ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "B" NEW DELHI
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. Nos. 1104 & 1105/Del/2012
A.Yrs. : 2003-2004 & 2008-09
ACIT, Cir. 3(1), vs. M/s Chemical Construction
New Delhi International Pvt. Ltd.,
205, Kusal Bazaar, 32-33, Nehru
Place, New Delhi 19
(PAN/GIR NO. : AAACC0282M)
AND
C.O. No. 151/Del/2012
(In ITA No. 1105/Del/2012)
A.Y. 2008-09
M/s Chemical Construction vs. ACIT, Circle 3(1)
International Pvt. Ltd., New Delhi
205, Kusal Bazaar, 32-33,
Nehru Place, New Delhi 19
(PAN : AAACC0282M)
(Appellant) (Respondent)
Assessee by : Sh. A.K. Chadha, CA
Department by : Sh. Tarun Seem, Sr. D.R.
ORDER
PER SHAMIM YAHYA : AM
These appeals by the Revenue and Cross Objection by the
assessee emanate out of order of the Ld. Commissioner of Income Tax
(Appeals) for A.Yrs. 2003-04 & 2008-09 and the appeals were heard
together and they are being consolidated for the sake of convenience
and disposed of by this common order.
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
I.T.A. NO. 1104/Del/2012 (A.Y. 2003-04)
2. The issues raised in the Revenue's appeal read as under:-
(1) The Ld. Commissioner of Income Tax (Appeals) has erred
on facts and in law in holding that the initiation of
reassessment proceeding is not sustainable in law.
(2) The Ld. Commissioner of Income Tax (A) has erred on facts
and in law in deleting addition of ` 78,10,046/- on account
of bad debts written off.
(3) The appellant craves leave for reserving the right to amend,
modify, alter, add or forego any ground(s) of appeal at any
time before or during the hearing of this appeal.
3. In this case assessee company filed its return of income on
27.11.2003 declaring taxable income of ` 1,25,93,120/-. The scrutiny
assessment in this case was completed on 30.3.2006 wherein income
of the assessee was assessed at ` 12618280/-. Assessing Officer
further noted that on perusal of assessment records reveals that
assessee had debited ` 7810046/- on account of `bad debts written off'
which are of prior period, the same was not added back to the income
of the assessee by the AO. Accordingly, the case was reopened u/s.
147. Assessee in this regard objected the reopening in this case and
stated that he has disclosed fully and truly all material facts necessary
for the assessment at the time of original assessment and there was
no reasons to believe nor there was any material on the basis of which
there was any escapement of income. The Assessing Officer was not
convinced by the above submissions of the assessee. He proceeded
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
to make the reassessment. He added the bad debt written off
amounting to ` 7810046/- to the income of the assessee.
4. Before the Ld. Commissioner of Income Tax (A) assessee
submitted that all relevant material were placed before the
Assessing Officer and the same were duly taken cognizance by the
Assessing Officer. The Assessing Officer has made all requisite
enquiries and thereafter the claim of bad debt was accepted.
Therefore, it was argued that reopening in the present case was not
sustainable as it was based on mere change of opinion on the facts
and material already available on record.
4.1 Ld. Commissioner of Income Tax (A) in this regard, noted that
genesis of reopening was to be found in the Tax Audit Report furnished
in Form no. 3CD by the Tax Auditors. Col. 22(b), of the Form 3CD
Report states that a sum of ` 7810046/- being bad debts pertaining to
prior period has been debited. Taking cognizance of this observation
of the Auditors, the Assessing Officer in the course of original
assessment proceedings had asked the assessee company to justify
(a) the claim of bad debts written off and (b) the basis on which the
amount of ` 7810046/- pertaining to prior period had been claimed in
the financial year relevant to the assessment year under consideration.
In response to the aforesaid, a detailed reply was filed on behalf of the
assessee company vide its letter dated 7.12.2005 wherein complete
details along with justification regarding claim of bad debts written off
was furnished. Considering the above, Ld. Commissioner of Income
Tax (A) held that the issue of bad debts in this case was raised and
examined by the Assessing Officer. Thereafter having taking into
consideration the explanation and documents furnished by the
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
assessee company, the Assessing Officer did not find it appropriate to
make any disallowance. Therefore, Ld. Commissioner of Income Tax
(A) held that the he was in agreement with the ld. Counsel of the
assessee company that the reopening of the assessment was based
on change of opinion or review of his own decision on the same facts
of the case. Ld. Commissioner of Income Tax (A) further noted that
the fact that the auditors have made an observation in Form no. 3CD
that the amount of ` 7810046/- was pertaining to the prior period was
also duly taken into account by the Assessing Officer and detailed
enquiries were made at the time of original assessment. Therefore,
Ld. Commissioner of Income Tax (A) held that in the absence of any
fresh credible and cogent material being gathered by the Assessing
Officer, no reopening of earlier assessment was permissible in law.
Hence, Ld. Commissioner of Income Tax (A) held that initiation of re-
assessment proceedings in the case of the assessee company for the
assessment year under consideration was not sustainable in law.
5. Against the above order the Revenue is in appeal before us.
6. We have heard the rival contentions in light of the material
produced and precedent relied upon. We note that on the issue of
bad debt was duly enquired upon by the Assessing Officer in the
assessment u/s. 143(3) of the I.T. Act. In the Tax Audit Report as per
Col. 22(b), it was mentioned that ` 7810046/- were bad debts
pertaining to prior period. Taking cognizance of this observation in
the course of original assessment proceedings, assessee was asked to
justify (a) the claim of bad debts written off and (b) the basis on which
the amount of ` 7810046/- pertaining to prior period had been claimed
in the financial year relevant to the assessment year under
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
consideration. In response to the aforesaid, a detailed reply was
given on behalf of the assessee company vide its letter dated
7.12.2005 wherein complete details along with justification regarding
claim of bad debts written off was furnished as under:-
"Bad debts written off
Reasons for the bad debts written off during the year 2003-
04 are enclosed herewith as per Annexure-A attached.
Ledger account of each party showing the details of amount
not recovered is enclosed with the copy of project wise
trading account, which shows the year of closing of the
projects and revenue shown in the books of account by the
assessee. A project wise brief summary is given below.
Ajanta Soya Ltd.
There was no written agreement with this party because a
small item of ` 250,000/- excluding sales tax was supplied
to this customer in the assessment year 2002-03. Sales tax
of ` 10,000/- was not paid by the party they argued that
item was to be supplied inclusive of tax on ` 250,000/- and
therefore sales tax was not reimbursed by the customer
which has been written off.
Bajwa Agro Industries Ltd.
Out of total sale proceeds of ` 2,29,00,000/- a sum of `
28,19,827/- which was kept as retention money by the
customer had to be written off because the customer
refused to release the money on the following grounds:
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
1. The plant supplied by the assessee did not perform
according to the parameters laid down in the
contract. The assessee had several meetings with
the customer and had correspondence with it but of
no avail.
2. Further the customer has also filed suit against the
assessee for recovery of further sum of ` 6,70,000/-
for engaging the services of outside firm to rectify
defect purported to have occurred in the
installation of the above plant. This was resisted
by the assessee.
Due to the above the assessee feels it was pointless
carrying the above debit in its books and the
amount was transferred to bad debts account
during the year under assessment.
Chand Vanaspati Ltd.
This project was closed in the assessment year 1995-
96. Total contract value of ` 158,00,000/- was shown
as sales in revenue account. Copy of trading account
extracted from the balance sheet of relevant year and
ledger account of customer is enclosed herewith for
your kind perusal.
We found that Chand Vanaspati has gone into
liquidation therefore assessee was forced to write off
balance amount as not recoverable in case any
amount is subsequently recovered from the liquidator
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
it will be offered to tax by the assessee.
Correspondence on the matter is enclosed.
Diamond Agro Industries Ltd.
Total contract value of this project was ` 205,00,000/-
sales were shown in the assessment year 1995-96.
Small part of retention money ` 300,000/- was to be
received.
In the assessment year 2003-04 it was found that
company is unable to honour the debts due to
bankruptcy. Therefore assessee ultimately decided to
write off the retention money as bad debts.
Correspondence on the matter is enclosed.
Goetze India Ltd.
This project was established for by Escorts for
processing 400 tone per day mustered oil at Alwar
(Rajasthan) having a total contract value of ` 271.00 lakhs.
In comparison to the total contract value a small amount
of ` 401,402/- against retention money was not released by
the customer after waiting a reasonable time with no
response from the customer, the balance was written off.
Prashant India Ltd.
The project was disputed with the customer on the
matter of satisfactory trial run. Matter was presented
before the Solvent Extraction Association of India. Various
evidences of the dispute are enclosed herewith for your
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
kind perusal. Retention money forfeited by the customer
has been written off in the A.Y. 2003-04.
Other projects
Other project involves the retention money which was
forfeited by the customer. As per nature of the business
retention is an inherent loss in the contract accounting.
Copy of correspondence made to the parties from time to
time to recover the outstanding balances are enclosed with
Annexure.
Statement showing the details of bad debts written off
during the A.Y. 2003-04
S.No. Name of project Sales value Project Amount
closed in W/off
A.Y.
1 Ajanta soya ltd. 250000 2002-03 10000
2 Bajwa Agro Oils 22900000 1997-98 2819827
Ltd.
3 Chand Vanspati 15800000 1995-96 1170163.75
4 Diamond Agro 20500000 1995-96 300000
Industrial Ltd.
5 Goetze India Ltd. 27150000 1995-96 401402
6 Jindal Proteins Ltd. 5600000 1999-2000 388390
7 N.K. Oil Induct Ltd. 13000000 1998-99 478081
8 Nutech Agro Oils 4297915 1996-97 255783
Ltd.
9 Prashant India Ltd. 5900000 1998-99 1318385
10 Raj Solvex Induct 13520770 1999-2000 268014
Ltd.
11 VRV Breveries & 6875000 1996-97 400000
Bottling
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
6.1 Assessing Officer has duly considered the aforesaid reply and
having satisfied himself with regard to the admissibility of the bad
debts, Assessing Officer did not make any addition in the original
assessment.
6.2 Thus, we are in agreement with the Ld. Commissioner of Income
Tax (A) finding that the issue of bad debts was raised and examined
by the Assessing Officer and thereby having considered the
explanations and documents of the assessee company, he did not find
it appropriate to make any disallowance / addition. Thus, we agree
with the Ld. Commissioner of Income Tax (A) that reopening in this
case was based on change of opinion or review of his own order by
the Assessing Officer on the same set of facts.
6.3 We further note that the fact that auditors have made an
observation in Form no. 3CD that the amount of ` 7810046/- was
pertaining to the prior period was also duly taken into account by the
Assessing Officer and detailed enquiries were made at the time of
original assessment. Hence, we are in agreement with the Ld.
Commissioner of Income Tax (A) held that in the absence of any fresh
credible and cogent material being gathered by the Assessing Officer,
no reopening of earlier assessment was permissible in law. In this
regard, we place reliance upon the Hon'ble Apex Court decision in the
case Foramer France : 264 ITR 566 (SC) wherein it was held that the
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
reassessment on change of opinion is not permissible. Accordingly, we
do not find any infirmity in the order of the Ld. Commissioner of
Income Tax (A) and hold that the re-assessment proceedings in the
case of assessee company for the assessment year under
consideration was not sustainable in law.
6.4 Since we have already quashed the reassessment on account of
jurisdiction itself, the issue on the merit raised in the appeal is now
only academic. Hence, the same is not being dealt with.
7. In the result, the appeal filed by the Revenue stands dismissed.
I.T.A. NO. 1105/Del/2012 (A.Y. 2008-09)
8. The grounds raised in the appeal read as under:-
1) The Ld. Commissioner of Income Tax (A) has erred on facts
and in law in deleting disallowance of ` 20,16,607/- on
account loss in contract receipts.
2) The Ld. Commissioner of Income Tax (A) has erred on facts
and in law in deleting disallowance of expenditure of `
10,12,000/- incurred on gold sponsored fee and registration
fee for the conference on Bio Diesel.
3) The appellant craves leave for reserving the right to
amend, modify, alter, add or forego any ground(s) of
appeal at any time before or during the hearing of this
appeal.
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CO NO. 151/DEL/2012
9. Apropos ground no. 1
The assessee company was engaged in the business of drawing,
design, engineering and supply of machinery and equipments for
edible oil and bio diesel plants. During the asstt. proceedings, it was
noticed by the Ld. Assessing officer that the appellant company had
claimed loss of ` 20,16,607/- against the project undertaken on behalf
of M/s. Godrej Agrovet Limited. Accordingly, the appellant company
was required to furnish the necessary details of the loss in question
and justification for admissibility thereof. In response to the aforesaid,
a reply was filed on behalf of the appellant company vide letter dated
14.12.2010. In the said reply, it was stated on behalf of the appellant
company that the loss in question pertains to the supply and erection
of plant and machinery of M/s. Godrej Agrovet Limited during the
financial year 2006-07 and 2007-08. It was explained that during the
F.Y. 2006-07, the appellant had completed the project of M/s. Godrej
Agrovet Limited and recorded sales of Rs.4,05,62,254/- and GP of Rs.
32,06,679 was disclosed thereon.
It was submitted that there were certain defects in the project
completed in the case of M/s. Godrej Agrovet Limited and necessary
rectification/removal of defects had to be undertaken during the F.Y.
2007-08 relevant to the asstt year under consideration. The total cost
of rectification of defects amounted to Rs. 27,19,507 against which
only a sum of RS.7,02,900/- was reimbursed by M/s. Godrej Agrovet
Limited. The resultant loss of RS. 20,16,607/- was debited by the
appellant company to the profit and loss account for the F.Y. 2007-08
relevant to the asstt year under consideration. The aforesaid
explanation of the appellant company was not found acceptable by the
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
Assessing Officer and the same was rejected. Thereafter, the Ld. AO
made the impugned addition.
10. Considering the assessee's submissions in this regard Ld.
Commissioner of Income Tax (A) held as under:-
"I have carefully considered the submissions made on
behalf of the appellant company and the findings
recorded by the Ld. AO. On consideration, I find that
the claim of loss of RS.2016607/- has been sustained
by the appellant company in the normal course of
business. It is a established business practice that in
cases of setting of plant and machinery/
manufacturing units, normally, performance
guarantee and warranty agreements are executed
between the supplier of plant and machinery and the
buyer. Therefore, any defects/mistakes pointed
out/detected during the currency of
warranty/performance guarantee, it is the contractual
obligation on the part of the supplier to remove those
defects. In the present case also, the loss of
RS.2016607/- has been sustained by the appellant
company on account of rectifications carried out with
respect to the palm oil mill established at Pothapalli
(Andhra Pradesh) and supply of Hydraulic Bunch
Hopper and skid steer system. The complete
description of spa res/system installed during the F.Y.
2007-08 relevant to the asstt year under consideration
have been furnished by the appellant company and
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
reproduced in this order in para 3.5 above. In this fact
situation, I do not find myself in agreement with the
Ld. AO that the appellant company has not established
the factum the loss being sustained in the course of
normal business activities. On a perusal of the paper
book filed before me, I find that the appellant
company has furnished detailed explanation in regard
to transactions with M/s. Godrej Agrovet limited and
loss of RS. 20,16,607/- vide letter dated 14.12.2010. In
the said letter, it has been clearly stated that in the
F.Y, 2006-07, the appellant company had not created
any provision for carrying out rectifications/removal of
defects etc. and therefore, the actual expenses net of
reimbursement made by M/s. Godrej Agrovet limited
was only claimed in the year of incurring of
expenditure of RS.27,90,507/-. In view of the
aforesaid, I have no hesitation in holding that the
finding of the-Ld.AO that necessary details have not
been made available to him is opposed to the facts on
records. Accordingly, the disallowance of ` 20,16,607/-
is being deleted."
11. Against the above order the Revenue is in appeal before us.
12. We have heard the rival contentions in light of the material
produced and precedent relied upon. We find ourselves in agreement
with the Ld. Commissioner of Income Tax (A) that the claim of loss of `
RS.2016607/- was sustained by the assessee company in the normal
course of business. We note that it is an established business practice
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
that in cases of setting up of plant and machinery/ manufacturing
units, normally, performance guarantee and warranty agreements are
executed between the supplier of plant and machinery and the buyer.
Therefore, any defects/mistakes pointed out/detected during the
currency of warranty/performance guarantee, it is the contractual
obligation on the part of the supplier to remove those defects. In the
present case we also note that the loss of RS.20,16,607/- was
sustained by the assessee company on account of rectifications carried
out with respect to the palm oil mill established at Pothapalli (Andhra
Pradesh) and supply of Hydraulic Bunch Hopper and skid steer system.
In assessment year 2007-08 the assessee company had received two
purchase orders on 31.7.2006 and 11.1.2007 for ` 38,50,00,00/- and `
47,72,250/- respectively to establish palm oil mill at Pothapalli (Andhra
Pradesh). The assessee company started the project in financial year
2006-07 and conducted trial run on 15.3.2007. On commissioning the
plant, the assessee company raised an aggregate bill of `
4,05,62,254/- and against which cost of ` 3,73,55,575/- was debited.
Thus, the project undertaken on behalf of M/s Godrej Agrovet Ltd. had
resulted into profit of ` 32,06,679/- in F.Y. 2006-07 and the same was
offered to tax in the return of income for the A.Y. 2007-08.
12.1 Subsequently, the assessee company received certain complaints
regarding setting up of palm oil mills at Pothapalli (A.P.) and as per the
agreement between the assessee and M/s Godrej Agrovet Limited, the
assessee company was under obligation to remove / carry out
rectification with respect to the project completed in F.Y. 2006-07. We
further note that the assessee's submission that as per the final
performance guarantee executed by the assessee company with M/s
Godrej Agrovet Limited on 24.8.2007 and as per the mechanical
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
warranty undertaken for a period of 12 months from the date of
commissioning of the plant, the assessee company was obliged to
undertaken rectifications and remove defects, etc. upto 31.3.2008.
Thus, we find ourselves in agreement with the Ld. Commissioner of
Income Tax (A)'s observation that it has not been established by the
Assessing Officer that the assessee company had incurred the loss in
normal business activity. Accordingly, we do not find any infirmity in
the order of the Ld. Commissioner of Income Tax (A), hence, we uphold
the same.
13. Apropos ground no. 2
On this issue during the financial year relevant to the assessment
year under consideration, the assessee company had incurred a sum
of Rs. 10.12 lacs on account of payment of membership fee and
registration fee to Bio Diesel Association. Accordingly, the Id. Assessing
Officer required the assessee company to explain as to why the
amount in question should not be disallowed as capital expenditure.
In response to the aforesaid, it was explained on behalf of the
appellant that the assessee company has claimed Rs. 10 lacs on
account of gold sponsorship fee for attending conference held by Bio
Diesel Association and the balance of Rs. 12000/- has been paid for
registration etc. It was submitted that the expenditure in question was
recurring in nature and the appellant company has to make such
payments on year to year basis to cater the quality products for its
customers. It was argued that the payment of Rs. 10.12 lacs has not
resulted into acquisition of any capital asset nor any right of
permanent character has been obtained as a result of the aforesaid
payment. It was argued that the said expenditure was incurred with a
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view to assist/facilitate the trading operations of the appellant
company. It was therefore submitted that the payment in question was
allowable u/s 37(1) of the IT Act. 1961. However, the aforesaid
explanation did not find favour with the Id. AO and the same was
rejected. The case of the Id. AO was that the payment of Rs. 10 lacs for
securing membership of Bio Diesel Association was a benefit of
enduring nature and hence, the same was to be treated as capital
expenditure.
14. Upon assessee's appeal Ld. Commissioner of Income Tax (A)
noted that Assessing Officer has not brought any material on record
to substantiate his finding that the expenditure has secured any
benefit of enduring nature to the assessee company. Accordingly,
Ld. Commissioner of Income Tax (A) held that the expenditure was not
of capital nature and hence the disallowance made by the Assessing
Officer was deleted.
15. Against the above order the Revenue is in appeal before us.
16. We have heard the rival contentions in light of the material
produced and precedent relied upon. We note that the expenditure in
this case has been incurred in connection with enabling engineers and
other technical staff to participate in conferences and discussions
organized by the Bio Diesel Association of India. The discussion held
in the conferences were academic in nature and highlight the
constraints faced by the industry and the new technologies and trends
emerging as a result of globalization of economy. The problem faced
in day to day working of bio diesel industry also come up from
discussions and suggestions made during such discussions help the
technical staff in solving the day to day problems. Therefore, we
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agree with the Ld. Commissioner of Income Tax (A) that it was with a
view to update the knowledge of engineers and technical staff and
therefore, has to qualify as revenue expenditure. Accordingly, we do
find any infirmity in the order of the Ld. Commissioner of Income Tax
(A), hence, we uphold the same.
17. In the result, the Revenue appeal stands dismissed.
18. Assessee's Cross objection No. 151/Del/2012 (A.Y. 2008-09)
19. The grounds raised in the C.O. read as under:-
1) That Ld. Commissioner of Income Tax (A) has erred in
confirming disallowance of alleged interest of ` 87,448/- in
respect of sister concerns when, on the contrary, the
company had own funds of ` 3,85,51,138/- and there was no
finding of nexus between borrowed funds with advances of
` 10,93,100/- given to sister concerns and Ld. Commissioner
of Income Tax (A) erred in not considering jurisdictional
Delhi High court judgement in the case of C.I.T. vs. Tin Box
Company reported in 260 ITR 634 (Del)
2) That the appellant company craves leave to add, alter,
delete, amend, modify or vary cross objections before or at
the time of hearing of appeal.
20. In this case in the course of assessment proceedings it was
noticed by the Id. Assessing Officer that the assessee company has
granted unsecured interest free loans to its sister concerns, namely,
M/s Asian Spice Extracts Ltd. and M/s. Terra Safe Technologies (P) Ltd.
He further noticed that a sum of Rs. 2,22,62,252/- was recoverable
from another sister concerns namely M/s Chemical Construction (P)
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ITA NOS. 1104&1105/DEL/2012 &
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Ltd. Therefore, he was of the view that part of the interest payment of
Rs. 1,13,13,951- was disallowable proportionately on account of
interest free advances given to the sister concerns. Accordingly, the
appellant company was required to furnish explanation in this regard.
In response to the aforesaid, a detailed reply was filed on behalf of the
appellant company vide letter dated 14.12.2010. It was explained that
the amount of Rs. 2,22,62,252/- was outstanding against M/s. Chemical
Construction (P) Ltd. as on 31.03.2008. The advance in question was
made against purchase of equipments and material from the said
concern. It was explained that as against the advance of Rs.
2,22,62,252/-, equipment/material of Rs. 3,28,19,738/- was actually
purchased from the aforesaid concern in the immediately succeeding
year. Therefore, it was submitted that the advances made to the sister
concerns were relating to normal business of the appellant company
and therefore, no disallowance was called for. However, the aforesaid
explanation was not accepted by the AO and the same was rejected.
Thereafter, the disallowance in question has been made by the
Assessing Officer.
20.1 In the course of appellate proceedings before the Ld.
Commissioner of Income Tax (A), it was argued by the Id. counsel that
the Assessing Officer was not justified in making disallowance of Rs.
56,86,768/- on adhoc basis. It was submitted that the advances to
Asian Spices Extracts Ltd., terra Safe Technology (P) Ltd. and Chemical
Construction CO. (P) Ltd. were made in normal course of business and
thus, were commercial loans and not interest free loans as held by the
Assessing Officer. It was submitted that the appellant company is in
the business of setting up of big manufacturing units and for this
purpose requires supply of spare parts, equipments and services of
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engineers and technical staff. The aforesaid three companies have
been supplying these necessary services to the assessee company
and against rendering of such services payment of advances becomes
a business necessity. Therefore, the advances in question have been
made as a business necessity and not with a view to give any undue
advantage to the said concerns. Further, the advances given to the
sister concerns have not resulted into any financial burden to the
appellant company as the interest free funds far exceed the total
amount of advances given to the sister concerns.
21. Considering the above, Ld. Commissioner of Income Tax (A) held
as under:-
"I have carefully considered the submissions made on
behalf of the appellant company and the findings recorded
by the Id. AO. On consideration, I find that the Id. AO
himself has admitted that the advance of Rs. 2,22,62,252/-
was given by the appellant company to M/s. Chemical
Construction Co. (P) Ltd. against supply of plant and
machinery and equipments. Therefore, the advance was
given by the appellant as a commercial advance arising out
of business necessity in the case of the assessee company.
Therefore, there was no justification for making
disallowance of Rs. 4,99,230/- on an adhoc basis in relation
to the advance given to M/s Chemical Construction Co. (P)
Ltd. Accordingly, the disallowance to the extent of `
4,99,230/- is being deleted. However, as regards balance
disallowance of ` 87,448/- made on account of advances
given to M/s Terra Safe Technology (P) Ltd. and Asian Spice
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ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
Extracts Ltd., I find that the appellant company has not
established any business purpose in the aforesaid cases.
Therefore, the disallowance of ` 87,448/- is justified and
being sustained."
22. Against the above order the Assessee filed cross objection before
us.
23. We have heard the rival contentions in light of the material
produced and precedent relied upon. We find that the assessee has
inter-alia submitted before the authorities below that advance to
sister concerns was given in the normal course of business of the
assessee. Further, it has been submitted that the assessee has
adequate surplus funds which was not carrying any interest to give as
advance to sister concerns. Moreover, the assessee submitted that it
is settled law that where the assessee has mixed, owned and
borrowed funds and interest free advances has been given to the sister
concern then the presumption should be taken that said advances
have been advanced out of own funds and until and unless there is a
finding that there was direct nexus between borrowed and interest free
advances no disallowance of interest can be made. The assessee
company was maintaining an overdraft a/c which has been verified by
the Assessing Officer and it can be observed that the assessee
company had mixed own and borrowed funds and there was no nexus
between the borrowed and interest free advances given to sister
company. Therefore, we agree with assessee's submissions that no
disallowance of interest could be made in the light of Delhi High Court
judgement in case of C.I.T. vs. Tin Box Co. reported in 260 ITR 634
(Del.).
20
ITA NOS. 1104&1105/DEL/2012 &
CO NO. 151/DEL/2012
24. We find that the assessee's submissions that it has sufficient
surplus funds to give as advance to sister concern has not been
rebutted by the authorities below. Moreover, the decision of the
Hon'ble Apex Court in the case of C.I.T. vs. Tin Box Co. reported in 260
ITR 634 (Del.) above also supports the case of the assessee. Under the
circumstances, we are of the considered opinion, that there is no
cogent basis of the disallowance of ` 87,448/- and accordingly, we hold
that the said interest was properly allowable in the hands of the
assessee and we set aside the orders of the authorities below and
decide the issue in favour of the assessee.
25. In the result, the I.T.A. Nos. 1104/Del/2012 (A.Y. 2003-04) &
1105/Del/2012 (2008-09) filed by the Revenue stand dismissed and
Cross Objection No. 151/Del/2012 (A.Y. 2008-09) filed by the assessee
stands allowed.
Order pronounced in the Open Court on 08/2/2013.
Sd/- Sd/-
TOLANI]
[R.P. TOLANI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date:- 08/2/2013
SRBHATNAGAR
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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