IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, MUM BAI , , BEFORE SHRI SANJAY ARORA, AM AND SHRI VIJAY PAL RA O, JM ./ I.T.A. NO. 66/MUM/2012 ( / ASSESSMENT YEAR: 1998-99) DEE GEE EXPORTS 114, OLD HANUMAN LANE, KALBADEVI ROAD, MUMBAI-400 002 / VS. INCOME TAX OFFICER 14(2)(1), MUMBAI ./ ./PAN/GIR NO. AADFD 4573 C ( ! /APPELLANT ) : ( '#! / RESPONDENT ) ! $ % / APPELLANT BY : SHRI NITESH JOSHI & SHRI DHIREN K. RATHORE '#! $ % / RESPONDENT BY : SHRI DEEPAK SUTARIYA & ' ( $ ) * / DATE OF HEARING : 05.02.2014 +,- $ ) * / DATE OF PRONOUNCEMENT : 02.04.2014 . / O R D E R PER SANJAY ARORA, A. M.: THIS IS AN APPEAL BY THE ASSESSEE DIRECTED AGAINST THE ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-25, MUMBAI (CIT(A) FOR SH ORT) DATED 02.11.2011, DISMISSING THE ASSESSEES APPEAL CONTESTING ITS ASSESSMENT U/S .143(3) OF THE INCOME TAX ACT, 1961 (THE ACT HEREINAFTER) FOR THE ASSESSMENT YEAR (A. Y.) 1998-99 VIDE ORDER DATED 30.12.2009. 2. THE ONLY ISSUE ARISING IN THE INSTANT APPEAL IS THE MAINTAINABILITY OF THE DISALLOWANCE OF INTEREST IN THE SUM OF RS.8,27,254/ - PAID BY THE ASSESSEE, I.E., IN LAW AND IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2 ITA NO. 66/MUM/2012 (A.Y. 1998-99) DEE GEE EXPORTS VS. ITO 3.1 THIS IS THE THIRD ROUND BEFORE TRIBUNAL; IN THE FIRST ROUND, ORDER IN WHICH (IN ITA NO. 1513/MUM/2005 DATED 01/11/2006) IS NOT ON RECOR D, IT, AS NOTED AT PARA 8 OF ITS ORDER IN THE SECOND ROUND (IN ITA NO. 6624/MUM/2007 DATED 15.12.2008/ PB PAGES 34 - 51), RESTORED THE MATTER BACK TO THE FILE OF THE FIRST A PPELLATE AUTHORITY. THE TRIBUNAL, AFTER DISCUSSING THE ISSUE AT LENGTH IN THE SECOND ROUND, I.E., WITH REFERENCE TO THE LAW IN THE MATTER, VIDE PARA 9 (AT PAGES 5-11) OF ITS ORDER, R ESTORED THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER (A.O.), HOLDING THUS: 9.11 IN THE CASE UNDER CONSIDERATION, THE FACTS OF THE CASE ARE REQUIRED TO VERIFY FROM THE RECORD IN THE LIGHT OF ABOVE DISCUS SION, WE THEREFORE SEND BACK THESE MATTERS TO THE FILE OF AO TO DECIDE THES E ISSUES IN THE LIGHT OF ABOVE DISCUSSIONS AFTER PROVIDING OPPORTUNITY OF HE ARING TO THE ASSESSEE. CLEARLY, THEREFORE, THE MATTER WAS IN ITS VIEW REQ UIRED TO BE ADJUDICATED AFRESH, KEEPING IN VIEW THE FACTS OF THE CASE AND THE LAW I N THE MATTER, AS EXPLAINED BY IT PER THE FOREGOING DISCUSSION, I.E., VIDE PARAS 9.1 TO 9.10 OF ITS ORDER. THE BORROWED CAPITAL, ON WHICH INTEREST IS BEING CLAIMED, IS TO BE UTILIZED FOR THE PURPOSES OF THE BUSINESS. FURTHER, THIS CONDITION IS TO CONTINUE TILL THE BORROWING IS REPAID; THE INTEREST ONLY REPRESENTING THE COST TO THE BUSINESS OF SUCH CAPITAL. AS SUCH, IF T HE BORROWED CAPITAL IS SUBSEQUENTLY DIVERTED FOR NON-BUSINESS OR PERSONAL PURPOSES, INT EREST COULD NOT BE CLAIMED AS A BUSINESS EXPENSE. ANY OTHER VIEW WOULD BE CONTRARY TO THE OBJECT OF THE PROVISION (S. 36(1)(III)) AS WELL AS THE PURPOSE FOR WHICH BORROW ING STANDS MADE. AN ASSESSEE MAY, WHILE USING OR EMPLOYING THE BORROWING FOR PERSONAL PURPOSES, CLAIM DEDUCTION FOR INTEREST PAID THEREON. THE ASSESSEE, HOWEVER, HAS T HE RIGHT TO REPLACE CAPITAL, SO THAT IT CAN WITHDRAW IT BY BORROWING FUNDS, WHICH WOULD THUS BE CONSTRUED AS APPLIED FOR BUSINESS PURPOSES, I.E., INSTEAD OF OWN CAPITAL BEING THUS U SED, SINCE REPLACED, AND TOWARD WHICH ANALYSIS OF THE FINANCIAL STATEMENTS WOULD HAVE TO BE MADE, RELYING ON THE DECISIONS IN CASE OF CIT VS. GOPALKRISHAN MURLIDHAR [1963] 47 ITR 469 (A.P) AND CIT VS. U.P STATE INDUSTRIAL DEVELOPMENT CORPORATION [1997] 225 ITR 703 (SC). THIS SHOULD NOT POSE MUCH PROBLEM (I.E., LEGALLY SPEAKING) FOR INDIVIDUA LS AND PARTNERSHIP FIRMS, THOUGH FOR THE COMPANIES PROPER PROCEDURES WOULD BE REQUIRED T O BE FOLLOWED. ACCORDINGLY, IF THE 3 ITA NO. 66/MUM/2012 (A.Y. 1998-99) DEE GEE EXPORTS VS. ITO ASSESSEE HAS THE SUFFICIENT INTEREST-FREE FUNDS FOR OTHER THAN BUSINESS PURPOSES, NO DISALLOWANCE IS WARRANTED. CARE MUST THOUGH BE TAKE N THAT THE INTEREST-FREE FUNDS AVAILABLE TO AS WELL AS GIVEN BY THE ASSESSEE ARE N OT RELATED TO THE BUSINESS (PARA 9.1 THROUGH 9.10). 3.2 IN THE SET-ASIDE PROCEEDING, WHILE THE ASSESSEE CLAIMED SUFFICIENT INTEREST FREE CAPITAL, FURTHER STATING THAT INTEREST HAD BEEN PAI D ONLY ON OLD BORROWINGS FROM THE BHATIJA FAMILY, THE REVENUE WAS OF VIEW THAT ASSE SSEE HAS NO SURPLUS FUNDS IN-AS-MUCH AS IT HAD ADVANCED LOANS TO FRIENDS AND RELATIVES, I.E., NOT FOR THE PURPOSES OF BUSINESS, WITHOUT CHARGING ANY INTEREST, OUTSTANDING AT RS.78 .97 LACS AS AT THE YEAR-END. REFERENCE TO THE HUGE CAPITAL OF RS.8.60 CRORES WAS ILLUSORY AS, AS AGAINST THE SAME THERE WAS AN EQUIVALENT ENTRY OF RS.8.44 CRORES BY WAY OF RECEIV ABLES, LEAVING A FREE