M/s. Manickbag Automobiles P. Ltd., Belgaum V. Asst. Commissioner of Income tax Cir. 2, Belgaum

CO 4/PAN/2014

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9750 (ITAT-PANAJI)
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 26-06-2014
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Next Hearing Date: 26-06-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 07-01-2014
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A S PATIL ITP
• Assessee Lawyers: SHR NISANT K LD
• Keywords: Commercial expediency; Capital expenditure
• Section: 143(3); 37(1); 12; 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NOS. 365/PNJ/2013 (A.Y.2008 - 09) ITA NOS. 366/PNJ/2013 (A.Y.2009 - 10) ITA NOS. 367/PNJ/2013 (A.Y.2010 - 11) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2, BELGAUM (APPELLANT) VS. M/S. MANICKBAG AUTOMOBILES PVT. LTD., NO.360, P.B. ROAD, BELGAUM PAN:AADCM6259K (RESPONDENT) CROSS OBJECTION NO. 0 3/PNJ/2014 (A.Y.2008 - 09) ARISING OUT OF ITA NO.365/PNJ/2013 CROSS OBJECTION NO. 0 4/PNJ/2014 (A.Y.2009 - 10) ARISING OUT OF ITA NO.366/PNJ/2013 CROSS OBJECTION NO. 0 5 /PNJ/2014 (A.Y.2010 - 11) ARISING OUT OF I TA NO.367 /PNJ/2013 M/S. MANICKBAG AUTOMOBILES PVT. LTD., NO.360, P.B. ROAD, BELGAUM PAN:AADCM6259K (OBJECTOR ) VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2, BELGAUM (RESPONDENT) APPELLANT BY : SHR NISANT K. , LD. DR. RESPONDENT BY : SHRI A.S. PATIL, I . T . P DATE OF HEARING : 26/06 /2014 DATE OF PRONOUNCEMENT : 26 /06/2014 O R D E R PER: D.T. GARASIA THE ABOVE APPEAL S HAVE BEEN FILED BY THE DEPARTMENT AND C.OS. HAVE BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A) - BELGAUM, DATED 1 7.09. 2013 FOR THE ASSESSMENT YEAR 2008 - 09, 2009 - 10 & 2010 - 11 . 2 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 2. THE GROUNDS ARE RAISED IN THIS APPEAL WHICH READ AS UNDER: 1. THE CIT(APPEALS) ERRED IN OVERLOOKING THE STATEMENT RE CORDED OF THE BRANCH MANAGER OF M/S. SUNDARAM FINANCE WHEREIN IT IS CONFIRMED THAT THE AMOUNTS ADVANCED BY SUNDARAM FINANCE IS IN THE NATURE OF FACILITY GRANTED BY SUNDARAM FINANCE TO THE ASSESSEE FOR PROMOTION OF ITS BUSINESS. 2. THE CIT(A) ERRED IN COMING TO A CONCLUSION THAT THE AMOUN TS ADVANCED BY VARIOUS FINANCE COMPANIES TO THE ASSESSEE COMPANY IS IN THE NATURE OF BORROWED CAPITAL WHEREAS IN THE CONTRARY THESE ARE AMOUNTS ADVANCED BY THE FINANCE COMPANIES IN THE NATURE OF FACILITY GRANTED TO THE ASSESSEE TO PROMOTE THE BUSINESS OF F INANCE COMPANIES AND THESE ARE NOT IN THE NATURE OF BORROWED CAPITAL. 3. THE CIT(A) ERRED IN TREATING THE INTEREST PAID ON THESE TRADE ADVANCES AS AMOUNT OF INTEREST PAID ON BORROWED CAPITAL ELIGIBLE FOR DEDUCTION U/S 36(1)(III) OF THE LT. ACT IGNORING THE FACT THAT THE ASSESSEE HAS NOT BORROWED ANY CAPITAL FROM THESE FINANCE COMPANIES, BUT THESE ARE AMOUNTS ADVANCED BY SUNDARAM FINANCE AND OTHERS WHICH IS IN THE NATURE OF FACILITY GRANTED FOR PROMOTION OF THEIR BUSINESS. 4. THE CJT(A) HAS NOT APPRECIATED T HE FACT THAT THE ASSESSEE HAS NOT PROVED ANY COMMERCIAL EXPEDIENCY IN PLACING THE AMOUNTS BEYOND A PERIOD OF 30 DAYS WITH TATA MOTORS THAT WARRANTED PAYMENT OF INTEREST TO THE FINANCIERS. AS SUCH, AMOUNT OF INTEREST PAID TO FINANCIERS IS NOT EXPENDED WHOLL Y AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS WARRANTING DISALLOWANCE AS PER THE PROVISIONS OF SECTION 37(1) OF THE I.T. ACT. 5. THE CIT(A) HAS NOT APPRECIATED THE FACT THAT AT THE TIME OF ASSESSMENT THE ASSESSEE WAS UNABLE TO FURNISH THE COPIES OF AGREEME NT WHICH SPECIFIES THE TERMS AND CONDITION WHEREIN THE ASSESSEE IS LIABLE TO PAY INTEREST ON TRADE ADVANCES. 