MULTICOT TEXTILES P. LTD, MUMBAI V. ACIT 5(2), MUMBAI

ITA 5709/MUM/2009

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 49489 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 03-05-2011
• Assessment Year: 2004-2005
• Appeal Filed On: 23-10-2009
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA
• Assessee Lawyers: AJAY R SINGH; DR K SHIVARAM
• Keywords: Opportunity of being heard; Proportionate interest; Corroborative evidences; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH F BEFORE SHRI R.V. EASWAR, PRESIDENT AND SHRI R.K. PANDA, ACCOUNTANT MEMBER. ITA NO.5709/MUM/09 (ASSESSMENT YEAR : 2005-06) M/S.MULTICOT TEXTILES PVT. LTD., 4 TH FLOOR, SHALIMAR HOUSE, 335, GRANT ROAD, MUMBAI-400 007 PAN AAACH2034G VS. ASSISTANT COMMISSIONER OF INCOME TAX 5(2), MUMBAI. APPELLANT. RESPONDENT. APPELLANT BY : DR. K. SHIVARAM & MR. AJAY R. SINGH. RESPONDENT BY : SMT. ASHIMA GUPTA. O R D E R PER SHRI R.K. PANDA : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER DT.13.8.2009 OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-V, MUMBAI RELATING TO THE ASST. YEAR 2005-06. 2. IN GROUND NO.1 THE ASSESSEE HAS CHALLENGED THE ORDER OF THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST E XPENSES OF RS.7,39,120 MADE BY THE ASSESSING OFFICER U/S.36(1)(III) OF THE INCOME TAX ACT, 1961. 3. FACTS OF THE CASE IN BRIEF ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF POLYESTER AND DEALING IN COTTON YARN AND WASTE. ITA NO.5709/MUM/09 - 2 - DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE C OMPANY DEBITED AN AMOUNT OF RS.69,76,984 TO ITS PROFIT AND LOSS ACCOUNT ON A CCOUNT OF INTEREST PAID ON LOANS TAKEN FROM BANKS AMOUNTING TO RS.4,47,24,765. THE ASSESSEE COMPANY HAS ALSO GIVEN INTEREST FREE ADVANCES TO VARIOUS PE RSONS AMOUNTING TO RS.47,38,005. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY PRO PORTIONATE INTEREST SHOULD NOT BE DISALLOWED FOR GIVING INTEREST FREE ADVANCES TO OTHER PARTIES. IN REPLY THE ASSESSEE SUBMITTED THAT IT HAS CURRENT ACCOUNT WITH ITS SISTER CONCERNS AND ASSOCIATE CONCERNS. WHENEVER IT NEEDED FUNDS, THE SAME IS RECEIVED FROM THE SISTER CONCERNS AND VICE VERSA. THE ASSESSEE SUBMI TTED THAT NEITHER IT HAS CHARGED ANY INTEREST FROM SISTER CONCERNS NOR IT HA S PAID ANY INTEREST TO SISTER CONCERNS. THE ASSESSEE FURTHER STATED THAT NET ADV ANCE TO SISTER CONCERNS HAS COME DOWN DURING THE CURRENT YEAR AND, THEREFORE, N O DISALLOWANCE OF INTEREST IS CALLED FOR. 3.1 THE ASSESSING OFFICER, HOWEVER, REJECTED TH ESE CONTENTIONS OF THE ASSESSEE. ACCORDING TO THE ASSESSING OFFICER, ONUS IS ON THE ASSESSEE TO SHOW THAT ALL THE BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSE OF BUSINESS. IN THE CASE OF THE ASSESSEE, THERE ARE NO ACCUMULATED PROF ITS FROM WHICH ASSESSEE COULD HAVE ADVANCED INTEREST FREE FUNDS. THE ASSES SEE HAS THEREFORE, UTILIZED ITA NO.5709/MUM/09 - 3 - BORROWED FUNDS FOR GIVING INTEREST FREE ADVANCES. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED AN AMOUNT OF RS.7,39,120 BEI NG PROPORTIONATE INTEREST FOR BORROWED FUNDS UTILIZED BY THE ASSESSEE FOR GIV ING INTEREST FREE ADVANCES. 4. BEFORE THE LEARNED CIT(A), THE ASSESSEE REITERATED THE SAME SUBMISSIONS AS MADE BEFORE THE A.O. IT WAS SUBMITTED THAT THE INTEREST BEARING LOANS TAKEN FOR THE PURPOSE OF BUSINESS WERE TOTALLY UTILIZED F OR THE PURPOSE OF BUSINESS. IT WAS SUBMITTED THAT INTEREST FREE ADVANCES WERE GIVE N TO SISTER CONCERNS ON ACCOUNT OF COMMERCIAL EXPEDIENCY AND NO DISALLOWANC E OF INTEREST SHOULD BE MADE. THE ASSESSEE HOWEVER DID NOT FILE ANY DETAIL S DURING THE APPELLATE PROCEEDINGS ON THE GROUND THAT ITS RECORDS WERE DES TROYED IN SURAT FLOODS IN THE YEAR 2006. 4.1 HOWEVER, THE LEARNED CIT(A) WAS NOT SATI SFIED WITH THE EXPLANATION GIVEN BY THE ASSESSEE AND UPHELD THE DISALLOWANCE M ADE BY THE A.O. BY HOLDING AS UNDER : I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLANT . AS PER BALANCE SHEET OF THE APPELLANT, SHARE CAPITAL OF TH E APPELLANT IS RS.11,62,200 AND THERE IS NO BALANCE IN THE RESERVE AND SURPLUS ACCOUNT. WHEREAS DEBIT BALANCES AS PER PROFIT AND LOSS ACCOUNT IS RS.7,33,51,230. THEREFORE, IT CANNOT BE SAID THAT T HE APPELLANT HAS ANY SURPLUS FUNDS WHICH IT COULD USE FOR THE PURPOS E OF GIVING INTEREST LOANS. THE APPELLANT HAS TAKEN SECURED LO ANS OF RS.4,47,24,765. THE APPELLANT HAS ALSO GIVEN LOANS AND ADVANCES AMOUNTING TO RS.47,38,305. THUS, THERE IS A CLEAR NEXUS BETWEEN THE AMOUNT ADVANCED BY THE APPELLANT AND THE AMOUNT BOR ROWED. ITA NO.5709/MUM/09 - 4 - THEREFORE, DISALLOWANCE ON INTEREST IS REQUIRED IF THERE IS NO COMMERCIAL EXPEDIENCY IN ADVANCING THE INTEREST FRE E LOANS TO OTHERS. THE APPELLANT HAS NOT FURNISHED PARTY WISE DETAILS OF INTEREST FREE ADVANCES GIVEN NOR DID IT FURNISH PURPOSE OF G IVING ADVANCES. THE APPELLANT IS BOUND TO GIVE REASONS FOR GIVING I NTEREST FREE LOANS SO THAT IT CAN BE EXAMINED WHETHER THE LOANS HAS BE EN GIVEN ON ACCOUNT OF COMMERCIAL EXPEDIENCY OR NOT. SINCE THE APPELLANT HAS NOT PROVIDED ANY DETAILS, THE DECISION OF SUPREME C OURT IN THE CASE OF S.A. BUILDERS IS NOT APPLICABLE TO THE CASE OF T HE APPELLANT. THE ACTION OF THE ASSESSING OFFICER IS UPHELD. THIS GR OUND OF APPEAL IS NOT ALLOWED. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 5. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THAT IN THE PRECEDI NG ASSESSMENT YEARS I.E. DURING A.YS 2003-04 AND 2004-05, THE A.O. HAD MADE SIMILAR DISALLOWANCES WHICH WERE DELETED BY THE LEARNED CIT(A). ON FURTH ER APPEAL BY THE REVENUE, THE TRIBUNAL VIDE ITA NO.5136/MUM/2007 ORDER DT.25 .5.2009 FOR THE A.YS 2003-04 AND 2004-05 RESTORED THE ISSUE TO THE FILE OF A.O. WITH THE FOLLOWING OBSERVATION : AFTER HEARING THE RIVAL SUBMISSIONS AND PERUSING THE RECORD, WE FIND THAT THE ASPECT OF COMMERCIAL EXPEDIENCY AS DI RECTED BY THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. VS. CIT CITED SUPRA HAS NOT BEEN LOOKED INTO EITHER BY THE ASSESS ING OFFICER OR THE CIT(A). THE RATIO LAID DOWN BY THE HON'BLE SUPREME COURT IN THE S.A. BUILDERS LTD. VS. CIT (CITED SUPRA) IS APPLICABLE T O THE FACTS OF THE PRESENT CASE. HOWEVER, THE MATTER IS SET ASIDE TO THE FILE OF THE ITA NO.5709/MUM/09 - 5 - ASSESSING OFFICER TO LOOK INTO THE COMMERCIAL EXPED IENCY OF ADVANCING INTEREST BEARING FUNDS, AS INTEREST FREE ADVANCES, TO THE PARTIES. THE ASSESSING OFFICER SHALL AFFORD REASON ABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. THE GROUND OF APPEAL RAIS ED BY REVENUE IS ALLOWED FOR STATISTICAL PURPOSES. KEEPING IN MIND THE ORDER OF THE TRIBUNAL IN ASSESS EES OWN CASE FOR THE PRECEEDING ASSESSMENT YEARS AND IN THE INTEREST OF JUSTICE, WE DEEM IT PROPER TO RESTORE THE ISSUE BACK TO THE ASSESSING OFFICER FOR FRESH ADJUDICATION. THE ASSESSING OFFICER SHALL DECIDE THE ISSUE AFRESH AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING HEARD TO THE ASSESS EE. WE HOLD AND DIRECT ACCORDINGLY. THE GROUND RAISED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. 6. IN GROUND NO.2, THE ASSESSEE HAS CHALLENGED THE ORDER OF THE LEARNED CIT(A) IN CONFIRMING THE DISALLOWANCE OF RS.29,62,0 78 MADE BY THE A.O. ON ACCOUNT OF SALE OF COTTON WASTE. 6.1 THE FACTS IN BRIEF ARE THAT THE ASSESSEE IS IN THE BUSINESS OF TRADING OF YARN, POY AND COTTON. DURING THE YEAR UNDER CONSID ERATION, THE ASSESSING OFFICER NOTED THAT THE DETAILS OF COTTON WASTE PURC HASED AND SOLD BY THE ASSESSEE ARE AS UNDER : ITA NO.5709/MUM/09 - 6 - COTTON WASTE QUANTITY AMOUNT RS. RATE PER KG. (RS.) OPENING STOCK 46643.83 1632534 34.99 PURCHASES 571005.22 21930482 38.35 SALE 599611 19887160 33.16 CLOSING STOCK 18838.05 692675 36.77 THE AVERAGE OF THE OPENING STOCK AND PURCHASES AS N OTED BY THE ASSESSING OFFICER ARE AS UNDER : COTTON WASTE QUANTITY AMOUNT RS. RATE PER KG. (RS.) PURCHASES 618445.05 23563016 38.10 SALE 599611 19887160 33.16 6.2 ACCORDING TO THE ASSESSING OFFICER, THE SE DETAILS SHOW THAT THE ASSESSEE HAS MADE SALES OF COTTON WASTE AT THE AVER AGE RATE OF RS33.16 PER KG WHEREAS THE AVERAGE PURCHASE RATE OF COTTON WASTE BY THE ASSESSEE IS RS.38.10 PER KG. IT WAS