BALANCE OF ONLY RS.16 LACS, AGAINST WHICH THERE WERE FIXED ASSET OF RS.10.39 LACS AND DEBTORS AT RS.55.54 LACS, CONSUMING THE ENTIRE CAPITAL OF THE FIRM, SO THAT THERE IS IN FACT A DEFICIT, WHICH WAS FINANCED BY BORROWED CAPITAL. THERE WAS CLEARLY A D IVERSION OF BORROWED CAPITAL TOWARD INTEREST-FREE LOANS AND ADVANCES TO FRIENDS AND REL ATIVES BY THE ASSESSEE. FURTHERMORE, NO PART OF THE BORROWING COST COULD EVEN OTHERWISE BE SAID TO BE UTILIZED FOR BUSINESS PURPOSES IN-AS-MUCH AS THE ASSESSEE ONLY EARNED COM MISSION INCOME, NOT ENTAILING USER OF ANY CAPITAL, MUCH LESS BORROWED CAPITAL. THE ASS ESSEE WAS, BY ADVERTING ONLY TO PARA 9.10 OF ITS ORDER, INVOKING THE TRIBUNALS ORDER DA TED 15/12/2008 (SUPRA) SELECTIVELY, FAILING TO TAKE NOTE OF ITS OBSERVATIONS AT PARAS 9 .1 TO 9.5 OF ITS ORDER (REFER PARA 12 OF THE ASSESSMENT ORDER AND PARA 5 OF THE IMPUGNED ORDER). THE DISALLOWANCE HAVING BEEN CONFIRMED, THE ASSESSEE, BEING AGGRIEVED, IS IN SEC OND APPEAL. 4. WE HAVE HEARD THE PARTIES, AND PURSUED THE MATER IAL ON RECORD. 4.1 THE INSTANT PROCEEDINGS ARISING OUT OF THE SET- ASIDE PROCEEDINGS, OUR PURVIEW SHALL BE GOVERNED LARGELY BY THE CONSONANCE OR OTHERWISE OF THE REVENUES ACTION WITH THE DIRECTIONS OF THE TRIBUNAL IN THE EARLIER ROUND, I. E., VIDE ITS ORDER DATED 15/12/2008 (SUPRA), WHICH STANDS SET OUT AT PARA 3.1 OF THIS ORDER. 4 ITA NO. 66/MUM/2012 (A.Y. 1998-99) DEE GEE EXPORTS VS. ITO CONTINUING FURTHER, WE FIND THAT THE AO AS WELL AS LD. CIT (A) HAVE BY AND LARGE APPRECIATED AND FOLLOWED THE TRIBUNALS ORDER CORRE CTLY. SO, HOWEVER, AS WE SHALL PRESENTLY SEE, WRONG INFERENCE HAS BEEN DRAWN FROM THE WORKING/ANALYSIS MADE. FURTHER, THE FINANCIAL POSITION BEING SUBJECT TO CHANGE FROM TIME TO TIME, IT IS THAT AS OBTAINING AS AT THE BEGINNING OF THE YEAR, I.E., THE BALANCE SHE ET AS AT 31/03/1997 (PB PAGES 18-21), RATHER THAN AT THE YEAR-END (I.E., 31/03/1998/PB PA GES 3-6 ), THAT IS RELEVANT AND THEREFORE NEEDS TO BE EXAMINED. THE FINANCIAL STATEMENTS FOR F.Y. 1997-98 WOULD THOUGH BE RELEVANT FOR THE FUND FLOW DURING THE YEAR. THE SUMMARY FIGU RES OF THE OPENING FINANCIAL POSITION ARE AS UNDER (PB PAGE 18): ASSESSMENT YEAR: 1997-98 DEE GEE EXPORTS BALANCE SHEET AS ON 31 ST MARCH, 1997 LIABILITIES AMOUNT (RS.) ASSETS AMOUNT (RS.) PARTNERS CAPITAL A/C 86,201,009 FIXED SSSETS 1,038,490 UNSECURED LOANS 11,404,875 SUNDRY DEBTORS 5,554,615 CURRENT LIABILITIES AND PROVISIONS 515,243 CASH & BANK BALANCES 26,448 LOANS & ADVANCES 7,052,113 DEPOSITS 31,800 AMOUNT RECEIVABLES 84,417,661 98,121,127 98,121,127 4.2 WHAT WE NEED TO DETERMINE IS THE AVENUE OF THE BORROWED CAPITAL OF RS. 114.05 LACS. ALL THE ASSETS, EXCEPT LOANS AND ADVANCES FOR RS. 70.52 LACS, REPRESENT BUSINESS ASSETS OR THE ASSETS OF HIS TRADE BY THE ASSESSEE I N-AS-MUCH AS NO BUSINESS PURPOSE OF THE SAID INTEREST-FREE LOANS AND ADVANCES STANDS FURNIS HED OR SPECIFIED AT ANY STAGE. THE PARTNERS CAPITAL IS, BY DEFINITION, THE CAPITAL IN TRODUCED IN OR RETAINED BY THE PARTNERS IN THE PARTNERSHIP, WHICH IS CONSTITUTED FOR BUSINESS PURPOSES. ACCORDINGLY, THEIR ENTIRE CAPITAL IS TO BE CONSIDERED AS THE CAPITAL OF THE F IRM AND, THUS, TOWARD THE BUSINESS ASSETS OF THE PARTNERSHIP. LIKEWISE FOR THE CURRENT LIABIL ITIES AND PROVISIONS FOR RS.5.15 LACS, WHICH ARE ONLY UNPAID BUSINESS LIABILITIES, REPRESE NTED BY CORRESPONDING BUSINESS ASSETS. 5 ITA NO. 66/MUM/2012 (A.Y. 1998-99) DEE GEE EXPORTS VS. ITO CLEARLY, THEREFORE, THE UNSECURED LOANS FINANCE LOA NS AND ADVANCES TO THE EXTENT OF RS.70.52 LACS AND THE BUSINESS ASSETS FOR THE BALANCE OF RS.43.53 LA CS. INTEREST WOULD THUS STAND TO BE ALLOWED ON UNSECURED LOANS AT RS.43.53 LACS, PROVIDED OF COURSE IT CONTINUES TO BE INVESTED IN THE BUSINESS ASSETS. THE ASSESSEE HAS, HOWEVER, PAID INTEREST ONLY ON THE LOANS FROM THE BHATIJA FAMILY, WHICH OUTSTAND AT RS .52.47 LACS AS ON 31/03/1997 (PB PG. 20), AND NOT ON THE TOTAL OUTSTANDING OF RS.114.05 LACS, OR THE FURTHER LOANS FOR RS.61.87 LACS ASSUMED BY THE ASSESSEE DURING THE CURRENT YEA R. AS SUCH, RS.43.53 LACS OUT OF TOTAL LOANS OF RS.52.47 LACS FROM THE BHATIJA FAMILY, ON WHICH INTEREST OF RS.8.27 LACS STANDS PAID, CAN BE RIGHTLY CAN BE REGARDED AS UTILIZED FO R FUNDING BUSINESS ASSETS AND, THUS, DEDUCTIBLE, DISALLOWING THAT (THE INTEREST) ON THE BALANCE RS.8.94 LACS, REPRESENTING 17.04% OF THE IMPUGNED INTEREST, OR RS1.41 LACS. IT IS ALSO EASY TO SEE THAT THE FRESH LOAN/S FINANCE BOTH THE REPAYMENT OF THE INTEREST-BEARING LOANS FROM THE BHATIJA FAMILY (RS.52.47 LACS) AND ALSO THE FURTHER ADVANCES OF RS .8.45 LACS MADE DURING THE YEAR, AGGREGATING TO RS.60.92 LACS. 4.3 THE LD. CIT (A), WHILE PROCEEDING CORRECTLY, FI RSTLY, IN OUR VIEW, ADOPTED THE WRONG BALANCE-SHEET, I.E., AS AT THE CLOSE OF THE YEAR, AND ALSO DID NOT DRAW THE CORRECT INFERENCE FROM HIS WORKING. WE ARE ALSO NOT IN AGRE EMENT WITH HIS VIEW THAT AS THE ONLY BUSINESS ACTIVITY CARRIED ON DURING THE YEAR WAS TO WARD COMMISSION, NOT INVOLVING USER OF CAPITAL, NO INTEREST THEREON COULD BE ALLOWED. THIS IS AS WE HAVE ALREADY SEEN THAT, SAVE LOANS AND ADVANCES, THE ENTIRE CAPITAL OF THE FIRM AS WELL AS THE BORROWED CAPITAL IS UTILIZED TOWARD BUSINESS ASSETS. THAT THE SAME MAY NOT EITHER BE LIQUID OR GENERATE INCOME WOULD BE BY ITSELF NOT RELEVANT, EVEN AS CLA RIFIED BY THE HONBLE JURISDICTIONAL HIGH COURT IN CALICO DYEING & PRINTING WORKS V. CIT [1958] 34 ITR 265 (BOM). THE DECISION BY THE HONBLE APEX COURT IN VEECUMSEES V. CIT [1996] 220 ITR 185 (SC), RELIED UPON BY THE LD. AR BEFORE US IN THIS REGARD, THOUGH NOT SQUARELY ON THE POINT, IS ALSO APPOSITE. WE MAY BEFORE PARTING ALSO CLARIFY THAT T HE ASSESSEES RELIANCE ON THE ALLOWANCE OF INTEREST FOR EARLIER YEARS IS ONLY INDICATIVE AN D NOT DETERMINATIVE OF THE MATTER. THE BORROWED CAPITAL, AS EXPLAINED BY THE TRIBUNAL, MUS T CONTINUE TO BE UTILIZED FOR BUSINESS 6 ITA NO. 66/MUM/2012 (A.Y. 1998-99) DEE GEE EXPORTS VS. ITO PURPOSES FOR THE PERIOD FOR WHICH THE INTEREST IS B EING CLAIMED AS A BUSINESS EXPENSE. IF ALL THAT WAS RELEVANT AND REQUIRED TO BE ENTITLED F OR DEDUCTION IS ITS ALLOWANCE IN THE PAST, THE TRIBUNAL WOULD HAVE DONE SO, AND NOT TAKEN PAIN S TO DILATE IN THE MATTER. WE ARE IN ANY CASE TO PROCEED ON THE BASIS OF THE SAID ORDER, HAV ING SINCE ATTAINED FINALITY. THE ARGUMENT THUS IS MISCONCEIVED. WE THEREFORE CONFIRM THE DISALLOWANCE AT RS.140950/- ONLY, DIRECTING ALLOWANCE FOR THE BALANCE. WE DECID E ACCORDINGLY. 5. IN THE RESULT, THE ASSESSEE APPEAL IS PARTLY ALL OWED. /- )0 '1 2/) $ 3. 4 ) $ ) 56 ORDER PRONOUNCED IN THE OPEN COURT ON APRIL 02, 201 4 SD/- SD/- (VIJAY PAL RAO) (SANJAY ARORA) / JUDICIAL MEMBER / ACCOUNTANT MEMBER & 7( MUMBAI; 8' DATED : 02.04.2014 .'../ ROSHANI , SR. PS !' # $%&' (!'% / COPY OF THE ORDER FORWARDED TO : 1. ! / THE APPELLANT 2. '#! / THE RESPONDENT 3. & 9) ( ) / THE CIT(A) 4. & 9) / CIT - CONCERNED 5. < = ')'>1 , * >1- , & 7( / DR, ITAT, MUMBAI 6. = ?2 @ ( / GUARD FILE !' ) / BY ORDER, */)+ , (DY./ASSTT. REGISTRAR) , & 7( / ITAT, MUMBAI