M/s Shakti Agencies Pvt. Ltd, Bhubaneswar V. ACIT, Bhubaneswar

ITA 183/CTK/2012

• Counselvise Citation: 18322114 RSA 2012
• Duration Of Justice: 9 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-12-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 11-12-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 13-03-2012
• Court: TRIBUNAL
• Department Lawyers: N K NEB
• Assessee Lawyers: S C BHADRAB K MOHANTY ARS
• Keywords: Business expenditure; Notional interest; Sham transactions

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK ( ) BEFORE . . , , HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER. /AND . . . , H ONBLE SHRI K.S.S.PRASAD RAO, JUDICIAL MEMBER / I.T.A.NO. 183/CTK/2012 / ASSESSMENT YEAR 2007 - 08 M/S.SHAKTI AGENCIES PVT. LTD., 2, BAPUJUI NAGAR, BHUBANESWEAR PAN: AAGCS 9154 G - - - VERSUS - ASST.COMMISSIONER OF INCOME - TA X, CIRCLE 1(1), BHUBANESWAR. ( /APPELLANT ) ( / RESPONDENT ) / FOR THE APPELLANT : / SHRI S.C.BHADRA/B.K.MOHANTY, ARS / FOR THE RESPONDENT: / SHRI N.K.NEB, DR / DATE OF HEARING: 11.12.2012 / DATE OF PRONOUNCEMENT: 14.12.2012 / ORDER . . , , SHRI K.K.GUPTA, ACCOUNTANT MEMBER. THIS APPEAL BY THE ASSESSEE RAISES THE FOLLOWING GROUNDS. 1. THAT THE ASSESSMENT ORDER U/S.143 (3) AS WELL AS THE APPELLATE ORDER IS AGAINST LAW, WEIGHT OF EVIDENCES AND PROBABILITIES OF THE CASE. 2. THAT THE LEARNED ASSESSING OFFICER HAS ARBITRARILY DISALLOWED THE INTEREST PAYMENT U/S. 36 (I) (III) TO THE EXTENT OF 10,20,315 OUT OF TOTAL INTEREST PAID AMOUNTIN G TO 70,07,788 ON THE GROUNDS OF NOT UTILISING FOR THE PURPOSE OF THE BUSINESS AND SUCH INTEREST BEARING AMOUNT HAS BEEN GIVEN AS AN ADVANCE TO APPELLANTS SISTER CONCERN. THE HONORABLE CIT (APPEAL) ALSO CONFIRMED WITH THIS. HOWEVER, THE FACT IS THAT THE SOURCES OF ADVANCES GIVEN TO SISTER CONCERNS WERE FROM THIRD PARTY LOAN WAS IGNORED BY THE LEARNED ASSESSING OFFICER. 3. THAT, THE LEARNED ASSESSING OFFICER HAS ARBITRARILY TREATED THE BUSINESS EXPENDITURE REIMBURSEMENT AMOUNTING TO 15,51,550 AS COMMISS ION PAID AGAINST THE SERVICE OF FACILITATION OF SALE AND DISALLOWED THE SAME ON THE GROUNDS OF NOT DEDUCTING TAX. THE HONORABLE CIT(APPEAL) ALSO CONFIRMED WITH THIS. HOWEVER THE FACT IS THAT, TO GET HOLD OF HIGH VALUE I.T.A.NO. 183/CTK/2012 2 CUSTOMERS, THE APPELLANT COMPANY HAS T IED UP WITH ONE OF ITS SISTER CONCERNS WHO DEALS WITH ELECTRONIC AND OTHER FAST MOVING CONSUMER GOODS WAS NOT CONSIDERED. AS PER UNDERSTANDING, WHEREVER HIGH VALUE PURCHASERS ARRIVE THE FIRM PURSUES THEM TO GO TO APPELLANT COMPANYS SHOW ROOM FOR PURCHASE OF ORNAMENTS. DEPENDING UPON THE SALES VALUES THE COMPANY OFF LOADS ITS DISCOUNTS TO THAT SISTER CONCERN TO MEET THEIR EXPENSES BY WAY OF DEPUTATION OF STAFF, DISCUSSION, REFRESHMENT ETC. THESE EXPENSES HAVE BEEN NAMED AS BUSINESS EXPENSES REIMBURSEMENT. T HE SAID REIMBURSEMENT BY THE SISTER CONCERNS HAS BEEN OFFERED AS INCOME BY THE SISTER CONCERN. 2. THE BRIEF FACTS AS HAVE BEEN BROUGHT ON RECORD ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY FORMED WITH THE MAIN OBJECT OF PURCHASE AND SALE OF STONE DIAMOND AND JEWELLERY OF TRANISQ BRAND. THE ASSESSEE COMPANY DERIVES ITS INCOME FROM AFORESAID TRADING ACTIVITIES. DURING THE YEAR UNDER CON SIDERATION, THE ASSESSEE COMPANY FILED ITS RETURN OF INCOME ON 12.11.2007, DISCLOSING TOTAL INCOME OF 88,47.834 AND THE RETUR N WAS PROCESSED U/S.143(1) ON 5 TH DECEMBER, 2008. SUBSEQUENTLY THE RETURN WAS SELECTED FOR SCRUTINY AND ACCORDINGLY DEPARTMENTAL NOTICES U / S.143 (2) AND 142 (1) WERE SERVED ON THE ASSESSEE. AFTER EXAMINING THE DETAILS FURNISHED BY THE ASSESSEE A ND CONSIDERING THE EXPLANATION OF THE ASSESSEE, THE ASSESSING OFFICER COMPLETED THE ASSESSMENT U/SD.143(3) DISALLOWED INTEREST PAYMENT AMOUNTING TO 10,20,315 U/S. 36 (1) (III) OUT OF TOTAL CLAIM OF INTEREST OF 70,07,788 HOLDING THE SAME AS NOT PERTAINING TO BUSINESS. HE FURTHER D ISALLOWED BUSINESS EXPENDITURE REIMBURSEMENT OF 15.51,550 AND . ADVERTISEMENT EXPENSES OF 8,000 . 3. AGGRIE VED THE ASSESSEE APPEALED BEFORE THE APPELLATE AUTHORITY, WHO CONFIRMED THE DISALLOWANCE OF INTEREST U/S.36(1)(III) AMOUNTING TO 10,20,315 AND ALSO CONFIRMED THE DISALLOWANCE OF BUSINESS EXPENDITURE WHICH WAS A REIMBURSEMENT AMOUNTING TO 15,51,550. THE L EARNED CIT(A) HELD A VIEW THAT THE AMOUNTS GIVEN TO FRIENDS AND RELATIVES IN SISTER CONCERNS WERE THE I.T.A.NO. 183/CTK/2012 3 AMOUNT WHICH WERE DIRECTLY PAID FROM THE BANK ACCOUNT WHICH OVERDRAFT AGAIN WAS EXTENDED TO THE ASSESSEE BY THE BANK BY CHARGING INTEREST OF 70,07,778. T HEREFORE, ON THE BASIS OF NEXUS ESTABLISHED BY THE ASSESSING OFFICER, HE HELD THAT THE AMOUNTS ADVANCED WITHOUT CHARGING INTEREST WERE FROM INTEREST BEARING FUNDS OUGHT TO BE DISALLOWED AS PER THE ASSESSING OFFICERS NOTING. WITH RESPECT TO DISALLOWANCE OF 15,51,550 BEING THE REIMBURSEMENT OF EXPENDITURES INCURRED BY THE SISTER CONCERN WHO RAISED THE BILLS ON THE ASSESSEE AT THE FLAT RATE OF 5% UP TO 2 LAKHS OF THE TURNOVER AND 6% ON THE BILLS RAISED EXCEEDING 2 LAKHS OF THE TURNOVER WERE THEREFORE RIGHT LY DISALLOWED FOR WANT OF DEDUCTION OF TAX AT SOURCE UNDER THE PROVISIONS OF SECTION 194H. 4. THE LEARNED COUNSEL OF THE ASSESSEE INITIATING HIS ARGUMENTS SUBMITTED THAT THE ASSESSEE DEALS IN JEWELRY OF TANISHQ BRAND, BEING A RETAIL OUTLET OF TITAN GROUP O F INDUSTRIES LTD., WHICH BELONGS TO THE TATA GROUP. THE ASSESSEE DISCLOSES SALE, PURCHASE AND ALL OTHER TRANSACTION S RELATING TO SAME IN ITS BOOKS OF ACCOUNT AND ACCORDINGLY, THE PROFIT AND LOSS AND BALANCE SHEET IS PREPARED. THE ASSESSMENT UNDER CONTEXT W AS SELECTED FOR SCRUTINY AND THE ASSESSING OFFICER MADE ADDITION BY DISALLOWING INTEREST U/S 36(1) (III) AMOUNTING TO 10,20,315 AND ALSO ADDITIONS U/S 40(A)(I A) OF 15,51,500. 4. 1. AS REGARDS DISALLOWANCE OF 10.20,315 ON ACCOUNT OF INTEREST U/S 36(1)(III), IT IS SUBMITTED THAT THE SAME IS CALCULATED ON ASSUMPTION OF DIVERSION OF FUND OUT OF CASH CREDIT ACCOUNT WITHOUT CONSIDERING THE FACT THAT THE ENTIRE TRANSACTION IS ROUTED THROUGH CASH CREDIT ACCOUNT AS STIPULATED BY BANK. IT IS FURTHER SUBMITTED THAT THE CASH CREDIT ACCOUNT IS A RUNNING ACCOUNT IN WHICH DEPOSITS FROM ALL SOURCES ARE MADE AND ALSO ALL THE DISBURSEMEN T ARE ROUTED THROUGH THE SAME ACCOUNT. THE ASSESSEE CAN ONLY I.T.A.NO. 183/CTK/2012 4 MAKE OVERDRAWAL FROM THE SAME ACCOUNT WITHIN THE LIMIT SANCTIONED TO IT. THE PRIMARY SECURITY FOR OVERDRAWAL IS STOCK AND RECEIVABLES. FOR THIS, THE LEARNED COUNSEL OF THE ASSESSEE REFERRED TO PA GE S - 72 TO 77 OF THE PAPER BOOK CONTAINING THE SANCTION LETTER OF CASH CREDIT ACCOUNT BY ORIENTAL BANK OF COMMERCE. HE SUBMITTED THAT AFTER THE SANCTION LETTER, THE LIMIT OF CASH CREDIT IS ENHANCED FROM 2.00 CRORE TO 3.15 CRORE FROM THE END OF DECEMBER 2 006, ( P AGE 73 OF THE PAPER BOOK ) . THE PRI MARY SECURITY IS HYPOTHECATION OF STOCK AND RECEIVABLES AND RATE OF INTEREST IN 12% AS PER THE SANCTION LETTER. BESIDES ABOVE, COLLATERAL SECURITY IS EXTENDED TO IMMOVABLE PROPERTIES BELONGI NG TO HINDUSTAN AGENCIES, RAMKHRU SHNA AGENCIES AND HINDUSTAN DISTRIBUTOR, BEING THE SISTER CONCERNS. AS PER SCHEDULE C TO BALANCE SHEET ( PAGE 24 OF THE PAPER BOOK) UNDER THE HEAD SECURED LOAN, THERE IS A CREDIT AMOUNT FROM OBC AMOUNTING TO 1.326 CRORE AGAINST THE STOCKS OF 6.58 CRORE AND DEBTORS OF 0.264 CRORE , WHICH APPEARS IN PAGE - 22 OF THE PAPER BOOK UNDER THE HEAD CURRENT ASSETS LOANS AND ADVANCE. ON PRIMA - FACIE, THE CASH CREDIT OF 1.32 CRORE IS EXHAUSTED AGAINST STOCK OF 6.58 CRO RE . IN VIEW OF THE ABOVE, THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THERE IS NO DIVERSION OF CASH CREDIT TO ANY OTHER ACCOUNT. HE FURTHER SUBMITTED THAT IN THE BALANCE SHEET (PAGE - 22 OF PAPER BOOK ) THERE IS A NET CURRENT ASSETS OF 9.86 CRORE. HE REFERRED TO PAGE 33 OF THE PAPER BOOK, WHERE SOURCES OF FUND AND UTILIZATION OF FUND IS DISCLOSED. SOURCES OF FUND FROM OWN FUND, UNSECURED LOAN AND CURRENT LIABILITIES AMOUNTS TO 3.65 CRORE AGAINST UTILIZATION FOR LOAN AND ADVANCE AMOUNTS TO 2.10 CRORE , LEAVING 1 .5 CRORE AS SURPLUS FUND, WHICH IS UTILIZED OTHERWISE. APPARENTLY, THERE IS NO DIVERSION OF FUND FROM THE INTEREST BEARING LOAN TO OTHER ADVANCES, INCLUDING ADVANCE TO MAX INTERNATIONAL ( 56.50 LAKH) R. K. AGENCIES ( 117.05 LAKH) AND HINDUSTA N ENTERPRISES ( 7.95 LAKH). HE FURTHER I.T.A.NO. 183/CTK/2012 5 SUBMITTED THAT THE BANK ACCOUNT FOR CASH CREDIT CONTAINED IN PAGE 81 TO 104 OF THE PAPER BOOK ALONG WITH PARTY ACCOUNT CLEARLY ESTABLISH THAT THE AS SESSING OFFICER AS WELL AS THE L EARNED CIT(A) HAS WRONGLY DETERMINED THE ADVANCES TRANSFERRED FROM THE CASH CREDIT ACCOU NT. THE LEARNED COUNSEL OF THE ASSESSEE POINTED OUT THAT AS PER THE ASSESSMENT ORDER, FIRSTLY THE ASSESSING OFFICER HAS CALCULATED THE INTEREST @13.75% FOR DIVERSION FUND AGAINST 12% CONTAINED IN THE SANC TION LETTER. IN CASE OF HINDUSTAN ENTERPRISES, THE INTEREST IS CALCULATED ON 7.95 LAKH FOR 12 MONTHS. 7.95 LAKH APPEARS AS ADVANCE AT THE BEGINNING OF THE YEAR (OPENING BALANCE) APPEARING IN SCHEDULE D TO BALANCE SHEET IN BRACKET INDICATING DEBIT BALANCE IN PAGE 24. AND ALSO IN SCHEDULE C UNDER THE HEAD LOAN AND ADVANCE AS 7.95 LAKH AT THE END OF THE YEAR CONTAINED IN SCHEDULE C IN PAGE 26 OF THE PAPER BOOK. THEREFORE, THERE IS NO OUTFLOW OF FUND DURING THE YEAR FROM THE CASH CREDIT ACCOUNT, FOR WHICH NO INTEREST SHALL BE COMPUTED ON THE SAME ADVANCE. REGARDING ADVANCE OF 56,50, 000 TO MAX INTERNATIONAL, THE LEARNED COUNSEL OF THE ASSESSEE REFERRED TO THE LEDGER ACCOUNT CONTAINE D IN PAGE 78 OF THE PAPER BOOK AND SUBMITTED THAT D URING THE YEAR, THERE ARE THREE CREDITS AMOUNTING TO 61,00,000 ( 30,00,000 + 5,00,000+ 26,00,000) AG AINST WHICH THERE ARE TWO PAYMENT S AMOUNT ING TO 45,50,00 ( 20,00,000+ 25,50,000), LEAVING A RECEIPT OF 15.5 LAKH. RATHER THERE IS A LOAN OF 15.5 LAKH FROM MAX INTERNATIONAL, INSTEAD OF ADVANCE TO IT. THEREFORE, CALCULATION OF INTEREST ON SO CALLED ADV ANCE IS NOT CORRECT. TO CORROBORATE THE ABOVE FACTS, HE FURTHER REFERRED TO BANK ACCOUNT CONTAINED IN PAGE S 81, 82, 87, 94, 95,97, AND 99 OF PAPER BOOK. SIMILARLY, IN CASE OF R. K. AGENCIES, THERE ARE TWO RECEIPTS AMOUNTING TO 13.00 LAKH ( 10.00 LAKH+ 3. 00 LAKH) AND ADVANCE OF 96.00 LAKH IS MADE ON DT. 05.03.2007 AND 19.00 LAKH ON DT.09.03.2007, WHICH IS IN THE FAG END OF THE YEAR. WHEN ADVANCE OF I.T.A.NO. 183/CTK/2012 6 96.00 LAKH IS MADE THERE IS A CREDIT BALANCE OF 82.87 LAKH AGAINST CASH CREDIT OF 3.5 IAKH. IT MAY BE NO TED THAT DEPOSITS ARE MADE FROM VARIOUS SOURCES, WHICH REDUCES THE CREDIT BALANCE AND AFTER ADVANCE OF 96 LAKH THE CREDIT BALANCE IS 1.78 CRORE AGAINST THE SANCTION LIMIT OF 3.15 CRORE . SIMILARLY, ON 09.03.2007 ADVANCE OF 19.00 IAKH IS MADE AFTER WHIC H CREDIT IS 2.44 CRORE AGAINST THE SANCTION LIMIT OF 3.15 CRORE . AGAIN, IF THE ENTIRE BANK ACCOUNT CONTAINED IN THE PAPER BOOK IS EXAMINED, THE MINIMUM CREDIT IS 49.89 LAKH ON 05.05.2006 AND MAXIMUM CREDIT IS 2.339 L AKH ON 10.03.2007 AGAINST LIMIT OF 3.15 CRORE AND STOCK OF 6.58 CRORE AS ON 3L.03.2006, CONTAINED IN BALANCE SHEET (PAGE 22 OF THE PAPER BOOK). CONSIDERING THE ENTIRE SUBMISSION, THERE IS NO DIVERSION OF FUND FROM THE CASH CREDIT ACCOUNT AGAINST STOCK TO ANY OTHER SISTER CONCERN S FOR WHICH THE CALCULATION OF INTEREST ON PRESUMPTION AND SURMISE SHALL BE DELETED. IN THE BODY OF THE ASSESSMENT ORDER , THE ASSESSING OFFICER HAS NARRA TED THE NATURE OF PAYMENT OF 15,51,500 TO HINDUSTAN ELECTRONICS, WHICH IS A SISTER CONCERN, LOCATED NEXT TO THE S HOW ROOM OF THE APPELLANT COMPANY. FOR BUSINESS PROMOTION THE SISTER CONCERN HAS INCURRED CERTAIN EXPENDITURE WHICH CANNOT BE DIRECTLY SEPARATED FROM THEIR EXPENDITURE. THAT IS WHY THEY WERE RAISING BILL EVERY MONTH, AS REIMBURSEMENT OF EXPENSES, WHICH CON TAINED FROM PAGE 37 TO 65 OF THE PAPER BOOK THE ASSESSING OFFICER HAS NOT DISPUTED THE GENUINENESS OF THE EXPENDITURE. HE HAS ONLY CONCLUDED THAT THE DISCOUNT IS GIVEN IN DISGUISE OF REIMBURSEMENT OF THE EXPENDITURE. THE SISTER CONCERN NAMELY HINDUSTAN ELE CTRONICS HAS NOT PURCHASED ANY MATERIAL FOR WHICH THE DISCOUNT SHALL BE ALLOWED. IT HAS ONLY GIVEN SERVICES TO THE APPELLANT FOR WHICH REIMBURSEMENT IS MADE. AGAIN THE SO CALLED DISCOUNT IS TREATED AS COMMISSION WITH AN INTENSION TO APPLY THE MISCHIEF OF P ROVISION OF THE SECTION 40(A)(IA) FOR NON DEDUCTION OF TAX AS CONTAINED IN SECTION 194H I.T.A.NO. 183/CTK/2012 7 OF THE INCOME TAX ACT FOR NON - DEDUCTION OF TAX. THE LEARNED COUNSEL OF THE ASSESSEE SUBMITTED THAT THE ACTION OF THE ASSESSING OFFICER IS NOT CORRECT TO APPLY SECTION 4 0(A)(IA) TO DISALLOW EXPENDITURE BY GIVING A COLOUR TO REIMBURSEMENT OF EXPENSES AS COMMISSION. IN VIEW OF THIS, THE LEARNED COUNSEL OF THE ASSESSEE PRAYED TO ALLOW THE APPEAL BY DELETING BOTH THE ADDITIONS MADE ON ACCOUNT OF COMPUTATION OF INTEREST ON PRE SUMPTION ON AD VANCES GIVEN TO SISTER C ONCERNS AND ALSO ADDITIONS BY APPLYING THE PROVISION S OF SECTION 40(A)(IA), WHEN THE PAYMENT IS NOT ON ACCOUNT OF COMMISSION. 4.2. FOR THE ABOVE PROPOSITION HE HAS RELIED ON THE DOCUMENTS SUBMITTED TO THE ASSESSING OFF ICER AS WELL AS THE LEARNED CIT(A) INSOFAR AS THE FINANCIAL STATEMENTS AVAILABLE TO THE AUTHORITIES BELOW HAVE BEEN SUBMITTED IN PAPER BOOK PAGES 127 TO 33. THE REIMBURSEMENT OF EXPENDITURE HAS BEEN EXPLAINED ON THE BASIS OF BILLS CLAIMED BY THE SISTER CON CERN HINDUSTHAN ELECTRONICS WHICH CLEARLY INDICATES THAT THE TURNOVER BY THE ASSESSEE BEING THE FRANCHISE OF TANISKQ JEWELLER WAS NOT PERTAINING TO FRANCHISE AGREEMENT INSOFAR AS THE SISTER CONCERN HAD SENT THE CUSTOMERS BUYING ELECTRONIC ITEMS PATRONIZED THE ASSESSEE FOR THE PURPOSE OF JEWELLERY ITEMS HAS BEEN ESTABLISHED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. FOR THE PURPOSE OF CASH CREDIT AVAI LED FROM THE ORIENTAL BANK OF COMMERCE WHO HAS NOT OBJECTED TO SUCH PAYMENT TO THE SISTER CONCERNS WHICH H AS BEEN OTHERWISE NOTED BY THE ASSESSING AUTHORITIES BELOW AS PAYMENTS FROM INTEREST BEARING FUNDS. BOTH THE AMOUNTS WHICH HAVE BEEN PAID EITHER TO THE SISTER CONCERNS AS REIMBURSEMENT OF EXPENSES OR AS UNSECURED LOAN TO THE SISTER CONCERNS THEREFORE BECAM E PA RI MATERIA TO THE EXTENT THAT THE BANK CANNOT BE SAID TO HAVE CHARGED INTEREST ON THE OVER DRAFTS WHICH IS SECURED AGAINST THE STOCK AND THE DEBTORS HELD BY THE ASSESSEE WHICH IS MORE THAN THE ADVANCED I.T.A.NO. 183/CTK/2012 8 AMOUNT. THE LEARNED COUNSEL OF THE ASSESSEE THEREF ORE TRIED TO EMPHASIZE THAT THE CASH CREDIT INSOFAR AS THE BANK IS CONCERNED IS FULLY SECURED WHEN THE ASSESSEE WAS TO CONTRIBUTE TO A MARGIN WHICH INCOME HAD ALREADY BEEN RENDERED TO TAX BY THE ASSESSEE ALONG WITH THE BROUGHT FORWARD CAPITAL AND RESERVE A ND SURPLUS WHICH HAS ALSO BEEN NOTED BY THE AUTHORITIES BELOW IN THEIR ORDERS, WHICH MAY KINDLY BE PERUSED. THE LEARNED COUNSEL OF THE ASSESSEE IN A REJOINDER ALSO SUBMITTED THAT THE OBSERVATION OF THE LEARNED CIT(A) IN TRYING TO HOLD THE PAYMENTS BY CHEQU ES NOT ENCASHED BY THE SISTER CONCERN WAS A SHAM TRANSACTIONS RATHER LEANS IN FAVOUR OF THE ASSESSEE TO THE EXTENT THAT THE BANK COULD NOT HAVE CHARGED INTEREST ON OVER DRAFTS WHICH HAS NOT BEEN UTILISED. HE PRAYED THAT BOTH THE DISALLOWANCE MAY KINDLY BE DIRECTED TO BE DELETED. 5. THE LEARNED DR OPPOSED THE CONTENTIONS OF THE LEARNED COUNSEL OF THE ASSESSEE. HE SUBMITTED THAT THE ASSESSING OFFICER HAD GIVEN A CATEGORICALLY FINDING THAT THE ASSESSING OFFICER WAS CONSTRAINT TO DISALLOW A SUM OF 10,25,315 BY APPLYING INTEREST @ 13.75% ON THE AMOUNTS REMAINING UTILISED FROM THE INTEREST BEARING FUNDS FROM ORIENTAL BANK OF COMMERCE BY THE SISTER CONCERNS WHEN THE UNSECURED LOANS INCREASED IN THE IMPUGNED ASSESSMENT YEAR WAS ALSO NOTED BY THE ASSESSING OFFICER. IN OTHER WORDS, IT WAS A CLEAR CASE OF DIVERSION OF FUNDS BY THE ASSESSEE FROM INTEREST BEARING FUND TO NON - INTEREST LOANS WAS ESTABLISHED BEYOND DOUBT BY THE LEARNED CIT(A) WHICH MAY KINDLY BE PERUSED . PARKING OF CHEQUES WITHOUT ENCASHMENT HAS BEEN EXPLAI NED BY THE LEARNED COUNSEL OF THE ASSESSEE BUT IT MAY BE FOR BANKING TRANSACTIONS BUT UTILIZATION OF THE FUND HAS NOT BEEN DISPUTED BY THE LEARNED COUNSEL OF THE ASSESSEE AS OF NOW. WITH RESPECT TO THE SECOND ISSUE, HE SUBMITTED THAT THE LEARNED CIT(A) VER IFIED THAT THE EXPENSES CLAIMED WERE NOT REIMBURSEMENT INSOFAR AS THE SISTER CONCERN HAD I.T.A.NO. 183/CTK/2012 9 RAISED THE BILLS AT AN AVERAGE RATE ON ACCOUNT OF SALES MADE BY THE ASSESSEE WHICH INFORMATION COULD ONLY HAVE FLOWN FROM THE ASSESSEE TO THE SISTER CONCERN. THE GENU INENITY OF THE EXPENDITURE HAS NOT BEEN DISPUTED BUT DEDUCTION OF TAX AT SOURCE WAS A MUST FOR DENYING THE EXPENDITURE UNDER THE PROVISIONS OF SECTION 40(A)(IA). 6. WE HAVE HEARD THE RIVAL SUBMISSIONS. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCE S OF THE CASE, WE ARE INCLINED TO HOLD THAT THE NEXUS SOUGHT TO BE ESTABLISHED BY THE ASSESSING OFFICER AS WELL AS THE LEARNED CIT(A) APPEARS TO BE AN EXERCISE INSOFAR AS THE ASSESSING OFFICER HAS HIMSELF NOTED THAT UNSECURED LOANS INCREASED AND THE ASSE SSEE WAS ALREADY HAVING RESERVE AND SURPLUS OF MORE THAN THE AMOUNT HE PROPOSED TO HOLD HAS BEEN PAID TO THE SISTER CONCERN FROM INTEREST BEARING FUNDS NAMELY THE CASH CREDIT OF ORIENTAL BANK OF COMMERCE. WE HAVE PERUSED THE ORDERS OF THE AUTHORITIES BELOW AND FOUND THAT THE CASH CREDIT AMOUNT FROM ORIENTAL BANK OF COMMER CE IS COVERED UTILISED BY THE STOCK AND DEBTORS HELD BY THE ASSESSEE CANNOT BE SINGLED OUT INSOFAR AS THE ASSESSEE OW E THIS A MOUNT FOR THE PURPOSE OF ITS BUSINESS TRANSACTIONS. THE BANK WI LL ENCASH THE CHEQUES IN CASE THE STOCK AND THE DEBTORS HELD BY THE ASSESSEE ARE AT LEAST 100% OF THE OVER DRAFT. THE MARGIN AS A PROFIT WHICH THE ASSESSEE CLAIMS IS HELD BY IT IN THE FORM OF RESERVE AND SURPLUS FAR EXCEEDED THE AMOUNT WHICH OTHERWISE HAS BEEN UTILISED AND FOUND BY THE ASSESSING OFFICER AS HAVING BEEN TRANSFERRED FROM THE INTEREST BEARING FUNDS. BANK HAS CHARGED INTEREST AMOUNTING TO 70,07,788 WHICH WAS PURELY ON THE OVERDRAFTS ENJOYED BY THE ASSESSEE THROUGHOUT THE YEAR WAS A NECESSARY BU SINESS EXPENDITURE TO BE ALLOWED IN FULL. THEREFORE, THE NOTIONAL INTEREST COMPUTED BY THE ASSESSING OFFICER AMOUNTING TO 10,20,315 THERE FROM CANNOT BE DISALLOWED INSOFAR AS THE CHEQUES WERE TO BE ISSUED FROM THE SAME ACCOUNT WHEN THE PURCHASES I.T.A.NO. 183/CTK/2012 10 AND SALE S OF STOCK AND THE RECEIPTS FROM DEBTORS WERE ALSO DEPOSITED IN THE SAME ACCOUNT. IN OTHER WORDS, THE BANK IS SECURED OF THE AMOUNT ON WHICH THE INTEREST HAS BEEN CHARGED INSOFAR AS THE ASSESSEE IS HOLDING FUNDS IN THE FORM OF STOCK AND DEBTORS AND THE A MOUNT ADVANCED WERE FROM THE SURPLUS GENERATED BY IT CANNOT BE TAXED FOR THE PURPOSE OF DERIVING NOTIONAL INTEREST THEREON TO BE CHARGED BY THE ASSESSEE. THE SAME IS DIRECTED TO BE DELETED. 7. WITH RESPECT TO THE SECOND ISSUE REGARDING THE DISALLOWANCE OF 15 , 51,500, THE LEARNED COUNSEL OF THE ASSESSEE HAS TRIED TO SUBMIT THAT IT IS REIMBURSEMENT OF EXPENSES TO THE SISTER CONCERN NAMELY HINDUSTHAN ELECTRONICS WAS TO BE GIVEN A NAME INSOFAR AS IT WAS NOT EXPENDITURE BEING A CHARGE AS INCOME FROM THE ASSESSE E. IN FACT IT WAS A DISCOUNT AVAILED BY THE CUSTOMERS OF THE ASSESSEE INSOFAR AS THE CUSTOMERS REFUSED TO PAY TO THE SISTER CONCERN THE AMOUNT WHEN THE SALES WERE ADJUSTED ON THE BASIS OF DISCOUNT ALLOWED BY THE SISTER CONCERN NAMELY HINDUSTHAN ELECTRONICS AS WAS VERIFIED BY THE ASSESSING OFFICER AND THE LE ARNED CIT(A) BEING THE DISCOUNT AVAILED BY THE SISTER CONCERNS CUSTOMERS WHO WERE THE CUSTOMERS OF THE ASSESSEE AS WELL TOTALING 13,97,290. THERE IS A DIRECT CONNECTION INSOFAR AS , AS PER THE POLICY IN ITS STRICT SENSE THIS REIMBURSEMENT CANNOT BE CALLED AS COMMISSION WHICH M/S.TITAN LTD., OWNING THE BRAND NAME TANIS H Q COULD NOT RECOMMEND SUCH DISCOUNTS INSOFAR AS THE SELLING PRICE IS DETERMINED BY THEM. ONCE THE SELLING PRICE IS KNOWN THEN ONLY THE SIST ER CONCERN COULD KNOW THAT IT IS CUSTOMERS WHO HAD PURCHASED GOODS FROM THE ASSESSEE WERE NOT TO BE PAID THE RESIDUAL AMOUNT OF 13,97,290 COULD AT BEST BE CONSIDERED AN EXPENDITURE CLAIMED WITHOUT DEDUCTION OF TAX AT SOURCE AMOUNTING TO 1,54,259 ONLY. I N OTHER WORDS, TO ESTABLISH BEYOND DOUBT THAT IT WAS NOT ARRANGEMENT BETWEEN THE ASSESSEE AND HINDUSTHAN ELECTRICALS WHICH BECOMES BUSINESS TRANSACTIONS THE AMOUNT CLAIMED BY THE ASSESSEE AS I.T.A.NO. 183/CTK/2012 11 AN EXPENDITURE NOT CORRESPONDING TO THE AMOUNT ACTUALLY NOT PAID BY THE CUSTOMERS OF THE ASSESSEE BEING COMMON TO HINDUSTHAN ELECTRICALS THE AMOUNT OF 1,54,259 MAY BE GIVEN A NAME OF COMMISSION FOR WHICH DEDUCTION OF TAX AT SOURCE U/S.194H HAVING NOT BEEN MADE WILL BE DISALLOWED U/S.37(1). THE ASSESSING OFFICER IS DIRE CTED ACCORDINGLY TO DISALLOW ONLY 1,54,259 AS AGAINST THE DISALLOWANCE OF 15,51,550 MADE ON THIS COUNT. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. SD/ - SD/ - ( . . . ) , (K.S.S.PRASAD RAO), JUDIC IAL MEMBER ( . . ) , , (K.K.GUPTA), ACCOUNTANT MEMBER. ( ) DATE: 14.12.2012 - COPY OF THE ORDER FOR WARDED TO: 1 . / THE APPELLANT : M/S.SHAKTI AGENCIES PVT. LTD., 2, BAPUJUI NAGAR, BHUBANESWEAR 2 / THE RESPONDENT: ASST.COMMISSIONER OF INCOME - TAX, CIRCLE 1(1), BHUBANESWAR. 3 . / THE CIT, 4 . ( )/ THE CIT(A), 5 . / DR, CUTTACK BENCH 6 . GUARD FILE . / TRUE COPY, / BY ORDER, APPENDIX XVII SEAL TO BE AFFIXED ON THE ORDER SHEET BY THE SR. P.S./P.S. AFTER DICTATION IS GIVEN 1. DATE OF DICTATION 12.12.2012 . 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER 13.12.2012 OTHER ME MBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO THE SR. P.S./P.S. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER FOR PRONOUNCEMENT.... 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S./P.S . 6. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK 14.12.2012 7. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK .. 8. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER ................ 9. DATE OF DESPATCH OF THE ORDER .. ( ), (H.K.PADHEE), SENIOR.PRIVATE SECRETARY.