Shri Deven Khimasia, Indore V. The ITO, Indore

ITA 549/IND/2009

• Counselvise Citation: [2010] 119 COUNSELVISE.COM (IT) 6073 (ITAT-INDORE)
• Duration Of Justice: 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: APARNA KARAN
• Assessee Lawyers: P D NAGAR
• Keywords: Business income; Commercial expediency

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL, SMC BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER ITA NO.549/IND/2009 A.Y. 2006-07 DEVEN KHIMASIA PROP: M/S. A.K. SALES AGENCIES INDORE (PAN AHSPK-8260-H) .APPELLANT VS INCOMETAX OFFICER WARD-2(3) INDORE .RESPONDENT APPELLANT BY : SHRI P.D. NAGAR, CA RESPONDENT BY : SMT. APARNA KARAN, SR. DR O R D E R THIS APPEAL IS BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A) DATED 23.9.2009 ON THE GROUND THAT THE LD. FIRST APPELLAT E AUTHORITY ERRED IN LAW IN CONFIRMING THE DISALLOWANCE OF RS.55,504/- OUT OF I NTEREST PAID ON THE GROUND THAT INTEREST FREE AMOUNT ADVANCED TO M/S. JETHALAL NEMI CHAND & SONS, A PARTNERSHIP FIRM, IN WHICH THE APPELLANT IS A PARTNER, WAS FOR NON-BUSINESS PURPOSES. 2. DURING THE HEARING OF THE APPEAL, I HAVE HEARD S HRI P.D. NAGAR, LD. COUNSEL FOR THE ASSESSEE AND SMT. APARNA KARAN, LD. SR. DR. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE ASSESSEE WAS CAR RYING ON THE BUSINESS IN KIRANA GOODS AND OIL SEEDS AS PROP. OF M/S. A.K. SALES AGE NCIES. THE ASSESSEE IS ALSO 2 PARTNER IN THE FIRM M/S. JETHALAL NEMICHAND & SONS. IT WAS CONTENDED THAT THE ASSESSEE MADE ADVANCES FROM PROP. CONCERN TO THE PA RTNERSHIP FIRM FROM TIME TO TIME IN CURRENT ACCOUNT ON WHICH NO INTEREST WAS CH ARGED. THE DISALLOWANCE OF INTEREST OF RS.55,504/-, CONFIRMED BY THE LD. FIRST APPELLATE AUTHORITY, WAS CHALLENGED THAT THE INTEREST BEARING FUNDS WERE USE D FOR BUSINESS PURPOSES. RELIANCE WAS PLACED UPON THE DECISION IN SANTOSH KR . AGRAWAL VS. ACIT (78 ITD 394) (MUM) (SMC). 3. ON THE OTHER HAND, THE LD. SR. DR PLEADED THAT T HE ASSESSEE DIVERTED INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSES FOR WHICH M Y ATTENTION WAS INVITED TO THE FINDING OF THE LD. ASSESSING OFFICER. IT WAS PLEADE D THAT PARTNER AND FIRM ARE DIFFERENT LEGAL ENTITIES. PLEA WAS ALSO RAISED THAT THE DECISION IN THE CASE OF SANTOSH KR. AGRAWAL IS NOT APPLICATION TO THE FACTS OF PRES ENT APPEAL AS THE ASSESSEE HAS TO PROVE THAT FUNDS WERE UTILISED FOR BUSINESS PURPOSE S. IT WAS ALSO POINTED OUT THAT ASSESSEE PAID INTEREST ON UNSECURED LOAN. RELIANCE WAS PLACED UPON THE DECISION IN ABHISHEK INDUSTRIES (286 ITR 1) (P & H). 4. I HAVE CONSIDERED THE SUBMISSIONS OF LD. RE PRESENTATIVES OF BOTH SIDES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. BRIEF FAC TS ARE THAT THE ASSESSEE IS PARTNER IN THE FIRM NAMELY, M/S. JETHALAL NEMICHAND & SONS HAVING CAPITAL INVESTMENT OF RS.3,65,482/- AND ALSO CARRIES ON THE BUSINESS AS P ROP. IN KIRANA GOODS AND OIL SEEDS. THE ASSESSEE MADE SOME ADVANCES FROM PROP. C ONCERN TO THE PARTNERSHIP CONCERN FROM TIME TO TIME IN CURRENT ACCOUNT ON WHI CH NO INTEREST WAS CHARGED. ADMITTEDLY, THE PROPRIETORSHIP CONCERN BORROWED FUN DS FROM BANKS AND OTHERS ON 3 WHICH INTEREST WAS PAID. IN VIEW OF THESE FACTS, TH E LD. ASSESSING OFFICER DISALLOWED RS.55,505/- WHICH WAS CONFIRMED BY THE L D. CIT(A). BEFORE COMING TO ANY CONCLUSION, I AM REPRODUCING HEREUNDER THE RELE VANT OBSERVATION (PARA 2.3) OF THE LEARNED CIT(A) :- 2.3 THE ISSUE IS CONSIDERED. AT THE OUTSET BOTH THE ENTITY ARE INDEPENDENT IN THE EYES OF LAW, INTER-AL IA, INCOME TAX ACT, 1961 AND HENCE BOTH ARE ASSESSED SEPARATELY . FURTHER, IT IS JUDICIALLY SETTLED POSITION OF LAW T HAT CORRECT INCOME IS TO BE ASSESSED IN THE RIGHT HAND. THE APPE LLANT HAS BEEN CARRYING A PROPRIETORSHIP FIRM AND ALSO N PART NER IN ANOTHER FIRM M/S JETHALAL NEMICHAND & SONS. THE APP ELLANT BORROWED FUNDS FROM BANK AND OTHER PERSONS ON WHICH INTEREST WERE PAID CLAIMED RS.6,02,923/- IN THE YEA R UNDER CONSIDERATION. DURING THE YEAR, IT ADVANCED FUND T O M/S JETHALAL NEMICHAND, A FIRM IN WHICH HE IS A PARTNER , ON WHICH NO INTEREST WAS CHARGED. IT IS CLAIMED THAT INTERES T EARNED ON THE CAPITAL CREDITED IN THE PARTNERSHIP FIRM. THIS P LEA OF THE APPELLANT IS NOT CORRECT SINCE THE INTEREST FREE AD VANCE MADE TO THE FIRM WAS NOT CREDITED IN THE CAPITAL ACCOUNT OF THE APPELLANT, BUT THE SAME WAS SHOWN AS UNSECURED LOAN , ON WHICH NO INTEREST WAS RECEIVED. FURTHER, IT IS DIF FICULT TO APPRECIATE THAT HOW THE ADVANCING OF INTEREST FREE LOAN TO A FIRM WAS FOR THE COMMERCIAL EXPEDIENCY OF THE APPEL LANTS PROPRIETORY CONCERN. BESIDES THE VARIOUS CASE LAWS REFERRED TO AND RELIED UPON BY THE AO IN HIS ORDER, THIS IS SUE HAS BEEN DEALT WITH IN DETAIL BY THE PUNJAB & HARYANA HIGH C OURT IN THE CASE OF ABHISHEK INDUSTRIES 286 ITR 1 (P&H).:- IN THE LIGHT OF THE ABOVE, I AM SUPPOSED TO ANALYSE THE ISSUE BY KEEPING THE SAME IN JUXTAPOSITION WITH SECTION 36(1)(III) OF THE ACT WH ICH PROVIDES FOR DEDUCTION OF INTEREST ON LOANS RAISED FOR BUSINESS PURPOSES. ON CE SUCH CLAIM IS MADE BY THE ASSESSEE THEN THE ONUS WILL BE ON THE ASSESSEE TO S ATISFY THE AO AT LEAST TO THE EXTENT THAT WHATEVER LOANS WERE RAISED WERE USED FO R BUSINESS PURPOSES. IN THE PROCESS OF EXAMINATION OF GENUINENESS OF SUCH CLAIM , IF IT IS FOUND THAT THE ASSESSEE 4 ADVANCED CERTAIN FUNDS TO SISTER CONCERN OR ANY OTH ER PERSON WITHOUT ANY INTEREST FOR NON-BUSINESS PURPOSES OR WITH THE INTENTION OF COLOURABLE DEVICE THEN SUCH DEDUCTION CANNOT BE ALLOWED. IT CAN BE SAID THAT ON US IS STRICTLY ON THE ASSESSEE. THERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWAL AN D UTILIZATION OF FUNDS FOR THE PURPOSE OF BUSINESS EXIGENCIES TO THE EFFECT THAT I N SPITE TERM LOANS AND WORKING CAPITAL LOANS ON WHICH THE ASSESSEE INCURRING LIABI LITY TO PAY INTEREST, THERE WAS JUSTIFICATION TO ADVANCE LOANS TO SISTER CONCERN/OT HER PERSONS. DURING HEARING, THE LEARNED COUNSEL FOR THE ASSESSEE PLACED RELIANCE ON THE DECISION IN THE CASE OF SANTOSH KUMNAR AGRAWAL V. ACIT (78 ITD 394) AND ALS O THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF SA BUILDERS LIMITE D V. CIT (2007) 288 ITR 1 (SC) WITH REFERENCE TO INTEREST FREE ADVANCE AND DI SALLOWANCE OF INTEREST ON PROPORTIONATE BASIS ESPECIALLY THE PARA BELOW :- ONCE IT IS ESTABLISHED THAT THERE WAS NEXUJS BETWE EN THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSE E ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ART-CHAIR OF THE BUSINESSMAN OR IN TH E POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFITS. WHILE COMING TO THE AFORESAID DECISION, THE HONBLE APEX COURT UPHELD THE DECISION OF THE HONBLE DELHI HIGH COURT IN CIT V. D ALMIA CEMENT (B) LIMITED (254 ITR 377 THAT ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS, THE REVENU E CANNOT JUSTIFIABLY CLAIM TO 5 PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN. HOW EVER, THE HONBLE APEX COURT FURTHER CLARIFIED AS UNDER :- WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPIN ION THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE A LLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT A LL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CA SE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UT ILISE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE FOR THEIR PER SONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONE Y WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SIST ER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE H OLDING COMPANY ADVANCES BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SUBSIDIARY FOR SOME BUSINESS P URPOSES, THE ASSESSEE WOULD, IN OUR OPINION, ORDINARILY BE E NTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IF THE AFORESAID DECISION IS READ AS A WHOLE, THEN IT CAN BE SAID THAT ANY AND EVERY PAYMENT, IN THE GARB OF INTEREST, IN EXCESS OF WHAT CAN BE REALLY TERMED AS INTEREST, IS NOT ALLOWABLE UNLESS AND UNTIL BUSINESS EXIGENCI ES ARE ESTABLISHED. THE WORDS BORROWED AND PAID IN SECTION 36(1)(III) CLEARLY POSTULATE TWO DIFFERENT ENTITIES, ONE WHICH LENDS CAPITAL AND THE OTHER WHICH BORROWS AND PAYS INTEREST. THE SAME ENTITY CANNOT BE ITS OWN LENDER AND BORROWER NOR IN TEREST CAN BE PAID TO SELF, THEREFORE, INTEREST PAID BY ONE UNIT OF THE ASSESSE E TO ITS ANOTHER UNIT CANNOT BE ALLOWABLE BECAUSE IT IS PAID AND RECEIVED BY THE SA ME PERSON AND NOT BY ONE PERSON TO ANOTHER. THIS WOULD BE SO EVEN WHERE SEPA RATE ACCOUNTS WERE MAINTAINED FOR THE TWO UNITS. THE WORD FOR THE PU RPOSES OF BUSINESS ARE WIDER IN SCOPE THAN FOR THE PURPOSE OF EARNING INCOME. DE DUCTION IS LIMITED TO INTEREST ON 6 THAT PART OF CAPITAL WHICH IS USED FOR THE PURPOSES OF BUSINESS. IT CAN BE SAID THAT INTEREST ON BORROWALS IS ALLOWABLE AS A DEDUCTION O NLY WHEN THE BORROWALS ARE USED FOR THE PURPOSES OF BUSINESS AND CONTINUE AS SUCH. WHEN THE ASSESSEE PAYS INTEREST ON BORROWALS FOR THE USE IN HIS BUSINESS B UT LATER ADVANCED IT INTEREST FREE TO RELATIVES, THE INTEREST RELATABLE TO SUMS SO ADV ANCED IS NOT DEDUCTIBLE. FOR THIS PROPOSITION I DRAW SUPPORT FROM THE DECISIONS IN K. SOMASUNDARAM & BROTHERS V. CIT; 238 ITR 939 (MAD.); CIT V. MOTOR GENERAL FINANCE LIMITED; 272 ITR 550 (DEL); RATIO LAID DOWN IN MAROLIA & SONS V. CIT; 12 9 ITR 475 (ALL). ONCE THE ENTIRE MONEY COMES TO A COMMON KITTY OR WHATEVER AR E THE RECEIPTS IN THE BUSINESS HAVE THE COLOURS OF BUSINESS RECEIPTS. THE ONLY SI TUATION SUFFICIENT TO DISALLOW INTEREST PAID ON THE BORROWING TO THE EXTENT THE AM OUNT IS LENT TO A SISTER CONCERN WITHOUT ANY INTEREST FOR NON BUSINESS PURPOSES WOUL D BE THAT THE ASSESSEE HAS SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE ASSESSEE IS HAVING SURPLUS FUNDS WHICH COULD NOT BE REPAID PREMATURELY TO ANY FINANCIAL INSTITUTION, IT WOULD EITHER BE REQUIRED TO BE CIRCULATED AND UTILI SED FOR THE PURPOSE OF BUSINESS OR TO BE INVESTED IN A MANNER SO THAT IT MAY GENERATE INCOME AND NOT TO BE DIVERTED TO SISTER CONCERN FREE OF INTEREST. THIS SITUATION WOU LD RESULT IN NOT PRESENTING THE TRUE AND CORRECT PICTURE OF ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCURRED BY THE ASSESSEE, THE SISTER CONCERN WOULD BE ENJOYING THE BENEFIT THEREOF. THEREFORE, IT CAN BE SAID THAT THERE SHOULD BE NEXUS BETWEEN THE USE OF BORROWED FUNDS FOR THE PURPOSES OF BUSINESS TO CLAIM DEDUCTION U/S 36(1)(I II) OF THE ACT. I AM OF THE VIEW THAT IF THE INTEREST IS PAID BY THE ASSESSEE ON THE AMOUNTS WHICH ARE DIVERTED TO 7 SISTER CONCERN/OTHER PERSONS ON INTEREST FREE BASIS , WITHOUT BUSINESS EXIGENCIES, THESE HAVE TO BE DISALLOWED. HOWEVER, SINCE NO CLEA R CUT BIFURCATION HAS BEEN MENTIONED/MADE OUT, THEREFORE, IN ALL FAIRNESS, THE AO IS DIRECTED TO EXAMINE THE CLAIM OF THE ASSESSEE AFRESH FOR WHICH DUE OPPORTUN ITY BE PROVIDED TO THE ASSESSEE. THE AO IS EXPECTED TO MENTION CLEAR FINDINGS BASED O N TRUE FACTS. THE ASSESSEE IS ALSO AT LIBERTY TO FURNISH EVIDENCE, IF ANY, TO SUB STANTIATE ITS CLAIM, THEREFORE, THIS APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL P URPOSES ONLY. ORDER PRONOUNCED IN THE OPEN COURT ON 15.2.201 0. SD (JOGINDER SINGH) JUDICIAL MEMBER FEBRUARY 15TH, 2010 COPY TO APPELLANT, RESPONDENT, CIT, CIT(A), DR