The ITO, Ward-2(2), Baroda V. M/s. Ishwar Arts, Baroda

MA 427/AHD/2009

• Counselvise Citation: [2010] 123 COUNSELVISE.COM (IT) 4769 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 month(s) 1 day(s)
• Appeal Type: Miscellaneous Application
• Pronouncement Date: 31-08-2010
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 1994-1995
• Appeal Filed On: 29-12-2009
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Assessee Lawyers: R K DHANESTA
• Keywords: Business income

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH AHMEDABAD BENCH A AA A BEFORE BEFORE BEFORE BEFORE SHRI SHRI SHRI SHRI N NN N. .. .S. SAINI S. SAINI S. SAINI S. SAINI, , , , ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER ACCOUNTANT MEMBER AND AND AND AND SHRI SHRI SHRI SHRI MAHAVIR SINGH, JUDICIAL MEMBER MAHAVIR SINGH, JUDICIAL MEMBER MAHAVIR SINGH, JUDICIAL MEMBER MAHAVIR SINGH, JUDICIAL MEMBER DATE OF HEARING :23 8 10 DRAFTED ON: 236-8-10 ITA NO. 429 /AHD/ 2007 ASSESSMENT YEAR :2003-04 M/S. JAIN EXPORTS. 1 VENUNAD ROW HOUSE PANCHWATI, AHMEDABAD. VS. ASSISTANT COMMISSIONER OF INCOMETAX,CIRCLE-10, 1 ST FLOOR,NARAYAN CHAMBERS, ASHRAM ROAD, AHMEDABAD. PAN/GIR NO. : AABFJ3469M (A PPELLANT ) .. ( RESPONDENT ) APPELLANT BY : WR ITTEN SUBMISSION. RESPONDENT BY: SHRI R.K.DHANESTA, D.R. O R D E R O R D E R O R D E R O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :- THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XV I, AHMEDABAD DATED 16-11-2006. 2. THE ASSESSEE HAS RAISED FOLLOWING GROUNDS OF APP EAL :- 1. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS ) HAS ERRED BY IGNORING THE FACT THAT INTEREST FREE A DVANCES TO SISTER CONCERNS ARE MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE FIRM. 2. THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HAS NOT CONSIDERED THE FACT THAT INTEREST FREE ADVA NCES TO SISTER CONCERNS ARE OLD INTEREST FREE ADVANCES. 3. THE LEARNED COMMISSIONER OF INCOME TAX (APPEAL S) HAS GROSSLY ERRED IN CONFIRMING THE DISALLOWANCE OF GROSS AMOUNT OF BANK INTEREST WHILE ON THE FACT AND CIRCU MSTANCES OF THE CASE THE INTEREST EXPENDITURE DEBITED TO P & L ACCOUNT AS EXPENSES ARE NET AMOUNT OF BANK INTEREST. - 2 - 3. THE BRIEF FACTS OF THE CASE ARE THAT THE LEARNED ASSESSING OFFICER HAS MENTIONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAS DEBITED INTEREST EXPENDITURE OF `.3,97,357/- PA ID TO DENA BANK. THE ASSESSEE HAS ALSO EARNED INTEREST INCOME OF `.3 ,86,892/- FROM FIXED DEPOSITS WITH DENA BANK. THE ASSESSEE HAS AVA ILED THE LOAN FACILITY FROM DENA BANK O.D. ACCOUNT. THE CREDIT BA LANCE OF THE BANK AS ON 1-4-2002 WAS `.18,88,046/- AND CREDIT BA LANCE AS ON 31-3-2003 WAS `.16,06,797/-.THE ASSESSEE HAD WITHDR AWN AMOUNT FROM THE SAID ACCOUNT FROM TIME TO TIME AND ADVANCE D INTEREST FREE LOANS TO THE SISTER CONCERNS AND OTHERS. THE FOUR S ISTER CONCERNS TO WHOM THE INTEREST FREE LOANS WERE ADVANCED ALONG WI TH THE OPENING AND CLOSING BALANCES ARE AS UNDER: SR.NO. NAME OF THE CONCERN. BALANCE AS ON 1.4.02. BALANCE AS ON 31-3-2003. 