Ahmedabad Cement Company, Ahmedabad V. The Asstt. Commissioner of Income Tax, Circel-2(2), Ahmedabad

ITA 3527/AHD/2016

• Counselvise Citation: [2018] 112 COUNSELVISE.COM (IT) 5477 (ITAT-AHMEDABAD)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-11-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2012-2013
• Appeal Filed On: 28-12-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: LALIT P JAIN
• Assessee Lawyers: S N DIVATIA
• Keywords: Business income; Depreciation; Business expenditure; Proportionate interest; Question of law; Initiation of penalty proceedings; Commercial expediency; TDS
• Section: 143(3); 201; 274; 37; 28

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL, D BENCH, AHMEDABAD BEFORE SHRI AMARJIT SINGH, ACCOUNTANT MEMBER A ND MS MADHUMITA ROY, JUDICIAL MEMBER ./ ITA NO. 3527 / AHD/ 2016 / ASSTT. YEAR: 2012 - 2013 M/S AHMEDABAD CEMENT COMPANY, 1, GYANKUNJ COLONY, OPP. ST. XAVIERS COLLEGE, NAVRANGPURA, AHMEDABAD - 380009. PAN AAFF A 9569 F VS THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 2(2), AHMEDABAD (APPLICANT) (RESPONENT) ASSESSEE BY : SHRI S.N. DIVATIA, A.R REVENUE BY : SHRI LALIT P. JAIN, SR. D.R / DATE OF HEARING : 06 / 08 /201 8 / DATE OF PRONOUNCEMENT: 01 / 11 /201 8 / O R D E R PER MS MADHUMITA ROY, JUDICIAL MEMBER : THE INSTANT APPEAL HAS BEEN FILED BY THE ASSESSEE BEFORE U S AGAINST THE ORDER DATED 14/10 /2016 , PASSED U/S.250 OF THE ACT, BY THE LEA RNED COMMISSIONER OF INCOME TAX (APPEALS) - 10 , AHMED ABAD, ARISING OUT OF TH E ORDER DATED 05 /03/2015, PASSED U/S.143(3) OF THE INCOME TAX ACT 1961 , FRAMED BY THE ASSISTANT COMM ISSIONER OF INCOME TAX, CIRCLE - (2 )(2), AHMEDABAD, FOR THE ASSESSMENT YEAR 2012 - 2013 , WHEREBY AND ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 2 WHEREUNDER THE DISALLOWANCE OF INTEREST EXPENSES OF RS.6,45,629/ - MADE U/S.36(1)(III) OF THE ACT, HAS BEEN UPHELD. 2. THE ASSESSEE IS A PARTNERSHIP FIRM AND ENGAGED IN THE BUSINESS OF TRADING IN CEM ENT & COMMISSION AGENT AS WELL . THE RETURN OF INCOME FOR THE ASSESSMENT YEAR 2012 - 2013, DECLARING TOTAL INCOME OF RS.89,14750/ - WAS FILED BY THE ASSESSEE ON 2 5/09/2012. THE CASE W A S SELECTED FOR SCRUTINY AND NOTICE U/S.143(2) OF THE ACT, DATED 23/09/2013, WAS ISSUED AND SAME WAS SERVED UPON THE ASSESSEE, THROUGH REGISTERED POST. SUBSEQUENTLY, FURTHER NOTICE U/S.143(2) OF THE ACT, R.W.S 129 AND NOTICES U/S.142(1 ) OF THE ACT , WERE ISSUED DUE TO CHANGE IN INCUMBENCY ; THE DETAILS REGARDING RETURN WAS DIRECTED TO BE FILED BY THE ASSESSEE. IN REPLY, THE EXPLANATION GIVEN BY THE ASSESSEE, HOWEVER , WAS NOT ACCEPTED BY THE LD.AO. T HE NEXUS BETWEEN UTILIZATION OF FUNDS AND THE BUSINESS INTEREST OF TH E ASSESSEE WAS NOT FOUND IN THE SAID REPLY SUBMITTED BY THE ASSESSEE AS OBSERVED BY THE LD.AO . FURTHER THAT BY AND UNDER A QUESTIONNAIRE DATED 26/12/2014, THE ASSESSEE WAS DIRECTED TO GIVE DETAILS OF UN SECURED LOANS AND LOAN S & ADVANCES IN THE PRESCRIBE D FORMAT. 3. IN RESPONSE T HEREOF , THE ASSESSEE SUBMITTED THE DETA ILS OF THE PARTIES, THE AMOUNT RECEIVED AND REPAID, RATE OF INTEREST, THE AMOUNT OF INTEREST AND THE DETAILS OF TDS UNSECURED LOANS , THE DETAILS OF PARTIES LO ANS GIVEN, AMOUNT RECEIVED AND THE RATE OF INTEREST THEREOF , THE AMOUNT OF INTEREST RECEIVED FROM PARTIES TO WHOM LOANS AND ADVANCES WERE PROVIDED BY THE ASSESSEE. 4. THE ASSESSEE WAS THEREAFTER DIRECTED TO JUSTIFY THE SAME IN VIEW OF THE PROVISION OF SECTION 36(1)(III) OF THE ACT. IN RESPONSE TO THE SAME THE ASSESSEE SUBMITTED THE FOLLOWING DETAILS: 3.4 IN RESPONSE THE ASSESSEE MERELY SUBMITTED THE FOLLOWING ON 13/01/2015. ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 3 3.5. THE ASSESSEE DID NOT PROVE ANY COMMERCIAL EXPEDIENCY TO ADVANCE LO ANS AT CONCESSIONAL INTEREST NOR DID THE ASSESSEE PROVED THE NEXUS OF FUNDS. ACCORDINGLY VIDE ORDER SHEET ENTRY DATED 10/2/2015 THE ASSESSEE WAS GIVEN ONE MORE OPPORTUNITY TO JUSTIFY THE ALLOWABILITY OF INTEREST EXPENSES AS INTEREST BEARING LOANS WERE ADVA NCED AT CONCESSIONAL INTEREST TO DIFFERENT PARTIES. 3.6 IN RESPONSE THE ASSESSEE SUBMITTED THE FOLLOWING VIDE SUBMISSION DATED 13/2/2015 2. NOTE ON DIFFERENCE IN RATES OF INTEREST ON LOANS ACCEPTED AND ADVANCED BY THE ASSESSEE. AS STATED IN THE JUDGMENT OF COMMISSIONER OF INCOME TAX (A) IN THE CASE OF COMMISSIONER OF INCOME TAX VS. TULIP STAR HOTELS LTD, THE RATE OF INTEREST TO BE PAID ON BORROWED FUND IS DECIDED BY THE MANAGEMENT DEPENDING ON THE REQUIREMENT OF THE DEMAND AND THE SAME MAY NOT BE PARALLEL TO THE RATE OF INTEREST ON LOANS ADVANCED TO VARIOUS PARTIES, THE ASSESSEE MADE FURTHER SUBMISSIONS DATED 04/03/2015 AS UNDER: NOTE ON DIFFERENCE IN RATES OF INTEREST ON LOANS ACCEPTED AND ADVANCED BY THE ASSESSEE RWS U/S 36(1) ( III ). IN RESPECT TO THE ABOVE POINT, THE DISALLOWANCE IS MADE BY YOUR HONOUR WHERE THE KIND ATTENTION IS DRAWN TOWARDS THE FOLLOWING RWO JUDGEMENTS: 1) ITO V. AXON GLOBAL (P.) LTD, (2014) 146ITD 473/(2013) 38 TAXMAN.COM 392 (JODH.) (TRIB.) THE KEY WORDS OF THE CASE STATES THAT DECIDING THE RATE OF INTEREST COMPLETELY DEPENDS UPON THE POLICY OF THE ASSESSEE COMPANY AND IT IS ALLOWABLE. 2) S.A. BUILDERS LTD V. CIT (2007) 288ITR 1/158 TAXMAN 230/206 CTR 631 (SCJ/AJR 2007 SC 482 THIS CASE HELD THAT THE ALL THE COMM ERCIAL EXPEDIENCY INCLUDING SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF ITS BUSINESS IS ALLOWABLE. IN THE CASE OF ASSESSEE ALSO, THE RATE OF INTEREST ON LOANS ACCEPTED AND ADVANCED BY THE ASSESSEE IS AS PER THE ABOVE JUDGMENTS ONLY AND TH EREFORE IT SHOULD BE ALLOWABLE ' 5. IN APPEAL BEFORE THE LD.CIT (A), THE ASSESSEE SUBMITTED AS FOLLOWS: M/S. AHMEDABAD CEMENT COMPANY IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF TRADING OF CEMENT AND ACTING AS COMMISSION AGENT. THE FIRM WAS ESTABLISHED ON 1 ST DECEMBER, 1984, FOLLOWING ARE THE PARTNER S OF THE FIRM AS ON 31.03.2012. SR. NO. NAME OF PARTNER PERCENTAGE OF SHARE ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 4 1 MOHIT S. SHAH (HUSBAND) 30% 2 KINNARIBEN M. SHAH (WIFE) 25% 3 KUSHAL M, SHAH (SON) 30% 4 MS. AASHKA M. SHAH (DAUGHTER) 1 5% TOTAL 100% THE OPENING CAPITAL OF PARTNERS AS ON 01.04.2011 AGGREGATED TO RS.78,80,516/ - AND THE CLOSING CAPITAL OF PARTNERS AS ON 31.03.2012 AGGREGATED TO RS.5 LAKHS. 2. THERE WAS A FINANCIAL RESTRUCTURING OF THE PARTNERS' CAPITAL DURING FY 2011 - 12 RELEVANT TO AY 2012 - 13 WHEREBY THE CAPITAL OF THE PARTNERS WAS FIXED AT RS, 5 L AKHS AS ON 01.04.2011 AND THE EXCESS OF PARTNERS' CAPITAL OVER RS. 5 LAKHS WAS TRANSFERRED TO UNSECURED LOANS OF PARTNERS BEARING INTEREST @ 9% PER ANNUM. THE INITIAL CAPITAL OF THE PARTNERS WAS CONTRIBUTED AT THE TIME OF FORMATION OF THE PARTNERSHIP FIRM, TO WHICH PROFITS OF ALL FINANCIAL YEARS, INTEREST ON CAPITAL AND REMUNERATION TO WORKING PARTNERS WERE ACCUMULATED TO THE CAPITAL ACCOUNT, WHICH WAS INCREASING FROM YEAR TO YEAR DUE TO THESE ADJUSTMENTS. ALL THESE ACCUMULATED FUNDS WERE USED FOR THE BUSINESS PURPOSES OF THE FIRM. IT IS ONLY DURING FINANCIAL YEAR FY 2011 - 12 RELEVANT TO AY 2012 - 13 THAT THE PARTNERS DECIDED TO RESTRUCTURE THEIR CAPITAL BASE BY MAKING PARTNERS' CAPITAL FIXED AT RS.5 LAKHS AND THE EXCESS AMOUNT WAS TRANSFERRED AS UNSECURED LOANS FROM PA RTNERS, BEARING INTEREST @ 9% P ER ANNUM. THE FIRM ALSO HA D BORROWED FUNDS FROM SISTER CONCERNS IN THE PAST AND DEPLOYED SUCH FUNDS IN THE BUSINESS WHERE THE PARTNERS OF SUCH SISTER FIRMS WERE THE SAME PARTNERS AS THAT OF THE APPELLANT FIRM, DE TAILS OF WHICH ARE AS UNDER: - UNSECURED LOANS TAKEN FROM: (SISTER F IRMS/ CONCERN) [I] CROWN CORPORATION. SR. NO. NAME OF PARTNER PERCENTAGE OF SHARE 1 MOHIT S. SHAH - HUF 25% 2 KINNARIBEN M. SHAH 25% 3 KUSHAL M. SHAH 25% 4 MS. AASHKA M, SHA H 25% TOTAL 100% ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 5 II) ABAD CEMENT COMPANY SR. NO, NAME OF PARTNER PERCENTAGE OF SHARE 1. MOHIT S. SHAH - HUF 20% 2. KINNARIBEN M. SHAH 30% 3 KUSHAL M. SHAH 30% 4 JTIS. AASHKA M. SHAH 20% TOTAL 1 00% SR. NO. NAME OF PARTNER (III)ANANT CARRIERS PERCENTAGE OF SHARE 1 MO HIT S. SHAH - HUF . 40% 2 KINNARIBEN M. SHAH 40% 3 MS. AASHKA M. SHAH 20% TOTAL 1 00% [IV] GUJARAT CEMENT CO, SR. NO. NAME OF PARTNER PERCENTAGE OF SHARE 1 MOHIT S. SHAH - HUF 100% FROM THE ABOVE, IT MAY BE APPRECIATED THAT THERE ARE NO OUTSIDE PARTIES, FROM WHOM UNSECURED LOANS WERE TAKEN IN THE PAST BUT THE FUNDS WERE OWN FUNDS OF THE FAMILY MEMBERS INTRODUCED IN THE APPELLANT FIRM. IN OTHER WORDS, THE FUNDS OF THE FOUR FAMILY MEMBERS AND HUF HAVE BEEN BROUGHT INTO THE FIRM FROM TIME TO TIME, INITIALLY BY WAY OF CAPITAL AND THEREAFTER TREATING THE MAJOR COMPONENTS OF LOANS AS UNSECURED LOANS AND ALL SUCH FUNDS WERE USED IN THE APPELLANT'S BUSINESS FROM THE BEGINNING. : ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 6 3. THIS FINANCIAL RESTRUCTURING IN CASE OF THE APPELLANT DID NOT MAKE ANY DIFFERENCE SO FAR AS PAYMENT OF INTEREST IS CONCERNED AS THE PARTNERSHIP DEED STIPULATES PAYMENT OF INTEREST ON CAPITAL NOT EXCEEDING 12% , ON UNSECURED LOANS, THE INTEREST HAS BEEN PROVIDED/ PAID @ 9% TO INDIVIDUAL PARTNERS AND @ 12% TO SISTER CONCERNS. THUS, THE OVERALL EFFECT OF INTEREST PAYMENTS ON FAMILY FUNDS INTRODUCED IN THE BUSINESS OF THE APPELLANT FIRM EITHER BY WAY OF CAPITAL OR BY WAY OF UNSECURED LOANS HAS NOT MADE ANY DIFFERENCE SO FAR AS THE INTEREST PAYMENT IS CONCERNED. THE SUBSTANCE OVER FORM AS REGARDS UNSECURED LOANS FROM PARTNERS IS THAT SUCH FUNDS INTRODUCED IN THE BUSINESS ARE QUASI CAPITAL AND NOT BORROWINGS. AND SUCH OWN FUNDS REMAIN IN THE BUSINESS PERMANENTLY. 4. IT MAY BE APPRECIATED THAT THE MAJORITY OF THE LOANS AND ADVANCES WERE GIVEN DURING FY 2011 - 12 RELEVANT TO AY 2012 - 13 AS IS EVIDENT FROM THE TABLE GIVEN IN PARA 3.2 ON PAGE NO. 3 OF THE ASSESSMENT ORDER. I N CASE OF LOANS AND ADVANCES GIVEN TO MUKESHBHAI C. GANDHI, THERE IS A REDUCTION IN THE LOAN AMOUNT TO RS. 54.77 LAKHS AS ON 31.3.2012 AS COMPARED TO RS. 68.00 LAKHS AS ON 1.4.2011. IN OTHER WORDS, LOANS AND ADVANCES WERE GIVEN TO GINSHBHAI V. SHAH, HEMEND RABHAI B. SHAH, PRAKSHIKABEN H. - SHAH - AND BHAR - ATBHAI - J. - PATELFOR - THE FIRST' - TIME - DURING... FY 2011 - 12, WHEREAS THE CAPITAL/ UNSECURED LOANS FROM PARTNERS/ FAMILY MEMBERS WERE TAKEN BY THE FIRM MANY MANY YEARS BACK. THUS, THERE IS NO NEXUS BETWEEN UNSECUR ED LOANS TAKEN BY THE FIRM WHICH WERE DEPLOYED IN THE BUSINESS IN THE PAST AND LOANS & ADVANCES GIVEN TO THIRD PARTIES, MOST OF WHICH WERE GIVEN IN THE YEAR UNDER APPEAL. THE ID. ASSESSING OFFICER HAS FAILED TO ESTABLISH THE NEXUS BETWEEN INTEREST BEARING UNSECURED LOANS TAKEN AND INTEREST BEARING LOANS AND ADVANCES GIVEN DURING FY 2011 - 12 RELEVANT TO AY 2012 - 13. 5. THE APPELLANT FILED THE RETURN OF INCOME FOR AY 2012 - 13 ON 25.09.2012 DECLARING TOTAL INCOME AT RS. 89,14,750/ - . THE ASSESSING OFFICER DETERMI NED/ ASSESSED TOTAL INCOME AT RS. 95,60,380/ - THEREBY MAKING HUGE AND UNWARRANTED DISALLOWANCE OF INTEREST U/S. 36(1 )(III) OF THE ACT BY RS. 6,45,629/ - . BEING AGGRIEVED BY SUCH UNJUSTIFIED DISALLOWANCE, THE APPELLANT HAS FILED THIS APPEAL BEFORE YOUR HONO UR FOR GETTING DUE JUSTICE. 6. IT MAY FURTHER BE NOTED THAT NO SUCH ADDITION/ DISALLOWA NCE HAS BEEN MADE U/S. 36(L)(III) OF THE ACT FOR AY 2008 - 09, AY 2009 - 10 AND AY 2010 - 11 WHERE THE ASSESSMENTS WERE FINALIZED U/S. 143(3) OF THE ACT. SUBMISSION THESE WR ITTEN SUBMISSIONS ARE OVER AND ABOVE THE GROUNDS OF APPEAL APPENDED TO THE MEMORANDUM OF APPEAL FILED WITH YOUR HONOUR ON 06.04.2015 AND ARE TO BE READ ALONG WITH THE GROUNDS OF APPEAL AND STATEMENT OF FACTS ATTACHED HEREWITH. I. DISALLOWANCE OF INTEREST U/S. 36(L)(III ) OF THE ACT OF RS.6,45,629/ - [1] THE LD. ACIT, CIRCIE - 2(2), AHMEDABAD HAS ERRED IN LAW AND ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE IN DISALLOWING INTEREST EXPENSE OF RS.6,45,629/ - U/S. 36(1)(HI) OF THE ACT B Y HOLDING ERRONEOUS VIEW THAT THE \ APPELLANT HAS DIVERTED INTEREST BEARING UNSECURED LOANS FOR ADVANCES AT A CONCESSIONAL RATE OF INTEREST FOR NON - BUSINESS PURPOSE DESPITE THE FACT ' THAT THE CAPITAL FUNDS (NOW CONVERTED INTO ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 7 UNSECURED LOANS} WERE BROUGHT \ IN BY THE APPELLANT BEFORE 5 TO 7 YEARS OR EARLIER WHEREAS MOST OF THE LOANS AND ADVANCES WERE GIVEN FOR THE FIRST TIME DURING THE YEAR UNDER APPEAL. [2] THUS, 'THE LD. ACIT HAS FAILED TO APPRECIATE AND RECOGNIZE THE FACT THAT THERE IS NO NEXUS OF T RANSACTIONS BETWEEN THE CAPITAL FUNDS (NOW CONVENED INTO UNSECURED LOANS) BROUGHT IN THE PAST AND LOANS AND ADVANCES GIVEN DURING THE YEAR UNDER APPEAL AS BOTH THE SETS OF TRANSACTIONS HAVE TAKEN PLACE IN DIFFERENT FINANCIAL PE RIODS. THEREFORE, THE DIVERSION OF INTEREST BEARING FUNDS IS N OT ESTABLISHED OR PROVED BY THE LDCIT(A). [3] THE LD. ACIT ALSO FAILED TO APPRECIATE AND RECOGNIZE THE FACT THAT WHEN THE CAPITAL FUNDS (NOW CONVERTED INTO UNSECURED LOANS) WERE \ BROUGHT IN THE PAST, THEY WERE UTILIZED FOR THE LEGITIMATE PURPOSE OF THE J BUSINESS OF THE APPELLANT AND THERE WAS A DIRECT NEXUS BETWEEN THE ' UTILIZATION OF SUCH FUNDS AND BUSINES S INTERESTS OF THE APPELLANT. SUCH \ FUNDS WERE UTILIZED FOR PRESERVATION, PROTECTION AND ADVANCEMENT OF ITS BUSINESS INTERESTS AND HENCE INTEREST EXPENSE IS FULLY ALLOWABLE/ DEDUCTIBLE AS BUSINESS EXPENSES EVE N UNDER SECTION 37 OF THE ACT. [41 IT IS FURTHER EMPHASIZED THAT [A] THE ASSESSING OFFICER HAS NOT MADE ANY EFFORTS IN PROVING THE DIRECT NEXUS BETWEEN T HE TRANSACTIONS OF INTEREST BEARI NG UNSECURED LOANS AND INTEREST PAYMENT THEREON ON ONE HAND AND BEARING LOANS AND ADVANCES GIVE N AND INTEREST EARNED THEREON OTHER HAND. IF HE WOULD HAVE ESTABLISHED THE NEXUS BETWEEN THESE : - ;. - .SA N CTIONS, DIFFERENTIAL INTEREST WOULD HAVE BEE N LIABLE TO BE DISALLOWED UNDER SECTION 36(L)(III) OF THE ACT. HOWEVER, IN THE GIVEN FACTS OF THE APP ELLANT CASE, INTEREST EXPENSE INCURRED HAS NO NEX US WITH THE INTEREST EARNED ON LOANS AND ADVANCES GIVEN AND THEREFORE THE DIFFERENTIAL RATE OF INTEREST OF 3% PER ANNUM CANNOT BE DISALLOWED U/S. 36(L)(III) OF THE ACT. [ B] THE APPELLANT HAS NO SECURED LO AN BORROWINGS FROM BANKS OR FINANCIAL INSTITUTIONS. ALL THE FUNDS DEPLOYED IN THE BUSINESS FROM TIME TO TIME RIGHT FROM 1984 ONWARDS (WHEN THE FIRM WAS ESTABLISHED), WERE PARTNERS' OWN FUNDS EITHER DIRECTLY OR FROM THE SISTER CONCERNS' OF THE PARTNERS WHER E THE PARTNERS OF THE APPELLANT FIRM ARE THE PARTNERS IN THE SISTER CONCERNS. IT IS THUS ESTABLISHED THAT NO OUTSIDE FUNDS EITHER FROM BANKS, FINANCIAL INSTITUTIONS OR THIRD PARTIES WERE EVER DEPLOYED IN THE BUSINESS OF THE FIRM AND ALL THE FUNDS EITHER IN THE NATURE OF CAPITAL OR UNSECURED LOANS WERE PARTNERS' OWN FUNDS, WHICH WERE UTILIZED FOR THE BUSINESS PURPOSES OF THE FIRM. EVEN THE CHARACTER OF CAPITAL FUNDS AND UNSECURED LOANS OF THE PARTNERS AND SISTER CONCERNS IS THE SAME AS ALL SUCH FUNDS (INCLUD ING PARTNERS' CAPITAL) CARRY INTEREST AT THE RATE FROM 9% TO 12% PER ANNUM. THUS, IF ONE LOOKS AT THE SUBSTANCE OVER FORM, ALL THE FUNDS BROUGHT INTO THE BUSINESS WERE OWN FUNDS AND HAVE BEEN DEPLOYED FOR THE BUSINESS PURPOSES OF THE FIRM, [C] THE APPELLANT HAS GIVEN LOANS AND ADVANCES TO THIRD PARTIES AT THE RATE OF INTEREST OF 6% PER ANNUM OUT OF ITS SURPLUS FUNDS. THE APPELLANT HAD SUFFICIENT INVESTIBLE FUNDS ON THE DATE OF ADVANCEMENT OF LOANS AND ADVANCES. THUS, WHEN THE LOANS AND ADVANCES HAVE BEEN GIVEN OUT OF SURPLUS FUNDS OF THE BUSINESS, NO PART OF INTEREST ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 8 PAYMENT CAN BE DISALLOWED U/S.36(L)(III) OF THE ACT. THIS IS PROVED BY THE FOLLOWING AUDITED FIGURES OF THE APPELLANT FIRM: - SR. NO. PARTICULARS AMOUNT AS AT 01.04.2011 (RS.) AM OUNT AS AT 31.03.2012 (RS.) 1. UNSECURED LOANS OF PARTNERS/SISTER CONCERNS. 2,45,25,990 2. LOANS AND ADVANCES GIVEN TO THIRD PARTIES 89,08,000 3 . SURPLUS (1 - 2) 1,56,17,990 4 UNSECURED LOANS OF PARTNERS/ SISTER 8,21,72,196 5 LOANS AND ADVANCES GIVEN TO THIRD PARTIES 1,97,86,625 6 SURPLUS (4 - 5) 6,23,85,571 [D] THE INTEREST PAYMENT BY THE APPELLANT FIRM ON THE UNSECURED LOANS FROM THE PARTNERS AS WE LL AS SISTER CONCERNS HAVE BEEN TAXED AT THE SAME I RATE OF TAXATION I.E. AT 30% IN THE HANDS OF THE PARTNERS AS WELL AS SISTER \ PARTNERSHIP FIRMS (EXCEPT IN CASE OF KMNA NBEN M. SHAH, AASHIKA M, SHAH AND MOHIT SHAH HUF). THE RETURNS OF INCOM E OF THE FAMILY MEMBERS FOR AY 2012 - 13 ARE ENCLOSED FOR YOUR HONOU R'S PERUSAL AND CONSIDERATION. [E] IN THE LAST 3 ASSESSMENT ORDERS (AY 2010 - 11, AY 2009 - 10 AND AY 2008 - 09) RECEIVED BY THE APPELLANT, MADE U/S. 143(3) OF THE ACT, THERE WAS NO DISALLOWANCE OF INTEREST PAYMENT U/S, 3 6(L)(IN) OF THE ACT. THUS, THE DEPARTMENT HAS ACCEPTED THE CONTENTION OF THE APPELLANT THAT SINCE THERE IS NO NEXUS BETWEEN THE TRANSACTIONS OF INTEREST PAYMENT ON INTEREST BEARING UNSECURED LOANS AND INTEREST EARNED ON INTEREST BEARING LOANS AND ADVANCES, THERE CANNOT BE DISALLOWANCE U/S. 36(1 )(III) OF THE ACT. [ 5] THE CONTENTIONS OF THE APPELLANT AS NARRATED ABOVE HAS SUPPORT FROM FOLLOWING JUDICIAL PRONOUNCEMENTS, WHICH ARE HIGHLIGHTED HEREUNDER: - III SA BUILDER LTD. VS. CIT( APPEALS) AND ANR. (2007! 158 TAXMANN 74 (SCI /(2007) 158 TAXMAN 230 (SC). 'IN THIS CONNECTION WE MAY REFER TO S.36(L)(III) OF THE IT ACT, 1961 (HEREAFTER REFERRED TO AS THE 'ACT) WHICH STATES THAT 'THE AMOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BOR ROWED FOR THE PURPOSES OF THE BUSINESS OR PROFESSION ' HAS TO BE ALLOWED AS A DEDUCTION IN COMPUTING THE INCOME - TAX UNDER SECTION 28 OF THE ACT. IN MADHAV ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 9 PRASAD JATIA VS. CIT/1979) 10 CTR (SC) 375 : AIR 1979 SC 1291, THIS COURT HELD THAT THE EXPRESSION 'F OR THE PURPOSE OF BUSINESS' OCCURRING UNDER THE PROVISION IS WIDER M SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME, PROFITS OR GAINS ', AND THIS HAS BEEN THE CONSISTENT VIEW OF THIS COURT. 'IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING PROFITS' VIDE CIT VS. MALAYALAM PLANTATIONS LTD, (1964) 53 ITR 140(SC), CIT VS. BIRLA COTTON SPINNING & WEAVING MILLS LTD. (1971) 82 ITR 166 (SC), ET C. ' 'WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CIT VS. DALMIA CEMENT (BHARAT) LTD. (2002) 1 74 CTR (DEL) 188: (2002) 254 ITR 377 (DEL) THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH, NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EX PENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE IT AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEWPOINT BUT THAT OF A PRUDENT BUSINESSMAN. ' [IIJ RELIANCE INDUSTRIES VS. ADDL. ACIT 12014) 159 TTJ 349/ 55 SOT 8 (MUM.) ,'TNB.) S. 36(1)(IN) : INTEREST ON BORROWED CAPITAL - INTEREST FREE LOAN TO SUBSIDIARY COMPANIES. TRIBUNAL HELD THAT IN THE ABSENCE OF ANY NEXUS ESTABLISHING THAT THE INTEREST BEARING BORROWED FUNDS WERE GIVEN AS INTEREST FREE TO ITS SUBSIDIARIES, THE DISALLOWANCE OF INTEREST IS NOT JUSTIFIED. (AY2002 - 03). [III ] MODIPON LTD. V. I TO (1985) 22 TT J (DELHI) 108 'THE DELHI HIGH COURT HELD THAT THE ONUS IS ON THE ASSESSING OFFICER TO PROVE THAT ANY PART OF THE BORROWED FUNDS WAS DIVERTED TO A NON BUSINESS USE, BEFORE HE DISALLOWS PART OF INTEREST. WHERE THE SAID ONUS HAS NOT BEEN DISCHARGED BY THE I TO, PART OF THE INTEREST PAID ON BORROWED FUNDS CANNOT BE DISALLOWED. IN THE PRESENT CASE OF THE APPELLANT, THE LD. DCIT HAS FAILED TO PROVE WITH SOUND AND COGENT REASONS AND EVIDENCES THAT THE BORROWED FUNDS WERE DIVERTED FOR NON - BUSINESS USE DURING THE YEAR UNDER APPEAL. ' [IV] WHEN BORROWED FUNDS ARE DIVERTED FOR GIVING INTEREST - FREE LOAN - NON - CHARGING OF INTEREST ON LOANS GIVEN BY AN ASSESSEE CANNOT ITSELF BE A SUFFICIENT GROUND FOR DISALLOWING INTEREST PAID BY AN ASSESSEE ON LOANS TAKEN BY IT IN TH E ABSENCE OF ANY NEXUS BETWEEN BORROWED CAPITAL AND INTEREST - FREE ADVANCES OR IN THE ABSENCE OF ANY FINDING THAT BORROWED FUNDS OR PART THEREOF WAS DIVERTED TOWARDS INTEREST FREE ADVANCES - MEENAKSHI SYNTHETICS (P) LTD. V. CIT [2003] 84 ITD 563 (LUCKNOW). W HERE NOTHING HAS BEEN BROUGHT ON RECORD BY THE REVENUE TO PROVE THAT INTEREST - BEARING FUNDS AVAILABLE WITH THE ASSESSEE IS NOT