6. FOR THESE AND OTHER GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING, THE ORDER OF THE LEARNED CIT(A) MAY BE SET ASIDE AND THAT THE ORDER OF THE AS SESSING OFFICER BE RESTORED. 3. THE SHORT FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY, PRIMARILY ENGAGED IN THE BUSINESS OF DEALERSHIP OF TELCO AUTOMOBILES. THE ASSESSEE ALSO RUNS A WORKSHOP FOR REPAIRS/ MAINTENANCE OF TELCO A UTOMOBILES. IN ADDITION, THE ASSESSEE COMPANY TRADES IN LG CONSUMER DURABLES. FOR THE ASSESSMENT YEAR 2008 - 09, THE APPELLANT FILED ITS RETURN OF INCOME ON 30 TH SEPTEMBER 2008 BY DECLARING A T OTAL INCOME OF RS. 2,20,52,120/ - . THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) DETERMINING THE TOTAL INCOM E AT RS.2,37,57,730/ - BY MAKING THE ADDITI O NS/DISALLOWANCES OF INTEREST ON TRADE ADVANCES OF RS. 17,05,610/ - . 3 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 4. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS ALLOWED THE CLAIM BY OBSERVING AS UNDER: 5. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE, SUBMISSIONS MADE BY THE ASSESSEE AND ALSO PERUSED THE ASSESSMENT ORDER. I HAVE ALSO PERUSED THE CASE LAWS RELIED UPON BY THE APPELLANT. 5.1 THE BRIEF FACTS OF THE CASE AND THE REASONING GIVEN BY THE A.O IN HIS ASSESSMENT ORDER IS AS FOLLOWS. THE APPELLANT IS A PRIVATE LIMITED COMPANY, INTER ALIA, ENGAGED IN THE BUSINESS OF DEALERSHIP OF VEHICLES FOR TATA MOTORS LIMITED (HE REIN AFTER REFERR ED TO AS TATA MOTORS). DURING THE COURSE OF ASSESSMENT PROCEEDINGS FOR A.Y.2008 - 09, IT WAS NOTICED BY THE A.O THAT THE APPELLANT ASSESS EE HAD DEBITED AN AMOUNT OF RS. 17,05,610/ - ON ACCOUNT OF INTEREST ON TRADE ADVANCES. THESE TRADE ADVANCES HAD BEEN TAKEN BY THE ASSESSEE FROM THE THREE FINANCIAL INSTITUTIONS AND INTEREST HAD BEEN PAID TO THESE INSTITUTIONS ON THE BALANCES OUTSTANDING BEYOND 30 DAYS. IT IS FURTHER OBSERVED BY THE A.O THAT THE ASSESSEE WAS UTILIZING MOST OF THE TRADE ADVANCES SO OBTAINED FROM FINANCIERS FOR PAYMENTS TO THE TATA MOTORS. 5.1.1. DURING THE COURSE OF HEARING, THE ASSESSEE WAS ASKED BY THE A.O TO EXPLAIN THE NEED AND THE EXIGENCY FOR OBTAINING THE TRADE ADVANCE. THE ASSESSEE EXPLAINED THAT THE PRODUCTS IT DEALS IN CA PITAL INTENSIVE . EACH VEHICLE (TRUCKS AND CARS) MAY COST BETWEEN 5LAKHS TO 15 LAKHS AND UNLIKE A FMCG (FAST MOVING CONSUMER GOODS) WHICH ARE BOUGHT OFF THE SHELF, THEIR PRODUCTS NEED MUCH THINKING BY THE CONSUMER BEFORE PURCHASING THEIR PRODUCTS. SINCE THERE IS A HIGH OU TLAY OF CAPITAL EXPENDITURE FOR THE CUSTOMER, HE HAS IN MOST OF THE CASES TO TAKE LOANS TO PURCHASE THE VEHICLES. THE ASSESSEE FURTHER EXPLAINED THAT IT HAS TO PAY ITS PRINCIPAL I.E. TATA MOTORS IN ADVANCE TO BUY THE VEHICLES. UNLESS IT MAINTAINS A GOOD ST OCK OF DIFFERENT MODELS OF TATA VEHICLES, CUSTOMERS CANNOT HAVE CHOICE AND THEY MAY APPROACH ANOTHER DEALER OR THEY MAY GO IN FOR SOME OTHER BRAND OF VEHICLES. IF IT DOES NOT MAINTAIN THE STOCK IT WILL NOT BE IN A POSITION TO DELIVER THE VEHICLES TO THE CU STOMERS IN THE SHORTEST POSSIBLE TIME WHICH IS VERY ESSENTIAL FOR ITS BUSINESS WHICH IS VERY COMPETITIVE NOW - A - DAYS. THEREFORE, IT IS IMPERATIVE FOR IT TO PAY LUMP SUM AMOUNT TO TATA MOTORS FOR TAKING THE DELIVERY OF VEHICLES. IF IT PAYS TATA MOTORS IN AD VANCE IT GETS A PRIORITY OVER OTHER DEALERS WHO DO NOT PAY ANY ADVANCE. THIS REQUIREMENT OF LUMP SUM MONEY IS MET FROM TRADE ADVANCES AND THAT TOO FROM REPUTED FINANCERS LIKE SUNDARAM FINANCE LTD., LCLCL BANK ETC. IT HAS ALSO BEEN EXPLAINED TO THE A.O BY T HE APPELLANT THAT A PERUSAL OF ITS BOOKS OF ACCOUNTS AND BANK STATEMENT WOULD SHOW THAT THE TRADE ADVANCE IS DIRECTED TO TATA MOTORS DIRECTLY BY THE FINANCERS AND THE AMOUNT IS CREDITED TO ITS ACCOUNT IN THE BOOKS OF TATA MOTORS. AS PER THE AGREEMENT WITH THE FINANCERS 30 DAYS PERIOD IS GIVEN FOR THE TRADE ADVANCE TO BE UTILIZED. IF THE SAME IS NOT UTILIZED FULLY WITHIN 30 DAYS, TO THAT EXTENT THE FINANCERS BUSINESS IS REDUCED. THIS WILL ADD CERTAIN COST TO THE FINANCER. HENCE THE FINANCER IS CHARGING INTER EST ON THE UNUTILIZED AMOUNT BEYOND 30 DAYS. THE APPELLANT HAS FURTHER STATED TO THE A.O THAT BECAUSE OF THE ABOVE UNSECURED FINANCE AVAILABLE IT COULD CHURN OUT A TURNOVER OF 4 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 RS.327 CRORES AND THIS IN TURN HAS ENABLED IT TO MAKE A HIGHER PROFIT. THUS, THE APPELLANT HAS TRIED TO ESTABLISH A DIRECT LINK BETWEEN THE TRADE ADVANCES AND ITS BUSINESS. THE APPELLANT ALSO RELIED ON CERTAIN CASE LAWS. 5.1.2 IN PARA 4 OF HIS ORDER, THE A.O HAS MENTIONED AS FOLLOWS: IT IS NOT DISPUTED THAT THE ASSESSEE IS USING THE TRADE ADVANCE FOR MAKING PAYMENTS TO ITS PRINCIPAL, TATA MOTORS, FOR SUPPLY OF VEHICLES. BUT, WE HAVE TO EXAMINE WHETHER THE ASSESSEE GENUINELY REQUIRES TRADE ADVANCE FOR RUNNING THE BUSINESS. TH EREAFTER, THE A.O WENT ON TO RECORD THE STATEMENT OF THE BRANCH MANAGER OF ONE OF THE FINANCERS AND CAME TO THE CONCLUSION THAT THE TRADE ADVANCES ARE MORE BENEFICIAL TO THE FINANCE COMPANY THAN FOR THE AUTOMOBILE DEALER. THE A.O HAS FURTHER STATED THAT THE ASSESSEE SHOULD CONDUCT ITS BUSINESS IN SUCH A WAY THAT THE ENTIRE ADVANCE IS UTILIZED WITHIN 30 DAYS AND THE NEED TO PAY INTEREST DOES NOT ARISE. IN NUTSHELL THE A.O IS OF THE VIEW THAT THE APPELLANT HAS NOT CONDUCTED ITS BUSINESS LIKE A PRUDENT BUSINESS MAN AND IN THE END, THE A.O IN PARA 5 OF HIS ORDER HAS CONCLUDED AS FOLLOWS: 1 AM OF THE CONSIDERED OPINION THAT THE TRADE ADVANCES FROM DIFFERENT FINANCIERS IS ACTUALLY FAVORING THE FINANCIERS BECAUSE THE FINANCIERS ARE GETTING ASSURED BUSINESS FROM THE ASSESSEE, THEREFORE, THERE IS NO BUSINESS EXIGENCY OR PRUDENCE ON THE PART OF THE ASSESSEE TO ACCEPT TRADE ADVANCES. FURTHER, THE EXPENDITURE TOWARDS INTEREST PAYMENT ON SUCH TRADE ADVANCES IS NOT IN THE BUSINESS INTEREST OF THE ASSESSEE. IN VIEW OF THIS, I HOLD THAT THE ENTIRE INTEREST OF RS.17,05.610/ - PAID TOWARDS TRADE ADVANCES IS NOT LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE WITHIN THE MEANING OF SECTION 37(1) OF INCOME - TAX ACT. 1961 AND ACCORDINGLY IS NOT AN ALLOWABLE EXPENDITURE. 5.2 ON THE OTHER HAND, THE APPELLANT HAS CHALLENGED THE FINDINGS OF THE A.O IN AN APPEAL BEFORE ME. THE APPELLANT HAS MORE OR LESS REPEATED THE SUBMISSIONS MADE BEFORE THE A.O AT THE TIME OF ASSESSMENT PROCEEDINGS. THE APPELLANT HAS SUBMITTED THAT IT IS THE AUTHORIZED DEALER OF TATA MOTORS FOR NEARLY THE WHOLE OF NORTH KARNATAKA AND IT IS REQUIRED TO MAINTAIN STOCK OF VARIOUS MODELS OF TATA VEHICLES IN EACH OF ITS BRANCH AND SINCE THE PRODUCT THEY ARE DEALING IN IS EXPENSIVE, MOST OF ITS CUSTOMERS NEED LOANS TO PURCHASE CARS, TR UCKS ETC. IT HAS ALSO STATED THAT IF IT PAYS ADVANCE TO TATA MOTORS, ITS PRINCIPLE, THEN IT GETS PREFERENCE IN PROMPT SUPPLY OF GOODS AND ALSO PREFERENCE OF VARIOUS MODELS OF VEHICLES OVER THE OTHER DEALERS WHO DO NOT PAY ADVANCE. THE APPELLANT HAS ALSO SU BMITTED THAT IT HAS ENTERED INTO AGREEMENTS WITH VARIOUS REPUTED FINANCIERS LIKE SUNDARAM FINANCE LIMITED, SHRIRAM TRANSPORT LIMITED ETC. WHEREBY THE ADVANCE MONEY IS DIRECTLY PAID BY THEM TO THE TATA MOTORS AND WHEN CUSTOMERS REFERRED BY IT TO THE FINANCI ERS OR WHEN CUSTOMERS ARE REFERRED BY FINANCIERS TO IT AND UPON DELIVERY OF THE VEHICLE TO THE CUSTOMER, AN INVOICE IS RAISED ON THE CUSTOMER AND THE ACCOUNT OF THE FINANCIER IS DEBITED AGAINST THE ADVANCES. AS SOON AS TRADE ADVANCE IS EXHAUSTED, THE FINAN CIER REPLENISHES IT. AS PER THE AGREEMENT WITH THE FINANCIER, ANY AMOUNT OF TRADE ADVANCE NOT UTILIZED BY THE ASSESSEE WITHIN A 5 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 PERIOD OF 30 DAYS, IT ENTAILS AN INTEREST OF 12% PER ANNUM. THE APPELLANT HAS SUBMITTED THAT THE A.O HAS MISCONCEIVED THAT THE T RADE ADVANCE WAS THE BUSINESS EXIGENCY OF THE FINANCIAL INSTITUTION ONLY AND NOT OF THE ASSESSEE AND DISALLOWED THE ENTIRE AMOUNT OF RS.17,05,610/ - U/S 37(1) OF THE I. T. ACT AS NOT HAVING BEEN EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINES S OF THE ASSESSEE. THE APPELLANT HAS SUBMITTED THAT THE MAIN PURPOSE OF TAKING TRADE ADVANCE FROM THE FINANCIAL INSTITUTIONS IS TO ENSURE THE PROMPT SUPPLY OF VEHICLES FROM TATA MOTORS AND ONCE IT IS ASSURED OF PROMPT SUPPLY, IT IS ABLE TO CATER TO THE NEE DS OF ITS CUSTOMERS BY DELIVERING THE VEHICLES IN THE SHORTEST POSSIBLE TIME THEREBY ENHANC ING ITS GOODWILL, CREDIBILITY, I TS TURNOVER AND ULTIMATELY ITS PR OFIT. THE APPELLANT HAS ALSO CONTENDED THAT THE AO HAS ERRED IN INVOKING THE PROVISIONS OF SECTION 3 7(1) WHERE AS THE PROVISIONS OF THE SECT ION 36(1)(III) SPECIFICALLY PROVIDE FOR DEDUCTION OF INTEREST ON BORROWINGS AND THE SPECIFIC PROVISIONS OF SECTION 36(1)(III) PREVAIL OVER THE GENERAL PROVISIONS OF SECTION 37(1). THE ASSESSEE HAS ALSO RELIED ON THE FOLLOWING CASE LAWS DISCUSSED IN THE AFORESAID SUBMISSIONS: I) MADHAV PRASADIATIA VS. CIT (1979) 118 ITR PAGE 200 (SC). II) CIT VS. BOMBAY SAM ACHAR LTD. (1969) 74 ITR PAGE 723 (BORN). III) EASTERN INVESTMENTS LTD. VS. CIT - 20 ITR PAGE 1(SC). IV) BANSHIDHAR ONKARMAL VS. CIT (1965) 58 ITR 462. 6. IT IS A UNDISPUTED FACT THAT THE APPELLANT VIDE VARIOUS AGREEMENTS TAKES ADVANCES FROM SOME WELL REPU TED AUTO FINANCIERS AND THE AMOUNT IS DIRECTLY PAID BY THE FINANCIERS TO THE TATA MOTORS LTD. AS AND WHEN THE APPELLANT SELLS VEHICLES TO CUSTOMERS WHETHER COMING DIRECTLY TO IT OR REFERRED TO IT BY THE FINANCIER, THE ACCOUNT OF THE FINANCIER ADVANCING LOA N TO THE CUSTOMER IS DEBITED. AS PER AGREEMENT THE FINANCIER CHARGES INTEREST @12% P.A ON UNUTILIZED AMOUNT OF ADVANCE AFTER THE EXPIRY OF 30 DAYS PERIOD. THIS ARRANGEMENT LEADS TO A GREATER CUSTOMER SATISFACTION RESULTING IN GREATER BUSINESS AND PROFITABI LITY TO THE APPELLANT AS WELL AS TO THE FINANCIERS. THIS ARRANGEMENT NOT ONLY APPEARS TO BE MUTUALLY BENEFICIAL TO THE APPELLANT AND THE FINANCIERS BUT ALSO TO THE TATA MOTORS WHO DO NOT HAVE TO EXTEND CREDIT FACILITY TO THE DEALERS PAYING IN ADVANCE AND T HEIR SALES ALSO GET BOOST. THE PRACTICE OF PAYING ADVANCE BY THE APPELLANT TO ITS PRINCIPALS I.E TATA MOTORS PUTS THE APPELLANT IN AN ADVANTAGEOUS POSITION OVER ITS OTHER RIVALS IN THE FIELD IN A HIGHLY COMPETITIVE BUSINESS ENVIRONMENT THEREBY LEADING TO G REATER CUSTOMER SATISFACTION AND BOOST IN ITS SALES. THEREFORE, TO SAY THAT ONLY FINANCIAL INSTITUTIONS STAND TO BENEFIT IN THE WHOLE PROCESS WOULD NOT BE CORRECT. THE BENEFITS THAT THE APPELLANT RECEIVES CANNOT BE IGNORED, IF ONE UNDERSTANDS THE WHOLE ARR ANGEMENT AND THE ROLE PLAYED BY ADVANCES IN FURTHERANCE OF THE APPELLANTS BUSINESS. 