1. M/S.DEVANG HANDICRAFTS 43,55,000/ - 39,40,000/ - 2. JAIN HANDICRAFTS 64,15,035/ - 57,50,035/ - 3. M/S. TULSI HANDICRAFTS. 28,60,000/ - 39,69,500/ - 4. WOODS & CRAFTS 24,44,000/ - 35,00,000/ - TOTAL. 1,60,74,035/ - 1,71,59,535/ - THE ASSESSING OFFICER HAS OBSERVED THAT THE ASSESSE E HAS NOT CHARGED ANY INTEREST ON MONEYS GIVEN TO THEM. BEFOR E THE LEARNED ASSESSING OFFICER THE ASSESSEE MENTIONED THAT M/S. DEVANG HANDICRAFTS AND M/S. JAIN HANDICRAFTS ARE THE PROPR IETARY CONCERNS OF SHRI VINOD JAIN AND SHRI SUSHIL JAIN RESPECTIVEL Y WHO ARE THE PARTNERS OF THE APPELLANT. THE PARTNERS ARE HAVING SUFFICIENT CAPITAL WITH THE FIRM AND THE LOAN ADVANCED BY THE APPELLAN T TO THE TWO SISTER CONCERNS WERE MADE OUT OF THE WITHDRAWALS MA DE BY THE PARTNERS FROM THEIR CAPITAL ACCOUNT. THE EXPLANATIO N OF THE ASSESSEE WITH REGARD TO THESE TWO ADVANCES WAS NOT ACCEPTED BY THE LEARNED ASSESSING OFFICER. AS REGARDS THE ADVAN CE GIVEN TO M/S. TULSI HANDICRAFT, THE ASSESSEE STATED BEFORE T HE LEARNED ASSESSING OFFICER THAT THE AMOUNT WAS PAID AGAINST THE PURCHASE OF GOODS AND NO EXPLANATION WAS GIVEN WITH REGARD TO T HE ADVANCE GIVEN TO WOOD AND CRAFT. IN THE CASE OF M/S. TULSI HANDICRAFT, THE LEARNED ASSESSING OFFICER HAS OBSERVED THAT THE ASS ESSEE CONTINUED ADVANCING LOAN TO THAT PARTY AND THE TOTA L OUTSTANDING UPTO DECEMBER WAS `.53.10 LACS WHEREAS THE PURCHASE S WORTH - 3 - `.13.04 LACS WERE MADE IN THE MONTH OF JANUARY AND THE OUTSTANDING BALANCE WAS `.39.69 LACS. SIMILARLY, TH E ASSESSEE HAD ADVANCED A HUGE AMOUNT OF `.35 LACS TO WOOD AND CRA FT AND HAS NOT FURNISHED ANY EXPLANATION FOR NOT CHARGING THE INTEREST. THE LEARNED ASSESSING OFFICER HAS OBSERVED THAT THE LOA NS HAVE BEEN ADVANCED TO M/S. TULSI HANDICRAFT AND M/S. WOOD & C RAFT FROM DENA BANK OVERDRAFT ACCOUNT WHICH WERE INTEREST BEARING. THE ASSESSEE HAS THEREFORE, DIVERTED INTEREST BEARING FUNDS AND THERE IS A DIRECT NEXUS BETWEEN THE AMOUNT WITHDRAWN FROM ASSESSEES BANK CREDIT ACCOUNT AND LOANS GIVEN TO OTHERS. SINCE THE AMOUNT ADVANCED WAS DIVERTED TO OTHERS AND WAS INTEREST FREE, LOAN TAKE N FROM THE BANK WAS NOT USED FOR BUSINESS PURPOSES AND THE LEARNED ASSESSING OFFICER HELD THAT INTEREST EXPENDITURE IS NOT DEDUC TIBLE UNDER SECTION 36(1)(III). THE LEARNED ASSESSING OFFICER, THEREFORE, DISALLOWED INTEREST EXPENSES OF `.3,97,367/- BEING INTEREST EXPENDITURE NOT FOR BUSINESS PURPOSES. THE LEARNED ASSESSING OFFICER PLACED RELIANCE ON THE DECISION IN THE CASE OF K. SOMSUNDARAM & BROTHERS VS. CIT 238 ITR 939 (MAD.). THE LEARNED ASSESSING OFFICER FURTHER OBSERVED THAT THERE IS VE RY CLEAR AND DIRECT NEXUS BETWEEN THE AMOUNT BORROWED FROM THE B ANK AND ADVANCED TO OTHERS FREE OF INTEREST. 