M/s Jai Kishan Agro Products, Indore V. The ITO, Indore

ITA 327/IND/2010

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 2723 (ITAT-INDORE)
• Duration Of Justice: 1 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 09-07-2010
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2007-2008
• Appeal Filed On: 26-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: P D NAGAR
• Keywords: Commercial expediency

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, SMC BENCH-I, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER ITA NO.327/IND/2010 AY: 2007-08 M/S JAI KISHAN AGRO PRODUCTS INDORE PAN AACFM-5898G ..APPELLANT V/S. ITO- WARD 1(1), INDORE ..RESPONDENT APPELLANT BY : SHRI P.D. NAGAR, CA DEPARTMENT BY : SMT. APARNA KARAN, SR. DR ORDER THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R DATED 30.3.2010 PASSED BY LEARNED CIT(A) WHEREIN THE FIRS T GROUND RAISED IS THAT THE LD. FIRST APPELLATE AUTHORITY ERRED IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.60,000/- OUT OF INTEREST PAID ON THE GROUND OF NON- CHARGING OF INTEREST ON ADVANCES GIVEN TO M/S HINDU STAN EQUIPMENT PRIVATE LIMITED WITHOUT APPRECIATING THAT SUCH ADVA NCES WERE GIVEN TO 2 THE FIRM OUT OF THE CAPITAL OF THE FIRM AND BORROWE D FUNDS WERE NOT UTILISED FOR GIVING INTEREST FREE ADVANCES. 2. DURING HEARING, MR. NAGAR, LD. COUNSEL FOR ASSE SSEE, ADVANCED HIS ARGUMENTS WHICH ARE IDENTICAL TO THE G ROUND RAISED. ON A QUERY FROM THE BENCH WHETHER THE ADVANCES WERE GIVE N FROM THE BORROWED FUNDS, IT WAS FAIRLY ADMITTED BY HIM THAT THOUGH THE ADVANCES WERE GIVEN FROM THE BORROWED FUNDS BUT SUFFICIENT A MOUNT WAS AVAILABLE IN THE CAPITAL ACCOUNT OF THE ASSESSEE. THE LD. CO UNSEL FOR ASSESSEE, HOWEVER, PLACED RELIANCE ON THE DECISION OF THE HON BLE APEX COURT IN SA BUILDERS LIMITED V. CIT; 288 ITR 1 (SC). ON THE OTHER HAND, THE LEARNED SR. DR STRONGLY DEFENDED THE IMPUGNED ORDER BY CONTENDING THAT ONUS IS ON THE ASSESSEE TO ESTABLISH THE BUSIN ESS EXIGENCIES AND AT THE SAME TIME IT IS TO BE PROVED BY THE ASSESSEE TH AT INTEREST FREE ADVANCES MADE TO SISTER CONCERN WERE OUT OF SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE AND NOT FROM THE BORROWED FUNDS. . 3. I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON FILE. BRIEF FACTS ARE THAT THE ASSESS EE IS IN THE BUSINESS OF MANUFACTURING OF ANIMAL FEED IN THE PALLET FORM. M /S JAI KISHAN AGRO INDUSTRIES MANUFACTURED ANIMAL FEED FOR THE ASSESSE E FIRM IN THE POWER FORM WHICH IS SOLD UNDER THE NAME OF SWET KRANTI. THE ASSESSEE TOOK LOANS FROM BANKS AND VARIOUS OTHER PERSONS AND PAID INTEREST TO THEM. 3 IN ADDITION, THE ASSESSEE ALSO PAID INTEREST TO PAR TNERS ON THE CAPITAL CONTRIBUTED BY THEM. THE ASSESSEE FIRM ALSO GAVE AD VANCES TO SEVERAL PARTIES AND RECEIVED INTEREST FROM THEM WHICH WAS O FFERED UNDER THE HEAD MISCELLANEOUS INCOME. HOWEVER, THE ASSESSEE ALSO GAVE LOAN TO SISTER CONCERN I.E. M/S HINDUSTAN EQUIPMENTS PRIVAT E LIMITED. A SUM OF RS. 1,81,956/- WAS OUTSTANDING FROM THE PARTY AS ON 31.3.2007 BUT THE ASSESSEE RECEIVED INTEREST OF RS.24,938/- ONLY ON S UCH ADVANCES. ON A QUERY BY THE LEARNED AO, THE ASSESSEE COULD NOT FUR NISH ANY EXPLANATION FOR NON-CHARGING OF INTEREST FROM SISTER CONCERN, C ONSEQUENTLY, THE LEARNED AO WAS OF THE VIEW THAT NON-INTEREST BEARIN G FUNDS WERE DIVERTED FOR NON BUSINESS PURPOSES. HE ALSO FOLLO WED THE DECISION OF THE HONBLE ALLAHABAD HIGH COURT IN CIT V. H.R. SUG AR FACTORY PRIVATE LIMITED; 187 ITR 363. SINCE THE ASSESSEE PAID INTE REST AT THE RATE OF 15% PER ANNUM, CONSEQUENTLY, HE MADE DISALLOWANCE O F RS.60,000/- BEING APPROXIMATELY @ 15% OF RS.3,96,358/-. ON APP EAL THE STAND OF THE AO WAS AFFIRMED WHICH IS UNDER CHALLENGE BEFORE THIS TRIBUNAL. 4. THE THRUST OF THE ARGUMENTS ON BEHALF OF THE AS SESSEE IS THAT LOANS/ADVANCES WERE MADE OUT OF CAPITAL AND SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE. HOWEVER, THE ASSESSEE COULD NOT SUBSTANTIATE WITH DOCUMENTARY EVIDENCE THAT THE INTEREST FREE FUNDS W ERE MADE AVAILABLE TO THE SISTER CONCERN FROM OWN SURPLUS FUNDS. IN MY HUMBLE OPINION, 4 BUSINESS EXPEDIENCY/COMMERCIAL EXPEDIENCY VIZ-A-VIZ AVAILABILITY OF FUNDS HAS TO BE VIEWED. THE HONBLE PUNJAB AND HARY ANA HIGH COURT IN THE CASE OF CIT V. ABHISHEK INDUSTRIES LIMITED; 286 ITR 1, IDENTICALLY DECIDED AGAINST THE ASSESSEE AS THE AMOUNT WAS DIVE RTED FOR NON- BUSINESS PURPOSES. IN A LATER DECISION THOUGH THE H ONBLE APEX COURT IN THE CASE OF SA BUILDERS V. CIT(SUPRA), CONSIDERED T HE ISSUE BY FOLLOWING VARIOUS JUDICIAL PRONOUNCEMENTS AND APPROVED THE DE CISION IN CIT VS. DALMIA CEMENT; 254 ITR 377 (DEL) BY HOLDING THAT C OMMERCIAL EXPEDIENCY HAS TO BE SEEN. THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER IN SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING AN INCOME, PROFIT AND GAINS. HOWEVER, THE I NTEREST PAID ON BORROWED CAPITAL WILL BE ALLOWED AS A DEDUCTION ONL Y IF THE CAPITAL WAS BORROWED AND USED FOR THE PURPOSE OF BUSINESS AND I F IT IS USED FOR PURPOSED OTHER THAN BUSINESS, THEN THE INTEREST TO THAT EXTENT WILL NOT BE ALLOWED. INTEREST ON BORROWALS IS ALLOWABLE AS DEDU CTION ONLY WHEN THE BORROWALS ARE USED FOR THE PURPOSE OF BUSINESS AND CONTINUE AS SUCH. WHERE THE ASSESSEE PAID INTEREST ON BORROWALS FOR U SE IN HIS BUSINESS AND ADVANCES INTEREST FREE LOAN TO RELATIVES, SIST ER CONCERNS, INTEREST RELATABLE TO SUMS SO ADVANCED IS NOT DEDUCTIBLE. B ORROWED FUNDS ADVANCED TO THIRD PARTY SHOULD BE FOR COMMERCIAL EX PEDIENCY. THE RATIO LAID DOWN IN THE FOLLOWING CASES CAN BE LOOKED INTO :- 5 1 . MADHAV PRASAD JATIA V. CIT; 118 ITR 200 (SC) 2. L.M. THAPAR VS. CIT; 173 ITR 577 (CAL) 3. P.R.M.S. RAMANATHAN CHETTIAR V. CIT; 72 ITR 534 (MAD) 4. M.S.P. RAJA V. CIT; 105 ITR 295 (MAD.) 5. K. SOMASUNDARAM & BRO.; 238 ITR 939 (MAD) 6. S.A. BUILDERS V. CIT; 158 TAXMAN 74 (SC) 7. CIT V. MOTOR GENERAL FINANCE LIMITED; 272 ITR 5 50 (DEL) 8. CIT V. ABHISHEK INDUSTRIES; 156 TAXMAN 257 (P&H ) 9. MAROLIA & SONS V. CIT; 129 ITR 475 (ALL) IN THE LIGHT OF THE ABOVE JUDICIAL PRONOUNCEMENTS, IF THE FACTS OF THE PRESENT APPEAL ARE ANALYSED, THERE IS NO DISPUTE TO THE FACT THAT ONUS IS ON THE ASSESSEE TO SATISFY THAT WHATEVER LOANS W ERE RAISED WERE USED FOR BUSINESS PURPOSES AND IF IT IS FOUND THAT CERTAIN FUNDS WERE ADVANCED INTEREST FREE TO SISTER CONCERN, IN THE AB SENCE OF ANY JUSTIFICATION, NO DEDUCTION CAN BE ALLOWED. IN THE PRESENT APPEAL, THE ASSESSEE COULD NOT ESTABLISH THAT THE INTEREST FREE ADVANCES WERE MADE AVAILABLE TO SISTER CONCERN, THEREFORE, THERE IS NO INFIRMITY IN THE CONCLUSION DRAWN BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS), CONSEQUENTLY, THIS GROUND OF THE ASSESSEE IS HAVING NO MERIT AND DISMISSED AS SUCH. 5. THE NEXT GROUND PERTAINS TO CONFIRMING THE DISA LLOWANCE OF RS.2,04,750/- OUT OF CLAIMED PROCESSING CHARGES TO AN ASSOCIATE CONCERN M/S JAI KISHAN AGRO INDUSTRIES. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT RENDERING OF SERVICE I.E. PROCESSING OF ANIMAL FEED IS NOT IN DISPUTE, RATHER THE PAYMENT A T THE RATE OF RS. 300/- PER M.T. WAS CONSIDERED TO BE UNREASONABLE. I T WAS PLEADED 6 THAT DISALLOWANCE MADE TO THE EXTENT OF 50% OF PROC ESSING CHARGES AND CONFIRMATION THEREOF IS UNJUSTIFIED. ON THE OTH ER HAND, THE LEARNED SENIOR DR STRONGLY DEFENDED THE IMPUGNED ORDER BY C ONTENDING THAT A DEVICE HAS BEEN FRAMED BY THE ASSESSEE TO DIVERT ITS BUSINESS PROFIT BY PAYING THE SAME TO THE SISTER CONCERN. IT WAS F URTHER SUBMITTED THAT DETAILS OF MACHINERY AND RAW MATERIAL WAS NOT PRODUCED DURING ASSESSMENT STAGE. 6. I HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERU SED THE MATERIAL AVAILABLE ON FILE. BRIEF FACTS ARE THAT THE ASSESS EE CLAIMED THE AMOUNT OF RS.4,09,500/- UNDER THE HEAD PROCESSING CHARGES WHICH WERE CLAIMED TO BE PAID TO M/S JAI KISHAN AGRO INDU STRIES, SISTER CONCERN OF THE ASSESSEE, ON ACCOUNT OF PROCESSING CHARGES. THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENT AND WAS F URTHER ASKED TO EXPLAIN THE PROCESS INVOLVED ALONG WITH DETAILS OF PLANT AND MACHINERY UTILISED BY SISTER CONCERN IN SUCH PROCESSING. IN T HE ABSENCE OF EXPLANATION, THE LEARNED ASSESSING OFFICER DISALLOW ED 50% OF PROCESSING CHARGES WHICH COMES TO RS.2,04,750/- AND WAS ALSO AFFIRMED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) WHICH IS UNDER CHALLENGE BEFORE THE TRIBUNAL. 7. IF THE TOTALITY OF FACTS IS ANALYSED, IT IS AN U NDISPUTED FACT THAT THE FACTORY PREMISES OF THE ASSESSEE AS WELL AS OF SIST ER CONCERN M/S JAI KISHAN AGRO INDUSTRIES ARE ADJACENT TO EACH OTHER. THE MOVEMENT OF 7 GOODS WAS MADE WITHOUT ISSUE OF GATE PASS. TO CUT S HORT THE MATTER, IT IS AN ADMITTED FACT THAT THE TOTAL CLAIMED AMOUN T WAS NOT DISALLOWED AND ONLY 50% OF SUCH CLAIM WAS DISALLOWED MEANING T HEREBY THAT EVEN THE DEPARTMENT HAS NOT DISPUTED FULLY THAT THE PROCESS WAS DONE BY THE SISTER CONCERN FOR MANUFACTURING THE ANIMAL FEED. ON A QUERY FROM THE BENCH REGARDING LIST OF PLANT AND MACHINER Y, MY ATTENTION WAS DRAWN TO PAGE 2 OF THE PAPER BOOK WHEREIN A LIS T OF MACHINERY MENTIONING 9 IN NUMBER HAS BEEN MENTIONED. A COMBINED DETAILS OF EXPENSES (PAGE 1) HAS ALSO BE EN MENTIONED WHICH INCLUDE OFFICE EXPENSES, ADVERTISEMENT EXPENS ES, SALARY, BONUS, TAX, STATIONARY EXPENSES, ETC. HOWEVER, IT I S OBSERVED THAT ALL THESE EXPENSES ARE DIRECTLY NOT RELATED WITH THE PR OCESSING OF THE ANIMAL FEED FOR THE ASSESSEE FIRM. IN ANY WAY, IN THESE CIRCUMSTANCES, THERE IS NO OPTION BUT ESTIMATION. KEEPING IN VIEW THE TOTALITY OF FACTS AND AFTER CONSIDERING THE SUGGEST IONS FROM BOTH THE SIDES, THE PER METRIC TON ESTIMATION IS ESTIMATED A T RS. 225/- PER MT IN PLACE OF RS. 300/- PER MT SUSTAINED BY LEARNED C OMMISSIONER OF INCOME TAX (APPEALS), THEREFORE, THIS GROUND IS PAR TLY ALLOWED. IT IS MADE CLEAR THAT THIS ESTIMATION MAY NOT BE QUOTED F OR FUTURE REFERENCES/ASSESSMENT YEARS AS THE SAME IS BASED ON THE PECULIAR FACTS OF THE PRESENT ASSESSMENT YEAR ONLY AS EACH Y EAR IS 8 INDEPENDENT. THIS GROUND OF THE ASSESSEE IS, THERE FORE, PARTLY ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON 9 .7.20 10. (JOGINDER SINGH) JUDICIAL MEMBER DATED: 9 .7.2010 COPY TO: APPELLANT/RESPONDENT/CIT/CIT(A)/DR/GUARD F ILE D/-