LAKHANI SHOE CO. PVT. LTD., V. ACIT, Alwar

ITA 724/JPR/2014

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 5356 (ITAT-JAIPUR)
• Duration Of Justice: 1 year(s) 4 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-03-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: A
• Assessment Year: 2010-2011
• Appeal Filed On: 29-10-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Question of law; Notional interest; Commercial expediency
• Section: 143(3)

Judgement Text

VK;DJ VIHYH; VF/KDJ.K] T;IQJ U;K;IHB] T;IQJ IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR JH VH-VKJ-EHUK] YS[KK LNL; ,OA JH YFYR DQEKJ] U;KF; D LNL; DS LE{K BEFORE: SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM VK;DJ VIHY LA-@ ITA NOS. 724/JP/2014 FU/KZKJ.K O'K Z@ ASSESSMENT YEARS : 2010-11 . M/S. LAKHANI SHOE CO. PVT. LTD., PLOT NO. 130, SECTOR-24, FARIDABAD. CUKE VS. THE ACIT, CIRCLE-2, ALWAR. LFKK;H YS[KK LA-@THVKBZVKJ LA-@ PAN/GIR NO. AAACL 2991 A VIHYKFKHZ@ APPELLANT IZR;FKHZ@ RESPONDENT FU/KZKFJRH DH VKSJ LS@ ASSESSEE BY S BY : SHRI S.C. VASUDEVA (C.A.) JKTLO DH VKSJ LS@ REVENUE BY : SMT. NEENA JEPH (JCIT) LQUOKBZ DH RKJH[K@ DATE OF HEARING : 10.02.2016. ?KKS'K .KK DH RKJH[K @ DATE OF PRONOUNCEMENT : 18/03/2016. VKNS'K@ ORDER PER SHRI LALIET KUMAR, J.M. THIS IS AN APPEAL FILED BY THE ASSESSEE ARISING FR OM THE ORDER DATED 14.08.2014 PASSED BY THE LEARNED CIT (A), ALWAR FOR THE A.Y. 2 010-11. THE GROUND RAISED BY THE ASSESSEE IS AS UNDER :- THAT THE LD. CIT (A) HAS MISDIRECTED HIMSELF IN C OMING TO THE CONCLUSION THAT THE AMOUNT BORROWED FROM BANK HAS N OT BEEN UTILIZED FOR THE PURPOSES OF BUSINESS AND IN THE PR OCESS SUSTAINING THE DISALLOWANCE OF RS. 48,85,314/- AS MADE BY THE LEARNED ASSESSING OFFICER OUT OF THE INTEREST PAID DURING T HE YEAR. 2 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CO MPANY WAS ENGAGED IN MANUFACTURING AND TRADING OF HAWAI CHAPPALS. THE ASSESSEE HAS FILED ITS RETURN OF INCOME ON 27.09.2011 DECLARING NIL INCOME FOR THE Y EAR UNDER CONSIDERATION. THE CASE OF THE ASSESSEE WAS SCRUTINIZED UNDER SECTION 143(3 ) OF THE I.T. ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, WHILE SCRUTINIZING THE B ALANCE SHEET OF THE ASSESSEE COMPANY, THE AO NOTICED THAT THE ASSESSEE COMPANY H AS INVESTED RS. 3,28,08,080/- IN M/S. MASCOT FOOTCARE, NOIDA AND RS. 1,45,76,154/- I N M/S. MASCOT UDHYOG, NOIDA. THE ASSESSEE HAD SHOWN A PROFIT OF RS. 8,01,141/- FROM THE ABOVE TWO FIRMS UNDER THE HEAD OTHER INCOME IN SCHEDULE 8 OF THE PROFIT & LOSS ACC OUNT. IT IS ALSO NOTICED THAT MRS. KAMLESH LAKHANI, MR. K.C. LAKHANI AND MR. GUNJAN LA KHANI, DIRECTORS OF THE ASSESSEE COMPANY ARE ALSO THE PARTNERS IN THE ABOVE TWO COMP ANIES I.E. M/S. MASCOT FOOTCARE AND M/S. MASCOT UDHYOG, NOIDA. THE