Ita 1401/09 & Conn v. Ita 1401/09 & Conn

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HONOURABLE MR.JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR.JUSTICE K.VINOD CHANDRAN WEDNESDAY, THE 8TH DAY OF FEBRUARY 2012/19TH MAGHA 1933 ITA.No. 1401 of 2009 ( ) ------------------------ITA.29/COCH/1998 of I.T.A.TRIBUNAL,COCHIN BENCH APPELLANT/APPELLANT: ---------------------- THE COMMISSIONER OF INCOME TAX, COCHIN. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) RESPONDENT: -------------- M/S. CHOICE TRADING CORPORATION LTD., CHOICE HOUSE, COCHIN-15. BY SR. ADV. SRI.C.V.RAJAN ADV. SRI.SAJI VARGHESE THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 08-02-2012, ALONG WITH ITA. 1096/2009, ITA. 1214/2009, ITA. 1438/2009, THECOURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX (ITA 1401/2009) ANNEXURE A: TRUE COPY OF ORDER OF THE ASSESSING OFFICER DT.28.3.1997. ANNEXURE B: TRUE COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DT.10.10.1997. ANNEXURE C: TRUE COPY OF ORDER OF THE TRIBUNAL DT.3.7.2002. TRUE COPY P.S. TO JUDGE C.R. C.N.RAMACHANDRAN NAIR, &K.VINOD CHANDRAN, JJ. .................................................................... I.T. Appeal Nos.1401, 1096, 1214 & 1438 of 2009 ....................................................................Dated this the 8th day of February, 2012. JUDGMENT Ramachandran Nair, J. These are appeals filed by the Revenue under Section 260A ofthe Income Tax Act raising various questions of law arising fromorders of the Income Tax Appellate Tribunal pertaining to respondent'sassessments for the assessment years 1994-95 to 1996-97 and 1998-99. We have heard Senior counsel Sri.P.K.R.Menon appearing for theRevenue and Senior Adv. Sri.C.V.Rajan appearing along with Adv.Sri.Saji Varghese for the respondent-assessee. 2. The common question raised for all the years is whether the Income Tax Appellate Tribunal was justified in cancellingdisallowance of interest on borrowed funds diverted by the assessee forrunning a school owned by a trust under the control of the ManagingDirector of the assessee. Huge amounts ranging between one to twocrores rupees was given every year to M/s.Choice Foundation for ITA 1401/09 & conn. acquisition of land and building for the Choice School which is said tobe a business enterprise under the control of the Managing Director ofthe assessee-company. The Assessing Officer noticed that assessee-company had no surplus and the amounts transferred to M/s.ChoiceFoundation was from out of borrowed funds and since the fundsdiverted were not used for business purpose of the assessee, interestpaid on borrowed funds so diverted was disallowed. Assessee,however, challenged the disallowance of interest on the ground that theassessee was engaged in real estate business and school facility in thearea near to the flats constructed by the assessee would attractcustomers which will promote the business of the assessee. It is thisargument which found acceptance with the first appellate authority aswell as with the Tribunal for upholding assessee's contentions and toallow the claim. However, before us Revenue contended that there isno correlation between establishment of school and the promotion ofassessee's business in real estate. Senior counsel also contended thatassessee was mainly engaged in processing and export of marineproducts and real estate business itself was not returning any sizeableincome to the assessee and the assessee eventually closed down the real ITA 1401/09 & conn. ITA 1401/09 & conn. estate business. Counsel appearing for the respondent-assesseesupported the findings of the lower authorities. He also relied on thedecision of the Supreme Court in S.A.BUILDERS LTD. Vs.COMMISSIONER OF INCOME TAX reported in 288 ITR 1. Seniorcounsel appearing for the Revenue on the other hand relied on DivisionBench judgment of this court in COMMISSIONER OF INCOME TAXVs. MANGALAM PUBLICATIONS INDIA(P) LTD. reported in(2010) 190 TAXMAN 38 wherein this court held that proportionateinterest on borrowed funds diverted for other purposes attractdisallowance. 3. After hearing both sides and after going through the findingsof the Tribunal, we are unable to sustain the order of the Tribunalbecause there is nothing to indicate that the construction of school by atrust at a huge cost any way benefited the assessee's business in marineexports or even in real estate business. Of course it is very commonthat big developers engaged in real estate business construct townshipwith school, hospital, shopping complex and other facilities attractingcustomers for purchase of flats, villas and business premises.However, there is nothing to indicate that the assessee even owned or ITA 1401/09 & conn. possessed any sizeable real estate property in or near the school whichwas constructed by the trust with the managing director of