Gujarat High Court
C.I.T vs Sharp Springs & Stapples Co. (P) ... on 19 November, 2014
Author: Ks Jhaveri
Bench: Ks Jhaveri, K.J.Thaker
O/TAXAP/198/2003 JUDGMENT
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
TAX APPEAL NO. 198 of 2003
With
TAX APPEAL NO. 232 of 2003
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR.JUSTICE KS JHAVERI
and
HONOURABLE MR.JUSTICE K.J.THAKER
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1 Whether Reporters of Local Papers may be allowed to see
the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy of the
judgment ?
4 Whether this case involves a substantial question of law as
to the interpretation of the Constitution of India, 1950 or any
order made thereunder ?
5 Whether it is to be circulated to the civil judge ?
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C.I.T.....Appellant(s)
Versus
SHARP SPRINGS & STAPPLES CO. (P) LTD.....Opponent(s)
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Appearance:
MR M.R. BHATT, SR. ADVOCATE WITH MRS MAUNA M BHATT,
ADVOCATE for the Appellant(s) No. 1
MR SN SOPARKAR, SR. ADVOCATE WITH MRS SWATI SOPARKAR,
ADVOCATE for the Opponent(s) No. 1
Page 1 of 7
O/TAXAP/198/2003 JUDGMENT
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CORAM: HONOURABLE MR.JUSTICE KS JHAVERI
and
HONOURABLE MR.JUSTICE K.J.THAKER
Date : 19/11/2014
ORAL JUDGMENT
(PER : HONOURABLE MR.JUSTICE KS JHAVERI)
1. Both these appeals involve common questions on law and facts and hence, they are decided by this common judgment.
1.1 In these Tax Appeals filed u/s.260-A of the Income-tax Act, 1961, challenge is made to the judgment and order dated 03.02.2003 and 25.02.2003 passed by the Income Tax Appellate Tribunal, Rajkot Bench in ITA No.4293/Ahd/1991 and ITA No.4290/Ahd/1991 respectively for the A.Y. 1988-89 whereby, both the appeals were partly allowed.
2. The facts in brief are that in September 1988, a search was carried out by the Revenue in the premises of the assessee and in pursuance thereof, assessments were finalized. The assessee had paid interest to the Bank for cash credit facilities obtained by it whereas, it had not charged interest on the money advanced to its associate concerns in which the Directors were Page 2 of 7 O/TAXAP/198/2003 JUDGMENT interested. The A.O disallowed the said difference.
3. Against the aforesaid order of the A.O., appeal was preferred before the CIT(A). In the said appeal, the CIT(A) recorded the finding of fact that the assessee had availed loans from Banks only and that no new loans were taken in the current year and therefore, the A.O was not justified in making the disallowance of interest since the A.O. had not made any disallowance of interest for the earlier years.
3.1 The CIT(A) also recorded a finding that the assessee had inflated the stock merely to obtain larger funds from the Banks and there was, actually, no excess stock. Therefore, no addition was made on account of difference between the stock shown in the books of accounts and that shown in the statement submitted to the Bank. Accordingly, the CIT(A) partly allowed the appeal filed by the assessee. Being aggrieved by the order passed by the CIT(A), appeal was filed before the Income Tax Appellate Tribunal.
4. The Appellate Tribunal confirmed the decision of the CIT(A) on the ground that nexus between the interest bearing fund and interest free loans was not proved. Being aggrieved by the same, the Page 3 of 7 O/TAXAP/198/2003 JUDGMENT present appeals have been preferred.
5. The questions of law formulated in these two appeals are the same. It reads as under;
"1. Whether the Appellate Tribunal was right in law and on facts in upholding the deletion of disallowance of interest paid on the amount borrowed by the assessee in view of the fact that the assessee had lent it to its sister concerns without charging any interest thereon?
2. Whether the Appellate Tribunal was justified in making an addition to the value of closing stock by looking at the difference between the value of stock- in-trade as per the books of accounts and the statement which was submitted by the assessee to its banker for availing credit facilities by way of hypothecation of the stock?"
6. We have heard learned counsel for both the sides.
7. Insofar as question no.1 is concerned, the A.O found that the assessee has paid interest to Page 4 of 7 O/TAXAP/198/2003 JUDGMENT the banks for cash credit facilities and has advanced interest free loans to five concerns. In the opinion of the A.O., the assessee has given indirect benefit to the five concerns wherein the Directors were having interest by not charging the interest on such advances. When the assessee was asked to show as to why it has not charged interest from the alleged five debtors, it was contended that, in principle, it was decided not to charge interest for advances made to the sister concerns and not to pay interest on the loans from the sister concerns. No interest bearing fund has been given as interest free advances.
7.1 The A.O recorded the finding that had the assessee charged interest on the outstanding balances against the proprietary concern, then it would recover an amount of Rs.1,60,790/-. The said amount could take care of the interest payment to the Bank to the tune of Rs.1,36,277/-. In this manner, the disallowance of claim of interest payment was made by the A.O.
8. However, the CIT(A) deleted the disallowance on the ground that the A.O has not proved the nexus between the interest bearing fund and the interest free advances. The funds have not been given to the sister concern during the accounting Page 5 of 7 O/TAXAP/198/2003 JUDGMENT period of the relevant year. The A.O has to establish direct correlation between the funds borrowed on interest and funds lent without interest.
9. In the absence of such correlation, disallowance was held to be unjustified. Considering the aforesaid factual aspects, we are of the opinion that the Appellate Tribunal has not committed any error in allowing the deletion of disallowance of interest. Accordingly, we answer question no.1 in favour of the assessee and against the Revenue.
10. Insofar as question no.2 is concerned, the assessee has proved on record that the group of companies were maintaining stock at a common place. The stock of the other group concerns were given in the Bank statement. This fact was also brought to the notice of the Bank. Similarly, a letter given by the Bank Manager to the Director of the assessee was on record, which is indicative of the fact that the assessee has informed the Bank regarding common stock position at one place of the sister concerns. In this way, the assessee has duly discharged the onus of explaining the excess stock and the CIT(A) was justified in deleting the addition.
Page 6 of 7O/TAXAP/198/2003 JUDGMENT 11. In our opinion, no illegality has been
committed by the Appellate Tribunal by allowing the deletion. Hence, question no.2 is answered in favour of the assessee and against the Revenue.
12. The appeal, accordingly, stands allowed.
(K.S.JHAVERI, J.) (K.J.THAKER, J) Pravin/* Page 7 of 7