M/s Vishal Industries, Yamunanagar V. JCIT, Yamunanagar

ITA 110/CHANDI/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80814 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 6 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 08-08-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 23-07-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 27-01-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO. 110/CHD/2011 ASSESSMENT YEARS : 2006-07 VISHAL INDUSTRIES V J.C.I.T. KHAJURI ROAD YAMUNANAGAR RANGE YAMUNANAGAR YAMUNANAGAR AABFV 0158K (APPELLANT) (RESPONDENT) APPELLANT BY: SHRI TEJ MOHAN SINGH RESPONDENT BY: SHRI AKHILESH GUPTA DATE OF HEARING 24.7.2014 DATE OF PRONOUNCEMENT 8.8.2014 O R D E R PER T.R. SOOD, A.M THIS APPEAL IS DIRECTED AGAINST THE ORDER DATED 3.1 1.2010 OF THE LD CIT(A), KARNAL. 2. IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLO WING GROUNDS: 1 THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED IN LAW AS WELL AS ON FACTS IN DECIDING THE AP PEAL EX-PARTE WITHOUT AFFORDING PROPER OPPORTUNITY OF HEARING WHI CH IS AGAINST THE SETTLED PRINCIPLES OF NATURAL JUSTICE AND AS SU CH THE ORDER PASSED IS ILLEGAL, ARBITRARY & UNJUSTIFIED. 2 WITHOUT PREJUDICE TO THE ABOVE, THE LD. COMMISSIO NER OF INCOME TAX (APPEALS) HAS ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDING THE ADDITION OF RS. 1,35,944/- MADE ON AC COUNT OF DISALLOWANCE OF INTEREST PAID TO BANK IN RESPECT OF LOAN RAISED FOR PURCHASE OF NEW MACHINERY IN UTTER DISREGARD OF THE EXPLANATION RENDERED VIDE WRITTEN SUBMISSIONS WHICH IS ARBITRAR Y AND UNJUSTIFIED. 3 THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER ERRED IN LAW AS WELL AS ON FACTS IN UPHOLDI NG THE REJECTION OF BOOKS OF ACCOUNT U/S 145(3) WITHOUT PINPOINTING ANY MATERIAL DISCREPANCY IN ITS MAINTENANCE WHICH IS ARBITRARY A ND UNJUSTIFIED. 4 THAT THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS FURTHER ERRED IN ESTIMATING GP RATE AT 7.5% AS AGAI NST 6.67% DECLARED BY THE ASSESSEE WHICH IS ARBITRARY AND UNJ USTIFIED. 2 3 GROUND NO. 1 WAS NOT PRESSED BEFORE US AND THEREF ORE THE SAME IS DISMISSED AS NOT PRESSED. 4 GROUND NO. 2 AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS THE AO NOTICED THAT T HE ASSESSEE HAD CLAIMED INTEREST OF RS. 135944/- ON SE CURED LOANS OF INDIAN OVERSEAS BANK. FURTHER IT WAS NOTI CED THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCES TO FOLLOW ING ENTITIES: M/S VED PARKASH HUF, PARTNER RS. 403354/- SH. VISHAL GUPTA, PARTNER RS. 789323/- (AS PER CAPITAL A/C OF SH. VISHAL GUPTA THERE IS A DEBIT BALANCE OF RS. 1773437/-) SH. VED PARKASH, INDUSTRIAL. RS. 250000 /- (NO BUSINESS CONSIDERATION) FURTHER IT WAS NOTICED THAT DEBIT BALANCE IN THE NA ME OF VISHAL GUPTA PARTNER WAS DUE TO AMOUNTS TRANSFERRED TO SIS TER CONCERNS, VIZ. M/S PRAGATI HIGH TECH PVT LTD RS. 50.00 LAKHS AND M/S PRAGATI ENGINEERS RS. 5.00 LAKHS. IN RES PONSE TO THE QUERY IN THIS REGARD IT WAS MAINLY SUBMITTED TH AT THE LOAN FROM BANK WAS TAKEN FOR PURCHASE OF MACHINERY AND N O PART OF THE BORROWING WAS DIVERTED TO SISTER CONCERNS AND R ELIANCE WAS ALSO PLACED IN CASE OF S.A. BUILDERS V CIT, 288 ITR 1. ACCORDING TO THE ASSESSING OFFICER SINCE THE ASSESS EE HAS NOT BEEN ABLE TO SHOW COMMERCIAL EXPEDIENCY, THEREFORE INTEREST AMOUNTING TO RS. 135994/- WAS DISALLOWED. 5 ON APPEAL THE LD. CIT(A) CONFIRMED THE ADDITION V IDE PARA 4.03 WHICH IS AS UNDER: THE ISSUE IS EXAMINED. DURING THE ASSESSMENT PROCE EDINGS, THE AO NOTED THAT ON ONE HAND THE APPELLANT CLAIMED INTERE ST OF RS. 135944/- BUT ON THE OTHER MADE INTEREST FREE ADVANCES TO THE RELATED PERSONS INCLUDING TO THE PARTNERS. THE APPELLANT SUBMITTED BEFORE THE ASSESSING OFFICER THAT TERM LOAN FOR PURCHASE OF MACHINERY WA S TAKEN AFTER THE DATE OF MAKING THESE INTEREST FREE ADVANCES AND HENCE NO DISALLOWANCE OUT OF INTEREST CLAIMED IS CALLED FOR. THE PLEA OF THE APP ELLANT WAS NOT FOUND TENABLE BY THE AO FOR THE REASON THAT THE ASSESSEE DID NOT BRING ON RECORD THE COMMERCIAL EXPEDIENCY OF ADVANCING INTER EST FREE LOANS / ADVANCES TO INDIVIDUALS / SISTER CONCERNS THROUGH P ARTNERS. DIVERSION OF HUGE AMOUNTS TO SISTER CONCERNS FOR NON BUSINESS PU RPOSES NECESSITATED 3 BORROWINGS FROM BANK FOR WHICH INTEREST WAS PAID. T HE AO PLACED RELIANCE ON THE DECISION OF THE HONBLE PUNJAB & HA RYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES 286 ITR 1 AND D ISALLOWED THE CLAIM OF INTEREST. IN THE WRITTEN SUBMISSIONS, THE APPELL ANT REITERATED THE SUBMISSION MADE BEFORE THE AO DURING ASSESSMENT PRO CEEDINGS THAT LOAN WAS TAKEN FROM THE BANK AFTER MAKING INTEREST FREE ADVANCES. THE APPELLANT HAS HOWEVER NOT ADDRESSED/REBUTTED THE FI NDINGS OF THE AO THAT DIVERSION OF HUGE AMOUNTS TO SISTER CONCERNS F OR NON BUSINESS PURPOSES, NECESSITATED BORROWINGS FROM BANK FOR WHI CH INTEREST WAS PAID. HAD THE INTEREST FREE ADVANCES BEEN NOT MADE, THERE WOULD HAVE BEEN NO NEED TO TAKEN THE LOAN FROM BANK. THE RATIO OF DECISION OF THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF M/S ABHISHEK INDUSTRIES (SUPRA) IS THEREFORE, SQUARELY APPLICABL E TO THE FACTS OF THE CASE OF THE APPELLANT AND HENCE DISALLOWANCE OF INT EREST MADE BY THE AO IS HEREBY CONFIRMED. 6 BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE REITE RATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND T HE LD. CIT(A) AND ALSO RELIED ON THE DECISION OF S.A. BUIL DERS V CIT (SUPRA). 7 ON THE OTHER HAND, THE LD. D.R. FOR THE REVENUE STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 8 WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULL Y AND FIND THAT IN CASE OF S.A. BUILDERS V CIT (SUPRA) TH E OBSERVATIONS WERE MADE AT PAGE 25, 29, 35 WHICH ARE AS UNDER: IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIBU NAL AND OTHER INCOME- TAX AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE . IN OTHER WORDS, THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIR ED AS TO WHETHER THE INTEREST FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY , AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOT THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANC ED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM TH EIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED AB OVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONC ERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POIN T OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN . IT ALL DEPENDS ON THE FACTS A ND CIRCUMSTANCES OF THE RESPECTIVE CASE. 4 ABOVE OBSERVATIONS MAKES IT CLEAR THAT THE AUTHORIT IES ARE REQUIRED TO EXAMINE WHETHER THERE IS A COMMERCIAL EXPEDIENCY OR NOT? THE ASSESSEE HAS NOT BEEN ABLE TO SHOW ANY COMMERCIAL E XPEDIENCY FOR ADVANCES GIVEN TO VARIOUS PARTIES. 