the assesseeas the promoter of the school. It is also the finding that the assesseewas not engaged in major real estate business. It is also to be notedfrom the records that the assessee slowly gave up real estate businessand, therefore, assessee shifted the stand that the school constructionwas for the benefit of the children of the assessee's employees. Hereagain, we do not find any priority for admission or incentives for thechildren of employees of the assessee in the school set up by theassessee. In fact, it is the case of the assessee that the school itself is anindependent business concern of the managing director and it iscompletely distinct and separate from the assessee's activities and assuch, we do not find any material to hold that the establishment of theschool at huge cost in any way advances the business interest of theassessee. So much so, the commercial expediency pleaded by therespondent does not stand proved. Section 36(1)(iii) of the IncomeTax Act provides for allowing interest on funds borrowed for businesspurposes. Unless it is established that the funds were atleast indirectlyused for business purpose or for promotion of business, assessee is not ITA 1401/09 & conn. entitled to deduction of interest on funds diverted for personal benefitsby the managing director for himself or along with others. We,therefore, allow the appeal on this issue by reversing the findings of theTribunal and that of the first appellate authority. 4. The next question raised which is common for the assessmentyears 1994-95 and 1995-96 is the deduction claimed by the assesseeunder Section 80I of the Act for the investment in fish processing unit.The claim was rejected by the Assessing Officer on the ground thatassessee was not engaged in manufacture or production of any article inthe factory and all what the assessee was engaged was processing offish which did not come within “manufacture or production of anyarticle or thing” entitling assessee for deduction under Section 80I ofthe Income Tax Act. Counsel for the Revenue relied on decisions ofthe Supreme Court in STERLING FOODS Vs. THE STATE OFKARNATAKA reported in 63 STC 239 and in COMMISSIONER OFINCOME TAX Vs. RELISH FOODS reported in 237 ITR 59 andcontended that processing of prawns does not amount to manufactureor production of goods eligible for deduction under Section 80I of theAct. Learned counsel appearing for the respondent-assessee on the ITA 1401/09 & conn. ITA 1401/09 & conn. other hand explained the process adopted and contended that theprocessing involved in assessee's factory is different from cleaning,deveining and freezing referred to in the above two decisions andsubmitted that the product generated in the processing in assessee'sfactory is a manufactured product. Prima facie the issue is coveredagainst the assessee by the above two decisions because the itemprocessed and exported is nothing but fish in frozen condition.Therefore, the only question to be considered is whether the peculiarprocessing adopted by the assessee amounts to manufacture orproduction of a thing which alone will qualify for deduction underSection 80I. Counsel for the assessee explained that assessee isengaged partly in cooking and blanching of the product as well asglazing and freezing the item in the fish processing plant. However,there is no dispute that the item exported is not cooked food but fish inraw form and the part cooking itself is for blanching it for appearance.The product is called IQF (Individually Quick Frozen). Counsel for theassessee contended that contrary to the normal processing of sea foodwhich is block freezing, assessee is engaged in individual freezing aftercooking and chemical treatment. We do not find any distinction in the ITA 1401/09 & conn. process involved because preservation of fish is achieved throughfreezing and it makes no difference whether it is block freezing orindividual freezing. Even though counsel for the assessee has alsorelied on Full Bench decision of this court in COMMISSIONER OFINCOME TAX Vs. BHARAT SEA FOODS reported in 237 ITR 46,we do not think the said decision can any longer apply after the threeBench decision of Supreme Court in COMMISSIONER OF INCOMETAX Vs. RELISH FOODS (237 ITR 59) wherein it is held thatprocessing of shrimps and prawns does not involve manufacture orproduction of article entitling deduction under Section 80I of theIncome Tax Act. We, therefore, allow the appeals on this issue byreversing the orders of the Tribunal and that of the first appellateauthority and restore the disallowance made in assessment. 5. The additional issue raised in I.T.A. 1401/2009 for theassessment year 1994-95 pertains to disallowance of interest on fundsdiverted for acquiring industry with factory by the assessee. WhileSenior counsel appearing for the Revenue contended that theacquisition of another industrial undertaking does not directly promotethe business of the assessee, counsel for the assessee referred to the ITA 1401/09 & conn. findings of the lower authorities that the acquisition of the industrywith the funds advanced by the assessee helped the assessee to makeavailable the factory facility of that industry for processing sea food forexport. The clear finding of the lower authorities including theTribunal is that processing facility was inadequate for the assessee andby availing the factory facility of the asset acquired, the assessee couldexpand his business. We are of the view that the test of commercialexpediency referred to in the decision of Supreme Court in S.A.BUILDERS' case referred to above squarely applies to assessee's case.We, therefore, reject the appeal on this issue by confirming the order ofthe Tribunal in favour of the assessee. 6. The next issue pertains to disallowance of interest on borrowed funds utilised by the assessee for purchase of landed property inMunnar. The Assessing officer disallowed the claim because assesseeduring the relevant previous year was not involved in real estatebusiness. Counsel for the assessee, however, submitted that theassessee was engaged in real estate business and so much so, landacquired in Munnar was for business purpose. We find force in thiscontention because though assessee in the course of time gave up the ITA 1401/09 & conn. 6. The next issue pertains to disallowance of interest on borrowed funds utilised by the assessee for purchase of landed property inMunnar. The Assessing officer disallowed the claim because assesseeduring the relevant previous year was not involved in real estatebusiness. Counsel for the assessee, however, submitted that theassessee was engaged in real estate business and so much so, landacquired in Munnar was for business purpose. We find force in thiscontention because though assessee in the course of time gave up the ITA 1401/09 & conn. business in real estate, during the previous year relevant for theassessment year 1994-95 the assessee was engaged in real estatebusiness and in this connection acquisition of property at Munnarwhich is a prime location for tourism business cannot be said to beother than for business purpose, though the assessee later did not goahead with the development or construction work. Since the asset wasacquired for the company and with the motive to develop it and dobusiness in real estate, no disallowance is called for. We, therefore,reject this ground raised by the Revenue and confirm the order of theTribunal. 7. The last question raised pertains to disallowance of interest onborrowed funds diverted for acquisition of foreign car for the managingdirector. While the case of the Revenue is that the car was purchasedfor personal use by the managing director and the car also remainedregistered in the name of the managing director, counsel for theassessee contended that the assessee was engaged in export of marineproducts and assessee necessarily had to engage in and provide facilityto foreign buyers reaching India. The assessee's case is that the car wasused for transporting foreign buyers and so much so, the acquisition of ITA 1401/09 & conn. car should be treated as for business purpose. However, it isspecifically admitted by the assessee that the car was purchased andregistered in the name of the managing director and only in thesubsequent year it was transferred in the name of the company. We areof the view that so long as car was owned and used by the managingdirector for his personal purpose, it cannot be said to be for use byforeign visitors reaching India for business transaction of the assessee.So much so, the nexus between the acquisition of the car in thepersonal name of the Managing Director and it's use for businesspurpose is not established. Of course from the following year when thecar was transferred to the name of the assessee and used by it forbusiness purposes, the company is entitled to eligible deductions.However, for the assessment year 1994-95 disallowance was rightlymade for the interest free funds given by the assessee to the ManagingDirector for acquisition of car from out of interest bearing borrowedfunds. We, therefore, allow the appeal on this issue by reversing theorders of the Tribunal and that of the first appellate authority andrestore the disallowance of interest on the amount of Rs.26,55,000/-advanced by the assessee-company to the Managing Director from out of borrowed funds for purchase of foreign car. In view of the findings above, I.T.A. Nos.1438, 1214 and 1096are allowed reversing the orders of the Tribunal and that of the first appellate authority and by restoring the assessments. I.T.A.No.1401/2009 is allowed in part as indicated above. Sd/-C.N.RAMACHANDRAN NAIRJudge Sd/-K.VINOD CHANDRANJudge True copy P.S. to Judge