PIONEER STEEL INDUSTRIES, MUMBAI V. ITO 18(3)(2), MUMBAI

ITA 862/MUM/2012

• Counselvise Citation: 86219914 RSA 2012
• Duration Of Justice: 1 year(s) 11 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-01-2014
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 19-08-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 09-02-2012
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL

Judgement Text

C IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, MUMBAI .. , ; BEFORE SHRI P.M. JAGTAP, AM AND SHRI VIVEK VARMA, J M ./ I.T.A. NO.862 /MUM/2012 ( / ASSESSMENT YEAR : 2008-2009 M/S PIONEER STEEL INDUSTRIES, 552, KRISHNA KUNJ, 4A/3B, IST FLOOR, 7 TH /8 TH KHAR PALI ROAD, KHAR (WEST), MUMBAI 400 052. / VS. I.T.O. - 18(3)(2), MUMBAI. . / PAN : AAEFP3511B ( # / APPELLANT ) .. ( $%# / RESPONDENT ) APPELLANT BY MS. MRUGAKSHI K. JOSHI RESPONDENT B Y : SHRI SANJEEV JAIN ) * / DATE OF HEARING : 28-11-2013 ) * / DATE OF PRONOUNCEMENT : 10-01-2014 [ / O R D E R PER P.M. JAGTAP, A.M . : .. , THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DTD. 28- 12-11PASSED BY THE LD. CIT(A) 29, MUMBAI AND THE SOLITARY ISSUE ARISING OUT OF THE SAME RELATES TO THE DISALLOWANCE OF RS. 25,2 4,646/- MADE BY THE A.O. AND CONFIRMED BY THE LD.CIT(A) ON ACCOUNT OF INTERE ST EXPENDITURE ON THE GROUND THAT THE SAME IS ATTRIBUTABLE TO THE LOANS U TILIZED BY THE ASSESEE FOR GIVING INTEREST FREE ADVANCES TO ITS SISTER CONCERN . 2. THE ASSESSEE IN THE PRESENT CASE IS A PARTNERSHI P FIRM WHICH IS ENGAGED IN THE BUSINESS OF TRADING IN IRON AND STEEL. THE R ETURN OF INCOME FOR THE YEAR ITA 862/M/12 2 UNDER CONSIDERATION WAS FILED BY IT ON 7-10-2008 DE CLARING TOTAL INCOME OF RS.5,99,247/-. DURING THE COURSE OF ASSESSMENT PROC EEDINGS, IT WAS NOTICED BY THE A.O. FROM THE BALANCE SHEET FILED BY THE ASS ESSEE ALONG WITH ITS RETURN OF INCOME THAT INTEREST OF RS. 25,24,646/- WAS PAID ON THE UNSECURED LOANS OF RS. 1.13 CRORES. HE ALSO NOTICED THAT LOANS AND ADV ANCES OF RS. 2.13 CRORES WERE GIVEN BY THE ASSESSEE TO ITS SISTER CONCERN FR EE OF INTEREST. SINCE THE ASSESSEE COULD NOT ESTABLISH ANY BUSINESS PURPOSE I N GIVING THESE LOANS AND ADVANCES TO ITS SISTER CONCERN, THE A.O. DISALLOWED THE INTEREST OF RS. 25,24,646/- CALCULATED @ 12% ON THE BORROWED FUNDS OF RS. 1.13 CRORES BEING ATTRIBUTABLE TO THE LOANS UTILIZED BY THE ASSESSEE FOR GIVING INTEREST FREE LOANS AND ADVANCES TO ITS SISTER CONCERN FOR OTHER THAN B USINESS PURPOSE. ON APPEAL, THE LD. CIT(A) CONFIRMED THE DISALLOWANCE M ADE BY THE A.O. ON ACCOUNT OF INTEREST EXPENDITURE FOR THE FOLLOWING R EASONS GIVEN IN HIS IMPUGNED ORDER:- (I) THERE IS AN UNAMBIGUOUS DIVERSION OF FUNDS TO SISTER CONCERN. APPELLANT HAS NOT PROVED ANY BUSINESS NECESSITY FOR SUCH A DIVERSION. (II) THE ARGUMENT OF THE APPELLANT THAT PARTNERS WO ULD HAVE DRAWN FROM THEIR CAPITAL ACCOUNT AND WOULD HAVE ADVANCED LOAN TO THE SISTER CONCERN IS ALSO NOT TENABLE. EVERY ENTITY IS A SEP ARATE ENTITY. TAX CANNOT BE LEVIED ON THE BASIS OF HYPOTHETICAL PRESU MPTIONS. (III) IT IS A FACT THAT IF THE LOANS TO THE TUNE OF RS. 2.1 CRORE WOULD NOT HAVE BEEN GIVEN, THEN THERE WAS NO NECESSITY TO PAY SUCH A HUGE INTEREST OF RS. 25,24,646/- ON UNSECURED LOANS. TH EREFORE INTEREST ON THESE LOANS ARE NOT OUT OF BUSINESS NECESSITY. IT IS ONLY TO ACCOMMODATE INTEREST-FREE LOANS GIVEN BY THE APPELL ANT TO SISTER CONCERNS. (IV) INTEREST PAID ON CAPITAL BORROWED FOR THE PURP OSES OF BUSINESS OR PROFESSION IS ALLOWABLE AS PER THE PROVISIONS OF SE CTION 36(1)(III). THE BORROWED FUNDS THEREFORE MUST BE USED FOR THE PURPO SES OF BUSINESS. WHEN BORROWED FUNDS ARE DIVERTED AS INTEREST FREE L OANS OR ADVANCES TO SISTER CONCERNS, PARTNERS OR RELATED CONCERNS THE C LAIM OF INTEREST ON THESE FINDS CAN BE DISALLOWED. ITA 862/M/12 3 AGGRIEVED BY THE ORDER OF THE LD. CIT(A), THE ASSES SEE HAS PREFERRED THIS APPEAL BEFORE THE TRIBUNAL. 3. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AN D ALSO PERUSED THE RELEVANT MATERIAL AVAILABLE ON RECORD. THE MAIN CON TENTION RAISED BY THE LD. COUNSEL FOR THE ASSESSEE IN SUPPORT OF ASSESSEES C ASE ON THE ISSUE UNDER CONSIDERATION IS THAT NO SUCH DISALLOWANCE ON ACCOU NT OF INTEREST EXPENDITURE WAS MADE IN THE ASSESSEES CASE IN THE EARLIER YEAR S. SHE HAS SUBMITTED THAT THE FINANCIAL POSITION OF THE ASSESSEE IN THE EARLI ER YEARS WAS SIMILAR INASMUCH AS THERE WERE LOANS AND ADVANCES GIVEN TO THE SISTER CONCERN ON THE ONE HAND AND FUNDS BORROWED ON INTEREST ON THE OTHE R HAND. SHE HAS CONTENDED THAT THE CIRCUMSTANCES INVOLVED IN THE YE AR UNDER CONSIDERATION BEING SIMILAR, THE DISALLOWANCE MADE BY THE A.O. AN D CONFIRMED BY THE LD. CIT(A) ON ACCOUNT OF INTEREST EXPENDITURE IS NOT SU STAINABLE. IN SUPPORT OF HER CONTENTION, SHE HAS RELIED ON THE DECISION OF THE C O-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF PRINCE MARKETING, MUMBAI VS . ASST. COMMISSIONER OF INCOME TAX RENDERED VIDE ITS ORDER DATED 8-11-2013 PASSED IN ITA NO. 7913/MUM/11. 4. THE LD. D.R., ON THE OTHER HAND, HAS STRONGLY RE LIED ON THE ORDERS OF THE AUTHORITIES BELOW IN SUPPORT OF THE REVENUES CASE ON THE ISSUE UNDER CONSIDERATION THAT THE INTEREST BEARING BORROWED FU NDS HAVING BEEN UTILIZED BY THE ASSESSEE TO GIVE THE INTEREST FREE ADVANCES TO ITS SISTER CONCERN FOR NON- BUSINESS PURPOSE, THE DISALLOWANCE OF INTEREST EXPE NDITURE IS LIABLE TO BE MADE BEING THE EXPENDITURE NOT WHOLLY AND EXCLUSIVE LY INCURRED FOR THE PURPOSE OF BUSINESS. 5. AFTER CONSIDERING THE RIVAL SUBMISSION AND PERUS ING THE RELEVANT MATERIAL AVAILABLE ON RECORD, WE ARE OF THE VIEW TH AT THE ISSUE RELATING TO THE DISALLOWANCE OF INTEREST IS A FACTUAL ONE WHICH IS REQUIRED TO BE DECIDED TAKING ITA 862/M/12 4 INTO CONSIDERATION ALL THE RELEVANT FACTS AS INVOLV ED IN THE CASE ON HAND DURING THE RELEVANT YEAR. IF IT IS FOUND ON APPREC IATION OF THE RELEVANT FACTS AND FIGURES THAT THE INTEREST BEARING BORROWED FUND S ARE UTILIZED FOR THE PURPOSE OF BUSINESS, THE INTEREST EXPENDITURE IS RE QUIRED TO BE ALLOWED U/S 36(1)(III) OF THE ACT WHEREAS IF IT IS FOUND THAT S UCH