Sri. Anil K Mehra, Bangalore V. DCIT, Bangalore

ITA 50/BANG/2011

• Counselvise Citation: 5021114 RSA 2011
• Duration Of Justice: 1 year(s) 5 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-06-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 13-06-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 19-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SUSAN THOMAS JOSE
• Assessee Lawyers: RAGHAVENDRA R CHAKRAVARTHY

Judgement Text

IN THE INCOME TAX APPELLATE TRIBNAL BANGALORE BENCH B, BANGALORE BEFORE SHRI N.V.VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P BOAZ, ACCOUNTANT MEMBER ITA NO.50(BNG.)/2011 (ASSESSMENT YEAR : 2003-04) SHRI ANIL K.MEHRA, THE DEPUTY COMMISSIONER INCOME-TAX, PROP: M/S MEHRA & CO., CIRCLE-5(1), NO.7,MANDI VEERAPPA LANE, BANGALORE SJP ROAD, BANGALORE PAN NO.ABTMP6490L VS APPELLANT RESPONDENT ASSESSEE BY : SHRI RAGHAVENDRA R CHAKRAVARTHY, CA REVENUE BY : SMT. SUSAN THOMAS JOSE, JCIT DATE OF HEARING : 1 3-06-2012 DATE OF PRONOUNCEMENT : 29-06-2012 O R D E R PER SHRI N.V.VASUDEVAN, JM: THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDER DATED 12- 10-2010 OF CIT(A)-II, BANGALORE RELATING TO AY: 20 07-08. 2. THE ONLY ISSUE THAT ARISES FOR CONSIDERATION IN THIS APPEAL BY THE ASSESSEE IS AS TO WHETHER THE CIT(A) WAS JUSTIFIED IN UPHOLDING THE DISALLOWANCE OF INTEREST OF RS.9,99,525/- MADE BY T HE AO. THE ASSESSEE IS AN INDIVIDUAL AND HE IS ENGAGED IN THE BUSINESS OF TRADING IN SANITARY WARE, PIPES AND FITTINGS. ON PERUSAL O F THE PROFIT & LOSS ITA NO.50(B)/2011 2 ACCOUNT THE AO NOTICED THAT THE ASSESSEE HAD CLAIME D DEDUCTION A SUM OF RS.29,32,184/- UNDER THE HEAD INTEREST EXPEN SES. THE ABOVE INTEREST EXPENDITURE RELATES TO INTEREST ON BORROWI NGS OF RS.2,54,65,206/-. FROM THE BALANCE SHEET THE AO NOT ICED THAT THE ASSESSEE HAS MADE THE FOLLOWING ADVANCES. 1. OTHER LOANS RS. 90,46,510 2. MEHRA & SONS RS. 15,00,000 3. SHRAVAN MEHRA RS. 9,00,000 1,14,46,510 THE AO FURTHER NOTICED THAT THE ASSESSEE HAS RECEIV ED AN INTEREST OF ONLY RS.3,18,480/-. THE AO WAS OF THE VIEW THAT TH E ASSESSEE PAID HIGHER INTEREST ON BORROWINGS AND GAVE THOSE FUNDS AT LOWER RATE OF INTEREST. IN VIEW OF THE ABOVE, THE DIFFERENCE BET WEEN INTEREST PAID AND INTEREST RECEIVED WAS TREATED AS EXPENDITURE NO T INCURRED FOR THE PURPOSE OF BUSINESS AND DISALLOWED. THE DISALLOWAN CE WAS WORKED OUT BY THE AO AS UNDER: RS. 29,32,184 = 0.1151 2,54,65,206 0.1151 X 1,14,46,510 = RS.13,18,005 LESS: INTEREST RECEIVED RS. 3,18,480 INTEREST DISALLOWABLE RS. 9,99,525 THIS SUM OF RS.9,99,525/- WAS HELD TO BE INTEREST E XPENDITURE NOT RELATABLE TO BUSINESS AND WAS DISALLOWED. 3. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT T HE CONTENTION OF THE ASSESSING OFFICER IS NOT CORRECT FOR THE REASON S THAT THE ASSESSEE ITA NO.50(B)/2011 3 HAD BORROWED MONEY FROM THE BANK TO THE TUNE OF RS. 2.54 CRORES AND HAD USED THE SAME IN THE FOLLOWING MANNER. SOURCE: AMOUNT BORROWED FROM BANK AS ON 31-03 2007 RS.2,54 ,65,206 BORROWED FUNDS RS.2,54,65,206 APPLICATION: CLOSING STOCK AS ON 31-03-2007 RS.2,63,07,533 SUNDRY DEBTORS AS ON 31-07-2007 RS.1,66,51,765 LESS: SUNDRY CREDITORS FOR GOODS RS.4,29,59,298 RS.1,51,75,010 BORROWINGS UTILIZED FOR WORKING CAPITAL RS.2,77,84,288 IT WAS THUS SUBMITTED THAT THE MONEY BORROWED FROM THE BANK HAVE BEEN UTILIZED ONLY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT AS CAN BE SEEN FROM THE RECORDS THAT THE AMOUNTS THAT HAVE BEEN GIVEN AS LO AN OR OUT OF OWN FUNDS AND BORROWINGS FROM VARIOUS PARTIES. UNSECURED LOANS FROM BANKS AND FIN. INSTITUTIONS AMOUNT (RS.) CHOLAMANDALAM DBS 699,502.00 DCB BANK LOAN 576,345,00 DEUTSCHE BANK 484,827,00 ING VYSYA LOAN A/C 954,700,00 OTHER UNSECURED LOANS AMARCHAND 346,000,00 BATIJA SANJAY 200,000,00 B.T.MOHAN 200,000,00 CHAITANYA & CO 136,960,00 DRUSINA 250,000,00 HARILAL 197,062,00 KAMAL BENSILAL 173,000,00 KANCHAN B TUKREL 171,200,00 KRANTI MOHAN MEHRA 100,000,00 KRIPA S BATHIJA 200,000,00 ITA NO.50(B)/2011 4 MANOJ KUMAR CO 342,400,00 NIRMALA BANSILAL 200,000,00 PANDU BHAI 550,000,00 SHRAVAN MEHRA 72,500,00 TOTAL RS. 5,854,496,00 4. THE CIT(A) HOWEVER, DID NOT ACCEPT THE SUBMISSIONS MADE BY THE ASSESSEE. HE HELD AS FOLLOWS; 3.5 I HAVE CONSIDERED THE FACTS OF THE CASE, THE A SSESSEES SUBMISSIONS AND PERUSED THE ASSESSMENT ORDER. A PE RUSAL OF THE BALANCE SHEETS AS ON 31/3/2006 AND 31/3/2007 RE VEALS THAT UNSECURED LOANS INCREASED FROM RS.1,49,92,398/ - TO RS.2,75,65,414/- AND IT WAS MAINLY WITHDRAWAL FROM THE OD ACCOUNT WITH CANARA BANK FROM RS.1,25,23,004/- TO RS.2,54,65,206/-. IT IS ALSO OBSERVED THAT THE ASS ESSEE HAS ALSO GIVEN LOANS AND ADVANCES AS MENTIONED AT PARA 3.3 S UPRA. FURTHER, IT IS ALSO OBSERVED THAT THE LOAN GIVEN TO M/S M.S.MARKETING ENTERPRISES PVT.LTD., A SISTER COMPAN Y WHEREIN THE ASSESSEE IS A DIRECTOR, ADVANCED LOAN OF RS.90, 56,510/- THIS YEAR AGAINST RS.48,77,810/- LAST YEAR. IN FACT, TH E ADVANCE GIVEN TO THE AFORESAID COMPANY HAS BEEN SHOWN AS O THER LOAN. THE ASSESSEE HAS ALSO GIVEN LOAN DURING THE YEAR TO M/S MEHRA & SONS AND SHRI SHRAVAN MEHRA OF RS.15,00,000/- AND RS.9,00,000/- RESPECTIVELY. THESE CONCERNS AND INDI VIDUALS ARE CLOSELY ASSOCIATED WITH THE ASSESSEE. 3.6. FURTHER, IT IS ALSO SEEN THAT THE ASSESSEE CLA IMED INTEREST TOTALING RS.29,32,184/- ON LOANS, WHICH INCLUDES IN TEREST OF RS.21,19,255/- ON OVERDRAFT ACCOUNT AND INTEREST OF RS.2,01,055/- ON UNSECURED LOANS. ON THE CONTRARY, INTEREST RECEIVED AGAINST LOAN/ADVANCE WAS ONLY RS.3,18,480/ -. 3.7 AT THE TIME OF APPEAL HEARING, THE ASSESSEE HAS FURNISHED EXTRACTS OF THE LEDGER ACCOUNT WITH M/S M.S.MARKETI NG ITA NO.50(B)/2011 5 ENTERPRISES PVT.LTD., FOR THE PERIOD 1/4/2006 TO 31 /3/2007. THE ABSTRACT OF THE ACCOUNT IS AS UNDER. OPENING BALANCE AS ON 1/4/2006 RS. 65,5 3,474 ADD: PAYMENTS MADE DURING THE YEAR RS. 1,06,70,476 LESS: AMOUNT RECEIVED AS REPAYMENT OF LOAN RS. 8 4,27,440 CLOSING BALANCE AS ON 31/3/2007 RS. 87,96,510 3.8 A PERUSAL OF THE LEDGER ACCOUNT SHOWS THAT THE TOTAL ADVANCE MADE DURING THE PREVIOUS YEAR RELEVANT TO T HE ASSESSMENT YEAR UNDER CONSIDERATION WAS RS.1,06,70, 476/- BY WITHDRAWING FROM THE ACCOUNT NO.10748 WITH CANARA B ANK (OD ACCOUNT). IT IS INTERESTING TO NOTE THAT REPAYMENT OF LOAN WAS THROUGH VARIOUS PARTIES AND THAT ALSO BY JOURNAL EN TRIES AND NO SINGLE TRANSACTION HAS BEEN RECEIVED THROUGH CHEQUE S OR DEMAND DRAFTS. A FEW OF SUCH PARTIES ARE H.MURLID HAR & SONS, KOSHANDAS JETHANAND, SUNIL FINANCE, BHARAT SATRAM K UMAR, JAGADISH HEMDEV, CHAITANYA & CO., SHRI SHIVA SAKTHI , GOPALDAS THAKUR, ETC. 3.9 AT THE END OF THE PREVIOUS YEAR, THEY ARE HAVIN G CREDIT BALANCE IN RESPECT OF SUCH PARTIES. IT HAS BEEN TR EATED AS LOAN AND ALSO INTEREST HAS BEEN CLAIMED ON SUCH LOANS. DURING THE YEAR, THE ASSESSEE HAS CLAIMED INTEREST OF RS.2,01, 055/-, WHEREAS IT WAS RS.10,49,942/-LAST YEAR ON SUCH LOAN S. IN FACT, THE AMOUNT BELONGS TO THE ASSESSEE HIMSELF BUT REPA YMENT IS SHOWN IN THE NAME OF VARIOUS PERSONS, WHICH SEEMS T O BE NO GENUINE. THUS, THE INTEREST CLAIMED IS ALSO NOT GEN UINE. ON CLOSE ANALYSIS OF THE STATEMENT OF ACCOUNTS, THE FO LLOWING MISMATCH APPEARS IN THE RELEVANT ACCOUNTS; I) AS PER LEDGER A/C WITH M/S MARKETING ENTERPISES PVT.LTD. OPENING BALANCE AS ON 1/4/2006 RS.65,53,474 AS PER BALANCE SHEET AS ON 31/3/2006 CLOSING BALANCE WOULD BE RS.48,77,810 II) IN THE CAPITAL ACCOUNT FOR THE YEAR ENDING 31/3/2006 THE CLOSING BALANCE WOULD BE RS.65,18,407 IN THE CAPITAL ACCOUNT FOR THE YEAR EN DING 31/3/2006 OPENING BALANCE WOULD BE RS.76,75,346 ITA NO.50(B)/2011 6 III) AS PER STATEMENT OF ACCOUNT IN THE BO OKS OF M/S MS MARKETING ENTERPRISES PVT.LT D., BALANCE AS ON 31/3/2007 RS.53,73,358 AS PER ASSESSEEES BOOK CLOSING BALANCE IS RS.8 7,96,510 3.10 THUS, IT IS OBSERVED THAT SEVERAL DISCREPANCIE S APPEAR IN THE BOOKS OF ACCOUNT. MORE SIGNIFICANT IS THAT WI THDRAWALS FROM THE ODD ACCOUNT WERE UTILIZED IN MAKING ADVANC E TO THE ASSESSEES SISTER COMPANY TO THE EXTENT OF RS.1,00, 85,240/-. THUS, IT CLEARLY INDICATES THAT THE OD ACCOUNT WAS UTILIZED FOR GIVING LOAN INTEREST FREE OF INTEREST AT LOWER RATE . ON THE OTHER HAND, THE ASSESSEE HAS CLAIMED INTEREST IN RESPECT OF OD ACCOUNT AMOUNTING TO RS.21,19,225/- AND INTEREST OF RS.2,01,055/- ON UNSECURED LOAN. THE ASSESSEE ADVA NCED LOAN TO THE EXTENT OF RS.24,00,000/- TO CLOSE ASSOCIATES BUT NO INTEREST WAS CHARGED. 3.11. IN THE LIGHT OF THE DISCUSSIONS MADE ABOVE, I AM IN AGREEMENT WITH THE AOS OBSERVATION THAT THE ASSESS EE IS PAYING HIGHER RATE OF INTEREST ON THE FUNDS, WHICH HAVE BE EN ADVANCED AT LOWER RATE OF INTEREST. SINCE THERE IS NO EXAC T METHOD OF WORKING OUT SUCH INTEREST, THE AOS WORKING FOR DIS ALLOWANCE OF RS.9,99,529/- IS REASONABLE LOOKING TO THE TRANSACT IONS MADE DURING THE YEAR. THEREFORE, THE DISALLOWANCE OF R S.9,99,525/- IS CONFIRMED. 5. AGGRIEVED BY THE ORDER OF CIT(A), HE ASESSEE PR EFERRED THE PRESENT APPEAL BEFORE THE TRIBUNAL. 6. WE HAVE HEARD THE SUBMISSIONS OF THE LEARNED CO UNSEL FOR THE ASSESSEE AND THE LEARNED DR. THE LEARNED COUNSEL F OR THE ASSESSEE SUBMITTED THAT THE AMOUNTS GIVEN TO THE SISTER CONC ERN WITHOUT CHARGING INTEREST WERE GIVEN OWING TO COMMERCIAL EX PEDIENCY AND THERE WAS BUSINESS TRANSACTION JUSTIFYING INTEREST FREE LOANS. IT WAS ALSO SUBMITTED THAT ON HIS FUNDS, OUT OF WHICH THE INTEREST FREE LOAN ITA NO.50(B)/2011 7 WERE GIVEN TO THE SISTER CONCERN. OUR ATTENTION WA S DRAWN TO THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF CIT VS RELIANCE UTILITIES & POWER LTD., 313 ITR 340(BOM.) WHEREIN THE HONBLE BOMBAY HIGH COURT HAS HELD THAT IF THERE WE RE FUNDS AVAILABLE BOTH INTEREST FREE AND OVER DRAFT/LOANS A RE TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OU T OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE ASSESSEE , IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT. IT WA S FURTHER SUBMITTED THAT ONE HAS TO SEE THE OVERALL FUNDS POS ITION TO FIND OUT IF THE INTEREST BEARING FUNDS WERE GIVEN AS INTEREST F REE LOANS TO SISTER CONCERN. 7. THE LEARNED DR HOWEVER RELIED ON THE ORDER OF T HE CIT(A). FURTHER, HE RELIED ON THE DECISION OF THE HONBLE K ERALA HIGH COURT IN THE FOLLOWING CASES; 1. CIT VS V.I.BABY & CO., ( 254 ITR 248) AND 2. CIT VS H.R.SUGAR FACTORY PVT.LTD., (187 ITR 363) WHEREIN IT WAS LAID DOWN IF THE ASSESSEE HAD SUFFIC IENT INTEREST FREE FUNDS THEN THE ASSESSEE OUGHT NOT TO HAVE BORROWED FUNDS AND INCURRED EXPENDITURE IN THE FORM OF INTEREST WHICH WOULD GO TO REDUCE ITS TAXABLE INCOME. REFERENCE WAS ALSO MADE TO THE DECISION OF THE HONBLE DELHI HIGH COURT IN THE CASE OF PUNJAB STAI NLESS STEEL INDUSTRY VS CIT ( 324 ITR 396) WHEREIN IT WAS HEL D THAT INTEREST DISALLOWANCE HAS TO BE SUSTAINED WHERE COMMERCIAL E XPEDIENCY IS NOT ESTABLISHED BY THE ASSESSEE. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS. PERUS AL OF THE WRITTEN SUBMISSIONS FLED BY THE ASSESSEE BEFORE THE CIT(A) SHOWS THAT THE ITA NO.50(B)/2011 8 ASSESSEE HAS SPECIFICALLY PLEADED AVAILABILITY OF S UFFICIENT INTEREST FREE FUNDS FROM WHICH INTEREST FREE LOANS HAD BEEN ADVAN CED TO THE SISTER CONCERN. THE ABOVE ASPECT HAS NOT BEEN EXAMINED BY THE CIT(A). THE CIT(A) HAS PROCEEDED ONLY ON THE BASIS OF THAT THERE WAS NEXUS BETWEEN INTEREST FREE LOANS AND THE INTEREST BEARIN G FUNDS BORROWED FROM THE BANK. IN OUR VIEW, IN THE LIGHT OF THE DE CISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS RELIANCE UT ILITIES & POWER LTD., SUPRA THE PROPER APPROACH SHOULD HAVE BEEN TO FIND OUT THE AVAILABILITY OF FUNDS BOTH INTEREST FREE AND INTERE ST BEARING FUNDS AND APPROPRIATE INTEREST FROM BORROWED FUNDS TO THE INT EREST FREE LOANS TO THE SISTER CONCERN. WE ARE OF THE VIEW, THAT IT W OULD BE JUST AND PROPER TO REMAND THE ISSUE TO THE AO FOR FRESH CONS IDERATION IN THE LIGHT OF THE DECISION OF THE HONBLE BOMBAY HIGH CO URT REFERRED TO ABOVE. WE ARE ALSO OF THE VIEW THAT THE PLEA WITH REGARD TO THE INTEREST FREE FUNDS HAVING BEEN GIVEN OWING TO COMM ERCIAL EXPEDIENCY ALSO REQUIRES EXAMINATION. IN THIS REGARD, WE FIND THAT THE ASSESSEE HAS GIVEN A COPY OF THE ACCOUNTS OF M/S MARKETING W HICH SHOWS THE PURCHASES OF MATERIAL FROM THE AFORESAID COMPANY BY THE ASSESSEE. WE ARE ALSO OF THE VIEW THAT THE ASSESSEE SHOULD BE AFFORDED AN OPPORTUNITY TO PROVE THE EXISTENCE OF COMMERCIAL EX PEDIENCY FOR GIVING THE INTEREST FREE FUNDS TO ITS SISTER CONCER N. REGARDING THE DECISIONS RELIED UPON BY THE LEARNED DR, WE ARE OF THE VIEW THAT IN THE PRESENT CASE THE PLEA OF THE ASSESSEE IS THAT B OTH INTEREST FREE FUNDS AND INTEREST BEARING FUNDS WERE USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE AND THERE WAS NECESSITY TO BORROW FUNDS AND THEREFORE THE DECISIONS RELIED UPON BY THE LEAR NED DR CANNOT BE APPLIED TO THE FACTS OF THE PRESENT CASE. ITA NO.50(B)/2011 9 9. WE THEREFORE, SET ASIDE THE ORDER OF THE AO AND REMAND THE ISSUE WITH REGARD TO DISALLOWANCE OF INTEREST TO THE AO F OR FRESH CONSIDERATION IN THE LIGHT OF THE DIRECTIONS GIVEN ABOVE. FOR STATISTICAL PURPOSES, THE APPEAL OF THE ASSESSEE IS TREATED AS ALLOWED. 10. IN THE RESULT THE APPEAL BY THE ASSESSEE IS TR EATED AS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON THE 29 TH JUNE, 2012. SD/- SD/- (JASON P BOAZ) (N.V.VASUD EVAN) ACCOUNTANT MEMBER JUDICIAL MEMBE R BANGALORE: D A T E D : 29-06-2012 AM* COPY TO : 1 APPELLANT 2 RESPONDENT 3 CIT(A)-IV, BANGALORE. 4 CIT 5 DR, ITAT, BANGALORE. 6 GUARD FILE (1+1) SR. PRIVATE SECRETARY ITAT, BANGALORE