6.1. FURTHER, THE APPELLANT IS CORRECT IN ITS CONTENTION WHEN IT SAYS THAT THE AO HAS ERRED IN INVOKING THE PR OVISIONS OF SECTION 37(1) WHERE AS THE PROVISIONS OF THE SEC TION 36(1)(II I) SPECIFICALLY PROVIDES FOR DEDU CTION OF INTEREST ON BORROWINGS AND THE SPECIFIC PROVISIONS OF SECTION 36(1)(III) OVER RIDE THE GENERAL 6 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 PROVISIONS OF SECTION 37(1). IT IS ALSO SEEN THAT THE APPELLANT SATISFIES ALL THE THREE CONDITIONS LAID DO W N IN SECTION 36(1)(III) OF THE I .T. ACT. FOR THIS PURPOSE THE PROVISION S OF SECTION 36(1)(III) OF THE I .T. ACT ARE REPRODUCED HEREIN BELOW: OTHER DEDUCTIONS. 36. (1) THE DEDUCTIONS PROVIDED FOR THE FOLLOWING CLAUSES SHALL BE ALLOWED IN RESPECT OF THE MAT TERS DEALT WITH THEREIN, IN COMPUTING THE INCOME REFERRED TO IN SECTION 28 - (I) ............................. (III) THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION: PRO VIDED ........................... 6.1.1 FROM THE ABOVE PROVISIONS OF SEC.36(1)(III), IT IS CLEAR THAT TO ALLOW THE CLAIM FOR DEDUCTION OF INTEREST PAID ON BORROWED CAPITAL ALL THAT IS NECESSARY IS THAT: (I) THE MONEY MUST HAVE BEEN BORROWED BY THE ASSESSEE. (II) IT SHOULD HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS. (III) THE ASSESSEE SHOULD HAVE PAID THE INTEREST AMOUNT CLAIMED BY HIM AS AN ALLOWANCE. 6.1.2 IN THE INSTANT CASE, IT IS SEEN THAT THE MONEY HAS BEEN BORROWED BY THE APPELLANT VIDE VARIOUS AGREEMEN TS FOR THE PURPOSE OF ITS BUSINESS AND THE APPELLANT HAS PAID INTEREST ON IT AS THE TERMS AND CONDITIONS OF THE AGREEMENTS. AS THE ADVANCE MONEY IS PAID DIRECTLY BY THE FINANCIER TO TATA MOTORS ON BEHALF OF THE APPELLANT, IT GETS ADJUSTED AGAINST THE PURCH ASES MADE BY THE APPELLANT FROM TATA MOTORS. THEREFORE, THE ADVANCE PAID BY THE APPELLANT IS FOR ITS BUSINESS PURPOSES. IT HAS BEEN HELD BY THE MP HIGH COURT IN THE CASE OF MAIWA VANASPATI & CHEMICAL CO. LTD. VS. CIT(1985) 154 ITR 655(MP) THAT THE PROVISIO NS OF SEC.37(1) BEI NG A RESIDUAL PROVISION, IT CAN NOT BE TAKEN AID OF, UNLESS AND UNTIL IT IS ESTABLISHED THAT NONE OF THE PROVISIONS OF SECTIONS 30 TO 36 ARE APPLICABLE TO A GIVEN CASE. THEREFORE, IN THIS VIEW OF THE MATTER I AM OF THE VIEW THAT INVOCATIO N OF SECTION37(1) BY THE A.O IN THE FACTS AND THE CIRCUMSTANCES OF THE CASE IS NOT CALLED FOR AND THE CASE OF THE APPELLANT HAS TO BE JUDGED ON TOUCH STONE OF THE PROVISIONS OF SECTION 36(1)(III) OF THE I.T. ACT. 6.1.3. EVEN IF FOR THE SAKE OF ARGUMENT, T HE CASE OF THE APPELLANT IS EXAMINED IN THE LIGHT OF THE IONS OF SEC.37(1) OF THE I.T. ACT, IN ORDER TO DISALLOW THE EXPENDITURE ON ACCOUNT OF ?ST PAID, IT WILL HAVE TO BE ESTABLISHED BY THE A.O THAT THE EXPENDITURE INCURRED IS CAPITAL IN NATURE OR IT IS N OT FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE OR THE EXPENDITURE INCURRED BY THE ASSESSEE IS FOR A PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. THE CASE OF THE A.O IN THE PRESENT CASE IS MAINLY THAT THE APPELLANT HAS NOT ACTED PRUDENTLY AND IN THE INTEREST OF HIS BUSINESS. 6.2 IN HIS ASSESSMENT ORDER, THE A.O HAS TRIED TO BUILD UP A CASE AGAINST THE APPELLANT MAINLY ON THE GROUND THAT THE APPELLANT HAS NOT ACTED AS A PRUDENT BUSINESS MAN AND HE COULD HAVE MANAGED HIS BUSINESS WITHOUT ADVA NCES ALSO. IN THIS REGARD THE DECISION OF THE APEX COURT IN THE CASE OF EASTERN INVESTMENTS LTD. VS. CIT - 20 ITR PAGE 1(SC) IS RELEVANT TO THE ISSUE AT HAND. THE SUPREME COURT IN THIS CASE HAS HELD AS FOLLOWS: 7 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 IN THE ABSENCE OF A SUGGESTION OF FRAUD THIS IS NOT RELEVANT AT ALL FOR GIVING EFFECT TO THE PROVISIONS OF SECTION 12 (2) OF THE INCOME - TAX ACT. MOST COMMERCIAL TRANSACTIONS ARE ENTERED INTO FOR THE MUTUAL BENEFIT OF BOTH SIDES, OR AT ANY RATE EACH SIDE HOPES TO GAIN SOMETHING FOR ITSELF. THE TEST FO R PRESENT PURPOSES IS NOT WHETHER THE OTHER PARTY BENEFITED, NOR INDEED WHETHER THIS WAS A PRUDENT TRANSACTION WHICH RESULTED IN ULTIMATE GAIN TO THE APPELLANT, BUT WHETHER IT WAS PROPERLY ENTERED INTO AS A PART OF THE APPELLANTS LEGITIMATE COMMERCIAL UNDE RTAKINGS IN ORDER INDIRECTLY TO FACILITATE THE CARRYING ON OF ITS BUSINESS THERE ARE USUALLY MANY WAYS IN WHICH A GIVEN THING CAN BE BROUGHT ABOUT IN BUSINESS CIRCLES BUT IT IS NOT FOR THE COURT TO DECIDE WHICH OF THEM SHOULD HAVE BEEN EMPLOYED WHEN THE CO URT IS DECIDING A QUESTION UNDER SECTION 12 (2) OF THE INCOME - TAX ACT. IN THE CASE OF CIT, BOMBAY VS. BOMBAY SAMACHAR LTD. BOMBAY 741TR 723 (1969), THE HIGH COURT OF BOMBAY HAS HELD AS FOLLOWS: IF THE CAPITAL IS USED IN THE YEAR OF ACCOUNT AND THE USE I S FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE, IT IS IMMATERIAL WHETHER THE USER OF THE CAPITAL ACTUALLY YIELDED PROFIT OR NOT AND IT IS NOT OPEN TO THE DEPARTMENT TO REJECT THE CLAIM OF THE ASSESSEE IN RESPECT OF THE INTEREST PAID ON THE CAPITAL MEREL Y BECAUSE THE USE OF THE CAPITAL IS UN REMUNERATIVE IN VIEW OF THE CLEAR DECISION ON THE POINT BY NO LESS A COURT THAN THE SUPREME COURT OF INDIA HOLDING THAT THAT THE ASSESSING OFFICER CANNOT STEP INTO THE SHOES OF THE ASSESSEE AND DECIDE ON BEHALF OF T HE ASSESSEE. IT IS FOR THE ASSESSEE TO CARRY ON HIS BUSINESS AND THE TAX DEPARTMENT CANNOT DECIDE HOW THE ASSESSEE SHOULD CARRY ON HIS BUSINESS. 6.3 IT IS NOT THE CASE OF THE A.O THAT THE BORROWED CAPITAL HAS BEEN USED FOR NON BUSINESS PURPOSE OR IT HAS BE EN DIVERTED TO SOME SISTER CONCERN. IT IS ALSO NOT THE CASE OF THE A.O THAT THE TRANSACTIONS ARE FRAUDULENT IN NATURE. IT IS NOT THE CASE OF THE A.O THAT THE EXPENDITURE INCURRED IS CAPITAL IN NATURE OR THE EXPENDITURE INCURRED BY THE ASSESSEE IS FOR A PUR POSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW. IT IS ALSO NOT THE CASE OF THE A.O THAT THE PAYMENT OF INTEREST IS EXCESSIVE AND UNREASONABLE AND THEREFORE, THE PROVISIONS OF SECTION 40A(2) ARE ATTRACTED. IT IS ALSO SEEN THAT THE A.O HAS ACCEPTED T HAT THE ADVANCES HAVE BEEN MADE TO TATA MOTORS FOR SUPPLY OF VEHICLES WHICH IS THE BUSINESS OF THE APPELLANT. WHETHER THE BUSINESS IS BEING RUN PRUDENTLY OR NOT IS NONE OF THE CONDITIONS FOR ALLOW ABILITY OF AN EXPENSE EITHER UNDER SEC TION 37(1) OR 36(1)(I II) OF THE L.T. ACT OR UNDER ANY OTHER PROVISIONS OF THE INCOME TAX ACT. THE PAYMENT OF ADVANCE TO SUPPLIERS IS A COMMON PRACTICE IN THE MARKET AND IT IS NOT MATERIAL WHETHER THE ADVANCES HAVE BEEN PAID OUT OF BORROWED CAPITAL OR FROM THE ASSESSEES OWN CA PITAL. IN CASE SUCH ADVANCES ARE PAID OUT OF BORROWED CAPITAL, THE INTEREST ON SUCH BORROWED CAPITAL IS AN ALLOWABLE EXPENDITURE U/S 36(1)(III) OF THE L.T. ACT. AN EXPENSE IS ALLOWABLE AS LONG AS IT IS INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSE E AND IT IS OTHERWISE NOT BARRED BY EXPRESS PROVISIONS OF THE ACT. AS THE 8 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 ADVANCE MONEY IS PAID DIRECTLY BY THE FINANCIER TO TATA MOTORS ON BEHALF OF THE APPELLANT, IT GETS ADJUSTED AGAINST THE PURCHASES MADE BY THE APPELLANT FROM TATA MOTORS. THEREFORE, T HE ADVANCE PAID BY THE APPELLANT IS CLEARLY FOR ITS BUSINESS PURPOSES. MERELY BECAUSE THE A.O IS OF THE VIEW THAT THE ASSESSEE HAS NOT CONDUCTED ITS BUSINESS PRUDENTLY IS NO GROUND UNDER THE ACT FOR DISALLOWANCE OF AN EXPENSE. 7. IN VIEW OF THE FOREGOING DISCUSSION AND THE CASE LAWS DISCUSSED ABOVE AND IN THE AFORESAID SUBMISSIONS OF THE APPELLANT BEING DIRECTLY APPLICABLE TO THE APPELLANTS CASE, I AM OF THE VIEW THAT DISALLOWANCE OF INTEREST OF RS. 17,05,610/ - BY THE A.O FOR A. Y.2008 - 09 IS UN CALLED FOR AND THE CLAIM OF THE APPELLANT IS UPHELD AND THE ADDITION MADE BY THE A.O IS DELETED. 5. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE F IND THAT THE AO HAS NOTICED THAT THE ASSESSEE HAS DEBITED AT RS.17,05,610/ - TOWARDS INTEREST ON TRADE ADVANCE. THE TRADE ADVANCE HAVE BEEN TAKEN BY THE ASSESSEE FROM THREE FINANCIAL INSTITUTIONS AND IN TURN PAYS INTEREST TO THE RESPECTIVE INSTITUTIONS, ON THE BALANCES LEFT BEYOND 30 DAYS, IT IS THE ASSESSEE UTILISING MOST OF THE TRADE ADVANCE SO OBTAINED FROM THE TAT MOTORS. WE FIND THAT IT IS UNDISPUTED FACT THAT ASSESSEE HAS USED THIS ADVANCES FOR TRADE PURPOSES AND INTEREST HAS BEEN PAID ON ITS TERMS AND CONDITION OF THE AGREEMENT , THEREFORE, WE ARE OF THE VIEW THAT THE ADVANCE MADE BY THE ASSESSEE IS USED FOR THE BUSINESS PURPOSE, THEREFORE, THE INTEREST PAID BORROWED CAPITAL IS ALLOWABLE EXPENDITURE U/S. 36(1)(III) OF THE ACT, THEREFORE, OUR INTERFERENCE IS NOT REQUIRED. 6. IN T HE RESULT, THE APPEAL FILED BY THE DEPAR TMENT IS DISMISSED. 7. THE C.O. IS SUPPORTING THE ORDER OF THE COMMISSIONER OF INCOME TAX , THEREFORE, IT IS DISMISSED. ITA NO. 366/PNJ/2013 & C.O. NO.04/PNJ/2014 8. THE SHORT FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY, PRIMARILY ENGAGED IN THE BUSINESS OF DEALERSHIP OF TELCO AUTOMOBILES. THE ASSESSEE ALSO RUNS A WORKSHOP FOR REPAIRS/ MAINTENANCE OF TELCO AUTOMOBILES. IN ADDITION, THE ASSESSEE COMPANY TRADES IN LG CONSUMER 9 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 DURABLES. FOR THE ASSESSMENT YEAR 2009 - 10, THE APPELLANT FILED ITS RETURN OF INCOME ON 30 .09. 2009 BY DECLARING A TOTAL INCOME OF RS.77,68,220/ - . THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) DETERMINING THE TOTAL INCOME AT RS.1,02,96,630 / - BY MAKING THE DISALLOWANCE OF INTEREST ON TRADE ADVANCES OF RS. 25,28,406 / - 8.1. THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS DELETED THE SAME BY OBSERVING AS UNDER: 5. IN MY ORDER NO.ITA NO.596/BGM/1O - 11 DATED:17 - 09 - 2013 FOR A.Y.2008 - 09 IN THE APPELLANTS OWN CASE, THE FACTS OF THE CASE, ARGUMENTS OF THE APPELLANT AND REASONING ADOPTED BY THE A.O HAVE BEEN DISCUSSED IN GREAT DETAIL. THE APPEAL OF THE APPELLANT FOR A.Y.20 08 - 09 HAS BEEN ALLOWED. SINCE THE FACTS OF THE CASE AND ISSUES INVOLVED IN A.Y.2009 - 1O ARE SAME AS THOSE INVOLVED IN A.Y.2008 - 09, FOLLOWING THE SAME REASONING AND LOGIC, THE ADDITION MADE BY THE A.O FOR A.Y.2009 - 1O ON ACCOUNT OF DISALLOWANCE OF INTEREST ON TRADE ADVANCE OF RS.25,28,406/ - PAID TO VARIOUS FINANCIERS IS DELETED. 8.2 . WE HAVE ALREADY HEARD A ND DECIDED ITA NO. 365/PNJ/2013 WHER EIN DEPARTMENT APPEAL HAS BE EN DISMISSED, THEREFORE, IN THE SAME REASON, WE DISMISS THIS APPEAL. 9. THE C.O. IS SUPPOR T ING THE ORDER OF THE COMMISSIONER OF INCOME TAX , THEREFORE, IT IS DISMISSED. ITA NO. 367/PNJ/2013 & C.O. NO.05 /PNJ/2014 10. THE SHORT FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY, PRIMARILY ENGAGED IN THE BUSINESS OF DEALERSHIP OF TELCO AUTOMOBILES. THE ASSESSEE ALSO RUNS A WORKSHOP FOR REPAIRS/ MAINTENANCE OF TELCO AUTOMOBILES. IN ADDITION, THE ASSESSEE COMPANY TRADES IN LG CONSUMER DURABLES. FOR THE ASSESSMENT YEAR 2010 - 11, THE APPELLANT FILED ITS RETURN OF INCOME ON 7 TH OCTOBER, 2010 BY DECLARING A TOTAL INCOME OF RS. 70,97,460 / - . THE ASSESSING OFFICER COMPLETED THE ASSESSMENT UNDER SECTION 143(3) DETERMINING 10 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 THE TOTAL INCOME AT RS.1,07,27,487 / - BY MAKING FOLLOWING ADDITIONS/DISALLOWANCE. 1. DISALLOWANCE OF INTEREST ON TRADE ADVANCE RS.29,87, 663/ - 2. DISALLOWANCE ON ACCOUNT OF DISCREPANCIES RS. 6,19,768/ - 3. DISALLOWANCE UNDER SECTION 40(A)(IA) RS. 22,596/ - . HOWEVER, IN THE PRESENT APPEAL, THE APPELLANT HAS NOT CONTESTED THE ADDITION OF RS.6,19,768/ - MADE ON ACCOUNT OF DISALLOWANCE ON ACCOUNT OF DISCREPANCIES. 10.1. THE MATTER CARRIED TO CIT (A) AND CIT(A) HA S DELETED THE DISALLOWANCE BY OBSERVING AS UNDER: AS FAR AS THE FIRST ISSUE OF DISALLOWANCE OF INTEREST PAID ON ADVANCE IS CONCER NED, THE WRITTEN SUBMISSIONS OF THE APPELLANT DATED 29 - 08 - 2013 ARE ALMOST SAME AS THE WRITTEN SUBMISSIONS DATED 29 - 08 - 2013 SUBMITTED FOR A.Y.2008 - 09 WHICH HAVE BEEN REPRODUCED IN MY ORDER NO.ITA NO.596/BGM/10 - 11 DATED:17 - 09 - 2013 FOR A.Y.2008 - 09 IN THE APPE LLANTS OWN CASE. 5.1.1 IN MY ORDER NO.ITA NO.596/BGM/10 - 11 DATED:17 - 09 - 2013 FOR A.Y.2008 - 09 IN THE APPELLANTS OWN CASE, THE FACTS OF THE CASE, ARGUMENTS OF THE APPELLANT AND REASONING ADOPTED BY THE A.O HAVE BEEN DISCUSSED IN GREAT DETAIL. THE APPEAL OF THE APPELLANT FOR A.Y.2008 - 09 HAS BEEN ALLOWED. SINCE THE FACTS OF THE CASE AND ISSUES INVOLVED IN A.Y.2010 - 11 ARE SAME AS THOSE INVOLVED IN A.Y.2008 - 09, FOLLOWING THE SAME REASONING AND LOGIC, THE ADDITION MADE BY THE A.O FOR A.Y.2010 - 11 ON ACCOUNT OF DIS ALLOWANCE OF INTEREST ON TRADE ADVANCE OF RS.29,87,663/ - PAID TO VARIOUS FINANCIERS IS DELETED. 10.2. WE HAVE ALREADY DECIDED IN ITA NO.365 & 366/PNJ/2013 WHEREIN THE DEPARTMENT APPEALS OBSERVED TO BE DISMISSED, THEREFORE, ON THE BASIS OF ABOVE APPEALS WE DISMISSED THIS APPEAL. 11. GROUND NOS. 1 & 2 IN CROSS OBJECTION ARE SUPPORTING THE ORDER OF THE CIT(A), THEREFOR E, IT IS DISMISSED AND C.O. NO. 3 IS NOT PRESSED DURING THE COURSE OF HEARING, THEREFORE, IT IS ALSO DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 6.6.2014. S D / - S D / - ( P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : PANAJI / GOA DATED : 2 6 . 0 6 .2014 P.S. - *PK* 11 . ITA NO.365, 366 & 367/PNJ/2013, C.O. NOS. 3, 4 & 5/PNJ/2014 COPY TO : ( 1 ) APPELLANT ( 2 ) RESPONDENT ( 3 ) CIT CONCERNED ( 4 ) CIT(A) CONCER NED ( 5 ) D.R ( 6 ) GUARD FILE TRUE COPY, BY ORDER