BORROWED FUNDS ARE UTILIZED FOR NON-BUSINESS PURPOSE, INTEREST TO THE EXTENT AT TRIBUTABLE TO THE BORROWED FUNDS UTILIZED FOR NON-BUSINESS PURPOSE IS LIABLE T O BE DISALLOWED. IN THIS REGARD, THE RELEVANT FIGURES AS APPEARING IN THE BA LANCE SHEET OF THE ASSESSEE AS ON 31-3-2008 PLACED AT PAGE 24 OF THE PAPE R BOOK ARE EXTRACTED BELOW BEING RELEVANT IN THE PRESENT CONTEXT:- BALANCE SHEET AS ON END OF 31-02-08 LIABILITIES CURRENT YR ASSETS CURRENT YR AMOUNT AMOUNT------------------- --------------------------------------------------- --------------------------------------------------- ----------------------------------------- SCHEDULE FOR LIABILITIES SCHEDULE FOR ASSETS UNSECURED LOANS 11381564.37 FIXED ASSETS 108436 9.63 SUNDARY CREDITORS FOR R.M. 20975331.51 SUNDRY D EBTORS 48623596.90 PARTNERS CAPITAL A/CS. 10363573.47 CASH ON HAND 361757.83 SCHEDULE FOR ASSETS LOANS/ADVANCES/DEPOSITS 187 35007.00 BALANCE AT BANK 26084262.01 GRAND TOTAL RS. 68804731.36 GRAND TOTAL RS. 6880 4731.36 CUS/TRIO/FA/BALANCE SHEET 6. A PERUSAL OF THE FUND FLOW POSITION OF THE ASSES SEE AT THE RELEVANT TIME AS REFLECTED IN ITS BALANCE SHEET SHOWS THAT THE AM OUNT OF SUNDRY CREDITORS WAS RS. 2.09 CRORES AND THE SAME REPRESENTING AN EL EMENT OF WORKING CAPITAL IS NOT RELEVANT IN THE PRESENT CONTEXT. THE AMOUNT OF PARTNERS CAPITAL WAS RS. 1.03 CRORES AND AS RIGHTLY CONTENDED BY THE LD. COU NSEL FOR THE ASSESSEE, THE SAME WAS AVAILABLE WITH THE ASSESSEE FIRM BEING ITS OWN FUNDS TO GIVE INTEREST FREE ADVANCES TO ITS SISTER CONCERN. THE AMOUNT OF NET LOANS/ADVANCES, HOWEVER, WAS RS. 1.87 CRORES AND SINCE THE SAME WAS MORE THAN ITS OWN FUNDS AVAILABLE WITH THE ASSESSEE IN THE FORM OF PA RTNERS CAPITAL ACCOUNT, IT IS CLEAR THAT THE EXCESS AMOUNT WAS GIVEN BY THE ASSES SEE OUT OF THE BORROWED FUNDS AND THE INTEREST EXPENDITURE ATTRIBUTABLE TO THE BORROWED FUNDS TO THE EXTENT UTILIZED FOR GIVING SUCH LOANS AND ADVANCES, IN OUR OPINION, IS LIABLE TO ITA 862/M/12 5 BE DISALLOWED BEING EXPENDITURE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ITS BUSINESS BY THE ASSESSEE. THE QUANTU M OF DISALLOWANCE TO BE MADE ON ACCOUNT OF INTEREST EXPENDITURE THUS IS LIA BLE TO BE RECOMPUTED ON THIS BASIS. ACCORDINGLY, WE MODIFY THE IMPUGNED ORD ER OF LD. CIT(A) AND RESTORE THIS ISSUE TO THE FILE OF THE A.O. FOR RECO MPUTING THE DISALLOWANCE TO BE MADE ON ACCOUNT OF INTEREST AFTER GIVING AN OPPORTU NITY OF BEING HEARD TO THE ASSESSEE. 7. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PAR TLY ALLOWED AS INDICATED ABOVE. ORDER PRONOUNCED IN THE OPEN COURT ON 10 TH JANUARY, 2014. . ) 0 1 10-01-2014 ) SD/- SD/- (VIVEK VARMA) (P.M. JAGTAP ) JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI ; 1 DATED 10-01-2014 [ .../ RK , SR. PS ' #%& '& / COPY OF THE ORDER FORWARDED TO : 1. # / THE APPELLANT 2. $%# / THE RESPONDENT. 3. 4 () / THE CIT(A)29, MUMBAI. 4. 4 / CIT 18, MUMBAI 5. $8 , * 8 , / DR, ITAT, MUMBAI C BENCH 6. / GUARD FILE. / BY ORDER, % $ //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI