ITO 24(3)(1), MUMBAI V. INDUSTRIAL ENGG. WORKS, MUMBAI

ITA 9048/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 8781 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 30 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-09-2012
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2007-2008
• Appeal Filed On: 27-12-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: BHARAT DALAL
• Assessee Lawyers: K G KUTTY
• Keywords: Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH I , MUMBAI BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO, JUDICIAL M EMBER ITA NO. 9048/MUM/2010 ASSESSMENT YEAR : 2007-08 INCOME TAX OFFICER WARD 23(3)(1) ROOM NO.703 C-11, 7 TH FLOOR, BKC , BANDRA(E) MUMBAI-400 051. VS. M/S. INDUSTRIAL ENGINEERING WORKS C-4, BLDG. NO.1, SMALL INDL. CO- OP. ESTATE LTD. I.B. PATEL ROAD GOREGAON (E) MUMBAI-63. PAN NO. AAAFI 0453 R (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.G. KUTTY DEPARTMENT BY : SHRI BHARAT DALAL DATE OF HEARING : 12.9.2012 DATE OF PRONOUNCEMENT : 26.9.2012 O R D E R PER RAJENDRA SINGH, AM: THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST THE ORDE R DATED 25.10.2010 OF CIT(A) FOR THE ASSESSMENT YEAR 2007-08. T HE ONLY DISPUTE RAISED IN THIS APPEAL IS REGARDING DISALLOWANCE O F INTEREST OF RS.7,52,571/- UNDER SECTION 36(1)(III) OF THE ACT. 2. FACTS IN BRIEF ARE THAT THE AO DURING ASSESSMENT PROCEE DINGS NOTED THAT THE ASSESSEE HAD CLAIMED DEDUCTION ON ACCOUNT OF INTEREST ITA NO.9048/M/10 A.Y. 07-08 2 PAID OF RS.15,88,259/- WHICH INCLUDED INTEREST OF RS.13 ,52,156/- TO BANK AND RS .2,36,103/- TO OTHERS. THE AO ALSO NOTED FROM THE BAL ANCE SHEET THAT THE ASSESSEE HAD TAKEN SECURED AND UNSECURED LO ANS OF RS.176.4 LACS AND THERE WAS DEBIT BALANCE IN, PARTNERS ACCO UNT OF RS.157.84 LACS. THE AO FURTHER NOTED THAT THE ASSESSEE WAS PAYING INTEREST @ 12% TO BANK AND OTHERS AND WHEREAS ASSESSEE WA S CHARGING INTEREST @ 5.5% FROM PARTNERS. THE AO THEREFO RE, ASKED THE ASSESSEE TO EXPLAIN AS TO WHY CLAIM OF INTEREST DEDUCTION S HOULD NOT BE DISALLOWED PROPORTIONATELY. THE ASSESSEE SUBMITTED THAT THE PARTNERS HAD MADE INVESTMENT IN SHARES OF BOLT MASTER INDIA P. LTD. OF RS.160.22 LACS AS ON 31.3.2007. THE SAID COMPANY MANUFACT URED THE SAME PRODUCT AS THE ASSESSEE AND THEREFORE, INVESTMENT WAS O N COMMERCIAL EXPEDIENCY FOR THE FIRM. IT WAS ALSO SUBMITTED THAT DURING THE YEAR THE PARTNERS DEBITS HAD INCREASED ONLY BY RS. 14.56 LACS ON ACCOUNT OF WITHDRAWALS AND BALANCE WAS BECAUSE OF DEBIT OF INTEREST. IT WAS ALSO SUBMITTED THAT INTEREST FREE LOANS DURING THE Y EARS HAD INCREASED BY RS.58.04 LACS AND INTEREST BEARING LOANS HAD INCREASED ONLY BY RS.9.50 LACS. IT WAS EXPLAINED THAT INTEREST FR EE LOANS RECEIVED DURING THE YEAR WERE MUCH HIGHER THAN WITHDRAWALS AND INTEREST BEARING LOANS DURING THE YEAR. IT WAS THEREFORE REQUE STED THAT NO DISALLOWANCE SHOULD BE MADE. THE AO HOWEVER, DID NOT A CCEPT THE EXPLANATION GIVEN. IT WAS NOTED BY HIM THAT FIXED A SSETS AND ITA NO.9048/M/10 A.Y. 07-08 3 INVESTMENTS INCLUDING CASH AND BANK BALANCE WERE TO THE TUNE OF RS. 131.10 LACS AND CURRENT LIABILITIES WERE RS.113.54 LACS. T HUS, FUNDS TO THE TUNE OF RS.17,55,797/- WERE UTILIZED OUT OF L OANS FOR THE PURPOSE OF FIXED ASSETS. THE INTEREST FREE FUNDS AS PER EXPLANATION OF THE ASSESSEE WAS RS.58.04 LACS. IT WAS THUS CLEAR THAT PARTNE RS HAD WITHDRAWN AND UTILIZED FUNDS TO THE TUNE OF RS.157.8 4 LACS OUT OF LOANS TAKEN. THEREFORE, INTEREST DEBITED TO THE PARTNERS ACCOUNT AT LOWER RATE WAS NOT JUSTIFIED AS ASSESSEE HAD TAKEN INTEREST AT H IGHER RATE. THE AO THEREFORE DISALLOWED THE DIFFERENTIAL INTEREST OF RS.7,52,571 ( 15,88,259 8,35,688). 2.1 THE ASSESSEE DISPUTED THE DECISION OF AO AND SUBMITTED BEFORE CIT(A) THAT AT THE END OF THE YEAR, DEBIT BALANCE IN PARTNERS ACCOUNT WAS RS. 157.84 LACS WHICH INCLUDED INTEREST DEBIT OF RS.68.35 L ACS. THE ASSESSEE HAD ALSO PAID A SUM OF RS.12.87 LACS DURING FINANCIA L YEAR 2000-01 TOWARDS GRATUITY AND RETRENCHMENT COMPENSATION WHICH WAS FOR THE PURPOSE OF BUSINESS. THE NET DEBIT WHICH WAS ON ACCOUNT OF WITHDRAWALS WAS RS.76.60 LACS (157.84-12.87-68.35). I T WAS POINTED OUT THAT ASSESSEE WAS HAVING INTEREST FREE LOANS OF RS.76.2 4 LACS AND NOT RS.58.04 LACS AS MENTIONED BY THE AO. THE SUM OF RS.5 8.04 LACS WAS INCREASE IN INTEREST FREE LOANS DURING THE YEAR. IT WAS ALSO POINTED OUT THAT THE AO HAD NOT TAKEN INTO ACCOUNT THE FACT TH AT RS.10.57 LACS HAD BEEN PAID TO RETIRING PARTNERS DURING THE YEAR W HICH WAS FOR ITA NO.9048/M/10 A.Y. 07-08 4 BUSINESS EXPEDIENCY. IT WAS FURTHER POINTED OUT THAT B ANK OVERDRAFT FROM SYNDICATE BANK WAS MORE THAN 15 YEARS OLD AND BA LANCE AS ON 31.3.2002 WAS RS.145.36 LACS WHICH HAD BEEN REDUCED TO RS. 89.16 LACS ON 31.3.2007. THERE WERE NO FRESH OR ADDITIONAL LOANS FROM THE BANK AND, THEREFORE, DISALLOWANCE OF WHOLE INTEREST WA S NOT JUSTIFIED. CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSESSEE OBSER VED THAT INTEREST ON DEBIT BALANCE OF PARTNERS HAD BEEN CHARGED AS PER PARTNERSHIP DEED @ 6% PER ANNUM. THE ASSESSEE HAD ALSO FA IR AMOUNT OF INTEREST FREE LOANS. CIT(A), THEREFORE DID NOT FIN D ANY JUSTIFICATION IN MAKING ADDITION OF RS.7,52,571/- AND ACCORDINGLY DELET ED THE SAME AGGRIEVED BY WHICH REVENUE IS IN APPEAL BEFORE THE TR IBUNAL. 3. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE AP PEARING FOR THE REVENUE ASSAILED THE ORDER OF CIT(A). IT WAS ARGUED TH AT THE ASSESSEE HAD BEEN BORROWING FUNDS @ 12% BUT THE SAME HAD BEEN ADVANCED TO THE PARTNERS AT CONCESSIONAL RATE OF 6% AND, THEREFORE, THE INTEREST PAID AT THE HIGHER RATE COULD NOT BE SAID TO BE FOR T HE PURPOSE OF BUSINESS. IT WAS ACCORDINGLY URGED THAT THE ORDER OF CI T(A) SHOULD BE SET ASIDE AND ADDITION MADE BY AO SHOULD BE CONFIRMED. 3.1 THE LD. AR FOR THE ASSESSEE ON THE OTHER HAND SUBMI TTED THAT THE LOANS HAD BEEN TAKEN IN THE EARLIER YEAR IN WHICH THE RE HAD BEEN NO DISALLOWANCE IN ASSESSMENTS SOME OF WHICH HAD BEEN COMPLETED UNDER ITA NO.9048/M/10 A.Y. 07-08 5 SECTION 143(3). THEREFORE, IT WAS ARGUED THAT NO DISAL LOWANCE COULD BE MADE IN OPENING BALANCE WHICH REMAINED ACCEPTED IN EAR LIER YEAR. AS FOR THE CURRENT YEAR IT WAS SUBMITTED THAT THE ASSESSEE HA D SUFFICIENT INTEREST FREE ADVANCES WHICH WAS MUCH HIGHER THAN THE ADV ANCES MADE TO PARTNERS DURING THE YEAR AND THEREFORE, THER E WAS NO CASE FOR DISALLOWANCE OF ANY INTEREST. 4. WE HAVE PERUSED THE RECORDS AND CONSIDERED THE RIVAL CONTENTIONS CAREFULLY. THE DISPUTE IS REGARDING DISALLOWA NCE OF INTEREST 7,52,571/- UNDER SECTION 36(1)(III) ON ACCOUNT OF BORRO WING MADE. THE AO HAD NOTED THAT THE ASSESSEE HAD MADE SUBSTANTIAL BORRO WINGS OF RS.176.4 LACS OUT OF WHICH A SUM OF RS.157.84 HAD BEEN AD VANCED TO THE PARTNERS AT A CONCESSIONAL RATE OF 5.5% AGAINST INTE REST OF 12% PAID BY THE ASSESSEE TO THE BANK AND OTHERS. THE AO DISA LLOWED THE DIFFERENTIAL INTEREST OF RS.7,52,571/- OUT OF TOTAL I NTEREST OF RS.15,88,259/- AS NOT INCURRED FOR THE PURPOSE OF BUSINE SS. THE ASSESSEE SUBMITTED BEFORE CIT(A) THAT OUT OF TOTAL MONEY ADVANCED TO PARTNERS AMOUNTING TO RS.157.84, RS.68.35 LACS WAS INTERE ST COMPONENT AND ANOTHER SUM OF RS.12.87 LACS HAD BEEN PAID TOWARDS GRATUITY AND RETIREMENT COMPENSATION AND THEREFORE, T HE NET DEBIT WAS ACTUALLY RS.76.60 LACS. THE ASSESSEE ALSO EXPLAINED THAT THE ASSESSEE HAD TOTAL INTEREST FREE LOANS OF RS.76.24 LACS AND THERE FORE, THE DEBIT TO PARTNERS WERE EXPLAINED SATISFACTORILY. IT WAS ALSO SUB MITTED THAT ITA NO.9048/M/10 A.Y. 07-08 6 LOAN IN THE FORM OF OVERDRAFT FROM SYNDICATE BANK WA S MORE THAN 15 YEARS OLD AND BALANCE ON 31.3.2002 WAS RS.145.36 LACS WH ICH HAD BEEN REDUCED TO RS.89.16 LACS AS ON 31.3.2007. THEREFORE , THERE WERE NO FRESH LOANS DURING THE YEAR. AFTER CONSIDERING THE SU BMISSIONS OF THE ASSESSEE CIT(A) HELD THAT INTEREST TO PARTNERS HAD BE EN CHARGED @ 6% AS PER TERMS OF PARTNERSHIP DEED AND ASSESSEE HAD FAIR AMOUNT OF INTEREST FREE LOANS AND ACCORDINGLY HE DIRECTED THE AO T O DELETE THE ADDITION. 4.1 ON CAREFUL CONSIDERATION, WE FIND THAT CIT(A) HAS N OT PASSED A REASONED AND SPEAKING ORDER AND HAS GIVEN NO CLEAR FIN DING ON THE VARIOUS CLAIM MADE BY THE ASSESSEE. THE ASSESSEE CLAIMED THAT IT HAD INTEREST FREE LOANS OF RS.76.24 LACS OUT OF WHICH RS.58.0 4 LACS WAS RECEIVED DURING THE CURRENT YEAR. THUS INTEREST FREE L OAN AVAILABLE IN THE EARLIER YEARS WERE ONLY TO THE TUNE OF RS.18.20 L ACS. CIT(A) HAS GIVEN NO FINDING AS TO HOW THE LOANS GIVEN TO THE PAR TNERS IN THE EARLIER YEAR WAS EXPLAINED SATISFACTORILY. THUS CIT(A) HAS GIVEN NO REASONABLE BASIS FOR ALLOWING RELIEF TO THE ASSESSEE. HOWEV ER, BEFORE US, THE ASSESSEE HAS RAISED A PLEA THAT MOST OF THE DEBIT OF THE PARTNERS ACCOUNT WAS FROM THE EARLIER YEARS AND IN TH E EARLIER YEARS NO DISALLOWANCE OF INTEREST HAD BEEN MADE BY THE AO AN D THEREFORE, IN RESPECT OF OPENING BALANCE NO DISALLOWANCE COULD BE MADE. THE PLEA RAISED IS REQUIRED TO BE EXAMINED IN THE LIGHT OF SEVE RAL JUDICIAL ITA NO.9048/M/10 A.Y. 07-08 7 PRONOUNCEMENTS AVAILABLE ON THE SUBJECT RELATING TO DISA LLOWANCE IN RELATION TO OPENING BALANCE. AS FOR THE CURRENT YEAR, ASSESSEE HAD CLAIMED THAT FRESH WITHDRAWAL OF THE PARTNERS DURING T HE YEAR WERE TO THE TUNE OF RS.14.56 LACS. FURTHER, THE ASSESSEE HAD FRESH INTEREST FREE LOANS OF RS.58.04 LACS IN THE CURRENT YEAR WHEREAS INTERE ST BEARING LOANS HAD INCREASED ONLY BY RS.9.05 LACS. THEREFORE, THE CURRENT YEAR WITHDRAWAL BY THE PARTNERS WAS CLEARLY EXPLAINED FROM OWN FUNDS. THE PLEA OF THE ASSESSEE IS REQUIRED TO BE EXAMINED AFTER V ERIFICATION OF THE FACTUAL DETAILS GIVEN. IN OUR VIEW, THE MATTER REQUIR ES FRESH EXAMINATION AT THE LEVEL OF CIT(A). WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THE MATTER BACK TO HIM FOR PASSI NG A FRESH ORDER AFTER NECESSARY EXAMINATION IN THE LIGHT OF OBSERVATION S MADE ABOVE AND AFTER ALLOWING OPPORTUNITY OF HEARING TO THE ASSE SSEE. 5. IN THE RESULT, APPEAL OF THE REVENUE IS ALLOWED FO R STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 26.09.2012 SD/- SD/- (VIJAY PAL RAO ) JUDICIAL MEMBER (RAJENDRA SINGH) ACCOUNTANT MEMBER MUMBAI, DATED: 26.09.2012. JV. ITA NO.9048/M/10 A.Y. 07-08 8 COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT(A) CONCERNED, MUMBAI THE DR BENCH TRUE COPY BY ORDER DY/ASSTT. REGISTRAR, ITAT, MUMBAI.