Kumar Agro Products Pvt.Ltd, Pune V. Income-tax Officer, Ward - 14(4), Pune

ITA 556/PUN/2018

• Counselvise Citation: [2021] 108 COUNSELVISE.COM (IT) 0841 (ITAT-PUNE)
• Duration Of Justice: 3 year(s) 3 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-07-2021
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 09-07-2021
• Assessment Year: 2014-2015
• Appeal Filed On: 27-03-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: MAHADEVAN A M KRISHNAN
• Keywords: Rule of consistency; Proportionate interest
• Section: 143(3); 192

Judgement Text

] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B PUNE (THROUGH VIRTUAL COURT) BEFORE SHRI INTURI RAMA RAO, AM AND SHRI S. S. VISWANETHRA RAVI, JM ITA NO.556/PUN/2018 / ASSESSMENT YEAR : KUMAR AGRO PRODUCTS PRIVATE LIMITED, 1 ST FLOOR, KUMAR CAPITAL, EAST STREET, CAMP, PUNE 411 001. PAN : AAACK7660H. . / APPELLANT V/S THE INCOME TAX OFFICER, WARD 14(4), PUNE. . / RESPONDENT ASSESSEE BY : SHRI RAJAN VORA / SHRI RAJENDRA AGIWAL. REVENUE BY : SHRI MAHADEVAN A.M. KRISHNAN. / DATE OF HEARING : 09.07.2021 / DATE OF PRONOUNCEMENT : 12.07.2021 / ORDER PER INTURI RAMA RAO, AM: THIS IS AN APPEAL FILED BY THE ASSESSEE DIRECTED AGAINST T HE ORDER OF LEARNED COMMISSIONER OF INCOME TAX (APPEALS) 7, PUNE DATED 29.12 .2017 FOR THE ASSESSMENT YEAR 2014-15. 2. THE BRIEF FACTS OF THE CASE ARE AS UNDER : 2 THE APPELLANT IS A COMPANY INCORPORATED UNDER THE PROVIS IONS OF THE COMPANIES ACT, 1956. IT IS ENGAGED IN THE BUSINESS OF CON STRUCTION OF SALE AND RESIDENTIAL COMMERCIAL BUILDINGS. THE RETURN OF INCOME FOR A.Y. 2014- 15 WAS FILED ON 31.082014 DECLARING A LOSS OF RS.4,24,68,213/ -. AGAINST THE SAID RETURN OF INCOME, THE ASSESSMENT WAS COMPLETE D BY THE INCOME TAX OFFICER, WARD 14(4), PUNE (HEREINAFTER REFERRED TO AS ASS ESSING OFFICER) AT A TOTAL INCOME OF RS.8,76,61,830/- VIDE ORDER D ATED 23.12.2016 PASSED U/S 143(3) OF THE INCOME TAX ACT (HEREI NAFTER REFERRED TO AS THE ACT). WHILE DOING SO, THE ASSESSING OFFICER MA DE DISALLOWANCE OF THE FOLLOWING ITEMS : 1) DISALLOWANCE OF INTEREST OF RS.5,15,54,324/- ON THE GROUND TH AT THE APPELLANT COMPANY HAD DIVERTED INTEREST BEARING FUNDS TO SISTER CONCERNS / RELATED PARTIES BY ADVANCING LOANS AND ADVANCES. 2) DISALLOWANCE OF RS.3,59,33,237/- ON ACCOUNT OF INCOME FROM OTHER SOURCES. 3. BEING AGGRIEVED BY THE ABOVE ADDITIONS, ASSESSEE PRE FERRED APPEAL BEFORE THE LD.CIT(A) WHO VIDE IMPUGNED ORDER HAD DELETED T HE ADDITION OF RS.3,59,33,237/- ON ACCOUNT OF INTEREST RECEIVED UNDER TH E HEAD INCOME FROM OTHER SOURCES. AS REGARDS TO THE ADDITION OF RS.5,1 5,54,324/- ON ACCOUNT OF PROPORTIONATE INTEREST BEING NOT FOR BUSINESS PURPOSE, LD.CIT(A) HAD RESTRICTED THE ADDITION TO THE EXTENT OF TOTAL INTERE ST CLAIM OF RS.3,80,00,399/-. 3 4. BEING AGGRIEVED WITH THE DIRECTION OF LD.CIT(A), THE APPELLA NT IS IN APPEAL BEFORE US. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THA T THE ASSESSING OFFICER MADE A DISALLOWANCE OF PROPORTIONATE INTEREST ON TH E GROUND THAT INTEREST BEARING FUNDS HAVE BEEN DIVERTED TO SISTER CONC ERNS / RELATED PARTIES. ACCORDING TO THE LD.A.R, THIS FINDING IS CONTRARY T O THE FACTS THAT THE NON-INTEREST BEARING FUNDS WERE UTILIZED FOR THE PURPO SE OF MAKING ADVANCES TO THE SISTER CONCERNS / RELATED PARTIES. IN THIS CONNECTION, HE TAKEN US THROUGH THE FINANCIAL STATEMENTS DEMONSTRATING THAT NON -INTEREST BEARING FUNDS WERE AVAILABLE FOR THE PURPOSE OF MAKING THE ADVANCES TO SISTER CONCERNS / RELATED PARTIES AND ALSO TAKEN US TH ROUGH PAGE NO.12 OF THE ORDER OF LD.CIT(A) TO DEMONSTRATE THAT INTEREST FREE FU NDS IN THE FORM OF RESERVES AND SURPLUSES AND ADVANCE FROM CUSTOMERS ARE AVAILABLE FOR THE PURPOSE OF MAKING LOANS AND ADVANCES TO SISTER CONCERNS / RELATED PARTIES. LD.A.R. FURTHER TAKEN US THROUGH THE CHARTS PLACED AT PA GE NO.321 AND 322 OF THE PAPER BOOK DEMONSTRATING THAT INTEREST FREE FUNDS ARE AVAILABLE. HE FURTHER SUBMITTED THAT MOST OF THE LOANS AND ADVANC ES ARE MADE DURING THE PREVIOUS YEAR RELEVANT TO THE YEARS 2012-13 AND 2013-14. THE DETAILS OF WHICH ARE FURNISHED AT PAGE NO.324 TO 338 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT IN THE INITIAL YEAR IN WHICH ADVA NCES WERE MADE, NO DISALLOWANCE U/S 36(1)(III) WAS MADE, IT WAS ONLY FOR THE FIRST TIME DURING THE ASSESSMENT YEAR UNDER CONSIDERATION, ASSESSIN G OFFICER HAD CHOSEN TO MAKE THE DISALLOWANCE U/S 36(1)(III) OF THE ACT. L D.A.R. FURTHER TAKEN US THROUGH PAGE NO.323 OF THE PAPER BOOK DEMONS TRATING THAT A SUM OF RS.4,37,39,540/- WAS GIVEN TO SISTER CONCERNS / RELA TED PARTIES AS LOANS AND ADVANCES DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT 4 YEAR UNDER CONSIDERATION AS AGAINST THE RESERVES GENE RATED OF RS.13,12,44,064/-. FINALLY, THE CONTENTION OF THE LD.A.R. IS T HAT EVEN IN CASE WHEN THERE IS A MIXTURE OF BORROWED FUNDS AS WELL A S INTEREST FREE FUNDS ARE UTILIZED AND WHEN THE INTEREST FREE FUNDS ARE MO RE THAN THE INVESTMENTS, THEN A PRESUMPTION SHOULD BE DRAWN THAT LOA NS AND ADVANCES TO SISTER CONCERNS / RELATED PARTIES IS MADE O UT OF THE OWN FUNDS. IN SUPPORT OF THIS PROPOSITION, HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES REPORTED IN 313 ITR 340. ON THE SAID PROPOSITION, HE ALSO RELIED ON THE FOLLOWING DECISIONS : 1) ACIT VS. M/S. INDO INDUSTRIAL ENGINEERS ITAT, DELHI. 2) JCIT VS. M/S. MBHARAT FRITZ WERNER LTD, ITAT, BANGALORE. 3) PCIT VS. SHAPOORJI PALLONJI AND CO., LTD 423 ITR 220 (BOM) 4) CIT(LTU) VS. RELIANCE INDUSTRIES LTD 410 ITR 466 (SC). 5) CIT VS. HDFC BANK LTD. 366 ITR 505 (BOM) 6) MUNJAL SALES CORPORATION VS. CIT - 298 ITR 298 (SC). 6. THE NEXT LIMB OF LD.A.R.S ARGUMENT IS THAT THE DISALLOWA NCE, IF ANY, SHOULD BE RESTRICTED TO THE EXTENT OF ONLY INCREMENTAL A DVANCES MADE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YE AR UNDER CONSIDERATION. IN THIS CONNECTION, HE RELIED ON THE DECISIO N OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SRIDEVI ENTER PRISES REPORTED IN 192 ITR 165. LD.A.R. FURTHER SUBMITTED THAT WHEN NO D ISALLOWANCE WAS MADE IN EARLIER YEARS, ON THE PRINCIPLE OF CONSISTENCY, N O DISALLOWANCE CAN BE MADE IN THE SUBSEQUENT YEARS RELYING ON THE FOLLO WING JUDICIAL PRECEDENTS : 5 (1) CIT VS. SRIDEVI ENTERPRISES 192 ITR 165 (KAR) (2) CIT VS. GIVO LIMITED (ITA NO.941/2010) OF HONBLE DELHI HIGH COURT. 7. ON THE OTHER HAND, LD.D.R. HAD PLACED RELIANCE ON THE OR DER OF LD.CIT(A). 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE ISSUE IN THE PRESENT APPEAL RELATES TO DISA LLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT ON THE GROUND THAT INTEREST BEAR ING FUNDS HAVE BEEN DIVERTED TO THE SISTER CONCERNS / RELATED PARTIES. THE ASSESSING OFFICER FOUND THAT THE APPELLANT COMPANY HAD BORROWED FUN DS OF RS.44,86,69,395/- ON WHICH INTEREST OF RS.7,39,32,205/- WAS PA ID. AFTER DEDUCTING THE INTEREST ON LOANS AND ADVANCES RECEIVED, T HE TOTAL INTEREST EXPENDITURE CLAIMED IS RS.3,80,00,399/-. THE ASSESSING OFFIC ER ALSO OBSERVED THAT THE APPELLANT COMPANY HAD GIVEN LOANS AND ADVANCES TO THE SISTER CONCERNS / RELATED PARTIES TO THE TUNE OF RS.51,3 7,56,632/- ON WHICH INTEREST @ 7% P.A. WAS CHARGED. BASED ON THIS INFORM ATION, THE ASSESSING OFFICER WAS OF THE OPINION THAT INTEREST BEARING FU NDS HAVE BEEN UTILIZED FOR THE PURPOSE OF MAKING LOANS AND ADVANCES. ACC ORDINGLY, IN THE ABSENCE OF ANY BUSINESS EXPEDIENCY, MADE DISALLOWANCE OF P ROPORTIONATE INTEREST I.E., INTEREST CHARGED ON LOANS TO THE RELATED PAR TIES WAS AT 7% PER ANNUM AS AGAINST INTEREST PAID ON BORROWED FUNDS @ 14.93 % BY THE APPELLANT AND THE BALANCE INTEREST AT THE RATE OF DIFFERENC E OF 7.93% WAS BROUGHT TO TAX AS INTEREST WAS PAID FOR NON-BUSINESS PURPOSES. 9. ON APPEAL BEFORE LD.CIT(A), LD.CIT(A) WHILE REJECTING THE C ONTENTION OF THE APPELLANT RESTRICTED THE AMOUNT OF DISALLOWANCE TO T HE EXTENT OF 6 INTEREST CLAIMED AS AN EXPENDITURE VIDE PARA 6.10 OF THE O RDER OF LD.CIT(A) BY HOLDING THAT INTEREST IS REQUIRED TO BE DISALLOWED IRRESP ECTIVE OF THE FACT THAT WHETHER THE BORROWED FUNDS HAVE BEEN UTILIZED FOR T HE PURPOSE OF MAKING ADVANCES TO THE SISTER CONCERNS / RELATED PARTIE S AS NO BUSINESS EXPEDIENCY WAS ESTABLISHED. 10. ON PERUSAL OF THE RELEVANT FINANCIAL STATEMENTS OF THE APPELLANT COMPANY WHICH ARE PLACED AT PAGE NO.323 OF THE PAPER BO OK, TWO THINGS ARE CLEAR, FIRSTLY, A SUM OF RS.51,37,56,632/- WAS ADVANCED TO SISTER CONCERNS / RELATED PARTIES AS ON 31.03.2014 OUT OF WHICH ONLY, A SUM OF RS.4,79,39,540/- WERE ADVANCED TO SISTER CONCERNS / RELA TED PARTIES DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YE AR UNDER CONSIDERATION AND SECONDLY, TOTAL RESERVES AND SURPLUSES AVAILABLE AS ON 31.03.2014 WAS RS.25,10,65,020/- AND THE ADVANCES FROM CUS TOMERS WHICH ARE ALSO INTEREST FREE FUNDS AVAILABLE ARE OF RS.45,02,2 7,730/- WHICH AGGREGATE TO A SUM OF RS.70,12,92,750/-. OUT OF WHIC H THE NET INCREMENTAL INTEREST FREE FUNDS AVAILABLE DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION IS RS.29,57,23 ,475/-. THIS FINANCIAL INFORMATION IS ALSO BORNE OUT OF THE RECORD. THUS, FROM THE MATERIAL ON RECORD, IT IS CLEAR THAT MAJOR ADVANCES WERE MADE PRIOR TO THE A.Y. 2012-13 TO THE TUNE OF RS.45,32,63,443/- AND DURING T HE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR 2013-14, INCREMENTAL ADV ANCES TO THE EXTENT OF RS.4,79,39,540/- WAS MADE DURING THE PREVIOUS Y EAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERATION. 11. IT IS AN UNDISPUTED FACT THAT DURING THE EARLIER ASSE SSMENT YEAR, NO DISALLOWANCE OF INTEREST U/S 36(1)(III) WAS MADE BY THE ASSESSIN G OFFICER. DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YE AR UNDER 7 CONSIDERATION, THE NET INCREMENTAL INTEREST FREE FUNDS AVAILA BLE TO THE APPELLANT ARE TO THE TUNE OF RS.29,57,23,475/- AND THE INC REMENTAL LOANS AND ADVANCES TO SISTER CONCERNS / RELATED PARTIES IS ON LY RS.4,79,39,540/-. THEREFORE, IN VIEW OF THE SETTLED POSITION OF LAW THAT THE D ISALLOWANCE, IF ANY, U/S 36(1)(III) OF THE ACT CAN BE MADE ONLY TO THE EXTE NT OF INCREMENTAL LOANS AND ADVANCES MADE DURING THE PREVIOUS YEAR RELEVA NT TO THE ASSESSMENT YEAR UNDER CONSIDERATION, IN VIEW OF THE LAW LA ID DOWN BY THE HONBLE KARANATAKA HIGH COURT IN THE CASE OF CIT VS. SRID EVI ENTERPRISES (SUPRA) AND THE HONBLE DELHI HIGH COURT IN THE CASE OF CI T VS. GIVO LIMITED (ITA NO.941/2010) FOR THE PURPOSE OF DISALLOWANCE OF INTEREST U/S 36(1)(III) OF THE ACT IN CASE WHERE NO DISALLOWANCE WAS MADE IN THE EARLIER YEARS, THE OPENING BALANCE OF LOANS AND ADVANCES OF SISTER CONCERNS / RELATED PARTIES SHOULD NOT BE CONSIDERED. THEREFORE, WE A RE OF THE CONSIDERED OPINION THAT APPLYING THE RATIO OF THE DECISION OF HONBLE DELHI AND KARNATAKA HIGH COURTS CITED SUPRA, THE OPENING BALAN CE OF LOANS AND ADVANCES OF SISTER CONCERNS / RELATED PARTIES SHOULD NOT BE CONSIDERED FOR THE PURPOSE OF MAKING, ANY DISALLOWANCE FOR THE YEAR UNDER CONSIDERA TION. 12. SECONDLY, AS REGARDS TO THE INCREMENTAL ADVANCES M ADE TO SISTER CONCERNS DURING THE PREVIOUS YEAR RELEVANT TO THE ASSE SSMENT YEAR UNDER CONSIDERATION AS EXTRACTED BY US, APPELLANT COMPANY HAD GENERATED INCREMENTAL INTEREST FREE FUNDS OF RS.29,57,23,475/- AND THE LOANS AND ADVANCES MADE TO SISTER CONCERNS / RELATED PARTIES DU RING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER CONSIDERAT ION IS ONLY RS.4,79,39,540/-. IT IS SETTLED POSITION OF LAW THAT WHERE TH ERE IS A MIXTURE OF BOTH BORROWED FUNDS AS WELL AS THE INTEREST FR EE FUNDS ARE AVAILABLE, A PRESUMPTION HAS TO BE DRAWN THAT INVESTMENTS ARE MADE OUT 8 OF THE INTEREST FREE FUNDS AS HELD BY THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES (SUPRA) WHEREIN IT WAS HELD AS UNDER : 10. IF THERE BE INTEREST FREE FUNDS AVAILABLE TO A N ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE H AD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTE REST FREE FUNDS AVAILABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMACEUTICAL WORKS LTD. (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHE RE A SIMILAR ISSUE HAD ARISEN.. BEFORE THE SUPREME COURT IT WAS ARGUED THA T IT SHOULD HAVE BEEN PRESUMED THAT IN ESSENCE AND TRUE CHARACTER THE TAX ES WERE PAID OUT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVE RDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THESE CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM THE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUMENT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT TH AT THE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE TO BE ANSW ERED. IT THEN NOTED THAT IN WOOLCOMBERS CASE (SUPRA) THE CALCUTTA HIGH COURT H AD COME TO THE CONCLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANCE TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVER DRAFT AC COUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOULD BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFITS OF THE YEAR AND NOT OUT OF THE OVERDRAFT AC COUNT FOR THE RUNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTION, T HERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THEREFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OVER DRAFT AND/OR LOANS TAKEN, TH EN A PRESUMPTION WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FU NDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN THIS CASE THIS PRESUMPTION IS E STABLISHED CONSIDERING THE FINDING OF FACT BOTH BY THE C.I.T. (APPEALS) AND I. T.A.T. THE ABOVE RATIO WAS REITERATED BY SEVERAL HIGH COURTS IN SEVERAL CASES LIKE PCIT VS. SHAPOORJI PALLONJI AND CO., LTD REPORTED IN 423 ITR 220 OF HON BLE BOMBAY HIGH COURT, CIT VS. HDFC BANK LTD REPORTED IN 3 66 ITR 105 (BOM) ETC. 13. THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES REPORTED IN 313 ITR 340 WAS CONFIRMED BY THE HONBLE SUPREME COURT IN THE CASE OF CIT VS RELIANCE INDUSTRIES LIMITED REPORTED IN 410 ITR 466 (SC) AND SIMILAR IS THE DECISION OF MUNJAL SALE S CORPORATION VS. CIT REPORTED IN 298 ITR 298 (SC). THERE FORE, NO DISALLOWANCE U/S 36(1)(III) IS CALLED FOR IN THE LIGHT OF THE ABOVE LEGAL SETTLED 9 POSITION OF LAW AND FACTS OF THE CASE IN RESPECT OF THE INCR EMENTAL LOANS AND ADVANCES MADE TO THE SISTER CONCERNS / RELATED PA RTIES DURING THE PREVIOUS YEAR RELEVANT TO THE ASSESSMENT YEAR UNDER C ONSIDERATION. THEREFORE, WE ARE OF THE CONSIDERED OPINION THAT THE ORDE RS OF LOWER AUTHORITIES ARE CONTRARY TO THE FACTS OF THE LAW OF THE C ASE. THEREFORE, WE REVERSE THE ORDERS OF THE LOWER AUTHORITIES AND DIRECT T HE ASSESSING OFFICER TO DELETE THE DISALLOWANCE OF INTEREST OF RS.3,80,00,399/- AS CONFIRMED BY THE LD.CIT(A). 14. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED ON 12 TH DAY OF JULY, 2021. SD/- SD/- (S. S. VISWANETHRA RAVI) (IN TURI RAMA RAO) / JUDICIAL MEMBER / ACCOUNTANT MEMBER / PUNE; / DATED : 12 TH JULY, 2021. YAMINI / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT. 2. / THE RESPONDENT. 3. THE CIT(A)-7, PUNE. 4. THE PR.CIT-6, PUNE. 5. , , , / DR, ITAT, B BENCH, PUNE. 6. / GUARD FILE. / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE.