M/s Fashion Textiles, Kollam V. The ACIT, Kollam

ITA 539/COCH/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 58342 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 5 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2012
• Appeal Filed By: Assessee
• Bench Allotted: DB
• Assessment Year: 2006-2007
• Appeal Filed On: 11-10-2010
• Court: TRIBUNAL
• Department Lawyers: VIJAYAPRABHA
• Assessee Lawyers: R KRISHNAN
• Keywords: Proportionate interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI N.R.S.GANESAN, JM AND B.R.BASKAR AN, AM I.T.A. NOS. 538 & 539/COCH/2010 ASSESSMENT YEARS : 2005-06 & 2006-07 FASHION TEXTILES, MAIN ROAD, KOLLAM. [PAN: AAAFR 2000K] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-1, KOLLAM. (ASSESSEE -APPELLANT) (ASSESSEE- RESPONDENT) ASSESSEE BY SHRI R. KRISHNAN, CA REVENUE BY SMT. VIJAYAPRABHA, JR. DR DATE OF HEARING 01/03/2012 DATE OF PRONOUNCEMENT 23/03/2012 O R D E R PER B.R.BASKARAN, ACCOUNTANT MEMBER: THESE TWO APPEALS HAVE BEEN FILED BY THE ASSESSEE AGAINST THE SEPARATE ORDERS DATED 21-07-2010 PASSED BY THE LD. CIT(A)-I, TRIVAN DRUM FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07. SINCE ONE OF THE ISSUES URGE D IN THESE TWO APPEALS IS IDENTICAL IN NATURE, THEY WERE HEARD TOGETHER AND ARE BEING DISP OSED OF BY THIS COMMON ORDER, FOR THE SAKE OF CONVENIENCE. 2. WE SHALL DISPOSE OF THE COMMON ISSUE FIRST. THE SAID ISSUE RELATES TO THE DISALLOWANCE OF INTEREST PAID TO BANKS ON THE GROUN D THAT THE ASSESSEE HAD DIVERTED INTEREST BEARING FUNDS TO ITS SISTER CONCERN. THE FACTS RELATING TO THE SAME ARE STATED IN BRIEF. THE ASSESSEE IS A DEALER IN TEXTILE GOODS. THE BALANCE SHEET OF THE ASSESSEE DISCLOSED DEBIT BALANCES IN THE PARTNERS CURRENT A CCOUNT FOR BOTH THE YEARS. ON A CLOSE SCRUTINY OF THE WITHDRAWALS MADE BY THE PARTNERS, I T WAS NOTICED THAT THE PARTNERS HAVE I.T.A. NOS. 538 & 539/COCH/2010 2 WITHDRAWN MONEY TO THE TUNE OF ` 74.12 LAKHS AND ` 80.95 LAKHS DURING THE YEARS RELEVANT TO THE ASSESSMENT YEARS 2005-06 AND 2006-07 RESPEC TIVELY FOR ADVANCING FUNDS TO A SISTER CONCERN NAMED M/S. FASHION JEWELLERY. THE ASSESS ING OFFICER ALSO NOTICED THAT THE ASSESSEE HAS PAID INTEREST IN BOTH THE YEARS ON THE LOAN TAKEN FROM BANKS, BUT DID NOT COLLECT INTEREST ON THE DEBIT BALANCE OF PARTNERS. HENCE, THE AO SOUGHT EXPLANATIONS ABOUT DIVERSION OF INTEREST BEARING FUNDS TO THE SI STER CONCERN. BEFORE THE ASSESSING OFFICER THE ASSESSEE EXPLAINED THAT IT HAD SUFFICIE NT INTEREST FREE FUNDS AT ITS DISPOSAL IN THE FORM OF SUNDRY CREDITORS AND THE PARTNERS HAVE ONLY WITHDRAWN SUCH FUNDS ONLY AND HENCE THERE WAS NO DIVERSION OF INTEREST BEARING FU NDS. THE SAID EXPLANATIONS WERE NOT CONVINCING TO THE ASSESSING OFFICER AS HE WAS OF TH E VIEW THAT THE SUNDRY CREDITORS MOSTLY REPRESENTED CREDITORS FOR GOODS. ACCORDINGL Y, BY PLACING RELIANCE ON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS. V.I. BABY & CO., (254 ITR 248); THE DECISION OF HONBLE MADRAS HIGH COURT IN THE CASE OF K. SOMASUNDARAN VS. CIT, (238 ITR 939) AND THE DECISION OF HONBLE PUNJ AB & HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., (286 ITR 1), THE ASSESSING OFFICER DISALLOWED PROPORTIONATE INTEREST RELATABLE TO THE ADVANCES GI VEN TO THE SISTER CONCERNS. THE SAID ADDITIONS WERE CONFIRMED BY THE LD. CIT(A). AGGRIE VED, THE ASSESSEE IS IN APPEAL BEFORE US. 3. THE LD. AR SUBMITTED THAT THE PARTNERS OF THE AS SESSEE-FIRM ARE ALSO THE PARTNERS IN THE SISTER CONCERN VIZ., M/S. FASHION JEWELLERY. THE BUSINESSES OF BOTH THE CONCERNS ARE RELATED TO EACH OTHER, I.E., THE ASSESSEE IS IN TEXTILE BUSINESS AND THE OTHER ONE IS IN JEWELLERY BUSINESS. THE TREND TO COMBINE TEXTILE A ND JEWELLERY BUSINESS IS PICKING UP ALL OVER THE COUNTRY, AS THE PEOPLE ARE MOSTLY BUYING J EWELLERY AND CLOTHES DURING FESTIVAL OCCASIONS AND ALSO DURING FAMILY FUNCTIONS. FURTHE R BOTH THE CONCERNS ARE LOCATED AT THE SAME PLACE. HENCE THERE IS COMMERCIAL EXPEDIENCY I N THE ACTION OF THE PARTNERS TO MAKE INVESTMENT IN THE JEWELLERY BUSINESS BY WITHDRAWING FUNDS FROM TEXTILE BUSINESS, AS BOTH THE BUSINESSES COMPLIMENT EACH OTHER. SINCE, MOST OF THE TIME THEY HAVE COMMON CUSTOMERS; THEY BRING IN BUSINESS TO EACH OTHER. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD SUFFICIENT AMOUNT OF INTEREST FREE FUNDS IN THE FORM OF SUNDRY CREDITORS. EXPLAINING I.T.A. NOS. 538 & 539/COCH/2010 3 FURTHER, HE SUBMITTED THAT THE SUNDRY CREDITORS USU ALLY GIVE CREDIT FOR CERTAIN PERIOD AND DURING THAT PERIOD, THE PARTNERS COULD ENJOY THE FU NDS GENERATED THROUGH SALES REALISATION. IN ROTATION, THE PARTNERS USUALLY HAVE SURPLUS FUND S, WHICH HAS BEEN WITHDRAWN FOR MAKING INVESTMENT IN THE SISTER CONCERN. ACCORDINGL Y, HE SUBMITTED THAT THE INTEREST BEARING FUNDS HAVE NOT BEEN USED FOR WITHDRAWALS. ACCORDINGLY HE CONTENDED THAT NO DISALLOWANCE IS CALLED FOR. HE FURTHER SUBMITTED T HAT THE DECISION OF HONBLE KERALA HIGH COURT IN THE CASE OF V.I.BABY & CO. SUPRA IS NOT AP PLICABLE TO THE FACTS OF THE INSTANT CASE, AS THE ASSESSEE HERE-IN IS A BENEFICIARY OF THE INV ESTMENTS SO MADE. 4. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE ASSESSEE HAD BORROWED LOANS FROM BANKS AND PAID INTEREST THEREON BUT FAILED TO COLLECT INTEREST ON ADVANCES MADE TO THE SISTER CONCERN. HENCE, THE DECISION OF THE HON BLE KERALA HIGH COURT IN THE CASE OF V.I. BABY, REFERRED SUPRA IS SQUARELY APPLICABLE TO THE FACTS OF THE CASE. ACCORDINGLY, HE SUBMITTED THAT THE ADDITIONS MADE BY THE ASSESSING OFFICER HAVE TO BE SUSTAINED. 5. WE HAVE HEARD THE RIVAL SUBMISSIONS AND CAREFULL Y PERUSED THE RECORD. WE FIND FORCE IN THE SUBMISSIONS OF THE LD. AR THAT THE BUS INESSES OF BOTH THE CONCERNS COMPLEMENT EACH OTHER AND PARTICULARLY DURING FESTI VALS AND MARRIAGE OCCASIONS. THE BUSINESS STRATEGY ADOPTED BY THE BUSINESSMEN CONSTA NTLY CHANGE AND WE ALSO NOTICE THAT THE TREND OF COMBINING JEWELLERY BUSINESS WITH TEXT ILE BUSINESS IS GEARING UP GRADUALLY. HENCE, IN OUR VIEW, THERE IS COMMERCIAL EXPEDIENCY IN MAKING ADVANCES TO THE SISTER CONCERN THROUGH THE ACCOUNT OF THE PARTNERS. IN OU R VIEW, THERE IS MERIT IN THE ALTERNATIVE CONTENTION OF THE ASSESSEE THAT IT HAS UTILISED INT EREST FREE FUNDS, WHICH ARE AVAILABLE IN THE FORM OF SUNDRY CREDITORS. WE ALSO NOTICE THAT THE ASSESSING OFFICER HAS FAILED TO ESTABLISH THE NEXUS BETWEEN THE BORROWED FUNDS AND THE IMPUGN ED ADVANCES. 6. IN VIEW OF THE FOREGOING DISCUSSION, WE DO NOT F IND ANY MERIT IN THE IMPUGNED ADDITIONS. ACCORDINGLY, WE SET ASIDE THE ORDER OF THE LD. CIT(A) AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED ADDITIONS IN BOTH TH E CASES. I.T.A. NOS. 538 & 539/COCH/2010 4 7. FOR THE ASSESSMENT YEAR 2006-07, THE ASSESSEE HAS ALSO RAISED A GROUND RELATING TO DISALLOWANCE OF CHITTY LOSS OF ` 9000/-. WE HAVE GONE THROUGH THE ORDER OF THE LD. CIT(A) AND DO NOT FIND ANY INFIRMITY IN HIS DECISIO N ON THIS ISSUE. 8. IN THE RESULT, THE APPEAL OF THE ASSESSEE FOR 20 05-06 IS ALLOWED AND THE APPEAL RELATING TO ASSESSMENT YEAR 2006-07 IS PARTLY ALLO WED.. PRONOUNCED ACCORDINGLY ON 23-03-2012 SD/- SD/- (N.R.S.GANESAN) (B.R.BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: KOCHI DATED: 23 MARCH, 2012 GJ COPY TO: 1. M/S. FASHION TEXTILES, MAIN ROAD, KOLLAM. 2. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE -1, KOLLAM. 3. THE COMMISSIONER OF INCOME-TAX (APPEALS)-I, TRIV ANDRUM.. 4. THE COMMISSIONER OF INCOME-TAX, TRIVANDRUM. 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE . BY ORDER (ASSISTANT REGISTRAR) I.T.A.T, COCHIN