Deputy Commissioner of Income-tax, circle-11(5), Bangalore V. M/s Kamalam handlooms Pvt Ltd, Bangalore

ITA 1056/BANG/2014

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 7468 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 2 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-10-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-08-2017
• Assessment Year: 2006-2007
• Appeal Filed On: 11-08-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: V CHANDRASHEKAR S HRI P DH
• Keywords: Business expenditure; Proportionate interest
• Section: 40A(3); 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, B E NGAL U R U BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI LALIET KUMAR, JUDICIAL MEMBER ITA NO. 1034/ BANG/ 201 4 (ASSESSMENT YEAR : 2006 - 07 ) KAMALAM HANDLOOMS (P) LTD., NO.22, DORAISWAMY COMPLEX, K ENCHANAYAKANAGALLI, NAGARATHPET, BENGALURU - 560002. PAN:AABCK 6325 Q VS. APPELLANT ASSISTANT COMMISSIONER OF INCOME - TAX, CIRCLE - 11 ( 5 ), BENGALURU. RESPONDENT AND ITA NO.10 56 /BANG/ 201 4 (ASSESSMENT YEAR : 2006 - 07 ) (BY THE REVE NUE) A SSESSEE BY : SHRI V.CHANDRASHEKAR, ADVOCATE . REVENUE BY : S HRI P.DHIVAHAR, JCIT(DR) DATE OF HEARING : 03 /08/2017 DATE OF PRONOUNCEMENT : 13 / 10 /2017 O R D E R PER I NTURI RAMA RAO, AM : THESE TWO CROSS APPEALS FILED BY THE ASSESSE E - COMPANY AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE ORDER OF THE CIT(A) - 1, BANGALORE, DATED 28/03/2014 FOR THE ASSESSMENT YEAR 2006 - 07. 2. BRIEF FACTS OF THE CASE ARE AS UNDER: THE ASSESSEE IS A COMPANY DULY INCORPORATED UNDER THE PROVISIONS OF T HE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND TRADING IN ALL KINDS OF MAN - MADE FILAMENT YARNS. RETURN OF INCOME FOR THE ASSESSMENT YEAR 2006 - 07 WAS FILED ON 29/11/2006 DECLARING TOTAL INCOME OF RS.23,28,840/ - . AFTER PROCESSING THE SAID RETURN OF INCOME, THE CASE WAS SELECTED FOR SCRUTINY ASSESSMENT AS PER THE GUIDELINES ISSUED BY ITA NO . 1034 & 1056 /BANG/201 4 PAGE 2 OF 14 THE CBDT. ACCORDINGLY, NOTICE U/S 143(2) OF THE INCOME - TAX ACT, 1961 [HEREINAFTER REFERRED TO AS 'THE ACT' FOR SHORT] WAS ISSUED AND THE ASSESSMENT W AS COMPLETED BY THE ASST. COMMISSIONER OF INCOME - TAX, CIRCLE 11(5), BENGALURU, VIDE ORDER DATED 30/12/2008 PASSED U/S 143(3) OF THE ACT. WHILE DOING SO, THE ASSESSING OFFICER (AO) DISALLOWED INTEREST OF RS.3,37,893/ - BY HOLDING THAT BORROWED FUNDS WERE DI VERTED FOR NON - BUSINESS PURPOSES IN THE FORM OF LOANS TO DIRECTORS. ACCORDINGLY, THE AO DISALLOWED PROPORTIONATE INTEREST OF RS.3,37,893/ - . 3. THE AO ALSO DISALLOWED EXPENDITURE ON ACCOUNT OF PURCHASE OF WOOD OF RS.30,62,181/ - BY HOLDING THAT PURCHASE I NVOICE ONLY IN THE FORM OF BILL ISSUED BY THE ASSESSEE - COMPANY BY SELF - MADE VOUCHERS. THE AO ALSO MADE ADDITION ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK OF RS.32,60,000/ - . 4. BEING AGGRIEVED, AN APPEAL WAS PREFERRED BEFORE THE CIT(A), WHO VIDE IMPUG NED ORDER, HAD CONFIRMED THE ADDITION ON ACCOUNT OF DISALLOWANCE OF INTEREST OF RS.3,37,893/ - AND ALSO CONFIRMED ADDITION ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK OF RS.32,60,000/ - . HOWEVER, IN RESPECT OF DISALLOWANCE ON ACCOUNT OF PURCHASE OF WOOD, T HE CIT(A) HAD GRANTED PARTIAL RELIEF BY DIRECTING THE AO TO ALLOW 50% OF THE EXPENDITURE CLAIMED OF RS.30,62,181/ - AS DEDUCTION. 5. BEING AGGRIEVED, THE ASSESSEE IS IN APPEAL IN ITA NO.1034/BANG/2014 CHALLENGING THAT PART OF THE ORDER OF THE CIT(A) WHICH I S AGAINST IT AND THE REVENUE IS ALSO IN APPEAL IN ITA NO.1056/BANG/2014 CHALLENGING THE DIRECTION OF THE CIT(A) TO ALLOW 50% OF THE EXPENDITURE INCURRED ON WOOD. ITA NO.1034/BANG/2014: 6. NOW, WE SHALL TAKE UP THE ASSESSEES APPEAL. THE ASSESSEE RAISED THE FOLLOWING GROUNDS OF APPEAL: ITA NO . 1034 & 1056 /BANG/201 4 PAGE 3 OF 14 7. GROUND N OS. 1, 2, 6 AND 7 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. 8. GROUND N O.3 CHALLENGES THE FINDING OF THE CIT (A) CONFIRMING DISALLOWANCE OF INTEREST OF RS.3,37,893/ - . THE AO MADE DISALLOWANCE OF ITA NO . 1034 & 1056 /BANG/201 4 PAGE 4 OF 14 RS. 3,37,893/ - BY HOLDING THAT THE ASSESSEE COMPANY HAD DIVERTED BORROWED FUNDS FOR NON - BUSINESS PURPOSES IN THE FORM OF LOANS TO DIRECTORS. THIS FINDING CAME TO BE CONFIRMED BY THE CIT (A) REJECTING THE CON TENTION OF THE ASSESSEE COMPA NY THAT AMOUNTS WERE PROVIDED TO THE DIRECTORS TO MEET BUSINESS EXPENDITURE OF THE ASSESSEE - COMPANY . W ITHOUT PREJUDICE TO THIS ARGUMENT , IT WAS FURTHER CONTENDED THAT LOANS WERE GRANTED TO DIRECTORS ONLY OUT OF NON BORROW ED FUNDS . THE CIT(A) REJECTED THE FIRST CON TENTION OF THE ASSESSEE THAT LOANS WERE PROVIDED FOR BUSINESS PURPOSE BY HOLDING THAT NO EVIDENCE WAS FURNISHED IN SUPPORT OF THIS CONDITION . S IMILARLY IN RESPECT OF THE CONTENTION THAT NON - BORROWED FUNDS WERE UTILIZ ED FOR THE PURPOSE OF PROVIDIN G LOANS TO THE DIRECTORS , THE CIT (A) REJECTED THE CON TENTION AS NO BALANCE - SHEET OF THE ASSESSEE COMPANY WAS FURNISHED BEFORE HIM TO VERIFY THIS FACTUAL INFORMATION. 9. BEFORE US LEARNED COUNSEL FOR THE ASSESSEE CONTESTED THAT NO LOANS WERE PRO VIDED TO THE DIRECTORS OUT OF BORROWED FUNDS OF THE COMPANY. IN FACT, AMOUNTS WERE PROVIDED TO DIRECTORS FOR V ARIOUS EXIGENCIES OF THE BUSINESS. HE FURTHER CONTENDED THAT BORROWED FUNDS REPRESENT BANK OVERDRAFT FACILITIES GRANTED BY BANKERS ON THE BASIS OF STOCK INVENTORY. T HEREFORE , QUESTION OF DIVERTING WORKING CAPITAL TO PERSONAL NEEDS OF DIRECTORS OF THE COMPANY DOES NOT ARISE . LEARNED COUNSEL FOR THE ASSESSEE FURTHER CONTENDED THAT IN ANY EVENT FREE FUNDS OF THE ASSESSEE COMPANY F AR EXCEEDED BORROWED FUND AND THEREFORE NO DISALLOWANCE OF INTEREST IS CALLED FOR. 10. WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE DISALLOWANCE OF INTEREST U/S 36(1)(III) CAN BE MADE ONLY IN CASE BORROWED FUNDS WERE UTILIZ ED FOR NON - BUSINESS PURPOSE . T HE CASE THE CASE OF THE ASSESSEE IS THAT SINCE LOANS WERE PROVIDED TO DIRECTORS OF THE COMPANY , HE PRESUMED THAT BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF LOANS TO DIRECTORS. THE ONUS ALWAYS LIES ON THE ASSESSEE TO PROVE THAT ADVANCES ARE MADE O NLY FOR BUSINESS PURPOSES . I N THE PRESENT CASE , THE ASSESSEE - COMPANY, EXCEPT MAKING A BALD ASSERTION THAT ADVANCES ARE MADE TO DIRECTORS ONLY FOR BUSINESS EXIGENCY , HA D NOT L ED ANY EVIDENCE TO DEMONSTRATE THIS FA C T . HOWEVER, ITA NO . 1034 & 1056 /BANG/201 4 PAGE 5 OF 14 THE OTHER CONTENTION OF THE AS SESSEE - COMPANY THAT LOANS AND ADVANCES ARE MADE OUT OF FREE FUNDS , MERITS CONSIDERATION . I N THE BALANCE SHEET FILED BEFORE US AT PAGE 147 OF THE PAPER BOOK , WE FIND THAT THERE IS A SHARE CAPITAL TO THE EXTENT OF RS.2,14,46,989/ - AND THERE IS NET CURRENT A SSE TS, LOANS AND ADVANCES OF RS.66,98,505/ - . WE FIND THAT THERE ARE NO INVENTOR IES AS SUNDRY DEBTORS BASED ON WHICH BANKS HAVE GR ANTED WORKING CAPITAL FACILITY. T HIS CLINCHES THE ISSUE THAT NO BORROW ED FUNDS HAVE BEEN UTILIZ ED FOR BUSINESS PURPOSE . T HEREFO RE , WE HOLD THAT THIS CONTENTION OF THE ASSESSEE - COMPANY ALSO CANNOT BE ACCEPTED . T HIS GROUND OF APPEAL BY THE ASSESSEE IS DISMISSED. 11. NEXT GROUND OF APPEAL RELATES TO DISALLOWANCE OF FIREWOOD EXPENDITURE. THE AO DISALLOWED A TOTAL EXPENDITURE OF R S.30,62,181/ - INCURRED TOWARDS PURCHASE OF WOOD BY HOLDING THAT THE EXPENDITURE IS INFLATED AND QUESTIONED THE GENUINENESS OF EXPENDITURE AS THE EXPENDITURE IS SUPPORTED BY SELF - MADE VOUCHERS. THE SUBMISSIONS MADE BY THE ASSESSEE - COMPANY DURING THE COURSE OF ASSESSMENT PROCEEDINGS AS WELL AS BEFORE THE CIT(A) ARE AS UNDER: ITA NO . 1034 & 1056 /BANG/201 4 PAGE 6 OF 14 ITA NO . 1034 & 1056 /BANG/201 4 PAGE 7 OF 14 ITA NO . 1034 & 1056 /BANG/201 4 PAGE 8 OF 14 ITA NO . 1034 & 1056 /BANG/201 4 PAGE 9 OF 14 THE CIT(A), AFTER CONSIDERING THE SUBMISSIONS MADE , CONFIRM ED THE ADDITION TO THE EXTENT OF 50% AND DELETED ENTIRE ADDITION ON ACCOUNT OF VALUATION OF CLOSING STOCK. 11.1 T HE LEARNED COUNSEL FOR THE ASSESSEE CONTENDED THAT THE ADDITION WAS MADE BY AO ON MERE SURMISES AND CONJECTURES . T HE FACT THAT PURCHASE S ARE MA D E FROM UN - ORGANIZ ED PEOPLE /ILLITERATES AND THE EXPENDITURE IS SUPPORTED BY SELF - MADE VOUCHERS, CANNOT GO AG AINST THE CLAIM OF THE ASSESSEE. LEARNED COUNSEL FOR THE ASSESSEE RELIED ON THE DECISION OF THE HON BLE ALLAHABAD HIGH COURT IN THE CASE OF NISAR BIRI SIKKA NO. 1 V. CIT ( 174 TAXMAN 51 ) IN SUPPORT OF THE PROPOSITION THAT SELF - MADE VOUCHERS CANNOT BE REJEC TED BY HOLDING TO BE BOGUS . T HEREFORE , HE SUBMITTED THAT THERE IS NO BASIS FOR MAKING ADDITION OF OR CONFIRMING THE ADDITION AND NO ADDITION CAN BE MADE BASED ON SURMISES AND CONJECTURES. 11.2 O N THE OTHER HAND LEARNED DR PLACE D R ELIANCE ON THE ORDER S OF THE LOWER AUTHORITIES . 11.3 WE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT GROUND OF APPEAL THE ISSUE RELATES TO THE ALLOWANCE OF FIREWOOD E XPENDITURE . A DDITION IS MADE BY THE AO ON THE BASIS OF SELF - MADE VOUCHERS AND THE EXPENDITURES IS ON THE HIGHE R SIDE COMPARED TO EARLIER YEARS. TH E FACT THAT SIMILAR EXPENDITURE WAS ALLOWED IN EARLIER YEARS GOES TO PROVE THAT THE ASSESSEE INCURRED EXPENDITURE DURING THIS YEAR ALSO . THE FIREWOOD WAS USED FOR OPERATION OF BOILE RS. THE AO HAS NOT DOUBTED WORKING OF THE BOILERS OR USE OF BOILERS. THE ASSESSEE - COMPANY GAVE DETAILS OF PURCHASE OF BOILERS INSTALLED DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2006 - 07. THE AO HAD NOT GIVEN REASONS AS TO HOW THIS EXPENDITURE I S ITA NO . 1034 & 1056 /BANG/201 4 PAGE 10 OF 14 INFLATED. THE FINDINGS SHOULD BE SUPPORTED BY MATERIAL BROUGHT ON RECORD BY THE AO. THE AO HAD NOT BROUGHT ANY EVIDENCE IN SUPPORT OF THIS FINDING. I T IS SETTLED PRINCIPLE OF LAW THAT NO ADDITION CAN BE MADE BASED ON CONJECTURES AND SURMISES. THE FACT THAT EXPENDITURE IS SUPPORTED BY SELF - MADE VOUCHERS WOULD NOT MILITATE AGAINST THE ASSESSEE TO CLAIM THE EXPENDITURE, UNLESS AND OTHERWISE THERE IS A MATERIAL INDICATING THAT THE EXPENDITURE CLAIMED IS BOGUS. IN THE PRESENT CASE, INCURRING OF EXPENDITURE IS BEYOND DOUBT. IT IS ONLY THE QUANTUM OF EXPENDITURE WHICH CAN BE PERHAPS BE DOUBTED BY THE AO. BUT THE AO HAD NOT BROUGHT ANY EVIDENCE SHOWING THAT EXPENDITURE IS INFLATED. THERE IS NO ALLEGATION OF VIOLATION OF PROVISIONS OF SECTION 40A(3) OF THE AC T IN THE PRESENT CASE. THE ASSESSEE - COMPANY HAD ALSO FILED FULL NAME AND ADDRESSES OF THE SELLER OF FIREWOOD TO THE ASSESSEE - COMPANY. IT IS ALSO OPEN TO THE AO TO EXAMINE THOSE SELLERS. THE AO CHOSE NOT TO CONFRONT THIS EVIDENCE WITH THE SELLERS. IN TH E CIRCUMSTANCES, WE DO NOT FIND ANY REASONS TO CONFIRM THE ADDITION. THEREFORE W E DIRECT THE AO TO ALLOW THE ENTIRE EXPENDITURE. T HIS GROUND OF APPEAL IS ALLOWED 12. IN THE RESULT, T HE A PPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PUR POSES . ITA NO.1056/BANG/2014: 13. THE REVENUE RAISED THE FOLLOWING G ROUNDS OF APPEAL : ITA NO . 1034 & 1056 /BANG/201 4 PAGE 11 OF 14 14. GROUND NOS. 1 , 9 AND 10 ARE GENERAL IN NATURE AND DO NOT REQUIRE ANY ADJUDICATION. GROUND NOS. 2 AND 3 CHALLENGE THE FINDING OF THE CIT(A) IN ALLOWING 5 0% OF EXPENDITURE ON PURCHASE OF FIREWOOD. F OR THE REASONS GIVEN IN THE ASSESSEE S APPEAL, WE HOLD THAT ENTIRE EXPENDITURE IS ALLOWABLE AND THEREFORE, THESE GROUNDS OF APPEAL FILED BY THE REVENUE ARE DISMISSED. 15. GROUND NOS.4, 7 AND 8 CHALLENGE D ELETION OF ADDITION ON ACCOUNT OF U NDER - VALUATION OF CLOSING STOCK. THE FIN DING OF THE CIT (A) IS AS UNDER: ITA NO . 1034 & 1056 /BANG/201 4 PAGE 12 OF 14 ITA NO . 1034 & 1056 /BANG/201 4 PAGE 13 OF 14 ITA NO . 1034 & 1056 /BANG/201 4 PAGE 14 OF 14 THE FINDINGS OF THE CIT (A) ARE BASED ON THE SALUTARY PRINCIPLE THAT CLOSING STOCK SHOULD BE VALUED AT THE COST OR MARKET PRICE WHICHEVER IS LESS . AS RIGHTLY HELD BY THE CIT(A) , THE AO HAD NOT DETECTED IN EXCESS PHYSICAL STOCK BUT ONLY DISPUTED WITH REGARD TO THE RATE TO BE APPLIED FOR THE PURPOSE OF VALUATION OF CLOSING STOCK. THEREFORE WE DO NOT FIND ANY REASON TO INTERFERE WITH THE REASON ING OF THE. CIT(A). HENCE THIS GROUND OF APPEAL IS DISMISSED . 16. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 13 TH OCTOBER , 201 7 SD/ - SD/ - ( LALIET KUMAR ) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE : B EN GAL URU D A T E D : 13 /10 /2017 SRINIVASULU, SPS COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A) - 4 CIT 5 DR, ITAT , BANGALORE. 6 GUARD FILE BY ORDER SENIOR PRIVATE SECRETARY INCOME - TAX APPELLATE TRIBUNAL BANGALORE