4. IN APPEAL BEFORE THE LEARNED COMMISSIONER OF INC OME TAX (APPEALS) THE ASSESSEE SUBMITTED THAT THERE ARE SUF FICIENT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE WHICH IS CLE ARLY EVIDENT FROM THE BALANCE SHEET AS ON31-3-2003. THE CREDIT BALANC E OF THE CAPITAL ACCOUNT AS ON 31-3-2002 WAS `.2,27,23,198/- OUT OF WHICH INTEREST FREE ADVANCES WERE `.1,60,74,035/-.THE BALANCE OF T HE CAPITAL ACCOUNT AS ON 31-3-2003 WAS `.2,28,60,845/- WHILE T HE INTEREST FREE ADVANCES WERE `.1,71,69,535/-. THE LEARNED AUTHORIS ED REPRESENTATIVE OF THE ASSESSEE ARGUED THAT IT IS CL EAR THAT DURING THE YEAR, THE INTEREST FREE LOANS OF `.10,85,500/- WERE GIVEN. THE LEARNED ASSESSING OFFICER HAS PARTLY DISALLOWED INT EREST EXPENDITURE WHEREAS SUFFICIENT INTEREST FREE FUNDS WERE AVAILABLE WITH THE ASSESSEE. THE LEARNED AUTHORISED REPRESENT ATIVE OF THE - 4 - ASSESSEE RELIED UPON THE DECISION OF THE ITAT HYDER ABAD IN THE CASE OF ASHOK BROTHERS VS. ITO 76 TTJ 427, AHMEDABA D ITATS DECISION IN THE CASE OF TORRENT FINANCERS VS. ACIT 76 TTJ 224 AND SOME OTHER CASE-LAWS. THE LEARNED AUTHORISED REPRES ENTATIVE OF THE ASSESSEE ALSO ARGUED THAT DISALLOWANCE OF INTER EST ON OLD INTEREST FREE LOANS COULD NOT BE MADE IN SUBSEQUENT YEAR WHICH WAS NOT DISALLOWED IN THE EARLIER YEAR. HE RELIED O N THE DECISION OF ITAT CHANDIGARH IN THE CASE OF MALVA COTTON SPINNIN G MILLS VS. ACIT, 83 TTJ 72. ON THE CONTENTION OF DIRECT NEXUS, THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE ARGUED TH AT THE ASSESSEE HAD ONLY ONE BANK ACCOUNT AND THE BANK HAD IMPOSED THE CONDITION THAT ALL TRANSACTIONS SHOULD BE ROUTED TH ROUGH THIS ACCOUNT ONLY. THEREFORE, MERE ISSUE OF CHEQUE FROM THIS ACCOUNT DOES NOT PROVE THE NEXUS SINCE THE ASSESSEE DOES NO T HAVE ANY OTHER BANK ACCOUNT. 5. AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSE E THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) OBSERV ED AS UNDER: I HAVE CAREFULLY CONSIDERED THE OBSERVATIONS OF TH E LEARNED ASSESSING OFFICER AND THE ARGUMENTS OF THE LEARNED AUTHORISED REPRESENTATIVE OF THE ASSESSEE. THE ASSE SSEE DURING THE YEAR HAS ADVANCED HUGE AMOUNT OF INTERES T FREE LOANS TO SISTER CONCERNS, M/S. TULSI HANDICRAFT (`. 39,29,500/-) AND TO M/S. WOOD & CRAFT (`.35 LAC).THESE INTEREST FREE LOANS WERE ADVANCED OUT OF OD ACCOUNT MAINTAINED WITH THE DENA BANK. THE ASSESSEE PAID INTEREST AMOUNTING TO `.3,9 7,357/- ON THE LOAN UTILIZED THROUGH O.D. ACCOUNT. THE ARGU MENTS OF THE LEARNED ASSESSING OFFICER THAT THE INTEREST FRE E LOANS HAVE BEEN ADVANCED FROM THE O.D. ACCOUNT AND THEY H AVE DIRECT NEXUS WITH THE INTEREST BEARING LOAN TAKEN B Y THE ASSESSEE HAS FORCE. THE INTEREST FREE ADVANCES MADE BY THE ASSESSEE WERE NOT FOR BUSINESS PURPOSES. SINCE THE LEARNED ASSESSING OFFICER HAS ESTABLISHED DIRECT NEXUS BETW EEN THE INTEREST BEARING LOAN TAKEN BY THE ASSESSEE FROM TH E DENA BANK THROUGH O.D. ACCOUNT AND THE INTEREST FREE ADV ANCES MADE TO THE SISTER CONCERNS WHICH WERE NOT FOR BUSI NESS PURPOSES, THE DISALLOWANCE OF INTEREST UNDER SECTIO N 36(1)(III) IS JUSTIFIED. THE ARGUMENTS OF THE LEARN ED AUTHORISED REPRESENTATIVE OF THE ASSESSEE HAVE NO F ORCE AND ARE REJECTED. THE CASE-LAWS RELIED UPON BY THE LEAR NED ASSESSING OFFICER I.E. K.SOMSUNDARAM & BROTHERS VS. CIT 238 ITR-939 (MAD.) IS DIRECTLY APPLICABLE TO THE FACTS OF THIS CASE. - 5 - IT IS HELD IN THE CITED CASE THAT THE INTEREST ON T HE BORROWED FUNDS IS AN ALLOWABLE DEDUCTION ONLY WHEN THE BORRO WED FUNDS ARE USED FOR THE PURPOSE OF BUSINESS AND CONT INUED TO BE USED IN THE BUSINESS AS SUCH. RECENTLY, THE PUNJ AB AND HARYANA HIGH COURT IN THE CASE OF CIT VS. ABHISHEK INDUSTRIES LTD., 286 ITR 1 HAVE HELD, ONCE IT IS BORNE OUT FR OM THE RECORD THAT THE ASSESSEE HAD BORROWED CERTAIN FUNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE OTHER HANDS, CERTAIN AMOUNTS HAVE BEEN ADVANCED TO SISTER CONCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST AN D WITHOUT ANY BUSINESS PURPOSES, THE INTEREST TO THE EXTENT T HE ADVANCE HAS BEEN MADE WITHOUT CARRYING ANY INTEREST IS TO BE DISALLOWED UNDER SECTION 36(1)(III) OF THE ACT. THIS IS THE LATEST DECISION GIVEN BY THE PUNJAB HIGH & HARYANA HIGH COURT IN WHICH ALL OTHER DECISIONS OF VARIOUS HIGH COURTS HAVE BEEN DISCUSSED. SINCE THE DIRECT NEXUS HAS BEEN EST ABLISHED BY THE LEARNED ASSESSING OFFICER AND IT HAS BEEN ES TABLISHED THAT INTEREST FREE LOANS HAVE BEEN ADVANCED BY THE ASSESSEE TO THE SISTER CONCERNS FOR NON-BUSINESS PURPOSES, T HE INTEREST EXPENDITURE HAS BEEN RIGHTLY DISALLOWED UNDER SECTI ON 36(1)(III).THE ACTION OF THE LEARNED ASSESSING OFFI CER IS UPHELD AND THIS GROUND OF APPEAL IS REJECTED. 6. THE ASSESSEE HAS FILED WRITTEN SUBMISSIONS WHERE IN IT HAS STATED AS UNDER:- SIR, THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS) HAS IGNORED THE FACT THAT INTEREST FREE ADVANCES TO SIS TER CONCERNS ARE OLD INTEREST FREE AND ARE MADE OUT OF INTEREST FREE FUNDS AVAILABLE WITH THE FIRM. THE LEARNED COM MISSIONER OF INCOME TAX (APPEALS) HAS ERRED BY CONFIRMING THE DISALLOWANCE OF GROSS AMOUNT OF INTEREST PAID `.3,9 7,357/- AND IGNORED THE FACT THAT ONLY NET AMOUNT OF INTERE ST `.10,475/- DEBITED TO P &L ACCOUNT. WE RESPECTFULLY SUBMIT AS UNDER: 1) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S GROSSLY ERRED IN CONSIDERING THE WHOLE AMOUNT OF IN TEREST FREE ADVANCES TO M/S. TULSI HANDICRAFTS AND M/S. WO OD-N- CRAFT AS AMOUNT ADVANCED DURING THE YEAR WHILE THE MAJOR PORTION OF ADVANCES ARE OLD AS MENTIONED BY LEARNED COMMISSIONER OF INCOME TAX (APPEALS) ON PAG E NO.2 OF HIS ORDER. THE TABLE IS REPRODUCED AS UNDER :- SR. NO. NAME OF THE CO NCERN. BALANCE AS ON 1.4.02. BALANCE AS ON 31-3-2003. 1. M/S.DEVANG HANDICRAFTS 43,55,000/ - 39,40,000/ - 2. JAIN HANDICRAFTS 64,15,035/ - 57,50,035/ - - 6 - 3. M/S. TULSI HANDICRAFTS. 28,60,000/ - 39,69,500/ - 4. WOODS & CRAFTS 24,44,000/ - 35,00,000/ - TOTAL. 