transferred all the assets and liabilities to M/s DB Corp Limited.

5. Ld. AO conclusion: The way assessee has concealed the particulars of loan it seems there may be more issues related to loan which could get expose at the time of assessment. "

Our Submission: There is nothing to conceal in this transaction. The demerger of the business was undertaken with the approval H'ble High Court as per the scheme of arrangement between the company and DB Corp Limited and respective shareholders under section 391 and 394 read with section 100 to 103 and other applicable provisions of the companies Act 1956. The conclusion of the Ld AO that "it seems more issue related to loan which could be get exposed ... " is only the imagination of the Ld AO and nothing else. Apart from the above specific comments in regards to Ld AO's conclusion our submission is as under:

The Learned Assessing Officer has stated that "in view of above the above loan cannot be held to be taken for business purposes and in the year under consideration genuineness of loan also could not be 37 established. Hence, interest paid amounting to Rs.6,30,00,000/- on account of above loan should not be allowed and added to the income of the assessee". It is beyond the reach of understanding that whether the assessee has to establish year after year that loan has been taken for business purposes while the transaction of loan taken does not belongs to the year under consideration as mentioned by the Ld AO in its body of order" ... and in the year under consideration genuineness of loan also could not be established". This observation of Ld AO is not only bad in law but also unwarranted in the context of disallowing the interest as no loan has been taken by the company during the year under consideration and at the same time no interest free advance have been given to related concern during the year under consideration but to invest in other company in earlier years which subsequently got allotted the shares (proof of allotment is enclosed herewith-return of allotment filed with the registrar of companies by M/s Bhaskar Multinet Limited). Another observation of Ld AO, that interest free loan given by the company to related concern. Here the simple question that arises is, whether any share application money paid by the company, which subsequently got allotted shares, can be considered as loan given without interest? As a matter of shall be considered only where the money has been given on a pre determined, and conditions between the parties. Merely non-charging of interest on advance should not be the 38 sole criteria for disallowing the interest expenses it has not been established that the interest paid by the assessee on borrowed funds has not been utilized for the purpose of business. During the year before the previous year relevant to the assessment year under question company has undergone into demerger of its publishing business into DB Corp Limited Therefore all the assets and liabilities pertaining to publishing business have been transferred to resulting company in pursuance to a scheme of arrangement between the company and DB Corp Limited and respective shareholders under section 391 and 394 read with section 100 to 103 and other applicable provisions of the companies Act 1956 as approved by the H'ble High Court (Order of demerger is enclosed for your ready references). To give effect of the scheme of demerger all the assets and liabilities pertaining to publishing business has to be transferred to the resulting company and accordingly company has transferred all the assets and liabilities to Mis DB Corp Limited In result of this an amount of Rs. 70 Crores was appearing in the books of the assessee company as liability to be payable to M/s D B Corp Limited on which interest has been paidfor Rs. 6.30 Crores only during the year under consideration. Other payment of interest amounting to Rs. 3.02 lacs to Bank, Rs. 0.17 lacs to Bank against loan for DG Set and Rs. 0.24 lacs on public deposits total comes to Rs. 633.43 lacs paid in totality during the year under 39 consideration. On receipt side the company has received Rs. 232.84 lacs from bank on FDRs, Rs.8.84 lacs from other parties and Rs.0.04 lacs on securities total comes Rs.241.71 lacs during the year. Therefore the net interest payment is Rs. 391. 71 lacs charged to profit and loss account during the year under consideration by the assessee company against which the Ld. AO has disallowed Rs. 630.00 lacs and added to the income of assessee.

First of all payment of interest can be disallowed only when it is established that the borrowed fund has not been utilized wholly or solely for the purpose of business of the assessee. In this case there is no finding of the Ld. A 0 that the assessee company has not utilized its borrowed fund for its business. Further as we have stated earlier that due to demerger of business of the company Rs.70 crores is the resultant figure appeared as credit balance in the books of company on which company has paid interest. This credit balance representing the various fixed assets, current assets of the company. Secondly, The assessee company has interest free unsecured loan from directors/ shareholders for Rs.O.63 Crores (detail enclosed). In addition to above company has also credit balances of Rs. 66.12 crores on which no interest has been paid by the company. These credit balances includes credit balances of group companies also on which company is not paying any interest to them, but the Learned Assessing Officer has 40 not considered the same while framing view for disallowing interest expenses. In fact every case shall be looked in its totality and not in specific terms. If the assessee company wants to give funds without interest to its related concern other concern then what is the need to have credit balances without interest from them? In fact during the course of business operation, especially in large organizations there is a need to give advances which ultimately results in the interest of business. That too company has not given interest free advances or loan to related concern but invest in shares of a particular company. Therefore disallowing interest -on.the loan taken by the company in earlier year is not justified at all. Always both sides of coin should be looked upon before framing any view. But in case of assessee company the Learned Assessing Officer fails to do so and disallowed interest expense of Rs. 630. 00 Lacs.

