M/s. Shree Jagdish Coconut Co., Ahmedabad V. The Income tax Officer,Ward-2(3), Ahmedabad

ITA 1459/AHD/2008

• Counselvise Citation: [2009] 115 COUNSELVISE.COM (IT) 0384 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-10-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 07-10-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 25-04-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUDHANSHU JHA
• Assessee Lawyers: G S PATEL
• Keywords: Set aside
• Section: 192

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI MAHAVIR SINGH, JUDICIAL MEMBER DATE OF HEARING: 7.10.09 DRAFTED ON: 7.10.2009 ITA NO.1459/AHD/2008 ASSESSMENT YEAR : 2005-2006 M/S. SHREE JAGDISH COCONUT CO. OLD MADHUPURA, AHMEDABAD. VS. THE INCOME TAX OFFICER, WARD-2(3), AHMEDABAD. PAN/GIR NO. : AABFJ 6566 F (APPELLANT) .. (RESPONDENT) APPELLANT BY : SHRI G.S.PATEL RESPONDENT BY: SHRI SUDHANSHU JHA SR. D.R. O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY ASSESSEE AGAINST THE OR DER OF THE LD.CIT(APPEALS)-VII, AHMEDABAD, DATED 20.12.2007. 2. IN THIS APPEAL, THE ASSESSEE HAS TAKEN THE SOLE GROUND OF APPEAL THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) ERRED I N CONFIRMING THE DISALLOWING OF INTEREST UNDER SECTION 36(1)(III) ON THE BALANCE AMOUNT OF RS.6.74 LACS OUT OF THE TOTAL DEBIT BALANCES OF PARTNERS OF RS.12.81 LACS. 3. THE BRIEF FACTS OF THE CASE ARE THAT FROM PERUSA L OF PROFIT AND LOSS ACCOUNT, THE LEARNED ASSESSING OFFICER OBSERVED THA T THE ASSESSEE HAS CLAIMED INTEREST EXPENDITURE OF RS.31,11,391/-. THE LEARNED ASSESSING OFFICER ALSO OBSERVED THAT PARTNERS OF THE FIRM ARE HAVING DEBIT BALANCES AT THE BEGINNING OF THE YEAR AS WELL AS AT THE END OF THE YEAR. HE NOTE D THAT THE AGGREGATE OPENING DEBIT BALANCE OF PARTNERS IS RS.11,04,612/- AND CLO SING DEBIT BALANCE OF PARTNERS ITA NO.1459/AHD/ 2008 M/S.SHREE JAGDISH COCONUT CO. ASST.YEAR -2005-2006 - 2 - IS RS.12,81,024/-. HE FURTHER NOTED THAT THERE ARE LOAN CREDITORS AS AT THE END OF THE YEAR AMOUNTING TO RS.31,54,545/- INCLUSIVE OF I NTEREST. IN REPLY TO THE SHOW CAUSE NOTICE THE ASSESSEE SUBMITTED THAT THE PARTNE RS HAVE WITHDRAWN THEIR CAPITAL FOR INVESTMENT IN RESIDENCE. THEREFORE, THE LEARNED ASSESSING OFFICER WAS OF THE VIEW THAT THE BORROWED FUNDS HAVE NOT BE EN FULLY UTILISED FOR BUSINESS PURPOSES BY THE ASSESSEE. THE LEARNED ASS ESSING OFFICER THEREFORE, OBSERVING THAT ASSESSEE WAS PAYING INTEREST TO THE LOAN CREDITORS AT THE RATE OF 15% COMPUTED THE INTEREST ON THE AVERAGE DEBIT BAL ANCE OF PARTNERS CAPITAL ACCOUNT AS AT THE BEGINNING AND CLOSING OF THE YEAR OF RS.11,92,818/- AND DISALLOWED INTEREST EXPENDITURE OF RS.1,78,920/-. 4. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS), THE ASSESSEE SUBMITTED THAT OPENING DEBIT BALANCE IN PA RTNERS CAPITAL ACCOUNT WAS RS.11,04,612/- AND CLOSING DEBIT BALANCE IN PARTNER S CAPITAL ACCOUNT WAS RS.12,81,024/-. THUS, THERE WAS INCREASE OF RS.1,76 ,412/- ONLY IN THE DEBIT BALANCE DURING THE YEAR. FURTHER, THE OPENING CREDI T BALANCE IN THE LOAN CREDITORS ACCOUNT WAS RS.26,62,089/- AND CLOSING CR EDIT BALANCE IN THE LOAN CREDITORS ACCOUNT WAS RS.31,54,545/-. THUS, THERE W AS INCREASE OF RS.4,92,456/-. THIS INCREASE WAS ON ACCOUNT OF CAR LOAN OF RS.1,96 ,545/- AND INTEREST OF RS.3,11,392/-. THIS SHOWS THAT NO NEW LOAN FOR GIVI NG LOAN TO PARTNERS WAS TAKEN DURING THE YEAR. FURTHER, NET INTEREST PAID ON LOAN DURING THE YEAR WAS RS.2,48,627/- AS AGAINST RS.2,51,953/- PAID IN THE PRECEDING YEAR. IT WAS FURTHER SUBMITTED THAT LEARNED ASSESSING OFFICER HAS NOT MA DE DISALLOWANCE OF INTEREST IN EARLIER YEARS ON THE DEBIT BALANCE IN THE PARTNE RS ACCOUNT. THERE IS NO NEW BORROWING DURING THE YEAR. THEREFORE, IT CANNOT BE ALLEGED THAT THE BORROWED FUNDS WERE UTILISED FOR NON BUSINESS PURPOSES. THE ASSESSEE RELIED ON THE DECISION OF HON'BLE KARNATAKA HIGH COURT IN THE CAS E OF COMMISSIONER OF INCOME TAX VS. SRIDEV ENTERPRISES (1991) 192 ITR 16 5 (KAR), WHEREIN IT WAS HELD AS UNDER: ITA NO.1459/AHD/ 2008 M/S.SHREE JAGDISH COCONUT CO. ASST.YEAR -2005-2006 - 3 - WE ARE IN AGREEMENT WITH THE VIEW EXPRESSED BY TH E APPELLATE TRIBUNAL. THE STATUS OF THE AMOUNT OUTSTANDING FROM NALANDA ON TH E FIRST DAY OF THE ACCOUNTING YEAR IS THE AMOUNT THAT STOOD OUTSTANDIN G ON THE LAST DAY OF THE PREVIOUS ACCOUNTING YEAR AND, THEREFORE, ITS NATURE AND STATUS CANNOT BE DIFFERENT ON THE FIRST DAY OF THE CURRENT ACCOUNTIN G YEAR FROM ITS NATURE AND STATUS AS ON THE LAST DAY OF THE PREVIOUS ACCOUNTIN G YEAR. REGARDING THE PAST YEARS, THE ASSESSEE'S CLAIMS FOR DEDUCTION WERE ALL OWED IN RESPECT OF THE SUMS ADVANCED DURING THOSE YEARS ; THIS COULD BE ONLY ON THE ASSUMPTION THAT THOSE ADVANCES WERE NOT OUT OF BORROWED FUNDS OF THE ASSE SSEE. THIS FINDING DURING THE PREVIOUS YEARS IS THE VERY BASIS OF THE DEDUCTI ONS PERMITTED DURING THE PAST YEARS, WHETHER A SPECIFIC FINDING WAS RECORDED OR N OT. A DEPARTURE FROM THAT FINDING IN RESPECT OF THE SAID AMOUNTS ADVANCED DUR ING THE PREVIOUS YEAR WOULD RESULT IN A CONTRADICTORY FINDING ; IT WILL NOT BE EQUITABLE TO PERMIT THE REVENUE TO TAKE A DIFFERENT STAND NOW IN RESPECT OF THE AMO UNTS WHICH WERE THE SUBJECT- MATTER OF PREVIOUS YEARS' ASSESSMENTS ; CONSISTENCY AND DEFINITENESS OF APPROACH BY THE REVENUE IS NECESSARY IN THE MATTER OF RECOGNISING THE NATURE OF AN ACCOUNT MAINTAINED BY THE ASSESSEE SO THAT THE B ASIS OF A CONCLUDED ASSESSMENT WOULD NOT BE IGNORED WITHOUT ACTUALLY RE OPENING THE ASSESSMENT. THE PRINCIPLE IS SIMILAR TO THE CASES WHERE IT HAS BEEN HELD THAT A DEBT WHICH HAD BEEN TREATED BY THE REVENUE AS A GOOD DEBT IN A PARTICULAR YEAR CANNOT SUBSEQUENTLY BE HELD BY IT TO HAVE BECOME BAD PRIOR TO THAT YEAR. 5. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE HELD AS UNDER: I HAVE CONSIDERED THE ISSUE. IT IS TO BE POINTED OUT THAT IN EARLIER YEARS NO INTEREST WAS DISALLOWED ON DEBIT BALANCES OF THE PA RTNERS. IF YEAR WISE DETAILS ARE SEEN, IT IS NOTICED THAT CAPITAL ACCOUNT OF PAR TNER SHOWED DEBIT BALANCE RIGHT FROM A.Y.1988-89. UPTO 31.03.2001, DEBIT BALANCE OF THE PARTNER WAS RS.6.91 LAKHS AS AGAINST THAT ASSESSEE HAD INTEREST FREE LO ANS OF RS.7.89 LAKHS. THEREAFTER, THE DEBIT BALANCE OF PARTNERS HAVE INCR EASED ON ACCOUNT OF WITHDRAWALS MADE BY THEM FOR THEIR PERSONAL PURPOSE . HOWEVER, THE ALLEGED INTEREST FREE LOANS HAVE COME DOWN TO 6.07 LAKHS. T HIS GOES TO SHOW THAT AFTER 31.03.2001, FUNDS OF BUSINESS WERE BEING USED TO PR OVIDE FUNDS TO THE PARTNERS AND ALMOST 6.74 LAKHS WORTH OF BUSINESS FUNDS WERE USED TO PROVIDE INTEREST FREE ADVANCES TO THE PARTNERS FOR THEIR PERSONAL PU RPOSES. THUS, THE DECISION OF MUMBAI HIGH COURT IN THE CASE OF CIT VS. BABY & CO. , 254 ITR 248 IS SQUARELY APPLICABLE . THE FUNDS OF BUSINESS HAVE BEEN USED B Y THE PARTNER AND THE BANK ACCOUNT HAD A DEBIT BALANCE FROM WHERE FUNDS WERE W ITHDRAWN. THEREFORE, THERE IS ALSO AN NEXUS BETWEEN THE BANK BORROWINGS AND THE DEBIT BALANCES OF PARTNER. INTEREST IS THEREFORE, DISALLOWABLE. HOWE VER, AS DISCUSSED EARLIER RS.6.07 LAKHS WORTH OF FUNDS WERE AVAILABLE WITH TH E ASSESSEE FREE OF INTEREST FOR LAST SO MANY YEARS. THEREFORE, THE AO WILL WOR K OUT THE DISALLOWANCE ON THE BALANCE AMOUNT OF DEBIT BALANCE OF PARTNER WHICH WO ULD BE 6.74 LAKHS AND RESTRICT THE DISALLOWANCE ON THAT BASIS. THE AO WIL L WORK OUT THE DISALLOWANCE ACCORDINGLY. ITA NO.1459/AHD/ 2008 M/S.SHREE JAGDISH COCONUT CO. ASST.YEAR -2005-2006 - 4 - 6. THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASS ESSEE REITERATED THE SUBMISSION MADE BEFORE THE LOWER AUTHORITIES AND TH E LEARNED DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDER OF THE LEARNED C OMMISSIONER OF INCOME TAX(APPEALS). 7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND THE MATERIALS AVAILABLE ON RE CORD. IN THE INSTANT CASE, THE LEARNED ASSESSING OFFICER FOUND FROM THE BALANCE SH EET FILED BY THE ASSESSEE THAT THE OPENING DEBIT BALANCE IN THE PARTNERS CAPI TAL ACCOUNT WAS RS.11,06,412/- AND THE CLOSING DEBIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT WAS RS.12,81,024/-. HE ALSO NOTED THAT THE ASSESSEE HAS SHOWN LOAN CREDITORS AT RS.31,54,545/- AS AT THE END OF THE YEAR. FROM THI S, THE LEARNED ASSESSING OFFICER INFERRED THAT THE ASSESSEE HAS NOT UTILISED THE BORROWED FUND FOR ITS BUSINESS PURPOSES. HE DISALLOWED INTEREST EXPENDITU RE OF RS.1,78,920/- ON THE AVERAGE DEBIT BALANCE IN THE PARTNERS CAPITAL ACCOU NTS AS AT THE OPENING AND CLOSING OF THE YEAR BY APPLYING INTEREST RATE OF 15 % WHICH WAS THE RATE OF INTEREST PAID BY THE ASSESSEE TO THE LOAN CREDITORS . THE CONTENTION OF THE ASSESSEE WAS THAT IN THE IMMEDIATELY PRECEDING YEAR , THERE WAS NO DISALLOWANCE OF INTEREST EXPENDITURE MADE BY THE LEARNED ASSESSI NG OFFICER ON ACCOUNT OF DEBIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT OF RS .11,04,612/-, WHICH IS THE OPENING BALANCE OF THE CURRENT YEAR. THUS, IT WAS A CCEPTED BY THE LEARNED ASSESSING OFFICER THAT BORROWED FUNDS WERE NOT UTIL ISED BY THE ASSESSEE FOR GIVING ADVANCE TO THE PARTNERS. THEREFORE, NO DISAL LOWANCE OF INTEREST COULD BE MADE ON THE OPENING DEBIT BALANCE OF RS.11,04,612/- IN PARTNERS CAPITAL ACCOUNT. FOR THE BALANCE AMOUNT OF DEBIT BALANCE O F RS.1,76,412/-, THE ASSESSEE SUBMITTED THAT BORROWED FUNDS WERE NOT