AGGREGATE RATE OF RETURN FROM THE INVESTMENT OF THE ASSESSEE COMPANY IN THE ABOVE TWO FIRMS IS 1.69 %. WHEREAS THE ASSESSEE IS PAYING INTEREST ON UNSECURED LOAN FROM SHRI GUNJAN LAKHANI @ 12% AND INTEREST TO PUNJAB NATIONAL BANK @12%. HENCE ON ONE SIDE THE ASSESSEE HAD INVESTED HUGE AMOUNTS IN THE FIRM, IN WHICH DIRECTORS OF THE FIRM ARE PARTNE RS, AT A VERY LOW RATE OF RETURN, ON THE OTHER HAND THE ASSESSEE COMPANY IS HAVING LOANS ON WHICH IT IS PAYING INTEREST @ 12% WHICH IS VERY MUCH HIGHER THAN THE RATE OF RETURN F ROM THESE INVESTMENTS. THE AO FURTHER OBSERVED THAT IF THE ASSESSEE WOULD NOT HAV E MADE THE ABOVE INVESTMENT, HE WOULD HAVE SAVED THE AMOUNT OF INTEREST PAID ON UNS ECURED LOAN AND BANK LOAN TO THE EXTENT OF 10.31% I.E. 12% - 1.69% OF THE INVESTMENT MADE WHICH COMES TO RS. 3 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT 48,85,314/- (10.31% OF RS. 4,73,84,234/-). THEREFOR E HE OBSERVED THAT THE INVESTMENT MADE BY THE ASSESSEE COMPANY WAS NOT JUSTIFIED AND IT WAS DETRIMENTAL TO THE INTEREST OF THE ASSESSEE COMPANY AND IS NOT ALLOWABLE. 2.1. THE AO VIDE ORDER SHEET ENTRY DATED 25.02.2013 ASKED THE ASSESSEE TO SHOW CAUSE AS UNDER :- AS PER SCHEDULE-5 OF BALANCE SHEET YOU HAVE INVES TED AN AMOUNT OF RS. 3,28,08,080/- IN M/S. MASCOT FOOTCARE, NOIDA AND RS. 1,45,75,154/- IN M/S. MASCOT UDHYOG, NOIDA OUT OF I NTEREST BEARING FUNDS. THE RATE OF RETURN FROM THESE INVESTMENTS IS BELOW 2% AND THE RATE OF PAYMENT OF INTEREST ON UNSECURED/BANK L OANS IS 12%, WHY THE DIFFERENCE AMOUNT OF INTEREST SHOULD NOT BE DISALLOWED AS THE SAME HAS NOT BEEN USED FOR THE PURPOSE OF THE B USINESS OF THE COMPANY RESULTING IN MIS-UTILIZATION OF INTEREST BE ARING FUNDS CAUSING LOSS TO COMPANY. IN REPLY FILED BY THE ASSESSEE DATED 01.03.2012 ON THIS ISSUE IS REPRODUCED HEREUNDER:- DETAILS OF INVESTMENT MADE BY THE COMPANY IN M/S. MASCOT FOOTCARE AND M/S. MASCOT UDHYOG ENCLOSED. PLEASE NOTE THAT THE INVESTMENT IN CAPITAL OF M/S. MASCOT FOOTCARE WAS MADE AS UNDER :- A) 1988-1989 RS. 5,00,000/- B) 1998-1999 RS. 25,00,000/- C) 1999-2000 RS. 30,00,000/- SIMILARLY INVESTMENT IN CAPITAL OF M/S. MASCOT UDHY OG WAS MADE AS UNDER :- A) 1988-1999 RS. 5,00,000/- B) 1999-2000 RS.40,00,000/- AFTER ADDING THE PROFIT YEAR BY YEAR AND INTEREST, THE CAPITAL IN M/S. MASCOT FOOTCARE BECOME RS. 3,28,08,080.42 AND IN M/ S. MASCOT 4 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT UDHYOG RS. 1,45,76,154.59. SO IT IS INCORRECT THAT THE COMPANY HAS INVESTED RS. 3,28,08,080.42 IN M/S. MASCOT FOOTCARE AND RS. 1,45,76,154.59 IN M/S. MASCOT UDHYOG. MOREOVER THE INVESTMENT IN THE ABOVE FIRMS WERE MADE NOT OUT OF BORROWED FUNDS BUT ONLY OUT OF INTERNAL ACCRUALS. THE ASSESSMENT OF THE COMPANY IS BEING MADE ALMOST REGULARLY U/S 