M/s Supreme Overseas Exports Pvt Ltd , Bangalore V. Deputy Commissioner of Income Tax Ward-12(3), Bangalore

ITA 1985/BANG/2016

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 0657 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 1 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-12-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Next Hearing Date: 19-12-2019
• Assessment Year: 2007-2008
• Appeal Filed On: 18-11-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJEET SINGH
• Keywords: Proportionate interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : BANGALORE BEFORE SHRI A. K. GARODIA, ACCOUNTANT MEMBER AND SMT. BEENA PILLAI, JUDICIAL MEMBER ITA 1985 /BANG/201 6 A. Y : 20 07 08 M/S. SUPREME OVERSEAS EXPORTS INDIA PVT. LTD., NO. 11/1, 24 TH A CROSS, K. R. RAOD, BANASHANKARI 2 ND STAGE, BENGALURU 560 070. PAN NO : AADCS9934M VS. DEPUTY COMMISSIONER OF INCOME TAX, WARD 12 (3), BENGALURU. APPELLANT RESPONDENT A PPELLANT BY : SHRI. BALRAM R RAO, ADVOCATE RE SPONDENT BY : SHRI. MANJEET SINGH , ADDL. CIT DR DATE OF H EARING : 19 . 1 2 .2019 DATE OF PRONOUNCEMENT : 20 . 1 2 .2019 O R D E R PER BEENA PILLAI, JUDICIAL MEMBER : THE PRESENT APPEAL HAS BEEN FILED BY ASSESSEE AGAINST ORDER DATED 25/08/2016 PASSED BY LD. CIT (A) 6, BANGALORE FOR ASSESSMENT YEAR 2007 08 ON FOLLOWING GROUNDS OF APPEAL : ITA 1985/BANG/2016 PAGE 2 OF 8 BRIEF FACTS OF THE CASE ARE AS UNDER: 2 ASSESSEE FILED ITS RETURN OF INCOME ON 29/10/07 DECLARING TOTAL INCOME OF RS. 50, 59, 160/-. THE RETURN WAS PROCESSED UNDER SECTION 143 (1) OF THE ACT AND STATUTORY NOTICES WERE ISSUED TO ASSESSEE IN RESPONSE TO WHICH REPRESENTATIVE OF ASSESSEE APPEARED FROM TIME TO TIME IN THE CASE WAS DISCUSSED. ITA 1985/BANG/2016 PAGE 3 OF 8 3 LD. AO OBSERVED THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT OF LEATHER GARMENTS OF VARIOUS SIZE, QUALITY AND DESIGNS TO VARIOUS COUNTRIES LIKE USA, GERMANY, SPAIN, ENGLAND, FRANCE ETC. ON PERUSAL OF DETAILS FILED BY ASSESSEE, LD. AO COMPLETED ASSESSMENT BY MAKING FOLLOWING ADDITIONS: DISALLOWANCE OF PROPORTIONATE INCOME-RS. 17, 61, 867/- DISALLOWANCE OF WAGES-RS. 3, 00, 000/- 4 AGGRIEVED BY ADDITIONS MADE BY LD.AO, ASSESSEE PREFERRED APPEAL BEFORE LD. CIT (A) WHO CONFIRMED THE ORDER OF LD. AO. AGGRIEVED BY ORDER OF LD. CIT (A) ASSESSEE IS IN APPEAL BEFORE US NOW. IT HAS BEEN SUBMITTED BY LD. AR THAT GROUND NO. 1-2 ARE GENERAL IN NATURE AND THEREFORE DO NOT REQUIRE ADJUDICATION. GROUND NO. 3-5 IS IN RESPECT OF DISALLOWANCE OF INTEREST RELATING TO ADVANCE TO DIRECTORS/SHAREHOLDERS OF ASSESSEE. 5 ASSESSEE SUBMITTED THAT IT HAD INTEREST-FREE RESERVE FUNDS AMOUNTING TO RS. 9,02,27,293/- AS ON 31/03/07 AND THAT TOTAL WORKING CAPITAL SUPPORT FROM BANK WAS IN FACT REDUCED FROM RS.11,47,22,300/- DURING 2005-06 TO RS.11,41,1272,147/- DURING THE YEAR UNDER CONSIDERATION WHICH PROVES A POSITION THAT NO WORKING CAPITAL FUNDS BORROWED FROM BANKS WERE UTILISED FOR ADVANCING LOANS TO ITS DIRECTORS. PLACING RELIANCE UPON THE DECISION OF HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITY AND POWER LTD., REPORTED IN (2009) 178 TAXMANN 135 LD. AR SUBMITTED THAT THE LOANS ADVANCED TO DIRECTORS WERE OUT OF ITS ITA 1985/BANG/2016 PAGE 4 OF 8 OWN FUNDS AND NOT FROM BORROWED FUNDS AND THEREFORE NO INTEREST COULD BE IMPUTED. 6 ON THE CONTRARY LD. SENIOR DR SUBMITTED THAT ASSESSEE COULD NOT SUBSTANTIATE ITS CLAIM BY MERELY RELYING UPON WORKING CAPITAL OBTAINED FROM BANK THAT REDUCED FROM THE PRECEDING ASSESSMENT YEARS. HE SUBMITTED THAT LD. AO WAS RIGHT IN DISALLOWING PROPORTIONATE INTEREST ON INTEREST FREE ADVANCES MADE TO DIRECTORS. WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. 7 IN THE PRESENT CASE WE NOTE THAT LD. AO HAS NOT APPLIED HIS MIND WHILE DECIDING THE ISSUE. THIS IS A CASE WHERE PROVISIONS OF SECTION 2 (22) (E) SHOULD HAVE BEEN APPLIED. HOWEVER LD. AO CHOSE TO MAKE ADDITION UNDER SECTION 36 (III) OF PROPORTIONATE INTEREST. THEREFORE WE ARE ANALYSING APPLICABILITY OF SUCH PROPORTIONATE INTEREST IN THE PRESENT FACTS OF THE CASE. 8 IT IS OBSERVED THAT ASSESSEE HAD GIVEN INTEREST-FREE ADVANCES TO ITS DIRECTORS NAMELY SMT. USHA SUDHINDRA, SRI. SRIHARSHA, SRI. K. L. NAGENDRA, SRI.RAMPRASAD, SRI. GOPINATH AND SRI. NAGRAJA RAO. IT IS NOTED THAT INTEREST DEBITED AN PROFIT AND LOSS ACCOUNT AMOUNTED TO RS.1,01,22,264/- AS AGAINST THE OUTSTANDING AGAINST THE DIRECTORS WAS RS.2,01,97,436/-. IT IS ALSO OBSERVED THAT ASSESSEE HAD ITS OWN INTEREST-FREE FUNDS AMOUNTING TO RS.9,02,27,293/- IN THE FORM OF EQUITY AND FREE RESERVES AS ON 31/03/07 APART FROM CASH GENERATIONS AMOUNTING TO RS.2,33,03,001/- OUT OF WHICH AN AMOUNT OF RS.2,01,97,438/- HAD BEEN LENT TO DIRECTORS AND SHAREHOLDERS. ITA 1985/BANG/2016 PAGE 5 OF 8 9 THUS ASSESSEE WAS HAVING SUFFICIENT INTEREST-FREE FUNDS TO COVER THE FUNDS GIVEN TO DIRECTORS. HONBLE BOMBAY HIGH COURT IN CASE OF CIT VS. RELIANCE UTILITY POWER LTD (SUPRA) HELD AS UNDER: 10. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD.'S CASE (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD.'S CASE (SUPRA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE THE SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT THAT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBERS OF INDIA LTD.'S CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVERDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. 10 THE RATIO LAID DOWN BY HONBLE BOMBAY HIGH COURT HEREINABOVE IS SQUARELY APPLICABLE TO THE FACTS OF THE PRESENT CASE AND THE ADDITION DESERVES TO BE DELETED. ACCORDINGLY, THIS GROUND RAISED BY ASSESSEE STANDS ALLOWED. GROUND NO. 6-7 IS IN RESPECT OF DISALLOWANCE OF WAGES PAID AMOUNTING TO RS. 3, 00, 000/-. 11 LD. AR SUBMITTED THAT ASSESSING OFFICER SOME REALLY DISALLOWED AN AMOUNT OF RS. 3 LACS IN RESPECT OF WAGES PAID TO CASUAL LABOURERS THAT WAS INCURRED IN THE NORMAL COURSE OF BUSINESS. HE SUBMITTED THAT NEITHER OF THE AUTHORITIES BELOW HAVE ITA 1985/BANG/2016 PAGE 6 OF 8 ANY EVIDENCE OF SUCH EXPENSES HAVING NOT INCURRED BY ASSESSEE. ON THE CONTRARY, LD. SR. DR SUBMITTED THAT ASSESSEE FAILED TO FURNISH ANY EVIDENCE WHATSOEVER TO ESTABLISH THE PAYMENTS HAVING BEING MADE IN THE FORM OF ANY VOUCHERS/BILLS ETC. HE HAS NEITHER FILED ANY DETAILS BEFORE ASSESSING OFFICER NOR BEFORE LD.CIT (A) OR BEFORE THIS HONBLE TRIBUNAL . HE THUS SUBMITTED THAT THE ADDITION DESERVES TO BE CONFIRMED. 12 WE HAVE PERUSED SUBMISSIONS ADVANCED BY BOTH SIDES IN LIGHT OF RECORDS PLACED BEFORE US. ADMITTEDLY, EXCEPT FOR MAKING A BALD STATEMENT THAT ASSESSEE HAS MADE SUCH PAYMENTS AND THAT REVENUE AUTHORITIES DO NOT HAVE ANY EVIDENCE CONTRARY THE DISALLOWANCE CANNOT BE DELETED. ASSESSEE HAS NOT EVEN MADE ANY EFFORTS TO FILE ANY DETAIL BEFORE THIS TRIBUNAL WHICH COULD BE CONSIDERED. UNDER SUCH CIRCUMSTANCES WE ARE LEFT WITH NO OPTION BUT TO CONFIRM THE ADDITION MADE. ACCORDINGLY, THIS GROUND RAISED BY ASSESSEE STANDS DISMISSED. IN THE RESULT APPEAL FILED BY ASSESSEES STANDS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH DECEMBER, 2019. SD/- (A.K. GARODIA) ACCOUNTANT MEMBER SD/- (BEENA PILLAI) JUDICIAL MEMBER BANGALORE, DATED, 20 TH DECEMBER, 2019. /MK/ ITA 1985/BANG/2016 PAGE 7 OF 8 COPY TO: 1. THE APPLICANT 2. THE RESPONDENT 3. THE CIT 4. THE CIT(A) 5. THE DR, ITAT, BANGALORE. 6. GUARD FILE BY ORDER ASST. REGISTRAR, ITAT, BANGALORE. ITA 1985/BANG/2016 PAGE 8 OF 8 1. DATE OF DICTATION 2. DATE ON WHICH THE TYPED DRAFT IS PLACED BEFORE THE DICTATING MEMBER . 3. DATE ON WHICH THE APPROVED DRAFT COMES TO SR. P. S. .. 4. DATE ON WHICH THE FAIR ORDER IS PLACED BEFORE THE DICTATING MEMBER .. 5. DATE ON WHICH THE FAIR ORDER COMES BACK TO THE SR. P.S. .. 6. DATE OF UPLOADING THE ORDER ON WEBSITE.. 7. IF NOT UPLOADED, FURNISH THE REASON FOR DOING SO .. 8. DATE ON WHICH THE FILE GOES TO THE BENCH CLERK .. 9. DATE ON WHICH ORDER GOES FOR XEROX & ENDORSEMENT 10. DATE ON WHICH THE FILE GOES TO THE HEAD CLERK . 11. THE DATE ON WHICH THE FILE GOES TO THE ASSISTANT REGISTRAR FOR SIGNATURE ON THE ORDER . 12. THE DATE ON WHICH THE FILE GOES TO DISPATCH SECTION FOR DISPATCH OF THE TRIBUNAL ORDER . 13. DATE OF DESPATCH OF ORDER. .. 14. DICTATION NOTE ENCLOSED