1,60,74,035/ - 1,71,59,535/ - 2) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) HA S GROSSLY ERRED BY CONFIRMING THE ORDER OF A.C.I.T. I N WHICH THE ACIT HAS PARTLY TREATED THE INTEREST FREE ADVAN CES WERE MADE OUT OF INTEREST FREE FUND AVAILABLE FUND WITH THE FIRM I.E. ADVANCES TO M/S. DEVANG HANDICRAFT & M/S. JAIN HANDICRAFTS, WHILE SUFFICIENT INTEREST FREE FU ND WAS AVAILABLE WITH THE FIRM TO COVER THE WHOLE AMOUNT O F INTEREST FREE ADVANCES. IT IS CLEARLY EVIDENT ON TH E FACE OF BALANCE SHEET AS ON 31-3-2002 AND 31-3-2003. THE CR EDIT BALANCE OF PARTNERS CAPITAL AS ON 31-3-2002 WAS `.2,27,23,198/- WHICH WAS INCREASE UP TO `.2,28,60, 845/- AS ON 31-3-2003, WHICH CLEARLY SHOWS THAT NO INTERE ST BEARING FUND WAS ADVANCED DURING THE YEAR. THE HIGH COURT OF HYDERABAD IN THE CASE OF ASHOK BROTHERS VS. ITO (2002) 076 TTJ(HYD) 0427 CLEARLY S TATED THAT DISALLOWANCE WAS NOT JUSTIFIED IF THERE ARE SU FFICIENT INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE TO MATCH INTEREST FREE ADVANCES TO SISTER CONCERNS. THE SIMI LAR VIEW HAS BEEN TAKEN BY AHMEDABAD ITAT A BENCH IN TORREN T FINANCER VS. ACIT (2001) 73 TTJ 624 AND A-BENCH OF AHMEDABAD TRIBUNAL IN THE CASE OF G.N.F.C. VS. DY. CIT (2001) 73 TTJ (AHD) 787 AND JODHPUR BENCH OF HIGH C OURT IN THE CASE OF ACIT VS. ARUNKUMAR GUPTA IN WHICH TH E HON'BLE HIGH COURT HAS DISMISSED THE APPEAL OF REVE NUE. 3) THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) H AS GROSSLY ERRED AND STATED THAT AMOUNTS WERE ADVANCED OUT OF O.D. ACCOUNT MENTIONED WITH THE DENA BANK. THEREFORE, THERE IS DIRECT NEXUS BUT NOT CONSIDERED THE FACT THAT THE ASSESSEE HAS ONLY ONE BANK ACCOUNT. T HE BANK HAS GRANTED THE FACILITY ON THE CONDITION THAT THE ALL TRANSACTION SHOULD BE ROUTED THROUGH THE ACCOUNT MAINTAINED. THEREFORE, MERELY THAT THE CHEQUES WAS ISSUED FROM THE O.D. ACCOUNT WAS NOT PROVED THE NEX US FOR THE SIMPLE REASON THAT THE ASSESSEE DOES NOT HA VE ANY BANK ACCOUNT. THE SIMILAR VIEW HAS BEEN TAKEN B Y THE HYDERABAD A-BENCH IN THE CASE OF ASHOK BROTHERS VS. ITO (2002) 076 TTJ 0427. 4) MOREOVER, LD. ACIT HAS NOT CONSIDERED THAT ONLY `.10,85,000/- HAS BEEN ADVANCED DURING THE YEAR AND THE MAJOR AMOUNT OF INTEREST FREE ADVANCES WERE MADE IN PREVIOUS YEARS. THE DISALLOWANCE OF INTEREST ON OLD INTEREST FREE ADVANCES COULD NOT BE MADE IN SUBSEQU ENT YEARS WHICH WAS NOT DISALLOWED IN EARLIER YEARS. TH E SIMILAR VIEW HAS BEEN TAKEN BY HON'BLE ITAT CHANDIG ARH - 7 - IN THE CASE OF MALVA COTTON SPINNING MILLS VS. ACIT 83 TTJ- 72. 7. THE LEARNED DEPARTMENTAL REPRESENTATIVE RELIED O N THE ORDERS OF THE LOWER AUTHORITIES. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS AVAILABLE ON RECORD. IN THE INSTANT CASE THE LEARNED ASSESSING OFFICER OBSERVED THAT THE ASSESSEE HAS AD VANCED SUBSTANTIAL AMOUNT OF MONEY TO ITS SISTER CONCERNS WITHOUT INTEREST WITH WHOM THE ASSESSEE HAS NO BUSINESS RELATION. T HE LEARNED ASSESSING OFFICER FURTHER OBSERVED THAT THE ADVANCE S WERE GIVEN FROM DENA BANK WITH WHICH THE ASSESSEE MAINTAINED O VERDRAFT ACCOUNT AND THEREFORE CONCLUDED THAT INTEREST FREE ADVANCES WERE GIVEN OUT OF INTEREST BEARING FUNDS. HE THEREFORE, DISALLOWED INTEREST EXPENDITURE OF `.3,97,357/- CLAIMED BY THE ASSESSEE. 9. ON APPEAL, LEARNED COMMISSIONER OF INCOME TAX (A PPEALS) CONFIRMED THE ACTION OF THE LEARNED ASSESSING OFFIC ER 10. BEFORE US, IN THE WRITTEN SUBMISSION THE ASSESS EE SUBMITTED THAT OUT OF INTEREST FREE ADVANCE OF `.1,71,59,535/ - AS AT THE END OF THE RELEVANT YEAR, `.1,60,74,035/- WAS THE OPENING BALANCE. THUS, ONLY FRESH ADVANCE WAS `.10,85,500/- WAS MADE DURIN G THE YEAR UNDER CONSIDERATION. IT WAS CONTENDED THAT NO DISAL LOWANCE OF INTEREST WAS MADE IN THE ASSESSMENT OF EARLIER YEAR WHICH EVIDENCES THAT THE ADVANCE WERE GIVEN OUT OF INTERE ST FREE FUNDS AVAILABLE WITH THE ASSESSEE. THE ASSESSEE ALSO POIN TED OUT THAT OPENING CAPITAL BALANCE OF PARTNERS WAS `.2,27,23,1 98/- ON WHICH NO INTEREST WAS PAID BY THE ASSESSEE FIRM AND OUT O F WHICH INTEREST FREE ADVANCE OF `.1,60,74,035/- WAS GIVEN. THE ASS ESSEE ALSO SUBMITTED THAT ALL ITS BUSINESS RECEIPTS WERE DEPOS ITED IN DENA BANK AND THEREFORE, THE LEARNED ASSESSING OFFICER WAS NOT JUSTIFIED IN CONCLUDING THAT INTEREST FREE ADVANCE OF `.10,85 ,500/- MADE DURING THE YEAR WAS OUT OF BORROWED FUNDS ON WHICH INTEREST - 8 - EXPENDITURE WAS INCURRED. IT WAS ALSO CONTENDED THA T INTEREST FREE FUNDS AVAILABLE WITH THE ASSESSEE FIRM AS AT THE EN D OF THE RELEVANT YEAR WAS `.2,28,60,845/- IN FORM OF PARTNERS CAPIT AL CONTRIBUTION WHICH WAS MUCH MORE THAN THE TOTAL ADVANCE OF `.1,7 1,59,535/- AS AT THE YEAR END. THUS IT WAS CONTENDED THAT LOWER AUTHORITIES WERE NOT JUSTIFIED IN DISALLOWING GENUINE INTEREST EXPEN DITURE OF THE BUSINESS. 11. ON THE OTHER HAND, LEARNED DEPARTMENTAL REPRESE NTATIVE SUPPORTED THE ORDERS OF THE LOWER AUTHORITIES. 12. WE FIND THAT THE GENUINENESS OF THE INTEREST EX PENDITURE OF `.3,97,357/- IS NOT IN DOUBT. THE ABOVE EXPENDITURE WAS DISALLOWED ON THE GROUND THAT INTEREST FREE ADVANCE WAS GIVEN OUT OF THE BORROWED FUNDS ON WHICH INTEREST WAS PAID BY THE AS SESSEE. THE CONTENTION OF THE ASSESSEE THAT INTEREST FREE ADVAN CE HAD OPENING BALANCE OF `.1,60,74,035/- AND THE OPENING INTEREST FREE FUND AVAILABLE WITH THE ASSESSEE WAS `.2,27,23,198/- AND NO PART OF INTEREST EXPENDITURE WAS DISALLOWED IN THE EARLIER YEAR HAD NOT BEEN DISPUTED BY THE REVENUE BEFORE US. THUS, IT SH OWS THAT OPENING INTEREST FREE ADVANCE WAS OUT OF INTEREST F REE FUND AVAILABLE WITH THE ASSESSEE AND IN RESPECT OF THE S AME DISALLOWANCE OF INTEREST EXPENDITURE WAS NOT JUSTIF IED. FURTHER, IT IS OBSERVED THAT THE CONTENTION OF THE ASSESSEE THAT B USINESS RECEIPTS WERE ALSO DEPOSITED IN DENA BANK AND THEREFORE IT C ANNOT BE HELD THAT ALL THE WITHDRAWALS MADE FROM DENA BANK WAS ON ACCOUNT OF INTEREST BEARING LOAN WAS NOT EXAMINED BY THE