Dalal Lakhmichand Traders, Pune V. Income-tax Officer,

ITA 764/PUN/2014

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 1121 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-09-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2006-2007
• Appeal Filed On: 16-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: HITENDRA NINAVE
• Assessee Lawyers: NILESH KHANDELWAL
• Keywords: Assessment record

Judgement Text

] IQ.KS ] IQ.KS ] IQ.KS ] IQ.KS IQ.KS IQ.KSIQ.KS IQ.KS IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE . . , , ' # BEFORE SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM . / ITA NO.764/PN/2014 '% % / ASSESSMENT YEAR : 2006-07 DALAL LAKHMICHAND TRADERS, MSZK ASSOCIATES, LEVEL 3, BUSINESS BAY, PLOT NO.84, WELLESLEY ROAD, PUNE 411 001 PAN NO.AAEFD2597F . / APPELLANT V/S ITO, WARD-2(3), AURANGABAD . / RESPONDENT / ASSESSEE BY : SHRI NILESH KHANDELWAL / DEPARTMENT BY : SHRI . HITENDRA NINAVE / ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAINST THE O RDER DATED 28-03-2014 OF THE CIT(A), AURANGABAD RELATING TO A SSESSMENT YEAR 2006-07. 2. DISALLOWANCE OF INTEREST U/S.36(1)(III) OF RS.2,57,926/- ON DEBIT BALANCE IN PARTNERS ACCOUNT OF THE ASSESSEE FIRM AND RS .1,30,000/- / DATE OF HEARING :08.09.2015 / DATE OF PRONOUNCEMENT:11.09.2015 2 ITA NO.764/PN/2014 ON ACCOUNT OF INTEREST FREE BUSINESS ADVANCES MADE BY THE ASSESSEE ARE THE ONLY ISSUES RAISED BY THE ASSESSEE IN THE GROUNDS OF APPEAL. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF CANVASSING AGENT AND FILED THE RETURN OF INCOME ON 26-10-2006 DECLARING TOTAL INCOME OF RS.1,44,070 /-. THE ASSESSMENT U/S.143(3) WAS COMPLETED ON 26-12-2008 DETER MINING THE TOTAL INCOME AT RS.2,20,836/-. THEREAFTER, A NOTICE U/S.148 OF THE ACT WAS SERVED ON THE ASSESSEE IN RESPONSE TO WHICH THE A SSESSEE FILED THE RETURN OF INCOME ON 02-06-2010 DISCLOSING INCOME OF RS.1,69,540/-. 4. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT ONE OF THE PARTNER SHRI AJEET BOTHRA HAD OPENING DEBIT BALANCE OF RS.21,57,032/-. SIMILARLY HE NOTED THAT THE ASSESSEE HAS DIVERTED INTEREST BEARING FUNDS TO THE FOLLOWING PARTIES AND NO INTER EST WAS CHARGED TO THEM, THE DETAILS OF WHICH ARE AS UNDER : SR.NO. NAME OF THE PARTY CLOSING BALANCE AS ON 31-03-2006 1 BHAVESH SURANA, NASHIK RS.4,45,000/ - 2 SARDA CLOTH STORES, NAGAR RS.5,00,000/ - 3 AJEET BENEFICIAL TRUST RS.6,82,404/ - 5. THE AO OBSERVED THAT THE ASSESSEE HAS PAID INTERES T TO OTHER 5 PARTNERS ON THEIR CREDIT BALANCES @12% AT RS.4,09,220/-. THUS, ON ONE HAND THE ASSESSEE HAD PROVIDED FOR INTEREST ON OP ENING CREDIT BALANCES OF 5 PARTNERS CURRENT ACCOUNT AND ON THE OT HER HAND IT HAD NOT CHARGED INTEREST ON DEBIT BALANCE OF SHRI AJEET BOTH RA. HE THEREFORE ASKED THE ASSESSEE TO EXPLAIN THE SAME AND ALSO THE BUSIN ESS NEXUS FOR ADVANCING TO THE OTHER 3 PARTIES MENTIONED IN THE ABOVE TABLE. 3 ITA NO.764/PN/2014 6. THE ASSESSEE REPLIED THAT THE ADVANCE GIVEN TO THE PARTIES ARE EITHER DIRECTLY LINKED WITH THE TRANSACTION OR INDIRECTLY LIN KED WITH THE TRANSACTION. HOWEVER, THE AO DID NOT ACCEPT THE CONTEN TION OF THE ASSESSEE. SINCE THE ASSESSEE HAD NOT CHARGED INTEREST ON THE DEBIT BALANCE IN THE CAPITAL ACCOUNT OF PARTNER AND HAD PAID INT EREST FREE ADVANCES FOR NON-BUSINESS PURPOSES, THEREFORE, THE AO H ELD THAT FUNDS OF THE FIRM HAD BEEN DIVERTED FOR NON-BUSINESS PURPOSES B Y ADVANCING IT WITHOUT INTEREST TO PARTNER AND OTHERS AND THUS THE BUSINESS HAS SUFFERED. HAD NO INTEREST BEEN PAID ON CREDIT BALANCE OF P ARTNERS AND BANK INTEREST, THEN POSITION WOULD HAVE BEEN ALTOGETHER D IFFERENT. HE FURTHER NOTED THAT THE ASSESSEE COULD NOT MAKE ANY DIR ECT OR INDIRECT LINK TO THE ADVANCES MADE AND COMMISSION EARNED THOUGH HE WAS ESPECIALLY ASKED TO PROVE THE SAME. REJECTING THE VAR IOUS EXPLANATIONS GIVEN BY THE ASSESSEE AND RELYING ON THE DECISION OF HON BLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS. M/S. ABHISHEK IN DUSTRIES LTD. REPORTED IN 319 ITR 98 THE AO HELD THAT THE ASSES SEE HAS DIVERTED INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSES. HE THE REFORE DISALLOWED AN AMOUNT OF RS.2,57,926/- U/S.36(1)(III) BEING THE INTER EST SUFFERED BY THE ASSESSEE ON DEBIT BALANCE OF THE PARTNER . SIMILARLY, HE DISALLOWED AN AMOUNT OF RS.1,30,000/- BEING INTEREST BEARING FUNDS DIVERTED TO THE 3 PARTIES. 7. IN APPEAL THE LD.CIT(A) UPHELD THE ACTION OF THE AO. AGGRIEVED WITH SUCH ORDER OF THE CIT(A) THE ASSESSEE IS IN APPEAL BEFORE US. 8. THE LD. COUNSEL FOR THE ASSESSEE REFERRING TO PARA 3 .1 OF THE ASSESSMENT ORDER SUBMITTED THAT IN THE CASE OF SHRI BHA VESH SURANA, NASHIK THE OPENING AND CLOSING ADVANCES WAS RS.4,45,000/- . SIMILARLY, IN THE CASE OF SARDA CLOTH STORE THE OPENING AS WELL AS 4 ITA NO.764/PN/2014 CLOSING BALANCE WAS ALSO RS.5 LAKHS. HE SUBMITTED THAT IN T HE CASE OF M/S. AJEET BENEFICIAL TRUST THE OPENING BALANCE AND CLOSING BALANCE IS SAME ALTHOUGH THE SAME IS NOT MENTIONED IN THE ASSESSMENT ORDER. 9. SO FAR AS THE INTEREST DISALLOWED IN THE CASE OF SHRI AJ EET BOTHRA THE LD. COUNSEL FOR THE ASSESSEE REFERRED TO THE ANNEXU RE A ATTACHED TO THE ASSESSMENT ORDER AND SUBMITTED THAT THE OPENIN G BALANCE AS ON 01-04-2005 IN THE CASE OF SHRI AJEET BOTHRA WAS RS.21,57 ,032/- WHEREAS THE CLOSING BALANCE AS ON 31-03-2006 IS RS.2,57,92 6/-, THUS SHRI AJEET BOTHRA HAD REPAID THE MAJOR PORTION OUTSTAN DING AGAINST HIM. HE SUBMITTED THAT NO SUCH DISALLOWANCE WAS MADE IN THE PRECEDING ASSESSMENT YEARS. REFERRING TO THE DECISION OF THE AHMEDABAD BENCH OF THE TRIBUNAL IN THE CASE OF JAGDISH COC ONUT COMPANY VS. ITO VIDE ITA NO.1459/AHD/2008 ORDER DATED 07-10- 2009 HE SUBMITTED THAT THE TRIBUNAL IN THE SAID DECISION H AS HELD THAT THERE IS NO JUSTIFICATION IN DISALLOWING INTEREST EXPENDITURE O N THE DEBIT BALANCE IN PARTNERS CAPITAL ACCOUNT IN ABSENCE OF ANY DIS ALLOWANCE OF INTEREST MADE IN THE IMMEDIATELY PRECEDING YEAR ON THE D EBIT BALANCE IN THE PARTNERS CAPITAL ACCOUNT WHICH IS THE OPENING BALAN CE OF THE CURRENT YEAR. HE SUBMITTED THAT SINCE THE OPENING BALAN CE DURING THE YEAR IN CASE OF THE 4 PARTIES ARE THE CLOSING BALANCE O F THE PRECEDING ASSESSMENT YEAR AND SINCE THERE IS NO DISALLOWANCE OF INTE REST ON ACCOUNT OF SUCH DEBIT BALANCE IN THE PRECEDING ASSESSMEN T YEAR, THEREFORE, NO DISALLOWANCE IN THE CURRENT YEAR U/S.36(1)(III) OF T HE I.T. ACT CAN BE MADE. HE ACCORDINGLY SUBMITTED THAT NO DISA LLOWANCE IS CALLED FOR. 10. IN AN ALTERNATE CONTENTION HE SUBMITTED THAT SINCE T HE ASSESSMENT ORDER MENTIONS THAT THE CLOSING BALANCE OF LA ST YEAR WHICH 5 ITA NO.764/PN/2014 IS THE OPENING BALANCE OF THE CURRENT YEAR IN CASE OF 2 P ERSONS OUT OF THE 4 PERSONS, THEREFORE, THE MATTER MAY BE RESTORED T O THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE ASSESSMENT RECORDS OF THE PRECEDING YEARS AND IN CASE THERE IS NO FRESH ADVANCES GIVEN DURIN G THE YEAR, THEN NO DISALLOWANCE IS CALLED FOR. 11. THE LD. DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND HEAVILY RELIED ON THE ORDER OF THE CIT(A). 12. WE HAVE HEARD THE RIVAL ARGUMENTS MADE BY BOTH TH E SIDES, PERUSED THE ORDERS OF THE AO AND CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIO US DECISIONS CITED BEFORE US. WE FIND THE AO IN THE INSTANT CASE INVOK ED THE PROVISIONS OF SECTION 36(1)(III) FOR NON CHARGING OF INTEREST IN C ASE OF SHRI AJEET BOTHRA, PARTNER IN WHOSE ACCOUNT THERE WAS OPENING DEBIT BALANCE OF RS.21,57,032/-. SINCE THE ASSESSEE FIRM IS PAYING INTEREST TO THE OTHER PARTNERS ON THEIR CREDIT BALANCES AND NOT CHARGING ANY INTEREST FROM SHRI AJEET BOTHRA THE AO HELD THAT PROVISIO NS OF SECTION 36(1)(III) ARE APPLICABLE. HE ALSO INVOKED THE PROVISIONS OF SECT ION 36(1)(III) ON ACCOUNT OF INTEREST BEARING FUNDS DIVERTED TO TH E 3 PARTIES FROM WHOM NO INTEREST WAS CHARGED. 