IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORESHRI B.RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO.1090/HYD/2013 (ASSESSMENT YEAR 2007-08) M/S. KALANIKETAN TEXTILES & JEWELS (P) LIMITED, HYDERABAD (PAN - AAHCS 8070 J ) V/S DY. COMMISSIONER OF INCOME - TAX, CIRCLE 2(1), HYDERABAD. (APPELLANT) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY : SHRI B.KURMI NAIDU DATE OF HEARING 2 3 .11.015 DATE OF PRONOUNCEMENT 27.11.2015 O R D E R PER SAKTIJIT DEY, JUDICIAL MEMBER : THIS APPEAL OF THE ASSESSEE IS AGAINST THE ORDER DATED 30.4.2013 OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) III, HYDERABAD FOR THE ASSESSMENT YEAR 2007-08. 2. AT THE OUTSET, WE NEED TO MENTION, AT THE TIME OF HEARING, NO ONE APPEARED ON BEHALF OF THE ASSESSEE. IT IS SEEN FRO M THE RECORD THAT NOTICE WAS ISSUED BY REGISTRY TO THE ASSESSEE ON THE ADDR ESS NOTED AGAINST COL. NO.10 OF FORM NO.36, BUT THE NOTICE WAS RETURNED BY POSTAL AUTHORITIES UNSERVED. IT IS FURTHER NOTICED THAT THE ASSESSEE HAS NOT INTIMATED ANY CHANGE OF ADDRESS TO THE REGISTRY. IN VIEW OF THE AFORESAID FACTS AND CIRCUMSTANCES, WE PROCEED TO DISPOSE OF THE APPEAL EX-PARTE -QUA THE ASSESSEE- AFTER HEARING THE LEARNED DEPARTMENTAL RE PRESENTATIVE. 3. THE FIRST ISSUE RAISED BY THE ASSESSEE IN GROUN DS NO.2 TO 5 RELATE TO DISALLOWANCE OF INTEREST EXPENDITURE AMOUNTING TO RS.9,87,418. ITA NO.1090/HYD/2013 M/S. KALANIKETN TEXTILES & JEWELS (P) LTD., HYDERABAD 2 4. BRIEFLY, FACTS RELATING TO THIS ISSUE ARE THAT THE ASSESSEE, A PRIVATE LIMITED COMPANY, IS ENGAGED IN THE BUSINESS OF TRADING IN TEXTILES SAREES. FOR THE ASSESSMENT YEAR UNDER CONSIDERATIO N, ASSESSEE FILED ITS RETURN OF INCOME ON 25.10.2007 DECLARING TOTAL INCO ME OF RS.1,01,93,098. DURING THE SCRUTINY ASSESSMENT PROCEEDINGS, THE ASS ESSING OFFICER, ON VERIFICATION OF THE BALANCE SHEET, NOTICED THAT THE ASSESSEE HAD MADE ADVANCES AMOUNTING RS.3,54,13,025 DURING THE RELEVA NT PREVIOUS YEAR. AFTER CALLING FOR THE PARTY-WISE DETAILS OF ADVANCE S MADE AND UPON VERIFICATION OF THE SAME, IT WAS NOTICED BY THE ASS ESSING OFFICER THAT AN AMOUNT OF RS.82,28,480 HAS BEEN ADVANCED EITHER TO THE DIRECTORS OF THE COMPANY OR THEIR FAMILY MEMBERS. THE ASSESSING OFFI CER OBSERVED THAT THE SAID INTEREST FREE ADVANCES TO THE DIRECTORS AND TH EIR FAMILY MEMBERS WERE MADE OUT OF INTEREST BEARING FUNDS. THEREFORE, INFE RRING THAT INTEREST FREE ADVANCES WERE NOT FOR BUSINESS PURPOSES, PROPORTION ATE INTEREST CORRESPONDING TO INTEREST FREE ADVANCES CALCULATED AT 12% AMOUNTING TO RS.9,87,418 WAS DISALLOWED. 5. BEING AGGRIEVED BY SUCH DISALLOWANCE, ASSESSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. BEFORE THE F IRST APPELLATE AUTHORITY, THOUGH THE ASSESSEE SUBMITTED THAT THERE WAS NO NEX US BETWEEN INTEREST BEARING FUNDS AND THE ADVANCES MADE TO THE DIRECTOR S AND THEIR FAMILY MEMBERS AND FURTHER, THOUGH, IT WAS STATED INTEREST FREE ADVANCES WERE ON RUNNING ACCOUNT, THE CIT(A) WAS NOT CONVINCED WITH THE SAME, AND ACCORDINGLY SUSTAINED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER . 6. THE LEARNED DEPARTMENTAL REPRESENTATIVE SUBMITT ED BEFORE US THAT AS THE ASSESSEE HAS NOT ESTABLISHED THAT THE I NTEREST BEARING FUNDS WERE NOT DIVERTED TOWARDS ADVANCES TO DIRECTORS AND THEI R FAMILY MEMBERS, THE DISALLOWANCE OF PROPORTIONATE INTEREST WAS PROPER AND JUSTIFIED. ITA NO.1090/HYD/2013 M/S. KALANIKETN TEXTILES & JEWELS (P) LTD., HYDERABAD 3 7. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LEAR NED DEPARTMENTAL REPRESENTATIVE AND PERUSED THE MATERIA L ON RECORD. AS COULD BE SEEN, THERE IS NO DISPUTE WITH REGARD TO THE FAC T THAT THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR HAS MADE ADVANCES. THE ASSESSING OFFICER HAS DISALLOWED PROPORTIONATE INTEREST ATTRIBUTABLE TO I NTEREST FREE ADVANCES MADE OF RS.82,28,480 TO DIRECTORS AND THEIR FAMILY MEMBE RS. HOWEVER, BEFORE THE FIRST APPELLATE AUTHORITY, AS COULD BE SEEN FROM TH E WRITTEN SUBMISSIONS EXTRACTED IN THE IMPUGNED ORDER, ASSESSEE TOOK THE PLEA THAT INTEREST FREE ADVANCES WERE NOT OUT OF INTEREST BEARING FUNDS A ND ALSO THAT SOME OF THE AMOUNTS WERE APPEARING AS OPENING BALANCES AND WERE BROUGHT FORWARD FROM EARLIER YEARS AND THEY ARE ON RUNNING ACCOUNT . IF THAT IS THE CASE, THEN, IT HAS TO BE VERIFIED WHETHER THERE IS NEXUS BETWEEN THE INTEREST BEARING FUNDS AND THE INTEREST FREE ADVANCES AND WH ETHER SIMILAR ADDITIONS OF PROPORTIONATE INTEREST WERE MADE IN THE YEAR IN WHICH SUCH ADVANCES WERE ACTUALLY MADE. IT ALSO NEEDS TO BE VERIFIED WHETHER IN THE RELEVANT ASSESSMENT YEAR IN WHICH ADVANCES WERE MADE, THERE WERE SUFFICIENT OWN FUNDS OF THE ASSESSEE TO MAKE SUCH ADVANCES. IN TH AT EVENT, THE ASSESSING OFFICER CAN CONSIDER DISALLOWANCE OF INTEREST EXPEN DITURE ONLY IN RESPECT OF INTEREST FREE ADVANCES MADE DURING THE IMPUGNED ASS ESSMENT YEAR, IF THEY CAN BE LINKED TO BORROWED FUNDS. WITH THE AFORESAI D OBSERVATIONS, WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER TO RE-DECIDE THE SAME AFTER VERIFICATION OF FACTS. HE SHALL OF COURSE, ALLOW R EASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE TO SUBSTANTIATE ITS CLAIM, AND THEREAFTER REDECIDE THE ISSUE IN ACCORDANCE WITH LAW. THESE GROUNDS OF THE ASSESSEE ARE ALLOWED FOR STATISTICAL PURPOSE. 8. IN GROUNDS NO.6 TO 12, ASSESSEE HAS CHALLENGED THE DISALLOWANCE OF DEPRECIATION OF RS.4,02,851. ITA NO.1090/HYD/2013 M/S. KALANIKETN TEXTILES & JEWELS (P) LTD., HYDERABAD 4 9. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER WHILE EXAMINING THE CLAIM FOR DEPRECIATION, FOUND THAT DU RING THE RELEVANT ASSESSMENT YEAR, AS PER THE DEPRECIATION SCHEDULE, THE ASSESSEE MADE ADDITIONS TO FIXED ASSETS TO THE EXTENT OF RS.3,28, 79,538 AND CLAIMED DEPRECIATION OF RS.74,30,187. HOWEVER, AS OBSERVED BY THE ASSESSING OFFICER, DURING THE ASSESSMENT PROCEEDINGS, THE AS SESSEE COULD NOT PRODUCE SUPPORTING BILLS TO THE EXTENT OF RS.2,77,24,470. ACCORDINGLY, THE ASSESSING OFFICER ALLOWING THE CLAIM FOR DEPRECIATION TO TH E EXTENT IT WAS SUPPORTED BY BILLS/INVOICES, DISALLOWED THE BALANCE CLAIM OF RS. 4,02,851. 10. THE FIRST APPELLATE AUTHORITY ALSO SUSTAINED THE DISALLOWANCE BY OBSERVING THAT THE ASSESSEE HAS NOT PRODUCED ANY EV IDENCE TO SUBSTANTIATE ITS CLAIM FOR DEPRECIATION. 11. WE HAVE HEARD THE LEARNED DEPARTMENTAL REPRES ENTATIVE AND PERUSED THE MATERIAL ON RECORD. AS COULD BE SEEN FR OM THE ORDERS OF THE DEPARTMENTAL AUTHORITIES, DEPRECIATION CLAIMED ON A DDITIONS TO FIXED ASSETS WAS ALLOWED TO THE EXTENT, THE ASSESSEE WAS ABLE TO PRODUCE BILLS AND INVOICES SHOWING THE PURCHASE OF ASSETS. THE ASSESS ING OFFICER HAS DISALLOWED DEPRECIATION PROPORTIONATELY IN RESPECT OF THE ASSETS, PURCHASE OF WHICH WAS NOT SUPPORTED BY BILLS AND INVOICES. IT IS OBSERVED THAT BEFORE THE FIRST APPELLATE AUTHORITY ALSO, ASSESSEE HAS NOT SU BSTANTIATED ITS CLAIM BY PRODUCING ANY EVIDENCE TO SHOW THE ADDITIONS MADE T O THE FIXED ASSETS AND THE POSITION REMAINS THE SAME EVEN BEFORE THIS FORU M ALSO. FOR THAT MATTER, AS NOTED ABOVE, NONE APPEARED ON BEHALF OF THE ASSE SSEE. HOWEVER, CONSIDERING THE FACT THAT IN GROUND NO.12 OF THIS A PPEAL, ASSESSEE HAS STATED THAT IT WOULD PRODUCE NECESSARY EVIDENCE IN THE FOR M OF INVOICE/BILLS IN RESPECT OF PURCHASE, IN THE INTEREST OF JUSTICE, WE REMIT THIS ISSUE ALSO TO THE FILE OF THE ASSESSING OFFICER, WITH A DIRECTION TO HIM TO GIVE ONE MORE OPPORTUNITY TO THE ASSESSEE TO FURNISH NECESSARY EV IDENCE IN SUPPORT OF THE ITA NO.1090/HYD/2013 M/S. KALANIKETN TEXTILES & JEWELS (P) LTD., HYDERABAD 5 ADDITIONS CLAIMED TO HAVE BEEN MADE TO THE ASSETS, AND ACCORDINGLY REDECIDE THIS ISSUE. ACCORDINGLY, THESE GROUNDS ARE ALSO AL LOWED FOR STATISTICAL PURPOSES. 12. IN THE RESULT, THIS APPEAL OF ASSESSEE IS ALL OWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE COURT ON 27 TH NOVEMBER, 2015 SD/- SD/- (B.RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER. JUDICIAL MEMBER DT/- 27 TH NOVEMBER, 2015 COPY FORWARDED TO: 1. M/S. KALANIKETAN TEXTILES & JEWELS (P) LIMITED, 6 - 3 - 1186/10, NEAR ITC GRAND KAKATIYA, RAJBHAVAN ROAD, BEGUMPET, HYDERABAD 16. 2. DY. COMMISSIONER OF INCOME - TAX CIRCLE 2(1), HYDERABAD 3. 4. COMMISSIONER OF INCOME-TAX(APPEALS) III HYDERABAD COMMISSIONER OF INCOME-TAX II HYDERABAD 5. DEPARTMENTAL REPRESENTATIVE ITAT, HYDERABAD B.V.S.