Wender;s Foods P.Ltd, Kollam V. ACIT, Kollam

ITA 241/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 61421 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-04-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Next Hearing Date: 29-03-2012
• Assessment Year: 2003-2004
• Appeal Filed On: 05-04-2010
• Court: TRIBUNAL
• Department Lawyers: S VIJAYAPRABHA
• Assessee Lawyers: R KRISHNAN
• Keywords: Proportionate interest
• Section: 14A; 148

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NOS. 241 & 242/COCH/2010 ASSESSMENT YEARS : 2003-04 & 2004-05 WENDORS FOODS (P) LTD., SANGAM, BEACH ROAD, KOLLAM. [PAN: AAACW 2603E] THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. (ASSESSEE-APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY SHRI R.KRISHNAN, CA REVENUE BY SMT. S.VIJAYAPRABHA, JR. DR DATE OF HEARING 29/03/2012 DATE OF PRONOUNCEMENT 19/04/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: BOTH THE APPEALS OF ASSESSEE ARE DIRECTED AGAINST THE ORDERS PASSED BY THE LD. CIT(A)-I, TRIVANDRUM AND THEY RELATE TO THE ASSESSM ENT YEARS 2003-04 AND 2004-05. SINCE THE SOLITARY ISSUE URGED IN BOTH THESE APPEAL S IS IDENTICAL IN NATURE, THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON O RDER, FOR THE SAKE OF CONVENIENCE. 2. THE DISALLOWANCE OF PROPORTIONATE INTEREST MADE BY THE ASSESSING OFFICER IN BOTH THE YEARS, HAVING BEEN CONFIRMED BY THE LD. CIT(A), THE ASSESSEE IS IN APPEAL BEFORE US. 3. THE FACTS RELATING TO THE SAID ISSUE ARE DISCUSS ED IN BRIEF. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS RELATING TO THE A.Y. 2003-04 , THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAD ADVANCED LOANS TO ITS SISTER CONCE RNS AND ALSO TO THE MANAGING DIRECTOR AGGREGATING TO RS. 84,00,022/-. NO INTEREST WAS CO LLECTED FROM THESE ADVANCES. HOWEVER, THE ASSESSEE HAD AVAILED LOANS FROM VARIOU S SOURCES AND PAID INTEREST THERE ON. HENCE, THE ASSESSING OFFICER TOOK THE VIEW THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING ITA NOS.241 & 242/COCH/ 2010 2 FUNDS AND ACCORDINGLY DISALLOWED PROPORTIONATE INTE REST RELATING TO THE ADVANCES CITED ABOVE. IN THE A.Y. 2004-05, THE AMOUNT ADVANCED TO ITS SISTER CONCERNS AND THE MANAGING DIRECTOR STOOD AT RS. 25,56,114/- AND THE AO DISALLOWED PROPORTIONATE INTEREST IN THAT YEAR ALSO. THE INTEREST SO DISALLOWED WAS RS.4,97,376/- IN THE ASSESSMENT YEAR 2003-04 AND RS.4,56,353/- IN THE ASSESSMENT YEAR 20 04-05. IN THE APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE COULD NOT SUCCEED. HENCE, IT HAS PREFERRED THESE APPEALS BEFORE US. 4. IN THE YEAR RELEVANT TO THE ASSESSMENT YEAR 2003 -04, THE FOLLOWING AMOUNTS HAVE BEEN STATED AS DIVERTED TO THE SISTER CONCERN OF TH E ASSESSEE AND TO ITS MANAGING DIRECTOR:- A) WESTERN INDIA CASHEW (P) LTD. : RS. 58,29,040/- B) ADVANCE TO THE MANAGING DIRECTOR: RS. 25.00 LAKHS WITH REGARD TO THE AMOUNT STANDING IN THE NAME OF W ESTERN INDIA CASHEW (P) LTD., THE LD. AR SUBMITTED THAT THE ASSESSEE WAS MAINTAINING THREE SEPARATE ACCOUNTS IN RESPECT OF TRANSACTIONS ENTERED WITH THAT COMPANY AS GIVEN BEL OW, FOR THE PURPOSE OF OPERATIVE CONVENIENCE:- A) WESTERN INDIA CASHEW (P) LTD. SALES ACCOUNT WHI CH SHOWED A CREDIT BALANCE OF RS. 60,59,676/-. B) WESTERN INDIA CASHEW (P) LTD PURCHAS ES ACCOUNT WHICH SHOWED DEBIT BALANCE OF RS. 47,05,706/-. C) WESTERN INDIA CASHEW (P) LTD ADVANCE S ACCOUNT WHICH SHOWED DEBIT BALANCE OF RS. 11,23,334/-. THE CONTENTION OF THE LD. AR IS THAT THERE IS A NET CREDIT BALANCE, IF ALL THE OUTSTANDING BALANCES IN THESE THREE ACCOUNTS ARE NETTED OFF. W ITH REGARD TO THE ADVANCE OF RS. 25.00 LAKHS GIVEN TO THE MANAGING DIRECTOR, THE LD A.R SU BMITTED THAT IT REPRESENTS A BUSINESS TRANSACTION, VIZ., AMOUNT GIVEN AS ADVANCE TO THE M ANAGING DIRECTOR FOR PURCHASE OF 30 CENTS OF LAND BELONGING TO HIM, WHICH WAS LOCATED I N SURVEY NO. 2025 IN MUNDAKKAL VILLAGE. THE LD. AR FURTHER SUBMITTED THAT THE DEP ARTMENT ASSESSED THE ABOVE SAID AMOUNT OF RS. 25.00 LAKHS IN THE HANDS OF THE MANAG ING DIRECTOR AS DIVIDEND U/S. 2(22)(E) OF THE ACT. HOWEVER, THE TRIBUNAL HAS CAN CELLED THE SAID ASSESSMENT BY HOLDING THAT THE ABOVE SAID ADVANCE AMOUNT OF RS. 25.00 LAK HS WAS A BUSINESS TRANSACTION GIVEN ITA NOS.241 & 242/COCH/ 2010 3 AS ADVANCE TOWARDS PURCHASE OF A PROPERTY. THE LD. AR PLACED A COPY OF THE ORDER DATED 31.03.2011 PASSED BY ITAT, COCHIN BENCH IN THE HAND S OF THE MANAGING DIRECTOR, SHRI HARIKRISHNAN NAIR IN I.T.A. NO. 264/COCH/2009. 5. ON THE CONTRARY, THE LD. DR SUPPORTED THE ORDER OF THE LD. CIT(A) BY PLACING RELIANCE ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO. 254 ITR 248. SHE FURTHER SUBMITTED THA T THERE IS NO REQUIREMENT OF NETTING OFF THE OUTSTANDING BALANCE WHEN THE ASSESSEE ITSEL F IS MAINTAINING THREE SEPARATE ACCOUNTS IN RESPECT OF THE SINGLE PARTY. WITH REGA RD TO THE ADVANCE OF RS. 25 LAKHS GIVEN TO THE MANAGING DIRECTOR, THE LD. DR SUBMITTED THAT THE ASSESSEE ENTERED INTO AN AGREEMENT FOR PURCHASE OF PROPERTY ON 01-04-2002, B UT THE SAME WAS TRANSFERRED IN THE NAME OF THE COMPANY ONLY IN MARCH, 2008, I.E., AFTE R THE ISSUE OF NOTICE U/S 148 OF THE ACT TO THE MANAGING DIRECTOR TO ASSESS THE INCOME U /S. 2(22)(E) OF THE ACT. SHE, THEREFORE, SUBMITTED THAT THERE WAS DIVERSION OF FU NDS DURING THE YEARS UNDER CONSIDERATION. 6. IN REJOINDER, THE LD. AR SUBMITTED THAT NETT ING OFF OF PERSONAL ACCOUNT IS NECESSARY IN ORDER TO FIND OUT THE ACTUAL AMOUNT RECEIVABLE/P AYABLE TO A PARTICULAR PARTY. THE DEPARTMENT CANNOT TAKE ADVANTAGE OF THE ACTION OF T HE ASSESSEE IN MAINTAINING THREE SEPARATE ACCOUNTS IN RESPECT OF THE SAME PARTY, WHI CH WERE MAINTAINED FOR OPERATIVE CONVENIENCE. WITH REGARD TO THE ADVANCE OF RS. 25. 00 LAKHS GIVEN TO THE MANAGING DIRECTOR, THE LD. AR SUBMITTED THAT THE TRIBUNAL HA S ALREADY GIVEN A FINDING THAT THE SAME REPRESENTS BUSINESS ADVANCE. 7. THE LD. AR FURTHER SUBMITTED THAT THE ASSESS EE DID NOT POSSESS ANY DISPOSABLE SURPLUS FROM OUT ITS BORROWINGS. IN THIS REGARD, H E DREW OUR ATTENTION TO THE BALANCE SHEET OF THE ASSESSEE AS AT 31-03-2003 AND SUBMITTED THAT THE ASSESSEE HAD FOLLOWING TYPES OF BORROWINGS:- A) CANARA BANK TERM LOAN RS. 80,015 B) CANARA BANK PACKING CREDIT LOAN RS. 75,00,000 ITA NOS.241 & 242/COCH/ 2010 4 C) CREDIT BALANCE IN CANARA BANK RS. 26,86,223 CURRENT ACCOUNT (CHEQUE ISSUED YET TO BE PRESENTED) THE LD. AR SUBMITTED THAT THE TERM LOAN WAS AVAILED BY THE ASSESSEE FOR PURCHASING COMPUTERS AND PERIPHERALS. SINCE THE SAID LOAN IS GIVEN FOR A SPECIFIC PURPOSE, THE QUESTION OF DIVERSION OF THE SAME DOES NOT ARISE. HE FURTHER SUBMITTED THAT THE PACKING CREDIT LOAN IS GIVEN BY THE BANK FOR FINANCING THE EXPORT ACTIVITIES, I.E., ON RECEIPT OF EXPORT ORDER, A PERSON IS ENTITLED TO AVAIL CREDIT FROM THE BANK IN ORDER TO PURCHASE THE MATERIALS REQUIRED FOR EXPORT. THE SAID LOAN IS GI VEN FOR A SPECIFC PERIOD AND IS REQUIRED TO BE CLOSED OUT OF EXPORT SALE PROCEEDS. HENCE, T HE PACKING CREDIT LOAN IS NOT AN OPEN LOAN AND HENCE THERE IS NO SCOPE FOR DIVERTING THE FUNDS TO ANY OTHER PURPOSE OTHER THAN FOR THE PURPOSE OF PURCHASING MATERIALS REQUIRED FO R EXPORT. THE CREDIT BALANCE IN THE CANARA BANK CURRENT ACCOUNT IS NOT A LOAN FACILITY GIVEN BY THE BANK AND IT ONLY REPRESENTS CHEQUES ISSUED IN ADVANCE TO THE CUSTOME RS WITHOUT CORRESPONDING BALANCE IN THE BANK. 8. WE HAVE HEARD THE RIVAL CONTENTIONS AND CARE FULLY PERUSED THE RECORD. WITH REGARD TO THE TRANSACTIONS ENTERED WITH M/S WESTERN INDIA CASHEW COMPANY (P) LTD, THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE ASSESSEE H AS MAINTAINED THREE SEPARATE ACCOUNTS FOR THE TRANSACTIONS ENTERED WITH THAT PARTY. ONE IS A PURCHASE ACCOUNT, ANOTHER ONE IS A SALES ACCOUNT AND THIRD ONE IS THE ADVANCE ACCOUNT. THE PURCHASE ACCOUNT AND SALES ACCOUNT ENTERED WITH THAT PARTY REPRESENTS TRADING TRANSACT IONS AND HAVE THE ELEMENT OF COMMERCIAL CONSIDERATION. THE ADVANCE ACCOUNT MAY BE GIVEN COLOUR OF