DCIT,CIRCLE-3, Nagpur V. M/S SHAH NANJI NAGSI, Nagpur

ITA 103/NAG/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1629 (ITAT-NAGPUR)
• Duration Of Justice: 2 year(s) 7 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-10-2015
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2005-2006
• Appeal Filed On: 25-03-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: NARENDRA KANE
• Assessee Lawyers: S C THAKAR; C J THAKAR
• Keywords: Diversion of income; Commercial expediency
• Section: 143(3); 10B

Judgement Text

1 ITA NO. 103/NA G/2013 IN THE INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR BEFORE SHRI MUKUL K. SHRAWAT, JUDICIAL MEMBER AND SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER. I.T.A. NO.103/NAG/2013 ASSESSMENT YEAR : 2005 - 06. DY. COMMISSIONER OF INCOME - TAX, M/S SHAH NANJI NAGSI, CIRCLE - 3, NAGPUR. VS. NAGPUR. PAN AAMFS7600J. APPELLANT. RESPONDENT. APPELLANT BY : SHRI NARENDRA KANE. RESPONDENT BY : SHRI C.J. THAKAR & SHRI S.C. THAKAR. DATE OF HEARING : 1 1 - 08 - 2015 DATE OF PRONOUNCEMENT : 30 TH OCT., 2015 O R D E R PER MUKUL K. SHRAWAT, J.M. THIS IS AN APPEAL FILED BY THE REVENUE ARISING FROM THE ORDER OF LEARNED CIT(APPEALS) - 19 , MUMBAI (CAMP OFFICE NAGPUR) DATED 11 TH JANUARY, 2013. THE GROUNDS RAISED BY THE REVENUE ARE AS UNDER: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS. 61,02,756/ - WHICH WAS MADE U/S 36(1)(III) OF THE IT ACT, 1961. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, LD. CIT(APPEALS) FAILED TO APPRECIATE THE COLORABLOE DEVICE ADOPTED BY THE ASSESSEE TO DIVERT INTEREST BEARING FUNDS FOR NON BUSINESS PURPOSES. 2. FACTS IN BRIEF AS EMERGED FROM THE CORRESPONDING ASSESSMENT ORDER PASSED U/S 143(3) DATED 28 - 12 - 2007 WERE THAT THE ASSESSEE FIRM IS IN THE BUSINESS OF 2 ITA NO. 103/NA G/2013 TRADING OF GRAINS AND PULSES. THE ASSESSEE IS ALSO A COMMISSION AGENT PERTAINING TO GRAINS AND PU L SES TRANSACTIONS. IN RESPECT OF THE ISSUE RAISED BY THE REVENUE THE OBSERVATION OF THE AO WAS THAT THE ASSESSEE HAD ADVANCED INTEREST FREE LOAN TO M/S SHAH NANJI NAGSI EXPORTS P. LTD. FURTHER, THE OBSERVATION OF THE AO WAS THAT THE ASSESSEE FIRM HAD TAKEN LARGE AMOUNTS OF UNSECURED LOANS FROM VARIOUS PARTIES. AS ON 31 ST MARCH, 2005 UNSECURED LOANS WERE TO THE TUNE OF RS.8,78,11,609/ - . IT WAS NOTICED BY THE AO THAT THE FUNDS WERE USED FOR MAKING PAYMENT ON BEHALF OF THE SAID SISTER CONCERN, NAMELY, M/S SHAH NANJI NAGSI EXPORTS P. LTD. THE ASSESSEE HAD ADVANCED INTEREST F REE LOANS TO THE SAID CONCERN AS WELL. THE AO HAD ALSO MADE A REFERENCE OF AN ANOTHER CONCERN, NAMELY, M/S ASHWIN TRADING CO. TO WHOM INTEREST FREE ADVANCE WAS GIVEN BY THE ASSESSEE. ON THE OTHER HAND, THE ASSESSEE HAD PAID INTEREST OF RS.1,24,09,864/ - . AN