143(3) OF THE INCOME TAX ACT A ND BASED ON THE ABOVE FACTS THE DEPARTMENT HAS NEVER MADE ADDIT ION ON THIS ACCOUNT. YOU ARE, THEREFORE, REQUESTED NOT TO MAKE ANY ADDITION ON THIS ACCOUNT. THE AO CONSIDERED THE REPLY OF THE ASSESSEE CAREFUL LY BUT FOUND IT NOT ACCEPTABLE. THE AO DISCUSSED THE REASONS FOR NOT ACCEPTING THE ASSE SSEES SUBMISSIONS, AT PAGES 4 TO 6 OF HIS ORDER. HE CONCLUDED THAT IN VIEW OF ABOVE DI SCUSSION AND CAREFULLY CONSIDERING THE REPLY OF THE ASSESSEE, AN AMOUNT OF RS. 48,85,3 14/- IS ADDED TO THE INCOME OF THE ASSESSEE BY WAY OF DISALLOWANCE OF INTEREST ON UNNE EDED LOANS, AS IT IS CLEAR THAT IF THE ASSESSEE WOULD NOT HAVE KEPT THE CAPITAL INVESTED T HERE WOULD HAVE NO REQUIREMENT OF THE LOANS. 3. BEING AGGRIEVED BY THE ORDER OF AO, ASSESSEE CAR RIED THE MATTER BEFORE LD. CIT (APPEALS), WHO HAS UPHELD THE ACTION OF THE AO BY O BSERVING AS UNDER :- 4.3. I HAVE PERUSED THE ASSESSMENT ORDER AS WELL AS SUBMISSIONS MADE BY THE APPELLANT AND FIND THAT A DISALLOWANCE OF RS . 48,85,314/- OUT OF THE INTEREST PAYMENTS MADE BY THE APPELLANT ON LOANS HA S BEEN MADE BY THE AO ON THE GROUND OF MIS-UTILIZATION OF INTEREST BEA RING FUNDS. THE AO HAS STATED THAT AN AMOUNT OF RS. 3.28 CRORES STANDS INV ESTED AS CAPITAL IN M/S. MASCOT FOOTCARE AND AMOUNT OF RS. 1.45 CRORES STAND S INVESTED AS CAPITAL IN M/S. MASCOT UDHYOG. THE PROFITS EARNED ON THE IN VESTMENT MADE BY THE COMPANY IS ONLY 1.69% AND THE RATE OF INTEREST PAID BY THE APPELLANT AT 12% IS MUCH HIGHER AND THEREFORE A DISALLOWANCE @ 1 0.31% ON THE INTEREST PAID ON UNSECURED AND BANK LOAN HAS BEEN M ADE BY THE AO WHICH COMES TO RS. 48,85,314/- (10.31% OF RS. 4,73,84,234 /-). 5 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT 4.4. THE APPELLANT HAS STATED THAT AN INVESTMENT OF RS. 60 LACS HAS BEEN MADE IN M/S. MASCOT FOOTCARE AND AN INVESTMENT OF RS. 45 LACS WAS MADE IN M/S. MASCOT UDHYOG BY THE APPELLANT DURING 1998-2000. THE REMAINING BALANCE REPRESENTS INVESTMENTS OUT OF INT ERNAL ACCRUAL AND NOT OUT OF BORROWED FUNDS. THEREFORE, THERE IS NO JUSTI FICATION IN MAKING THE DISALLOWANCE OUT OF INTEREST PAYMENTS MADE BY THE C OMPANY. 4.5. HAVING CONSIDERED THE SUBMISSIONS MADE BY THE APPELLANT AND EVIDENCE AVAILABLE ON RECORD, I FIND THAT THE CONCE RNS IN WHICH THE APPELLANT COMPANY HAS MADE SUBSTANTIAL INVESTMENT F ALL WITHIN THE AMBIT OF SPECIFIED PERSONS AS DEFINED IN THE PROVISIONS O F SECTION 40A(2)(B) OF THE IT ACT. THE DIRECTORS/SHAREHOLDERS OF THE COMPA NY ARE HAVING SUBSTANTIAL INTEREST IN THE ABOVE MENTIONED FIRMS, IN WHICH THE APPELLANT COMPANY HAS INVESTED SUBSTANTIAL AMOUNTS AS CAPITAL + ACCUMULATED PROFITS OVER THE YEARS. 4.6. IT IS NOT DENIED BY THE APPELLANT THAT THE PER CENTAGE OF SHARE OF PROFITS BEING GIVEN TO THE COMPANY IS DISPROPORTION ATE TO THE AMOUNT OF INVESTMENT MADE VIS--VIS THE PERCENTAGE OF SHARE O F PROFITS AND THE INVESTMENT MADE OTHER PERSONS (WHO ARE SHAREHOLDERS /DIRECTORS OF THE APPELLANT COMPANY). THE APPELLANT HAS NOT BEEN ABL E TO CONTROVERT THAT THE INTEREST PAYMENTS MADE TO THE SPECIFIED PERSONS AND TO THE BANKS ARE JUSTIFIABLE IN VIEW OF THE UTILIZATION OF THE FUNDS . THE AO HAS GIVEN A FINDING THAT THE FUNDS HAVE BEEN UTILIZED FOR THE P URPOSES OF PURCHASE OF SHARES OF ANOTHER GROUP COMPANY AND THUS DO NOT STA ND COVERED WITHIN THE AMBIT OF FOR THE PURPOSES OF THE BUSINESS. FU RTHER, IT IS FOUND THAT THE FIRM IN WHICH THE APPELLANT HAS SUBSTANTIAL INV ESTMENT HAS INVESTED THEIR FUNDS FOR THE PURCHASE OF EQUITY SHARES OF RS . 2.49 CRORES OF ANOTHER GROUP COMPANY. 4.7. THE APPELLANT HAS MERELY REITERATED THE SUBMIS SIONS FILED BEFORE THE AO AND HAS NOT BEEN ABLE TO PRODUCE ANY EVIDENC E SO AS TO CONTROVERT THE FINDINGS GIVEN BY THE AO. FURTHER, ON EXAMINATI ON OF THESE FACTS, I DO NOT FIND ANY ARGUMENT OR JUSTIFICATION BEING GIVEN BY THE APPELLANT FOR OBTAINING HUGE LOANS AND THEIR UTILIZATION FOR THE PURPOSES OF THE BUSINESS OF THE COMPANY. MOREOVER, THERE IS NO JUSTIFICATIO N FOR PAYMENT OF INTEREST ON LOANS TAKEN FROM RELATED PERSONS, WHERE AS THE FUNDS OF THE COMPANY HAVE BEEN PARKED IN OTHER CONCERNS WHERE SU CH RELATED PERSONS ARE HOLDING SUBSTANTIAL INTEREST. HONBLE KERALA HI GH COURT HAS HELD IN THE CASE OF CIT VS. ACCELERATED FREEZE DRYING PVT. LTD. 324 ITR 316 THAT 6 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT INTEREST PAID IS NOT DEDUCTIBLE AS MONEY WAS GIVEN TO SISTER CONCERN WITHOUT INTEREST. FURTHER, HONBLE ALLAHABAD HIGH C OURT HAS IN THE CASE OF CIT VS. SAHU ENTERPRISES PVT. LTD. 352 ITR 008 HAS H ELD THAT ONUS IS ON ASSESSEE TO PROVE UTILIZATION OF BORROWED FUNDS FOR THE PURPOSES OF BUSINESS. INTEREST WAS HELD NOT ALLOWABLE U/S 36(1) (III) OF THE IT ACT. ACCORDINGLY, I UPHOLD THE ACTION OF THE AO IN MAKIN G THE DISALLOWANCE AND CONFIRM THE ADDITION OF RS. 48,85,314/- OUT OF THE INTEREST PAYMENTS ON LOANS CLAIMED BY THE COMPANY. 4. NOW THE ASSESSEE IS BEFORE US. 4.1. WE HAVE HEARD THE RIVAL CONTENTIONS OF BOTH TH E PARTIES AND PERUSED THE MATERIAL AVAILABLE ON THE RECORD. THE ONLY POINT RAISED IN T HE APPEAL IN THE AFORESAID MATTER IS WITH REGARD TO THE DISALLOWANCE OF RS 48,85,314/-O UT OF INTEREST OF RS 1,91,99648/-PAID BY THE APPELLANT TO THE BANK AS WELL AS TO THE OTHE R PARTIES. IT WAS CONTENDED BY THE LD AR FOR THE ASSESSEE THAT THE INVESTMENTS IN THE PAR TNERSHIP FIRM WERE NOT MADE IN THE YEAR UNDER CONSIDERATION AND WERE MADE IN EARLIER Y EARS. IN FACT THE DETAIL HAS BEEN PROVIDED TO THE ASSESSING OFFICER IN THE FOLLOWING MANNER : M/S MASCOT FOOTCARE M/S MASCOT UDYOG YEAR AMOUNT YEAR AMOUNT 1988 - 89 500000/* 1988 - 89* 500,000 1998 - 99 25,00,000 1999 - 2000 40,00,000 1999 - 2000 30,00,000 * AS PER ASSESSEE SHOULD BE RS 125000/ 89 AND RS 375000/ IN 1989-90 *AS PER THE ASSESSEE IT SHOULD HAVE BEEN1989-90 7 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT IT WAS THEREAFTER SUBMITTED THAT THE CAPITAL INITIA LLY CONTRIBUTED HAS INCREASED ON ACCOUNT OF THE SHARE PROFIT AND INTEREST ACCRUING T O THE ASSESSEE. IT WAS SUBMITTED THAT NO BORROWED FUNDS WERE UTILIZED DURING THOSE YEARS FOR MAKING THE INVESTMENT IN THE ABOVE SAID CONCERNS. 4.2. THE LD. D/R FOR THE REVENUE HAS SUBMITTED THAT THE INVESTMENT IN THESE CONCERNS WERE NOT PART OF THE BUSINESS OF THE ASSESSEE COMPA NY AND THERE IS NO PROFIT TO THE BUSINESS OF THAT THE ASSESSEE FROM SUCH INVESTMENT. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE COMPANY HAS TAKEN A LOAN FROM THE PUNJAB N ATIONAL BANK AT THE RATE OF 12% AND IT WAS SUBMITTED THAT IF THE ASSESSEE COMPANY H AS WITHDRAWN THE INVESTMENT FROM THESE CONCERNS THEN THERE WAS NO NECESSITY TO TAKE THE LOAN FROM THE PUNJAB NATIONAL BANK. IT WAS ALSO HIGHLIGHTED THAT THE SHARE IN THE PROFIT OF THE ASSESSEE IS ONLY 10% WHEREAS A CAPITAL CONSIDERATION IS VERY HIGH IN COM PARISON TO THE OTHER PARTNERS OF THE FIRM. 4.3. THE LD D/R FURTHER SUBMITTED THAT M/S MASCOT U DYOG IS NOT DOING ANY BUSINESS AND THE CAPITAL OF THE ASSESSEE IS LYING BLOCKED AN D NO STEPS HAVE BEEN TAKEN BY THE ASSESSEE TO RECALL THE CAPITAL INVESTMENT MADE BY I T . THE ASSESSEE NOT RECALLING THE INVESTMENT FROM M/S MASCOT UDYOG AND TAKING LOAN FR OM PUNJAB NATIONAL BANK, CLEARLY SHOWS THAT THE COMMERCIAL INTEREST OF THE ASSESSEE HAS BEEN COMPROMISED BY THE ASSESSEE. IT WAS SUBMITTED ON BEHALF OF THE REVENUE THAT THE M/S MASCOT UDYOG HAD INVESTED THE MAJOR AMOUNT IN EQUITY SHARES OF M/S L AKHANI INDIA LTD. THUS LD DR, 8 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT EMPHASISED THAT THE MONEY OF THE ASSESSEE HAS BEEN ROOTED FOR THE PURCHASE OF EQUITY SHARES OF M/S LAKHANI INDIA LTD . THEREAFTER IT WAS SUBMITTED THAT THERE WAS NO JUSTIFICATION FOR PAYMENT OF INTEREST ON LOANS TAKE N FROM THE RELATED PERSONS AND BANKS. 4.4. IN OUR VIEW, THE ADMITTED POSITION AS EMERGES FROM THE RECORD IS THAT THE ASSESSEE HAS MADE INVESTMENTS IN M/S MASCOT FOOTCAR E AND M/S MASCOT UDYOG PRIOR TO THE ASSESSMENT YEAR 1999-2000 AND THE SAID INVESTME NT MADE BY THE ASSESSEE IN THOSE YEARS HAVE INCREASED MANY FOLDS ON ACCOUNT OF THE P ROFIT, INTEREST ETC. TO THE TUNE OF RS 47,38,4234/-. MOREOVER IT IS ALSO AN ADMITTED POSIT ION THAT OUT OF THE SAID AVAILABLE FUNDS, THE SAID CONCERNS HAD INVESTED IN MS LAKHANI INDIA LTD. THE ASSESSMENT YEAR IN WHICH THE INVESTMENTS WERE MADE IN THE EQUITY SHARE OF M/S LAKHANI INDIA LTD, BY M/S MASCOT UDYOG WERE AS UNDER :- 1995 - 96 RS 24378150 1996 - 97 R S 351110 2001 - 02 RS 237144 TOTAL RS 24966404 THUS IT IS CLEAR THAT NO INVESTMENT WERE MADE IN M/ S LAKHANI INDIA LTD IN THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER HAD FAIL ED TO PROVE THE NEXUS BETWEEN THE INTEREST PAID TO THE RELATED PARTIES AND BANKERS AN D THE INVESTMENT MADE BY THE ASSESSEE IN THE CURRENT ASSESSMENT YEAR. NO NEW INV ESTMENTS WERE MADE BY THE ASSESSEE IN THE YEAR UNDER CONSIDERATION. 9 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT 4.5. IN OUR VIEW THE ASSESSEE WAS ABLE TO ESTABLISH THAT HE HAD INCURRED THE EXPENDITURE WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND THEREFORE THERE IS NO JUSTIFICATION FOR THE REVENUE TO DISALLOWANCE THE I NTEREST COMPONENT. THE REVENUE CANNOT CLAIM TO PUT ITSELF IN THE ARMCHAIR OF THE B USINESSMAN AND DECIDE HOW MUCH IS REASONABLE EXPENDITURE. THE REVENUE IS REQUIRED TO EXAMINE THE ISSUE FROM THE PERSPECTIVE OF THE PRUDENT BUSINESSMEN RATHER FROM ITS OWN ANGLE. REVENUE AUTHORITIES HAVE FAILED TO BRING ON RECORD ANY COGENT EVIDENCE AND MATERIAL TO SHOW THAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSES OF INVESTMENT AND WERE NOT USED FOR THE BUSINESS PURPOSES. IT WOULD BE RELEVANT TO REPRODUCE BELOW THE FINDING RECORDED BY THE ASSESSING OFFICER IN PARAGRAPH 4.3 TO THE FO LLOWING EFFECT: 4.3 THE AGGREGATE RATE OF RETURN FROM THE INVESTME NT OF THE ASSESSEE COMPANY IN THE ABOVE TWO FIRMS IS 1.69%. ON THE OTH ER THAN THE ASSESSEE IS PAYING THE INTEREST ON UNSECURED LOAN FROM SHRI GUNJAN LAKHANI @12% AND INTEREST TO PUNJAB NATIONAL BANK @ 12%. HENCE O N ONE SIDE THE ASSESSEE HAD INVESTED HUGE AMOUNTS IN THE FIRMS ( I N WHICH DIRECTORS OF THE FIRMS ARE PARTNERS) AT THE VERY LOW RATE OF RET URN, ON THE OTHER HAND THE ASSESSEE COMPANY IS HAVING LOANS ON WHICH IT IS PAYING INTEREST@ 12% WHICH IS VERY MUCH HIGHER THAN THE RATE OF RET URN FROM THESE INVESTMENT IN OUR VIEW THE AUTHORITIES BELOW HAVE FAILED TO BR ING ON RECORD ANY MATERIAL WHICH SHOWS THAT THE BORROWED FUNDS HAVE NOT BEEN USED FO R THE PURPOSES OF BUSINESS. IN THE LIGHT OF THE ABOVE THE APPEAL OF THE ASSESSEE IS RE QUIRED TO BE ALLOWED AS NO FRESH INVESTMENT HAS BEEN MADE IN THE YEAR UNDER CONSIDER ATION AND FURTHER NO LOAN AMOUNT WAS USED FOR THAT PURPOSES. 10 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT 4.6. OUR VIEW IS ALSO SUPPORTED BY THE JUDGMENT OF HONBLE SUPREME COURT IN THE MATTER OF HERO CYCLE LTD. VS. CIT, 63 TAXMAN.COM 30 8 WHEREIN IT IS HELD AS UNDER :- 12. INSOFAR AS LOANS TO THE SISTER CONCERN/SUBSIDIARY COMPANY ARE CONCERNED, LAW IN THIS BEHALF IS RECAPITULATED BY THIS COURT IN TH E CASE OF S.A. BUILDERS LTD. V. CIT (APPEALS) [2007 (288) ITR 1/158 TAXMAN 74 ]. AFTER TAKING NOTE OF AND DISCUSSING ON THE SCOPE OF COMMERCIAL EXPEDIENCY, THE COURT SU MMED UP THE LEGAL POSITION IN THE FOLLOWING MANNER: '26. THE EXPRESSION 'COMMERCIAL EXPEDIENCY' IS AN E XPRESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT B USINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HA VE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIE NCY. 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979 (118) ITR 200 (SC) ], IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENT IMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIA L EXPEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEEN ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. IN MADHAV PRASAD 'S CASE [ 1979 (118) ITR 200 (SC) ], THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMM EMORATE THE MEMORY OF THE ASSESSEE'S DECEASED HUSBAND AFTER WHO M THE COLLEGE WAS TO BE NAMED, IT WAS HELD BY THIS COURT THAT THE INTERE ST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NO T BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIENCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA 'S CASE [ 1979 (118) ITR 200 (SC) ] IS THAT THE BORROWED FUND ADVANCED TO A THIRD PAR TY SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADVANC ED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXP RESSION 'FOR THE PURPOSE OF EARNING PROFITS' VIDE CIT V. MALAYALAM PLANTATIONS LTD. [ 1964 53 ITR 140 (SC) , CIT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [ 1971 82 ITR 166 (SC) ], ETC.' 13. IN THE PROCESS, THE COURT ALSO AGREED THAT THE VIE W TAKEN BY THE DELHI HIGH COURT IN CIT V. DALMIA CEMENT (P.) LTD. [2002] 254 ITR 377/121 TAXMAN 706 WHEREIN THE HIGH COURT HAD HELD THAT ONCE IT IS EST ABLISHED THAT THERE IS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF BUSINESS (WHICH NEED NOT NECESSARILY 11 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENU E CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN TH E POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. IT FURTHER HELD THAT NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT AND THAT TH E INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MAT TER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. FURTHER, THE HONBLE JURISDICTIONAL HIGH COURT IN T HE MATTER OF CIT VS. RAM KISHAN VERMA HAS HELD AS UNDER :- 13. TAKING INTO CONSIDERATION THE FACT AS NOTICED HERE INABOVE, IN OUR VIEW AS WELL, WHEN THERE WAS NO AGREEMENT TO CHARGE INTEREST FROM THE PERSONS, TO WHOM THE ASSESSEE ADVANCED SHORT TERM LOAN/ADVANCE, THE AO C OULD NOT DISALLOW PART OF THE INTEREST. IT IS ALSO AN ADMITTED FACT, AS OBSERVED BY THE TRIBUNAL, THAT THE AO .VAS NOT ABLE TO PIN POINTEDLY COME TO A DEFINITE CONCLUSION THAT HOW INTEREST BEARING LOANS HAD BEEN DIVERTED TOWARDS INTEREST FREE ADVANCES AN D SINCE THE AO WAS NOT ABLE TO PROVE NEXUS BETWEEN INTEREST BEARING LOANS VIS-A-VI S INTEREST FREE LOANS/ADVANCES, THEREFORE, IN OUR VIEW AS WELL, ONCE THE AO WAS NOT ABLE TO COME TO A DEFINITE CONCLUSION AS TO NEXUS HAVING BEEN ESTABLISHED ABOU T INTEREST BEARING LOANS HAVING BEEN DIVERTED TOWARDS INTEREST FREE LOANS/ADVANCES, AND SUCH BEING A FINDING OF FACT BASED ON APPRECIATION OF EVIDENCE, IN OUR VIEW NO S UBSTANTIAL QUESTION OF LAW ARISE ON THIS QUESTION AS WELL. IT CAN BE OBSERVED THAT T HIS COURT IN SIMILAR CIRCUMSTANCES AND ON IDENTICAL FACTS, WHEN THE CAPITAL OF THE PAR TNERS/PROPRIETOR BEING MORE THAN THE INTEREST FREE SHORT TERM ADVANCES, HAS IN THE CASE OF CIT V. VIJAY SOLVEX LTD. [2015] 59 TAXMANN.COM 294 (RAJ.) WHILE RELYING ON THE JUDGMENT RENDERED IN (A) S.A. BUILDERS LTD. V. CIT (APPEALS) [2007] 288 ITR 1/158 TAXMAN 74 (SC) ; (B), MUNJAL SALES CORPN. V. CIT [2008] 298 ITR 298/168 TAXMAN 43 (SC) ; (C), CIT V. RADICO KHAITAN LTD. [2005] 274 ITR 354/142 TAXMAN 681 (ALL.) ; (D), CIT V. DALMIA CEMENT (P.) LTD. [2002] 254 ITR 377/121 TAXMAN 706 (DELHI) ; (E), CIT V. BRITANNIA INDUSTRIES LTD. [2006] 280 ITR 525/[2005] 148 TAXMAN 654 (CAL.) AND (F) CIT V. MOTOR SALES LTD. [2008] 304 ITR 123 (ALL.) , HELD AS UNDER: '16. IN VIEW OF THE AUTHORITATIVE PRONOUNCEMENT OF THE APEX COURT AND OTHER JUDGMENTS REFERRED SUPRA , IN OUR VIEW, THE ASSESSEE ADMITTEDLY HAD ITS OWN FUNDS, AS REFERRED TO EARLIER, AND ADMITTED LY SUCH FUNDS/RESERVES BEING SUBSTANTIALLY HIGHER THAN, EVEN OTHERWISE, TH E ADVANCES TO THE DEBTORS, NO NOTIONAL INTEREST OR HYPOTHETICAL INTER EST COULD HAVE BEEN DISALLOWED ON SUCH FACTS. THE REVENUE HAS FAILED TO PROVE NEXUS. IN OUR VIEW, THE ITAT HAS CORRECTLY APPRECIATED THE FACTS AND LAW.' 12 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT SIMILAR VIEWS HAVE BEEN EXPRESSED BY HONBLE MADRAS HIGH COURT IN THE MATTER OF CIT VS. PREMIER POLY SACKS PVT. LTD., 321 ITR 450 (MAD) . 5. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 18/03/2016. SD/- SD/- VH-VKJ-EHUK YFYR DQEKJ (T.R. MEENA) (LALIET KUMAR) YS[KK LNL;@ ACCOUNTANT MEMBER U;KF;D LNL;@ JUDICIAL MEMBER TK;IQJ@ JAIPUR FNUKAD@ DATED:- 18/03/2016. DAS/ VKNS'K DH IZFRFYFI VXZSFKR@ COPY OF THE ORDER FORWARDED TO: 1. VIHYKFKHZ@ THE APPELLANT- M/S. LAKHANI SHOE CO. PVT. LTD., FAR IDABAD. 2. IZR;FKHZ@ THE RESPONDENT- THE ACIT, ALWAR. 3. VK;DJ VK;QDR@ CIT 4. VK;DJ VK;QDRVIHY@ THE CIT(A) 5. FOHKKXH; IZFRFUF/K] VK;DJ VIHYH; VF/KDJ.K] T;IQJ@ DR, ITAT, JAIPUR 6. XKMZ QKBZY@ GUARD FILE (ITA NO. 724/JP/2014) VKNS'KKUQLKJ@ BY ORDER, LGK;D IATHDKJ@ ASST. REGISTRAR 13 ITA NO. 724/JP/2014 LAKHANI SHOE CO. PVT. LTD. VS. ACIT