ACIT, Nashik V. Bedmutha Industries Ltd, Nashik

ITA 1277/PUN/2013

• Counselvise Citation: 127724514 RSA 2013
• Duration Of Justice: 1 year(s) 7 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2015
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 09-12-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 06-06-2013
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: B C MALAKAR
• Keywords: Related party transaction; Business income; Depreciation; Earning of tax free income; Bad and doubtful debts
• Section: 14A; 37(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE MS. SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI R.K. PANDA, ACCOUNTANT MEMBER ITA NO. 1277/PN/2013 (ASSESSMENT YEAR : 2009-10) ACIT, CIRCLE-1, NASHIK .. APPELLANT VS. BEDMUTHA INDUSTRIES LTD., PLOT NO.A-32/35, STICE, DIST. NASHIK-422002 .. RESPONDENT PAN NO.AABCB3313M ASSESSEE BY : SHRI NIKHIL PATHAK REVENUE BY : SHRI B.C. MALAKAR DATE OF HEARING : 09-12-2014 DATE OF PRONOUNCEMENT : 29-01-2015 ORDER PER R.K.PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 25-03-2013 OF THE CIT(A)-I, NASHIK RELATING T O ASSESSMENT YEAR 2009-10. 2. GROUND OF APPEAL NO.1 BY THE REVENUE READS AS UN DER : 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE ADDITION OF RS.66,565/- MADE ON ACCOUNT OF DISALLOWANCE U/S 14A R. W.R 8D OF THE INCOME TAX ACT, 1961. 2.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSES SEE IS A COMPANY ENGAGED IN THE BUSINESS OF MANUFACTURING, TRADING A ND JOB WORK OF METALLIC WIRES. IT FILED ITS RETURN OF INCOME ON 3 0-09-2009 DECLARING TOTAL INCOME OF RS.9,04,90,630/-. DURING THE COURS E OF ASSESSMENT 2 PROCEEDINGS, THE AO OBSERVED THAT THE ASSESSEE HAS ALSO SHOWN INVESTMENTS IN SHARES/MUTUAL FUNDS. THE ASSESSEE H AS PAID TOTAL INTEREST OF RS.4,73,73,798/- DURING THE YEAR. IT H AS ALSO CLAIMED EXEMPT DIVIDEND INCOME OF RS.12,600/-. HOWEVER, NO EXPENSES HAVE BEEN APPORTIONED TOWARDS EXPENSES INCURRED FOR EARNING THE EXEMPTED INCOME ATTRIBUTABLE TO HOLDING OF SUCH INV ESTMENTS. THE AO, THEREFORE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY DISALLOWANCE U/S.14A SHOULD NOT BE MADE. REJECTING THE VARIOUS A RGUMENTS ADVANCED BY THE ASSESSEE AND RELYING ON VARIOUS DEC ISIONS THE AO DISALLOWED AN AMOUNT OF RS.66,565/- U/S.14A R.W. RU LE 8D. THE ABOVE AMOUNT CONSISTS OF DISALLOWANCE OF INTEREST O F RS.57,929/- UNDER RULE 8D(2)(II) AND ADMINISTRATIVE EXPENSES O F RS.8,636/- UNDER RULE 8D(2)(III). 3. BEFORE CIT(A) IT WAS SUBMITTED THAT AS ON 31-03- 2009 THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS AGGREGA TING TO RS.4391.19 LAKHS WHICH IS MORE THAN SUFFICIENT TO FINANCE THE INVESTMENT OF RS.17,27,510/- THE INCOME ON WHICH IS EXEMPT. RELY ING ON THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF RELIANCE UTILITIES AND POWER LTD. WHERE IT HAS BEEN HELD THA T IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFIC IENT TO MEET ITS INVESTMENT AND AT THE SAME TIME THE ASSESSEE HAD RA ISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE, THE ASSESSEE ARGUED THAT NO DISALL OWANCE U/S.14A IS CALLED FOR. THE DISALLOWANCE OF RS.8,363/- TOWARDS GENERAL EXPENSES WAS ALSO CHALLENGED UNDER THE GIVEN FACTS AND CIRCUMSTANCES. 3 4. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO U /S.14A R.W. RULE 8D. WHILE DOING SO, HE OBSERVED THAT THE AO HA S NOT BROUGHT ON RECORD THE PROXIMATE RELATIONSHIP BETWEEN THE EX PENSES DISALLOWED BY HIM AND THE TAX EXEMPT INVESTMENT. T HE ASSESSEE HAS ENOUGH INTEREST FREE FUNDS TO MAKE INVESTMENT GIVIN G RISE TO TAX EXEMPT INCOME. FURTHER, THE AO HAS NOT BROUGHT ON RECORD THE SATISFACTION REGARDING THE INCORRECTNESS OF THE CLA IM OF THE ASSESSEE. HE ACCORDINGLY HELD THAT THE DISALLOWANCE OF RS.66, 565/- WAS NOT CORRECT. 5. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REVE NUE IS IN APPEAL BEFORE US. 6. THE LD. DEPARTMENTAL REPRESENTATIVE STRONGLY OBJ ECTED TO THE ORDER OF THE AO. HE SUBMITTED THAT THE AO IN THE B ODY OF THE ASSESSMENT ORDER HAS DISCUSSED AT LENGTH AS TO WHY EXPENDITURE IN RELATION TO EXEMPTED INCOME HAS TO BE DISALLOWED EV EN THOUGH SUCH EXPENDITURE WOULD HAVE BEEN ALLOWABLE UNDER THE COM PUTATION PROVISIONS RELATING TO VARIOUS HEADS OF INCOME. IN TENT OF THE LEGISLATURE WAS VERY WELL ANALYSED IN THE SAID ASSE SSMENT ORDER AND IT WAS DERIVED WITH LOGICAL CONCLUSION. THE CLAIM OF THE ASSESSEE IS DISALLOWABLE BY APPLYING RULE 8D OF THE I.T. RULES. HOWEVER, THE LD.CIT(A) IGNORED THE FINDING GIVEN BY THE AO AND C ONSIDERED THE SUBMISSION OF THE ASSESSEE IN THE LIGHT OF HONBLE BOMBAY HIGH COURT IN THE CASE OF M/S. RELIANCE UTILITIES AND PO WER LTD. REPORTED IN 313 ITR 340 AND DELETED THE DISALLOWANCE. HE AC CORDINGLY 4 SUBMITTED THAT THE ORDER OF THE LD.CIT(A) ON THIS I SSUE BE REVERSED AND THAT OF THE AO BE RESTORED. 7. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HA ND HEAVILY RELIED ON THE ORDER OF THE CIT(A). HE SUBMITTED TH AT THE INVESTMENT OF THE ASSESSEE AS ON 31-03-2009 STOOD AT RS.19,25, 654/- WHEREAS THE CAPITAL AND FREE RESERVES OF THE ASSESSEE COMPA NY AS ON 31-03- 2009 WAS RS.19,64,56,058/-. REFERRING TO THE DECIS ION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF DHARMVEER SAMB HAJI URBAN CO-OP BANK LTD. VS. ADDL.CIT VIDE ITA NO.1287/PN/20 12 ORDER DATED 20-09-2013 FOR A.Y. 2008-09 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HAS HELD THAT WHERE THERE IS N O CATEGORICAL FINDING OF THE AO THAT THE ASSESSEE UTILIZED THE IN TEREST BEARING FUNDS FOR MAKING THE INVESTMENT IN THE MUTUAL FUNDS , THE DIVIDEND INCOME OF WHICH IS EXEMPT, THERE IS NO JUSTIFICATIO N FOR MAKING DISALLOWANCE U/S.14A R.W. RULE 8D. WHILE DOING SO, THE TRIBUNAL HAS FOLLOWED THE DECISION OF HONBLE PUNJAB & HARYA NA HIGH COURT IN THE CASE OF CIT VS. HERO CYCLES LTD. REPORTED IN 323 ITR 518 WHERE IT HAS BEEN HELD THAT DISALLOWANCE U/S.14A RE QUIRES FINDING OF INCURRING OF EXPENDITURE FOR EARNING EXEMPT INCOME AND WITHOUT SUCH FINDING NO EXPENDITURE CAN BE DISALLOWED U/S.1 4A OF THE I.T. ACT. REFERRING TO THE DECISION OF THE PUNE BENCH O F THE TRIBUNAL IN THE CASE OF ADDL. CIT VS. M.D. INDUSTRIES VIDE ITA NO.2454/PN/2012 ORDER DATED 31-01-2014 FOR A.Y. 200 8-09 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION HA S HELD THAT WHEN THE AO FAILED TO ESTABLISH ANY NEXUS BETWEEN THE BO RROWED FUNDS AND THE INVESTMENTS IN THE TAX FREE FUNDS, THEREFOR E, THE 5 APPORTIONMENT OF EXPENSES ON PRO-RATA BASIS TO MAK E DISALLOWANCE U/S.14A WAS NOT JUSTIFIED. IT WAS HELD THAT WHEN T HE FUNDS WERE AVAILABLE BOTH INTEREST FREE AND INTEREST BEARING, THEN A PRESUMPTION ARISES THAT INTEREST FREE FUNDS HAVE BEEN UTILIZED FOR INVESTMENT AND NO DISALLOWANCE OF INTEREST COULD BE MADE. ACCORDI NGLY, THE ORDER OF THE CIT(A) DELETING THE DISALLOWANCE MADE U/S.14 A R.W. RULE 8D WAS UPHELD AND THE APPEAL FILED BY THE REVENUE WAS DISMISSED. 7.1 HE SUBMITTED THAT SINCE IN THE INSTANT CASE THE RE IS NO CATEGORICAL FINDING BY THE AO THAT BORROWED FUNDS H AVE BEEN UTILIZED FOR INVESTMENT IN SHARES, THE INCOME OF WH ICH IS EXEMPT AND SINCE OWN CAPITAL AND FREE RESERVES OF THE COMPANY AT RS.19.65 CRORES IS FAR MORE THAN THE INVESTMENT OF RS.19,25, 654/- IN SHARES AND MUTUAL FUNDS THE INCOME OF WHICH IS EXEMPT, THE REFORE, NO DISALLOWANCE U/S.14A R.W. RULE 8D IS CALLED FOR. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. THE DISPUTE IS REGARDING DISALLOWANCE U/S.14A R.W. RULE 8D TOWARDS INTEREST AND ADMINISTRATIVE EXPENSES. SO FAR AS DISALLOWANCE OF INTEREST IS CONCERNED, WE FIND THE INVESTMENT IN SHARES AND MUT UAL FUNDS AS ON 31-03-2009 IS SHOWN AT RS.19,25,654/- AS AGAINST RS .16,58,300/- IN THE PRECEDING YEAR. FURTHER, THERE IS NO DISPUTE T O THE FACT THAT THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE COMPA NY AS ON 31-03- 2009 IS RS.19,54,56,058/- AS AGAINST RS.13,78,51,97 2/- IN THE 6 PRECEDING YEAR. THUS, EVEN AT THE BEGINNING OF THE ASSESSMENT YEAR, THE OWN CAPITAL AND FREE RESERVES OF THE ASSESSEE C OMPANY IS MUCH MORE THAN THE INVESTMENT IN SHARES AND MUTUAL FUNDS THE INCOME OF WHICH IS EXEMPT U/S.10(35). FURTHER, THERE IS NO C ATEGORICAL FINDING BY THE AO THAT THE ASSESSEE HAS USED THE INTEREST B EARING FUNDS FOR INVESTMENT IN SHARES/MUTUAL FUNDS, THE INCOME OF WH ICH IS EXEMPT FROM TAX. 8.1 WE FIND THE PUNE BENCH OF THE TRIBUNAL IN THE C ASE OF DHARMEER SAMBHAVI URBAN CO-OP. BANK LTD., (SUPRA) W HILE DELETING THE DISALLOWANCE U/S.14A R.W. RULE 8D IN A CASE WHEN THERE WAS NO FINDING BY THE AO FOR INCURRING OF SUCH EXPE NDITURE FOR EARNING EXEMPT INCOME HAS OBSERVED AS UNDER : 6.3 WE FIND THAT THERE IS NO CATEGORICAL FINDING OF THE AO THAT THE ASSESSEE UTILISED THE INTEREST BEARING FUND FOR MAKING TH E INVESTMENT IN THE MUTUAL FUNDS. WE FURTHER FIND THAT AO HAS APPLIED SECTION 14A(2) BUT SECTION 14A(2) ONLY VESTS PO WERS IN THE AO FOR QUANTIFICATION OF THE EXPENDITURE FOR MAKING THE DISALLOWANCE BUT AT THE SAME TIME SECTION 14A(2) DOES N OT OVERRIDE SECTION 14A(1) OF THE INCOME TAX ACT. 6.4 IN THE CASE OF HERO CYCLES LTD. (SUPRA) THE HONB LE HIGH COURT OF PUNJAB AND HARYANA HAS OBSERVED THAT DISALLOW ANCE U/S.14A REQUIRED FINDING OF INCURRING OF EXPENDITURE FOR EARNING EXEMPTED INCOME, AND WITHOUT SAID FINDING NO EXPENDI TURE CAN BE DISALLOWED U/S.14A OF THE ACT. THE HONBLE HIGH COUR T CONSIDERED SECTION 14A(2) AND RULE 8D(1) ALSO. IN THE CASE OF CC I LTD. (SUPRA) THE ASSESSEE EARNED THE DIVIDEND INCOME ON THE ASSETS WHIC H WAS CLAIMED EXEMPT BUT THE PROFIT ON THE SALE WAS OFFERED AS BUSINESS INCOME. IN THIS CASE, THERE CANNOT BE PROFIT ON THE TRANSFER OF THE MUTUAL FUNDS BUT AS WE HAVE HELD THAT THERE IS NO SPECI FIC FINDING BY THE AO NOR BY THE CIT(A) THAT INFACT THE ASSESSEE HAS USE D THE INTEREST BEARING FUNDS FOR INVESTMENT, ON THIS FACTUAL ASPECT, WE HOLD THAT THERE IS NO JUSTIFICATION TO MAKE THE DISALL OWANCE. WE ACCORDINGLY DELETE THE ADDITION MADE BY THE AO U/S.1 4A R.W. RULE 8D AS THE MANDATE OF SECTION 14A(1) IS NOT FULFILLED. 8.2 SIMILAR VIEW HAS BEEN TAKEN BY THE TRIBUNAL IN THE CASE OF M.D. INDUSTRIES (SUPRA). SINCE THE OWN CAPITAL AND FREE RESERVES OF 7 THE ASSESSEE COMPANY IS MUCH MORE THAN THE INVESTME NT IN SHARES AND MUTUAL FUNDS, THE DIVIDEND INCOME OF WHICH IS E XEMPT, AND SINCE THERE IS NO CATEGORICAL FINDING BY THE AO THA T BORROWED FUNDS HAVE BEEN UTILIZED FOR INVESTMENT IN SHARE AND MUTU AL FUNDS, THEREFORE, NO DISALLOWANCE UNDER RULE 8D(2)(II) IS WARRANTED IN THE INSTANT CASE. ACCORDINGLY, THE ORDER OF CIT(A) DEL ETING THE DISALLOWANCE OF RS.57,929/- UNDER RULE 8D(2)(II) IS UPHELD. 8.3 HOWEVER, AS REGARDS THE DISALLOWANCE OF RS.8,63 6/- UNDER RULE 8D(2)(III) IS CONCERNED THE SAME RELATES TO D ISALLOWANCE OF ADMINISTRATIVE EXPENSES. NOTHING HAS BEEN BROUGHT TO OUR NOTICE THAT ADMINISTRATIVE EXPENSES IS NOT REQUIRED OR HAS NOT BEEN INCURRED FOR EARNING SUCH EXEMPT INCOME. THEREFORE, IN ABSEN CE OF ANY SUCH DETAILS THE DISALLOWANCE UNDER RULE 8D(2)(III) AMOU NTING TO RS.8,636/- HAS TO BE SUSTAINED. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND RAISED BY THE REVENUE IS ACCORDINGLY PAR TLY ALLOWED. 9. GROUNDS OF APPEAL NO.2 BY THE REVENUE READS AS U NDER : 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE ADDITION OF RS.1,83,450/- MADE ON ACCOUNT OF DISALLOWANCE BY INVO KING PROVISIONS OF SEC. 36(1 )(VA) OF THE INCOME TAX ACT, 1 961. 9.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO MA DE ADDITION OF RS.1,83,450/- BEING EMPLOYEES CONTRIBUTION TO THE PROVIDENT FUND PAID BEYOND THE DUE DATE PRESCRIBED IN THE PROVIDEN T FUND ACT. 10. BEFORE CIT(A) THE ASSESSEE FILED THE DETAILS ST ATING THAT ALTHOUGH SUCH DUES WERE NOT PAID WITHIN THE DUE DAT E PRESCRIBED IN 8 THE PROVIDENT FUND ACT, HOWEVER, SUCH DEPOSITS WERE MADE BEFORE THE DUE DATE OF FILING OF THE RETURN PRESCRIBED UND ER 139(1). 11. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED SUCH DISALLOWANCE. WHILE DOING S O, HE RELIED ON THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF AIMIL LTD & OTHERS REPORTED IN 321 ITR 508, THE DECISION OF THE PUNE BENCH OF THE TRIBUNAL IN THE CASE OF ASHOKA BUILDCO N LTD. VIDE ITA NO.378/PN/2010 FOR A.Y. 2006-07 AND THE DECISIO N OF THE HONBLE HIMACHAL PRADESH HIGH COURT IN THE CASE OF CIT VS. NIPSO POLY FABRICS LTD. VIDE ITA NO.73/2008. 12. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 13. AFTER HEARING BOTH THE SIDES, WE FIND THE ISSUE STANDS DECIDED IN FAVOUR OF THE ASSESSEE BY THE RECENT DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. GHATGE PAT IL TRANSPORTS LTD. VIDE ITA NO.1002/2012 AND ITA NO.1034/2012 ORD ER DATED 14-10-2014 WHERE IT HAS BEEN HELD THAT EMPLOYEES C ONTRIBUTION PAID AFTER THE DUE DATE PRESCRIBED UNDER THE RELEVA NT ACT BUT DEPOSITED ON OR BEFORE THE DUE DATE OF FILING OF TH E RETURN PRESCRIBED U/S.139(1) IS TO BE ALLOWED AS EXPENDITURE. THE PU NE BENCHES OF THE TRIBUNAL ARE ALSO TAKING THE CONSISTENT VIEW TH AT EMPLOYEES CONTRIBUTION TOWARDS PROVIDENT FUND, IF DEPOSITED B EFORE THE DUE DATE OF FILING OF THE RETURN PRESCRIBED U/S.139(1) IS TO BE ALLOWED. WE THEREFORE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE CIT(A) ON 9 THIS ISSUE. ACCORDINGLY, THE GROUND RAISED BY THE REVENUE IS DISMISSED. 14. GROUND OF APPEAL NO.3 BY THE REVENUE READS AS U NDER : 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF RS.48,228/- MADE ON ACCOUNT OF DISALLOWANCE OF WRITE- OFF U/S 36(1)(VII)OF THE INCOME TAX ACT, 1961. 14.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO D URING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE H AD DEPOSITED EARNEST MONEY DEPOSITS (EMDS) FOR BIDDING IN VARIOU S TENDERS. DURING THE IMPUGNED ASSESSMENT YEAR, THE ASSESSEE F OUND THAT CERTAIN OLD DEPOSITS HAVE BECOME IRRECOVERABLE AND THEREFORE WERE WRITTEN OFF IN ACCOUNTS AND CLAIMED SUCH AMOUNT WRI TTEN OFF OF RS. 48,228/- BY WAY OF DEDUCTION HOWEVER, THE A.O. REJE CTED ASSESSEE'S CLAIM AND HELD THAT DEDUCTION FOR SUCH WRITE OFFS I S NOT ALLOWABLE U/S 36(1)(VII) AS BAD DEBTS, SINCE THE SAME WERE NEVER FORMED AS ITEMS OF INCOME IN PAST AND OFFERED TO TAX AS ENVISAGED BY SEC. 36(2)(I). 15. BEFORE CIT(A) IT WAS SUBMITTED THAT AS A NORMAL BUSINESS PRACTICE, ASSESSEE HAS TO APPLY FOR TENDERS FLOATED BY VARIOUS GOVERNMENTAL AND NON-GOVERNMENTAL AUTHORITIES. IN M OST OF THE CASES, MAKING EARNEST MONEY DEPOSITS (EMD) IS ONE O F THE PRE- REQUISITES FOR FURNISHING TENDERS. UNLESS THE REQUI RED EMDS ARE PAID, ASSESSEE IS NOT ELIGIBLE TO TAKE PART IN THE BIDDING PROCESS. THEREFORE, FROM THE ABOVE FACTS IT IS VERY CLEAR TH AT THE ACTIVITY OF MAKING EMDS IS SOLELY IN THE BUSINESS INTEREST OF T HE ASSESSEE. DURING THE YEAR ASSESSEE WAS OF THE VIEW THAT EMDS AMOUNTING TO 10 RS. 48,228/- (BREAK-UP ENCLOSED), DEPOSITED DURING THE BIDDING PROCESS, WERE NO MORE RECEIVABLE AND HENCE DECIDED TO WRITE OFF THE SAME. SINCE, THE EMDS WERE MADE WHOLLY AND EXCLUSIV ELY FOR BUSINESS PURPOSES, ASSESSEE CLAIMED THE WRITE OFF S UCH EMDS AS LOSS U/S 37(1). HOWEVER, THE AO WITHOUT APPRECIATING THE SUBMISSIONS AND THE TRUE NATURE OF TRANSACTION, REJECTED ASSESS EE'S SUBMISSIONS AND HELD THAT SUCH WRITE OFFS ARE BEING CLAIMED BY THE ASSESSEE U/S 36(1)(VII) AS BAD DEBT WRITE OFFS, BUT SINCE THE SA ME WERE NEVER OFFERED TO TAX BEFORE IN TERMS OF 36(2)(I) THE BAD DEBTS CLAIMED ARE NOT TO BE ALLOWED. THUS, THE AO WITHOUT APPRECIATIN G THE VERY NATURE OF WRITE OFFS AND THE SECTION UNDER WHICH TH EY WERE CLAIMED, MADE THE DISALLOWANCE. IT WAS ACCORDINGLY SUBMITTED TO ALLOW THE WRITE OFFS OF EMDS U/S 3 7(1). 16. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) ALLOWED THE CLAIM OF THE ASSESSEE BY OBSE RVING AS UNDER: 6.2 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND THE REASONING GIVEN BY A.O. FOR THE IMPUGNED DISALLOWANC E AND THE SUBMISSIONS OF THE ASSESSEE. IT IS NOT IN DISPUTE THAT, PA YMENT OF EMDS IS NORMAL INCIDENT OF BUSINESS AND ITS BUSINESS PURPOSE CANNOT BE DISPUTED. IRRECONCILABLE AND IRRECOVERABLE SMALL AMOUNTS OF SUCH DEPOSITS ARE WRITTEN OFF BY THE ASSESSEE AND CHARG ED AGAINST THE PROFITS FOR THE YEAR. ADMITTEDLY THIS IS NOT A WRI TE OFF OF ANY DEBT ARISING ON ACCOUNT OF ANY INCOME IN THE PAST. HOWEVE R, BUSINESS NECESSITY OF MAKING SUCH DEPOSITS IS UNDISPUTED. HENCE, TH E LOSS ARISING ON ACCOUNT OF WRITE OFF OF SUCH DEPOSITS IS C LEARLY A BUSINESS LOSS ALLOWABLE U/S 37(1) OF THE I.T. ACT. THE ONLY ISSUE THAT REMAINS IS THE YEAR OF ALLOWABILITY. CONSIDERING THE RATIONAL E BEHIND THE PROVISIONS OF DEDUCTION ALLOWABLE U/S.36(1)(VII) AN D THE SMALLNESS OF AMOUNTS INVOLVED, IT WOULD BE FAIR TO ALLOW DEDUCTI ON FOR SUCH LOSSES IN THE YEAR OF WRITE OFF. THEREFORE, THE IMPUGNED DISALLOWANCE OF RS.48,228/- IS DELETED. THE GROUND OF APPEAL IS ALLO WED. 17. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE REV ENUE IS IN APPEAL BEFORE US. 11 18. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. IN THE INSTANT CASE WE FIND THE LD.CIT(A) ALLOWED THE CLAIM OF DEDUCTIO N AS BUSINESS LOSS CONSIDERING THE SMALLNESS OF THE ITEMS. IT IS AN ADMITTED FACT THAT THESE ARE VERY OLD EMDS LYING WITH VARIOUS DEP ARTMENTS SUCH AS NATIONAL SAFETY COUNCIL, INDRAVAI HYDRO POWER, S BI SATPURA, BHUSAWAL THERMAL ETC. ALTHOUGH THESE ARE NOT BAD D EBTS BUT CONSIDERING THE SMALLNESS OF THE AMOUNTS LYING WITH VARIOUS DEPARTMENTS UNDER THE HEAD EMD THE ASSESSEE HAS WRI TTEN OFF THESE ITEMS AND THE CIT(A) CONSIDERING THE RATIONALE BEHI ND THE PROVISIONS OF SECTION 36(1)(VII) HAS ALLOWED THE SA ME AS BUSINESS LOSS IN THE YEAR OF WRITE OFF. THE LD. DEPARTMENTA L REPRESENTATIVE COULD NOT SERIOUSLY CHALLENGE THE FINDING OF LD.CIT (A). CONSIDERING THE TOTALITY OF THE FACTS OF THE CASE A ND CONSIDERING THE SMALLNESS OF THE AMOUNTS VIS--VIS NUMBER OF ENTRIE S WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD.CIT(A) ON THIS ISS UE. ACCORDINGLY, THE SAME IS UPHELD AND THE GROUND BY THE REVENUE IS DISMISSED. 19. GROUND OF APPEAL NO.4 BY THE REVENUE READS AS U NDER : 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANC ES OF THE CASE, THE LD.CIT(A)-I, NASHIK WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF INTEREST OF RS.9,33,867/- MADE ON ACCOUNT OF DISALLOWA NCE OF INTEREST CALCULATED ON INTEREST FREE ADVANCES MADE BY THE ASSESSEE TO GROUP CONCERNS. 12 19.1 FACTS OF THE CASE, IN BRIEF, ARE THAT THE AO D URING THE COURSE OF ASSESSMENT PROCEEDINGS NOTED THAT THE ASSESSEE H AS MADE INTEREST FREE ADVANCES TO SOME OF THE GROUP CONCERNS THE CLO SING BALANCES OF WHICH AS ON 31-03-2009 WERE AS BELOW : KREEPA STEEL INDUSTRIES RS.63.97 LACS USHA CHEMICALS RS.44.89 LACS ELME PLAST CO. RS.42.85 LACS ------------------- TOTAL INTEREST FREE ADVANCES MADE RS.151.71 LACS ------------------- THE AO ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PROP ORTIONATE INTEREST DISALLOWANCE SHOULD NOT BE MADE ON THE SAI D INTEREST FREE ADVANCES SINCE THE ASSESSEE HAS BORROWED INTEREST B EARING FUNDS WHICH HAVE LATER BEEN UTILIZED FOR GRANT OF INTERES T FREE ADVANCES TO THE GROUP CONCERNS. FURTHER, THE ASSESSEE HAS ALS O CLAIMED INTEREST EXPENSES OF RS.4.73 CRORES IN THE PROFIT & LOSS ACC OUNT. 19.2 IN RESPONSE TO THE QUERY RAISED BY AO, THE ASS ESSEE VIDE SUBMISSION DATED 08-12-2011 SUBMITTED AS UNDER: DETAILS OF MAJOR RELATED PARTY TRANSACTIONS, ALONGWI TH SUITABLE EXPLANATION ARE ENCLOSED. AS TO THE INTEREST FREE NON BUSINESS ADVANCES, KINDLY NOTE THAT, THE AMOUNT OF INTEREST FR EE NON BUSINESS ADVANCES IS VERY SMALL, AS COMPARED TO THE AVAILABILITY OF INTEREST FREE FUNDS WITH THE ASSESSEE. FOLLOWING ARE THE DETAILS O F INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE EQUITY SHARE CAPITAL RS. 8,89,58,380/- RESERVES & SURPLUSES RS.10,64,97,678/- DEPRECIATION RESERVE RS.16,12,23,167/- UNSECURED LOANS - WMDC/DIC S. T. LOANS RS. 8,05,39,9 16/- UNSECURED LOANS FROM STAR LITE COMPONENTS LTD. RS. 9,00,000/- ----------------------- TOTAL RS.43,91,19,141/- ----------------------- IT MAY KINDLY BE NOTED THAT, IN THE CASE OF CIT VS. R ELIANCE UTILITIES & POWER LTD., (COPY OF DECISION ENCLOSED) THE HON'BLE B OMBAY HIGH COURT HAS HELD THAT, WHERE AN ASSESSEE HAS HIS OWN FUNDS A S WELL AS 13 BORROWED FUNDS, A PRESUMPTION CAN BE MADE THAT THE AD VANCES FOR NON-BUSINESS PURPOSES HAVE BEEN MADE OUT OF THE OWN FUN DS AND THAT THE BORROWED FUNDS HAVE NOT BEEN USED FOR THIS PU RPOSE. ACCORDINGLY, IT IS HELD THAT, THE DISALLOWANCE OF THE INTEREST ON THE BORROWED FUNDS IS NOT JUSTIFIED' 19.3 REJECTING THE VARIOUS EXPLANATIONS GIVEN BY TH E ASSESSEE AND FOLLOWING VARIOUS DECISIONS THE AO MADE ADDITION OF RS.9,33,867/- BEING INTEREST @12% ON INTEREST FREE ADVANCES, THE DETAILS OF WHICH ARE AS UNDER : KREEPA STEEL INDUSTRIES RS.5,60,511/- USHA CHEMICALS RS.3,46,999/- ELME PLAST CO. RS. 26,357/- 20. BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT THE INTEREST FREE FUNDS WERE SUFFICIENT ENOUGH TO FUND THE NON INTERE ST BEARING ADVANCES OF RS. 151.71 LACS. THE ASSESSEE ALSO RELI ED ON THE DECISION OF THE JURISDICTIONAL HIGH COURT IN THE CA SE OF CIT VS .RELIANCE UTILITIES & POWER LTD REPORTED IN 313 ITR 340. IT WAS ARGUED THAT THE A.O. WITHOUT BRINGING ANY ADVERSE F ACT ON RECORD HELD THAT THE DECISION OF THE JURISDICTIONAL HIGH C OURT DID NOT APPLY TO THE CASE OF THE ASSESSEE AND REJECTED ASSESSEE'S SUBMISSIONS, MAKING AN ADDITION OF RS.9,33,867/- CALCULATED @ 12 % ON THE INTEREST FREE ADVANCES OF RS.151.71 LACS. IT WAS SU BMITTED THAT ALL ITS RECEIPTS, SALES AS WELL AS LOAN RECEIPTS, ARE DEPOS ITED IN THE CASH CREDIT ACCOUNT. IT IS FROM THIS ACCOUNT THAT THE IN TEREST FREE LOANS WERE ADVANCED. IT IS NOT POSSIBLE ON A ONE TO ONE B ASIS TO DETERMINE AS TO WHICH FUNDS WERE USED TO FUND THE NON INTERES T BEARING ADVANCES. IT WAS ARGUED THAT THE SUPREME COURT IN T HE CASE OF EAST 14 INDIA PHARMACEUTICAL WORKS LTD. V. CIT REPORTED IN 224 ITR 627, THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF WOOL COMBERS OF INDIA LTD. V. CIT REPORTED IN 134 ITR 219 AND THE H ONBLE BOMBAY HIGH COURT IN THE CASE CIT VS RELIANCE UTILITIES & POWER LTD (SUPRA) HAVE HELD THAT IN CASES WHERE THE ASSESSEE IS HAVIN G BOTH INTEREST BEARING AND NON INTEREST BEARING FUNDS, THEN IT HAS TO BE ASSUMED THAT THE INTEREST FREE ADVANCES HAVE BEEN MADE FROM THE NON INTEREST BEARING ADVANCES. THEREFORE, FOLLOWING THE ABOVE JU DICIAL PRONOUNCEMENTS, IN ASSESSEE'S CASE ALSO, SINCE IT I S NOT POSSIBLE TO TRACE THE FUNDING OF NON-INTEREST BEARING ADVANCES AND ALSO SINCE ASSESSEE HAD ENOUGH OF INTEREST FREE FUNDS AVAILABL E TO FUND THE INTEREST FREE ADVANCES, IT SHOULD BE ASSUMED THAT T HE ABOVE REFERRED ADVANCES HAVE BEEN MADE BY ASSESSEE FROM ITS INTERN AL ACCRUALS. AS TO THE VARIOUS DECISIONS REFERRED TO BY THE A.O., I T WAS POINTED OUT THAT THE SUPREME COURT AND THE JURISDICTIONAL BOMBA Y HIGH COURT IN THE ABOVE REFERRED CASES HAVE TAKEN A CONTRARY V IEW AND FOLLOWING THE PRINCIPLES OF JURISPRUDENCE DECISION OF THE APEX COURT AND THE JURISDICTIONAL HIGH COURT HAS A BINDI NG EFFECT. IT WAS ACCORDINGLY SUBMITTED TO DELETE THE DISALLOWANCE OF INTEREST OF RS.9,33,867/-. 21. BASED ON ARGUMENTS ADVANCED BY THE ASSESSEE THE LD.CIT(A) DELETED THE DISALLOWANCE BY OBSERVING AS UNDER : 7.2 I HAVE CAREFULLY GONE THROUGH THE FACTS OF THE CASE AND THE RELEVANT PORTIONS OF THE IMPUGNED ASSESSMENT ORDER AND T HE SUBMISSIONS OF THE ASSESSEE. IT IS NOT DISPUTED THAT, THE FU NDS USED FOR MAKING INTEREST FREE NON BUSINESS PURPOSE ADVANCES WE RE BY USE OF CASH CREDIT LIMITS. HOWEVER, IT IS EQUALLY TRUE THAT IT IS THE VERY SAME CASH CREDIT ACCOUNT, IN WHICH SALE PROCEEDS A RE ALSO DEPOSITED. THUS, THE ISSUE IN DISPUTE IS CLEARLY COVERED BY THE DECISIONS CITED BY THE LEARNED A.R. OF ASSESSEE I.E. SUPR EME COURT 15 DECISION IN THE CASE OF EAST INDIA PHARMACEUTICAL WORK S LTD. V. CIT (224 ITR 627), THE CALCUTTA HIGH COURT DECISION IN T HE CASE OF WOOLCOMBERS OF INDIA LTD. V. CIT (134 ITR 219) AND T HE BOMBAY HIGH COURT DECISION IN THE CASE CIT V/S RELIANCE UTILI TIES & POWER LTD (313 ITR 340). THEREFORE, THE IMPUGNED DISALLOWA NCE OF INTEREST OF RS. 9,33,867/- IS UNJUSTIFIED, HENCE DELETE D. THIS GROUND OF APPEAL IS, THEREFORE, ALLOWED. 22. AGGRIEVED WITH SUCH ORDER OF CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 23. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECISIONS CITED BEFORE US. WE FIND THE AO IN THE INSTANT CASE DISALLOWED AN AMOUNT OF RS.9,33,86 7/- BEING INTEREST @12% ON INTEREST FREE ADVANCES MADE TO GRO UP CONCERNS. WE FIND THE LD.CIT(A) DELETED THE DISALLOWANCE MADE BY THE AO ON THE GROUND ALTHOUGH THE LOANS HAVE BEEN ADVANCED OUT OF THE CASH CREDIT ACCOUNT, HOWEVER, THE ENTIRE SALE PROCE EDS OF THE ASSESSEE ARE DEPOSITED IN THE SAID CASH CREDIT ACCO UNT. THE INTEREST FREE FUNDS ARE SUFFICIENT ENOUGH TO FUND THE NON-IN TEREST BEARING ADVANCE OF RS.151.71 LAKHS. HE THEREFORE FOLLOWING THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIAN CE UTILITIES AND POWER LTD. (SUPRA), THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA) AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF WOOLCOMBERS OF INDIA LTD. (SUPRA) DELETED THE DISAL LOWANCE. ADMITTEDLY, THE ASSESSEE HAS ARGUED BEFORE THE AO T HAT ITS OWN CAPITAL AND FREE RESERVES AND NON INTEREST BEARING FUNDS AMOUNTING TO RS.43.91 CRORES IS FAR MORE THAN THE INTEREST FR EE ADVANCE OF 16 RS.1.52 CRORES. THE ARGUMENT ON THIS ASPECT BY THE ASSESSEE WAS COMPLETELY OVERLOOKED BY THE AO. THE HONBLE BOMBA Y HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER L TD. (SUPRA) HAS HELD THAT IF THERE BE INTEREST FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME T IME THE ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVE STMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. SINCE IN T HE INSTANT CASE THE CAPITAL AND FREE RESERVES AS WELL AS INTEREST FREE FUNDS ARE MUCH MORE THAN THE LOANS ADVANCED TO SISTER CONCERNS AND SINCE THE SALE PROCEEDS ARE DEPOSITED IN THE CASH CREDIT ACCOUNT F ROM WHERE THE LOANS HAVE ADVANCED TO THE SISTER CONCERNS, THEREFO RE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A) DELETING THE D ISALLOWANCE MADE BY THE AO. WE ACCORDINGLY UPHOLD THE SAME AND THE GROUND RAISED BY THE REVENUE IS DISMISSED. 24. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 29-01-2015. SD/- SD/- (SUSHMA CHOWLA) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBE R PUNE DATED: 29 TH JANUARY, 2015 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. THE CIT(A)-I, NASHIK 4. THE CIT-I, NASHIK 5. THE D.R, B PUNE BENCH 6. GUARD FILE BY ORDER // TRUE COPY // ASSISTANT REGISTRAR ITAT, PUNE BENCHES, PUNE