THE ACIT 14(3), MUMBAI V. M/S. TREND SETTERS, MUMBAI

ITA 3802/MUM/2008

• Counselvise Citation: [2010] 136 COUNSELVISE.COM (IT) 7906 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 05-02-2010
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: J
• Next Hearing Date: 29-01-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 30-05-2008
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: B V JHAVERI
• Assessee Lawyers: N K BHALODIA
• Keywords: Business income; Business expenditure; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J BEFORE S/SHRI N.V. VASUDEVAN (JM) & R.S. SYAL (AM) I.T.A. NO. 3802 /MUM/0 8 (ASSESSMENT YEAR: 2005 - 06 ) A SST. COMMISSIONER OF INCOME - TAX - 14 ( 3 ), EARNEST HOUSE, 6 TH FLOOR , NARIMAN POINT, MUMBAI - 4 00 02 1. VS. M/S. TREND SETTERS ENGINEER BUILDING, 265, PRINCESS STREET, MUMBAI 400 002. PAN/GIR NO.: AAAFT 1573 B APPELLANT RESPONDENT ASSESSEE BY: SHRI N.K. BHALODIA DEPARTMENT BY: SHRI B.V. JHAVERI ORDER PER N.V. VAS UDEVAN, J.M. THIS IS AN APPEAL BY THE REVENUE AGAINST THE ORDER DATED 17/03/2008 OF THE CIT(A) - XV, MUMBAI, RELATING TO ASSESSMENT YEAR 2005 - 06. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL BY THE REVENUE IS AS TO WHETHER THE CIT(A) WAS CORRECT IN RESTRICTING THE CLAIM OF THE ASSESSEE FOR DEDUCTION ON ACCOUNT OF EXPENDITURE ON ACCOUNT OF INTEREST U/S.36(1)(III) FROM RS.85,11,524/ - TO RS.1,16,759/ - . 3. THE FACTS AND CIRCUMSTANCES GIVING RISE TO THIS APPEAL BY THE REVENUE ARE AS FOLLOWS: THE ASSESSEE IS A PARTNERSHIP FIRM. IT CARRIES ON THE BUSINESS OF MANUFACTURE AND EXPORT OF BED LINENS AND BED SHEETS. WHILE COMPUTING IT S BUSINESS INCOME, THE ASSESSEE HAD ARRIVED AT ITS PROFIT AS PER PROFIT AND LOSS ACCOUNT AFTER CLAIMING A DEDUCTION O N ACCOUNT OF INTEREST EXPENDITURE OF RS.85,11,524/ - . THE ABOVE INTEREST REPRESENTS INTEREST PAID TO BANK. THE DETAILS OF THE BANK INTEREST PAID ARE AS FOLLOWS: - AMOUNT (RS.) INTEREST PAID I] BANK INTEREST ON BILL DISCOUNT 1. INTEREST ON ADVANCE AGAINST OVERDUE BILL DISCOUNT (AAOEB) 551,820.01 2. INTEREST ON ADVANCE AGAINST USANCE BILL FOR COLLECTION (AAUBC) 197,257.78 3. INTEREST ON ADVANCE AGAINST BILL COLLECTION (AABC) 220,644.71 4. INTEREST ON CRYSTALISAT ION FOR OVER DUE BILL DISCOUNT 317,467.09 5. INTEREST ON FOREIGN BILL NEGIOATIATION AND PURCHASED 3,270,330.98 TOTAL A 4,557,520.57 II] BANK INTEREST ON BILL DISCOUNT (PCL) 1. INTEREST ON PCL WITH SYN DICATE BANK 3,837,248.31 TOTAL B 3,837,248.31 III] BANK INTEREST ON BILL DISCOUNT 1. INTEREST ON T.O.D. WITH SYNDICATE BANK 16,167.57 2. INTEREST ON T.O.D. WITH STATE BANK OF INDIA 591.31 TOTAL C 16,75 8.88 IV] BANK INTEREST ON RECOVERY 1. INTEREST ON HUNDI VYSYA BANK (KARUR) 100,000.00 TOTAL D 100,000.00 TOTAL A+B+C+D 8,511,527.76 THE DETAILS OF THE LOANS AND ADVANCES AGAINST WHICH THE ABOVE INTEREST WAS PAID AR E AS FOLLOWS: - PARTICULARS AMOUNT (RS.) PCL SY. BANK BANK FDBP