Shreenath Intermediates, V. The DY.CIT.(Asst.)., S.R.-3,

ITA 2080/AHD/2004

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 5667 (ITAT-AHMEDABAD)
• Duration Of Justice: 6 year(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 01-07-2010
• Assessment Year: 1994-1995
• Appeal Filed On: 15-06-2004
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: M J SHAH
• Assessee Lawyers: K M MAHESH
• Keywords: Depreciation; Opportunity of being heard; Cost of acquisition; TDS; Set aside
• Section: 37(1); 68

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND D. C. AGRAWAL , AM) ITA NO.2031/AHD/2004 A. Y. 1994-95 THE INCOME TAX OFFICER, WARD-6(4), ROOM NO.103, C. U. SHAH BUILDING, ASHRAM ROAD, AHMEDABAD VS M/S. SHREENATH INTERMEDIATES, C/O. BHAILALBHAI TRIBHOVANDAS AKHANI, 2, AMARKUNJ SOCIETY, GORDHANWADI TEKRO, KANKARIA, AHMEDABAD 380 028 PA NO. -- (APPELLANT) (RESPONDENT) ITA NO.2080/AHD/2004 A. Y. 1994-95 M/S. SHREENATH INTERMEDIATES, C/O. BHAILALBHAI TRIBHOVANDAS AKHANI, 2, AMARKUNJ SOCIETY, GORDHANWADI TEKRO, KANKARIA, AHMEDABAD 380 028 VS THE D. C. I. T., (ASST) SR-3, 4 TH FLOOR, VASANT NATURE VIEW BUILDING, NR. H. N. HOUSE, NAVRANGPURA, ASHRAM ROAD, AHMEDABAD 380 009 PA NO. -- (APPELLANT) (RESPONDENT) DEPARTMENT BY SHRI K. M. MAHESH, DR RESPONDENT BY SHRI M. J. SHAH, AR O R D E R PER BHAVNESH SAINI: BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-IX, AHMEDAB AD DATED 30-04-2004 FOR ASSESSMENT YEAR 1994-95. THE APPEAL OF THE ASSE SSEE WAS EARLIER DISMISSED IN DEFAULT WHICH WAS RECALLED BY ALLOWING MISC. APPLICATION NO.160/AHD/2009. 2. WE HAVE HEARD LEARNED REPRESENTATIVES OF BOTH THE P ARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND CONSIDERE D THE MATERIAL ON RECORD POINTED OUT BY THE PARTIES. ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 2 ITA NO.2031/AHD/2004 (DEPARTMENTAL APPEAL) 3. ON GROUND NOS. 1 AND 2, THE REVENUE CHALLENGED T HE ORDER OF THE LEARNED CIT(A) IN DELETING THE DISALLOWANCE OF DEPR ECIATION OF RS.39,837/- . THE AO HELD THAT FABRICATION OF MACHINERIES AND U TILISATION IN BUSINESS BEFORE CLOSE OF THE YEAR WAS NOT ESTABLISHED. IT WA S SUBMITTED BEFORE THE LEARNED CIT(A) THAT THE CLAIM OF DEPRECIATION WAS M ADE AS PER LAW. IT WAS SUBMITTED THAT PLANT AND MACHINERY OF COST OF RS.1, 59,350/- WERE PURCHASED UP TO 31-03-1993 AND SINCE THEY HAVE REMA INED UN-INSTALLED ON 31-03-1993, THEY WERE SHOWN AS WORK IN PROGRESS. IT WAS HOWEVER, SUBMITTED THAT BEFORE 30-09-1993 ALL THE SAID PLANT AND MACHINERIES WERE INSTALLED AND PUT TO USE AND THEREFORE, THEY W ERE TRANSFERRED TO PLANT AND MACHINERY ACCOUNT. IT WAS SUBMITTED THAT DISALLOWANCE WAS UNJUSTIFIED. STATEMENT SHOWING BREAK UP OF WORK IN PROGRESS WAS FILED. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS MADE AD DITION OF RS.1,81,705/- IN PLANT AND MACHINERY WHICH IS SHOWN AS ADDITION PRIOR TO 30-09-1993. RS.1,59,350/- WAS WORK IN PROGRESS I N THE EARLIER YEAR ON WHICH INSTALLATION COST OF RS.22,355/- WAS INCURRED AND THE AMOUNT OF RS.1,81,705/- WAS CAPITALIZED. COPIES OF ALL THE BI LLS WERE SUBMITTED BEFORE THE AO. NO BILL WAS OF MARCH, 1994. HOWEVER, INADVERTENTLY DATE PERTAINING TO 1993 WAS READ AS MARCH 1994 AND ON TH E WRONG BELIEF DISALLOWANCE WAS MADE OUT OF THE DEPRECIATION. SIMI LARLY, BILLS WERE SUBMITTED BEFORE THE LEARNED CIT(A) FOR HIS PERUSAL . THE LEARNED CIT(A) ACCEPTED THE CONTENTION OF THE ASSESSEE AND WAS OF THE VIEW THAT THE DETAILS FILED OF MACHINERIES REPRESENTING PURCHASE MADE LAST YEAR AND INSTALLED THIS YEAR TOGETHER WITH PURCHASE MADE IN THIS YEAR UP TO SEPTEMBER 1993. THEREFORE, THERE WAS NO JUSTIFICATI ON TO DISALLOW THE DEPRECIATION. ADDITION WAS ACCORDINGLY DELETED. 4. THE LEARNED DR RELIED UPON THE ORDER OF THE AO. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 3 AUTHORITIES BELOW AND REFERRED TO PB -18 AND PB- 19 WHICH ARE SCHEDULE OF ITS ASSETS TO SUPPORT THE ABOVE CONTENTION AND S UBMITTED THAT THE LEARNED CIT(A) RIGHTLY DELETED THE ADDITION. 5. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE AR E OF THE VIEW THAT THE LEARNED CIT(A) RIGHTLY DELETED THE ADDITION. TH E ASSESSEE IN PB-18 WHICH IS DETAILS OF ITS ASSETS HAS SPECIFICALLY MEN TIONED ABOUT THE ADDITION MADE PRIOR TO 30-09-1993 WAS PLANT AND MAC HINERY IN A SUM OF RS.1,81,705/- AS WAS SUBMITTED BEFORE THE AUTHORITI ES BELOW. THE SAME DETAILS WERE SUPPORTED BY BILLS. IT, THEREFORE, APP EARS THAT DUE TO TAKING THE YEAR WRONGLY, THE DISALLOWANCE WAS MADE. WE, TH EREFORE, DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARNED CIT(A) IN DELETING THE ADDITION BECAUSE THE MACHINERY WAS PURCHASED IN LAST YEAR AN D INSTALLED UP TO SEPTEMBER 1993 AND PUT TO USE FOR BUSINESS PURPOSE ALSO. AS A RESULT, THESE GROUNDS OF APPEAL OF THE REVENUE HAVE NO MERI T. THE SAME ARE ACCORDINGLY DISMISSED. 6. ON GROUND NO.3, THE REVENUE HAS CHALLENGED THE D ELETION OF ADDITION U/S 68 OF THE IT ACT IN THE NAME OF THE FO LLOWING CREDITORS: 1) ANAND CORPORATION RS.2,00,000/- 2) M/S. CHANDAN TEA ENTERPRISES RS.5,50,000/- (0UT OF RS.7,00,000/-) THE AO MADE ADDITION OF RS.9,00,000/- U/S 68 OF THE IT ACT AND ALSO DISALLOWED INTEREST OF RS.3,228/- PAID ON LOAN FROM M/S. CHANDAN TEA ENTERPRISES. THE ASSESSEE FILED CONFIRMATION IN RES PECT OF THE LOAN FROM ANAND CORPORATION IN A SUM OF RS.2,00,000/- ON WHIC H THE AO FOUND THAT NO GIR NUMBER HAS BEEN MENTIONED. HENCE, CONFI RMATION WAS NOT FOUND PROPER. IN RESPECT OF FRESH LOAN RECEIVED OF RS.7,00,000/- FROM M/S. CHANDAN TEA ENTERPRISES, NO CONFIRMATION WAS F ILED. ONLY A COPY OF THE ACCOUNT WAS FILED. ADDITION WAS ACCORDINGLY MAD E. IT WAS SUBMITTED ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 4 BEFORE THE LEARNED CIT(A) THAT REJECTION OF THE CON FIRMATION FROM ANAND CORPORATION IS NOT PROPER BECAUSE THE SAME FINDS ME NTIONED COMPLETE ADDRESS, PERMANENT ACCOUNT NUMBER AND TDS ACCOUNT A LSO. AS REGARDS LOAN FROM M/S. CHANDAN TEA ENTERPRISES IT WAS SUBMI TTED THAT REJECTION WAS INCORRECT IN AS MUCH AS THE CONFIRMATION CONTAI NED THE NAME OF THE PARTY, COMPLETE ADDRESS OF THE PARTY, COMPLETE DETA ILS OF THE TRANSACTION, PERMANENT ACCOUNT NUMBER AND APPROPRIATE VERIFICATI ON. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAS NOT RECEIVED ANY LO AN OF RS.7,03,228/- FROM M/S. CHANDAN TEA ENTERPRISES AS ALLEGED BY THE AO. ADDITION WAS MADE DUE TO NON-APPLICATION OF MIND ON THE PART OF THE AO. THE ASSESSEE ENCLOSED COPY OF THE ACCOUNT OF M/S. CHANDAN TEA EN TERPRISES WHICH IS ALSO PLACED ON RECORD OF THE AO ON PERUSAL OF WHICH IT MAY BE APPRECIATED THAT THE ASSESSEE HAD FROM TIME TO TIME ADVANCED FUNDS TO M/S. CHANDAN TEA ENTERPRISES AND IT DERIVED INTERES T INCOME. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD NOT PAID AN Y INTEREST TO M/S. CHANDAN TEA ENTERPRISES BUT HAD RECEIVED INTEREST O F RS.12,749/- WHICH HAS BEEN CONSIDERED IN THE COMPUTATION OF TOTAL INC OME AND ASSESSED BY THE AO ALSO. THE AO HAS ALSO ALLOWED CREDIT IN RESP ECT OF THE TAX DEDUCTED AT SOURCE OF RS.1,428/- ON THE BASIS OF CE RTIFICATE ISSUED BY M/S. CHANDAN TEA ENTERPRISES. IT WAS, THEREFORE, SU BMITTED THAT THERE WAS NO LOAN OF RS.7,00,000/- AND THERE WAS ALSO NO INTEREST OF RS.3,228/-. THEREFORE, ADDITION IS UNJUSTIFIED. IT WAS FURTHER SUBMITTED THAT COPY OF THE ACCOUNT OF THE PARTY WOULD REVEAL THAT RS.6,00,000/- WAS GIVEN AS LOAN TO M/S. CHANDAN TEA ENTERPRISES W HICH WAS RECEIVED BACK TO THE EXTENT OF RS.5,50,000/- FROM TIME TO TI ME AND RS.1,50,000/- WAS RECEIVED AS DEPOSIT ON 20-09-1993 WHICH HAS BEE N REPAID ON 22-10-1993. IT WAS SUBMITTED THAT ADDITION IS UNJUS TIFIED AND THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE GU JARAT HIGH COURT IN THE CASE OF DCIT VS. ROHINI BUILDERS 256 ITR 360. T HE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION OF RS.2,00,000/- IN THE CASE OF ANAND CORPORATION BECA USE CONFIRMATION ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 5 FROM ANAND CORPORATION APPEARS THE SIGNATURE OF THE PARTNERS AS WELL AS PERMANENT ACCOUNT NUMBER ALONG WITH TDS DETAILS. TH EREFORE, FINDINGS OF THE AO WERE FOUND TO BE INCORRECT. AS REGARDS LO AN FROM M/S. CHANDAN TEA ENTERPRISES, THE LEARNED CIT(A) NOTED THAT THE AMOUNT OF RS.6,00,000/- WAS REPAYMENT OF ADVANCE AND ONLY RS. 1,50,000/- REPRESENTED A LOAN. THE LEARNED CIT(A), THEREFORE, CONFIRMED THE ADDITION OF RS.1,50,000/- BECAUSE IN THE CONFIRMATION, NAME AND ADDRESS HAVE BEEN GIVEN AND CREDITWORTHINESS OF THE PARTY AND GE NUINENESS OF THE TRANSACTION IS NOT PROVED. REST ADDITION OF RS.5,50 ,000/- WAS DELETED. 7. THE LEARNED DR RELIED UPON THE ORDER OF THE AO A ND SUBMITTED THAT THE ASSESSEE HAS NOT PLEADED BEFORE THE AO THAT THE CONFIRMATION IN THE CASE OF ANAND CORPORATION BEARS PERMANENT ACCOUNT N UMBER AND THAT IN THE CASE OF M/S. CHANDAN TEA ENTERPRISES IT WAS A REPAYMENT OF THE AMOUNT ADVANCED OF THAT PARTY. THE LEARNED DR SUBMI TTED THAT SINCE NO DETAIL WAS FILED BEFORE THE AO, THEREFORE, ADDITION WAS RIGHTLY MADE. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSE E REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND R EFERRED TO COPY OF THE ACCOUNT IN THE CASE OF M/S. CHANDAN TEA ENTERPR ISES PB- 52 AND PB-53 AND IN THE CASE OF ANAND CORPORATION CONFIRMA TION IS RELIED UPON A COPY OF WHICH IS FILED AT PB-54. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MAT ERIAL AVAILABLE ON RECORD. IN THE CASE OF ANAND CORPORATION, THE AS SESSEE FILED CONFIRMATION BEFORE THE AO IN WHICH GIVING OF LOAN WAS CONFIRMED. THE AO DID NOT MAKE ANY FURTHER ENQUIRY INTO THE MATTER AND SIMPLY REJECTED THE CONFIRMATION FROM THIS PARTY BECAUSE THE SAME D ID NOT BEAR ANY GIR NUMBER. THE ASSESSEE FILED COPY OF THE CONFIRMATION IN PAPER BOOK AT PAGE 54 WHICH SHOWS THAT THE SAME BEAR PERMANENT AC COUNT NUMBER OF THIS PARTY ALONG WITH TDS DETAILS. THE LEARNED CIT( A), THEREFORE, ON PROPER APPRECIATION OF THE CONFIRMATION AND DETAILS INCORPORATED THEREOF ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 6 WAS JUSTIFIED IN DELETING THE ADDITION. THE AO HAS NOT MADE OUT ANY OTHER CASE AGAINST THE ASSESSEE FOR REJECTING THE GENUINE CREDIT. IN THE ABSENCE OF FURTHER ENQUIRY INTO THE MATTER, WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE. SIMILARLY, IN THE CASE OF M/S. CHANDA N TEA ENTERPRISES, THE LEARNED CIT(A) DELETED THE ADDITION OF RS.5,50,000/ - BECAUSE THE AMOUNT OF RS.6,00,000/- WAS REPAYMENT OF ADVANCE. THE ASSE SSEE SPECIFICALLY PLEADED BEFORE THE LEARNED CIT(A) THAT THE ASSESSEE HAD FROM TIME TO TIME ADVANCED FUNDS TO M/S. CHANDAN TEA ENTERPRISES AND HAD DERIVED INTEREST INCOME. THE REPAYMENT OF THE AMOUNT TOWARD S THE FUNDS ADVANCED BY THE ASSESSEE WAS WRONGLY TREATED AS CAS H CREDIT U/S 68 OF THE IT ACT. THE ASSESSEE FILED COPY OF THE ACCOUNT OF M/S. CHANDAN TEA ENTERPRISES WHICH SUPPORT THE FINDINGS OF THE LEARN ED CIT(A) AND THE SUBMISSION OF THE ASSESSEE THAT THE ASSESSEE HAD AD VANCED FUNDS TO M/S. CHANDAN TEA ENTERPRISES WHICH WERE RETURNED FR OM TIME TO TIME. IT MAY ALSO BE NOTED HERE THAT ON ADVANCING THE FUNDS TO M/S. CHANDAN TEA ENTERPRISES, THE ASSESSEE HAD RECEIVED INTEREST ON WHICH TDS WERE DEDUCTED AND THE AO HAS TAKEN INTO CONSIDERATION TH IS FACT. IT WOULD SHOW THAT THE ADDITION WAS MADE BY THE AO DUE TO NO N-APPLICATION OF MIND. THEREFORE, THE LEARNED CIT(A) ON PROPER APPR ECIATION OF FACTS AND MATERIAL ON RECORD RIGHTLY DELETED THE ADDITION OF RS.5,50,000/-. THE ASSESSEE HAS ADMITTED IN ITS SUBMISSION BEFORE THE LEARNED CIT(A) THAT RS.1,50,000/- ONLY WAS RECEIVED AS DEPOSIT ON 20-09 -1993 ON WHICH THE ASSESSEE IS IN APPEAL SEPARATELY. THAT ISSUE WILL BE DECIDED SEPARATELY WHILE CONSIDERING THE APPEAL OF THE ASSESSEE. HOWEV ER, CONSIDERING THE MATERIAL ON RECORD AND THE FINDINGS OF THE LEARNED CIT(A), WE DO NOT FIND ANY JUSTIFICATION TO INTERFERE WITH THE ORDER OF TH E LEARNED CIT(A) IN DELETING THE ADDITION OF RS.2,00,000/- AND RS.5,50, 000/- THIS GROUND OF DEPARTMENTAL APPEAL IS ACCORDINGLY DISMISSED. 9. NO OTHER POINT IS ARGUED OR PRESSED IN THE DEPAR TMENTAL APPEAL. ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 7 10. IN THE RESULT, THE DEPARTMENTAL APPEAL IS DISMI SSED. ITA NO.2080/AHD/2004 (ASSESSEES APPEAL) 11. THE ASSESSEE IN IS APPEAL HAS RAISED 15 GROUNDS . HOWEVER, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT GRO UNDS NO.1, 2, 3, 6, 7 AND 12 ARE GENERAL IN NATURE AND NO ARGUMENT HAS BE EN MADE FOR THE SAME. THE SAME ARE ACCORDINGLY DISMISSED. 12. GROUNDS NO.14 AND 15 ARE RELATING TO CHARGING O F INTEREST WHICH ARE CONSEQUENTIAL IN NATURE AND HAVE ALSO SIMILARLY NOT BEEN ARGUED. THE SAME ARE ACCORDINGLY DISMISSED. THE LEARNED COUNSEL FOR THE ASSESSEE RESTRICTED HIS ARGUMENTS TO THE REMAINING GROUNDS O NLY WHICH ARE DISPOSED OF AS UNDER. 13. ON GROUND NO.4, THE ASSESSEE CHALLENGED THE ORD ER OF THE LEARNED CIT(A) FOR CALCULATION OF DEDUCTION U/S 80 HHC OF T HE IT ACT, THE TOTAL TURNOVER SHOULD BE CONSIDERED BY EXCLUDING THE FIGU RE OF CENTRAL EXCISE DUTY AND SALES TAX AS PER THE DECISION OF THE HONB LE SUPREME COURT IN THE CASE OF CIT VS LAKSHMI MACHINE WORKS 290 ITR 66 7 IN WHICH IT WAS HELD IN HEAD NOTE - EXPORT BUSINESS SPECIAL EXEMPTION OBJECT TO PROVIDE INCENTIVE FOR PROMOTION OF EXPORTS TO TAL TURNOVER FORMULA ADOPTED ION STATUTE FOR DETERMINATION EXC LUSION FROM TOTAL TURNOVER OF BROKERAGE, COMMISSION, INTEREST, RENT, ETC. EXCISE DUTY AND SALES TAX ALSO OF SAME NATURE ARE TO BE DEDUCTED INCOME-TAX ACT, 1961, 1961 S. 80 HHC (3). 14. LEARNED DR CONCEDED THAT THE ISSUE IS COVERED I N FAVOUR OF THE ASSESSEE. CONSIDERING THE ABOVE FACTS WE ARE OF THE VIEW THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASSESSEE BY THE JUDGMENT O F THE HONBLE SUPREME COURT IN THE CASE OF LAKSHMI MACHINE WORKS (SUPRA). WE ACCORDINGLY, DIRECT THE AO TO EXCLUDE THE EXCISE DU TY AND SALES TAX FOR THE ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 8 PURPOSE OF CALCULATING DEDUCTION U/S 80 HHC OF THE IT ACT OUT OF THE TURNOVER AS PER THE ABOVE DECISION. GROUND NO.4 OF THE APPEAL OF THE ASSESSEE IS ACCORDINGLY ALLOWED. 15. ON GROUND NO.5, THE ASSESSEE CHALLENGED THE ORD ER OF THE LEARNED CIT(A) IN HOLDING THAT RS.9,16,617/- (EXCISE DUTY R EFUND) FALL WITHIN THE PURVIEW OF PROVISIONS OF EXPLANATION (BAA) TO SECTI ON 80 HHC OF THE IT ACT. THE ASSESSEE OBJECTED BEFORE THE LEARNED CIT(A ) THE DEDUCTION BEING NOT PROPERLY COMPUTED AND THAT THE COMPUTATION OF T HE TOTAL TURNOVER ON EXPORT TURNOVER AND OF PROFITS OF BUSINESS AND OTHE R VARIOUS COMPUTATIONS WAS PROPERLY DONE BY THE ASSESSEE AND SHOULD BE SO HELD. IT WAS STATED THAT VARIOUS DISALLOWANCES MADE BY TH E AO BE CONSIDERED AS PROFITS FOR THE YEAR FOR CALCULATION OF SUCH DED UCTION. THE ADDITION OF CENTRAL EXCISE AND SALES TAX IN THE DECLARED TOTAL TURNOVER WAS WRONG. ALSO THE REFUND OF EXCISE DUTY OF RS.9,15,617/- SHO ULD NOT BE TREATED AS SUBJECT TO PURVIEW OF EXPLANATION (BAA) TO SECTION 80 HHC OF THE IT ACT AND THUS, THE AO ERRED IN REDUCING WRONGLY THE PROF ITS BY 90% OF THIS AMOUNT I. E. RS.8,24,055/- WHEN THE GROSS TOTAL IN COME OF RS.10,70,000/- AS PER STATEMENT OF INCOME DO NOT IN CLUDE THIS AMOUNT OF RS.9,15,617/-. THE AO REJECTED THE CLAIM THAT CENTR AL EXCISE SET OFF OF RS.9,15,617/- IS IN THE NATURE OF AN ASSET AMOUNT A S PER MODVAT ACCOUNT AND THAT COST OF CONSUMPTION OF RAW MATERIAL STANDS REDUCED BY PAYMENT OF EXCISE DUTY. THE AO HAS INSTEAD HELD THAT SINCE CORRECT ACCOUNTING MEANT INCLUDING EXCISE DUTY PAID IN PURCHASE COST W HILE ADDING EXCISE DUTY RECEIVED ON SALES AS IN TOTAL SALE VALUE, OR R EFUND OF EXCISE DUTY WOULD BE OTHER INCOME, 90% OF WHICH ALONG WITH GROS S INTEREST RECEIVED WOULD BE REDUCED IN TERMS OF EXPLANATION (BAA) TO S ECTION 80 HHC OF THE IT ACT. IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) WITH REGARD TO ADDITION OF 90% OF RS.9,15,617/- FOR CALCULATION OF EXPORT B ENEFITS U/S 80 HHC OF THE IT ACT THAT THIS AMOUNT IS TOWARDS EXCISE RECOV ERABLE ON ACCOUNT OF EXPORTS MADE BY CHARGING EXCISE DUTY OF EXPORTS BIL LS AND SUBSEQUENTLY ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 9 CLAIMING REFUND OF THE SAID EXCISE CHARGE ON EXPORT BILLS. IN THE SAID CASE THE EXPORTS WOULD HAVE BEEN POSSIBLE BY GIVING BOND UNDER WHICH NO EXCISE DUTY IS PAYABLE. INSTEAD OF GIVING BOND THE ASSESSEE DEBITED RG- 23A PART- II ACCOUNT AND CLEARED THE GOODS BY CHARG ING EXCISE DUTY ON EXPORT BILLS. THE ADJUSTMENT AS REQUIRED BY SECTION 80 HHC (BAA) IS NOT IN CONNECTION WITH EXCISE DUTY RECOVERABLE WHICH IS CHARGE OF EXPORT GOODS. THE DETAILS OF SALES BILLS IN WHICH THE AMOU NT OF EXCISE DUTY CHARGED WAS TO BE RECOVERED BACK WERE EXPLAINED BEF ORE THE LEARNED CIT(A) AND INCORPORATED AT PAGE 3 OF THE IMPUGNED O RDER. ON REFERRING TO THE PROFIT & LOSS ACCOUNT, IT WAS OBSERVED THAT THE FIRM HAS PAID INTEREST OF RS.8,21,294/- AND HAS EARNED INTEREST OF RS.2,03 ,720/- AND HENCE NET INTEREST WAS DEBITED. THE LEARNED CIT(A) HOWEVER DI D NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND CONFIRMED THE ADDITI ON MADE OF RS.9,15,617/- BEING REFUND OF EXCISE DUTY IN THE TO TAL TURNOVER AND UPHELD THE ORDER OF THE AO. 16. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND REFERRED TO W RITTEN SUBMISSION FILED AT PAGE 33 AND 34 OF THE PAPER BOOK IN WHICH IT WAS BRIEFLY EXPLAINED THAT THE ASSESSEE HAD EFFECTED EXPORTS OF THE GOODS MANUFACTURED BY THE ASSESSEE FIRM AND THE EXPORTS A RE NOT LIABLE TO EXCISE DUTY. THE AMOUNT OF RS.9,15,617/- IS STRICT LY IN CONNECTION WITH THE GOODS MANUFACTURED BY THE ASSESSEE FIRM AND EXP ORTED BY THE ASSESSEE FIRM. IT WAS FURTHER EXPLAINED THAT THERE IS NO EXCUSE DUTY PAYABLE BY THE MANUFACTURER AND THE GOODS EXPORTED BY THE ASSESSEE. THE ASSESSEE CAN EXERCISE THE OPTION OF EXECUTING T HE BOND AND EXPORTING THE GOODS OR THE OPTION OF MAKING THE PAYMENT/CLAIM ING THE CREDIT AGAINST ADVANCE, EXCISE DUTY ACCOUNT IN RG-23A PART II. IT WAS EXPLAINED THAT IF A BOND IS EXECUTED BY THE MANUFAC TURER ON THE STRENGTH OF SUCH BOND WITHOUT MAKING ANY PAYMENT GOODS CAN B E REMOVED AND EXPORTED AND AFTER EXPORTING THE GOODS AND ON INFOR MING THE EXCISE ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 10 AUTHORITIES SUCH BOND CAN BE RELEASED. IT WAS FURTH ER SUBMITTED THAT IN THE CASE OF THE ASSESSEE FIRM IT DID NOT EXECUTE TH E BOND BUT OPTED TO MAKE PAYMENT/CLAIMS CREDIT IN EXCISE DUTY ACCOUNT I N RG-23A PART-II. THE ENTRIES WERE ALSO EXPLAINED ACCORDINGLY. IT WAS SUBMITTED THAT CENTRAL EXCISE RECOVERABLE AMOUNT HAS NEVER BEEN IN THE NATURE OF INCOME CREDITED TO THE PROFIT & LOSS ACCOUNT BUT TH E ENTRY WAS MADE WITH A VIEW OF REFLECTING THE CORRECT AMOUNT DUE FROM M/ S. CRESCENT INTERNATIONAL INC. AND THE CORRECT AMOUNT OF CENTRA L EXCISE RECOVERABLE AMOUNT WITH A VIEW TO CLAIMING CORRECT CREDIT FROM GOVERNMENT OF INDIA AND ALSO PREPARE THE RECORDS AND MADE ENTRIES AS PE R EXCISE LAW. IT WAS FURTHER SUBMITTED THAT THE CENTRAL EXCISE DUTY OF R S.9,15,617/- NOT BEING AN ITEM OF REVENUE NATURE NEVER ENTERED PROFIT OF R S. 6,84,643/- COMPUTED BY THE ASSESSEE AS PER THE PROFIT & LOSS A CCOUNT NOR IT EVER ENTERED THE COMPUTATION OF TOTAL INCOME OF RS.10,70 ,000/- DECLARED IN THE RETURN OF INCOME. IT WAS SUBMITTED THAT THE AO HAS GROSSLY ERRED IN INVOKING EXPLANATION (BAA) TO SECTION 80 HHC OF THE IT ACT. THE LEARNED COUNSEL FOR THE ASSESSEE BY REFERRING TO THE ABOVE WRITTEN SUBMISSION AT PAGE 33 AND 34 OF THE PAPER BOOK SUBMITTED THAT THE AUTHORITIES BELOW HAVE NOT CONSIDERED THE ISSUE PROPERLY AND RELIED U PON THE DECISION OF ITAT AHMEDABAD BENCH IN THE CASE OF AARTI INDUSTRIE S LTD. VS DCIT 95 TTJ 14 IN WHICH IT WAS HELD CONCLUSION NEITHER THE PAYMENT NOR THE REFUND OF EXCISE DUTY AFFECT THE BUSINESS PROFI TS OF ASSESSEE AND 90 PER CENT OF SUCH REFUND COULD NOT BE EXCLUDE D IN TERMS OF EXPLN. (BAA) TO S. 80 HHC (4B) FROM THE PROFITS OF BUSINESS. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSESSEE RE LIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 17. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE AR E OF THE VIEW THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN REJECTING T HE CLAIM OF THE ASSESSEE. THE ASSESSEE MADE A SPECIFIC SUBMISSION BEFORE THE AUTHORITIES BELOW BY CLAIMING THAT THE GROSS TOTAL INCOME OF RS.10,70,00 0/- DID NOT INCLUDE ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 11 THE AMOUNT OF RS.9,15,617/-. ONCE THE ABOVE AMOUNT OF EXCISE DUTY REFUND WAS NOT SHOWN AS PART OF THE INCOME, THERE W AS NO REASON TO HAVE CONSIDERED THE SAME IN THE LIGHT OF EXPLANATION (BA A) TO SECTION 80 HHC OF THE IT ACT. THE ASSESSEE MADE DETAILED SUBMISSIO N BEFORE THE LEARNED CIT(A) BUT THE LEARNED CIT(A) WITHOUT PASSING ANY S PEAKING ORDER ON THE ISSUE REJECTED THE CLAIM OF THE ASSESSEE BY CONSIDE RING OTHER ISSUES ATTACHED TO THE ABOVE GROUND OF APPEAL. ACCORDING T O SECTION 250(6) OF THE IT ACT, THE LEARNED CIT(A) IS REQUIRED TO PASS SPEAKING ORDER DISCUSSING THE POINT FOR DETERMINATION, SUBMISSION OF THE ASSESSEE AND SHOULD HAVE GIVEN REASONS FOR DECISION ON THE SAME. SINCE THE LEARNED CIT(A) DID NOT APPRECIATE THE FACTS OF THE CASE IN PROPER PERSPECTIVE AND HAS NOT PASSED SPEAKING ORDER, WE, THEREFORE, SET A SIDE THE ORDER OF THE LEARNED CIT(A) AND RESTORE THIS ISSUE TO HIS FILE W ITH DIRECTION TO RE-DECIDE THE ABOVE ISSUE IN THE LIGHT OF THE SUBMISSIONS MAD E BY THE ASSESSEE ABOVE AND IN THE LIGHT OF THE DECISION OF ITAT AHME DABAD BENCH IN THE CASE OF AARTI INDUSTRIES LTD. (SUPRA). AS A RESULT, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. T HE LEARNED CIT(A) SHALL GIVE REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEA RD TO THE ASSESSEE. 18. ON GROUND NO.8, IT IS SUBMITTED THAT INTEREST I NCOME OF RS.2,05,807/- BE EXCLUDED WHILE CONSIDERING DEDUCTI ON U/S 80 I OF THE IT ACT. THE AO HELD THAT INTEREST INCOME EARNED IS NOT DERIVED FROM THE MANUFACTURING ACTIVITY; THEREFORE, CLAIM OF THE ASS ESSEE WAS REJECTED. THE LEARNED CIT(A) CONFIRMED THE ORDER OF THE AO BECAUS E IN THE PAST ALSO THE ORDER OF THE AO WAS UPHELD ON THE SAME ISSUE. THE L EARNED COUNSEL FAIRLY CONCEDED THAT THE ISSUE IS COVERED AGAINST T HE ASSESSEE BY THE JUDGMENT OF IN THE CASE OF PENDIAN CHEMICALS 262 IT R 278. IN THIS VIEW OF THE MATER, WE DO NOT FIND ANY MERIT IN THIS GROU ND OF APPEAL OF THE ASSESSEE. THE SAME IS ACCORDINGLY DISMISSED. ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 12 19. ON GROUNDS NO.9 AND 10, THE ASSESSEE CHALLENGED DISALLOWANCE OF RS.90,000/- BEING INTEREST U/S 36(1)(III) OF THE IT ACT. THE ASSESSEE OBJECTED TO THE DISALLOWANCE OF RS.90,000/- OUT OF EXPENDITURE ON ACCOUNT OF INTEREST WHICH WAS CLAIMED TO BE WHOLLY FOR BUSINESS PURPOSES. THE AO ON THE BASIS OF THE PAST HISTORY P ROPOSED TO DISALLOW ON ACCOUNT OF DIVERSION OF INTEREST BEARING FUNDS. THE AO HAS HELD THAT IN THE ABSENCE OF COMPLETE DETAILS ABOUT RS.8,00,00 0/- WORTH OF INTEREST FREE ADVANCES ARE FOUND IN THE YEAR, WHILE ONLY ABO UT RS.2,00,000/- OF INTEREST FREE FUNDS ARE AVAILABLE. THEREFORE, RS.6, 00,000/- OF INTEREST BEARING ADVANCES WERE BEING DIVERTED WITHOUT INTERE ST. THE AO HAS FOUND THAT THIS AMOUNT WAS ABOUT 15% OF THE TOTAL FUNDS O N WHICH INTEREST WAS BEING PAID OF RS.7,90,311/-. THEREFORE, 15% OF THIS INTEREST WAS DISALLOWED. IT WAS SUBMITTED BEFORE THE LEARNED CIT (A) THAT TOTAL AMOUNT OF INTEREST FREE ADVANCES AVAILABLE WITH THE ASSESS EE FIRM ARE AS UNDER: (A) PARTNERS CAPITAL ACCOUNT BALANCE RS. 65,20, 652/- LESS: CLOSING BALANCE OF PARTNERS CAPITAL A/C TO WHOM INTEREST PAID. INTEREST IS PAID TO SHRI MAHENDRAKUMAR TRIBHUVANDAS THAKKAR HUF RS. 7,00,712/- RS.58,19,940/- (B) RESERVE AND SURPLUS RS. 3,47,401/- (C ) INTEREST FREE UNSECURED LOANS AS UNDER RS. 2 ,06,220/- NAME OF PARTY AMOUNT (RS.) MAHENDRAKUMAR T. AKHANI 56220.00 MANSIBEN C. THAKKAR 10000.00 MAHAVIR PLASTIC 75000.00 TRANS ROADLINES 30000.00 HARSHIDABEN C. THAKKAR 10000.00 KANTILAL RAMANLAL SHAH 25000.00 AS THE TOTAL AMOUNT OF INTEREST FREE FUNDS AVAILABL E TO THE FIRM IS RS.63,73,561/- WHICH IS SUBSTANTIALLY MORE THAN THE INTEREST FREE LOANS ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 13 GIVEN OF RS.6,00,000/- THEN THE QUESTION OF DISALLO WING INTEREST OF RS.90,000/- ON ACCOUNT OF DIVERSION OF FUNDS IS ABS OLUTELY ILLEGAL AND IT REQUIRES TO BE DELETED. YOUR APPELLANT RELIES ON TH E FOLLOWING DECISIONS: A. SHAHIBAG ENTREPRENEURS VS ITO (1994) 49 TTJ 554 (AHMEDABAD) : 50 ITD 13 (AHMEDABAD) B. DURA METALIC INDIA LTD. VS IAC (1991) 38ITD 211 (MAD) C. EID PARRY (INDIA) LD. VS DCIT (1992) 42 TTJ 209( MAD): (1993) 46 ITD 389 (MAD) D. SHRI DIGVIJAY CEMENT LD. VS CIT (1982) 26 CTR 18 4 (GUJ) (1982) 138 ITR 45 (GUJ) E. CIT VS HOTEL SAVERA (1998) 148 CTR 585 (MAD) G. REGAL THEATRE VS CIT (1998) 100 TAXMAN 116 (DELH I) H) GUJARAT NARMADA VALLEY FERTILISERS CO. LTD. VS D CIT (2001) 73 TTJ 787 (AHMEDABAD) I. TORRENT FI0NANCIERS VS ACIT (2001) 73 TTJ 624 (A HD D) J. CIT VS TINGRI TEA CO. LTD. (1971) 79 ITR 294 (CA L) K. ITO VS NARESH FABRICS (2002) 75 TTJ 386 (JD) L. DCIT VS. ZARHAK ENTERPORISES ITA NO.6008//MUMBAI BE NCH B/1990 M. ITO VS AJAY TEXTILES STORES ITA NO.5433/ASD/91 ( AHMEDABAD TRIBUNAL) FURTHER SUBMISSIONS OF THE ASSESSEE WERE RECORDED B Y THE LEARNED CIT(A) IN THE IMPUGNED ORDER IN WHICH IT WAS ALSO EXPLAINE D THAT SIMILAR ADDITION MADE IN THE ASSESSMENT YEAR 1991-92 HAD BE EN DELETED BY THE LEARNED CIT(A). THE LEARNED CIT(A) HOWEVER, CONFIRM ED THE ADDITION. HIS FINDINGS IN PARA 5.3 ARE REPRODUCED AS UNDER: 5.3 I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE. I FIND THAT BY APPELLANTS OWN ADMISSION VIDE LETTER DATED 1.10.2003, THE INTEREST FREE LOANS AND ADVANCES ARE AGGREGATING TO RS.42,08,852/- WHICH ARE VERY SUBSTA NTIAL. EVEN THOUGH THE PARTNERS CAPITAL IS ALSO SUFFICIEN T TO COVER THESE ADVANCES BUT IT CANNOT BE ESTABLISHED THAT TH E FLOW OF ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 14 FUNDS IS SUCH THAT IT IS THE PARTNERS AVAILABLE CAP ITAL THAT HAS BEEN SO ADVANCED AS FREE OF INTEREST, OR AS NOT ATT RIBUTABLE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES. THERE FORE, THE INTEREST PAID OUT IS NOT FULLY ESTABLISHED AS DEDUC TIBLE U/S. 36(1) (III) AS AMOUNT OF INTEREST PAID IN RESPECT O F CAPITAL BORROWED FOR PURPOSE OF BUSINESS, NOR IS IT FOUND D EDUCTIBLE U/S. 37(1) AS EXPENDED WHOLLY AND EXCLUSIVELY FOR T HE PURPOSE OF BUSINESS. IN FACT OUT OF BORROWED FUNDS WHERE UN SECURED LOANS ARE SHOWN AT RS.49,74,733/- IN THE YEAR, RS.42,88,852/- WAS AT LEAST 86% OF THE BORROWINGS W HICH ARE ADMITTEDLY NOT FOR BUSINESS PURPOSES. THEREFORE INT EREST PAYMENT WAS NOT FULLY ALLOWABLE. THE DISALLOWANCE B Y AO IS VERY REASONABLE,(AFTER LOOKING TO AVAILABILITY OF I NTEREST FREE FUNDS, AND ABSENCE OF NEXUS WITH INTEREST FREE ADVA NCES CONSIDERING THE FLOW OF FUNDS), AND THE SAME IS UPH ELD. 20. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THA T THE AO HAS NOT BROUGHT ANY NEXUS BETWEEN THE BORROWED FUNDS ON WHI CH INTEREST IS PAID AND THE AMOUNT DIVERTED. THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED THAT FINDING OF THE AO ARE NOT SPECIFIC A ND EVEN THE LEARNED CIT(A) ADMITTED IN HIS FINDINGS THAT INTEREST FREE LOANS AND ADVANCES ARE VERY SUBSTANTIAL WHICH ARE AVAILABLE TO THE ASSESSE E AND THAT PARTNERS CAPITAL IS ALSO SUFFICIENT TO COVER THESE ADVANCES, HOWEVER, THE LEARNED CIT(A) WRONGLY CONFIRMED THE ADDITION. THE LEARNED COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE BO MBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD . 313 ITR 340 AND THE ORDER OF THE ITAT AHMEDABAD BENCH IN THE CASE OF GU JARAT NARMADA VALEU FERTILIZERS CO. LTD. VS DCIT 73 TTJ 787. ON T HE OTHER HAND THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIE S BELOW. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL AVAILABLE ON RECORD ON RECORD. THE AO DISALLOWED RS.90,000/- AS ACCORDING TO HIM APPROXIMATELY RS.6,00,000/- CAN BE TREATED AS INTER EST FREE LOANS GIVEN WITHOUT JUSTIFICATION. THE EXPLANATION OF THE ASSES SEE MADE BEFORE THE LEARNED CIT(A) IS INCORPORATED ABOVE WHICH IS CONS IDERED BY THE LEARNED ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 15 CIT(A) AND HE FOUND THAT INTEREST FREE LOANS AND AD VANCES AGGREGATING TO RS.42,08,582/- ARE VERY SUBSTANTIAL AND EVEN THE PA RTNERS CAPITAL IS ALSO SUFFICIENT TO COVER THESE ADVANCES. HOWEVER, THE LE ARNED CIT(A) NOTED THAT IT COULD NOT BE ESTABLISHED THAT THE FLOW OF F UNDS IS SUCH THAT IT IS THE PARTNERS AVAILABLE CAPITAL THAT HAS BEEN SO ADV ANCED AS FREE OF INTEREST, THEREFORE, IS NOT ATTRIBUTABLE WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES. HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 HELD AS UNDER: THE ASSESSEE CLAIMED DEDUCTION OF INTEREST ON BORROWED CAPITAL. THE ASSESSING OFFICER RECORDED A FINDING THAT THE SUM OF RS. 213 CRORES WAS INVESTED OUT OF ITS OWN FUNDS AND RS.147 CRORES WAS INVESTED OUT OF BORROWED FUNDS. ACCORDINGLY HE DISALLOWED INTEREST AMOUNTING TO RS. 4.40 CRORES CALCULATED AT 12 PER C ENT PER ANNUM FOR THREE MONTHS FROM JANUARY 2000 TO MARCH, 2000. THE COMMISSIONER (APPEALS) FOUND THAT THE ASSESSEE HAD ENOUGH INTEREST-FREE FUNDS AT IS DISPOSAL FOR INVESTMENT AND ACCORDINGLY DELETED THE ADDITION OF RS.4.40 CRORES MADE BY THE ASSESSING OFFICER AND DIRECTED HIM TO ALLOW THE DEDUCTION UND ER SECTION 36(1) (III). THE ORDER OF THE COMMISSIONER (APPEALS) WAS UPHELD BY THE TRIBUNAL. ON APPEAL TO THE HIGH COURT: HELD, DISMISSING THE APPEAL, THAT IF THERE WERE FUNDS AVAILABLE BOTH INTEREST-FREE AND OVERDRAFT AN D/OR LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST-FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION WAS ESTABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE COMMISSIONER (APPEALS) AND THE TRIBUNAL. THE INTERE ST WAS DEDUCTIBLE. 22. ITAT AHMEDABAD BENCH IN THE CASE OF GUJARAT NAR MADA VALEU FERTILIZERS CO. LTD. VS DCIT 73 TTJ 787 HELD AS UND ER: CONCLUSION ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 16 SUFFICIENT FUNDS BEING AVAILABLE WITH ASSESSEE ON WHICH NO INTEREST WAS PAID AND THERE BEING NO EVIDENCE TO LINK THE INTEREST BEARING LOAN OBTAINED BY ASSESSEE WITH INTEREST-FREE ADVANCES MADE TO ASSOCIATE CONCERNS, NO DISALLOWANCE UNDER S. 36(1)(III) COULD BE MADE. 23. CONSIDERING THE FACTS OF THE CASE IN THE LIGHT OF THE FINDINGS OF THE LEARNED CIT(A) AND THE DECISIONS QUOTED ABOVE, IT I S CLEAR THAT THE AO HAS NOT MADE ANY EFFORTS TO FIND OUT IF THERE WAS ANY N EXUS BETWEEN THE BORROWED FUNDS AND THE FUNDS DIVERTED. THE ASSESSEE HAS SUFFICIENT FUNDS AVAILABLE BOTH INTEREST FREE LOANS AND ADVANC ES AS WELL AS PARTNERS CAPITAL AS NOTED ABOVE. THEREFORE, PRESUMPTION WOUL D ARISE THAT THE INVESTMENTS WOULD BE OUT OF INTEREST FREE FUNDS GEN ERATED OR AVAILABLE TO THE ASSESSEE SINCE THE AVAILABILITY OF INTEREST FRE E FUNDS WERE SUFFICIENT TO MEET THE FINDINGS OF THE AO, THEREFORE, THERE WAS N O PURPOSE IN DISALLOWING THE INTEREST U/S 36(1)(II) OF THE IT AC T. THE AO ON THE BASIS OF THE FINDING GIVEN IN THE LAST YEAR THAT THERE WAS A DIVERSION OF INTEREST BEARING FUNDS MADE THE ADDITION WITHOUT POINTING OU T AS TO WHICH OF THE INTEREST BEARING FUNDS HAVE BEEN DIVERTED FOR NON-B USINESS PURPOSES. CONSIDERING THE FACTS AND CIRCUMSTANCES NOTED ABOVE , WE ARE OF THE VIEW THAT THE AUTHORITIES BELOW WERE NOT JUSTIFIED IN MA KING THE DISALLOWANCE OF THE INTEREST AND CONFIRMING THE SAME ADDITION. W E ACCORDINGLY SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELET E THE ENTIRE ADDITION. AS A RESULT, THESE GROUNDS OF APPEAL OF THE ASSESSE E ARE ALLOWED. 24. ON GROUND NO.11, THE ASSESSEE CHALLENGED THE AD DITION OF RS.1,50,000/- U/S 68 OF THE IT ACT. THE FACTS HAVE BEEN NOTED WHILE CONSIDERING GROUND NO.3 IN THE DEPARTMENTAL APPEAL ABOVE IN WHICH WITH REGARD TO M/S. CHANDAN TEA ENTERPRISES THE LEARNED CIT(A) DELETED THE ADDITION OF RS.5,50,000/- AND CONFIRMED BY THE TRIB UNAL. IT WAS NOTED THAT R.1,50,000/- WAS RECEIVED BY THE ASSESSEE AS D EPOSIT ON 20-09-1993 WHICH WAS REPAID ON 22-10-1993. THE LEARNED CIT(A) NOTED THAT THE ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 17 ASSESSEE HAS NOT FILED ANY CONFIRMATION OF THE LOAN . HOWEVER, IT WAS EXPLAINED BEFORE THE LEARNED CIT(A) THAT COPY OF TH E ACCOUNT OF THE PARTY WAS FILED ALONG WITH CONFIRMATION TO SHOW THAT RS.5 ,50,000/- WAS THE AMOUNT ADVANCED BY THE ASSESSEE TO M/S. CHANDAN TEA ENTERPRISES AND ONLY RS.1,50,000/- WAS REPRESENTED AS LOAN. IN VIEW OF THE ABOVE, IT IS CLEAR FROM THE COPY OF THE ACCOUNT AND CONFIRMATION FILED ON RECORD NOW THAT THE AMOUNT OF RS.1,50,000/- IS ALSO SAME PART OF THE AMOUNT WHICH HAS BEEN CONSIDERED BY THE AUTHORITIES BELOW FOR TH E PURPOSE OF DELETING THE ADDITION. THE LEARNED CIT(A) ALSO NOTED THAT CR EDITWORTHINESS AND GENUINENESS OF THE TRANSACTION IS NOT PROVED IN THE MATTER. HOWEVER, OUT OF THE SAME TRANSACTIONS WHEN THE OTHER TRANSACTION S HAVE BEEN TAKEN INTO CONSIDERATION IN RESPECT OF THE SAME PARTY, TH EREFORE, THE AUTHORITIES BELOW SHOULD HAVE CONSIDERED THE ISSUE IN THE LIGHT OF THE STATEMENT OF ACCOUNT OF THE AFORESAID PARTY FILED AT PAGE 52 OF THE PAPER BOOK. THIS PARTY IS ALSO ASSESSED TO TAX AND PERMANENT ACCOUNT NUMBER IS GIVEN IN THE CONFIRMATION FILED AT PB 53. THE CREDITWORTHINE SS AND GENUINENESS OF THE TRANSACTION COULD BE CONSIDERED FROM THESE DOCU MENTS. THE CONFIRMATION FILED AT PB-53 IS STATED TO BE FILED B EFORE THE AO AND THE LEARNED CIT(A) AS PER CERTIFICATE GIVEN BY THE LEAR NED COUNSEL FOR THE ASSESSEE IN THE PAPER BOOK. CONSIDERING THE FACT TH AT DEPARTMENTAL APPEAL IS DISMISSED ON WHICH LEARNED CIT(A) SUBSTAN TIALLY DELETED THE ADDITION ON THE BASIS OF THE DOCUMENTS ON RECORD, W E ARE OF THE VIEW THAT INTEREST OF JUSTICE REQUIRES THAT THE MATER MAY BE REMANDED TO THE LEARNED CIT(A) FOR RECONSIDERATION OF THE ISSUE. WE ACCORDINGLY SET ASIDE THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND R ESTORE THE SAME TO HIS FILE WITH DIRECTION TO RE-DECIDE THE SAME BY GIVING REASONABLE SUFFICIENT OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. THE ASS ESSEE MAY FURNISH FURTHER ADEQUATE EVIDENCES BEFORE THE LEARNED CIT(A ) TO HIS SATISFACTION FOR FINAL ADJUDICATION OF THE MATTER. AS A RESULT, THIS GROUND OF APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 18 25. ON GROUND NO.13, THE ASSESSEE CHALLENGED THE OR DERS OF THE AUTHORITIES BELOW IN DISALLOWING RS.15,432/- OUT OF TELEPHONE EXPENSES. THE AO BECAUSE OF PERSONAL USER OF THE TELEPHONE AN D FOR NON-BUSINESS PURPOSES DISALLOWED THE ABOVE AMOUNT BEING ONE FIFT H OUT OF RS.77,162/- . IT WAS SUBMITTED BEFORE THE LEARNED CIT(A) THAT T OKEN DISALLOWANCE SHOULD BE MADE. THE LEARNED CIT(A) CONSIDERING THE NATURE OF THE EXPENSES RESTRICTED THE ADDITION TO RS.8,285/- AND ALLOWED RELIEF OF RS.7,147/- IN FAVOUR OF THE ASSESSEE. 26. THE LEARNED COUNSEL FOR THE ASSESSEE GAVE BIFUR CATION OF THE TELEPHONE EXPENSES AND SUBMITTED THAT TELEPHONE IS USED IN THE FACTORY FOR BUSINESS PURPOSES AND TELEPHONE EXPENSES OF RS. 5,824/- WAS INCURRED FOR THE TELEPHONE INSTALLED AT THE RESIDEN CE OF THE PARTNERS. THEREFORE, AT THE MOST, ONE FIFTH OUT OF RS.5,824/- MAY BE DISALLOWED. ON THE OTHER HAND, THE LEARNED DR RELIED UPON THE ORDE RS OF THE AUTHORITIES BELOW. 27. ON CONSIDERATION OF THE RIVAL SUBMISSIONS, WE D O NOT FIND ANY JUSTIFICATION TO INTERFERE IN THE ORDER OF THE LEAR NED CIT(A). THE LEARNED CIT(A) HAS ALREADY REDUCED THE DISALLOWANCE OF RS.1 5,432/-. THEREFORE, GROUND RAISED IN THE GROUNDS OF APPEAL ITSELF IS IN CORRECT. PERSONAL USER OF THE TELEPHONE BY THE PARTNERS AND OTHERS IS NOT DISPUTED. NO LOG BOOK OR OTHER MATERIALS WAS PRODUCED TO SHOW THAT THE TE LEPHONE HAS BEEN USED ONLY FOR THE PURPOSE OF BUSINESS. IN THE ABSEN CE OF ANY ADEQUATE MATERIAL ON RECORD AND CONSIDERING THAT THE ADDITIO N HAS ALREADY BEEN SUBSTANTIALLY REDUCED BY THE LEARNED CIT(A), WE DO NOT FIND IT TO BE A FIT CASE FOR INTERFERENCE. WE ACCORDINGLY CONFIRM THE O RDER OF THE LEARNED CIT(A) AND DISMISS THIS GROUND OF APPEAL OF THE ASS ESSEE. 28. NO OTHER GROUND IS ARGUED OR PRESSED. 29. AS A RESULT, THE APPEAL OF THE ASSESSEE IS PART LY ALLOWED. ITA NO.2031 AND 2080/AHD/2004 SHREENATH INTERMEDIATES 19 30. AS A RESULT, DEPARTMENTAL APPEAL IS DISMISSED A ND THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 9-07-2010 SD/- SD/- (D. C. AGRAWAL) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 9-07-2010 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE BY ORDER DY. REGISTRAR, ITAT, AHMEDABAD