13. IT IS THE SUBMISSION OF THE LD. COUNSEL FOR THE ASSESS EE THAT ALL THESE AMOUNTS WERE APPEARING IN THE BOOKS OF THE ASSES SEE IN THE PRECEDING ASSESSMENT YEAR AND NO SUCH DISALLOWANCE WAS MADE IN THE PRECEDING ASSESSMENT YEAR. THEREFORE WHEN NO INTEREST BEARING FUNDS HAS BEEN DIVERTED TO THE PARTNER OR THE OTHER 3 PERS ONS DURING THE YEAR AND NO DISALLOWANCE WAS MADE IN THE PRECEDING YEAR, THER EFORE, NO DISALLOWANCE U/S. 36(1)(III) IS CALLED FOR. FROM THE COPY OF THE ASSESSMENT ORDER, WE FIND THE AO HAS MENTIONED THAT THE OPENING AND 6 ITA NO.764/PN/2014 CLOSING ADVANCE IN CASE OF SHRI BHAVESH SURANA, NASHIK AND SARDA CLOTH STORE ARE RS.4,45,000/- AND RS. 5 LAKHS RESPECTIVELY . HOWEVER, IT IS NOT BORNE OUT FROM THE RECORDS THAT THE OPENING A ND CLOSING BALANCE IN CASE OF AJEET BENEFICIAL TRUST WAS RS.6,82,404/-. IT IS ALSO NOT BORNE OUT ON RECORD AS TO WHETHER ANY DISALLOWANCE WAS MADE BY THE AO IN THE PRECEDING ASSESSMENT YEAR/YEARS. 14. IN OUR OPINION, IF IN THE PRECEDING ASSESSMENT YEAR TH E AO HAS NOT DISALLOWED ANY INTEREST U/S. 36(1)(III) ON ACCOUNT OF INTE REST FREE ADVANCES GIVEN TO DIFFERENT PARTIES, THEN IT IS PRESUMED THAT NO INTE REST BEARING FUNDS HAVE BEEN DIVERTED FOR NON-BUSINESS PURPOS ES IN THAT YEAR. THEREFORE, IF THE SAME BALANCES ARE CONTINUING IN THE CURRENT YEAR AND NO FRESH ADVANCES/LOANS HAVE BEEN DIVERTED FRO M INTEREST BEARING FUNDS AND WHEN NO SUCH DISALLOWANCE WAS MADE IN T HE PRECEDING ASSESSMENT YEAR, THEN IN THAT CASE, NO DISALLOWA NCE U/S. 36(1)(III) IS CALLED FOR. THE VARIOUS DECISIONS RELIED ON BY THE L D. COUNSEL FOR THE ASSESSEE SUPPORTS THE ABOVE PROPOSITION . HOWEVER, NEITHER THE ASSESSMENT ORDER NOR THE PAPER BOOK FILED O N BEHALF OF THE ASSESSEE SHOW THAT NO SUCH DISALLOWANCE WAS MADE BY TH E AO U/S. 36(1)(III) IN THE PRECEDING ASSESSMENT YEARS. WE, THEREFORE, RE STORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO VERIFY THE R ECORDS AND FIND OUT AS TO WHETHER ANY DISALLOWANCE WAS MADE U/S. 36(1) (III) IN THE PRECEDING ASSESSMENT YEARS OR NOT. HE SHALL ALSO EXAMINE AS TO WHETHER THE SAME BALANCES ARE CONTINUING DURING THE CU RRENT YEAR OR THERE IS ANY INCREASE IN THE ADVANCES GIVEN DURING THE YEAR. THE AO SHALL DECIDE THE ISSUE IN THE LIGHT OF OUR DISCUSSION ABOVE AND IN ACCORDANCE WITH LAW AFTER GIVING DUE OPPORTUNITY OF BEING H EARD TO THE ASSESSEE. WE HOLD AND DIRECT ACCORDINGLY. THE GROUNDS RAISED BY THE ASSESSEE ARE ACCORDINGLY ALLOWED FOR STATISTICAL PURPOSES. 7 ITA NO.764/PN/2014 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS ALLOW ED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 11-09-2015. SD/- SD/- ( VIKAS AWASTHY ) ( R.K. PANDA ) ' / JUDICIAL MEMBER / ACCOUNTANT MEMBER IQ.KS PUNE ; # DATED : 11 TH SEPTEMBER, 2015. LRH'K ( )'+ , / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT 3. ( ( ) S / THE CIT(A), AURANGABAD 4. ( S / THE CIT, AURANGABAD 5. 6. + ., ., IQ.KS / DR, ITAT, B PUNE; / GUARD FILE. / BY ORDER , + //TRUE C + //TRUE COPY// 2 . / SR. PRIVATE SECRETARY ., IQ.KS / ITAT, PUNE