Madhu Industries Ltd, Ahmedabad V. The Jt.CIT.,Ahmedabad Range-4, Ahmedabad

ITA 136/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6616 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 4 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 10-05-2011
• Assessment Year: 2000-2001
• Appeal Filed On: 12-01-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S P TALATI
• Keywords: Notional interest; Tax effect
• Section: 143(3); 192; 147

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH : AH MEDABAD ( BEFORE HONBLE SHRI T.K.SHARMA, J.M. & HONBLE SHRI A.N.PAHUJA, A.M.) I.T.A.NO. 136/AHD./2009 : ASSESSMENT YEAR 2000 -01 MADHU INDUSTRIES LTD., AHMEDABAD VS- J.C.I.T., AHMEDABAD RANGE-4 (PAN : AAFCM 2587A) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SUNIL TALATI, A.R. RESPONDENT BY: SHRI S.P.TALATI, D.R. O R D E R PER SHRI T.K.SHARMA, JUDICIAL MEMBER : THIS APPEAL IS FILED BY THE ASSESSEE AGAINST THE OR DER OF LD. CIT(A)-VIII, AHMEDABAD DATED 15.10.2008 FOR THE ASSESSMENT YEAR 2000-2001. 2. BRIEFLY STATED THE FACTS ARE THAT THE ASSESSEE I S A COMPANY ENGAGED IN MANUFACTURING OF MADE-UPS AND FABRICS. FOR THE ASSE SSMENT YEAR UNDER APPEAL, IT FILED THE RETURN OF INCOME ADMITTING NIL INCOME. THE AS SESSING OFFICER FRAMED THE ASSESSMENT UNDER SECTION 143(3) READ WITH SECTION 1 47 AT TOTAL INCOME OF RS.1,39,37,290/-. IN THIS ASSESSMENT ORDER, THE ASS ESSING OFFICER DISALLOWED RS.6,03,200/- UNDER SECTION 36(1)(III) OF THE I.T. ACT, 1961. IN MAKING THIS DISALLOWING IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER OBSE RVED THAT THE ASSESSEE COMPANY HAD MADE LOANS/ADVANCES TO THE FOLLOWING PERSONS WHICH WERE NOT IN THE NATURE OF TRADE ADVANCE I.E. THE LOANS AND ADVANCES WERE MADE FOR N ON-BUSINESS PURPOSE. (I) MADHU INTERNATIONAL (3850643 + 84621) RS.39,3 5,264/- (II) CHETNA PATEL RS. 1,20,000/- (III) HI-FI MARKETING RS. 80,000/- (IV) SAHARA ENTERPRISE RS. 50,000/- (V) GATI CARGO MAN SERV. RS. 1,000/- (VI) CTM TEXTILE MILLS RS. 8,40,399/- RS.50,26,663/- ITA NO.136/AHD/2009 2 2.1 THE ASSESSING OFFICER, IN THE ASSESSMENT ORDER, FURTHER OBSERVED THAT ASSESSEE HAS CLAIMED HUGE INTEREST EXPENSES AS UNDER: (I) BANK INTEREST RS. 14,53,907/- (II) INTEREST TO DEPOSITORS RS. 20,47,007/- (III) PCFC INTEREST RS. 16,98,935/- 2.2 FROM THE AFORESAID FACTS, THE ASSESSING OFFICER FINALLY CONCLUDED THAT THAT THE ASSESSEE IS INCURRING HUGE INTEREST EXPENSES AND AT THE SAME TIME THEY HAVE ADVANCED THE SUM OF RS.50,26,663/- TO THE AFORESAID SIX PART IES ON WHICH NO INTEREST HAS BEEN RECEIVED. SINCE THE ASSESSEE FAILED TO PROVE THAT I NTEREST-BEARING FUNDS WERE NOT DIVERTED FOR ADVANCEMENT OF THE ABOVE SAID SUMS OF RS.50,26,663/-. SO, THE PROPORTIONATE DISALLOWANCE OF INTEREST UNDER SECTIO N 36(1)(III) NEEDS TO BE MADE. IN THE ASSESSMENT ORDER, THE ASSESSING OFFICER ALSO STATED THAT SIMILAR DISALLOWANCE WAS MADE IN THE ASSESSMENT YEAR 1999-2000. FOR THE ASSE SSMENT YEAR UNDER APPEAL, HE WORKED OUT THE DISALLOWANCE AT RS.6,03,200/- AND DI SALLOWED THE SAME. 3. ON APPEAL, IN THE IMPUGNED ORDER, THE LD. LEARNE D COMMISSIONER OF INCOME TAX(APPEALS) CONFIRMED THE DISALLOWANCE OF RS.6,03, 200/- OUT OF INTEREST PAID, MAINLY ON THE GROUND THAT THE ASSESSEE FAILED TO BRING ON RECORD NECESSARY EVIDENCE TO ESTABLISH THAT ADVANCES MADE TO THESE PARTIES WERE NOT OUT OF INTEREST BEARING FUNDS. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE THE TRI BUNAL ON THE FOLLOWING GROUNDS: 1. THE LEARNED C.I. T. (APPEALS) HAS ERRED IN CONFIRMI NG THE DISALLOWANCE OF RS.6,03,200/- OUT OF THE INTEREST EXPENSES ON THE GROUND THAT THE ASSESSEE HAS MADE ADVANCES AND LOANS TO SIX DIFFERENT PARTIES W ITHOUT CHARGING INTEREST. IT IS SUBMITTED THAT ADVANCES PAID TO THESE PARTIES HAVE BEEN GIVEN OUT OF INTEREST- FREE FUNDS AVAILABLE WITH THE APPELLANT. THE ASSES SING OFFICER AND C.I.T. (APPEALS) HAVE FAILED TO PROVE THE NEXUS BETWEEN M ONEY BORROWED ON INTEREST AND IN TURN GIVEN INTEREST-FREE. IN VIEW OF THIS, THE DISALLOWANCE AND ADDITION OF RS.6,03,200/- BE DELETED. 2. WITHOUT PREJUDICE TO THE ABOVE IT IS SUBMITTED THAT THE LEARNED C.I.T.(APPEALS) HAS ERRED IN CONFIRMING THE DISALL OWANCE U/S. 36(1)(III) BEING NOTIONAL INTEREST DISALLOWED ON THE GROUND THAT TH E ASSESSEE HAS ADVANCED RS. 56.26 LAKHS INTEREST-FREE AND THEREFORE, 12% INTER EST THEREON NEED TO BE ADDED TO THE TOTAL INCOME. IT IS SUBMITTED THAT ON THE F ACTS AND CIRCUMSTANCES OF THE ITA NO.136/AHD/2009 3 CASE, DISALLOWANCE AND CONSEQUENTIAL ADDITION U/S. 36(1)(III) IS UNJUSTIFIED IN LAW AND THE SAME BE DELETED.' 3. AT THE TIME OF HEARING BEFORE US, ON BEHALF OF T HE ASSESSEE, SHRI SUNIL TALATI APPEARED AND POINTED OUT THAT THE LD. LEARNED COMMI SSIONER OF INCOME TAX(APPEALS) HAS FAILED TO APPRECIATE THE SUBMISSIONS OF THE ASS ESSEE THAT ADVANCES MADE TO THESE SIX PARTIES WERE OUT OF HUGE INTEREST-FREE FUNDS AVAILABLE WITH THE ASSESSEE. THE TRANSACTIONS WITH THE AFORESAID PARTIES WERE BOTH O N BUSINESS ACCOUNT AS WELL AS ADVANCES WERE GIVEN OUT OF INTEREST FREE FUNDS AVAI LABLE WITH THE ASSESSEE. THEREFORE, NO DISALLOWANCE UNDER SECTION 36(1)(III) WAS CALLED FOR. 3.1 ELABORATING HIS ARGUMENT, THE COUNSEL OF THE AS SESSEE SUBMITTED THAT THE STATEMENT SHOWING THE DETAILS OF ADVANCES ALONG WIT H COPY OF LEDGER ACCOUNT OF THE SIX PARTIES WAS FURNISHED BEFORE THE ASSESSING OFFICER. FROM THE SAME, IT IS CLEAR THAT AS FAR AS THE ACCOUNT OF MADHU INTERNATIONAL LTD. IS C ONCERNED, THERE WAS HUGE CREDIT BALANCE, AS CAN BE SEEN FROM PAGE 2 TO 4 OF THE PAP ER BOOK AND CLOSING CREDIT BALANCE AS ON 31.3.1999 WAS RS.47,65,379/-. THE ABOVE CREDI T BALANCE CONTINUED EVEN DURING THE ACCOUNTING YEAR 1999-2000 RELEVANT TO ASST. YEA R 2000-01 AND NO INTEREST HAS BEEN PAID BY THE ASSESSEE ON THE AFORESAID CREDIT B ALANCE. SIMULTANEOUSLY, THERE WAS NO INTEREST DEBITED ON THE DEBIT BALANCE OF THE SAI D PARTY (TTD ACCOUNT) WHICH SHOWED DEBIT BALANCE OF RS.38,50,343/- AS ON 31-3-2 000. AS REGARDS DEBIT BALANCE OF RS.8,40,399/- IN THE ACCOUNT OF CTM TEXTILE MILLS I S CONCERNED, AS CAN BE SEEN FROM PAGE-11 OF THE PAPER BOOK, THAT THE ABOVE DEBIT WAS ON ACCOUNT OF BUSINESS TRANSACTION BEING GREY CLOTH BILL AND GREY COTTON B ILL SOLD TO THE SAID PARTY AND THE TOTAL AMOUNT OF RS. 8,40,399/- WAS COMPRISING OF ABOVE TW O BUSINESS TRANSACTIONS ONLY. UNDER THE ABOVE CIRCUMSTANCES, DISALLOWANCE OF RS.6 ,03,200/- BY CALCULATING THE RATE OF INTEREST AT 12% ON THE AGGREGATE OF THE OUTSTAND ING BALANCE AS ON 31-3-2000 IS NEITHER JUSTIFIED ON FACTS NOR ON LEGAL PRINCIPLES. 3.2 THE LD. COUNSEL FOR THE ASSESSEE FURTHER SUBMIT TED THAT WITH REGARD TO THE DEBIT BALANCE OF MADHU INTERNATIONAL LTD. (TTD) IT WAS AN OPENING BALANCE BROUGHT FORWARD ITA NO.136/AHD/2009 4 FROM EARLIER YEAR IN THE ACCOUNT AT PAGE-6 OF THE P APER BOOK AND NO AMOUNT WAS DEBITED IN RESPECT OF ANY FRESH ADVANCES BUT SOME R ECOVERIES WERE CREDITED IN THE SAID ACCOUNT. SINCE NO DISALLOWANCE WAS MADE IN THE EARL IER YEAR WHEN THE ADVANCES WERE GIVEN (COPY OF ASSESSMENT ORDER FOR A.Y. 1999-2000 IS ENCLOSED AT PAPER BOOK PAGES 12 TO 23), THERE CANNOT BE ANY DISALLOWANCE MADE SU DDENLY FOR THE YEAR UNDER APPEAL AS HELD BY THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SRIDEVI ENTERPRISE 192 ITR 165 (KAR.), COPY OF WHICH IS ENCLOSED AT PAGE 24 AND 25. 3.3 WITHOUT PREJUDICE TO THE ABOVE, AS CAN BE SEEN FROM THE POSITION OF THE FUNDS AVAILABLE WITH THE ASSESSEE, THE ASSESSEE HAD HUGE AMOUNT OF ITS OWN INTEREST-FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES FOR ALL THE YEARS, I.E. 31 ST MARCH, 1999, 31 ST MARCH, 2000 AND 31 ST MARCH, 2001 THE SUMMARIZED POSITION S GIVEN ON PAP ER BOOK AT PAGE 26. AS CAN BE SEEN FROM PAGE 27 OF THE PAPER BOOK IN THE BALANCE SHEET AS ON 31-3-2000, THE ASSESSEE HAD SHARE CAPITAL AND RESERVES AMOUNTING TO RS. 5,87,67,487/-, WHICH WAS AVAILABLE FOR GIVING INTER EST-FREE ADVANCES. OWN FUNDS HAD INCREASED TO RS.5,87,67,487/- DURING THE FINANCIAL YEAR 1999-2000 FROM RS.4,48,53,529/- AS ON 31-3-1999. NOT ONLY THIS, BU T THE LIABILITY OF LOAN FUNDS HAD DECREASED CONSIDERABLY FROM RS. 6,05,22,627/-AS AT 31-3-1999 TO RS.4,42,50,957/- AS AT 31-3-2000. AT THE SAME TIME THE DEBIT BALANCE OF LOANS AND ADVANCES ON THE ASSET'S SIDE HAD DECREASED FROM RS.87,30,203/- AS AT 31-3-1 999 TO RS. 66,99,589/- AS ON 31-3- 2000. ALSO THERE WAS HUGE CURRENT LIABILITIES IN TH E FORM OF UNPAID CREATOR'S FUNDS WAS AVAILABLE. 3.4 UNDER THE ABOVE CIRCUMSTANCES, THE DISALLOWANCE OF 12% ON THE OUTSTANDING BALANCE OF ADVANCES CANNOT BE UPHELD. IN THIS REGAR D THE COUNSEL OF THE ASSESSEE RELIED UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS . RELIANCE UTILITIES & POWER LTD. REPORTED IN 221 CTR 435 (BOM), A COPY OF WHICH IS PLACED AT PAPER BOOK PAGE 38 TO 43. IN THE SAID CASE, THE HON 'BLE BOMBAY HIGH COURT, CONSIDERING THE DECISION OF SUPREME COURT, HAS HELD THAT IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE AND AT THE SAME TIME THE A SSESSEE HAS RAISED A LOAN WHICH CAN ITA NO.136/AHD/2009 5 BE PRESUMED THAT INVESTMENTS WERE FROM INTEREST-FRE E FUNDS AVAILABLE. IN THE CASE OF THE ASSESSEE, THIS PRESUMPTION IS ESTABLISHED FROM THE ABOVE FIGURES OF HUGE FUNDS, WHICH WAS INTEREST-FREE AVAILABLE WITH THE ASSESSEE . 3.5 IT IS ALSO SUBMITTED BY THE LD. COUNSEL OF THE ASSESSEE THAT AS CAN BE SEEN FROM PAGE 28 OF THE PAPER BOOK, THE ASSESSEE HAD EARNED HUGE PROFIT OF RS.1,39,30,537/- FOR THE CURRENT YEAR, WHICH WAS AVAILABLE FOR GIVING OF ANY FRESH ADVANCES, WHICH, IN THE CASE OF THE ASSESSEE, WAS VERY MEAGER, AS PER THE C HART PLACED AT PAPER BOOK PAGE-1. AS HELD BY THE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT REPORTED IN 298 ITR 298 (S.C.), THE PROFIT OF THE CURRENT YEAR WAS SUFFICIENT TO COVER THE LOAN GIVEN WITHOUT INTEREST, IT MAY NOT BE OUT OF PLACE TO MENTION THAT FOR A.Y. 2001-02 ALSO DISALLOWANCE OF INTEREST ON ADVANCES T O ONE PARTY NAMELY, CTM TEXTILES, WAS DELETED BY THE C I.T.(A) AND DELETION WAS CONFI RMED BY THE HON'BLE I.T.A.T. IN ITA NO.1494/A/05 AS PER PARA-8 OF THE SAID TRIBUNAL ORDER, WHICH IS AT PAGE 52 OF THE PAPER BOOK . 4. ON THE OTHER HAND, SHRI S.P.TALATI, APPEARING ON BEHALF OF THE REVENUE, VEHEMENTLY SUPPORTED THE ORDER OF THE LD. LEARNED C OMMISSIONER OF INCOME TAX(APPEALS). THE LD. D.R. POINTED OUT THAT ONUS WA S ON THE ASSESSEE TO PROVE THAT NO INTEREST-BEARING FUNDS WERE DIVERTED IN GIVING THE ADVANCES TO THE AFORESAID THREE PARTIES. SINCE THE ASSESSEE COULD NOT PROVE THE SAM E, DISALLOWANCE WAS RIGHTLY MADE. APART FROM THIS, THE LD. D.R. POINTED OUT THAT IN T HE IMMEDIATELY PRECEDING ASSESSMENT YEAR 1999-2000, SIMILAR DISALLOWANCE WAS MADE AND T HE SAME HAS BEEN CONFIRMED BY THE LD. LEARNED COMMISSIONER OF INCOME TAX(APPEALS) . 5. IN REPLY, THE LD. COUNSEL OF THE ASSESSEE PRODUC ED THE COPY OF THE ASSESSMENT ORDER FOR THE ASSESSMENT YEAR 1999-2000. HE POINTED OUT THAT IN THAT ASSESSMENT YEAR, INTEREST EXPENSES OF RS.39,600/- WAS MADE IN RESPEC T OF THREE PARTIES VIZ. (I) SHRI DALPATBHAI SHRIMALI OF RS.2 LACS, (II) HI FI MARKET ING OF RS.80,000/- AND (III) POONAM IMPEX OF RS.50,000/-. THE COUNSEL OF THE ASSESSEE F AIRLY ADMITTED THAT THE SAID ITA NO.136/AHD/2009 6 DISALLOWANCE IS CONFIRMED BY THE LD. LEARNED COMMIS SIONER OF INCOME TAX(APPEALS) BUT NO FURTHER APPEAL WAS FILED BEFORE THE TRIBUNAL BECAUSE THE TAX EFFECT WAS LESS THAN RS.10,000/-. THUS, IT WAS NOT ECONOMICAL TO FILE AN APPEAL AGAINST THE SAID ORDER OF THE LD. LEARNED COMMISSIONER OF INCOME TAX(APPEALS). HE FURTHER POINTED OUT THAT IN THAT ASSESSMENT YEAR, THE DISALLOWANCE WAS IN RESPECT OF THREE PARTIES AND NONE OF THEM ARE INCLUDED IN THE ASSESSMENT YEAR UNDER APPEAL. HE FU RTHER POINTED OUT THAT SHARE CAPITAL AND RESERVE AND SURPLUS ALONE ARE MORE THAN RS.58,7 6,487/- AND CURRENT INCOME AND GROSS TOTAL INCOME OF THE ASSESSEE IN THE ASSESSMEN T YEAR UNDER APPEAL IS RS.1,33,34,094/-. THESE FIGURES ALONE CLEARLY INDIC ATE THAT THE ASSESSEE COMPANY WAS HAVING SUFFICIENT FUNDS. NO DISALLOWANCE OF INTERES T IN RESPECT OF THE AFORESAID SIX PARTIES WAS MADE IN THE ASSESSMENT YEAR 1999-2000 A ND IMMEDIATELY SUCCEEDING ASSESSMENT YEAR I.E. ASSESSMENT YEAR 2001-02. THE R ELIANCE WAS ALSO PLACED ON THE DECISION OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF CIT-VS- SRIDEV ENTERPRISES REPORTED IN 192 ITR 165 FOR THE PROPOSI TION THAT WHEN IN THE PAST YEARS, THE ASSESSEES CLAIM FOR DEDUCTION OF INTEREST PAID ALLOWED ON THE ASSUMPTION THAT THOSE ADVANCES WERE NOT OUT OF BORROWED FUNDS, THE DISALLOWANCE CANNOT BE MADE IN THE ASSESSMENT OF SUBSEQUENT ASSESSMENT YEAR. 6. HAVING HEARD BOTH THE SIDES, WE HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS PERTINENT TO NOTE THAT STA TEMENT SHOWING DETAILS OF ADVANCES ALONG WITH THE COPY OF LEDGER ACCOUNT OF SIX PARTIE S WERE DULY FURNISHED BEFORE THE ASSESSING OFFICER. WHEN COMPLETE DETAILS WERE FURNI SHED, ONUS WAS ON THE ASSESSING OFFICER TO PROVE THAT SUFFICIENT INTEREST-FREE FUND S WERE NOT AVAILABLE, WHILE ASSESSEE COMPANY ADVANCED THE LOANS OF RS.50,26,663/- TO THE AFORESAID SIX PARTIES. WE ALSO FIND CONSIDERABLE FORCE IN THE SUBMISSIONS OF THE L D. COUNSEL OF THE ASSESSEE THAT DEBIT BALANCE OF MADHU INTERNATIONAL LTD. (TTD), IT WAS A N OPENING BALANCE BROUGHT FORWARD FROM EARLIER YEAR IN THE ACCOUNT AT PAGE 6 OF THE PAPER BOOK AND NO AMOUNT WAS DEBITED IN RESPECT OF ANY FRESH ADVANCES BUT RE COVERY WAS CREDITED IN THE SAID ACCOUNT. IN THIS CASE, THE JUDGEMENT OF THE HON'BLE KARNATAKA HIGH COURT IN THE CASE OF SRIDEV ENTERPRISE ( SUPRA ) IS SQUARELY APPLICABLE AND NO DISALLOWANCE IN RES PECT OF ITA NO.136/AHD/2009 7 THESE INTEREST-FREE ADVANCES CAN BE MADE. WITHOUT P REJUDICE TO THIS, WE ARE CONVINCED THAT HUGE AMOUNT OF ITS OWN INTEREST FREE FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES WERE AVAILABLE AS ON 31.3.1999, 31.3.2000 AND 31.3.2001. SINCE HUGE INTEREST FREE FUNDS ARE AVAILABLE, THE JUDGMENT OF HON'BLE B OMBAY HIGH COURT IN THE CASE OF CIT-VS- RELIANCE UTILITIES & POWER LTD. ( SUPRA ) IS ALSO APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. 6.1 FOR THE AFORESAID REASONS, WE ARE OF THE VIEW T HAT THE ASSESSING OFFICER WAS NOT JUSTIFIED IN DISALLOWING RS.6,03,260/- OUT OF INTER EST ON ASSUMPTION AND PRESUMPTIONS. THEREFORE, DISALLOWANCE IS HEREBY DELETED. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED IN THE COURT ON 13.05.2011 SD/- SD/- (A.N.PAHUJA) (T.K.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED : 13/05/2011 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT 3) CIT(A) CONCERNED 4) CIT CONCERNED 5) D.R., ITAT, AHMEDABAD TRUE COPY BY ORDER DEPUTY REGISTRAR, ITAT, AHMEDABAD TALUKDAR/SR.P.S.