9 THE HON'BLE HIGH COURT OF PUNJAB & HARYANA IN CA SE OF CIT V ABHISHEK INDUSTRIES, 286 ITR 1 HAS CLEARLY HELD THA T IF CERTAIN FUNDS ARE DIVERTED OUT OF MIXED FUNDS THEN INTEREST CANNO T BE ALLOWED TO THE EXTENT OF DIVERSION. THEREFORE WE FIND NOTHING WRONG IN THE ORDER OF CIT(A) AND CONFIRM THE SAME. 10 GROUNDS NO. 3 - AFTER HEARING BOTH THE PARTIES W E FIND THAT DURING ASSESSMENT PROCEEDINGS THE ASSESSING OF FICER NOTICED THAT THE ASSESSEE WAS NOT MAINTAINING ANY S TOCK REGISTER AND HAS NOT FILED EVEN THE DETAILED INVENT ORY FOR OPENING STOCK OR CLOSING STOCK. FURTHER THE PURCHA SES OF TIMBER WOOD WERE BEING MADE ON THE BASIS OF WEIGHT / PIECES WHEREAS SALE WAS BEING MADE ON CFT BASIS. THEREFOR E QUANTITATIVE RECONCILIATION OF THE SAME WAS NOT POS SIBLE. SALE BILLS DID NOT REFER TO THE QUANTITY OR GRADE OF THE GOODS SOLD. IN VIEW OF THESE DEFECTS THE BOOKS OF ACCOUNT WERE REJ ECTED AND THE GROSS PROFIT WAS ESTIMATED AT 9.63% INSTEAD OF 6.67% DECLARED BY THE ASSESSEE. 11 ON APPEAL ACTION OF THE ASSESSING OFFICER WAS CO NFIRMED BY THE LD. CIT(A). 12 BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT NO SPECIFIC DEFECTS HAVE BEEN FOUND THEREFORE REJECTION OF BOOKS OF ACCOUNT IS NOT CORRECT. 5 13 ON THE OTHER HAND, THE LD. D.R. FOR THE REVENUE STRONGLY SUPPORTED THE ORDER OF THE LD. CIT(A). 14 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THE LD. CIT(A) HAS CORRECTLY UPHELD THE REJECTION OF BO OKS OF ACCOUNT BECAUSE THE ASSESSEE WAS NOT MAINTAINING AN Y STOCK REGISTER. FURTHER EVEN VERIFICATION OF SALES WAS N OT POSSIBLE BECAUSE OF NOT MENTIONING OF QUALITY / GRADE OF THE GOODS SOLD. IN ADDITION TO THIS SOME MINOR DEFECTS WERE ALSO PO INTED OUT THEREFORE BOOKS OF ACCOUNT HAVE BEE CORRECTLY REJEC TED BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT(A). 15 GROUND NO. 4 - AFTER HEARING BOTH THE PARTIES WE FIND THAT AFTER REJECTING THE BOOKS OF ACCOUNT THE ASSESSING OFFICER APPLIED AVERAGE RATE OF PROFIT DECLARED FOR LAST TW O YEARS. 16 THE LD. CIT(A) HOWEVER, REDUCED THE GROSS PROFIT RATE TO 7.5%. 17 BEFORE US. THE LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE ASSESSEE HAS CHANGED NATURE OF BUSINESS IN THE LAST YEAR AND THAT IS WHY PROFIT HAS GONE DOWN TO 4.46% FROM 14.79%. IN FACT PROFIT OF 6.67% WAS BETTER THAN TH E LAST YEAR OF 4.46%. 18 ON THE OTHER HAND, THE LD. D.R. FOR THE REVENUE SUPPORTED THE ORDER OF THE LD. CIT(A). 19 AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND THAT THERE WAS NO EVIDENCE PRODUCED BEFORE US TO SHOW THAT NAT URE OF BUSINESS HAS REALLY CHANGED. HOWEVER, AT THE SAME TIME IN THE INTEREST OF JUSTICE, WE ARE OF THE OPINION THAT ENDS OF 6 JUSTICE WOULD MEET IF THE GROSS PROFIT IS ESTIMATE D AT 7% IN THIS YEAR. THEREFORE WE SET ASIDE THE ORDER OF THE CIT(A) AND ESTIMATE THE GROSS PROFIT AT 7%. 20 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 8.8.2014 SD/- SD/- (SUSHMA CHOWLA) (T.R. SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 8.8.2014 SURESH COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT/THE C IT(A)/THE DR