M/s Black Mountin Looms (India), Agra V. A.C.I.T.,Circle-1, Agra

ITA 175/AGR/2013

• Counselvise Citation: 17520314 RSA 2013
• Duration Of Justice: 1 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-07-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 05-06-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 27-05-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S D SHARMA
• Assessee Lawyers: ARVIND KUMAR BANSAL
• Keywords: Notional interest; Commercial expediency
• Section: 143(3)

Judgement Text

I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 1 OF 6 IN THE INCOME TAX APPELLATE TRIBUNAL, AGRA BENCH, AGRA [CORAM : PRAMOD KUMAR AM AND JOGINDER SINGH JM] I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR:2008-09 BLACK MOUNTAIN LOOMS INDIA .APPELLANT 21/49, FREEGUNJ, AGRA 282 004 [PAN: AACF8640B] VS. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1, AGRA .RESPONDENT APPEARANCES BY: ARVIND KUMAR BANSAL, FOR THE APPELLANT S D SHARMA, FOR THE RESPONDENT DATE OF CONCLUDING THE HEARING :JUNE 5, 2014 DATE OF PRONOUNCING THE ORDER :JULY 18 TH , 2014 ORDER PER PRAMOD KUMAR: 1. THIS IS AN APPEAL FILED BY THE ASSESSEE AND IS D IRECTED AGAINST THE ORDER DATED 11 TH JANUARY 2013, PASSED BY THE LEARNED COMMISSIONER ( APPEALS), IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) OF THE INCOME TAX A CT, 1961, FOR THE ASSESSMENT YEAR 2008-09. 2. GRIEVANCES RAISED BY THE ASSESSEE ARE AS FOLLOWS : 3. IN GROUND NO. 2, THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE: BECAUSE THE AUTHORITIES BELOW HAVE WRONGLY AND ARBI TRARILY MADE ADDITION OF NOTIONAL INTEREST ON THE MONEY ADVANCED TO SISTER CONCERN FROM WHOM REGULAR PURCHASES ARE BEING MADE AND AMOU NT OF ADVANCE I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 2 OF 6 WAS ADJUSTED FROM THE PURCHASES MADE IN FUTURE FOR WHICH EVIDENCES WERE PRODUCED BEFORE THE AUTHORITIES BELOW. INTERES T ADDED RS.9,00,000. 4. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT WHILE THE ASSESSEE HAD ADVANCED INTERE ST FREE FUNDS TO ITS SISTER CONCERN, THE ASSESSEE WAS PAYING INTEREST ON ITS BO RROWINGS. IT WAS NOTED THAT THE ASSESSEE HAD GIVEN RS 80,00,000 TO ORIENTAL RUGS PV T LTD AND THE FUNDS SO GIVEN BY THE ASSESSEE WERE USED BY ORIENTAL RUGS PVT LTD FOR ITS BUSINESS PURPOSES. ON THESE FACTS, THE ASSESSING OFFICER HELD THAT THE AS SESSEE OUGHT TO HAVE CHARGED 12% INTEREST ON THESE BORROWINGS. ACCORDINGLY, THE ASSESSING OFFICER ADDED AN AMOUNT OF RS 9,60,000. AGGRIEVED, ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT(A) BUT WITHOUT COMPLETE SUCCESS. LEARNED CIT(A) REDUCED THE ADDITION TO RS.9,00,000, AND, WHILE DOING SO, REASONED AS FOLLO WS: 6.2 AGAINST THE ABOVE DECISION OF THE AO, THE LD. AR IN HIS WRITTEN SUBMISSION FILED VIDE LETTER DATED 19.12.2012 HAS E XPLAINED THAT THIS AMOUNT WAS PAID ,AS ADVANCE FOR PURCHASE OF GOODS FROM THI S SISTER CONCERN AND THE ASSESSEE (APPELLANT) HAS PURCHASED GOODS WORTH RS.3 ,69,59,304/- DURING THE YEAR AND RS.5,93,63,153/- IN SUBSEQUENT YEAR AND AS SUCH THE AMOUNT OF RS.80,00,000/- PAID BY THE ASSESSEE (APPELLANT) TO ITS SISTER CONCERN IS TRADING ADVANCE AND NO ADDITION FOR NOTIONAL INTEREST SHOUL D BE MADE. IN ORDER TO EXAMINING THE CONTENTION OF THE LD. AR, COPY OF ACC OUNTS OF M/S ORIENTAL RUGS (P) LTD. IN THE BOOKS OF ASSESSEE HAVE BEEN EX AMINED AND IT HAS BEEN FOUND THAT ASSESSEE (APPELLANT) HAS BEEN MAKING PUR CHASES OF CARPETS FROM ITS SISTER CONCERN AND THERE IS CREDIT BALANCE WITH IT TILL F.Y. 2005-06 RELEVANT TO ASSESSMENT YEAR 2006-07 BUT DURING THE F.Y. 2006-07 , THE ASSESSEE (APPELLANT) HAS PAID RS.80,00,000/-- TO ITS SISTER CONCERN ON 28.08.2006 AND AT THAT TIME, THERE WAS ALREADY DEBIT BALANCE OF RS.19 ,87,429/- AND AT THAT TIME, THERE WAS NO NEED FOR GIVING OF ANY ADVANCE AND SUB SEQUENTLY, BECAUSE OF THE PAYMENT OF RS.80,00,000/- ON 29.08.2006, THERE REMAINED DEBIT BALANCE WITH THE SISTER CONCERN THROUGHOUT THE YEA AND AT 3 1.03.2007, THERE WAS DEBIT BALANCE OF RS.94,95,208/-. THE SAME DEBIT BALANCE C ONTINUED DURING THE YEAR UNDER CONSIDERATION AND AS ON 31.03.2008, IT INCREA SED TO RS.99,70,904/-. THEREFORE, IT IS QUITE CLEAR THAT PAYMENT OF RS.80, 00,000/- MADE BY THE ASSESSEE (APPELLANT) TO ITS SISTER CONCERN, M/S ORI ENTAL RUGS (P) LTD. IS NOT FOR THE PURPOSE OF GIVING ADVANCE TO MAKE PURCHASES BUT TO HELP IT TO GET FDR MADE MAKING OF SUCH FDR BY THE SISTER CONCERN IS NO T ASSOCIATED WITH THE BUSINESS OF THE ASSESSEE (APPELLANT). ON POINTING O UT THE ABOVE POSITION OF FUND FLOW BETWEEN THE ASSESSEE (APPELLANT) AND ITS SISTER CONCERN AND SHOWING IT QUITE CLEARLY TO THE LD. AR THAT RS.80, 00,000/- PAID ON 29.08.2006 TO SISTER CONCERN WAS NOT FOR THE PURPOSE OF GIVING ADVANCE FOR PURCHASE BUT I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 3 OF 6 TO HELP THE SISTER CONCERN FOR MAKING OF FDR WITH W HICH NO BUSINESS PURPOSE OF THE ASSESSEE (APPELLANT) WOULD GET FULFILLED, TH E LD. AR FURTHER MADE SUBMISSION VIDE HIS LETTER DATED 07.01.2013 AND THE SAME IS REPRODUCED AS UNDER:- 2. ADDITION ON ACCOUNT OF INTEREST ON AMOUNT ADVANCED TO M/S ORIENTAL RUGS (P) LTD.:- IN CONTINUATION OF OUR EXPLANATION ON THE GROUND IT IS FURTHER STATED AS UNDER:- THOUGH THE ADVANCE GIVEN TO THE SAID CONCERN IS A T RADING ADVANCE AS STATED IN OUR PREVIOUS REPLY, ANY HOW THE ASSESSEE ALSO LIKE TO BRING THE FOLLOWING FACTS FOR CONSIDERATION TO DECIDE AND RE- COMPUTATION OF INTEREST TO BE ADDED/DISALLOWED ON THIS GROUND:- A. THAT OUT OF TOTAL ADVANCE OF RS.80,00,000/- ONLY RS.65,00,000/- WAS USED BY THE SAID FIRM FOR PURCHASE OF FDR WHICH IS CLEAR FROM THE FACT THAT IMMEDIATELY BEFORE PURCHASE OF FDR OF RS.1,05,00,00 0/- ON 29.08.2006 THE FDRS OF RS.40,09, 510/- WERE MAJORED OF THE SAID FI RM ON 26.08.2006. PHOTO STATE OF BANK STATEMENT IS ENCLOSED. B. THAT THE FDR WAS PURCHASED BY THE SAID FIRM FOR OBTAINING LOAN FOR BUSINESS PURPOSE IN SECURITY THEREOF, WHICH IS PROV ED FROM THE FACT THAT THERE WAS OVERDRAFT OF BANK WHICH IS USED FOR PAYMENT OF TRADING LIABILITIES. PHOTO STATE OF BANK STATEMENT IS ENCLOSED. THUS FROM THE ABOVE IT IS CLEAR THAT THE ADVANCE GI VEN TO THE SAID SISTER CONCERN IS USED BY THAT FIRM DIRECTLY OR INDIRECTLY FOR THE BUSINESS PURPOSE AS SUCH NO DISALLOWANCE/ADDITION BE MADE ON THIS GROUN D AND IN ANY CASE SINCE THE MAXIMUM AMOUNT WHICH SAID FIRM USED FOR PURCHAS E OF FDR IS RS.65,00,000/- ONLY AS STATED ABOVE THE DISALLOWANC E/ADDITION BE RESTRICTED TO 12% OF RS.65,00,000/-' IN THE ABOVE WRITTEN SUBMISSION, THOUGH THE LD. AR ARGUED THAT THE SISTER CONCERN HAS UTILIZED THE SAID AMOUNT DIRECTL Y OR INDIRECTLY FOR THE BUSINESS PURPOSES BECAUSE FDR PURCHASED WAS UTILIZE D BY THE SISTER CONCERN FOR OBTAINING LOANS FROM BANK BY GIVING THE FDR AS SECURITY AND THIS LOAN/OD ACCOUNT WITH BANK WAS USED FOR PAYMENT OF T RADING LIABILITIES, IT IS I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 4 OF 6 ULTIMATELY STATED THAT SINCE THE MAXIMUM AMOUNT WHI CH THE SAID FIRM (SISTER CONCERN M/S ORIENTAL RUGS (P) LTD.) USED FOR PURC HASE OF FDR IS RS.65,00,000/- ONLY, THE DISALLOWANCE/ ADDITION BE RESTRICTED TO 12% OF RS.65,00,000/-. WITH SUCH ASSERTION MADE BY THE LD . AR IN HIS WRITTEN SUBMISSION, NOW, IT IS VERY CLEAR THAT RS.80,00,000 /- GIVEN BY THE ASSESSEE (APPELLANT) TO ITS SISTER CONCERN IS NOT ADVANCE AG AINST PURCHASES BUT PAID FOR MAKING OF FDR BY SISTER CONCERN. NOW, IT HAS TO BE EXAMINED WHETHER FULL AMOUNT OF RS.80,00,000/- HAS BEEN UTILIZED FOR MAKI NG OF FDR OR ONLY RS.65,00,000/- HAS BEEN UTILIZED FOR MAKING OF FDR AS CONTENDED BY THE LD. AR, I HAVE EXAMINED THE BANK STATEMENT OF THE BANK ACCOUNT OF M/S ORIENTAL RUGS (P) LTD. FROM WHERE THE FDR WAS MADE. RELEVANT ENTRIES OF THE BANK ACCOUNT ARE GIVEN AS UNDER:- 17.08.2006 TO CLG : 00125080 12,696.00 9,75,642.75 18.08.2006 TO CLG : 00125074 18,040.00 9,93,682.75 22.08.2006 TO CLG : 00125083 5,740.00 9,99,422.75 25.08.2006 C & I STDR 941309/ 0120210032201 PAID 29,92,721.00 19,93,298.25 25.08.2006 C & I STDR 763071/ 0120210032202 PAID 10,16,789.00 30,10,087.25 26.08.2006 TO CLG : 00125085 22,490.00 29,87,597.25 29.08.2006 TO CLG : 00125084 28,694.00 29,58.903.25 29.08.2006 TO CLG : 00 125075 4,320.00 29,54,593.25 29.08.2006 TO FROM: 80,00,000.00 1,09.54,583.25 30.08.2006 TO CLG: 00125088 4,305.00 1,09,50,278.25 30.08.2006 TO CLG: 00125087 2,600.00 1,09,47,678.25 30.08.2006 0120210032204 1,05,00 . 4,47,678.25 31.08.2006 INTEREST TO DATE 5,591.11 4,42,087.14 ON EXAMINATION OF THE ABOVE BANK ACCOUNT, IT IS CLE AR THAT OUT OF MATURITY AMOUNT OF RS.40,09,570/- (29,92,721 + 10,1 6,789), ONLY RS.29,54,593/- WAS LEFT REMAINING, WHEN RS.80,00,00 0/- WAS RECEIVED FROM THE ASSESSEE (APPELLANT) AND AFTER RECEIPT OF THIS AMOUNT, TOTAL BALANCE IN THE BANK ACCOUNT WAS RS.1,09,54,593/- OUT OF WHICH, RS. 1,05,00,000/- WAS UTILIZED FOR MAKING OF FDR AND HENCE, IT CAN BE SAI D BY ANY CONSERVATIVE ESTIMATE THAT RS.75,00,000/- WAS UTILIZED OUT OF RS .80,00,000/- FOR MAKING OF FDR AND HENCE, DISALLOWANCE I ADDITION OF INTEREST SHOULD BE MADE @ 12% ON THE AMOUNT OF RS.75,00,0-00/-, INSTEAD OF RS.65, 00,000/- AS PROPOSED BY LD. AR OR ON RS.80,00,000/- AS MADE BY THE AO. COMP UTATION OF INTEREST @ 12% ON RS.80,00,000/- COMES TO RS.9,00,000/-. THERE FORE, DISALLOWANCE OF INTEREST OUT OF INTEREST CLAIMED U/S 36(1)(III) IS TO BE MADE AT RS.9,00,000/-, INSTEAD OF RS.9,60,000/- MADE BY THE AO AND HENCE, THE ASSESSEE (APPELLANT) GETS A RELIEF OF RS.60,000/. ACCORDINGLY, GROUND NO .2 IS PARTLY ALLOWED. I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 5 OF 6 5. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 6. WE HAVE HEARD THE RIVAL CONTENTIONS, PERUSED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE IN THE LIGHT OF THE APPLICABLE LEGAL POSITION. 