Karnataka High Court
Commissioner Of Income Tax vs M/S Bellary Steels & Alloys Ltd on 29 January, 2014
Bench: N.Kumar, C.R.Kumaraswamy
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IN THE HIGH COURT OF KARNATAKA
DHARWAD BENCH
DATED THIS THE 29TH DAY OF JANUARY 2014
PRESENT
THE HON'BLE MR.JUSTICE N.KUMAR
AND
THE HON'BLE MR.JUSTICE C.R.KUMARASWAMY
ITA NO.225/2010 C/W ITA NO.226/2010 C/W ITA No.227/2010
IN ITA NO.225/2010
BETWEEN:
1. COMMISSIONER OF INCOME TAX
(CENTRAL CIRCLE) CENTRAL REVENUE
BUILDINGS, QUEENS ROAD,
BANGALORE 560 001.
2. JOINT COMMISSIONER OF INCOME TAX,
SPECIAL RANGE, HUBLI.
...APPELLANTS
(BY SRI. Y.V. RAVIRAJ, ADVOCATE)
AND:
M/S BELLARY STEELS AND ALLOYS LTD,
S.10/11, ANANTAPUR ROAD, BANGALORE.
...RESPONDENT
(BY SRI.M.V.V. RAMANA, ADVOCATE)
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THIS APPEAL IS FILED UNDER SECTION 260/A
OF THE INCOME TAX ACT 1961 AGAINST ORDER
DATED 10/02/2010 PASSED IN ITA
NO.711/BANG/2003 ON THE FILE OF THE INCOME
TAX APPELLATE TRIBUNAL "A" BENCH BANGALORE,
ASSESEE'S APPEALS ARE PARTLY ALLOWED FOR THE
ASSESSMENT YEAR 1997-98 AND 1998-99 AND
ALLOWED FOR THE ASESSMENT YEAR 1999-2000.
REVENUE'S APPEALS FOR THE ASSESSMENT YEARS
1997-98 AND 1999-2000 ARE DISMISSED.
IN ITA NO.226/2010
BETWEEN:
1. COMMISSIONER OF INCOME TAX
(CENTRAL CIRCLE) CENTRAL REVENUE
BUILDINGS, QUEENS ROAD,
BANGALORE 560 001.
2. ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE-1, BELLARY
...APPELLANTS
(BY SRI. Y.V. RAVIRAJ, ADVOCATE)
AND:
M/S BELLARY STEELS AND ALLOYS LTD,
S.10/11, ANANTAPUR ROAD, BELLARY.
...RESPONDENT
(BY SRI .M.V.V. RAMANA, ADVOCATE)
THIS APPEAL IS FILED UNDER SECTION 260-A
OF THE INCOME TAX ACT 1961 AGAINST ORDER
DATED 10/02/2010 PASSED IN ITA
NO.1154/BANG/2003 ON THE FILE OF THE INCOME
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TAX APPELLATE TRIBUNAL "A" BENCH BANGALORE,
ASSESEE'S APPEALS ARE PARTLY ALLOWED FOR THE
ASSESSMENT YEAR 1997-98 AND 1998-99 AND
ALLOWED FOR THE ASESSMENT YEAR 1999-2000.
REVENUE'S APPEALS FOR THE ASSESSMENT YEARS
1997-98 AND 1999-2000 ARE DISMISSED.
IN ITA NO.227/2010
BETWEEN:
1. COMMISSIONER OF INCOME TAX
(CENTRAL CIRCLE) CENTRAL REVENUE
BUILDINGS, QUEENS ROAD,
BANGALORE 560 001.
2. ASSISTANT COMMISSIONER OF INCOME TAX,
CIRCLE-1, BELLARY.
...APPELLANTS
(BY SRI. Y.V. RAVIRAJ, ADVOCATE)
AND:
M/S BELLARY STEELS AND ALLOYS LTD,
S.10/11, ANANTAPUR ROAD, BANGALORE.
...RESPONDENT
(BY SRI .M.V.V. RAMANA, ADVOCATE)
THIS APPEAL IS FILED UNDER SECTION 260-A
OF THE INCOME TAX ACT 1961 AGAINST ORDER
DATED 10/02/2010 PASSED IN ITA NO.45/BANG/2004
ON THE FILE OF THE INCOME TAX APPELLATE
TRIBUNAL "A" BENCH BANGALORE, PARTLY
ALLOWING THE APPEAL FILED BY THE ASSESSEE FOR
THE ASSESSMENT YEAR 1997-98.
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THESE APPEALS ARE COMING ON FOR FINAL
HEARING THIS DAY, N.KUMAR J, DELIVERED THE
FOLLOWING:
JUDGMENT
All these 3 appeals are taken up for consideration together because the parties are the same. One question of law is common in all the appeals and two different question of law do arise for consideration in the two appeals. However, the impugned order is a common order, as such, all these 3 appeals are disposed of by this common order.
2. Assessee company is engaged in manufacture of iron and steel products. It had undertaken new project consisting of power supply and integrated steel plant. For the assessment years 1997-98, 1998-99 and 1999-2000 the asessee claimed lease rentals which was debited to P and L account and deductions were claimed. During the :5: survey conducted under Section 133A of the Act in the premises of the assessee and on the basis of the materials found there and gathered, on enquires it was found that the claim of lease rentals claimed was bogus and also for the purpose of accommodating lessor companies in claiming depreciation in respect of non-existing assets. Therefore, a claim of 100% depreciation as claimed by the lessor was found to be bogus. On the other hand, enquiry relating to assessment year 1998-99 showed that the assesse had substantial creditors under the head advances against sales and sundry creditors which are reflected in the balance sheet. In fact, the Managing Director of the assessee Sri. S. Madhava filed an affidavit confirming the above facts. Therefore the Assessing Authority recorded a finding that the lease rentals paid by the assessee company and debited to P and L account need to be disallowed. Accordingly, it was :6: disallowed. The assessee contended if the lease rentals is disallowed, the said amount is allowable as an expenditure as financial charges. During the assessment year 1998-99 the total payments of lease rentals to the tune of Rs.23,99,48,2790/- was made. Out of this, an amount of Rs.1,63,10,230/- only is debited to P and L account and the balance amount Rs.22,36,38,040/- has been taken as closing work in progress/integrated steel plant. Therefore, he disallowed a sum of Rs.1,63,10,230/-. He declined to treat the said amount as financial charges and to give deductions on the ground that neither under the Income Tax Act nor in equity, a person is entitled to reap the fruits of his own misdeeds. Similarly, an amount of Rs.1,38,65,266/- and Rs.44,63,063/- were disallowed as being bogus lease rentals for the assessment years 1997-98 and 1999-2000. :7:
3. For the assessment year 1998-99, the Assessing Authority dealing with the question of advances against sales and advances for integrated plants, found a sum of Rs.71.73 crores increase in the amount compared to the previous year towards creditors and other advances. The assessee was called upon to furnish the list of parties with their postal addresses and confirm so as to discharge the onus under Section 68 of the Act. The Assessee company furnished the particulars sought for in respect of the parties for outstanding amount exceeding Rs.50,00,000/-. The particulars furnished did not show how much amount is standing to the credit of each party. Confirmations were not filed. In those circumstances, though the Managing Director, Sri. S. Madhava, by way of an affidavit admitted financial leases and not operation leases and after considering when no details of the parties or the :8: amount alleged of the creditors under various heads available are forthcoming, he admittedly felt it necessary to consider 10% of the total advances rental received during the year under consideration as not having been satisfactorily explained under Section 68 of the Act and therefore he brought to tax a sum of Rs.7,16,30,000/- under Section 68 of the Act as unexplained cash credit.
4. For the assessment year 1999-2000, the assessee had invested Rs.45.5 crores in S.N. Project Limited, Bangalore for the purpose of generation of electricity and supply it to the assessee-company. In the course of assessment proceedings, it came to light that the said S.N. Project Limited had neither generated the electricity nor supplied it to the company. It was ascertained that the said S.N.Project Limited siphoned off Rs.25.00 crores to S.N. Securities Limited as unsecured loans. It said M/s.S.N.Securities :9: Limited have pumped in the money of Rs.25.00 crores to the assessee towards purchase of shares. On the basis of the aforesaid admitted facts, the Assessing Authority held that there has been conjoint action by participating companies to siphon of the interest bearing borrowed funds for non-business purpose. The funds are routed through various associated companies for the reason therein business consideration. Therefore, the Assessing Authority held that the amount of Rs.45.5 Crores of the borrowed funds from banks and financial institutions is diverted and invested by the assessee in various associated companies is not a genuine business transaction and therefore, the proportionate interest at the prevailing rates paid by the companies amounting to Rs.4,91,65,609/- was disallowed and added back to the total income.
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5. Aggrieved by these findings of the Assessing Authorities, the assessee preferred the appeals. The Commissioner of Income Tax (Appeals), after re-appreciating the entire material on record, confirmed the said findings. It is against the said order, the assessee preferred an appeal to the Tribunal.
6. The Tribunal on the question of lease rentals, after referring to various judgments held that, unless the revenue has disputed the assessee's claim with the documentary evidence, it cannot be termed as a sham or a device. The revenue has placed more stress on the survey report rather than making discreet enquiry to pin point, where the assessee at fault. It further held that the assessee having entered into the lease agreement with various financial institutions and also made financial transactions with them, cannot be merely brushed aside. If the lease rentals as claimed : 11 : by the assessee cannot be allowed, the excess amount claimed, more than the amount, which have been taken as closing work in progress should be treated as interest paid for the financial loan, so available from the various financial institutions. Therefore, it held that in the interest of justice and equity, the transaction made by the assessee during the assessment year under dispute, were treated as financial transactions and the claims are treated as interest paid for the financial loans availed by the assessee and the assessee is entitled to claim the same as allowable deductions for the respective assessment years under dispute.
7. On the question of treating 10% of the total advances as unexplained credit under Section 68 of the Income Tax Act is concerned, it held that the Assessing Officer has not discharged the onus cast upon him to look into cash credit and make necessary : 12 : enquiry and come to a finding on such an enquiry in a proper and a fair manner. Therefore, without causing any enquiry, treating 10% of the total advances as unexplained cash credit is contrary to the spirit of the judicial precedents. Even the Appellate Authority did not make any efforts to find out the cause of such action. Therefore, it set aside the said addition as unexplained cash credit under Section 68 of the Act.
8. Insofar as interest on borrowed funds is concerned, the Tribunal did not find the factual aspect setout above, but it held that a assessee was in the process of expanding of integrated steel plant, for which considerable power was necessitated for smooth running of the said plant. Since S.N.Project Limited, a sister concern had inclined to generate the required power for the assessee, for which the assessee had advanced the funds for implementation of the said project and accordingly, the memorandum of : 13 : understanding was drawn by them, the fact, which is not in dispute. Therefore, it held that an inference can be drawn from the above narration that the project taken by S.N. Project Limited was not abandoned but it got delayed due to technical snag. The bonafide intention of the assessee was to procure the electricity for its use from S.N. Project Limited, for which it had invested Rs.45.5 crores. Due to technical snag faced by M/s.S.N.Project Limited, the proposed project could not take shape, as was expected, for which the assessee had no control over it. The Assessing Officer's assertion is that all the three companies were having Directors with common interest and shareholders. However on a perusal of the documents reveal that the total number of directors were four. Out of which the Managing Director of the assessee- S.Madhav was holding 14.28% of shares, whereas the other directors together were holding the remaining : 14 : 85.72% of shares. Therefore, it was of the view that the observations made by the Assessing Officer is lacking conviction. It held that the assessee was financially on sound footing and had advanced a sum of Rs.45.5 crores to S.N. Project Limited and not out of the loans availed from the financial institution. The said loan amount received from the financial institutions have been invested for the different purposes and not for advancing to S.N. Project Limited as alleged by the revenue. The sole intention of the assessee was perhaps out of its commercial expediency and for its own advantage. It must have entered into an agreement with S.N. Project Limited and advanced the required fund as per memorandum of understanding with an intention to buy power, which was to be generated by the S.N. Project Limited. Therefore, it was of the view that there was no diversion of funds as alleged by the authorities. By : 15 : the impugned order it granted the relief to the assessee on all three counts. Aggrieved by these orders, the revenue is in appeal.
9. This Court while admitting these appeals formulated the following substantial questions of laws in each appeal:
ISSUES IN ITA NO.225/2010:
(a) Whether the tribunal was right in law in setting aside the order of the assessing authority with regard to disallowance of lease rentals even the assessee had failed to establish the claim by producing reliable evidences in support of its claim?
(b) Whether in the facts and circumstances of the case, the tribunal was right in setting aside the order passed by assessing authority regarding addition of 10% of total creditors amounting to Rs.7.16 crores as unproved creditors under Section 68 of the Act even when assessee had not produced any : 16 : materials to show that the said creditors were genuine and not bogus?
ISSUES IN ITA NO.226/2010:
(a) Whether the tribunal was right in law in setting aside the order of the assessing authority with regard to disallowance of lease rentals even the assessee had failed to establish the claim by producing reliable evidences in support of its claim?
(b) Whether in the facts and circumstances of the case, the tribunal was right in setting aside the assessing authority's disallowance with regard to proportionate interest claimed by assessee amounting to Rs.4.91 crores even when the assessee had failed to substantiate such claim by producing substantial material in support of it and when on the said transaction was found to be a fake and bogus and the same was a colorable device used by assessee to get such allowance?: 17 :
ISSUE IN ITA NO.227/2010:
(a) Whether the tribunal was right in law in setting aside the order of the assessing authority with regard to disallowance of lease rentals even the assessee had failed to establish the claim by producing reliable evidences in support of its claim?
10. From the aforesaid material on record, it is clear that the lessor has not purchased any machinery. When no machineries were purchased, the question of leasing non-existence machinery would not arise. Therefore, the payment of rent for a property, which is not leased would not arise. That is why the Assessing Authority and the lower appellate authority rightly and concurrently held that the lease in question is a sham and it is not real. The Tribunal has not disturbed this finding that there was no purchase of machinery, there was no lease of machinery and there was no payment of lease rentals. : 18 : But strangely, it recorded a finding that unless the revenue has disputed the assessee's claim with documentary evidence, it cannot be termed as a sham or a device. When once the Managing Director admits in his affidavit that there was no purchase of materials/machinery, there was no lease of machinery and therefore, the amounts paid is not lease rentals, we fail to understand what more evidence was required to establish that the case of lease rentals pleaded by the assessee is a sham transaction or unreal transaction. Therefore, the Tribunal without any justification erred in setting aside the concurrent findings recorded by the two Courts below, which is based on legal evidence. However, after holding that the assessee is not entitled to a claim of depreciation on the lease rentals it holds that the said amount is to be treated as financial transactions and treated as interest paid for the financial loans availed by the : 19 : assessee, a finding, which is without any basis, without any legal evidence on record. When once the case pleaded by the assessee was found to be without basis and the transaction, on which reliance is placed was found to be bogus, sham and unreal, the assessee's claim is to be negatived. In the absence of legal evidence to substantiate the claim under different heads, the Tribunal without properly appreciating the material on record to find out whether such a claim has any legal basis could not have granted the relief, which it has granted. The said finding is not only contrary to law, but is contrary to the material on record. In that view of the matter, the said substantial question of law is answered in favour of the revenue and against the assessee.
11. Insofar as the unexplained cash credit of Rs.7,16,30,000/- is concerned, the Assessing Authority has clearly setout the total credit under : 20 : various heads. He called upon the assessee to furnish the list of parties with their postal addresses and confirmation, so as to discharge the onus under Section 68 of the Act. Though the assessee furnished some particulars, the details of the parties as well as the amount of the alleged creditors under the various heads were not furnished. The assessee was unable to give the total amount due to each creditor. If the assessee had given the names and addresses of those creditors, certainly the Assessing Authority would be in a position to approach them, make enquiry and then find out the correctness of the particulars furnished by the creditors. The fact that the assessee was not able to give particulars shows that all is not well with the said list. The Tribunal was relying on various judgments, where the assessee had given the names and addresses of the alleged creditors, who are all Income Tax assesses, who had also given their : 21 : P.A.N. numbers and confirmation letters were given and in those cases, except issuing notices to them, no further enquiry was conducted and the assessee was saddled with liability. In those circumstances, it was held that there is an obligation cast on the Assessing Authority to conduct an enquiry to find out the truth or otherwise of the particulars furnished by the assessee. Those judgments have no application to the facts of these cases. Particulars were sought for, complete particulars were not furnished thereby disabling the Assessing Authority to make any further enquiry. It is in those circumstances, the Assessing Authority has been very reasonable, instead of treating the entire credit, for which the particulars are not given, he has treated only 10% of the total advances as unexplained cash credit. The finding of the Tribunal that such procedure is contrary to the spirit of judicial precedents is unfounded. In view of : 22 : that, the finding recorded by the Tribunal cannot be sustained. It is contrary to law. Therefore, the said substantial question of law is answered in favour of the revenue and against the assessee.
12. Insofar as interest on borrowed funds amounting to Rs.4,91,65,609/- is concerned, the admitted position is that the assessee invested Rs.45.5 crores in S.N. Project Limited for the purpose of generation of electricity and supply of the same to the assessee. Even assuming that it was part of an integrated steel plant and because of various factors they could not manufacture the electricity and supply the same, there was no justification for S.N. Project Limited to lend a sum of Rs.25.00 crores from S.N. Securities Limited as unsecured loans. Assuming that the transaction also to be treated as bonafide transaction, absolutely there is no justification for S.N. Securities Limited to invest the said amount in : 23 : purchasing of the shares of the assessee. It is because of these inter connection between these two concerns, in which there are common directors, the Assessing Authority and the Appellate Authority rightly held that it is a sham transaction, not a bonafide one and therefore they disallowed the interest on borrowed funds. Unfortunately, the Tribunal did not look into all three transactions as one transaction. It was of the view because S.N. Project Limited did not take off and because of the memorandum of understanding entered into between the parties towards the purchase of the electricity, which is not in dispute. It was of the view that the transaction cannot be held to be a sham transaction. However, it holds that the amount of Rs.45.5 crores invested by S.N.Project Limited, is money, which the assessee had raised from the shareholders, it is not a part of borrowed amount. Absolutely there is no material to substantiate this : 24 : particular aspect, thereby the tribunal also accepts if this represents the borrowed money that transaction cannot be sustained.
13. Both the authorities below on a careful scrutiny of the material on record and on the basis of the admission of the Managing Director, which is found in the affidavit have recorded the aforesaid findings. It is based on the legal evidence. Such concurrent findings of fact has been disturbed by the Tribunal without there being any evidence to the contrary. That is not the scope of appeal, in which the appellate Authority could have interfered with the concurrent findings of fact. In that view of the matter, the said finding is also unsustainable. Accordingly, it is hereby set aside. The said substantial question of law is answered in favour of the revenue and against the assessee.
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14. For the aforesaid reasons, we pass the following order:
(i) All the three appeals are allowed.
(ii) Parties to bear their own costs.
SD/-
JUDGE
SD/-
JUDGE
Kmv/Vnp*