N (ULC) BANK FDBP P BANK PUBP P AABC FORD CREDIT KOTAK MAHINDRA LTD. (IKON) (CAR LOAN) ICICI BANK (COROLLA) (CAR LOAN) ICICI BANK (INDIGO) (CAR LOAN) 39,818,217.57 3,284,301.19 2,116,682.36 9,501,193.20 5,184,000.40 327,642.02 870,125.00 323,342.00 TOTAL 61,425,503.74 4 . THE ASSESSING OFFICER NOTICED THAT THE INTEREST INCOME SHOWN IN THE PROFIT AND LOSS A/C. WAS RS.3,75,000/ - WHICH WAS INTEREST ON FIXED DEPOSIT AND RS.3,62,221/ - WHICH WAS INTEREST ON LOAN GIVEN BY THE ASSESSEE TO ONE SHRI.J.P. SHROFF. THE ASSESSING OFFICER FURTHER NOTICED THAT IN THE BALANCE SHEET OF THE ASSESSEE LOANS AND DEPOSITS GIVEN BY THE ASSESSEE WERE TO THE TUNE OF RS.7.3 7 CRORES [LOANS: RS.7,29,88,364/ - AND DEPOSITS: RS.7,49,744/ - ]. OUT OF THE ABOVE, THE ASSESSING OFFICER NOTICED THAT THE FOLLOWING FIVE LOANS GIVEN BY THE ASSESSEE WERE TO SISTER CONCERNS/ FAMILY MEMBERS. NIK H IL N. RUPERELIA - RS. 3,62,227 PAN WORLD EXPORT CORPN. - RS. 37,47,403 TREND SETTERS KFTZ - RS. 38,42,205 ADITYA INTERNATIONAL - RS.1,96,16,186 SHRUTI CORPORATION - RS. 15,45,462 TOTAL RS.2,91,13,483 5 . FROM THE ABOVE, THE AO WAS OF THE VIEW THAT THE ASSESSE E HAD DIVERTED FUNDS ON WHICH INTEREST WAS PAID IN GIVING INTEREST FREE LOANS TO SISTER CONCERNS. THE OBJECTION OF THE ASSESSING OFFICER REGARDING THE ALLOWABILITY OF INTEREST PAID AS EXPENDITURE WAS TWO FOLD: - (A) LOANS AND ADVANCES ON WHICH INTEREST WAS P AID WERE GIVEN AS INTEREST FREE ADVANCES TO SISTER CONCERNS/ FAMILY MEMBERS. (B) THE ASSESSEE HAD ENOUGH FUNDS IN THE FORM OF FIXED DEPOSITS AND THIS WAS THEREFORE NO NECESSITY TO HAVE BORROWED FUNDS AND INCUR INTEREST EXPENDITURE. IT IS NOT CLEAR FROM THE OR DER OF ASSESSMENT AS TO WHAT WAS THE EXACT STAND TAKEN BY THE ASSESSEE BEFORE THE ASSESSING OFFICER ON THE ABOVE QUERY OF THE ASSESSING OFFICER. THE ASSESSING OFFICER HAS HOWEVER OBSERVED IN PARA 5.3 OF THE ORDER OF THE ASSESSMENT THAT THE CONTENTION OF TH E ASSESSEE THAT THE ADVANCES GIVEN BY IT WERE ALL RELATED TO ITS BUSINESS WERE NOT CORRECT AND THAT THE ASSESSEE HAD DIVERTED MAJOR PORTION OF INTEREST BEARING BORROWED FUNDS TO ITS FAMILY MEMBERS/ SISTER CONCERNS AS INTEREST FREE LOANS AND, THEREFORE TO T HAT EXTENT BORROWED FUNDS HAD NOT BEEN USED FOR THE PURPOSE OF BUSINESS AND THEREFORE THE DEDUCTION CLAIMED BY THE ASSESSEE U/S.36(1)(III) CANNOT BE ALLOWED. THE ENTIRE INTEREST EXPENDITURE CLAIMED BY THE ASSESSEE WAS THUS DISALLOWED BY THE ASSESSING OFFIC ER. 6 . BEFORE THE CIT(A), IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT IT HAD TAKEN PACKING CREDIT LOAN (PCL) OF RS.3.98 CRORES FROM SYNDICATE BANK. THE ASSESSEE HAD ALSO DISCOUNTED ITS FOREIGN BILLS WITH THE BANKS AGGREGATING TO RS.2,00,86,176/ - . THUS , THE LOAN OF RS.3.98 CRORES AND THE LOAN OF RS.2.00 CRORES WERE UTILIZED FOR THE PURPOSE OF CARRYING ON THE BUSINESS BY THE ASSESSEE FIRM. THE BALANCE LOANS AGGREGATING TO RS.15,21,109 WERE TAKEN AS CAR LOANS. THUS, THE WHOLE OF THE BORROWINGS AMOUNTING T O RS.6.14 CRORES HAVE NOT BEEN AND COULD NOT HAVE BEEN UTILIZED FOR LENDING INTEREST FREE FUNDS. IT WAS ALSO SUBMITTED THAT THE ASSESSEE HAD DISCOUNTED ITS BILLS ON EXPORT OF GOODS WITH THE BANK ON WHICH THE ASSESSEE PAID INTEREST AGGREGATING TO RS.45,57, 521/ - . SIMILARLY, THE ASSESSEE HAD TAKEN PACKING CREDIT LOAN (PCL) ON WHICH IT HAD PAID INTEREST AGGREGATING TO RS.38,37,248/ - . THE ASSESSEE EXPLAINED THAT IN ORDER TO PRODUCE THE GOODS FOR EXPORT THE ASSESSEE TOOK PCL FROM THE BANK AND ON THAT AMOUNT THE ASSESSEE PAID INTEREST WHICH WAS AGGREGATING TO RS.38,37,248/ - DURING THE PREVIOUS YEAR. AFTER THE GOODS ARE MANUFACTURED AND EXPORTED A BILL WOULD BE RAISED ON THE FOREIGN PARTY WHICH IS GENERALLY PAID AFTER CREDIT PERIOD OF 90 TO 180 DAYS AND THEREFORE, SUCH EXPORT BILL IS DISCOUNTED BY THE ASSESSEE FIRM WITH THE BANK. THIS WAS A CONDITION PRECEDENT FOR AVAILING PCL. ON DISCOUNTING SUCH FOREIGN EXPORT BILL THE BANK COLLECTS INTEREST FOR THE PERIOD DURING WHICH THE FUNDS OF THE BANK ARE UTILIZED BY THE AS SESSEE FIRM I.E. FOR THE PERIOD OF 90 TO 180 DAYS. ON RECEIPT OF THE MONEY ON DISCOUNTING OF THE FOREIGN EXPORT BILL THE SAID AMOUNT IS ADJUSTED BY THE BANK AGAINST THE PCL GIVEN TO THE ASSESSEE FOR MANUFACTURING THOSE GOODS WHICH WERE EXPORTED. IN THESE C IRCUMSTANCE S , BOTH THE PCL AS WELL AS THE AMOUNT RECEIVED ON DISCOUNTING OF BILLS CAN BY NO ST RETCH OF IMAGINATION BE UTILIZED BY THE ASSESSEE FOR PERSONAL PURPOSES OR FOR DIVERTING THE SAME TO THE SISTER CONCERNS/ GROUP COMPANIES WITHOUT CHARGING INTEREST . IT WAS, THEREFORE, SUBMITTED THAT NO PORTION OF THE INTEREST PAID ON DISCOUNTING OF BILLS I.E. RS.45,57,521/ - AND NO PORTION OF INTEREST PAID ON PCL I.E. RS.38,37,248/ - CAN EVER BE DISALLOWED ON THE GROUND OF DIVERSION OF THE BORROWED FUNDS TO THE SISTER CONCERNS/ GROUP COMPANIES WITHOUT CHARGING INTEREST. 7. IT WAS FURTHER SUBMITTED THAT THERE WAS NO EVIDENCE ON RECORD OF THE ASSESSING OFFICER TO COME TO THE CONCLUSION THAT ANY PORTION OF THE LOANS AGGREGATING TO RS.6.14 CRORES WERE UTILIZED BY THE AS SESSEE FOR THE PURPOSE OF GIVING INTEREST FREE ADVANCES TO THE SISTER CONCERNS/ GROUP COMPANIES. IT WAS ALSO HIGHLIGHTED THAT IN THE BALANCE SHEET OF THE ASSESSEE FIRM AS ON 31.03.2001 OUT OF THE TOTAL OF THE ASSET SIDE OF RS.16.65 CRORES, THE PARTNERS CA PITAL AND RESERVES WERE AGGREGATING TO RS.10.50 CRORES. THESE INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE FOR GIVING INTEREST FREE LOANS/ ADVANCES TO THE SISTER CONCERNS/ GROUP COMPANIES. THEREFORE, THERE WAS NO BASIS FOR DISALLOWING THE INTEREST PAID ON VARIOUS LOAN FACILITIES TAKEN BY THE ASSESSEE WHICH WERE BEYOND DOUBT UTILIZED FOR CARRYING ON THE BUSINESS. 8. WITH REGARD TO THE ADVANCES GIVEN TO THE SISTER CONCERNS WHICH ARE AS FOLLOWS: - NIKHIL N. RUPERELIA - RS. 3,62,227 PAN W ORLD EXPORT CORPN. - RS. 37,47,403 TREND SETTERS KFTZ - RS. 38,42,205 ADITYA INTERNATIONAL - RS.1,96,16,186 SHRUTI CORPORATION - RS. 15,45,462 TOTAL RS.2,91,13,483 THE ASSESSEE EXPLAINED THAT THE AFORESAID AMOUNTS AGGREGAT ING TO RS.2,91,13,483/ - WERE NOT GIVEN OUT OF BORROWED FUNDS AS THE ASSESSEE HAS IT OWN FUNDS OF RS.10.50 CRORES AND THEREFORE, THE ASSESSING OFFICER OUGHT NOT TO HAVE DISALLOWED ANY PORTION OF THE INTEREST OF RS.85,11,528/ - . 9. IN RESPECT OF THE AMOUN T OUTSTANDING FROM M/S. S HRUTI CORPORATION AMOUNTING TO RS.15,45,462/ - , IT WAS SUBMITTED THAT THE ASSESSEE WAS PURCHASING FINISHED GOODS FROM M/S. SHRUTI CORPORATION. IN THE YEAR ENDED 31 ST MARCH, 2005 M/S. SHRUTI CORPORATION HAS SUPPLIED GOODS WORTH RS.37 ,16,479/ - . THUS, THE ASSESSEE HAD GIVEN ADVANCES TO M/S. SHRUTI CORPORATION AGGREGATING TO RS.15,45,462/ - AS ON 31.03.2005 IN THE COURSE OF THE BUSINESS AND FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. IT WAS THEREFORE, SUBMITTED THAT THE QUESTION OF CHARGING ANY INTEREST TO M/S. SHRUTI CORPORATION FOR THE ADVANCES GIVEN IN THE COURSE OF THE BUSINESS DOES NOT ARISE AT ALL. IN RESPECT OF THE AMOUNT GIVEN TO M/S. TREND SETTERS KFTZ AMOUNTING TO RS.38,42,205/ - , ATTENTION OF CIT(A) WAS INVITED TO THE AFFI DAVIT OF THE PARTNERS OF THE ASSESSEE EXPLAIN ING THE PURPOSE OF THE ADVANCE GIVEN WHICH WAS TO THE EFFECT THAT M/S. TREND SETTERS KFTZ WAS HAVING A FACTORY FOR MANUFACTURING OF BED LINENS AND HOME TEXTILES AT KANDLA, GUJARAT. M/S. TREND SETTERS KFTZ WAS TH E SUPPLIER OF THE GOODS EXPORTED BY THE ASSESSEE. THE FACTORY OF M/S. TREND SETTERS KFTZ GOT DESTROYED IN THE MONTH OF JUNE, 1998 DUE TO CYCLONE WHICH HAD AFFECTED THE WHOLE OF THE COASTAL AREA OF THE GUJARAT STATE. IN ORDER TO SET UP THE SAID FACTORY, WHI CH IS THE LIFELINE OF THE ASSESSEE INTEREST FREE ADVANCES WERE GIVEN SO THAT THE SUPPLYING OF THE GOODS TO BE EXPORTED ARE RESTORED TO THE ASSESSEE. ACCORDINGLY IN ASSESSMENT YEARS 2001 - 02 TO 2006 - 07 THE ASSESSEE HAD PURCHASED GOODS WORTH CRORES OF RUPEES AS SHOWN HEREIN BELOW: - ASSESSMENT YEAR AMOUNT (RS.) 2001 - 2002 69,73,783 2002 - 2003 1,01,56,563 2003 - 2004 1,37,64,484 2004 - 2005 78,97,287 2005 - 2006 4,85,22,818 2006 - 2007 5,14,87,934 10. THE ASSESSEE PLACED RELIANCE ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF M/S. S.A. BUILDERS VS. CIT, 288 ITR 1, WHEREIN IT WAS HELD THAT INTEREST FREE LOAN TO A SISTER CONCERN GIVEN BY THE ASSESSEE A S A MEASURE OF COMMERCIAL EXPED IENCY HAS TO BE CONSIDERED FOR THE PURPOSE OF SECTION 36(1)(III) OF T HE ACT. IT WAS SUBMITTED THAT THEIR LORDSHIPS FURTHER EXPLAINED THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF THE WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN WOULD INCUR FOR THE PURPOSE OF THE BUSINESS. THE EXPENDITURE MIGHT NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE OF IT WAS INCURRED ON THE GROUNDS OF COMMERCIAL EXPEDIENCY. IT WAS SUBMITTED THAT IN ORDER TO SET UP THE FACTORY WHICH WAS SUPPLYING THE GOODS FOR EXPORT TO THE ASSESSEE; THE ASSESSEE HAD NO OPTION BUT TO LEND MONEY WITHOUT CHARGING INTEREST. IT WAS THUS, SUBMITTED THAT THE DISALLOWANCE OF INTEREST OF RS.85,11,524/ - WAS NOT PROPER AND THAT IT DESERVED TO BE DELETED. 11 . IN THE ASSESSMENT YEAR 2001 - 02 ALSO , AN IDENTICAL DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER IN THE CASE OF THE ASSESSEE. IN A.Y. 2001 - 02, IDENTICAL SUBMISSION AS MADE BY THE ASSESSEE BEFORE THE CIT(A) IN THE PRESENT ASSESSMENT YEAR WAS ALSO MADE. THE CIT(A) HAD CALLED FOR REMAND REPORT F ROM THE ASSESSING OFFICER IN A.Y. 2001 - 02. THE REMAND REPORT OF THE ASSESSING OFFICER BEFORE THE CIT(A) FOR A.Y. 2001 - 02 WAS TO THE EFFECT THAT PACKING CREDIT AND BILL DISCOUNTING/ TEMPORARY OD S WERE MEANT TO BE USED ONLY FOR THE PURPOSE FOR WHICH THEY AR E GIVEN. BUT IN THE CASE OF THE ASSESSEE, THE ASSESSING OFFICER POINTED OUT THAT THE PACKING CREDIT, FUNDS ON BILLS DISCOUNTED ALL CAME TO A COMMON PO O L FROM WHICH VARIOUS PAYMENTS WERE MADE TO THE SISTER CONCERNS. THE FACTS IN THE PRECEDING YEAR WERE SIMI LAR. THE CIT(A) BEFORE DECIDING THE ISSUE IN THE PRESENT A.Y. KEPT IN MIND THE ABOVE OBJECTION OF THE ASSESS ING OFFICER IN THE REMAND REPORT AND GAVE HIS FINDINGS ON THE ISSUE OF DISALLOWANCE OF INTEREST. 1 2 . ON THE QUESTION OF DISALLOWANCE OF PACKING CR EDIT LOAN AND BILL DISCOUNTING CREDIT, THE CIT(A) HELD THAT T HE PACKING CREDIT AND BILL DISCOUNTING CREDIT WERE MEANT TO BE US ED EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A) NOTICED THAT THE ASSESSING OFFICER WAS OF THE VIEW THAT THE AMOUNT PERTAINI NG TO PACKING CREDIT AND BILL DISCOUNTING CREDIT HAVE JOINED THE COMMON PO OL OF MONEY WERE FROM VARIOUS EXPENSES AND LOANS TO THE SISTE R CONCERNS HAVE BEEN DISBURSED. THE CIT(A) WAS OF THE VIEW THAT THE ABOVE CIRCUMSTANCE WILL NOT BE SUFFICIENT TO DRAW AN INFERENCE THAT THE PACKING CREDIT AND THE BILL DISCOUNTING CREDIT WERE NOT UTILIZED FOR THE PURPOSE OF BUSINESS. IN THE OPINION OF THE CIT(A), THESE LOANS WERE TAKEN FOR SPECIFIC PURPOSES AND CANNOT BE UTILIZED FOR ANY OTHER PURPOSE OF BUSINESS . IN THIS RE GARD, THE CIT(A) FOUND THAT THERE WAS IN BUILT CHE CKS AND BALANCES FOLLOWED BY THE BANK TO ENSU R E THAT THE LOANS ARE UTILIZED FOR THE PURPOSE FOR WHICH THEY HAVE BEEN GIVEN. 13. THE CIT(A) HELD THAT THE ASSESSING OFFICER HAS NOT BROUGHT ANY EVIDENCE ON R ECORD TO SHOW THAT THE AFORESAID LOANS WERE USED FOR PURPOSES OTHER THAN BUSINESS. THE CIT(A), THEREFORE, HELD THAT INTEREST OF RS.38,37,248/ - RELATING TO BILL DISCOUNTING CREDIT AND RS.45,57,521/ - RELATING TO PACKING CREDIT WERE SPENT ONLY FOR BUSINESS PU RPOSE AND THEREFORE , NO DISALLOWANCE COULD BE MADE. 14. AS FAR AS THE LOAN GIVEN TO M/S. TREND SETTERS KFTZ AND M/S. SHRUTI CORPORATION WERE CONCERNED; THE CIT(A) HELD THAT THESE LOANS WERE GIVEN TO SISTER CONCERN S AND WERE GIVEN OWING TO COMMERCIAL EXPED IENCY. IN THIS REGARD, THE CIT(A) FOUND THAT THE SISTER CONCERN WERE SUPPLYING GOODS TO THE ASSESSEE WHICH THE ASSESSEE WAS EXPORTING. THE CIT(A) RELIED ON THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF M/S. S.A. BUILDERS (SUPRA) AND HELD THAT TH E ADVANCES GIVEN TO THE AFORESAID TWO SISTER CONCERNS WERE OWING TO COMMERCIAL EXPEDIENCY AND, THEREFORE, THOSE HAVE TO BE CONSIDERED HAVING BEEN GIVEN FOR BUSINESS PURPOSE AND NO DISALLOWANCE U/S. 36(1)(III) CAN BE MADE. THUS, THE CIT(A) RESTRICTED THE DI SALLOWANCE TO RS.1,16,758/ - . HENCE, THE REVENUE IS IN APPEAL BEFORE THE TRIBUNAL. 15. WE HAVE HEARD THE SUBMISSIONS. THE LD. DR SUBMITTED THAT THE CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE WITHOUT GIVING A POSITIVE FINDING REGARDING USE OF BORROWED FUNDS FO R THE PURPOSE OF BUSINESS. IT WAS SUBMITTED BY HIM THAT THE H ON BLE S UPREME C OURT IN THE CASE OF M/S. S. A BUILDERS (SUPRA) HAS HELD IN PARA 32 THAT IN ALL CASES IN INTEREST FREE ADVANCES TO SISTER CONCERNS WILL NOT BE ALLOWED AS A DEDUCTION. THE H ON BLE S UPREME C OURT HAS HELD THAT IF THE SISTER CONCERN UTILIZES THE AMOUNT WHICH IT HAD RECEIVED AS INTEREST FREE LOAN FOR PERSONAL BENEFIT OF THE DIRECTOR THEN IT CANNOT BE SAID THAT THE INTEREST FREE ADVANCE WAS FOR THE PURPOSE OF COMMERCIAL EXPEDIENCY. IN THI S REGARD, THE LD. DR SUBMITTED THAT IN THE CASE OF INTEREST FREE LOANS TO M/S/. TREND SETTERS KFTZ AND M/S. SHRUTI CORPORATION, THE CIT(A) HAS NOT GIVEN ANY FINDING WITH REGARD TO UTILIZATION OF INTEREST FREE FUNDS BY THEM FOR THEIR BUSINESS. THE LD. DR FU RTHER PLACED RELIANCE ON THE DECISION OF THE H ON BLE PUNJAB & H ARYANA COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P & H) AND SUBMITTED THAT THE BURDEN OF ESTABLISHING THAT THE BORROWED FUNDS ON WHICH INTEREST WAS PAID WAS UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WAS ON THE ASSESSEE AND ONLY ON ESTABLISHING SUCH FACT THE ASSESSEE WILL BE ENTITLED TO CLAIM DEDUCTION U/S. 36(1)(III) OF THE I. T. ACT. ACCORDING TO HIM , THE ASSESSEE IN THE PRESENT CASE HAS FAILED TO SATISFACTORIL Y EXPLAIN AS TO HOW THE BORROWED FUNDS ON WHICH INTEREST WAS PAID WERE UTILIZED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. 1 6 . THE LD. COUNSEL SHRI. B.V. JHAVERI FOR THE ASSESSEE REITERATED THE PLEA OF THE ASSESSEE AS PUT FORTH BEFORE THE CIT(A). FURTH ER RELIANCE WAS PLACED BY HIM ON THE DECISION OF THE HON BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD. 313 ITR 340 (BOM). IN THE AFORESAID DECISION THE HON BLE BOMBAY HIGH COURT HAS HELD THAT WHERE INTEREST FREE FUNDS AND I NTEREST BEARING FUNDS WERE AVAILABLE FOR USE THEN A PRESUMPTION WOULD ARISE THAT INTEREST FREE FUNDS WERE UTILIZED TO GIVE INTEREST FREE LOANS. FURTHER RELIANCE WAS PLACED BY HIM ON THE DECISION OF THE HBHC IN THE CASE OF CIT VS. BOMBAY SAMCHAR LTD. 74 ITR 723 (BOM) WHEREIN IT WAS LAID DOWN THAT THE FACT THAT THE ASSESSEE COULD HAVE DECREASED THE EXTENT OF ITS BORROWINGS BY COLLECTING THE OUTSTANDING AND THEREFORE WOULD NOT BE ENTITLED TO CLAIM INTEREST PAID BY IT ON BORROWED CAPITAL WAS UNTENABLE. IT WAS S UBMITTED THAT THE DECISION OF HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF ABHISHEK INDUSTRIES LTD. (SUPRA) TO THE CONTRARY CANNOT BE FOLLOWED. 1 7 . WE HAVE HEARD THE RIVAL SUBMISSIONS. THE ASSESSEE FIRM IS CARRYING ON BUSINESS OF MANUFACTURING AND EXPORTING OF BED LINENS AND BED SHEETS. IN THE COURSE OF THE BUSINESS THE ASSESSEE FIRM AVAILED OF PRE - SHIPMENT CREDIT LOAN (PCL). ON THE RECEIPTS OF PCL THE ASSESSEE FIRM INCURRED EXPENSES FOR PURCHASE OF RAW MATERIALS AND MANUFACTURE OF BED LINENS AND B ED SHEETS FOR EXPORT. ON EXPORT OF THE GOODS THE EXPORT BILL S ARE DISCOUNTED WITH THE BANK. THE DISCOUNTED EXPORT SALE PROCEEDS ARE ADJUSTED AGAINST THE PCL GIVEN BY THE BANK. ON REALIZATION OF THE EXPORT BILL THE AMOUNT REALIZED IS ADJUSTED AGAINST THE AM OUNT GIVEN ON DISCOUNTING OF THE BILL. THE AFORESAID MODUS OPERANDI HAS BEEN EXPLAINED BY AN EXAMPLE AS UNDER: (I) THE ASSESSEE FIRM RECEIVED THE PCL OF RS.25,00,000/ - ON 02.04.2004 AND ACCORDINGLY THE ASSESSEE CREDITED PCL A/C. IN ITS BOOKS BY RS.25,00 ,000/ - . (II) THE SAID AMOUNT OF RS.25,00,000/ - WAS CREDITED INTO THE BANK ACCOUNT OF THE ASSESSEE WITH SYNDICATE BANK ON 02.04.2004 (III) FROM THE AFORESAID AMOUNT OF RS.25,00,000/ - VARIOUS PAYMENTS WERE MADE FOR PURCHASE OF RAW MATERIALS AND MANUFACTURE OF GOO DS. (IV) THEREAFTER THE ASSESSEE FIRM EXPORTED THE GOODS AND RAISED TWO EXPORT BILLS BEARING NOS. TS - 84 DATED 12.05.2005 FOR $ 6,046.50 (I.E. RS.2,73,604.13) AND TS - 93 DATED 19.05.2004 FOR $ 63,227.82 (I.E. RS.28,61,058.86). (V) THESE TWO EXPORTS BILLS WERE DISCOU NTED BY THE ASSESSEE FIRM WITH THE BANK FOR WHICH THE BANK ISSUED ADVICES FOR RS.28,61,058.86 AND RS.2,73,604.12. (VI) THE AFORESAID BANK ADVICES ARE RECORDED BY THE ASSESSEE IN THE BANK ACCOUNT MAINTAINED IN ITS BOOKS BY PASSING THE JOURNAL ENTRY. SIMILARLY N ECESSARY JOURNAL ENTRIES ARE PASSED IN PCL ACCOUNT AND THEREBY PCL ACCOUNT IS DEBITED BY THE AMOUNT OF DISCOUNTED PROCEEDS. (VII) ON REALIZATION OF THE EXPORT BILLS THE SALE PROCEEDS RECEIVED BY THE BANK ARE ADJUSTED AGAINST THE BILL DISCOUNTING. THE AFORESAI D EXAMPLE PROVES THAT NEITHER THE PCL AMOUNT NOR THE AMOUNT RECEIVED ON BILL DISCOUNTING CAN EVER BE USED FOR NON - BUSINESS PURPOSES BY THE ASSESSEE FIRM. 18. IT IS ALSO SEEN FROM THE BALANCE SHEET OF THE ASSESSEE FIRM AS ON 31 ST MARCH, 2005 THAT THE PARTN ERS OF THE ASSESSEE FIRM HAD THEIR OWN CAPITAL OF RS.10.50 CRORES AND THE LOAN FUNDS OF RS.6.14 CRORES. THE DETAILS OF THE LOAN FUNDS (SECURED LOANS) ARE GIVEN ON PAGE 16 OF THE PAPER BOOK WHICH SHOWS THAT THE ASSESSEE FIRM HAD AVAILED PCL OF RS.3,98,18,21 8/ - AND THE ASSESSEE FIRM HAD AVAILED THE FACILITY OF DISCOUNTING BILLS AGGREGATING TO RS.2,00,86,177/ - (I.E. RS.32,84,301 + RS.21,15,682 + RS.95,01,193 + RS.51,84,001). 19 . AS EXPLAINED HEREINABOVE NO PORTION OF THE PCL AND THE BILL DISCOUNTING FUNDS COU LD BE USED FOR NON - BUSINESS PURPOSES AND THEREFORE, INTEREST PAID ON PCL OF RS.3.98 CRORES AND THE BILL DISCOUNTING FACILITY OF RS.2.00 CRORES AMOUNTING TO RS.83,94, 769/ - CANNOT BE DISALLOWED AND WAS RIGHTLY DELETED BY THE CIT(A). 2 0 . THE BALANCE LOAN FUN DS ARE IN RESPECT OF THREE CAR LOANS TAKEN BY THE ASSESSEE FIRM AGGREGATING TO RS.15,21,109/ - . THESE LOANS ARE UNDOUBTEDLY USED FOR PURCHASING THE CARS AND THEREFORE, THESE LOAN AMOUNTS COULD NOT HAVE BEEN USED FOR NON - BUSINESS PURPOSES. 21. AS REGARDS THE LOANS GIVEN TO M/S. TREND SETTER, KFTZ AT RS.38,42,205/ - , M/S. SHRUTI CORPORATION AT RS.15,45,462/ - , T HERE IS NO QUARREL ON THE FACT THAT M/S. TREND SETTER, KFTZ GOT DESTROYED IN JUNE 98 DUE TO HEAVY CYCLONE WHICH OCCURRED IN THE COASTAL AREA OF GUJARA T. FURTHER, THE FACTS ARE ALSO ON RECORD THAT THE SAID SISTER CONCERN SUPPLIED GOODS TO THE A SSESSEE TO A LARGE EXTENT. IN SUCH CIRCUMSTANCES THE PLEA OF THE ASSESSEE THAT IT GAVE ADVANCE RE - ESTABLISH THE FACTORY OF SISTER CONCERN VIZ. TREND SETTER, KFTZ T O RESTORE THE SUPPLY OF GOODS FROM THE SAID FIRM HAS TO BE ACCEPTED AS A STEP TAKEN OWING TO COMMERCIAL EXPEDIENCY. SIMILARLY, THE INTEREST - FREE ADVANCE GIVEN TO M/S. SHRUTI CORPORATION IS ALSO OWING TO COMMERCIAL EXPEDIENCY AS IT WAS ONLY FOR THE ADVANCE TO SUPPLY THE GOODS. IT IS ALSO NOTICED DURING THE F.Y. 1999 - 2000, M/S SHRUTI CORPN SUPPLIED THE GOODS WORTH RS.91,65,816/ - AND IT HAS ALSO SUPPLIED GOODS WORTH RS.53,25,487/ - DURING THE PREVIOUS YEAR RELEVANT TO ASSESSMENT YEAR 2005 - 06. THEREFORE, THE A DVANCES GIVEN TO SHRUTI CORPN AGGREGATING TO RS.15,45,462/ - AS ON 31.03.2005 HS TO BE HELD AS ONE GIVEN OWING TO COMMERCIAL EXPEDIENCY. 2 2 . IN THE LIGHT OF THE ABOVE, WE ARE OF THE VIEW THAT THE CIT(A) WAS JUSTIFIED IN RESTRICTING DISALLOWANCES MADE BY T HE ASSESSING OFFICER. AS FAR AS THE DECISION OF THE HON BLE SUPREME COURT IN THE CASE OF ABHISHEK IS CONCERNED, IT RUNS CONTRARY TO THE LAW LAID DOWN BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF BOMBAY SAMCHAR (SUPRA) . T HE DE CISION OF THE HON BLE BOMB AY HIGH COURT WHICH IS JURISDICTIONAL HIGH COURT HAS TO BE FOLLOWED. FOR ALL THE ABOVE REASONS, WE UPHOLD THE ORDER OF THE CIT(A) AND DISMISS THE APPEAL FILED BY THE REVENUE. 2 3 . IN THE RESULT, REVENUE S APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COU RT ON 5 TH FEBRUARY, 2010 . SD/ - SD/ - R.S. SYAL N.V.VASUDEVAN ( ACCOUNTANT MEMBER ) ( JUDICIAL MEMBER ) MUMB AI: DATED 5 TH FEBRU ARY, 2010. NEELAM COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT (A) - XV CONCERNED 4. THE CIT CONCERNED 5. THE DR J BENCH BY ORDER TRUE COPY AS ST. REGISTRAR, ITAT, MUMBAI