Income Tax Appellate Tribunal - Delhi
Indo Industrial Engineers, Faridabad vs Department Of Income Tax on 30 June, 2015
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES : "C" NEW DELHI
BEFORE SHRI G.C. GUPTA, VICE PRESIDENT
AND
SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER
ITA No: 2913/Del/2011
Asstt. Year : - 2006-07
ACIT vs. M/s. Indo Industrial Engineers
Circle-II, B-Block, Plot No. 334-38,
CGO Complex, NH-IV, Sector-24,
Faridabad. Faridabad.
(PAN AAAF12703E)
(Appellant) (Respondent)
CO No. 235/Del/2011
Asstt. Year: - 2006-07
M/s. Indo Industrial Engineers vs ACIT
Plot No. 334-38, Circle-II, B Block,
Sector-24, CGO Complex, NH-IV,
Faridabad. Faridabad.
(PAN AAAF12703E)
(Appellant) (Respondent
Appellant by :Shri T. Vasanthan, Sr. DR
Respondent by :Shri Rakesh Gupta, Advocate
Shri Ashwani Taneja, Advocate
Date of Hearing :07.5.2015
Date of pronouncement : 30.6.2015
O R D E R
PER INTURI RAMA RAO, AM
This is an appeal filed by the revenue against the order of Commissioner of Income Tax (Appeals) Faridabad dated 16th March, 2011 for the asstt. year 2006-07. The revenue raised the following grounds of appeal:-
1. "On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the disallowance of interest liability of Rs. 14,28,230/- made by AO under section 36(l)(iii)of the Income Tax Act, without taking into consideration the ratio of the decision in the case of 'Commissioner of Income-tax, Bangalore vs L.K. Trust 297 ITR 53' wherein Hon'ble Court has held that 'where the interest is paid in respect of the amount borrowed for acquisition of asset, unless asset is acquired and put to use, deduction for the interest cannot be claimed. Allowing any such deduction will be contrary to the proviso to section 36(1)(iii) of the Income Tax Act, 1961'. In the instant case, the plot which was allotted to the assessee was not put to use for business purposes by the assessee during the year."
2. "On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the disallowance of interest liability of ~14,28,2301- made by Aa under section 36(l)(iii)of the Income Tax Act, by observing that "the profit generated during the year and recoveries from the debtors etc are more than the investment so made in the assets" without taking into consideration the ratio of the judgment pronounced by the Hon'ble Punjab and Haryana High Court in the case of Abhishek Industries Ltd. reported in 286 ITR 1 (P&H), wherein Hon'ble Court has opined that" the monies received as share capital, as term loans, as working capital loan, as sale proceeds etc., do not have any different colour. Whatever are the receipts in the business, they have colour of business receipts and have no separate identification. Sources have no concern whatsoever."
3. On the facts and in the circumstances of the case, the Ld. ClT{A) has erred on facts and in law in deleting the disallowance of premium of Rs.6,53,762/- paid on second partners' keyman insurance policy. In view of the circular No. 762 dated 18.02.1998, the firm can purchase Keyman Insurance policy on the life of one partner."
4. "On the facts and in the circumstances of the case, the Ld. CIT(A) has erred on facts and in law in deleting the disallowance of excess interest of Rs.91,103/- paid on unsecured loans. The disallowance was made by AO as per provisions of section 40A(2) of the Income Tax Act on the admitted fact that the prevalent interest rate during the relevant period was 12.25% as charged by the bank from the assessee firm."
5. "On the facts and in the circumstances of the case, the Ld. ClT{A) has erred on facts and in law in deleting the disallowance of commission of Rs.4,97,3001- paid to Mr. Karl Neuchal for the period prior to 01.01.2006 when there is clear mention in the agreement that "the contract relationship starts on 01.01.2006 and will end on 31.12.2008 as timeout". Thus there was stipulation regarding payment of commission starting from 01.01.2006."
6."That the appellant craves for the permission to add, delete or amend the grounds of appeal before or at the time of hearing of appeal."
2. The facts of the case are that the appellant is a partnership firm engaged in the business of manufacturing of auto components and sheet metal and fabricated components. The respondent-assesee firm filed return of income on 26.10.2006 disclosing income of Rs. 56,24,340/- for the asstt. year 2006-07. The return was processed u/s 143(1) on 22nd March, 2007. Subsequently the case was taken up for scrutiny and the assessment was completed u/s 143 (3) vide order dated 19.12.2008 at a total income of Rs. 1,46,65,599/- by the Additional Commissioner of Income Tax, Range 2, Faridabad. While doing so, the AO made the following disallowances :-
Disallowance of interest on advances for land and buildings Rs. 14,28,230/-
Disallowance on account of payment of interest to partners Rs. 91,103/-
Disallowance of the premium paid Rs. 6,53,762/- keyman insurance Disallowance of professional expenses of Rs. 4,97,300/-
Disallowance as capital expenditure of Rs. 1,42,634/- and Disallowance out of worker welfare expenses of Rs. 1 lac
3. Aggrieved by these disallowances the respondent- assessee firm preferred an appeal before the Commissioner of Income Tax (A) Faridabad who vide order dated 10th March, 2011 partly allowed the appeal. While doing so the Ld. CIT(A) deleted all the additions except in respect of item f where addition to the extent of Rs. 50,000/- was confirmed by the CIT(A). Being aggrieved by this order the revenue had come up with the present appeal.
4. We shall now deal with the above items groundwise.
Ground No. 1 relates to deletion of addition of Rs. 14,28,230/- in respect of interest paid for advances given for land proposed to be used for construction in the factory of the respondent- assessee firm. During the assessment proceedings the AO noticed that the respondent- assessee firm paid advances of Rs. 1,17,66,000/- for the land situated at 261/24, Faridabad that the land was never put to use and therefore the interest attributable to the above amount was disallowed after giving an opportunity to the respondent- assessee firm to explain why such interest should not be disallowed. In response to this, the respondent- assessee firm replied vide his letter dated 15.12.2008 that the payments for above amounts were made out of internal accruals and no borrowed funds were used for the above purposes. Therefore he submitted that no disallowance was called for. The AO placing reliance on the decision of CIT vs. Abhishek Industries Ltd. brushed aside the explanation of the respondent assessee firm and made disallowance of Rs. 14,28,230/- calculated the interest @ 12.25 of the above sum. On appeal before CIT(A) It was submitted before him that the above advances were made out of internal accruals and no borrowed funds were used. In support of this he filed copies of ledger accounts of loan accounts and he further submitted that in any event the funds were used only for business purpose and therefore he pleaded that the interest should not be disallowed . In support of this he placed reliance on the following decisions :-
SA Builders Ltd. vs. CIT (2007) 288 ITR 1(SC) Munjal Sales Corporation vs. CIT (2008) 215 CTR 105 (SC) CIT vs. Rockman Cycle Industries Ltd. (2009) 176 Taxman 21 (P&H)
5. CIT(A) after considering the submissions deleted the addition vide para 6.1 of his order by holding as follows :-
"The principle that emerges from the above discussion and judicial rulings is that when the sale proceeds and internal accruals etc. are deposited by the assesee in cash credit account or over draft account and the investment in assets is made which are not put to use in business, the disallowance of interest cannot be made only on the ground that the payments have been made from cash credit or over draft account, provided the profits generated during the year are more than the investment made in the assets. In these facts and circumstances and the principles emanating from the above judicial rulings, there appears to be no justification for disallowance of interest of Rs. 14,28,230/- when the internal accruals of Rs. 279.88 lacs of the appellant are far in excess of investment made in assets during the year. Therefore, the addition of Rs. 14,28,230/- made by the AO is deleted. The ground No. 3 of the appeal is allowed."
6. We find that the CIT(A) reached the conclusion after properly appreciating the facts governing the issue. The CIT(A) had come to the conclusion that there were enough internal accruals to make the above advances after considering the material on record. The view taken by the CIT(A) that when there is a mixture of borrowed funds and internal accruals, the presumption that the investments have been made out of internal accruals is supported by the decision of High Court of Calcutta in the case of Woolcombers of India Ltd. vs CIT,7, Taxman 188, Hon'ble Mumbai High Court in the case of Reliance Utilities and Powers Ltd. (221 CTR 435), S.A. Builders Ltd. vs. CIT (A) & Anr. (2006) 206 CTR (SC) 631.
7. Therefore Ld. DR has not brought any evidence on record in rebuttal of the facts relied by CIT(A). We therefore confirm the findings of the CIT(A) on this ground . Accordingly this ground of appeal filed by the revenue is dismissed.
8. The next ground of the appeal relates to the interest paid into on unsecured loans borrowed from the relatives of the partners of respondent-assessee firm on the ground that interest paid was excessive. The AO had disallowed the interest paid. Over and above 12.25 %. The CIT(A) after considering the facts of the issue held that the AO had not brought any evidence on record to show that the respondent assessee firm had paid to any other person interest at a lower rate of interest than paid to the relatives partners for the respondent -assessee firm and CIT(A) placing reliance on the decision of ITAT Amritsal bench in the case of Subhash Chander and Co. vs. ITO (121 TTJ 718) wherein it was held that payment of interest @ 15% per annum is reasonable and deleted the addition of Rs. 91,103/- vide para 6.2 of the order.
9. After hearing both the sides, on this ground of appeal, we are of the opinion that the AO had not brought any comparable rate of interest which is reasonable. No disallowance can be made based on mere suspicion. Therefore we are of the opinion that there is no basis to hold that payment of interest at 15% is excessive and accordingly we hereby confirm the order of the CIT(A) on this ground of appeal and therefore the ground of appeal filed by the revenue is dismissed.
