M/s. Madhav Cotton Ginning & Pressing Factory, Botad V. The Income tax Officer,Ward-2(3), Bhavnagar

ITA 604/AHD/2014

AI Insights

The case revolves around the disallowance of interest expenses claimed by M/s. Madhav Cotton Ginning Pressing Factory for the Assessment Year 2010-11. The Income Tax Officer (ITO) disallowed interest expenses amounting to Rs.36,84,544, which were incurred on advances made to M/s. Om Kailash Cotton, arguing that these were non-business related. The Commissioner of Income-Tax (Appeals) upheld this decision, and the Tribunal also confirmed the disallowance, noting that the assessee did not provide sufficient evidence to prove that the advances were made from interest-free funds. The Tribunal's decision was based on the finding that the assessee could not bifurcate the financial and trading transactions with M/s. Om Kailash Cotton and failed to show that interest-free funds were available for making such advances.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 133549 (ITAT-AHMEDABAD)
• Duration Of Justice: 9 year(s) 2 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2023
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 05-03-2023
• Assessment Year: 2010-2011
• Appeal Filed On: 27-02-2014
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Principle of natural justice

Judgement Text

आयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरणआयकर अपीलीय अिधकरण आयकर अपीलीय अिधकरण, अहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठअहमदाबाद 瀈यायपीठ अहमदाबाद 瀈यायपीठ ‘B’ अहमदाबाद। अहमदाबाद।अहमदाबाद। अहमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “B” BENCH, AHMEDABAD ] ] BEFORE SMT.ANNAPURNA GUPTA, ACCOUNTANT MEMBER AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No.604/Ahd/2014 Assessment Year :2010-11 M/s.Madhav Cotton Ginning Pressing Factory Opp: Market Yard Palliyad Road Haddad, Botad – 364 710. PAN : AADFM 7111 K Vs ITO, Ward-2(3) Bhavnagar. (Applicant) (Responent) Assesseeby : Shri S.N. Divatia, AR Revenue by : Shri Rakesh Jha, Sr.DR स ु नवाई क तार ख/D a t e o f H e a r i n g : 0 6 / 0 3 / 2 0 2 3 घोषणा क तार ख /D a t e o f P r o n o u n c e m e n t : 2 6 / 0 5 / 2 0 2 3 आदेश/O R D E R PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER The present appeal has been filed by the assessee against order passed by the Ld.Commissioner of Income-Tax(Appeals)-7, Ahmedabad (hereinafter referred to as “ld.CIT(A)”) dated 23.01.2014 under section 250(6) of the Income Tax Act, 1961 ("the Act" for short) pertaining to Assessment Year 2010-11. 2. The grounds raised by the assessee read as under: “1.1 The order passed u/s.250 on 23-1-2014 for A.Y.2010-11 by CIT(A)- XX, Abad upholding partly the disallowance interest exp. made by AO is wholly illegal, unlawful and against the principles of natural justice. ITA No.604/Ahd/2014 2 1.2 The Ld. CIT(A) has grievously erred in law and or on facts in not considering fully and properly the submissions made and evidence produced by the appellant with regard to the impugned additions. 2.1 The Ld.CIT(A) has grievously erred in law and on facts in confirming the disallowance of interest expenses on financial transactions. 2.3 That in the facts and circumstances of the case as well as in law, the Ld.CIT(A) ought not to have upheld the disallowance of interest exp. to the extent of financial transactions. 3.1 The Ld.CIT(A) has erred in observing that it was an admitted fact that the borrowed capital was not utilized for business purposes and given as loan & advance to sister concern. The Ld CIT(A) ought not to have rejected, the contentions about interest free funds, current year's profit, NO Revenue loss in charging interest etc. The Ld CIT(A) has erred in following the decision of both the appellate authorities for A.Y. 2009-10.” 3. Solitary issue in the present appeal relates to disallowance of interest expenses which were noted to have been incurred for making non-business interest free advances. The facts as emanate from order of the authorities below are that the assessee was noted to have made huge loans and advances to one “Om Kailesh Cotton” (“OKC” for short). The amount outstanding as at the end of the impugned year being Rs.5,84,19,065/-. The opening balance relating to this party had been reflected as loans and advances, but closing balance was reflected by the assessee as sundry debtors. The AO held that it was nothing but change of head and balance in fact related to loans/advances only. Further noting that the assessee had huge interest bearing funds on which interest of Rs.1,55,11,995/- had been claimed by the assessee, the funds including secured loans of Rs.10.82 crores, unsecured loan of Rs.2,22,07,859/- and partners capital of Rs.4,39,91,0390/-, the AO held that the assessee had diverted its interest bearing funds for making advances to this party viz. OKC for non-business purpose, and accordingly he disallowed interest pertaining to the same amounting to Rs.36,84,544/- as interest expenses not incurred for the purpose of business of the assessee. ITA No.604/Ahd/2014 3 The ld.CIT(A) noted that identical disallowance inrelationto interest expenses pertaining to advances made to the very same party, OKC had been made in the preceding year also, i.e.Asst.Year 2009-10 which had been confirmed by the ld.CIT(A) and also by the ITAT, rejecting the assessee’s contention that interest free funds had been utilized for making impugned advances noting that there was no interest free loans taken by the assessee in the said year. The findings of the ITAT in the preceding year are produced at para 4.6 of the order as under: "5. We have heard the rival contentions and perused the material on record. The Id.A.O. had calculated the interest on day to day basis. It is admitted fact that the assessee had borrowed interest bearing fund which has been advanced to the sister concerns -without charging any interest. The assesse 's explanation is totally imaginary. The firm had granted interest free loans to M/s.Om Kailash Cotton at Rs.3,07,88,727/-, wherein the assessee firm partners holding 60% interest. If at all the interest @12% had been charged on loans given to Om Kailash Cotton then interest worked out Rs.35,07,708/- then the Income Tax return would show less return ofM/s. Om Kailash Cotton as against which M/s. Madhav Cotton Ginning & Pressing Factory earned much income. The computation at page 28 shows that total business income had been shown by the assessee at Rs.9,65,080/-. The profit calculated by the assessee under the Company Act. thus, the argument put forth by the appellant before us factually incorrect. The case laws referred by the assessee are squarely not applicable because reserve and surplus is only Rs.60.39 lacs. There is no interest free loan had taken by the appellant. The principle of res judicata do not apply in case of IT law, however, year is separate and is to be decided on facts of the case. The assessee also has not established any business relevancy or business expediency that interest free loan advances for business purposes. Thus, we upheld the order of the CIT(A). " 4. Taking note of the above and also taking note of the contention of the assessee that the balance of the said party included business transactions also, the ld.CIT(A) asked for the details from the assessee for excluding the business transaction from the account of the said party, considering only the financial transactions, and thereafter working out disallowance of interest pertaining to the financial transactions undertaken bythe said party. The assessee submitted detailed working of interest expenses of Rs.19,13,491/- ITA No.604/Ahd/2014 4 on the financial transaction. The ld.CIT(A) held that it was only interest in relation to the financial transactions undertaken with the saidparty which need to be disallowed, but at the same time, he directed the AO to verify the details filed by the assessee and make disallowance according. His finding, in this regard at para 4.9 of the order are as under: “4.9. In the assessment order, the A.O. has made the observation that the balance in the account of M/s.Om Kailash Cotton has been shown by the appellant under the head of Sundry Debtors in the year under consideration while it was shown under the head of loans and advances in the immediately preceding year. Further, A.O. observed that the transactions carried out with the aforesaid sister concern were only on account of loans and advances and no trading activity had been carried out in the year under consideration. However, during the appellate proceedings the appellant has submitted the ledger account copy of M/s.Om Kailash Cotton from its books of accounts and claimed that it has made the trading transactions towards kapas sales to its sister concern also alongwith the loans and advances. Moreover certain purchases were also made by the appellant. In support, he has produced the contra account from the books of M/s.Om Prakash Cotton also. On going through the ledger account, it is found that the sales to the sister concerns are shown as "Shankar Kapas Sales Account" while the purchases are shown as "Shankar Kapas RD purchase account". These transactions were in fact relating to the trading activity of the appellant with its sister concern on which the A.O. appears to have worked out the interest for disallowance. During the course of appellate proceedings, a separate ledger account copy excluding the trading transactions and showing only the financial transactions was submitted alongwith the working of the interest @12% and accordingly interest of Rs. 19,13,491/- has been worked out which ought to have been disallowed as per the appellant. The correctness of the said working is yet to be judged. Since, no working of interest disallowance and its interest rate are available in the assessment order, hence A.O. is directed to work out the disallowance of the interest only on the financial transactions and such interest should only be considered for disallowance. Further, no disallowance of the interest on the trading activities are called for as it was not intended by the A.O. also as is seen from the assessment order. It is needless to mention that while working out the interest disallowance each of the repayments may be considered as repayment towards the first loan/advances/sales. In other words, first repayment should be considered against the first loan/opening balance/first sale and accordingly the interest disallowance may be worked out.” / 5. The assessee is in appeal against this order of the ld.CIT(A) holding disallowance of interest expenses to the extent of financial transactions undertaken by the assessee with the said party i.e. OKC. ITA No.604/Ahd/2014 5 During the course of hearing before us, the ld.DR at the outset pointed out that in the consequent proceedings before the AO, on the direction of the ld.CIT(A) to verify the details of financial transaction undertaken by the assessee with the said party for the purpose of qualifying the amount of disallowance of interest expenses, the AO had confirmed original disallowance of Rs.36,84,544/- noticing several discrepancies in the working submitted by the assessee. The same was upheld by the ld.CIT(A), and the matter had travelled thereafter to the ITAT, who in turn dismissed the assessee’s appeal noting that the assessee was unable to produce any bifurcation between the financial and trading transactions, and also not submitting bifurcation of the opening balance of Rs.3.08 crores between the trading and financial transactions. The ITAT also noted that the assessee was unable to demonstrate that interest free funds were available with the assessee during the year for making the interest free advances, and therefore, the entire disallowance of Rs.36,84,544/- made by the AO was upheld by the ITAT. The finding of the ITAT at para 8. of its order in ITA No.2348/Ahd/20124 dated 22.7.2022, copy of which was placed before us, is as under: “8. We have heard the rival contentions and perused the material on record. We note that the assessee, at any stage the proceedings, has been unable to produce bifurcation between financial and trading transactions with M/s Om Kailash Cotton, despite having been given several opportunities to produce the same. Neither has the assessee given bifurcation of opening balance of Rs. 3,07,80,727/- between trading transactions and financial transactions, nor has the assessee furnished such bifurcation in respect of amounts advanced to M/s. Om Kailash Cotton during the year under consideration. The assessee has not been able to produce any justifiable reason why the closing balance in "loans and advances account" of financial year 2008- 09 of Rs.3,07,80,727/-was converted opening balance of the "sundry debtors" account for the impugned assessment year. As correctly noted by the Ld. CIT(Appeals) in the appellate ITA No.604/Ahd/2014 6 proceedings, the assessee has not been able to demonstrate that interest-free funds were available with the assessee during the year under consideration out of which interest-free advances had been given to M/s Om Kailash Cotton. Also,, we note that Ld. CIT(Appeals) also observed specifically that the interest disallowance of Rs.19,13,491/- on account of financial transactions with M/s Om Kailash Cotton offered for taxation by the assessee (at pages 11 to 16 of the paper book) is also not reliable for the reason that it has taken the opening balance of Rs.5,24,388/- instead of Rs. 3,07,80,727/- for which no justification has been given. The argument of the assessee that the opening balance of Rs.3,07,80,727/-should not be considered for disallowance of interest is also not acceptable since firstly, the assessee has been unable to demonstrate that a part of this relates to trading transactions with M/s Om Kailash Cotton despite being given several opportunities and secondly, since assessee has been unable to demonstrate with any supporting evidence that interest-free funds were utilised for giving advances to M/s Om Kailash Cotton, and since the assessee has claimed deduction of interest on the aforementioned interest bearing funds made available to M/s Om Kailash Cotton during the impugned assessment year, interest on the same is liable to disallowed. In the result, we are of the view, that in the instant set of facts, the assessee's appeal is liable to be dismissed.” 