M/s Deepak Agro Industries, Solan V. Pr. CIT, Shimla

ITA 497/CHANDI/2019

AI Insights

The case involves M/s Deepak Agro Industries appealing against the order of the Principal Commissioner of Income Tax (PCIT), Shimla, which was passed under section 263 of the Income Tax Act, 1961. The appeal contested the PCIT's decision to set aside the assessment order under section 143(3) dated 23/09/2016 for the assessment year 2014-15. The primary contention was that the original assessment was neither erroneous nor prejudicial to the interests of the revenue, and thus, the invocation of section 263 was unjustified. The Tribunal found that while some issues raised by the PCIT warranted re-examination, others, such as the disallowance of bank charges and interest on car loans, were correctly decided by the Assessing Officer.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 127675 (ITAT-CHANDIGARH)
• Duration Of Justice: 3 year(s) 9 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-01-2023
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: A
• Next Hearing Date: 08-01-2023
• Assessment Year: 2014-2015
• Appeal Filed On: 17-04-2019
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Revision of order; Business expenditure; Assessment record
• Section: 263; 2; 143(3)

Judgement Text

आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “ए” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “A”, CHANDIGARH ी आकाश द प जैन, उपा य एवं ी #व$म &संह यादव, लेखा सद+य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM आयकर अपील सं./ ITA NO. 497/Chd/ 2019 नधा रण वष / Assessment Year : 2014-15 M/s Deepak Agro Industries Deonghat, Kalka Shimla Road, Solan (H.P.) बनाम The Pr. CIT Shimla (H.P.) थायी लेखा सं./PAN NO: AAHFD1258L अपीलाथ /Appellant यथ /Respondent नधा रती क! ओर से/Assessee by : Shri Raj Kumar, C.A राज व क! ओर से/ Revenue by : Shri Vivek Nangia, CIT, DR स ु नवाई क! तार&ख/Date of Hearing : 09/01/2023 उदघोषणा क! तार&ख/Date of Pronouncement : 27/01/2023 आदेश/Order PER VIKRAM SINGH YADAV, A.M. : This is an appeal filed by the Assessee against the order of Learned Principal Commissioner of Income Tax, Ludhiana-1 [in short the ‘Ld. PCIT’] passed u/s 263 of the Income Tax Act, 1961 (in short ‘the Act’) dated 25/03/2019 pertaining to assessment year 2014-15, wherein the Assessee has taken the following grounds of appeal: “1. That under the facts and circumstances, the impugned asstt. order u/s. 143(3) Dtd.23.09.16 is neither erroneous nor prejudicial to the interest of revenue so as to provide the ground for invoking and assuming the jurisdiction u/s.263 of the I.T. Act by PCIT. 2. That under the facts and circumstances, during impugned asstt. proceedings, the A.O. examined the regular books of account, all details asked for were furnished and examined, the case was discussed and trading addition of Rs.40,000/- and addition of Rs.78,620/-was made out of expenses claimed in the P&L, A/c. hence, the impugned asstt. being framed after examining the returned income and the books as per law, therefore the impugned asstt. order is neither erroneous nor prejudicial to the interest of revenue so as to allow to invoke jurisdiction u/s.263 of the I.T. Act. 3. That under the facts and circumstances, in view of the fact that SCN u/s 263 was issued on only three issues namely verification of sundry creditors 2 correctness of interest expenses u/s.36(1 )(iii) claimed at Rs. 19,48.522/- and to examine the nature and reasonableness of expenses claimed in P&L A/c., Ld. PCIT was not legally justified and competent to set aside the complete asstt. order which obviously includes other issues also. 4. That under the facts and circumstances, the issue of sundry creditors was examined by the Ld. A.O. as per law during the course of impugned asstt. proceedings and he has taken a possible view on the aspect, hence, the impugned asstt. order on this issue is neither erroneous nor prejudicial to the interest of the revenue so as to allow to proceed u/s.263 of the I.T. Act. 5. That under the facts and circumstances, the issue of interest expenses of Rs. 19,48,522/- was examined bv the Ld. A.O as per law during the course of impugned asstt. proceedings and he has taken a possible view on the aspect, hence, the impugned asstt. order on this issue is neither erroneous nor prejudicial to the interest of the revenue so as to alllow to proceed u/s.263 of the I.T. Act. 6. That under the facts and circumstances, the issue of nature and reasonableness of expenses claimed in the P&l. A/c was examined by the Ld. A.O as per law during the course of impugned asstl. proceedings whereby he also made a disallowance of Rs.78.620/- out of such expenses and has taken a possible view on the aspect, hence, the impugned asstt. order on this issue is neither erroneous nor prejudicial to the interest of the revenue so as to allow to proceed u/s.263 of the I.T. Act. 7. That under the facts and circumstances, the impugned order u/s.263 further stands vitiated in law on the ground of no enquiry being done by the PC1T himself for finding of as to how and in what manner the impugned order u/s. 143(3) Dtd.23.09.16 is erroneous and prejudicial to the interest of revenue.” 2. At the outset, the Ld. AR submitted that the assessee does not wish to press Ground Nos. 4 and 6, hence these grounds are dismissed as not pressed by the Ld. AR on behalf of the assessee. 2.1 It was submitted by the ld AR that the only issue that remains relates to the interest on loans amounting to Rs. 19,48,522/- which has been directed to be disallowed u/s 36(1)(iii) of the Act by the Ld. Pr. CIT. 2.2 In this regard, it was submitted that the assessee has maintained regular books of account which were produced and examined on test check basis by the AO and there is a categorical finding in this regard in the assessment order. It was submitted that after examining the books of account, the AO disallowed Rs. 40,000/- relating to inventory and Rs. 78,620/- out of various expenses which 3 proves that the AO examined the case thoroughly and made the additions wherever the same were required. It was submitted that the AO examined the complete case as he thought prudent and necessary under the facts of the case and it is the prerogative of the AO to decide the issues on which he want to raise specific queries after examining the books of account and records. It was submitted that there is no requirement in law to raise queries even on the issues on which the AO after examining the record feels satisfied. It was submitted that if in the opinion of the Ld. PCIT, some more enquiries were to be made, this opinion of the Ld. Pr. CIT cannot be a basis for invoking the provisions of Section 263 of the Act. It was further submitted that various instances wherein the Explanation 2 to Section 263 can be invoked are not applicable in the instant case. It was accordingly submitted that it is not a case where the AO has lapsed in his duties so much so which may provide the platform for invoking Section 263 of the Act. It was submitted that where two views are possible, the provision of Section 263 are not applicable and merely because the Ld. Pr. CIT disagrees with the AO, the same cannot be a reason for invoking Section 263 of the Act. 2.3 On merits, it was submitted that the disallowance consists of two amounts namely bank charges of Rs. 1,32,786/- and interest of Rs. 18,15,736/-. It was submitted that the bank charges being normal business expenses cannot be disallowed under section 36(1)(iii) of the Act. It was further submitted that interest of Rs. 18,15,736/- in turn consists of interest on car loan amounting to Rs 91,293/- which again cannot be disallowed u/s 36(1)(iii) of the Act and interest of Rs 17,24,442/- for availing cash credit limits from Punjab National Bank. 2.4 In this regard, it was submitted that the capital of the Partners is Rs. 1,20,93,976/- as apparent from the balance sheet of the assessee firm and in addition, a sum of Rs. 42,25,539/- is available interest free to the assessee, which 4 has been shown under the head “payable to others”, in the balance sheet. It was submitted that it is a settled law that to the extent of partners capital, the interest free amount given should be set off. It was accordingly submitted that to the extent of Rs. 1,63,19,515/-, the amount should be deemed to be available with the assessee for giving interest free loans. 2.5 It was further submitted there is no nexus between the interest bearing funds availed and interest free loans given. The Ld. Pr. CIT has not been able to point out that any interest bearing funds have been used for giving interest free loans. It was further submitted that out of the total interest, Rs. 17,24,442/- has been paid to the bank for availing cash credit limit which has been availed since earlier period and no disallowance has ever been made in the past for the interest paid to bank for availing the cash credit limit. It was accordingly submitted that even on merits there is no case for disallowance of any interest under section 36(1)(iii) of the Act. Further in support, various decisions were relied upon and it was submitted that the impugned order so passed by the ld PCIT may be set-aside and that of the AO be sustained. 3. Per contra, the Ld. CIT/ DR submitted that it is a case where no show cause notice has been issued by the AO inquiring about the interest expenses claimed by the assessee. It was submitted that no query has been raised by the AO during the course of entire assessment proceedings and it is therefore a case where the matter has not been examined at all by the AO, and it is therefore a case of complete lack of inquiry on the part of the AO. It was submitted that it was a case where the matter was selected for complete scrutiny and given the quantum of loan transactions and interest expense claimed by the assessee, it was incumbent on the part of the AO to raise specific queries regarding these transactions and seek explanation and submissions from the assessee which the AO has failed to carry out during the 5 course of assessment proceedings and basis the material available on the record, it has rightly been pointed out by the Ld. Pr. CIT and the jurisdiction under section 263 has rightly been invoked by the Ld. Pr. CIT. Further the reference was drawn to the findings of the Ld. Pr. CIT which are contained at para 6.3 to 6.5 of the impugned order which read as under: “6.3 Further, in the Balance Sheet, the assessee has shown secured & unsecured loans at Rs.2,03,71,893/- and Rs. 10,00,000/- respectively on which the interest & bank expense have been claimed at Rs. 19,48,522/- in the Profit & Loss Account. On the assets side of the Balance Sheet, the assessee has shown amount Recoverable from Others' at Rs.2,15,68,200/-. The assessee in its reply has stated that it enjoys its own capital of Rs. 1,20,93,976/- and interest free amount of Rs. 42,25,540/- which can be given interest free to anyone. However, the interest free funds available with the assessee are found less than the interest free advances given. Or in other words, the interest free advances are given by the assessee out of the interest bearing funds; the details and purpose thereof whether for proposes or otherwise is not verified by the A.O. 6.4 The essential test to be applied for disallowance u/s 36(1)(iii) of the act is whether there is direct nexus between diversion of interest- bearing funds for interest free advances. In this case, from the perusal of Balance Sheet, it is observed that in the year under consideration, there is a increase of Rs. 1.58 crore as secured loan and Rs. 42 lakhs as payable to others by the assessee on the liability side; and increase of Rs. 2.04 crore as recoverable from others shown on asset side. It clearly shows that this increase in liability side is used to provide interest free advances. Besides, from the perusal of the list of parties available on assessment record, it is noticed that only one party (namely Deepak Industries, Chambaghat) is a supplier. Further, it is also noted that during the year under consideration there is a decrease in outstanding balance shown as advances to this supplier vis-a-vis previous year. All other parties are sister concerns of the assessee to whom interest free advance have been given and from those no goods or services are to be received. The AO has completely failed to conduct any enquiry to verify the commercial purpose of giving interest bearing funds as interest free advances to sister concerns. Thus, interest attributable to such amounts advanced as free of interest requires to be disallowed as the funds to this extent cannot be termed as used for the business purposes and requires to be disallowed u/s 36(1)(iii). 6.5 On account of these undisputed facts on record, it is held that the assessment order passed by the AO u/s 143(3) dated 23.09.2016 is not only erroneous but also prejudicial to the interest of the revenue within the meaning of the provisions of section 263 of the Act.” 3.1 It was accordingly submitted that there is no infirmity in the Ld. Pr. CIT invoking his jurisdiction under section 263 of the Act and the order passed by the 6 AO under section 143(3) has been rightly held as erroneous in so far as prejudicial to the interest of the Revenue. He accordingly supported the order and the findings of the Ld. Pr. CIT and it was submitted that the appeal so filed by the Assessee be dismissed. 4. In the rejoinder, referring to the contention advanced by the ld CIT DR that it was a case of complete scrutiny where all matters arising out of the return of income are opened for verification by the AO, our reference was drawn to the impugned order where it has been stated by the ld PCIT that “the case was selected for complete scrutiny to verify low income shown by large contractors, large increase in sundry creditors against reduction in business income as compared to preceding year and mismatch in amount paid to related persons u/s 40A(2)(b) reported in ITR and Audit report”. It was accordingly submitted that the said contention raised by the ld CIT DR cannot be accepted. 5. We have heard the rival contentions and purused the material available on record. Firstly, it is noted that the matter was selected for complete scrutiny to examine interalia low income shown by the assessee. The AO was therefore required to examine the transactions both on the receipts and expenditure side which will have an impact on the income so disclosed by the assessee and which will include claim of interest expense in the profit/loss account. On perusal of the profit/loss account, it is noted that the assessee has claimed total interest and bank expenses of Rs 19,48,522/- which is prima facie a substantial claim given quantum of other expenses claimed in the profit/loss account and the same therefore should have been subject to examination and verification by any reasonable yardstick which may be employed by the AO. The said claim of interest expense is coupled with the movement in the secured loan taken by the assessee which has increased by Rs 1.58 crores during the year and increase of Rs 2.04 crores as recoverable from others as shown in the asset side of the 7 assessee’s balance sheet. There is however nothing on record that the AO has raised any query to the assessee seeking any information/documentation relating to loan transactions and interest expenses claimed in the profit/loss account. There is thus no enquiry or verification initiated and undertaken by the AO during the course of entire assessment proceedings regarding the claim of interest expense and therefore, we agree with the findings of the ld PCIT that it is a case where the AO has failed to conduct any enquiry and verification. In light of the same, we are unable to accept the ld AR’s contention that there was no requirement in law to raise queries even on the issues on which the AO after examining the record feels satisfied as it is case where there is a failure on the part of the AO to examine the profit/loss and balance sheet where there is substantial movement in loan transactions both on the liability and asset side of the balance sheet besides claim of interest expense in the profit/loss account and the question of satisfaction will arise where the matter has been examined at first place and which is completely absent in the instant case. 6. The bank charges amounting to Rs. 1,32,786/- and interest on car loan amounting to Rs 91,293/- cannot be subject matter of disallowance u/s 36(1)(iii) of the Act and to this extent, we agree with the ld AR and the order passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue and the findings of the ld PCIT are set-aside to this extent. 7. This leaves us with claim of interest expense amounting to Rs 17,24,442/- for availing cash credit limits from Punjab National Bank. In this regard, it has been contended that the interest has been paid to the bank for availing cash credit limit which has been availed since earlier period and no disallowance has ever been made in the past for the interest paid to bank for availing the cash credit limit. It has been further contended that the assessee is having interest free funds in form of partner’s capital and has another sum of Rs. 42,25,539/- 8 which is available interest free to the assessee. Merely the fact that no disallowance has been made in the earlier period, and partners capital and other funds are available at the balance sheet cannot be accepted on face value as what is relevant is the availability of funds and nature thereof at the relevant point in time when the funds were advanced to the sister concerns out of the cash credit account. The cash credit facility is an ongoing (rather than one time) credit facility provided by the banks for working capital purposes to its clients and there are withdrawals and deposits from time to time for meeting business expenditure and receipts from business operations. Depending on the position of the funds in the said cash credit account on a given day, where the withdrawals are more than the deposits, the surplus withdrawals are in the nature of short term borrowings from the bank on which the bank charges interest at the prescribed rate. Where such borrowings are used for the purposes of giving the loans/advances, then there is clearly a nexus between the borrowings and the loans/advances and interest to that extent is directly related to giving of loans/advances and test of business expediency needs to be satisfied. Similarly, where the deposits are more than the withdrawals on a given day and such excess deposits are utilised by the assessee for the purpose of making any loans and advances, no interest would be charged by the bank as the assessee would in effect be using its own funds at the given point of time. Further, nature of deposits in such cash credit account needs to be examined as to whether the deposits are from business operations or there are also deposits by way of fund transfer from other bank accounts and the nature of such funds from other bank accounts – in the nature of borrowings or from business operations. In case of borrowed funds have been transferred to this particular cash credit account and such funds are then utilized in giving loans and advances, again a nexus is established between the borrowed funds and the loans/advances. In our view, the nature and movement of funds in the cash credit account through which the advances to sister concerns have been given 9 by the assessee has not been examined by the AO and the order so passed is clearly erroneous in so far as prejudicial to the interest of the Revenue. The credits and withdrawals in such cash credit account need to be examined and a clear nexus is required to be established between the borrowed funds and making of loans/advances to Sister concerns. On the same footing, the argument of the assessee regarding availability of its own funds need to be tested and examined after analyzing the nature and position of funds at the relevant point of time of making such advances. In light of aforesaid discussions, we uphold the order of the ld PCIT to this extent and the assessment order is set- aside to this limited extent to examine the matter afresh in light of above discussions and as per law. Needless to say, the Assessing officer shall provide reasonable opportunity to the assessee and the latter shall submit the desired information/documentation as so desired by the Assessing officer. 8. In the result, the appeal of the assessee is partly allowed. Order pronounced in the open Court on 27/01/2023 Sd/- Sd/- आकाश द प जैन #व$म &संह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा य / VICE PRESIDENT लेखा सद+य/ ACCOUNTANT MEMBER AG Date: 27/01/2023 आदेश क! त,ल-प अ.े-षत/ Copy of the order forwarded to : 1. अपीलाथ / The Appellant 2. यथ / The Respondent 3. आयकर आय ु /त/ CIT 4. आयकर आय ु /त (अपील)/ The CIT(A) 5. -वभागीय त न4ध, आयकर अपील&य आ4धकरण, च7डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड फाईल/ Guard File आदेशान ु सार/ By order, सहायक पंजीकार/ Assistant Registrar