M/s. Liberty Marketers, Ernakulam V. The ACIT, Cochin

ITA 85/COCH/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5117 (ITAT-COCHIN)
• Duration Of Justice: 2 year(s) 1 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2018
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: DB
• Assessment Year: 2010-2011
• Appeal Filed On: 16-02-2016
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: A DHANARAJ
• Section: 147

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE S/SHRI CHANDRA POOJARI , AM & GEORGE GEORGE K., JM I .T . A. NO S . 409/COCH /2014 AND 85 & 86/COCH / 2016 ASSESSMENT YEAR S : 2009 - 10, 2010 - 11 & 2011 - 12 M/S. LIBERTY MARKETERS, 44/356,LIBERTY TOWERS, MANAPATTI PARAMBU ROAD, KALOOR, ERNAKULAM, KOCHI-682 017. [PAN:AABFL 6579Q] VS. THE ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-2(2), KOCHI. (ASSESSEE - APPELLANT) (REVENUE - RESPONDENT) ASSESSEE BY SHRI ANIL D. NAIR, ADV. REVENUE BY SHRI A. DHANARAJ, SR. DR D ATE OF HEARING 02 / 0 4 /2018 DATE OF PRONOUNCEMENT 03 / 0 4 /2018 O R D E R PER BENCH: THESE APPEALS FILED BY THE ASSESSEE ARE DIRECTED AGAINST DIFFERENT ORDERS OF THE CIT(A)-II, KOCHI AND PERTAIN TO ASSESSMENT YEARS 20 09-10, 2010-11 AND 2011-12. I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 2 2. SINCE THE ISSUE INVOLVED IN THESE APPEALS IS CO MMON, HENCE THEY WERE HEARD TOGETHER AND ARE BEING DISPOSED OF BY THIS CONSOLID ATED ORDER FOR THE SAKE OF CONVENIENCE. 3. THE ONLY ISSUE IN THESE APPEALS IS WITH REGAR D TO DISALLOWANCE OF PORTION OF THE INTEREST PAID ON SECURED LOANS FROM BANKS AS PR OPORTIONATE INTEREST PERTAINING TO PERSONAL DRAWINGS MADE BY THE PARTNER S. 4. SINCE THE FACTS ARE COMMON IN ALL THESE APPEAL S, WE CONSIDER THE FACTS AS EMANATING FROM THE APPEAL FOR THE ASSESSMENT YEAR 2 009-10. THE ASSESSING OFFICER WHILE MAKING THE ASSESSMENT HAD GONE INTO T HE DETAILS OF DRAWINGS MADE BY VARIOUS PARTNERS FROM THE FIRM AND THE SECURED L OAN TAKEN BY THE ASSESSEE BY BRINGING OUT THE WORKING OF INTEREST ON DEBIT BALAN CE AND DRAWINGS IN RESPECT OF THREE PARTNERS. INTEREST CHARGEABLE ON THEIR WITHDR AWALS WAS WORKED OUT BY THE ASSESSING OFFICER AS:- I) SHRI FISEL : RS. 4,08,649/- II) SHRI SIYAJ : RS. 3,96,558/- III) SHRI ZULFIKAR : RS.18,24,738/- TOTAL AMOUNT OF INTEREST CHARGEABLE : RS.26,29,945/- 4.1 THIS TOTAL INTEREST OF RS.26,29,945/- WAS DI SALLOWED U/S. 36(1)(III) BY THE ASSESSING OFFICER RELYING ON THE DECISION OF MADRAS HIGH COURT IN THE CASE OF MILAPCHAND R. SHAH VS. CIT (58 ITR 525) AND ROOPCHA ND CHANBILDASS & SONS VS. I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 3 CIT (63 ITR 166) AND THAT OF ALLAHABAD HIGH COURT I N THE CASE OF MAROLIA & SONS VS. CIT (129 ITR 475). SIMILAR DISALLOWANCE WAS MA DE FOR THE ASSESSMENT YEAR 2010-11 AT RS.24,37.980/- AND FOR 2011-12 AT RS.27, 93,606/-. 5. ACCORDING TO THE CIT(A), IF ANY AMOUNTS ARE USED FOR NON BUS INESS PURPOSES BY THE ASSESSEE, THE SAME ARE TO BE DISALLOWED U/S 36(1)(III). SINCE IN THIS CASE THE THREE PARTNERS HAVE MADE THESE DRAWINGS FROM TH E PARTNERSHIP FIRM AND THESE DRAWINGS HAVE NOT BEEN USED FOR ANY BUSINESS PURPOSES, THEREFORE ACCORDING TO THE CIT(A), THE PROVISIONS OF SECTION 36(1)(III) ARE SQUARELY APPLICABLE. THE CIT(A) OBSERVED THAT THE ASSESSEE T RIED TO CONTEND THAT WHILE MAKING THESE ADVANCES TO THE PARTNERS THE ASSESSEE HAD ENOUGH CREDIT IN ITS BOOKS SO AS TO ALLOW INTEREST FREE CREDIT TO ITS PA RTNERS BUT SINCE IT WAS NOTICED FROM THE DETAILED WORKING MADE OUT BY THE ASSESSING OFFICER ABOUT THE DEBIT BALANCE AND DRAWINGS IN RESPECT OF THREE PARTNERS T HAT VARIOUS AMOUNTS AS BROUGHT OUT IN THE TABLES IN THE ASSESSMENT ORDER H AVE BEEN GIVEN TO THE PARTNERS, THE ASSESSEE WAS ASKED TO SHOW THAT SUCH PAYMENTS WERE MADE FROM THE SURPLUS FUNDS AVAILABLE WITH THE ASSESSEE AS CO NTENDED IN THE SUBMISSIONS MADE. 5.1 IN THIS CONNECTION, THE CIT(A) OBSERVED THAT THE ASSESSEE FURNISHED A COPY OF ITS BANK STATEMENT TO SHOW THAT THE VARIOUS PAYM ENTS WERE MADE FROM THE CREDIT BALANCE RECEIVED FROM SALES ETC., WHICH WERE RECEIVED JUST BEFORE MAKING THESE ADVANCES TO THE PARTNERS. HOWEVER, THE CIT(A) DID NOT JUSTIFY THE I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 4 EXPLANATION OF THE ASSESSEE AS IT WAS SEEN THAT THE BANK STATEMENT OF ASSESSEE IS A CONTINUOUS OVER DRAFT FACILITY WHERE BALANCE O N ANY PARTICULAR DAY IN THE WHOLE YEAR IN THE BANK STATEMENT WAS MORE THAN A 2 CRORES DEBIT FIGURE. TH US ACCORDING TO THE CIT(A), EVEN IF A PAYMENT IS RECEIVED FROM THE BUSINESS TRANSACTIONS/SALES, THE SAME GOES INTO THE BANK ACC OUNT AND IT ONLY HAS THE EFFECT OF REDUCING THE OVER DRAFT BALANCE IN THE BA NK. THUS THE CIT(A) OBSERVED THAT IT WAS CLEAR THAT IF THE BANK BALANCE OF THE ASSESSEE WAS A CONT INUOUS DEBIT BALANCE THEN THE ASSESSEE WAS MAKING REGULAR PAYMENT OF INTEREST ON SUCH DEBIT BALANCE TO THE BANK AND HENCE ANY PAYMENTS MADE OUT OF THIS BANK STATEMENT HAS THE CHARACTER OF INTEREST BEING FUNDS WHICH WAS DIVERTED TO THE PARTNERS OF THE ASSESSEE FOR NON BUSINESS PURPOSES. ACCORDING T O THE CIT(A), A LL THE PAYMENTS THAT WAS MADE TO THE PARTNERS WERE SEEN AN D THEY HAD GONE FROM THIS BANK ACCOUNT SHOWING CONTINUOUS DEBIT BALANCE. FOR THE SAKE OF RECORD AND CLARITY, THE CIT(A) OBSERVED THAT FOR ONE ENTRY MAD E ON 1.11.2008 TO SHRI FISEL OF RS.7,00,000/-, VARIOUS ENTRIES IN THE BANK ON THAT DAY ARE AS FOLLOWS: DATE REFERENCE CHEQUE NO. DEBIT CREDIT BALANCE 1 NOV2008 OUTWARD CLG 23943865 - 1,46,713.00 -2,66,55,446.20 1 NOV2008 OUTWARD CLG 23943890 - 64,454.00 -2,65,90,992.20 1 NOV 2008 OUTWARD CLG 23943920 - 20,668.00 -2,65,70,324.20 1 NOV 2008 OUTWARD CLG 23943958 - 10,00,000.00 -2,55,70,324.20 1 NOV 2008 OUTWARD CLG 23946744 - 15,000.00 -2,55,55,324.20 1 NOV 2008 OUTWARD CLG 23944301 - 19,386.00 -2,55,35,938.20 1 NOV 2008 FISEL 1303 7,00,000.00 -2,62,35,938.20 I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 5 5.2 THE CIT(A) OBSERVED THAT ALTHOUGH ASSESSEE TR IED TO EXPLAIN THAT PAYMENT OF RS. 7,00,000/- WAS MADE FROM RS. 10,00,000/- CRE DIT COMING ON THE SAME DAY, BUT THE FACT REMAINS THAT THE CREDIT OF RS. 10 ,00,000/- ONLY HAD THE EFFECT OF REDUCING OVERDRAFT FACILITY OF MORE THAN 2 CRORES, AND HENCE FOR THE PAYMENT OF RS.7,00,000/- TO SHRI FISEL, INTEREST BEARING FUNDS WAS UTILIZED. THE CIT(A) FOUND THAT IT WAS EXACTLY THE SAME PATTERN THAT WAS REP EATED FOR ALL THE PAYMENTS TO THESE PARTNERS. THUS ACCORDING TO THE CIT(A) IT WAS ESTABLISHED THAT THE PAYMENTS TO THE PARTNERS HAVE BEEN MADE FOR NON-BUS INESS PURPOSES FROM INTEREST BEARING FUNDS. HENCE, ACCORDING TO THE CIT(A), T HE ASSESSING OFFICER WAS RIGHT IN WORKING OUT THE INTEREST ON DEBIT BAL ANCES AND TOTAL DRAWINGS IN RESPECT OF THESE PARTNERS AND MAKING THE DISALLOWAN CE U/S. (1)(III) OF THE IT ACT AND CONFIRMED THE SAME. 5.3 FURTHER, THE CIT(A) NOTICED THAT IN THE ADDI TIONAL GROUND OF APPEAL, THE ASSESSEE CONTENDED THAT EVEN IF ANY DISALLOWANCE U/ S 36(1)(III) WAS MADE, THIS COULD ONLY BE MADE FOR THE INCREASE IN ADVANCES DUR ING THE YEAR AND NOT ON THE DEBIT BALANCE, IN THIS REGARD, THE ASSESSEE RELIED ON THE CASE LAW OF CIT VS SRIDEV ENTERPRISIES, 192 ITR L15(KAR). HOWEVER, ACCORDING T O THE CIT(A), IT WAS SEEN THAT IN THAT CASE SUCH OBSERVATION THAT DISALLOWANC E COULD NOT BE MADE FOR INTEREST ON DEBIT BALANCE WAS MADE IN THE LIGHT OF THE FACT THAT THERE WAS NO NEXUS THAT WAS SHOWN THAT SUCH PAYMENTS WERE MADE F ROM INTEREST BEARING FUNDS IN THE EARLIER YEARS. IN THE PRESENT CASE, TH E CIT(A) NOTICED THAT SINCE THE I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 6 PAYMENTS TO THE PARTNERS WERE MADE FROM INTEREST BE ARING FUNDS, AND SUCH NEXUS WAS ALSO EVIDENT FROM THE BANK STATEMENT FILE D, THEREFORE THE CIT(A) DISMISSED ALL THE GROUNDS OF APPEAL FILED BY THE AS SESSEE. 6. AGAINST THIS THE ASSESSEE IS IN APPEAL BEFORE U S. THE LD. AR PLEADED THAT THE RATIO OF THE JUDGMENTS RELIED ON BY THE ASSESSING O FFICER WOULD NOT APPLY IN THE FACTS OF THE CASE AS IN THOSE MATTERS THERE WERE MA XIMUM FUNDS BOTH INTEREST AND NON INTEREST BEARINGS. THE LD. AR OBJECTED TO THE FINDING OF THE ASSESSING OFFICER THAT AS PER THE BALANCE SHEET, THE ASSESSEE HAD SUBSTANTIAL INTEREST FREE FUNDS BEING CREDIT BALANCE IN RESPECT OF TWO PARTNE RS, SUPPLY CREDIT OF RS.6,46,40,000/- IN THE SUNDRY CREDITORS ACCOUNTS A ND THE PROFITABILITY OF THE CURRENT YEAR. IT WAS SUBMITTED THAT THE STATEMENT THAT INTEREST FREE FUNDS EXCEEDED INTEREST BEARING FUNDS IN THE RELEVANT YEA R WAS NOT CONTROVERTED BY THE AUTHORITIES BELOW. 6.1 THE LD. AR RELIED ON THE JUDGMENTS OF THE SU PREME COURT TO CONTRAVENE THE DISALLOWANCE: 1) S.A. BUILDERS VS. CIT (288 ITR 1) (SC) 2) CIT VS. HOTEL SAVERA (239 ITR 795) (MAD.) 3) CHANCHAL KATYAL VS. CIT (298 ITR 182) (ALL) 4) CIT VS. PREM HEAVY ENGINEERING WORKS (P) LTD. (285 ITR 554) (ALL) 5) ONGC VS. DCIT (262 ITR 648) (UTTARANCHAL) 6) CIT VS. RAGHUVIR SYTHETICS LTD. (36 TAXMAN.COM 275) (GUJ) 7) CIT VS. RELIANCE UTILITIES & POWER LTD. (178 TAX MAN 135) (BOM) I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 7 THEREFORE, BY APPLYING THE RATIOS OF THE ABOVE MENT IONED JUDGMENTS, IT WAS SUBMITTED THAT SINCE THE ASSESSEE HAD COMMON FUNDS BOTH INTEREST BEARING AND NON INTEREST BEARING AND THE SAME WAS FOUND IN ONE ACCOUNT, THE WITHDRAWALS MADE FOR NON BUSINESS PURPOSE WERE OUT OF NON INTER EST BEARING OWN FUNDS. 6.2 FURTHER THE LD. AR BY WAY OF ADDITIONAL GROU NDS SUBMITTED THAT ON SIMILAR FACTS, NO DISALLOWANCE WAS MADE IN RESPECT OF THIS ISSUE IN EARLIER ASSESSMENT YEARS UPTO 2008-09. THE LD. AR SUBMITTED THAT SINC E NO DISALLOWANCE WAS MADE IN RESPECT OF THE DEBIT BALANCES OF THE PARTNERS IN THE EARLIER ASSESSMENT YEARS AS IT WAS UTILIZING THE BORROWED MONEY, OTHERWISE THAN FOR BUSINESS PURPOSE, THE OPENING DEBIT BALANCE OF THE PARTNERS COULD NOT BE CONSIDERED DURING THE CURRENT YEAR AND DISALLOWANCE WAS TO BE LIMITED TO THE INCR EASE IN THE PARTNERS DEBIT BALANCE OF THE CURRENT YEAR ONLY. THE LD. AR PLACE D RELIANCE ON THE JUDGMENT OF THE KARNATAKA HIGH COURT IN THE CASE OF CIT VS. SR IDEV ENTERPRISES (192 ITR 165). 7. ON THE OTHER HAND, THE LD. DR SUBMITTED THAT THE ASSESSEE DIVERTED INTEREST BEARING FUNDS FOR NON-BUSINESS PURPOSE BY WAY OF AL LOWING WITHDRAWALS BY THE PARTNERS OF THE ASSESSEE-FIRM. HENCE, INTEREST EXP ENDITURE IS NOT WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF BUSINESS. ACCORDINGLY, HE SUPPORTED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER U/S. 36( 1)(III) OF THE ACT AND CONFIRMATION OF THE SAME BY THE CIT(A). HE RELIED O N THE FOLLOWING JUDGMENTS: I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 8 I) MADHAV PRASAD JATIA VS. CIT (118 ITR 200 (SC) II) CIT VS. V.I. BABY (254 ITR 248 (KER.) III) SOMASUNDARAM & BROTHERS VS. CIT (239 ITR 795 ) (MDS.) 7.1 THE LD. DR DISTINGUISHED THE JUDGMENTS RELIE D UPON BY THE ASSESSEE. THE LD. DR SUBMITTED THAT THE FACTS IN THE CASE OF CIT VS. HOTEL SAVERA (SUPRA) ARE THAT THE ADVANCE WAS MADE WITH ASSESSEE-FIRMS OWN FUNDS AND INTEREST PAID ON BORROWED CAPITAL WAS DEDUCTIBLE. SIMILARLY, ACCORD ING TO THE LD. DR, THE FACTS IN THE CASE OF CHANCHAL KATYAL VS. CIT (SUPRA) IS DIFF ERENT SINCE THE ASSESSEE IN THAT CASE HAD SUFFICIENT FUNDS OTHER THAN BORROWED MONEY . THE FACTS IN THE CASE OF CIT VS. PREM HEAVY ENGINEERING WORKS (P) LTD. (SUPR A), ACCORDING TO THE LD. DR ARE DIFFERENT AS IN THAT CASE, THE ASSESSEE HAD SUF FICIENT INTEREST FREE FUNDS. SIMILARLY, IT WAS SUBMITTED THAT THE FACTS IN THE C ASE OF ONGC VS. CIT ARE DIFFERENT SINCE THE ISSUE IN THAT CASE WAS REOPENIN G OF THE ASSESSMENT U/S. 147 OF THE ACT. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIAL ON RECORD. IN THIS CASE, THE PARTNERS OF THE ASSESSEE-FIRM HAD WI THDRAWN AMOUNT FROM THE ASSESSEE-FIRM ONLY FOR PERSONAL PURPOSE. THE ASSES SEE HAS BEEN PAYING INTEREST ON BORROWED FUNDS. THE WITHDRAWALS MADE BY THE PART NERS WAS NOT UTILIZED FOR THE PURPOSE OF BUSINESS AND THE ASSESSEE-FIRM HAS N OT DERIVED ANY BUSINESS ADVANTAGE FROM SUCH WITHDRAWALS BY THE PARTNERS. T HE ASSESSEE-FIRM HAS NOT CHARGED ANY INTEREST ON THE WITHDRAWALS MADE BY THE PARTNERS BY WAY OF PAYING I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 9 INTEREST ON ITS BORROWINGS. HOWEVER, AT THE SAME T IME, THE ASSESSEE HAS INCURRED INTEREST EXPENDITURE ON THE BORROWALS MADE BY THE PARTNERS OF THE ASSESSEE-FIRM. 8.1 THE MAIN CONTENTION OF THE LD. AR IS THAT T HE ASSESSEE IS HAVING SUFFICIENT CASH BALANCE TO MEET THE WITHDRAWALS MADE BY THE PA RTNERS. IN OUR OPINION, IF THE CASH BALANCE IS AVAILABLE, IT SHOULD BE MEANT F OR THE BUSINESS PURPOSE OF THE ASSESSEE-FIRM AND NOT FOR THE PERSONAL PURPOSE OF T HE PARTNERS OF THE ASSESSEE- FIRM. THE ASSESSEE WITH LIQUIDITY CANNOT CLAIM THAT IT COULD GIVE SUCH CASH BALANCE FOR THE BENEFIT OF THE PARTNERS OF THE ASSE SSEE-FIRM. SUCH ADVANCE MADE BY THE PARTNERS HAS NOT BEEN USED FOR THE BUSINESS PURPOSE BUT FOR THE PERSONAL BENEFIT OF THE RESPECTIVE PARTNERS. HAD THE ASSESS EE-FIRM USED SUCH CASH BALANCE FOR THE BUSINESS PURPOSE OR FOR PAYMENT OF BORROWALS MADE BY THE PARTNERS OF THE ASSESSEE-FIRM, IT COULD HAVE SAVED INTEREST EXPENDITURE. 8.2 FURTHER, THE LD. AR M A DE AN ARGUMENT THAT ONLY THE WITHDRAWALS OF THE PRESENT ASSESSMENT YEARS IS TO BE CONSIDERED FOR CO MPUTATION OF INTEREST EXPENDITURE AND THE EARLIER OLD BALANCE OF ADVANCE IN THE NAME OF THE PARTNERS WHICH WAS CARRIED FORWARD FROM THE EARLIER YEARS CA NNOT BE CONSIDERED. IN OUR OPINION, THIS ARGUMENT OF THE ASSESSEES COUNSEL HA S NO MERIT AS THE ASSESSEE IS PAYING INTEREST ON SUCH CARRIED FORWARD OPENING BAL ANCE AND INCURRED INTEREST EXPENDITURE ON IT. THEREFORE, THE TOTAL ADVANCE OU TSTANDING IN THE NAME OF THE I.T.A. NOS. 409/C/2014 & 85&86/COCH/2016 10 PARTNERS IS TO BE CONSIDERED FOR COMPUTATION OF INT EREST DISALLOWANCE IN THE CASE OF THE ASSESSEE-FIRM. ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDERS OF THE LOWER AUTHORITIES. THIS COMMON GROUND FOR ALL THE ASSESSMENT YEARS IS DISMISSED. 9. IN THE RESULT, THE APPEALS OF THE ASSESSEE ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THI S 03, APRIL, 2018. SD/- SD/- ( GEORGE GEORGE K.) (CHAN DRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER PLACE: DATED: 03 APRIL, 2018 GJ COPY TO: 1. M/S. LIBERTY MARKETERS, 44/356,LIBERTY TOWERS, MANAPATTI PARAMBU ROAD, KALOOR, ERNAKULAM, KOCHI-682 017. 2. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE -2(2), KOCHI. 3. THE COMMISSIONER OF INCOME-TAX(APPEALS)-II, KOCH I 4. THE PR. COMMISSIONER OF INCOME-TAX, KOCHI 5. D.R., I.T.A.T., COCHIN BENCH, COCHIN. 6. GUARD FILE. BY ORDER (ASSISTANT REGISTRA R) I.T.A.T. , COCHIN