Income Tax Appellate Tribunal - Ahmedabad
Patel Madhavlal Maganlal & Co.,, Surat vs Department Of Income Tax on 14 March, 2012
आयकर अपीलीय अिधकरण,
अिधकरण, अहमदाबाद Ûयायपीठ 'बी
बी'
बी अहमदाबाद ।
IN THE INCOME TAX APPELLATE TRIBUNAL
" B " BENCH, AHMEDABAD
सव[ौी मुकुल कुमार ौावत, Ûयाियक सदःय एवं ौी टȣ.आर.मीणा, लेखा सदःय के सम¢ ।
BEFORE SHRI MUKUL Kr.SHRAWAT, JUDICIAL MEMBER AND
SHRI T.R. MEENA, ACCOUNTANT MEMBER
Sl. IT(ss)A No(s) Assessment Appeal(s) by
No(s). Year(s)
Appellant (s) Respondent(s)
1. 69/Ahd/2009 2001-02 The ACIT M/s.Patel
Central Madhavlal
Circle-4 Maganlal & Co.
Surat 3/139, Navapura
Parsi Sheri
Surat
PAN: AADF 2740 F
2. 70/Ahd/2009 2002-03 -do-Revenue -do-Assessee
3. 71/Ahd/2009 2003-04 -do- -do-
4. 72/Ahd/2009 2004-05 -do- -do-
5. 73/Ahd/2009 2005-06 -do- -do-
6. 74/Ahd/2009 2006-07 -do- -do-
Revenue by : Shri BKS Pandya, CIT-DR
Assessee by : Shri P.M. Mehta
सुनवाई कȧ तारȣख/
/ Date of Hearing : 14/03/2012
घोषणा कȧ तारȣख /Date of Pronouncement : 31/5/2012
आदे श/O R D E R
PER SHRI MUKUL Kr. SHRAWAT, JUDICIAL MEMBER :
These six appeals filed by the Assessee pertaining to AYs 2001- 02 to 2006-07 are against the consolidated order of the Ld.CIT(A)-II, Ahmedabad dated 02/07/2009. The substantive ground which is argued before us is Ground No.4; reproduced below from the lead Assessment Year, i.e. Assessment Year 2001-02. Rest of the grounds are either in supportive or in argumentative in nature.
IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -2- "4. The Ld.CIT(A) has erred in law and on facts in deletion of disallowance of interest expenditure of Rs.13,81,799/- in the absence of justification by the assessee to establish nexus between the borrowed funds and its utilization for the purpose of business"
2. At the outset, it was clarified that number of grounds have been raised, however, those grounds are revolving around the main issue as raised vide Ground No.4 reproduced above.
3. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) r.w.s. 153A of the IT Act dated 31/10/2008 were that a search u/s.132 of IT Act was conducted on 25/10/2006 at the Rajkot branch of the assessee. The assessee is in Angadia business. The assessee is carrying courier packets stated to be containing goods or cash to be delivered at several places through-out India. The packets are being delivered at the behest of the Centre. For the lead Assessment Year, i.e. for 2001-02 in response to notice u/s.153A of the Act, a return was filed declaring an income of Rs.12,29,713/-. It was noticed by the AO that the assessee has claimed interest expenditure on unsecured loans. The assessee was asked to establish the business nexus. Further it has also been noted by the AO that for the assessment years in question, the assessee had claimed interest expenditure totalling to Rs.87,35,707/- and the bifurcation of the same is as under:-
A.Y. Interest Expenditure
2001-02 1381799
2002-03 987663
2003-04 662235
2004-05 951080
2005-06 1552024
2006-07 1521581
2007-08 1679325
TOTAL 8735707
IT(ss)A Nos.69 to 74/Ahd/09
ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07
-3-
3.1. As per AO, a deduction u/s.36(1)(iii) is allowable only on the capital borrowed and utilized for the purpose of the business. The AO has made a chart through which the AO has demonstrated that in all the six years the total of the partners' capital account, loan from others and loan from banks was to the tune of Rs.1,40,56,050/-. As against that, the total of the bank balances, cash in hand/tijori, cash balance of branches was to the tune of Rs.3,62,95,294/-. The AO has then also tabulated the utilization of funds for business use towards fixed assets, advances/deposits, miscellaneous and advances to employees totalling to Rs.2,13,71,306/-. On the basis of the above tabulation, the AO's allegation was that surplus of capital over business use was Rs.2,18,80,635/-. The AO has then concluded that the borrowed funds have not been utilized for any business purpose but a hug cash balance was maintained at various branches totalling to Rs.2,02,58,291/-. He has issued a show-cause to give reply that the borrowed funds have been diverted to create huge cash balance and bank balance which was not required for business purposes. So, why not interest expenditure claimed was to be disallowed. As per AO, the requirement of cash was hardly Rs.2,000/- per day in the regular course of business. On the other hand, the assessee has claimed that about Rs.3 lacs upto Rs.4 lacs was required at the branches which was necessary for the running of angadia business. It was explained to AO that the assessee is running 20 branches and necessary cash is required to be maintained. In support, the assessee has provided the branch-wise position of cash balance to the AO. As against that, the AO wanted certain details to establish that in fact branch-wise cash was maintained and that it was required for the running of the business. The AO's main allegation was that the interest was paid IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -4- to partners on their contribution which was the borrowed funds for the assessee, but those borrowed funds on which interest was paid was not utilized for the purpose of the business but mainly utilized to maintain cash balance. The AO has made few charts through which he has tried to demonstrate that the borrowed funds kept idle as a cash or as a bank balance, hence there was mis-utilization of borrowed funds on which no interest deserve to be allowed. After discussing the case-laws and the details furnished by the assessee, he has concluded that the borrowed funds were not utilized for the purpose of the business. According to him, the interest debited to P&L account on the said expenditure was liable to be disallowed. Accordingly, a calculation was made and for A.Y. 2001-02 disallowance of Rs.13,81,799/- was made. For rest of the years, on identical manner, the AO had made the disallowance of interest expenditure. The matter was carried before the first appellate authority.
4. Before ld.CIT(A), it was contested as under:-
"..Appellant submitted that it was; the burden on department to prove that the appellant has not used funds for the business purpose and has diverted its interest bearing funds for non- business purpose i.e. advances to friends & relatives, creating non-business assets/payment, withdrawn by the partners for their personal use etc. A.O. has not brought any evidence that the appellant has used the cash balance for non-business purposes. Appellant also submitted that during the course of the various searches in past, cash as per cash book was invariably found at head office & branches, which: support the contention of the point that keeping of cash is the prime requirement in its line of business, otherwise a prudent real businessman would not keep cash in hand idle- and pay interest on it. Appellant contended that assessing officer totally failed to prove that the appellant had used borrowed funds/cash on hand for non-business purposes & was IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -5- totally unjustified in observing that the borrowed funds were not used for business purpose.
Appellant further submitted that the A.O. had overlooked the contention raised by the appellant that cash balance as on close of each year is covered by partner's capital which has been mainly built up from the profits of the firm and therefore, there was no question of disallowing the interest on loans and borrowing to that extent. In this connection following details are submitted:
A.Y. CASH BANK TOTAL PARTNERS
BALANCE BALANCE CAPITAL
1999-00 73,37,190 -47,46,198 25,90,992 1,72,55,874
2000-01 88,33,057 -38,22,876 50,10,181 1,90,26,722
2001-02 1,06,73,115 -36,65,218 70,07,897 2,16,05,984
2002-03 1,26,25,631 -39,06,165 87,19,466 1,70,47,377
2003-04 1,48,52,300 -25,17,501 1,23,34,799 1,98,79,670
2004-05 1,88,19,289 4,11,297 1,92,30,586 1,92,88,702
2005-06 1,74,31,138 -11,99,257 1,62,31,881 1,51,92,632
2006-07 2,07,03,959 9,51,337 2,16,55,296 2,52,47,653
Finally appellant submitted that looking to the nature of services provided, reasons for keeping cash in hand, reasonable amount of cash considering number of branches, substantiated capital of partners which covers cash In hand receipt of income in cash, disallowance of interest was not justified & requested to delete the same."
4.1. After considering the facts of the case and the business necessity of the assessee, ld.CIT(A) has held as under:-
"4. I have considered the facts ad submissions. I agree with the view. It is seen that the appellant has cash balance as per the cash book. It is not established by the A.O. that the borrowed funds are not used for the purpose of business. Merely because the appellant is maintaining cash balance, it cannot be said that the borrowings' are not used for the business. It is not the case that borrowed funds are diverted anywhere. The cash balance is maintained in business and i.e. as per the needs as judged by appellant.
IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -6- Moreover that cash balance was totally covered by partner's capital. The claim is thus admissible u/s.36(i)(iii) of I.T. Act. In view of these facts, the disallowance of interest on borrowed funds is not justified and therefore, the addition made is deleted."
5. Now the revenue is before us. Ld.CIT-DR Mr.BKS Pandya appeared and placed reliance on the order of AO. He has vehemently argued that during the course of assessment proceedings, the assessee had failed to furnish the requisite details. Vide several notices, the AO had made certain enquiries specially asking the assessee to demonstrate the daily requirement of cash for each branch. But branch-wise as well as day-wise requirement of daily cash could not be demonstrated by the assessee. Ld.DR has placed reliance on Punjab Stainless Steel Industries vs. CIT reported at (2010) 324 ITR 396) [Delhi] and on Inamulhaq S.Iraki vs. Addl.CIT in ITA No.243/Ahd/2011 and ITA No.3512/Ahd/2010, order dated 31/01/2012 [ITAT "B" Bench Ahmedabad].
6. From the side of the respondent-assessee, ld.AR Mr.P.M.Mehta appeared and submitted that since the assessee is in angadia business, therefore there is always a requirement of cash. The AO had erred in not appreciating the nature of business, necessity to maintain the cash balance, mode of receipt is cash and that the liquidity requirement of the assessee as well as at the several branches of the assessee. He has emphasized that in respect of identical nature of business, the Respected Tribunal is consistently taking a view in favour of assessee. In support, he has cited following decisions:-
IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -7- Sl.No(s) Decision in the case of ... In ITA No(s)....
(i) M/s.Patel Ambalal 573/Ahd/2009
Hargovandas & CO.
(ii) M/s.Vasant Ambalal Patel 754/Ahd/2008
(iii) M/s.Vasant Ambalal Patel 748/Ahd/2008
(iv) M/s.Patel Natverlal 733/Ahd/2008
Chinubhai & Co.
(v) M/s.Patel Somabhai 4296 to
Maganlal & Co. 4300/Ahd/2007
7. We have heard both the sides at some length. We have also perused the orders of the authorities below in the light of the compilation filed. At the outset, it is worth to mention that on identical facts in the case of an angadia business-man, ITAT "D" Bench Ahmedabad vide an order dated 30/06/2011 titled as "Asst.CIT vs. M/s.Patel Ambalal Hargovandas & Co." in ITA No.573/Ahd/2009 along with CO No.59/Ahd/2009 for A.Y.2005-06, has held as follows:-
"6. We have heard the parties. There is no case for interference in the order of ld.CIT(A). Interest paid on borrowed funds can be disallowed only when borrowed funds are used for non-business purposes. The assessee has shown to the Authorised Officers that cash balance is required to be kept in the line of his business. The nature of business shown by the assessee is transfer of parcels and cash from one place to another. If for certain unavoidable circumstances like delay in transportation on account of cancellation of trains or other problems not in the control of the assessee, the assessee was not able to make delivery of the cash then cash lying with it, is utilized for delivery back and to fulfill its commitment. The assessee is himself to judge about the requirement of cash in his line of his business. Even otherwise cash balance is fully covered by partners' capital and, therefore, there is no reason to disallow a part of interest payment. Thus once assessee discharges the onus then for making disallowances it is for the AO to produce evidence to show that money borrowed was utilized for non-business purposes. Since it is not the case and IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -8- there is no material on record to show that money borrowed was utilized for non-business purposes the disallowance of interest cannot be upheld. As a result, this ground of Revenue is also rejected."
7.1. Likewise, ITAT "B" Bench Ahmedabad In ITA Nos.748,751,752 and 753/Ahd/2008 for A.Ys 1999-2000, 2002-03, 2003-04 and 2004-05 in the case of "ACIT vs. Shri Vasantlal Ambalal Patel", vide order dated 07/01/2011, has held as under:-
"6. We have carefully considered the arguments of both the sides and perused the material placed before us. From the perusal of the assessment order of all the years under consideration, we find that there was no allegation by the AO that any part of the business carried on by the assessee is illegal business. The disallowance of interest by the AO was on the ground that the assessee kept huge cash balance. The assessee carried out only one business of Angadia and from such composite business, profit/loss is worked out in the respective years and the AO himself has treated the business of the assessee to be one business. The contention of the learned counsel that neither in any of the past years nor in the subsequent years, part of the business of the assessee was held to be illegal by the AO, has not been disputed by the learned DR. The contention of the ld.DR is based upon various presumption. His first presumption is that part of business is illegal business and part is legal business. He further presumes that there would be loss from illegal business and profit from legal business, which cannot be set off against each other. However, fact on record remains that there is only one business of the assessee, part of which is not held to be illegal either by IT department or by any other government agency. Considering the totality of the above facts, in our opinion, the contentions of the learned DR that part of the business by the assessee is an illegal business and there should be separate working of the profit of the legal/illegal, cannot be accepted."
IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07 -9- 7.2. We have been informed that one of the decisions of ITAT "C" Bench Ahmedabad in ITA Nos.4296, 4297, 4298, 4299 & 4300/Ahd/2007 for AYs 2001-02 to 2005-06 pronounced in the case of "DCIT vs. M/s.Patel Somabhai Maganlal & Co." order dated 18/09/2009, has held as under:-
"8. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. The short issue involved in this ground of appeal is that interest expenditure on amount borrowed were disallowed on the ground that amount borrowed were kept as cash with the assessee and the same was in the opinion of the Learned Assessing Officer not utilized for the business purposes of the assessee. The Learned Commissioner of Income Tax (Appeals) deleted the disallowance observing that assessee's business was also consisting of transfer of money. Due to this business, the assessee was required to have sufficient cash always so that it can make payment of amount on due date. Thus, in the opinion of the Learned Commissioner of Income Tax (Appeals) cash possessed by the assessee was its business asset and therefore, interest paid on borrowed capital for that cash was business expenditure of the assessee. We find that genuineness and reasonableness of payment of interest is not in dispute. The only dispute was that the borrowed funds were utilized for the purpose of business of the assessee or not. We find that the Learned Departmental Representative could not dispute the findings of Learned Commissioner of Income Tax (Appeals) that the assessee's nature of business required it to possess cash balance of sufficient amount of all the material time as the making of timely payment was essence of business transaction of the assessee. We find that it is case of the revenue that the borrowed funds were utilized by assessee for any other purposes than its business. The assessee be imprudent in holding large amount of cash but when the cash was possessed for business purposes it would constitute business asset the assessee and the borrowings connected therewith had to be held for business purposes. We therefore, do not find any error in the order of the Learned Commissioner of Income Tax (Appeals) in deleting the IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07
- 10 -
disallowance of interest of expenditure. Therefore, this ground of appeal of Revenue is dismissed."
7.3. In all these cases, in the like manner, the AO had found that there was huge cash balances. On one hand, the allegation was that those assessees have maintained idle cash balances, however, at the same time borrowed money and paid interest thereon. Therefore, in the same manner, it was alleged by the Revenue Department that the borrowed money was kept as cash in hand and borrowed money was not in fact utilised for the purpose of the business. The Tribunal has taken a view that it could be a possibility that the assessee might be imprudent in holding large amount of cash but when this act of the assessee is to be visualized vis-à-vis the business activity, then the allegation of the Revenue Department appears to be a conjuncture. Otherwise also, the outstanding cash is nothing but a business asset of the assessee. There is nothing illegal to maintain cash at various branches. An another aspect has also been examined by the Respected Co-ordinate Benches that as far as the actual payment of interest to various parties was concerned and overall interest expenditure was claimed, it was not objected by the AO that claim of expenditure was not genuine. The question of reasonableness of an expenditure is a subjective matter which is to be determined by the assessee who is running a business and it is not expected from the AO to step into the issues of a business-man. A business man is required to judge about the requirement of the cash in his line of business. The business need and the business purpose depends upon the circumstances of each case. As far as the decisions cited by ld.DR are concerned, both are not akin to the facts and circumstances of IT(ss)A Nos.69 to 74/Ahd/09 ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07
- 11 -
the present appeals. In the case of Inamulhaq S.Iraki vs. Addl.CIT (supra), there was a finding that the assessee had mixed funds and could not establish any commercial expediency. Some of the funds were given for interest-free advances, hence the disallowance was confirmed. Like- wise, DR has placed reliance on Punjab Stainless Steel Industries vs. CIT(supra), but the fact were that the interest-free advances were extended out of borrowed funds. Those interest-free advances were not made out of credit balance available with the assessee, therefore, a proportionate disallowance of interest was upheld. We therefore hold that these case-laws do not apply on the present set off facts and circumstances of the case. Rather, the case-laws as discussed hereinabove relied upon by the respondent-assessee do apply directly on the facts of the assessee. Hence, we find no fallacy in the view taken by the ld.CIT(A) that merely because the assessee had maintained cash balances at its several branches being in angadia business should not be a cause of disallowance of interest on borrowed funds. The deletion of addition is thus hereby confirmed. Ground raised by the Revenue is dismissed in all the appeals.
8. In the result, all the six appeals of the Revenue are dismissed.
Sd/- Sd/-
(टȣ.आर.मीणा) (मुकुल कुमार ौावत)
लेखा सदःय Ûयाियक सदःय
( T.R. MEENA ) ( MUKUL Kr. SHRAWAT )
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 31/ 5 /2012
टȣ.सी.नायर, व.िन.स./T.C. NAIR, Sr. PS
IT(ss)A Nos.69 to 74/Ahd/09
ACIT vs. M/s. Patel Madhavlal Maganlal & Co.
Asst.Years - 2001-02 to 2006-07
- 12 -
आदे श कȧ ूितिलǒप अमेǒषत/Copy
षत of the Order forwarded to :
1. अपीलाथȸ / The Appellant
2. ू×यथȸ / The Respondent.
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ(अपील) / The CIT(A)-II, Ahmedabad
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / Learned Departmental Representative, ITAT, Ahmedabad
6. गाड[ फाईल / Guard file.
आदे शानुसार/ BY ORDER, स×याǒपत ूित //True Copy// उप/सहायक पंजीकार (Dy./Asstt.Registrar) उप/ आयकर अपीलीय अिधकरण, अिधकरण, अहमदाबाद / ITAT, Ahmedabad
1. Date of direct dictation...... 30.5.12
2. Date on which the typed draft is placed before the Dictating Member 30.5.12.................. Other Member.....................
3. Date on which the approved draft comes to the Sr.P.S./P.S.................
4. Date on which the fair order is placed before the Dictating Member for pronouncement......
5. Date on which the fair order comes back to the Sr.P.S./P.S.........31.5.12
6. Date on which the file goes to the Bench Clerk..................... 31.5.12
7. Date on which the file goes to the Head Clerk..................................
8. The date on which the file goes to the Assistant Registrar for signature on the order..........................
9. Date of Despatch of the Order..................