LOWER AUTHORITIES BEFORE CONCLUDING THAT INTEREST FREE ADVANCE GIVEN DURING THE YEAR WAS OUT OF BORROWED FUNDS. IN OUR CONSIDERED OPINI ON, THE ABOVE EXPLANATION OF THE ASSESSEE REQUIRES VERIFICATION A ND THEREFORE, IT SHALL BE IN THE INTEREST OF THE JUSTICE TO RESTORE THIS ISSUE BACK TO THE FILE OF THE LEARNED ASSESSING OFFICER FOR PROPE R VERIFICATION. IN OUR CONSIDERED OPINION, IF BEFORE MAKING INTEREST F REE ADVANCE IF THERE WAS DEPOSIT IN DENA BANK FROM WHERE THE MONEY WAS WITHDRAWN THEN IT CANNOT BE HELD THAT THE WITHDRAWA L WAS OUT OF - 9 - BORROWED FUNDS ONLY AND THE ASSESSEES EXPLANATION THAT WITHDRAWAL WAS OUT OF SUCH DEPOSIT DESERVES TO BE A CCEPTED. RECENTLY, THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT V. RELIANCE UTILITIES & POWER LTD. (2009) 313 ITR 340 (BOM) HAS HELD AS UNDER :- 8. WE HAVE HEARD LEARNED COUNSEL FOR BOTH THE PART IES. IN OUR OPINION THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDER S FUNDS TO THE TUNE OF OVER RS. 172 CRORES WAS UTILISED FOR TH E PURPOSE OF FIXED ASSETS IN TERMS OF THE BALANCE SHEET AS ON 31ST MARCH, 1999, IS FALLACIOUS. FIRSTLY, WE ARE NOT CON CERNED WITH THE BALANCE SHEET AS OF 31ST MARCH, 1999. WHAT WOUL D BE RELEVANT WOULD BE BALANCE SHEET AS ON 31ST MARCH, 2 000. APART FROM THAT, THE LEARNED COUNSEL HAS BEEN UNABL E TO POINT OUT TO US FROM THE BALANCE SHEET THAT THE BAL ANCE SHEET AS ON 31ST MARCH, 1999 SHOWED THAT THE SHAREHOLDERS FUNDS WERE UTILISED FOR THE PURPOSE OF FIXED ASSETS. TO O UR MIND THE P&L A/C AND THE BALANCE SHEET WOULD NOT SHOW WHETHE R SHAREHOLDERS FUNDS HAVE BEEN UTILISED FOR INVESTMEN TS. THE ARGUMENT HAS TO BE REJECTED ON THIS COUNT ALSO. 9. APART FROM THAT WE HAVE NOTED EARLIER THAT BOTH IN THE ORDER OF THE CIT(A) AS ALSO THE TRIBUNAL, A CLEAR F INDING IS RECORDED THAT THE ASSESSEE HAD INTEREST-FREE FUNDS OF ITS OWN WHICH HAD BEEN GENERATED IN THE COURSE OF THE YEAR COMMENCING FROM 1ST APRIL, 1999. APART FROM THAT IN TERMS OF THE BALANCE SHEET THERE WAS A FURTHER AVAILABILITY OF RS. 398.19 CRORES INCLUDING RS. 180 CRORES OF SHARE CAP ITAL. IN THIS CONTEXT, IN OUR OPINION, THE FINDING OF FACT R ECORDED BY CIT(A) AND TRIBUNAL AS TO AVAILABILITY OF INTEREST- FREE FUNDS REALLY CANNOT BE FAULTED. 10. IF THERE BE INTEREST-FREE FUNDS AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENTS AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST-FREE FUNDS AVAIL ABLE. IN OUR OPINION THE SUPREME COURT IN EAST INDIA PHARMAC EUTICAL WORKS LTD. (SUPRA) HAD THE OCCASION TO CONSIDER THE DECISION OF THE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. (SUPRA) WHERE A SIMILAR ISSUE HAD ARISEN. BEFORE TH E SUPREME COURT IT WAS ARGUED THAT IT SHOULD HAVE BEEN PRESUM ED THAT IN ESSENCE AND TRUE CHARACTER THE TAXES WERE PAID O UT OF THE PROFITS OF THE RELEVANT YEAR AND NOT OUT OF THE OVE RDRAFT ACCOUNT FOR THE RUNNING OF THE BUSINESS AND IN THES E CIRCUMSTANCES THE APPELLANT WAS ENTITLED TO CLAIM T HE DEDUCTIONS. THE SUPREME COURT NOTED THAT THE ARGUME NT HAD CONSIDERABLE FORCE, BUT CONSIDERING THE FACT THAT T HE CONTENTION HAD NOT BEEN ADVANCED EARLIER IT DID NOT REQUIRE - 10 - TO BE ANSWERED. IT THEN NOTED THAT IN WOOLCOMBER S CASE (SUPRA) THE CALCUTTA HIGH COURT HAD COME TO THE CON CLUSION THAT THE PROFITS WERE SUFFICIENT TO MEET THE ADVANC E TAX LIABILITY AND THE PROFITS WERE DEPOSITED IN THE OVE RDRAFT ACCOUNT OF THE ASSESSEE AND IN SUCH A CASE IT SHOUL D BE PRESUMED THAT THE TAXES WERE PAID OUT OF THE PROFIT S OF THE YEAR AND NOT OUT OF THE OVERDRAFT ACCOUNT FOR THE R UNNING OF THE BUSINESS. IT NOTED THAT TO RAISE THE PRESUMPTIO N, THERE WAS SUFFICIENT MATERIAL AND THE ASSESSEE HAD URGED THE CONTENTION BEFORE THE HIGH COURT. THE PRINCIPLE THE REFORE WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INT EREST-FREE AND OVERDRAFT AND/OR LOANS TAKEN, THEN A PRESUMPTIO N WOULD ARISE THAT INVESTMENTS WOULD BE OUT OF THE INTEREST -FREE FUND GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST-FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENTS. IN T HIS CASE THIS PRESUMPTION IS ESTABLISHED CONSIDERING THE FIN DING OF FACT BOTH BY THE CIT (A) AND TRIBUNAL. 13. WE THEREFORE, SET ASIDE THE ISSUE BACK TO THE F ILE OF THE LEARNED ASSESSING OFFICER AND DIRECT THE LEARNED AS SESSING OFFICER TO RE-ADJUDICATE THE ISSUE AFTER PROPER VERIFICATIO N AND KEEPING IN VIEW THE OBSERVATIONS MADE HEREINABOVE. NEEDLESS TO MENTION THAT PROPER OPPORTUNITY OF HEARING SHOULD BE ALLOWED TO THE ASSESSEE BEFORE ADJUDICATING THE ISSUE AFRESH AS PER LAW. T HUS, THE GROUNDS OF APPEAL OF THE ASSESSEE ARE ALLOWED FOR STATISTIC AL PURPOSES. 14. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED FOR STATISTICAL PURPOSES. ORDER SIGNED, DATED AND PRONOUNCED IN THE COURT ON 27 TH AUGUST,2010 SD/- SD/- ( MAHAVIR SINGH) ( N.S. SAINI ) JUDICIAL MEMBER ACCOUNTAN T MEMBER AHMEDABAD: ON THIS 27 TH DAY OF AUGUST, 2010 COMPILED AND COMPARED BY: PATKI. - 11 - COPY OF THE ORDER FORWARDED TO : 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE LD. CIT (APPEALS)-XVI, AHMEDABAD. 5. THE DR, AHMEDABAD BENCH 6. THE GUARD FILE. BY ORDER, //TRUE COPY// (DY./ASSTT.REGISTRAR), ITAT, AHMEDABAD DATE INITIALS 1. DRAFT DICTATED ON 26-8-2010 -------------- ----- 2. DRAFT PLACED BEFORE AUTHORITY 26-8-2010 ---- --------------- 3. DRAFT PROPOSED & PLACED 26-8-2010 ----------- -------- JM BEFORE THE SECOND MEMBER 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER ----------- ----- ------------------- JM 5. APPROVED DRAFT COMES TO P.S ---------------- -- ------------------ 6. KEPT FOR PRONOUNCEMENT ON ---------------- --- ----------------- 7. FILE SENT TO THE BENCH CLERK ---------------- -------------------- 8. DATE ON WHICH FILE GOES TO THE ---------------- -------------------- 9. DATE OF DISPATCH OF ORDER ---------------- --- ------------------