Dy. C.I.T., Circle-4(1), Agra V. M/s Pee Cee Soap & Chemicals (P) Ltd., Agra

ITA 152/AGR/2013

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 0745 (ITAT-AGRA)
• Duration Of Justice: 6 year(s) 8 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-05-2019
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 19-06-2013
• Assessment Year: 2009-2010
• Appeal Filed On: 08-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Proportionate interest; Retrospective amendment; TDS; Rule 8D; Set aside
• Section: 14A; 40(a)(ia)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO.124/AGRA/2013 ASSESSMENT YEAR: 2009-10 M/S PEE CEE SOAP & CHEMICALS (P) LTD. VS. JOINT CO MMISSIONER OF INCOME G-10/8, PADAMDEEP TOWER, TAX, RANGE-4, AGRA. SANJAY PLACE, AGRA. (PAN : AAACP 7281 M). ITA NO.152/AGRA/2013 ASSESSMENT YEAR: 2009-10 JOINT COMMISSIONER OF INCOME VS. M/S PEE CEE SOAP & CHEMICALS (P) TAX, RANGE-4, AGRA. LIMITED, G-10/8, PADAMDEEP TOWER, SANJAY PLACE, AGRA. (PAN : AAACP 7281 M). (APPELLANTS) (RESPONDENTS) ASSESSEE BY : SHRI PANKAJ GARGH, ADVOCATE REVENUE BY : SHRI WASEEM ARSHAD, SR. D.R. DATE OF HEARING : 19.06.2013 DATE OF PRONOUNCEMENT : 28.06.2013 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AND R EVENUE AGAINST THE ORDER DATED 28.02.2013 PASSED BY THE LD. CIT(A)-II, AGRA FOR THE ASSESSMENT YEAR 2009- 10. 2 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 2. THE GROUNDS RAISED IN BOTH THE APPEALS ARE AS UN DER :- GROUNDS IN ITA NO.124/AGRA/2013 BY THE ASSESSEE 1. BECAUSE THE LD. CIT(A) HAS WRONGLY, ILLEGALLY A ND ARBITRARILY CONFIRMED THE ADDITION OF RS.21,33,377/- MADE BY TH E ASSESSING OFFICER BY APPLYING THE PROVISION OF SECTION 40(A)( IA) OF THE ACT. THE LD. CIT(A) HAS ERRED IN REJECTING THE APPELLANTS S UBMISSION AND IN IGNORING THE FACTS OF THE CASE AND THE LEGAL POSITI ON. 2. BECAUSE THE LD. ASSESSING OFFICER AS WELL AS LD. CIT(A) HAS ERRED BOTH IN LAW AND ON FACTS IN HOLDING AND INCLU DING THE REIMBURSEMENT OF EXPENSES TO CONSIGNEE AGENT AS COM MISSION PAYMENT AND THEREBY MAKING THE ASSESSEE LIABLE FOR DEDUCTION OF TAX AT SOURCE. UNDER THE FACTS AND CIRCUMSTANCES OF TH E CASE THE ASSESSEE IS NOT LIABLE TO DEDUCT TAX AT SOURCE AS THE EXPENS ES REIMBURSED TO THE CONSIGNEE AGENT ARE THE EXPENSES INCURRED BY THEM O N BEHALF OF THE ASSESSEE COMPANY ON SALES MADE BY THEM AS CONSIGNEE AGENT ON BEHALF OF ASSESSEE COMPANY. HENCE THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ASSESSING OFFICERS OBSERVATION IN I NVOKING THE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 3. BECAUSE THE LD. ASSESSING OFFICER AS WELL AS LD. CIT(A) HAS ERRED IN IGNORING THE LEGAL POSITION THAT THE EXPEN SES INCURRED BY THE CONSIGNEE AGENTS ON BEHALF OF ASSESSEE COMPANY ARE MET OUT BY THE CONSIGNEE AGENT OUT OF SALE PROCEED WITH THEM AND T HE EXPENSES INCURRED ARE ALWAYS MORE THAN THE EXPENSES REIMBURS ED TO THEM BY THE ASSESSEE COMPANY, THERE IS NO ELEMENT OF INCOME IN THE HANDS OF CONSIGNEE AGENTS AND HENCE ON THIS GROUND ALSO TAX AT SOURCE IS NOT REQUIRED TO BE DEDUCTED. 4. BECAUSE THE ADDITION IS ALSO WRONG AND ILLEGAL C ONSIDERING THE AMENDMENT MADE IN SECTION 40(A)(IA) OF THE ACT BY T HE FINANCE ACT, 2011. THE AMENDMENT IN SECTION 40(A)(IA) OF THE AC T IS REMEDIAL AND CLARIFICATORY IN NATURE HAS BE TREADED AS AMENDED W ITH RETROSPECTIVE EFFECT. 3 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 5. BECAUSE WITHOUT PREJUDICE TO THE GROUNDS TAKEN A S MENTIONED ABOVE, THE LD. CIT(A) WHILE CONFIRMING THE ADDITION OF RS.21,33,377/- HAS ERRED IN IGNORING THE LEGAL POSITION THAT SECTI ON 40(A)(IA) OF THE ACT IS APPLICABLE ONLY IN THE CASE WHERE THE AMOUNT IS PAYABLE ON THE LAST DAY OF PREVIOUS YEAR. SINCE ALL THE PAYMENTS AS REIMBURSEMENT OF EXPENSES HAS BEEN MADE TIME TO TIME DURING THE YEAR AND NO AMOUNT IS PAYABLE ON THE LAST DAY OF PREVIOUS YEAR, SECTIO N 40(A)(IA) OF THE ACT ON THIS LEGAL POSITION IS NOT APPLICABLE TO THE FAC TS OF THE ASSESSEES CASE. 6. BECAUSE CONSIDERING THE FACTS OF THE CASE AND TH E LEGAL POSITION THE ADDITION MADE, AS OBJECTED IN THE GROUNDS OF AP PEAL MENTIONED ABOVE, IS WRONG, BAD IN LAW, TOTALLY UNWARRANTED AN D DESERVES TO BE DELETED. GROUNDS IN ITA NO.152/AGRA/2013 - BY THE REVENAUE 1. THE LD. CIT(A) HAS ERRED IN LAW AND IN FACTS IN DELETING THE ADDITION OF RS.12,39,836/- MADE BY THE AO U/S 14A W ITHOUT APPRECIATING THE FACTS OF THE CASE THAT AFTER INVES TMENT IN FIXED ASSETS, STOCK IN TRADE AND TRADE DEBTORS, NO FUNDS OTHER TH AN INTEREST BEARING FUNDS ARE LEFT TO MAKE INVESTMENT FOR PROPHASE OF S HARES TO THE EXTENT OF RS.5,31 CRORES AND THE ASSESSEE HAD PAID INTERES T OF RS.44,43,291/- DURING THE YEAR. 2. THE ORDER OF THE LD. CIT(A) BEING ERRONEOUS IN L AW AND ON FACTS DESERVES TO BE QUASHED AND THAT THE ORE OF A. O. BE RESTORED. 3. FIRS WE TAKE UP ITA NO.124/AGRA/2013 FILED BY TH E ASSESSEE. THE ASSESSEE HAS RAISED AS MANY AS 7 GROUNDS OF APPEAL BUT THE E FFECTIVE GROUND IS ONLY ONE WHICH PERTAINS TO ADDITION OF RS.21,33,377/- BEING DISALLOWANCE MADE UNDER SECTION 40A(IA) OF THE INCOME TAX ACT, 1961 (THE A CT HEREINAFTER). 4 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF LAUNDRY, SOAP, WASHING POWER AND D ETERGENT CAKE. DURING THE ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE A SSESSEE HAS MADE PAYMENT TO THE CONSIGNMENT A AGENTS AT THE FIXED RATE OVER AND ABOVE THEIR COMMISSION. THE A.O. WAS OF THE VIEW THAT SUCH OVER AND ABOVE PAYME NT OF COMMISSION IS NOT IN NATURE OF REIMBURSEMENT OF EXPENDITURE BUT IT WAS P ART AND PARCEL OF COMMISSION. SINCE THIS AMOUNT WAS PART AND PARCEL OF THE COMMIS SION AND THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE, THEREFORE, SUCH EXPENSES ARE NOT ALLOWABLE. THE A.O. INVOKED SECTION 40A(IA) OF THE ACT AND MADE ADDITION OF RS. 21,33,377/-. THE CIT(A) CONFIRMED THE ACTION OF THE A.O. 5. THE LD. AUTHORISED REPRESENTATIVE OF THE ASSESSE E SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF I.T.A.T. IN ANOTHE R CASE OF M/S. PEE CEE COSMA SOPE LIMITED VS. JCIT IN ITA NOS.54/AGRA/2013 AND 5 5/AGRA/2013 VIDE ORDER DATED 30.04.2013. THE LD. AUTHORISED REPRESENTATIV E DREW OUR ATTENTION ON THE FINDING OF CIT(A) AND SUBMITTED THAT THE FINDING OF CIT(A) IN THE CASE UNDER CONSIDERATION AND IN THE CASE OF M/S. PEE CEE COSMA SOPE LIMITED VS. JCIT (SUPRA) ARE IDENTICAL. 6. THE LD. DEPARTMENTAL REPREHENSIVE RELIED ON THE ORDER OF A.O. 5 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 7. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. WE FIND THAT ON IDENTICAL SET OF FACTS THE ISSUE HA S ALREADY BEEN DECIDED BY I.T.A.T., AGRA BENCH IN ITA NOS.54/AGRA/2013 AND 55 /AGRA/2013 IN THE CASE OF M/S. PEE CEE COSMA SOPE LIMITED VS. JCIT (SUPRA). THE RELEVANT FINDING OF THE I.T.A.T. IS REPRODUCED AS UNDER :- (PARAGRAPH NOS.5 & 6) 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF T HE PARTIES AND RECORDS PERUSED. THE ISSUE UNDER CONSIDERATION WHETHER THE IMPUGNED EXPENDITURES ARE IN NATURE OF COMMISSION OR REIMBURSEMENT OF EXP ENDITURES. TO UNDERSTAND NATURE OF TRANSACTION FIRST OF ALL WE HAVE TO SEE D ICTIONARY MEANING OF COMMISSION. THE RELATED MEANING AS PER DIFFERENT DICTIONARIES ARE AS UNDER :- I) AS PER THE LAW LEXICON COMMISSION AGENT : ONE WHO SALES OR BUYS GOODS FOR ANOTHER AND RECEIVES BY WAY OF REMUNERATION A COMMISSION OR PER CENTAGE UPON THE AMOUNT INVOLVED IN EACH TRANSACTION. II) AS PER OXFORD DICTIONARY PAYMENT TO AN AGENT FOR SELLING GOODS OR SERVICES. III) BY FARLEX DICTIONARY A FEE PAID BASED ON A PERCENTAGE OF THE SALE MADE B Y AN EMPLOYEE OR AGENT, AS DISTINGUISHED FROM REGULAR PAYMENTS OF WA GES OR SALARY. IV) AS PER WEBSTERS DICTIONARY THE FEE GIVEN AN AGENT OR SALES PERSON FOR HIS OR H ER SERVICES. V) AS PER DICTIONARY OF CULTUIRAL LITERACY ECNOMICS A FEE PAID TO A BROKER OR OTHER FINANCIAL AGENTS FO R NEGOTIATING A SALE. THE FEE IS BASED ON PERCENTAGE OF SALE PRICE. 6 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 5.1 IN THE LIGHT OF ABOVE DICTIONARY MEANING, IF WE SEE THE FACTS OF THE CASE UNDER CONSIDERATION, WE NOTICE THAT THE ASSESSEE CL AIMED RS.28,14,174/- AS REVENUE EXPENSES ON CONSIGNMENT SALES IN PROFIT AND LOSS ACCOUNT. IT IS RELEVANT TO NOTE THAT THE ASSESSEE PAID COMMISSION ON SALE A ND WERE SEPARATELY ACCOUNTED FOR UNDER THE HEAD COMMISSION ON SALE O F RS.48,55,646/-IN PROFIT LOSS ACCOUNT. THE CONSIGNEE AGENTS MAKE THE SALE ON BEHALF OF THE ASSESSEE COMPANY TO THE DISTRIBUTOR/DEALER/RETAILER APPOINTE D BY THEM FOR WHICH THEY ARE PAID COMMISSION AT THE FIXED PERCENTAGE AS PER THE AGREEMENT EXECUTED BETWEEN THEM AND TDS IS DEDUCTED ON THE SAID COMMIS SION. NO DISPUTE ON THIS ISSUE. GOODS ARE SENT TO THE CONSIGNEE AGENTS FROM MALANPUR UNIT FOR WHICH THE PRIMARY FREIGHT IS PAID ON BEHALF OF THE ASSESS EE COMPANY. THIS FREIGHT PAID IS REIMBURSED BY THE ASSESSEE COMPANY BY WAY OF CRE DIT NOTE. NO DISPUTE OF THIS FACT ALSO. THE SALE OF U.P., RAJASTHAN AND GU JARAT ARE THROUGH CONSIGNEE AGENTS. AGREEMENTS ARE EXECUTED BETWEEN THE ASSESSE E COMPANY AND THE CONSIGNEE AGENTS. THE IMPORTANT CLAUSE FOR CONSIDER ATION IS THAT IN CONSIDERATION OF VARIOUS SERVICES RENDERED, THE SEC OND PARTY SHALL BE COMMISSION @ 1% (ONE) ON THE VALUE OF THE SALES MAD E BY THE SECOND PARTY DURING THE FINANCIAL YEAR. IN ADDITION THE FIRST PA RTY SHALL ALSO REIMBURSE TO THE SECOND PARTY THE EXPENSES INCURRED BY HIM (TO BE DE RIVED ON FIXED COST STRUCTURE BASIS). THAT ON THE RECEIPT OF GOODS BY THE CONSIGNEE AGENTS TILL THE SALES MADE BY THEM, THE CONSIGNEE AGENTS INCUR CERT AIN EXPENSES ON BEHALF OF THE ASSESSEE COMPANY WHICH ARE OTHERWISE TO BE INCU RRED BY THE ASSESSEE COMPANY IF THE ASSESSEE COMPANY MAKE DIRECT SALE AT THESE PLACES. THE NATURE OF EXPENSES INCURRED BY THE CONSIGNEE AGENTS AND RE IMBURSED BY THE ASSESSEE COMPANY AS PER THE AGREEMENT EXECUTED BETWEEN THEM ARE :- A) UNLOADING EXPENSES ON RECEIPT OF GOODS FROM THE ASSESSEE COMPANY. B) LOADING EXPENSES WHEN THE GOODS ARE SENT BY THE CONSIGNEE AGENTS FOR SALE TO DISTRIBUTOR/DEALER/RETAILER. C) CARTAGE PAID ON DISPATCH OF GOODS/SALE TO DISTRIBUTOR/DEALER/RETAILER. D) TRAVELING EXPENSES OF THE STAFF KEPT BY CONSIGNE E AGENTS OR SALARY OF THE SALES STAFF. THE CONSIGNEE AGENTS SENT THE MONTHLY DETAILS OF SALES ON SALE PATTI. ON THE SALE PATTI THE CONSIGNEE AGENT DEDUCTS THEIR COMMISSION ON SALES AND THE EXPENSES AT THE FIXED C OST RATE STRUCTURE AS PER AGREEMENT. THE ASSESSEE COMPANY BY WAY OF CREDI T NOTE AMOUNT FOR THEIR EXPENSES AS PR SALE PATTI, THOUGH THE EXPENSE S INCURRED BY THE, ARE MUCH MORE THAN THE EXPENSES ACCOUNTED FOR BY THE AS SESSEE COMPANY. COPIES OF THEIR LEDGER ACCOUNT OF EXPENSES INCURRED BY THEM ON BEHALF OF ASSESSEE COMPANY HAVE BEEN FILED AND ARE PUT ON RECORD. IT IS ALSO TO 7 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 NOTE THAT THAT THE EXPENSES INCURRED BY THE CONSIGN EE AGENTS ON BEHALF OF THE ASSESSEE COMPANY ARE FROM THE SALE AMOUNT COLLE CTED BY THEM AS THERE ALWAYS REMAIN OUTSTANDING BALANCE. CONSIDERIN G THE FACTS OF THE CASE FOLLOWING POINTS ARE NOT IN DISPUTE :- I) CONSIGNEE AGENTS ARE MAKING SALES ON BEHALF OF A SSESSEE COMPANY ON COMMISSION BASIS. II) CONSIGNEE AGENT INCURS EXPENSES ON SALES ON BEH ALF OF THE ASSESSEE COMPANY. III) CONSIGNEE AGENT MAINTAINS DAY TO DAY DETAILS O F EXPENSES INCURRED BY THEM FOR AND BEHALF OF THE ASSESSEE COMPANY. IV) MONTHLY SALE PATTI IS SENT BY CONSIGNEE AGENTS ALONG WITH LEDGER ACCOUNT OF EXPENSES INCURRED. V) IN SALE PATTI CONSIGNEE AGENT, FROM THE SALE AMO UNT DEDUCT THEIR COMMISSION AND EXPENSES WHICH THEY HAVE TO RECEIVE FROM THE ASSESSEE COMPANY ON THE BASIS OF FIXED COST RATE AS PER AGRE EMENT. VI) ON RECEIPT OF SALE PATTI CREDIT NOTE FOR THE EX PENSES IS ISSUED. VII) IN THE BOOKS OF THE ASSESSEE COMPANY AMOUNT OF CREDIT NOTE IS DEBITED UNDER THE HEAD EXPENSES ON CONSIGNMENT SALE. 5.2 THE COMMISSION IS SAID TO BE PAYMENT OF COMMISS ION IF IT IS EVIDENT THAT IT IS BEING PAID FOR SERVICE OF A PERSON PROVI DED IN RESPECT OF SALE OF PRODUCT OF THE ASSESSEE. IN THE CASE UNDER CONSIDER ATION, THE LD. AUTHORISED REPRESENTATIVE HAS DEMONSTRATED BY FILING VARIOUS E VIDENCES AND MATERIAL OF WHICH COPIES HAVE BEEN PLACED IN PAPER BOOK. COPIE S OF AGREEMENT, PAPER BOOK PAGE NOS. 1 TO 4, COPIES OF SALE PATTI PAGE NO S. 5 TO 9 OF THE PAPER BOOK, COPIES OF LEDGER ACCOUNT OF EXPENSES PAGE NOS. 32 T O 50. ON PERUSAL OF AGREEMENT, WE NOTICE THAT AS PER CLAUSE-3 IN ADDITI ON TO 3% SALE, THE AGENT IS ENTITLED TO REIMBURSEMENT OF EXPENSES. THE RELEVANT ABSTRACT OF THE AGREEMENT IS REPRODUCED AS BELOW :- 1.5 THAT ON THE RECEIPT OF GOODS BY THE CONSIGNEE AGENTS TILL THE SALES MADE BY THEM, THE CONSIGNEE AGENTS INCURR CER TAIN EXPENSES ON BEHALF OF THE ASSESSEE COMPANY WHICH ARE OTHERWISE TO BE INCURRED BY THE ASSESSEE COMPANY IF THE ASSESSEE COMPANY MAKE D IRECT SALE AT THESE PLACES. THE NATURE OF EXPENSES INCURRED BY THE CONS IGNEE AGENTS AND REIMBURSED BY THE ASSESSEE COMPANY AS PER THE AGREE MENT EXECUTED BETWEEN THEM ARE :- 8 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 A) UNLOADING EXPENSES ON RECEIPT OF GOODS FROM THE ASSESSEE COMPANY. B) LOADING EXPENSES WHEN THE GOODS ARE SENT BY THE CONSIGNEE AGENTS FOR SALE TO DISTRIBUTOR/DEALER/RETAILER. C) CARTAGE PAID ON DISPATCH OF GOODS/SALE TO DISTRIBUTOR/DEALER/RETAILER. D) TRAVELING EXPENSES OF THE STAFF KEPT BY CONSIGNE E AGENTS OR SALARY OF THE SALES STAFF. 1.6 THAT THE CONSIGNEE AGENTS SENT THE MONTHLY DETA ILS OF SALES ON SALE PATTI, COPY ENCLOSED (PAGE NO.5 TO 29) FOR K IND PERUSAL OF YOUR GOODSELF. ON THE SALE PATTI THE CONSIGNEE AGEN T DEDUCTS THEIR COMMISSION ON SALES AND THE EXPENSES AT THE FIXED C OST RATE STRUCTURE AS PER AGREEMENT. THE ASSESSEE COMPANY BY WAY OF CREDIT NOTE AMOUNT FOR THEIR EXPENSES AS PR SALE PA TTI, THOUGH THE EXPENSES INCURRED BY THE, ARE MUCH MORE THAN THE EX PENSES ACCOUNTED FOR BY THE ASSESSEE COMPANY. COPY OF THEI R LEDGER ACCOUNT OF EXPENSES INCURRED BY THEM ON BEHALF OF A SSESSEE COMPANY ARE ENCLOSED (PAGE NO. 30 TO 50) IN SUPPORT OF THE SUBMISSION THAT THE EXPENSES INCUR BY THEM ARE MUCH MORE THAN THE EXPENSES REIMBURSED TO THEM BY WAY OF CREDIT NO TE. 1.7. IT IS IMPORTANT TO MENTION HERE THAT THE EXPEN SES INCURRED BY THE CONSIGNEE AGENTS ON BEHALF OF THE ASSESSEE COMPANY ARE FROM THE SALE AMOUNT COLLECTED BY THEM AS THERE ALWAYS REMAI N OUTSTANDING BALANCE. 1.8. THAT THE ASSESSING OFFICER HAS TREATED THE REI MBURSEMENT OF EXPENSES AS COMMISSION PAID ONLY ON THE GROUND THAT THE EXPENSES ARE REIMBURSED AT FIXED RATE AND THEREFORE IT IS NO T IN THE NATURE OF REIMBURSEMENT OF EXPENSES BUT IT WAS PART AND PARCE L OF COMMISSION ON WHICH TAX AT SOURCE HAS NOT BEEN DEDU CTED AND CONSEQUENTLY MADE ADDITION U/S 40A(IA) OF THE ACT. 5.3 THE CONCERNED PARTIES HAVE ALSO FURNISHED THE S ALE PATTI ALONG WITH CLAIM OF THE EXPENSES ON SALE OF CONSIGNMENT GOODS THE CLAIM OF EXPENSES GIVEN DETAIL THE EXPENSES PERTAINING TO THE MONTHLY SELLI NG EXPENSES LOADING AND UNLOADING DEALING WITH EXPENSES. THESE EXPENSES HAV E BEEN ADJUSTED AND ACCOUNTED FOR IN THE ACCOUNT OF RESPECTIVE PARTIES. AFTER CONSIDERING THESE 9 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 ARGUMENTS, WE NOTICE THAT THE IMPUGNED PAYMENT IS R EIMBURSEMENT OF THE EXPENSES AND ARE NOT THE COMMISSION AS THE CONCERN ED PARTY DID NOT GIVE ANY SERVICES IN RESPECT OF THE PAYMENT OF EXPENDITURES MADE. PROVIDING SERVICES IS ESSENTIALLY REQUIREMENT OF THE NATURE OF TRANSACTIO N OF A COMMISSION. SINCE THIS CONDITION IS NOT SATISFIED IN THE CASE UNDER CONSID ERATION THEREFORE IT IS A CASE OF REIMBURSEMENT OF THE EXPENSES INCURRED BY THE CO NCERNED PARTY ON BEHALF OF THE ASSESSEE. UNDER THE CIRCUMSTANCES, WE FIND THAT THE REVENUE AUTHORITY IS NOT CORRECT IN TAKING SUCH EXPENSES AS COMMISSION E XPENSES. THE FINDING OF REVENUE AUTHORITIES IN THIS BEHALF IS ON PRESUMPTIO N BASIS, WITHOUT CONSIDERING THE RELEVANT AGREEMENT/DOCUMENTS AND BOOKS OF ACCOU NT MAINTAINED BY THE ASSESSEE. WE, THEREFORE, SET ASIDE THE ORDERS OF RE VENUE AUTHORITIES AND THE CLAIM OF THE ASSESSEE IS ALLOWED. 5.4 SINCE THIS IS NOT A COMMISSION PAYMENT, THEREFO RE, THERE IS NO QUESTION OF DEDUCTING TAX AT SOURCE UNDER SECTION 194H OF TH E ACT. SINCE THE PAYMENT IS NOT SUBJECT TO TAX DEDUCTED AT SOURCE, THEREFORE, P ROVISIONS OF SECTION 40(A)(IA) OF THE ACT IS NOT APPLICABLE ON THE ISSUE. WE THER EFORE, DELETE THE ADDITION OF RS.28,14,174/- ITA NO. 55/AGRA/2013 - M/S. SURAJ BHAN AGENCIES (P) LTD. 6. THE LEARNED REPRESENTATIVES OF THE PARTIES SUBM ITTED THAT THE FACTS OF THE CASE IN ITA NO.54/AGRA/2013 IN THE CASE OF M/S PEE CEE COSMA SOPE LTD. ARE IDENTICAL TO THE FACTS OF THE CASE IN ITA NO.55 /AGRA/2013 IN THE CASE OF M/S. SURAJ BHAN AGENCIES (P) LTD. EXCEPT THE FIGURES. I N THAT CASE THE AMOUNT ADDED BY THE A.O. WAS RS.21,94,506/- AND RS.16,48,1 86/-. SINCE THE FACTS ARE IDENTICAL WITH THE FACTS OF THE CASE OF M/S PEE CEE COSMA SOPE LTD. (SUPRA) AND THAT CASE HAS BEEN DECIDED AFTER DETAILED DISCU SSION MADE IN PARA NOS.5 TO 5.4 OF THIS ORDER, IN THE LIGHT OF THE ABOVE DISCUS SION, THE ADDITION OF RS.21,94,506/- AND RS.16,48,186/-ARE DELETED. 8. SINCE THE FACTS OF THE CASE UNDER CONSIDERATION AND THE FACTS OF THE CASE DECIDED BY THE I.T.A.T., AGRA BENCH IN CASE OF M/S. PEE CEE COSMA SOPE LIMITED VS. JCIT (SUPRA) VIDE ORDER DATED 30.04.2013, ARE I DENTICAL, TO MAINTAIN 10 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 CONSISTENCY, WE FOLLOW THE ABOVE ORDER OF I.T.A.T. AND IN THE LIGHT OF THE FACT, WE SET ASIDE THE ORDER OF REVENUE AUTHORITIES AND DELE TE THE ADDITION OF RS.21,33,377/- MADE BY THE A.O. INVOKING PROVISIONS OF SECTION 40A (IA) OF THE ACT. 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED . 10. NOW WE TAKE UP ITA NO.152/AGRA/2013 FILED BY TH E REVENUE. THE BRIEF FACTS OF THE CASE ARE THAT THE DURING THE ASSESSMEN T PROCEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE HAS PAID INTEREST OF RS.44,43,291 /- ON LOANS RAISED BY IT. THE A.O. FURTHER NOTICED THAT THE ASSESSEE HAS MADE INVESTME NT OF RS.5,31,40,782/- IN PURCHASE OF SHARES. THE A.O. WAS OF THE VIEW THAT THE INVESTMENT TO THE ABOVE EXTENT MADE PRIOR TO 31.03.2008 AND CONTINUED UPTO THE END OF THE PREVIOUS YEAR I.E. 31.03.2009 WAS NOT MADE FOR THE PURPOSE OF EA RNING INCOME WHICH FORMS PART OF TOTAL INCOME SUBJECTED TO TAX. THE A.O. FURTHER NOTICED THAT THE ASSESSEE HAS ALSO MADE INVESTMENT FOR PURCHASE OF IMMOVABLE PROP ERTY AND GIVEN LOAN OF WHICH DETAILS HAS BEEN GIVEN AT PAGE NO. 6 OF HIS ORDER. THE A.O. WAS OF THE VIEW THAT THE ASSESSEE HAS DIVERTED THE LOAN BEARING FUND TO NON- BUSINESS PURPOSES ON ACCOUNT OF MAKING INVESTMENT IN SHARES FOR EARNING TAX FREE IN COME. THE A.O. DISALLOWED THE INTEREST UNDER SECTION 36(1)(III) READ WITH SECTION 14A OF THE ACT AND RULE 8D OF 11 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 THE I.T.A.T. RULES. THE A.O. DISALLOWED THE INTERE ST AS PER RULE 8D AS UNDER :- (PAGE NO.8 ) THE AMOUNT OF DISALLOWANCE AS PER RULE 8D IS THERE FORE COMPUTED IS AS UNDER :- (I) THE AMOUNT OF EXPENDITURE DIRECTLY RELATING TO INCOME WHICH DOES NOT FORM PART OF THE TOTAL INCOME. ---- (II) PROPORTIONATE INTEREST : INTEREST PAID X AVERAGE VALUE OF INVESTMENT IN SHAR ES -------------------------------------------------- ------------- AVERAGE OF ASSETS = 4443291 X 53140782 ----------------------------- = RS.974133/- 242387436 III) % OF RS.53140782 = RS.265703/- TOTAL AMOUNT OF DISALLOWANCE -- RS.1239836/- THEREFORE, THE AMOUNT OF RS.1239836/- IS DISALLOWED AND ADDED TO THE INCOME OF THE ASSESSEE (DISALLOWANCE RS.12,39,836/- 11. THE CIT(A) FOLLOWED THE ORDER OF I.T.A.T. IN AS SESSEES OWN CASE FOR A.Y. 2007-08 AND DELETED THE ADDITION AS UNDER :- (PAGE NO.11, PARAGRAPH NO.5.1) 5.1 I HAVE CAREFULLY CONSIDERED THE ASSESSMENT ORD ER AS WELL AS THE WRITTEN SUBMISSION OF THE APPELLANT WITH REGARD TO THIS ISSUE. I FIND THAT THE HONBLE ITAT AGRA BENCH IN THE ASSESSEES OWN CASE FOR A.Y. 2007-08 HAS CONSIDERED THIS ISSUE AND AFTER CONSIDE RING THE FACTS OF THE CASE WHICH ARE IDENTICAL IN THE YEAR UNDER CONS IDERATION HELD THAT NO DISALLOWANCE IS REQUIRED ON THE BASIS OF PRESUMP TION THAT BORROWED FUNDS HAS BEEN DIVERTED TO INVESTMENTS IN SHARES. 12 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE TRIBUNAL AGRA BENCH THE ADDITION MADE U/S 36(1)(III)/14A IS DELET ED. 12. AT THE OUTSET, THE LD. AUTHORISED REPRESENTATIV E SUBMITTED THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER DATED 20.04.2012 OF I .T.A.T. IN ASSESSEES OWN CASE FOR A.Y. 2006-07 IN ITA NO.236/AGR/2011. 13. THE LD. AUTHORISED REPRESENTATIVE FURTHER SUBMI TTED THAT IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS HAVING SUFFICIENT O WN FUNDS OF WHICH DETAILS HAS BEEN NOTED BY THE CIT(A) IN HIS ORDER AT PAGE NOS. 9 & 10 WHICH ARE AS UNDER :- 1. THE RELEVANT FIGURES AS ON 31.03.2009 FOR CONSI DERATION OF YOUR GOOD SELF ARE AS UNDER :- SHARE CAPITAL RS. 44,50,000/- RESERVE AND SURPLUS RS.16,09,74,771/- UNSECURED LOAN NIL SECURED LOAN :- O.D. LIMIT RS.3,10,24,143/- VEHICLE LOAN RS. 23,06,233/- RS.3,33,30,376/- LOAN GIVEN RS.1,82,19,091/- INTEREST RECEIVED RS. 79,32,145/- INTEREST PAID RS. 44,43,291/- INVESTMENT IN SHARES RS.5,31,40,782/- 14. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, RELIED UPON THE ORDER OF A.O. AND SUBMITTED THAT OWN CAPITAL AND RE SERVE HAS ALREADY BEEN INVESTED IN FIXED ASSETS/LOANS, ADVANCES, STOCK IN TRADE AND TRADE DEBTORS ETC. AS STATED IN THE 13 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 GROUNDS OF APPEAL. LD. DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT WHEN THE OWN CAPITAL HAS ALREADY BEEN EXHAUSTED IN INVESTMENT AN D THE INVESTMENT MADE IN SHARES WAS OUT OF THE BORROWED FUND ON WHICH THE AS SESSEE IS NOT ENTITLED FOR INTEREST UNDER SECTION 36(1)(III) READ WITH SECTION 14A OF THE ACT. 15. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. WE NOTICE THAT THE ISSUE IS SQUARELY COVERED BY THE ORDER OF I.T.A.T., AGRA BENCH IN ASSESSEES OWN CASE FOR A.Y. 2006-07 IN ITA NO.2 36/AGRA/2011 VIDE ORDER DATED 20.04.2012. THE RELEVANT FINDING OF THE I.T. A.T. IS REPRODUCED AS BELOW:- (PARA NOS.6 TO 8) 6. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. THE ASSESSING OFFICER MADE OUT THE CASE T HAT SECTION 14A OF THE ACT READ WITH RULE 8D OF WHICH THE EFFECT IS RETROS PECTIVE AND APPLICABLE TO ASSESSMENT YEAR 2006-07, THE YEAR UNDER CONSIDERATI ON. THE ASSESSING OFFICER DISALLOWED THE AMOUNT CALCULATED UNDER RULE 8D OF IT RULES. THE CIT(A) DID NOT AGREE WITH THE VIEW THAT SECTION 14A READ WITH RULE 8D IS APPLICABLE IN THE YEAR UNDER CONSIDERATION FOLLOWIN G A JUDGEMENT OF BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. L TD., 234 CTR (BOMBAY) 1 WHEREIN IT HAS BEEN HELD THAT RULE 8D READ WITH S ECTION 14A IS APPLICABLE W.E.F. ASSESSMENT YEAR 2007-08. 7. THE LD. REPRESENTATIVES OF PARTIES ADMITTED THAT THE REVENUE DID NOT FILE ANY APPEAL AGAINST THIS FINDING OF THE CIT(A). THUS, THE CONTROVERSY RELATING TO WHETHER SECTION 14A OF THE ACT READ WIT H RULE 8D IS APPLICABLE IN THE YEAR UNDER CONSIDERATION, ASSESSMENT YEAR 2006- 07, OR NOT BECAME FINAL AS REVENUE DID NOT FILE ANY APPEAL AGAINST THE ORDE R OF CIT(A) WHEREIN IT HAS BEEN HELD THAT SECTION 14A READ WITH RULE 8D IS APPLICABLE W.E.F. 2007- 08. HOWEVER, THE PRESUMPTION OF THE CIT(A) WAS THA T SOME BORROWED FUNDS HAVE BEEN DIVERTED TO INVESTMENT IN SHARES OF WHICH INCOME IS EXEMPT. THE 14 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 LD. AUTHORISED REPRESENTATIVE POINTED OUT THE POSIT ION OF SHARE CAPITAL, RESERVE & SURPLUS, UNSECURED LOAN ETC. AND LOAN GIV EN AND INVESTMENT IN SHARES. THE DETAILS WHICH IS POINTED OUT FROM ORDE R OF THE CIT(A) AT PAGE NO.2 READS AS UNDER :- SHARE CAPITAL RS.44,50,000/- RESERVE AND SURPLUS RS.12,59,74,541/- UNSECURED LOAN NIL SECURED LOAN:- O.D. LIMIT RS.2,52,72,561/- VEHICLE LOAN RS.15,50,588/- RS.2,68,23,149/- LOAN GIVEN RS.5,15,88,194/- INTEREST RECEIVED RS.60,36,620/- INTEREST PAID RS.34,81,490/- INVESTMENT IN SHARES RS.5,28,01,422/- 8. AFTER CONSIDERING THE TOTALITY OF THE FACTS OF T HE CASE, THE LIMITED ISSUE TO BE DECIDED BEFORE US IS WHETHER THE INTEREST CLA IM OF THE ASSESSEE IS DISALLOWABLE ON THE GROUND THAT THE ASSESSEE HAS US ED THE INTEREST BEARING BORROWED FUNDS IN THE INVESTMENT OF SHARES. THE CL AIM OF INTEREST ON BORROWED FUND IS ALLOWABLE UNDER SECTION 36(1)(III) OF THE ACT. ACCORDING TO THE SAID SECTION 36(1)(III) THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION IS ALLOWABLE EXPENSES SO LONG AS THE AMOUNT BORROWED IS USED IN THE BUSINESS . THE INTEREST PAID ON SUCH BORROWING IS AN EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FROM BUSINESS. TO EXAMIN E THE PROBLEM IN CASES WHERE FUNDS ARE PUMPED OUT OF THE BUSINESS WHICH AR E COMPRISED OF BOTH TYPE OF FUNDS I.E. BORROWED AS WELL AS OWN FUNDS, F OR NON-BUSINESS PURPOSE. IN ALL SUCH CASES WHERE MIXED FUNDS ARE USED FOR BU SINESS AND OTHER THAN BUSINESS PURPOSES IN SUCH CIRCUMSTANCES THE I.T.A.T ., MUMBAI BENCH IN THE CASE OF ACIT VS. H.P. SHAH & CO. ITA NO.3694/M/2006 ORDER DATED 15.01.2009 HELD THAT THERE IS NO PRESUMPTIONS THAT MONEY USED FOR OTHER PURPOSES CAME OUT OF BORROWED FUNDS. IT CAN BE SAI D THAT INTEREST FREE FUNDS GIVEN ON INVESTMENT IF ARE OUT OF OWN FUNDS, I.E. O WN CAPITAL AND RESERVES IS SUFFICIENT TO COVER SUCH INTEREST FREE INVESTMENT. IN THAT CIRCUMSTANCES, IT IS PRESUMED THAT THE INVESTMENT IN INTEREST FREE FUNDS WERE OUT OF OWN CAPITAL AND RESERVES AND UNDER SUCH CIRCUMSTANCES, THE REVE NUE CANNOT DISALLOW 15 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 INTEREST CLAIM OF THE ASSESSEE UNDER SECTION 36(1)( III) OF THE ACT. THE ALLAHABAD HIGH COURT IN THE CASE OF CIT VS. PREM HE AVY ENGINEERING WORKS PVT. LTD., 285 ITR 554 (ALLD.) WHEREIN IT HAS BEEN HELD THAT IF THE ASSESSEE HAD ADEQUATE INTEREST FREE FUNDS BY WAY OF PROPRIETARY CAPITAL OR BY WAY OF INTEREST FREE DEPOSITS FROM CUSTOMERS, THERE IS INFERENCE THAT BORROWED FUNDS ARE NOT DIVERTED FOR NON-BUSINESS PU RPOSES. THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION VS. CIT(A) 298 ITR 298 WHEREIN LAW LAID DOWN THAT INTEREST FREE FUNDS TO SISTER CO NCERN OUT OF OWN FUNDS, THE DISALLOWANCE CANNOT BE MADE UNDER SECTION 36(1)(III ) OF THE ACT. THE LD. AUTHORISED REPRESENTATIVE RELIED UPON VARIOUS DECIS IONS OF WHICH GIST HAS BEEN FILED BUT THESE DECISIONS RELATED TO THE INVOC ATION OF SECTION 14A OF THE ACT. THESE CASES HAVE BEEN DECIDED BY THE COURT/BE NCH CONSIDERING THE FACTS OF RESPECTIVE CASES. IN THE LIGHT OF ABOVE D ISCUSSIONS AND JUDICIAL PRONOUNCEMENTS NOTED ABOVE, IF WE CONSIDER THE FACT S, WE FIND THAT THE ASSESSEE WAS HAVING SHARE CAPITAL OF RS.44,50,000/- AND RESERVE AND SURPLUS OF RS.12,59,74,541/- OUT OF WHICH THE INVESTMENT IN SHARES WAS RS.5,28,01,422/-. THUS, WE FIND THAT THE ASSESSEE WAS HAVING SUFFICIENT OWN FUNDS IN THE FORM OF SHARE CAPITAL AND RESERVES TO MAKE INVESTMENT IN SHARES. UNDER THE CIRCUMSTANCES, NO DISALLOWANCE IS REQUIRE D UNDER SECTION 36(1)(III) OF THE ACT. IN THE LIGHT OF THE FACT, W E DO NOT AGREE WITH THE FINDING THE CIT(A) WHICH IS ON PRESUMPTION BASIS THAT BORRO WED FUNDS HAS BEEN DIVERTED TO INVESTMENT IN SHARES AND THAT PART OF T HE ORDER OF CIT(A) IS SET SIDE AND DELETE THE ADDITION OF RS.8,00,000/- SUSTA INED BY HIM. 16. AS REGARDS THE CONTENTION OF THE LD. DEPARTMENT AL REPRESENTATIVE THAT THE OWN CAPITAL AND RESERVE HAS ALREADY BEEN EXHAUSTED IN INVESTMENT AND HE TRIED TO DEMONSTRATE BY REFERRING THE BALANCE SHEET OF THE A SSESSEE, BUT IT HAS ALREADY BEEN STATED BY I.T.A.T., AGRA BENCH IN ASSESSEES OWN CA SE FOR A.Y. 2006-07 IN ITA NO.236/AGRA/2011 VIDE ORDER DATED 20.04.2012 THAT S UCH ARGUMENTS AND SITUATION HAS BEEN CONSIDERED BY THE I.T.A.T., MUMBAI BENCH I N THE CASE OF ACIT VS. H.P. SHAH & CO. IN ITA NO.3694/M/2006 ORDER DATED 15.01. 2009. THE RELEVANT FINDING 16 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 OF THE I.T.A.T. IN CASE OF ACIT VS. H.P. SHAH & CO. (SUPRA) IS REPRODUCED AS UNDER:- 4. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED RECORD. THE CRUX OF THE MATTER TO BE CO NSIDERED BY US IS IN RESPECT OF ALLOWABILITY OF INTEREST EXP ENDITURE UNDER SECTION 36(1)(III) OF THE ACT WHERE INTEREST BEARING BORROWED FUNDS AND OWN CAPITAL HAS LOST ITS SEPARA TE IDENTITY AS BOTH ARE MIXED. SECTION 36 OF THE ACT OCCURS IN CHAPTER IV WHICH DEALS WITH THE COMPUTATION OF TOTAL INCOME AN D IT IS A PROVISION WHICH RELATES TO THE COMPUTATION OF INCOM E EARNED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PR OFESSION'. THE DEDUCTION CONTEMPLATED BY THE SECTION IS IN REL ATION TO THE EXPENDITURE WHICH COULD PROPERLY BE REGARDED AS NECESSARY FOR THE PURPOSE OF THE BUSINESS OR PROFES SION. EXPENDITURE INCURRED ON ACCOUNT OF COMMERCIAL EXPED IENCY FOR THE PURPOSE OF BUSINESS WOULD BE ALLOWABLE UNDE R THIS PROVISION. THE EXPENDITURE TO BE ALLOWED MUST HAVE A NEXUS WITH THE BUSINESS OF THE ASSESSEE. IF THE EXPENDITU RE INCURRED IS OSTENSIBLY INCURRED FOR THE BUSINESS, BUT IF IN REALITY IS NOT FOR THE PURPOSE OF BUSINESS THEN SUCH EXPENDITURE I S NOT ALLOWABLE. 4.1 SECTION 36(1) (III) OF THE ACT REFERS TO 'THE A MOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR TH E PURPOSES OF THE BUSINESS OR PROFESSION'. THE CAPITAL BORROWE D SHOULD BE FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. IT IS IMPLICIT IN THIS PROVISION THAT THE CAPITAL SO BORROWED SHOU LD NOT ONLY BE INVESTED IN THE BUSINESS, BUT THAT THE AMOUNT BO RROWED SHOULD CONTINUE TO REMAIN IN THE BUSINESS. SO LONG AS THE AMOUNT BORROWED IS USED IN THE BUSINESS, THE INTERE ST PAID ON SUCH BORROWING IS AN EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FROM THE BUSINESS. THE INTEREST PAYABLE ON THE CAPITAL BORROWED IS A L IABILITY WHICH CONTINUES TILL SUCH TIME AS THE AMOUNT BORROW ED IS REPAID. SUCH INTEREST IS ALLOWABLE UNDER THE PROVIS ION ONLY FOR THE REASON THAT THE AMOUNT ON WHICH INTEREST IS PAI D CONTINUES 17 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 TO BE USED IN THE BUSINESS AND THE PAYMENT OF SUCH INTEREST IS, THEREFORE, NECESSARY FOR THE PURPOSE OF RUNNING THE BUSINESS. 4.2 THE OBJECT OF THE PROVISION IS NOT TO ENABLE AN ASSESSEE TO MAKE A LARGE BORROWING AND CREATE A LIABILITY FO R PAYMENT OF INTEREST THEREON NOT ONLY IN THE YEAR IN WHICH T HE BORROWING WAS MADE, BUT THE SUBSEQUENT YEARS AS WEL L, KEEP THE LOAN OUTSTANDING AND THEREAFTER, DIVERT THE AMO UNT BORROWED BY TAKING IT OUT OF THE BUSINESS BY GIVING IT INTEREST- FREE TO OTHERS LIKE SISTER CONCERNS AND RELATIVES O R FOR PERSONAL USE., BUT CONTINUE TO PAY INTEREST OUT OF THE INCOME OF THE BUSINESS AND CLAIM THE AMOUNT OF INTEREST PA ID AS A BUSINESS EXPENDITURE. THE PAYMENT OF INTEREST ON TH E AMOUNT NOT USED IN THE BUSINESS CANNOT BE REGARDED AS A BU SINESS EXPENDITURE AS THE BUSINESS DOES NOT DERIVE ANY BEN EFIT BY THE OUTGOING BY WAY OF INTEREST ON AN AMOUNT WHICH IS N O LONGER IN THE BUSINESS, BUT HAD BEEN DIVERTED FROM THE BUS INESS. THIS PROVISION, THEREFORE, CANNOT BE CONSTRUED AS ENABLI NG AN ASSESSEE TO BURDEN THE BUSINESS WITH INTEREST EVEN WHILE TAKING THE AMOUNT INITIALLY BORROWED FOR THE BUSINE SS, BUT SUBSEQUENTLY TAKEN OUT OF THE BUSINESS BY DIVERTING IT AS INTEREST-FREE LOANS TO SISTER CONCERNS AND RELATIVE S OR FOR PERSONAL USE. 4.3 THE AMOUNT BORROWED FOR THE BUSINESS REMAINS A LIABILITY FOR THE BUSINESS TILL ITS DISCHARGE. THE FACT THAT THE AMOUNT BORROWED MAY HAVE BEEN INVESTED IN THE PURCH ASE OF MACHINERY OR UTILISED AS WORKING CAPITAL OR USED IN ANY OTHER WAY DOES NOT IN ANY WAY AFFECT THE LIABILITY FOR RE PAYMENT OF THE AMOUNT BORROWED. SO 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 EXPENDIT URE. UNDER SECTION 36(1)(III) OF THE ACT, AMOUNTS DIVERT ED NOT BEING USED FOR THE PURPOSES OF THE BUSINESS, INTERE ST RELATING TO THE AMOUNT DIVERTED OUT OF THE BUSINESS CANNOT B E TREATED AS A PERMISSIBLE DEDUCTION IN THE COMPUTATION OF IN COME. ON MANY OCCASIONS THE ASSESSEE TAKE STAND THAT ONCE TH E AMOUNT BORROWED IS FOUND TO HAVE BEEN USED FOR SOME TIME I N THE BUSINESS, THEN SUBSEQUENT DIVERSION IS OF NO CONSEQ UENCE, BUT 18 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 SUCH STAND OF THE ASSESSEE CANNOT BE ACCEPTED. THE LEGISLATIVE LANGUAGE OF SEC. 36(1)(III) OF THE ACT IS VERY AS C LEAR EXPRESSION BORROWED FOR THE PURPOSE OF THE BUSINES S IS USED. THE AMOUNT BORROWED MUST CONTINUE TO BE USED FOR THE PURPOSES OF THE BUSINESS AND THE FACT THAT IT WAS U SED FOR SOME POINT OF TIME, BUT LATER DIVERTED WOULD NOT EN TITLE THE ASSESSEE TO CLAIM THE INTEREST PAID ON THE BORROWIN G AS A DEDUCTION UNDER SEC.36(1)(III) EVEN AFTER SUCH DIVE RSION. IN CASES WHERE DIVERSION OCCURS IMMEDIATELY AFTER THE BORROWING AND THE BORROWED AMOUNTS ARE NOT INVESTED IN THE BU SINESS AT ALL, BUT DIVERTED FOR OTHER PURPOSES, THEN THERE SH OULD NOT BE ANY CLOUD OF DOUBT THAT INTEREST PAID ON SUCH BOR ROWED AMOUNTS IS NOT ALLOWABLE DEDUCTION. THE FACTUM OF D EFERMENT, IN CASES WHERE SUCH DIVERSION OF FUNDS FROM THE BUS INESS IS CLEARLY ESTABLISHED FROM THE FACTS ON RECORD, DOES NOT ENTITLE THE ASSESSEE TO CLAIM THE BENEFIT OF DEDUCTION IN R ESPECT OF INTEREST PAID ON THE AMOUNTS BORROWED BUT NOT PRESE NTLY USED IN ITS BUSINESS. THE TIME AT WHICH THE DIVERSION TA KES PLACE IS NOT THE ONLY RELEVANT CRITERION BUT IT IS THE FACT OF THE DIVERSION WHICH IS MATERIAL AND ONCE IT HAS BEEN SH OWN THAT THERE HAS BEEN DIVERSION OF INTEREST ON THE AMOUNT BORROWED, BUT SUBSEQUENTLY DIVERTED WOULD NOT QUALIFY FOR DED UCTION. ANY VIEW TO THE CONTRARY WOULD NOT IN THE LEAST SUB SERVE THE OBJECT OF THE LEGISLATIVE PROVISION, BUT IT WOULD O NLY OPEN THE GATES FOR THE ASSESSEES TO BORROW MERRILY AND AFTER OSTENSIBLY USING IT IN THE BUSINESS FOR A SHORT PERIOD AND AT A SUBSEQUENT POINT OF TIME DIVERT THE FUNDS IN WHOLE OR PART, FO R NON- BUSINESS PURPOSES AND CONTINUE TO CLAIM THE INTERES T ON THE BORROWING AS A DEDUCTIBLE ITEM OF EXPENDITURE. THE OBJECTS OF THE SECTION WOULD NOT IN ANY WAY BE ADVANCED BY THE ADOPTION OF SUCH A VIEW. IF A BUSINESS FOR WHICH THE INTERES T PAID IS CLAIMED AS A DEDUCTION HAS NOT BENEFITED DURING THE YEAR FROM THE CAPITAL BORROWED BY SUCH BORROWED AMOUNT BEING USED IN THE BUSINESS, SUCH INTEREST CANNOT BE REGARDED AS E XPENDITURE FOR THE PURPOSES OF THE BUSINESS. THE ASSESSEE MAY NOT EVEN WHILE USING BORROWED FUNDS FOR ITS PERSONAL PURPOSE S AND NOT BUSINESS PURPOSES CLAIM DEDUCTION OF THE INTEREST P AID ON THE BORROWING. IN ANY CASE IF THE ASSESSEE TAKES STAND THAT IT IS BUSINESS EXPEDIENCY THEN, HEAVY BURDEN LIES ON THE ASSESSEE 19 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 TO PROVE SUCH CONTENTION AND SAID CONTENTION IS TO BE EXAMINED BY APPLYING DEFERENT CRITERIA. 4.4 A REAL PROBLEM ARISES IN CASES WHERE FUNDS ARE PUMPED OUT OF BUSINESS WHICH ARE COMPRISE OF BOTH TYPE OF FUNDS, BORROWED AS WELL AS OWN FUNDS FOR NON-BUSINESS PURP OSES. IN ALL SUCH CASES WHERE MIXED FUNDS ARE USED FOR BOTH BUSINESS AND OTHER THAN BUSINESS PURPOSES, THERE IS NO PRESU MPTION THAT MONEYS USED FOR OTHER PURPOSES CAME OUT OF BOR ROWED FUNDS. IT CAN BE SAID THAT INTEREST FREE FUNDS GIVE N ARE OUT OF OWN FUNDS TO THE EXTENT OF CAPITAL AND RESERVES, AN D THIS PROPOSITION IS SUPPORTED BY THE DECISION OF HONB LE ANDHRA PRADESH HIGH COURT IN THE CASE OF CIT VS. GOPIKRISH NA MURLIDHAR, 47 ITR 469 (AP) AND IN THE SAID CASE THE IR LORDSHIPS ACCEPTED THE CONTENTION THAT THE ASSESSEE IS ENTITLED TO WITHDRAW FROM CAPITAL. THE FACTS OF THAT CASE AR E THAT THE ASSESSEE IS A HINDU UNDIVIDED FAMILY CARRYING ON BU SINESS ON AN EXTENSIVE SCALE WITH A CAPITAL OF NEARLY RS. 20, 00,000 (TWENTY LAKHS). DURING THE YEAR ENDED 9TH NOVEMBER, 1950, THE ASSESSEE MADE LARGE BORROWINGS FOR PURPOSES OF HIS BUSINESS AND PAID INTEREST AMOUNTING TO RS. 93,611 ON SAID BORROWINGS. DURING THE COURSE OF THAT YEAR, THE ASS ESSEE WITHDREW FROM THE BUSINESS FROM TIME TO TIME AMOUNT OF RS. 1,77,984 FOR HIS PERSONAL EXPENSES. THE INCOME-TAX OFFICER DISALLOWED A SUM OF RS. 13,500 ON PRORATA, REPRESEN TING THE INTEREST ELEMENT RELATING TO RS. 1,77,984, SINCE HE WAS OF VIEW THAT AMOUNT OF RS. 1,77,984 WITHDREW WAS MADE IN TH E NAME OF THE BUSINESS BUT USED FOR HIS PERSONAL PURPOSES. ACCORDING TO HIM, MONEY WAS WITHDRAWN FROM THE BOOKS OF ACCOU NT TO MEET THE PERSONAL EXPENDITURE OF THE ASSESSEE AND, AS THIS SUM OF MONEY WAS NOT ACTUALLY USED FOR THE BUSINESS, TH E INTEREST PAID THEREON COULD NOT BE ALLOWED AS PERMISSIBLE DE DUCTION. 4.5 THE RELEVANT FINDING OF THE COURT IS REPRODUCED BELOW:- WE DO NOT THINK THAT WE CAN GIVE EFFECT TO THIS ARGUMENT. INDISPUTABLY, THESE AMOUNTS WERE BORROWED ONLY FOR THE PURPOSE OF BUSINESS OF THE FAMILY. THE ASSESSEE DREW OUT FROM TIME TO TIME VARIOUS SUMS OF 20 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 MONEY AGGREGATING TO RS. 1,77,984/- FROM THE BUSINE SS. IT IS NOT A CASE WHERE ANY PARTICULAR SUM PURPORTIN G TO BE BORROWED ON BEHALF OF THE BUSINESS WAS SPENT FOR HOUSEHOLD EXPENSES. THIS IS A CASE WHERE THE LOANS WERE TAKEN FOR CARRYING ON THE BUSINESS BUT THE FAMILY U SED TO WITHDRAW SOME AMOUNTS FROM THE BUSINESS WHENEVER OCCASIONS AROSE. THE FAMILY WAS SURELY ENTITLED TO WITHDRAW FROM THE CAPITAL SUPPLIED BY IT WITH THE R ESULT OF THE CAPITAL BEING DEPLETED. THERE IS, THEREFORE, NO SUBSTANCE IN THE SUBMISSION THAT THE FACT THAT PART OF THE AMOUNT BORROWED WAS LATER ON USED FOR PERSONAL EXPENSES, WOULD DEPRIVE THE ASSESSEE OF THE BENEFIT S. 4.6 FROM THE ABOVE JUDGMENT OF HONBLE ANDHRA PRADE SH HIGH COURT WE FIND THAT THE ASSESSEE HAS RIGHT TO R EPLACE HIS OWN CAPITAL WITH BORROWED FUNDS WHICH WERE ALREADY USED FOR THE PURPOSE OF BUSINESS IN ACQUIRING ASSETS AND OTH ER. WITH THE HELP OF THIS RATIO OF THE JUDGMENT SUCH PROBLEM CAN BE RESOLVED BY EXAMINATION AND ANALYSES OF FINANCIAL S TATEMENTS PREPARED ON THE BASIS OF BOOKS OF ACCOUNT MAINTAINE D BY THE ASSESSEE. IT IS WELL ACCEPTED PROPOSITION THAT FOR THE PURPOSE OF ASCERTAINING PROFIT AND GAINS, THE NORMAL PRINCI PLES OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NOT CONFLICT WITH ANY EXPRESS STATUTORY PROVISIONS AS HELD BY THE HONBLE SUPREME COURT IN CIT VS. U.P. STATE IND USTRIAL DEVELOPMENT CORPORATION, 225 ITR 703(SC). THUS SUCH PROBLEM CAN BE RESOLVED BY ANALYZING STATEMENT OF A CCOUNTS AND IN PARTICULAR BALANCE-SHEET. WHERE DETAILS OF O WN CAPITAL, BORROWED FUNDS AND INTEREST FREE FUNDS GIVEN OR UTI LIZED FOR OTHER PURPOSES ARE AVAILABLE. THERE IS NO MUCH DIFFICULTIES IN EXAMINATION OF RIG HT TO REPLACE OWN CAPITAL TO BORROW FUNDS IN CASE OF INDI VIDUAL AND PARTNERSHIP FIRM. BUT IN THE CASE OF COMPANY, CAPIT AL IS FUND OF PUBLIC/ SHARE HOLDERS WHICH IS MANAGED BY THE BO ARD OF DIRECTORS. IN THE CASE OF COMPANY THERE ARE CERTAIN RESTRICTIONS UNDER THE COMPANIES ACT IN USE OF CAPI TAL/FUND FOR PERSONAL BENEFITS. SUCH REPLACEMENT IS REQUIRED TO BE AUTHORIZED BY PROPER RESOLUTION AND MUST BE IN CONF ORMITY 21 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 WITH THE PROVISIONS OF COMPANIES ACT AND RULES AND REGULATIONS OF REGULATORY BODIES. SAME ARE REQUIRED TO REFLECT IN THE FINANCIAL STATEMENTS PREPARED ON THE BASIS O F AUDITED BOOKS OF ACCOUNT. THE AUDITOR IS ALSO REQUIRED TO P OINT OUT SUCH REPLACEMENT/UTILIZATION OF FUNDS. IF FUNDS ARE DIVERTED IN CONTRAVENTION OF STATUTORY PROVISIONS, THEN SAME MA Y BE SUBJECT TO LEGAL AND PENAL CONSEQUENCES UNDER THE C OMPANIES ACT AND OTHERS. THE ONUS IS ON THE ASSESSEE TO FURN ISH THE RELEVANT MATERIAL REGARDING REPLACEMENT OF BORROWED FUNDS BY OWN CAPITAL AND INTEREST FREE FUNDS AVAILABLE WI TH THE ASSESSEE. 17. SINCE THE FACTS OF THE CASE UNDER CONSIDERATION ARE IDENTICAL TO THE FACTS OF THE CASE DECIDED BY I.T.A.T., AGRA BENCH IN ASSESS EES OWN CASE FOR A.Y. 2006-07 IN ITA NO.236/AGRA/2011 VIDE ORDER DATED 20.04.2012 AND THE ISSUE IS SQUARELY COVERED BY THE SAID ORDER OF THE I.T.A.T. AND TO MA INTAIN CONSISTENCY, WE FOLLOW THE ORDER OF THE I.T.A.T. CITED SUPRA AND IN THE LI GHT OF THAT, ORDER OF CIT(A) IS CONFIRMED IN DELETING THE ADDITION OF RS.12,39,836/ -. THUS, APPEAL FILED BY THE REVENUE IS DISMISSED. 18. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D AND APPEAL OF THE REVENUE IS DISMISSED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* 22 ITA NOS.124 & 152/AGRA/2013 A.Y. 2009-10 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, AGRA BENCH, AGRA 6. GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBUNAL, AGRA TRUE COPY