DIVERSION OF FUNDS, UNLESS IT IS SHOWN THAT THE SAID ACCOUNT ALS O HAVE COMMERCIAL CONSIDERATION. IN ANY CASE, AS RIGHTLY POINTED OUT BY LD A.R, THE AMOUNT RECEIVABLE/PAYABLE TO A PARTICULAR PARTY CAN BE ASCERTAINED ONLY IF THE BALANCES OUTST ANDING IN THE SEPARATE ACCOUNTS ARE NETTED OFF. IN OUR VIEW, THE SAME ANALOGY HAS TO B E APPLIED FOR ASCERTAINING THE DIVERSION OF FUNDS, IF ANY. IN THE INSTANT CASE, THE NET EFF ECT OF NETTING OFF OF ALL THE THREE ACCOUNTS RESULTS IN CREDIT BALANCE. HENCE, IN OUR VIEW, THE QUESTION OF DIVERSION OF FUNDS DOES NOT ARISE WITH REGARD TO THE TRANSACTIONS ENTERED WITH THE ABOVE SAID PARTY. ITA NOS.241 & 242/COCH/ 2010 5 9. WITH REGARD TO THE ADVANCE OF RS.25.00 LAKHS GIVEN TO THE MANAGING DIRECTOR SHRI HARIKRISHNAN R NAIR, THE TRIBUNAL HAS CONSIDERED TH E QUESTION WHETHER THE SAME REPRESENTS ADVANCE GIVEN FOR PERSONAL PURPOSE OR FO R BUSINESS PURPOSES IN THE APPEAL FILED BY THE MANAGING DIRECTOR SHRI HARIKRISHNAN R NAIR IN THE CONTEXT OF SEC. 2(22)(E) OF THE ACT IN ITA NO.264/COCHIN/2009. THE TRIBUNAL, IN TH AT CASE HAS ALREADY GIVEN A SPECIFIC FINDING THAT THE SAID AMOUNT REPRESENTS ADVANCE GIV EN FOR PURCHASE OF PROPERTY AND HENCE THE SAME IS OUTSIDE THE PURVIEW OF THE PROVISIONS O F SEC. 2(22)(E) OF THE ACT. SINCE A SPECIFIC FINDING HAS ALREADY BEEN GIVEN, WE DO NOT WANT TO DIFFER FROM THE SAME. ACCORDINGLY WE HOLD THAT THERE IS COMMERCIAL EXPEDI ENCY IN GIVEN THE ABOVE SAID AMOUNT OF RS.25.00 LAKHS TO THE MANAGING DIRECTOR. 10. IN THE ASSESSMENT YEAR 2004-05 ALSO, THE SA ME TYPE OF ADVANCES HAVE BEEN CONSIDERED BY THE AO. HENCE THE DISCUSSIONS MADE I N THE FOREGOING PARAGRAPHS IN RESPECT OF ASSESSMENT YEAR 2003-04 SHALL EQUALLY AP PLY TO ASSESSMENT YEAR 2004-05 ALSO. 11. IN VIEW OF THE ABOVE, WE HOLD THAT THERE I S NO NECESSITY TO MAKE ANY DISALLOWANCE U/S 14A OF THE ACT FROM OUT OF INTEREST EXPENDITURE INCURRED BY THE ASSESSEE. ACCORDINGLY, WE SET ASIDE THE ORDERS OF LD CIT(A) A ND DIRECT THE AO TO DELETE THE IMPUGNED DISALLOWANCES MADE IN BOTH THE YEARS. SI NCE WE HAVE GIVEN RELIEF ON THE REASONS DISCUSSED EARLIER, WE DO NOT FIND IT NECESS ARY TO ADDRESS THE SUBMISSIONS MADE BY LD A.R ABOUT NON-AVAILABILITY OF DISPOSABLE AMOUNT OUT OF THE FUNDS BORROWED BY THE ASSESSEE. 12. IN THE RESULT, BOTH THE APPEALS OF THE ASSE SSEE ARE ALLOWED. PRONOUNCED ACC ORDINGLY ON 19-04-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 19TH APRIL, 2012 ITA NOS.241 & 242/COCH/ 2010 6 GJ COPY TO: 1. WENDORS FOODS (P) LTD., SANGAM, BEACH ROAD, KOLL AM. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOLLAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN