M/s Kedarnath Agencies, Cuttack V. ITO, Cuttack

ITA 302/CTK/2009

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 4274 (ITAT-CUTTACK)
• Duration Of Justice: 6 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-07-2010
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 29-12-2009
• Court: TRIBUNAL
• Department Lawyers: S C MOHANTY
• Assessee Lawyers: M UDAYAPURIYA
• Keywords: Business expenditure; Notional interest

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE HONBLE SHRI D.K.TYAGI, JUDICIAL MEMBER. /AND HONBLE SHRI K.K.GUPTA, ACCOUNTANT MEMBER . / I.TA.NO . 302/CTK/2009 / ASSESSMENT YEAR 2006 - 07 M/S. KEDARNATH AGENCIES, DOLMUNDAI, CUTTACK AAEFK 0009 M - - - VERSUS - . INCOME - TAX OFFICER, WARD 2(2), CUTTACK. / A PPELLANT RESPONDENT FOR THE APPELLANT : SHRI M.UDAYAPURIYA, AR FOR THE RESPONDENT : SHRI S.C.MOHANTY, DR / ORDER SHRI K.K.GUPTA, ACCOUNTANT MEMBER . THE ASSESS EE IS AGITATING THE ORDER OF THE LEARNED CIT(A) ON A SOLITARY ISSUE WITH RESPECT TO PROPORTIONATE DISALLOWANCE OF THE INTEREST CLAIMED IN THE P & L ACCOUNT PAID ON FUNDS BORROWED FOR THE ASSESSEES BUSINESS IN VIEW OF THE ASSESSING OFFICER HOLDING THAT AMO UNTS WERE ADVANCED TO SISTER CONCERNS WITHOUT CHARGING INTEREST. 2. THE LEARNED CIT(A) HAS ON THE BASIS OF CITED DECISIONS HELD INTERMINGLING OF FUNDS AVAILABLE AND BORROWED PARTLY ALLOWED THE ASSESSEES CONTENTION BY ALLOWING THE PROPORTION OF INTEREST WHICH COULD BE ADVANCED FROM THE FUNDS AVAILABLE TO THE ASSESSEE AS NON - INTEREST BEARING FUNDS. 3. THE LEARNED COUNSEL SUBMITTED THAT THE LEARNED CIT(A) IS WHOLLY UNJUSTIFIED TO HOLD THAT DISALLOWANCE OF INTEREST ON THE ACCOMMODATION LOAN GIVEN TO A SISTE R CONCERN CAN BE DISALLOWED IN THE RATIO OF OWN FUNDS AVAILABLE VIS - - VIS FUNDS AVAILABLE ON INTEREST, THEREBY PARTIALLY CONFIRMING DISALLOWANCE OF INTEREST ON BORROWED FUND IS HIGHLY ARBITRARY, ILLEGAL AND VITIATED AND SHOULD BE ALLOWED IN THE FACTS AN D CIRCUMSTANCES OF THE CASE. HE FURTHER SUBMITTED THAT THE DISALLOWANCE OF INTEREST ON BORROWED CAPITAL DUE TO ADVANCING ACCOMMODATION LOAN TO A SISTER CONCERN SHOULD NOT HAVE BEEN DISALLOWED AND THEREFORE THE ORDER OF LEARNED CIT(A) BEING ARBITRARY AND UN FAIR, UNREASONABLE AND ILLOGICAL; INTEREST CLAIMED ON BORROWED CAPITAL SHOULD BE I.TA.NO . 302/C T K/2009 2 FULLY ALLOWED IN THE FACTS AND CIRCUMSTANCES OF THE CASE. IN SUPPORT OF HIS CONTENTION, HE HAS SUBMITTED A CHART ALONG WITH THE BALANCE SHEET WHICH INDICATES THAT THE ASSESSEE S OWN FUNDS WERE AVAILABLE TO BE ADVANCED FOR NOT EARNING INTEREST TO SISTER CONCERNS. HE POINTED OUT ON PERUSAL OF THE BALANCE SHEET OF THE ASSESSEE THE SECURED LOAN, WHICH THE ASSESSEE OBTAINED, BORE INTEREST WERE TOTALLY INVESTED IN THE BUSINESS OF THE ASSESSEE THEREFORE LEFT THE OTHER FUND AVAILABLE FOR INTEREST FREE ADVANCE WAS WRONGLY DIRECTED BY THE LEARNED CIT(A) TO BE PROPORTIONATELY DISALLOWED IN SO FAR AS HE RELIED ON THE DECISION OF HONBLE APEX COURT IN THE CASE OF S.A.BUILDERS LTD. V. CIT [28 8 ITR 1 (SC)], CIT V. RELIANCE UTILITIES & POWER LTD [221 CTR (BOM) 435] AND CIT V. ORISSA CEMENT LTD.,[252 ITR 878 (DEL)] , WHO HAVE HELD THAT IT IS A QUESTION OF FACT FINDING WHERE THE INTEREST BEARING FUNDS WERE ESTABLISHED TO HAVE BEEN GIVEN TO THE BUS INESS ENTITIES WITHOUT CHARGING INTEREST. HE POINTED THAT THE LEARNED ASSESSING OFFICER IN HIS EIGHT PAGES ORDER CONFINED HIMSELF TO FIND CLUES FROM VARIOUS DECISIONS OF HIGH COURTS THAT THE INTEREST CLAIMED AMOUNTING TO RS.21,45,856 BY THE ASSESSEE WAS TO BE PROPORTIONATELY REDUCED OUT OF THE INTEREST CALCULATED @12% ON THE TOTAL ADVANCE OF RS.19,18,800 TO A SISTER CONCERN. THIS BEING THE FACTUAL POSITION, THE LEARNED CIT(A) THEREFORE WAS NOT JUSTIFIED IN GIVING PROPORTIONATE RELIEF TO THE ASSESSEE IN THE RATIO OF FUNDS AVAILABLE OTHER THAN THOSE AVAILABLE TO THE ASSESSEE ON INTEREST. HE POINTED OUT THAT THE INTERMINGLING WAS NOT THE CRITERIA FOR PROPORTIONATELY DISALLOWING THE REMAINING FUNDS IN SO FAR AS IT IS GLARING IN THE BALANCE SHEET THAT THE FUNDS P ROCURED ON INTEREST WERE FULLY UTILIZED IN HOLDING BUSINESS ASSETS NAMELY STOCK, DEBTORS AND CASH IN HAND WHICH BOTH THE AUTHORITIES BELOW HAVE ACKNOWLEDGED AS BELONGING TO THE ASSESSEES BUSINESS. THEREFORE, THE RESIDUAL AMOUNT OF FUND AVAILABLE AND RESID UAL OF INVESTMENT IN THE BUSINESS CLEARLY LEAVE THE AMOUNT OF INTEREST FREE ADVANCE TO THE SISTER CONCERN AVAILABLE FROM THE BALANCE FUNDS WHICH DID NOT REQUIRE CONSIDERATION ON THIS SCORE. HE POINTED OUT THAT IT WAS THE FACTUAL MISTAKE ON THE PART OF THE AUTHORITIES BELOW TO DISALLOW NOTIONAL INTEREST THAT OUGHT TO HAVE BEEN CHARGED FROM THE SISTER CONCERN FUNDED WITHOUT ANY INTEREST IS BOUND TO BE PART OF FUNDS ON WHICH THE ASSESSEE HAD PAID INTEREST. 4. THE LEARNED DR SUPPORTED THE ORDERS OF THE AUTHORIT IES BELOW FOR HIS PART OF SUBMISSION S . I.TA.NO . 302/C T K/2009 3 5. WE HAVE HEARD THE RIVAL CONTENTION AND PERUSED THE MATERIAL ON RECORD. ON CAREFUL CONSIDERATION OF THE FACTS AND CIRCUMSTANCE, WE FIND FORCE IN THE CONTENTION OF THE LEARNED COUNSEL IN SO FAR AS AN EXERCISE HAS BEE N MADE BY THE ASSESSING OFFICER AND THE LEARNED CIT(A) TO DETERMINE THE FUNDS AVAILABLE FOR NON - BUSINESS PURPOSE SO THAT THE ASSESSEE MAY BE DISALLOWED THE CLAIM OF INTEREST PAID AS BUSINESS EXPENDITURE ON ACCOUNT OF BORROWED FUNDS UTILIZED IN THE BUSINESS . 6. IT IS NOBODYS CASE THAT THE BUSINESS HAS TO BE RUN IN ACCORDANCE WITH THE PRINCIPLE OF BANKING BUSINESS , WHERE FUNDS ARE BORROWED ON INTEREST AND FURTHER ADVANCED ON HIGHER RATE OF INTEREST TO EARN INTEREST INCOME. THIS THEREFORE LEAVES US WITH THE L OGICAL FINDING OF FACT WHERE THE FUNDS REMAIN AVAILABLE WITH THE ASSESSEE TO ADVANCE WITHOUT INTEREST TO A SISTER CONCERN. BOTH THE AUTHORITIES BELOW HAVE ESTABLISHED THAT THE FUNDS WERE ADVANCED FOR THE BUSINESS PURPOSES. THEREFORE, A SIMPLE PERUSAL OF T HE BALANCE SHEET WOULD INDICATE THAT THE FUNDS FOR INTEREST CHARGED BY THE LOAN CREDITORS AND BANK WERE FULLY UTILIZED IN THE BUSINESS OF THE ASSESSEE AND HELD IN THE FORM OF HOLDING ASSETS SUCH AS STOCK, DEBTORS CASH AND BANK BALANCE. IT IS NOT THE CASE O F THE DEPARTMENT THAT THE ASSESSEE HAS BEEN OVER TRADING IN VIEW OF THE FACT THAT THE ASSESSEE HAS TURNOVER OF MORE THAN RS.7.7 CRORES THAT ENTITLED IT TO HAVE STOCK HOLDING FOR TWO MONTHS ON WHICH INTEREST HA D BEEN PAID. THE REMAINING THEREFORE IS CLEARLY OUT OF SELF GENERATED FUNDS OF THE ASSESSEE THEREFORE CANNOT BE LINKED WITH INTEREST PAID ON THE BORROWED FUNDS FOR DISALLOWANCE. IN THE LIGHT OF THE CITED DECISIONS AND ON THE BASIS OF FACTS CONSIDERED HEREIN ABOVE BY US, WE ARE INCLINED TO HOLD THAT THE RE IS NO MERIT FOR DISALLOWING NOTIONAL INTEREST FOR HOLDING THE SAME AS BEING PAID FROM INTEREST BEARING FUNDS. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED AND THE BALANCE DISALLOWANCE AS CONFIRMED BY THE LEARNED CIT(A) IS DIRECTED TO BE DELETED. THIS ORDER IS PRONOUNCED IN OPEN COURT ON DT. 23.07.2010 SD/ - SD/ - ( ), D.K.TYAGI JUDICIAL MEMBER (K.K.GUPTA), ACCOUNTANT MEMBER. DATE: 23.07.2010 ( /) H.K.PADHEE SENIOR.PRIVATE SECRETARY. I.TA.NO . 302/C T K/2009 4 - COPY OF THE ORDER FORWARDED TO : / THE APPELLANT : M/S. KEDARNATH AGENCIES, DOLMUNDAI, CUTTACK / THE RESPONDENT : INCOME - TAX OFFICER, WARD 2(2), CUTTACK. THE CIT, THE CIT(A), DR, CUTTACK BENCH GUARD FILE TRUE COPY , BY ORDER , [ ] SENIOR PRIVATE SECRETARY