10. The next ground of appeal relates to disallowance of keyman insurance policy of Rs. 6,53,752/-. The assessee firm paid premium for keyman interest policy taken in the name of two partners namely Shri S.K. Jain and Shri Anand Kumar Jain. The premium paid was Rs. 8,41,320/- and Rs. 6,53,762/- respectively. The AO while allowing the premium paid for Keyman Insurance Policy taken in the name of Shri S.K. Jain and disallowed the premium paid in respect of Shri Anand Kumar Jain by holding that the premium can be allowed as a deduction only in respect of one partner. The CIT(A) has allowed it after observing that there is no restriction under the Act that only the premium paid in respect of one person only to be allowed as deduction. He further relied on the decision of Hon'ble Coordinate bench in respect of Escorts Heart Institute & Research Centre Ltd. vs. ACIT 128 ITD 108 . The CIT(A) following the above decision held that the understanding of the AO that the assessee can purchase Keyman Insurance Policy in respect of one employee only and not more than 1 is not in conformity with provisions of law. We note that the AO had not disputed the allowability of the premium paid for keyman insurance policy. He was of the only view that the premium paid in respect of only one person can be allowed. He had no dispute at all about allowability of the keyman insurance policy premium. Similarly the provisions of the Income Tax Act does not stipulates that the premium paid in respect of only one partner or director is alone allowable. In absence of such bar we are of the opinion that deduction should be allowed and therefore we uphold the order of the CIT(A). This ground of the appeal filed by the revenue is dismissed.
11. The brief facts leading to this addition of Rs. 4,97,300/- is extracted by CIT(A) in para 6.4 of his order which is as under :-
"6.4. In ground No.6 of appeal, the appellant has challenged the disallowance of Rs.4,97,300/- out of commission. During the year, the appellant had entered into an agreement with one Mr. Karl Neuchel to promote its exports sales, for which a commission of 5% subject to monthly income of 1000 euro was fixed. The agreement was entered into on 20.03.2005 which clearly stipulated that the contract relationship was to start from 01.01.2006. During the year under appeal, the sales achieved through Mr. Karl Neuchel amounted to Rs.18,17,574j-, out of which sales of Rs.4,08,000/- were achieved upto 01.01.2006. Mr. Karl Neuchel was paid commission of Rs.6,60,000/- at the rate of 1000 euro against the bills raised by him. The AO has held that since the contract relationship started only on 01.01.2006 and there was no stipulation for making payment of commission before that date, the commission of Rs.4, 97 ,300 / - relating to the period from 01.04.2005 to 31.12.2005 was not allowable. The contentions of the appellant are that the entire commission paid Mr: Karl Neuchel was on account or services rendered by him throughout the year for which invoices were raised and all the payments were made through banking channels.Therefore, the genuineness of the expenditure and its relation to the business of the assessee was clearly established. The appellant has further contended that the specification of date in the agreement for the commencement of contractual relationship between the appellant and Mr. Karl Neuchel could not be read to mean that no commission could have been paid prior to that period. Moreover, the invoices raised for the prior period also tantamounted to agreements. The appellant also submitted a certificate from Mr. Karl Neuchel regarding the receipt of commission payment form the appellant. Which reveals that for the period from 1.4.2005 to 31.12.2005, he has been paid commission @ 1000 Euro per month. This leads to inference that commission to Mr. Karl Neuchel was paid at the fixed rate. In these facts, it is not in dispute that Mr. Karl Neuchel rendered services for the appellant throughout the year which resulted in procuring sales to the extent of Rs.18 17,584/- . The genuineness of the invoices raised by him for the period in dispute has neither been doubted by the AO nor the payment made through the banking channels. In making the disallowance, the AO has relied upon the agreement which stipulated the commencement of contractual relationship from 1.1.2006 and completely ignored the bills raised by him and payments received for the period from April to December 2005. It is correct that the sales made through him in that period were not commensurance with the amount of commission paid, but when he was paid commission at fixed rate, the quantum of sales becomes irrelevant. Therefore, the entire expenditure on commission paid to Mr. Karl Neuchel was genuine and incurred for the purpose of the business of the assesee, which is allowable as per the provision of section 37(1) of the Act. I agree with the contention of the appellant that stipulation in the contract regarding the commencement of the agreement w,e,f 1.1.2006 does not mean that athe appellant was debarred from making payment of commission for the earlier period when the services rendered by him are not disputed by the AO. Therefore, the addition of Rs. 4,97,300/- made by the AO is deleted and ground No. 6 of appeal is allowed."
12. We do not find any reason to interfere with the findings of the CIT(A), Therefore ground of appeal is allowed.
13. The next ground of appeals relates to disallowance of Rs. 1,58,482/- out of total building repair expenses amounting to Rs. 12,46,045/- holding them to be capital expenditure. On appeal before CIT(A), the CIT(A) after perusing the nature of expenditure incurred come to the conclusion that the expenditure does not result in a creation of an asset and therefore is allowed as a deduction vide para 6.5 of his order.
"6.5. In the ground No.7 the appellant has challenged the disallowance of Rs.1,58,482/- made by the AO out of building repair expenses. The appellant had claimed total building repair expenses amounting to Rs.12,46,045/ -, the detail of which revealed that an expenditure of Rs.1,58,482/- was incurred for purchasing aluminum doors/windows, flooring material, tiles etc. The AO held that these expenses resulted in the acquisition of assets of enduring nature and hence treated the same as capital expenditure. After allowing depreciation at the rate of 10%, the AO has disallowed Rs.1,42,634/-. It is seen from the assessment order that the AO has made the disallowance without confronting this issue with the appellant. The appellant contended that the expenditure was incurred for renovating its old office building and did not result in any asset of enduring nature coming into existence. It has been explained that the expenditure incurred on doors and windows was for repairing the old and worn out doors and windows of the office building. The flooring material expenditure related to replacement and change of flooring of a portion the office building and the entire expenditure was revenue in nature. I find from the detail of expenditure reproduced in the assessment order that the same relates to purchase of doors, windows and flooring material but when looking to the total expenditure of Rs.12,46045/- incurred on building repairing, the expenditure on such items clearly points to replacement only, which by itself does not bring into existence an asset of enduring nature. The term repairs or renovation means only to restore the life to former stage and does not bring a new asset into existence and it does not involve any capital expenditure. I therefore, do not agree with the contention of the AO that the expenditure of Rs.1,58,482/- debited in the repair & maintenance account of building resulted in the acquisition of a capital asset. Hence, the addition of Rs.1, 42,634/ - is deleted and this ground of appeal is allowed. "
14. The finding of CIT(A) is based on the well settled principle of law that the expenditure not resulting in creation of asset should be allowed as a revenue expenditure as held by Supreme Court in the case of Empire Jute Company Ltd. Vs. CIT 124 ITR 1. Therefore the order of CIT(A) is in conformity with the well settled principle of law, hence we uphold the order of the CIT(A) in deleting the addition and this ground of appeal filed by the revenue is also dismissed.
15. The next ground of appeal relates to disallowance of Rs. 1 lac out of the staff welfare expenses incurred. It was pleaded before Commissioner (Appeals ) that all the expenses were duly vouched and produced before AO. From the bills on record we notice that this expenditure relates to refreshment, tea, milk, Prasad provided to workers who were outside the factory and office. From these it is very clear that the vouchers are mostly not supported by bills but nevertheless it cannot b e said that the expenditure was not incurred. In the absence of any evidence on record brought by AO to say that the assessee has not incurred this expenditure, the disallowance of expenditure is not justified. On similar reasoning, we also allowed the cross objection filed by the respondent-assessee firm and therefore we dismiss the ground of appeal filed by the revenue.
CO No. 235/201116. This crosss objection is filed by the assessee firm raising the following ground of appeal :-
"1. That having regards to the facts and circumstances of the case Ld. CIT(A) has erred in law and on facts upholding the disallowance of Rs. 50,000/- out of Staff Welfare Expenses."
17. The assesee firm challenges the confirmation of addition of Rs. 50,000/- out of staff welfare expenses vide the above grounds of appeal. It was argued before us that all the expenses were duly vouched and produced before AO. From the bills on record we notice that this expenditure relates to refreshment, tea, milk, Prasad provided to workers who were outside the factory and office. From these it is very clear that the vouchers are mostly not supported by bills but nevertheless it cannot b e said that the expenditure was not incurred. In the absence of any evidence on record brought by AO to say that the assessee has not incurred this expenditure, the disallowance of expenditure is not justified. No disallowance can be made on round some basis without pointing out the defects in the books of accounts. Hence we are of the considered opinion that the CIT(A) is not justified in confirm the disallowance to the extent of Rs. 50,000/- out of staff welfare expenses.
18. The cross objection filed by the respondent assesee firm is allowed
19. In the result, the appeal filed by the revenue is dismissed and the cross objection filed by the assesse firm is allowed.
Order pronounced in the open court on 30.6. 2015.
sd/- sd/-
(G.C. GUPTA) (INTURI RAMA RAO)
VICE PRESIDENT ACCOUNTANT MEMBER
Dated: the 30th June, 2015
'veena'
Copy of the Order forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR
6. Guard File By order
Dy. Registrar
ITA Nos.2913/Del/2011& CO 235/2011
ACIT vs. Indo Industrial Engineers