TMI Blog2011 (5) TMI 1016X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the holding company. 2.1.Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T.Act, 1961 dated 18/03/2004 were that the assessee-company was established as a joint sector company in 1980 to manufacture pesticides. The promoters of the company, on one hand, were Gujarat Agro Industries Corporation Limited (A Government of Gujarat Enterprise) and, on the other hand, Gharda Chemicals Ltd., Bombay. Later on, in the year 1986 all the shares of Government were purchased by Gharda Chemicals Ltd., with the result the assessee-company had become a 100% subsidiary of M/s.Gharda Chemicals Ltd. The result of the said change was that the assessee-company had become a closely held company. Assessee s business is manufacturing of pesticides and intermediates. In respect of the above ground, the observation of the AO was that the assessee has obtained demand loan and working capital facility from Bank of Baroda. The assessee has debited interest and financial charges to the tune of ₹ 2,16,75,000/-. On the other hand, it was found by the AO that the amount receivable from Gharda Chemicals Ltd. (in short GCL) appearing under the head sundry ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credit, and that too at the prevailing market rates, the assessee company has given an undue advantage to its holding company. It would be interesting to note that the total outstanding of GCL as at the end of the year is ₹ 8.33 crores, whereas the total borrowings, including demand loan and working capital facilities, are to the tune of ₹ 6.29 crores. Thus, if the assessee company had not resorted to such diversion of funds and had been regular in receiving payments against the sales effected to GCL, it would not be required to bear huge interest burden, which has a direct bearing on its profitability. Since, GCL is a holding company falling within the proviso of sec. 40A(2)(b), the entire interest payments cannot be allowed in totality. In order to arrive at the disallowance interest payment during the year under consideration, a chart is prepared, which is enclosed along with this order. While computing the disallowance interest, a credit period of 30 days is reckoned. The rate of interest is adopted at 15% per annum. Further, in respect of the marketing expenses to the tune of ₹ 1.33 crores claimed to have been paid to GCL, since the same has been disallowed f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olding company as is the norm with other customers. The ground is thus partly allowed. 3. From the side of the assessee, ld.AR Mr. M.G.Patel appeared and his foremost argument was that the transaction with GCL was a commercial transaction and there was no element of grant of loan. His next plank of argument was that the assessee has granted such facility to other customers as it was a prevailing market practice. AR has placed a comparative chart of sales to demonstrate the outstanding balance with GCL and outstanding balances of others. He has emphasised that in comparison to the total turnover the percentage of outstanding balance on sale account from GCL was hardly 18.02%, as against that outstanding balances with other debtors were 81.98%. Therefore, he has emphasised that there was no special concession or benefit granted to GCL but it was a prevailing market practice which was observed by the assesseecompany in respect of all the customers including GCL. He has pleaded to allow the ground. 4. From the side of the Revenue, ld.DR Mr.Alok Johri has vehemently supported the findings of the AO and the CIT(A). He has emphasised that the assessee is nothing but a 100% sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to assessee in the field of manufacturing and marketing. All these facts were narrated to ld.CIT(A) through written submissions which were placed before us on page Nos.138 to 190 of paper-book. From this discussion, it is evident that the assessee-company had a regular business transaction and it was not for any extraneous consideration. In the regular course of business purchases and sales have been made with the said concern and not with the intention to siphon out the borrowed funds. The factum of the case thus demonstrated that the assessee has taken a commercial decision keeping in mind the interest of its business and the other surrounding circumstances under which the assessee was getting facilities. Once it was a commercial decision, then the Courts have held that it is not proper for the revenue authorities to step into the shoes of a business man to decide whether such a commercial decision was advantageous or not. Rather, we are of the view that the AO has proceeded merely on this presumption that the borrowed funds of Bank of Baroda have been siphoned to GCL, but no specific instance or transaction was demonstrated. As far as the ld.CIT(A) s view was concerned, the gran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said expenditure was exactly at 10% of the total sales of ₹ 13.399 crores claimed to have been effected through the said holding company. The explanation of the assessee was that the impugned expenditure was in the nature of reimbursement but as per ld.CIT(A) it was difficult to believe that those expenses under several heads would have the exact percentage of the total amount expended. He has therefore affirmed the disallowance. 7. With this brief background, we have heard both the sides. For AY 1999-2000 in assessee s own case the ITAT Ahmedabad in ITA No.1438/Ahd/2007 order dated March-2010 held vide paragraph No.14 that the assessee had failed to prove any nexus between the payment to holding company and the expenditure incurred for the purpose of business of the assessee. The relevant conclusion is reproduced below:- 14. We have considered rival submissions and material available on record. Learned Counsel for assessee referred to agreement dated 7.04.1997 (PB-131) executed between assessee and the holding company through which the holding company M/s.Gharda Chemical Company Ltd. was appointed as marketing agent for the assessee to carry out the task of mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Counsel for assessee though referred to note on marketing commission PB-167, but no submissions are made as regards justifiability of the expenditure under the head sales promotion, travelling, conveyance, telephone, etc. and vehicle maintenance, because these are the common expenditure, which is to be spent by the holding company for its business also. Therefore, assessee was required to file sufficient evidence before the authorities below to claim that some services are rendered by the holding company for the assessee in this way to claim reimbursement of the expenditure but no such efforts have been made. Even no such evidences were filed before the Tribunal. It is also not explained as to why the 10% of the sales have been claimed as reimbursement of the expenditure on the above expenses only. It is also not explained whether holding company has exactly incurred the same expenditure on the above heads at 10% of the sales for and on behalf of the assessee. The explanation of the assessee is thus, not believable that the holding company exactly spent expenditure of 10% of the sales on the above expenditure. As noted above, the nature of the expenses shows that the same would b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no details were furnished except credit notes issued. The action of the AO was affirmed and now the assessee is in appeal. 10. On hearing both the sides it is worth to mention at the outset itself that in assessee s own case for AY 2000-01 in ITA Nos.459 and 498/Ahd/2008 order dated 19/03/2010 vide paragraph No.5 the disallowance was confirmed; reproduced below:- 5. We have heard both the parties and gone through the facts of the case. We find that in the preceding year also disallowance of ₹ 5 lakhs on sales commission to Nipun Finvest Pvt.Ltd. was made and on appeal, the ld. CIT(A) dismissed the appeal of the assessee. In the year under consideration, as pointed out by the AO, though terms and conditions of commission payment were fixed vide letter dated 19.5.1999, ₹ 5,00,000 was paid to M/s.Nipun Finvest P Ltd. on 20.4.1999. Further all the commission payments were in round figures such as ₹ 5 lacs, ₹ 7 lacs, etc. whereas if it was worked out at percentage of sales it was not likely to be in round figures. The onus is on the assessee claiming deduction for payment of commission to establish that payments had been made for services rendered. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. The ld.CIT(A) has held that the assessee has unilaterally decided not to account for the interest on the ground that it was uncertain to recover the amount. As per ld.CIT(A) it was incorrect because out of the total inter-corporate of ₹ 3 crores placed with Nipun Investments Pvt.Ltd., the assessee has recovered ₹ 160 lacs in the past. Further, it was also noted by ld.CIT(A) that the assessee used to regularly credit sales commission to one of a sisterconcern of Nipun Investments Pvt.Ltd. According to him, there was a contradiction in the stand of the assessee. After discussing and distinguishing few case laws viz. Sarabhai Chemicals 257 ITR 355(Guj.) and Shiv Prakash Janak Raj 222 ITR 583(SC) the action of the AO was affirmed. 12.3. The argument of ld.AR Mr. MG Patel was that the said company was neither repaying the ICD nor paying the interest on the deposit. Since no real income had actually accrued therefore not offered for tax. 12.4. On hearing the submissions of both the sides, the issue of interest on ICD stood covered by decision of ITAT B Bench Ahmedabad in assessee s own case for AY 2000-01 bearing ITA No.459/Ahd/2008 dated 19/03/2010 wherein vide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecovered. This view which we have taken finds support from the decision of the Hon ble Delhi High Court in the case of Magnum Power generation Ltd. vs. Addl. CIT, 311 ITR 332 (Delhi). In these circumstances, especially when there is no material before us for taking a different view in the matter, we are not inclined to interfere. Therefore, ground no.6 in the appeal of the assessee is dismissed. 12.5. Respected Co-ordinate Bench has held that once the assessee had followed mercantile system of accounting consistently therefore should have shown interest on ICD and for this legal proposition followed a decision of Hon ble Delhi High Court as cited supra. We respectfully follow the said decision and dismiss this ground. 13. Ground No.5 reads as under: 5. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by holding that replacement expenditure on Hand Sealing machine, Paper Shredding machine, imported Gas Burner along with custom duty totalling to ₹ 9,87,462/- are of capital nature and accordingly has erred in confirming the disallowance made by the Assessing Officer. 13.1.A total expenditure of ₹ 1,41,85,2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ngs contained in paragraph No.26; reproduced below: 26. We have heard both the parties and gone through the facts of the case. At the outset, we find that reliance by the assessee on the decision of the ITAT in their own case for the AY 1998-99 is totally misplaced since in the AY 1998-99 expenditure was incurred on replacement of crates and steam injector system. The expenditure on ejector system was allowed, following the decision of the ITAT for the AY 199293 1993-94 while the issue of expenditure on crates had been restored to the file of the AO. In the instant case, the boiler in The processing plant was hitherto being run on oil fuel. In the year under consideration, the assessee incurred expenditure on imported Thermax Gas Burner assembly, Gas Burner-Gas Train, Control Panel, other accessories for Heat Resistance etc in order to replace oil based fuel system with the gas based fuel system . We find from the impugned orders that nowhere the assessee claimed that the said expenditure amounted to 'current repairs' under s. 31 of the Act. Rather, the claim is that expenditure is revenue in nature. The issue before us is as to whether the replacement of oil based f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing into existence a new asset or an enduring benefit for the assessee amounts to capital expenditure. Since the aforesaid replacement in the instant case amounts to bringing into existence a new asset advantage, and thereby an enduring benefit for. the assessee, it is clear then that expenditure of the assessee here is not of revenue nature and thus, cannot be claimed as a deduction even under s.37 of the Act. In view thereof, especially when there is no material before us for taking a different view in the matter, we have no alternative but to uphold the findings of the Id. CIT(A). Therefore, ground no. 7 in the appeal of the assessee is dismissed. 13.4. Once a view has already been taken the expenditure was capital in nature therefore we have no reason to take any other view but to follow the same, hence this ground is dismissed. 14. Ground No.6 reads as under: 6. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of ₹ 2,48,078/- out of total sales promotional expenditure of ₹ 12,40,390/- made by the Assessing Officer after holding the same as for non-business purposes. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect to allow the claim. This ground is, therefore, allowed. 15. Ground No.7 reads as under: 7. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in confirming disallowance of ₹ 1,64,666/- out of total expenditure of ₹ 32,93,318/- incurred under the head of Canteen expenses. Miscellaneous expenses and other expenses. 15.1.The observation of the AO was that under the head miscellaneous expenses and staff welfare expenses the assess has incurred a sum of ₹ 1.88 crores and 1.05 crores respectively. As per AO most of the expenditure was in cash hence, there was no check over the expenses. For want of check an amount of ₹ 4,11,085/- was disallowed. When the matter was carried before the first appellate authority the disallowance was restricted to ₹ 1,64,666/-. 16. A short submission of the ld.AR before us is that there was no such disallowance uptill AY 2000-01 and the AO has abruptly disallowed for the year under consideration. Further, ld.AR has also informed that as per the comparative chart for AY 1999-2000 there was no substantial increase in the expenditure under the head miscellaneous expenses and canteen expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 19.1. The observation of the AO was that the assessee had claimed deduction u/s.80IA of the Act in respect of Unit-V and Unit-VI. It has also been observed that the assessee had shown total sales of ₹ 139.20 crores against the taxable profit of ₹ 1.12 crores. As per AO, the assessee had tried to manipulate the profit of Industrial Unit by apportioning cost of production. However, the claim of the assessee was that all the Units are integrated to each other so cannot be differentiated. In addition to the above observation, it was also observed by the AO that certain income were not related to manufacturing activity, such as, interest on investment, interest on deposit, miscellaneous income, profit on sale of fixed assets and interest from Nipun Finvest Pvt.Ltd. As per Annexure-B of the assessment order, the AO has calculated the deduction u/s.80IA of the Act and allowed the claim at ₹ 8,29,912/- against the claim of the assessee of ₹ 73,29,231/-. When the matter was carried before the ld.CIT(A), the claim of the assessee was partly allowed and the AO was directed to recomputed the deduction. 20. In the AY 1998-99 in assessee s own case bearing ITA Nos.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t length by the Respected Coordinate Benches and the law emerges that for the purpose of claiming deduction u/s.80IA, the assessee is required to establish that the eligible business profit are from Industrial Undertaking and, most importantly, the assessee has to establish that the said profit is derived from the business activity of the Industrial Undertaking . In other words, the assessee has to establish a direct nexus between the eligible profit and Industrial Undertaking . As far as the eligibility of income under the head other sources and under the head interest income , the observation was that the assessee has to first establish the correct nature of the income. For example, interest paid by the customers for late payment of sale proceeds may form part of the eligible income subject to the affirmation of correct facts. It has also been defined that the charging of interest represents a converse situation to offering of cash discount and so the transaction must be viewed as if the purchaser pays a higher price on the late payment. Still the question was that if the assessee is not in the business of finance or to lend funds, then it is necessary to draw a distinctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee s appeal hereinabove. Accordingly, these grounds of the Revenue are, therefore, dismissed. 25. Ground Nos.2 4 read as under: 2. The Learned CIT(A) has erred on facts and in law in directing re-computation of deduction u/s.80IA. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee was sympathetically manipulating the profits of separate units to maximize deduction u/s.80IA. The Ld.CIT(A) therefore also erred in directing the AO to exclude the profit from the trading activity while working out the eligible profit for deduction u/s.80IA. 25.1. These grounds have already been restored back with certain directions to re-compute the deduction u/s.80IA of the Act. Revenue is aggrieved by the restoration of the computation of the said deduction, but we have also adopted the same recourse, resultantly, in the like manner, these grounds may be treated as allowed for statistical purposes. 26. In the result, appeal of the Revenue (A.Y. 2001-02) may be treated as partly allowed but only for statistical purpose. (C) Assessee s appeal, i.e. ITA No.461/Ahd/2008 A.Y. 2002-03 27. Grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firmed the action of the AO. Accordingly, for this year as well, this ground of the assessee is dismissed. 39. Ground No.4 reads as under: 4. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming disallowance of ₹ 3,38,400/- out of total sales promotion expenditure of ₹ 16,92,000/- made by the Assessing Officer after holding that the same is for nonbusiness purposes. 39.1. The issue of sales promotion expenses was raised by the AO on the ground that the assessee has claimed payment for purchase of dry-fruits, sweets, posters, calendars, etc. While deciding ground No.6 for AY 2001-02 hereinabove in assessee s appeal we have followed an earlier decision of this Tribunal for AY 2000-01 and directed to allow the claim. Therefore, this ground of the assessee is allowed. 40. Ground No.5 reads as under: 5. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming addition of notional interest of ₹ 31,50,000/- made by the Assessing Officer in respect of ICD placed with Nipun Investments Pvt.Ltd. 40.1. The issue of notional interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 4,19,300/- i.e. 5% of the total expenditure was disallowed. The matter was carried before the first appellate authority and the same was restricted to ₹ 1,86,600/-. Herein above in this order this issue was discussed in AY 2001-02 while deciding ground No.7 (vide paragraph No.17 of this order) and affirmed the part relief granted by first appellate authority. Respectfully following the same, we are not inclined to disturb the finding of CIT(A) hence in the like manner as already held, this ground of the assessee is dismissed. 44. Ground No.8 reads as under: 8. The Learned Commissioner of Income Tax (Appeals)-VI, Baroda has erred in law and on facts of the case by confirming reduction of 90% of notional interest income of ₹ 31,50,000/- made by the Assessing Officer for working out claim u/s.80HHC while computing the income. 44.1. While computing the deduction u/s.80HHC of the Act, the AO has reduced 90% of the notional interest of ₹ 31,50,000/-. The first appellate authority has mentioned that as per Annexure-A of the assessment order the said amount was excluded from the eligible profit of business. Assessee s contention was that the said income wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on the assessee s profitability. 47. A view has already been taken in favour of the assessee while deciding the Assessee s appeal in Ground No.1 (for Assessment Year 2001-02) hereinabove, as also, ante this ground of the Revenue has already been dismissed. Accordingly, these grounds of the Revenue are hereby dismissed. 48. Ground Nos.2 4 read as under: 2. The Learned CIT(A) has erred on facts and in law in directing re-computation of deduction u/s.80IA. 4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee was sympathetically manipulating the profits of separate units to maximize deduction u/s.80IA. The Ld.CIT(A) therefore also erred in directing the AO to exclude the profit from the trading activity while working out the eligible profit for deduction u/s.80IA. 49. These grounds have already been restored back with certain directions to re-compute the deduction u/s.80IA of the Act. Resultantly, in the like manner, these grounds may be treated as allowed for statistical purposes. 50. In the result, appeals of the Assessee (A.Ys. 2001-02 2002-03) as well as appeals of the Revenue (A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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