Appeal Details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 61580 (ITAT-CUTTACK)
Assessee PAN
Bench
Appeal Number
Duration Of Justice
5 month(s) 23 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
11-05-2012
Appeal Filed By
Assessee
Bench Allotted
DB
Next Hearing Date
07-05-2012
Assessment Year
2007-2008
Appeal Filed On
18-11-2011
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE : SHRI K.K.GUPTA, AM, AND SHRI K.S.S.PRASAD RAO, JM ITA NO. 465/CTK/2011 (ASSESSMENT YEAR 2007 - 08) SRI SURESH KUMAR BHARALAWALA, CHOUDHARY BAZAR, CUTTACK 753 002 PAN: AAWPB 4454 D VER SUS INCOME - TAX OFFICER, WARD 2(3), CUTTACK. (APPELLANT) (RESPONDENT) FOR THE APPELLANT: SHRI P.C.MISHRA, AR FOR THE RESPONDENT SHRI S.C.MOHANTY, DR DATE OF HEARING : 08.05.2012 DATE OF PRONOUNCEMENT : 11.05.2012 ORDER SHRI K.K.GUPTA, AM : T HIS APPEAL BY THE ASSESSEE IS ON THE SOLITARY ISSUE THAT THE LEARNED CIT(A) ERRED IN CONFIRMING THE PROPORTIONATE INTEREST PAID ON THE BANK LOAN AGAINST HYPOTHECATION OF STOCK IS TO BE DISALLOWED AS AMOUNT OF ADVANCE MADE BY THE ASSESSEE WAS WITHOUT CHARGI NG OF INTEREST AS HAD BEEN ROUTED THROUGH THE BANK . 2. THE BRIEF FACTS RELATING TO THE ISSUE AS HAVE BEEN BROUGHT ON RECORD ARE THAT THE ASSESSEE IS A WHOLESALE DEALER IN BOOKS AND STATIONERIES WHEN THE ASSESSING OFFICER IN THE PROCEEDINGS U/S.143(3) OBSER VED THAT A SUM OF 32,37,348 WAS HELD AS ADVANCE BY THE FOLLOWING PERSONS. A . BHUBANESWAR MODEL PUBLIC SCHOOL 21,62,348 B . ASHOK KUMAR 5,00,000 C . SUSHIL BUDHIA 2,00,000 D . RAM GOPAL SIKARIA 3,75,000 32,37,348 THE ASSESSING OFFICER REQUIRED T HE ASSESSEE TO FILE THE AUDITED ACCOUNTS OF BHUBANESWAR MODEL PUBLIC SCHOOL IN ORDER TO CONFIRM THAT THE ADVANCE WITHOUT ANY INTEREST WAS MADE BY THE ASSESSEE FROM ITS BANK ACCOUNT ON WHICH LOAN ACCOUNT THE ASSESSEE HAD PAID INTEREST @12%. THE ASSESSEES I NABILITY TO FURNISH THE BALANCE SHEET OF BHUBANESWAR MODEL PUBLIC SCHOOL RESULTED IN DISALLOWING INTEREST OF 3,88,482 WHEN THE CLAIM OF INTEREST AT ITA NO.465/CTK/2011 2 7,71,973 ON THE AMOUNT OF LOAN BEING THE CASH CREDIT ACCOUNT AGAINST HYPOTHECATION OF STOCK FROM UNION BANK OF INDIA STOOD AT 49,86,000. 3. AGGRIEVED, THE ASSESSEE APPEALED BEFORE THE FIRST APPELLATE AUTHORITY WHO CONFIRMED THE ACTION OF THE ASSESSING OFFICER BY JUSTIFYING HIS VIEW THAT THE ONUS WAS ON THE ASSESSEE TO ESTABLISH WITH CASH FLOW STATEMENTS ABOUT THE AVAILABILITY OF ITS OWN FUND AT THE TIME OF MAKING INTEREST FREE ADVANCES. RELYING ON THE DECISION OF HO NBLE KERALA HIGH COURT IN THE CASE OF CIT V. MANGALAM PUBLICATIONS INDIA (P) LTD., THE LEARNED CIT(A) ALSO DENIED THE ASSESSEE THE BENEFIT OF SUBMISSION THAT THE INTEREST FREE ADVANCES WERE BEING BROUGHT FORWARD FROM EARLIER YEAR WHEN THE INCREASE OF ADVA NCE WAS ONLY 7 LAKHS IN THIS YEAR AS COMPARED IN THE FINANCIAL STATEMENT S FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR. 4. THE LEARNED AR OF THE ASSESSEE SUBMITTED A PAPER BOOK WHEREIN INTER ALIA THE FINANCIAL STATEMENTS DULY AUDITED FOR THE AYS 2006 - 07 AND 2007 - 08 HAVE BEEN FILED. THE COMPILATION OF CASE LAWS REGARDING DISALLOWANCE OF INTEREST HAVE ALSO BEEN FURNISHED IN THE PB WHEN THE ASSESSEE HAS TRIED TO ESTABLISH THE NEXUS THAT THE AMOUNTS PAID AS ADVANCE WITHOUT CHARGING OF INTEREST THOUGH ROUTED THROUGH THE BANK BUT AT THE SAME TIME CANNOT BE CONSIDERED AS FROM INTEREST BEARING FUNDS UTILIZED FOR THE PURPOSE OF ADVANCING THE INTEREST FREE AMOUNT. THE LEARNED AR OF THE ASSESSEE SUBMITTED THAT THE ASSESSEE BEING A WHOLESALE DEALER OF BOOKS WAS REQUI RED TO BRING UP THE SCHOOL WHOSE STUDENTS WOULD REQUIRE THE BOOKS AND THEREFORE, WAS NECESSARILY A BUSINESS TRANSACTION AND NOT AN ADVANCE WITHOUT CHARGING OF INTEREST. HE SUBMITTED THE BALANCE SHEET FOR THE IMMEDIATELY PRECEDING ASSESSMENT YEAR WHEN THE A DVANCE TOTALING 42,04,000 WERE GRANTED AGAINST SECURITY OF SOCK WHEN THE BANK HAD GRANTED LOAN OF 34,62,000. THE INTEREST PAID TO BANK AMOUNTING TO 5,48,694 WAS NOT CONSIDERED FOR NOTIONAL ITA NO.465/CTK/2011 3 DISALLOWANCE IN THE ASSESSMENT YEAR 2006 - 07. IN THE IMPUGNED ASS ESSMENT YEAR THE ADVANCE INCREASED TO 48,43,000 WHEN THE SUM OF 49,85,000 WAS OWED TO THE BANK AGAINST HYPOTHECATION OF THE STOCK. AN INCREASE OF 7 LAKHS I N INTEREST FREE ADVANCE S CAN ONLY BE CONSIDERED IN THE IMPUGNED ASSESSMENT YEAR WHETHER WAS FOR ES TABLISHING THE NEXUS BETWEEN THE INTEREST BEARING FUNDS UTILIZED FOR NON - INTEREST BEARING ADVANCE. 5. THE LEARNED AR OF THE ASSESSEE VEHEMENTLY ARGUED THAT ON A MERE PERUSAL OF THE FINANCIAL STATEMENTS IT WOULD CLEARLY INDICATE THAT THE NEXUS WAS NOT TO BE ESTABLISHED AS OTHERWISE SOUGHT TO BE CONSIDERED BY THE LEARNED CIT(A) AS WELL. THE AMOUNTS HAVE BEEN PAID THROUGH BANK AND THE TURNOVER OF THE ASSESSEE IS DEPOSITED IN THE VERY BANK ACCOUNT BEING MORE THAN 2.5 CRORES. HE P OINTED OUT THAT THE ASSESSEE HAD SUFFICIENT BALANCE INSOFAR AS THE CREDITORS FOR GOODS SUPPLIED AMOUNT ED TO 2.14 CRORES ARE NOT PART AND PARCEL OF THE STOCK HYPOTHECATED AGAINST CASH CREDIT FROM THE BANK. THE STOCK HELD BY THE ASSESSEE WA S SUFFICIENT TO JUSTIFY THE BORROWING FROM THE BANK AND THEREFORE, THE CREDIT AVAILED BY THE ASSESSEE WAS SUFFICIENT TO GIVE INTEREST FREE ADVANCE WHICH IN ITS STRICT SENSE OF A BUSINESS TRANSACTION CANNOT BE DISALLOWED AS NOT FOR ASSESSEES BUSINESS AS BO OKS OF SCHOOL STUDENTS WERE TO BE ROUTED THROUGH THE ASSESSEE. THE ASSESSEES CLAIM BEFORE THE AUTHORITIES BELOW OF HAVING A POSITIVE CAPITAL BALANCE OF 21.5 LAKHS WAS TO SUBSTANTIATE THAT THE NEXUS WAS TO ESTABLISH IN THE IMPUGNED ASSESSMENT YEAR ONLY WH EN THE INTEREST FREE ADVANCE IN THE EARLIER YEARS STOOD SATISFIED TO THE EXTENT THAT THEY WERE MADE OUT OF THE ASSESSEES OWN FUNDS AND NOT FROM THE INTEREST BEARING FUNDS. THE ASSESSEE IS NOT IN MONEY LENDING BUSINESS AND THEREFORE COULD NOT CHARGE FOR AN ADVANCE FOR BUSINESS PURPOSE WHEN THE ASSESSING AUTHORITIES REQUIRED THE ASSESSEE TO EXPLAIN THE BUSINESS REQUIREMENT OF THE DEBTORS FOR USING THE ADVANCE BY THE ASSESSEE ITA NO.465/CTK/2011 4 FOR THEIR BENEFIT. THE DISALLOWANCE THEREFORE BECOMES PRIMARILY UNJUSTIFIED, ILLEGAL AND A FUTILE EXERCISE CONDUCTED BY THE ASSESSING OFFICER FOR DISCHARGING THE NEXUS BY A CASH FLOW WITH ONUS WAS ON THE ASSESSEE WHEN DURING THE COURSE OF BUSINESS OF THE ASSESSEE IT WAS OBSERVED THAT THE INTEREST HAS BEEN PAID TO BANK HOLDING STOCK OF BOO KS ON CREDIT. 6. THE LEARNED DR SUPPORTED THE IMPUGNED ORDERS. 7. WE HAVE HEARD THE RIVAL CONTENTIONS OF THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE, WE ARE INCLINED TO FIND THE CONTENTION OF THE LEARNED AR OF THE ASSESSEE APPROPRIATE TO THE EXTENT THAT THE NEED ARISES FOR ESTABLISHING THE NEXUS ONLY WHEN IT IS TO BE DISALLOWED FOR CAPITALIZATION . A PORTION OF INTEREST INCURRED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE CANNOT BE DISALLOWED JUST BECAUSE THE CHEQUES FLOWED OUT FROM THE SAME ACCOUNT WHICH OVERDRAFT WAS AGAINST THE HYPOTHECATION OF THE STOCK. THE ASSESSEE HAD COMFORTABLE LIQUIDITY POSITION INSOFAR AS BOTH THE AUTHORITIES BELOW HAVE ACCEPTED THAT BESIDES THE ADVANCE WITHOUT INT EREST , THE ASSESSEE WAS ALSO HAVING CASH AND BANK BALANCE OF MORE THAN 39 LAKHS AS ON 31 ST MARCH,2007 AND MORE THAN 25 LAKHS AS ON 31 ST MARCH, 2006. HAVING CONTRADICTED THEIR OWN FINDINGS, THE AUTHORITIES BELOW COULD NOT SHIFT THE ONUS TO BE DISCHARGED BY THE ASSESSEE TO ESTABLISH THE NEXUS. THE ASSESSEE HAD ADEQUATE LIQUIDITY POSITION INSOFAR AS THE CREDITORS WERE BEING PAID AFTER THE SALES HAD BEEN M ADE, THEREFORE , SATISFIED THE BANK INSOFAR AS THE STOCK HYPOTHECATED WAS SUFFICIENT TO SATISFY THE BANK FOR CHARGING INTEREST AS PER THE BALANCE OUTSTANDING. SIMILARLY, THE ASSESSEE IS INDULGED IN A BUSINESS ACTIVIT Y INSOFAR AS HAVING SUFFICIENT CASH AND BANK POSITION DID NOT REQUIRE THE ADVANCES TO BE GIVEN FOR EARNING INTEREST BEING A BUSINESS PROPOSITION. IT WAS NOT THE CASE OF THE ASSESSING OFFICER TO REQUIRE THE ASSESSEE TO CHARGE INTEREST AS THE ASSESSEES CAPITAL ITA NO.465/CTK/2011 5 WAS LESS THAN THE INTEREST FREE ADVANCE. WE HAVE PERUSED THE FINANCIAL STATEMENT FOR BOTH THE CLOSING YEARS AS ON 31 ST MARCH,2006 AND 31 ST MA RCH,2007 WHICH INDICATE THAT THE INTEREST FREE ADVANCE INCREASED F ROM 42 LAKHS TO 48 LAKHS WHEN THE SECURED LOAN INCREASED FROM 34 LAKHS TO 49 LAKHS. IN OTHER WORDS, THE ASSESSEE WAS ALWAYS HAVING SURPLUS FUNDS WHEN IN THE IMPUGNED ASSESSMENT YEAR THE ASSESSEE HAD GENERATED SUFFICIENT FUNDS FOR FURTHER ENHANCING THE ADVA NCE BY 7 LAKHS. AVAILING CREDIT FROM REPUTED PUBLISHERS, THE ASSESSEE HAD RAISED BILLS WHICH SALES WERE ROUTED FOR ADVANCE TO BHUBANESWAR MODEL SCHOOL FOR CONSTRUCTION OF THEIR BUILDING WAS A PURE BUSINESS TRANSACTION CANNOT BE IMPOSED FOR DISALLOWANC E OF A LEGITIMATE CLAIM OF INTEREST PAID TO THE BANK ON THE LOAN AMOUNT UTILIZED BY THE ASSESSEE. WE DO NOT FIND MERIT IN THE DISALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMATION THEREOF BY THE LEARNED CIT(A). IN THIS VIEW OF THE MATTER, WE DIRECT D ELETIO N OF THE ADDITION/DISALLOWANCE OF 3,88,480 WHICH HAS BEEN DISALLOWED FROM THE CLAIM OF INTEREST OF 7,71,793. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALLOWED. S D/ - S D/ - (K.S.S.PRASAD RAO) JUDICIAL MEMBER (K.K.GUPTA) ACCOUNTANT MEMBER DATE: 11.05.2012 H.K.PADHEE, SENIOR PRIVATE SECRETARY. COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT: SRI SURESH KUMAR BHARALAWALA, CHOUDHARY BAZAR, CUTTACK 753 002 2. THE RESPONDENT: INCOME - TAX OFFICER, WARD 2(3), CUTTACK. 3. THE CIT, 4. THE CIT(A), 5. THE DR, CUTTACK 6. GUARD FILE (IN DUPLICATE) TRUE COPY, BY ORDER, SENIOR PRIVATE SECRETARY.
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