UTI LISED FOR GIVING THIS AMOUNT AS ADVANCE TO THE PARTNERS. IT WAS SUBMITTED THAT INCREASE IN THE BORROWED FUNDS DURING THE YEAR WAS RS.4,92,456/- WH ICH WAS ON ACCOUNT OF CAR LOAN RS.1,96,545/- AND INTEREST ON LOAN RS.3,11,392 /-. THUS, THIS SHOWS THAT ITA NO.1459/AHD/ 2008 M/S.SHREE JAGDISH COCONUT CO. ASST.YEAR -2005-2006 - 5 - THERE WAS NO UTILIZATION OF BORROWED FUNDS IN GIVIN G ADVANCE TO THE PARTNERS DURING THE YEAR ALSO. HENCE, NO DISALLOWANCE OF INT EREST EXPENDITURE SHOULD BE MADE IN THE COMPUTATION OF INCOME OF THE ASSESSEE. WE FIND THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) HAS CONFIRMED T HE DISALLOWANCE OF INTEREST ON THE PARTNERS DEBIT BALANCE OF RS.6,74,0 00/- ON THE GROUND THAT THE ASSESSEE HAS SHOWN DEBIT BALANCE SINCE 1988-89 TO 3 1.03.2001 IN PARTNERS CAPITAL ACCOUNT OF RS.6.91 LACS AGAINST WHICH ASSES SEE HAD INTEREST FREE FUNDS OF RS.7.89 LACS. THEREAFTER THE DEBIT BALANCE IN PART NERS CAPITAL ACCOUNT HAS INCREASED WITHOUT THERE BEING CORRESPONDING INCREAS E IN THE NON INTEREST BEARING FUNDS. IN OUR CONSIDERED OPINION, THE LEARN ED COMMISSIONER OF INCOME TAX(APPEALS) WAS NOT JUSTIFIED IN DISALLOWING INTER EST EXPENDITURE ON THE DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNT OF RS.6.74 LAC S, AS THE REVENUE HAS BROUGHT NO MATERIAL ON RECORD TO CONTROVERT THE SUBMISSIONS MADE BY THE ASSESSEE THAT NO DISALLOWANCE OF INTEREST WAS MADE IN THE IMMEDIA TELY PRECEDING YEAR ON THE DEBIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT OF RS .11,04,612/-, WHICH IS THE OPENING BALANCE OF THE CURRENT YEAR AND THAT THE IN CREASE IN THE LOAN AMOUNT DURING THE YEAR OF RS.4,92,456/-WAS ON ACCOUNT OF C AR LOAN RS.1,96,554/- AND INTEREST RS.3,11,392/-. IN THE CIRCUMSTANCES, WE A RE OF THE CONSIDERED OPINION THAT THE ASSESSEE HAS NOT UTILISED ANY BORROWED FUN DS FOR GIVING ADVANCE TO THE PARTNERS DURING THE YEAR UNDER CONSIDERATION. FURTH ER, IN THE IMMEDIATELY PRECEDING YEAR THE LEARNED ASSESSING OFFICER HAS MA DE NO DISALLOWANCE OF INTEREST ON ACCOUNT OF UTILIZATION OF BORROWED FUND S FOR GIVING ADVANCES TO THE PARTNERS, WHICH SHOWS THAT THE SAME WAS NOT ADVANCE D OUT OF BORROWED FUNDS. THEREFORE, THE LEARNED COMMISSIONER OF INCOME TAX(A PPEALS) WAS NOT JUSTIFIED IN DISALLOWING INTEREST EXPENDITURE ON THE AMOUNT O F RS.6.74 LACS ON ACCOUNT OF DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNT. WE THER EFORE, SET ASIDE THE ORDER OF THE LOWER AUTHORITIES AND DIRECT THE LEARNED ASSESS ING OFFICER TO DELETE THE DISALLOWANCE OF INTEREST MADE ON ACCOUNT OF DEBIT B ALANCE IN PARTNERS CAPITAL ACCOUNT. THUS, THE GROUND OF APPEAL OF THE ASSESSE E IS ALLOWED. ITA NO.1459/AHD/ 2008 M/S.SHREE JAGDISH COCONUT CO. ASST.YEAR -2005-2006 - 6 - 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED AT THE CLOSE OF HEARING IN THE PRE SENCE OF PARTIES IN THE COURT ON 7/10/2009. SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD; DATED 7/10/2009 PARAS# COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT(APPEALS)-VII, AHMEDABAD. 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD