MAHENDRA PUKHRAJ JAIN, MUMBAI V. ITOA 14(30(3), MUMBAI

ITA 3679/MUM/2011

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84019 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 5 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 28-10-2014
• Assessment Year: 2006-2007
• Appeal Filed On: 06-05-2011
• Court: TRIBUNAL
• Department Lawyers: VIJAY KUMAR BORA
• Assessee Lawyers: MATHURIA
• Keywords: Proportionate interest; Commercial expediency
• Section: 234B

Judgement Text

, , , , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES B, MUMBAI , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER ITA NO.3679/MUM/2011 (A.Y. 2006-07) ITA NO.3680/MUM/2011 (A.Y. 2007-08) ITA NO.5661/MUM/2011 (A.Y. 2008-09) SHRI MAHENDRA PUKHRAJ JAIN 23/25, CHAMPAGALLI 2 ND FLOOR, KALBADEVI ROAD MUMBAI-400 002. / VS. INCOME TAX OFFICER 14(3)(3) NARIMAN POINT MUMBAI. ( ! / // / APPELLANT) ( '# ! / RESPONDENT) P.A. NO.AABPJ 5218 N ! $ % $ % $ % $ % /APPELLANT BY : SHRI M.S. MATHURIA '# ! $ % $ % $ % $ % /RESPONDENT BY : SHRI VIJAY KUMAR BORA $ &'( / / / / DATE OF HEARING : 28.10.2014 )*+ $ &'( / DATE OF PRONOUNCEMENT : 28.10.2014 ,- ,- ,- ,- / / / / O R D E R PER JOGINDER SINGH (JM) : ALL THESE THREE APPEALS ARE BY THE ASSESSEE FOR DI FFERENT ASSESSMENT YEARS CHALLENGING THE IMPUGNED ORDERS D ATED 11/3/2011, 24/05/2011 OF THE LD. FIRST APPELLATE AUTHORITY ON THE FOLLOWING COMMON GROUNDS:- ITA NO.3679,3689,5661/MUM/2011 2 ITA NO.3679/MUM/2011 & ITA NO.5661/M/11 1.DISALLOWANCE MADE OF RS. 40,61,761/- RS.211583 ( AY 08- 09) OUT OF INTEREST PAID: 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE A ND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) ERRED IN CONFIRMING DISALLOWANCES MADE OF RS. 406L76/- AND R S.211583/- (ASSESSMENT YEAR 08-09) AND THEREBY MAKING ADDITION TO THE TOTAL INCOME OF THE APPELLANT. THE SAID DISALLOWANCE HAS BEEN MADE OUT OF INTEREST EXPENSES. PROVISIONS OF THE ACT OUGHT TO HAVE BEEN PROPERLY C ONSTRUED AND REGARD BEING HAD TO FACTS OF THE CASE NO SUCH DISAL LOWANCES OF RS. 406176/-SHOULD HAVE BEEN MADE OUT OF ABOVE EXPENSES . REASONS ASSIGNED BY HIM ARE WRONG AND INSUFFICIENT TO JUSTI FY MAKING DISALLOWANCES OF RS. 406176/- UNDER THE ACT AND THE REBY MAKING ADDITION TO THE TOTAL INCOME OF THE APPELLANT. 1 .2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ASSESSING OFFICER HAS FAI LED TO MATCH THE BORROWED FUND AND THEIR UTILIZATION WHETHER THE SAM E IS FOR THE PURPOSE OF BUSINESS OR NOT. WITHOUT CORRELATING THE INTEREST FREE LOANS TO THE BORROWED FUNDS, NO DISALLOWANCES CAN B E MADE ON THAT SCORE. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ASSESSING OFFICE R HAS GROSSLY ERRED IN DISALLOWING RS. 406176/- OUT OF INTEREST P AID BY THE APPELLANT ON BORROWED FUND FOR THE PURPOSE OF HIS B USINESS. 