Income Tax Appellate Tribunal - Ahmedabad
Nareshchandra Popatlal Shah, ... vs Assessee on 11 December, 2006
IN THE INCOME TAX APPELLATE TRIBUNAL,
AHMEDABAD "B" BENCH,
BEFORE SHRI BHAVNESH SAINI, J.M. AND SHRI D.C. AGRAWAL, A.M.
ITA No.1368/AHD/2007
A. Y.: 2003-04
Nareshchandra Popatlal Vs Income Tax Officer,
Shah Ward 10(3),
20, Kalyan Society, Ahmedabad.
Mithakhali,
Ellisbridge,
Ahmedabad-380006.
PAN No. ADFPS 9289 K
(Appellant) (Respondent)
For Assessee: Shri Mehul K. Patel, AR
For Department: Smt Neeta Shah, Sr. D R
ORDER
PER SHRI BHAVNESH SAINI, J.M. This appeal by assessee
is directed against the order of Learned Commissioner of Income Tax (Appeals)-XVI, Ahmedabad dated 11-12-2006 for Assessment Year 2003-2004.
2. We have heard learned representatives of both the parties, perused the findings of the authorities below and considered the material on record pointed out by the parties.
23. On Ground No.1 assessee challenged the disallowance of interest amounting to Rs.27,75,730/- under Section 36(1)(iii) of the IT Act. Briefly the facts of the case are that the Assessing Officer has mentioned in the assessment order that the assessee is carrying out the business of manufacture and sale of yarn and cloth and is proprietor of three concerns viz. N.P. Textile Mills, Nita Textile Industries and Nareshchandra Popatlal Shah. In the concern, Nareshchandra Popatlal Shah, the assessee has claimed deduction amounting to Rs.37,57,590/- towards interest expenses. Out of these expenses, Rs.9,81,860/- is claimed as attributable to income from property and the balance amount of Rs.27,75,730/- is claimed to be attributable to assessee's business. The Assessing Officer has mentioned that the assessee diverted borrowed funds towards interest free loans and advances and for non-business investments. The Assessing Officer has given break up of the interest free funds and investments diverted as under:
(a) Investment in income free deposits & shares. Rs.1,69,48,527/-
(b) Interest free loan and advance........ Rs. 58,40,130/-
(c) Investment in immovable property ........ Rs.1,47,60,479/-
(d) Debit balance of proprietors capital account..Rs. 36,64,691/-
-----------------------
Total............. Rs.4,12,13,827/-
The break-up of each of the tour heads is further given by the Assessing Officer at Page-6, 7 & 8 of the Assessment Order. As regards investment in deposits and shares, the Assessing Officer has 3 mentioned that out of investment of Rs.1,73,76,537/- in deposits and shares the assessee has shown interest on deposits of Rs.4,28,010/- with Progressive Mercantile Co.Op Bank. No. dividend or interest is shown on the balance investment of Rs.1,69,48,527/- which is nothing but diversion of interest bearing funds towards income free investments. The Assessing Officer has stated that out of the investment of Rs.1,69,48,527/-, the assessee has invested Rs.1,26,25,000/- in purchase of shares of Neptune Spinners Pvt. Ltd., a company in which the assessee has substantial interest. The Assessing Officer mentioned that purchase of these shares is not in connection with the business of the assessee i.e. trading in cloth and yarn. The shares were purchased either for controlling affairs of Neptune Spinners Pvt. Ltd. or for investment. The Assessing Officer held that the assessee diverted borrowed funds for non-business purposes to the extent of Rs.1,26,25,000/-. The Assessing Officer relied on the decision in the case of CIT Vs. Saraya Sugar Mills Pvt. Ltd., 201 ITR 181(All.), the decision in the case of CIT Vs. Saraya Sugar Mills Pvt. Ltd., 201 ITR 181 (All.), the decision in the case of Indian Shaving Products Ltd. Vs. CIT, 265 ITR 250 (Raj.) and the decision of ITAT, Ahmedabad in the case of Manish Krishnakant Bhatt Vs. ITO, 85 TTJ 872 (Ahd), 91 ITD 311(Ahd.).
3.1 As regards interest free loans and advances, the Assessing Officer has mentioned that the assessee has given interest free loans of advances amounting to Rs.60,37,130/- to sister concern. No interest has been charged on such loans of advances except loan of Rs.1,97,000/- given to Popatlal R. Shah H.U.F. The advances are 4 given to family members and have nothing to do with the business of the assessee. Hence, the balance advances of Rs.58,,40,130/- represent diversion of interest bearing funds towards interest free advances.
3.2 As regards investment of Rs.1,47,60,479/- in immovable properties, the Assessing Officer has stated that these properties are held as investment by the assessee. These properties are not at all utilized for business of the assessee. The assessee has not disclosed any rental income/other income from the properties. The assessee is not a dealer in property. The Assessing Officer held that the assessee has diverted interest bearing borrowed funds for acquisition of immovable property for investment only. The Assessing Officer has mentioned that the debit balance of Rs.36,64,691/- in the proprietor's capital account is not on account of loss sustained in the business but is due to overdrawing for his personal expenses or investment elsewhere.
3.3 The Assessing Officer has also produced balance sheet of the assessee for the three years ending on 31-03-01, 31-03-02 and 31- 03-03 on Page No.10 & 11 of the assessment order. The Assessing Officer has observed that from the three balance sheets, it is clear that the assessee's borrowings were not deployed for business purposes in any of these years. The deployment of funds were for fixed assets not used for business purposes, deposits and investments, loans and advances and none of these deployments have any business connection whatsoever with the business of the 5 assessee. The Assessing Officer has placed reliance on the decision of the Madras High Court in the case of K. Somsundaram & Brothers Vs. CIT, 238 ITR 939. In this judgment, the Madras High Court have held that the capital borrowed should be for the purpose of business or profession. It is implicit in this provision that the capital so borrowed should not only be invested but that the amount borrowed continued to remain in business. So long as the amount borrowed is used in the business, the interest paid on such borrowings is an expenditure which is required to be deducted in computation of income. The High Court have further observed that the object of the provision is not to enable an assessee to make large borrowings and create a liability for payment of interest thereon not only in the year in which the borrowings was made but in the subsequent year as well, keeping the loan outstanding and thereafter diverting the amount borrowed by taking it out of business by giving it interest free to relatives and partners but continue to pay interest out of the income of the business and claim that as business expenditure. The time at which the diversion takes place is not only the relevant criteria. The Assessing Officer has held that the assessee has diverted the borrowed money for making interest free advances and for making non-business investments. The Assessing Officer has also relied on the decision of the Supreme Court in the case of CIT Vs United 89 ITR 17, Kerala High Court in the case of CIT Vs. V.I. Baby & Co., 254 ITR 248 and decision of the Orissa High Court in the case of Indian Metal & Ferro Alloys Ltd. Vs. CIT, 193 ITR 344. The Assessing Officer has mentioned that the interest on the total amounts diverted works out to Rs.74,18,487/- at the rate of 18%. Since the assessee 6 has claimed interest expenditure of Rs.27,75,730/-, the Assessing Officer restricted the disallowance u/s. 36(1)(iii) to Rs.27,75,730/-.
4. The assessee challenged the addition before Learned Commissioner of Income Tax (Appeals) and it was submitted that the basis of disallowance of the interest is on account of borrowed funds have been diverted towards interest free loans and advances and non business investments. It was submitted with regard to all four items of interest free funds and investments that these are opening balances and hence diversion of interest free funds to non-interest bearing loan is not established and no nexus can be proved with the past year investments to the current interest bearing funds. The assessee therefore, submitted that it is clear that the whole of amount of Rs.4,12,13,227/- is mostly opening balance. There was no justification to disallow interest actually paid on the borrowed funds which are interest bearing. The assessee placed reliance on the decision of Karnataka High Court in the case of ITO Vs Sri Dev Enterprises 192 ITR 165. It was further submitted that the Assessing Officer has not drawn any nexus between the interest bearing funds and interest bearing loans, advances and investments in shares and immovable properties. It was submitted that amount given as loan, advances and made in the past year has nexus with the past year's funds which might be given out of the interest free funds or out of the interest bearing funds and hence, unless correlation or nexus between the interest bearing funds and interest free loan is established, there is no justification to disallow the interest u/s 36(1)(iii) of the IT Act. The learned Counsel for the assessee placed 7 relied on the decisions of the ITAT Ahmedabad Bench in the cases of ACIT Vs Neptune Textile Mills Ltd. in ITA No.4757/Ahd/1995, M/s. Ronak Dyes & Chemicals Vs ACIT in ITA No.2668/Ahd/1993 and Shahibaug Enterprise Vs ITO in ITA No. 2620 and 2621/Ahd/ dated 21-02-1994. He also relied upon the decision of the Hon'ble M.P. High Court in the case of R. D. Joshi & Co. Vs CIT 251 ITR 332 in which it was held that the Tribunal was not justified in law in disallowing the interest on entire debit balances including the opening balances of the partners.
5. The learned Commissioner of Income Tax (Appeals) considering the submissions of the assessee confirmed the additions. His findings in Para 13 to Para 19 are reproduced as under:
"13. I have carefully considered the arguments of the counsel for the appellant and the observations made by the Assessing Officer in the assessment order and have also carefully gone through the case-laws relied upon by the A O as well as by the counsel. I have also carefully perused the balance sheets of M/s. Nareshchandra Popotlal Shah for the three years ending on 31.3.01, 31.03.02 and 31.03. In this case, the A O has held that the appellant has advanced interest free loans or made investments under various heads which are not for business purposes amounting to Rs.4,12,13,827/-.The break-up of these investments and loans and advances is given by the A O in the assessment order. The A O's argument is that the appellant has paid interest by taking interest bearing loans whereas the interest free loans have been given or investments have been made for non- business purposes. The A O, thus, disallowed interest expenditure u/s. 36 (1) (iii). The main argument of the counsel for the appellant is that as regards the interest free loans and investments in immovable properties and 8 shares and these are mostly opening balances. Thus, the interest expenditure cannot be disallowed u/s. 36 (1) (iii) on the opening balances and n\moreover, no nexus has been established by the A O between the interest bearing loans taken by the appellant and the investments made for non-business purposes.
14. The A O has reproduced the balance sheets of M/s. Nareshchandra Popotlal Shah as on 31.03.2001, 31.03.2002 and 31.03.2003. The balance sheets are as under:
Particulars As on As on As on
31.03.03Am 31.03.02 31.03.01Am
ount (Rs.) Amount ount (Rs.)
(Rs.)
1. Source of Funds
Proprietor's capital Account 36,64,691 33,55,803 16,45,908
2. Loans & Advances
i)Secured Loans 1,24,11,959 32,59,609 32,90,453
ii)Advance against capital 1,00,0001 - -
goods Jaytech Hydralics
iii)Advance Rent - SBI 11,93,876 - -
(C.A.G. Bs.)
iv)Unsecured loans 1,56,34,906 - -
(considered goods)
Application of Funds 2,56,76,050 1,17,68,690 1,19,88,557
1.Fixed Assets 1,48,93,253 1,43,42,979 1,30,56,534
2.Capital work in progress 1,87,800 1,87,800 2,57,800
3.Loans & Advances
i)Loans to relatives, 60,37,130 1,86,87,230 5,19,000
9
associate concern & others
4. Current Assets &
Properties
i)Inventorised stock in trade - - -
as valued and certified by
the assessee
ii)Sundry debtors for goods 2,93,827 5,55,500 -
iii)Cash & Bank Balance 62,292 3,21,325 52,76,985
Less: 5. Current Liabilities
& Provisions
i)Sundry creditors for goods 1,34,94,554 26,67,556 1,09,23,558
ii)Sundry Liability & 1,61,525 61,114 3,150
provisions
iii)Other credit balance - 9,95,852 -
6.Net Current Assets 1,32,99,960 2,68,47,697 56,49,723
7,Other debit balance 4,81,290 4,59,571 4,51,811
Total 2,56,76,050 1,17,68,690 11,98,88,577
15. From the three balance sheets, it is clear that the secured loans have increased from Rs.32 lacs (approx.) in the earlier two years to Rs.1.24 crores in the year under consideration. The unsecured loans have also increased from Rs.1.03 crores to Rs.1.18 crores and Rs.1.56 crores in the year under consideration. Interestingly under the heading application of funds the inventory of stock is Nil in all the three years. The sundry debtors for goods are nominal and are Rs.2.93 lacs in the year under consideration. The investment in fixed assets of business is negligible. This shows that the investment of the appellant in the business is negligible. The secured and unsecured loans and the sundry creditors have been utilized by the appellant for making deposits and investments, giving loans and advances, making investment in immovable properties and meeting the debit balance of the proprietor's capital. All these utilization of funds are for non-business purposes and are not earning any income. From the P. & L. A/c. of M/s. Nareshchandra Popotlal Shah, it is seen that the interest expenditure was Rs.17,72,139/- in A. Y. 2002-03 which has increased to Rs.37,57,590/- in the A. Y. 2003-04 under consideration. The appellant has rental income of more than Rs.47 lacs 10 which is considerably reduced by claiming interest expenditure.
16. I agree with the views of the A O that interest u/s. 36(1)(iii) cannot be allowed to the appellant on the interest bearing loans when the appellant has given interest free loans and advances and has made investments for non- business purposes. The Madras High Court's decision relied upon by the A O in the case of K. Somsundaram & Brothers Vs. CIT, 238 ITR 939 is clearly applicable on the facts of the present case. The Madrash High Court has held that the capital borrowed should not only be invested in the business but the amount borrowed continues to remain in the business. From this, it is clear that there is no need of nexus between the interest bearing loans taken and interest free advances give. Once the appellant has taken interest bearing loans for business purposes, these loans should continue to remain invested in the business in the business even in the subsequent year. No doubt, the interest free advances and investments made for non-business purposes are the opening balances this year but the interest bearing loans taken by the appellant have been utilized for discharging the liabilities which are not for business purposes. In the statement of facts at Page No.4, the appellant has mentioned that there is increase in interest bearing funds during the previous year to the extent of Rs.1,62,02,964/-. The appellant has tried to explain that these interest bearing loans taken have been utilized for making payments to the creditors of goods purchased and also for reducing interest bearing loans taken from Naresh Textile Mills. This clearly shows that interest bearing loans taken by the appellant during the year have not been utilized for the purpose of 11 business. In case, the appellant had not made investment for non-business purposes and had not advanced interest free loans amounting to more than Rs.4.12 crores, there was no need for the appellant to take interest bearing loans of Rs.1.62 crores. The A O has mentioned in the assessment order that action as per the law is being taken for earlier years in the case of the assessee to withdraw the claim of interest payment u/s. 36(1)(iii). Hence, there is no force in the arguments of the appellant that disallowance of interest has been made on the opening balances and such disallowance has not been made in the earlier year.
17. The interest bearing loans of Rs.1.62 lacs taken by the appellant this year and the interest bearing loans of Rs.1.30 crores (approx.) taken in the earlier years have all been utilized by the appellant for non-business purposes which is clear from the balance sheets discussed earlier. The investment of the appellant is negligible in all the years. Hence, interest expenditure is not allowable on the interest bearing loans taken by the appellant which have been utilized for non- business purposes. Moreover, there is no need of establishing nexus between the interest bearing loans taken and interest free advances given and investments made because all the interest bearing loans raised by the appellant have been utilized for non-business purposes. All the case laws relied upon by the appellant are not applicable to the facts of the appellant's case.
18. Even in a situation where the interest bearing loans have been partly used for business purposes and partly for non-business purposes, there is no need of establishing the nexus. The reliance in this regard is placed on the decision of 12 Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd., 286 ITR 1. In this decision, the High Court have held that onus will be on the assessee to satisfy the A O that whatever loans were raised by the assessee were used for business purposes. If it transpired that the assessee had advanced certain funds to sister concern or any other person without any interest, there would be very heavy onus on the assessee to discharge before the A O to effect that inspite of pending term loan and working capital loan on which the assessee is incurring liability to pay interest, there was justification to advance loans to the sister concern for non- business purposes without any interest. The High Court further observed that the entire money in business entity comes in a common kitty. Whatever are the receipts in the business have the colour of business receipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowings to the extent of amount lent to sister concern without carrying any interest for non-business purposes would be that the assessee had some loans or other interest bearing debts to be repaid. The High Court further held that once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced without carrying any interest and without any business purposes, the interest to the extent advance had been made without carrying any interest is to be disallowed u/s. 36(12)(iii) of the Act. The Hon'ble High Court has discussed the decision of Allahabad High Court in the case of CIT vs. Radico Khaitan Ltd., 274 ITR 354, Delhi High Court's decision in the case of CIT Vs. Tinbox Co., 260 ITR 637 and also the decision of M. P. High Court in the case of R. D. Joshi & Co. Vs. CIT, 251 ITR 332 and dissented 13 from these judgements. In view of the Punjab & Haryana High Court's decision reported in 286 ITR 1 which is a later judgement and which has discussed the M. P. High Court's decision, the reliance placed by the appellant on the M. P. High Court decision in the case of R. D. Joshi & Co. is rejected.
19. It is clear that the appellant has given interest free advances and has also made investments in shares and immovable properties for non-business purposes to the extent of Rs.4.12 crores whereas the appellant has taken interest bearing loans to the extent of Rs.2.90 crores including loan of Rs.1.62 crores during the year under consideration. Interestingly, the investment of the appellant in the business is negligible. It is not a case where a part of the interest bearing loans have been diverted for non- business purposes. The appellant has utilized entire amount of the interest bearing loans for non-business purpose and hence all the loans taken are not for business purposes. As regards loans of Rs.1.62 crores taken during the year, the better option for the appellant was to reduce its investments or interest free advances rather than resort to taking interest bearing loans. Thus, following the Madras High Court's decision in the case of K. Somsundaram & Brothers Vs. CIT, 238 ITR 939 and the Punjab & Haryana High Court's decision in the case of CIT Vs. Abhishek Industries Ltd., 286 ITR 1, it is held that the interest bearing loans have been taken by the appellant for non-business purposes. The interest amounting to Rs.27,75,730/- disallowed by the A O u/s. 36(1)(iii) is upheld. This ground of appeal is rejected".14
6. The learned Counsel for the assessee reiterated the submissions made before authorities below and submitted that opening balances are earlier year's loan and advances have reduced in this year. Interest bearing funds was used for payment to creditors. No disallowance of interest has been made in earlier years despite orders are framed by the A O u/s 143(3) of the IT Act. He has referred to statement of facts filed before the learned CIT (A) in which on all the four items which are considered for the purpose of disallowance of the interest, explained that these are opening balances carried forward from the past years. It was also explained that A O while analysing balance sheet as on 31-03-2003 has not considered the funds generated during the year which were non-interest bearing. On 31-03-2002 there was a sum of Rs.1,86,87,230/- as balance and as on 31.03.2003 a sum of Rs.60,37,130/- was the balance. It was application of funds and reduced the liability of the assessee. Rs.1,26,50,100/- was converted into purchase of shares of Neptune Spinners Ltd. and hence purchase of shares were not out of interest bearing borrowed funds. Details of availability of funds are also explained. It is stated that interest bearing funds have been utilized in payment to the creditors which is shown as under:
Borrowings Rs.
Increase in interest bearing funds
15
during previous year 16202964/-
Utilization
Payment to creditors due for
goods during the year
(Rs.26667556/- - Rs.13494554/-) 13173002/-
Other amounts bearing interest
Naresh Textile
(Rs.10006828/- - Rs.4988688/-) 5018140/-
Total 18191142/-
As per the above statement it will be found that interest bearing funds received during the year are used for the purpose of business i.e. payment to creditors for goods and to reduce interest bearing loans. It was explained that the A O had taken the view that on four items assessee diverted the amount for loans and advances which are opening balances, therefore, no nexus proved between interest bearing borrowings and disallowed interest. He has referred to PB 259 and 260 which is reply filed before the A O in which it was explained that assessee paid Rs.1,81,91,142/- during the year towards amount due for goods. He has referred to PB 271 to show financial charges. He has referred to PB 277 to show loan and advances to relatives and associates in a sum of Rs.1,86,87,230/- as on 31-03-2002 which reduced to Rs.60,37,130/- as on 31-03-2003. PB -290 is the details of loan to related concerns. He has submitted that in the assessment year under appeal opening balances of earlier 16 years have reduced, therefore, no advance is given in the assessment year under appeal to the relatives and associates. He has therefore, submitted that authorities below were not justified in making the disallowance. On the other hand, learned Departmental Representative relied upon orders of authorities below and submitted that funds were not deployed for the purpose of business, therefore, authorities below were justified in disallowing the interest.
7. We have considered the rival submissions and material available on record. Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs CIT (A) 288 ITR 1 held that "decisions relating to section 37 will be applicable to section 36(1) (iii) because in section 37 also the expression used is "for the purpose of business". For the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby". Hon'ble Karnataka High Court in the case of CIT Vs Sri Dev Enterprises 192 ITR 165 held "that the amount due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status could not be different from its nature and status as on the last day of the previous year. Regarding past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years. This could be only on the assumption that those advances were 17 not out of borrowed funds of the assessee. This finding during the previous years was the very basis of the deductions permitted during the past years. It would not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject- matter of previous years' assessments". Hon'ble M. P. High Court in the case of R.D. Joshi & Co. Vs CIT 251 ITR 332 held "The assessee was a partnership firm assessed in the status of a registered firm. For the assessment years 1978- 79, 1979-80, 1980-81 and 1981-82, the assessee claimed deduction of interest on borrowings. The Income-tax Officer held that the borrowings, to the extent of the overdrawings and consequent debit balance to the partners' account were not utilized for the purpose of the business therefore disallowed the interest paid to the creditors to the extent of the followings not utilized for the business. On appeal the Commissioner of Income-tax (Appeals) held that the Department failed to establish a direct nexus between the borrowings and the withdrawals made by the partners and that the order of the Assessing Officer was not sustainable. The Tribunal held that the order of the Commissioner of Income-tax (Appeals) was incorrect and erroneous and confirmed the order of the Assessing Officer. On a reference: Held that when the Tribunal was to dislodge the order passed by the appellate authority it was obligatory on the part of the Tribunal to demonstrate as to how the findings recorded by the appellate authority were not 18 consistent with the facts and the provisions of law. It was obligatory on the part of the Tribunal to demonstrate as to how the Department proved a nexus between the borrowings and withdrawals made by the partners. It was obligatory on the part of every appellate authority to point out by good and acceptable reasoning as to how the facts and circumstances of one case happened to be different from other cases. It was improper to close the doors to a litigant by a casual treatment of some statements moving towards a conclusion that the precedents on which such litigant relied were different from his case. Therefore, the Tribunal was not justified in law in disallowing the interest on the entire debit balances, including the opening balances of t he partners". ITAT Ahmedabad "B" Bench in the case of M. Rajvi & Co. Vs DCIT in ITA No.1745/Ahd/1995 dated 23-01-2001 copy of which is filed by learned Counsel for assessee, considering the identical issue of opening balances of the earlier years by following the decision in the case of Sri Dev Enterprises (supra) deleted the disallowance of interest.
8. Considering the facts in the case in the light of the above decisions, it is clear that the authorities below have not appreciated the contention of the assessee in proper perspective. The material on record prima facie proves that all the four items which have been considered by the authorities below for the purpose of disallowing the interest, 19 are the opening balances in the assessment year under appeal. The A O has not made any disallowance out of the interest in the preceding assessment years 2001-02 and 2002-03 in the orders u/s 143(3) of the IT Act. The material on record also makes it clear that the assessee paid Rs.1,81,91,142/- in the assessment year under appeal for repayment to the creditors and there was increase in the borrowings of Rs.1,62,02,964/-. The comparative study of the balance sheets of the preceding assessment years and the balance sheet of the assessment year under appeal also makes it clear that the amount of loan and advances to the relatives and associate concerns have reduced in the assessment year under appeal. It would also support contention of learned Counsel for assessee that in the assessment year under appeal the opening balances of the earlier years have reduced and no new advance has been given in the assessment year under appeal to any relatives or the others. The learned CIT (A) has also noted in Para 16 of the order that the interest free advances and investments made for non-business purposes are the opening balances this year. It is also not clarified by the authorities below as to how there was a nexus between borrowed funds and the funds alleged to have been diverted for non-business purposes. The above facts and material on record clearly proves that the authorities below have not considered the issue properly. The matter, therefore, requires reconsideration in the light of the observation 20 above and the decisions cited. We accordingly set aside the orders of authorities below and restore this issue to the file of A O with direction to re-decide this issue in the light of the observation in this order and the decisions quoted above. As a result, this ground of appeal of the assessee is allowed for statistical purposes.
9. On ground No.2 assessee challenged the addition on account of disallowance of fuel expenses of Rs.8,40,208/-. The A O has mentioned in the assessment order that the assessee has claimed fuel expenses amounting to Rs.16,63,931/- in the case of M/s. N.P. Textile Mills, proprietary concern of the assessee. In the immediate previous year , these expenses were Rs.8,23,723/- whereas the turnover was Rs.8.89 crores as against the turnover of Rs.2.26 crores this year. Thus, the fuel expenses have increased substantially whereas the turnover has reduced considerably. The fuel account is of the sister concern, Neptune Spinners Ltd. from whom the fuel has been purchased. The A O stated that the reply furnished by the assessee is not satisfactory and convincing with regard to the disproportionate increase in the expenditure which is more than double. The assessee has also not filed any evidence which could satisfy such abnormal rise in the fuel expenses. The A O, therefore, considered the fuel expenses at the level of previous year to be reasonable and made disallowance of Rs.8,40,208/- under this head. Before the 21 learned CIT (A) it was submitted that up to assessment year 2001-02, the assessee was using steam from group company but due to some legal and technical problems, it has to use fire wood and wood bhusu for boiler. It was further submitted that since these items contain water and moisture, the heat generated is less and it became costlier for generation of heat and hence, the production was substantially reduced. He further submitted that the entire fuel expenses cannot be disallowed. The learned CIT (A) considering the facts and the submissions of the learned Counsel for the assessee upheld the disallowance made by the A O. His findings in Para 23 are reproduced as under:
"23. I have carefully considered the observations of the A O and the arguments of the counsel for the appellant. The turnover of the appellant during the previous year was R.8.89 crores and the fuel expenses were Rs.8,23,723/-.
This year, the turnover has decreased substantially to 2.26 cores whereas the fuel expenses have gone upto Rs.16,53,931/-. In fact, the fuel expenses have increased eight times with respect to turnover. The appellant has not furnished any plausible explanation with supporting evidence for phenomenal increase in the fuel expenses before the A O nor has furnished any supporting evidence by giving calculation such as production in quantitative term and the quantity of steam used per unit of production and the quantity of fire woods used per unit of production. In the absence of any plausible explanation given by the appellant along with supporting evidence for the substantial increase in the fuel expenses, the disallowance 22 made by the A O is held to be very reasonable and justified. The addition made by the A O is upheld and this ground of appeal is rejected.
10. The learned Counsel for the assessee reiterated the same submissions made before authorities below. He has submitted that A O has disallowed part of the expenditure after comparing the same with the expenses of the earlier years without pointing out any defect in any vouchers or details. Expenses have not been doubted. The details of the expenses are filed in the paper book at PB - 182 to 210. On the other hand, the learned D R relied upon orders of the authorities below and submitted that onus on assessee has not been discharged by producing evidence of actual user of fuel etc.
11. We have considered rival submissions. The Assessing Officer compares the expenses of this year with the earlier years. Nothing is pointed out in the assessment order if assessee claimed any inadmissible expenditure on this issue. There may be several factors for increase in the expenditure. A O shall have to prove that the expenditure was not laid out wholly and exclusively for the purpose of business. Merely expenditure have increased in this year is no ground to reject the claim of the assessee. A O has not doubted genuineness of the expenditure. The assessee has filed details of the expenditure in PB 182 to 210 supported by all bills and vouchers. We, therefore, do not find any 23 justification to sustain the orders of authorities below. We accordingly set aside the orders of the authorities below and delete the entire addition. As a result, this ground of appeal of assessee is allowed.
12. On ground No.3 assessee challenged the disallowance of payment of Rs.2,36,749/- made in cash u/s 40A(3) of the IT Act. The Assessing Officer has mentioned that the assessee has made cash payments in the concern M/s. N.P. Textile Mills which are in contravention of provisions of section 40A(3). These payments have been made otherwise than by crossed bank cheque/draft. The payments have been made for purchase. The total of such payments made by M/s. N. P. Textile Mills is Rs.4,01,508/-. It was also observed by the A O that the assessee made payments otherwise than by crossed bank cheque/draft to his concern, M/s. Nita Textile & Industries for power consumption and purchases amounting to Rs.7,82,235/- in contravention of the provisions of section 40A(3). Before the A O it was submitted by the assessee that payments were made in cash due to the fact that the cheques issued were returned due to liquidity problem. The A O did not accept the contention of the assessee because the assessee failed to substantiate his contention and disallowed 20% of this expenditure u/s 40A (3) amounting to Rs.2,36,749/-. Before the learned CIT (A) the assessee submitted that the assessee was under serious financial 24 crisis during the year under appeal. He issued cheques to Ahmedabad Electricity Company and to other parties for electric power consumption and the cheques was returned due to shortage of funds and therefore, the assessee was compelled to make the cash payment under such constraints. The learned CIT (A) on consideration of the submissions of the assessee upheld the addition made by the A O. His findings in Para 25 are reproduced as under:
"25. I have carefully considered the arguments of the counsel for the appellant and the observations of the A O. The argument taken by the counsel is contradictory. On one hand, the counsel has stated that the cheques of the appellant were returned due to shortage of funds whereas on the other hand, he stated that the appellant was forced to make payments in cash. When the appellant had cash available with him, it is not understood why the cheques issued by him were not cleared but returned. The appellant could have easily deposited the available cash in the bank account and the cheques issued by him would have been cleared. Thus, it is clear that the payments for purchases and for electricity consumption have been made by the appellant otherwise than crossed cheques/bank draft in contravention of the provisions of section 40A(3) without any plausible explanation. The disallowance of Rs.2,36,749/- made by the A O is confirmed. This ground of appeal is rejected."
13. Learned Counsel for the assessee reiterated the same submissions. He has submitted that cheques were given to various parties for electricity consumption and for 25 purchases which were dishonored. Therefore, parties insisted for cash payment. Accordingly cash amount was paid for power consumption and purchases. The details are filed at PB-131 and PB -166 supported by all the vouchers and bills and dishonored cheques. He has submitted that due to the above compelling reasons assessee made the cash payments to the parties. On the other hand, the learned D R relied upon the orders of the authorities below and submitted that statutory auditor of the assessee stated in the statement that the above amounts are inadmissible because the same expenses are paid in cash contravening the provisions of section 40A(3) of the IT Act. The learned D R submit ed that since the auditor has stated that these are inadmissible expenses and explanation of assessee is not supported by any evidence or confirmation, therefore, additions were rightly made by the authorities below. Learned D R submitted that when cash was available with the assessee, there was no reason not to deposit the same in the bank account for clearing the payments of the cheques.
14. We have considered rival submissions. The Assessing Officer has mentioned in the assessment order specifically that statutory auditor of the assessee categorically mentioned in the statement that the above amount are inadmissible u/s 40A (3) of the IT Act. This fact was also noted in the audit report. The assessee claimed that since 26 cheques were returned dishonored therefore, parties insisted for cash payment. Though the details are filed by the assessee in the paper book that cheques returned dishonored but no details are filed in the paper book to show and prove that the parties insisted for cash payments. The explanation of the assessee is, therefore, not supported by any evidence and material on record. Thus, the assessee has not satisfied the A O about the genuineness of the transactions and the explanation offered about insistence of cash payment by the parties. No confirmation from the parties is also filed to show that parties have insisted for cash payment. Hon'ble Punjab & Haryana High Court in the case of Aggarwal Steel Traders Vs CIT 250 ITR 738 held "(i) that the explanation rendered by the assessee in respect of the payments of Rs.24,000 and Rs.40,000 would be covered by the exceptional circumstances as provided in t he Board's circular, yet that by itself would not entitle the assessee to claim the relief. There is a further requirement provided in the Board's circular itself of furnishing a confirmatory letter from the concerned parties. Admittedly, no such letter in the above terms had been furnished by the assessee. Hence, the Tribunal was justified in sustaining the addition of Rs.64,000 in view of the provisions of section 40A(3) read with rule 6DD of the Income-tax Rules, 1962". Considering the above facts in the light of the above discussion and auditors remark, we do not find any justification to interfere 27 with the orders of authorities below. We accordingly confirm the findings of the authorities below and dismiss this ground of appeal of the assessee.
15. No other point is argued or pressed.
16. As a result, appeal of the assessee is partly allowed.
Order pronounced in the open Court on 11-06-2010 Sd/- Sd/-
(D. C. AGRAWAL) (BHAVNESH SAINI)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 11/06/2010
Ankit/Lakshmikant/-
Copy of the order forwarded to:
1. The Appellant
2. The Respondent
3. The CIT concerned
4. The CIT(A) concerned
5. The DR, ITAT,
6. Guard File
BY ORDER
ूित //True Copy//
DY.R/AR, ITAT, AHMEDABAD