UTILIZED FOR THE PURPOSE OF ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 10 BUSINESS BUT IS GIVEN AS INTEREST - FREE LOANS OR ADVANCES, DISALLOWANCE OF INTEREST ON BORROWED CAPITA L IS UNJUSTIFIED - ITO V. NARESH FABRICS [2002] 75 TTJ (JODH.) 386. THE PRINCIPLES ENUNCIATED IN VARIOUS DECISIONS ARE THAT IF THERE ARE SUFFICIENT FUNDS ON A PARTICULAR DATE TO COVER THE ADVANCE, MERELY BECAUSE THE ASSESSEE HAS ALSO TAKEN SOME LOAN, IT CANNOT BE ATTRIBUTED THAT THE INTEREST - BEARING FUNDS ARE DIVERTED FOR NON - BUSINESS PURPOSES. IN OTHER WORDS, THE BENEFIT OF DOUBT OF UTILIZING THE OWN FUNDS FROM THE COMMON POOL ACCOUNT, SHOULD BE GIVEN TO THE ASSESSEE. (PARA - 10) - SANGHAVI SWISS REFILLS (P ) LTD. V ITO (2003) IS ITD 59(MUB.) (SMC - I). [V] CIT - I VS. AMOD STAMPING PVT. LTD. (2014) (45 TAXMAN.COM 427) '13.2] SIMILAR OBSERVATIONS ARE MADE BY THE LEARNED ITAT WITH RESPECT TO THE ASSESSMENT YEARS 2005 - 06 AND 2006 - 07, IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., THE BOMBAY HIGH COURT HAS HELD THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST - FREE AND OVERDRAFT AND/ OR LOANS TAKEN, THEN A PRESUMPTION WO ULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS AND THEREFORE, INTEREST WAS DEDUCTIBLE. SIMILAR VIEW HAS BEEN TAKEN BY THE DIVISION BENCH OF THIS COURT IN THE CASE OF COMMISSIONER OF INCOME TAX VS. GUJARAT STATE FERTILI ZERS AND CHEMICALS LTD. REPORTED IN [2013] 358 !TR 323 (GUJ.J. APPLYING THE RATIO / LAW LAID DOWN BY THE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER LTD., AS WELL AS DIVISION BENCH OF THIS COURT IN THE CASE OF GUJARAT STATE FERTILIZERS AN D CHEMICALS LTD. TO THE FACTS OF THE CASE ON HAND AND WHEN IT HAS BEEN FOUND THAT THE ASSESSEE WAS HAVING INTEREST FREE FUNDS FAR IN EXCESS OF INVESTMENTS AND THEREFOR E, IT CAN BE SAID THAT THE INVESTMENTS ARE MADE OUT OF INTEREST FREE FUNDS AND THEREFORE, THE AO WAS NOT JUSTIFIED IN MAKING ADDITIONS AND/ OR MAKING DISALL OWANCE UNDER SECTION 36(1)(III) OF THE 1. T. ACT. UNDER THE CIRCUMSTANCES, NO ERROR AND/ OR ILLEGALITY HAS BEEN COMMITTED BY THE LEARRIED ITAT IN DELETING THE DISALLOWANCE MADE BY THE AO UN DER SECTION 36(L)(III) OF THE I. T. ACT. NO QUESTION OF LAW MUCH LESS SUBSTANTIAL QUESTION OF LAW ARISE WITH RESPECT TO DELETION OF DISALLOWANCE MADE BY THE AO UNDER SE CTION 36(1)(III) ) OF THE I. T. ACT. ' [VIJ SHAHIBAUG ENTREPRENEURS VS. ITO, 50 1TD 113 (AHD) 'IN ABSENCE OF NEXUS BETWEEN INTEREST - BEARING LOANS TAKEN AND INTEREST FREE LOAN GIVEN, INTEREST PAID ON BORROWED MONEY CANNOT BE DISALLOWED. THERE MAY BE VARIETY OF REASONS WHY AN ASSESSEE DOESN'T CHARGE OR TAKE INTEREST FROM LOAN PARTIES; WHILE AT THE SAME TIME, IT PAYS INTEREST ON BORROWINGS WHICH ARE FOR BUSINESS PURP OSES. FOR THE SIMPLE REASON THAT THE ASSESSEE HAS FAILED TO CHARGE INTEREST ON ITS RECEIVABLES AND DUES THERE SHOULD NOT BE PROPORTIONATE DISALLOWANCE IN RESPECT OF INTEREST PAID BY THE ASSESSEE ON ITS BORROWINGS WHICH ARE FOR THE PURPOSE OF BUSINESS. IN THE ABSENCE OF ANY FINDING OR EVIDENCE THAT BORROWING WAS NOT FOR BUSINESS, THE DISALLOWANCE OF PROPORTIONATE INTEREST BY THE ASSESSING OFFICER CANNOT BE UPHELD. THUS, WHERE THE ASSESSEE BORROWED MONEY FOR THE PURPOSE OF THE BUSINESS AND THE INTEREST PAID THEREON WAS DISALLOWED PROPORTIONATELY BY THE ASSESSING OFFICER ON THE GROUND THAT THE ASSESSEE DID NOT CHARGE INTEREST ON AMOUNTS RECEIVABLE BY IT FROM ITS ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 11 SUBSIDIARY COMPAN Y AND ETHERS BUT THE ASSESSING OFFICER HAD NOT SHOWN ANY NEXUS OR CLOSE RELATION BETWEEN THE LOANS OBTAINED AND THE LOANS ADVANCED FREE OF INTEREST, IT WAS HELD THAT THE DISALLOWANCE WAS NOT JUSTIFIED. [VII] GUIARAT NARMADA VALIEV FERTILIZERS CO. LTD. VS. DCIT ITAT, AHMEDABAD - A BENCH (73 TTJ7871 'BUSINESS EXPENDITURE: INTEREST ON BORROWED CAPITAL, DIVERSION OF INTEREST BEARING ADVANCES TO ASSOCIATE CONCERNS WITHOUT INTEREST, SUFFICIENT FUNDS AVAILABLE WITH ASSESSEE ON WHICH NO INTEREST WAS PAID, NO EVIDENCE TO LINK THE INTEREST BEARING LOAN OBTAINED BY ASSESSEE WITH INTEREST FREE ADVANCES MADE TO ASSOCIATE CONCERNS, ADDITION DELETED. HELD ON GOING THROUGH THE FIGURE IN THE BALANCE SHEET OF THE ASSESSEE COMPANY AS ON 1 S ' APRIL, 1994 AND 31 ST MARCH, 1995 IT WAS FOUND THAT THE SHARE CAPITAL AND THE RESERVES AND SURPLUS TOGETHER WITH THE ACCUMULATED DEPRECIATION WOULD FAR EXCEED THE LOANS AND ADVANCES MADE TO THE THREE CONCERNS. THE PERCENTAGE OF LOANS AND ADVANCES IN RELATION TO THE OWN FUNDS OF THE ASSESSEE COMPANY WOULD BE 0.012 PERCENT AS ON 1 S ' APRIL, 1994 AND 0.0135 PERCENT AS ON 31 ST MARCH, 1995, AS PER DETAILS FURNISHED, IN OTHER WORDS WHERE SUFFICIENT FUNDS AVAILABLE WITH THE COMPANY ON WHICH NO INTEREST WAS PAID AND OUT OF WHICH THE LOAN S AND ADVANCES TO THE ABOVE SAID CONCERNS COULD BE MADE. THERE IS NO CLEAR EVIDENCE THAT THE INTEREST BEARIN G LOANS TAKEN BY THE ASSESSEE COMPANY FOR THE PURPOSE OF ITS OWN BUSINESS HAVE BEEN DIVERTED FOR NON BUSINESS PURPOSE, NO DIRECT NEXUS HAS BEEN PROV ED EITHER BY THE AO OR BY THE CIT (A) BETWEEN THE INTEREST BEARING LOANS TAKEN AND THE INTEREST FREE ADVANCES GIVEN. IN THIS VIEW OF THE MATTER, THE AO IS DIRECTED TO DELETE THE ADDITION. SHAHIBAUG ENTERPRENEURS V. 1TO (1994) 49 TTJ (AHDJ 554; (1994) 50 ITD 113(AHD) DURAMETIALIC INDIA VS. I AC (1991) 38 1TD 211 (MAD.) 209; (1993) 46 ITD 389 (MAD.) 138 ITR 45 (GUJ) CIT VS. HOTEL SEVERN (1998) 148 CTK (MAD.) 585 AND REGAL THEATR E VS. CIT(1998) 100 TAXMAN 116 (DEL.) RELIED ON'. [VIII] ITO VS, ANIANI SYNTHETICS LTD. (2012) 20 TAXMANN.COM 121 (AHD. ITAT) DATED 07.05.2010. WHEREBY IT HAS BEEN HELD THAT WHEN AO HAVING NOT ESTABLISHED THAT ANY BORROWED FUNDS WERE UNITED BY THE ASSESSEE EITHER FOR GIVING INTEREST FREE LOANS OR FOR NON BUSINESS PURPOSE, NO PART OF INT EREST PAID ON BORROWED FUNDS COULD BE DISALLOWED. IX] CIT - IV VS. SHREE RAMA MULTI TECH LTD. (20131 39 TAXMANN.COM 108 (GUIARAT) IN THIS JUDGMENT, THE HON 'BLE HIGH COURT OF GUJARAT HELD THAT ON HAVING FOUND FROM THE RECORDS THAT THERE WAS SUFFICIENT FUND AVAILABLE WITH THE ASSESSEE - RESPONDENT, THERE WAS NO QUESTION O F DIVERSION OF INTEREST BEARI NG FUNDS BY WAY OF LOANS AND ADVANCES AND THE ADDITION MADE ON ACCOUNT OF DISALLOWANCE OF INTEREST U/S. 3 6(1) (HI) IS DELETED. IN THE SAID JUDGMENT, GUJARAT HIGH COURT OBSERVED THAT 'EVEN OTHERWISE, LAW ON THIS ISSUE IS WELL SETTLED AS LAID DOWN IN THE CASE REPORTED IN S.A, BUILDERS LTD. VS. CIT (2007) 288ITR 1/158 TAXMAN 74 (SC). [X] ACIT V. APOLLO HOSPITAL ENT ERPRISE LTD, 139 ITD 594 /CHENNAIXTNB.) WHERE ASSESSEE HAD UTILIZED ITS OWN SURPLUS FUNDS TO GIVE INTEREST FREE LOANS TO ITS SISTER CONCERNS, DISALLOWANCE OF INTEREST PAYMENT MADE BY AO UNDER SECTION 36(L)(III) WAS TO BE DELETED, [XI] KNSHAN MURAN LAI AGARWAL .V. DCIT, 59 SOT 136. ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 12 THE ASSESSING OFFICER HAVING NOTICED THAT ASSESSEE HAS GIVEN LOAN TO FAMILY MEMBERS WITHOUT CHARGING INTEREST DISALLOWED INTEREST CLAIM OF ASSESSEE UNDER SECTION 3 6(1} (HI). THE ASSESSEE WAS HAVING SUFFICIENT OWN CAPITAL AS AGAINST INTEREST FREE LOAN GIVEN TO FAMILY MEMBERS. THEREFORE, NO DISA LLOWANCE OF INTEREST PAID BY ASSESSEE COUID OE MADE UNDER SECTION 3 6(1) (II I). [XII] MARUDHAR HOTEL (?) LTD, V. ACIT. 156 TTJ 697. TRIBUNAL HELD THAT REVENUE HAS NOT PROVED THAT BORROWED FUNDS WERE DIVERTED IN MAKING INTEREST FREE ADVANCE, THEREFORE , NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED. [XIII] CIT VS. ABHISHEK INDUSTRIES (HON'BLE PUNJAB & HARYANA HIGH COURT} 'THE ENTIRE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SALE PROCEEDS ETC. DO NOT HAVE ANY COLOUR. WHATEVER ARE THE RECEIPTS IN BUSINESS, THEY HAVE THE COLOUR OF BUSINESS RECEIPTS AND HAVE NO SEPARATE IDENTIFICATION. SOURCES HAVE NO CONCERN WHATSOEVER. ' LX IV] CIT VS. RAGHUVEER SYNTHETICS LTD. (2013 354 ITR 222 (GUIARAT HIGH COURT) [6] WITHOUT PREJUDICE TO WHAT IS STATED IN PRECEDING PARAGRAPHS, AVERAGING METHOD FOLLOWED BY THE ASSESSING OFFICER AS GIVEN ON PAGE NO. 7 OF THE ASSESSMENT ORDER IS NOT THE RECOGNIZED METHOD AND IT INVOLVES ARBI TRARINESS AND THEREFORE DISALLOWANCE U/S. 36(L)(III) ON THE BASIS OF SUCH ARBITRAROMESS IS NOT TENABLE IN LAW AS IT IGNORES THE ACTUAL DATE OF TRANSACTION OF UNSECURED LOANS TAKEN AND LOANS AND ADVANCES GIVEN. FOR EXAMPLE, THE LOAN GIVEN TO SHRI GIRISHB HAI V. SHAH RS. 1,10,00,OOO/ - WAS GIVEN IN DECEMB ER, 2011 AND NOT FROM 1 A. 2011. {7] IN SUPPORT OF WHAT IS STATED ABOVE, THE APPELLANT ENCLOSED FOLLOWING DOCUMENTS FOR YOUR HONO R'S PERUSAL AND CONSIDERATION: [I] COPIES OF LEDGER ACCOUNT OF PARTNERS' CAPITAL AND PARTNERS' UNSECURED LOANS FROM FY 2007 - 08 TO FY 2011 - 12). [II] COPIES OF LEDGER ACCOUNT OF LOANS AND ADVANCES GIVEN FROM FY 2007 - 08 TO FY 2011 - 12. [III] IT RETURNS OF THE PARTNERS/ FAMILY MEMBERS FOR AY 2012 - 13. [IV] COPIES OF AS SESSMENT ORDERS OF THE APPELLANT FOR AY 2010 - 11, AY 2009 - 10 AND AY 2008 - 09 : ON THE BASIS OF WHAT IS STATED ABOVE, YOUR APPELLANT PRAYS THAT DISALL OWANCE OF RS. 6, 45,629/ - MADE U/S. 36(I)(II I) OF THE ACT IS UNJUSTIFIED AND UNLAWFUL AND MAY PLEASE BE DELETED. II. LEVY OF INTEREST U/S. 234 B, C AND D OF THE ACT IS NOT JUSTIFIED. III. INITIATION OF PENALTY PROCEEDINGS U/S. 274 R.W .S. 271(L)(C) OF THE ACT IS NOT JUSTIFIED ... ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 13 6. THE LD.CIT(A), CONSIDERED BOTH THE ORDER PASSED BY THE LD.AO, AND THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE HIM . T HE CASE AS MADE OUT BY THE APPELLANT THAT THE MONEY ADVANCED WAS OUT OF THE SURPLUS FUND AND/OR NO INTEREST WAS BEING PAID BY THE COMPNAY HAS NOT BEEN ACCEPTED BY THE LD. CIT(A). A CCORDING TO HIM HAD THERE BEING SURPLUS FUNDS , THE SAME SHOULD HAVE BEEN UTILIZED IN RETURNING THE UNSECURED LOANS WHICH WAS TAKEN AT HIGHER RATE OF INTEREST RANGING FROM 9 % TO 12 %. THE REASON AS TO WHY THAT THE MONEY HAVE BEEN ADVANCED AT CONCE SSIONAL RATE OF INTEREST OR EVEN WITHOUT INTEREST HAS NOT BEEN GIVEN BY THE ASSESSEE , AS ALSO OBSERVED BY THE LD.CIT (A). A CCORDING TO HIM THE ARGUMENT AS ADVANCED BY THE APPELLANT , THAT IT HAS SURPLUS FUNDS , IS NOT TENABLE AS ANY PRUDENT BUSINESS MAN WOULD LIKE TO PAY HIS LIABILITIES FIRST FROM SUCH FUNDS. THE SAME , FURTHER, WOULD HAVE NOT BEEN AT A CONCESSIONAL RATE OR WITHOUT INTEREST TO OTHER PARTIES. IN HIS OPINION, SUBMISSIONS AS MADE BY THE ASSESSEE THAT SUCH ADDITION /DISALLOWANCE HAS NOT BEEN MADE IN ASSESSMENT YEARS 2008 - 2009, 2009 - 2010 AND 2010 - 2011 , HAS NO BASIS SINCE THE ASSESSEE HAS FAILED TO ESTABLISH THAT THE FACTS ARE IDENTICAL TO THOSE YEARS WHERE NO SUCH ADDITION/ OR /DISALLOWANCE WERE MADE. THE LD.CIT(A) , THEREFORE, CONFIRMED THE ORDER PASSED BY THE LD.AO. HENCE THE INSTANT APPEAL BEFORE US. 7. AT TH E TIME OF HEARING OF APPEAL THE LEARNED COUNSEL APPEARING FOR THE ASSESSEE PRAYED FOR DELETION OF ADDITION MADE BY THE LD.AO, WHICH WAS SUBSEQUENTLY CONFIRME D BY THE LD.CIT (A). HE FURTHER ARGUED THAT THE CAPITAL FUNDS WERE BROUGHT IN BY THE ASSESSEE BEFORE 5 TO 7 YEARS OR EARLIER WHEREAS MOST OF THE LOANS AND ADVANCES WERE GIVEN FOR THE FIRST TIME DURING THE YEAR UNDER APPEAL. IT WAS FURTHER CONTENDED BY THE LD.AR, THAT THERE IS NO NEXUS OF TRANSACTION BETWEEN THE CAPITAL FUNDS BROUGHT IN THE PAS T AND LOANS AND ADVANCES GIVEN DURING THE YEAR UNDER APPEAL DUE TO B USINESS PURPOSE AS BOTH THE SETS OF TRANSACTIONS HAVE TAKEN PLACE IN DIFFERENT FINANCIAL PERIODS. A CCORDING T O THE LD.AR, THE DIVERSION OF ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 14 INTEREST BEARING FUND HAS NOT BEEN ESTABLISHED OR PROVED BY THE AUTHORITIES BELOW. HE REITERATED HIS SUBMISSION THAT THE LOANS AND ADVANCES GIVEN BY THE ASSESSEE TO THIRD PA RTIES @ 6% INTEREST WERE OUT OF ITS SURPLUS FUNDS A ND THUS NO PART OF THE INTEREST PAYMENT CAN BE DISALLOWED U/S.36(I)(III) OF THE ACT. IN SUPPORT OF HIS ARGUMENT HE RELIED UPON THE JUDGMENT PASSED BY HON BLE JURISDICTIONAL HIGH COURT IN THE MATTER OF COMMISSIONER OF INCOME TAX VS RAGHUVIR SYNTHET ICS LTD. 8. ON THE CONTRARY, THE LD.DR, RELIED UPON THE ORDER PASSED BY THE AUTHORITIES BELOW: 9. WE HAVE HEARD THE LEARNED REPRESENTATIVES APPEARING FOR THE PARTIES AND PERUSED THE RELEVANT MATERIALS AVAILABLE ON RECORD. WE FOUND THAT THE LD.CIT(A), IN THE ORDER IMPUGNED BEFORE US OBSERVED THAT THE APPELLANT HAS NOT GIVEN ANY REASON FOR ADVANCING THE MONEY AT CONCESSIONAL RATE OF INTEREST OR EVER WITHOUT INTEREST. FURTHER THAT , HE QUESTIONED THE PRUDENCE OF THE ASSESSEE REGA RDING THE REPAYMENT OF HIS LIABILITIES OUT OF HIS SURPLUS FUNDS AVAILABLE WITH HIM . THE ASSESSEE THOUGH HAS ESTABLISHED THE NEXUS BETWEEN THE EXPENDITURE AND PURPOSE OF BUSINESS THE AUTHORITIES HAVE CONSIDERED THE SAME FROM THEIR POINT OF VIEW AND NOT FROM THE ANGLE OF A PRUDENT BUSINESSMAN . IN THIS REGARD THE JUDGMENT RELIED UPON BY THE LEARNED REPRESENTATIVES OF THE ASSESSEE HAS BEEN CONSIDERED BY US, THE RELEVANT PORTION WHEREOF IS AS FOLLOWS: 4. ON HEARING LEARNED COUNSEL, MR. MANISH BHATT, AND ON CL OSELY EXAMINING THE PAPER - BOOK PRODUCED IN THIS CASE, THIS APPEAL IS DECIDED. 5. AS CAN BE NOTED FROM THE ORDER OF THE TRIBUNAL, THE ASSESSING OFFICER DISALLOWED THE INTEREST SOLELY ON THE GROUND THAT THE ASSESSEE HAD GIVEN INTEREST - FREE LOANS TO THE ASSOCIATE CONCERNS, VIZ., R. R. FAMILY TRUST AND SAGAR TEXTILE MILLS AND THIS DISAL LOWANCE, IN APPEAL THE COMMISSIONER OF INCOME - TAX (APPEALS) DELETED BY HOLDING THAT THE AMOUNT ADVANCED TO BOTH R. R. FAMILY TRUST AND SAGAR TEXTILES MILS WERE NOT GIVEN DURING THE YEAR UNDER CONSIDERATION, BUT THE SAME WAS GIVEN IN THE EARLIER YEARS. THE COMMISSIONER OF INCOME - TAX (APPEALS) HAD ALSO TAKEN NOTE OF THE FACT THAT THERE WAS SUFFICIENT FUNDS AVAILABLE WITH THE ASSESSEE - RESPONDENT ON WHICH THERE WAS NO INTEREST LIABILITY THAT HAD BEEN INCURRED. IN SUCH CIRCUMSTANCES, RELYING ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 15 ON THE CASE OF TORRE NT FINANCIERS (SUPRA), IT FOUND THAT THE DISALLOWANCE WAS NOT JUSTIFIABLE. 6. THE TRIBUNAL ON NOTING THESE DETAILS, IN TERMS HELD THAT THERE WAS NOTHING CONTRARY THAT COULD BE BROUGHT ON RECORD BY THE DEPARTMENT. THE ASSESSEE'S EQUITY SHARE CAPITAL RS. 3. 85 CORES AND RESERVE AND SURPLUS OF RS. 5.52 CRORES ALSO WERE NOTED BY THE TRIBUNAL. IT FOUND THAT THE INTEREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE WAS FAR GREATER THAN THE LOAN ADVANCED TO THE SISTER CONCERNS AND AS A COROLLARY TO THAT, IT CONCLUDED TH AT THE BORROWED MONEY WAS NOT UTILIZED FOR THE PURPOSE OF ADVANCE TO THE SISTER CONCERNS, AS HAD BEEN NOTED BY THE ASSESSING OFFICER. WHAT HAD WEIGHED WITH THE TRIBUNAL IS THE FACT THAT THE ENTIRE INTEREST - FREE FUNDS INCLUDED OWNER'S OWN CAPITAL AND ACCUMU LATED PROFITS AND OTHER INTEREST - FREE CREDITS AND LOANS AND IF THE TOTAL INTEREST - FREE ADVANCES INCLUDING THE DEBIT BALANCE OF THE PARTNERS DID NOT EXCEED THE TOTAL INTEREST - FREE FUNDS AVAILABLE WITH THE ASSESSEE, INTEREST WAS NOT DISALLOWABLE MERELY ON AC COUNT OF UTILIZATION OF THE FUNDS FOR NON - BUSINESS PURPOSES. 7. THUS, AS CAN BE SEEN THE TRIBUNAL ACTUALLY RELIED ON THE FINDINGS GIVEN IN CASE OF TORRENT FINANCIERS (SUPRA) AND FURTHERMORE THERE WAS NOTHING CONTRARY THAT COULD BE BROUGHT ON RECORD BY THE DEPARTMENT FOR IT TO HOLD OTHERWISE. FACTUALLY, IT FOUND HUGE FUNDS WERE AVAILABLE WITHOUT ANY INTEREST LIABILITY WITH THE ASSESSEE AND THAT THERE WAS NO EVIDENCE TO HOLD THAT THE BORROWED MONEY WAS UTILIZED FOR THE PURPOSE OF ADVANCE TO THE SISTER CONCER NS. ALL THESE ASPECTS CUMULATIVELY LED THE TRIBUNAL TO HOLD THAT THE DISALLOWANCE MADE ONLY ON THE GROUND THAT ADVANCES WERE GIVEN OUT OF THE BORROWED FUNDS, HOLDING THE ASSESSEE INELIGIBLE FOR ALLOWANCE OF INTEREST BY THE ASSESSING OFFICER OF THE SUM OF R S. 18.66 LAKHS WAS NOT SUSTAINABLE. 8. THE TRIBUNAL HAS CORRECTLY APPROACHED THE ISSUE WHICH HAS BEEN PROPOSED IN THE PRESENT TAX APPEAL. WHEN THERE WAS NO EVIDENCE BROUGHT ON RECORD BY THE DEPARTMENT FOR THE TRIBUNAL TO HOLD OTHERWISE THAN WHAT HAS BEEN CONCLUDED BY WAY OF ANY MATERIAL, WE HOLD THAT THE ISSUE IS APPROPRIATELY CONCLUDED IN FAVOUR OF THE ASSESSEE AND AGAINST THE REVENUE. 9. WE MAY REFER TO THE JUDGMENT OF THE APEX COURT AT THIS STAGE GIVEN IN CASE OF S. A. BUILDERS LTD. V. CIT [2007] 288 IT R 1/158 TAXMAN 74 (SO WHERE THE QUESTION WAS WHETHER INTEREST ON FUNDS BORROWED BY THE ASSESSEE TO GIVE AN INTEREST - FREE LOAN TO SISTER CONCERN SHOULD BE ALLOWED AS DEDUCTION AND THE APEX COURT RULED THUS (PAGES 7 AND 8): 'WE HAVE CONSIDERED THE SUBMISSION OF THE RESPECTIVE PARTIES. THE QUESTION INVOLVED IN THIS CASE IS ONLY ABOUT THE ALLOWABILITY OF THE INTEREST ON BORROWED FUNDS AND, HENCE, WE ARE DEALING ONLY WITH THAT QUESTION. IN OUR OPINION, THE APPROACH OF THE HIGH COURT AS WELL AS THE AUTHORITIES BE LOW ON THE AFORESAID QUESTION WAS NOT CORRECT..... IN OUR OPINION, THE HIGH COURT IN THE IMPUGNED JUDGMENT, AS WELL AS THE TRIBUNAL AND THE INCOME - TAX AUTHORITIES HAVE APPROACHED THE MATTER FROM AN ERRONEOUS ANGLE. IN THE PRESENT CASE, THE ASSESSEE BORROW ED THE FUND FROM THE BANK AND LENT SOME OF IT TO ITS SISTER CONCERN (A SUBSIDIARY) ON INTEREST FREE LOAN. THE TEST IN OUR OPINION, IN SUCH A CASE IS REALLY WHETHER THIS WAS DONE AS A MEASURE OF COMMERCIAL EXPEDIENCY. .. ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 16 'THE EXPRESSION 'COMMERCIAL EXPEDI ENCY' IS AN EXPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUND S OF COMMERCIAL EXPEDIENCY. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COURT IN CITV. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 (DELHI), THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM - CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE ITS PROFIT. THE INCOME - TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUT HORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF THE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF COMMERCIAL EXPEDIENCY AND NOT FROM TH E POINT OF VIEW WHETHER THE AMOUNT WAS ADVANCED FOR EARNING PROFITS.' 10. ACCORDINGLY, THE QUESTION IS ANSWERED IN FAVOUR OF THE ASSESSEE BY THE APEX COURT. IN THIS TAX APPEAL IT IS TO BE SPECIFIED HERE THAT CONSIDERING THE MATERIAL ON RECORD AND KEEPING IN VIEW SUBSTANTIAL INTEREST - FREE FUNDS AND BUSINESS EXPEDIENCY THAT THE COMMISSIONER OF INCOME - TAX (APPEALS) AND THE TRIBUNAL HELD THE ISSUE IN FAVOUR OF THE ASSESSEE. 11. THERE IS ABSOLUTELY NO PERVERSITY IN SUCH FINDINGS. ON THE CONTRARY, THEY ARE CONFORMING TO THE WELL LAID DOWN GUIDING PRINCIPLE ON THE SUBJECT. IN THE PREMISE, THE QUESTION OF LAW NEEDS TO BE ANSWERED IN FAVOUR OF ASSESSEE AND AGAINST THE REVENUE. THE TAX APPEAL IS DISMISSED ACCORDINGLY AND STANDS DISPOSED OF 10. IN VIEW OF THE JUDGMENT PASSED BY THE JURISDICTIONAL HIGH COURT ON THE ISSUE BEFORE US, WE FIND THAT THE OBSERVATION MADE BY THE LD.CIT(A), WHILE CONFIRMING THE ORDER PASSED BY THE LD.AO, IS NOT WARRANTED SINCE THE ASSES SEE HAS BEEN ABLE TO ESTABLISH THAT THE LOANS A ND ADVANCES TO THIRD PARTIES WERE GIVEN AT THE RATE OF INTEREST OF 6% PER ANNUM OUT OF ITS SURPLUS FUNDS. ITANO3527/AHD/2016 FOR A.Y.2012 - 2013 17 11. FURTHER THAT , IN THE ABSENCE OF ANY PROOF OF NEXUS BETWEEN THE INTEREST BEARING BORROWING AND INTEREST FREE LOANS WHICH WAS FAILED TO HAVE BEEN ESTABLISHED BY THE AUTHORITIES BELOW THE INTEREST PAID ON BORROWED FUNDS CANNOT BE DISALLOWED BY THE LD.CIT(A) . 12. WE, THEREFORE, DELETE THE DISALLOWANCE OF RS.6,45,629/ - MADE U/S.36(1)(III) OF THE AC T, ON ACCOUNT OF DIVERSION OF INTEREST BEARING LOAN TO INTEREST FREE ADVANCES AT CONCESSIONAL RATE OF INTEREST FOR NON BUSINESS PURPOSE AS HEL D BY THE LD.AO, CONFIRMED BY THE FIRST APPELLATE AUTHORITY. 13. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON 01 / 11 / 201 8 AT AHMEDABAD. - SD - ( AMARJIT SINGH ) ACCOUNTANT MEMBER - SD - ( MS MADHUMITA ROY ) JUDICIAL MEMBER TRUE COPY AHMEDABAD; DATED 01 / 11 / 201 8 MANISH / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A), AHMEDABAD 5. , , / DR, ITAT, AHMEDABAD 6. / GUARD FILE . / BY ORDER, / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD