M/s Jain Rice Mills, Samana V. ACIT, Patiala

ITA 1213/CHANDI/2010

• Counselvise Citation: 121321514 RSA 2010
• Duration Of Justice: 1 year(s) 9 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 06-08-2012
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 06-08-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 14-10-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Keywords: Business income; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCHES B CHANDIGARH BEFORE SHRI H.L.KARWA, HON'BLE, VICE PRESIDENT AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 1213/CHD/2011 ASSESSMENT YEAR: 2008-09 M/S BANSAL IRON & STEEL ROLLING MILLS, VS THE ADDL. CIT. MANDI GOBINDGARH. MANDI GOBINDGARH RANGE, MANDI GOBINDGARH. PAN NO. AABFB4635R (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI ASHWANI KUMAR RESPONDENT BY : SMT. JAISHREE SHARMA DATE OF HEARING : 09.04.2012 DATE OF PRONOUNCEMENT : 10.04.2012 ORDER PER H.L.KARWA, VP THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER OF CIT(A), PATIALA DATED 12.10.2011 RELATING TO ASSESS MENT YEAR 2008-09. 2. THE ONLY EFFECTIVE GROUND RAISED BY THE ASSESSEE IN THIS APPEAL READS AS UNDER:- THAT ORDER PASSED U/S 250(6) OF THE INCOME TAX ACT, 1961 IS AGAINST LAW AND FACTS ON THE FILE IN AS MUC H THE LD. CIT(A), PATIALA WAS NOT JUSTIFIED TO ARBITRARIL Y UPHOLD DISALLOWANCE OF RS. 12,59,555/- OUT OF INTER EST ACCOUNT ON THE GROUND THAT THE APPELLANT HAD ADVANC ED CERTAIN INTEREST FREE AMOUNTS. 2 3. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE IS A PARTNERSHIP FIRM AND IS ENGAGED IN THE BUSINESS OF MANUFACTURING / SALE OF IRON AND STEEL PRODUCTS AND ALSO ENJOYS INCOME FROM AGRICULTURE. THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2008-09 WAS FILED ON 24.9.2008 DECLARING TOTAL INCOME AT RS. 2,43,13,481/-. INCOME WAS ASS ED BY THE ADDL. CIT, MANDI GOBINDGARH RANGE, GOBINDGARH AT A TOTAL INCOM E OF RS. 2,53,73,040/- VIDE ORDER DATED 23.8.2008. WHILE FRAMING THE ASSE SSMENT, THE ASSESSING OFFICER DISALLOWED INTEREST AMOUNTING TO RS. 12,59, 555/- ON THE GROUND THAT THE ASSESSEE HAD ADVANCED RS. 25,00,000/- TO M/S GL OBAL EDUCATIONAL AND RESEARCH SOCIETY, CHANDIGARH AND RS. 1,15,10,000/- TO M/S JAGAN REALTORS PVT LTD, CHANDIGARH AS INTEREST FREE. THE AMOUNT OF RS. 15,00,0000/- WAS ADVANCED TO M/S JAGAN REALTORS PVT LTD DURING THE Y EAR UNDER CONSIDERATION AND THERE WAS BROUGHT FORWARD OUTSTANDING BALANCE O F RS. 1,00,10,000/- AGAINST THIS CONCERN. REGARDING ADVANCE OF RS. 25, 00,0000/- TO M/S GLOBAL EDUCATIONAL & RESEARCH SOCIETY, THE SAME WAS GIVEN BY THE ASSESSEE DURING THE LAST MONTH I.E. IN MARCH 2008 FOR THE YEAR UNDE R CONSIDERATION. THE ASSESSING OFFICER DISALLOWED RS. 12,59,555/- AS INT EREST IN RESPECT OF BOTH THE ABOVE INTEREST FREE NON-BUSINESS ADVANCES HOLDI NG THAT ADVANCE TO M/S GLOBAL EDUCATIONAL AND RESEARCH SOCIETY, CHANDIGARH AND M/S REALTORS WERE MADE FOR PERSONAL AND