Thirdly The Learned Assessing Officer also failed to consider that the Assessee Company has its own funds to the tune of Rs. 225.11 Crores for which detail as under:

...                     Paid up Capital of     Rs   33.6
                        Reserve and           Rs.   185.
                        Deferred Tax          Rs.   6.31
                        Total (Rs. in         Rs.   225.

Thus it is clear that apart from interest free unsecured loan and interest free credit balances, Company has its own fund to the tune of Rs. 41 225.11 Crores on which no interest expense is incurred by the Assessee Company. It is well settled law that the company may give its own funds without charging interest. Therefore interest can not be disallowed until and unless the interest free advance is not more than the company's capital and free reserves. Therefore on this count interest can not be disallowed. There are settled cases where company may give interest free advance or loan to the extent of interest free funds are available with the company.

Even in cases where mixed funds are used for both business and other than business purposes, there is no presumption that moneys used for other purposes came out of borrowed funds; There are a number of cases held on this ground. it can be said that interest free funds given are out of own funds to the extent of capital and reserves; if an assessee having sufficient interest free funds, in the form of capital reserves and other funds without interest from relatives and friends not related to business, to cover funds given interest free or utilized other than for business purposes, no disallowance is warranted; if the own funds are not sufficient to cover interest free advances, a proportionate disallowance is warranted. ( ITAT, MUMBAI BENCH 'G', MUMBAI Metro Exporters Ltd.v.ITO ITA No. 1693/M/05 February 20,2009) The amount borrowed for the business remains a liability for the business till its discharge. So long as the money borrowed is used in the 42 business, interest paid on such borrowing is a proper charge on the business and is allowable as expenditure. Therefore it is very well established fact, that no funds have been given as interest free advances out of borrowed funds. Whatever amount borrowed the same has been utilized for the purpose of business solely and exclusively. Therefore question of disallowance of interest does not attract in this case.

Without prejudice to above we would like to bring one more fact into your kind notice that, if for a movement one can consider that the assessee company has given interest free advances/ loan to the group concern under question have been given in earlier years, therefore there is no nexus between the funds borrowed and giving to related concern without interest and where the borrowed funds have been utilized for the purpose of its business then interest can not be disallowe There in no finding of Ld AO that borrowed fund has been advancing to group company.

Finally we would also like to bring into your kind notice that the assessee company has earned interest during the year for Rs. 8.84 lacs from other parties on its debit balance. Hence concluding that the assessee company has given interest free loan(in fact this is share application money which Ld AO has erred to mentioned as interest free loan) is not correct. Company is charging interest from the parties 43 whether it is group company or not where it is due and accounted far in its books of accounts.

Further we request you to please consider following points as well while deciding our appeal:

• An expense can be disallowed only when the same is not wholly or solely for the purpose of its business. There is no case where the assessee company has not utilized its borrowed funds wholly or solely for the purpose of its business. • Assessee Company has a Paid up Capital and free Reserves of more than Rs. 225.11 Crores at the end of previous year relevant to the Assessment year 2007-08, which does not bear any interest cost. Further, we humbly request that there are various case laws where company may give its own funds to its group concerns without charging any interest. A case which is similar of our case is that of CIT. Vs. PREM HEA VY ENGINEERING WORKS PVT.LTD. (2006)285 ITR 554 (All). • Reliance were placed onfollowing decisions also: > S.A. Builders Vs. CIT, 288 ITR 1 (SC) > CIT Vs. Gopikrishna Murlidhar, 47 ITR 469 (AP) > Torrent Financers V. ACIT, 73 TTJ 624 ITAT (Ahd) > CITvs. DCM Ltd., 44 (2009)177 Taxman 300 (Delhi) > Metro Exporters Ltd Vs ITO ITA 1693/M/05 (ITAT.

Mumbai'G') > CIT Vs Hotel Savera (1999) 239 ITR 0795

20. After considering the above contentions, the CIT deleted the disallowance of interest after having the following observations :-

I have gone through the observations and findings of the AO made in the assessment order. I have also considered the submissions made by the appellant and various judicial decisions relied upon by the Ld. AR. The Ld. AR submitted that pursuant to the scheme of demerger approved by the Hon'ble Gujrat High Curt all the assets and liabilities pertaining to the appellant company's publishing business has been transferred to D.B. Corp Ltd. being the resulting company and due to this resultant effect, an amount of Rs.70.00 crores appeared as liability in the books of the appellant company as loan payable to M/s 45 DB Corp Ltd. on which inter; The appellant produced copy of TDS certificate issued by it to M/s DB Corp Ltd. reflecting the interest of Rs.6.30 crores has been paid interest payment of Rs.6.30 crores on which TDS of Rs.141372001- has been deducted and paid and it is contended that the same has been offered to tax by M/s DB Corp Ltd. The audited financial statements of M/s DB Corp Ltd. for the relevant financial year has also been filed in support of his contention. It is seen that this loan of Rs.70.00 crores also stood in the appellant's books in the previous A Y. 2006-2007 as well as interest disallowed of Rs. 2,18,36,3001- thereon by the AO was allowed by me vide appellate order dated 30.11.2010 in ITA No. 222/0809 for the AY. 2006-07 by highlighting the facts of the case and relying on the judicial decisions stated therein. It is clear that the loan of Rs. 70.00 crores in the name of DB Corp Ltd. has not arisen in the current assessment year but is a result of outcome of demerger scheme pertaining to which entries were passed in previous A.Y. 2006-07. Therefore, there will no reflection of this transaction in the bank accounts of the appellant. I find force in the Ld. AR's contentions that no interest free advance were made to any related concern during the current 46 assessment year and it had invested in share capital related companies. There is merit in Ld. AR's contentions that the if appellant has sufficient interest free fund by way of share capital, reserves and surplus etc. totaling to Rs.225.11 crores which can easility cover the interest free advances given by the appellant. Therefore, on the facts and in the circumstances of the appellant's case, the AO was not at all justified in disallowance of interest of Rs.6.30 crores paid to MIs DB Corp Ltd. on outstanding loan of Rs.70.00 crores. It is settled position of law that no interest can be disallowed on interest free advances to the extent of interest free funds available with the appellant.

It has been held in the case of CIT Vs. Hotel Savera (1999) 239 ITR 0795 by Hon'ble Madras High Court that if the firm has sufficient funds to cover its advances than interest on borrowed capital is allowable in full U/S 36(i)(iii) and no disallowance of interest is called for. Further in the case of CIT V s. Prem Heavy Engineering Works Pvt. Ltd. (2006) 285 ITR 554 (All) it is held that if the appellant had sufficient amount of money towards share capital, reserve & surplus and also interest free advances than the interest free advances made to various sister concerns are fully covered from the interest 47 free advances" shares capital, surplus & reserves. The Hon'ble Tribunal was justified in confirming the deletion of disallowance of interest. The ratio of these cases are applicable to the case of the appellant as the appellant had sufficient interest free funds with him to take care of the interest free loans and advances. In view of the above facts, I am the considered view that the AO was not justified in making the disallowance of interest of Rs.6,30,00,0001- paid to DB Corp Ltd. Thus, the disallowance made by the AO is deleted and this ground is decided in favour of the appellant"

21. The contention of the learned counsel for the assessee before us was as under :-

"As it would be seen that all the assets and liabilities were transferred in relation to the publication business under a Demerger Scheme, an amount of Rs.70.00 crs were credited in the name of the resultant company. The debtors of the earlier business not connected to the demerger scheme had to be retained by the assessee. The liability of Rs.70.00 crs was created and the interest was paid on the same. The assessee also paid interest on public deposits of Rs.24,070/- and Rs.17,360/- on DG Set. An interest of Rs.3,Ol,OOO/- waspaid to the banks. The assessee received interest of Rs.2,41,71,765/- on bank FDRs' and others. From the balance sheet, it would be seen that, the unsecured loans 48 have been reduced from Rs.76.00 crs. to Rs.67.00 crs. The loans and advances are also reduced from Rs.170 crs. To Rs.156.00 crs. The bank FDRs' have increased from Rs.9.00 lacs to Rs.l02 crs.(P.9 ofPB). Thus, it would be seen that there is no bifurcation of the borrowed funds for advances to non- business purposes. The assessee has made the FDRs' of Rs.I02 crs. during the year. The assessee had a substantial capital of Rs.33.00 crs. and reserves to the tune of Rs.20.00 crs. The interest has been paid only on account of the business liability created under the demerger scheme. It cannot be said that the borrowed funds have been utilized for non-business purposes. The other interest has been paid at a very nominal amount against which the interest receipts are to the tune of Rs.2.41 crs.

In view of the above, it cannot be stated that the borrowed funds have been utilized for non-business purposes and no disallowance is called for"

22. Rival contentions have been heard and record perused. From record we find that the liability of Rs. 70 crores arose in favour of B.D. Corp Limited for giving due effect to the scheme of demerger approved by the Hon'ble High Court. This liability arose in the earlier years and not in the year, under consideration. Thus, the credit balance of Rs. 70 crores in the books of the assessee was for business consideration. As a result of transfer of assets and liabilities 49 in terms of the order of the Hon'ble High Court, the assessee was to pay a net sum of Rs. 70 crores to B.D. Corp Limited on which the assessee has paid interest during the year under consideration. Thus, the observation of the Assessing Officer to the effect that the liability of Rs. 70 crores was created in the books of the assessee without business consideration, is de void of any merit. The liability so arose was in the course of business and duly approved by the Hon'ble High Court under the scheme of demerger wherein publishing business of the assessee company was transferred to B.D. Corp Limited. Under the provisions of section 36(1)(iii) interest expenditure is allowable when loan is taken for the purpose of business. In the instant case before us, this loan has resulted due to passing of necessary entries in the books as per scheme of demerger approved by the Hon'ble Gujarat High Court. Accordingly, there is no justification for disallowing the interest on the credit balance in the assessee's books. We also find that no loan has been given by the assessee without charging interest to M/s Bhaskar Multinet Limited. This is 50 entirely a different antity to whom money was given by the assessee for allotment of shares and the shares were also allotted to the assessee company as per the details filed before the lower authorities in the form of copies of return of allotment filed with the Registrar of Companies by M/s Bhaskar Multinet Ltd. Thus, by no stretch of imagination, the amount given by the assessee to Bhaskar Multinet Limited can be said to be interest free loan. From record we also find that the assessee was having sufficient interest free loan of Rs. 225.11 lacs in the form of paid up share capital, reserve and surplus and deferred liability, in addition to the interest free credit balance and unsecured interest free loan. There is no dispute to the proposition that where a company has given its own funds without charging interest, interest expenditure cannot be disallowed until and unless interest free advance is not more than the company's capital and free reserve. Therefore, on this count also the interest cannot be disallowed. Thus, a company may give interest free advance or loan to the extent of interest free funds available with the 51 company. The amount borrowed for business remains a liability for the business till it is discharged. Till such borrowed money is utilized for the purpose of business, the interest paid on such borrowings is a proper charge of business and is allowable as expenditure u/s 36(1)(iii) of the Act. Pursuant to the scheme of demerger approved by the Gujarat High Court, all the assets and liabilities pertaining to the assessee company's publishing company has been transferred to B.D. Corp Limited being the resulting company and due to this resultant effect, the amount of Rs. 70 crores appeared as liability in the books of the assessee company as loan payable to B.D. Corp Limited on which interest of Rs. 6.30 has been paid by the assessee. Copy of TDS certificate issued by B.D. Corp Limited reflecting interest payment of Rs. 6.30 crores on which TDS of Rs. 1,41,37,200/- has been deducted and paid, was duly reflected and the same has been offered to tax by B.D. Corp Limited. As the liability has been created due to journal entry, there was no reflection of this transaction in the bank statement. Accordingly, the 52 contention of the Assessing Officer to the effect that the bank statement was not produced is of no avail. The finding recorded by the CIT(A) are as per the material on record which do not require any interference. The CIT(A) has also correctly dealt with the issue with reference to sufficiency of interest free funds and its allowability u/s 36(1)(iii) of the Act and the same do not require any interference.

23. In view of the above discussion, we do not find any infirmity in the order of the CIT(A) in deleting the disallowance of interest.

A.Y. 2008-09

24. In this year the following grounds have been taken by the revenue :-

"On the facts and in the circumstances of the case, the CIT(Appeal) has erred in -

1. Allowing the expenses of Rs. 2,29,42,267/- disallowed by the A.O. on account of legal and professional expenses.

2. Allowing the sundry balances of Rs. 9123482/- written off u/s 36(i)(vii) which were disallowed by the A.O.

3. Allowing the sum of Rs. 33196475/- on account of difference in opening balance of unsecured loans 53 which was disallowed by the A.O."

The facts of the issue in brief are that the appellant has claimed legal and professional charges totalling to Rs.23295295/-. The A.O. disallowed legal and professional expenses of Rs.22942267/- after assigning the following reasons:-

"During the course of assessment proceedings, on perusal of Profit and Loss Account it is observed that the assessee is showing Legal & Professional Charges worth Rs.2,32,95,295/-. While in ledger account of Legal & Professional Charges as submitted by the assessee is as under :

     Insurance Survey Expenses             Rs.   3400.00

     Internal Audit Expenses               Rs. 469764.00

     Legal & Professional Expenses         Rs. 227478.00

Professional & Consultancy Charges Rs. 218828.00 Total Rs.9,19,470.00 From the above it is very clear that assessee has incurred expenses on Legal & Professional Charges only at Rs.9,19,470/- whereas, in the Profit & Loss Account the said expenses is claimed at Rs.2,32,95,295/-.

Further, it is noted that the expenses under Legal & Professional Charges in last year is only Rs.3,53,028/- which is much less than that of current year. This is despite the fact that the total income of the assessee has only increased from Rs.36,13,47,022/- to Rs.12,19,37,324/- i.e. Rs. 23,94,09,698/- which is 2.96 times. Thus, current year expenses under this head are increased by 65.99 times than that of previous year. The legal and professional charges in a business are usually directly proportional to the total income earning activities done by the assessee. Since, the income earning activities have shown three times increase as compared to last year. It is unexplainable how the legal and professional charges have jumped up by such a high margin. No reply was submitted by the assessee on this point.

Therefore, expenses under the head Legal & Professional Charges is taken as per ledger account submitted by the assessee at Rs.9,19,470/- and balance expenses of Rs.2,29,42,267/- is disallowed and added to the income of the assessee.

2.2 The appellant has made the following submissions:

While disallowing the Legal & Professional Expenses the Ld AO stated as under:

During the course of assessment proceedings, on perusal of profit and Loss Account it is observed that the assessee is Showing Legal & professional Charges worth Rs. 2,32,95,295/-. While in ledger account of Legal & Professional Charges submitted by the assessee is as under:

     Insurance Survey Expenses                    Rs.   3400.00

     Internal Audit Expenses                      Rs.469764.00

     Legal & Professional Expenses                Rs.227478.00

     Professional & Consultancy Charges           Rs.218828.00

                       Total                      Rs. 9,19,470.00

From the above it is very clear that assessee has incurred expenses on Legal & Professional Charges only at Rs. 9,19,470/- whereas, in the Profit & Loss Account the said expenses claimed at Rs. 2,32,95,295/-

Further it is noted that the expenses under Legal &Professional charges in the last year is only Rs. 3,53,028/- which is much less than of current year. This is despite the fact the total income of the assessee has only increased from Rs. 36,13,47,022/- to Rs. 12,19,37,324/- i.e. Rs. 23,94,09,698/- which is 2.96 times. Thus current year expenses under this head are increased by 65.99 times than that of previous year. The legal and professional 56 charges in a business are usually directly proportionate to the total income earning activities done by the assesse. Since, the income earning activities have shown three times increased as compared to last year. It is unexplainable how the legal and professional charges have jumped up by such a high margin, No reply was submitted by the assessee on this point.

Therefore expenses under the head Legal & Professional Charges is taken as per ledger account submitted by the assessee at Rs. 9,19,470/- and balance expenses if Rs. 2,29,42,267/- is disallowed and added to the income of the assessee. From the above fact it is clear that the Ld AO has allowed the Legal & Professional Expenses to the extent of Rs. 919470/- i.e. to the extent of ledger copy of such expenses submitted. Whereas, infact assessee company has a printing division named as M P Printers situated at Noida. During the assessment proceedings the Ld AO asked to produce the books of accounts along with vouchers for verification, the same has been produced on 3rd September 2010 (Copy of letter attached as per Annexure 2). During the course of examination of books of accounts the Ld AO has asked to submit some of the ledger copy of expenses including the ledger copy of Legal and Professional Expenses. Accordingly the ledger copies have been submitted. Out of various ledger copy of various 57 expenses the Ld AO picked up the Ledger copy of Legal & Professional Expenses and found that the total expenses as claimed by the assessee company is Rs. 2,32,95,295/- as per profit and loss account against the ledger copy of Rs. 919470/- only. The Ld AO without bothering the difference of such huge amount of Rs. 2,29,42,267/-, restricted to allow the legal and professional expenses at previous year level i.e. Rs. 353028/- only and rest of the amount added back to the total income of the assessee company.

The assessee company has incurred Legal and professional expenses of Rs. 919470/- on its printing division for which each and every vouchers has been produced along with the books of accounts and verified the same by the Ld AO during the course of assessment proceedings. The Ld AO has also not found any discrepancies during the examination of books of accounts, even then the Ld AO restricted the allowability of such expenses to the extent of earlier year only i.e. Rs. 353028/- whereas the Ld AO himself admitted that the volume of the assessee's business has been increased by 2.96 times. Therefore the question of disallowance of Legal and Professional expenses incurred by the assessee company in case of its MP Printers division should not be 58 arises and has to allowed as claimed by the assessee as per its audited books of accounts.

Regarding the amount of Rs. 22375825/- for legal and professional expenses incurred and appeared in the books of accounts of the assessee maintained for head office [Detail enclosed as per Annexure 3, we would like to state these expenses are wholly and solely incurred for business purposes and must be allowed to the assessee company as business expenditure. During the year the assessee company has raised loan form ILFS. These expenses mainly incurred by the assessee in relation to processing fee of loan taken from ILFS and expenses incurred on documentation etc. such as stamping and mortgaging charges. From the detail of such expenses your good self may observed that the assessee company has also deducted income tax at source wherever applicable. Therefore disallowance of these expenses is un-warranted do not have merit.

Further the Ld AO, while disallowing the expenditure has not gone in detail that for what purpose these expenses incurred by the assessee company nor brought any material evidence that why these expenses has been disallowed except comments about the turnover of the assessee which is increase by 2.96 time, whereas these expenses increase by 65.99 times during the year. In this 59 connection we would like to state that the comparison of expenses works for guiding factor and should not be the sole criteria for allowability of expenses at all. During the year under consideration the assessee company raised loan from ILFS for Rs. 150 Crores, on which processing fee has been paid by the company for Rs. 1.50 Crore to ILFS. Apart from this fee, expenses on valuation of various properties of the company, expenses for purchase of stamps etc. for mortgaging of various property of the company had to incur by the company. All these expenses are legal in nature and have to be incurred in the year in which loan has been raised and could not be compared with the earlier year.

Considering the above submissions, the ld. CIT(A) deleted the disallowance after recording the following findings :-

"In order to examine the issue the books of A/c were examined. On examination of A/c it is found that total expense of Rs.23295295/- is debited to legal and professional charges account. The legal and professional charges totalling to Rs.919470/- are legal and professional expenses of M.P. Printers a division of appellant company. The other legal and professional charges are debited to head office accounts. This shows that total expenses of Rs.23295295/- is incurred on account of legal and professional 60 charges. The reason due to increase in expenses unexplained by the appellant in written submissions. The A.O. has disallowed the expenses on the basis of a theory that legal and professional charges in a business are usually proportionate to total income. This is not a valid reason for disallowance. Since there is no evidence to prove that any of the legal and professional charges been wrongly debited to the A/c the A.O. was not justified in making the disallowance out of the expense. In view of the above it is held that disallowance out of legal and professional charges at Rs.22942267/- is invalid hence the same is deleted. This ground of appeal is allowed."

25. Rival contentions have been heard and record perused. We find from record that the expenditure of Rs.2,32,95,295/- was debited to legal and professional charges account. The other legal and professional charges were debited to Head office account. Without pointing out any defect in the expenses debited in the head office account, the Assessing Officer has not considered the same and disallowed the entire expenditure by stating that there is increase in expenses debited under the head "legal and professional charges" 61

totaling to Rs. 9,19,470/-. It was duly explained by the assessee before the Assessing Officer that the assessee has printing division named M.P. Printers situated at Noida and during the course of assessment proceedings, books of accounts along with vouchers of M.P. Printers, Noida, were produced before the Assessing Officer on 3rd September, 2010 and the Assessing Officer has asked to submit copies of some of the expenses ledger including the ledger copy of legal and profession expense. However, out of various ledgers of expenses the Assessing Officer picked up ledger of legal and professional expenses and found that the total expenses, as claimed bythe assessee, at Rs. 2,32,95,295/- as per the profit and loss account against ledger copy of Rs. 9,19,470/-. We find that copy of ledger account of M.P. Pinters produced before the Assessing Officer for verification during the course of assessment proceedings wherein no discrepancy was found during the examination whereas the Assessing Officer himself has admitted that volume of assessee's busienss has been increased to 2.96 times with respect to expenditure of Rs. 62 2,23,75,825/- on account of legal and professional expenses appearing in the books of the assessee maintained for head office. We also find that the expenses so incurred were wholly and exclusively for the purpose of business. The expenditure were incurred in relation to processing fee of loan taken from ILFS and the expenditure incurred on its documentation such as stamping and mortgaging charges were debited under the head legal and professional expenses. We also find that tax has been deducted at source by the assessee out of such payments wherever applicable. The detailed findings recorded by the CIT(A) at para 2.3, page 4 of his appellate order are as per material on record and do not require any interference, accordingly, we do not find any infirmity in the order of CIT(A) for deleting the disallowance of legal and professional expenses.

26. With regard to addition of Rs. 93,482/- on account of sundry balance written off, the observation of the Assessing Officer was as under :-

"In the Profit & Loss Account the assessee has debited an amount of Rs.9,84,664/- under the head Sundry Balances W/off. These expenses are not an allowable expenditure because there are certain amounts which are written off is more than Rs.1,00,000/- and even Rs.3,00,000/- hence, account w/off to such a extent is not considerable. The assessee did not offer any explanation in this regard. Therefore, sundry balances w/off of above Rs.25,000/- is disallowed. Detail of such expenses are as under :

              Name of Party             Amount
              Indian Express            111366
              Business Standard Ltd.     26426
              Fourth        Dimention    69875
              Media P. Ltd.
              H.T. Media Ltd.           396911
              Sachhi Shiksha             32955
              Swarn Gems Pvt. Ltd.       45501
              Diamond Magazines         191336
              Maruti Electricals         39112
                    Total (Rs.)         913482

Hence, above expenditure of Rs.9,13,482/- can not be allowed as no reason for such Write off has been given. Accordingly this amount is added to the income of the assessee."

27. The submissions of the assessee before the CIT(A) were as under :-

"During the year under consideration the assessee company has write off Rs. 9,84,664/- due to its various customers. Since there are no possibilities of recovery of such outstanding amount, hence the assessee has written off this amount from the books of accounts.

During the course of business there are various customers of the assessee to whom printing job undertaken by the assessee. There are dispute/conversation with the customers for non-payment of outstanding amount on account of quality/ short supply etc. Staff of Assessee Company tried hard to recover such outstanding amount as the same has to be reported by them to its higher authorities. But in case non recovery of such amount assessee company has no option but to write/ off such amount from its books of account. There are various case law/ judgment whereas it has been established that the amount written off has to be allowed as business expenditure to the assessee as and when it has been written off from its books of account.

Further while disallowing the amount of bad debts written off the Ld AO has stated that ".................certain amounts which are written off is more than Rs. 1,00,000/- and even Rs. 300000/- hence, account written off to such extent is not considerable" the observation of the Ld AO does not find any merit that why the amount written off to the extent of Rs. 25000 allowable and more than Rs. 25000 should not be allowed. Under the provision of section 36(1)(vii) of the Act there is no necessity to establish on the part of assessee that the amount is become bad debts.

The provision of section 36(1)(vii) of the Act, we are reproducing as under for your ready reference:

36(1) The deduction provided for in the following clauses shall be allowed in respect of the matter dealt with therein, in computing the income referred to in section 28- ..................................................... .........................................

(vii) .............................., the amount of any bad debts or part thereof which is written off as irrecoverable in the account of the assessee for the previous year.

Even in the recent judgment of Hon'ble Apex Court in case of Vijay Bank Vs. CIT established that there in no need to 66 writing off individual debtors account and it is sufficient to reduce it from your assets side even you have made a provision for writing off of bad debts.

Further various judicial pronouncement are also in support of the claim of bad debts are as under:

In a recent decision the Hon'ble Apex Court in the case of Vijaya Bank Vs. CIT reported in [2010] 323 ITR 166 (SC) disposing the civil appeal no. 3286-3287 of 2010 on 15th April 2010 held as under:

"The AO denied the claim for bad debts u/s 36(1)(vii) on the ground that the individual account of the debtor had not been written off. The CIT (A) and Tribunal allowed the assessee's claim though the High Court reversed it. On appeal by the assessee, held reversing the High Court."

Hon'ble Apex Court in the case of T.R.F. Ltd. Vs. CIT reported in [2010] 323 ITR 397 (SC), held as under:

"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable: it is 67 enough if the bad debt is written off as irrecoverable in the accounts of the assessee."

Bomaby High court in the case of DI v/s M/s Oman international Bank, SAOG, held that :

"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, it is neither obligatory nor is it burden on the assessee to prove that the debts written off by him is indeed a bad debts as long as it "bona fide" and based on commercial wisdom or expediency.

Ahemdabad ITAT in case of ACIT Vs. Ashima Dyecot Pvt. Ltd. ITA No. 538/Ahd./2006 held as under:

"After the amendment of section 36(1)(vii) of the Income-tax Act, 1961, with effect from April 1, 1989, in order to obtain a deduction in relation to bad debts, it is not necessary for the assessee to establish that the debt, in fact, has become irrecoverable: it is enough if the bad debt is written off as irrecoverable in the accounts of the assessee."

28. By the impugned order, the CIT(A) deleted the disallowance after having the following observations :- 68

3.3 The A.O. has disallowed certain bad debt w/off u/s 36(1)(vii) only for the reason that the amount w/off is higher than Rs.25000/- This is not a valid ground for disallowances made by the A.O. It is not the case of the A.O. that good debts have been w/off. In respect of bad debts it is well settled that allowance u/s 36(1)(vii) is to be made in the year the bad debts are w/off in books of A/c. In view of the above, disallowance of deduction u/s 36(1)(vii) of Rs.913482/- is deleted."

29. Rival contentions have been heard and record perused. We find that the Assessing Officer has disallowed Rs. 93,482/- on account of sundry balance written off by observing that the amount written off is higher than Rs. 25,000/-. It is not a case of the Assessing Officer that good debts have been written off. Under the provisions of section 36(1)(vii) bad debts written off are to be allowed in the year they are written in the books of accounts. The finding of the CIT(A) at par 3.3 page 6 of his order is as per the material on record and do not require any interference. Accordingly, we 69 do not find any infirmity in his order for deleting disallowance of Rs.93,482/-.

30. The Assessing Officer also made the addition on account of difference in opening balance of unsecured loans. The facts of the issue in brief are that the A.O. found that there was a difference in the balance of account of some sundry creditors. He made addition of Rs.33196475/- after assigning the following reasons:

"On verification of Balance Sheet of the assessee and Ledger Account of unsecured loans it is observed as under

:-


Name of Parties of Unsecured    Balance As  Balance As    Difference
           Loan                 On 31.03.08 On 31.03.07
                                              As Per
                                            Ledger A/c.
Bhaskar Food Pvt. Ltd.           756790500                    -

Bhopal Finacial Services Pvt.                                 -
                                  38977528
Ltd
Chambal Trading Pvt. Ltd.          1311517                    -

R.C. Printers                          697680                 -

Sharda Solvent Ltd.             259011914                     -
                                  70

ILFS Financial Services Ltd.    180000000                     -

ILFS Infrastructure Leasing &                                 -
                              1330410147
Fin. Ser. Ltd.
Yes Bank Loan                  290000000                      -

Bhaskar Publicaiton & Allied                                  -
                                 31366095        4071430
Ind. Ltd.
DB Corp. Ltd.                     6016874              -      -

Bhaskar Exxoils Ltd.             57915793       28813969      -

Bhaskar Industries Ltd.               356776      356776      -

DB Corp. Ltd.                   554166665      670833333      -

Smt. Beena Baijal                 2761049        2761049      -

Intec Securities Ltd.                 855412     1440368      -

Smt. Kasturi Devi Agrawal         3510242        3515860      -

             Total             3514148192      711747085

Opening As Per Balance Sheet                   678550610 33196475

From the above table it is shown that the opening balances of unsecured loan shown in balance is not truly reflected in the current year. In the Balance Sheet, balance of unsecured loans as on 31.03.2007 is Rs.67,85,50,610/- . On perusal of ledger account of various unsecured loans for A.Y. 2008-09 it is observed that as per these ledger account opening balance is Rs.71,17,47,085/- which is not tallied with the closing balance of A.Y. 2007-08. Thus, 71 there is difference of Rs.3,31,96,475/- in the Opening Balance as per ledger account of A.Y.2008-09 and closing balance as per Balance Sheet for A.Y. 2007-08. Hence, difference in opening balance of unsecured loan to the tune of Rs.3,31,96,475/- for the year under consideration is added to income of the assessee."

31. Before the CIT(A) the submissions of the assessee were as under :-

"From the above there is difference in total of second column for Rs. 45700/-. The correct total of this column is Rs. 711792785 and not of Rs. 711747085, therefore the difference of opening balance of unsecured loan is Rs. 33242175 and not Rs. 33196475 as stated in the body of assessment order.

During the assessment proceedings the Ld AO has asked the detail of opening and closing unsecured loan of the assessee company. The same has been submitted. In such detail of unsecured loan the assessee company has classified balance of following parties as unsecured loan during the year under consideration, which had been classified in earlier year as sundry creditors under the head current liabilities:

Bhaskar Publication and Allied Industries P Ltd Rs. 4071430 Bhaskar Exxoils Ltd. Rs.28813969 Bhaskar Industires Ltd. Rs. 356776 Total Rs. 33242175 The Ld A has not asked the reason of difference and also not given any opportunity to explain the difference and arbitrary added this difference to the total income of the assessee. Had the Ld AO been asked during the assessment proceedings the reason of difference, the same could have been explained, but the Ld AO has opted an easy option without informing/ asking to the assessee or giving proper opportunity to explain, added this amount into total income of the assessee and create a huge demand on assessee company which against the natural justice. Further, it is worthwhile to mention here that the Ld AO asked the confirmation from the parties including the parties listed at above i.e. Bhaskar Publication and Allied Industries P Ltd, Bhaskar Exxoils Ltd and Bhaskar Industires Ltd, and the same has been submitted to the Ld AO vide letter dt. 25.11.2010. Such confirmations are on records and the Ld AO has not raised any further query about outstanding balances of such parties during the assessment proceedings. In such situation the arbitrary addition made by the Ld AO is nothing but the shown the desire of 73 the Ld AO to make a high pitch assessment order by making huge addition without giving opportunity to the assessee and creating huge demand and put the assessee in trouble. In such situation our humble request to your good self that such type of addition must be deleted and assessee company is entitled to get relief. "

32. By the impugned order, the CIT(A) deleted the addition after having the following observations :-

"4.3 On examination it is ound that the adition result of change in classification of the head in balance sheet. The facts of the case are that the appellant has taken advances from the three parties in earlier year which were shown under the head sundry creditors. In the year in appeal the advances from these parties are shown under the head unsecured loan. This fact is clear from examination of record. Since the only head of account in the balance sheet has changed there is no valid reason for making the impugned addition. In view of the above, the impugned addition of Rs.33196475/- is deleted. This ground of appeal is allowed."

33. Rival contentions have been heard and record perused. We find that the Assessing Officer has made 74 addition of Rs. 3,31,96,475/- on the plea of change in heads of loan as was appearing in the balance sheet. We find that the assessee has taken loans from three parties in earlier year which was shown under the head "sundry creditors. During the year under consideration advances from these parties were shown under the head 'unsecured loans'. It is clear from examination of balance sheet placed before the lower authorities which clearly indicate that there is only change in head of account in the balance sheet. There is no reason to make the addition on the belief that there is change in heads in respect of sundry creditors. A detailed finding has been recordered by the CIT(A) to this effect in para 4.3 of his order which do not require any interference on our part.

34. In the result, all the appeals of the revenue as well as of the assessee are dismissed.

    Sd                                    sd
(JOGINDER SINGH)                  (R.C. SHARMA)
JUDICIAL MEMBER               ACCOUNTANT MEMBER
Dated - 5th April, 2013

Copy to : Appellant/Respondent/CIT/CIT(A)/DR Dn/-

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Income Tax Appellate Tribunal - Indore

Writers And Publishers Limited, Bhopal vs Department Of Income Tax on 10 October, 2006