FULABHAI GOVINDBHAI TOBACCO PVT.LTD., Anand V. THE ACIT, CIRCLE-3, Baroda

ITA 1227/AHD/2006

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 9822 (ITAT-AHMEDABAD)
• Duration Of Justice: 4 year(s) 4 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 28-09-2010
• Assessment Year: 2002-2003
• Appeal Filed On: 15-05-2006
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K M MAHESH
• Keywords: Proportionate interest; Initiation of penalty proceedings; Commercial expediency
• Section: 234B; 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MUKUL SHRAWAT, JM & SHRI A N PAHUJA, AM ITA NO.1227/AHD/2006 (ASSESSMENT YEAR:-2002-03) FULABHAI GOVINDBHAI TOBACCO PVT. LTD., AT & PO: BHADRAN, TAL: BORSAD, DIST: ANAND [PAN: AAACF 3336 K] V/S ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3, AAYAKAR BHAVAN, RACE COURSE CIRCLE,BARODA [APPELLANT] [RESPONDENT] ITA NO.1368/AHD/2006 (ASSESSMENT YEAR:-2002-03) ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-3, BARODA V/S FULABHAI GOVINDBHAI TOBACCO PVT. LTD., AT & PO: BHADRAN, TAL: BORSAD, DIST: ANAND [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI MILIN MEHTA, AR RESPONDENT BY:- SHRI K M MAHESH, DR O R D E R A N PAHUJA: THESE CROSS APPEALS FILED BY THE REVENUE AND THE ASSESSEE AGAINST AN ORDER DATED 13-03-2006 OF THE LD. CIT(APPEALS)-I, BARODA, RAISE THE FOLLOWING GROUNDS :- ITA NO.1368/AHD/2006[ REVENUE] 1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LEARNED CIT(A)-I, BARODA HAS ERRED IN I. DELETING THE ADDITION OF RS.6,92,730/- BEING INT EREST ON INTEREST FREE ADVANCES GIVEN TO OTHER CONCERN, WHER E AS THE INTEREST DUE THEREON OUGHT TO HAVE BEEN DECLARED AS INCOME ON MERCANTILE SYSTEM OF ACCOUNTING FOLLOWED, NOTWIT HSTANDING THE STAGE-MANAGED RESOLUTION PASSED WRITING OFF THE HUGE LOAN OF RS.40.14 LAKHS AND INTEREST ON COLLUSIVE MA NNER. ITA NO.1227& 1368/A/06 2 II. THE CIT(A) OUGHT TO HAVE UPHELD THE DISALLOWANC E OF INTEREST ON BORROWINGS IN VIEW OF THE FACTS AND CIRCUMSTANCE S OF THE CASE BROUGHT BY THE AO. 2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED CIT(A) OUGHT TO HAVE UPHELD THE ORDER PASSED BY THE AO. 3 IT IS, THEREFORE, PRAYED THAT THE ORDER OF THE CI T(A) BE SET ASIDE AND THAT OF THE AO BE RESTORED. ITA NO.1227/AHD/2006[ ASSESSEE] 1 THE LEARNED CIT(A) AND LEARNED AO HAS ERRED IN DIS ALLOWING THE INTEREST PAID TO M M PATEL & SONS PVT. LTD. RS.89,7 86/- AND TO ASHOKKUMAR & HARSHADBHAI & CO. RS.18,926/-. THE NA TURE OF DISALLOWANCES THAT YOUR APPELLANT HAS NOT CHARGED I NTEREST FROM THESE PARTIES FOR APPROPRIATE THEIR DEBT AGAINST TH E DEPOSITS OF YOUR APPELLANT TO GET THEIR MONEY BACK FROM C.N.S.B. BAN K LTD. WHICH IS IN LIQUIDATION. 2 THE LEARNED CIT(A) AND THE LEARNED AO HAS ERRED A ND DISALLOWED OF RS.10,280/- U/S 14A FOR EARNING EXEMPTED DIVIDEN D INCOME U/S 14A. 3 BOTH THE LOWER AUTHORITIES HAVE ERRED IN LAW AND ON FACTS IN NOT CONSIDERING VARIOUS EXPLANATIONS, SUBMISSIONS AND E VIDENCES PLACED ON RECORD BY THE APPELLANT IN ITS PROPER PER SPECTIVE AND FURTHER ERRED IN NOT APPRECIATING THE LEGAL AS WELL AS JUDICIAL VIEW POINT AS CANVASSED BY THE APPELLANT. 4 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE LEVY OF INTEREST UNDER 234B AND 234C OF THE ACT. 5 THE LEARNED CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THE INITIATION OF PENALTY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THE APPELLANT CRAVE TO ADD, AMEND, ALTER, EDIT, DEL ETE, MODIFY, OR CHANGE ALL OR ANY OF THE GROUNDS OF APPEAL AT THE T IME OF OR BEFORE THE HEARING OF THE APPEAL. 2. ADVERTING FIRST TO GROUND NO.1 IN THE APPEAL OF THE REVENUE, FACTS, IN BRIEF, AS PER RELEVANT ORDER ARE THAT THE RETURN DECLARING INCOME OF RS.19,76,050/- FILED ON 18-10-2002 BY THE ASSESSEE, IN THE BUSINESS OF PROCESSING AND TRADING TOBACCO, AFT ER BEING PROCESSED ON 17.2.2003 U/S 143(1) OF THE INCOME-TAX ACT, 1961 ITA NO.1227& 1368/A/06 3 [HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTE D FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT.DURING TH E COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER (AO) NOTICED THAT THE ASSESSEE HAD ADVANCED INTEREST FREE LOANS TO TH E FOLLOWING PARTIES AND THEIR OUTSTANDING AS ON 31.3.2002 WERE AS UNDER :- 1. M/S S J ENTERPRISE RS.35,79,044 2. M M PATEL & SONS P. LTD. RS.33,53,000 3. ASHOKKUMAR & HARSHADBHAI & CO. RS.11,04,000 WHILE THE ASSESSEE HAD PAID INTEREST OF RS.1,27,26 ,782/- ON BORROWED FUNDS IN THE YEAR UNDER CONSIDERATION. TO A QUERY BY THE AO, THE ASSESSEE REPLIED THAT THE LOAN OF RS. 40,00 ,000/- WAS ADVANCED TO M/S S J ENTERPRISE IN THE PRECEDING YEA R ON 24.3.2000 AND A SIMILAR DISALLOWANCE IN THE AY 2001-02 HAVI NG BEEN DELETED BY THE LD. CIT(A) , THERE WAS NO POINT IN MAKING TH E DISALLOWANCE. IT WAS POINTED OUT THAT INTEREST OF RS. 14,044/- WAS C HARGED UP TO 31.3.2000. THEREAFTER, INTEREST WAS NOT CHARGED, TH E SAID COMPANY HAVING SUFFERED HEAVY LOSSES. SINCE NO INTEREST WAS RECEIVED, THE ASSESSEE DID NOT REFLECT ANY INCOME, IT WAS ARGUED. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE O N THE GROUND THAT THE ASSESSEE DID NOT ENTER INTO A SINGLE TRANS ACTION WITH THIS PARTY IN THE AY 2000-01 OR IN SUBSEQUENT YEARS, ALT HOUGH THE ASSESSEE HAD SHARE TRANSACTIONS WITH MANY OTHER PAR TIES. ACCORDINGLY, RELYING UPON HIS OWN FINDINGS IN THE A Y 2001-02 , THE AO BROUGHT TO TAX AN AMOUNT OF RS.6,92,730/- ON ACC OUNT OF INTEREST, CALCULATED ON THE AMOUNT OF RS. 35,79,044/-, THE S AID PARTY HAVING REPAID RS.4,35,000/- ON 13.11.2001. 3. ON APPEAL, THE LEARNED CIT(A) DELETED THE ADDITI ON, FOLLOWING THE ORDER OF THE CIT(A) FOR THE AY 2001-02, IN THE FOLLOWING TERMS:- 12. THIS ISSUE WAS SUBJECT MATTER OF APPEAL BEFORE THE THEN CIT(A)-I IN RESPECT OF ASSESSMENT YEAR 2001-02. ON THE BASIS OF ALL THE DETAILS AND ARGUMENTS SUBMITTED AND RELYING ON THE APEX COURT'S DECISION IN THE CASE ITA NO.1227& 1368/A/06 4 OF STATE BANK OF TRAVANCORE V. CIT, 158 ITR 102 (S. C.) AND GODHRA ELECTRICITY CO. LTD., 225 ITR 746 ON THE CONCEPT OF THE REAL INCOME THE THEN CIT(A)-I IN APPEAL ORDER NO.CAB/I-0164/2003-04 H AS COME TO THE CONCLUSION THAT DISALLOWANCE ON ACCOUNT OF INTER EST SHOULD BE DELETED. RELIANCE HAS ALSO BEEN PLACED ON THE DECISION OF HO N'BLE ITAT, AHMEDABAD BENCH IN THE CASE OF TORRENT FINANCIERS V . ACIT, 73 TTJ 624 WHEREIN IT HAS BEEN HELD THAT THE BURDEN OF PROVING THAT BORROWED FUNDS HAVE BEEN UTILIZED WAS ON THE AO AND NOT ON THE APP ELLANT. SINCE THE MATTER IS A COVERED ISSUE AND DECISION OF THE JURIS DICTIONAL BENCH OF THE TRIBUNAL APPLIES, AND AGREEING WITH THE DECISION OF MY PREDECESSOR, ADDITION MADE ON ACCOUNT OF INTEREST ON THE DEPOSIT WITH M/S S J P ENTERPRISES IS DELETED. 4. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST T HE AFORESAID FINDINGS OF THE LEARNED CIT(A). AT THE OUTSET, BOTH THE PARTIES AGREED THAT THE ISSUE IS SQUARELY COVERED IN FAVOUR OF TH E ASSESSEE BY THE DECISION DATED 22-03-2007 OF THE ITAT IN THE ASSESS EES OWN CASE FOR THE AY 2001-02 IN ITA NO.2545/AHD/2004. 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE AFORESAID DECISION OF THE ITAT IN THE ASSESSEES OWN CASE FOR THE AY 2001-02. WE FIND TH AT THE TRIBUNAL WHILE ADJUDICATING A SIMILAR ISSUE IN THEIR ORDER D ATED 22-03-2007 CONCLUDED AS UNDER:- 5. WE HAVE HEARD THE PARTIES AND CONSIDERED THE RI VAL SUBMISSIONS. ON 20TH MARCH, 2000, THE ASSESSEE PASSED A RESOLUTI ON AUTHORIZING THE CHAIRMAN OF THE COMPANY TO MAKE ADVANCE TO M/S. S.J .P. ENTERPRISES, ANAND OUT OF THE SURPLUS FUNDS AMOUNT NOT EXCEEDING RS.40 LACS FOR A PERIOD OF ONE YEAR FOR PURCHASE OF SHARES AND SECUR ITIES. IT IS FURTHER SUBMITTED THAT IF THEY DO NOT PURCHASE SHARES AND S ECURITIES AS INVESTMENT FOR A PARTICULAR YEAR, THE INTEREST MAY, BE CHARGED FROM THEM TILL 31ST MARCH, 2000. THE ASSESSMENT YEAR INVOLVED IS A.Y. 2 001-2002 FOR WHICH THE PREVIOUS YEAR ENDED ON 31ST MARCH, 2001. IN THE SE CIRCUMSTANCES, THERE IS NO CONTEMPLATION FOR CHARGE OF ANY INTERES T AS PER THE RESOLUTION OF THE COMPANY. FURTHERMORE, AS HELD BY THE CIT(A) AND ALSO IT APPEARS FROM THE RESOLUTION, THAT THE ADVANCES WERE GIVEN FOR TH E PURCHASE AND SALE OF SHARES VIZ., WITHIN THE BUSINESS COURSE OF THE ASSE SSEE. IN THESE CIRCUMSTANCES, NO INCOME TO THE ASSESSEE HAS ACCRUE D. THE FINANCIAL POSITION OF THE PAYEE-COMPANY HAS ALSO BECOME BAD A ND ULTIMATELY THE AMOUNT HAS TO BE WRITTEN OFF BY THE ASSESSEE IN THE SUBSEQUENT YEAR. IN THESE CIRCUMSTANCES, IN OUR OPINION, THE CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION, HIS ORDER IS ACCORDINGLY UPHELD. ITA NO.1227& 1368/A/06 5 5.1 SINCE THE FACTS OBTAINING IN THE YEAR UNDER C ONSIDERATION ARE UNDISPUTEDLY SIMILAR TO THE FACTS OBTAINING IN THE PRECEDING ASSESSMENT YEAR WHILE THE REVENUE HAVE NOT REFERRED TO US TO ANY MATERIAL CONTROVERTING THE FINDINGS OF THE LEARNED CIT(A), WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE LEARNED CIT(A) IN THE LIGHT OF VIEW TAKEN IN THE AFORESAID DECISION OF THE ITAT . THEREFORE, GROUND NO..1 IN THE APPEAL OF THE REVENUE IS DISMIS SED. 6. COMING NOW TO GROUND NO. 1 IN THE APPEAL OF THE ASSESSEE IN RESPECT OF DISALLOWANCE OF INTEREST ATTRIBUTABLE TO ADVANCES TO M/S M/S M M PATEL & SONS PVT. LTD. AND ASHOKKUMAR & HAR SHADBHAI & CO.,THE AO NOTICED THAT THE ASSESSEE ADVANCED AN AM OUNT OF RS.33,53,000/- TO M M PATEL & SONS PVT. LTD. ON 07- 02-2002 AND RS.11,04,000/- TO ASHOKKUMAR & HARSHADBHAI & CO. ON 25-02-2002 ON INTEREST FREE BASIS EVEN WHEN THE ASSESSEE PAID HUGE AMOUNT OF INTEREST ON THE BORROWINGS. TO A QUERY BY THE AO, THE ASSESSEE EXPLAINED THAT THE COMPANY HAD FIXED DEPOSIT ACCOUN T WITH CHAROTAR NAGRIK SAHAKARI BANK LTD., WHICH HAD BEEN UNDER LIQ UIDATION DUE TO CLOSURE OF OPERATION OF THE BANK. SINCE THE BANK WA S NOT RETURNING ANY FIXED DEPOSIT TO THEIR DEPOSITORS, THE ASSESSEE MADE AN ARRANGEMENT WITH THE BANK AND THE AFORESAID PARTIES WHEREUNDER DUES OF THE BANK OUTSTANDING FROM M M PATEL & SONS PVT. LTD. AND ASHOKUMAR & HARSHADBHAI & CO. WERE TO BE APPROPRIAT ED OUT OF THEIR FIXED DEPOSITS. ACCORDINGLY, THE ASSESSEE PAID THE AFORESAID AMOUNTS TO THE BANK OUT OF THEIR DEPOSITS ON BEHALF OF THE SAID TWO PARTIES. SINCE THE ARRANGEMENT HAD BEEN ENTERED INT O IN ORDER TO SECURE THEIR PRINCIPAL AMOUNT OF FIXED DEPOSITS WIT H THE BANK, NO INTEREST WAS CHARGED FROM THE AFORESAID PARTIES. H OWEVER, THE AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE ON T HE GROUND THAT THERE WAS NO MENTION OF BANKS LIQUIDITY IN THE LET TER DATED 20-12- 2001 ISSUED BY THE RBI U/S 35A OF THE BANKING REGUL ATION ACT TO ITA NO.1227& 1368/A/06 6 SAFEGUARD THE INTEREST OF THE PUBLIC. WITHDRAWALS O F AMOUNT AND PREMATURE WITHDRAWALS OF FIXED DEPOSITS HELD BY GEN ERAL PUBLIC WERE ALSO ALLOWED, SUBJECT TO CERTAIN CONDITIONS. SINCE THE BANK WAS UNDER LIQUIDATION WITH EFFECT FROM 23-07-2003 ONLY WHILE THE RBI OR ANY OTHER GOVERNMENT AGENCIES HAD NOT DECLARED FORF EITURE OF DEPOSITS BY THE BANK, THE AO DID NOT ACCEPT THE CO NTENTIONS OF THE ASSESSEE IN RESPECT OF THE AFORESAID ARRANGEMENT OF ADVANCING INTEREST FREE LOANS TO DEFAULTERS OF THE BANK WITHO UT ANY SECURITY EVEN WHEN THE ASSESSEE PAID HUGE AMOUNT OF INTERE ST TO OTHERS ON THEIR BORROWED FUNDS. SINCE NO BUSINESS EXPEDIENCY WAS INVOLVED IN THE AFORESAID ARRANGEMENT, THE AO DISALLOWED INTERE ST AT THE RATE OF 18% PA ON THE AMOUNTS ADVANCED TO THE AFORESAID PAR TIES, RESULTING IN DISALLOWANCE OF RS.1,08,712/-. 7. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FINDING S OF THE AO IN THE FOLLOWING TERMS:- 17. I HAVE PERUSED OF THE LETTER DATED 20.12.2001 ISSUED BY THE RESERVE BANK OF INDIA AND FILED BY THE ASSESSEE IN SUPPORT OF ITS CONTENTION THAT THE BANK HAD GONE INTO LIQUIDATION AND THE ASSESSEE SHO ULD HAVE LOST ITS DEPOSIT HAD IT NOT BEEN MADE THE ABOVE MENTIONED AR RANGEMENTS. 18. HOWEVER, IT IS SEEN FROM THE LETTER THAT PREMAT URE WITHDRAWAL OF FIXED DEPOSITS COULD HAVE, BEEN .MADE SUBJECT TO TH E CERTAIN CONDITIONS. FURTHER, THE DEPOSITS TO THE TWO PARTIES M.M. PATEL & ASHOKKUMAR HARSHADBHAI & CO. HAVE BEEN MADE IN THE MONTH OF FE BRUARY, 2002 WHEREAS THE CHAROTAR NAGRIK SAHAKARI BANK LTD. HAD BEEN TREATED AS IN LIQUIDATION WITH EFFECT FROM 23RD JULY, 2003. IN VI EW OF THE FACT THAT THE BANK HAD NOT BEEN DECLARED TO BE IN LIQUIDATION, THE ADV ANCING OF HUGE AMOUNTS, FREE OF INTEREST SPECIFICALLY WHEN THE WITHDRAWAL O F THE APPELLANT'S FIXED DEPOSITS WAS POSSIBLE CANNOT BE ACCEPTED TO B E FOR BUSINESS PURPOSES. ACCORDINGLY, THE ADDITION MADE ON ACCOUNT OF INTEREST ON THESE DEPOSITS IS CONFIRMED . 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LD. AR ON BEHAL F OF THE ASSESSEE, WHILE CARRYING US THROUGH PAGES 20 TO 26 OF THE PAP ER BOOK, ITA NO.1227& 1368/A/06 7 REITERATED THEIR SUBMISSIONS BEFORE THE LD. CIT(A) AND FURTHER POINTED OUT THAT SINCE A TRIPARTITE ARRANGEMENT HAD BEEN EN TERED INTO IN ORDER TO SECURE THE PRINCIPAL AMOUNT OF THEIR FIXED DEPOS ITS DUE FROM THE BANK UNDER LIQUIDATION, ADVANCES WERE GIVEN TO THE AFORESAID PARTIES ON INTEREST FREE BASIS IN ORDER TO ENABLE THEM TO L IQUIDATE THEIR DUES TO THE BANK. TO A QUERY BY THE BENCH, THE LEARNED A R ON BEHALF OF THE ASSESSEE ADMITTED THAT THERE WAS NO EVIDENCE OF SUCH TRIPARTITE ARRANGEMENT WITH THE BANK, IN WRITING . SINCE THE F UNDS BORROWED BY THEM HAD BEEN UTILIZED FOR THE BUSINESS PURPOSE AND THE AO DID NOT ESTABLISH THE NEXUS BETWEEN THE BORROWED FUNDS AND THE ADVANCES TO THE AFORESAID PARTIES, THERE WAS NO JUSTIFICATIO N FOR DISALLOWANCE OF ANY PROPORTIONATE INTEREST. ON THE OTHER HAND, T HE LEARNED DR SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. THE RELEVANT PROVISIONS OF SECTION 36(1)(III) OF TH E ACT PROVIDE FOR DEDUCTION OF INTEREST ON THE BORROWED FUNDS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION, THE ONUS IS ON THE ASSES SEE TO SATISFY THE AO THAT LOANS RAISED BY THE ASSESSEE WERE USED FOR BUSINES S PURPOSES. IF IN THE PROCESS OF EXAMINATION OF CLAIM FOR SUCH A DEDUCTION, IT TR ANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO ANY OTHER PERSON WITHOUT ANY INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BE FORE THE AO TO THE EFFECT THAT IN SPITE OF PENDING LOANS ON WHICH THE ASSESSE E IS INCURRING THE LIABILITY TO PAY INTEREST, STILL THERE WAS JUSTIFICATION TO ADVA NCE LOANS TO OTHER PERSONS FOR NON- BUSINESS PURPOSES WITHOUT ANY INTEREST. IN MADHAV P RASAD JATIA V. CIT [1979] 118 ITR 200 (SC) HONBLE SUPREME COURT OBSERVED THAT UNDER S. 10(2)(III) OF THE 1922 ACT( NOW SEC. 36(1)(III) OF THE 1961 ACT), THR EE CONDITIONS ARE REQUIRED TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDUCTION IN RESPECT OF INTEREST ON BORROWED CAPITAL, NAMELY, (A) THAT MONE Y (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSESSEE, (B) THAT IT MUST HAVE BEE N BORROWED FOR THE PURPOSE OF BUSINESS, AND (C) THAT THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT WAS ALSO HELD THA T THE EXPRESSION 'FOR THE ITA NO.1227& 1368/A/06 8 PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROF ITS OR GAINS'. IN THE CASE UNDER CONSIDERATION, THERE IS NOTHING IN THE ORDER OF LOWER AUTHORITIES TO SUGGEST THAT THE ASSESSEE DISCHARGED THE ONUS LAID DOWN UP ON THEM THAT BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF I TS BUSINESS SO AS TO ENTITLE IT TO CLAIM DEDUCTION U/S 36(1)(III) OF THE ACT. EVEN WHE N THE ASSESSEE PLEADED THAT BORROWED FUNDS HAD NOT BEEN UTILIZED WHILE ADVANC ING INTEREST FREE FUNDS, THE LD. AR DID NOT PLACE BEFORE US ANY DETAILS OF BORRO WED FUNDS AND THEIR UTILIZATION NOR THE RELEVANT DETAILS OF INTEREST FREE FUNDS NO R EVEN THE LD. CIT(A) RECORDED HER FINDINGS ON THIS PLEA ON BEHALF OF THE ASSESSE E. THERE IS NOTHING TO SUGGEST IN THE IMPUGNED ORDERS NOR ANY DETAILS HAVE BEEN PL ACED BEFORE US, FROM WHICH IT COULD BE INFERRED AS TO WHETHER OR NOT BORROWED FUN DS HAD INDEED BEEN UTILISED FOR ADVANCING INTEREST FREE ADVANCE TO THE AFORESAI D TWO PARTIES. THE LD. AR , EVEN THOUGH PLEADED THAT FUNDS WERE PROVIDED TO THE AFORESAID TWO PARTIES IN ORDER TO HAVE THEIR PRINCIPAL AMOUNT UNDER THE FIX ED DEPOSIT WITH THE BANK UNDER A TRIPARTITE ARRANGEMENT, THIS CLAIM HAS NOT BEEN SUBSTANTIATED WITH ANY EVIDENCE. THERE IS NOTHING TO SUGGEST THAT SUCH AN ARRANGEMENT WAS INDEED ENTERED IN TO WITH THE BANK. HERE WE MAY POINT OUT THAT HONBLE APEX COURT IN THEIR DECISION IN THE CASE OF SA BUILDERS,288ITR1(S C) WHILE REFERRING TO A DECISION OF THE HONBLE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (BHARAT) LTD., (2002) 254 ITR 377 IN THE CONTEXT COMMERCIAL EXPEDIENCY IN VOLVED IN ADVANCING FUNDS TO OTHER PARTIES OBSERVED AS UNDER: 'WE AGREE WITH THE VIEW TAKEN BY THE DELHI HI GH COURT IN CIT V. DALMIA CEMENT (BHARAT) LTD., (2002) 254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DE CIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF T HE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMISE ITS PROFIT. THE INCOME-TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MAT TER FROM THEIR OWN VIEWPOINT, BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATE D ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIE W WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS.' ITA NO.1227& 1368/A/06 9 9.1 IN VIEW OF THE FOREGOING, WE ARE OF THE OPINION THAT S O LONG AS THE MONEY BORROWED IS USED IN THE BUSINESS, INTEREST PAID ON SUCH BORROWING IS A PROPER CHARGE ON THE BUSINESS AND IS ALLOWABLE AS AN EXPEN DITURE. IN TERMS OF PROVISIONS OF SEC. 36(1)(III) OF THE ACT, AMOUNTS DIVERTED & NOT BEING USED FOR THE PURPOSES OF THE BUSINESS, INTEREST RELATING TO THE AMOUNT DI VERTED OUT OF THE BUSINESS, CANNOT BE TREATED AS A PERMISSIBLE DEDUCTION IN THE COMPUTATION OF INCOME. BEFORE DISALLOWANCE ANY PORTION OF INTEREST , THE A O IS DUTY BOUND TO EXAMINE AS TO WHETHER OR NOT BORROWED FUNDS HAD INDEED BEEN UT ILIZED FOR THE PURPOSE OF BUSINESS AND THAT INTEREST-FREE FUNDS GIVEN TO OTHE RS WERE IN CONFORMITY WITH PROVISIONS OF THE COMPANIES ACT AND THE RULES STIPU LATED BY OTHER REGULATORY BODIES. SINCE, IN THE INSTANT CASE, COMPLETE DETAI LS OF BORROWED FUNDS AND THEIR UTILIZATION AND EVEN OF THE INTEREST FREE FUNDS, HAVE NOT BEEN PLACED BEFORE US NOR ARE MENTIONED IN THE IMPUGNED ORDERS WHILE THE ASSESSEE DID NOT FURNISH ANY FUND FLOW STATEMENT EVIDENCING NEXUS OR UTILIZA TION OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS, WE CONSIDER IT FAIR AND APPROP RIATE TO VACATE THE FINDINGS OF THE LEARNED CIT(A) AND RESTORE THE ISSUE TO HIS FIL E FOR DECIDING THE ISSUE RAISED IN THIS GROUND, AFRESH IN ACCORDANCE WITH LAW IN THE LIGHT OF OUR AFORESAID OBSERVATIONS, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY THAT WHILE REDECIDING THE ISSUE, THE LEARNED CI T(A) SHALL PASS A SPEAKING ORDER, KEEPING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT.INTER ALIA, THE LD. CIT(A) SHALL ALLOW ADEQUATE OPPORTUNITY TO THE ASSESSEE TO ESTABLISH THAT THE SUFFICIENT INTEREST FREE FUNDS W ERE AVAILABLE WITH THEM ON THE DATE WHEN INTEREST FREE ADVANCES WERE GIVEN AND THE ENTIRE BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF THEIR BUSI NESS. WITH THESE DIRECTIONS, GROUND NO.1 IS DISPOSED OF. 10. GROUND NO.2 IN THE APPEAL OF THE ASSESSEE RELAT ES TO DISALLOWANCE OF RS.10,280/- U/S 14A OF THE ACT. THE AO NOTICED DURING THE COURSE OF ASSESSMENT PROCEEDINGS THAT TH E ASSESSEE EARNED DIVIDEND INCOME OF RS.1,02,790/- ON ITS INVE STMENTS EXEMPT U/S 10(33) OF THE ACT. SINCE THE ASSESSEE DID NOT A TTRIBUTE ANY ITA NO.1227& 1368/A/06 10 EXPENDITURE TOWARDS EARNING THE SAID INCOME, THE AO DISALLOWED AN ESTIMATED AMOUNT OF 10% OF THE DIVIDEND INCOME ,HAV ING RECOURSE TO PROVISIONS OF SECTION 14A OF THE ACT. 11. ON APPEAL, THE LEARNED CIT(A), RELYING UPON THE DECISIONS OF THE HON'BLE APEX COURT IN THE CASES OF CIT VS. UNIT ED GENERAL TRUST LTD., 200 ITR 488 (SC) AND DISTRIBUTORS (BARODA) P. LTD. VS. UNION OF INDIA, 155 ITR 120 (SC), UPHELD THE ESTIMATED DISAL LOWANCE ON THE GROUND THAT THE SAME WAS REASONABLE. 12. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LEARNED AR ON B EHALF OF THE ASSESSEE REITERATED THE SUBMISSIONS BEFORE THE LEAR NED CIT(A). ON THE OTHER HAND, THE LEARNED DR SUPPORTED THE FINDIN GS OF THE LEARNED CIT(A). 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE LEARNED AR ON BEHALF OF THE ASSESSEE HAS NOT DE NIED THAT SOME EXPENDITURE HAD BEEN INCURRED TOWARDS EARNING SAID DIVIDEND INC OME OF RS.1,02,790/-, EXEMPT U/S 10(33A) OF THE ACT. IN CIT VS. UNITED GE NERAL TRUST LTD., 200 ITR 488 (SC), HONBLE APEX COURT HELD THAT PROPORTIONATE MA NAGEMENT EXPENSES HAD TO BE DEDUCTED FROM GROSS DIVIDEND FOR RELIEF UNDER S. 80M. RECENTLY, THE HONBLE BOMBAY HIGH COURT IN THEIR DECISION DATED 12.8.2010 IN CASE OF GODREJ & BOYCE MFG.CO.LTD. MUMBAI. IN THE ITA NO. 626/2010 WHILE A DJUDICATING A SIMILAR ISSUE IN THE CONTEXT OF RULE 8D OF THE IT RULES,1962 CONCLUD ED THAT RULE 8D, INSERTED W.E.F 24.3.2008 CANNOT BE REGARDED AS RETROSPECTIVE BECAUSE IT ENACTS AN ARTIFICIAL METHOD OF ESTIMATING EXPENDITURE RELATAB LE TO TAX-FREE INCOME. IT APPLIES ONLY W.E.F AY 2008-09. FOR THE ASSESSMENT YEARS WHE RE RULE 8D DOES NOT APPLY, THE AO WILL HAVE TO DETERMINE THE QUANTUM OF DISALL OWABLE EXPENDITURE BY A REASONABLE METHOD HAVING REGARD TO ALL FACTS AND CI RCUMSTANCES. IN THE INSTANT CASE, THE LD. CIT(A) UPHELD THE FINDINGS OF THE AO, ATTRIBUTING 10% OF THE DIVIDEND INCOME AS REASONABLE EXPENDITURE FOR EARNING THE D IVIDEND INCOME AND ITA NO.1227& 1368/A/06 11 ACCORDINGLY DISALLOWED IN TERMS OF PROVISIONS OF SE C. 14A OF THE ACT. SINCE THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT POINT OUT ANY INFIRMITY IN THE ESTIMATE MADE BY THE AO AND UPHELD BY THE LD. CIT(A), WE HAVE NO HESITATION IN CONFIRMING THE FINDINGS OF THE LD. CIT(A),UPHOLDING DISALLOWANCE O F RS.10,280/-. THEREFORE, GROUND NO.2 IN THE APPEAL OF THE ASSESSEE IS DISMI SSED. 14. GROUND NO..3 IN THE APPEAL OF THE ASSESSEE AND GROUND NOS.2 AND 3 IN THE APPEAL OF THE REVENUE, BEING GENERAL I N NATURE DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE, THEREFOR E, DISMISSED. 15. GROUND NO.4 IN THE APPEAL OF THE ASSESSEE RELAT ES TO LEVY OF INTEREST U/S 234B AND 234C OF THE ACT. THE LD. AR DID NOT MAKE ANY SUBMISSIONS ON THIS GROUND. THE LEVY OF INTEREST U/ S 234B & 234C OF THE ACT BEING MANDATORY [COMMISSIONER OF INCOME TAX.VS ANJU M M. H. GHASWALA AND OTHERS,252 ITR 1(SC), AFFIRMED BY HON'BLE APEX COUR T IN THE CASE OF CIT V. HINDUSTAN BULK CARRIERS [2003] 259 ITR 449 (SC) AND IN THE CASE OF CIT V. SANT RAM MANGAT RAM JEWELLERS [2003] 264 ITR 564 (SC) ], THIS GROUND IS DISMISSED. HOWEVER, THE AO SHALL ALLOW CONSEQUENTIAL RELIEF ,I F ANY, WHILE GIVING EFFECT TO OUR AFORESAID DIRECTIONS. 16. GROUND NO. 5 PERTAINS TO INITIATION OF PENAL TY PROCEEDINGS U/S 271(1)(C) OF THE ACT. THE LD. AR DID NOT MAKE ANY SUBMISSIONS ON THIS GROUND. MERE INITIATION OF PENALTY PROCEEDINGS BEING NOT APPEALABLE, THIS G ROUND IS, THEREFORE, DISMISSED 17 NO ADDITIONAL GROUND HAVING BEEN RAISED IN TERMS OF RESIDUARY GROUND IN THE APPEAL OF THE ASSESSEE, ACCORDINGLY, THIS GROUND IS ALSO DISMISSED. ITA NO.1227& 1368/A/06 12 18 IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES WHILE THAT OF THE REVENUE IS D ISMISSED. ORDER PRONOUNCED IN THE COURT TODAY ON 30-09-2010 SD/- SD/- (MUKUL SHRAWAT) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 30-09-2010 COPY OF THE ORDER FORWARDED TO: 1. FULABHAI GOVINDBHAI TOBACCO PVT. LTD., AT & PO: BHADRAN, TAL: BORSAD, DIST: ANAND 2. ACIT, CIRCLE-3, BARODA 3. CIT CONCERNED 4. CIT(A)-I, BARODA 5. DR, BENCH-C, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD