M/s SMT Machines Pvt. Ltd., Mandi Gobindgarh V. Addl. CIT, Mandi Gobindgarh

ITA 1134/CHANDI/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51424 (ITAT-CHANDIGARH)
• Duration Of Justice: 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-08-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-08-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 08-09-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: N K SAINI
• Assessee Lawyers: RAJIV DATTA
• Keywords: Business expenditure; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH A; CHANDIGARH. BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNANT MEMBER. I.T.A. NO.1134(CHD)/2010. (ASSESSMENT YEAR: 2007-08). M/S.SMT MACHINE (PVT.) LIMITED, THE ADDL. C.I.T., MANDI GOBINDGARH. RANGE, MANDI GOBINDGARH. (APPELLANT) VS. (RESPONDENT) ASSESSEE BY : SHRI RAJIV DATTA. DEPARTMENT BY: SHRI N.K. SAINI, D.R. DATE OF HEARING: 3 RD AUGUST, 2011. DATE OF PRONOUNCEMENT: 24AUGUST, 2011. ORDER PER MEHAR SINGH, A.M. THE ASSESSEE FILED THE PRESENT APPEAL AGAINST TH E ORDER OF THE CIT(A), PATIALA, DATED 5-7-2010, FOR THE ASSESSMENT YEAR 20 07-08, UNDER SECTION 250(6) OF THE INCOME TAX ACT, 1961 (IN SHORT THE A CT). THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL:- 1. THAT THE ORDER OF THE LD. CIT(A) IS AGAINST THE FACTS OF THE CASE AND IS BAD IN LAW. 2. THAT ON THE FACTS & CIRCUMSTANCES OF THE CASE, T HE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS.604119/- OUT OF RS.10,36,153/- MADE BY THE A.O. ON ACCOUNT OF DISAL LOWANCE OF INTEREST. 3. WITHOUT PREJUDICE TO THE ABOVE THE LD. CIT(A) HA S FAILED TO APPRECIATE THE FACT THAT NO DISALLOWANCE OF INTERES T WAS CALLED 2 FOR AS SUFFICIENT INTEREST FREE FUNDS WERE AVAILABL E WITH THE ASSESSEE FOR MAKING THE ALLEGED INTEREST FREE ADVAN CES. 4. THAT THE APPELLANT CRAVES LEAVE TO ADD, AMEND OR DELETE ANY OF THE GROUNDS OF APPEAL BEFORE THE SAME IS FINALLY HE ARD & DISPOSE OFF. 2. THE FACTS, IN BRIEF, ARE THAT THE ASSESSEE FILED ITS RETURN DECLARING AN INCOME OF RS.4,86,98,050/- ON 31-10-2007. THE ASS ESSEE-COMPANY IS ENGAGED IN MANUFACTURING AND TRADING OF MACHINERIES , REQUIRED IN ROLLING MILLS AND OTHER MACHINERIES. DURING THE COURSE O F ASSESSMENT PROCEEDINGS, IT WAS FOUND THAT THE ASSESSEE HAD MADE NET PAYMENT OF RS.11,04,486/-, AS INTEREST ON LOANS RAISED BY IT FROM DIFFERENT PERSO NS @ RANGING FROM 12% TO 18%. ON THE OTHER HAND, THE ASSESSEE HAD ADVANCED C ONSIDERABLE AMOUNT OF MONEY TO DIFFERENT PERSONS, ON WHICH NO INTEREST HA D BEEN CHARGED BY IT. THE ASSESSEE WAS ASKED BY THE A.O. TO APPROACH IN T HE MATTER OF BORROWING FUNDS AND ADVANCING THE SAME. IT IS SEEN THAT THE ASSESSEE FAILED TO DISCHARGE THE ONUS AS IT HAS FAILED TO PROVE THAT ADVANCES IN QUESTION WERE GIVEN OUT OF COMMERCIAL EXPEDIENCY OR FOR BUSINESS PURPOSES, T HE ASSESSEE GAVE DETAILS OF 33 PERSONS TO WHOM ADVANCES HAD BEEN GIVEN. THE TOTAL INTEREST @ 12% ON THE AMOUNTS OUTSTANDING WITH THE PERSONS MENTION ED ABOVE COMES TO RS.10,36,153/-. THUS, THE A.O. HELD THAT INTEREST EXPENSES TO THE EXTENT OF RS.10,36,153/-, CLAIMED BY THE ASSESSEE, ARE NOT AL LOWABLE AS BUSINESS EXPENSES, OUT OF RS.11,04,485/-, BEING THE TOTAL EX PENDITURE DEBITED TO P & L ACCOUNT BY THE ASSESSEE ON ACCOUNT OF INTEREST, ON THE REASONING THAT THE INTEREST FREE ADVANCES TO THE PERSONS ARE FOR NON-B USINESS PURPOSES OR OUT OF COMMERCIAL EXPEDIENCY. THUS, THE A.O. MADE THE ADD ITION OF RS.10,36,153/-, TO THE TOTAL TAXABLE INCOME OF THE ASSESSEE. 3 3. AGGRIEVED BY THE ORDER OF THE A.O., THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A), AFT ER CONSIDERING THE SUBMISSIONS OF THE LEARNED COUNSEL FOR THE ASSESSE E, CONFIRMED THE DISALLOWANCE TO THE EXTENT OF RS.6,04,119/- AND GAV E A RELIEF OF RS.4,32,034/-. 4. NOW, ONLY THE ASSESSEE HAS FILED THE APPEAL AGAI NST THE ABOVE ORDER OF THE LEARNED CIT(A). THE DEPARTMENT HAS NOT FILED A NY APPEAL AGAINST THE RELIEF OF RS.4,32,034/-, ALLOWED BY THE LEARNED CIT (A). 5. THE LEARNED A.R. CONTENDED THAT THE ADVANCES WER E GIVEN FOR BUSINESS PURPOSES AND HENCE THE SAME ARE ELIGIBLE FOR DEDUCT ION. IT WAS FURTHER CONTENDED THAT THE DECISION OF THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H) IS APPLICABLE ONLY IN A SITUATION, WHERE INTEREST FREE ADVANCES ARE GIVEN TO THE SISTER CONCERN. THE LEARNED A.R. CONTENDED THAT T HE ADVANCES WERE MADE FOR PURCHASE OF LAND, REQUIRED FOR BUSINESS TRANSA CTION. 5.1 THE LEARNED D.R. CONTENDED THAT THE ISSUE RAISE D IN GROUND NOS.2 AND 3 IS COVERED BY THE DECISION OF THE HONBLE JURISDI CTIONAL HIGH COURT, IN THE CASE OF C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H) (SUPRA). HE FURTHER CONTENDED THAT THERE IS NO EVI DENCE OF BUSINESS EXIGENCY AND NO BUSINESS TRANSACTIONS WERE INVOLVED IN RESPE CT OF PARTIES, WHERE LOANS WERE GIVEN. THE LEARNED D.R. FURTHER REFERRED TO P AGE 3 TO 6 OF THE ASSESSMENT ORDER, WHEREBY CATEGORIES OF VARIOUS ADV ANCES ARE MENTIONED. HE ALSO PLEADED THAT THE DECISION OF THE JURISDICTI ONAL HIGH COURT, IN THE CASE OF C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H), IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CAS E. 4 6. THE LEARNED CIT(A) HAS DEALT WITH THE ISSUE, IN PARA 3, OF THE IMPUGNED ORDER. HOWEVER, THE RELEVANT AND OPERATIN G FINDINGS OF THE CIT(A) ARE REPRODUCED HEREUNDER:- 3.3 THE COUNSEL OF THE ASSESSEE HAS RELIED ON THE LATEST JUDGMENT OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COMMIS SIONER OF INCOME TAX VS. M/S.ASHOK COMMERCIAL ENTERPRISES, CO PY OF WHICH HAS BEEN FILED IN SUPPORT OF THE FACT THAT WHERE IN TEREST FREE FUNDS ARE AVAILABLE WITH THE ASSESSEE, NO DISALLOWANCE OF INT EREST CAN BE MADE. BUT THE ADVANCES TO THE TUNE OF RS.1.20 CRORES ARE HELD TO BE FOR NON BUSINESS PURPOSES ONLY AND ACCORDINGLY DISALLOWANCE TO THE EXTENT OF RS.6,04,119/- IS CONFIRMED. THE ASSESSEE GETS A RE LIEF OF (10,36,153 6,04,119) RS.4,32,034/-. 7. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIO NS, PERUSED THE RELEVANT RECORDS AND THE IMPUGNED ORDERS, PASSED BY THE LOWER AUTHORITIES, INCLUDING THE CASE LAW CITED BY THE CONTENDING PART IES. IN OUR CONSIDERED OPINION, THE ISSUE, IN HAND, IS SQUARELY COVERED IN FAVOUR OF THE REVENUE, BY THE DECISION OF THE JURISDICTIONAL HIGH COURT, IN T HE CASE C.I.T. VS. ABHISHEK INDUSTRIES LTD. (2006) 286 ITR 01 (P&H), WHEREIN TH E HONBLE HIGH COURT HAS HELD AS UNDER:- SECTION 36(1)(III) OF THE INCOME TAX ACT, 1961, PR OVIDES FOR DEDUCTIONS OF INTEREST ON LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION IN THE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISFY THE ASSESSI NG OFFICER THAT WHATEVER LOANS WERE RAISED BY THE ASSESSEE WERE USE D FOR BUSINESS PURPOSES. IF IN THE PROCESS OF EXAMINATION OF GENU INENESS OF SUCH A DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVA NCED CERTAIN FUNDS TO SISTER CONCERNS OR ANY OTHER PERSON WITHOUT ANY INT EREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO DISCHARGE B EFORE THE ASSESSING OFFICER TO THE EFFECT THAT IN SPITE OF PE NDING TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE IS INCU RRING LIABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LO ANS TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT ANY INTEREST AND ACCORDINGLY THE ASSESSEE SHOULD BE ALLOWED DEDUCTION OF INTEREST BE ING PAID ON THE LOANS RAISED BY IT TO THAT EXTENT. 5 THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A CO MMON KITTY. MONIES RECEIVED AS SHARE CAPITAL OR AS TERM LOAN OR AS WORKING CAPITAL LOAN OR AS SALE PROCEEDS DO NOT HAVE A DIFFERENT CO LOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, HAVE THE COLOUR OF BU SINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. THE ONLY THING SU FFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT TH E AMOUNT IS LENT TO A SISTER CONCERN WITHOUT CARRYING ANY INTEREST FOR NO N-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD A SUR PLUS WHICH, ACCORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, IT WOULD EITHER BE REQUIRED TO BE CIRC ULATED AND UTILIZED FOR THE PURPOSE OR BUSINESS OR TO BE INVESTED IN A MANN ER IN WHICH IT GENERATES INCOME AND NOT DIVERTED TOWARDS SISTER CO NCERNS FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING THE TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE C OST BEING INCURRED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. THERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWED F UNDS FOR THE PURPOSE OF BUSINESS TO CLAIM DEDUCTION UNDER SECTIO N 36(1)(III) OF THE ACT. THAT BEING THE POSITION, THERE IS NO ESCAPE F ROM THE FINDING THAT INTEREST BEING PAID BY THE ASSESSEE TO THE EXTENT T HE AMOUNTS ARE DIVERTED TO SISTER CONCERNS ON INTEREST FREE BASIS ARE TO BE DISALLOWED. IF THE PLEA OF THE ASSESSEE IS ACCEPTED THAT THE IN TEREST FREE ADVANCES MADE TO THE SISTER CONCERNS FOR NON-BUSINE SS PURPOSES WERE OUT OF ITS OWN FUNDS IN THE FORM OF CAPITAL INTRODU CED IN BUSINESS, THAT AGAIN WILL SHOW A CAMOUFLAGE BY THE ASSESSEE AS AT THE TIME OF RAISING OF LOAN, THE ASSESSEE WOULD SHOW THE FIGURES OF CAP ITAL INTRODUCED BY IT AS A MARGIN FOR LOANS BEING RAISED AND AFTER TH E LOANS ARE RAISED, WHEN SUBSTANTIAL AMOUNTS ARE DIVERTED TO SISTER CON CERNS FOR NON- BUSINESS PURPOSES WITHOUT INTEREST, A PLEA WOULD BE RAISED THAT THE AMOUNT ADVANCED WAS OUT OF ITS CAPITAL, WHICH IN FA CT STOOD EXHAUSTED IN SETTING UP OF THE UNIT. SUCH A PLEA MAY BE ACC EPTABLE AT A STAGE WHEN NO LOANS HAVE BEEN RAISED BY THE ASSESSEE AT T HE TIME OF DISBURSEMENT OF FUNDS. THIS WOULD DEPEND ON THE FA CTS OF EACH CASE. THE VIEW THAT WHERE THE AMOUNT IS ADVANCED FROM A M IXED ACCOUNT OR SHARE CAPITAL OR SALE PROCEEDS OR PROFIT S, IT WOULD NOT BE DEEMED DIVERSION OF BORROWED CAPITAL OR THAT THE RE VENUE HAD NOT BEEN ABLE TO ESTABLISH NEXUS OF THE FUNDS ADVANCED TO THE SISTER 6 CONCERNS WITH THE BORROWED FUNDS, IS NOT CORRECT. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERT AIN FUNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE O THER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER CONCERNS OR OTH ERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURP OSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYI NG ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE AC T. 8. RESPECTFULLY FOLLOWING THE RATIO LAID DOWN BY TH E HONBLE JURISDICTIONAL HIGH COURT, IN THE ABOVE REFERRED TO CASE, WE UPHOLD THE FINDINGS OF THE CIT(A), ON THIS ISSUE AND REJECT TH E GROUND OF APPEALS OF THE ASSESSEE. 9. GROUND NOS.1 AND 4 ARE GENERAL IN NATURE AND HEN CE DO NOT REQUIRE ANY ADJUDICATION. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED, ORDER PRONOUNCED IN THE OPEN COURT ON 24 AUGUST, 2011. SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER. ACCOUNTANT MEMBER. DATED: 24 AUGUST, 2011. KC/- COPY OF THE ORDER FORWARDED TO: (1) THE ASSESSEE: M/S.SMT MACHINE (PVT.) LIMITED, MANDI GOBINDGARH. (2) THE ADDL. C.I.T., RANGE, MANDI GOBINDGARH. (3) THE CIT, (4) THE CIT(A), PATIALA. (5) THE SR.D.R., ITAT, CHANDIGARH. TRUE COPY BY ORDER ASSTT. REGISTRAR, INCOME TAX APPELLATE TRIBUNAL, AMRITSAR.