Packaging Products,, Ahmedabad vs Department Of Income Tax

Income Tax Officer, Ward-6(4), C. U. Shah Building, Ashram Road, Ahmedabad Appellant

Vs.

M/s. Packaging Products, Plot No.413, GIDC Estate, Vatva, Ahmedabad Respondent

PAN: AADFP3499F

अपीलाथ क ओर से /By Appellant : Shri B. L. Yadav, Sr. D.R. ू यथ क ओर से/By Respondent : Shri Tushar Hemani, A.R. सुनवाई क तार!ख/Date of Hearing : 11.03.2015 घोषणा क तार!ख/Date of Pronouncement : 27.03.2015 ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 2

ORDER

PER SHAILENDRA KUMAR YADAV, J.M:

This appeal has been filed by the Revenue against the order of Commissioner of Income Tax (Appeals)-XI, Ahmedabad, dated 30.11.2010 for A.Y. 2001-02 on the following ground:

"1) The Ld. Commissioner of Income tax (A) has erred in law and on facts in deleting the disallowance of Rs.7,26,568/- being interest on investment in Joint Venture."

2. Assessee had been engaged in business of manufacturing of corrugated boxes. Assessing Officer disallowed the interest of Rs.7,26,568/-. Only issue before us with regard to this disallowance of interest of Rs.7,26,568/-. In first round, ITAT vide its order dated 18.05.2007 directed the Assessing Officer to examine one joint venture agreement and secondly to ascertain whether assessee has shown income from joint venture in subsequent years. As stated above assessee is engaged in business of manufacturing of corrugated boxes. Due to heavy competition, assessee was looking for new business opportunities. It came across a proposal to develop agricultural produces in controlled conditions using latest technology. Having evaluated the viability of proposal, assessee decided to go ahead with it and therefore it entered into a joint venture agreement for purpose with M/s. Kavitan ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 3

Agro On 14th May, 1996. As per broad terms of agreement , assessee was in the role of providing finance for a specified income while other venture M/s Kavitan Agro was to arrange for land, technology, develop farming, take care of day to day business activities, market products, maintain accounts, etc. The relevant clauses of agreement are re-produced hereunder:-

"Clause 1. This agreement is specifically an agreement of Joint Venture and the parties hereto shall not act as an agent of another. In short this agreement is not a partnership agreement.

Clause 2. This agreement shall come into force with effect from 14th day of May, 1996.

Clause 3. The party of the first part shall be responsible to provide joint venture business finance of Rs 50 lacs during the phased period upto 31-03-2000.

Clause 4. In consideration of providing the finance, the party of the first part shall be entitled to a sum of 15% of the joint venture turnover effected after 01-04-2000 and this consideration shall become due on 31st March 2001 and thereafter every year on 31st March. It is specifically agreed that the part of the first part shall have no right or claim whatsoever for any consideration for turnover effected in joint venture upto 31- 03-2000.

Clause 5. The party of the first part shall have first charge and lien on all claims, dues and assets of joint venture business."

ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 4

As per stipulation of agreement M/s Kavitan Agro arranged for land, developed the farm including Green House, Bore well, etc and commenced farming activities. Assessee provided finance to joint venture business as per stipulation of agreement. As per balance sheet of Kavitan Agro as on 31.03.1997, position emerged as under:

"1. The appellant had invested an amount of Rs.

22,81,064 as against Rs.50,00,000 stipulated in the agreement.

2. As against that a sum of Rs.24,63,130 was invested by the co-venturer in the business of development of farm.

3. Out of the total investment a sum of Rs 59,393 was invested by way of financing the loss in the nature of recurring expenses on development of agricultural produce."

Despite best efforts on part of both venturers, joint venture business lost a huge sum of Rs. 0.59 lacs during its first year of operations. As against total expenses of Rs.66,351/- incurred on agriculture produces, it could realize meager sale of Rs.6,958/- of agricultural produce. As per terms of its agreement of assessee was not entitled to any income during year under consideration. Assessing Officer while making assessment calculated interest @ 18% on amount invested by assessee in joint venture business till 31.03.2001. Assessing Officer has disallowed interest treating this investment as a non-business investment ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 5

made by assessee. While in first round, remanding the matter back to Assessing Officer, ITAT gave following directions :

"We in the interest of justice, think it just and proper to set aside the order of CIT(A) and restore the matter back to the file of the Assessing Officer with a direction to re-decide the issue afresh in accordance with law after considering the joint venture agreement entered into by the assesses and also the fact whether the assesses has subsequently shown the income from joint venture as agreed. We order accordingly"

According to Para 5 of Assessing Officer, assessee could not fulfill the terms and conditions laid down in joint venture agreement dated 14.05.1996 entered into with Kavitan Agro and assessee had not shown any income subsequently. According to assessee, remuneration was based on sales turnover of the firm. There was no sales turnover of said firm, no income accrued to assessee. As per clause 1 of agreement, wherein it was mentioned that agreement was not in nature of partnership in fact, it was a simple joint venture agreement wherein both parties were to take away their shares of income as per stipulation and were supposed to offer the same in its own hand for taxation. As per para 5.2 of assessment order, assessee could not furnish any evidence to substantiate its claim that investment was not made out of borrowed funds. Balance sheet of assessee were furnished to Assessing Officer, wherefrom it was observed that it had only two secured loans, one being term loan for acquisition of fixed assets of corrugated boxes manufacturing unit and another being working capital ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 6

finance again for corrugated boxes manufacturing unit. Thus, no specific borrowings were raised for the purpose of its business activity. Assessing Officer did not agree with the contention of assessee and made addition in question.

3. Matter was carried before the First Appellate Authority, wherein various contentions were raised on behalf of assessee and having considered the same, CIT(A) granted relief to assessee. Same has been opposed on behalf of Revenue inter alia submitted that CIT(A)(A) was not justified in deleting the disallowance of Rs.7,26,568/- being interest on investment in joint venture. Accordingly, order of CIT(A)(A) be set aside and that of Assessing Officer be restored. On other hand, learned Authorized Representative supported the order of CIT(A).

4. After going through rival submissions and material on record we find that Tribunal in first round directed the Assessing Officer to examine i. joint venture agreement and ii. to ascertain whether assessee has shown income from joint venture in subsequent years.

4.1 With regards to first point, contention of assessee has been that Assessing Officer merely stated that assessee contributed funds as partner. He failed to consider the contents of joint venture agreement. Perusal of agreement shows that agreement with M/s. Kavitan Agro dated ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 7

14.05.1996 is titled "Joint Venture Business Agreement". Clause 1 of agreement states that agreement is one of joint venture and is not a partnership agreement. In accordance with clause 4 of said agreement, assessee was entitled to 15% of turnover (and not any share in profits/losses, which is key element of any partnership). Clause 12 of agreement specifically states that assessee shall have no right or claim in profit or loss of joint venture business.

4.2 As regards income from joint venture in subsequent year, stand of assessee has been that since business never took of and no turnover was affected, question of showing income from joint venture business did not arise. Just because, there was no profit, expenditure could not be allowed.

4.3 As regards source of funds, it was stand of assessee that at the end of year, investment in joint venture business was Rs.40,36,494/-. Balance Sheet, secured loan were machinery loan, car loan and hypothecation loan. Thus, no borrowing was made for investment in joint venture business. Investment was only out of business funds. In facts and circumstances, Assessing Officer's action in disallowing interest @ 18% on notional basis was not found in accordance with law and CIT(A) was justified in holding that agreement was in joint venture agreement for the purpose of business. Therefore, disallowance in question was found unwarranted and same ITA No. 264/Ahd/11 A.Y. 01-02 [ITO vs. M/s. Packaging Pr oducts] Page 8

was rightly deleted by CIT(A). This reasoned finding of CIT(A) needs no interference from our side. We uphold the same.

5. As a result, appeal filed by the Revenue is dismissed.

Pronounced in the open Court on this the 27th day of March, 2015.

Sd/- Sd/- (N. S. SAINI) (SHAILENDRA KUMAR YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 27/03/2015 True Copy S.K.SINHA

आदे श क ूितिल'प अमे'षत / Copy of Order Forwarded to:-

1. राजःव / Revenue

2. आवेदक / Assessee

3. संबिं धत आयकर आयु0 / Concerned CIT

4. आयकर आयु0- अपील / CIT (A)

5. 'वभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad

6. गाड9 फाइल / Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।