M/s. Motilal Manakchand, Ahmednagar V. Tax Recovery Officer,

ITA 797/PUN/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 1763 (ITAT-PUNE)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-06-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 12-05-2016
• Assessment Year: 2008-2009
• Appeal Filed On: 21-04-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D N PARAKH
• Assessee Lawyers: SHRENIK GANDHI
• Keywords: Unexplained expenditure; Opportunity of being heard
• Section: 69C; 143(3)

Judgement Text

] ]] ] IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE , !', $ % BEFORE SHRI VIKAS AWASTHY, JM AND SHRI PRADIP KUMAR KEDIA, AM ITA NO.797/PN/2014 ASSESSMENT YEAR : 2008-09 M/S MOTILAL MANAKCHAND, NEWASKAR NIWAS, ADATE BAZAR, AHMEDNAGAR 414 001. PAN : AAFFM5874M . APPELLANT VS. THE TAX RECOVERY OFFICER (INCOME-TAX), AHMEDNAGAR RANGE, AHMEDNAGAR. . RESPONDENT / APPELLANT BY : SHRI SHRENIK GANDHI / RESPONDENT BY : SHRI D.N. PARAKH / DATE OF HEARING : 12.05.2016 / DATE OF PRONOUNCEMENT: 03.06.2016 & / ORDER PER PRADIP KUMAR KEDIA, AM : THE CAPTIONED APPEAL FILED BY THE ASSESSEE IS AGAIN ST THE ORDER OF CIT(A)-IT/TP, PUNE DATED 30.01.2014 RELATING TO ASS ESSMENT YEAR 2008-09 PASSED UNDER SECTION 143(3) OF THE INCOME-TAX ACT, 1961 (IN SHORT THE ACT). 2. IN THIS APPEAL, THE ASSESSEE HAS RAISED THE FOLL OWING GROUNDS OF APPEAL :- 1(A) THE HON'BLE COMMISSIONER (APPEALS) OUGHT NOT TO HAVE UPHELD DISALLOWANCE THE INTEREST AMOUNTING TO RS. 15,74,077, AS THE APP ELLANT HAD PAID THE INTEREST OF RS.15,74,077 TO THE BANK AND OTHER, WHICH FACT HAS NOT BEEN DISPUTED. 1(B) THE HON'BLE COMMISSIONER (APPEALS) OUGHT TO HA VE APPRECIATED THAT, THE FUNDS HAD BEEN WITHDRAWN BY THE PARTNERS OF THE APP ELLANT, AS PER THE PROVISIONS OF THE PARTNERSHIP DEED AND WAS REQUIRED TO BE DONE SO , FOR THE PURPOSE OF CARRYING OUT THE BUSINESS. 2 ITA NO.797/PN/2014 2. THE HON'BLE COMMISSIONER (APPEALS) OUGHT TO HAVE CONSIDERED THE FACTS OF THE CASE AND DELETED THE ADDITION OF RS.1,20,579 MA DE BY THE ASSESSING AUTHORITY, AS PER THE PROVISIONS OF SECTION 69C OF THE INCOME-TAX ACT, 1961. 3. THE HON'BLE COMMISSIONER (APPEALS) OUGHT TO HAVE APPRECIATED THAT THE CLAIM OF DEDUCTION OF RS.1,92,323 AROSE OUT OF BUSI NESS DEALINGS WITH U.P. STATE CO- OPERATIVE SPINNING MILLS LIMITED, KANPUR AND THEREF ORE, HE OUGHT TO HAVE SET ASIDE THIS DISALLOWANCE. 3. BY WAY OF GROUND NO.1, THE ASSESSEE HAS ASSAILED THE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) OF THE ACT AMOUNT ING TO RS.15,74,077/- ON THE GROUND THAT THE FUNDS HAVE BEEN WITHDRAWN BY SOME O F THE PARTNERS OF THE ASSESSEE FIRM WHICH IS NOT THE BUSINESS PURPOSES OF THE ASSESSEE. 3.1 BRIEFLY STATED, THE RELEVANT FACTS CONCERNING T HE ISSUE ARE THAT THE ASSESSING OFFICER OBSERVED THAT ON EXAMINATION OF R ECORDS IT IS SEEN THAT THE ASSESSEE HAS RAISED HUGE LOANS FROM ICICI BANK DURI NG THE YEAR AND INCURRED INTEREST EXPENDITURE THEREON. THE ASSESSING OFFICE R ALSO NOTED THAT THERE WERE SIMULTANEOUS DRAWINGS BY SOME OF THE PARTNERS AGGRE GATING TO RS.1,31,17,310/- AT THE END OF THE YEAR. THE TOTAL LOAN OUTSTANDING FROM ICICI BANK AT THE END OF THE FINANCIAL YEAR STANDS AT RS.1,86,48,966/-. THE ASSESSING OFFICER WENT ON TO OBSERVE THAT ASSESSEE IS PAYING INTEREST ON B ORROWED CAPITAL I.E. LOANS FROM BANKS AND THE MONEY HAS NOT BEEN UTILIZED FOR THE BUSINESS PURPOSE BUT HAVE BEEN UTILIZED BY WAY OF WITHDRAWALS BY THE PAR TNERS. NO INTEREST HAS BEEN CHARGED ON THE MONEY UTILIZED BY THE PARTNERS WHICH IS AGAINST THE BUSINESS PRACTICES. HE, ACCORDINGLY, PROCEEDED TO DISALLOW THE PROPORTIONATE AMOUNT FROM THE INTEREST PAID ON BORROWED FUNDS UNDER SECT ION 36(1)(III) OF THE ACT TO THE PARTNERS WHICH WAS WORKED OUT TO RS.15,74,077/- OUT OF TOTAL INTEREST OF RS.40,61,336/- PAID ON BORROWED FUNDS AND CHARGED T O PROFIT & LOSS ACCOUNT. THE CIT(A) CONFIRMED THE ACTION OF THE ASSESSING OF FICER. 3.2 THE LD. AUTHORIZED REPRESENTATIVE (AR) FOR THE ASSESSEE SHRI SHRENIK GANDHI REITERATED THE FACTS PLACED BEFORE THE REVEN UE AUTHORITIES AND CONTENDED THAT THERE IS NO WARRANT FOR DISALLOWANCE OF INTEREST AGAINST DEBIT BALANCES OF THE PARTNERS. HE SUBMITTED THAT OUTSTA NDING BALANCES OF ALL THE 3 ITA NO.797/PN/2014 PARTNERS WHEN CLUBBED TOGETHER HAS CREDIT BALANCE A T THE BEGINNING OF THE YEAR AS WELL AS AT THE END OF THE FINANCIAL YEAR. WHILE BALANCES ATTRIBUTABLE TO SOME PARTNERS REFLECTS DEBIT BALANCE, CREDIT AVAILABLE I N THE HANDS OF THE OTHER PARTNERS FAR OUTWEIGHS THE DEBIT BALANCES. RESULTA NTLY, THERE IS A CLEAR CREDIT BALANCE AGAINST THE PARTNERS ACCOUNT ON CUMULATIVE BASIS AT ALL POINT OF TIME. THE LD. AR CONTENDED THAT IN SUCH A SCENARIO, IT CA NNOT BE SAID THAT INTEREST EXPENDITURE INCURRED ON BORROWED FUNDS HAVE BEEN UT ILIZED FOR NON-BUSINESS PURPOSES. THE LD. AR RELIED UPON THE DECISION OF T HE HONBLE DELHI HIGH COURT IN THE CASE OF REGAL THEATRE VS. CIT, (1997) 225 ITR 205 (DEL) FOR THE PROPOSITION THAT ONCE THE CONDITIONS LAID DOWN UNDE R SECTION 36(1)(III) OF THE ACT ARE SATISFIED, THE DEDUCTION MUST BE GIVEN. 3.3 PER CONTRA , THE LD. DEPARTMENTAL REPRESENTATIVE (DR) FOR THE REVENUE RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE DEBIT BALANCES IN THE SOME PARTNERS HAND CLEARLY REFLECT S THAT THE BORROWED FUNDS HAVE BEEN DIVERTED FOR NON-BUSINESS PURPOSES. THE LD. DR RELIED UPON THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CA SE OF CIT VS. V.I. BABY AND CO., (2002) 254 ITR 248 (KER) TO SUBMIT THAT ADVANC ES MADE TO THE PARTNERS OR RELATIVES ARE NOT FOR THE BUSINESS PURPOSES AS THE ASSESSEE HAS NOT DERIVED AT THE BENEFIT OUT OF THE SAME. THUS, NO INTERFERENCE WIT H THE ORDER OF THE CIT(A) IS CALLED FOR. 3.4 WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSI ONS AND ALSO PERUSED THE MATERIAL PLACED ON RECORD. WE NOTICE FROM THE BALA NCE SHEET OF ONE OF THE PROPRIETARY CONCERN OF ASSESSEE NAMELY M.M. CORPORA TION, AHMEDNAGAR/PUNE AS ON 31.03.2008 THAT THE ASSESSEE DURING THE YEAR HAS OBTAINED FRESH BORROWED FUNDS FROM ICICI BANK. SIMILARLY, WE NOTICE THAT T HERE IS A POSITIVE COMBINED CAPITAL OF PARTNERS STANDS AT RS.224.07 LACS AT THE BEGINNING OF THE FINANCIAL YEAR ON 01.04.2007. THE COMBINED PARTNERS CAPITAL AT THE END OF THE FINANCIAL YEAR ON 31.03.2008 STANDS AT POSITIVE AMOUNT OF RS. 74.51 LACS. IT IS THE CASE OF THE ASSESSING OFFICER THAT SOME OF THE PARTNERS HAV E OVERDRAWN THE CAPITAL 4 ITA NO.797/PN/2014 DURING THE YEAR WHICH HAS RESULTED IN NEGATIVE CAPI TAL IN THEIR RESPECTIVE HANDS. HE THUS CONCLUDED THAT THE BORROWED FUNDS HAVE BEEN UTILIZED FOR THE PERSONAL USAGE OF THE PARTNERS AND OTHER FAMILY MEMBERS. IN THIS CONTEXT, WE TAKE NOTE OF THE FACTS THAT SOME OF THE PARTNERS CARRIED CRED IT BALANCES IN THEIR RESPECTIVE CAPITAL ACCOUNT WHEREAS SOME OF THE OTHER PARTNERS CARRIED NEGATIVE BALANCES IN THEIR RESPECTIVE CAPITAL ACCOUNT. HOWEVER, WHEN SE EN HOLISTICALLY, THE BALANCES OF PARTNERS CAPITAL AS A CLASS, THE COMBINED CAPIT AL CONTRIBUTION OF THE PARTNERS TO THE BUSINESS CONTINUES TO REMAIN POSITIVE. IN T HE CIRCUMSTANCES, PRESUMPTION STANDS IN FAVOUR OF THE ASSESSEE THAT B ORROWED FUNDS HAVE BEEN UTILIZED FOR THE PURPOSES OF BUSINESS. MERE OVER-W ITHDRAWAL BY SOME OF THE PARTNERS RESULTING IN DEBIT BALANCES IN THEIR HANDS CANNOT BE SEEN IN ISOLATION WHEN OTHER PARTNERS POSITIVE CAPITAL IS SUFFICIENT TO MITIGATE AND OVERWEIGH SUCH DEBIT BALANCES. WE FIND THAT THE DECISION OF THE HONBLE KERALA HIGH COURT IN THE CASE V.I. BABY AND CO. (SUPRA) RELIED UPON BY THE LD. DR IS CLEARLY DISTINGUISHABLE ON FACTS. IN THAT CASE, TH E OVERALL PARTNERS CAPITAL WAS FOUND TO BE IN NEGATIVE. WE, THUS, DO NOT SEE AS T O HOW THE AFORESAID DECISION IS APPLICABLE TO THE FACTS OF PRESENT CASE. IN THE INSTANT CASE, BORROWED FUNDS HAVE BEEN PRESUMABLY UTILIZED FOR THE WITHDRAWAL BY SOME OF THE PARTNERS. HOWEVER, IN THE SAME VEIN, THE OVERALL CAPITAL CONT INUES TO REMAIN POSITIVE AND THEREFORE ALLOWABILITY OF INTEREST IN THE CASE OF T HE ASSESSEE IS SQUARELY COVERED BY THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES AND POWER LTD., (2009) 313 ITR 3 40 (BOM.). THUS, CONTENTIONS ADVANCED BY THE LD. AR FOR THE ASSESSEE MERITS ACCEPTANCE. HENCE, THE GROUND NO.1 OF THE ASSESSEES APPEAL IS ALLOWED. 4. GROUND NO.2 RELATES TO DISALLOWANCE OF RS.1,20,5 79/- BY INVOKING SECTION 69C OF THE ACT. 4.1 THE RELEVANT FACTS CONCERNING THE ISSUE ARE THA T THE ASSESSING OFFICER INTER-ALIA OBSERVED THAT THE ASSESSEE HAS INCURRED EXPENDITURE OF RS.6,69,180/- ATTRIBUTABLE TO M/S SHANTOLI CORPORATION, AHMEDABAD TOWARDS PAYMENT OF 5 ITA NO.797/PN/2014 COMMISSION TO THE AFORESAID PARTY. THE ASSESSING O FFICER OBSERVED FROM THE BOOKS OF ACCOUNT THAT A COMMISSION OF RS.5,53,604/- IS SHOWN AS PAYABLE AT M/S SHANTOLI CORPORATION. HE SIMULTANEOUSLY NOTED THAT ASSESSEE HAS PAID/CREDITED RS.6,69,180/- AS COMMISSION TO THE AB OVE PARTY AS PER THE TDS CERTIFICATE. HE, ACCORDINGLY, TREATED THE DIFFEREN TIAL AMOUNT OF RS.1,20,579/- AS UNEXPLAINED EXPENDITURE UNDER SECTION 69C OF THE AC T. THE CIT(A) REMITTED THE MATTER FOR PROPER VERIFICATION BY THE ASSESSIN G OFFICER. THE RELEVANT FINDINGS OF THE ORDER OF THE CIT(A) IS AS UNDER :- 2.1.4 I HAVE CONSIDERED THE FACTS. I FIND THAT THE LEARNED AO HAS STATED ON THE BASIS OF EXAMINATION OF THE TDS RETURNS THAT THE APPELLAN T HAS PAID MORE COMMISSION TO SHANTOLI CORPORATION THAN THE AMOUNTS RECORDED IN T HE BOOKS OF ACCOUNTS. HOWEVER, I DO NOT AGREE THAT BECAUSE OF THIS REASON IT SHOUL D LEAD TO THE ADDITION U/S 69C. THIS IS BECAUSE THE APPELLANT HAS STATED THAT THIS DIFFE RENCE IS RESULTED BECAUSE OF THE ACCOUNTING DIFFERENCE BETWEEN THE APPELLANT AND SHANTOLI CORPORATION. THEREFORE, IT MAY BE NECESSARY TO EXAMINE RECONCILI ATION STATEMENT, IF IT IS FURNISHED BY THE APPELLANT. 2.1.5 THE OTHER UNLIKELY POSSIBILITY IS THE DIFFERE NCE HAS ARISEN BECAUSE THE APPELLANT HAS PAID FROM ITS BOOKS BUT NOT CLAIMED T HE SAME AS DEDUCTION. IN SUCH CASE, NO DISALLOWANCE U/S 69C IS CALLED FOR, AS IT COULD BE THE CASE FOR APPELLANT NOT CLAIMING DEDUCTION OF THE EXPENDITURE BUT THE PAYME NT IS MADE FROM ACCOUNTED FUNDS. HOWEVER, IF THE APPELLANT HAS CLAIMED DEDUCT ION AND NOT DEDUCTED TAX ON IT, THEN THE PAYMENT IS LIABLE TO BE DISALLOWED U/S 40( A)(IA) AND NOT U/S 69C. 2.1.6 THEREFORE, IN VIEW OF THE ABOVE DISCUSSION, I DIRECT THE APPELLANT TO FILE RECONCILIATION STATEMENT BETWEEN APPELLANT AND SHAN TOLI CORPORATION BEFORE THE LEARNED AO. THE LEARNED AO IS DIRECTED TO EXAMINE T HE SAME AND ALLOW THE PAYMENT IF THE DIFFERENCE IS RECONCILED AND DISALLOW IF IT IS NOT RECONCILED. THE LEARNED AO IS ALSO DIRECTED TO ASCERTAIN AS TO WHETHER THE PAYMEN T IS MADE OUT OF THE ACCOUNTED FUNDS OR NOT AND ALSO FIND OUT AS TO WHETHER THE AP PELLANT HAS CLAIMED DEDUCTION IN THE PROFIT AND LOSS ACCOUNT OR NOT. IF THE APPELLAN T HAS MADE PAYMENT FROM ITS ACCOUNTED FUNDS WITHOUT MAKING TDS AND DEBITED TO P ROFIT AND LOSS ACCOUNT THEN THE PAYMENT WILL BE DISALLOWED U/S 40(A)(IA). THE LEAR NED AO IS DIRECTED TO ALLOW OR DISALLOW THE PAYMENT IN ACCORDANCE WITH THE DIRECTI ONS CONTAINED IN THIS PARAGRAPH. 4.2 WE NOTE THAT THE CIT(A) HAS DIRECTED THE ASSESS ING OFFICER TO RECONCILE THE DIFFERENCE BETWEEN THE ENTRIES MADE IN THE BOOK S OF ACCOUNT QUA THE TDS CERTIFICATE WHILE DRAWING CONCLUSION ON THE ISSUE. WE FIND NO INFIRMITY IN SUCH DIRECTION GIVEN AS A MATTER OF FAIR PLAY. ACCORDIN GLY, WE REMIT THE ISSUE BACK TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO EXAMINATION ON THE ISSUE IN 6 ITA NO.797/PN/2014 ACCORDANCE WITH LAW AFTER GIVING PROPER OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. HENCE, THE GROUND NO.2 IS ALLOWED FOR ST ATISTICAL PURPOSES. 5. THE FACTS CONCERNING GROUND NO.3 AS CULLED OUT F ROM THE ASSESSMENT ORDER ARE THAT AS PER SUBMISSIONS MADE BY THE ASSES SEE, THERE ARE NO ONGOING BUSINESS ACTIVITIES DUE TO DISCONTINUANCE OF BHATIN DA UNIT. HOWEVER, THE ASSESSEE HAS CLAIMED LOSS OF RS.5,66,223/- FROM THI S UNIT OUT OF WHICH, THE ASSESSEE HAS CLAIMED EXPENDITURE OF RS.1,92,323/- P AID TO UP STATE TEXTILE. THE ASSESSEE CLARIFIED THAT THE PAYMENT IS MADE ON ACCOUNT OF THE CHARGES PAID TO UP GOVERNMENT. THE ASSESSING OFFICER, HAVING RE GARD TO THE FACT THAT THE ASSESSEES BUSINESS IS DISCONTINUED, HELD THAT PAYM ENT IS NOT MADE FOR THE PURPOSE OF BUSINESS AND DISALLOWED THE SAME. 5.1 BEFORE THE CIT(A), THE ASSESSEE SUBMITTED THAT IT WAS TO RECEIVE CERTAIN PAYMENT FROM UP STATE CO-OPERATIVE SPINNING MILLS L TD., KANPUR FOR SUPPLY OF COTTON. AFTER LITIGATION, THE ASSESSEE RECEIVED SUM OF RS.21,11,597/- AS AGAINST THE TOTAL RECEIVABLE OF RS.23,03,920/-. TH EREFORE, THE BALANCE AMOUNT OF RS.1,92,323/- BEING NON-RECOVERABLE WAS CHARGED TO THE PROFIT & LOSS ACCOUNT. IN THESE CIRCUMSTANCES, DISCONTINUATION O F BUSINESS OF COTTON IS NOT RELEVANT. THE CIT(A) TOOK A VIEW THAT WRITE-OFF OF RS.1,92,323/- SHOULD BE ALLOWED IF THE ASSESSEE WAS DECLARED INCOME ON THE SAME IN THE EARLIER YEARS. HE, ACCORDINGLY, DIRECTED THE ASSESSING OFFICER TO EXAMINE THIS ASPECT. 5.2 WE FIND OURSELVES IN AGREEMENT WITH THE DIRECTI ONS GIVEN BY THE CIT(A). WINDING UP OF A UNIT OF BUSINESS IS DIFFERENT FROM WINDING UP THE ENTIRE BUSINESS OPERATIONS. THE BAD DEBT IS ALLOWABLE EXP ENDITURE UNDER SECTION 36(1)(VII) OF THE ACT PROVIDED IT HAS BEEN INCURRED IN COURSE OF TRADE AND DEBT OR PART THEREOF HAS BEEN TAKEN INTO ACCOUNT WHILE C OMPUTING THE INCOME OF THE ASSESSEE IN THE EARLIER YEARS. IN VIEW OF THE AFOR ESAID LEGAL POSITION, WE REMIT THE ISSUE TO THE FILE OF THE ASSESSING OFFICER FOR DE NOVO EXAMINATION OF THE ISSUE. THE ASSESSING OFFICER SHALL ALLOW THE AFORE SAID CLAIM ON BEING SATISFIED 7 ITA NO.797/PN/2014 THAT THE DEBTS WERE INCURRED IN THE COURSE OF TRADE AND CONDITIONS AS PER SECTION 36(1)(VII) R.W.S. 36(2) OF THE ACT ARE SATISFIED. THUS, GROUND NO.3 IS ALLOWED FOR STATISTICAL PURPOSES. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS ALL OWED. ORDER PRONOUNCED ON THIS 03 RD DAY OF JUNE, 2016. SD/- SD/- ( VIKAS AWASTHY ) ( PRADIP KUMAR KEDIA ) / JUDICIAL MEMBER $ / ACCOUNTANT MEMBER PUNE ; DATED : 03 RD JUNE, 2016. & ' () *+( / COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE; 2) THE DEPARTMENT; 3) THE CIT(A)-IT/TP, PUNE; 4) THE CIT-IT/TP, PUNE; 5) THE DR B BENCH, I.T.A.T., PUNE; 6) GUARD FILE. &, / BY ORDER , ' # //TRUE COPY// $ %& # '( / SR. PRIVATE SECRETARY ) '* , / ITAT, PUNE