PR COMMISSIONER OF INCOME TAX ALWAR vs. M/S LAKHANI SHOE CO PVT LTD

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR 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 are involved hence they are decided by this common judgment. 2. By way of these appeals, the appellant has assailed the judgment and order of the tribunal whereby tribunal has dismissed the appeal of the department and confirmed the order of the CIT(A).

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(2) Whether the tribunal was legally justified in deleting the disallowance of interest made @ 10.29% specifically when the profit earned on the investments made by the company was 1.71% whereas the interest paid on unsecured and bank loans was 12%?

(3) Whether the tribunal was legally justified in deciding the appeal of the revenue on the basis of findings of A.Y.2010-11 specifically when against the order of the tribunal the department could not prefer an appeal u/s 260A as the tax effect was less than the monetary limit prescribed by the CBDT?” Appeal No.283/2017 “(1) Whether the Tribunal was legally justified in deleting the addition of Rs.50,31,326/- made on account of interest paid on loans which were not required by the assessee company since it had made huge investments in firm in which directors of the firm were partners and the investment so made generated low return in comparison to interest paid on loans?

(2) Whether the tribunal was legally justified in deleting the disallowance of

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interest made @ 10.29% specifically when the profit earned on the investments made by the company was 1.71% whereas the interest paid on unsecured and bank loans was 12%? (3) Whether the tribunal was legally justified in deciding the appeal of the revenue on the basis of findings of A.Y. 2010-11 specifically when against that order of the tribunal the department could not prefer an appeal u/s 260A as the tax effect was less than the monetary limit prescribed by the CBDT?” 4. The facts of the case are that the assessment in this case was reopened by issuance of notice u/s 148 of the Act by the Assessing Officer. In terms of the reasons recorded by the AO, it was stated that the assessee company has made investment of 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 Directors of the assessee company are also partners in the said two firms. It was further stated that the assessee was paying interest on unsecured loan from Shri Gunjan Lakhani and interest to banks on secured loan on which it was paying the interest @ 12% which is higher as compared to low rate of return on investment in the said two firms and the investments were not reasonable. Thereafter, after disposing off the objections raised by the assessee, the reassessment was completed u/s 147 r/w section 143(3) of the Act wherein the AO has held that the business of the assessee company is manufacture of Hawai Chapal, the investment in these two firms is not part of the business of the assessee and there is no

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profit to the business of the assessee from such investment and the amounts so invested is not reasonable. The Assessing officer didn’t accept the assessee’s company submission that the investments in the firms were not made out of borrowed funds but out of internal accruals and the investments were made in the earlier years. The Assessing Officer finally held that if the assessee had not made the above investment, the assessee company would have saved the amount of interest paid on unsecured loan and bank loan to the extent of 12% of the investment made which comes to Rs. 55,79,771/- which was disallowed and added to the income of the assessee company. 5. He has taken us to the order of CIT(A) who observed as under:- “4.3 I have perused the assessment order as well as submissions made by the appellant and find that a disallowance of Rs.55,79,771/- out of interest payments made by the appellant on loans has been made by the AO on the ground of mis- utilization of interest bearing funds. The AO has stated that an amount of Rs.3.19 crores stands invested as capital in M/s Mascot Footcare and amount of Rs.1.45 crores stand invested as capital in M/s Mascot Udhyog. The profits earned on the investment made by the company are very less and the rate of interest paid by the appellant at 12% is much higher. Therefore a disallowance @ 12% on the amount of investment made has been made by the AO which comes to Rs.55,79,771 (12% of Rs.4,64,98,092). AO has made the disallowance on the ground that if the appellant would not have been made the

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investment, than the interest burden on the borrowings made would have been lesser by this amount. 4.4 The appellant has stated that an investment of Rs.60 lacs has been made in M/s Mascot Footcare and an investment of Rs.45 lacs was made in M/s Mascot Udhyog by the appellant during the years 1988 to 2000. The remaining balance represents investments out of share of profit and interest and not out of borrowed funds. Therefore, there is no justification in making the disallowance out of interest payments made by the company. 4.5 The appellant has furnished complete details of year wise investment made in both the firms alongwith the quantum of profits received on account of internal accruals on the investments made in those firms. The details are as under:- M/s Mascot Footware 1988-89 Rs.1,25,000 1989-90 3,75,000 1998-99 25,00,000 1999-2000 30,00,000 M/s Mascot Udyog Year Rs. 1989-90 5,00,000 1999-2000 40,00,000 Further, the investments in these partnership firms were made out of internal accruals and no borrowed funds were utilized in those years while making these investments. The appellant had internal accruals in the years when investment was made in above two firms as under:-

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Year Internal Accruals Investment made in Mascot Footware Mascot Udyog 1988-89 27,48,569.00 1,25,000.00 -- 1989-90 47,82,970.00 3,75,000.00 5,00,000.00 1998-99 1,48,68,410.00 25,00,000.00 -- 1999-2000 1,10,29,599.00 30,00,000.00 40,00,000.00 4.6 The appellants has further stated that no loans have been taken from the bank for making investments in these firms and its stated that on these small investments, actual withdrawals made from M/s Mascot Udyog are Rs.1,06,75,000 as against the investment of Rs.45,00,000. Similarly, appellant has made withdrawals of Rs.1,06,68,401 have been made from M/s Mascot Footcare as against the investment of Rs.60,00,000 made. 4.7 The appellant has stated that appeal on this issue had been decided against by the CIT(A), Alwar vide order dated 14.08.2014 for A.Y. 2010-11. It is submitted that Hon’ble ITAT Jaipur Bench vide order dated 18.03.2016 in ITA No.724/JP/2014 for A.Y. 2010-11 has decided this issue in favour of the appellant. A copy of the order has been filed on record. 4.8 Having considered the submissions made by the appellant and evidence available on record, I find that the concerns in which the appellant company has made substantial investment fall with in the ambit of specified persons as defined in the provisions of section 40A(2)(b) of the IT Act. The Directors/Share holders of the company are having substantial interest in the above mentioned firms, in which the appellant company has invested substantial amounts as capital+accumulated profits over the years. 4.9 I have gone through the copy of the order passed by the Hon’ble Tribunal in the case of the appellant and find that there is no change in the facts of the case in this

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year. Therefore, respectfully following the same order, and considering the fact that investments have been made out of the interest free funds available in the business, I delete the addition of Rs.55,79,771 out of the interest payments on loans claimed by the company. 6. Taking into consideration the overall business condition of the assessee for which he has invested right from 1988-89 & 1999-2000, it will not be appropriate to disturb the findings arrived 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 adjust for which purpose the loan is taken in business and being a prudent businessman, no man make a loss in the long run, therefore, we ought not to substitute our opinion over his view for the investment made by the assessee. Therefore, no substantial question of law arises. 9. The appeals stand dismissed. (VIJAY KUMAR VYAS),J. (K.S. JHAVERI),J. Brijesh 22 & 24.