EXPLAINED BY THE ASSESSEE TO THE AS SESSING OFFICER THAT TRANSACTIONS FOR THE SALE OF COTTON WASTE ARE ENTER ED INTO IN ADVANCE AND THE SALE RATE WAS FIXED AT THE TIME OF ENTERING INTO SALE TR ANSACTIONS. HOWEVER, THE DELIVERY OF COTTON WASTE TOOK PLACE LATER ON. THE ASSESSEE CLAIMED THAT THE MARKET SITUATION WAS HIGHLY VOLATILE AND THIS AFFEC TED THE WORKING OF THE ASSESSEE COMPANY. THESE CONTENTIONS OF THE ASSESSE E WERE REJECTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE ASSESSEE H AS FILED A GENERAL REPLY ITA NO.5709/MUM/09 - 7 - WITHOUT ACTUALLY PROVIDING SPECIFIC INSTANCES. IT HAS NOT FILED ANY ACCEPTABLE EVIDENCE TO SHOW WHY IT HAS MADE SALES BELOW PURCHA SE RATES. THE ASSESSING OFFICER, THEREFORE, APPLIED THE AVERAGE PURCHASE RA TE OF RS.38.10 PER KG IN RESPECT OF SALES ALSO AND ON THIS BASIS MADE AN ADD ITION OF RS.29,62,078 TO THE INCOME OF THE ASSESSEE. 7. BEFORE THE LEARNED CIT(A), THE ASSESSEE REPEATED THE SAME SUBMISSIONS AS MADE BEFORE THE ASSESSING OFFICER. IT WAS FURTH ER SUBMITTED THAT ITS TURNOVER HAS COME DOWN FROM 13.64 CRORES IN THE LAST YEAR TO RS.2.07 CRORES IN THE CURRENT YEAR AND THIS HAS AFFECTED THE PROFITABILIT Y OF THE ASSESSEE COMPANY. THE ASSESSEE ALSO RELIED ON THE DECISION OF ITAT IN ITS OWN CASE FOR ASSESSMENT YEAR 2004-05 WHEREIN SIMILAR ADDITION MADE BY THE ASSESS ING OFFICER WAS DELETED BY THE CIT(A) AND ON FURTHER APPEAL, THE ITAT DISMISSE D THE APPEAL FILED BY THE REVENUE. 7.1 HOWEVER, THE CIT(A) WAS NOT SATISFIED WITH T HE ARGUMENTS ADVANCED BEFORE HIM AND UPHELD THE ADDITION MADE BY THE ASSE SSING OFFICER BY HOLDING AS UNDER : I HAVE CONSIDERED THE SUBMISSIONS OF THE APPELLA NT. THE MAJOR CONTENTION OF THE APPELLANT FOR SELLING COTTON WAST E AT A RATE LESS THAN THE PURCHASE RATE IS THAT IT ENTERED INTO SALE TRANSACTIONS IN ADVANCE AND DELIVERY OF GOODS ARE GIVEN LATER ON. THE APPELLANT FILED ABSOLUTELY NO EVIDENCE FOR THIS CLAIM. THERE FORE, THE CLAIM OF THE APPELLANT THAT IT WAS UNDER CONTRACTUAL OBLIGAT ION TO SUPPLY ITA NO.5709/MUM/09 - 8 - GOODS AT A LOW RATE THAN THE RATE OF PURCHASE OF WA STE COTTON CANNOT BE ACCEPTED. AS REGARDS DECISION OF ITAT DATED 25. 5.2009 IN ITA NO.5136/MUM/2004-05 IS CONCERNED, THE DECISION WAS DELIVERED BY THE ITAT ON THE FACTS EXISTING IN THAT YEAR. IN TH AT YEAR, THERE WAS NO FINDING THAT THERE IS NO EVIDENCE WITH THE APPELLAN T TO SHOW THAT IT HAS ENTERED INTO SALE TRANSACTIONS IN ADVANCE. AS ALREADY POINTED OUT IN THE CURRENT YEAR, THE APPELLANT HAS NOT PROD UCED ANY EVIDENCE FOR MAKING CLAIM THAT IT IS ENTERING INTO SALE TRAN SACTIONS IN ADVANCE. THE ACTION OF THE ASSESSING OFFICER IS UP HELD. THIS GROUND OF APPEAL IS NOT ALLOWED. AGGRIEVED WITH SUCH ORDER OF THE CIT(A), THE ASSESS EE IS IN APPEAL BEFORE US. 8. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY B OTH THE SIDES, PERUSED THE ORDERS OF THE ASSESSING OFFICER AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF ASSESSEE. WE HAVE ALSO GONE THROUGH ORDE R OF THE TRIBUNAL IN ASSESSEES OWN CASE FOR A.YS 2003-04 AND 2004-05. WE FIND DURING THE ASST. YEAR 2003-04, DISALLOWANCE MADE BY THE A.O. ON ACCO UNT OF GROSS LOSS WAS DELETED BY THE LEARNED CIT(A) AND ON APPEAL THE TRI BUNAL DISMISSED THE APPEAL FILED BY THE REVENUE ON THE GROUND THAT THE EXPLANA TION FILED BY THE ASSESSEE WAS FULLY BACKED BY ENTRIES IN THE BOOKS OF ACCOUNT AND THE SUPPORTING EVIDENCES OF THE PURCHASES AND SALES WERE MADE BY THE ASSESSEE. SIMILARLY, WE FIND THE CIT(A) DELETED THE DISALLOWANCE OF LOSS OF RS.3,65, 25,176 FOR THE ASST. YEAR 2004-05, AND ON FURTHER APPEAL BY THE REVENUE THE T RIBUNAL RESTORED THE MATTER TO THE FILE OF ASSESSING OFFICER WITH A DIRECTION T O COMPUTE THE TRADING RESULTS OF ITA NO.5709/MUM/09 - 9 - THE ASSESSEE AFTER VERIFYING THE PURCHASES FROM THE FOUR PARTIES WHOSE CONFIRMATIONS WERE FILED AT A LATER DATE. 8.1 HOWEVER, THE FACTS DURING THE IMPUGNED ASSES SMENT YEAR ARE QUITE DIFFERENT. WE FIND THE ASSESSEE HAS MADE GENERAL S UBMISSIONS BEFORE THE LOWER AUTHORITIES REGARDING FALL IN PRICE OF COTTON OR EX PLANATION REGARDING LOSS WITHOUT ANY CORROBORATIVE EVIDENCE. CONFIRMATION O F THE PARTIES WERE NOT PRODUCED EITHER BEFORE THE ASSESSING OFFICER OR BEF ORE THE CIT(A) OR EVEN BEFORE US. IN ABSENCE OF THE SAME THE ACCEPTANCE O F LOSS CONSECUTIVELY FOR THE 3 RD YEAR IS NOT POSSIBLE. IN OUR OPINION, NO PRUDENT BUSINESSMAN WILL INCUR LOSSES YEAR AFTER YEAR WHICH IS AGAINST ALL HUMAN PROBABILITIES. NOW EVEN THE BOOKS OF ACCOUNTS ARE ALSO STATED TO BE DESTROYED D UE TO FLOODS. SINCE THE CIT(A) HAS GIVEN A CATEGORICAL FINDING THAT THE ASS ESSEE FILED NO EVIDENCE FOR THE CLAIM THAT IT ENTERED INTO SALE TRANSACTION IN ADVANCE AND DELIVERY TOOK PLACE LATER ON AND SINCE NOTHING MORE COULD BE PRODUCED B EFORE US TO TAKE A CONTRARY VIEW THAN THE VIEW ALREADY TAKEN BY THE CIT(A), THE REFORE, WE FIND NO INFIRMITY IN THE ORDER OF THE CIT(A). ACCORDINGLY, THE GROUN D RAISED BY THE ASSESSEE IS DISMISSED. 10. IN THE RESULT THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO.5709/MUM/09 - 10 - ODER PRONOUNCED IN THE OPEN COURT ON 15.07 .2011. SD/- SD/- (R.V. EASWAR) (R.K. PANDA) PRESIDENT ACCOU NTANT MEMBER MUMBAI, DT.15.07.2011. *GPR TRUE COPY COPY TO : 1. THE ASSESSEE. 2. THE ASSESSING OFFICER. 3. CIT(APPEALS) 4. CIT 5. DEPARTMENTAL REPRESENTATIVE, ITAT, MUMBAI. 6. GUARD FILE. BY ORDER DY./ASST.REGISTRAR, ITAT, MUMBAI