The ACIT,Patan Circle, Patan V. Shri Kantilal Pransukhram Nayak, Patan

ITA 1959/AHD/2009

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9033 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-09-2009
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 20-08-2009
• Assessment Year: 2003-2004
• Appeal Filed On: 15-06-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M C PANDIT
• Keywords: Commercial expediency; Set aside
• Section: 143(1); 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL: AHMEDABAD BEN CHES C BENCH: AHMEDABAD (BEFORE S/SHRI H. L. KARWA, JM AND A N PAHUJA, AM) ITA NO. 1959/AHD/2009 A. Y.:2003-04 ACIT PATAN CIRCLE, PATAN VS SHRI KANTILAL PRANSUKHRAM NAYAK, PROP. KANITLAL PRANSUKHRAM & CO. KHADIYA, OLD GUNJ BAZAR, UNJHA [PAN: AAPPN 6840 A] APPELLANT RESPONDENT REVENUE BY SHRI M. C. PANDIT, DR ASSESSEE BY SHRI TUSHAR HEMANI, AR ORDER A N PAHUJA: THIS APPEAL BY THE REVENUE DIRECTED AGAINST AN OR DER DATED 20-3-2009 OF THE LD. CIT(A), GANDHINAGAR, RAISES TH E FOLLOWING GROUNDS: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS.6,98,402/- BEING INTEREST EXPENSES MADE FOR N ON BUSINESS PURPOSE. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 3. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LEA RNED CIT(APPEALS) MAY BE SET ASIDE AND THAT OF THE A. O. BE RESTORED TO THE ABOVE EXTENT. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOME OF RS. 5,12,980/- FILED ON 23-10-2003 BY THE ASSESSEE ,TRADING IN ISABGOL, FENNEL SEEDS ETC.,WAS PROCESSED U/S 143(1) OF THE INCOME T AX ACT, 1961 (HEREINAFTER REFERRED TO AS THE ACT). SUBSEQUENTLY, A NOTICE U/S 148 OF THE ACT WAS ISSUED ON 19-03-2008 AFTER RECORDING REASONS REPRODUCED IN PA RA 2 OF THE ASSESSMENT ORDER. SINCE THE ASSESSEE WAS PAYING HUGE INTEREST OF RS. 36,85,827/- ON ITS SECURED AND UNSECURED BORROWINGS OF RS.3,14,45,912/ - AND HAD GRANTED LOANS/ADVANCES OF RS. 2,27,53,964/- (EXCLUDING ADVA NCES TO CUSTOMERS) TO 10 PARTIES AND NO INTEREST WAS CHARGED FROM THE PARTIES TO WHOM LOANS AND ITA NO. 1989/AHD/2009 SHRI KHUSHVKANT A AGRAWAL 2 ADVANCES WERE GIVEN TO THE EXTENT OF RS.58,20,018/- WHILE THE ASSESSEE WAS HAVING INTEREST FREE ADVANCES OF ONLY RS. 11,13,732 /-,THE AO ASKED THE ASSESSEE AS TO WHY INTEREST OF RS. 6,98,402/-@12% ON THE SAI D ADVANCES BE NOT DISALLOWED. IN RESPONSE, THE ASSESSEE SUBMITTED VID E LETTER DATED 12-12-2008 THAT INTEREST FREE FUNDS TO THE EXTENT OF RS.1,18,2 0,403/- ,BEING TRADE CREDITORS AND ADVANCES FROM CUSTOMERS WERE AVAILABLE, ON WHIC H NO INTEREST WAS PAYABLE. THEREFORE, DISALLOWANCE OUT OF INTEREST PAID BY THE ASSESSEE CANNOT BE MADE. HOWEVER, THE AO REJECTED THESE CONTENTIONS OF THE A SSESSEE AND DISALLOWED AN AMOUNT OF RS. 6,98,402/-@12% ON THE INTEREST FREE F UNDS ADVANCED TO THE EXTENT OF RS.58,20,018/-. 3. ON APPEAL, THE ASSESSEE REITERATED THEIR CONTENT IONS BEFORE THE AO THAT SINCE INTEREST FREE ADVANCES FROM CUSTOMERS TO THE EXTENT OF RS. 1,18,20,403/- WERE AVAILABLE, NO DISALLOWANCE COULD BE MADE OUT O F INTEREST PAID BY THE ASSESSEE. IN THE LIGHT OF THESE SUBMISSIONS, THE LE ARNED CIT(A) DELETED THE ADDITION, HOLDING AS UNDER: 3.3 THE MATTER HAS BEEN CONSIDERED AND I AM AFRAI D THAT ON THE FACTS COLLECTED BY THE ASSESSING OFFICER, DI VERSION OF INTEREST-BEARING FUNDS CANNOT BE PROVED. THIS IS NO T TO SAY THAT THE ASSESSEE HAS BEEN ABLE TO CONCLUSIVELY SUPPORT ITS STAND THAT NO INTEREST BEARING FUNDS HAS BEEN DIVERTED TO INTERES T-FREE ADVANCES BECAUSE AUTHORISED REPRESENTATIVE HAS ALSO WORKED O UT THE CASE AT THE MACRO LEVEL ONLY E. G. GREAT EMPHASIS WAS LA ID ON THE ASSESSEE HAVING INTEREST-FREE TRADE CREDITORS AND A DVANCES FOR CUSTOMERS TO ABOUT RS. 1.18 CR. HOWEVER, HE DID NOT TAKE INTO ACCOUNT THE FACT THAT THERE WERE ALSO INCREASED DEB TORS AND ADVANCES ON THE DEBIT SIDE TO THE TUNE OF RS.1.62 C R. GIVEN THE LEVEL OF OPERATION THE ASSESSEE IS INVOLVED IN, THE INTEREST-BEARING FUNDS HAVE GOT MERGED WITH THE INTEREST FREE FUNDS AND THEREFORE IF THE ASSESSING OFFICER HAD TO PROVE THE DIVERSION OF FUNDS, THE SCRUTINY HAD TO TAKE PLACE AT THE MACRO LEVEL OF FI NDING OUT THE EXACT SOURCES OF FUNDS INTEREST-FREE ADVANCES MADE BY THE APPELLANT. THE ENTIRE ONUS IN SUCH A SITUATION WOULD BE ON THE ASS ESSING OFFICER AND HE HAS CLEARLY NOT DISCHARGED THE SAME. PRIMA F ACIE THE AUTHORISED REPRESENTATIVES CONTENTION, AS STATED E ARLIER, REMAINED UNCONTROVERTED, INSPITE OF THE ASSESSING OFFICER RE PRODUCING THE ASSESSEES REPLY IN THE BODY OF THE ORDER. THEREFOR E, IN THE LIGHT OF ITA NO. 1989/AHD/2009 SHRI KHUSHVKANT A AGRAWAL 3 THE FACTS BROUGHT ON RECORD, THE ADDITION CANNOT BE SUSTAINED AND HENCE THE SAME IS DELETED. 4. THE REVENUE IS NOW IN APPEAL AGAINST THE AFORESA ID FINDINGS OF THE LEARNED CIT(A). AT THE OUTSET, THE LEARNED AR ON BE HALF OF THE ASSESSEE CONTENDED THAT THE ISSUE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATI ON VS. CIT,298 ITR 298 (SC) AND THE DECISION OF THE HONBLE BOMBAY HIGH CO URT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 34 0 (BOM). THE LEARNED AR CONTENDED THAT IF THERE WERE FUNDS AVAILABLE BOTH I NTEREST FREE AND OVER DRAFTS OR LOANS TAKEN, THEN PRESUMPTION ARISES THAT INVESTMEN T WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS ARE SUFFICIENT TO MEET THE INVESTMENTS. THE LEARNED DR VEHEMENTLY DISPUTED THESE SUBMISSIONS OF THE LEARNED AR AND CONTENDED THAT IN THE SAID DECISION, BOTH THE LEARNED CIT(A) AND THE ITAT CONCLUDED THAT THE SA ID ASSESSEE HAD ENOUGH INTEREST FREE FUNDS AT THEIR DISPOSAL FOR INVESTMEN T WHEREAS IN THE CASE UNDER CONSIDERATION, NO SUCH FACTS WERE ESTABLISHED ; RAT HER THE LEARNED CIT(A) OBSERVED THAT THOUGH THE ASSESSEE CONTENDED THAT IN TEREST FREE FUNDS OF ABOUT RS. 1.18 CR. WERE AVAILABLE WITH THE ASSESSEE, THEY DID NOT TAKE INTO ACCOUNT THE FACT THAT THERE WERE ALSO INCREASED DEBTORS AND ADVANCES TO THE EXTENT OF RS.1.62 CR . IN THESE CIRCUMSTANCES, THE DECISIONS RELIED UPON BY THE LEARNED AR ON BEHALF OF THE ASSESSEE WERE NOT APPLICABLE TO TH E FACTS OF THE CASE UNDER CONSIDERATION, THE LEARNED DR ADDED. 5. WE HAVE HEARD THE LD. DR AND GONE THROUGH THE FACTS OF THE CASE. THE RELEVANT PROVISIONS OF SECTION 36(1)(III) OF THE AC T PROVIDE FOR DEDUCTION OF INTEREST ON THE BORROWED FUNDS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTION, THE ONUS IS ON THE ASSESSEE TO SATISFY THE AO THAT LOANS RAISED BY THE ASSESSEE WERE USED FOR BUSINESS PURPO SES. IF IN THE PROCESS OF EXAMINATION OF CLAIM FOR SUCH A DEDUCTION, IT TRANS PIRES THAT THE ASSESSEE HAD ADVANCED CERTAIN FUNDS TO ANY OTHER PERSON WITHOUT ANY INTEREST, THERE WOULD BE A VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE AO TO THE EFFECT ITA NO. 1989/AHD/2009 SHRI KHUSHVKANT A AGRAWAL 4 THAT IN SPITE OF PENDING LOANS ON WHICH THE ASSESSE E IS INCURRING THE LIABILITY TO PAY INTEREST, STILL THERE WAS JUSTIFICATION TO ADVA NCE LOANS TO OTHER PERSONS FOR NON-BUSINESS PURPOSES WITHOUT ANY INTEREST. IN MADH AV PRASAD JATIA V. CIT [1979] 118 ITR 200 (SC) HONBLE SUPREME COURT OBSERVED THAT UNDER S. 10(2)(III) OF THE 1922 ACT( NOW SEC. 36(1)(III) OF THE 1961 AC T), THREE CONDITIONS ARE REQUIRED TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDUCTION IN RESPECT OF INTEREST ON BORROWED CAPITAL, NAMELY, (A) THAT MONE Y (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSESSEE, (B) THAT IT MUST HAVE BEE N BORROWED FOR THE PURPOSE OF BUSINESS, AND (C) THAT THE ASSESSEE MUST HAVE PA ID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT WAS ALSO H ELD THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVIS ION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROF ITS OR GAINS'. IN THE CASE UNDER CONSIDERATION, THERE IS NOTHING IN THE ORDER OF LOWER AUTHORITIES TO SUGGEST THAT THE ASSESSEE DISCHARGED THE ONUS LAID DOWN UP ON HIM THAT BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF ITS BUS INESS SO AS TO ENTITLE IT TO CLAIM DEDUCTION U/S 36(1)(III) OF THE ACT. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT THE AMOUNT IS A DVANCED TO A SISTER CONCERN OR OTHER PERSONS, WITHOUT CARRYING ANY INTEREST FOR NO N-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HAD SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE HAD SOME SURPLUS AMOUNT WHICH, AC CORDING TO HIM, COULD NOT BE REPAID PREMATURELY TO ITS CREDITORS, STILL THE S AME IS EITHER REQUIRED TO BE CIRCULATED AND UTILISED FOR THE PURPOSE OF BUSINESS OR TO BE INVESTED IN A MANNER IN WHICH IT GENERATES INCOME AND NOT THAT IT IS DIV ERTED TOWARDS SISTER CONCERNS OR OTHER PERSONS FREE OF INTEREST. THIS WOULD RESULT I N NOT PRESENTING THE TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCURRED BY THE ASSESSEE, THE SISTER CONCERN OR THE OTHER PERSO N WOULD BE ENJOYING THE BENEFITS THEREOF. IT CANNOT BE HELD THAT THE FUNDS TO THE EXTENT DIVERTED TO SISTER CONCERNS OR OTHER PERSONS FREE OF INTEREST WERE REQ UIRED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS AND LOANS TO THAT EXTENT WE RE REQUIRED TO BE RAISED. AS IS APPARENT FROM THE IMPUGNED ORDERS, THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT THE AO EXAMINED THE COMMERCIAL EXPEDIENCY IN AD VANCING FUNDS TO VARIOUS ITA NO. 1989/AHD/2009 SHRI KHUSHVKANT A AGRAWAL 5 PERSONS, WITHOUT CHARGING ANY INTEREST NOR THE ASSE SSEE ESTABLISHED AS TO HOW BORROWED FUNDS HAD BEEN UTILIZED. IN THIS CASE, T HE AO FOUND THAT THE ASSESSEE HAD NOT CHARGED ANY INTEREST FROM THE PARTIES TO W HOM LOANS/ADVANCES OF RS. 58,20,018/- WERE GRANTED. NOTHING EMERGES FROM THE IMPUGNED ORDERS NOR IT HAS BEEN EXPLAINED BEFORE US AS TO WHEN THESE ADVANCES WERE GRANTED AND WHAT WAS THE RELATION OF THE ASSESSEE WITH THE PARTIES T O WHOM THESE ADVANCES GIVEN. BEFORE THE AO, THE ASSESSEE PLEADED THAT HUGE AMOUN T AGGREGATING TO RS.1,18,20,.403/- WAS AVAILABLE WITH HIM ON ACCOUN T OF TRADE CREDITORS AND ADVANCES FROM THE CUSTOMERS. BUT THEN THE LD. CIT(A ) OBSERVED THAT THE ASSESSEE IGNORED THE FACT THAT DEBTORS AND ADVANCES OF DEBIT SIDE WERE OF THE ORDER OF RS. 1.62 CRORES. INSTEAD OF ASCERTAINING THE CORRECT FACTS, THE LD. CIT(A) DELETED THE ADDITION ON THE GROUND THAT THE AO HAD NOT DISCHARGED THE ONUS. BEFORE US, THERE IS NO MATERIAL AS TO WHEN AND TO WHOM THE AFORESAID INTEREST FREE ADVANCES OF RS. 58,20,018/- WERE GIVEN AND WHA T WAS THE PURPOSE OF THESE TRANSACTIONS AND AS ON THE DATE WHEN ADVANCES WERE GIVEN , WHAT WAS THE CASH FLOW POSITION I.E AS TO WHETHER THE ASSESSEE HAD ,I N FACT, INTEREST FREE FUNDS AVAILABLE WITH HIM FOR MAKING THESE ADVANCES. THO UGH THE LD. AR RELIED UPON DECISIONS IN THE CASE OF MUNJAL SALES CORPORATION(S UPRA) AND RELIANCE UTILITIES AND POWER LTD.(SUPRA) , THE LD. AR HAS NOT PLACED A NY MATERIAL BEFORE US, ESTABLISHING THAT SUFFICIENT INTEREST FREE FUNDS WE RE AVAILABLE WITH THE ASSESSEE FOR MAKING INTEREST FREE ADVANCES TO THE EXTENT OF RS. 58,20,018. AS POINTED OUT BY THE LD. DR, THE AVAILABILITY OF INTEREST FREE FU NDS AS ON THE DATE WHEN INTEREST FREE ADVANCES OF RS. 58,20,018/- WERE GIVEN, HAD TO BE ESTABLISHED AND IN THIS CASE, THE ASSESSEE HAS NOT DONE SO. THE LD. CIT(A), WITHOUT RECORDING ANY FINDINGS AS TO WHETHER OR NOT BORROWED FUNDS HAD B EEN UTILIZED FOR THE PURPOSE OF BUSINESS, DELETED THE DISALLOWANCE ONLY ON THE GROU ND THAT THE AO HAS NOT DISCHARGED THE ONUS IN ASCERTAINING THE EXACT SOUR CES OF FUNDS FOR MAKING INTEREST FREE ADVANCES. IN THESE CIRCUMSTANCES, ESP ECIALLY WHEN THERE IS NO MATERIAL BEFORE US AS TO THE AVAILABILITY OF INTERE ST FREE FUNDS WITH THE ASSESSEE AS ON THE DATE WHEN FUNDS TO THE TUNE OF RS. 58,20,01 8/- WERE ADVANCED NOR EVEN THE DATE WHEN SUCH FUNDS WERE ADVANCED IS AVAILABLE ON RECORDS WHILE THE ITA NO. 1989/AHD/2009 SHRI KHUSHVKANT A AGRAWAL 6 ASSESSEE DID NOT FURNISH ANY FUND FLOW STATEMENT EV IDENCING NEXUS OR UTILIZATION OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS, WE C ONSIDER IT FAIR AND APPROPRIATE TO VACATE THE FINDINGS OF THE LEARNED CIT(A) AND RE STORE THE ISSUE TO THE FILE OF THE AO WITH THE DIRECTIONS TO ALLOW ADEQUATE OPPORTUNIT Y TO THE ASSESSEE TO ESTABLISH THAT THE SUFFICIENT INTEREST FREE FUNDS WERE AVAILA BLE WITH HIM ON THE DATE WHEN INTEREST FREE ADVANCES OF RS. 58,20,018/- WERE GIV EN AND THE ENTIRE BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF THEIR BUSINESS. WHILE KEEPING THESE ASPECTS IN MIND, THE AO IS DIRECTED TO READJU DICATE THE MATTER IN ACCORDANCE WITH LAW , IN THE LIGHT OF VARIOUS JUDIC IAL PRONOUNCEMENTS INCLUDING THE AFORESAID DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD. (SUPRA), WITH THESE DIRECTIONS, GROU ND NO.1 IS DISPOSED OF. 6. GROUND NOS. 2 & 3 BEING GENERAL IN NATURE, DO NOT REQUIRE ANY SEPARATE ADJUDICATION AND ARE, THEREFORE, DISMISSED. 7. IN THE RESULT, APPEAL IS ALLOWED , BUT FOR STAT ISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 18 TH SEPTEMBER,2009 SD/- SD/- (H. L. KARWA) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER DATE:18TH SEPTEMBER,2009 LAKSHMIKANT/ COPY OF THE ORDER FORWARDED TO: 1. THE ASSESSEE 2. ACIT PATAN CIRCLE,PATAN 3. CIT(A)-GANDHINAGAR 4. THE CIT CONCERNED 5. THE D.R. ITAT, AHMEDABAD, 6. GUARD FILE BY ORDER DR / AR, ITAT, AHMEDABAD