, " "
IN THE INCOME TAX APPELLATE TRIBUNAL" D" BENCH, MUMBAI
BEFORE HON'BLE S/SHRI VIJAY PAL RAO (JM), AND B.R.BASKARAN (AM)
, .. ,
./I.T.A. No.3805/Mum/2004
( / Assessment Year : 1998-1999)
Ranjit Holdings Pvt.Ltd., / Addl. Commissioner of Income Tax
445, Mandhan Manor, Special Range-36,
Vs.
C-Wing Moghul Lane, Mumbai-400038
Matunga Road (W),
Mumbai-400016
( /Appellant) .. ( / Respondent)
./I.T.A. No.4103/Mum/2004
( / Assessment Year : 1998-1999)
The Income Tax Officer / Ranjit Holdings Pvt.Ltd.,
Ward 9(3)(4), 445, Mandhan Manor,
Vs.
255, 2nd floor, Aayakar Bhavan, C-Wing Moghul Lane,
M K Road, Matunga Road (W),
Mumbai-400020 Mumbai-400016
( /Appellant) .. ( / Respondent)
. / . /PAN/GIR No. :AAACR2731C
./I.T.A. No.3803/Mum/2004
( / Assessment Year : 1998-1999)
Pelican Syntex Pvt.Ltd., / Addl. Commissioner of Income Tax
445, Mandhan Manor, Special Range-36,
Vs.
C-Wing Moghul Lane, Mumbai-400038
Matunga Road (W),
Mumbai-400016
( /Appellant) .. ( / Respondent)
./I.T.A. No.4572/Mum/2004
( / Assessment Year : 1998-1999)
Income Tax Officer, / Pelican Syntex Pvt.Ltd.,
9(2)(4), 445, Mandhan Manor,
Vs.
Room No.261, C-Wing Moghul Lane,
Aayakar Bhavan Matunga Road (W),
M K Road, Mumbai-400016
Mumbai-400020
( /Appellant) .. ( / Respondent)
ITA No.3805/M/2004, ITA 4103/Mum/2004,
2 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
. / . /PAN/GIR No. :AAACP-3110-B
/: Assessee by Shri Rajiv Khandelwal and
Shri Neelkanth Khandelwal
/ Revenue by : Shri Love Kumar
/ Date of Hearing : 28.04.2015
/Date of Pronouncement : 30.4.2015
/ O R D E R
Per Bench:
These cross-appeals are directed against the orders passed by the
ld. CIT(A)-9, Mumbai and they relate to the assessment year 1998-99.
Since one of the issues urged in the appeals filed by both the assesses is
identical in nature, these appeals were heard together and are being
dispose of by this common order, for the sake of convenience.
2. First we shall take up the appeal filed by the assessee named as
M/s Ranjit Holdings Pvt.Ltd.(I.T.A.No.3805/Mum/2004).
2.1 The assessee is engaged in the business of Investment and
Financing and also it deals in shares. During the year under consideration,
the assessee has claimed a sum of Rs.53.40 lakhs relating to
compensation paid by it as deduction under the head "Finance Expenses".
The AO noticed that the assessee had received an advance of Rs.2.50
crores from a group company named as M/s Welspun India Ltd. for
arranging supply of cotton for the period from 27.3.1997 to 30.6.1997.
However, the assessee did not arrange the supply of cotton as per the
agreement. Hence, upon reaching a settlement over the dispute that
arose in connection with the breach of agreement, the assessee paid a
sum of Rs.53,40,600/- as compensation to M/s Welspun India Ltd. and
ITA No.3805/M/2004, ITA 4103/Mum/2004,
3 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
claimed the same as deduction. The AO examined the said claim and made
following observations:
a) The assessee has tried to trade in an area which is not its
business activity;
b) Before entering into an agreement with M/s Welspun Terry
Towels (a unit of M/s Welspun India Ltd.), the assessee has not
carried out any market research.
c) The assessee did not have experienced staffs or expertise in
procuring of cotton;
d) The assessee has used the advance of Rs.2.50 crores received
from M/s Welspun India Ltd to re-pay the loan taken by it from M/s
Dhanush Engineering Co.P.Ltd. Thus, the assessee was very much
clear in its mind as to how the advance amount received from M/s
Welspun India Ltd is to be used i.e. assessee did not have any
intention to use the money for purchase of cotton;
e) The assessee did not purchase cotton on behalf of M/s
Welspun India Ltd;
f) Though the assessee has claimed that the price of cotton has
gone up and hence, it could not supply cotton at the agreed rate,
yet it is seen that the assessee has fixed a rate for contract and
another rate for settlement and accordingly paid the difference
amount as compensation. Hence, this transaction falls under the
definition of Speculative transaction as defined u/s 43(5) of the
Income Tax Act, 1961.
3. Accordingly, the AO disallowed the claim for deduction of
compensation amount of Rs.53,40,600/-, by holding the same as
expenditure related to speculative transaction. The ld.CIT(A) also
ITA No.3805/M/2004, ITA 4103/Mum/2004,
4 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
confirmed the disallowance by holding that it was a speculation loss.
Hence the assessee has filed this appeal.
4. The Ld A.R submitted that the assessee entered into an agreement
to procure cotton for M/s Welspun India Ltd and accordingly received an
advance of Rs.2.50 crores. The assessee entered into the above said
agreement on the impression that the prices of cotton would be stable till
it completes the contract. However, the cotton prices started going
upwards and hence it could not purchase the cotton and accordingly
honour the contract entered with M/s Welspun India Ltd. Hence the M/s
Welspun India Ltd was constrained to purchase cotton on its own at higher
rates. Since it had paid interest free advance of Rs.2.50 crores, dispute
arose between the assessee and M/s Welspun India Ltd. The said dispute
was settled by agreeing to pay 75% of the difference in cotton prices as
compensation. The compensation amount was arrived as under:-
Rate on the date of settlement of dispute Rs.19,400 per candy
Rate on the date of contract Rs.15,100 per candy
Difference in rate Rs.4,300 per candy
Compensation payable 75% of (1656 candy x Rs.4300) = Rs.53,40,600/-
5. The Ld A.R further submitted that the parties entered into a
Settlement agreement on 28.02.1998 and the advance amount of Rs.2.50
crores was repaid by the assessee on the very same date. Since M/s
Welspun India Ltd suffered loss and since the assessee had also failed to
comply with the contract terms, it was constrained to pay the
compensation amount to M/s Welspun India Ltd. Accordingly, the Ld A.R
submitted that the above said compensation was paid in the ordinary
course of its business and hence the same is allowable as business
expenditure.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
5 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
6. The Ld A.R further submitted that though the assessee as well as
M/s Welspun India Ltd falls in the same group, yet there are no common
directors. He further submitted that the directors of the assessee
company are well experienced in Cotton trade, which is evident from their
respective qualification. In this regard, he invited our attention to the
written submissions made before Ld CIT(A) placed at page 18 of the paper
book, wherein the details of directors are given. Accordingly, the ld A.R
contended that the assessing officer was not right in holding that the
assessee company does not have experience in cotton business. He
further submitted that the assessee has entered into the impugned
contract by passing a Board Resolution in this regard. Accordingly he
submitted that the assessing officer was not correct in doubting about the
genuineness of business transaction. He further submitted that the
manner of utilisation of advance amount is a business decision and the
same will not change the colour of the transaction.
7. The Ld A.R further submitted that the tax authorities have dubbed
the impugned transaction as a case of "Speculative transaction". He
submitted that the nature of speculative transaction has been explained in
detail in the following case law:-
(a) CIT Vs. Shantilal (P) Ltd (1983)(144 ITR 57)(SC)
(b) CIT Vs. Jaydwar Textiles (1993)(202 ITR 569)(Bom)
(c) CIT Vs. National Steel & General Mills (P) Ltd (188 ITR
571)(Del)
(d) Daulatram Rawatmal Vs. CIT (1970)(78 ITR 503)(Cal)
The Ld A.R submitted that the compensation paid for breach of contract
cannot be considered to be speculative loss as held in the above cited case
laws and hence the compensation paid by the assessee is allowable as
business expenditure.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
6 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
8. On the contrary, the Ld D.R submitted that the assessee's main
business activity is investment and finance and it was not engaged in
cotton business. He submitted that the so called agreement entered
between the parties was only a make belief arrangement only, since both
the parties belong to the same group. He submitted that the assessee has
used the advance amount received by it to repay the loan and hence there
was no intention to procure and supply cotton to M/s Welspun India Ltd.
He further submitted that the Agreement entered between the parties did
not contain "Compensation clause" and hence the impugned payment is
not covered by the Agreement. Accordingly he submitted that the
assessee has simply entered into a speculative transaction and the
compensation was also paid on the basis of price of cotton as on the date
of entering into the contract and the date of settlement. Accordingly he
submitted that the Ld CIT(A) was justified in treating the compensation
amount as Speculation loss.
9. We heard the parties on this issue and perused the record. We
notice that the tax authorities have considered the transaction entered by
the assessee as a case of Speculative transaction. However, the Hon'ble
Supreme Court has held in the case of Cit Vs.Shantilal (P) Ltd (supra) that
the damages paid on a dispute between the parties for breach of contract
cannot be considered to be Speculative loss. In the following case law
also, which were relied upon by the assessee, identical view has been
expressed.
(a) In the case of Daulatram Rawatmull Vs. CIT (Cal) (supra),
the assessee therein entered into contract with foreign party
for delivery of certain goods. However, the assessee could
not secure export license for shipping of goods and, therefore,
failed to supply goods contracted for. Hence an Arbitrator
was appointed in terms of contract and assessee had to pay
damages to foreign party as per award of arbitrator. It was
ITA No.3805/M/2004, ITA 4103/Mum/2004,
7 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
held that the damages paid could not be said to be
speculation loss within scope of Explation 2 of section 24(1) of
1922 Act. Accordingly it was held that the amount paid by
assessee could be allowed as deduction under section 10 of
1922 Act.
(b) In the case of CIT Vs. Jaydwar Textiles (Bom)(supra), the
compensation paid for breach of contract was not held to be a
speculative transaction within the meaning of sec. 43(5) of
the Act.
The above cited case laws support the case of the assessee. Hence, we
are of the view that the tax authorities are not correct in holding that the
compensation paid by the assessee was a speculation loss.
10. We further notice that the assessing officer has not brought any
other material on record to show that the agreement entered between the
parties was a sham agreement. He did not make any kind of enquiry with
M/s Welspun India Ltd in order to ascertain about the veracity of the
agreement. We notice that the assessing officer has drawn adverse
inferences only on the basis of documents furnished by the assessee
without disproving them. On the contrary, we notice that the assessee
has shown that it has taken a business decision by duly considering the
same in the Board meeting by passing a Board resolution. The assessee
has furnished the agreement entered between the parties and has also
given the reason for not executing contract, i.e., the upsurge in the prices
of cotton which would have resulted in loss to the assessee. We have also
noticed that the compensation has been worked out on the basis of price
of cotton prevailing on two different dates, which fact substantiate the
claim of the assessee that there was increase in the price of cotton. It is
quite natural that the damages are normally fixed on the basis of loss
suffered by a party on account of breach of contract committed by another
party. It is further seen that the assessing officer has not doubted about
the quantum of compensation determined.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
8 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
11. During the course of arguments, the ld D.R contended that the
compensation was determined without the help of an arbitrator and hence
the decision rendered by the Hon'ble Supreme Court in the case of
Shantilal (P) Ltd is distinguishable. We are unable to agree with the Ld
D.R. The question of appointment of arbitrator would arise only if the
parties in dispute could not reach an agreement. In the instant case, the
parties have settled the dispute inter-se and hence the question of
appointment of arbitrator did not arise. It is settled principle that the ratio
of the decision is binding and accordingly the ratio laid down in the case of
Shantilal (P) Ltd, in our view, squarely applies in the facts of the present
case, since the facts prevailing in the instant case has not been proved to
be wrong.
12. In view of the foregoing discussions, we are of the view that the
compensation paid by the assessee was in the nature of damages paid by
it for breach of contract entered in the normal course of business and
accordingly the same is allowable as deduction. Accordingly, we set aside
the order of ld CIT(A) and direct the assessing officer to delete the
impugned addition.
13. The assessee has filed an additional ground claiming set off of
brought forward business loss against the dividend income. However, the
ld A.R submitted that the decision taken on the issue contested by the
revenue in its appeal will have a bearing on the additional ground.
Accordingly, we take up the appeal filed by the revenue, wherein the
revenue is challenging the decision of Ld CIT(A) in deleting the
disallowance of interest expenditure.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
9 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
14. The assessee had claimed interest expenditure of Rs.19,32,500/-
paid to a group company named M/s Dhanush Engineering (P) Ltd on the
loan borrowed from it. The assessee had utilised the said loan amount for
making investment in shares. The AO noticed that the assessee had
borrowed funds from M/s Lloyds finance Ltd also, a non-group company,
and it did not pay interest due to it. The AO further noticed that the
shares purchased by the assessee company were given as security to the
loan obtained by other group companies. Hence, the AO took the view
that the fruits of investments have been enjoyed by other companies and
not by the assessee. Accordingly, the assessing officer held that the
business prudence of the assessee company and its credentials are highly
doubtful and dubious. Accordingly, the AO came to the conclusion that
the payment of interest to M/s Dhanush Engineering Co. P Ltd cannot be
justified as the same cannot be attributed to a proper and sound business
expense, since according to the AO, the borrowed funds have been utilised
for non-business purpose. The AO further noticed that the assessee had
disclosed dividend income of Rs.14,65,211/-; interest on income tax refund
of Rs.1,15,632/- and money market income of Rs.53,970/-. The AO took
the view that the assessee did not carry on any worth mentioning business
and accordingly held that the interest claim of Rs.19,32,500/- is not
allowable as business expenditure. In this regard, the AO also referred to
certain case law which dealt with the investment made for acquiring
controlling interest.
15. The Ld CIT(A) noticed that the assessee is engaged in the business
of investment and financing. Its main source of income is dividend and
interest income. It was seen that the amount borrowed by the assessee
was found invested in the shares. The Ld CIT(A) further noticed that the
assessee did not acquire any controlling interest and hence the case law
relied upon by the AO are not applicable. Accordingly, the Ld CIT(A) held
ITA No.3805/M/2004, ITA 4103/Mum/2004,
10 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
that the assessee has utilised borrowed funds in the natural course of
carrying on business and hence the interest paid by it is allowable as
normal business expenditure. The revenue is aggrieved by the said
decision.
16. We heard the parties on this issue and perused the record. It is an
admitted fact that the assessee is engaged in the business of investment
and financing. Hence investment in shares is a normal business activity of
the assessee. There is no dispute between the parties that the amount
borrowed by the assessee from M/s Dhanush Engineering (P) Ltd was used
for making investment in shares. During the year under consideration, the
dividend income received by the assessee has also been assessed to tax.
Thus, it is seen that the conditions prescribed in sec. 36(1)(iii) has been
fulfilled by the assessee. During the course of arguments, the Ld A.R
submitted that the interest payment made to M/s Dhanush Engineering (P)
Ltd was allowed as deduction in scrutiny assessments made for the
preceding years, viz., AY 1996-97 and 1997-98 and the said fact was not
disputed by the assessee. Under these set of facts, we are of the view
that the Ld CIT(A) was justified in holding that the assessee has utilised
the borrowed funds in the normal course of carrying on business and
hence the Ld CIT(A) was justified in directing the AO to allow the interest
expenditure claimed by the assessee. Though the AO has commented
upon business prudence etc., in our view, they are not relevant for
deciding the issue of allowing the interest expenditure. Accordingly, we
uphold the order of Ld CIT(A) on this issue.
17. Since we have upheld the order of Ld CIT(A) on the issue contested
by the revenue, the additional ground raised by the assessee, which is in
the nature of alternative plea, does not require adjudication.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
11 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
18. Now, we shall take up the appeal numbered as I.T.A.
No.3803/Mum/2004 filed by the assessee M/s Pelican Syntex Pvt.Ltd,
wherein following issues are being contested:
a) Disallowance of compensation payment of Rs.21.34 lakhs;
b) Disallowance of Bill Discounting Charges of
Rs.28.02 lakhs;
c) Disallowance of Selling Expenses of Rs.85,119/-
d) Disallowance of Sundry Balances written off Rs.4,93,480/-
19. The first issue relating to disallowance of compensation
payment is identical with the issue considered by us in the case
of M/s Ranjit Holdings Pvt.Ltd. (supra), in the preceding paragraphs. We
notice that the ld.CIT(A) has followed his order passed in the hands of
M/s Ranjit Holdings Pvt.Ltd in deciding the issue against the assessee.
Since in the preceding paragraphs, we have held that the compensation
paid by the assessee cannot be considered to be a speculation loss, by
following the same, we set aside the order of ld. CIT(A) on this issue and
direct the AO to allow the compensation paid by the assessee as normal
deduction.
20. The next issue relates to disallowance of bill discounting charges
claimed by the assessee. The ld. AR submitted that the ld.CIT(A) has
confirmed the disallowance by holding that the assessee has not furnished
any detail relating to the same. The ld. AR invited our attention to the
various details filed before both the AO as well as ld.CIT(A), which are
placed in the paper book. The ld. AR submitted that the assessee has filed
all the relevant details before the tax authorities and accordingly
contended that the ld. CIT(A) was not justified in confirming the
disallowance by stating that the assessee has not filed required details.
Accordingly, he prayed that this issue may be set aside to the file of the
ITA No.3805/M/2004, ITA 4103/Mum/2004,
12 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
ld.CIT(A) for fresh consideration. The ld. DR did not object to the plea put-
forth by the ld.AR. Accordingly, we set aside the order of ld.CIT(A) on this
issue and restore the same to his file for fresh consideration with a
direction to dispose of this issue by duly considering the information and
explanations that may be filed by the assessee.
21. The next issue relates to the disallowance of selling expenses of
Rs.85,119/-. Though the assessee has characterized the expenses as
selling expenses, we notice that they are in the nature of brokerage and
commission paid to various banks in respect of "Hundies". Hence, we are
of the view that the same is allowable as normal business deduction
though they have been characterized under wrong head. Accordingly, we
set aside the order of ld.CIT(A) on this issue and direct the AO to allow the
same as deduction.
22. The next issue relates to disallowance of sundry balances written off
by the assessee. The ld.CIT(A) has confirmed the disallowance by holding
that the assessee has not furnished any detail and justification supporting
the claim. However, the ld.AR invited our attention to pages 38 and 39 of
the paper book and submitted that the assessee has furnished the details
relating to the amount written off by the assessee. A perusal of the details
furnished by the assessee would show that the assessee has given party
wise details and also furnished the reasons for writing off the outstanding
balance. Hence, we find no justification for disallowing this claim.
Accordingly, we set aside the order of ld.CIT(A) on this issue and direct
the AO to allow this claim.
23. We shall now take up the appeal filed by the Revenue in the case of
Pelicon Syntax Private Ltd., wherein the revenue is assailing the decision of
ld.CIT(A) in allowing the interest expenditure claimed by the assessee.
ITA No.3805/M/2004, ITA 4103/Mum/2004,
13 ITA 4572/Mum/2004 and ITA 3803/Mum/2004
Both the parties agreed that this issue is identical to the issue considered
by us while deciding the appeal filed by the revenue in the case of M/s
Ranjit Holdings Pvt.Ltd. In the preceding paragraphs, we have upheld the
order of Ld CIT(A) on this issue. Consistent with the view taken in the case
of M/s Ranji Holdings Pvt Ltd, we confirm the order of the ld. CIT(A) on
this issue.
24. In the result, both the appeals filed by the Revenue are dismissed.
The appeal filed by the assessee M/s Ranjit Holdings P Ltd in ITA
No.3805/Mum/2004 is allowed and other appeal filed by M/s Pelican
Syntex P Ltd is treated as allowed for statistical purposes.
The above order was pronounced in the open court on 30th April, 2015.
30th April, 2015
Sd sd
( /VIJAY PAL RAO) (.. ,/ B.R. BASKARAN)
/ Judicial Member /Accountant Member
Mumbai: 30th April,2015.
. ../ SRL , Sr. PS
/Copy of the Order forwarded to :
1. / The Appellant
2. / The Respondent.
3. () / The CIT(A)- concerned
4. / CIT concerned
5. , , /
DR, ITAT, Mumbai concerned
6
/ Guard file.
/ BY ORDER,
True copy
(Asstt. Registrar)
, /ITAT, Mumbai
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