Prem Raja Yarns, Karur V. ITO, Karur

ITA 858/CHNY/2015

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 7452 (ITAT-CHENNAI)
• Duration Of Justice: 1 year(s) 11 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 04-01-2017
• Assessment Year: 2001-2002
• Appeal Filed On: 17-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B SAHADEVAN
• Assessee Lawyers: N QUADIR HOSEYN
• Section: 11

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, CHENNAI . . . , !.. # $%, ' () BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D.S. SUNDER SINGH, ACCOUNTANT MEMBER ./ ITA NOS.858, 859 & 860/MDS/2015 + ,+ / ASSESSMENT YEARS : 2001-02, 2002-03 & 2003-04 M/S PREM RAJA YARNS, NO.11, MAIN ROAD, RAMAKRISHNAPURAM, KARUR. PAN : AAAFP 6640 F V. THE INCOME TAX OFFICER, WARD 1(2), KARUR. (.// APPELLANT) (01.// RESPONDENT) ./ 2 3 / APPELLANT BY : SHRI N. QUADIR HOSEYN, ADVOCATE 01./ 2 3 / RESPONDENT BY : SHRI B. SAHADEVAN, JCIT # 2 4' / DATE OF HEARING : 04.01.2017 56, 2 4' / DATE OF PRONOUNCEMENT : 23.03.2017 / O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: ALL THE THREE APPEALS OF THE ASSESSEE ARE DIRECT ED AGAINST THE RESPECTIVE ORDERS OF THE COMMISSIONER OF INCOME TAX (APPEALS), TIRUCHIRAPALLI AND PERTAIN TO ASSESSMENT YEARS 2001-02, 2002-03 AND 2003-04. SINCE COMMON ISSUE ARISES FOR 2 I.T.A. NOS.858 TO 860/MDS/15 CONSIDERATION IN ALL THESE APPEALS, WE HEARD THESE APPEALS TOGETHER AND DISPOSING OF THE SAME BY THIS COMMON ORDER. 2. SHRI N. QUADIR HOSEYN, THE LD.COUNSEL FOR THE AS SESSEE, SUBMITTED THAT FOR THE ASSESSMENT YEAR 2002-03, THE ASSESSING OFFICER MADE AN ADDITION OF ` 9,12,351/- IN THE ORIGINAL ASSESSMENT. THE ASSESSEE FILED APPEAL BEFORE THE CIT(APPEALS). WHILE CONSIDERING THE APPEAL OF THE ASSESSEE, THE CIT(APP EALS) CONFIRMED THE ADDITION OF ` 1,45,000/- BEING THE INTEREST RECEIVABLE ON THE DEPOSIT OF ` 8,10,000/-. THE CIT(APPEALS) HAS ALSO CONFIRMED TH E DISALLOWANCE OF ` 4,60,296/- BEING THE INTEREST PAID TO SHRI P. KANDASAMY, THE PARTNER OF THE ASSESSEE-FIRM. 3. REFERRING TO THE DISALLOWANCE OF ` 1,45,000/-, THE LD.COUNSEL FOR THE SUBMITTED THAT THE ASSESSEE-PARTNERSHIP FIR M IS ENGAGED IN THE BUSINESS OF YARN. IN THE COURSE OF ITS BUSINES S, THE ASSESSEE ENTERED INTO AN AGREEMENT IN THE YEAR 1994 WITH M/S ASSCARD SPINNERS. IN FACT, M/S ASSCARD SPINNERS APPOINTED ASSESSEE- PARTNERSHIP FIRM AS DEALER AND ALSO DEPOT MANAGER. TO ACT AS DEPOT MANAGER, THE ASSESSEE DEPOSITED A SUM OF ` 8,10,000/-. M/S ASSCARD SPINNERS HAS ALSO PAID INTEREST ON THE DEPO SIT MADE BY THE ASSESSEE. ACCORDING TO THE LD. COUNSEL, IN THE ASS ESSMENT YEAR 3 I.T.A. NOS.858 TO 860/MDS/15 1995-96, IN FACT, THE ASSESSEE RECEIVED INTEREST OF ` 1,10,445/-, IN THE ASSESSMENT YEAR 1996-97, THE ASSESSEE RECEIVED ` 1,48,230/-. AS ON 31,03.1999, THE DEPOT DEPOSIT OF ` 8,10,000/- AND ALSO THE TRADE OUTSTANDING OF ` 9,13,649.98 WERE DUE TO THE ASSESSEE FROM M/S ASSCARD SPINNERS. FOR THE ASSESSMENT YEAR 2002 -03, ACCORDING TO THE LD. COUNSEL, THE ASSESSING OFFICER MADE ADDITION TOWARDS INTEREST ON ACCRUED BASIS ON THE DEPOSIT MA DE BY THE ASSESSEE AND ALSO TRADE OUTSTANDING. EVEN THOUGH T HE ASSESSEE RECOGNIZED INTEREST AS INCOME, ACCORDING TO THE LD. COUNSEL, DURING THE ASSESSMENT YEARS UNDER CONSIDERATION, NO INCOME WAS ACCRUED TO THE ASSESSEE. 4. REFERRING TO THE PAPER-BOOK, MORE PARTICULARLY, THE ORDER OF THE CIT(APPEALS) DATED 24.03.2006, COPY OF WHICH IS AVAILABLE AT PAGE 9 OF THE PAPER-BOOK, THE LD.COUNSEL FOR THE AS SESSEE SUBMITTED THAT M/S ASSCARD SPINNERS, AN ASSOCIATED COMPANY OF THE ASSESSEE, SUFFERED HEAVY FINANCIAL LOSS AND AN APPL ICATION WAS ALSO FILED BY ONE OF THE CREDITORS FOR LIQUIDATION BEFOR E THE HIGH COURT. INITIALLY, THE LIQUIDATION PETITION FILED BY THE CR EDITOR WAS ALLOWED BY THE HIGH COURT. SUBSEQUENTLY, THE ORDER WAS RECALL ED BY THE HIGH COURT AND THE SAME WAS DISMISSED. IN VIEW OF THE F INANCIAL 4 I.T.A. NOS.858 TO 860/MDS/15 CONSTRAINT FACED BY M/S ASSCARD SPINNERS, THE ASSES SEE MADE ARRANGEMENT FOR EXTENDING LOAN TO THE SAID COMPANY THROUGH OTHER FINANCIERS AND FINANCIAL INSTITUTIONS. IN FACT, SH RI P. KANDASAMY HAS ALSO ADVANCED FUNDS TO THE FIRM WHICH WAS CREDITED IN ITS CAPITAL ACCOUNT AND THE SAME WAS EXTENDED AS LOAN TO M/S AS SCARD SPINNERS. INITIALLY, M/S ASSCARD SPINNERS PAID INT EREST ON THE LOAN. SUBSEQUENTLY, THE SAID COMPANY COULD NOT PAY EVEN T HE INTEREST ON THE SAID BORROWED FUNDS. THEREFORE, ACCORDING TO T HE LD. COUNSEL, THE FINANCIERS AND FINANCIAL INSTITUTIONS, PRESSURI ZED THE ASSESSEE TO MAKE THE PAYMENT. IN FACT, THE ASSESSEE MADE PAYME NT ON BEHALF OF M/S ASSCARD SPINNERS. IN VIEW OF BUSINESS INTER EST THE ASSESSEE HAD WITH THE SAID COMPANY, ACCORDING TO THE LD. COU NSEL, FOR THE PURPOSE OF CONTINUOUS SUPPLY OF YARN, THE ASSESSEE- FIRM WAS FORCED TO REPAY THE MONEY TO FINANCIAL INSTITUTIONS AND OT HER FINANCIERS, WHO LENT MONEY TO M/S ASSCARD SPINNERS. THEREFORE, ACC ORDING TO THE LD. COUNSEL, THE ASSESSEE PAID INTEREST TO SHRI P. KANDASAMY, THE PARTNER OF THE ASSESSEE-COMPANY WHO CONTRIBUTED CAP ITAL WHICH WAS UTILISED FOR REPAYMENT OF THE LOAN. 5. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMITTE D THAT WHEN THE MATTER CAME BEFORE THIS TRIBUNAL IN THE FIRST R OUND OF LITIGATION IN 5 I.T.A. NOS.858 TO 860/MDS/15 I.T.A. NO.1272/MDS/2006, THIS TRIBUNAL BY AN ORDER DATED 7.11.2008, A COPY OF WHICH IS AVAILABLE AT PAGE 35 OF THE PAPER- BOOK, DIRECTED THE ASSESSING OFFICER TO RE-EXAMINE WHETHER THE FUNDS WERE ADVANCED FOR BUSINESS PURPOSE OR PERSONA L PURPOSE AND THEREAFTER DECIDE THE ISSUE, IN ACCORDANCE WITH LAW , IN THE LIGHT OF THE JUDGMENT OF APEX COURT IN S.A. BUILDERS LTD. V. CIT (2007) 288 ITR 1. THE ORDER OF THIS TRIBUNAL DATED 7.11.2008 BECAME FINAL, THEREFORE, ACCORDING TO THE LD. COUNSEL, THE ASSESS ING OFFICER IS BOUND TO EXAMINE THE PURPOSE FOR WHICH THE LOAN WAS ADVANCED AND INTEREST PAID TO THE PARTNER OF THE ASSESSEE-FI RM. 6. SHRI N. QUADIR HOSEYN, THE LD.COUNSEL FURTHER SU BMITTED THAT EVEN THOUGH THE ASSESSEE WAS FOLLOWING MERCANTILE S YSTEM OF ACCOUNTING, THE RECIPIENT COMPANY, NAMELY, M/S ASSC ARD SPINNERS COULD NOT REPAY THE DEPOSIT MADE BY THE ASSESSEE AN D ALSO THE LOAN BORROWED AT THE INSTANCE OF THE ASSESSEE-FIRM. THE REFORE, THERE WAS A DOUBT WHETHER THE ASSESSEE WOULD BE ABLE TO R ECOVER THE DEPOSIT AND TRADE OUTSTANDING. IN VIEW OF THE DOUB T EXISTED FOR RECOVER OF FUNDS, ACCORDING TO THE LD. COUNSEL, THE ASSESSEE HAS NOT RECOGNIZED THE INTEREST ON DEPOSIT AND ALSO TRA DE ADVANCE FROM THE SAID COMPANY, NAMELY, M/S ASSCARD SPINNERS, THE REFORE, 6 I.T.A. NOS.858 TO 860/MDS/15 INTEREST ON ` 8,10,000/- TO THE EXTENT OF ` 1,45,800/- WAS NOT TAKEN AS INCOME FOR ALL THE YEARS UNDER CONSIDERATION. 7. NOW COMING TO THE DISALLOWANCE OF INTEREST PAID TO PARTNER, NAMELY, SHRI P. KANDASAMY, THE LD.COUNSEL FOR THE A SSESSEE SUBMITTED THAT THE INTEREST WAS PAID ON THE CAPITAL CONTRIBUTION MADE BY SHRI P. KANDASAMY, WHICH WAS UTILISED FOR REPAYM ENT OF LOAN BORROWED BY M/S ASSCARD SPINNERS. IN VIEW OF ORDER OF THIS TRIBUNAL DATED 7.11.2008, IT IS OBLIGATORY ON THE PART OF TH E ASSESSING OFFICER TO EXAMINE WHETHER THE ADVANCEMENT OF LOAN AND REPA YMENT OF THE SAME WERE FOR COMMERCIAL PURPOSE. ACCORDING TO THE LD. COUNSEL, IT IS NOT IN DISPUTE THAT THE ASSESSEE IS A DEALER NOM INATED BY M/S ASSCARD SPINNERS FOR THE PURPOSE OF SALE OF YARN. BUT FOR THE SUPPLY MADE BY M/S ASSCARD SPINNERS, THE ASSESSEE WOULD NO T HAVE EARNED ANY INCOME AT ALL. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE PARTNERSHIP FIRM HAS ADVANCED FUNDS TO M/S ASSC ARD SPINNERS FOR THE PURPOSE OF ITS OWN BUSINESS. IN OTHER WORD S, SUCH ADVANCE WOULD ENSURE CONTINUOUS SUPPLY OF YARN TO THE ASSES SEE-FIRM. THEREFORE, ACCORDING TO THE LD. COUNSEL, THE ADVANC E WAS MADE FOR THE PURPOSE OF BUSINESS ONLY. SINCE THE PARTNER SH RI P. KANDASAMY CONTRIBUTED THE CAPITAL WHICH WAS, IN FACT, USED FO R REPAYMENT OF 7 I.T.A. NOS.858 TO 860/MDS/15 LOAN AVAILED BY M/S ASSCARD SPINNERS, ACCORDING TO THE LD. COUNSEL, THE ASSESSEE-FIRM HAS TO NECESSARILY PAY INTEREST T O SHRI P. KANDASAMY. IN FACT, THE INTEREST WAS PAID TO THE E XTENT OF ` 4,60,296/-. SINCE THE INTEREST PAYMENT MADE TO PAR TNER SHRI P. KANDASAMY WAS FOR THE PURPOSE OF BUSINESS, ACCORDIN G TO THE LD. COUNSEL, BOTH THE AUTHORITIES BELOW ARE NOT JUSTIFI ED IN DISALLOWING THE CLAIM OF THE ASSESSEE. THE LD.COUNSEL PLACED H IS RELIANCE ON THE JUDGMENT OF APEX COURT IN HERO CYCLES PVT. LTD. V. CIT (2015) 379 ITR 347. 8. ON THE CONTRARY, SHRI B. SAHADEVAN, THE LD. DEPA RTMENTAL REPRESENTATIVE SUBMITTED THAT THE ASSESSEE, IN FACT , RECOGNIZED INCOME ON THE DEPOSIT OF ` 8,10,000/- FOR ASSESSMENT YEAR 1996-97 AND 1997-98. THEREFORE, THERE IS NO JUSTIFICATION FOR NOT RECOGNIZING THE INTEREST INCOME FOR THE YEAR UNDER CONSIDERATIO N. MOREOVER, THE INTEREST PAID TO PARTNER MR. KANDASAMY IS NOT FOR B USINESS PURPOSE. 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS ON EITH ER SIDE AND PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. FOR ALL THE THREE YEARS, COMMON ISSUE ARISES FOR CONSIDERATION. THE FIRST ADDITION WAS ` 1,45,800/- TOWARDS INTEREST ON THE DEPOSIT OF ` 8,10,000/-. IT IS NOT IN DISPUTE THAT IN THE EARLIER YEARS, THE ASSES SEE RECOGNIZED FOR 8 I.T.A. NOS.858 TO 860/MDS/15 SUCH INTEREST. FOR THE YEARS UNDER CONSIDERATION, THE ASSESSEE HAS NOT RECOGNIZED ANY INTEREST. SINCE THE ASSESSEE WA S FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING, THE ASSESSING OFFI CER FOUND THAT THE INTEREST INCOME HAS TO BE INCLUDED IN THE TOTAL INCOME ON ACCRUAL BASIS. NO DOUBT, WHEN THE ASSESSEE WAS FOLLOWING M ERCANTILE SYSTEM OF ACCOUNTING, THE INTEREST INCOME HAS TO BE INCLUDED IN THE TOTAL INCOME ON ACCRUAL BASIS. IN THIS CASE, M/S A SSCARD SPINNERS FACED SEVERE FINANCIAL DIFFICULTY AND THE MATTER TR AVELLED EVEN TO THE HIGH COURT IN A LIQUIDATION PROCEEDING. EVEN THOUG H THE HIGH COURT INITIALLY ALLOWED THE LIQUIDATION PETITION, SUBSEQU ENTLY, THE ORDER WAS RECALLED. EVEN THE ASSESSEE MADE ARRANGEMENT FOR B ORROWING LOAN FOR THE COMPANY M/S ASSCARD SPINNERS. IN THOSE CIR CUMSTANCES, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE RE WAS A DOUBT WHETHER M/S ASSCARD SPINNERS WOULD PAY EVEN THE DEP OSIT OF ` 8,10,000/-. WHEN THERE WAS A DOUBT ABOUT THE RECOV ERY OF DEPOSIT OF ` 8,10,000/- ITSELF, THIS TRIBUNAL IS OF THE CONSIDER ED OPINION THAT EVEN ON ACCRUAL BASIS, THERE CANNOT BE ANY ADDITION TOWARDS INTEREST. 10. THE CONCEPT OF ACCRUAL BASIS OR THE MERCANTILE SYSTEM OF ACCOUNTING CANNOT OVERRIDE THE THEORY OF REAL INCOM E. THE INCOME- 9 I.T.A. NOS.858 TO 860/MDS/15 TAX ACT DOES NOT EXPECT TO OFFER THE INCOME WHICH C OULD NOT OTHERWISE BE EARNED BY THE ASSESSEE. THEREFORE, TH IS TRIBUNAL IS OF THE CONSIDERED OPINION THAT WHEN THE ASSESSEE COULD NOT RECOVER THE DEPOSIT OF ` 8,10,000/- OR THERE WAS A DOUBT WHETHER THE ASSESSEE WOULD BE ABLE TO RECOVER THE DEPOSIT OF ` 8,10,000/-, THE INTEREST ON SUCH DEPOSIT CANNOT BE TREATED AS INCOM E ON ACCRUED BASIS FOR ALL THE THREE YEARS UNDER CONSIDERATION. THEREFORE, WE ARE UNABLE TO UPHOLD THE ORDERS OF THE LOWER AUTHORITIE S. ACCORDINGLY, THE ORDERS OF BOTH THE AUTHORITIES BELOW, FOR ALL T HE THREE YEARS, ARE SET ASIDE AND THE ADDITION MADE BY THE ASSESSING OF FICER IS DELETED. 11. NOW COMING TO DISALLOWANCE OF ` 4,60,296/-, ADMITTEDLY THIS AMOUNT WAS PAID TO SHRI P. KANDASAMY, PARTNER OF TH E ASSESSEE- FIRM. WHEN THE MATTER TRAVELLED BEFORE THIS TRIBUN AL IN THE EARLIER OCCASION, FOR ASSESSMENT YEAR 2002-03, THIS TRIBUNA L FOUND THAT THE MATTER NEEDS TO BE EXAMINED AND PURPOSE FOR WHICH T HE FUNDS WERE GIVEN TO RELATED PARTY HAS TO BE ASCERTAINED. IN F ACT, THIS TRIBUNAL HELD AT PARA 5 OF ITS ORDER AS FOLLOWS:- WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFULLY. WE FIND THAT THE ASSESSING OFFICER HAS NOT GIVEN ANY FINDING WHETHER THE FUNDS WERE GIVEN FOR THE PURPOSE OF BUSINESS OR PERSONAL PURPOSE AND WHETHER THE PARTIES TO WHOM FUNDS WERE GIVEN RELATED TO THE ASSESSEE. THEREFORE, WE SET ASIDE THE ORDER OF THE 10 I.T.A. NOS.858 TO 860/MDS/15 CIT(APPEALS) AND REMIT THE MATTER BACK TO THE FILE OF THE ASSESSING OFFICER WITH A DIRECTION TO ASCERTAIN WHETHER THE FUNDS WERE GIVEN FOR BUSINESS PURPOSE O R NOT AND THEN DECIDE THE ISSUE IN ACCORDANCE WITH LAW PARTICULARLY IN THE LIGHT OF THE DECISION OF THE HO N'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. (SUP RA) 12. IT IS NOT IN DISPUTE THAT THE ORDER OF THIS TRI BUNAL ATTAINED FINALITY. THEREFORE, THE DIRECTION OF THIS TRIBUNA L CANNOT BE IGNORED BY BOTH THE AUTHORITIES BELOW. THE MATERIAL AVAILA BLE ON RECORD SUGGESTS THAT M/S ASSCARD SPINNERS WAS SUPPLYING YA RN TO THE ASSESSEE. IN FACT, THE ASSESSEE WAS NOMINATED AS D EALER AND DEPOT MANAGER. WHEN M/S ASSCARD SPINNERS FACED FIN ANCIAL DIFFICULTY, IN ORDER TO ENSURE BUSINESS OF THE ASSE SSEE AND CONTINUOUS SUPPLY OF YARN, THE ASSESSEE MADE ARRANG EMENT TO ADVANCE FUNDS TO M/S ASSCARD SPINNERS. THE SAID CO MPANY COULD NOT REPAY THE MONEY. THEREFORE, DUE TO PRESSURE FR OM THE FINANCIERS AND FINANCIAL INSTITUTIONS, THE ASSESSEE -FIRM WAS FORCED TO REPAY THE SAME. IT IS NOT IN DISPUTE THAT ADVANCE PAID BY SHRI P. KANDASAMY, ONE OF THE PARTNERS, WHICH WAS PART OF C APITAL ACCOUNT, WAS ALSO USED IN REPAYMENT OF SUCH LOAN. ALL THIS WAS DONE WITH AN INTENTION THAT M/S ASSCARD SPINNERS WOULD ENSURE CO NTINUOUS SUPPLY OF YARN TO THE ASSESSEE AND ASSESSEE COULD C ONTINUE ITS BUSINESS AS DEALER OF M/S ASSCARD SPINNERS. IN THO SE 11 I.T.A. NOS.858 TO 860/MDS/15 CIRCUMSTANCES, THIS TRIBUNAL IS OF THE CONSIDERED O PINION THAT THE LOAN WAS GIVEN FOR THE PURPOSE OF BUSINESS AND NOT FOR PERSONAL PURPOSE. AS OBSERVED BY THIS TRIBUNAL IN THE EARLI ER ROUND OF LITIGATION, WHEN THE ADVANCE WAS MADE FOR BUSINESS PURPOSE, THIS TRIBUNAL IS OF THE CONSIDERED OPINION THAT THERE CA NNOT BE ANY DISALLOWANCE OF INTEREST. ACCORDINGLY, THE ORDERS OF THE AUTHORITIES BELOW ARE SET ASIDE AND DISALLOWANCE MADE BY THE AS SESSING OFFICER FOR ALL THE THREE YEARS IS DELETED. 13. IN THE RESULT, THE APPEALS FILED BY THE ASSESSE E FOR ALL THE THREE YEARS STAND ALLOWED. ORDER PRONOUNCED ON 23 RD MARCH, 2017 AT CHENNAI. SD/- SD/- ( ! . . # $% ) ( . . . ) (D.S. SUNDER SINGH) (N.R.S. GANESAN) ' / ACCOUNTANT MEMBER /JUDICIAL MEMBER /CHENNAI, 8 /DATED, THE 23 RD MARCH, 2017. KRI. 2 04$9 :9,4 /COPY TO: 1. ./ /APPELLANT 2. 01./ /RESPONDENT 3. # ;4 () /CIT(A), TIRUCHIRAPPALLI-1 4. # ;4 /CIT-1, TRICHY 5. 9< 04 /DR 6. !+ = /GF.