7. WE FIND THAT IT IS AN UNDISPUTED POSITION THAT T HE MONEY WAS ADVANCED BY THE ASSESSEE TO ITS SISTER CONCERN WITH WHICH IT HAD RE GULAR DEALINGS. THE ASSESSEES CONTENTION TO THE EFFECT THAT THE SAID SISTER CONC ERN HAS USED THESE FUNDS FOR BUSINESS PURPOSES, INASMUCH AS THE FIXED DEPOSITS M ADE BY THE SISTER CONCERN WERE USED TO FACILITATE BANK BORROWINGS, HAS NOT BEEN CO NTROVERTED OR DISPUTED. ON THESE FACTS, IN OUR CONSIDERED VIEW, THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY HONBLE SUPREME COURTS JUDGMENT IN THE CASE OF CIT VS S A BUILDERS (288 ITR 1) WHEREIN THEIR LORDSHIPS HAVE, INTER ALIA, OBSERVED AS FOLLOWS: .......ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NEC ESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNO T JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HO W MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PRO FIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIE S MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A P RUDENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFE R OF THE BORROWED FUNDS TO A SISTER-CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER T HE AMOUNT WAS ADVANCED FOR EARNING PROFITS. 8. IN THIS VIEW OF THE MATTER, AND HAVING REGARD TO THE FACT THAT THE EXPLANATION OF THE ASSESSEE HAS NOT BEEN FAULTED ON FACTS, WE DO NOT S EE ANY LEGALLY SUSTAINABLE BASIS FOR THE IMPUGNED DISALLOWANCE. IT IS ALSO IMPORTANT TO BEAR IN MIND, AS WAS STATED BY THEIR LORDSHIPS IN THE CASE OF SA BUILDERS (SUPRA), .... MONEY CAN BE SAID TO BE ADVANCED TO A SISTER-CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OT HER CIRCUMSTANCES (WHICH NEED I.T.A. NO.: 175/AGRA/2013 ASSESSMENT YEAR: 2008-09 PAGE 6 OF 6 NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIO US THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE H OLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE S UBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDIN ARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS . THEREFORE, THE MERE FACT THAT THE MONEY ADVANCED BY THE ASSESSEE HAS BEEN USED FOR PLACING A FIXED DEPOSIT WITH THE BANK, AS LONG AS ASSESSEES CONTENTION THAT VERY PLACEMENT OF FIXED DEPOSIT WAS IN FURTHERANCE OF THE LEGITIMATE BUSINESS INTEREST OF THE SISTER CONCERN REMAINS UNCONTROVER TED, CANNOT BE PUT AGAINST THE ASSESSEE. IN VIEW OF THESE DISCUSSIONS, AS ALSO BEARING IN MI ND ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO DELETE THE IMPUGNED ADDITION, OR RATHER D ISALLOWANCE, OF INTEREST OF RS 9,00,000. THE ASSESSEE GETS THE RELIEF ACCORDINGLY. 9. GROUND NO. 2 IS THUS ALLOWED. 10. NO OTHER GROUND OF APPEAL WAS PRESSED BEFORE US . 11. IN THE RESULT, THE APPEAL IS ALLOWED IN THE TER MS INDICATED ABOVE. PRONOUNCED IN THE OPEN COURT TODAY ON 18 TH DAY OF JULY 2014. SD/- SD/- JOGINDER SINGH PRAMOD KUMAR (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) AGRA, THE 18 TH DAY OF JULY, 2014. COPIES TO : (1) THE APPELLANT (2) THE RESPONDENT (3) CIT (4) CIT(A) (5) THE DEPARTMENTAL REPRESENTATIVE (6) GUARD FILE BY ORDER ETC ASSISTANT REGISTRAR INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA