Shri Deven Khimasia,P/o.A.K.Sales Agencies, Indore V. The I.T.O., Indore

ITA 241/IND/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2830 (ITAT-INDORE)
• Duration Of Justice: 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-06-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2007-2008
• Appeal Filed On: 23-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: P D NAGAR
• Keywords: Business income; Diversion of income; Commercial expediency

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, SMC BENCH-I, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER ITA NO.241/IND/2010 AY: 2007-08 DEVEN KHIMASIA PAN AHSPK 8260 H C/O P.D. NAGAR & CO., CA 403, CITY PLAZA, 564, M.G. ROAD, INDORE ..APPELLANT V/S. ITO, WARD-II(3), INDORE ..RESPONDENT APPELLANT BY : SHRI P.D. NAGAR, CA DEPARTMENT BY : SMT. APARNA KARAN, SR. DR ORDER THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER O F THE LD. CIT(A)- I, INDORE, DATED 22.2.2010. DURING HEARING OF THIS APPEAL, I HAVE HEARD THE LD. RESPECTIVE COUNSELS AND CONSIDERED THE ARGU MENTS ADVANCED BY THEM. THE ONLY GROUND RAISED IN THE APPEAL PERTAINS TO CONFIRMING THE DISALLOWANCE OF RS.62,640/- OUT OF INTEREST PAID ON THE GROUND THAT THE INTEREST FREE AMOUNT WAS ADVANCED TO A PARTNERSHIP FIRM. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE TRI BUNAL ON IDENTICAL 2 FACTS REMANDED THE ISSUE BACK TO THE FILE OF THE AS SESSING OFFICER VIDE ORDER IN ITA NO.549/IND/2009 (AY: 2006-07). THE LD. SR. DR CONTENDED THAT THE ISSUE IN THE PRESENT APPEAL MAY ALSO BE SE NT TO THE FILE OF THE LD. ASSESSING OFFICER SO THAT NO GRIEVANCE IS CAUSE D TO EITHER SIDE. 2. I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE MATERIAL AVAILABLE ON THE FILE. BRIEF FACTS ARE THAT THE LD. ASSESSING OFFICER DISALLOWED A SUM OF RS.62,640/- OUT OF INTEREST PAI D AND THAT INTEREST FREE AMOUNT WAS ADVANCED FOR NON-BUSINESS PURPOSES TO M/S. JETHALAL NEMICHAND & SONS, A PARTNERSHIP FIRM IN WHICH THE A SSESSEE WAS A PARTNER. WHEREAS THE CLAIM OF THE ASSESSEE IS THAT IT WAS EXCLUSIVELY FOR BUSINESS PURPOSES AND THERE IS NO DIVERSION OF INCOME. ON APPEAL, BY FOLLOWING VARIOUS DECISIONS INCLUDING THE CASE O F ABHISHEK INDUSTRIES (286 ITR 1) (P & H), THE LD. CIT(A) AFFIRMED THE ST AND OF THE LD. ASSESSING OFFICER WHICH IS UNDER CHALLENGED BEFORE THIS TRIBUNAL. IT IS SEEN THAT THE LD. FIRST APPELLATE AUTHORITY BY FOLL OWING THE DECISION FOR AY 2006-07 CONFIRMED THE ASSESSMENT ORDER. THE TRIB UNAL WHILE DEALING WITH THE APPEAL OF THE AY 2006-07 REMANDED THE ISSUE BACK TO THE FILE OF THE LD. ASSESSING OFFICER. THE RELEVANT PORTION OF THE SAME IS REPRODUCED HEREUNDER FOR READY REFERENCE: 3 THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER O F THE LD. CIT(A) DATED 23.9.2009 ON THE GROUND THAT THE LD . FIRST APPELLATE AUTHORITY ERRED IN LAW IN CONFIRMIN G THE DISALLOWANCE OF RS.55,504/- OUT OF INTEREST PAID ON THE GROUND THAT INTEREST FREE AMOUNT ADVANCED TO M/S. JETHALAL NEMICHAND & SONS, A PARTNERSHIP FIRM, IN W HICH THE APPELLANT IS A PARTNER, WAS FOR NON-BUSINESS PURPOSES. 2. DURING THE HEARING OF THE APPEAL, I HAVE HEARD SHRI P.D. NAGAR, LD. COUNSEL FOR THE ASSESSEE AND S MT. APARNA KARAN, LD. SR. DR. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE ASSESSEE WAS CAR RYING ON THE BUSINESS IN KIRANA GOODS AND OIL SEEDS AS PR OP. OF M/S. A.K. SALES AGENCIES. THE ASSESSEE IS ALSO PART NER IN THE FIRM M/S. JETHALAL NEMICHAND & SONS. IT WAS CONTENDED THAT THE ASSESSEE MADE ADVANCES FROM PROP . CONCERN TO THE PARTNERSHIP FIRM FROM TIME TO TIME I N CURRENT ACCOUNT ON WHICH NO INTEREST WAS CHARGED. T HE DISALLOWANCE OF INTEREST OF RS.55,504/-, CONFIRMED BY THE LD. FIRST APPELLATE AUTHORITY, WAS CHALLENGED T HAT THE INTEREST BEARING FUNDS WERE USED FOR BUSINESS PURPO SES. RELIANCE WAS PLACED UPON THE DECISION IN SANTOSH KR . AGRAWAL VS. ACIT (78 ITD 394) (MUM) (SMC). 3. ON THE OTHER HAND, THE LD. SR. DR PLEADED THAT THE ASSESSEE DIVERTED INTEREST BEARING FUNDS FOR NO N- BUSINESS PURPOSES FOR WHICH MY ATTENTION WAS INVITE D TO THE FINDING OF THE LD. ASSESSING OFFICER. IT WAS PL EADED THAT PARTNER AND FIRM ARE DIFFERENT LEGAL ENTITIES. PLEA WAS ALSO RAISED THAT THE DECISION IN THE CASE OF SA NTOSH KR. AGRAWAL IS NOT APPLICATION TO THE FACTS OF PRES ENT APPEAL AS THE ASSESSEE HAS TO PROVE THAT FUNDS WERE UTILISED FOR BUSINESS PURPOSES. IT WAS ALSO POINTED OUT THAT ASSESSEE PAID INTEREST ON UNSECURED LOAN. RELI ANCE WAS PLACED UPON THE DECISION IN ABHISHEK INDUSTRIES (286 ITR 1) (P & H). 4. I HAVE CONSIDERED THE SUBMISSIONS OF LD. REPRESENTATIVES OF BOTH SIDES AND PERUSED THE MATER IAL AVAILABLE ON RECORD. BRIEF FACTS ARE THAT THE ASSES SEE IS PARTNER IN THE FIRM NAMELY, M/S. JETHALAL NEMICHAND & SONS HAVING CAPITAL INVESTMENT OF RS.3,65,482/- AND 4 ALSO CARRIES ON THE BUSINESS AS PROP. IN KIRANA GOO DS AND OIL SEEDS. THE ASSESSEE MADE SOME ADVANCES FROM PROP. CONCERN TO THE PARTNERSHIP CONCERN FROM TIME TO TIME IN CURRENT ACCOUNT ON WHICH NO INTEREST WAS CHARGED. ADMITTEDLY, THE PROPRIETORSHIP CONCERN BORROWED FUNDS FROM BANKS AND OTHERS ON WHICH INTEREST WAS PAID. IN VIEW OF THESE FACTS, THE LD. ASSESSING OFFICER DISALLOWED RS.55,505/- WHICH WAS CONFIRMED BY THE LD. CIT(A). BEFORE COMING TO ANY CONCLUSION, I AM REPRODUCING HEREUNDER THE RELEVANT OBSERVATION (PARA 2.3) OF THE LEARNED CIT(A) :- 2.3 THE ISSUE IS CONSIDERED. AT THE OUTSET BOTH TH E ENTITY ARE INDEPENDENT IN THE EYES OF LAW, INTER-AL IA, INCOME TAX ACT, 1961 AND HENCE BOTH ARE ASSESSED SEPARATELY. FURTHER, IT IS JUDICIALLY SETTLED POSI TION OF LAW THAT CORRECT INCOME IS TO BE ASSESSED IN THE RI GHT HAND. THE APPELLANT HAS BEEN CARRYING A PROPRIETORS HIP FIRM AND ALSO N PARTNER IN ANOTHER FIRM M/S JETHALA L NEMICHAND & SONS. THE APPELLANT BORROWED FUNDS FROM BANK AND OTHER PERSONS ON WHICH INTEREST WERE PAID CLAIMED RS.6,02,923/- IN THE YEAR UNDER CONSIDERATI ON. DURING THE YEAR, IT ADVANCED FUND TO M/S JETHALAL NEMICHAND, A FIRM IN WHICH HE IS A PARTNER, ON WHIC H NO INTEREST WAS CHARGED. IT IS CLAIMED THAT INTEREST E ARNED ON THE CAPITAL CREDITED IN THE PARTNERSHIP FIRM. TH IS PLEA OF THE APPELLANT IS NOT CORRECT SINCE THE INTEREST FREE ADVANCE MADE TO THE FIRM WAS NOT CREDITED IN THE CAPITAL ACCOUNT OF THE APPELLANT, BUT THE SAME WAS SHOWN AS UNSECURED LOAN, ON WHICH NO INTEREST WAS RECEIVED. FURTHER, IT IS DIFFICULT TO APPRECIATE T HAT HOW THE ADVANCING OF INTEREST FREE LOAN TO A FIRM WAS F OR THE COMMERCIAL EXPEDIENCY OF THE APPELLANTS PROPRIETOR Y CONCERN. BESIDES THE VARIOUS CASE LAWS REFERRED TO AND RELIED UPON BY THE AO IN HIS ORDER, THIS ISSUE HAS BEEN DEALT WITH IN DETAIL BY THE PUNJAB & HARYANA HIGH CO URT IN THE CASE OF ABHISHEK INDUSTRIES 286 ITR 1 (P&H). :- IN THE LIGHT OF THE ABOVE, I AM SUPPOSED TO ANALYSE THE ISSUE BY KEEPING THE SAME IN JUXTAPOSITION WITH SEC TION 36(1)(III) OF THE ACT WHICH PROVIDES FOR DEDUCTION OF 5 INTEREST ON LOANS RAISED FOR BUSINESS PURPOSES. ON CE SUCH CLAIM IS MADE BY THE ASSESSEE THEN THE ONUS WI LL BE ON THE ASSESSEE TO SATISFY THE AO AT LEAST TO TH E EXTENT THAT WHATEVER LOANS WERE RAISED WERE USED FO R BUSINESS PURPOSES. IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH CLAIM, IF IT IS FOUND THAT THE ASSESSEE ADVANCED CERTAIN FUNDS TO SISTER CONCERN O R ANY OTHER PERSON WITHOUT ANY INTEREST FOR NON-BUSIN ESS PURPOSES OR WITH THE INTENTION OF COLOURABLE DEVICE THEN SUCH DEDUCTION CANNOT BE ALLOWED. IT CAN BE SAID TH AT ONUS IS STRICTLY ON THE ASSESSEE. THERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWAL AND UTILIZATION OF FUND S FOR THE PURPOSE OF BUSINESS EXIGENCIES TO THE EFFECT TH AT IN SPITE TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE INCURRING LIABILITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERN/OT HER PERSONS. DURING HEARING, THE LEARNED COUNSEL FOR T HE ASSESSEE PLACED RELIANCE ON THE DECISION IN THE CAS E OF SANTOSH KUMNAR AGRAWAL V. ACIT (78 ITD 394) AND ALS O THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SA BUILDERS LIMITED V. CIT (2007) 288 ITR 1 (SC) WITH REFERENCE TO INTEREST FREE ADVANCE AND DISALLOWANCE OF INTEREST ON PROPORTIONATE BASIS ESPECIALLY THE PARA BELOW :- ONCE IT IS ESTABLISHED THAT THERE WAS NEXUJS BETWE EN THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ART-CHAIR OF THE BUSINESSMAN OR IN THE POSIT ION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECID E HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN B E COMPELLED TO MAXIMIZE HIS PROFITS. WHILE COMING TO THE AFORESAID DECISION, THE HONBLE APEX COURT UPHELD THE DECISION OF THE HONBLE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (B) LIMITED (254 I TR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXU S BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS , THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN. HOWEVER, THE HONBLE APEX COURT FURTHER CLARIFIED AS UNDER :- 6 WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINI ON THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CON CERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF TH E RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILISE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PERSONAL BENEFIT, OBVIOUSLY IT C ANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE O F COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVI OUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANC ES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE ENTIT LED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IF THE AFORESAID DECISION IS READ AS A WHOLE, THEN IT CAN BE SAID THAT ANY AND EVERY PAYMENT, IN THE GARB OF INTEREST, IN EXCESS OF WHAT CAN BE REALLY TERMED AS INTEREST, IS NOT ALLOWABLE UNLESS AND UNTIL BUSINES S EXIGENCIES ARE ESTABLISHED. THE WORDS BORROWED A ND PAID IN SECTION 36(1)(III) CLEARLY POSTULATE TWO DIFFERENT ENTITIES, ONE WHICH LENDS CAPITAL AND THE OTHER WHI CH BORROWS AND PAYS INTEREST. THE SAME ENTITY CANNOT BE ITS OWN LENDER AND BORROWER NOR INTEREST CAN BE PAI D TO SELF, THEREFORE, INTEREST PAID BY ONE UNIT OF THE A SSESSEE TO ITS ANOTHER UNIT CANNOT BE ALLOWABLE BECAUSE IT IS PAID AND RECEIVED BY THE SAME PERSON AND NOT BY ONE PERSON TO ANOTHER. THIS WOULD BE SO EVEN WHERE SEPARATE ACCOUNTS WERE MAINTAINED FOR THE TWO UNITS . THE WORD FOR THE PURPOSES OF BUSINESS ARE WIDER I N SCOPE THAN FOR THE PURPOSE OF EARNING INCOME. DEDUCTION IS LIMITED TO INTEREST ON THAT PART OF CA PITAL WHICH IS USED FOR THE PURPOSES OF BUSINESS. IT CAN BE SAID THAT INTEREST ON BORROWALS IS ALLOWABLE AS A DEDUCTION ONLY WHEN THE BORROWALS ARE USED FOR THE PURPOSES OF BUSINESS AND CONTINUE AS SUCH. WHEN T HE ASSESSEE PAYS INTEREST ON BORROWALS FOR THE USE IN HIS 7 BUSINESS BUT LATER ADVANCED IT INTEREST FREE TO REL ATIVES, THE INTEREST RELATABLE TO SUMS SO ADVANCED IS NOT DEDUCTIBLE. FOR THIS PROPOSITION I DRAW SUPPORT FRO M THE DECISIONS IN K. SOMASUNDARAM & BROTHERS V. CIT; 238 ITR 939 (MAD.); CIT V. MOTOR GENERAL FINANCE LIMITED ; 272 ITR 550 (DEL); RATIO LAID DOWN IN MAROLIA & SO NS V. CIT; 129 ITR 475 (ALL). ONCE THE ENTIRE MONEY COMES TO A COMMON KITTY OR WHATEVER ARE THE RECEIPTS IN THE BUSINESS HAVE THE COLOURS OF BUSINESS RECEIPTS. TH E ONLY SITUATION SUFFICIENT TO DISALLOW INTEREST PAID ON T HE BORROWING TO THE EXTENT THE AMOUNT IS LENT TO A SIS TER CONCERN WITHOUT ANY INTEREST FOR NON BUSINESS PURPO SES WOULD BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE AS SESSEE IS HAVING SURPLUS FUNDS WHICH COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, IT WOULD EITHER BE REQUIRED TO BE CIRCULATED AND UTILISED FOR THE P URPOSE OF BUSINESS OR TO BE INVESTED IN A MANNER SO THAT IT MAY GENERATE INCOME AND NOT TO BE DIVERTED TO SISTER CONCERN FREE OF INTEREST. THIS SITUATION WOULD RES ULT IN NOT PRESENTING THE TRUE AND CORRECT PICTURE OF ACCO UNTS OF THE ASSESSEE AS AT THE COST BEING INCURRED BY TH E ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFIT THEREOF. THEREFORE, IT CAN BE SAID THAT TH ERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWED FUNDS F OR THE PURPOSES OF BUSINESS TO CLAIM DEDUCTION U/S 36(1)(III) OF THE ACT. I AM OF THE VIEW THAT IF TH E INTEREST IS PAID BY THE ASSESSEE ON THE AMOUNTS WHICH ARE DIVERTED TO SISTER CONCERN/OTHER PERSONS ON INTERES T FREE BASIS, WITHOUT BUSINESS EXIGENCIES, THESE HAVE TO BE DISALLOWED. HOWEVER, SINCE NO CLEAR CUT BIFURCATION HAS BEEN MENTIONED/MADE OUT, THEREFORE, IN ALL FAIRNESS , THE AO IS DIRECTED TO EXAMINE THE CLAIM OF THE ASSE SSEE AFRESH FOR WHICH DUE OPPORTUNITY BE PROVIDED TO THE ASSESSEE. THE AO IS EXPECTED TO MENTION CLEAR FIND INGS BASED ON TRUE FACTS. THE ASSESSEE IS ALSO AT LIBER TY TO FURNISH EVIDENCE, IF ANY, TO SUBSTANTIATE ITS CLAIM , THEREFORE, THIS APPEAL OF THE ASSESSEE IS ALLOWED F OR STATISTICAL PURPOSES ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON 15.2.2010 . 8 IF THE FACTS OF THE PRESENT APPEAL AND THAT OF AY 2 006-07 ARE KEPT IN JUXTA-POSITION AND ANALYSED, ONE CLEAR FACT IS OOZI NG OUT THAT IN THE PRESENT APPEAL ALSO, SINCE THE AMOUNT WAS ADVANCED TO SISTER CONCERN, THEREFORE, THE ASSESSEE IS SUPPOSED TO PROVE THE NE XUS AND ALSO THE BUSINESS NEED FOR CLAIMING SUCH DEDUCTION. THE ASSE SSEE IS ALSO SUPPOSED TO EXPLAIN AS OBSERVED IN THE AFORESAID OR DER, THEREFORE, RESPECTFULLY FOLLOWING THE AFORESAID ORDER AND THE DIRECTIONS CONTAINED THEREIN, THIS APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES ONLY. FINALLY, APPEAL OF THE ASSESSEE IS ALLOWED FOR STA TISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT IN THE PRESENC E OF LD. REPRESENTATIVES OF BOTH SIDES AT THE CONCLUSION OF THE HEARING ON 21.5.2010. SD/- (JOGINDER SINGH) JUDICIAL MEMBER DATED: 2.6.2010 !VYAS! COPY TO: APPELLANT/RESPONDENT/CIT/CIT(A)/DR/GUARD F ILE