Income Tax Appellate Tribunal - Amritsar
Ito vs Davinder Hide Co. on 25 January, 2007
ORDER
A.D. Jain, J.M.
1. This is department's appeal for the assessment year 2001-02, against the order dated 22-11-2004 passed by the learned Commissioner (Appeals), Jalandhar. The following effective grounds of appeal have been raised :
1. The learned Commissioner (Appeals) has erred in allowing the interest payable on borrowings diverted for non-business purposes to the sister-concem.
2. The learned Commissioner (Appeals), while deleting the aforesaid addition, has not appreciated the evidence brought on record, nor has he distinguished the case relied during the assessment from the ones relied on by the assessee.
2. As per the assessment order, the assessee is a registered firm dealing in sale and purchase of hides and skins. In the year under consideration, the assessee made total sales of Rs. 2,06,26,691, as against those of Rs. 1,65,05,297 in the immediately preceding assessment year. GP shown was of Rs. 13,55,220, as opposed to that of Rs. 9,26,233 in the earlier year. The sales and purchases were found to be vouched. The GP rate was observed to have improved from 5.65 per cent for the last year to 6.57 per cent this year. According to the balance sheet, the assessee had raised secured loans from banks, amounting to Rs. 36,47,208. The assessee had advanced an amount of Rs. 28,50,000 to M/s Kashmir Builders (P) Ltd., Jalandhar. The assessing officer observed that thus, only 21.85 per cent of the total secured loans had been utilised by the assessee for its business purposes and 78.15 per cent thereof had been diverted for nonbusiness purposes. Therefore, the assessee was asked why an appropriate amount of interest calculated on the amount so advanced, be not disallowed in view of the judgment of the Hon'ble Kerala High Court in CIT v. V.I. Baby & Co. .
3. The assessee responded by saying that V.I. Baby (supra) was not applicable since the amount had been paid for business purposes; that the assessee, in assessment proceedings for the assessment year 1998-99, where the same issue had been raised, had eixplained that the amount had been paid for purchase of building for business purposes; and that this explanation had then been accepted by the assessing officer. The assessee filed copies of the aforesaid reply and the assessment order dated 19-2-2001, for assessment year 1998-99.
4. In order to verify the contention of the assessee, the assessing officer summoned M/s Kashmir Builders (P) Ltd., who furnished a copy of agreement dated 15-5-1995 between the assessee and the said company, and also a copy of its memorandum and articles of association. From the latter document, the assessing officer observed that two of the subscribers to the capital of that company, i.e., Shri Sat Paul and Shri Davinder Pal were husband and son, respectively, of Smt. Kamlesh Rani, one of the partners of the assessee firm.
5. From the agreement dated 15-5-1995 (supra), the assessing officer observed that as per Clause 3 thereof, the company had agreed to sell 25 per cent of a commercial complex, to be constructed, to the assessee firm, for Rs. 90,00,000 and the assessee firm was, in lieu thereof, to pay to the company an advance of Rs. 28,50,000, a sum of Rs. 30,00,000 on or before 31-5-1997, or on the completion of the first floor of the commercial complex, whichever was earlier, and a sum of Rs. 31,50,000 on or before the completion of the commercial complex.
6. The assessing officer opined that since the assessee had failed to make any payment to the company by 31-5-1997, as required by the agreement, the company should have returned the advance amount of Rs. 28,50,000 to the assessee; that in the absence of any penal clause in the agreement, such agreement could not be considered to be legally perfect; that the assessee did not take the amount back even upto the second quarter of 2003 for the obvious reason that the husband and the son of one of the partners of the assessee firm had a substantial interest in the company, with which, the amount was lying; that in fact, the business interest of the company appeared to be prime with the assessee firm, rather than its own interest; and that thus, the borrowed funds were diverted, interest-free, for non-business purposes by the assessee firm. The assessing officer relied on VI Baby & Co. (supra).
6.1. Before the learned Commissioner (Appeals), the assessee contended, inter alia, that the construction of the complex could not start, because the plan was not sanctioned by the Municipal Corporation, Jalandhar, and the money was received back from the company in June, 2003, amounting to Rs. 10 lacs and in September, 2003, amounting to Rs. 18.50 lacs; that as per the agreement, the second instalment was to be paid by the assessee firm to the company by 31-5-1997, or before the completion of the first floor of the commercial complex, whichever was earlier, but it was not paid, since the company had not been able to obtain the permission from the Municipal Corporation, Jalandhar, for construction of the commercial complex; that it was beyond the power of the assessee to get back the amount from the company earlier than 2003, when it was returned after repeated requests; that even otherwise, the addition was not called for, since the assessee did not suffer any interest loss, as the assessee had accepted family deposits of Rs. 18,78,905, on which, no interest was paid and further, there was sufficient credit balance of the partners, i.e., opening capital of Rs. 39,88,498 and closing capital of Rs. 44,00,744; that the partners could have got interest @ 18 per cent, but were paid interest only @ 8 per cent, on the net balance; that the notional interest on the capital short-charged by the partners and the notional interest on the interest-free deposit worked out to be much more than the notional interest on the alleged interest-free advance; that the assessing officer had not established any nexus between the money advanced and the money borrowed; that as per the balance sheet filed, for the year ending 31-3-1996, the assessee had a bank liability of only Rs. 10,89,269 in the year in which the money was advanced, which was much lesser than the amount advanced, i.e., Rs. 28,50,000; that even in the earlier year, when the money had not been advanced, the bank liability of the assessee was of Rs. 10 lacs only; that the ratio of 78.15 per cent : 21.85 per cent had been calculated by the assessing officer with regard to the secured loans outstanding as on 31-3-2001 and the advance made in 1995-96, and this could not form the basis for making the addition in the year under consideration; that there was no material on record to prove that the advance for purchase of the building was made by the assessee from the secured loans raised from banks; that V.I. Baby (supra) was distinguishable on facts; and that no disallowance should have been made when the money was advanced in the earlier years and no addition had been made in the earlier years on such advances on account of interest-free advances.
7. The learned Commissioner (Appeals) having deleted the addition in question, the department is in appeal before us.
8. Before us, the learned departmental Representative, challenging the impugned order, has supported the order of the assessing officer. It has been submitted that as found by the assessing officer, the assessee diverted interest bearing borrowed funds interest-free for non-business purposes and that therefore, the addition was rightly made by the assessing officer. Distinguishing- the facts of the year under consideration from those concerning the assessment year 1998-99, it has been contended that till that time, a business purpose of the assessee was there, but for the year under consideration, there is no such purpose.
9. On the other hand, the learned counsel for the assessee has vehemently supported the Commissioner (Appeals)'s order. Written submissions have also been filed. It has been contended that here, it is not an interest-free advance or loan given by the assessee. It has been pointed out that at the beginning of the assessment order, the assessing officer himself admitted the existence of a business purpose for making such loan. It has been submitted that no disallowance should be made when money was advanced in earlier years and no addition was made in those years on account of interest-free advances. For this proposition, the following case laws have been relied on by the assessee :
(i). Meenakshi Synthetics (P) Ltd. v. Assistant Commissioner (2003) 79 TTJ (Lucknow) 423 : (2003)84 ITD 563 (Lucknow);
(ii). Malwa Cotton Spinning Mills v. Assistant Commissioner (2004) 83 TTJ (Chd) (TM) 72 : (2004)89 LTD 65 (Chd)(TM);
(iii). CIT v. Sridev Enterprises .
The learned counsel for the assessee has further argued that no disallowance can be made when no nexus is established between the borrowed funds and the interest-free advances. For this, the following case laws have been cited :
(i). Income Tax Officer v. Bharat Motors (2000) 68 TTJ (Jd) 431;
(ii). Shree Digvijay Cement Co. Ltd. v. CIT ;
(iii). R.D. Joshi v. CIT;
(iv). Smt. Tara Devi v. Income Tax Officer (2000) 68 TTJ (Jd) 361.
10. We have heard the parties and have perused the material on record. The assessing officer has indeed accepted that the loans taken were originally diverted by the assessee for business purposes. The addition, however, was made for the sole reason that the assessee had failed to pay the second instalment to the company and that the company had failed to return the advance amount of Rs. 28,50,000 to the assessee. It is seen that as observed by the learned Commissioner (Appeals), the advance was treated by the assessing officer as a non-business advance, without calling for further details. No nexus between the interest bearing funds and the interest- free advances stands made out. The amount in question was advanced in the assessment year 1995-96. The secured loans were taken in the assessment year 1996-97. This has not been controverted by the assessing officer. At that point of times, the assessee had interest bearing advances, credit balances of the partners, and also substantial sundry creditor. Even the limit was available in the assessment year 1995-96. All this shows that the amount advanced was not advanced out of the borrowed funds taken in the assessment year 1996-97. Moreover, for the year ending 31-3-2001, there were family deposits of Rs. 18,78,905, on which, no interest was paid. This is available from the balances sheet of the company, a copy whereof is at pp. 15 to 19 of the assessee's paper book. The opening balance in the capital account of the partners of the assessee firm was Rs. 39,88,498 and the closing balance was of Rs. 44,00,744. Interest had been paid to partners @ 8 per cent per annum as against 18 per cent allowable under the Act. This amounted to Rs. 3,02,961, as against Rs. 7,17,930 allowable under the Act. Thus, notional interest on capital short-charged by the partners and notional interest on deposits amount to much more interest on the alleged advance. Also, in the assessment year 1998-99, the position was much the same and no adverse inference was drawn against the assessee. The ratio of 78.15 per cent : 21.85 per cent was calculated with reference to the secured loans as outstanding on 31-3-2001. This could not form the basis of addition for the assessment year 2001-02, i.e., the year under consideration. Further, the interest disallowed by the assessing officer was on the entire interest bearing borrowed funds of Rs. 36,48,208, in the relevant year, whereas the transaction related to the assessment year 1996-97, when the secured loans stood at Rs. 10,89,269 only.
11. In Meenakshi Synthetics (P) Ltd. v. Assistant Commissioner (supra), it has been held, inter alia, that no disallowance should be made when money had been advanced in earlier years and no addition was made in the earlier years on such advances on account of interest-free advances.
12. This is also the ratio of the decision in the case of Malwa Cotton Spinning Mills v. Assistant Commissioner (supra) and CIT v. Sridev Enterprises (supra) wherein it was held, inter alia, that where the assessing officer had failed to establish any nexus between funds borrowed on interest and amount invested in the plot, there was no justification for making any disallowance out of interest expenditure.
13. Then, where no nexus is established between the borrowed funds and the interest-free advances, no disallowance can be made, as held in Bharat Motors (supra). Similar is the ratio of Shree Digvijay Cement Co. Ltd. (supra), R.D. Joshi v. CIT (supra) and Smt. Tara Devi v. Income Tax Officer (supra).
14. In view of above, it cannot be said that the learned Commissioner (Appeals) has, in any manner, erred in deleting the addition made by the assessing officer. Accordingly, the grievance raised by the department is rejected.
15. In the result, the appeal of the department stands dismissed.