The Commissioner Of Income Tax,Trichy v. M/S Premier Poly Sacks (P) Limited

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated : 06.01.2010 Coram : THE HONOURABLE MR.JUSTICE D.MURUGESANand THE HONOURABLE MR.JUSTICE P.P.S.JANARTHANA RAJA Tax Case (Appeal) No.625 of 2004 The Commissioner of Income Tax,Trichy ... Appellant v. M/s Premier Poly Sacks (P) Limited,No.12D Sipcot Complex, Pudukottai-622 002. ... Respondent Appeal filed under section 260A of the Income Tax Act, 1961against the order of the Income Tax Appellate Tribunal, Chennai'D' Bench dated 19.12.2003 made in ITA No.1967/Mds/2002 againstthe Commissioner of Income-Tax (Appeals) No.4, Williams Road,Contonment,Tiruchirapalli-620 001 in ITA 7/2001-2002, dt.30.9.2002for the assessment year 1997-1998 and against the JointCommissioner of Income-Tax,Special Range,Trichirapalli inG.I.No.102-P/97-98 dt.24.2.2000 for the assessment year 1997-98.For appellant: Mr.K.SubramaniamFor respondent : Mr.M.P.Senthil Kumar for Mr.Philip George The appeal is filed by the revenue as against the order ofthe Income Tax Appellate Tribunal, Chennai 'D' Bench dated19.12.2003 made in ITA No.1967/Mds/2002. 2. The appeal was admitted on 01.09.2004 on the followingsubstantial questions of law: "1.Whether on the facts and in the circumstances ofthe case, the Appellate Tribunal was right in law in https://hcservices.ecourts.gov.in/hcservices/ holding and justifying the commission paid to theDirectors of the company and set aside the order of theCommissioner of Income-tax (Appeals) in confirming theorder of the assessing officer?2.Whether on the facts and in the circumstances of thecase, the Appellate Tribunal was justified in grantingdeduction a sum of Rs.13,47,894/- being the interestpayable in respect of investments made in M/s VirgoPolymers India Limited as mentioned in the Tribunal'sorder? 3.The assessee is a private limited company engaged in thebusiness of manufacture of HDPE pipes. The relevant assessmentyear is 1997-1998 and the corresponding accounting year ended on31.03.1997. The assessee/respondent has filed return of incomeadmitting 'nil' income for the said assessment year after settingoff unabsorbed loss, investment allowance and business losses ofearlier years to the extent of Rs.20,12,148/-. The said returnwas processed under Section 143(1)(a) of the Income Tax Act, 1961and notice under Section 143(2) of the Act was also issued. Theassessing officer has completed the assessment under Section 143(3) of the Act and demanded a sum of Rs.59,292/-. While completingthe assessment, the assessing officer disallowed the assessee'sclaim of deduction on account of sales commission amounting toRs.4,20,000/- paid to three Directors and proportionatedisallowance of interest amounting to Rs.13,47,894/- withreference to the investments made by the assessee in the case ofM/s Virgo Polymers (India) Limited by treating such investment asnot relating to business. Aggrieved by that order, the assesseehas filed an appeal before the Commissioner of Income Tax(Appeals), Tiruchirapalli. The said Commissioner has confirmedthe order of the assessment in respect of the above. Aggrievedby that order, the assessee has filed an appeal before the IncomeTax Appellate Tribunal. The Tribunal allowed the appeal and setaside the order of the lower authorities. As against the same,the revenue has filed the present appeal. 4. The learned counsel appearing for the revenue submittedthat the order passed by the Tribunal is contrary to the factsand circumstances of the case and that there is no evidence forthe services rendered in respect of the claim of Rs.4,20,000/-and the commission was paid not for securing orders but only forgiving personal guarantee to M/s Shree Balaji Poly Packs. Hefurther contended that the claim regarding sales commission isnot a business expenditure. He has also contended that theTribunal is wrong in deleting the disallowance of proportionateinterest at Rs.13,47,894/- and the borrowed amount is diverted tonon business purpose and hence, the Tribunal ought not to haveallowed the claim of the assessee and has also relied on adecision in the case of COMMISSIONER OF INCOME-TAX VS V.I. BABY https://hcservices.ecourts.gov.in/hcservices/ AND CO., reported in (2002) 254 ITR 248(Ker) in support of hisproposition and seeks to set aside the same. 5.The learned counsel appearing for the assessee submittedthat the sales commission paid to the Directors is businessexpenditure and also the said amount comes to less than 5% of thetotal value of the orders secured by the Directors from M/s ShreeBalaji Poly Packs and the Directors also gave bank guarantee tothe said company and therefore, it is allowable expenditure andthe Tribunal is correct in allowing the claim of the assessee inrespect of the commission paid to the three Directors. In respectof disallowance of the proportionate interest, the learned counselappearing for the assessee submitted that no part of theinvestment in shares of M/s Virgo Polymers Ltd., had been made outof interest bearing borrowed funds and there was no nexusbetween the interest bearing borrowed funds and the investmentsand also the revenue has not established that the borrowed amountwas actually diverted for the purpose of investment. Therefore,the Tribunal has considered all the facts and circumstances of thecase and rendered its finding, which is in accordance with lawand the same has to be confirmed. 6. Heard the learned counsel appearing for the appellant andperused the materials available on record. In respect of thefirst question of law, the assessee-respondent has claimeddeduction towards payment of sales commission at Rs.4,20,000/-to its three Directors. The details regarding the same are asunder: ----------------- The said directors secured orders from M/s Shree Balaji Poly Packto the value of Rs.30.72 lakhs for the assessment year 1996-1997;Rs.32.24 lakhs for the assessment year 1997-98 and Rs.25.34 lakhsfor the assessment year 1998-99. The said sales commissionpayment were made to these three Directors at 5% of the totalvalue of orders received by the assessee. Besides the commission,on securing order from the said company, the said companyinsisted on bank guarantee or personal guarantee for theperformance and value of goods delivered for conversion. The saidDirectors also furnished guarantees for the purpose of meetingthe demand made by M/s Shree Balaji Poly Packs and also it ispertinent to note that the assessee also passed a resolution dated04.03.1996, wherein the assessee company should pay commissionfor a personal guarantee given by them. It is also pertinent tonote that the amount received by the above Directors have been https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ shown in the respective returns and the same were assessed fortax. The bona fide nature of the transaction as well as thereasonableness of the transactions have not been questioned bythe assessing officer. The assessing officer has also notinvoked Section 40A(2)(a) of the Income Tax Act, 1961. Afterconsidering these facts, the Tribunal held that it is businessexpenditure and the assessee was justified in paying commissionto its Directors against the value of the order secured from M/sShree Balaji Poly Packs and the personal guarantees offered bythe Directors for the performance and value of goods delivered forconversion. In para 4.3, the Tribunal held as follows: "On this issue, we have heard rival submissions andcontentions and perused the materials placed before us.The counsel also placed before us, a paper bookcontaining pages 1 to 36. It is seen that the salescommission was paid to the three directors @ 5 per centof the total value of the order secured from M/s BalajiPoly Packs for the value of Rs.30.72 lakhs for the year1996-97, 32.24 lakhs for 1997-98 and Rs.25.34 lakhs forthe year 1998-99 for thse years, all the three directorsstood personal guarantee for the performance of value ofgoods and in order to meet the above demand of personalguarantee by the directors, the appellant company hadpaid sales commission/guarantee commission as insistedby M/s Shree Balaji Poly Packs vide letter dated26.02.1996 and all the directors had declared the incomefrom sales commission to the extent of Rs.4,20,000/- intheir respective Returns of Income for the relevantassessment years. Even it is not denied by theAssessing Officer or it is claimed by the AssessingOfficer that excess payments have been made. Even thefirst Appellate Authority had not doubted these paymentsor its reasonableness. Rather, the Commissioner ofIncome Tax (Appeals) had admitted that the threeDirectors have offered personal guarantee to M/s ShreeBalaji Poly Packs for performance and value of goods.Rather, the Commissioner of Income Tax (Appeals)suggested that there was no reason why the appellant didnot show the commission in question under the head"guarantee commission" which would have beenappropriate. It is seen from the order of theCommissioner of Income Tax (Appeals) that the threeDirectors have given personal guarantees to severalconcerns for securing loan for M/s Virgo Polymers IndiaLtd. The learned Commissioner of Income Tax (appeals),in his order has tried to find a nexus between theguarantees given by the three directors and the networth and that in the business it is common and usualthat guarantees are given and taken. By these means, expenditure on sales commission cannot be disallowed.Rather, it shows that the three directors are men of'mean' especially when Tamil Nadu Industrial InvestmentCorporation Ltd., the Lakshmi Vilas Bank Ltd., theCommercial Tax Department of the Govt. of Tamil Nadu andM/s Industrial Development Bank of India have acceptedtheir guarantees as per the Commissioner of Income Tax(Appeals). Even, it is not the case of the revenue thatthe expenditure incurred or payment made is excessive orunreasonable having regard to the Fair Market Value(FMV) of the services rendered or facilities for whichpayment is made or the legitimate needs of the businessof the assessee and the benefits derived by theassessee. The Assessing Officer has not even invokedthe provisions of Section 40A(2)(a) of the Act. In viewof the above submissions and discussions, the appellantwas justified in paying commission to its directorsagainst value of the order secured from M/s Shree BalajiPoly Packs and the personal guarantee offered by theDirectors for the performance and value of goodsdelivered for conversion. In view of the above, weallow this issue of this appeal in favour of theassessee and set aside the order of the Commissioner ofIncome tax (Appeals) in confirming the order of theAssessing Officer on this issue." From a reading of the above finding, it is clear that the amountis paid for the purpose of securing the order from M/s ShreeBalaji Poly Packs as well as for personal guarantee given by theDirectors. Therefore, the Tribunal held that the expenditureincurred is a revenue expenditure. The finding given by theTribunal is based on valid material and evidence and thereforethe first question is answered in favour of the assessee and asagainst the revenue. 7.In respect of second question of law is concerned, theassessing officer disallowed the interest at Rs.13,47,894/- withreference to the investments made by the assessee in M/s VirgoPolymers India Ltd. During the assessment years 1996-97 and 1997-98, the assessee had acquired Rs.3,98,200/- worth shares of M/sVirgo Polymers India Ltd., at a total consideration ofRs.95,09,550/-. The assessee had shown loss of Rs.31,70,350/-in the profit and loss account for the year ended on 31.03.1997and the investment made by them. The assessing Officer was ofthe view that the investment made by the assessee was not relatingto the business and therefore, he disallowed a sum ofRs.13,47,894/- towards interest attributable on investment to theextent of 18% per annum. The assessing officer further held thatmoney borrowed from various concerns including TIIC Limited wasdiverted for non business purpose. The Tribunal had given a https://hcservices.ecourts.gov.in/hcservices/ https://hcservices.ecourts.gov.in/hcservices/ factual finding that the assessee used to get orders from M/sVirgo Polymers India Limited and also the existence of theassessee company depended on the orders received from the saidM/s Virgo Polymers India Limited. It is also to be noted thatthe assessee/respondent depended on the orders received fromM/s Virgo Polymers India Limited and to the extent of 80 to 90per cent of the orders are from the said company. Therefore, theTribunal has come to the conclusion that the investment was madefor the purpose of commercial interest of the assessee. It isalso pertinent to note that one of the objects of the Memorandumof Association is that the assessee company can makeinvestment in shares in companies. The assessee has received asum of Rs.60,00,000/- from TIIC on 23.05.1996. The assessingofficer was of the view that the said amount was invested in theshares. Actually investment was made on or before 03.04.1996 bythe assessee. The said borrowal from TIIC on 23.05.1996 is muchlater than the investment already made by the assessee i.e. on03.05.1996. So, the revenue has also not produced anyevidence to show that the borrowal money was diverted forinvestment. There is no material available on record and theassessing officer failed to correlate that the borrowed amount wasdiverted for the investment purpose. Therefore, it is useful torefer a decision of the Supreme Court in the case of S.A.BUILDERSLTD., V. COMMISSIONER OF INCOME TAX (APPEALS) AND ANOTHERreported in 2007 (288) ITR 1, wherein it has considered as towhether the interest on funds borrowed by the assessee to give aninterest free loan to a sister concern should be allowed as adeduction under Section 36(1)(iii) of the Income Tax Act, 1961 andone has to enquire whether the loan was given by the assessee as ameasure of commercial expediency and held as follows: "We agree with the view taken by the Delhi High Courtin CIT v. Dalmia Cement (B.) Ltd. (2002) 254 ITR 377that once it is established that there was nexusbetween the expenditure and the purpose of the business(which need not necessarily be the business of theassessee itself), the Revenue cannot justifiably claimto put itself in the arm-chair of the businessman or inthe position of the board of directors and assume therole to decide how much is reasonable expenditurehaving regard to the circumstances of the case. Nobusinessman can be compelled to maximize his profit.The income-tax authorities must put themselves in theshoes of the assessee and see how a prudentbusinessman would act. The authorities must not lookat the matter from their own view point but that of aprudent businessman. As already stated above, we haveto see the transfer of the borrowed funds to a sisterconcern from the point of view of commercial expediencyand not from the point of view whether the amount was advanced for earning profits." In this case, the assessee has an object for investment and hasalso got orders from the said M/s Virgo Polymers India Limitedto the extent of 80 to 90 percent and hence, there is acommercial expediency. Further there is no proof that the borrowedamount has actually been diverted to investment. Therefore,after taking into consideration the object of the assessee as wellas the investment was made due to commercial expediency and alsothere is no nexus between the borrowed amount, the Tribunal iscorrect in holding that the investment in shares was madekeeping in view the commercial interest of the assessee. advanced for earning profits." In this case, the assessee has an object for investment and hasalso got orders from the said M/s Virgo Polymers India Limitedto the extent of 80 to 90 percent and hence, there is acommercial expediency. Further there is no proof that the borrowedamount has actually been diverted to investment. Therefore,after taking into consideration the object of the assessee as wellas the investment was made due to commercial expediency and alsothere is no nexus between the borrowed amount, the Tribunal iscorrect in holding that the investment in shares was madekeeping in view the commercial interest of the assessee. 8. The learned counsel appearing for the revenue relied onthe decision of Kerala High Court in the case of COMMISSIONER OFINCOME TAX V. V.I.BABY AND CO., reported in 2002 (254) ITR 248,wherein the assessee, a firm dealing in piece goods, had paidinterest on its borrowings from banks and since, the assessee hadtransferred sizeable amounts to the personal accounts of itspartners and also advanced amounts to relatives of the partnersand sister concerns; but no interest was charged and the assessingofficer disallowed the proportionate interest in respect of theamounts so advanced by the assessee firm. On an appeal to theCIT (Appeals), the Commissioner has confirmed the order of theassessing officer. On further appeal by the assessee, theTribunal allowed the claim of the assessee. The Kerala HighCourt reversed the order of the Tribunal and confirmed the orderpassed by the assessing officer on the ground that the assesseehad not derived any benefit from the advances to the partners,their relatives and the sister concerns and therefore, held thatthe same was not for business purpose. In the present case, theassessee solely depends upon the orders of the M/s Virgo PolymersIndia Limited and therefore in the interest of the assessee theinvestment was made and also has one of the objects as investmentand hence, the above cited decision of Kerala High court isfactually different from the present case. So that judgment isnot helpful to the revenue. The finding given by the Tribunal isbased on valid materials and evidence and it is a question offact. It is not a perverse order. We do not find any error orillegality in the order of the appellate Tribunal warrantinginterference. The second question of law is also answered infavour of the assessee and as against the revenue. Therefore, theappeal filed by the revenue is devoid of merits and the same isdismissed. /true copy/ Sd/Asst.Registrar Sub Asst.Registrar raa To 1.The Commissioner of Income -Tax (Appeals),No.4,Williams Road, Contonment,Tiruchirapalli 620 001. 2.The Joint Commissioner of Income Tax,Special Range, Tiruchirapalli. 3.The Income-Tax Appellate Tribunal, D-Bench,Chennai. +1cc to Mr.K.Subramaniam, Sr.S.C.for IT Sr 816 +1cc to Mr.Philip George,Advocate Sr 645 VSV(CO)km/10.2. T.C.(A) No.625 of 2004