Srinath Trading Co., Hyd, Hyderabad V. ACIT, Circle-10(1), Hyd, Hyderabad

ITA 1279/HYD/2015

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 5927 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-12-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 07-12-2016
• Assessment Year: 2006-2007
• Appeal Filed On: 09-11-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K J RAO
• Assessee Lawyers: SIDHARDH TOSHNIVAL
• Keywords: Notional interest; Commercial expediency
• Section: 143(3)

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SMT P. MADHAVI DEVI, JUDICIAL MEMBER AND SHRI B, RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO. 1279/HYD/2015 ASSESSMENT YEAR: 2006-07 M/S SRINATH TADING CO, SECUNDERABAD PAN ABCFS0494H VS. ACIT, CIRCLE - 10(1). HYDERABAD (APPELLANT) (RESPONDENT) ITA NO. 1280/HYD/2015 ASSESSMENT YEAR: 2011-12 M/S SRINATH TADING CO, SECUNDERABAD PAN ABCFS0494H VS. CIT(OSD), RANGE - 10 HYDERABAD (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI SIDHARDH TOSHNIVAL REVENUE BY : SHRI K.J. RAO DATE OF HEARING: 07 - 12 - 2016 DATE OF PRONOUNCEMENT: 21 - 12 - 2016 O R D E R PER P. MADHAVI DEVI, J.M.: BOTH ARE ASSESSEES APPEALS FOR THE A.YS 2006-07 AN D 2011-12, AGAINST THE ORDERS OF THE CIT(A)-VI, HYDER ABAD DATED 10-08-2015 & 19-08-2015, RESPECTIVELY. A.Y. 2006-07 2. IN THE APPEAL FOR A.Y. 2006-07. THE ASSESSEE HA S RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESS ING OFFICER TO DISALLOW INTEREST EXPENDITURE TO THE EXTENT OF INTE REST ON INTEREST FREE ADVANCES OF RS. 83,32,641/-. 2 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. 2. THE LEARNED CIT(A) ERRED IN HOLDING THAT APPELLA NT HAD USED INTEREST BEARING FUNDS TO GIVE INTEREST FREE ADVANC ES TO RELATED PARTIES. 3. THAT THE ASSESSING OFFICER COULD NOT ESTABLISH T HAT INTEREST BEARING FUNDS WERE UTILIZED FOR GIVING INTEREST FRE E ADVANCES AND HENCE HE DID NOT DISALLOW THE INTEREST EXPENDIT URE BUT INSTEAD MADE ADDITION OF NOTIONAL INTEREST ON THE I NTEREST FREE ADVANCES. THEREFORE CIT(A) SHOULD NOT HAVE HELD THA T INTEREST BEARING FUNDS HAVE NOT BEEN USED FOR APPELLANT'S BU SINESS. 4. WITHOUT PREJUDICE TO ABOVE, SO FAR ADVANCES TO S MT. CHANCHALDEVI ASAWA AND SRI BRIJGOPAL ASAWA ARE CONC ERNED, THE LEARNED CIT (A) HAS OVERLOOKED THE FACT THAT TH ESE PARTIES GAVE PERSONAL GUARANTEE IN BANK FOR THE LOAN OBTAIN ED BY APPELLANT AND NO GUARANTOR/COMMITMENT CHARGES WERE PAID TO THEM. FURTHER THE LEARNED CIT(A) ERRED IN STATING T HAT NO PROOF WAS FILED IN SUPPORT OF THE CLAIM OF THESE PARTIES PROVIDING PERSONAL GUARANTEE DESPITE THE FACT THE LOAN SANCTI ON LETTER WAS FILED IN SCRUTINY PROCEEDINGS. 5. THAT SO FAR AS ADVANCE TO SHRI RAMAKANTH IYER IS CONCERNED, HE IS NOT A RELATED PARTY AND ADVANCE WAS GIVEN DUE TO COMMERCIAL EXPEDIENCY. NO NOTIONAL INTEREST WAS ADD ED BY ASSESSING OFFICER ON THIS ADVANCE, STILL THE LEARNE D CIT(A) DIRECTED THE ASSESSING OFFICER TO DISALLOW INTEREST TO THE EXTENT OF ADVANCE GIVEN. FURTHER SUCH DIRECTION AMOUNTS TO ENHANCEMENT OF INCOME FOR WHICH NO NOTICE U/S 256(2 ) WAS GIVEN BY LEARNED CIT(A). 6. THE REASONS ASSIGNED BY THE LEARNED CIT(A) ARE WRONG, INSUFFICIENT AND ILLEGAL. 7. ANY OTHER GROUND THAT MAY ARISE AT THE TIME OF H EARING OF THE APPEAL 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE, A PARTNERSHIP FIRM, ENGAGED IN COMMISSION AGENCY BUSINESS OF SYNT HETIC YARN AND FIBER MANUFACTURED BY RELIANCE INDUSTRIES LTD., FILED ITS RETURN OF INCOME ON 30-10-2006 DECLARING TOTAL INCO ME OF RS. 15,05,310/- DURING THE ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT, THE A.O. REQUIRED THE ASSESSEE TO FILE ITS BOOKS OF ACCOUNT AND OTHER DETAILS. FROM THE BALANCE SHEET OF THE ASSESSEE, THE A.O. NOTICED THAT THE ASSESSEE HAS SE CURED LOANS/CASH CREDIT FACILITIES FROM ICICI BANK AND BA NK OF BARODA, AND ALSO HE HAS TAKEN UN-SECURED LOANS AMOU NTING TO RS.1,35,00,000/-, FROM VARIOUS PERSONS FOR WHICH CO NFIRMATIONS 3 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. HAVE BEEN SUBMITTED. FROM THE SAID CONFIRMATION LE TTER, THE A.O. OBSERVED THAT THE ASSESSEE IS PAYING INTEREST AT THE RATE OF 18% PER ANNUM TO UN-SECURED LOAN CREDITORS. HE FUR THER OBSERVED THAT UNDER THE HEAD CURRENT ASSETS, THE ASSESSEE HAS ADVANCED LOANS AMOUNTING TO RS. 1,29,32,641/- TO VA RIOUS PERSONS INCLUDING PARTNERS WITHOUT CHARGING ANY INT EREST. THEREFORE, THE A.O. CALCULATED THE INTEREST AT THE RATE OF 18% ON THE CLOSING BALANCE OF UNSECURED CREDITORS AND ARRI VED AT A SUM TO RS. 11,35,938/- AS INTEREST CHARGEABLE BY THE AS SESSEE ON THE ADVANCES GIVEN BY IT TO THE LOAN CREDITORS. A SHOW CAUSE NOTICE DATED 17-12-2008, WAS ISSUED TO THE ASSESSEE ASKING IT TO EXPLAIN AS TO WHY THE INTEREST AT THE RATE OF 18 % PER ANNUM, SHOULD NOT BE CALCULATED ON THE INTEREST FREE ADVAN CES MADE BY THE ASSESSEE AMOUNTING TO RS. 1,35,00,000/- AND ADD ED TO THE TOTAL INCOME OF THE ASSESSEE. SINCE THE ASSESSEE D ID NOT SUBMIT ITS REPLY, THE ASSESSING OFFICER PRESUMED THAT THE ASSESSEE HAS NO OBJECTION AND ACCORDINGLY HE ADDED THE SUM OF RS . 11,35,938/- TO THE RETURNED INCOME OF THE ASSESSEE AND BROUGHT IT TO TAX. 4. AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE P REFERRED AN APPEAL BEFORE THE CIT(A) STATING THAT (I) THE AS SESSEE HAD ADVANCED INTEREST FREE LOANS TO A TOTAL OF EIGHT PA RTIES OUT OF WHICH SEVEN ARE RELATED TO ASSESSEE (II) OUT OF THI S SEVEN, TWO PERSONS HAVE STOOD AS PERSONAL GUARANTORS FOR LOANS TAKEN BY THE FIRM FROM THE BANKS AND THEREFORE, THERE IS A C OMMERCIAL EXPEDIENCY IN ADVANCING INTEREST FREE LOANS TO THE M. IT WAS EXPLAINED THAT SMT. CHANCHALA DEVI ASAWA AND SHRI B RIJ GOPAL ASAWA HAVE GIVEN THEIR PERSONAL GUARANTEES FOR THE TERM LOAN OBTAINED BY THE ASSESSEE AND HAD NOT TAKEN ANY COMM ISSION OR GUARANTOR CHARGES FOR RENDERING SUCH SERVICES. FUR THER, IT WAS ALSO EXPLAINED THAT SHRI BRIJ GOPAL ASAWA, IS ALSO A PARTNER OF FIRM IN THE CAPACITY OF THE KARTHA OF HIS HUF BRIJ GOPAL 4 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. SRINIVAS ASAWA AND WAS A CORE PERSON OF THEIR ORGAN IZATION. THEREFORE, IT WAS EXPLAINED THAT THERE WAS COMMERCI AL EXPEDIENCY IN ADVANCING THE INTEREST FREE LOAN TO T HESE TWO PEOPLE. AS REGARDS THE FIVE OTHER RELATED PARTIES, THE ASSESSEE HAD GIVEN NO EXPLANATION. THE CIT(A) AFTER CONSIDE RING THE ASSESSEES SUBMISSIONS AT LENGTH, OBSERVED THAT THE A.O IS WRONG IN BRINGING TO TAX THE NOTIONAL INTEREST WHEN THE ASSESSEE HAS NOT CHARGED ANY INTEREST ON THE LOANS ADVANCED BY IT. SHE OBSERVED THAT THE DISALLOWANCE U/S 36(1)(III) OF TH E ACT, IS WARRANTED WHERE THE INTEREST BEARING BORROWED CAPIT AL IS NOT USED FOR THE PURPOSES OF BUSINESS. SHE OBSERVED TH AT A FINDING HAS ALREADY BEEN GIVEN THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS WHICH WERE NOT FOR BUSINESS PURPOSES AND HENC E, ACCORDING TO HER, THE CORRESPONDING AMOUNT OF INTER EST CLAIMED AS EXPENDITURE IN THE PROFIT AND LOSS ACCOUNT IS TO BE DISALLOWED. SHE, THEREFORE, DIRECTED THE A.O. TO C ALCULATE THE AMOUNT OF INTEREST TO BE DISALLOWED U/S 36(1)(III) OF THE ACT. FURTHER, SHE ALSO OBSERVED THAT THE ASSESSEE HAS AD VANCED A SUM OF RS. 46,00,000/- ON THE LAST DAY OF THE FINAN CIAL YEAR I.E ON 31-03-2006, AND THEREFORE, SHE DIRECTED THAT NO INTEREST SHOULD BE CALCULATED ON THAT AMOUNT. 5. AGGRIEVED BY THE ORDER OF THE CIT(A) IN DIRECTIN G THE A.O. TO CALCULATE AMOUNT OF INTEREST CLAIMED AS EXPENDIT URE IN THE PROFIT AND LOSS ACCOUNT TO BE DISALLOWED U/S 36(1)( III), THE ASSESSEE IS IN APPEAL BEFORE US. 6. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE LOWER A UTHORITIES AND HAS ALSO DRAWN OUR ATTENTION TO VARIOUS DOCUMEN TS FILED IN THE PAPER BOOK TO DEMONSTRATE THAT THE ASSESSEE HAD SUFFICIENT INTEREST FREE FUNDS FOR ADVANCING INTEREST FREE LOA NS AND ALSO TO DEMONSTRATE THAT THE INTEREST BEARING BORROWED FUND S WERE 5 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. UTILIZED FOR THE BUSINESS PURPOSES OF THE ASSESSEE . HE HAS ALSO FILED COPIES OF THE CASE LAWS ON WHICH HE HAS PLACE D RELIANCE UPON IN SUPPORT OF HIS CONTENTIONS THAT MERELY BECA USE THE ASSESSEE HAS INTEREST BEARING FUNDS, DISALLOWANCE O F INTEREST PAID CANNOT BE MADE UNLESS THE NEXUS BETWEEN THE IN TEREST BEARING FUNDS AND INTEREST FREE ADVANCES IS PROVED. 7. THE LD. DR, ON THE OTHER HAND, SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESS EE HAS FAILED TO PROVE THE COMMERCIAL EXPEDIENCY FOR MAKIN G INTEREST FREE ADVANCES. 8. HAVING REGARD TO THE RIVAL CONTENTIONS AND THE M ATERIAL PLACED ON RECORD, WE FIND THAT THE A.O HAS BROUGHT TO TAX THE NOTIONAL INTEREST ON THE INTEREST FREE ADVANCES GIV EN BY THE ASSESSEE TO VARIOUS PARTIES AT THE RATE OF 18% PER ANNUM, WHILE THE CIT(A) HAS DIRECTED THE A.O. TO CALCULATE THE I NTEREST FOR DISALLOWANCE U/S 36(1)(III) OF THE ACT. THE REVENU E IS NOT IN APPEAL AGAINST THE FINDING OF THE CIT(A) THAT THE N OTIONAL INTEREST CANNOT BE BROUGHT TO TAX. THEREFORE, WE S HALL NOW PROCEED TO CONSIDER THE SUSTAINABILITY OF THE CIT(A )S DIRECTION TO CALCULATE THE DISALLOWANCE OF INTEREST UNDER SEC TION 36(1)(III) OF THE ACT. UNDISPUTEDLY, THE ASSESSEE HAS INTERES T BEARING FUNDS AND THE ASSESSEE HAS PAID INTEREST AT THE RAT E OF 18% ON UN-SECURED LOANS. THE DISALLOWANCE UNDER SECTION 36 (1)(III) OF THE ACT CAN BE MADE ONLY IF THE INTEREST BEARING FU NDS ARE NOT UTILIZED FOR THE BUSINESS PURPOSES OF THE ASSESSEE. AS SEEN FROM THE DETAILS OF NET INTEREST INCOME FURNISHED A T PAGE NO.8 OF THE PAPER BOOK, THE ASSESSEE HAS EARNED INTEREST IN COME OF RS. 64,31,980/-, WHEREAS, IT HAS PAID INTEREST OF RS. 5 4,95,667/- TO THE BANKS AND INTEREST TO SUPPLIERS IS OF RS. 52,40 2/- SEPARATELY DEBITED TO PROFIT AND LOSS ACCOUNT. FUR THER, FROM THE INTEREST ACCOUNT, IT ALSO SEEN THAT THE ASSESSEE HA S CHARGED 6 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. INTEREST @ 7%, 12%, 14%, 15% TO SOME PARTIES WHILE IT WAS @ 18% TO SOME OTHER PARTIES AND IT HAS ALSO PAID INTE REST @ 9%, 10%, 12%, 15% AND 18% TO SOME OTHER PARTIES. THUS, IT IS SEEN THAT THE INTEREST PAID BY THE ASSESSEE IS MAINLY TO THE BANKS AND TO THE SUPPLIERS AND THEREFORE, THE NEXUS BETWE EN THE INTEREST BEARING FUNDS AND THE INTEREST FREE ADVANC ES CANNOT BE RULED OUT ENTIRELY. HOWEVER, THIS FACT NEEDS VERIF ICATION BY THE A.O. THEREFORE WE MODIFY THE DIRECTIONS OF THE CIT (A) BY DIRECTING THE A.O TO CALCULATE THE DISALLOWANCE U/S 36(1)(III) OF THE ACT ONLY AFTER VERIFYING THE NEXUS BETWEEN THE INTEREST BEARING BORROWED FUNDS AND INTEREST FREE ADVANCES A ND IF THE ADVANCES WERE GIVEN OUT OF INTEREST BEARING FUNDS, THEN, A.O SHALL ALSO EXAMINE THE COMMERCIAL EXPEDIENCY, IF AN Y, IN MAKING SUCH ADVANCES. THE ASSESSEES APPEAL IS ACC ORDINGLY TREATED AS ALLOWED FOR STATISTICAL PURPOSES. A.Y. 2011-12 9. IN THE APPEAL FOR ASSESSMENT YEAR 2011-12, THE A SSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEALS: 1. THE LEARNED CIT(A) ERRED IN CONFIRMING THE ORDE R PASSED BY CIT(OSD)RANGE 10 U/S. 143(3) DETERMINING THE TOTAL INCOME AT RS. 1,08,17,980/- AS AGAINST RETURNED INCOME OF RS. 98,51 ,936/-. 2. THE LEARNED CIT(A) ERRED IN CONFIRMING THE DISAL LOWANCE OF INTEREST EXPENDITURE OF RS.8,42,520/- BY HOLDING TH AT APPELLANT HAD UTILIZED INTEREST BEARING FUNDS TO GIVE INTERES T FREE LOANS & ADVANCES DESPITE THE FACT THAT THE INTEREST FREE LO ANS AND ADVANCES WERE GIVEN DUE TO COMMERCIAL EXPEDIENCY AN D IT IS THE JUDGMENT OF THE ASSESSEE TO FOREGO INTEREST FOR THE BENEFIT OF BUSINESS. 3. THAT OUT OF TOTAL INTEREST FREE LOANS AND ADVANC ES OF RS.70,21 ,000/-, LOANS & ADVANCES TO THE EXTENT OF RS.39,61 ,000/- WERE GIVEN TO PARTIES NONE OF WHOM WERE SISTER CONCERNS/ RELATED PARTIES AND THE LOANS WERE GIVEN DUE TO COMMERCIAL EXPEDIENCY. 4. THE LEARNED CIT(A) ERRED IN IGNORING ASSESSEE CO NTENTION THAT INTEREST FREE ADVANCES OF RS.11 ,55,000/- EACH TO S MT. CHANCHALDEVI ASAWA & RAJUDEVI ASAWA WERE SHORT TERM 7 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. ADVANCES(GIVEN FOR 2 MONTHS) AND THESE PARTIES WERE PERSONAL GUARANTORS FOR LOAN OBTAINED FROM BANK BY APPELLANT BUT NO COMMITMENT CHARGES/GUARANTOR CHARGES WAS PAID TO TH EM BY APPELLANT. 5. THAT THE LEARNED CIT(A) ERRED IN HOLDING THAT TH E ORDER PASSED BY CIT(OSD) U/S. 143(3) IS A LEGALLY VALID O RDER DESPITE THE FACT THAT ONLY AN ASSESSING OFFICER AS DEFINED U/S. 2(7A) CAN PASS AN ASSESSMENT ORDER U/S. 143(3) AND SINCE CIT( OSD) IS NOT AN ASSESSING OFFICER U/S.2(7A) THE ORDER PASSED U/S. 143(3) BY CIT(OSD) IS BAD IN LAW. 6. THE REASONS ASSIGNED BY THE LEARNED CIT(A) ARE W RONG, INSUFFICIENT AND ILLEGAL. 7. ANY OTHER GROUND THAT MAY ARISE AT THE TIME OF HEARING OF THE APPEAL. 10. AT THE TIME OF HEARING, THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS NOT INTERESTED TO PU RSUE THE GROUND OF APPEAL NO.5. THUS, THIS GROUND IS ACCORDI NGLY REJECTED AS NOT PURSED. 11. AS REGARDS THE OTHER GROUNDS, WE FIND THAT THE FACTS AND CIRCUMSTANCES ARE SIMILAR AS IN THE A.Y. 2006-07 AN D FOR THE DETAILED REASONS GIVEN BY US IN THE ABOVE ORDER, WE DIRECT THE A.O TO CALCULATE THE DISALLOWANCE OF INTEREST U/S 3 6(1)(III) OF THE ACT, ONLY AFTER VERIFICATION OF THE NEXUS BETWEEN T HE INTEREST BEARING FUNDS AND INTEREST FREE ADVANCES AND ALSO A FTER VERIFYING THE COMMERCIAL EXPEDIENCY OF MAKING SUCH ADVANCES, IF ANY, OUT OF THE BORROWED FUNDS. 12. IN THE RESULT THIS APPEAL FOR THE 2011-12, AND ALSO FOR THE A.Y. 2006-07 ARE PARTLY ALLOWED FOR STATISTICAL PUR POSES. PRONOUNCED IN THE OPEN COURT ON 21 ST DECEMBER, 2016. SD/- SD/- (B. RAMAKOTAIAH) (P. MADHAV I DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER HYDERABAD, DATED: 21 ST DECEMBER, 2016 KRK 8 ITA NOS. 1279&1280/HYD/2015 SHRINATH TADING CO, SECUNDERABAD. COPY TO:- 1) SRINATH TRADING CO., C/O K.L. RATHI, ADVOCATE, 3 -5-144/5, EDEN GARDEN, HYDERABAD 500 001. 2) ACIT, CIRCLE 10(1); HYDERABAD. 3) CIT(OSD), RANGE-10, HYDERABAD 4) CIT(A) VI, HYDERABAD 5) THE PCIT-6, HYDERABAD 6) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., H YDERABAD. 7) GUARD FILE DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON 09 - 12 - 16 PS 2. DRAFT PLACED BEFORE AUTHOR 15 - 12 - 16 PS 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO THE SR.P.S./PS 6. KEPT FOR PRONOUNCEMENT ON 7. FILE SENT TO THE BENCH CLERK 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER