M/s Woodman Trading Co. P. Ltd., GANDHIDHAM V. The Income Tax Officer (OSD), GANDHIDHAM

ITA 552/RJT/2008

• Counselvise Citation: [2010] 135 COUNSELVISE.COM (IT) 2940 (ITAT-RAJKOT)
• Duration Of Justice: 1 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-12-2010
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Next Hearing Date: 20-12-2010
• Assessment Year: 2005-2006
• Appeal Filed On: 24-11-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AVINASH KUMAR
• Assessee Lawyers: M P SARDA
• Keywords: Business expenditure; Commercial expediency
• Section: 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH, RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI D.T. GARASIA (JM) I.T.A. NO. 552/RJT/2008 (ASSESSMENT YEAR 2005-06) M/S WOODMAN TRADING CO PVT LTD VS THE ITO (OSD) PLOT NO.573, GALPADAR ROAD GANDHIDHAM GANDHIDHAM PAN : AAACW3815G (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI MP SARDA RESPONDENT BY: SHRI AVINASH KUMAR O R D E R A.L. GEHLOT : THIS IS AN APPEAL FILED BY THE ASSESS EE AND IS DIRECTED AGAINST THE ORDER OF THE CIT(A)-II, RAJKOT DATED 29-09-2008 FOR THE ASSESSMENT YEAR 2005-06. THE GROUND RAISED IN THE APPEAL IS THAT THE CIT(A) ERRED IN SUSTAINING DISALLOWANCE OF RS.3,99,452 OUT OF THE INTEREST EXP ENSES. 2. DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS GIVEN ADVANCE FREE LOANS OF RS. 3,84,0 00 TO DIFFERENT PARTIES FOR WHICH HE DID NOT CHARGE ANY INTEREST WHEREAS THE AS SESSEE HAS CLAIMED INTEREST EXPENSES U/S 36(1)(III) OF THE ACT. THE ASSESSING OFFICER WAS OF THE VIEW THAT INTEREST TO THE EXTENT OF THOSE PARTIES FROM WHOM I NTEREST HAS NOT BEEN CHARGED IS DISALLOWABLE. HE ACCORDINGLY CALCULATED BY APPLYING 12% OF THE INTEREST RATE AT RS.3,99,452 AND THE SAME WAS ADDED TO THE TOTAL INC OME. 3. THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER AS UNDER: 3.2 I HAVE CONSIDERED THE ARGUMENTS OF THE A.O. AS WELL AS A.R. CAREFULLY. WITH DUE RESPECT, I WISH TO DIFFER FROM THE DECISION OF AHMEDABAD ITAT IN THE CASE OF TORRENT FINANCERS. I N THE APPELLANTS CASE, THER A.O. TRIED TO CREATE DIRECT LINK BETWEEN INTEREST-BORNE LOANS AND INTEREST-FREE ADVANCES. B UT, AS PER THE ITA NO.552/RJT/2008 2 APPELLANT, IT HAD SUFFICIENT INTEREST-FREE FUNDS, I NCLUDING ADEQUATE RESERVES TO COVER INTEREST-FREE ADVANCES. HERE, IT IS PERTINENT TO DRAW THE SUPPORT FROM THE APEX COURTS DECISION IN THE CASE OF S.A. BUILDERS LTD VS. CIT(A)_(2007) 288 ITR 1. THE SUPR EME COURT CLEARLY SAID THAT IN ORDER TO DECIDE WHETHER INTERE ST ON FUNDS BORROWED BY THE ASSESSEE GIVEN AS AN INTEREST-FREE LOAN TO BE ALLOWED AS A DEDUCTION U/S 36(1)(III) OF THE ACT, O NE HAS TO INQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEA SURE OF COMMERCIAL EXPEDIENCY AND ALSO FOR THE PURPOSE OF B USINESS. IT FURTHER SAID THAT THE AUTHORITIES AND COURTS SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY A ND WHAT THE RECIPIENT DID WITH THE MONEY. IN THIS INSTANT CASE , THE APPELLANT ADVANCED INTEREST-FREE LOANS TO ITS RELATIVES AND F RIENDS AND THE APPELLANT FAILED TO PROVE THAT THE ADVANCEMENT INVO LVED ANY LOGICAL GROUNDS OF COMMERCIAL EXPEDIENCY. THE A.R. ALSO FAI LED TO ELABORATE HOW THESE FRIENDS AND RELATIVES UTILIZED THE SAID LOAN AMOUNTS PURPOSEFULLY. AS THE APPELLANT FAILED TO P ROVIDE NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS , I HAVE NO OTHER GO, EXCEPT UPHOLDING THE PROPORTIONATE DISALL OWANCE OF INTEREST IS TO BE UPHELD. 4. THE LD.AR SUBMITTED THAT IT WAS CONTENDED BEFORE THE ASSESSING OFFICER AND CIT(A) BY THE ASSESSEE THAT THE ASSESSEE WAS HA VING SUFFICIENT OWN FUND OUT OF WHICH THE ASSESSEE HAS GIVEN THE INTEREST FR EE ADVANCES. HE SUBMITTED THAT THE ASSESSEE BEFORE THE CIT(A) ASSESSEE CITED DECISION OF ITAT, AHMEDABAD BENCH IN THE CASE OF TORRENT FINANCERS 73 TTJ (AHD) 624 AND M/S CHOICE IMPEX VS ITO (UNREPORTED) AND SA BUILDERS V S CIT 288 ITR 1 (SC) WHICH WERE NOT FOUND FAVOUR WITH THE CIT(A). THE LEARNED AR ALSO RELIED UPON ORDER OF THE ITAT IN THE CASE OF DY.CIT VS. HP SHAH & CO ITA NO.3694/MUM/2006 ORDER DATED 15-01-2009. THE LD.DR, ON THE OTHER HAND REL IED UPON THE ORDER OF THE CIT(A). 5. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF THE PARTIES, RECORD PERUSED. THE CIT(A) WHILE UPHOLDING THE ORDER OF THE ASSESSI NG OFFICER OBSERVED THAT HE WANT TO DIFFER FROM THE DECISION OF AHMEDABAD ITAT IN THE CASE OF TORRENT FINANCERS (SUPRA). AT THE COST OF REPETITION THE R ELEVANT OBSERVATIONS OF THE CIT(A) REPRODUCED BELOW: ITA NO.552/RJT/2008 3 WITH DUE RESPECT, I WISH TO DIFFER FROM THE DECISI ON OF AHMEDABAD ITAT IN THE CASE OF TORRENT FINANCERS . THE ABOVE OBSERVATIONS MADE BY THE CIT (A) ARE NOT WARRANTED IN JUDICIAL DISCIPLINE. HERE WE WOULD LIKE TO MENTION THAT THE PRINCIPLES OF JUDICIAL DISCIPLINE REQUIRE THAT THE ORDERS OF HIGHER APPELLATE AUTHORI TIES SHOULD BE FOLLOWED BY THE SUBORDINATE AUTHORITIES OTHERWISE; ENTIRE JUDICIAL SYSTEM WOULD LEAD TO CHAOS. IN THIS REGARD WE WOULD LIKE TO REFER FOLLOWING OBSERV ATIONS OF HONBLE DELHI HIGH COURT IN THE CASE OF NOKAI CORPORATION V. DIRECTOR OF INCOME TAX (INTERNATIONAL TAXATION) [2007] 162 TAXMAN 369 (DELHI). 12. THE SUPREME COURT STATED, MANY YEARS AGO, IN UNION OF INDIA V. KAMLAKSHI FINANCE CORPN. LTD. [1991] (55) ELT 433 AS FOLLOWS : ...THE PRINCIPLES OF JUDICIAL DISCIPLINE REQUIRE T HAT THE ORDERS OF THE HIGHER APPELLATE AUTHORITIES SHOULD BE FOLLOWED UNRESERVEDLY BY THE SUBORDINATE AUTHORITIES.... (P. 436) IT WAS FURTHER OBSERVED BY THE SUPREME COURT THAT I F THE ORDER OF AN APPELLATE AUTHORITY IS THE SUBJECT-MATTER OF FUR THER APPEAL, THAT CANNOT FURNISH ANY GROUND FOR NOT FOLLOWING IT , UNLESS ITS OPERATION HAS BEEN SUSPENDED BY A COMPETENT COURT. THE SUPREME COURT WENT ON TO SAY THAT IF THIS HEALTHY R ULE IS NOT FOLLOWED; THE RESULT WILL NOT ONLY BE UNDUE HARASSM ENT TO ASSESSEES BUT CHAOS IN THE ADMINISTRATION OF TAX LA WS. 13. IN CIT V.RALSON INDUSTRIES LTD. [2007] 2 SCC 326, THE SUPREME COURT HELD : 9. WHEN AN ORDER IS PASSED BY A HIGHER AUTHORITY, THE LOWER AUTHORITY IS BOUND THEREBY KEEPING IN VIEW THE PRIN CIPLES OF JUDICIAL DISCIPLINE.... (P. 330) THE SUPREME COURT DREW SUPPORT FROM BHOPAL SUGAR IN DUSTRIES LTD. V. ITO [1960] 40 ITR 618 WHEREIN IT WAS HELD : IF A SUBORDINATE TRIBUNAL REFUSES TO CARRY OUT DIR ECTIONS GIVEN TO IT BY A SUPERIOR TRIBUNAL IN THE EXERCISE OF ITS APPELLATE POWERS THE RESULT WILL BE CHAOS IN THE ADMINISTRATION OF JUSTICE.... (P. 622) IT WAS FURTHER OBSERVED IN BHOPAL SUGAR INDUSTRIES LTD.S CASE (SUPRA) : ...THE JUDICIAL COMMISSIONER WAS NOT SITTING IN AP PEAL OVER THE TRIBUNAL AND WE DO NOT THINK THAT, IN THE CIRCUMSTA NCES OF THIS CASE, IT WAS OPEN TO HIM TO SAY THAT THE ORDER OF T HE TRIBUNAL WAS WRONG AND, THEREFORE, THERE WAS NO INJUSTICE IN DIS REGARDING THAT ITA NO.552/RJT/2008 4 ORDER. AS WE HAVE SAID EARLIER, SUCH A VIEW IS DEST RUCTIVE OF ONE OF THE BASIC PRINCIPLES OF THE ADMINISTRATION OF JU STICE. (P. 623) 14. SIMILARLY, IN TRIVENI CHEMICALS LTD. V. UNION OF I NDIA [2007] 2 SCC 503, THE SUPREME COURT REITERATED THE PRINCIPLE THA T ADJUDICATING AUTHORITIES ARE BOUND BY THE DOCTRINE OF JUDICIAL D ISCIPLINE. . 5.1. ON MERIT, WE FIND THAT THE ISSUE IS SQUARELY C OVERED BY THE DETAILED ORDER OF THE ITAT IN THE CASE OF DY.CIT VS HP SHAH & CO I TA NO.3694/MUM/2006 ORDER DATED 15-01-2009 WHEREIN VARIOUS RELEVANT JUD GMENTS OF THE APEX COURT, HIGH COURTS AND ITAT ARE CONSIDERED. THE RELEVANT FINDING IS REPRODUCED BELOW: 4. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF TH E PARTIES AND PERUSED RECORD. THE CRUX OF THE MATTER TO BE CONSID ERED BY US IS IN RESPECT OF ALLOWABILITY OF INTEREST EXPENDITURE UND ER SECTION 36(1)(III) OF THE ACT WHERE INTEREST BEARING BORROWED FUNDS AND O WN CAPITAL HAS LOST ITS SEPARATE IDENTITY AS BOTH ARE MIXED. SECTION 3 6 OF THE ACT OCCURS IN CHAPTER IV WHICH DEALS WITH THE COMPUTATION OF TOTA L INCOME AND IT IS A PROVISION WHICH RELATES TO THE COMPUTATION OF INCOM E EARNED UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. THE DEDUCTION CONTEMPLATED BY THE SECTION IS IN RELATION TO THE E XPENDITURE WHICH COULD PROPERLY BE REGARDED AS NECESSARY FOR THE PUR POSE OF THE BUSINESS OR PROFESSION. EXPENDITURE INCURRED ON ACC OUNT OF COMMERCIAL EXPEDIENCY FOR THE PURPOSE OF BUSINESS WOULD BE ALL OWABLE UNDER THIS PROVISION. THE EXPENDITURE TO BE ALLOWED MUST HAVE A NEXUS WITH THE BUSINESS OF THE ASSESSEE. IF THE EXPENDITURE INCURR ED IS OSTENSIBLY INCURRED FOR THE BUSINESS, BUT IF IN REALITY IS NOT FOR THE PURPOSE OF BUSINESS THEN SUCH EXPENDITURE IS NOT ALLOWABLE. 4.1 SECTION 36(1) (III) OF THE ACT REFERS TO 'THE A MOUNT OF THE INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE S OF THE BUSINESS OR PROFESSION'. THE CAPITAL BORROWED SHOULD BE FOR THE PURPOSES OF THE ITA NO.552/RJT/2008 5 BUSINESS OR PROFESSION. IT IS IMPLICIT IN THIS PROV ISION THAT THE CAPITAL SO BORROWED SHOULD NOT ONLY BE INVESTED IN THE BUSINES S, BUT THAT THE AMOUNT BORROWED SHOULD CONTINUE TO REMAIN IN THE BU SINESS. SO LONG AS THE AMOUNT BORROWED IS USED IN THE BUSINESS, THE INTEREST PAID ON SUCH BORROWING IS AN EXPENDITURE WHICH IS REQUIRED TO BE DEDUCTED IN THE COMPUTATION OF THE INCOME FROM THE BUSINESS. TH E INTEREST PAYABLE ON THE CAPITAL BORROWED IS A LIABILITY WHICH CONTIN UES TILL SUCH TIME AS THE AMOUNT BORROWED IS REPAID. SUCH INTEREST IS ALL OWABLE UNDER THE PROVISION ONLY FOR THE REASON THAT THE AMOUNT ON WH ICH INTEREST IS PAID CONTINUES TO BE USED IN THE BUSINESS AND THE PAYMEN T OF SUCH INTEREST IS, THEREFORE, NECESSARY FOR THE PURPOSE OF RUNNING THE BUSINESS. 4.2 THE OBJECT OF THE PROVISION IS NOT TO ENABLE AN ASSESSEE TO MAKE A LARGE BORROWING AND CREATE A LIABILITY FOR PAYMEN T OF INTEREST THEREON NOT ONLY IN THE YEAR IN WHICH THE BORROWING WAS MAD E, BUT THE SUBSEQUENT YEARS AS WELL, KEEP THE LOAN OUTSTANDING AND THEREAFTER, DIVERT THE AMOUNT BORROWED BY TAKING IT OUT OF THE BUSINESS BY GIVING IT INTEREST-FREE TO OTHERS LIKE SISTER CONCERNS AND RE LATIVES OR FOR PERSONAL USE., BUT CONTINUE TO PAY INTEREST OUT OF THE INCOM E OF THE BUSINESS AND CLAIM THE AMOUNT OF INTEREST PAID AS A BUSINESS EXP ENDITURE. THE PAYMENT OF INTEREST ON THE AMOUNT NOT USED IN THE B USINESS CANNOT BE REGARDED AS A BUSINESS EXPENDITURE AS THE BUSINESS DOES NOT DERIVE ANY BENEFIT BY THE OUTGOING BY WAY OF INTEREST ON A N AMOUNT WHICH IS NO LONGER IN THE BUSINESS, BUT HAD BEEN DIVERTED FR OM THE BUSINESS. THIS PROVISION, THEREFORE, CANNOT BE CONSTRUED AS E NABLING AN ASSESSEE TO BURDEN THE BUSINESS WITH INTEREST EVEN WHILE TAKING THE AMOUNT INITIALLY BORROWED FOR THE BUSINESS, BUT SUB SEQUENTLY TAKEN OUT OF THE BUSINESS BY DIVERTING IT AS INTEREST-FREE LO ANS TO SISTER CONCERNS AND RELATIVES OR FOR PERSONAL USE. ITA NO.552/RJT/2008 6 4.3 THE AMOUNT BORROWED FOR THE BUSINESS REMAINS A LIABILITY FOR THE BUSINESS TILL ITS DISCHARGE. THE FACT THAT THE AMOU NT BORROWED MAY HAVE BEEN INVESTED IN THE PURCHASE OF MACHINERY OR UTILI SED AS WORKING CAPITAL OR USED IN ANY OTHER WAY DOES NOT IN ANY WA Y AFFECT THE LIABILITY FOR REPAYMENT OF THE AMOUNT BORROWED. SO LONG AS TH E MONEY BORROWED IS USED IN THE BUSINESS, INTEREST PAID ON SUCH BORR OWING IS A PROPER CHARGE ON THE BUSINESS AND IS ALLOWABLE AS EXPENDIT URE. UNDER SECTION 36(1)(III) OF THE ACT, AMOUNTS DIVERTED NOT BEING U SED FOR THE PURPOSES OF THE BUSINESS, INTEREST RELATING TO THE AMOUNT DI VERTED OUT OF THE BUSINESS CANNOT BE TREATED AS A PERMISSIBLE DEDUCTI ON IN THE COMPUTATION OF INCOME. ON MANY OCCASIONS THE ASSES SEE TAKE STAND THAT ONCE THE AMOUNT BORROWED IS FOUND TO HAVE BEEN USED FOR SOME TIME IN THE BUSINESS, THEN SUBSEQUENT DIVERSION IS OF NO CONSEQUENCE, BUT SUCH STAND OF THE ASSESSEE CANNOT BE ACCEPTED. THE LEGISLATIVE LANGUAGE OF SEC. 36(1)(III) OF THE ACT IS VERY AS CLEAR EXPRESSION BORROWED FOR THE PURPOSE OF THE BUSINESS IS USED. THE AMOUNT BORROWED MUST CONTINUE TO BE USED FOR THE PURPOSES OF THE BUSINESS AND THE FACT THAT IT WAS USED FOR SOME POINT OF TIM E, BUT LATER DIVERTED WOULD NOT ENTITLE THE ASSESSEE TO CLAIM THE INTERES T PAID ON THE BORROWING AS A DEDUCTION UNDER SEC.36(1)(III) EVEN AFTER SUCH DIVERSION. IN CASES WHERE DIVERSION OCCURS IMMEDIATELY AFTER T HE BORROWING AND THE BORROWED AMOUNTS ARE NOT INVESTED IN THE BUSINE SS AT ALL, BUT DIVERTED FOR OTHER PURPOSES, THEN THERE SHOULD NOT BE ANY CLOUD OF DOUBT THAT INTEREST PAID ON SUCH BORROWED AMOUNTS I S NOT ALLOWABLE DEDUCTION. THE FACTUM OF DEFERMENT, IN CASES WHERE SUCH DIVERSION OF FUNDS FROM THE BUSINESS IS CLEARLY ESTABLISHED FRO M THE FACTS ON RECORD, DOES NOT ENTITLE THE ASSESSEE TO CLAIM THE BENEFIT OF DEDUCTION IN RESPECT OF INTEREST PAID ON THE AMOUNTS BORROWED BUT NOT PRESENTLY USED IN ITS BUSINESS. THE TIME AT WHICH THE DIVERSI ON TAKES PLACE IS NOT THE ONLY RELEVANT CRITERION BUT IT IS THE FACT OF T HE DIVERSION WHICH IS MATERIAL AND ONCE IT HAS BEEN SHOWN THAT THERE HAS BEEN DIVERSION OF ITA NO.552/RJT/2008 7 INTEREST ON THE AMOUNT BORROWED, BUT SUBSEQUENTLY D IVERTED WOULD NOT QUALIFY FOR DEDUCTION. ANY VIEW TO THE CONTRARY WOU LD NOT IN THE LEAST SUB SERVE THE OBJECT OF THE LEGISLATIVE PROVISION, BUT IT WOULD ONLY OPEN THE GATES FOR THE ASSESSEES TO BORROW MERRILY AND A FTER OSTENSIBLY USING IT IN THE BUSINESS FOR A SHORT PERIOD AND AT A SUBSEQUENT POINT OF TIME DIVERT THE FUNDS IN WHOLE OR PART, FOR NON-BUS INESS PURPOSES AND CONTINUE TO CLAIM THE INTEREST ON THE BORROWING AS A DEDUCTIBLE ITEM OF EXPENDITURE. THE OBJECTS OF THE SECTION WOULD NOT I N ANY WAY BE ADVANCED BY THE ADOPTION OF SUCH A VIEW. IF A BUSIN ESS FOR WHICH THE INTEREST PAID IS CLAIMED AS A DEDUCTION HAS NOT BEN EFITED DURING THE YEAR FROM THE CAPITAL BORROWED BY SUCH BORROWED AMO UNT BEING USED IN THE BUSINESS, SUCH INTEREST CANNOT BE REGARDED AS E XPENDITURE FOR THE PURPOSES OF THE BUSINESS. THE ASSESSEE MAY NOT EVEN WHILE USING BORROWED FUNDS FOR ITS PERSONAL PURPOSES AND NOT BU SINESS PURPOSES CLAIM DEDUCTION OF THE INTEREST PAID ON THE BORROWI NG. IN ANY CASE IF THE ASSESSEE TAKES STAND THAT IT IS BUSINESS EXPEDIENCY THEN, HEAVY BURDEN LIES ON THE ASSESSEE TO PROVE SUCH CONTENTIO N AND SAID CONTENTION IS TO BE EXAMINED BY APPLYING DEFERENT C RITERIA. 4.4 A REAL PROBLEM ARISES IN CASES WHERE FUNDS ARE PUMPED OUT OF BUSINESS WHICH ARE COMPRISE OF BOTH TYPE OF FUNDS, BORROWED AS WELL AS OWN FUNDS FOR NON-BUSINESS PURPOSES. IN ALL SUCH CA SES WHERE MIXED FUNDS ARE USED FOR BOTH BUSINESS AND OTHER THAN BUS INESS PURPOSES, THERE IS NO PRESUMPTION THAT MONEYS USED FOR OTHER PURPOSES CAME OUT OF BORROWED FUNDS. IT CAN BE SAID THAT INTEREST FRE E FUNDS GIVEN ARE OUT OF OWN FUNDS TO THE EXTENT OF CAPITAL AND RESERVES, AND THIS PROPOSITION IS SUPPORTED BY THE DECISION OF HONBLE ANDHRA PR ADESH HIGH COURT IN THE CASE OF CIT VS. GOPIKRISHNA MURLIDHAR, 47 ITR 4 69 (AP) AND IN THE SAID CASE THEIR LORDSHIPS ACCEPTED THE CONTENTION T HAT THE ASSESSEE IS ENTITLED TO WITHDRAW FROM CAPITAL. THE FACTS OF THA T CASE ARE THAT THE ASSESSEE IS A HINDU UNDIVIDED FAMILY CARRYING ON BU SINESS ON AN ITA NO.552/RJT/2008 8 EXTENSIVE SCALE WITH A CAPITAL OF NEARLY RS. 20,00, 000 (TWENTY LAKHS). DURING THE YEAR ENDED 9TH NOVEMBER, 1950, THE ASSES SEE MADE LARGE BORROWINGS FOR PURPOSES OF HIS BUSINESS AND PAID IN TEREST AMOUNTING TO RS. 93,611 ON SAID BORROWINGS. DURING THE COURSE OF THAT YEAR, THE ASSESSEE WITHDREW FROM THE BUSINESS FROM TIME TO TI ME AMOUNT OF RS. 1,77,984 FOR HIS PERSONAL EXPENSES. THE INCOME-TAX OFFICER DISALLOWED A SUM OF RS. 13,500 ON PRORATA, REPRESENTING THE IN TEREST ELEMENT RELATING TO RS. 1,77,984, SINCE HE WAS OF VIEW THAT AMOUNT OF RS. 1,77,984 WITHDREW WAS MADE IN THE NAME OF THE BUSIN ESS BUT USED FOR HIS PERSONAL PURPOSES. ACCORDING TO HIM, MONEY WAS WITHDRAWN FROM THE BOOKS OF ACCOUNT TO MEET THE PERSONAL EXPENDITU RE OF THE ASSESSEE AND, AS THIS SUM OF MONEY WAS NOT ACTUALLY USED FOR THE BUSINESS, THE INTEREST PAID THEREON COULD NOT BE ALLOWED AS PERMI SSIBLE DEDUCTION. 