M/s. Bellary Steel Rolling mills, Bellary V. JCIT, Hubli

ITA 712/BANG/2003

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9539 (ITAT-BANGALORE)
• Duration Of Justice: 6 year(s) 2 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2009
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 1998-1999
• Appeal Filed On: 27-05-2003
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HARSHA PRAKASH
• Assessee Lawyers: VENKATESAN
• Keywords: Proportionate interest; Commercial expediency
• Section: 143(3); 192

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH : BANGALORE BEFORE SHRI K.P.T. THANGAL, VICE PRESIDENT AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA NO.712/BANG/2003 ASSESSMENT YEAR : 1998-99 M/S. BELLARY STEEL ROLLING MILLS, S.NO.890, ANANTHPUR ROAD, BELLARY. : APPELLANT VS. THE JOINT COMMISSIONER OF INCOME-TAX (ASSESSMENT), SPECIAL RANGE, HUBLI. : RESPONDENT APPELLANT BY : SHRI VENKATESAN RESPONDENT BY : HARSHA PRAKASH O R D E R PER A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE CIT(APPEALS) ORDER DATED 19.3.03 FOR THE ASSESSMENT YEAR 1998-99. 2. THE SOLITARY ISSUE THAT IS RAISED IN THIS APPEAL IS WHETHER THE CIT(APPEALS) IS JUSTIFIED IN CONFIRMING THE AOS AC TION IN DISALLOWING INTEREST OF RS.20,03,048 ON THE REASON THERE WAS A DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSE. 3. ASSESSEE IS A FIRM ENGAGED IN THE BUSINESS OF MA NUFACTURING AND TRADING IN IRON AND STEEL ROLLED PRODUCTS. FOR THE CONCERNED YEAR, A RETURN ITA NO.712/B/03 PAGE 2 OF 6 OF INCOME WAS FILED CLAIMING A LOSS OF RS.1,30,76,5 00. THE ASSESSMENT WAS COMPLETED U/S. 143(3) WHEREIN THE NET LOSS WAS REDUCED TO RS.91,36,824. IN ARRIVING AT THE NET LOSS OFRS.91, 36,824, THE ASSESSING OFFICER DISALLOWED OUT OF INTEREST PAYMENT AS FUNDS ACCORDING TO HIM, WERE LAID OUT FOR NON-BUSINESS PURPOSES. THE TOTAL SUCH DISALLOWANCES CAME TO RS.20,03,048. THE REASON FOR THE DISALLOWANCE ARE AS FOLLOWS. 4. A SUM OF RS.2,84,28,694 WAS ADVANCED TO VARIOUS PERSONS BY THE ASSESSEE FIRM INTEREST-FREE IN THE PAST YEAR. THE ASSESSING OFFICER REASONED OUT WITH THE ASSESSEE AS TO WHY A PORTION OF THE INTEREST WHICH IT PAYS ON ITS BORROWINGS SHOULD NOT BE DISALLOWED ON ACCOUNT OF INTEREST-FREE ADVANCES MADE BY THE ASSESSEE FIRM AS MENTIONED ABO VE. THE ASSESSEE OBJECTED TO THE PROPOSAL BY STATING THAT THE ADVANC ES WERE MADE IN THE PAST YEARS AND NO DISALLOWANCES OF INTEREST ON THE BORROWED FUND WERE MADE ON THE PREMISES THERE WERE DIVERSION OF FUNDS FOR NON-BUSINESS PURPOSE. IT WAS FURTHER SUBMITTED THAT PARTNERS C APITAL WOULD MORE OR LESS TAKE CARE OF SUCH INTEREST-FREE ADVANCES AND FOR TH IS REASON ALSO, NO DISALLOWANCES CAN BE MADE. THE CONTENTIONS OF THE ASSESSEE WAS REJECTED BY THE AO ON THE FOLLOWING LINES: HOWEVER, I AM NOT IMPRESSED BY THE ARGUMENTS THAT AS NO DISALLOWANCES HAS BEEN MADE IN THE PAST NO SUCH DIS ALLOWANCES EVEN FOR THE YEAR UNDER CONSIDERATION. THIS IS FOR THE SIMPLE REASON THAT IN THE PECULIAR FACTS OF THE ASSESSEE F IRMS CASE, THE FIRM HAD PARTNERS CAPITAL WHICH TOOK CARE OF THE IN TEREST FREE ADVANCES MADE IN THE PAST. THUS, THE FACTS MUST BE HELD TO HAVE BEEN ALTERED LEADING TO THE CONCLUSION THAT ATLEAST PART OF THE INTEREST EXPENDITURE FOR THE YEAR UNDER CONSIDERATI ON IS ON ACCOUNT OF SUCH INTEREST FREE ADVANCES WHICH HAS NO BEARING ON THE ASSESSEE FIRMS BUSINESS AND HENCE SUCH PART IS NOT ALLOWABLE U/S 36(1)(III) IN VIEW OF THE FACT THAT TOTAL INTER EST FREE ADVANCES ARE TO THE TUNE OF RS.2,84,28,694 AND PARTNERS CAPI TAL AS AT THE ITA NO.712/B/03 PAGE 3 OF 6 BEGINNING OF THE YEAR IS TO THE TUNE OF RS.1,73,00, 000 ONLY. I HOLD THAT AMOUNT OF INTEREST RELATABLE TO THE BUSIN ESS BETWEEN THE TWO, AS UNDER, IS NOT AN ALLOWABLE EXPENDITURE. INTEREST FREE ADVANCES RS.2,84,28,000 LESS: PARTNERS CAPITAL RS.1,73,00,000 ------------------- RS.1,11,28,000 ------------------- REFERABLE INT. CLAIM @ 18% WOULD COME TO RS.20,03,0 48. A SUM OF RS.20,03,048 IS THEREFORE DISALLOWED OUT OF INTE REST EXPENSES. 5. BEFORE THE CIT(APPEALS), IT WAS SUBMITTED THAT I N ABSENCE OF DIRECT NEXUS TO THE BORROWINGS AND AMOUNTS DIVERTE D, NO DISALLOWANCE OF INTEREST COULD BE MADE. IT WAS FURTHER SUBMITTED B Y REFERRING TO THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CIT V. ALOK PAPER INDUSTRIES (138 ITR 729) THAT THE INTEREST FOR THE CURRENT YEAR CANNOT BE DISALLOWED ON THE AMOUNTS ADVANCED IN THE EARLIER Y EAR, WHEN IT WAS SUPPORTED BY SUFFICIENT INTEREST-FREE FUNDS INCLUDI NG CAPITAL OF THE PARTNERS. THE CIT(APPEALS) DISMISSED THE APPEAL OF THE ASSESS EE AND THE RELEVANT PORTION OF THE CIT(APPEALS) ORDER IS EXTRACTED BELO W: I DO NOT AGREE WITH THE SUBMISSIONS OF THE AUTHOR IZED REPRESENTATIVE. IN THE CASE OF C.I.T. VS ALOK PAPE R INDUSTRIES, IT WAS HELD THAT INTEREST CANNOT BE DISALLOWED ON THE GROUND THAT THERE ARE DEBIT BALANCES IN THE PARTNERS CAPITAL A /C IN THE PECULIAR NATURE OF THE FACTS AND CIRCUMSTANCES OF THAT CASE. IN THAT CASE, THE ASSESSEE HAS PAID INTEREST ON CREDIT BALANCES AND N OT CHARGED INTEREST ON DEBIT BALANCES. HOWEVER, THE INCOME TA X OFFICER DID ADD BACK THE INTEREST PAID BY THE FIRM TO THE TOTAL INCOME OF THE FIRM. AS SUCH, THE MADHYA PRADESH HIGH COURT DIREC TED THAT NO INTEREST CAN BE DISALLOWED UNDER SUCH FACTS AND CIR CUMSTANCES OF THE CASE. IN THIS CASE ALSO THE ASSESSING OFFICER ESTABLISHED THAT ALTHOUGH THE ADVANCES WERE GIVEN IN EARLIER YEARS, THE ASSESSEE HAS PAID INTEREST IN THIS YEAR ALSO FOR THE FUNDS B ORROWED. SINCE FUNDS HAVE BEEN DIVERTED, ALTHOUGH IN EARLIER YEARS , THE INTEREST ITA NO.712/B/03 PAGE 4 OF 6 PAID CANNOT BE ALLOWED AS THE PARTNERS CAPITAL IS L OWER THAN THE ADVANCES MADE. AS SUCH, THE ASSESSING OFFICER IS J USTIFIED IN DISALLOWING THE PROPORTIONATE INTEREST. THE INTERE ST DISALLOWED IS CONFIRMED AND THE APPEAL ON THIS GROUND IS DISMISSE D. 6. THE ASSESSEE BEING AGGRIEVED BY THE ORDER OF THE CIT(APPEALS) IS IN SECOND APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE, THE LEARNED COMMISSIONER (APPEALS) ERRED IN DISALLOWING INTEREST OF RS.20,03,048/- BY ALLEGING THAT THERE WAS DIVERSION OF BORROWED FUNDS FOR NON-BUSINESS PURPOSES. 2. THE LEARNED COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED THAT THERE WAS NO BORROWALS OR WITHDRAW ALS DURING THE RELEVANT YEAR AND THE ADVANCES MADE WERE IN THE PAST AND THERE HAS BEEN NO DISALLOWANCE OF INTEREST IN THE P AST, THE DISALLOWANCE AS SUSTAINED BY HIM DURING THE RELEVAN T YEAR IN RESPECT OF THE OLD ADVANCES WAS WITHOUT JURISDICTIO N AS HELD BY THE HONBLE HIGH COURT OF KARNATAKA IN THE CASE OF CIT VS. SRIDEV ENTERPRISES, REPORTED IN 192 ITR 165. 3. ON THE FACTS, THE LEARNED COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE ADVANCES GIVEN TO MR. S. MADHAVA WAS IN EARLIER YEARS ON BUSINESS CONSIDERATION WHEN SUF FICIENT BALANCES WERE IN THE PARTNERS CAPITAL ACCOUNTS AND ACCORDINGLY THE DISALLOWANCE OF INTEREST AS MADE OUT OF THE BOR ROWED FUND FOR THIS YEAR WAS WITHOUT JURISDICTION AND THUS LIABLE TO BE DELETED. 4. FOR THESE GROUNDS AND SUCH OTHER GROUNDS THAT MA Y BE URGED AT THE TIME OF HEARING OF THE APPEAL, THE APP ELLANT PRAYS THAT THE APPEAL MAY BE ALLOWED. 7. THE LD. AR ESSENTIALLY REITERATED THE SUBMISSIO NS MADE BEFORE THE AUTHORITIES BELOW. ON THE OTHER HAND, THE LD. DR RELIED ON THE DECISION OF THE SUPREME COURT IN S.A. BUILDERS V. CIT (288 ITR 1) AND SUBMITTED THE ASSESSEE HAS NOT PROVED THAT AMOUNTS WERE ADVANCED OUT OF COMMERCIAL EXPEDIENCY. IT WAS SUBMITTED BY THE LD. DR SUBSEQU ENT TO THE SUPREME COURT DECISION IN THE CASE CITED SUPRA, THE IMPORTA NT CRITERIA TO BE ITA NO.712/B/03 PAGE 5 OF 6 EXAMINED IS WHETHER AMOUNTS HAD BEEN ADVANCED FOR B USINESS PURPOSE OR OUT OF COMMERCIAL EXPEDIENCY. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. ON PERUSAL OF THE ORDERS OF THE AO AS W ELL AS THE CIT(APPEALS), WE FIND THAT THERE HAS BEEN NON-CONSIDERATION OF TH E DECISION OF THE JURISDICTIONAL HIGH COURT IN CIT V. SRIDEV ENTERPRISES (192 ITR 165) WHEREIN THE HONBLE JURISDICTIONAL HIGH COURT HAD HELD AS FOLLOWS : HELD, THAT THE AMOUNT DUE FROM N ON THE FIRST DAY OF THE ACCOUNTING YEAR WAS THE AMOUNT THAT STOOD OUTSTANDI NG ON THE LAST DAY OF THE PREVIOUS ACCOUNTING YEAR AND, THEREFORE, ITS NATURE AND STATUS COULD NOT BE DIFFERENT FROM ITS NATURE AND S TATUS AS ON THE LAST DAY OF THE PREVIOUS YEAR. REGARDING PAST YEAR S, THE ASSESSEES CLAIMS FOR DEDUCTION WERE ALLOWED IN RES PECT OF THE SUMS ADVANCED DURING THOSE YEARS. THIS COULD BE ON LY ON THE ASSUMPTION THAT THOSE ADVANCES WERE NOT OUT OF BORR OWED FUNDS OF THE ASSESSEE. THIS FINDING DURING THE PREVIOUS YEAR WAS THE VERY BASIS OF THE DEDUCTIONS PERMITTED DURING THE P AST YEARS. IT WOULD NOT BE EQUITABLE TO PERMIT THE REVENUE TO TAK E A DIFFERENT STAND NOW IN RESPECT OF THE AMOUNTS WHICH WERE THE SUBJECT- MATTER OF PREVIOUS YEARS ASSESSMENTS. 9. MOREOVER, THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT REPORTED IN 288 ITR 1 , HAD HELD THAT THE IMPORTANT ASPECT TO BE CONSIDERED FOR ALLOWANCE OF CLAIM OF DEDUCTION O F INTEREST IS TO BE EXAMINED FROM THE POINT OF VIEW WHETHER FUNDS HAS B EEN DIVERTED OUT OF COMMERCIAL EXPEDIENCY. IN THE INSTANT CASE, THE AUT HORITIES BELOW HAVE NOT EXAMINED THE CASE IN THE CORRECT PERSPECTIVE. THEY HAVE NOT EXAMINED WHETHER THE FUNDS HAVE BEEN DIVERTED FOR THE PURPOS E OF BUSINESS NOR HAS THE JURISDICTIONAL HIGH COURT DECISION CITED SUPRA HAS BEEN CONSIDERED. IN LIGHT OF THE ABOVE, IN THE INTEREST OF JUSTICE, WE ARE OF THE VIEW THE MATTER ITA NO.712/B/03 PAGE 6 OF 6 NEEDS FRESH CONSIDERATION KEEPING IN VIEW THE DICTU M LAID DOWN BY THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS V. CIT REPORTED IN 288 ITR 1 AND THE JURISDICTIONAL HIGH COURT DECISION IN THE CASE OF CIT V. SRIDEV ENTERPRISES CITED SUPRA. THEREFORE, THIS MATTER IS REMITTED TO THE FILE OF ASSESSING OFFICER FOR DE NOVO CONSIDERATION IN LIGHT OF OUR OBSERVATION ABOVE. 10. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES. PRONOUNCED IN THE OPEN COURT ON THIS 21 ST DAY OF AUGUST, 2009. SD/- SD/- ( K.P.T. THANGAL) (A. MOHAN ALANKAMONY ) VICE PRESIDENT ACCOUNTANT MEMBER BANGALORE, DATED, THE 21 ST AUGUST, 2009. DS/- COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE (1+1) BY ORDER ASSISTANT REGISTRAR ITAT, BANGALORE.