Ramdev Polkampalli, Hyderabad, Hyderabad V. Addl. CIT, Range-4, Hyderabad, Hanamkonda

ITA 1704/HYD/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6010 (ITAT-HYDERABAD)
• Duration Of Justice: 1 year(s) 5 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-05-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2011-2012
• Appeal Filed On: 19-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: M NAVEEN
• Keywords: Proportionate interest

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH A, HYDERABAD BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER ITA NO.1704/HYD/2016 ASSESSMENT YEAR: 2011-12 SRI RAMDEV POLKAMPALLI HYDERABAD. PAN AGLPP6304M VS. THE ADDL. CIT, RANGE-4, HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.C. DEVDAS REVENUE BY : SHRI M. NAVEEN DATE OF HEARING : 28-05-2018 DATE OF PRONOUNCEMENT : 31-05-2018 ORDER PER B. RAMAKOTAIAH, AM: THIS IS AN APPEAL BY ASSESSEE AGAINST THE ORDER OF CIT(A)-1, HYDERABAD DATED 09.09.2016 ON THE ISSUE OF DISALLOWANCE U/S 36(1)(III) OF THE IT ACT ON THE DIVERSION OF BORROWED FUNDS ON WHICH INTEREST WAS PAID. 2. BRIEFLY STATED FACTS ARE THAT, ASSESSEE IS MANAGING PARTNER IN M/S PULOMI ENTERPRISES, A PARTNERSHIP FIRM, WHICH HAS TAKEN A LOAN FROM M/S BAJAJ LTD., TO AN EXTENT OF RS. 2.5 CRORES. OUT OF THIS FUNDS, THE FIRM EXTENDED LOAN TO ASSESSEE OF RS. 2 CRORES. ASSESSEE HAS PAID AN INTEREST OF RS. 29,42,526/- @ 18% P.A AS CHARGED BY THE SAID FINANCE COMPANY. IN ADDITION, ASSESSEE ALSO PAID AT RS. 2,04,590/- TOWARDS INSURANCE ON LOAN PREMIUM AND RS. 3,41,508/- TOWARDS LOAN PROCESSING FEE. ON EXAMINATION OF FUNDS FLOW, A.O WAS OF THE OPINION THAT OUT OF RS. 2 CRORES 2 ITA NO. 1704/HYD/2016 SHRI RAMDEV P, HYDERABAD. TAKEN LOAN FROM THE FIRM, ASSESSEE HAS DIVERTED AN AMOUNT OF RS. 1.02 CRORES TO RELATIVES AND FRIENDS WITHOUT ANY INTEREST. CONSEQUENTLY, INVOKING THE PROVISIONS OF SEC. 36(1)(III) OF THE ACT, A.O DISALLOWED THE PROPORTIONATE INTEREST AND DISALLOWED AN AMOUNT OF RS. 18,36,000/-. A.O ALSO DISALLOWED THE PROPORTIONATE CLAIM OF INSURANCE ON LOAN PREMIUM AND LOAN PROCESSING FEE STATING THAT THESE EXPENDITURES ARE NOT INCURRED BY ASSESSEE. 3. IT WAS THE SUBMISSION BEFORE LD. CIT(A) THAT ASSESSEE HAS NOT DIVERTED THE FUNDS AS CLAIMED BY A.O AND THE AMOUNTS WERE GIVEN TO FRIENDS AND RELATIVES FOR BUSINESS PURPOSES AND DISALLOWANCE OF PROPORTIONATE AMOUNT IS NOT WARRANTED. FURTHER WHILE EXPLAINING ABOUT THE INDIVIDUAL LOANS, IT WAS THE CONTENTION THAT AN AMOUNT OF RS. 9 LAKHS ADVANCED TO MR. A.V.N. REDDY WAS A CARRIED OVER DEBIT BALANCE AS ON 01.04.2010 AND SO THAT AMOUNT SHOULD NOT HAVE BEEN TAKEN. WITH REFERENCE TO THE ADVANCE TO MR. CH. SUDHAKAR RAO, IT WAS SUBMITTED THAT THESE AMOUNTS WERE ADVANCED IN THE MONTH OF MARCH 2010 TO THE EXTENT OF RS. 25 LAKHS BEFORE TAKING LOAN FROM M/S PULOMI ENTERPRISES AND THAT AMOUNT WAS ADVANCED FROM ANOTHER FIRM-INTEREST FREE. WITH REFERENCE TO THE OTHER AMOUNT OF ADVANCE OF RS. 25 LAKHS ON 15.09.2010, IT WAS SUBMITTED THAT ASSESSEE HAD OTHER BORROWINGS OF INTEREST FREE FUNDS AND THEREFORE THE DISALLOWANCE AT RS. 9 LAKHS ON THE ABOVE AMOUNTS NEED TO BE DELETED. WITH REFERENCE TO THE ADVANCE OF RS. 32,50,000/- TO SMT. P. DHARMA JYOTHI, IT WAS SUBMITTED THAT THE AMOUNT WAS ADVANCED TO AN EXTENT OF RS. 49 LAKHS AND RECEIVED BACK AN AMOUNT OF RS. 26,50,000/- IN THE 3 ITA NO. 1704/HYD/2016 SHRI RAMDEV P, HYDERABAD. MONTH OF MAY 2010 ITSELF, AND THERE WERE OPENING BALANCES ALSO THEREFORE THE AMOUNT OF ADVANCE OF RS. 26,50,000/- HAS LYING WITH DEBTOR FOR LESS THAN ONE MONTH. IT WAS CONTENTED THAT A.O OUGHT NOT TO HAVE DISALLOWED THE INTEREST AS THE FUNDS ADVANCED TO THE OTHER PERSONS ARE NO NEXUS TO THE BORROWED FUNDS FROM THE FIRM. WITH REFERENCE TO THE PROCESSING FEE AND INSURANCE FEE, IT WAS SUBMITTED THAT THE ASSESSEE HAS CLAIMED ONLY PROPORTIONATE AMOUNT AS THE MAJOR PART OF THE LOAN OBTAINED WAS TAKEN BY THE PARTNER AND FIRM WAS ONLY A PASS THROUGH ENTITY AND THESE TWO AMOUNTS ARE INCIDENTAL EXPENDITURE FOR OBTAINING THE LOAN AND ACCORDINGLY ALLOWABLE IN THE ASSESSEES HANDS. 4. LD. CIT(A), HOWEVER, DID NOT CONSIDER ANY OF THE DETAILS AND CONFIRMED THE ORDER OF THE A.O IN THE VERY BRIEF ORDER WITHOUT ANY REASONS. 5. IT WAS THE CONTENTION OF LD. COUNSEL THAT THE AMOUNT OF RS. 9 LAKHS ADVANCED TO MR. A.V.N. REDDY CONSIDERED AS DIVERSION BY A.O WAS OUT OF OPENING BALANCE AND NOT FROM THE BORROWED FUNDS. IT IS ALSO CONTENDED THAT ANOTHER RS. 25 LAKHS ADVANCED TO MR. CH. SUDHAKAR RAO WAS ALSO OUT OF BORROWED FROM OTHER FIRM AND NOT OUT OF INTEREST BEARING FUNDS. IT WAS HIS CONTENTION THAT INTEREST ON THESE TWO AMOUNTS SHOULD NOT HAVE BEEN DISALLOWED, AS ASSESSEE HAS HIS OWN FUNDS AND ALSO BORROWED FUNDS INTEREST FREE. WITH REFERENCE TO THE LOANS ADVANCED TO SMT. P. DHARMA JYOTHI, THE CORRECT INTEREST SHOULD BE DISALLOWED WHICH HAS TO BE WORKED OUT. 4 ITA NO. 1704/HYD/2016 SHRI RAMDEV P, HYDERABAD. 6. LD. DR, HOWEVER, RELIED ON THE ORDERS OF CIT(A) TO STATE THAT A.O HAS GIVEN CLEAR FINDINGS THAT AN AMOUNT OF RS. 1.02 CRORES HAS BEEN DIVERTED, ACCORDINGLY THE DISALLOWANCE IS WARRANTED. 7. WE HAVE CONSIDERED THE RIVAL CONTENTIONS AND PERUSED THE PAPER BOOKS PLACED ON RECORD. AS SEEN FROM THE DOCUMENTS, THERE IS NO DISPUTE THAT ASSESSEE HAS DIVERTED PART OF THE FUNDS BORROWED TO OTHERS INTEREST FREE, THEREFORE, TO THAT EXTENT INVOKING THE PROVISIONS OF SEC. 36(1)(III) OF THE IT ACT IS TO BE UPHELD. HOWEVER, WITH REFERENCE TO QUANTIFICATION OF THE AMOUNT ADVANCED, AS SEEN FROM THE SUBMISSIONS MADE BEFORE CIT(A) AND THE PAPER BOOK AN AMOUNT OF RS. 25 LAKHS ADVANCED TO MR. CH. SUDHAKAR RAO WAS OUT OF THE BORROWED FUNDS FROM ANOTHER FIRM INTEREST FREE. MOREOVER AN AMOUNT OF RS. 9 LAKHS ADVANCED TO MR. A.V.N REDDY WAS OPENING BALANCE AS ON 01.04.2010. LD. COUNSEL RESTRICTED HIS ARGUMENTS TO THE SOURCE OF THESE FUNDS. IT IS NOT KNOWN HOW A.O HAS CONSIDERED THESE AMOUNTS AS DIVERSION OF THE BORROWED FUNDS. LD. CIT(A) DID NOT MAKE ANY EFFORT TO EXAMINING THE FACTS THEREFORE TO THE EXTENT OF QUANTIFICATION, WE RESTORE THE ISSUE TO THE FILE OF A.O WITH A DIRECTION TO EXAMINE THE FUNDS FLOW AGAIN AND WHETHER THE BORROWED FUNDS AS QUANTIFIED BY HIM HAVING BEEN DIVERTED. ASSESSEES CONTENTION THAT AN AMOUNT OF RS. 9 LAKHS ADVANCED TO MR. A.V.N REDDY WAS PRIOR TO THE OBTAINING THE LOAN AND AN AMOUNT OF RS. 25 LAKHS GIVEN TO MR. CH. SUDHAKAR RAO WAS SOURCED OUT OF BORROWED FROM ANOTHER FIRM ARE REQUIRED TO BE EXAMINED FACTUALLY. IN CASE THESE FUNDS ARE NOT DIVERTED 5 ITA NO. 1704/HYD/2016 SHRI RAMDEV P, HYDERABAD. FROM THE INTEREST BEARING BORROWED FUNDS, DISALLOWANCE OF INTEREST ON THOSE AMOUNTS DOES NOT ARISE. IN ADDITION, ASSESSEE HAS ALSO CONTESTED BEFORE LD. CIT(A) THAT THE FUNDS HAVE BEEN RECEIVED BACK FROM SMT. DHARMA JYOTHI AND THE ADVANCE OF RS. 26,50,000/- WAS LYING WITH DEBTOR FOR LESS THAN ONE MONTH. THESE ASPECTS ALSO REQUIRE EXAMINATION BY A.O AND IF THESE CONTENTIONS ARE FOUND CORRECT, THE DISALLOWANCE SHOULD BE RESTRICTED TO THE PERIOD OF LOAN DIVERSION ONLY. THESE ASPECTS REQUIRE FRESH EXAMINATION BY A.O. ASSESSEE SHOULD BE GIVEN DUE OPPORTUNITY IN QUANTIFYING THE AMOUNT OF DIVERSION OF FUNDS AND QUANTIFICATION OF INTEREST TO BE DISALLOWED. THE GROUNDS ARE CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. 8. COMING TO THE CLAIM OF INSURANCE AND PROCESSING FEE, IT WAS THE SUBMISSION THAT THE AMOUNTS WERE CLAIMED PROPORTIONATELY. EVEN THOUGH THE FIRM HAS OBTAINED FOR LOAN. AS CAN BE SEEN FROM THE ORDER OF THE A.O SUBSTANTIAL PART OF THE AMOUNT WAS ADVANCED TO ASSESSEE. CONSEQUENTLY ON COMMERCIAL PRINCIPLES, PROPORTIONATE EXPENDITURE INCURRED FOR OBTAINING THE LOAN FROM THE SAID FINANCE COMPANY WOULD BE PASSED ON TO ASSESSEE. IF THAT BEING SO, THERE IS GENUINENESS IN THE CLAIM OF ASSESSEE THAT THE INSURANCE AND PROCESSING FEE INCURRED BY THE FIRM ARE TO BE REIMBURSED BY HIM, WHICH IS AN ALLOWABLE EXPENDITURE AS ASSESSEE HAS UTILIZED THESE FUNDS IN HIS BUSINESS. A.O IS DIRECTED TO EXAMINE THE TOTAL AMOUNT OF INSURANCE AND PROCESSING FEE PAID BY THE FIRM AND WHETHER ASSESSEES CLAIM WAS RESTRICTED PROPORTIONATELY TO THE 6 ITA NO. 1704/HYD/2016 SHRI RAMDEV P, HYDERABAD. AMOUNT RECEIVED. THESE ASPECTS REQUIRE FRESH VERIFICATION. SUBJECT TO THE QUANTIFICATION OF THE AMOUNT, WE HOLD THAT THE AMOUNTS ARE ALLOWABLE EXPENDITURE. THE GROUNDS ACCORDINGLY CONSIDERED AS ALLOWED. 9. IN THE RESULT APPEAL IS CONSIDERED ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON 31 ST MAY, 2018. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER HYDERABAD, DATED 31 ST MAY, 2018. KRK 1) SHRI RAMDEV POLKAMPALLI C/O B. NARSING RAO & CO CAS, PLOT NO. 554, ROAD NO. 92, JUBILEE HILLS, HYD 96. 2) ADD. CIT, RANGE-4, HYDERABAD. 3) CIT(A) -1, HYDERABAD. 4) THE PR.CIT-1, HYDERABAD. 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDERABAD. 6) GUARD FILE