ACIT, Jaipur V. M/S NAMDEV EXPORT, Jaipur

ITA 1104/JPR/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 99354 (ITAT-JAIPUR)
• Duration Of Justice: 3 year(s) 9 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-10-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-03-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 15-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: RAJ MEHRA
• Assessee Lawyers: JAVED KHAN ADV DH
• Keywords: Depreciation; Business expenditure; Proportionate interest; Notional interest; Commercial expediency; Onus to prove
• Section: 143(3); 37(1); 10

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHE S, JAIPUR JH VKJ-IH-RKSYKUH] U;KF;D LNL; ,OA JH FOE FLAG ;KN O] YS[KK LNL; DS LE{K BEFORE: SHRI R.P. TOLANI, JM & SHRI VIKRAM SINGH YA DAV, AM VK;DJ VIHY LA- @ ITA NO. 1104/JP/2011 FU/KZKJ.K O'K Z @ ASSESSMENT YEAR : 2008-09 ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-7, JAIPUR. CUKE VS. M/S NAMDEV EXPORT, 4&5, PALLIWALON KA BAGH, SANGANER, JAIPUR. LFKK;H YS[KK LA-@THVKBZVKJ L A-@ PAN/GIR NO.: AAAFN 8372 Q VIHYKFKHZ @ APPELLANT IZR;FKHZ @ RESPONDENT JKTLO DH VKSJ LS @ REVENUE BY : SHRI RAJ MEHRA (JCIT) FU/KZKFJRH DH VKSJ LS @ ASSESSEE BY : SHRI MANISH AGARWAL (CA) & SHRI JAVED KHAN (ADV). LQUOKBZ DH RKJH[ K@ DATE OF HEARING : 22/09/2015 MN?KKS'K .KK DH RKJH[ K @ DATE OF PRONOUNCEMENT : 09/10/2015 VKNS'K @ ORDER PER: R.P. TOLANI, J.M. THIS IS A REVENUE APPEAL AGAINST LD. CIT(A) WHO VID E HIS ORDER DATED 07.09.2011 IN ITA NO. 302/2010-11 PARTLY ALLOWED TH E APPEAL OF ASSESSEE, ALLOWING RELIEF OF RS. 28,78,770/-. GROUNDS RAISED ARE AS UNDER: (I) THE CIT(A) HAS ERRED IN HOLDING THAT THE RATIO OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS (288 ITR 1), WAS APPLICABLE IN THE FACTS AND CIRCUMSTANCES OF TH E ASSESSEE. (II) THE CIT(A) HAS ERRED IN HOLDING THAT THE LOANS AND ADVANCES GIVEN AT A RATE OF INTEREST WHICH WAS LOWER THAN TH E INTEREST ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 2 PAID BY ASSESSEE ON ITS LOANS RECEIVED, HAD NO IMPA CT/NEXUS AND SUCH PRACTICE AMOUNTED TO BUSINESS EXPEDIENCY. (III) THE CIT(A) HAS PASSED A PERVERSE ORDER IN DEL ETING THE DISALLOWANCE OF INTEREST OF RS. 23,36,403/- AND RS. 5,42,367/-. 2. BRIEFLY STATED THE FACTS ARE - THE APPELLANT IS A PARTNERSHIP FIRM ENGAGED IN EXPORT OF GARMENTS AND CLOTH MATERIAL, R ETURN OF INCOME DECLARING TOTAL INCOME AT RS. 70,72,380/- WAS FILED. HOWEVER, THE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE INCOME TAX ACT, 1961 AT A TOTAL INCOME OF RS. 1,04,22,760/- BY LD. AO CONSEQUENT TO DISALLOWANCE OF INTEREST EXPENSES OF RS. 28,78,770/- AS MENTIONED ABOVE. 3. AGGRIEVED BY THE ASSESSMENT ORDER, THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LD. CIT(A) WHO VIDE HIS ORDER DATED 07.0 9.2011 IN ITA NO. 302/2010-11 PARTLY ALLOWED THE APPEAL OF ASSESSEE A ND ALLOWED RELIEF OF RS. 28,78,770/- TABULATED AS UNDER: S.NO. PARTICULARS ADDITION / DISALLOWANCE MADE BY AO ADDITIONS DELETED BY CIT(A) ADDITION SUSTAINED BY CIT(A) 1. DISALLOWANCE OF INTEREST U/S 36(1)(III) RS. 28,78,770.00 RS. 28,78,770.00 NIL 2. TELEPHONE EXPENSES RS. 91,507.00 NIL RS. 91,507.00 3. VEHICLE EXPENSES RS. 2,66,046.00 NIL RS. 2,66,046.00 4. DEPRECIATION RS. 1,14,061.00 NIL RS. 1,14,061.00 TOTAL RS. 33,50,384.00 RS.28,78,770.00 RS.4,71,614.00 4. AGGRIEVED ON THE ORDER OF LD. CIT(A), THE REVENU E IS IN BEFORE US. ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 3 5. LD. COUNSEL FOR THE ASSESSE CONTENDS THAT THE A SSESSEE FIRM HAS SEVEN PARTNERS. ONE OF THESE PARTNERS, ONE OF THEM SHRI K UNJ BIHARI, HAD WITHDRAWN CAPITAL FROM THE FIRM LEADING TO HIS ACCOUNT SHOWIN G NEGATIVE OPENING DEBIT BALANCE OF RS. 1,81,09,440/- AND BY SOME DEPOSITS D URING THE YEAR IT STOOD REDUCED TO RS. 1,15,47,121/-. AS A POLICY NEITHER P AID OR CHARGED ANY INTEREST FROM ANY PARTNER. HOWEVER, THE LD. AO IN THE ASSESS MENT ORDER HAS ASSUMED THAT THE ASSESSEE HAD UTILIZED BORROWED FUN DS FOR ADVANCING THE SAME TO THE PARTNER AND THEREFORE, HYPOTHETICALLY C ALCULATED AN IMAGINARY FIGURE AT RS. 23,36,403/- BEING 15% OF THE DEBIT BA LANCE AND ASSUMED THE SAME TO BE INTEREST ATTRIBUTABLE TO SUCH DEBIT BALA NCE AND THEREAFTER DISALLOWED THE SAME U/S 36(1)(III) OF THE ACT. 5.1 FURTHER DISALLOWANCE WAS MADE OF RS. 5,42,367/- BY ALLEGING THAT THE INTEREST WAS PAID @ 15% (APPROXIMATELY) WHEREAS, IN TEREST CHARGED BY ASSESSEE ON LOAN GIVEN TO PARTIES WAS ONLY @ 9.5%. ON THE BASIS OF THIS FACT, LD. AO ASSUMED THAT THE ASSESSEE HAS DIVERTED ITS I NTEREST BEARING FUNDS TO LESS PROFITABLE PROPOSITIONS I.E. ADVANCE ON LOWER RATE OF INTEREST / INTEREST FREE ADVANCES. 5.2 WHILE MAKING THE DISALLOWANCE, THE LD. AO AT PA RA 3.2 OF HIS ORDER OBSERVED AS UNDER:- 3.2 ASSESSEE FIRM HAS NOT CHARGED ANY INTEREST FROM THE PARTNER I.E. SHRI KUNJ BEHARI. ON ONE HAND INTEREST IS BEING PAID ON BORROWINGS BUT ON THE OTHER HAND CAPITAL IS BEING WITHDRAWN FOR ADVANCING INTEREST FREE LOANS TO THE PARTNER. AS HAS BEEN DISCUSSED IN THE FOREGOING PARA, THAT THE FIRM HAS PAID INTEREST @ 14.4% - 15.6% ON THE LOANS TAKEN BY IT AND ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 4 CONSIDERING THE FACT THAT NO INTEREST HAS BEEN CHAR GED FROM THE PARTNER, THEREFORE, INTEREST WAS CALCULATED ON THE DEBIT BALANCE OF THE PARTNER SHRI KUNJ BEHARI, ON DAILY B ALANCES BY APPLYING INTEREST RATE OF 15% P.A. BEING THE RATE O F INTEREST PAID BY THE ASSESSEE ON UNSECURED LOAN. INTEREST ON DEBIT BALANCES OF PARTNER SHRI KUNJ BEHARI @ 15% WORKS OU T TO RS. 23,36,403/-. . 5.3 IT IS SUBMITTED THAT, THE LD. AO HAS NOT APPREC IATED THE FACTS AND CIRCUMSTANCES PROPERLY AND PROJECTED A DISTORTED PI CTURE THEREOF. THE CRUCIAL FACT THAT THE CUMULATIVE CREDIT BALANCE IN THE RESP ECTIVE CAPITAL ACCOUNTS OF ALL THE PARTNERS AMOUNTING TO RS. 2,40,50,752/- AFT ER REDUCING THE DEBIT BALANCE OF RS. 1,15,47,121/- IN THE CAPITAL ACCOUNT OF SHRI KUNJ BIHARI; HAS BEEN CONVENIENTLY IGNORED. ALL ALONG THERE HAS ALWA YS BEEN CUMULATIVE CREDIT BALANCE IN THE HEAD OF PARTNERS CAPITAL ACCOUNTS. CONSEQUENTLY THE DEBIT CAPITAL BALANCE OF ONE PARTNER CANNOT BE PICKED UP IN ISOLATION WHILE IGNORING THE CRUCIAL FACT THAT FIRM HAS OVERALL INTEREST FRE E POSITIVE CREDIT BALANCE UNDER PARTNERS CAPITAL. DETAILS OF NET CAPITAL EMP LOYED BY THE ALL THE PARTNERS FOR THE YEAR UNDER CONSIDERATION AND PRECEDING TWO YEARS ARE AS UNDER:- S. NO. A .Y. C APITAL OF SH. KUNJ BIHARI (DEBIT) TOTAL CAPITAL OF OTHER PARTNERS NET CAPITAL EMPLOYED OF ALL PARTNERS 1. 2006 - 07 1,36,82,607/ - 2,54,17,462/ - 1,17,34,855/ - 2. 2007 - 08 1,81,09,440/ - 3,01,02,217/ - 1,19,92,777/ - 3. 2008 - 09 1,15,47,121/ - 3,59,97,873/ - 2,44,50,752 / - 5.4 PERUSAL OF BALANCE SHEET AS ON 31.03.2008 MAKES IT ABUNDANTLY CLEAR THAT THE ASSESSEE FIRM HAD SUFFICIENT INTEREST FREE CAPITAL BALANCES OF OTHER ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 5 PARTNERS, NET PROFIT AFTER TAX BEFORE DEPRECIATION AND SUNDRY CREDITORS, DETAILS ARE AS UNDER:- S. NO. PARTICULARS AMOUNT 1 NET CAPITAL EMPLOYED BY ALL THE PARTNERS (RS. 3,59,97,873 - 1,15,47,121) 2,44,50,752.00 2 SUNDRY CREDITORS 2 ,7 2 , 66,043.00 3 NET PROFIT FOR THE YEAR AFTER TAX BEFORE DEPRECIATION 73,25,481.00 5,90,42,276.00 FURTHER THE NET CAPITAL EMPLOYED OF ALL THE PARTNER S HAS BEEN INCREASED TO RS. 2,44,50,752/- FROM RS. 1,19,92,777/- IN IMME DIATELY PRECEDING YEAR. BESIDES NO INTEREST ON CREDIT BALANCE OF PARTNERS CAPITAL ACCOUNTS WAS PAID BY THE ASSESSEE FIRM THOUGH THEY WERE ENTITLED FOR INTEREST @ 12%. THUS THE FIRM HAS RATHER MORE TAXABLE INCOME AND THERE IS NO LOSS TO REVENUE. HAD THE FIRM PAID INTEREST ON OTHER PARTNERS CAPITAL ACCOUN TS, THEN THE TAXABLE PROFIT WOULD HAVE BEEN REDUCED BY RS. 28 LACS APPROXIMATEL Y. SINCE CREDIT BALANCES OF REMAINING SIX PARTNERS I.E. RS. 3,59,97,873 - 1, 15,47,121-= INTEREST FREE PARTNERS CAPITAL OF RS. 2,44,50,752.00 IS STILL AV AILABLE TO FIRM, THERE IS NO QUESTION FOR NOTIONAL DISALLOWANCE OF INTEREST ON T HE DEBIT BALANCE OF ONE PARTNER. BESIDES ASSESSE EXPLAINED TO AO THAT THE I NTEREST BEARING BORROWINGS WERE UTILIZED ONLY FOR BUSINESS PURPOSES AND NOT WITHDRAWN BY THE PARTNER AS THE OPENING DEBIT BALANCE OF KUNJ BI HARI GOT REDUCED AT THE ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 6 END OF THE YEAR. AO HAS NOT REBUTTED THIS FACTUAL P OSITION AND SHOWN NO NEXUS BETWEEN INTEREST BEARING FUNDS AND WITHDRAWAL MADE BY THE PARTNER. 5.5 LD. CIT(A) AFTER PROPERLY APPRECIATING THE FACT S OF CASE AND ASSESSEES SUBMISSIONS DELETED THIS DISALLOWANCE BY FOLLOWING OBSERVATIONS AT PAGES 9 TO14 IN PARA 2.3.1: 2.3.1 DISALLOWANCE OF INTEREST TOWARDS NEGATIVE BALANCE OF PARTNER (RS. 23,36,403/-) . I FIND, THEREFORE, MERIT IN THE CONTENTION OF THE LD. AR THAT THE COMPREHENSIVE ANALYSIS OF THE CAPITAL ACCOUNTS OF THE PARTNERS WOULD REVEAL THAT, IF CONSIDERED IN TOTALITY, THE SAME IS HAVING NET POSITIVE CAPITAL EMPLOYED BY THEM TO EXTENT OF RS. 2,44,50,752/- AND WHICH COULD HAVE RESULTED INTO SUBSTANTIAL PAYMENT OF INTEREST TO OTHER PARTNERS, AS ALSO STIPULATED IN THE PARTNERSHIP DEED OF THE APPELLANT FIRM. AS THE APPELLANT FIRM HAS NOT PAID INTEREST ON SUCH CR EDIT BALANCES OF THE SIX PARTNERS, THEREFORE, IT IS QUIT E LOGICAL AND UNDERSTANDABLE THAT NO INTEREST COULD HAVE BEEN CHARGED ON THE NEGATIVE BALANCE OF SINGLE PARTNER, AS PERCEIVED BY THE AO. IT IS ALSO AN ADMITTED FACT TH AT HAD IT BEEN DONE THEN THE APPELLANT FIRM WOULD HAVE LEFT I N A SITUATION, WHEREIN THEY WOULD REQUIRED TO PAY MORE INTEREST AMOUNT TO OTHER PARTNERS, THEN CHARGING THE INTERES T FROM A SINGLE PARTNER. IN VIEW OF THE SAME, IT EVIDENT THA T THERE IS NO ESCAPEMENT OF INCOME OR EXCESS PAYMENT OF INTERE ST EXPENSES, AS ASSUMED BY THE AO. IN THE LIGHT OF THE ABOVE FACTS AND CIRCUMSTANCES, IT IS HELD THAT THE IMPUGN ED STAND OF THE AO, CANNOT BE RATIFIED AND APPROVED, IN THE GIVEN SITUATION, THEREFORE, THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF RS. 23,36,403/- OUT OF INTEREST PAY ABLE TO THIRD PARTIES ON LOANS RECEIVED BY THE APPELLANT, I S HEREBY DELETED. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTANCES OF CAS E IT IS SUBMITTED THAT INTEREST BEARING LOANS BEING USED BY ASSESSEE FOR B USINESS PURPOSE, INTEREST FREE FUNDS BEING MUCH MORE THAN THE KUNJ BIHARIS D EBIT BALANCE AND CAPITAL ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 7 EMPLOYED BY ALL THE PARTNERS IN THE BUSINESS BEING A HUGE POSITIVE FIGURE, THE ORDER OF LD. CUT(A) DESERVE TO BE UPHELD. 6. APROPOS THE DISALLOWANCE RS. 5,42,367/- BY AO, H OLDING THAT INTEREST PAID BY THE ASSESSEE FIRM @ 15% ON LOAN TAKEN, HOWE VER HAS ADVANCED CERTAIN LOANS EITHER ON INTEREST FREE BASIS OR HAS CHARGED LOWER RATE OF INTEREST 9.5%. DETAILS OF LOAN GIVEN TO THE PARTIES ARE AS UNDER:- S. NO. NAME OF PARTY CLOSING BALANCE % OF INTEREST CHARGED 1. KUNJ BIHARI (LOAN A/C) 68,65,393/ - 9.5% 2. RAKESH KUMAR 15,43,950/ - 9.5% 3. RAM PRASAD 35,45,183/ - 9.5% 4. RAM SWAROOPI DEVI 10,9 5,000/ - 9.5% 5. REKHA 5,54,000/ - NIL 6. STEEL SYNDICATE OF INDIA 20,00,000/ - 15.6% 6.1 WHILE MAKING A DISALLOWANCE THE LD. AO HAS IGNO RED THE FOLLOWING FACTS:- 1. THE INTEREST BEARING LOANS UTILIZED BY THE ASSES SEE FIRM FOR BUSINESS PURPOSE AND UNDER BUSINESS EXPEDIENCY WHICH IS CLEA RLY EVIDENT FROM THE LOAN UTILIZATION CHART SUBMITTED BY THE ASSESSE E DURING THE COURSE OF ASSESSMENT PROCEEDINGS. 2. THE ASSESSEE HAS ALSO RECEIVED LOANS FROM BANK @ 9% WHICH IS LOWER THAN THE RATE OF INTEREST I.E. 9.5% RECEIVED BY APP ELLANT ON IMPUGNED LOANS AND ADVANCES. ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 8 3. IN RESPECT OF PARTIES RAKESH KUMAR, RAM PRASAD, RAM SWAROOPI DEVI, LOANS AND ADVANCES WERE OLD IN NATURE, THERE IS NO NEXUS BETWEEN SUCH TRANSACTION AND CASH CREDIT RECEIVED BY THE AS SESSEE ON HIGHER RATE OF INTEREST. 4. THE ASSESSEE HAS SUFFICIENT INTEREST FREE FUNDS IN SHAPE OF CAPITAL BALANCE OF PARTNERS, SUNDRY CREDITORS ETC. TO MAKE THE LOANS AND ADVANCE EVEN ON LOWER RATE OF INTEREST. 5. THE RATE OF INTEREST DEPENDS UPON VARIOUS FACTOR S LIKE QUANTUM AND PERIOD OF LOAN, DEMAND AND SUPPLY OF FUNDS AND ALSO BUSINESS EXPEDIENCY. 6.2 LD. COUNSEL CONTENDS THAT THE CONNOTATION OF WO RD COMMERCIAL EXPEDIENCY AS PROPOUNDED BY HONBLE SUPREME COURT IS VERY WIDE AND FULLY ENABLES A PRUDENT BUSINESSMAN TO DO WHAT IS BEST FO R THE PURPOSE OF BUSINESS. RELIANCE IS PLACED ON: EMPIRE JUTE CO. LTD. VS. CIT 124 ITR 1 (SC) WHAT IS AN OUTGOING OF CAPITAL AND WHAT IS AN OUTGO ING ON ACCOUNT OF REVENUE DEPENDS ON WHAT THE EXPENDITURE IS CALCULAT ED TO EFFECT FROM A PRACTICAL AND BUSINESS POINT OF VIEW RATHER THAN UP ON THE JURISTIC CLASSIFICATION OF THE LEGAL RIGHTS, IF ANY, SECURED , EMPLOYED OR EXHAUSTED IN THE PROCESS. THE QUESTION MUST BE VIEWED IN THE LAR GER CONTEXT OF BUSINESS NECESSITY OR EXPEDIENCY. S.A. BUILDERS VS. CIT 158 TAXMAN 74 (SC) SECTION 37(1) OF THE INCOME TAX ACT, 1961 BUSINES S EXPENDITURE ALLOWABILITY OF ASSESSMENT YEARS 1990-91 AND 1991 -92 WHETHER ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 9 EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON GROUNDS OF COMMERCIAL EXPEDIENCY HELD, YES. 304 ITR 123 CIT VS. MOTOR SALES LTD. INTEREST ON BORROWED CAPITAL--INTEREST-FREE ADVANCE S MADE BY ASSESSEE-- FINDING THAT THERE WAS NO DIVERSION OF BORROWED FUN DS FOR NON-COMMERCIAL PURPOSES--NO PART OF INTEREST COULD BE DISALLOWED-- INCOME-TAX ACT, 1961, S. 36(1)(III). THE ASSESSEE CLAIMED DEDUCTION OF INTEREST PAID ON THE LOAN TAKEN BY IT AT RS. 52,46,521. IT HAD NOT CHARGED INTEREST ON THE S UNDRY DEBTORS EVEN THOUGH IT WAS PAYING INTEREST. THE ASSESSING AUTHOR ITY COMPUTED A NOTIONAL INTEREST AT RS. 22,11,906 ON THE AMOUNT OF LOANS AD VANCED BY THE ASSESSEE TO OTHER PERSONS. AFTER DEDUCTING INTEREST OF RS. 8 ,02,795 THE ASSESSING AUTHORITY ADDED A SUM OF RS. 14,09,111. IN APPEAL, THE COMMISSIONER OF INCOME-TAX (APPEALS) DELETED THE ADDITION WHICH ORD ER WAS UPHELD BY THE TRIBUNAL. ON APPEAL TO THE HIGH COURT : _ HELD, _ DISMISSING THE APPEAL, THAT THE COMMISSIONER OF I NCOME-TAX (APPEALS) HAD FOUND THAT THE ASSESSEE HAD PAID-UP C APITAL/RESERVE/SURPLUS OF RS. 6.10 CRORES ON WHICH NO INTEREST WAS BEING PAID AND THEREFORE THE INTEREST-FREE ADVANCES MADE BY IT WERE COVERED. THE TRIBUNAL HAD ALSO RECORDED A FINDING THAT THE ASSESSEE HAD NOT DIVERT ED ANY BORROWED FUNDS ON WHICH INTEREST WAS PAID FOR NON-COMMERCIAL PURPOSES AND THEREFORE, THERE WAS NO QUESTION OF DISALLOWANCE OF INTEREST OUT OF THE INTEREST PAID BY THE ASSESSEE. CIT VS. HOTEL SAVERA 239 ITR 795 (MAD.): WHETHER THE INTEREST FREE ADVANCES ARE MADE OUT OF OWN FUNDS OR OUT OF FUNDS BORROWED, PRESUMPTION ARISES THAT THE MONEY ADVANCED CAME OUT OF ITS OWN FUNDS. 142 TAXMAN 681 (ALL.) CIT VS. RADICO KHAITAN LTD. (ALLAHABAD) ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 10 SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961 - IN TEREST ON BORROWED CAPITAL - ASSESSMENT YEAR 1990-91 - ASSESSEE-COMPANY HAD AD VANCED LOAN OF RS. 17.19 LAKHS TO ITS SISTER CONCERN - IT HAD BORR OWED HUGE SUM FROM BANK AND FINANCIAL INSTITUTIONS AND CLAIMED DEDUCTION ON AMOUNT OF INTEREST PAID ON BORROWED CAPITAL - ASSESSING OFFICER DISALLOWED AMOUNT TOWARDS PROPORTIONATE INTEREST ON SAID ADVANCES - TRIBUNAL DELETED DISALLOWANCE OF INTEREST ON GROUND THAT THERE WAS SUFFICIENT FUND A VAILABLE WITH ASSESSEE- COMPANY IN FORM OF SHARE CAPITAL RESERVE AND SURPLU S OTHER THAN BORROWED MONEY FOR DIVERTING A SUM OF RS. 17.19 LAKHS TO ITS SISTER CONCERN - WHETHER IN VIEW OF FINDINGS RECORDED BY TRIBUNAL, ASSESSEE- COMPANY WAS ENTITLED TO FULL ALLOWANCE OF AMOUNT OF INTEREST PAID BY IT ON BORROWED CAPITAL - HELD, YES 114 TTJ 124 COMET HANDICRAFTS VS. ACIT (ITAT, DELHI BENCH) BUSINESS EXPENDITURE INTEREST ON BORROWED CAPITAL INTEREST FREE LOANS FOR NON BUSINESS PURPOSES LOANS AND ADVANCES OF RS. 9 .85 LACS WERE GIVEN TO FRIENDS AND RELATIVES OUT OF PARTNERS OWN CAPITAL OF RS. 3.05 CRORES WHICH WAS FREE OF INTEREST CREDIT FACILITIES WERE SANCT IONED FOR THE PURPOSE OF ASSESSEES EXPORT BUSINESS AND THE BORROWED FUNDS W ERE UTILIZED IN THE COURSE OF BUSINESS ITSELF THUS, NO PART OF INTERE ST PAID TO THE BANK COULD BE DISALLOWED. 313 ITR 340 CIT VS. RELIANCE UTILITIES & POWER LTD. (BOM.) INTEREST ON BORROWED CAPITAL INVESTMENTS BY ASSES SEE FINDING THAT INVESTMENTS WERE FROM INTEREST FREE FUNDS AVAILABLE WITH ASSESSEE BORROWED CAPITAL USED FOR PURPOSES OF BUSINESS IN TEREST DEDUCTIBLE INCOME TAX ACT, 1961, S. 36(1)(III). 298 ITR 298 MUNJAL SALES CORPORATION VS. CIT & OTHE RS (SC) HELD ALSO, THAT SINCE THE OPENING BALANCE OF THE PR OFITS OF THE ASSESSEE FIRM AS ON APRIL 1, 1994, WAS RS. 1.91 CRORES, AND THE P ROFITS WERE SUFFICIENT TO COVER THE LOAN GIVEN TO A SISTER CONCERN OF RS. 5 L ACS ONLY, THE APPELLATE TRIBUNAL OUGHT TO HAVE HELD THAT THE LOAN GIVEN WAS FROM THE ASSESSEES OWN FUNDS. ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 11 R.D. JOSHI & CO. VS. CIT, 251 ITR 332 (MP): BURDEN TO PROVE NEXUS BETWEEN THE BORROWED FUNDS AND INTEREST FREE ADVANC ES IS ON THE REVENUE. MALWA COTTON SPINNING MILLS VS. ACIT 89 ITD 65 (CHD .) (TM): WHERE OWN CAPITAL AND CURRENT YEARS PROFITS ARE MORE THA N INTEREST FREE ADVANCES, IT PROVES ABSENCE OF NEXUS BETWEEN BORROWED FUNDS AND INTEREST FREE ADVANCE. ACIT VS. CHANDRA PRAKASH, 27 TAX WORLD 328 (JAIPUR BENCH): NEXUS BETWEEN INTEREST BEARING FUNDS AND INTEREST FREE AD VANCES HAS TO BE ESTABLISHED BEFORE DISALLOWING INTEREST ON NOTIONAL BASIS. 6.3 LD. DR RELIED ON THE ORDER OF AO AND MUMBAI ITA T JUDGMENT IN THE CASE OF ITO V MODI MOTORS 31 DTR 0347 HOLDING THAT EVEN IF THE CAPITAL BALANCE OF OTHER PARTNERS IS POSITIVE, THE AO CAN D ISALLOW THE INTEREST WHICH MAY BE CHARGEABLE ON DEBIT BALANCE OF ANY PARTNER. 6.4 LD. COUNSEL FOR THE ASSESSEE IN REJOINDER CONTE NDS THAT THE MUMBAI ITAT HAVE DECIDED THE ISSUE ON PECULIAR FACTS OF TH AT CASE THE DECISION HAS NOT CONSIDERED ANY OF THE JUDGMENTS CITED ABOVE INC LUDING SUPREME COURT, BOMBAY HIGH COURT AND JAIPUR ITAT JUDGMENTS,. THERE FORE AS A MATTER OF JUDICIAL DISCIPLINE THE SUPREME COURT AND HIGH COUR T JUDGMENTS BECOME BINDING PRECEDENTS. 7. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACT THAT AFTER REDUCING T HE DEBIT BALANCE OF SHRI KUNJ BIHARI, THE ASSESSEE WAS STILL LEFT WITH A HUG E INTEREST FREE PARTNERS CAPITAL OF RS. 2,44,50,752/- WHICH HAS INCREASED FR OM RS. 1,19,92,777/- IN PRECEDING YEAR. SHRI KUNJ BIHARIS DEBIT BALANCE IS NOT WITHDRAWAL IN THIS YEAR ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 12 BUT IS COMING FROM EARLIER YEAR. IN THE CURRENT YEA R THE DEBIT BALANCE HAS BEEN REDUCED, THUS IT IS AN UNDENIABLE FACT THAT FI RM HAD HUGE INTEREST FREE PARTNERS CAPITAL AT ITS DISPOSAL. THE FACT THAT FIR M HAS NOT PAID ANY INTEREST ON CREDIT BALANCES OF PARTNERS IS ALSO NOT DISPUTED. 7.1 IN THESE FACTS AND CIRCUMSTANCES WE SEE NO INFI RMITY IN THE ORDER OF LD. CIT(A) IN DELETING THE DISALLOWANCE BY HOLDING THAT THE APPELLANT FIRM HAS NOT PAID ANY INTEREST ON HUGE CREDIT BALANCES OF THE SI X PARTNERS, AND HAD INTEREST FREE CAPITAL OF RS. 2,44,50,752/- WHICH IT WAS AT LIBERTY TO UTILIZE IN THE WAY IT LIKED. WE FIND PRUDENCE IN FIRMS DECISI ON OF NEITHER GIVING NOR CHARGING THE INTEREST ON PARTNERS BALANCES. HAD THE FIRM ADOPTED OTHER POLICY THEN THE APPELLANT IT WOULD HAVE BEEN REQUIRED TO P AY MORE INTEREST AMOUNT TO OTHER PARTNERS, THIS WOULD HAVE REDUCED THE PROF ITS RESULTING IN LESSER TAX LIABILITY. IT IS EVIDENT THAT THERE WAS NO TAX PLAN NING ALSO BY THE FIRM TO AVOID ANY TAX. 7.2 IT IS ALSO A FACT THAT LD. AO DID NOT ADVERSELY COMMENT ON ASSESSEES PRESENTATION THAT THE BORROWED FUNDS WERE UTILIZED FOR BUSINESS PURPOSES, CONSEQUENTLY ASSESSEES VERSION REMAINS UN REBUTTED . BESIDES THE DEBIT BALANCE OF SHRI KUNJ BIHARI WAS COMING FROM EARLIER YEARS AND IN THIS YEAR IT HAS ACTUALLY REDUCED. 7.3 VARIOUS COURTS BY THE JUDGMENTS CITED ABOVE HAV E HELD THAT IF ASSESSEE HAS OVERALL AVAILABILITY OF INTEREST FREE FUNDS A P ART DIVERSION THEREOF ON INTEREST FREE BASIS CANNOT RESULT IN PROPORTIONATE DISALLOWANCE OF INTEREST PAID ITA NO. 1104/JP/2011 ACIT VS. M/S NAMDEV EXPORT 13 ON BORROWINGS. THE MUMBAI ITAT JUDGMENT IN MODI MOT ORS IS RENDERED ON PECULIAR FACTS AND THE ABOVE JUDGMENTS FROM HONBLE SUPREME AND HIGH COURTS HAVE NOT BEEN CONSIDERED, CONSEQUENTLY THE S AME CANNOT BE APPLIED TO THIS CASE. THE SAME OBSERVATION APPLY TO THE OTH ER DISALLOWANCE RS. 5,42,367/-. 8. IN VIEW OF THE ENTIRETY OF FACTS AND CIRCUMSTANC E NARRATED ABOVE AND RESPECTFULLY FOLLOWING THE JUDGMENTS CITED SUPRA WE UPHOLD THE ORDER OF LD. CIT(A). 9. IN THE RESULT REVENUE APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 09/10/2015. SD/- SD/- FOE FLAG ;KNO VKJ-IH-RKSYKUH (VIKRAM SINGH YADAV) (R.P.TOLANI) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ @ JAIPUR FNUKAD @ DATED:- 09 TH OCTOBER, 2015 *RANJAN VKNS'K DH IZFRFYFI VXZSFKR @ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ @ THE APPELLANT- THE ACIT, CIRCLE-7, JAIPUR. 2. IZR;FKHZ @ THE RESPONDENT- M/S NAMDEV EXPORT, JAIPUR. 3. VK;DJ VK;QDR @ CIT 4. VK;DJ VK;QDR @ CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ @ DR, ITAT, JAIPUR 6. XKMZ QKBZY @ GUARD FILE (ITA NO. 1104/JP/2012) VKNS'KKUQLKJ @ BY ORDER, LGK;D IATHDKJ @ ASST. REGISTRAR