Income Tax Appellate Tribunal - Delhi
Laksons Footwear P. Ltd., Faridabad vs Department Of Income Tax on 2 March, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCHES: "D" NEW DELHI
BEFORE SMT. DIVA SINGH, JUDICIAL MEMBER
AND
SHRI B.C.MEENA, ACCOUNTANT MEMBER
ITA No: 2117 & 2118/Del/2011
A.Y. : 2006-07
&
A.Y.: 2007-08
ACIT, Circle II vs. M/s Laksons Footwear P.Ltd.
New Delhi Plot no.131 Sector 24
Faridabad
(Appellant) (Respondent)
Appellant by : Smt. Y.Kakkar, Sr.D.R..
Respondent by : Shri MK Mutham, Adv.
ORDER
PER DIVA SINGH, JUDICIAL MEMBER
These are appeals filed by the Revenue against separate orders dt. 20th January, 2011 pertaining to A.Y. 2006-07 and 2007-08 of CIT(A), Faridabad on identical issues. It was a common stand of the parties before the Bench that the arguments for both the appeals on behalf of the assessee and the department will be similar except the fact that in 2006-07 AY in ITA 2117/Del/11 no dividend income has been earned by the assessee. For ready reference we reproduce grounds raised in ITA 2117/Del/11.
ITA 2117 & 2118/Del/2011 Page 2 of 15
M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 "1. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred on facts and in law in deleting disallowance made by the A.O. of interest liability amounting to Rs. 19,32,077/- by invoking provisions of section 14A of the Income Tax Act, 1961 taking a view contrary to judgements pronounced by various Courts (i) 286 ITR 1 (P&H), (ii) 105 ITD 669 (ITAT Mumbai G Bench),
(iii) 89 ITD 44 (ITAT Calcutta C Bench), (iv) 97 ITJ 493 (ITAT Mumbai Bench), (v) 91 ITD 311 (ITAT Hyderabad B Bench), when the dividend income from shares of M/s Lakhani India Ltd. are not forming part of the total income by virtue of section 10(33) of the Income Tax Act and when the financial burden incurred by the assessee for acquiring these shares would have been proportionately disallowed by invoking provisions of section 14A of the Income Tax Act, 1961.
2. On the facts and in the circumstances of the case, the Ld.CIT(A) has erred on facts and in law in deleting disallowance made by the A.O. of interest liability amounting to Rs. 19,32,077/- by invoking provisions of section 14A of the Income Tax Act, 1961 in contravention of Hon'ble Punjab and Haryana High Court judgement in the case of Abhishek Industries Ltd. reported in 286 ITR 1 (P&H) as per which no nexus is required to be proved.
3. 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 relevant facts are that the A.O. observed that as per the balance sheet of the assessee the assessee had made investment of Rs.5,81,58,214/- with M/s Lakhani India Ltd., by way of investment in 670416 equity shares. It was further observed that the assessee besides share capital and reserves and surplus, has taken secured loan from Bank of India, Faridabad for Rs.1,57,20,774/- as on 31.3.2006. During the year the assessee had paid interest on loan to Bank of India amounting to Rs.19,32,077/-. The assessee was required to explain vide order sheet entry dt.13.10.2008 as to why proportionate interest in ITA 2117 & 2118/Del/2011 Page 3 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 respect of investment in sister concern/group company may not be disallowed out of interest debited to Profit and Loss account . The assessee's reply dt. 22.10.2008 is included at page 2 of the assessment order. The assessee in its reply stated that the investments are made in the earlier years and has been envisaged in a company manufacturing shoes within the group as such the investment was for the business purposes and the judgement of the Apex Court in S.A.Builders Ltd. Vs. CIT (2006), 206 CTR 631 (S.C.) is applicable. Reliance was placed upon orders in assessee's favour for 2003-04 and 2004-05 A.Ys which were decided by the CIT(A) in assessee's favour. The A.O. observed that the assessee had incurred liability for making investment in M/s Lakhani India Ltd. and payment of interest of Rs.19,32,077/-; for secured loan of Rs.1,57,20,774/- out of the total fund of Rs.4,98,64,453/- as on 31.3.2006 has been necessitated. The funds invested in the sister concern it was observed were also a part of the business funds which are locked in investment and thus carry a cost of interest because the assessee had borrowed funds on interest to meet out the business requirements. Taking into consideration the judgement of P&H High Court in the case of Abhishek Industries Ltd. reported in 286 ITR 1 (P&H) and the order of the Tribunal Kolkata A Bench in K.V.Trading Co.Ltd. vs DCIT in ITA no.924/Kol/2003 for A.Y. 1998-99 order dt. Feb.,2004 the A.O. was of the view that the assessee has maintained composite account of expenditure for both the exempted income and ITA 2117 & 2118/Del/2011 Page 4 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 non-exempted income then it is for the assessee to prove that the expenditure incurred by him was in relation to non-exempted income as it is the assessee which was claiming deduction. This is so because all material facts are in his special and exclusive knowledge. Accordingly in the circumstances it is for the assessee to prove that the expenditure incurred by the assessee was in relation to non-exempted income relying upon ITAT Kolkata Bench in the case of DCIT vs. S.G.Investments & Industries Ltd. (89 ITD 44). He was of the view that the expression "in relation to" means to bring into association or connection with. This term is equivalent to "concerning with" or "pertaining to". The term "in relation to" has broader meaning then the word "for the purpose of earning income" as used in Sec.57 (iii) of the Act. Thus holding that the amount of investment of Rs.5,81,58,214/- with M/s Lakhani India Ltd., is more than the sum total of source of funds of Rs.4,98,64,453/-. It was clear that the assessee would not have to pay any interest if there was no investment with the sister concern. As such interest of Rs.19,32,077/- was disallowed.
3. In appeal before the CIT(A) it was urged that the assessee has not made any specific borrowing for the above purpose. The payments have been made from the common kitty wherein the profits of the company are also deposited and the assessee has earned profits during the year under consideration as well as in the earlier years. Reliance was placed ITA 2117 & 2118/Del/2011 Page 5 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 upon the judgement of Bombay High Court in Reliance Utilities and Power Ltd. wherein the assessee had mixed funds interest free and Overdraft available with them. In the circumstances the presumption is that the interest free funds have been utilized for the purpose of making any investment. Reliance was also placed upon ACIT vs. Lakhani Marketing Incorporation ITA nos. 3784 & 3782/Del/2004 for A.Ys 2001- 2002 and 2002-2003. Considering these submissions the CIT(A) proceeded to decide the issue vide para 6 at pages 4 to 9 of the impugned order.
4. A perusal of the same shows that the CIT(A) was of the view that the facts regarding the investment in shares of group concern Lakhani India PLtd. And claim of interest expenditure of secured loan availed from Bank of India are not in dispute. Similarly the fact that the assessee is engaged in trading for foot wear by making purchases from group concern Lakhani India P.Ltd. and selling it to the retailers is also not in dispute. He took into cognizance copy of accounts of Lakhani India P.Ltd. in its books of accounts for F.Y. 2005-06 which according to CIT(A) established the fact that the assessee purchased goods worth Rs. 2.14 crores from Lakhani India Ltd Referring to the provisions of S.14A the CIT(A)was of the view that it is thus evident from the provisions that any expenditure incurred in earning any income which does not form part of the total income i.e. exempted income shall not be allowed as ITA 2117 & 2118/Del/2011 Page 6 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 expenditure whether the exempted income is received in a particular year or not it was concluded as of being of no consequence so long as the investment has been made in assets from which income is exempted and the expenditure has been incurred in earning such exempted income in a particular year. Considering the provisions of S.36(1)(iii) of the Act in the context of the judgement of the P&H High Court in the case of Abhishek Industries Ltd. (288 ITR 1); and S.A.Builders Ltd. vs CIT (269 ITR 535) of the Apex Court he was of the view that even if there is a nexus of borrowed funds that the funds advanced interest free the measure of commercial expediency has to be necessarily looked into before making disallowance of interest on borrowed funds. Referring to the judgement of the Apex Court in the case of Munjal Sales Corporation vs CIT 298 ITR 298 he was of the view that establishment of nexus of borrowed funds with the funds advanced interest free or invested in assets generating income which does not form total income was and remained the condition precedent to disallowance of interest on borrowed funds and the question of examining commercial expediency is a subsequent matter to be decided in terms of the judgement rendered in the case of S.A.Builders. The CIT(A) was of the view that the A.O. has not carried out inspection as to in which year and as to what extent the investment in shares was made vis a vis availability of reserves and surplus interest free and interest bearing funds and accordingly following details were culled out by him.
ITA 2117 & 2118/Del/2011 Page 7 of 15
M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 DETAIL OF INVESTMENTS MADE IN LAKHANI INDIA LTD.
S.NO. PARTICULARS NO. OF AMOUNT OF BALANCE OF RESERVES & SURPLUS SECURED
SHARES INVESTMENTS INVESTMENT LOANS
AT YAR END AS ON BALANCE
1. SHARES 1,20,610 10,85,500 10,85,500 31-3-1995 25,20,202
PURCHASED 0
IN 1994-95
2. SHARES SOLD - -1,50,250 9,35,250 31-3-1999 1,02,62,201
IN 1998-99 11,195 0
3. SHARES 1,48,830 98,89,388 1,08,24,638 31.3.2000 1,43,31,172
PURCHASED 0
IN 1999-00
4. SHARES 2,72,655 2,96,63,476 4,04,88,114 31.3.2001 1,78,98,183 3,00,00,000
PURCHASED
IN 2000-01
5. SHARES 1,27,876 1,44,08,092 5,48,96,206 31.03.2002 2,15,56,023 3,52,39,896
PURCHASED
IN 2001-02
6. SHARES 55,16,424 6,04,12,630 31.03.2003 2,21,41,979 3,39,47,068
PURCHASED 48,596
IN 2002-03
7. SHARES SOLD -37,956 -22,51,416 5,81,61,214 31.03.2004 2,49,27,821 2,56,24,406
IN 2003-04
INVESTMENT 6,69,416 5,81,61,214
AS ON
31/03/2006 &
31/03/2007
4.1. Accordingly he was of the view that it cannot be inferred that entire investment in shares has been made out on borrowed funds and investment has been made from A.Y. 1994-95, 1995 to 2000-2003 the assessee had accumulated reserves & surplus of Rs. 2.21 crores and share capital of Rs.9 lakhs upto 31.3.2003 as such he was of the view that investment in shares to the extent of Rs.2.30 crores can be inferred to have been made of reserves & surplus and share capital. Referring to the Cash flow statement filed by the assessee he was of the view that it is ITA 2117 & 2118/Del/2011 Page 8 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 evident that investment of Rs.2.21 crores in shares was made only on interest bearing unsecured loans of Rs.3 crores and since the amount of loan in the year under consideration on which interest has been claimed is less than the limit it was concluded that it can be inferred that the investment in shares was made out of interest bearing loans in F.Y. 2000-2001. The arguments of the assessee that in 2003-04 and 2004-05 and 2005-06 has deleted the additions were found to be not relevant in view of the fact that the Tribunal vide its order dt6. 16.5.09 in ITA 2233 and 4525/Del/07 had set aside the said order and restored the matter back to A.O. only for commercial expediency afresh. As such the orders of CIT(A) on which reliance has been placed it was held no longer remain in force consequent to the orders of the Tribunal.
5. In the light of this factual and legal position the CIT(A) proceeded to consider commercial expediency which he was of the view that was to be considered from the view point of the assessee in the light of business prudence. He further came to the conclusion that the assessee has not made any specific borrowings for the purpose of investment in shares and the payments have been made from the common funds wherein the profits of the company were also deposited. Considering the judgement of Mumbai High Court in the case of Reliance Utilities and Powers Ltd. 221 CTR 435 he was of the view that the said decision is applicable only when the interest free funds are sufficient to meet the investment in shares and on the other hand in assessee's case the investment in ITA 2117 & 2118/Del/2011 Page 9 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 shares exceeds profits earned over the years as seen from the Reserves & Surplus of only Rs.2.49 crores on 31.3.2004 and share capital Rs.9 lakhs as against investment of Rs.5.81 crores. Considering the arguments of the assessee that it was a commercial matter by virtue of order of Tribual in ACIT vs. Lakhani Marketing Inc. for A.Ys. 2000-2001 & 2001-2002 in ITA no. 3784/Del/2004 and 3782/Del/2004, wherein the decision of CIT(A) in deleting addition had been affirmed by ITAT against which department's appeal was dismissed by the Jurisdictional High Court and taking into consideration the judgement of the Jurisdictional High Court in CIT vs. Hero Cycles 323 ITR 518 he held that the A.O. has nowhere given a finding that the interest expenditure incurred by assessee was for the purpose of earning of dividend income only and that the borrowed funds were not used for the purpose of business but disallowed the interest only on the presumption that the investment in shares was more than the money borrowed from bank. Thus relying upon the group concern case the addition made by way of disallowance was deleted.
6. Aggrieved by which the Revenue is in appeal before the Tribunal. The ld.D.R. vehemently relying upon the judgement of Mumbai High Court in Godrej&Boyce Mfg. Co.Ltd. vs DCIT&Another, 328 ITR 81 (Bom.) submitted that their Lordships in the said judgement had nowhere laid down that disallowance cannot be made and they have laid ITA 2117 & 2118/Del/2011 Page 10 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 down that the issue has to be examined by the A.O. Similarly in the judgement rendered on 18.11.2009 by Hon'ble Delhi High Court in the case of Maxopp vs. CIT in ITA 667/2009 their Lordships have laid down elaborate directions as to how the issue has to be decided. The argument which may be advanced on behalf of the assessee that there is no income from the dividend in the year under consideration has to be considered in the light of the order of the Tribunal in the case of Renaissance Asset Management Co.Pvt. Ltd. Vs.A.O. 2 ITR (Tribunal) 765 Delhi. Referring to the provisions of the Act it was her stand that the scheme of the Act and the provision nowhere states that exempt income has to be received in a particular year and only then the disallowance can be made. It was her argument that so long as investment is made in the assets from which the income is exempted the expenditure incurred for earning such exempted income has to be disallowed whether it is earned in a particular year or not is an irrelevant argument. It was her vehement stand if the analogy advanced by the assessee is accepted then it would lead to a very precarious situation not envisaged under the provisions of the Act. Referring to the observations made in the impugned order qua the assessment order it was her stand that bifurcation pertaining to exempt income and not exempted income has to be given by assessee as it is exclusively in the personal knowledge and domain of assessee and no such exercise has been done. It was argued that separate accounts for the same have to be maintained and ITA 2117 & 2118/Del/2011 Page 11 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 evidence is required to be led by the assessee to show that it is not pertaining to the exempt income. The CIT(A) it was argued has merely accepted the bald assertions of the assessee and has arrived at inferences ignoring the fact that it is not inferences and bald statements but valid, cogent facts and evidences which can be legally accepted under law so as to support the claim that no disallowance can be made. It was argued that it is an entry by entry examination required qua each expenditure and available income which has to be demonstrated in the Cash Flow Statement by the assessee and simply accepting the bald statement of the assessee cannot satisfy a judicial and reasonable scrutiny which as per the judgements is required to be done. The decision arrived at on the basis of legal propositions where facts have not been taken into consideration it was argued is palpably wrong. As such heavy reliance was placed upon the assessment order.
7. Ld.A.R. on the other hand relying upon the impugned order contended that in 2006-07 no dividend has been earned by assessee as such he would place heavy reliance upon CIT vs. Winsome Textile Industries Ltd. 319 ITR 204 of P&H which is the jurisdictional High Court for the assessee situated at Faridabad. Reliance was also placed upon WNS Global Services P.Ltd. vs ACIT(2011), 9 ITR (Trib), 662 (Mum); and order of the Chennai Bench of the ITAT dt. 20th May, 2011 in M/s Siva Industries & Holdings Ltd. vs ACIT in ITA 2148/Mds/2010. The ITA 2117 & 2118/Del/2011 Page 12 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 reliance was placed on the impugned order for both the years and the above named judgements.
8. We have heard the rival submissions and perused the material available on record. On a careful consideration of some it is seen that the CIT(A) has made an exercise of considering the investment in shares of Lakhani India Ltd. vis-à-vis the availability of reserves and surplus, interest free funds and interest bearing funds on the basis of which he came to the conclusion that it cannot be inferred that the entire investment in shares has been made out of the borrowed funds. Therefore he has gone on to consider commercial expediency and also the contention that the payments have been made from the common funds wherein the profits of the company were also deposited. For this he came to the conclusion that the principle laid down in Reliance Utilities and Power 221 ITR 435 (Mum) would apply only when the interest free funds are sufficiency to meet the investment in shares whereas in assessee's case investment in shares exceeds the profits earned over the years.
8.1. Whereas for commercial expediency he has discussed that the concept of commercial expediency is very wide but the main guiding factors in determining the 'commercial expediency' are whether the business of the appellant is likely to be closed or adversely affected had no such investment been made or whether such an investment would have direct effect in earning of more income or whether the investment ITA 2117 & 2118/Del/2011 Page 13 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 would result in further expansion of business of Lakhani India Ltd. leading to more and wider opportunities for the assessee to expand its own business and earn higher income. The aspects are required to be seen from the view point of assessee in the context of 'business prudence'.
8.2. In the case of the assessee the CIT(A) has followed the Jurisdictional High Court's decision rendered in the case of a group concern namely Lakhani Marketing Incorporation for 2000-2001 A.Y. and lack of finding given by the Assessing Officer that interest expenditure income by the assessee was for the purpose of earning of dividend income only and the borrowed funds were not used for the purpose of business and has been faulted for making a disallowance of the interest on the presumption that investment in shares was more than the money borrowed from the bank. The A.O. it is seen on the other hand has faulted the assessee for failing to prove that the expenditure incurred by him is in relation to non-exempted as it is the assessee who is claiming a deduction especially since these are material facts in the special and exclusive knowledge of the assessee. 8.3. In the light of the aforementioned peculiar facts and circumstances, we are of the view that it is appropriate to restore the issue back to the file of the A.O. as it is seen that on facts no material has been brought on record by the CIT(A) to conclude that facts qua the group concern namely Lakhani Marketing Incorporation in 2000-2001 ITA 2117 & 2118/Del/2011 Page 14 of 15 M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08 A.Y. are exactly identified to the facts of the assessee in A.Y. 2006-07 and 2007-08. It is seen that no such exercise has been done by the A.O. Accordingly, the applicability of the facts pertaining to commercial expediency as considered in the facts of group concern needs to be aeen and brought on record. The A.O. shall in the light of the judgements of the Apex Court and Jurisdictional High Court shall examine and discuss each and every time funds were advanced by the assessee to Lakhani India Ltd. in the context of 'nexus' and 'commercial expediency' as has been laid down by the Apex Court in the case of S.A.Builders 288 ITR 1(SC) and Munjal Sales Corporation 298 ITR 298 (SC). Thus not only the facts qua the Lakhani Marketing Incorporation stated to be identical to assessee's case in the context of 'commercial expediency' need to be taken into consideration but also the finding in assessee's own case in 2003-04 and 2004-05 A.Ys is also relevant as the issue in the earlier years in the case of the assessee has been restored to the A.O. vide order dt. 16.4.2009 in ITA 2233 and 4545/Del/2007. Accordingly after marshalling the facts, the case law can be applied. 8.4. Accordingly for the detailed reasons given hereinabove the issue is restored to the file of the A.O. for both the years with the direction to decide the same in accordance with law by way of a speaking order. Needless to say that the assessee shall be afforded a reasonable opportunity of being heard.
ITA 2117 & 2118/Del/2011 Page 15 of 15
M/s Laksons Footwear P.Ltd.
A.Y. 2006-07 & 2007-08
9. In the result the appeals of Revenue are allowed for statistical purposes.
Pronounced in the open court on 2nd March, 2012.
Sd/- Sd/-
(B.C.MEENA) (DIVA SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 2nd March, 2012
*manga
Copy of the Order forwarded to:
1. Appellant; 2.Respondent; 3.CIT; 4.CIT(A); 5.DR; 6.Guard File By Order Dy. Registrar // C o p y //