M/s N.K. Forging & Rolling Inds., Ludhiana V. ACIT, Ludhiana

ITA 29/CHANDI/2014

• Counselvise Citation: [2015] 121 COUNSELVISE.COM (IT) 1575 (ITAT-CHANDIGARH)
• Duration Of Justice: 1 year(s) 8 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-04-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 06-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: S K MITTAL
• Assessee Lawyers: SUBHASH AGGRWAL
• Keywords: Proportionate interest; Question of law

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH, CHANDIGARH BEFORE SHRI H.L. KARWA, HONBLE VICE PRESIDENT AND MRS. ANNAPURNA MEHROTRA, ACCOUNTANT MEMBER ITA NO.29/CHD/2014 ASSESSMENT YEAR:2007-08 M/S N.K. FORGING & ROLLING INDS. VS. THE ADDL. C IT BEANTPURA, ST. NO. 7 CIRCLE I CHANDIGARH ROAD LUDHIANA LUDHIANA PAN NO. AACFN6016F (APPELLANT) (RESPONDENT) APPELLANT BY : SH. SUBHASH AGGRWAL RESPONDENT BY : SH. S.K. MITTAL DATE OF HEARING : 08/09/2015 DATE OF PRONOUNCEMENT :22/09/2015 ORDER PER ANNAPURNA MEHROTRA A.M. THIS APPEAL HAS BEEN FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A)-II, LUDHIANA DT. 08/11/2013. 2. THE ONLY ISSUE IN THE PRESENT APPEAL IS AGAINST THE DISALLOWANCE OF INTEREST OF RS. 5,21,459/- ON INTEREST FREE ADVANCES. 3. BRIEFLY STATED THE ASSESSEE IS ENGAGED IN THE B USINESS OF MANUFACTURING AND SALE OF HAMMERS AND HAD FILED ITS RETURN OF INC OME FOR THE IMPUGNED ASSESSMENT YEAR ON 29/10/2007, SHOWING INCOME OF RS . 26,64,140/- . DURING ASSESSMENT PROCEEDINGS THE AO NOTICED THAT THE ASSE SSEE HAD MADE INTEREST FREE ADVANCES AMOUNTING TO RS. 68,87,954/-. ON BEIN G ASKED TO EXPLAIN WHY INTEREST RELATING TO THE SAME MAY NOT BE DISALLOWED , THE ASSESSEE REPLIED THAT IT HAD SUFFICIENT INTEREST FREE FUNDS IN THE FORM OF A DVANCES FROM CUSTOMERS 2 AMOUNTING TO RS. 1.96 CRORES AND PARTNERS CAPITAL T O MAKE THE INTEREST FREE ADVANCES. THE ASSESSEE FURTHER SUBMITTED THAT THE I NTEREST BEARING UNSECURED LOANS HAD BEEN USED FULLY FOR THE PURPOSE OF BUSINE SS AND THEREFORE NO INTEREST PAID ON ACCOUNT OF THESE LOANS COULD BE DISALLOWED. THE AO DID NOT FIND THE REPLY OF THE ASSESSEE SATISFACTORY AND PLACING RELI ANCE ON THE DECISION OF JURISDICTIONAL HIGH COURT OF PUNJAB & HARYANA IN TH E CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. REPORTED IN [2006] 286 ITR 1 DISA LLOWED INTEREST, PROPORTIONATE TO SUCH INTEREST FREE ADVANCES, TO THE EXTENT DEBITED TO THE P&L ACCOUNT, AMOUNTING TO RS. 5,21,459/-. 4. IN APPEAL BEFORE THE LD. CIT(A), THE ASSESSEE RE PEATED ITS ARGUMENTS MADE BEFORE THE AO AND STATED THAT IT HAD SUFFICIEN T INTEREST FREE FUNDS IN THE FORM OF ADVANCES FROM CUSTOMERS AMOUNTING TO RS. 1. 96 CRORES AND PARTNERS CAPITAL AMOUNTING TO RS. 37,49,057/- TO FUND THE IN TEREST FREE ADVANCES. MOREOVER THE ASSESSEE ARGUED THAT OUT OF THE INTERE ST FREE ADVANCES OF RS. 68,87,954/- AS ON 31/03/2007, ADVANCES TO THE TUNE OF RS. 49,893,602/- WERE BROUGHT FORWARD ADVANCES OF EARLIER YEARS WHEN NO DISALLOWANCE U/S 36(I)(III) HAD BEEN MADE. THE ASSESSEE ALSO RELIED ON VARIOUS CASE LAWS IN SUPPORT OF HIS SUBMISSION. THE LD. CIT(A) REJECTED THE CONTENTION OF THE ASSESSEE AND PLACING RELIANCE ON THE DECISION OF JURISDICTIONAL HIGH COU RT OF PUNJAB & HARYANA HIGH COURT IN CASE OF M/S ABHISHEK INDUSTRIES LTD. (SUPR A) UPHELD THE DISALLOWANCE OF INTEREST MADE BY THE AO AMOUNTING TO RS. 5,21,459/- UNDER SECTION 36(1)(III) OF THE ACT. 5. AGGRIEVED BY THE SAME THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE US TAKING THE FOLLOWING GROUND : 1. THAT THE LEARNED CIT(A)-II HAS ERRED IN CONFIRMI NG THE DISALLOWANCE OF INTEREST OF RS. 5,21,459/- ON INTEREST FREE ADVANCE S IGNORING THE FACTS THAT MOST OF THE ADVANCES WERE OLE ONCE AND ALSO THAT APPELLANT HAD HUGE INTEREST FREE ADVANCES AND CAPITAL FOR MAKING INTEREST ADVANCES. 2. THAT IT HAS BEEN IGNORED THAT NO BORROWED FUNDS WERE UTILIZED FOR MAKING ANY ADVANCES. 3 3. THAT IN ANY CASE THE DISALLOWANCE CONFIRMED IS A GAINST THE LAW AND FACTS OF THE CASE. 6. BEFORE US THE LD. AR REPEATED THE ARGUMENT MADE BEFORE THE LOWER AUTHORITIES AND STATED THAT : 1. THE INTEREST FREE ADVANCES WERE VERY OLD, RIGHT FROM FY 2000-01, AND NO DISALLOWANCE OF INTEREST HAD EVER BEEN MADE EITHER PRIOR OR SUBSEQUENT TO AY 2007-08. THE LD. AR PLACED BEFORE US A CHART REVEALING THIS FACT FROM ASSESSMENT YEAR 2004-05 TO AY 2009-10. 2. SUFFICIENT INTEREST FREE FUNDS, BEING ADVANCES F ROM CUSTOMERS, PARTNERS CAPITAL AND INTEREST FREE LOANS FROM PARTIES WERE A VAILABLE WITH THE ASSESSEE, OUT OF WHICH THE INTEREST FREE ADVANCES H AD BEEN GIVEN BY THE ASSESSEE. 7. THE LD. AR STATED THAT NO DISALLOWANCE U/S 36(1) (III) COULD BE MADE IN SUCH CIRCUMSTANCES AND PLACED RELIANCE ON THE FOLLO WING DECISIONS OF THE JURISDICTIONAL HIGH COURTS IN SUPPORT OF ITS CONTEN TION CIT VS. RAKESH GUPTA IN ITA NO. 37/2014 DT. 02/07/2015 (P&H), BRIGHT ENTERPRISE S PVT. LTD. VS. CIT IN ITA NO. 224/2013 DT. 24/07/2015 (P&H). THE LD. AR FURTHER R ELIED ON THE JUDGMENT OF THE CHANDIGARH TRIBUNAL IN THE CASE OF ACIT VS. OMAX BI KES LTD. IN ITA NO. 1085/2013 A.Y. 2008-09 DT. 06/08/2015. 8. THE LD. DR ON THE OTHER HAND RELIED ON THE ORDER OF THE LD. CIT(A). 9. WE HAVE HEARD THE REPRESENTATIVES OF BOTH THE PA RTIES AND PERUSED THE DOCUMENTS PLACED BEFORE US. 10. WE FIND THAT IT IS NOT IN DISPUTE THAT THE ASSE SSEE HAD THE FOLLOWING INTEREST FREE FUNDS : PARTNERS CAPITAL 37,49,057/- CUSTOMERS ADVANCES 1,96,40,942/- INTEREST FREE LOANS RECEIVED 10,17,694/- 2,44,07,693/- 4 11. AGAINST THE SAME, THE INTEREST FREE ADVANCES GI VEN AMOUNTED TO RS. 68,87,954/-.CLEARLY THERE WERE SUFFICIENT INTEREST FREE FUNDS FOR MAKING THE INTEREST FREE ADVANCES. THE PRESUMPTION THAT ARISES IN SUCH CASES IS THAT THE INVESTMENT HAD BEEN MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE ASESSEE. THIS VIEW HAS BEEN UPHELD BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF BRIGHT ENTERPRISES PVT. LTD. VS. COMMISSIONER OF INCOME TAX, JALANDHAR IN ITA NO. 224 OF 2013 DT. 24/07/2015 WHEREIN AT PARA 16 & 18 OF THE ORDER IT HAS BEEN HELD AS FOLLOWS: 16. AS WE NOTED EARLIER, THE FUNDS/RESERVES OF THE APPELLANT WERE SUFFICIENT TO COVER THE INTEREST FREE ADVANCES MADE BY IT OF RS. 10.29 CRORES TO ITS SISTER COMPANY. WE ARE ENTIRELY IN AGREEMENT WITH THE JUDG MENT OF THE BOMBAY HIGH COURT IN COMMISSIONER OF INCOME TAX VS. RELIANCE UT ILITIES & POWER LTD., (2009) 313 ITR 340, PARA-10, THAT IF THERE ARE INTEREST FREE F UNDS AVAILABLE A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INT EREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUN DS WERE SUFFICIENT TO MEET THE INVESTMENT. 18. IN THE CIRCUMSTANCES, THE QUESTION OF LAW IS AN SWERED IN FAVOUR OF THE APPELLANT AND AGAINST THE DEPARTMENT. THE ORDER OF THE TRIBUNAL IS SET ASIDE. THE APPELLANT SHALL BE ENTITLED TO THE DEDUCTION UNDER SECTION 36(1)(III). THERE SHALL, HOWEVER, BE NO ORDER AS TO COSTS. MOREOVER THE DECISION IN THE CASE OF M/S ABHISHEK I NDUSTRIES 286 ITR 1 HAS BEEN CONSIDERED BY THE PUNJAB & HARYANA HIGH COURT IN TH E CASE OF CIT-I, LUDHIANA VS. KAPSONS ASSOCIATES IN ITA NO. 354 OF 2013 (O&M) DT. 04/08/2015, WHEREIN ONE OF THE SUBSTANTIAL QUESTIONS FRAMED BEFORE THEM: I. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE HONBLE INCOME TAX APPELLATE TRIBUNAL IS RIGHT IN LAW IN UP HOLDING THE ORDER OF THE LD. COMMISSIONER OF INCOME TAX (A) IN WHICH DISALLOWANC E OF PROPORTIONATE INTEREST AT RS. 23,54,722/- U/S 36(I)(III) WAS DELETED, IGNO RING THE FACTS THAT NO PROOF OF COMMERCIAL EXPENDIENCY AND BUSINESS PURPOSE WAS PRO VIDED. II. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE, THE HONBLE ITAT IS RIGHT IN LAW IN DELETING THE DISALLOWANCE, ACCEPTING THE ARGUMENTS OF THE ASSESSEE THAT IT HAD ENOUGH INTEREST FREE FUNDS IN THE FORM OF CAPITAL AND RESERVES AND OTHER INTEREST-FREE FUNDS IGNORING THE DECISION OF THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES, 286 ITR 1 THAT HELD THAT THE MONEYS RECEIVED AS SHARE CAPITAL, OR TERM LOAN, OR WORKING CAPITAL LOAN, OR SALES PROCEEDS DO NOT HAVE ANY DIFFERENT COLOUR AND THAT THE ONLY REQUIREMENT TO DISALLOW THE INTEREST PAID ON THE BORROWING TO THE EXTENT THE IN TEREST-FREE AMOUNT IS LENT TO SISTER CONCERN FOR NON-BUSINESS PURPOSES WOULD BE T HAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. WHILE DECIDING THE ABOVE QUESTION, THE HONBLE JURI SDICTIONAL HIGH COURT HELD AT PARA 3 & 4 OF THE ORDER AS UNDER: : 3. THE CIT(APPEALS) AND THE TRIBUNAL FOUND AS A MA TTER OF FACT THAT THE COMPANY HAD INTEREST FREE ADVANCES FROM ITS DIRECTO RS/SHAREHOLDERS AND THE 5 MEMBERS OF THEIR FAMILIES AMOUNTING TO RS. 315.11 L ACS AS AGAINST THE INTEREST, FREE ADVANCES MADE BY THE COMPANY AGGREGATING TO RS. 219 .72 LACS AS ON 31.03.2008. IN VIEW THEREOF, IT WAS RIGHTLY INFERRE D THAT THE RESPONDENT / ASSESSEE HAD ENOUGH INTEREST FREE FUNDS WHICH WOULD COVER TH E ADVANCES ALSO MADE INTEREST FREE. 4. THE MATTER IS COVERED AGAINST THE APPELLANT IN T HIS REGARD BY OUR ORDER AND JUDGMENT DATED 16.07.2015 IN ITA NO. 413 OF 20 14, GURDAS GARG VS. COMMISSIONER OF INCOME TAX (APPEALS), BATHINDA AND ANOTHER WHERE WE HELD AS UNDER:- IT IS A LITTLE DIFFICULT TO UNDERSTAND THESE OBSER VATIONS. IT HAS NOT BEEN DENIED THAT INTEREST ON FUNDS WERE AVAILABLE. NOR H AS IT BEEN DENIED THAT INTEREST FREE ADVANCES WERE MADE BY THE APPELLANT. IN FACT, THE LATTER HAS BEEN ACCEPTED BY THE ASSESSING OFFICER. THE CONTENTION T HAT THE APPELLANT HAS NOT ESTABLISHED THAT IT WAS THE INTEREST FREE FUNDS THA T WERE ACTUALLY ADVANCED AS INTEREST FREE ADVANCES IS WITHOUT SUBSTANCE. MONEY HAS NO IDENTITY. SO LONG IT IS ESTABLISHED THAT THE INTEREST FREE ADVANCES ARE MAD E BY AN ASSESSEE WHO HAS ADEQUATE FREE RESERVES, IT IS SUFFICIENT TO ESTABLI SH THAT THE AMOUNTS ADVANCED INTEREST FREE CANNOT BE ADDED TO THE ASSESSEES INC OME. IT WAS NOT CONTENDED THAT THE INTEREST FREE ADVANCES EXCEEDED THE INTERE ST FREE FUNDS AVAILABLE WITH THE APPELLANT. NOR WAS IT ESTABLISHED THAT A PARTIC ULAR ADVANCE RECEIVED WAS IN TURN ADVANCED BY THE ASSESSEE INTEREST FREE. QUESTION NO. 1 TO 3 ARE, THEREFORE, ANSWERED AGAINS T THE APPELLANT. 12. IN THE ABOVE CASE, THE SUBSTANTIAL QUESTION OF LAW RAISED BY THE REVENUE WAS THAT THE TRIBUNAL HAS PASSED THE ORDER IGNORING THE JUDGMENT OF HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. M/S ABHISHEK INDUSTRIES LTD. 286 ITR 1. IT APPEARS THAT WHILE DECIDING THE SUBSTANTIAL QUESTION OF LAW, THE HONBLE HIGH COURT HAS CONSIDERED THE DECISION RENDERED IN THE CASE OF M/S ABHISHEK INDUS TRIES LTD. (SUPRA). 13. IN VIEW OF THE ABOVE WE FIND THAT THE ASSESSE I S ENTITLED TO DEDUCTION U/S 36(1)(III) OF THE ACT AND THE DISALLOWANCE MADE OF RS. 5,21,459/- SHOULD BE DELETED. 14. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWE D. ORDER PRONOUNCED IN THE OPEN COURT ON 22/09/2015 SD/- SD/- (H.L. KARWA) (ANNAPURNA MEHROTRA) VICE PRESIDENT ACCOUNTANT MEMBER DATED :22/09/2015 AG COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT, TH E CIT(A), THE DR