6. In the backdrop of these facts, the ld.counsel for the assessee contended that despite order of the ITAT in the proceedings of the AO giving effect to the CIT(A)’s directions in the first round in the impugned case before us, its appeal was against the order of theld.CIT(A) holding that the disallowance of interest expenses was to be made with respect to the financial transactions undertaken by the assessee with the said party i.e. OKC. His arguments briefly put were that; (i) the assessee was cash-rich company having cash to the tune of Rs.3.00 croes reflected in its balance sheet, and therefore, it has sufficient interest free funds for making the impugned advances, (ii) there were sufficient funds with the assessee also to the tune of Rs.33 lakhs which were interest free funds for the purpose of making impugned advances. The ld.DR pointed out that both these ITA No.604/Ahd/2014 7 issues have been dealt with by the ITAT in its order passed in the appeal effect proceedings. The relevant para 8 of which as pointed out, were reproduced above. 7. We have heard rival contentions and we do not find any merit in the ld.counsel for the assessee’s contentionagainstthe findings of the ld.CIT(A) that the disallowance of interest expenses in relation to financial transactions incurred by the assessee with OKC be made in the absence of any business purpose established by the assessee for the same. We have noted from the order of the ITAT in the proceedings before the AO giving effect to order of the ld.CIT(A) that identical arguments were made before the ITAT also. We have noted that the ld.CIT(A), in appeal in the consequential proceedings had held that disallowance only with respect to financial transaction undertaken with the OKC be made. He had referred the matter to the AO to verify the details of financial transactions with the said party filed by the assessee before him. Before the AO, the assessee was unable to bifurcate financial and business transactions with the said party, and accordingly, he made disallowance of entire amount of advances made to the OKC of Rs.36,84,544/-. The matter travelled to the ITAT wherein the assessee argued alternatively before it that no disallowance be made on account of sufficient interest free funds being available with the assessee. The ITAT rejected this argument stating the assessee was unable to demonstrate any interest free funds available during the year under consideration, out of which interest free advances had been given to the OKC. This issue, therefore, as rightly pointed out by the ld.DR, has reached finality; since the Tribunal has given a finding of the fact in this regard that no interest free funds were available with the assessee during the year. Therefore, this matter requires no reconsideration again at our end. Even otherwise, we find that the ITA No.604/Ahd/2014 8 assessee had contended that the interest free funds available with it, was in relation to cash in hand available with the assessee of Rs.3 crores. It was pointed out at Bar to the ld.counsel for the assessee that cash-in-hand was an investment of funds available with the assessee; that this cash on hand may be available out of interest bearing funds,and cannotbe taken to be interest free funds on the face of it; that the availability of interest free funds is to be derived from the source of funds as reflected in the balance sheet of the assessee, and not from the application of funds in cash-in-hand or in any other mode as pointed out by the ld.counsel for the assessee. Therefore, these arguments of the ld.counsel for the assessee that the cash in hand reflected interest free funds merit no consideration. Further, as noted above, since ITAT in its order in ITA No.2348/Ahd/2014 (supra) has given a finding of the fact that no interest free funds available with the assessee during the year; there is no occasion to reconsider the arguments of the assessee again. In view of the same, the plea of the assessee that no disallowance of interest expenses be made since interest free funds were deployed for making advances is dismissed. All the grounds raised by the assessee are accordingly dismissed. 8. In the result, the appeal of the assessee is dismissed. Order pronounced in the Court on 26 th May, 2023 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) JUDICIAL MEMBER (ANNAPURNA GUPTA) ACCOUNTANT MEMBER Ahmedabad, dated 26/05/2023 vk*