1 .3 0N THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OU GHT TO HAVE APPRECIATED THAT THE ASSESSING OFFICER HAS FAILED T O CONSIDER OPENING BALANCE STANDING IN THE ACCOUNT OF M/S. SHR EYAS POLYESTER AMOUNTING TO RS. 1800000/- . IT WAS SUBMI TTED THAT BALANCE STANDING ON THE FIRST DAY OF THE ACCOUNTING YEAR IN THE ACCOUNT OF M/S. SHREYAS POLYESTER HAS NOT BEEN PAID OUT OF THE FUNDS BORROWED DURING THE YEAR AND THEREFORE THE SA ME IS OUT OF THE PURVIEW OF SECTION 36(1)(III) OF THE ACT. THE C OMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT INTEREST ATTRIBUTABLE TO THE OPENING BALANCE STANDING IN THE ACCOUNT OF M/S. SHREYAS POLYESTER CAN NOT BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT AND THE DISALLOWANCE TO THAT EXTENT IS UNWARRANTED AND CONTRARY TO THE PROVISIONS OF THE A CT. 1 .4 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT ADVANCING THE AMOUNT TO M/S. SHREYAS POLYESTER WAS A BUSINESS DECISION AND FOR THE PURPO SE OF BUSINESS AND THE SAME CAN NOT BE EQUATED WITH SIMPLE LOAN TR ANSACTIONS WITHOUT INTEREST. ITA NO.3679,3689,5661/MUM/2011 3 1.5THE ORDER MADE UNDER SECTION 143 (3) OF THE ACT BY THE LEARNED ASSESSING OFFICER IS ILLEGAL, BAD-IN-LAW, ULTRA V IRUS AND WITHOUT ALLOWING REASONABLE OPPORTUNITY OF THE HEARING, AND WITHOUT APPRECIATING THE FACTS, SUBMISSION AND EVIDENCES IN THEIR PROPER PERSPECTIVE AND IS LIABLE TO BE ANNULLED. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN CONFIRMING CHARGING INTEREST UNDER SECTION 234A, 23 4B, 234 C AND 234D OF THE ACT. 3. THE APPELLANT CRAVE LEAVE TO ADD, AMEND, ALTER A ND/ OR VARY ANY OF THE GROUNDS OF APPEAL BEFORE OR AT THE TIME OF H EARIN. ITA NO.3680/MUM/2011 1.DISALLOWANCE MADE OF RS. 3,12,708/-OUT OF INTERE ST PAID: 1.1 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ER RED IN CONFIRMING DISALLOWANCES MADE OF RS.3,12,708/- AND THEREBY MAKING ADDITION TO THE TOTAL INCOME OF THE APPELLAN T. THE SAID DISALLOWANCE HAS BEEN MADE OUT OF INTEREST EXPENSES . PROVISIONS OF THE ACT OUGHT TO HAVE BEEN PROPERLY C ONSTRUED AND REGARD BEING HAD TO FACTS OF THE CASE NO SUCH DISAL LOWANCES OF RS. 3,12,708/- SHOULD HAVE BEEN MADE OUT OF ABOVE EXPEN SES. REASONS ASSIGNED BY HIM ARE WRONG AND INSUFFICIENT TO JUSTIFY MAKING DISALLOWANCES OF RS. 3,12,708/- UNDER THE AC T AND THEREBY MAKING ADDITION TO THE TOTAL INCOME OF THE APPELLANT. 1 .2 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OUGHT TO HAVE APPRECIATED THAT UNDER THE MERCANTILE SYSTEM O F ACCOUNTING, THE APPELLANT SHOULD HAVE RECOGNIZED THE INTEREST I NCOME. THE APPELLANT HAS NOT RECOGNIZED ANY INTEREST INCOME ON ADVANCES GIVEN TO M/S. SHREYAS POLYESTER. 1 .3 0N THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OU GHT TO HAVE APPRECIATED THAT ADVANCING THE AMOUNT TO M/S. SHRE YAS POLYESTER WAS A BUSINESS DECISION AND FOR THE PURPOSE OF BUSI NESS AND THE SAME CANNOT BE EQUATED WITH SIMPLE LOAN TRANSACTION S WITHOUT INTEREST . THE APPELLANT HAS ADVANCED THE AMOUNT TO M/S. SHREYAS POLYESTER FOR THE PURPOSE OF BUSINESS AND FOR COMME RCIAL EXPEDIENCY AND NOT FOR THE PURPOSE OF EARNING INTER EST THEREON. THE APPELLANT ADVANCED AMOUNT TO M/S. SHREYAS POLYE STER TO GET GOOD QUALITY OF YARN AT REASONABLE PRICE AND UNINTE RRUPTED SUPPLY ITA NO.3679,3689,5661/MUM/2011 4 OF YARN, THEREFORE, HE HAS HELPED BY WAY OF FINANCE TO M/S. SHREYAS POLYESTER. 2. DURING HEARING OF THESE APPEALS THE LD. COUNSEL FOR THE ASSESSEE SHRI M.S. MATHURIA, CONTENDED THAT BORROWE D FUNDS WERE LENT TO SISTER CONCERN FOR BUSINESS EXPEDIENCY, HOWEVER, THE BUSINESS COULD NOT BE STARTED AND FINALLY IT WAS CLOSED DOWN AFTER TWO YEARS. THUS, CONFIRMATION OF DISALLOWANCE AND CONSEQUENT ADDITIO N IS NOT JUSTIFIED WHICH WAS MADE OUT OF INTEREST EXPENSES. IT WAS FUR THER CONTENDED THAT THE REASON ASSIGNED FOR MAKING DISALLOWANCE ARE INS UFFICIENT, MORE SPECIFICALLY THE ASSESSING OFFICER FAILED TO MATCH THE BORROWED FUNDS AND THEIR UTILIZATION WITHOUT CO-RELATING THE INTEREST FREE LOAN TO THE BORROWED FUNDS. RELIANCE WAS PLACED UPON THE DECISION IN S.A. BUILDERS VS. CIT (288 ITR 1)(SC),(298 ITR 294)(P&H) AND CIT VS. H.P. L OHIA (203 ITR 928)(CAL.) . THE CRUX OF ARGUMENT ON BEHALF OF THE ASSESSEE IS THAT BORROWED FUNDS WERE LENT, INTEREST FREE, TO SISTER CONCERNS, FOR BUSINESS EXPEDIENCY. 2.1 ON THE OTHER HAND THE LD. SR. DR SHRI VIJAY KUMA R BORA STRONGLY DEFENDED THE CONCLUSION ARRIVED AT IN THE ASSESSMENT ORDER AS WELL AS THE IMPUGNED ORDER BY FURTHER SUBMITTING TH AT THERE WAS NO BUSINESS EXPEDIENCY AS HAS BEEN CLAIMED AND DUE TAX ES HAS NOT BEEN PAID TO THE REVENUE . 3. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD . SINCE COMMON GROUNDS ARE RAISED IN ALL ITA NO.3679,3689,5661/MUM/2011 5 THE THREE APPEALS, THEREFORE, THESE CAN BE DISPOSED OF BY A COMMON AND CONSOLIDATED ORDER. THE FACTS IN BRIEF ARE THAT ASS ESSEE IS AN INDIVIDUAL ENGAGED IN THE BUSINESS OF MANUFACTURER AND TRADING IN TEXTILES. THE ASSESSEE FOR ASSESSMENT YEAR 2006-07 DECLARED TOTAL INCOME AT RS.1,74,930/-, RS.55,084/- FOR ASSESSMENT YEAR 2007 -08 AND FOR ASSESSMENT YEAR 2008-09 AT RS.3,66,582/- . THE RETU RNS WERE ACCOMPANIED WITH COMPUTATION OF TAXABLE INCOME, BAL ANCE SHEET, P&L ACCOUNT AND TAX AUDIT REPORT. THESE RETURNS WERE PR OCESSED U/S. 143(1) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT ). THE CASES WERE SELECTED FOR SCRUTINY UNDER CASS, CONSEQUENTLY NOTI CES U/S. 143(2) OF THE ACT WERE ISSUED AND SERVED UPON THE ASSESSEE . IN RESPONSE TO THE STATUTORY NOTICES THE ASSESSEE ATTENDED THE PROCEED INGS. THE ASSESSEE DEBITED VARIOUS EXPENSES IN ITS P&L ACCOUNT AS DETA ILED IN THE RESPECTIVE ASSESSMENT ORDER. IT WAS NOTICED FROM THE P&L ACCOU NT THAT THE ASSESSEE PAID INTEREST OF RS.25,23,100/- WHICH INCL UDES INTEREST PAID TO PRIVATE PARTIES OF RS.22,60,796/-. IT WAS FOUND BY THE ASSESSING OFFICER THAT THE ASSESSEE PAID INTEREST @ 12% TO MOST OF TH E PARTIES AND AT THE SAME TIME ASSESSEE ADVANCED INTEREST FREE LOAN OF R S.40,25,000/- (AY - 2006-07) TO SISTER CONCERN. AT THE SAME TIME THE AS SESSEE DEBITED INTEREST OF RS.44,51,633/- TO THE P&L ACCOUNT AND D ID NOT CHARGE INTEREST ON LOAN GIVEN TO M/S. SHREYAS POLYESTERS ( AY -2007-08). LIKEWISE FOR ASSESSMENT YEAR 2008-09 THE ASSESSEE DID NOT CHARGE ITA NO.3679,3689,5661/MUM/2011 6 INTEREST ON THE LOANS GIVEN TO M/S. SHREYAS POLYES TERS AND M/S. DIVYA TEXTILES. THUS, PROPORTIONATE INTEREST WAS DISALLOW ED AND ADDED TO THE TOTAL INCOME. 3.1 THE ASSESSEE FELT AGGRIEVED AND CARRIED THE MAT TER BEFORE THE LD. CIT(A) WHERE VIDE RESPECTIVE ORDERS, WHICH ARE UNDE R CHALLENGE BEFORE THIS TRIBUNAL, THE STAND OF THE ASSESSING OFFICER WAS AFFIRMED. BEFORE US, THE ONLY CONTENTION RAISED BY THE ASSESSEE IS T HAT INTEREST FREE LOANS WERE ADVANCED TO THE SISTER CONCERNS DUE TO BUSINE SS EXPEDIENCY. WE HAVE PERUSED THE RECORD AND FOUND THAT THE ASSESSEE HAD BEEN TAKING INCONSISTENT STAND RIGHT FROM ASSESSMENT STAGE. AS IS EVIDENT FROM LETTERS OF THE ASSESSEE DATED 31/8/2009 AND 9/11/20 09 WHICH HAVE BEEN DISCUSSED AT PAGE-2 (PARA-6) OF THE ASSESSMENT ORDER. IN LETTER DATED 9/11/2009 THE ASSESSEE CLAIMED THAT THE SAID FIRM ENTERED WITH A VERBAL AGREEMENT/COMPROMISE WITH ALL ITS LOAN CREDI TORS WITH A REQUEST TO FORGO INTEREST IN SUCH FINANCIAL CIRCUMSTANCES .. DURING THE IMPUGNED YEAR, M/S. SHREYAS POLYESTER HAS NOT PAID INTEREST TO ANY LOAN CREDITORS INCLUDING THE SAID ASSESSEE . FURTHER, IT HAS BEEN MENTIONED IT IS FURTHER STATED THAT M/S. SHREYAS POLYESTER IS NOT A SISTER CONCERN AS THE ASSESSEE HAS NO CONTROL OVER THE BUSINESS AFFAI RS OF THE SAID FIRM AND ASSESSEES BROTHER MR. VINOD PUKHRAJ JAIN IS A PART NER IN THE FIRM HAVING 1/3 RD SHARE. WHEREAS VIDE LETTER DATED 31/8/2009 IT WAS CLAIMED AS UNDER :- ITA NO.3679,3689,5661/MUM/2011 7 THE ASSESSEE HAS NOT GIVEN ANY INTEREST FREE LOAN EXCEPT THE LOAN GIVEN TO A SISTER CONCERN M/S. SHREYAS POL YESTER. THE INTEREST INCOME FOR THE YEAR ON THE SAID LOAN @ 12% P.A. AMOUNTING TO RS.3,12,708/- HAS NOT BEEN RECOGNIZED SINCE THE INTEREST WAS DOUBTFUL OF RECOVERY DUE TO DISCON TINUANCE OF THE BUSINESS OF THE SAID CONCERN M/S. SHREYAS PO LYESTER IN THE PREVIOUS YEAR. ALSO THE ASSESSEE HAS BEEN AB LE TO RECOVER RS.20.25 LACS DURING THE YEAR OUT OF THE OP ENING LOAN OF RS.40.25 LACS. 3.2 THUS, THE TOTALITY OF FACTS CLEARLY INDICATES THAT THERE WAS NO BUSINESS EXIGENCY AS HAS BEEN CLAIMED AND MERELY HI S BROTHER WAS ACCOMMODATED BY THE ASSESSEE, MORE SPECIFICALLY, W HEN THE ASSESSEE PAID HEAVY INTEREST ON BORROWED FUNDS, WHICH WERE U TILIZED FOR GIVING INTEREST FREE LOAN TO M/S. SHREYAS POLYESTER/OTHER SISTER CONCERNS. AT THE SAME TIME THE SAID CONCERNS WERE CLAIMED TO BE CLOS ED DOWN AFTER TWO YEARS AND NO BENEFIT WHATSOEVER IN ANY MANNER WAS R ECEIVED BY THE ASSESSEE. INTEREST ON BORROWALS IS ALLOWABLE AS A D EDUCTION ONLY WHEN THE BORROWALS ARE USED FOR THE PURPOSES OF BUSINESS AND CONTINUE AS SUCH. WHERE THE ASSESSEE PAID INTEREST ON BORROWALS FOR USE IN HIS BUSINESS BUT LATER ON ADVANCED INTEREST FREE TO REL ATIVES/SISTER CONCERNS, THE INTEREST RELATABLE TO SUMS SO ADVANCED IS NOT P ERMISSIBLE. THE BORROWED FUNDS ADVANCED TO THIRD PARTY SHOULD BE FO R COMMERCIAL EXPEDIENCY, IF IT IS SOUGHT TO BE ALLOWED U/S.36(1) (III) OF THE ACT. IT IS NOT IN EVERY CASE THAT INTEREST ON BORROWED LOANS HAS T O BE ALLOWED IF THE ASSESSEE ADVANCES IT TO SISTER CONCERN. IT ALL DEPE NDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. HEAVY BURDEN IS CAST UPON THE ITA NO.3679,3689,5661/MUM/2011 8 ASSESSEE TO SATISFY THE ASSESSING OFFICER THAT THE SUMS/BORROWALS WERE ONLY ADVANCED FOR COMMERCIAL EXPEDIENCY. EVEN THIS IS THE ESSENCE OF THE DECISION FROM HON'BLE APEX COURT IN THE CASE OF S.A. BUILDERS VS. CIT (SUPRA), RELIED UPON BY THE ASSESSEE. BEFORE MAKING DISALLOWANCE OF INTEREST PAID ON BORROWED MONEY ALLEGED TO HAVE BEE N ADVANCED TO SISTER CONCERNS THE ASSESSING OFFICER IS REQUIRED TO EXAMI NE THE EXTENT TO WHICH BENEFIT OF BORROWED FUNDS IS GRANTED BY WAY O F ALLOWING ADVANCES TO SISTER CONCERNS. OUT VIEW FINDS SUPPORT FROM THE DECISION FROM HONBLE DELHI HIGH COURT IN CIT VS. MOTOR GENERAL F INANCE LTD. (272 ITR 550)(DEL.) . IN THE PRESENT APPEAL THE ASSESSEE HAS NOT PROVED THAT THE LOANS WERE ADVANCED INTEREST FREE TO THE SISTER CON CERN FOR BUSINESS EXPEDIENCY, THEREFORE, THE CASES RELIED UPON BY THE ASSESSEE ARE NOT OF MUCH HELP. THE ASSESSEE HAS NOT PRODUCED ANY EVIDEN CE AT ANY STAGE AS TO WHAT BENEFIT HE HAS DERIVED FOR ADVANCING BORROW ED FUNDS TO THE SISTER CONCERN ON WHICH THE ASSESSEE PAID HUGE INTE REST AND AT THE SAME TIME NO BUSINESS EXPEDIENCY HAS BEEN PROVED, THEREF ORE, WE FIND NO INFIRMITY IN THE CONCLUSION DRAWN BY THE LD. CIT(A) . 3.3 SO FAR AS CHARGING OF INTEREST U/S.234A, 234B A ND 234C IS CONCERNED IT IS CONSEQUENTIAL AND MANDATORY IN NATU RE. SINCE NO OTHER GROUND WAS ARGUED, THEREFORE, WE ARE REFRAINING OUR SELVES TO COMMENT FURTHER AS MAJORITY OF THE GROUNDS RAISED ARE ARGUM ENTATIVE IN NATURE AND ARE CONNECTED WITH THE ABOVE DISPOSED OF GROUND . ITA NO.3679,3689,5661/MUM/2011 9 4. FINALLY, THE APPEALS OF THE ASSESSEE ARE DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT IN THE PRESENCE OF LD. REPRESENTATIVES FROM BOTH SIDES AT THE CONCLUSION O F THE HEARING ON 28 TH DAY OF OCTOBER, 2014 . ,- $ )*+ .,/ 28.10.2014 * $ 6 SD/- SD/- (N.K. BILLAIYA) (JOGINDER SINGH) ( ,7 ( ,7 ( ,7 ( ,7 / ACCOUNTANT MEMBER ,7 ,7 ,7 ,7 / JUDICIAL MEMBER MUMBAI; ., DATED : 28 TH OCT. 2014. ../ JV, SR.PS . ,- $ '&8 98+& ,- $ '&8 98+& ,- $ '&8 98+& ,- $ '&8 98+&/ COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '# ! / THE RESPONDENT. 3. : ( ) / THE CIT, MUMBAI. 4. : / CIT(A)-13, MUMBAI 5. 8=6 '& , , / DR, ITAT, MUMBAI 6. 6> ? / GUARD FILE. ,- ,- ,- ,- / BY ORDER, #8& '& //TRUE COPY// @ @@ @/ // /A B A B A B A B (DY./ASSTT. REGISTRAR) , , , , / ITAT, MUMBAI