SHRI VIPAN KHANNA , PATHANKOT V. INCOME TAX OFFICER, WARD6(3), PATHANKOT

ITA 209/ASR/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 1326 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 1 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-06-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 12-03-2019
• Assessment Year: 2013-2014
• Appeal Filed On: 16-04-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: P N ARORA
• Keywords: Capital asset; Proportionate interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (SMC) BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER I.T.A. NO. 209/ASR/2018 A SSESSMENT YEAR: 2013-14 VIPAN KHANNA, C/O PUSHAP PALACE, DHANGU ROAD, PATHANKOT [PAN: AELPK 0437Q] VS. INCOME TAX OFFICER, WARD 6(3), PATHANKOT, PUNJAB (APPELLANT) (RESPONDENT) APPELLANT BY : SH. P. N. ARORA (ADV.) RESPONDENT BY: SH. CHARAN DASS (D.R.) DATE OF HEARING: 12.03.2019 DATE OF PRONOUNCEMENT: 07.06.2019 ORDER PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-2, AMRITSAR (' CIT(A)' FOR SHORT) DATED 24.01.2018, DISMISSING THE ASSESSEES APPEAL CONTES TING HIS ASSESSMENT U/S. 143(3) OF THE INCOME TAX ACT, 1961 ('THE ACT' HEREINAFTER) DATED 23.03.2016 FOR THE ASSESSMENT YEAR (AY) 2013-14. 2. THE APPEAL RAISES A SINGLE ISSUE, I.E., THE SUST AINABILITY IN LAW OF THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL U/S. 3 6(1)(III) OF THE ACT, EFFECTED IN A SUM OF RS.12.72 LACS, IN THE FACTS AND CIRCUMSTANCE S OF THE CASE. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E-INDIVIDUAL IS ENGAGED, THROUGH THREE PROPRIETARY CONCERNS, AS A DEALER IN PETROLEUM PRODUCTS (M/S. KHANNA ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 2 PETROS MART, PATHANKOT) AND AS CONTRACT ENGINEERS ( THROUGH M/S. KHANNA ENGINEERS, PATHANKOT AND M/S. DC KHANNA & SONS, CHA MBA). HE FILED HIS RETURN OF INCOME FOR THE RELEVANT YEAR AT RS. 2,09,738 ON 07/01/2015. DURING THE ASSESSMENT PROCEEDINGS, INITIATED BY THE ISSUE OF N OTICE U/S. 143(2) ON 28/8/2015 (SERVED ON 05.9.2015), IT WAS OBSERVED BY THE ASSES SING OFFICER (AO) THAT THE ASSESSEE HAD CLAIMED INTEREST ON SECURED LOANS (OUT STANDING AT RS.166.36 LACS AS ON 31/03/2013) AT RS.21,34,843/-, BORROWED OSTENSIBLY FOR BUSINESS PURPOSES. THE ASSESSEE, WHOSE CAPITAL AS AT THE YEAR-END WAS AT A MEAGER RS.4.80 LACS, HAD ADVANCED LARGE AMOUNTS, AGGREGATING TO RS.122.77 LA CS, WHICH WERE NOT FOR THE PURPOSE OF HIS BUSINESS. THE ASSESSEE WAS ACCORDING LY SHOW CAUSED ON 19/3/2016 FOR PROPORTIONATE INTEREST DISALLOWANCE (I.E., AT R S.15.75 LACS) VIDE NOTICE DATED 17/3/2016. AFTER CONSIDERING THE ASSESSEES REPLY T HE AO FOUND ADVANCES FOR NON BUSINESS PURPOSES AT RS.99.13 LACS AND, ACCORDINGLY , DISALLOWED RS.12,72,216/-. THE SAME STOOD CONFIRMED IN FIRST APPEAL, WITH THE LD. CIT(A) HOLDING AS UNDER: DECISION- THE ASSESSMENT ORDER AND THE WRITTEN SUBMISSIONS OF THE APPELLANT ARE CONSIDERED. IT IS OBSERVED THAT THE TOTAL LOAN AND ADVANCES MAD E BY THE APPELLANT TO VARIOUS PARTIES WAS TO THE TUNE OF RS 122,76,505/- WHEREAS THE CONSOLIDATE D BALANCE SHEET OF THE ASSESSEE AS ON 31.3.2013 SHOWS CAPITAL OF RS 480,489/-, UNSECURED LOANS AMOUNTING TO RS 55,61,456/- AND SUNDRY CREDITORS OF RS 9,53,173/- AND OTHERS PAYABL E AMOUNTING TO RS 3,00,493/- AGGREGATING TO RS 72,95,612/-, WHICH WAS FREE OF COST. THEREFOR E TOTAL LOAN AND ADVANCES MADE BY THE APPELLANT WERE MUCH MORE THAN THE TOTAL INTEREST-FR EE FUNDS AVAILABLE WITH THE APPELLANT, AND ACCORDINGLY THE DECISIONS OF HONBLE PUNJAB & HARYA NA HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES P LTD, AND SH. GURDAS GARG AND THE DECI SION OF HONBLE APEX COURT IN THE CASE OF S A BUILDERS P LTD ARE NOT OF ANY HELP TO THE AP PELLANT. THE AO HAS ANALYZED EACH AND EVERY ADVANCE MADE BY THE APPELLANT AND THE ASSESSMENT ORDER AND RIGHTLY CONCLUDED THAT THE TOTAL ADVANCES OF RS 99,13,472/- WERE MADE OTHERWISE THAN FOR BUSINESS PURPOSES. FURTHER, THE ASSESSEE H AS NOT BROUGHT MATERIAL ON RECORD TO DISCHARGE ITS ONUS FOR PROVING THAT THE ADVANCES MA DE BY IT WERE PURELY FOR BUSINESS PURPOSES. THEREFORE, THE AO WAS JUSTIFIED IN CONCLUDING THAT THE AMOUNT OF RS 99,13,472/- WAS ADVANCED BY THE APPELLANT OTHERWISE THAN FOR BUSINE SS EXPEDIENCY AND WAS THEREFORE JUSTIFIED IN MAKING DISALLOWANCE OF RS 12,72,216/- U/S. 36(L) (III) OF THE ACT WHICH IS CONFIRMED. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 3 4. BEFORE ME, THE THRUST OF THE ASSESSEES CASE WAS THAT HE HAS SUFFICIENT INTEREST-FREE CAPITAL, I.E., AT RS.72,95,611 AS AT YEAR-END (31/03/2013), AS UNDER AND, ACCORDINGLY, NO INTEREST DISALLOWANCE IS CALLED FOR : (AMOUNT IN RS.) PROPRIETOR CAPITAL 4,80,489 UNSECURED LOANS (INTEREST FEE) 55,61,456 TRADE CREDITORS 9,53,173 OTHER PAYABLES 3,00,493 5. I HAVE HEARD THE PARTIES AND PERUSED THE MATERIA L ON RECORD. THERE IS, TO BEGIN WITH, NO DOUBT ABOUT THE ADVANCE S, TO THE EXTENT OF RS. 99.13 LACS, DETAILED IN THE ASSESSMENT ORDER, AS BE ING SANS ANY BUSINESS PURPOSE. NO MATERIAL, OR EVEN ARGUMENT TOWARD THE SAME, WAS IN FACT RAISED DURING HEARING, WHICH IS A SUBJECT MATTER OF CONCURRENT FINDINGS BY THE REVENUE AUTHORITIES. AS REGARDS THE SUFFICIENCY OF INTEREST-FREE CAPITAL , EVEN AS EXPLAINED DURING THE HEARING, THE AGGREGATE INTEREST-FREE CAPITAL AV AILABLE AS AT THE YEAR-END (RS. 72.96 LACS) IS AN ABSOLUTE FIGURE AND, THUS, BY ITS ELF OF LITTLE CONSEQUENCE. THE SAME, IN FACT, ALSO DOES NOT DRAW A DISTINCTION BET WEEN FUND-BASED AND NON-FUND BASED LIABILITIES, AS EXPLAINED BY THE TRIBUNAL IN SUNIL GROVER V. ASST. CIT (IN ITA NO. 97/ASR/2017, DATED 20/3/2019), AND WHICH IS REL EVANT IN ASCERTAINING THE ADEQUACY OR OTHERWISE OF INTEREST-FREE CAPITAL AVAI LABLE WITH THE ASSESSEE DURING THE YEAR. THE INTEREST COST ON BORROWED CAPITAL IS SUFF ERED ON THE BASIS OF THE CAPITAL BORROWED DURING THE YEAR WHICH MAY BE DIFFERENT A T DIFFERENT TIMES OF THE YEAR AND, ACCORDINGLY, IT IS NOT THE FIGURES AVAILABLE A T THE YEAR-END BUT DURING THE YEAR, ON AN AVERAGE, THAT ARE RELEVANT. FURTHER, THE SIGN IFICANCE OF A CREDIT IN THE BALANCE- SHEET, PARTICULARLY FROM THE STANDPOINT OF ITS APP LICATION, AS THAT OF INTEREST-FREE CAPITAL, COULD ONLY BE ASCERTAINED IN RELATION TO O THER SUMS, POSITIVE OR NEGATIVE, I.E., REPRESENTING THE SOURCE/S OF OR APPLICATION/S OF FUNDS, INCLUDING THE PURPOSE FOR ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 4 WHICH THE SAME HAVE BEEN RAISED OR, AS THE CASE MAY BE, STAND APPLIED. SURE, WHERE THE FUNDS ARE NOT DEDICATED, I.E., CONTRACTED FOR A SPECIFIC PURPOSE, IT IS OPEN FOR THE ASSESSEE TO APPROPRIATE THE SAME AGAINST A PARTICUL AR APPLICATION, I.E., AS MAY SUIT HIS INTEREST OR OPERATE TO MINIMIZE HIS TAX LIABILI TY. FOR EXAMPLE, IT IS PERFECTLY JUSTIFIED FOR THE ASSESSEE TO CONTEND THAT THE INTE REST-FREE LOANS HAD BEEN APPLIED FOR THE NON-BUSINESS PURPOSES, SO THAT, BY IMPLICATION, THE INTEREST-BEARING CAPITAL IS APPLIED FOR BUSINESS PURPOSES. THE ONLY CAVEAT IS T HAT THE INTEREST-FREE CAPITAL OUGHT TO BE AVAILABLE FOR BEING SO APPLIED. FURTHER, IT I S TO BE APPRECIATED THAT TRADE CREDIT ARISES ON THE PURCHASE ON GOODS AND SERVICES (FOR T HE BUSINESS) ON CREDIT AND, ACCORDINGLY, IS IN THE NATURE OF A SPONTANEOUS LIAB ILITY, TOWARD THE CORRESPONDING ASSETS OF THE BUSINESS. THAT IS, IT IS IN THE NATUR E OF NON-FUND SOURCE OF CREDIT AND, FURTHER, ONLY IN RESPECT OF THE RELEVANT ASSETS. LI QUID FUNDS QUA THE SAME, AND WHICH CAN THEREFORE BE SAID TO BE APPLIED TOWARD A PARTICULAR AVENUE, BUSINESS OR NON-BUSINESS, WOULD ONLY BE WHERE THE TRADE CREDIT EXCEEDS THE CORRESPONDING CURRENT ASSETS, I.E., THE FIRM HAS A NEGATIVE NET W ORKING CAPITAL (NWC). THE BALANCE-SHEET OF THE ASSESSEE AS AT 31/3/2013, WHICH IS THE ONLY BALANCE- SHEET ON RECORD, IS AS UNDER: BALANCE-SHEET AS AT 31.3.2013 LIABILITIES (AMT. RS.) ASSETS (AMT. RS.) PROPRIETORS CAPITAL 4.80 FIXED ASSETS 6.94 SECURED LOANS 166.36 SHARES 0.84 UNSECURED LOANS 55.62 SECURITIES 50.31 51.15 TRADE LIABILITIES 12.54 CURRENT ASSETS 82.10 ADVANCES(@) 99.13 _____ _____ TOTAL 239.32 TOTAL 239.32 [(*) (AMOUNT IN RS. LACS); (@) DENOTES THE IMPUGNED ADVANCES] ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 5 THE NWC IN THE INSTANT CASE IS AT A POSITIVE SUM OF RS.69.56 LACS (RS.82.10 LACS RS.12.54 LACS) AS AT THE YEAR-END. THERE IS ALSO NO INDICATION OF IT BEING AT A NEGATIVE SUM AT ANY TIME DURING THE YEAR. THE INTER EST-FREE CAPITAL (AS AT THE YEAR- END) WITH THE ASSESSEE IS, THUS NOT, AS CONTENDED, RS. 72.96 LACS, BUT RS. 60.42 LACS (RS. 72.96 LACS RS. 12.54 LACS). FURTHER, THE SEC URED LOANS (RS.166.36 LACS) ASSUMED BY THE ASSESSEE, AS APPARENT FROM THEIR PRO FILE AT SCHEDULE VII TO THE BALANCE-SHEET AS ON 31.3.2013 (PB PAGES 1-28), IS T OWARD FINANCING THE WORKING CAPITAL, WHICH IS THUS OVER-FINANCED BY RS.96.80 LA CS (RS.166.36 LACS RS. 69.56 LACS). THE INTEREST-FREE CAPITAL WITH THE ASSESSEE (RS.60.42 LACS) IS TO BE, WITHOUT DOUBT, FIRSTLY APPROPRIATED AGAINST FIXED ASSETS (A ND OTHER ASSETS) OF THE BUSINESS, OWNED BY THE ASSESSEE, AS IT IS ONLY AGAINST THEIR COLLATERAL SECURITY, I.E., OTHER THAN THE PRIMARY SECURITY IN THE FORM OF WORKING CAPITAL ASSETS, THAT THE SAID LOANS ARE SECURED AGAINST. THE FIXED ASSETS AND THE NON-CURRE NT ASSETS BLOCK AT THE YEAR-END IS AT RS.58.09 LACS, RESULTING THUS IN A SURPLUS INTER EST-FREE CAPITAL (AS AT THE YEAR-END) AT RS. 2.33 LACS (RS.60.42 LACS RS.58.09 LACS). T HE NON-BUSINESS ADVANCES (RS. 99. 13 LACS) ARE, THUS, FINANCED AS UNDER: (AMOUNT IN RS. LACS) AMT. (%) - INTEREST FREE CAPITAL 2.33 (2. 30) - BORROWED CAPITAL (SL) 96.80 (97.65) CLEARLY, THEREFORE, THE NON-BUSINESS ADVANCES STAND FINANCED, AS THE YEAR-END, BY INTEREST BEARING BORROWED CAPITAL (IN THE FORM OF S ECURED LOANS) TO THE EXTENT OF 97.65%, I.E., AS AGAINST 100% TAKEN BY THE REVENUE. THE POSITION AS AT THE BEGINNING OF THE YEAR MAY BE DIFFERENT. THERE COULD BE ACCRETION TO OR, AS THE CASE MAY BE, DEPLETION OF CAPITAL, INCLUDING INTEREST-FR EE LOANS, DURING THE YEAR. THE POSITION OF THE LATTER IS NOT AVAILABLE, WHILE THE DEPLETION DURING THE YEAR, IN THE FORM OF WITHDRAWALS AND LOSSS, IS AT RS.3.29 LACS, AMOUNTING TO 3.3% (OF THE ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 6 IMPUGNED ADVANCES), LEADING TO AN AVERAGE (BY TAKIN G THE MEAN OF OPENING AND CLOSING BALANCES) WOULD THEREFORE APPROXIMATE TO 4% . THE RATIO OF THE BORROWED CAPITAL FINANCING THE NON-BUSINESS ADVANCES MAY THU S BE REASONABLY TAKEN AT 96% (AS AGAINST 100% BY THE REVENUE). SURE, SOME VARIAB LES, AS THE UNSECURED AND SECURED LOANS AS AT THE BEGINNING OF THE YEAR, OR I NDEED THE AVERAGE FOR THE YEAR, MAY WELL BE DIFFERENT. WHY, THE NON-BUSINESS ADVANC ES ITSELF MAY WELL BE, FOR ALL WE KNOW, AT A HIGHER FIGURE (THAN AS AT YEAR-END), ABSORBING SUCH INTEREST-FREE OR, AS THE CASE MAY BE, INTEREST BEARING CAPITAL. HOWEV ER, IT WAS FOR THE ASSESSEE TO SET UP A CASE IN THIS REGARD. IN FACT, EVEN NO CONTENTI ON TO THIS EFFECT, I.E., THAT THE FIGURES AS AT THE BEGINNING OF THE YEAR ARE AT A MA TERIAL VARIANCE, STANDS RAISED. IN FACT, WHAT STANDS STATED IN THE PRECEDING PARAGR APHS, WAS DISCUSSED DURING HEARING, AND THE ASSESSEE, ALSO REPRESENTED BY SH. ANIL VASUDEVA, CA (I.E., ALONG WITH SH. ARORA) ON 07/3/2019, REQUIRED TO WORK OUT THE ADEQUACY OR OTHERWISE OF THE INTEREST-FREE CAPITAL DURING THE YEAR, SUBSTANT IATING, THUS, HIS CASE WITH FACTS AND FIGURES. HOWEVER, NO SUCH EXERCISE WAS DONE. SH. VA SUDEVA, WHO PRESENTED THE ASSESSEES CASE ON 07/3/2019, AND WAS EXPLAINED TO STATE HIS CASE WITH REFERENCE TO THE CONTRACTUAL OBLIGATIONS ATTENDING THE DIFFERENT INTEREST-BEARING OR, AS THE CASE MAY BE, INTEREST FREE, LIABILITIES, DID NOT APPEAR ON THE NEXT DATE, WITH NO EXPLANATION FOR THE SAME. AND NEITHER WAS ANY ADJOU RNMENT SOUGHT. RATHER, SH. ARORA, THE ASSESSEE COUNSEL, PROCEEDED DE HORS WHAT HAD TRANSPIRED DURING THE PREVIOUS HEARING, REITERATING, WITHOUT REFERENCE TO ANY FACTUAL BASIS, THAT THE ASSESSEE HAD SUFFICIENT INTEREST-FREE CAPITAL TO PR ECLUDE THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL. THE ASSESSEES CASE, THUS, CON TINUES TO BE NO MORE THAN A BALD STATEMENT, I.E., AS IT WAS BEFORE THE REVENUE AUTHO RITIES. IN VIEW OF THE FOREGOING, I FIND NO REASON TO INTE RFERE, EXCEPT TO DIRECT RELIEF TO THE EXTENT OF 5% (FIVE PER CENT.), BY FURTHER RE LAXING THE INTEREST-FREE FINANCING COMPONENT OF THE IMPUGNED ADVANCES BY THE ASSESSEE, OBTAINING FOR THE YEAR. NO ITA NO. 209/ASR/2018 (AY 2013-14) VIPAN KHANNA V. ITO 7 MISTAKE IN THE WORKING OF THE INTEREST BY THE AO HA VING BEEN POINTED OUT, THE SAME WORKS TO RS.63,611/-. REFERENCE, ONCE AGAIN, IS DRA WN TO THE ELABORATE DECISION IN SUNIL GROVER (SUPRA), ALSO CONSIDERING THE DECISIONS BY THE HIG HER COURTS OF LAW, EXPLAINING FURTHER THE MATTER TO BE PRINCIPALLY FAC TUAL. I DECIDE ACCORDINGLY, AND THE ASSESSEE GETS PART RELIEF. 6. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY A LLOWED. ORDER PRONOUNCED IN THE OPEN CO URT ON JUNE 07, 2019 SD/- (SANJAY ARORA) ACCOUNTANT MEMBER DATE: 07.06.2019 /PK/SR. PS. COPY OF THE ORDER FORWARDED TO: (1) THE APPELLANT: VIPAN KHANNA, C/O PUSHAP PAL ACE DHANGU ROAD, PATHANKOT (2) THE RESPONDENT: INCOME TAX OFFICER, WARD 6( 3), PATHANKOT, PUNJAB (3) THE CIT(APPEALS)-2, AMRITSAR (4) THE CIT CONCERNED (5) THE SR. DR, I.T.A.T TRUE COPY BY ORDER