Sri O.Abraham, Kottarakkara V. DCIT, Kollam

ITA 239/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61522 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 1 month(s) 26 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 08-05-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 30-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VIJAYAPRABHA
• Assessee Lawyers: A S NARAYANAMURTHY
• Keywords: Business expenditure

Judgement Text

1 ITA NO.239 & 240/COCH/2010 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKA RAN(AM) I.TA NO. 239 & 240/COCH/2010 (ASSESSMENT YEARS 2004-05 & 2005-06) SHRI O ABRAHAM VS DY.CIT, KOLLAM RANGE M/S EMMANUEL CASHEW INDUSTRIES KOLLAM CHEPRA PO, KOTTARAKKARA PAN : AAAPO8501E (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI A.S. NARAYANAMURTHY RESPONDENT BY : SMT. VIJAYAPRABHA DATE OF HEARING : 08-05-2012 DATE OF PRONOUNCEMENT : 25-05-2012 O R D E R PER N.R.S. GANESAN (JM) BOTH THE APPEALS OF THE ASSESSEE ARE DIRECTED AGAI NST THE COMMON ORDER OF COMMISSIONER OF INCOME-TAX(A)-I, TRIVANDRUM DATED 0 1-12-2009 AND PERTAIN TO ASSESSMENT YEARS 2004-05 AND 2005-06. 2. SHRI A.S. NARAYANAMURTHY, THE LD.REPRESENTATIVE FOR THE ASSESSEE SUBMITTED THAT THE ONLY ISSUE ARISES FOR CONSIDERATION IS WITH REG ARD TO THE DISALLOWANCE OF INTEREST ON THE FUNDS DIVERTED TO EDUCATIONAL TRUST. ACCORDING TO THE LD.REPRESENTATIVE, THE ASSESSING OFFICER DISALLOWED RS.8,87,416 FOR THE AS SESSMENT YEAR 2004-05 AND RS.10,28,497 FOR THE ASSESSMENT YEAR 2005-06. THE LD.REPRESENTATIVE SUBMITTED THAT THE COMMISSIONER OF INCOME-TAX(A) CONFIRMED THE ORD ER OF THE ASSESSING OFFICER ON THE BASIS OF THE JUDGMENT OF THE KERALA HIGH COURT IN C OMMISSIONER OF INCOME-TAX VS V.I. 2 ITA NO.239 & 240/COCH/2010 BABY & CO (2002) 254 ITR 248 (KER). REFERRING THE JUDGMENT OF THE SUPREME COURT IN THE CASE OF MUNJAL SALES CORPORATION VS COMMISSIONE R OF INCOME-TAX (2008) 298 ITR 298 (SC) THE LD.REPRESENTATIVE SUBMITTED THAT WHEN THE ASSESSEE HAS SUFFICIENT BALANCE OF ITS OWN FUNDS, DIVERSION OF A PART OF THE FUNDS EVEN FO R NON BUSINESS PURPOSE CANNOT BE CONSIDERED TO BE DIVERSION OF BORROWED FUNDS. IN T HIS CASE, ACCORDING TO THE LD.REPRESENTATIVE, THE CAPITAL BALANCE IS ABOUT RS. 6 CRORES. THE DIVERSION OF FUNDS WAS ONLY RS.79 LAKHS. WHEN THE ASSESSEE WAS HAVING RS. 6 CRORES AS CAPITAL, BY NO STRETCH OF IMAGINATION IT COULD BE SAID THAT THE BORROWED FUND S WERE DIVERTED. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE ASSESS EE BORROWED PACKING CREDIT LOAN WHICH NEEDS TO BE REPAID BY FOREIGN CURRENCY FROM THE PROCEEDS OF EXPORT. ACCORDING TO THE LD.REPRESENTATIVE, THERE IS NO NEXUS BETWEEN THE BORROWING OF THE FUNDS AS PACKING CREDIT LOAN AND THE WITHDRAWAL OF THE FUNDS FOR GIVING TO TRUST. ACCORDING TO THE LD.REPRESENTATIVE, THE WITHDRAWAL AND FUNDS GIVEN T O THE TRUST WERE ONLY FROM THE ACCUMULATED PROFIT. THE LD.REPRESENTATIVE FURTHER SUBMITTED THAT THE AMOUNT WAS GIVEN TO THE TRUST IN THE EARLIER ASSESSMENT YEARS. IN T HE EARLIER ASSESSMENT YEARS THERE WAS NO DISALLOWANCE OF ANY INTEREST. THEREFORE, IN VIE W OF THE JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA), ACCOR DING TO THE LD.REPRESENTATIVE, THERE CANNOT BE ANY DISALLOWANCE OF THE INTEREST ON THE B ORROWED FUNDS. 3. ON THE CONTRARY, SMT. VIJAYAPRABHA, THE LD.DR SU BMITTED THAT THE BORROWED FUNDS WERE DIVERTED TO EDUCATIONAL TRUST. THEREFOR E, IT IS NOT FOR BUSINESS PURPOSE. UNLESS AND UNTIL IT WAS SHOWN THAT THE BORROWED FUN DS WERE DIVERTED TO SISTER CONCERN FOR ITS BUSINESS PURPOSE, ACCORDING TO THE LD.DR, I T CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. REFERRING TO THE JUDGMENT OF THE KERA LA HIGH COURT IN THE CASE OF V.I. BABY & CO (SUPRA), THE LD.REPRESENTATIVE SUBMITTED THAT MERELY BECAUSE SUFFICIENT CASH BALANCES ARE AVAILABLE THAT ALONE WOULD NOT JUSTIFY THAT THE BORROWING WAS FOR THE PURPOSE OF BUSINESS. AN ASSESSEE WITH LIQUIDITY CA NNOT CLAIM THAT IT CAN GIVE INTEREST FREE ADVANCES TO THE PARTNERS OR OTHERS AND THEN BO RROW FUNDS FROM BANK ON INTEREST FOR THE PURPOSE OF BUSINESS. ACCORDING TO THE LD.R EPRESENTATIVE, SUCH BORROWING WILL NOT 3 ITA NO.239 & 240/COCH/2010 BE FOR BUSINESS PURPOSE. IN VIEW OF THE JUDGMENT O F THE KERALA HIGH COURT IN V.I. BABY & ORS (SUPRA), ACCORDING TO THE LD.DR, THE INTEREST O N THE DIVERTED FUNDS TO THE EDUCATIONAL INSTITUTION CANNOT BE ALLOWED AS BUSINESS EXPENDITU RE. REFERRING TO THE JUDGMENT OF THE APEX COURT IN MUNJAL SALES CORPORATION (SUPRA), THE LD.DR SUBMITTED THAT IN THE CASE BEFORE THE APEX COURT, THE FINDING OF THE TRIBUNAL WAS THAT THE ASSESSEE HAD GIVEN INTEREST FREE LOANS FROM ITS OWN FUNDS FOR BUSINESS PURPOSE. THEREFORE, THE APEX COURT FOUND THAT THE LOAN GIVEN TO SISTER CONCERN OUT OF THE ASSESSEES OWN FUNDS FOR BUSINESS PURPOSE IS AN ALLOWABLE EXPENDITURE U/S 36(1)(III) OF THE ACT. SINCE, IN THIS CASE, ACCORDING TO THE LD.REPRESENTATIVE, THE FUNDS WERE DIVERTED TO EDUCATIONAL INSTITUTION WHICH IS NOT THE BUSINESS OF THE ASSESSEE, ACCORDIN G TO THE LD.DR, THE LOWER AUTHORITIES HAVE RIGHTLY DISALLOWED THE CLAIM OF THE ASSESSEE. 4. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. ADMITTEDLY, THE ASSE SSEE ADVANCED A LOAN OF RS.69,52,602 TO IMMANUEL EDUCATIONAL TRUST AND ANOTHER SUM OF RS . 10 LAKHS TO EJA CASHEWS. THE CLAIM OF THE ASSESSEE IS THAT THE CAPITAL BALANCE I N THE BOOKS OF ACCOUNT OF THE ASSESEE IS ABOUT RS.6 CRORES, THEREFORE, THE DIVERSION OF RS.7 9,52,602 TO IMMANUEL EDUCATIONAL TRUST AND EJA CASHEWS CANNOT BE DISALLOWED AS DIVER SION OF BORROWED FUNDS. IT IS NOT THE CASE OF THE ASSESSEE THAT THE ADVANCES WERE GIV EN FOR BUSINESS PURPOSE. THE ONLY CONTENTION OF THE ASSESSEE BEFORE THIS TRIBUNAL IS THAT THE ASSESSEES OWN FUNDS FROM THE CAPITAL ACCOUNT WERE GIVEN TO THE EDUCATIONAL T RUST AND THE SISTER CONCERN. THE QUESTION ARISES FOR CONSIDERATION IS THAT WHEN THE ASSESSEES OWN FUNDS WERE GIVEN TO EDUCATIONAL TRUST AND SISTER CONCERN, WHETHER PROPO RTIONATE INTEREST ON THE BORROWED FUNDS COULD BE DISALLOWED? 5. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF T HE KERALA HIGH COURT IN THE CASE OF V.I. BABY & ORS (SUPRA). IN FACT, THE KERA LA HIGH COURT IN THE CASE OF V.I. BABY & CO (SUPRA) HAS OBSERVED AS FOLLOWS: 4 ITA NO.239 & 240/COCH/2010 .THE CLAIM OF THE ASESSEES COUNSEL THAT CASH B ALANCES WERE AVAILABLE WITH THE FIRM FOR ADVANCES TO THE PARTNER S, THEIR RELATIVES AND THE SISTER CONCERNS DOES NOT ADVANCE THE ASSESSEES CASE. IF CASH BALANCES ARE AVAILABLE, THE BORROWING ITSELF IS NOT FOR THE PURPOSE OF THE BUSINESS. AN ASSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT CAN GIVE INTEREST FREE ADVANCES TO THE PARTNERS AND OTHERS AND THEN B ORROW FUNDS FROM THE BANK ON INTEREST FOR BUSINESS PURPOSES. SUCH BORRO WINGS WILL NOT BE FOR BUSINESS PURPOSES, BUT FOR SUPPLEMENTING THE CASH D IVERTED BY THE ASSESSEE WITHOUT ANY BENEFIT TO IT. THEREFORE, SO LONG AS THE ASSESSEE IS NOT THE BENEFICIARY OF THE INVESTMENTS MADE BY THE PARTNERS, THEIR RELATIVES AND THE SISTER CONCERNS, AND SO LONG AS T HE ADVANCE ARE INTEREST FREE, THE ASSESSING OFFICER IS PERFECTLY JUSTIFIED IN DISALLOWING THE INTEREST IN PROPORTION TO THE ADVANCES MADE. 6. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION (SUPRA). FOR THE ASSES SMENT YEARS 1992-93 AND 1993-94, THE TRIBUNAL FOUND THAT THE LOANS GIVEN TO THE SIST ER CONCERNS FROM ITS OWN FUNDS AND THAT THEY WERE ADVANCED FOR BUSINESS PURPOSE. THE APEX COURT FOUND THAT SINCE THE LOAN WAS GRANTED IN THE YEAR 1991 AND CONTINUED UPT O ASSESSMENT YEAR 1997-98 AND THE SAID LOANS WERE ADVANCED FOR BUSINESS PURPOSE, THE INTEREST PAID THEREON IS ENTITLED FOR DEDUCTION U/S 36(1)(III) R.W.S. 40(B)(IV) OF THE AC T. HOWEVER, FOR THE ASSESSMENT YEAR 1995-96, THE TRIBUNAL FOUND THAT THERE WAS NOTHING ON RECORD TO SHOW THAT THE LOANS WERE GIVEN TO SISTER CONCERN OUT OF ITS OWN FUNDS. THEREFORE, THE ASSESSEE WAS NOT ENTITLED FOR DEDUCTION U/S 36(1)(III) OF THE ACT. THE APEX COURT FOUND THAT THE OPENING BALANCE AS ON APRIL 1, 1994 WAS RS.1.91 CRORES, THE REFORE, THE FINDING OF THE TRIBUNAL THAT THERE WAS NOTHING ON RECORD TO SHOW THAT THE L OANS WERE GIVEN TO SISTER CONCERN BY THE ASSESSEE FIRM OUT OF ITS OWN FUNDS IS ERRONEOUS . THE SUPREME COURT FURTHER FOUND THAT A SMALL AMOUNT OF RS.5 LAKHS WAS GIVEN TO SIST ER CONCERN AS A LOAN. THEREFORE, THE PROFIT EARNED BY THE ASSESSEE DURING THE RELEVANT Y EAR WAS SUFFICIENT TO COVER THE IMPUGNED LOAN OF RS.5 LAKHS. THIS JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPORATION WAS NOT BROUGHT TO THE NOTICE OF LOWER AUTHORITIES. THEREFORE, THIS TRIBUNAL IS OF THE OPINION THAT THE ASSESSING OFFIC ER HAS TO RECONSIDER THE ISSUE IN THE LIGHT OF THE LAW LAID DOWN BY THE APEX COURT IN MUN JAL SALES CORPORATION (SUPRA) AND THE 5 ITA NO.239 & 240/COCH/2010 KERALA HIGH COURT IN V.I. BABY & CO (SUPRA). ACCOR DINGLY THE ORDERS OF THE LOWER AUTHORITIES ARE SET ASIDE AND THE ISSUE OF DISALLOW ANCE OF INTEREST ON THE FUNDS DIVERTED TO EDUCATIONAL INSTITUTION AND THE SISTER CONCERN A RE REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER. THE ASSESSING OFFICER SHALL REC ONSIDER THE ISSUE IN THE LIGHT OF JUDGMENT OF THE APEX COURT IN THE CASE OF MUNJAL SALES CORPO RATION (SUPRA) AND KERALA HIGH COURT IN V.I. BABY & CO (SUPRA) AND THEN DECIDE THE ISSUE IN ACCORDANCE WITH LAW AFTER PROVIDING OPPORTUNITY TO THE ASSESSEE. 7. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 25 TH MAY, 2012. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 25 TH MAY, 2012 PK/- COPY TO: 1. O ABRAHAM, M/S EMMANUEL CASHEW INDUSTRIES, CHEPRA P O, KOTTARAKKARA 2. THE DY.CIT, KOLLAM RANGE, KOLLAM 3. THE COMMISSIONER OF INCOME-TAX(A)-I, TRIVANDRUM 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH