M/s. Hira Enterprises, Satara V. Assistant Commissioner of Income tax, Satara

ITA 266/PUN/2017

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 0100 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 17-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 15-05-2019
• Assessment Year: 2012-2013
• Appeal Filed On: 02-02-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: N ASHOK BABU
• Keywords: Principle of natural justice; Proportionate interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH, PUNE BEFORE MS. SUSHMA CHOWLA, JM AND SHRI ANIL CHATURVEDI, AM . / ITA NO. 266/PUN/2017 / ASSESSMENT YEAR : 2012-13 M/S. HIRA ENTERPRISES, H.NO.-111, RAVIWAR PETH, SATARA-415002. PAN-AAEFH7644H ....... / APPELLANT / V/S. ACIT, SATARA CIRCLE, SATARA. / RESPONDENT ASSESSEE BY : SHRI PRAMOD SHINGTE REVENUE BY : SHRI N.ASHOK BABU / DATE OF HEARING : 15.05.2019 / DATE OF PRONOUNCEMENT : 17.05.2019 / ORDER PER ANIL CHATURVEDI, AM : THIS APPEAL BY THE ASSESSEE IS FILED AGAINST THE ORDER OF THE LD. CIT(APPEALS)-4, PUNE DATED 27.10.2016 FOR THE ASSESSMENT YEAR 2012-13. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER:- 2. THE ASSESSEE IS A PARTNERSHIP FIRM STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING OF PAN MASALA AND GUTKA PRODUCTION. THE ASSESSEE ELECTRONICALLY FILED ITS RETURN OF INCOME ON 28.09.2012 DECLARING TOTAL INCOME OF RS.3,48,01,985/-. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER, ASSESSMENT WAS FRAMED U/S 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) VIDE ORDER DATED 23.03.2015 AND TOTAL INCOME WAS DETERMINED AT 2 ITA NOS. 266/PUN/2017 A.Y.2012-13 RS. 3,74,98,660/-. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO VIDE ORDER DATED 27.10.2016 IN APPEAL NO.PN/CIT(A)-4/ACIT, SATARA CIRCLE/93/2015-16/405 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE ORDER OF CIT(A), ASSESSEE IS IN APPEAL BEFORE US AND HAS RAISED FOLLOWING GROUNDS:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW LOWER AUTHORITIES HAVE ERRED IN MAKING THE DISALLOWANCE OUT OF INTEREST EXPENDITURE A SUM OF RS.22,43,993/- WHICH IS REDUCED BY APPROXIMATELY 50% BY LEARNED CIT(A), BUT WITHOUT APPRECIATING THE FACT THAT APPELLANT FIRM HAD SUFFICIENT NON-INTEREST BEARING FUNDS AND THEREFORE NO DISALLOWANCE WAS WARRANTED. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW LEARNED ASSESSING OFFICER FURTHER ERRED IN MAKING TOTAL DISALLOWANCE OF RS.3,34,831/- BEING PROVISIONS MADE FOR THE MONTH OF MARCH 2012 AND SINCE APPELLANT IS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THESE EXPENDITURE ARE LEGALLY ALLOWABLE THEREFORE THE ACTION OF LEARNED ASSESSING OFFICER IS ERRONEOUS AND BAD IN LAW. THE APPELLANT CRAVES FOR TO LEAVE, ADD, ALTER, MODIFY, DELETE ABOVE GROUND OF APPEAL BEFORE OR AT THE TIME HEARING, IN THE INTEREST OF NATURAL JUSTICE. 3. FIRST GROUND IS WITH RESPECT TO DISALLOWANCE OF INTEREST EXPENDITURE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT ONE OF THE PARTNERS OF THE ASSESSEES FIRM WAS HAVING DEBIT CLOSING BALANCE IN HIS CAPITAL ACCOUNT MEANING THEREBY THAT AMOUNT WAS OVER DRAWN BY THE PARTNER FROM THE FIRM AND ON WHICH THE ASSESSEE HAD NOT CHARGED ANY INTEREST. HE ALSO NOTICED THAT THE ASSESSEE HAD ALSO BORROWED SUBSTANTIAL AMOUNTS FROM BANK AND OTHER SOURCES AND ON WHICH THE ASSESSEE HAD PAID TOTAL INTEREST OF RS. 71,79,354/-. THE ASSESSEE WAS THEREFORE ASKED TO SHOW CAUSE AS TO WHY PROPORTIONATE INTEREST EXPENDITURE NOT TO BE DISALLOWED. THE SUBMISSIONS MADE BY THE ASSESSEE WERE NOT FOUND ACCEPTABLE TO THE AO. THE 3 ITA NOS. 266/PUN/2017 A.Y.2012-13 ASSESSING OFFICER THEREAFTER CALCULATED THE INTEREST EXPENSES BY APPLYING THE RATIO OF INTEREST PAID TO THE TOTAL SECURED LOANS AND BY APPLYING THE SAME RATIO TO THE TOTAL DEBIT BALANCE OF THE PARTNER, WORKED OUT THE INTEREST ATTRIBUTABLE ON SUCH DEBIT BALANCE AT RS. 22,43,993/- AND DISALLOWED THE SAME. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER BEFORE THE CIT(A) WHO IN PRINCIPAL ACCEPTED THE FINDINGS OF THE ASSESSING OFFICER BUT HOWEVER HELD THAT INTEREST CONSIDERED BY THE ASSESSING OFFICER WHILE DISALLOWING THE INTEREST ON DEBIT CAPITAL BALANCE AT 22.61% WAS HIGHER AND IT SHOULD HAVE BEEN AT THE AVERAGE RATE OF INTEREST ON 11.46%. HE ACCORDINGLY DIRECTED THE ASSESSING OFFICER TO CONSIDER THE SUBMISSIONS OF THE ASSESSEE AND IF THE RATE OF INTEREST PAID BY THE ASSESSEE ON BORROWED FUNDS WAS LESS, THAN HE DIRECTED THE THAT THE SAME RATE TO BE ADOPTED BY THE ASSESSING OFFICER FOR DETERMINATION OF DISALLOWANCE OF INTEREST ON DEBIT CAPITAL BALANCE. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE US. 4. BEFORE US, LD.AR REITERATED THE SUBMISSIONS MADE BEFORE THE ASSESSING OFFICER AND CIT(A) AND FURTHER POINTING TO THE BALANCE SHEET OF THE FIRM WHICH IS PLACED AT PAGE 16 OF THE PAPER BOOK SUBMITTED THAT THE TWO PARTNERS CAPITAL ACCOUNT AGGREGATED TO CREDIT OF RS.2.25 CRORES (ROUNDED OFF) AND THE CAPITAL ACCOUNT OF ONE PARTNER WAS DEBIT OF RS.1.34 CRORES BUT IN TOTALITY THE PARTNERS CAPITAL ACCOUNTS WAS HAVING CREDIT BALANCE. HE SUBMITTED THAT THE ASSESSING OFFICER HAD ONLY CONSIDERED THE DEBIT BALANCE OF THE PARTNERS IGNORING THE CREDIT BALANCE OF THE PARTNERS AND THE AGGREGATE CREDIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT. HE FURTHER SUBMITTED THAT NO INTEREST HAS BEEN PAID TO THE PARTNERS HAVING CREDIT BALANCES. HE THEREFORE SUBMITTED THAT WHEN THE TOTAL INTEREST FREE FUNDS IN THE PARTNERS CAPITAL ACCOUNT IN AGGREGATE IS MORE THAN THE DEBIT BALANCE IN ONE OF THE PARTNERS CAPITAL ACCOUNT, THEN NO INTEREST IS DISALLOWABLE ON ACCOUNT OF UTILIZATION OF FUNDS FOR NON BUSINESS 4 ITA NOS. 266/PUN/2017 A.Y.2012-13 PURPOSE AND FOR THIS PROPOSITION, HE RELIED ON THE DECISION OF AHMEDABAD TRIBUNAL IN THE CASE OF TORRENT FINANCIERS VS ACIT [2001] 73 TTJ 624 (AHD.) AND THE DECISION IN THE CASE OF APURVA & CO. VS ITO [1990] 51 TAXMAN 48 (AHD.) (MAG.). HE ALSO RELIED DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS M/S. RELIANCE INDUSTRIES LTD.(CIVIL APPEAL NO.10 OF 2019 ORDER DTD. 02.01.2019) FOR THE PROPOSITION THAT WHEN INTEREST FREE FUNDS AVAILABLE TO THE ASSESSEE WERE SUFFICIENT TO MEET ITS INVESTMENTS, THAN IT COULD BE PRESUMED THAT THE INVESTMENTS WERE MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. HE THEREFORE SUBMITTED THAT NO DISALLOWANCE OF INTEREST IS CALLED FOR IN THE PRESENT CASE. LD.DR ON THE OTHER HAND SUPPORTED THE ORDER OF LOWER AUTHORITIES. 5. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ISSUE IN PRESENT GROUND IS WITH RESPECT TO DISALLOWANCE OF INTEREST. THE ASSESSING OFFICER HAS WORKED OUT THE INTEREST ON THE PARTNERS CAPITAL ACCOUNT HAVING DEBIT BALANCE ON THE BASIS OF RATIO OF INTEREST PAID BY THE ASSESSEE ON UNSECURED LOANS. THE BALANCE SHEET OF THE FIRM AS ON 31.03.2012 WHICH IS PLACED AT PAGE NO.16 OF THE PAPER BOOK REVEALS THAT OUT OF THE THREE PARTNERS OF THE FIRM, THE CREDIT BALANCE IN TWO PARTNERS CAPITAL ACCOUNT AGGREGATED TO RS.2.25 CRORES AND IN ONE PARTNER CAPITAL ACCOUNT THE DEBIT BALANCE WAS RS.1.34 CRORES. IF THE PARTNERS CAPITAL ACCOUNT ARE SEEN IN AGGREGATE, IT IS CLEAR THAT THE CAPITAL ACCOUNT OF THE PARTNERS HAS A NET CREDIT BALANCE OF RS.91 LAKHS (ROUNDED OFF). BEFORE US, THE ASSESSEE HAS ALSO SUBMITTED THAT NO INTEREST HAS BEEN PAID TO THE PARTNERS HAVING CREDIT BALANCES. THE AFORESAID CONTENTIONS OF THE LD.AR HAS NOT BEEN CONTROVERTED BY THE REVENUE. IN THE PRESENT CASE SINCE THE NET AGGREGATE CAPITAL ACCOUNT OF THE PARTNERS IS HAVING CREDIT BALANCE MEANING THEREBY THAT THE PARTNERS HAVE IN AGGREGATE NOT OVERDRAWN THEIR ACCOUNTS. WE THEREFORE RELYING ON THE 5 ITA NOS. 266/PUN/2017 A.Y.2012-13 RATIO OF THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF CIT VS M/S. RELIANCE INDUSTRIES LTD.(SUPRA) CAN PRESUME THAT THE PARTNER WHO HAS OVER DRAWN IS OUT OF THE CREDIT BALANCE FROM THE INTEREST FREE CAPITAL ACCOUNT OF OTHER PARTNERS. WE FURTHER FIND THAT THE CO-ORDINATE BENCH OF THE TRIBUNAL IN THE CASE OF TORRENT FINANCIERS VS ACIT (SUPRA) HAS HELD THAT IF THE TOTAL INTEREST FREE ADVANCES INCLUDING THE DEBIT BALANCE OF PARTNER DO NOT EXCEED THE TOTAL INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE, NO INTEREST IS DISALLOWABLE ON ACCOUNT OF UTILIZATION OF FUND FOR NON BUSINESS PURPOSES. BEFORE US, REVENUE HAS NOT PLACED ANY CONTRARY FINDING DECISION IN ITS SUPPORT. WE THEREFORE, RELYING ON THE AFORESAID DECISIONS, HOLD THAT IN THE PRESENT CASE THE ASSESSING OFFICER & CIT(A) WERE NOT JUSTIFIED IN DISALLOWING THE INTEREST EXPENSES. WE THEREFORE, DIRECT ITS DELETION. THUS, GROUND NO.1 RAISED BY THE ASSESSEE IS ALLOWED. 6. GROUND NO.2 IS WITH RESPECT TO DISALLOWANCE OF RS.3,34,831/-. 7. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER ON PERUSING THE DETAILS OF EXPENSES NOTICED THAT IN THE CASE OF SALARY, ELECTRICITY CHARGES FOR FACTORY AT NEPANI AND ELECTRICITY CHARGES FOR ITS FACTORY AT SATARA, EXPENSES HAVE BEEN CLAIMED FOR 13 MONTHS INSTEAD OF 12 MONTHS FOR THE PREVIOUS YEAR. THE ASSESSING OFFICER IN THE ASSESSMENT ORDER HAS NOTED THAT WHEN THE ASSESSEE WAS CONFRONTED, HE ACCEPTED THAT THE CLAIM WAS EXCESSIVE AND THE PAYMENT MADE FOR MARCH 2011 WAS NOT ALLOWABLE AS DEDUCTION. THE ASSESSING OFFICER THEREAFTER DISALLOWED AGGREGATE PAYMENT OF RS.3,34,831/-. AGGRIEVED BY THE ORDER OF ASSESSING OFFICER, THE ASSESSEE CARRIED THE MATTER BEFORE CIT(A) WHO WHILE UPHOLDING THE ADDITION MADE BY THE ASSESSING OFFICER ALSO NOTED THE FACT THAT THE ASSESSEE WAS FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING AND ACCORDINGLY THE PAYMENTS ON ACCRUAL BASIS WAS TO BE ALLOWED AND SINCE THE EXPENDITURE WAS DISALLOWED BY THE ASSESSING OFFICER 6 ITA NOS. 266/PUN/2017 A.Y.2012-13 WAS PERTAINING TO PRIOR PERIOD, THE ASSESSING OFFICER HAS RIGHTLY DISALLOWED THE EXPENSES. AGGRIEVED BY THE ORDER OF CIT(A), THE ASSESSEE IS BEFORE US. 8. BEFORE US, LD.AR REITERATED THE SUBMISSIONS MADE BEFORE THE LOWER AUTHORITIES. LD.DR ON THE OTHER HAND SUPPORTED THE ORDER OF ASSESSING OFFICER AND FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS NOTED THAT THE LD.AR OF THE ASSESSEE HAD ACCEPTED THAT THE PAYMENT MADE TOWARDS MARCH 2011 WAS NOT ALLOWABLE. HE THUS SUPPORTED THE ORDER OF LOWER AUTHORITIES. 9. WE HAVE HEARD RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE ISSUE IN PRESENT GROUND IS WITH RESPECT TO DISALLOWANCE OF AGGREGATE EXPENSES OF RS.3,34,831/- WHICH PERTAIN TO YEAR ENDING MARCH 2011. WE FIND THAT BEFORE THE ASSESSING OFFICER, THE ASSESSEE HAD ACCEPTED THE FACT THAT THE EXPENSES WERE NOT ALLOWABLE & BEFORE CIT(A) ALSO THE ASSESSEE ACCEPTED THE CONTENTIONS MADE BEFORE ASSESSING OFFICER. BEFORE US, THE ASSESSEE HAS NOT POINTED OUT ANY FALLACY IN THE FINDING OF THE ASSESSING OFFICER & CIT(A). CONSIDERING THE TOTALITY OF THE AFORESAID FACTS, WE FIND NO REASON TO INTERFERE IN THE ORDER OF CIT(A) AND THUS, THIS GROUND RAISED BY THE ASSESSEE IS DISMISSED. 10. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED ON 17 TH DAY OF MAY, 2019. SD/- SD/- SD/- SD/- (SUSHMA CHOWLA) (ANIL CHATURVEDI) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / DATED : 17 TH MAY, 2019. AMIT KUMAR 7 ITA NOS. 266/PUN/2017 A.Y.2012-13 / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT-M/S. HIRA ENTERPRISES, H.NO.-111, RAVIWAR PETH, SATARA-415002. 2. / THE RESPONDENT-ACIT, SATARA CIRCLE, SATARA. 3. THE CIT(APPEALS), PUNE. 4. THE CCIT, PUNE. 5. , , / DR, ITAT, PUNE. 6. / GUARD FILE. / BY ORDER, SENIOR PRIVATE SECRETARY , / ITAT, PUNE.