ANOTHER ALLEGATION OF THE AO WAS THAT THE SAID SISTER CONCERN M/S SHAH NANJI NAGSI EXPORTS P. LTD. W AS HAVING EXEMPTED PROFIT U/S 10B OF I.T. ACT. IN RESPECT OF M/S SHAH NANJI NAGSI EXPORTS P. LTD. THE POSITION OF ACCOUNT AS PER THE AO WAS AS UNDER : M/S SHAH NANJI NAGSI EXPORT PRIVATE LTD. (SNNEPL): IN THE BOOKS OF THE ASSESSEE, THE SAID ACCOUNT OPENS WITH A DEBIT BALANCE OF RS.18,36,3058.64. THEN THERE ARE CREDIT ENTRIES UNDER DATE 1/4/04 OF RS. 4,81,489.57/ - AND RS.59,164/ - BEING TRANSFER OF BALAN CES FROM THE ACCOUNTS OF THE PARTNERS SHRI ASHWIN S. SHAH AND SHRI SUDHIR N. SHAH. THE FIRST DEBIT ENTRIES APPEAR ON 2/04/04 WHEREIN PAYMENTS ON BEHALF OF SNNEPL, ARE MADE TO M/S S.K. INDUSTRIES, DURG (AMOUNT RS. 4,48,500/ - ), DHANPATI ANAJ BAZAR (AMOUNT R S 2,93,500/ - & RS.2,00,000/ - RESPECTIVELY) AND AN AMOUNT OF RS.15,00,000/ - BEING ADVANCED AS INTEREST FREE LOAN TO SNNEPL. AGAIN THERE ARE DEBIT ENTRIES ON 5/04/04 REPRESENTING PAYMENTS MADE TO M/S BANSAL COMMODITIES (AMOUNT RS. 34,902/ - ), M/S KUSHAL RICE MILL (AMOUNT RS.4,25,500/ - ). ON 7/04/04, THERE IS A DEBIT ENTRY OF RS.7,00,000/ - REPRESENTING AN INTEREST FREE LOAN TO SNNEPL. ALSO ON THE SAME DATE THERE IS A CREDIT ENTRY OF RS.3,00,000/ - REPRESENTING AMOUNT REPAID BY SNNEPL TO THE FIRM. PROCEEDING IN THIS MANNER, THE ANALYSIS FOR THE FULL FY 2004 - 05 SHOWS THAT THERE 684 DEBIT ENTRIES TOTALLING RS. 26,88,62,781.51 REPRESENTING PAYMENTS MADE ON BEHALF OF SNNEPL BY THE ASSESSEE AND INTEREST FREE LOANS GIVEN TO 3 ITA NO. 103/NA G/2013 SNNEPL BY THE ASSESSEE. THERE ARE 135 CREDIT ENTRIES TOTALLING RS. 22,90,67,956.09 REPRESENTING PAYMENTS MADE BY SNNEPL TO THE ASSESSEE FIRM. THE ACCOUNT FOR HE YEAR 2004 - 05 CLOSES WITH A DEBIT BALANCE OF RS.3,97,94,852.42/ - ON 31.03.05. 3. LIKEWISE IN RESPECT OF THE POSITION OF ACCOUNT M/S AS HWIN TRADING COMPANY, THE OBSERVATIONS OF THE AO WERE AS UNDER: M/S ASHWIN TRADING COMPANY (ATC): IN THE BOOKS OF THE ASSESSEE THE SAID ACCOUNT OPENS WITH A DEBIT BALANCE OF RS.59,78,414/ - . THEN THERE ARE DEBIT ENTRIES UNDER THE DATE 1/4/04 OF RS. 40,00, 000/ - AND RS. 15,00,000/ - BEING INTEREST FREE LOANS GIVEN TO ATC. THE FIRST CREDIT ENTRY APPEARS ON 8/04/04 WHEREIN AN AMOUNT OF RS.2,954/ - HAS BEEN REC EIVED FROM ATC REPRESENTING REPAYMENTS TO THE ASSESSEE BY ATC. ON 15/04/04, THERE IS A CREDIT ENTRY OF RS.2,50,000/ - REPRESENTING AMOUNT REPAID BY ATC TO THE FIRM. AGAIN, ON 19/04/04, THERE WAS A DEBIT ENTRY OF RS.3,00,000 REPRESENTING INTEREST FREE LOAN TO ATC BY THE FIRM. PROCEEDING IN THIS MANNER, THE ANALYSIS OF THE FULL FY 2004 - 05 SHOWS THAT THERE 67 DEBIT ENTRIES TOTALLING RS.10,76,73,672/ - REPRESENTING PAYMENTS MADE ON BEHALF OF ATC BY THE ASSESSEE AND INTEREST FREE LOANS GIVEN TO ATC BY THE ASSESSEE. THERE ARE 92 CREDIT ENTRIES TOTALLING RS. 10,73,19,927/ - REPRESENTING PAYMENTS MADE BY SNNEPL TO THE ASSESSEE FIRM. THE ACCOUNT FOR THE YEAR 2004 - 05 CLOSES WITH A DEBIT BALANCE OF RS.3 ,53,754/ - ON 31.03.05. 