ADDL.CIT, SPECIAL RANGE-3, NEW DELHI vs. ESCORTS LTD., FARIDABAD
Facts
The assessee, Escorts Kubota Ltd., challenged the disallowance of Rs.21.11 crores interest expenditure on investments in group companies, disallowances related to long-term capital losses on sale of land and shares, and taxability of interest on income tax refund. The Revenue challenged the deletion of disallowances for foreign and domestic travel expenses, prior period expenses, and sales promotion expenses.
Held
The Tribunal deleted the interest disallowance, noting that investments were in equity/preference shares funded by own funds and similar issues were previously decided in assessee's favor. Other grounds related to capital losses and tax refund were remanded to the Assessing Officer for fresh adjudication with proper verification of additional evidence. The Revenue's appeal was dismissed, upholding the deletion of disallowances for travel, prior period, and sales promotion expenses due to the Assessing Officer's vague reasoning or the expenses accruing in the current year.
Key Issues
Whether disallowance of interest expenditure on investments in group companies is justified; treatment of long-term capital losses and interest on income tax refund; and validity of disallowance of travel, prior period, and sales promotion expenses.
Sections Cited
Section 36(1)(iii), Section 143(3)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH: ‘B’ NEW DELHI
Before: SHRI SAKTIJIT DEY, VICE- & SHRI NAVEEN CHANDRA
IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘B’ NEW DELHI
BEFORE SHRI SAKTIJIT DEY, VICE-PRESIDENT AND SHRI NAVEEN CHANDRA, ACCOUNTANT MEMBER
ITA No.5552/Del/2018 Assessment Year: 2004-05
Escorts Kubota Limited Vs. Dy. CIT, (formerly known as Escorts Circle -7(1), Ltd.), New Delhi Corporate Centre, 15/5, Mathura Road, Faridabad, Haryana PAN :AAACE0074B (Appellant) (Respondent)
With ITA No.6191/Del/2018 Assessment Year: 2004-05
Dy. CIT, Vs. Escorts Kubota Limited Circle -7(1), (formerly known as Escorts New Delhi Ltd.), Corporate Centre, 15/5, Mathura Road, Faridabad, Haryana PAN :AAACE0074B (Appellant) (Respondent)
Assessee by Sh. R.M. Mehta, CA Department by Sh. Vivek Kumar Upadhyay, Sr. DR
Date of hearing 27.05.2024 Date of pronouncement 31.05.2024
ITA No.5552/Del/2018 & 6191/Del/2018 AY: 2004-15
ORDER PER SAKTIJIT DEY, VICE-PRESIDENT
Captioned cross appeals arise out of order dated 18.07.2018
of learned Commissioner of Income Tax (Appeals)-XXVI, New
Delhi, pertaining to assessment year 2004-05.
ITA No.5552/Del/2018 (Assessee’s Appeal)
In ground no. 1 and its sub-grounds, the assessee has
challenged proportionate disallowance of interest expenditure
amounting to Rs.21,11,00,000/-.
Briefly the facts relating to this issue are, the assessee is a
resident corporate entity stated to be engaged in the business of
manufacturing and sale of tractors, shockers, railway equipments
etc. For the assessment year under dispute, the assessee filed its
return of income on 01.11.2004, declaring loss of
Rs.147,50,80,523/-. In course of assessment proceedings, the
Assessing Officer noticed that during the year under
consideration the assessee had invested Rs.175.9 crores in
various group companies. On verifying the profit and loss
account, he found that the assessee during the year had incurred
interest expenditure of Rs.72.82 crores and bank finance charges
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of Rs.28.95 crores towards borrowings. He observed that since the
assessee had sufficient own funds, he could have utilized them for
investment purposes, thereby prevented borrowings from banks
and financial institutions on payment of interest. He further
observed that the assessee had made investments in group
companies without receiving any interest. Therefore, applying
interest rate at 12%, he disallowed an amount of Rs. 21.11 crores,
out of the interest expenditure. The assessee contested the
aforesaid disallowance before learned first appellate authority.
However, the disallowance was sustained.
Before us, learned counsel appearing for the assessee
submitted that the investments are made in equity and preference
shares of group companies, hence, they are not in the nature of
loans and advances, which could have earned interest. He further
submitted that when the Assessing Officer himself records a
factual finding that the assessee had sufficient own funds, the
logical conclusion would be that the investments in group
companies were out of the own funds. Therefore, no disallowance
could have been made under section 36(1)(iii) of the Act. He
further submitted that identical disallowances made in the
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preceding and subsequent assessment years have been deleted by
the first appellate authority and the Tribunal. Thus, he
submitted, the issue is squarely covered in favour of the assessee.
Further, he relied upon the following decisions:
S.A. Builders Ltd. v. CIT [2007] 288 ITR 1/158 Taxman 74 (SC); 2. South Indian Bank Ltd. vs. CIT (Civil Appeal No. 9606 of 2011)(SC); 3. CIT(LTU) vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC); 4. Hero Cycles (P.) Ltd. v. CIT [2015] 379 ITR 347/63 taxmann.com 308/ [2016] 236 Taxman 447 (SC); 5. Munjal Sales Corpn. v. CIT [2008] 298 ITR 298/168 Taxman 43 (SC); 6. Principal Commissioner of Income-tax v. Basti Sugar Mills Co. Ltd. [2018] 98 taxmann.com 401 (Delhi); 7. Principal Commissioner of Income-tax v. Reebok India Company [2018] 98 taxmann.com 413 (Delhi);
The learned Departmental Representative, though, agreed
that the issue is squarely covered by the decision of Tribunal in
assessee’s own case, however, he relied upon the observations of
the Assessing Officer and learned first appellate authority.
We have considered rival submissions and perused the
materials on record. We have also applied our mind to the
decisions relied upon. Undisputedly, the disallowance in question
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has been made by the Assessing Officer on the ground that the
borrowed funds have been utilized in making interest free
advances to the group companies. The learned first appellate
authority has also upheld the disallowance. However, facts on
record reveal that the so called investments are not in the nature
of loans and advances, but are investments in equity and
preference shares of group companies. Therefore, the allegation of
the departmental authorities that the assessee has diverted
borrowed funds to group companies without charging any interest
are factually incorrect. Further, the Assessing Officer himself has
recorded a factual finding that the assessee had sufficient interest
free funds available with it.
That being the factual position on record, as per the settled
legal principle, it has to be presumed that interest free funds
available with the assessee have been invested in acquisition of
shares of group companies. In any case of the matter, it is
observed that identical disallowances were made by the Assessing
Officer in assessment years 2002-03, 2003-04 and 2005-06.
While deciding the issue, learned first appellate authority deleted
the disallowances. While deciding the appeals filed by the
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Revenue in ITA No.4673/Del/2005 & Ors., the Tribunal vide
order dated 06.03.2019 upheld the decision of learned first
appellate authority. On going through the aforesaid order of the
Tribunal, we find parity of facts between the impugned
assessment year and the appeals for other assessment years
decided by the Tribunal. That being the factual position on
record, we delete the disallowance made under section 36(1)(iii) of
the Act. This ground is allowed.
In ground no. 2, the assessee has challenged disallowance of
Rs.62,53,675/- claimed towards cost of acquisition of land.
Briefly the facts are, the assessee had purchased leasehold
land at Pune for its tractor division in financial year 1998-99 from
Maharashtra Industrial Development Corporation (MIDC). During
the year under consideration, the assessee had sold the land and
claimed long term capital loss of Rs.5,68,89,749/-. In course of
assessment proceedings, the Assessing Officer noticed that the
assessee has claimed cost of Rs.62,53,675/-. Alleging that the
assessee could not furnish the bills/vouchers pertaining to the
aforesaid cost, the Assessing Officer disallowed it. The assessee
contested the disallowance before learned first appellate
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authority. In course of hearing before the first appellate authority,
the assessee furnished additional evidences to support its claim.
However, alleging that the assessee furnished the photocopy of
letter issued by MTDC and no original was furnished, learned first
appellate authority sustained the disallowance.
We have considered rival submissions on the issue and
perused the materials on record. Undisputedly, due to inadequacy
of time available, the assessee could not furnish copies of
bills/vouchers relating to the cost incurred on the sale of asset
during assessment proceeding. However, before the first appellate
authority, the assessee did furnish the additional evidences to
support its claim towards cost incurred.
As could be seen, learned first appellate authority has
rejected the additional evidence on the ground that it is only a
photocopy and no original document was furnished. From the
facts on record, it is observed that additional evidence furnished
by the assessee is a letter from MIDC, which is a State
Government organization. If learned first appellate authority had
any doubt regarding the authenticity of such document, he could
have conducted necessary inquiry himself or through the
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Assessing Officer to verify the authenticity of the document.
Without conducting any such inquiry, he could not have rejected
the additional evidences.
In view of the aforesaid, we restore the issue to the
Assessing Officer to verify assessee’s claim by properly examining
the documentary evidences furnished by the assessee by way of
additional evidences. In case, any inquiry is required to be
conducted with reference to such evidences, it is open to the
Assessing Officer to do so. However, the Assessing Officer must
provide due and reasonable opportunity of being heard to the
assessee before deciding the issue. Ground is allowed for
statistical purposes.
In ground no. 3, the assessee has challenged disallowance of
long term capital loss of Rs.4.72 crores on sale of shares of
Escorts Hospital & Research Centre Ltd. (EHRCL)
We have heard the parties and perused the materials on
record. Facts on record reveal that in course of hearing before the
first appellate authority the assessee had furnished certain
additional evidences, however, rejecting such additional
evidences, learned first appellate authority has sustained the
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disallowance. In our view, the additional evidences furnished by
the assessee will have a crucial bearing for deciding the issue.
Therefore, such evidences should not be rejected without verifying
their authenticity.
In view of the aforesaid, we restore the issue to the
Assessing Officer for deciding afresh after considering all the
evidences, including the additional evidences filed by the assessee
before learned first appellate authority. Needless to mention, the
Assessing Officer must provide due and reasonable opportunity of
being heard to the assessee before deciding the issue. Ground is
allowed for statistical purposes.
In ground no. 4, the assessee has raised the issue of
disallowance of long term capital loss of Rs.3,88,612/-.
In course of assessment proceedings, the Assessing Officer
noticed that the assessee had claimed long term capital loss of
Rs.3,88,612/- on sale of shares of INAPEX Ltd. However, the
Assessing Officer disallowed the claim of loss without providing
any reasoning. The disallowance was contested before the first
appellate authority. While deciding the issue, learned first
appellate authority sustained the disallowance on the reasoning
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that the assessee failed to file complete information and further
failed to discuss the entire factual matrix.
We have heard the parties and perused the materials on
record. It is the case of the assessee that the shares of INAPEX
Ltd. were acquired by the assessee by way of buy-back offer in
the financial year 1995-96. It is observed, to justify its claim, the
assessee had submitted copy of buy-back acceptance letter of the
company and also a copy of cheque received from the company
towards buy-back. While the Assessing Officer has disallowed
assessee’s claim without assigning any reason, learned first
appellate authority has sustained the disallowance alleging lack
of complete information.
Considering the fact that documentary evidences furnished
by the assessee have not been properly evaluated by the
departmental authorities, we are inclined to restore this issue to the file of Assessing Officer for de novo adjudication after
providing due and reasonable opportunity of being heard to the
assessee. Ground is allowed for statistical purposes.
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In ground no. 5, the assessee has challenged the taxability
of Rs.72.67 lakhs, being interest on income tax refund, pertaining
to assessment year 2003-04.
We have heard the parties and perused the materials on
record. While processing assessee’s return of income, the
Assessing Officer, in the intimation issued under section 143(3) of
the Act, computed interest on income tax refund payable to the
assessee at Rs.72,67,332/-, which was adjusted against certain
arrear demand. Subsequently, after completion of assessment
under section 143(3) of the Act, the Assessing Officer, while
computing the income of the assessee, withdrew the interest on
income tax refund amounting to Rs.72,85,176/- due to the
additional demand created on account of various additions made.
However, while deciding assessee’s appeal, learned first appellate
authority granted relief to the assessee. While giving effect to the
order of learned Commissioner (Appeals), the Assessing Officer
determined interest on income tax refund about Rs.4.28 crores,
which according to the assessee, was offered to tax. Thus, it is the
case of the assessee before us that once the interest on income
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tax refund is withdrawn, the addition made deserves to be
deleted.
Having considered rival submissions, we are of the view that
assessee’s claim needs to be factually verified by the Assessing
Officer having regard to the facts and evidences brought on
record. Therefore, we restore this issue to the Assessing Officer for
fresh adjudication after providing due and reasonable opportunity
of being heard to the assessee. Ground is allowed for statistical
purposes.
In the result, assessee’s appeal is partly allowed.
ITA No.6191/Del/2018 (Revenue’s Appeal)
In ground no.1, the Revenue has challenged deletion of
disallowance of foreign as well as domestic travel expenses.
Briefly the facts are, in course of assessment proceedings,
the Assessing Officer noticed that the assessee has debited foreign
travel expenses of Rs.51,58,466/- and domestic travel expenses of
Rs.2,21,542/-. As far as foreign travel expenses are concerned,
the Assessing Officer observed that such expenses were incurred
for foreign travel undertaken to Italy, Singapore, Shanghai,
London, Dubai, Hong Kong etc. He observed that in these
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countries, the assessee has got no business interest. Therefore,
he treated such expenses to be not in connection with the
business. Accordingly, he disallowed it.
In so far as domestic travel expenses of Rs.2,21,543/- is
concerned, the Assessing Officer observed that it was in respect of
Nitasha Nanda, who is in no way connected with the business of
assessee. Accordingly, he disallowed the same. Assessee
contested the aforesaid disallowances before learned first
appellate authority. Being of the view that there is nothing
brought on record by the Assessing Officer to establish that the
expenses were not incurred for the purposes of business, learned
first appellate authority deleted the disallowance.
We have considered rival submissions and perused the
materials on record. The observation of the Assessing Officer
while disallowing the expenses is too ambiguous and general in
nature. He has not doubted the fact that the expenses, indeed,
were incurred. The only reason for disallowing foreign travel
expenses is, the assessee has no business interest in the
cities/countries, in respect of which, foreign travel expenses have
been incurred. However, what he means by ‘business interest’ is
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not clear. There is absolutely no observation by the Assessing
Officer that the foreign travel expenses were not related to
assessee’s business or were personal in nature. Similarly, he has
disallowed the domestic travel expenses by observing that the
concerned person has no business connection to the assessee. On
what basis the Assessing Officer has come to such conclusion is
not forthcoming from the assessment order. In the aforesaid
scenario, we do not find any infirmity in the decision of learned
first appellate authority in deleting the disallowances. Ground is
dismissed.
In ground no. 2, the Revenue has challenged deletion of
disallowance of prior period expenses amounting to
Rs.8,48,49,423/-.
Briefly the facts are, in course of assessment proceedings,
the Assessing Officer, while verifying the Audit Report, noticed
that the assessee has claimed prior period expenses of
Rs.8,48,29,423/-. In response to the query raised by the
Assessing Officer, the assessee submitted that such expenses
include personnel expenses, sales and administration expenses,
purchase/raw material consumption and operating expenses etc.
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Stating that such expenses pertained to earlier years and the
assessee is following mercantile system of accounting, the
Assessing Officer disallowed them. While deciding the issue in
appeal, learned first appellate authority found that the major part
of the expenses pertained to sales incentives payable to dealers of
assessee’s tractor division for the financial year 2002-03. He has
further given a factual finding that the claim of incentives has to
be based on aggregate performance for the year, hence, it is not
possible for the assessee to verify the claim of incentives by the
dealers on closure of account on 31.03.2003. However, it was
factually found that the sales promotion expenses actually
crystallized/finalized on 30.06.2003 falling in financial year 2003-
04 corresponding to assessment year 2004-05. Thus, the liability
to pay the expenditure accrued in the assessment year under
dispute. That being the case, it cannot be treated as prior period
expenses. It is worth mentioning that identical issue has been
decided in assessee’s own case by the Tribunal in earlier
assessment year. While deleting the disallowance, learned first
appellate authority has also taken cognizance of the decision of
Tribunal. In aforesaid view of the matter, we do not find any
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infirmity in the decision of the first appellate authority in deleting
the disallowance.
In ground no. 3, the Revenue has challenged the deletion of
disallowance of Rs.7,86,942/- made on account of sales
promotion expenses.
We have heard the parties and perused the materials on
record. As could be seen, the Assessing Officer has disallowed the
sales promotion expenses on the ground that such expenses
relate to payment of bills of various hotels. Observing that such
expenses are not incurred for the purpose of business, the
Assessing Officer disallowed it. Whereas, learned first appellate
authority deleted the disallowance on the reasoning that the
Assessing Officer has not established on record that such
expenses are not incurred for the purpose of business.
Having perused the observation of the Assessing Officer, we
find that the reason given for disallowance of expenditure is very
much general and vague. He has not stated on what basis he has
come to the conclusion that such expenses are not for the
purpose of business. Undisputedly, the Assessing Officer has not
doubted the fact that expenses were incurred.
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That being the factual position on record, we do not find any
infirmity in the decision of learned first appellate authority in
deleting the disallowance. This ground is dismissed.
In the result, Revenue’s appeal is dismissed.
To sum up, assessee’s appeal is partly allowed and
Revenue’s appeal is dismissed.
Order pronounced in the open court on 31st May, 2024
Sd/- Sd/- (NAVEEN CHANDRA) (SAKTIJIT DEY) ACCOUNTANT MEMBER VICE-PRESIDENT Dated: 31st May, 2024. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi
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