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ACIT, Cir. 3(1),New Delhi vs. M/s Chemical Construction International Pvt. Ltd., 205, Kusal Bazaar, 32-33, Nehru
February, 08th 2013
                                                               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.





                                       1
                                                       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



                                       2
                                                       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


                                    3
                                                              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


                                         4
                                                     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:


                                    5
                                           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



                         6
                                                      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

                               7
                                                       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







                                     8
                                                     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

                                    9
                                                          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.


                                       10
                                                      ITA NOS. 1104&1105/DEL/2012 &
                                                                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


                                    11
                                                        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


                                  12
                                                            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


                                     13
                                                      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

                                    14
                                                      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


                                    15
                                                    ITA NOS. 1104&1105/DEL/2012 &
                                                              CO NO. 151/DEL/2012


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

                                   16
                                                       ITA NOS. 1104&1105/DEL/2012 &
                                                                 CO NO. 151/DEL/2012


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)

                                   17
                                                        ITA NOS. 1104&1105/DEL/2012 &
                                                                  CO NO. 151/DEL/2012


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

                                    18
                                                       ITA NOS. 1104&1105/DEL/2012 &
                                                                 CO NO. 151/DEL/2012


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


                                    19
                                                        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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