4.5 THE RELEVANT FINDING OF THE COURT IS REPRODUCED BELOW:- WE DO NOT THINK THAT WE CAN GIVE EFFECT TO THIS AR GUMENT. INDISPUTABLY, THESE AMOUNTS WERE BORROWED ONLY FOR THE PURPOSE OF BUSINESS OF THE FAMILY. THE ASSESSEE DREW OUT FR OM TIME TO TIME VARIOUS SUMS OF MONEY AGGREGATING TO RS. 1,77, 984/- FROM THE BUSINESS. IT IS NOT A CASE WHERE ANY PARTICULAR SUM PURPORTING TO BE BORROWED ON BEHALF OF THE BUSINESS WAS SPENT FOR HOUSEHOLD EXPENSES. THIS IS A CASE WHERE THE LOANS WERE TAKEN FOR CARRYING ON THE BUSINESS BUT THE FAMILY USED TO WITHDRAW SOME AMOUNTS FROM THE BUSINESS WHENEVER OCCASIONS A ROSE. THE FAMILY WAS SURELY ENTITLED TO WITHDRAW FROM THE CAP ITAL SUPPLIED BY IT WITH THE RESULT OF THE CAPITAL BEING DEPLETED . THERE IS, THEREFORE, NO SUBSTANCE IN THE SUBMISSION THAT THE FACT THAT PART OF THE AMOUNT BORROWED WAS LATER ON USED FOR PERSON AL EXPENSES, WOULD DEPRIVE THE ASSESSEE OF THE BENEFIT S. 4.6 FROM THE ABOVE JUDGMENT OF HONBLE ANDHRA PRADE SH HIGH COURT WE FIND THAT THE ASSESSEE HAS RIGHT TO REPLACE HIS OWN CAPITAL WITH BORROWED FUNDS WHICH WERE ALREADY USED FOR THE PURP OSE OF BUSINESS IN ACQUIRING ASSETS AND OTHER. WITH THE HELP OF THIS R ATIO OF THE JUDGMENT SUCH PROBLEM CAN BE RESOLVED BY EXAMINATION AND ANA LYSES OF FINANCIAL STATEMENTS PREPARED ON THE BASIS OF BOOKS OF ACCOUN T MAINTAINED BY ITA NO.552/RJT/2008 9 THE ASSESSEE. IT IS WELL ACCEPTED PROPOSITION THAT FOR THE PURPOSE OF ASCERTAINING PROFIT AND GAINS, THE NORMAL PRINCIPLE S OF COMMERCIAL ACCOUNTING SHOULD BE APPLIED, SO LONG AS THEY DO NO T CONFLICT WITH ANY EXPRESS STATUTORY PROVISIONS AS HELD BY THE HONBL E SUPREME COURT IN CIT VS. U.P. STATE INDUSTRIAL DEVELOPMENT CORPORATI ON, 225 ITR 703(SC). THUS SUCH PROBLEM CAN BE RESOLVED BY ANALY ZING STATEMENT OF ACCOUNTS AND IN PARTICULAR BALANCE-SHEET. WHERE DET AILS OF OWN CAPITAL, BORROWED FUNDS AND INTEREST FREE FUNDS GIVEN OR UTI LIZED FOR OTHER PURPOSES ARE AVAILABLE. THERE IS NO MUCH DIFFICULTI ES IN EXAMINATION OF RIGHT TO REPLACE OWN CAPITAL TO BORROW FUNDS IN CAS E OF INDIVIDUAL AND PARTNERSHIP FIRM. BUT IN THE CASE OF COMPANY, CAPIT AL IS FUND OF PUBLIC/ SHARE HOLDERS WHICH IS MANAGED BY THE BOARD OF DIRE CTORS. IN THE CASE OF COMPANY THERE ARE CERTAIN RESTRICTIONS UNDER THE COMPANIES ACT IN USE OF CAPITAL/FUND FOR PERSONAL BENEFITS. SUCH REP LACEMENT IS REQUIRED TO BE AUTHORIZED BY PROPER RESOLUTION AND MUST BE I N CONFORMITY WITH THE PROVISIONS OF COMPANIES ACT AND RULES AND REGUL ATIONS OF REGULATORY BODIES. SAME ARE REQUIRED TO REFLECT IN THE FINANCIAL STATEMENTS PREPARED ON THE BASIS OF AUDITED BOOKS O F ACCOUNT. THE AUDITOR IS ALSO REQUIRED TO POINT OUT SUCH REPLACEM ENT/UTILIZATION OF FUNDS. IF FUNDS ARE DIVERTED IN CONTRAVENTION OF ST ATUTORY PROVISIONS, THEN SAME MAY BE SUBJECT TO LEGAL AND PENAL CONSEQU ENCES UNDER THE COMPANIES ACT AND OTHERS. THE ONUS IS ON THE ASSESS EE TO FURNISH THE RELEVANT MATERIAL REGARDING REPLACEMENT OF BORROWED FUNDS BY OWN CAPITAL AND INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE. 4.7 ON THE BASIS OF ABOVE DISCUSSION A PROPOSITION / FORMULA CAN BE LAID DOWN THAT IF AN ASSESSEE HAVING SUFFICIENT INT EREST FREE FUNDS, IN THE FORM OF CAPITAL RESERVES AND OTHER FUNDS WITHOU T INTEREST BEARING FROM RELATIVES AND FRIENDS NOT RELATED TO BUSINESS, TO COVER FUNDS GIVEN INTEREST FREE OR UTILIZED OTHER THAN FOR BUSINESS P URPOSES, NO DISALLOWANCE IS WARRANTED. IF THE OWN FUNDS ARE NOT SUFFICIENT TO COVER ITA NO.552/RJT/2008 10 INTEREST FREE ADVANCES, A PROPORTIONATE DISALLOWANC E IS WARRANTED. WHILE EXAMINING INTEREST FREE FUNDS AVAILABLE WITH ASSESSEE AND INTEREST FREE FUNDS GIVEN A CARE IS REQUIRED TO BE TAKEN THAT THESE FUNDS WERE NOT RELATED TO BUSINESS OF THE ASSESSEE. CAPIT AL AND RESERVES ARE CERTAINLY ASSESSEES OWN INTEREST FUNDS. THIS P ROPORTION IS FORTIFIED BY THE DECISION OF ITAT IN THE CASE OF TORRENT FINA NCERS V. ACIT, 73 TTJ 624 (AHD.), JUDGMENT OF ALLAHABAD HIGH COURT IN THE CASE OF CIT V. PREM HEAVY ENGINEERING WORKS P. LTD., 285 ITR 554 ( ALL.), AND THE JUDGMENT OF HONBLE SUPREME COURT IN THE CASE OF MU NJAL SALES CORPORATION V. CIT, 298 ITR 298 (SC).IT IS TO NOTE THAT DECISIONS OF THE HONBLE PUNJAB AND HARYANA HIGH COURT IN MUNJAL SAL ES CORPORATION V CIT (208) 298 ITR 288 AND CIT V MUNJAL SALES CORPOR ATION(2008) 298 ITR 294 WHEREIN THE HONBLE PUNJAB AND HARYANA HIGH COURT FOLLOWED CIT ABHISHEK INDUSTRIES LTD (2006) 286 ITR 1(P&H) HAVE BEEN REVERSED BY THE HONBLE SUPREME COURT. THUS THE DE CISION OF THE PUNJAB AND HARYANA HIGH COURT IN THE CASE OF CIT AB HISHEK INDUSTRIES LTD (2006) 286 ITR 1(P&H) HAS BEEN IMPLIEDLY REVERS ED ON THE ISSUE. 6 IF WE APPLY THE FORMULA LAID DOWN IN THE CASE OF ACIT VS HP SHAH & CO (SUPRA) WE FIND THAT THE ASSESSING OFFICER HIMSELF NOTED THE FOLLOWING BALANCE- SHEET FROM WHICH IT IS CLEARLY ESTABLISHED THAT THE ASSESSEE WAS HAVING ITS SHARE CAPITAL OF RS. 1,45,16,533 AGAINST WHICH THE LOANS AND ADVANCES WERE RS.38,40,000: LIABILITIES AMOUNT (RS.) ASSETS AMOUNT (RS.) SHARE HOLDERS FUND 1,45,16,533 FIXED ASSETS 44,08,048 LOAN FUND & BORROWINGS 1,05,36,997 LOANS & ADVANCES 38,40,000 CURRENT LIABILITIES & PROVISIONS 2,91,19,625 OTHER CURRENT ASSETS & CASH, BANK BALANCE & MISC. EXP. 4,59,25,107 TOTAL 5,41,73,155 TOTAL 5,41,73,155 ITA NO.552/RJT/2008 11 WE ARE, THEREFORE, OF THE CONSIDERED VIEW THAT NO A DDITION IS WARRANTED. THEREFORE, THE ADDITION OF RS. 3,99,452 IS DELETED. 7. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 31-12-2010. SD/- SD/- (D.T. GARASIA) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER RAJKOT, DT : 31 ST DECEMBER, 2010 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-II, RAJKOT 4. THE CIT-I, RAJKOT 5. THE DR (TRUE COPY) BY ORDER ASSTT.REGISTRAR, ITAT, RAJKOT