ITO, Nabha V. M/s Ruldu Ram & Sons, Nabha

ITA 156/CHANDI/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 60944 (ITAT-CHANDIGARH)
• Duration Of Justice: 2 year(s) 5 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-07-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-07-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 08-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Assessee Lawyers: JAI SHREE SHARMA
• Keywords: Business income; Proportionate interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B, CHANDIGARH BEFORE SHRI T.R. SOOD, ACCOUNTANT MEMBER AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER ITA NO.156 /CHD/2010 (ASSESSMENT YEAR: 2007-08) THE INCOME TAX OFFICER, VS. RULDU RAM & SONS, NABHA. PATIALA ROAD, NABHA. AMBALA CANTT. PAN: AALFR0163M (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI TEJ MOHAN SINGH RESPONDENT BY : SMT. JAISHREE SHARMA, DR DATE OF HEARING : 05.07.2012 DATE OF PRONOUNCEMENT : 13.07.2012 O R D E R PER SUSHMA CHOWLA, J.M. : THIS APPEAL BY THE REVENUE IS AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS), PATIALA DATED 10.12.2009 RELATING TO ASSESSMENT YEAR 2007-08 AGAINST THE ORD ER PASSED U/S 143(3) OF INCOME TAX ACT, 1961 (IN SHORT THE ACT). 2. THE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE AS UNDER: 1. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS.2,27,856/- ON A/C OF DISALLOWANCE OF EXCESS INTEREST OUTGO AS THE FIRM HAD PAID INTEREST ON UNSECURED LOANS AT A RATE HIGHER THAN IT HAD EARNED FROM THE FDRS IN WHICH THE FUNDS HAD BEEN PARKED, THEREBY REDUCING I TS INCOME AND CONSEQUENTIAL TAX LIABILITY TO THAT EXTENT. 2. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.2,27,856/- ON A/C OF DISALLOWANCE OF EXCESS INTEREST OUTGO WITHOUT APPRECIATING THAT THE FIRM HAD RAISED UNSECURED LOANS FROM PERSONS SPECIFIED U/S 4 0A(2)(B) AT A HIGHER RATE OF INTEREST AND PARKED THE SAME FUNDS IN THE FDRS AT A LOWER RATE OF INTEREST I.E. FOR NON BUSINESS P URPOSE, THEREBY REDUCING ITS INCOME BY, THUS, INFLATING THE BUSINES S EXPENSES. 2 3. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.4,00,000/- ON A/C OF DISALLOWANCE OF PROPORTIONATE INTEREST ON THE AMOUN T OF RS.40,00,000/- INVESTED FOR NON-BUSINESS PURPOSES I .E. IN PURCHASE OF PLOT, WITHOUT APPRECIATING THAT THE ASS ESSEE WAS NOT INVOLVED IN THE BUSINESS ACTIVITY OF REAL ESTAT E DURING THE YEAR OR SUBSEQUENTLY AND, WHEREAS THE ASSESSEE HAD PAID HUGE AMOUNT OF INTEREST ON BORROWED FUNDS. 4. IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THE CIT (A) HAS ERRED IN DELETING THE ADDITION OF RS.4,00,000/- ON A/C OF DISALLOWANCE OF PROPORTIONATE INTEREST ON THE AMOUN T INVESTED FOR NON-BUSINESS PURPOSES, IGNORING THE RATIO LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CI T VS M/S ABHISHEK INDUSTRIES LTD. (2006) 286ITR 1 (P&H). 3. THE ISSUE RAISED VIDE GROUND NOS. 1 AND 2 BY THE REVENUE IS AGAINST THE DISALLOWANCE OF RS.2,27,856/-. 4. THE BRIEF FACTS RELATING TO THE ISSUE, AS PER TH E ASSESSMENT ORDER, ARE THAT DURING THE YEAR UNDER CONSIDERATION THE AS SESSEE HAD PAID INTEREST TO PARTNERS AMOUNTING TO RS.1,79,552/- AND INTEREST ON UNSECURED LOANS AMOUNTING TO RS.9,18,166/-. THE RATE OF INTE REST PAID ON THE SAID LOANS WAS 12% PER ANNUM. FURTHER THE ASSESSEE HAD INVESTED RS.86,99,375/- IN FDRS WITH STATE BANK OF INDIA AND STATE BANK OF PATIALA AT INTEREST RATES VARYING BETWEEN 5.5% TO 1 0% PER ANNUM. THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE TO JUSTI FY THE PAYMENT OF INTEREST AT A HIGHER RATES AS AGAINST LOWER RATE OF INTEREST EARNED ON THE BANK FDRS. THE EXPLANATION OF THE ASSESSEE WAS THA T THE UNSECURED LOANS WERE TAKEN FOR A LONG TERM PERIOD AND CONSEQU ENTLY THE SAID RATE OF INTEREST. THE INVESTMENT IN BANK FDRS WAS CLAIMED TO BE FOR BUSINESS PURPOSES AS THE SAME WERE UTILIZED FOR GIVING BANK GUARANTEE TO M/S GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD., NABHA AN D ALSO FOR OVER DRAFT FACILITIES BY PAYING 0.25% AS AGAINST 3% RATE OF INTEREST CHARGED BY THE BANK AGAINST BANK GUARANTEES I.E. EARNINGS OF 2 .75%. THE SAID BANK FDRS WERE CLAIMED TO BE PURCHASED ABOUT 6 TO 7 YEAR S BACK FOR GIVING 3 THE BANK GUARANTEES TO M/S GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD., NABHA. THE ASSESSING OFFICER REJECTED THE EXPLANAT ION OF THE ASSESSEE ON THE FOLLOWING GROUNDS: A) THE FDRS PURCHASED TO GIVE THE BANK GUARANTEE AS PER THE BANK CERTIFICATE FILED BY THE ASSESSEE WERE TO THE TUNE OF RS.13 LACS UPTO 31.7.2006 FROM STATE BANK OF INDIA AND RS.9.5 LACS FROM 1.9.2006 TO 31.8.2007 FROM STATE BANK OF PATIALA. THE SAID BANK GUARANTEES WERE TAKEN AT 100% CASH MARGIN. THE INV ESTMENT IN BANK FDRS TOTALING RS.86 LACS AFTER RAISING LOANS A T HIGHER RATE OF INTEREST, AS PER THE ASSESSING OFFICER, WAS NOT FOR BUSINESS REQUIREMENT OF THE FIRM. B) THE LOANS WERE RAISED FROM THE PERSONS COVERED U NDER SECTION 40A(2)(B) OF THE ACT AT HIGHER RATES AND WERE UTILI ZED TO PURCHASE LONG TERM BANK FDRS AT LOWER RATE OF INTEREST. C) THE BANK FDRS OF RS.9.9 LACS AND RS.1.7 LACS MAT URED DURING THE YEAR AND THESE WERE RENEWED AT THE RATE OF 5.5% PER ANNUM INTEREST. D) NON-DRAWING OF THE OVER DRAFT FACILITY EXCEPT FO R AN INVESTMENT OF RS.20 LACS BY THE ASSESSEE IN THE MON TH OF MARCH, 2006 FOR THE PURCHASE OF A PLOT. CONSEQUENTLY, THE ASSESSING OFFICER DISALLOWED PRO PORTIONATE INTEREST PAID ON THE AMOUNT OF UNSECURED LOANS EQUI VALENT TO AMOUNT OF FDRS RESULTING IN DISALLOWANCE OF RS.2,27,856/-. 5. THE CIT (APPEALS) ALLOWED THE CLAIM OF THE ASSES SEE OBSERVING THAT THE FDRS TAKEN IN THE EARLIER YEARS WERE PLEDGED TO PROVIDE DAY-TO-DAY FUNCTIONING, STABILITY AND BANK GUARANTEE TO THE AS SESSEES BUSINESS. FURTHER THE ASSESSEE HAD ALSO CHARGED INTEREST @ 12 % ON THE DEBIT BALANCES OF THE PARTNERS AMOUNTING TO RS.1,54,181/- AND CONSEQUENTLY THE 4 NET BALANCE WAS ONLY RS.76,375/- WHICH SHOULD ALSO NOT HAVE BEEN DISALLOWED AS THE FUNDS WERE UTILIZED FOR THE PURPO SE OF BUSINESS. CONSEQUENTLY, THE ADDITION MADE BY THE ASSESSING OF FICER WAS DELETED. 6. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF TH E CIT (APPEALS). THE LEARNED D.R. FOR THE REVENUE PLACED RELIANCE ON THE FINDINGS OF THE ASSESSING OFFICER. 7. THE LEARNED A.R. FOR THE ASSESSEE POINTED OUT TH AT THE INTEREST EXPENDITURE WAS BECAUSE OF BUSINESS EXPEDIENCY WHER EIN INTEREST @ 12% WAS PAID TO THE PARTIES FROM WHOM LOANS WERE RAISED . THE INVESTMENT IN FDRS WAS CLAIMED TO BE @ 9% TO 10% INTEREST PER ANN UM EXCEPT ONE FDR WHICH WAS INVESTED AT INTEREST RATE OF 5.5%. T HE LEARNED D.R. FOR THE REVENUE FURTHER POINTED OUT THAT IN ADDITION TO THE INTEREST RECEIVED ON FDRS, FURTHER 2.5% WAS SAVED BY THE ASSESSEE ON THE COMMISSION TO BE PAID FOR ISSUE OF BANK GUARANTEE TO THE PRINCIPA L. OUR ATTENTION WAS FURTHER DRAWN TO THE CHARGING OF INTEREST @ 12% ON THE DEBIT BALANCE OF PARTNERS, WHICH IN TURN REDUCED THE DIFFERENCE POIN TED OUT BY THE ASSESSING OFFICER. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE LIMITED ISSUE WHICH ARISES FOR ADJUDICATION IS AGAI NST THE PROPORTIONATE DISALLOWANCE OF INTEREST MADE BY THE ASSESSING OFFI CER ON THE LOANS RAISED BY THE ASSESSEE, WHICH IN TURN WERE UTILIZED FOR INVESTMENT IN FDRS PRESUMABLY AT RATES LESSER THAN THE RATE OF IN TEREST PAID TO THE PARTIES. THE ASSESSEE CLAIMS TO HAVE MADE THE INVE STMENT IN FDRS BOTH FOR BUSINESS STABILITY AND ALSO EXPEDIENCY WHICH HA S FOR PROVIDING BANK GUARANTEE EQUIVALENT TO 100% AMOUNT TO ITS PRINCIPA L, M/S GLAXOSMITHKLINE CONSUMER HEALTH CARE LTD., NABHA. THE ASSESSEE CLAIMS TO HAVE RECEIVED INTEREST @ 9% TO 10% ON ITS FDRS AND ONLY ON ONE FDR WAS 5.5%. ON THE OTHER HAND, THE ASSESSEE PAID INTEREST @ 12% PER ANNUM ON THE AMOUNTS RECEIVED FROM CERTAIN PERS ONS WHO ARE 5 SPECIFIED PERSONS UNDER SECTION 40A(2)(B) OF THE AC T. THE ASSESSEE FURTHER CLAIMS TO HAVE SAVED 2.5% BEING EQUIVALENT TO THE COMMISSION PAYABLE ON THE BANK GUARANTEE ISSUED TO ITS PRINCIP AL. FURTHER THE ASSESSEE HAS ALSO CHARGED INTEREST @ 12% ON THE DEB IT BALANCES OF THE PARTNERS AMOUNTING TO RS.1,54,181/-. THE ASSESSING OFFICER HAD COMPUTED TOTAL INTEREST EARNING OF THE ASSESSEE AT RS.7,28,635/- ON THE EARNING PRINCIPLE AMOUNT OF RS.79.70 LACS INVESTED IN THE BANK FDRS. THE ASSESSEE HAD PAID INTEREST TO SPECIFIED PERSONS AT RS.9,56,491/-. THE ASSESSING OFFICER HAD FAILED TO CONSIDER THE CHARGI NG OF INTEREST BY THE ASSESSEE FIRM ON THE DEBIT BALANCE OF THE PARTNERS TOTALING RS.1,58,141/-. THUS IN THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE WE ARE IN AGREEMENT WITH THE ORDER OF THE CIT (APPEALS) THAT NO DISALLOWANCE ON ACCOUNT OF INTEREST IS WARRANTED IN THE CASE. UPHO LDING THE ORDER OF THE CIT (APPEALS) WE DISMISS GROUND NOS.1 AND 2 RAISED BY THE REVENUE. 9. THE ISSUE RAISED VIDE GROUND NOS.3 AND 4 BY THE REVENUE IS AGAINST THE DELETION OF ADDITION OF RS.4 LACS. THE ASSESSE E DURING THE YEAR UNDER CONSIDERATION HAD SHOWN ADVANCE OF RS.40 LACS TO M/ S GULMOHAR LAND CONE PVT. LTD., MOHALI. THE ASSESSEE HAD DEPOSITED RS.20 ALCS ON 16.3.2006 FOR BOOKING OF 1000 SQ.YD. PLOT AT MOHALI AND FURTHER PAID RS.10 LACS EACH ON 27.7.2006 AND 29.7.2006. AS PER THE ASSESSING OFFICER, THE ASSESSEE BEING IN THE BUSINESS OF SALE AND PURCHASE OF GHEE, TEA ETC., AND FUNDS AVAILABLE BEING INTEREST BEARIN G, THE ADMISSIBILITY OF INTEREST ON THE SAID AMOUNT DIVERTED FOR NON-BUSINE SS PURPOSE WAS QUESTIONED. THE ASSESSEE EXPLAINED THAT AS DURING THE FINANCIAL YEAR 2006-07, THE PROPERTY BUSINESS WAS IN FULL BLOOM, T HE PARTNERS OF THE ASSESSEE FIRM BY MUTUAL CONSENT AGREED TO ENTER INT O BUSINESS OF TRADING IN PROPERTY AS PER CLAUSE 2 OF THE PARTNERSHIP DEED . THE ASSESSEE DURING THE YEAR MADE INVESTMENT IN SEVEN NUMBER OF PLOTS N EAR MOHALI MEASURING 1006 SQ.YD. BY INVESTING RS.40 LACS. THE EXPLANATION OF THE ASSESSEE WAS REJECTED BY THE ASSESSING OFFICER AND PROPORTIONATE INTEREST 6 @ 12% OF RS.20 LACS AND 8% ON RS.20 LACS AMOUNTING TO RS.4 LACS WAS DISALLOWED BY THE ASSESSING OFFICER. THE CIT (APP EALS) VIDE PARA 4.9 OBSERVED AS UNDER: 4.9 THEREFORE, KEEPING IN VIEW THE ABOVE FACTS, IT IS VERY MUCH CLEAR THAT THE TRANSACTION OF THE FIRM WITH M/S GULMOHAR LAND CONE PVT. LTD. IS PURELY FOR DEALING IN REAL ESTATE BUSINESS AND NOT A INTEREST FREE ADVANCE. HENCE, I HELD THAT SINCE THE APPELLANT HAS DISCHARGED HIS ONUS IN PROVING THAT THE LOANS RAISED WERE UTILIZED FOR BUSINESS PURPOSE, THEREFORE, THE A.O. IS DIRECTED TO DELETE THE ADDITION AND ALLOW RELIEF ACCORDINGLY. 10. THE LEARNED A.R. FOR THE ASSESSEE DURING THE CO URSE OF ASSESSMENT PROCEEDINGS POINTED OUT THAT THE ASSESSEE IN THE SU CCEEDING YEAR I.E. IN THE FINANCIAL YEAR 2009-10 HAD SHOWN INCOME FROM SA LE OF LAND AS ITS BUSINESS INCOME AND THE INVESTMENT MADE WAS IN THE NEW LINE OF BUSINESS BEING CARRIED ON BY THE ASSESSEE. THE LEARNED A.R. FOR THE ASSESSEE ALSO REFERRED TO THE RESOLUTION PASSED BY THE PARTNERS P LACED AT PAGE 130 OF THE PAPER BOOK UNDER WHICH IT WAS AGREED THAT BECAU SE OF THE REDUCED BUSINESS IN GHEE, THE FIRM WOULD ENTER INTO REAL ES TATE BUSINESS. 11. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE BEFORE US THE ASSESSEE BY WAY OF VENTURING INTO NEW LINE OF BUSINESS OF REAL ESTATE HAD MADE ADVANCE OF RS.40 LACS FOR PURCHASE OF SEVEN PLOTS A T MOHALI. THE AMOUNT WAS PAID BY WAY OF ADVANCE AND WAS SO REFLEC TED IN THE BALANCE SHEET AS ON 31.3.2007. THE ASSESSEE DID VENTURE IN TO REAL ESTATE BUSINESS AND HAD SHOWN INCOME FROM THE SAID BUSINES S IN THE SUCCEEDING YEAR. IN THE TOTALITY OF THE ABOVE SAID FACTS AND CIRCUMSTANCES WHERE INVESTMENT HAS BEEN MADE FOR BUSINESS PURPOSE BY TH E ASSESSEE FIRM IN LINE WITH THE RESOLUTION PASSED BY THE PARTNERS FOR ENTERING INTO SUCH BUSINESS, WE FIND NO MERIT IN THE ORDER OF THE ASSE SSING OFFICER IN 7 DISALLOWING INTEREST RELATABLE TO SUCH ADVANCES PAI D FOR THE PURCHASE OF PLOTS. UPHOLDING THE ORDER OF THE CIT (APPEALS) WE DISMISS GROUND NOS. 3 AND 4 RAISED BY THE REVENUE. 12. IN THE RESULT, THE APPEAL OF THE REVENUE IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 13 TH JULY, 2012. SD/- SD/- (T.R.SOOD) (SUSHMA CHOWLA) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 13 TH JULY, 2012 *RATI* COPY TO: THE APPELLANT/THE RESPONDENT/THE CIT(A)/TH E CIT/THE DR. ASSISTANT REGISTRAR, ITAT, CHANDIGARH