Pr., Commissioner Of Income Tax, Alwar v. M/S Lakhani Shoe Co. Pvt Ltd., Plot

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 281 / 2017 Pr., Commissioner of Income Tax, Alwar. ----Appellant Versus M/s Lakhani Shoe Co. Pvt Ltd., Plot No. 130, Sector-24, Faridabad,Haryana. ----Respondent D.B. Income Tax Appeal No. 283 / 2017 Pr. Commissioner of Income Tax, Alwar. ----Appellant Versus M/S. Lakhani Shoe Co. Pvt. Ltd., Plot No. 130, Sector-24, Faridabad, Haryana. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Judgment 20/11/2017 1. In both these appeals common question of law and facts areinvolved hence they are decided by this common judgment. 2.By way of these appeals, the appellant has assailed thejudgment and order of the tribunal whereby tribunal has dismissedthe appeal of the department and confirmed the order of theCIT(A). 3.Counsel for the appellant has framed following substantial questions of law:- Appeal No.281/2017 “(1)Whether the Tribunal was legallyjustified in deleting the addition ofRs.55,79,771/- made on account ofinterest paid on loans which were notrequired by the assessee company since ithad made huge investments in firm inwhich directors of the firm were partnersand the investment so made generatedlow return in comparison to interest paidon loans? (2) Whether the tribunal was legallyjustified in deleting the disallowance ofinterest made @ 10.29% specifically whenthe profit earned on the investments madeby the company was 1.71% whereas theinterest paid on unsecured and bank loanswas 12%? (3) Whether the tribunal was legallyjustified in deciding the appeal of therevenue on the basis of findings ofA.Y.2010-11 specifically when against theorder of the tribunal the department couldnot prefer an appeal u/s 260A as the taxeffect was less than the monetary limitprescribed by the CBDT?” Appeal No.283/2017 “(1)Whether the Tribunal was legallyjustified in deleting the addition ofRs.50,31,326/- made on account ofinterest paid on loans which were notrequired by the assessee company since ithad made huge investments in firm inwhich directors of the firm were partnersand the investment so made generatedlow return in comparison to interest paidon loans? (2) Whether the tribunal was legallyjustified in deleting the disallowance of interest made @ 10.29% specifically whenthe profit earned on the investments madeby the company was 1.71% whereas theinterest paid on unsecured and bank loanswas 12%? (3) Whether the tribunal was legallyjustified in deciding the appeal of therevenue on the basis of findings of A.Y.2010-11 specifically when against thatorder of the tribunal the department couldnot prefer an appeal u/s 260A as the taxeffect was less than the monetary limitprescribed by the CBDT?” (2) Whether the tribunal was legallyjustified in deleting the disallowance of interest made @ 10.29% specifically whenthe profit earned on the investments madeby the company was 1.71% whereas theinterest paid on unsecured and bank loanswas 12%? (3) Whether the tribunal was legallyjustified in deciding the appeal of therevenue on the basis of findings of A.Y.2010-11 specifically when against thatorder of the tribunal the department couldnot prefer an appeal u/s 260A as the taxeffect was less than the monetary limitprescribed by the CBDT?” 4.The facts of the case are that the assessment in this casewas reopened by issuance of notice u/s 148 of the Act by theAssessing Officer. In terms of the reasons recorded by the AO,it was stated that the assessee company has made investmentof Rs. 3,19,21,938/- in M/s Mascot Footcare, Noida and Rs.1,45,76,154/- in M/s Mascot Udhyog, Noida and the Directorsof the assessee company are also partners in the said twofirms. It was further stated that the assessee was payinginterest on unsecured loan from Shri Gunjan Lakhani andinterest to banks on secured loan on which it was paying theinterest @ 12% which is higher as compared to low rate ofreturn on investment in the said two firms and the investmentswere not reasonable. Thereafter, after disposing off theobjections raised by the assessee, the reassessment wascompleted u/s 147 r/w section 143(3) of the Act wherein theAO has held that the business of the assessee company ismanufacture of Hawai Chapal, the investment in these twofirms is not part of the business of the assessee and there is no profit to the business of the assessee from such investmentand the amounts so invested is not reasonable. The Assessingofficer didn’t accept the assessee’s company submission thatthe investments in the firms were not made out of borrowedfunds but out of internal accruals and the investments weremade in the earlier years. The Assessing Officer finally heldthat if the assessee had not made the above investment, theassessee company would have saved the amount of interestpaid on unsecured loan and bank loan to the extent of 12% ofthe investment made which comes to Rs. 55,79,771/- whichwas disallowed and added to the income of the assesseecompany. 5.He has taken us to the order of CIT(A) who observed asunder:- “4.3I have perused the assessmentorder as well as submissions made by theappellant and find that a disallowance ofRs.55,79,771/- out of interest paymentsmade by the appellant on loans has beenmade by the AO on the ground of mis-utilization of interest bearing funds. The AOhas stated that an amount of Rs.3.19 croresstands invested as capital in M/s MascotFootcare and amount of Rs.1.45 croresstand invested as capital in M/s MascotUdhyog. The profits earned on theinvestment made by the company are veryless and the rate of interest paid by theappellant at 12% is much higher. Thereforea disallowance @ 12% on the amount ofinvestment made has been made by the AOwhich comes to Rs.55,79,771 (12% ofRs.4,64,98,092). AO has made thedisallowance on the ground that if theappellant would not have been made the investment, than the interest burden on theborrowings made would have been lesser bythis amount. 4.4The appellant has stated that aninvestment of Rs.60 lacs has been made inM/s Mascot Footcare and an investment ofRs.45 lacs was made in M/s Mascot Udhyogby the appellant during the years 1988 to2000. The remaining balance representsinvestments out of share of profit andinterest and not out of borrowed funds.Therefore, there is no justification in makingthe disallowance out of interest paymentsmade by the company. investment, than the interest burden on theborrowings made would have been lesser bythis amount. 4.4The appellant has stated that aninvestment of Rs.60 lacs has been made inM/s Mascot Footcare and an investment ofRs.45 lacs was made in M/s Mascot Udhyogby the appellant during the years 1988 to2000. The remaining balance representsinvestments out of share of profit andinterest and not out of borrowed funds.Therefore, there is no justification in makingthe disallowance out of interest paymentsmade by the company. 4.5The appellant has furnishedcomplete details of year wise investmentmade in both the firms alongwith thequantum of profits received on account ofinternal accruals on the investments madein those firms. The details are as under:- M/s Mascot Footware 1988-89Rs.1,25,0001989-903,75,0001998-9925,00,0001999-200030,00,000 M/s Mascot Udyog YearRs.1989-905,00,0001999-200040,00,000 Further, the investments in these partnershipfirms were made out of internal accruals andno borrowed funds were utilized in thoseyears while making these investments. Theappellant had internal accruals in the yearswhen investment was made in above twofirms as under:- YearInternal AccrualsInvestment made inMascot UdyogMascot Footware1988-8927,48,569.001,25,000.00--1989-9047,82,970.003,75,000.005,00,000.001998-991,48,68,410.0025,00,000.00--1999-20001,10,29,599.0030,00,000.0040,00,000.00 4.6 The appellants has further stated thatno loans have been taken from the bank formaking investments in these firms and itsstated that on these small investments,actual withdrawals made from M/s MascotUdyog are Rs.1,06,75,000 as against theinvestment of Rs.45,00,000. Similarly,appellant has made withdrawals ofRs.1,06,68,401 have been made from M/sMascot Footcare as against the investmentof Rs.60,00,000 made. 4.7 The appellant has stated that appeal onthis issue had been decided against by theCIT(A), Alwar vide order dated 14.08.2014for A.Y. 2010-11. It is submitted thatHon’ble ITAT Jaipur Bench vide order dated18.03.2016 in ITA No.724/JP/2014 for A.Y.2010-11 has decided this issue in favour ofthe appellant. A copy of the order has beenfiled on record. 4.8 Having considered the submissionsmade by the appellant and evidenceavailable on record, I find that the concernsin which the appellant company has madesubstantial investment fall with in the ambitof specified persons as defined in theprovisions of section 40A(2)(b) of the ITAct. The Directors/Share holders of thecompany are having substantial interest inthe above mentioned firms, in which theappellant company has invested substantialamounts as capital+accumulated profitsover the years. 4.9 I have gone through the copy of theorder passed by the Hon’ble Tribunal in thecase of the appellant and find that there isno change in the facts of the case in this year. Therefore, respectfully following thesame order, and considering the fact thatinvestments have been made out of theinterest free funds available in the business,I delete the addition of Rs.55,79,771 out ofthe interest payments on loans claimed bythe company. 6.Taking into consideration the overall business condition ofthe assessee for which he has invested right from 1988-89 &1999-2000, it will not be appropriate to disturb the findingsarrived at by both the authorities. 7.Counsel for the appellant submits that for earlier year,the appeal could not be preferred because of CBDT Circular. 8.In our considered opinion, it is for the assessee to adjustfor which purpose the loan is taken in business and being aprudent businessman, no man make a loss in the long run,therefore, we ought not to substitute our opinion over his viewfor the investment made by the assessee. Therefore, nosubstantial question of law arises. 9.The appeals stand dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J.Brijesh 22 & 24.