The DCIT, Circle-2(1), Guntur V. M/s Ploisetty Somasundaram, Guntur

ITA 117/VIZ/2010

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 2710 (ITAT-VISAKHAPATNAM)
• Duration Of Justice: 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2010
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 11-11-2010
• Assessment Year: 2006-2007
• Appeal Filed On: 19-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D S SUNDER SINGH
• Assessee Lawyers: U L N SUDHAKAR
• Keywords: Notional interest

Judgement Text

ITA 117/VIZAG/2010 M/S. POLISETTY SOMASUNDARAM, GUNTUR IN THE INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE: SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI BR BASKARAN, ACCOUNTANT MEMBER ITA NO. 117 /VIZAG/ 20 10 ASSESSMENT YEAR : 2006 - 07 DCIT, CIRCLE - 2(1) VISAKHAPATNAM POLISETTY SOMASUNDARAM GUNTUR (APPELLANT) VS. (RESPONDENT) PAN NO.AACFP 7251J APPELLANT BY: SHRI D.S. SUNDER SINGH, DR RESPONDENT BY: SHRI U.L.N. SUDHAKAR, ADVOCATE ORDER PER SHRI S.K. YADAV, JUDICIAL MEMBER : - THIS APPEAL IS PRE FERRED BY THE REVENUE AGAINST THE ORDER OF THE CIT(A) ON A SOLITARY GROUND THAT CIT(A) HAS ERRED IN NOT CONFIRMING THE ADDITION MADE BY THE A.O. ON ACCOUNT OF INTEREST RECEIVABLE AT RS.20,68,602/ - ON DEBIT BALANCE FROM SMT. POLISETTY RAJARAJES H WARI . 2. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULLY PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND DOCUMENTS PLACED ON RECORD. 3. THE FACTS IN BRIEF BORNE OUT FROM THE RECORD ARE THAT SMT. POLISETTY RAJARAJESHWARI, A PERSON SPECIFIED U/S 40(A)(2) OF THE ACT WAS SHOWN AS SUNDRY DEBTOR FOR AN AMOUNT OF RS.2,90,56,214/ - ON WHICH NO INTEREST WAS CHARGED. THE SAME PERSON WAS ALSO SHOWN AS SUNDRY CREDITOR FOR TRADE FOR A SUM OF RS.81,57,500/ - . THE ASSESSING OFFICER FOUND THAT A SUM OF RS.20,68,602/ - WAS RECEIVABL E TOWARDS INTEREST ON DEBIT BALANCE S FROM THE SAID P. RAJARAJESHWARI AFTER SETTING OFF THE INTEREST PAYABLE BY THE FIRM ON THE CREDIT BALANCE HELD BY HER. HE ACCORDINGLY ADDED THIS SAID AMOUNT TO THE TOTAL INCOME OF THE ASSESSEE. ITA 117/VI ZAG/2010 M/S. POLISETTY SOMASUNDARAM, GUNTUR 2 4. THE ASSESSEE PREFER RED AN APPEAL BEFORE THE CIT(A) WITH THE SUBMISSION THAT THE SAID AMOUNT S WERE ADVANCED BY THE ASSESSEE DURING THE ASSESSMENT YEAR 2005 - 06 AND IS EVIDENT FROM THE FINANCIAL STATEMENTS THAT THE PARTNERS HAVE USED CAPITAL BALANCE AND THE AMOUNTS WERE LENT OU T OF THE PRINCIPAL SURPLUS FUNDS AVAILABLE IN THE ASSESSEES FIRM AND NOT OUT OF INTEREST BEARING BORROWED FUNDS. THE NOTIONAL INTEREST OF R S.20,68,60 2 / - WAS CHARGED ON THE NET DEBT AMOUNT. IT WAS FURTHER EXPLAINED THAT SMT. P. RAJARAJESHWARI IS THE ERST WHILE PARTNER OF THE ASSESSEE FIRM FOR A CONSIDERABLE LONG PERIOD AND THE AMOUNTS WERE ADVANCED ON THE RELATIONSHIP AND SUPPORT EXTENDED BY HER DURING THEIR TENURE AS A PARTNER. HE HAS ALSO PLACED A RELIANCE UPON THE ORDER OF THE TRIBUNAL AMRITSAR BENCH I N THE CASE OF ITO VS. D AVINDER HID E CO REPORTED AT 109 TTJ 580. 5. THE CIT(A) RE - EXAMINED THE ISSUE AND HAS OBSERVED THAT WHEN THE NOTIONAL INTEREST CAN NOT BE CHARGED TO TAX , HOW THE INTEREST PAID ON A CREDIT BALANCE TO THE SAME PERSON IS AN ALLOWABLE EX PENDITURE. 6. HE ACCORDINGLY RESTRIC TED THE DISALLOWANCE TO RS.9,78,900/ - . THE CIT(A) HAS ALSO OBSERVED IN HIS ORDER THAT THE ASSESSEE COULD NOT PROVE THAT THE INTEREST PAID IS AN ALLOWABLE EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS. RELEVANT OB SERVATION S OF THE CIT(A) ARE EXTRACTED HEREUNDER: I HAVE CONSIDERED THE SUBMISSIONS MADE. THE AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT NO INTEREST WAS CHARGED ON THE DEBIT BALANCE STANDING IN THE NAME OF SMT. P. RAJARAJESHWARI BECAUSE OF THE LONG A SSOCIATION WITH HER AND TO SAFE GUARD BUSINESS INTEREST. HOWEVER, INTEREST @ 12% WAS PAYABLE ON THE CREDIT BALANCE IN HER NAME. WHILE NO N O TIONAL INTEREST CAN BE CHARGED THERE IS NO LOGIC IN PAYING INTEREST TO A PARTY WHEN IT IS NOT COLLECTED FROM THE S AME PARTY. RELIANCE IS PLACED ON THE DECISION OF PUNJAB AND HARYANA HIGH COURT IN THE CASE OF ABISHEK INDUSTRIES LTD. (268 ITR 1) WHERE IT WAS HELD THAT IF THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO ITS SISTER CONCERN OR ANY OTHER PERSON WITHOUT INTEREST, THERE WOULD BE HEAVY ONUS ON THE ASSESSEE.THAT IN SPITE OF PENDING TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE ITA 117/VI ZAG/2010 M/S. POLISETTY SOMASUNDARAM, GUNTUR 3 INCURRING LIABILITY TO PAY INTEREST, THERE WAS STILL JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERNS WITHOUT ANY INTERESTS.T HE ENTIRE MONEY IN A BUSINESS ENTITY COMES FROM A COMMON KITTY. THE ONLY THIS SUFFICIENT TO DISALLOW INTEREST PAID ON BORROWINGS TO THE EXTENT THE AMOUNT IS LENT TO A SISTER CONCERN WITHOUT ANY INTEREST FOR NON BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD SOME SURPLUS AMOUNTS WHICH ACCORDING TO IT COULD NOT BE REPAID PREMATURELY, STILL THE SAME IS REQUIRED TO BE CIRCULATED AND UTILIZED FOR THE PURPOSE OF BUSINESS OR TO B E INVESTED IN A MANNER THAT IT GENERATES INCOME AND NOT THAT IT IS DIVERTED TOWARDS SISTER CONCERNS FREE OF INTEREST. IN THE CASE IN 254 ITR 248, IT WAS HELD THAT WHERE THE ASSESSEE HAD NOT DERIVED ANY BENEFIT OUT OF THE ADVANCES TO PARTNERS, RELATIVES AN D SISTER CONCERNS THE DISALLOWANCE WAS JUSTIFIED. IN THIS CASE, WHETHER THE ADVANCE TO SMT. RAJARAJESHWARI WAS MADE OUT OF SURPLUS FUNDS AVAILABLE WITH THE FIRM, OR OUT OF INTEREST BEARING FUNDS BORROWED BY THE FIRM IS NOT STRICTLY RELEVANT. IF THE APPEL LANT FIRM HAD SUFFICIENT SURPLUS FUNDS TO ADVANCE TO SMT. RAJARAJESHWARI, THEN THERE WAS NO REASON TO BORROW FROM HER AND PAY INTEREST THEREON. THE APPELLANTS SUBMISSION IS THAT THE FIRM HAD LONG STANDING BUSINESS ASSOCIATION WITH HER AND THEREFORE THERE WAS NO QUESTION OF CHARGING INTEREST FROM HER. HOWEVER, IT IS STRANGE THAT THIS LONGSTANDING ASSOCIATION DID NOT PREVENT THE APPELLANT FROM PAYING INTEREST TO HER ! WHILE THERE MAY NO CASE FOR BRINGING TO TAX NOTIONAL INTEREST WHEN IT HAS NOT ACTUALLY B EEN EARNED, CERTAINLY THE APPELLANT HAS FAILED TO MAKE OUT A CASE THAT THE INTEREST PAID IS ALLOWABLE AS EXPENDITURE INCURRED FOR THE PURPOSES OF BUSINESS. THEREFORE, INTEREST IS WORKED OUT @ 12% ON RS.81,57,500/ - AND THIS IS DISALLOWED. THE DISALLOWANCE WORKS OUT RS.9,78,900/ - . THE BALANCE IS DELETED. 7 . AGGRIEVED, THE REVENUE HAS PREFERRED AN APPEAL BEFORE THE TRIBUNAL BUT COULD NOT POINT OUT AS TO HOW AND UNDER WHICH SECTION NOTIONAL INTEREST IS CHARGEABLE TO TAX. 8 . THE LD. COUNSEL FOR THE ASSES SEE ON THE OTHER HAND HAS SUBMITTED THAT CIT(A) HAS ALREADY DISALLOWED THE INTEREST PAID ON THE CREDIT BALANCE ON THE ANALOGY THAT ONCE THE NOTIONAL INTEREST CANNOT BE CHARGED FROM THE DEBTOR THEN HOW THE INTEREST CAN BE PAID TO SAME PERSON ON A CREDIT BAL ANCE. ITA 117/VI ZAG/2010 M/S. POLISETTY SOMASUNDARAM, GUNTUR 4 9 . HAVING HEARD THE RIVAL SUBMISSIONS AND FROM A CAREFUL PERUSAL OF TH E ORDER S OF THE LOWER AUTHORITIES, WE FIND THAT THE NOTIONAL INTEREST ON A DEB I T BALANCE IS NOT CHARGEABLE TO TAX ON THE BASIS OF THE REAL INCOME THEORY. IT IS A SWEET WILL OF TH E ASSESSEE TO CHARGE INTEREST ON A DEB I T BALANCE FROM THE DEBTOR . BUT SIMULTANEOUSLY , THE PAYMENTS OF INTEREST CANNOT BE ALLOWED TO THE SAME PERSON ON ITS CREDIT BALANCE. THE CIT(A) HAS RIGHTLY DISALLOWED THE PAYMENT OF INTEREST MADE ON THE CREDIT BALANC E TO THE SAME PERSON. THEREFORE, WE FIND NO INFIRMITY IN HIS ORDER. WE ACCORDINGLY CONFIRM THE SAME. 10 . IN THE RESULT, THE APPEAL OF THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 16.11 .20 10 SD/ - SD/ - (BR BASKARAN) (SUNIL KUMA R YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER VG/SPS VISAKHAPATNAM, DATED 16 TH NOVEMBER , 20 10 COPY TO 1 THE DCIT, CIRCLE - 2(1), GUNTUR 2 SRI U.L.N. SUDHAKAR, ADVOCATE, 883/1, TILAK ROAD, HYDERABAD - 500 001. 3 THE CI T, GUNTUR 4 THE CIT (A) , GUNTUR 5 THE DR, ITAT, VISAKHAPATNAM. 6 GUARD FILE. BY ORDER SENIOR PRIVATE SECRETARY INCOME TAX APPELLATE TRIBUNAL VISAKHAPATNAM