4. THE CONCLUSION OF THE AO WAS THAT THE ASSESSEE HAD EXTENDED INTEREST FREE LOANS ON BEHALF OF THESE TWO CONCERNS, HOWEVER, PAID HEAVY AMOUNT OF I NTEREST. IT WAS ALSO OBSERVED BY THE AO THAT THE INTEREST PAYMENT ON THE UNSECURED LOAN WAS NOT FOR THE PURPOSE OF BUSINESS AS ENVISAGED U/S 36(1)(III) OF THE I.T. ACT. ACCORDING TO THE AO, THE ASSESSEE HAD ADOPTED A COLOURABLE DEVICE WITH THE INTENTION T O CREATE A BUSINESS LOSS DUE TO WHICH AVOIDED THE LEGITIMATE TAX LIABILITY. THE FUNDS WERE DIVERTED DUE TO THE REASON THAT THE ASSESSEE HAD TAKEN UNSECURED LOANS AT THE RATE OF INTEREST VARYING FROM 9% TO 19%. THE AO HAD CALCULATED WEIGHTED AVERAGE OF THE INTEREST BECAUSE MULTIPLE LOANS WERE TAKEN AT DIFFERENT DATES, HENCE COMPUTED A WEIGHTED AVERAGE OF INTEREST WHICH WAS RS.32,12,428/ - IN THE CASE OF M/S SHAH NANJI NAGSI EXPORTS P. LTD. AND RS.28,90,328/ - IN THE CASE OF M/S ASHWIN TRADING COMPANY TOTALL ING 4 ITA NO. 103/NA G/2013 RS.61,02,756/ - WHICH WAS DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 36(1)(III) OF THE I.T. ACT. 5. BEING AGGRIEVED, THE MATTER WAS CARRIED BEFORE THE FIRST APPELLATE AUTHORITY. THE SUBMISSION BEFORE THE LEARNED CIT(APPEALS ) WAS THAT THE SAID E XP ORT P. LTD. WAS UNDER LIQUIDITY PROBLEM, THEREFORE, THE ASSESSEE HAD ADVANCED THE SAID LOAN WHICH WAS A BUSINESS REQUIREMENT. IN RESPECT OF M/S ASHWIN TRADING COMPANY IT WAS POINTED OUT THAT THERE WAS AN OPENING DEBIT BALANCE OF RS.59,78,414/ - . THE BUSINES S OF THE SAID CONCERN WAS GOING DOWN AND THE ASSESSEE WAS NOT EXPECTED TO RECOVER THE PRINCIPAL AMOUNT. THEREFORE, THE ACCRUAL OF INTEREST WAS NOT SHOWN IN THE BOOKS OF ACCOUNTS. AFTER CONSIDERING THE EVIDENCES AND CERTAIN CASE LAWS, LEARNED CIT(APPEALS) H AS GRANTED THE RELIEF AS UNDER : I HAVE CAREFULLY CONSIDERED THE FACTSW OF THE CASE, THE SUBMISSIONS OF THE APPELLANT, ASSESSMENT ORDER AND REMAND REPORT. IN RESPONSE TO THE REMAND REPORT, DURING THE COURSE OF APPELLATE PROCEEDINGS, THE APPELLANT HAS PRODUCED A LETTER FROM M/S SHAH NANJI NA NJI E XPORTS PVT. LTD. WHICH STATES THAT DUE TO LIQUIDITY PROBLEM THE INTEREST WAS NOT PAID TO THE APPELLANT IN F.Y. 2004 - 05 AND A.Y. 2005 - 06 WHICH WAS PAYABLE AT 12% PER ANNUM. HOWEVER, IN THE FOLLOWING TWO YEARS, I. E. F.Y. 2005 - 06 (A.Y. 2006 - 07) AND F.Y. 2006 - 07 (A.Y. 2007 - 08), THE INTEREST WAS PAID AT 18% INSTEAD OF 12% WITH A VIEW TO COMPENSATE NONE PAYMENT OF INTEREST IN F.Y. 2004 - 05. THE DETAILS OF INTEREST PAID BY SHAH NA NJI NAGSI EXPORTS PVT. LTD. TO THE APPELLANT IS AS UNDER : F.Y. A.Y. INTEREST PAID @ 18% INTEREST PAYABLE @ 12% EXCESS PAID. 2005 - 06 2006 - 07 52,26,861 34,84,574 17,42,287 2006 - 07 2007 - 08 47,41,038 31,60,691 15,80,346 TOTAL 99,67,899 66,45,266 33,22,633 FURTHER, THE APPELLANT HAS ALSO PRODUCED A LETTER FROM M/S SHAH NA NJI NAGSI EXPORTS PVT. LTD. STATING THAT NO INTEREST WAS PAID BY THEM TO THE APPELLANT IN A.Y. 2005 - 06 NOR THE INTEREST HAS BEEN DEBITED IN THEIR 5 ITA NO. 103/NA G/2013 BOOKS NOR THEY HAVE CLAIMED ANY DEDUCTION FOR THE INTEREST TO BE PAID TO THE APPELLANT IN THAT F.Y. 2004 - 05 (A.Y. 2005 - 06). THE APPELLANTS AR STATED THAT THERE IS NO LOSS TO THE APPELLANT IN VIEW OF RECEIPT OF HIGHER RFATE OF INTEREST IN THE SUCCEEDING YEARS. FURTHER, IT IS ALSO NOTICE D THAT EVEN IF THE INTEREST WOULD HAVE BEEN RECEIVED BY THE APPELLANT DURING THE YEAR IT WOULD HAVE NOT HAVE AFFECTED THE TAXABILITY AS THE TOTAL INCOME EVEN AFTER DISALLOWING THE INTEREST EXPENSES HAS RESULTED INTO LOSS. CONSIDERING THE FACTUAL MATRIX OF THE CASE AND EXAMINING THE ENTIRE FACTS AND COURSE OF EVENTS, IT IS NOTICED THAT APPELLANT HAS NOT INCURRED ANY LOSS ON ACCOUNT OF LOAN ADVANCED TO M/S SHAH NANJI NAGSI EXPORTS PVT. LTD., AS IT HAS BEEN COMPENSATED IN THE FOLLOWING TWO YEARS. IN VIEW OF TH IS, THE AO IS DIRECTED TO DELETE THE ADDITION OF RS.61,02,756/ - . GROUND IS ALLOWED. 6. FROM THE SIDE OF THE REVENUE LEARNED D.R. MR. NARENDRA KANE APPEARED AND VEHEMENTLY PLEADED THAT THIS IS A CLEAR CASE OF DIVERSION OF INCOME. WHEN THE ASSESSEE WAS MAIN TAINING ACCOUNTS ON MERCANTILE SYSTEM BASIS THEN THE ACCRUAL OF INTEREST SHOULD HAVE BEEN UNIFORMLY REFLECTED IN THE BOOKS OF ACCOUNTS. HE HAS ALSO MENTIONED THAT THE TAXABLE ENTITIES WERE NOT SHOWING INTEREST INCOME BUT THE ENTITIES HAVING EXEMPTED INCOME WERE SHOWING THE INTEREST INCOME ONLY TO AVOID THE TAX DUE. LEARNED D.R. HAS REITERATED THAT THE ASSESSEE HAD ADOPTED A COLOURABLE DEVICE TO AVOID THE TAX. 7. FROM THE SIDE OF THE RESPONDENT ASSESSEE, LEARNED A.R. MR. C.J. THAKAR APPEARED AND SUBMITTED THAT THERE WAS NO COLOURABLE DEVICE TO AVOID THE TAX BECAUSE THE ASSESSEE WAS OTHERWISE SUFFERING A HUGE LOSS YEAR AFTER YEAR. EVEN IN THE YEAR UNDER CONSIDERATION A RETURN OF HUGE LOSS WAS DECLARED BY THE ASSESSEE. LEARNED A.R. HAS ALSO PLEADED THAT THE SISTER CONCERN WAS FACING FINANCIAL DIFFICULTY, HENCE THE ASSESSEE HAS DEC IDED NOT TO CHARGE INTEREST FOR THE YEAR UNDER CONSIDERATION. ONE MORE POINT HAS ALSO BEEN MENTIONED BY THE ASSESSEE THAT ALTHOUGH THERE WERE TWO CONCERNS AS REFERRED BY THE AO FOR THE PURPOSE OF IMPUGNED DISALLOWANCE, BUT LEARNED CIT(APPEALS) HAS GIVEN TH E VERDICT ONLY CONSIDERING THE FACTS OF M/S SHAH NANJI NAGSI EXPORTS PVT. LTD. 6 ITA NO. 103/NA G/2013 INADVERTENTLY IN THE FINAL VERDICT THERE WAS NO MENTION OF ASHWIN TRADING COMPANY BY LEARNED CIT(APPEALS). HOWEVER, PLACING RELIANCE IN THE CASE OF CIT VS. GWALIOR SUGAR CO. 150 ITR 320 AND S.A. BUILDERS VS. CIT 288 ITR 1 (SC) LEARNED A.R. HAS PLEADED THAT THE BOOK RESULTS OF THE ASSESSEE DESERVES TO BE APPROVED. 8. WE HAVE HEARD BOTH THE SIDES AT SOME LENGTH. WE HAVE CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW IN THE LIGHT OF THE COMPILATION FIL E D. A COMPILATION HAS BEEN FILED BEFORE US CONTAINING THE AUDITED BALANCE SHEET OF M/S SHAH NANJI NAGSI EXPORTS PVT. LTD. TO DEMONSTRATE THAT THERE WAS FINANCIAL DIFFICULTY, HENCE UNABLE TO PAY INTEREST TO THE ASSESSEE. IT HAS ALSO BEEN NARRATED IN ONE OF THE SUBMISSION THAT IT WAS AGREED UPON BETWEEN THE ASSESSEE AND THE SAID E XPORT COMPANY THAT IN THE SUBSEQUENT YEARS INTEREST AT THE RATE OF 18% COULD BE CHARGED BY THE ASSESSEE. AS FAR AS THE CHARGING OF HIGHER RATE OF INT EREST IN SUBSEQUENT YEAR IS CONCERNED, WE ARE NOT CONVINCED WITH THIS ARGUMENT. RATHER WE ARE OF THE VIEW THAT IF THERE WAS COMMERCIAL EXPEDIENCY THEN THE ASSESSEE CAN ADVANCE LOAN TO A SISTER CONCERN WITHOUT CHARGING INTEREST. FOR THIS LEGAL PROPOSITION W E PLACE RELIANCE ON S.A. BUILDERS LTD. VS. CIT 288 ITR 1(SC). THEREFORE, IN RESPECT OF THE SAID EXPORT PVT. LTD., WE HEREBY AFFIRM THE FINDING OF LEARNED CIT(APPEALS) GRANTING RELIEF TO THE ASSESSEE. 8.1 AS FAR AS THE ISSUE PERTAINING TO ASHWIN TRADING CO MPANY IS CONCERNED , IT IS CORRECT THAT IN THE FINAL VERDICT LEARNED CIT(APPEALS) HAS INADVERTENTLY FORGOTTEN TO DISCUSS THE SAME. IN THE ABSENCE OF THE VERDICT OF LEARNED CIT(APPEALS) IN RESPECT OF NON CHARGING OF INTEREST FROM ASHWIN TRADING COMPANY, WE ARE OF THE VIEW THAT THE MATTER SHOULD GO BACK TO LEARNED CIT(APPEALS) SO THAT HE CAN GIVE HIS VERDICT AND PRONOUNCE A JUDGMENT IN THE LIGHT OF THE FACTS OF THE CASE IN RESPECT OF ASHWIN TRADING COMPANY. FOR THIS LIMITED PURPOSE, WE RESTORE THIS PART OF T HE GROUND BACK TO THE LE ARNED CIT(APPEALS) TO DECIDE DENOVO, NEEDLESS TO SAY AFTER PROVIDING AN ADEQUATE 7 ITA NO. 103/NA G/2013 OPPORTUNITY OF HEARING TO THE ASSESSEE. WE ORDER ACCORDINGLY. RESULTANTLY THIS GROUND OF THE REVENUE MAY BE TREATED AS PARTLY ALLOWED THAT TOO FOR ST ATISTICAL PURPOSES. 9. IN THE RESULT, REVENUES APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 30 TH DAY OF OCT., 2015. SD/ - SD/ - ( SHAMIM YAHYA) (MUKUL K. SHRAWAT) ACCOUNTA NT MEMBER. JUDICIAL MEMBER NAGPUR, DATED: 30 TH OCT., 2015. COPY FORWARDED TO : 1. M/S SHAH NANGI NAGSI, ANAZ BAZAR, ITWARI, NAGPUR. 2. D CIT, CIRCLE - 3, NAGPUR. 3. C.I.T., CONCERNED 4. CIT(APPEALS) 5. D.R., ITAT, NAGPUR. 6. GUARD FILE TRUE COPY BY ORDER ASSISTANT REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, NAGPUR BENCH, NAGPUR.