EMOTIVE REASONS AND NOT BORNE OUT OF ANY COMMERCIAL EXPEDIENCY OR FOR BUSINESS PURPOSES. ACCORDINGLY, THE ASSESSING OFFICER DISALLOWED THE ELEMENT OF INTEREST IN RESPECT OF AB OVE MENTIONED TWO NON- BUSINESS, INTEREST FREE ADVANCES FROM THE TOTAL INT EREST PAYMENTS MADE BY THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR. THE ASS ESSING OFFICER CALCULATED THE INTEREST DISALLOWABLE ON THE BASIS OF NUMBER OF DAYS FOR WHICH THE INTEREST FREE NON-BUSINESS LOANS WERE ADVANCED AT 12% PER AN NUM, THE SAME RATE, 3 WHICH THE ASSESSEE FIRM HAS CLAIMED IN RESPECT OF M OST OF THE LOANS RAISED BY IT AND ACCORDINGLY DISALLOWED A SUM OF RS. 12,59,55 5/- AS INTEREST COMPONENT ATTRIBUTABLE TO BOTH THE AFORESAID INTEREST FREE NO N BUSINESS ADVANCES OUT OF THE TOTAL INTEREST PAYMENT OF RS. 1,15,78,335/- DEB ITED BY THE ASSESSEE IN ITS PROFIT AND LOSS ACCOUNT THEREBY MAKING AN ADDITION OF RS. 12,59,555/- IN THE RETURNED INCOME OF THE ASSESSEE. 4. ON APPEAL, THE CIT(A) CONFIRMED THE ADDITION OBS ERVING AS UNDER:- 3.7 I HAVE CAREFULLY EXAMINED THE A.O.'S ORDER AS WELL AS THE CONTENTIONS PUT FORWARD BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE UNDISPUTED FACTS ARE THA T (1) THE APPELLANT IS A PARTNERSHIP FIRM BEING ENGAGED I N THE REGULAR BUSINESS OF RUNNING A STEEL ROLLING MILLS A T MANDI GOBINDGARH, ENGAGED IN MANUFACTURING OF JOIST S, CHANNELS AND TRADING IN IRON AND STEEL. BESIDES THI S THE APPELLANT HAS EARNING FROM INTEREST INCOME ON ADVAN CES GIVEN, AGRICULTURAL MEANS, INCOME FROM WEIGHT BRIDG E. (2) THE APPELLANT DURING THE YEAR HAS OUTSTANDING LOANS AGAINST WHICH IT HAS DEBITED A SUM OF RS. 1,15,,78, 335/- AS INTEREST PAID TO BANKS, PARTNERS AND UNSECURED L OANS RAISED FROM PARTIES FOR THE PURPOSE OF ITS BUSINESS . (3) THE APPELLANT HAS ITSELF STATED IN ITS SUBMISSIONS BEFORE THE A.O. AT THE TIME OF ASSESSMENT PROCEEDINGS AND ALSO DID NOT DISPUTE IT DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE THE UNDERSIGNED THAT THE TWO LOA NS TO M/S GLOBAL EDUCATION & RESEARCH FOUNDATION SOCIETY, CHANDIGARH AND M/S JAGAN REALTORS PVT. LTD ., CHANDIGARH OF RS, 2500,000/- AND RS. 1,15,10,000/- RESPECTIVELY WERE GIVEN BECAUSE BOTH THE PARTIES WE RE RELATIVES OR HAVING GOOD RELATIONS WITH SHRI PREM CHAND, THE PARTNER OF THE APPELLANT FIRM AND THEREF ORE THEY WERE GIVEN FOR KEEPING GOOD RELATIONS RATHER T HAN HAVING ANY COMMERCIAL EXPEDIENCY OR IN COURSE OF REGULAR BUSINESS. (4) THAT THE LOANS TO THE AFORESAID TWO PARTIES WERE GI VEN OUT OF THE COMMON KITTY OF THE FIRM AND INSPITE OF PENDING LOANS ON WHICH THE APPELLANT IS INCURRING LIABILITY TO PAY INTEREST. THE APPELLANT HAS NOT BE EN ABLE TO JUSTIFY THE COMMERCIAL EXPEDIENCY OR BUSINE SS PURPOSE OF ADVANCING HUGE AMOUNTS TO THE TWO PARTIE S 4 FOR NON-BUSINESS PURPOSES WITHOUT INTEREST AND THAT WHY THE APPELLANT SHOULD BE ALLOWED DEDUCTION OF INTERE ST BEING PAID ON LOANS RAISED BY IT TO THAT EXTENT. 3.9 THEIR LORDSHIP IN THE CASE OF CIT V ABHISHEK IN DUSTRIES LTD (2006) 286 ITR 1 (P&H) HAVE HELD THAT - SECTION 36(1)(III) OF THE INCOME-TAX ACT, 1961, PRO VIDES FOR DEDUCTIONS OF INTEREST ON LOANS RAISED FOR BUSI NESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTI ON IN THE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSES SEE TO SATISFY THE ASSESSING OFFICER THAT WHATEVER LOANS W ERE RAISED BY THE ASSESSEE WERE USED FOR BUSINESS PURPO SES. IF IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUC H A DEDUCTION, IT TRANSPIRES THAT THE ASSESSEE HAD ADVA NCED CERTAIN FUNDS TO SISTER CONCERNS OR ANY OTHER PERSO N WITHOUT ANY INTEREST, THERE WOULD BE A VERY HEAVY O NUS ON THE ASSESSEE TO DISCHARGE BEFORE THE ASSESSING OFFI CER TO THE EFFECT THAT IN SPITE OF PENDING TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE IS INCURRING LI ABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERNS FOR NON-BUSINESS PURPOSES WITHOUT A NY INTEREST AND ACCORDINGLY THE ASSESSEE SHOULD BE ALL OWED DEDUCTION OF INTEREST BEING PAID ON THE LOANS RAISE D BY IT TO THAT EXTENT. 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 COLOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, HAVE THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT THE AMOUNT IS LENT TO A SISTER CONCERN WITHOUT CARR YING ANY INTEREST FOR NON-BUSINESS PURPOSES WOULD BE THA T THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING D EBTS TO BE REPAID. IN CASE THE ASSESSEE HAD A SURPLUS WHICH , ACCORDING TO IT, COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, IT WOULD EITHER BE REQUIRED TO BE CIRCULATED AND UTILISED FOR THE PURPOSE OF BUSINESS OR TO BE INVESTED IN A MANNER IN WHICH IT GENERATES INCOM E AND NOT DIVERTED TOWARDS SISTER CONCERNS FREE OF INTERE ST. THIS WOULD RESULT IN NOT PRESENTING THE TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEIN G INCURRED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. THERE SHOULD BE NEXU S BETWEEN THE USE OF BORROWED FUNDS FOR THE PURPOSE O F BUSINESS TO CLAIM DEDUCTION UNDER SECTION 36(1)(III ) OF THE ACT. THAT BEING THE POSITION, THERE IS NO ESCAPE FR OM THE FINDING THAT INTEREST BEING PAID BY THE ASSESSEE TO THE 5 EXTENT THE 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- BUSINESS PURPOSES WERE OUT OF ITS OWN FUNDS IN THE FORM OF CAPITAL INTRODUCED IN BUSINESS, THAT AGAIN WILL SHO W A CAMOUFLAGE BY THE ASSESSEE AS AT THE TIME OF RAISIN G OF LOAN, THE ASSESSEE WOULD SHOW THE FIGURES OF CAPITA L INTRODUCED BY IT AS A MARGIN FOR LOANS BEING RAISED AND AFTER THE LOANS ARE RAISED, WHEN SUBSTANTIAL AMOUNT S ARE DIVERTED TO SISTER CONCERNS FOR NON-BUSINESS PURPOS ES WITHOUT INTEREST, A PLEA WOULD BE RAISED THAT THE A MOUNT ADVANCED WAS OUT OF ITS CAPITAL, WHICH IN FACT STOO D EXHAUSTED IN SETTING UP OF THE UNIT. SUCH A PLEA MA Y BE ACCEPTABLE AT A STAGE WHEN NO LOANS HAVE BEEN RAISE D BY THE ASSESSEE AT THE TIME OF DISBURSEMENT OF FUNDS. THIS WOULD DEPEND ON THE FACTS 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 O R THAT THE REVENUE HAD NOT BEEN ABLE TO ESTABLISH NEX US OF THE FUNDS ADVANCED TO THE SISTER CONCERNS WITH THE BORROWED FUNDS, IS NOT CORRECT. ONCE IT IS BORNE OU T FROM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN F UNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SI STER CONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST AN D WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THE E XTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTE REST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. 3.10 THEREFORE,, KEEPING IN VIEW THE ABOVE FACTS AN D CIRCUMSTANCES OF THE CASE, I HOLD THAT ASSESSING OFFICER IS JUSTIFIE D IN DISALLOWING THE INTEREST TO THE TUNE OF RS. 12,59,555/- OUT OF THE TOTAL INTEREST PAYMENT CLAIMED IN P&L A/C AND ACCORDINGLY UPHOLD THE ADDIT ION MADE BY THE ASSESSING OFFICER AND DISMISS THE APPEAL FILED BY T HE APPELLANT. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND HAVE ALS O PERUSED THE MATERIALS AVAILABLE ON RECORD. IN OUR CONSIDERED V IEW, THE ISSUE IS SQUARELY COVERED IN FAVOUR OF THE REVENUE AND AGAINST THE AS SESSEE BY THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT V ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1 (P&H). IN THE INSTANT CASE, THE A SSESSEE HAS ITSELF SUBMITTED BEFORE THE ASSESSING OFFICER AND ALSO BEF ORE THE CIT(A) THAT THE 6 TWO LOANS TO M/S GLOBAL EDUCATION & RESEARCH FOUNDA TION SOCIETY, CHANDIGARH AND M/S JAGAN REALTORS PVT LTD CHANDIGAR H OF RS. 25,00,000/- AND RS. 1,15,10,000/- RESPECTIVELY WERE GIVEN BECAU SE BOTH THE PARTIES WERE RELATIVES OR HAVING GOOD RELATIONS WITH SHRI PREM C HAND, THE PARTNER OF THE ASSESSEE FIRM AND, THEREFORE, THEY WERE GIVEN FOR K EEPING GOOD RELATIONS RATHER THAN HAVING ANY COMMERCIAL EXPEDIENCY IN THE COURSE OF REGULAR BUSINESS. THE CIT(A) HAS CATEGORICALLY STATED TH AT LOANS TO THE AFORESAID TWO PARTIES WERE GIVEN OUT OF COMMON KITTY OF THE F IRM AND INSPITE OF PENDING LOANS ON WHICH THE ASSESSEE IS INCURRING LI ABILITY TO PAY INTEREST. THE ASSESSEE FAILED TO JUSTIFY THE COMMERCIAL EXPEDIENC Y FOR BUSINESS PURPOSES OF ADVANCING HUGE AMOUNTS TO THE TWO PARTIES FOR NON-B USINESS PURPOSES WITHOUT INTEREST. CONSIDERING THE ENTIRE FACTS AND CIRCUMS TANCES OF THE PRESENT CASE AND FOLLOWING THE RATIO LAID DOWN BY THE JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT V ABHISHEK INDUSTRIES LTD (SUPRA), WE DO NOT SEE ANY GROUND TO INTERFERE WITH THE ORDER OF CIT(A) ON THIS ISSUE. ACCORDINGLY, WE UPHOLD THE ORDER OF CIT(A) AND DISMISS THE APPEAL FILED BY THE ASSESSEE. 6. IN THE RESULT, APPEAL IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 10 TH DAY OF APRIL, 2012 SD/- SD/- (MEHAR SINGH) (H.L.KARWA) ACCOUNTANT MEMBER VICE PRESIDENT DATED : 10 TH APRIL, 2012 RKK COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR 7