M/s AAGJ & Co, Bangalore V. DCIT, Bangalore

ITA 1038/BANG/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51400 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-12-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Next Hearing Date: 20-12-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 30-08-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: K L PRASHANTH
• Keywords: Business income; Business expenditure; Commercial expediency
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH A BEFORE SHRI N.K. SAINI, ACCOUNTANTMEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.1038(BANG)/2010 (ASSESSMENT YEAR: 2007-08) M/S. AAGJ & CO. CHARTERED ACCOUNTANTS, NO.10/1, 3 RD MAIN, MOUNT JOY EXTENSION HANUMANTHANAGAR, BANGALORE-560 019 APPELLANT PAN: AABFA5265E VS. DEPUTY COMMISSIONER OF INCOME-TAX, CIRCLE 5(1), BANGALORE. RESPONDENT APPELLANT BY: SHRI K.L.PRASHANTH. RESPONDENT BY : SHRI SATYASAI RATH. DATE OF HEARING: 20-12-2011 DATE OF PRONOUNCEMENT: 22-12-2011 O R D E R PER GEORGE GEORGE K, JM: THIS IS AN APPEAL INSTITUTED BY THE ASSESSEE IS DIRECTED AGAINST THE CIT(A)S ORDER DATED 23-10-201 0. THE RELEVANT ASSESSMENT YEAR IS 2007-08. THE EFFECTIVE GROUNDS READ AS UNDER: ITA 1038(BANG)/2010 PAGE 2 OF 8 1. THE HONBLE CIT(APPEALS) HAS ERRED BY DISALLOWING EXPENSES OF INTEREST U/S 37(10 OF THE INCOME-TAX ACT,1961. 2. THE PURPOSE OF LOAN WAS NOT CONSIDERED IN A RIGHT MANNER AND HENCE THE INTEREST IS DISALLOWED. 3. IF THE INTEREST IS DISALLOWED, IT WILL LEAD TO DOUB LE TAXATION WHICH IS NOT THE PURPOSE OF LAW AS IT IS ALREADY CHARGED TO TAX AS INCOME IN THE HANDS OF TAPASYA BPOS PVT.LTD. 2. THE ASSESSEE IS A FIRM OF CHARTERED ACCOUNTANTS . RETURN OF INCOME WAS FILED ON 2-4-2007 DECLARING IN COME OF ` .31,51,659/-. THE ASSESSMENT WAS TAKEN UP FOR SCRU TINY BY ISSUANCE OF NOTICE U/S 143(2) OF THE INCOME-TAX ACT , 1961 [HEREINAFTER REFERRED TO AS 'THE ACT']. SCRUTINY AS SESSMENT U/S 143(3) OF THE ACT WAS PASSED VIDE ORDER DATED 9-12- 2009 FIXING THE INCOME AT ` .37,52,781/-. IN THE SAID ASSESSMENT ORDER, THE AO DISALLOWED INTEREST PAYMENT OF ` .6,01,122/-. THE ABOVE INTEREST WAS PAID TO M/S.TAPASYA BPO LTD., K.L.JANA RDHAN & OTHERS TOWARDS UNSECURED LOAN BORROWED. ACCORDING TO THE AO, THE UNSECURED LOANS WERE UTILIZED BY THE ASSESSEE F OR MAKING ADVANCES TO PARTNERS OF THE FIRM. THE AO REJECTED THE CONTENTION OF THE ASSESSEE THAT UNSECURED LOANS FRO M SISTER CONCERNS AND OTHERS WERE UTILIZED FOR DAY-TO-DAY TR ANSACTIONS AND WERE FOR COMMERCIAL EXPEDIENCY. THE AO, FURTHE R HELD THAT DURING THE PREVIOUS YEAR CASH WAS AVAILABLE WITH TH E FIRM AND THE SAME WAS WITHDRAWN BY THE PARTNERS AND AS SUCH THERE WAS NO NEED TO BORROW LOANS TO MAKE ADVANCES. IT WAS A LSO NOTED THAT THE ASSESSEE IS HAVING SUBSTANTIAL SURPLUS AFT ER MEETING ITA 1038(BANG)/2010 PAGE 3 OF 8 EXPENDITURE AND THEREFORE THERE WAS NO NEED TO BORR OW FURTHER LOANS. THUS, THE INTEREST CLAIMED WAS DISALLOWED. 3. AGGRIEVED BY THE ASSESSMENT, THE ASSESSEE CARRIE D THE MATTER IN APPEAL BEFORE THE FIRST APPELLATE AUTHORI TY. IT WAS CONTENDED THAT INTEREST WAS PAID TO M/S.TAPASYA BPO LTD., A SISTER CONCERN AND OTHERS TOWARDS UNSECURED LOANS B ORROWED FOR THE PURPOSE OF RUNNING DAY TODAY BUSINESS OF THE AS SESSEE-FIRM. IT WAS SUBMITTED THAT DURING THE COURSE OF ASSESSME NT, THE AO HAD NOT TAKEN INTO CONSIDERATION JUDGMENTS OF VARIO US COURTS WITH REGARD TO ALLOWABILITY OF INTEREST AS EXPENSES . IT WAS FURTHER CONTENDED THAT M/S.TAPASYA BPO LTD., AND K.L.JANARDHANA HAD PAID TAX ON THESE INTEREST RECEI PTS AND ACCORDINGLY THE DISALLOWANCE OF INTEREST IN THE HAN DS OF THE ASSESSEE-FIRM WILL AMOUNT TO DOUBLE TAXATION. THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS OF TH E ASSESSEE WAS OF THE VIEW THAT PARTNERS OF THE ASSES SEE FIRM HAD WITHDRAWN TO THE EXTENT OF RS.63,36,037/- AND THESE WITHDRAWALS BY THE PARTNERS OF THE ASSESSEE-FIRM WE RE NOT FOR THE PURPOSE OF BUSINESS. 4. AGGRIEVED BY THE DISMISSAL OF APPEAL BY THE FIRS T APPELLATE AUTHORITY, THE ASSESSEE IS IN APPEAL BEFO RE US. THE ASSESSEE HAD FILED WRITTEN CONTENTIONS. THE ESSENC E OF THE SAME IS AS FOLLOWS: ITA 1038(BANG)/2010 PAGE 4 OF 8 4.1 IN RESPECT OF LOAN RECEIVED FROM K.L.JANARDHANA , IT WAS SUBMITTED THAT THE LOAN AMOUNT CONSISTS OF THE OPENING BALANCE OF ` .9,37,622/-. DURING THE YEAR THE NET BORROWINGS IS ONLY ` .43,796/- AND HENCE THE MAJOR PORTION OF THE INTERE ST EXPENSE IS TOWARDS THE OPENING BALANCE. 4.2 WITH REFERENCE TO LOAN TAKEN FROM M/S.TAPASYA, IT WAS SUBMITTED THAT THE ASSESSEE IS A FIRM OF CHARTE RED ACCOUNTANTS SET UP WITH INFRASTRUCTURE TO PROVIDE T HE SERVICES. M/S. TAPASYA WAS SET UP TO PROVIDE THE SERVICES IN ACCOUNTS AND PAYROLL. M/S. TAPASYA USES THE SAID INFRASTRUCTURE. THE ASSESSEE, WITH THEIR ESTABLISHED BUSINESS CONTACTS, WAS ABLE TO GET THE BUSINESS TO M/S. TAPASYA. BOTH THE FIRMS US E THE SAME INFRASTRUCTURE FACILITIES I.E. BUILDING. FIXED ASSE TS AND OTHER RESOURCES. MOST OF THE COMMON AND OTHER EXPENSES AR E PAID THROUGH THE ASSESSEE. COMMON EXPENSES TO THE MINIM UM PERCENTAGE ARE DEBITED TO M/S.TAPASYA. IN ORDER TO MAKE IT CONVENIENT TO MANAGE THE FUNDS AT ONE PLACE AND IN ORDER TO CONCENTRATE ON THE BUSINESS, ALL THE FUNDS WERE GET TING POOLED AT ONE PLACE SO THAT IT WOULD BE CONVENIENT TO MAKE THE PAYMENTS AT ANY GIVEN POINT OF TIME WITHOUT GETTING THE DIFFICULTIES OF MANAGING THE FUNDS FROM VARIOUS ACC OUNTS. THIS IS PURELY DONE IN VIEW OF THE COMMERCIAL EXPEDIENCY NO T FOR THE PURPOSE OF PARTNERS DRAWINGS. THE ASSESSEE USED TH E FUNDS BORROWED ONLY FOR BUSINESS PURPOSE AND FOR COMMERCI AL EXPEDIENCY AND ALSO FOR PARTNERS DRAWINGS WHO ARE E LIGIBLE TO ITA 1038(BANG)/2010 PAGE 5 OF 8 DRAW REMUNERATION AS THE WORKING PARTNERS AS PER TH E PROVISIONS OF ACT. 4.3 IT WAS FURTHER SUBMITTED THAT THE BORROWING FRO M M/S. TAPASYA ALONE CANNOT BE LINKED TO PARTNER'S DR AWINGS. THE ASSESSEE IS ALSO RUNNING THE BUSINESS, COLLECTING T HE BILLING MONEY AND ALSO ADVANCES FROM CLIENTS TO TAKE CARE O F STATUTORY LIABILITIES AND OTHER PAYMENTS WHICH ARE COLLECTIVE LY POOLED AT ONE PLACE INCLUDING OF BORROWINGS. HENCE, THE VARIO US PAYMENTS WERE MADE TO TAKE CARE OF EXPENSES, PURCHASE OF FIX ED ASSETS, ADVANCES, INCOME-TAX, AND REMUNERATION TO WORKING P ARTNERS WHICH IS OUT OF COLLECTIVE FUNDS AND CANNOT BE SEGR EGATED OR APPORTIONED WHETHER THE SAID PAYMENTS WERE MADE OUT OF LOAN FUNDS OR FROM BUSINESS FUNDS. FURTHER THE SAID PAYM ENTS CANNOT BE ESTABLISHED OR ESTABLISH CLEAR CUT NEXUS BETWEEN THE LOAN FUNDS OR OWN FUNDS. 4.4 IT WAS FURTHER STATED THAT THE BANK BA LANCES WERE ALWAYS POSITIVE AND ON AN AVERAGE THE BANK BALANCE WAS OF ` .9,58,848/- WHICH IS EVIDENT THAT, THE INTENTION OF THE BORROWINGS WAS NOT FOR THE PURPOSE OF PARTNERS DRAW INGS BUT IT WAS FOR COMMERCIAL EXPEDIENCY AND TO MANAGE THE FUN DS IN AN EFFICIENT MANNER. FURTHER, ASSESSEE HAD CONTENDED T HAT CONSIDERING THE INTEREST INCOME EARNED IS TAXED ALR EADY AND DISALLOWING INTEREST PAYMENT WILL PUT THE ASSESSEE IN A DIFFICULT SITUATION AND THE JUSTICE IS NOT DONE AND IS AGAINS T THE PROVISIONS OF THE ACT AND WILL LEAD TO DOUBLE TAXAT ION. ITA 1038(BANG)/2010 PAGE 6 OF 8 4.5 THE DEPARTMENTAL REPRESENTATIVE, ON THE OTHER H AND, SUPPORTED THE ORDERS OF THE INCOME-TAX AUTHORITIES. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND CONSIDERED T HE MATERIAL ON RECORD. THE DETAILS OF INTEREST DEBITE D TO P&L ACCOUNT AND CLAIMED AS DEDUCTION FOR THE COMPUTATIO N OF BUSINESS INCOME ARE AS FOLLOWS: NAME OF THE PARTY INTEREST ` . TDS ` . BALANCE ` . SHRI K.L.JANARDHANA 1,52,093 15,513 1,36,580 TAPASYA BPO P.LTD. 4,36,681 44,541 3,92,140 ICICI CREDIT CARD 7,200 - 7,200 CITY BANK 5,148 - 5,418 TOTAL 6,01,112 60,054 5,41,068 THE AO HAD DISALLOWED THE ENTIRE INTEREST CLAIMED. LOAN RECEIVED FROM K.L.JANARDHANA FOR THE CONCERNED ASSE SSMENT YEAR IS ONLY TO THE EXTENT OF ` .43,796/-. THE MAIN INTEREST COMPONENT IN RESPECT OF LOAN RECEIVED FROM K.L.JANA RDHANA IS ON ACCOUNT OF OPENING BALANCE AMOUNTING TO ` .9,37,622/-. IT IS NOT CLEAR WHETHER FOR THE AMOUNT SHOWN IN THE OPENI NG BALANCE, INTEREST HAS BEEN CLAIMED IN THE PRECEDING ASSESSME NT YEARS. IF THE INTEREST HAS BEEN CLAIMED BY THE ASSESSEE AS A DEDUCTION WITH REGARD TO THE LOAN AMOUNTS RECEIVED FROM K.L.J ANARDHANA IN THE PREVIOUS ASSESSMENT YEARS AND THE SAME HAS B EEN ALLOWED AS DEDUCTION, NECESSARILY INTEREST IN RESPE CT OF PAYMENT WITH REGARD TO OPENING BALANCE OF LOAN AMOUNT OF K.L.JANARDHANA HAS TO BE ALLOWED AS DEDUCTION FOR T HE CONCERNED ASSESSMENT YEAR. THESE ASPECTS OF THE MA TTER HAD ITA 1038(BANG)/2010 PAGE 7 OF 8 NOT BEEN CONSIDERED BY THE INCOME-TAX AUTHORITIES. INTEREST PAYMENT IN TOTALITY HAS BEEN DENIED BY STATING THAT PARTNERS HAVE OVERDRAWN THE NET AMOUNT OF ` .63,36,037/-. DURING THE CONCERNED ASSESSMENT YEAR. IT IS NOT CLEAR THE AMO UNTS WITHDRAWN BY THE PARTNERS OF THE ASSESSEE-FIRM CAN BE LINKED TO LOAN TAKEN FROM M/S.TAPASYA AND K.L.JANARDHANA. NO R HAS THE ASSESSEE HAS PROVED BEFORE US THE COMMERCIAL EXPEDI ENCY FOR TAKING LOAN AND UTILIZING THE SAME IN THE DAY-TODAY BUSINESS ACTIVITY OF THE ASSESSEE FIRM. 5.1 IN THE CASE OF S.A.BUILDERS VS. CIT(2007)(288 ITR 1)(SC), THE HONBLE SUPREME COURT HAS HELD THAT I N ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORROWED BY THE ASSESSEE TO GIVE AN INTEREST FREE LOAN TO A SISTER CONCERN SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT , ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEA SURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION' COMMERCIAL E XPEDIENCY' IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS- MAN INCURS FOR THE PURPOSE OF BUSINESS. T HE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATI ON, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 5.2 IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED OPINION THAT THE MATTER NEEDS FRESH LOOK AT THE HAN DS OF THE AO. THEREFORE, THIS ISSUE IS RESTORED TO THE FILE OF TH E AO. HE SHALL ITA 1038(BANG)/2010 PAGE 8 OF 8 DISPOSE OF THE MATTER AS EXPEDITIOUSLY AS POSSIBLE AFTER AFFORDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 6. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 22 ND DECEMBER, 2011 SD/- SD/- (N.K. SAINI) ACCOUNTANT MEMBER (GEORGE GEORGE K) JUDICIAL MEMBER PLACLE: BANGALORE DATE : 22 ND DECEMBER, 2011 EKS COPY TO : 1. APPELLANT 2. RESPONDENT 3. CIT(A) CONCERNED 4. CIT 5. DR, ITAT, BANGALORE 6. GUARD FILE BY ORDER ASSISTANT REGISTRAR, ITAT, BANGALORE