Indian Kanoon - Search engine for Indian Law

Income Tax Appellate Tribunal - Mumbai

Acit 14(3), Mumbai vs Assessee on 22 February, 2012

             IN THE INCOME TAX APPELLATE TRIBUNAL
                    MUMBAI BENCH "J", MUMBAI

                   Before D.K. Agarwal, Judicial Member
                   & Shri P.M. Jagtap, Accountant Member

                           I.T.A. No. 1063/Mum/2008.
                           Assessment Year : 2001-02.

Asstt. Commissioner of Income-tax,                Trend Setters,
14(3), Mumbai.                            Vs.     265, Shamaldas Gandhi Marg,
                                                  Engineer Bldg.,
                                                  Mumbai - 400002.
                                                  PAN AAAFT1573
Appellant.                                            Respondent.

                         Appellant by : Shri C.G.K. Nair.
                        Respondent by : Shri B.V. Jhaveri.

                         Date of Hearing : 22-02-2012
                      Date of pronouncement : 24-02-2012

                                  O R D E R.

Per P.M. Jagtap, A.M. :

This appeal is preferred by the Revenue against the order of learned CIT(Appeals)-XV, Mumbai dated 10-12-2007 whereby he restricted the disallowance of Rs.1,38,03,071/- made by the AO on account of interest to Rs.9,52,000/-.

2. The assessee in the present case is a partnership firm which is engaged in the business of export of bed liner. In the assessment completed for the year under consideration u/s 143(3) by an order dated 25-03-2004, the total income of the assessee was determined by the AO at Rs.44,62,290/- against the returned income of Rs.8,92,460/-. The said assessment was set aside by the learned CIT-XIV, 2 ITA No.1063/Mum/2008 Mumbai vide his order dated 28-03-2006 passed u/s 263 with a direction to the AO to make the assessment afresh after making proper and sufficient enquiries in relation to the assessee's claim for deduction on account of interest of Rs.1.38 crores. Accordingly the claim of the assessee for deduction on account of interest wax examined by the AO. He noted that loans of Rs.9.04 crores were advanced by the assessee to its sister concerns and others in the year under consideration without charging any interest. He also noted that interest of Rs.1.38 crores, on the other hand, was paid by the assessee on the borrowed funds of Rs.4.61 crores. He, therefore, required the assessee to explain as to whether the borrowed funds were utilized for giving interest free advances to its sister concerns and others. He also required the assessee to show as to how the borrowed funds of Rs.4.61 crores were utilized for the purpose of its business. According to the AO, the assessee, however, could not furnish the relevant details and documents to support and substantiate its claim for deduction on account of interest of Rs.1.38 crores. He, therefore, disallowed the claim of the assessee for the said deduction in the assessment completed u/s 143(3) read with section 263 vide an order dated 12-12- 2006.

3. Against the order passed by the AO u/s 143(3) read with section 263, an appeal was preferred by the assessee before the learned CIT(Appeals). During the course of appellate proceedings, it was submitted on behalf of the assessee before the learned CIT(Appeals) that the details already available on record before the AO were sufficient to show that the assessee had enough own funds in the form of partners' capital of Rs.12.24 crores and reserve and surplus of Rs.27.21 lakhs which were sufficient to give interest free loans to its sister concerns and others. It was pointed out that out of total interest of Rs.1,38,03,071/- paid during the year under consideration, interest of Rs.26,12,641/- paid on account of bill discounting, 3 ITA No.1063/Mum/2008 interest of Rs.55,46,238/- paid on packing credit limit and interest of Rs.2,13,768/- on temporary overdraft taken from bank was essentially paid for the purpose of business and the same, therefore, was undoubtedly allowable as business expenditure. It was also pointed out that out of the total loans and advances of Rs.9.04 crores, the advances to the extent of Rs.5.03 crores only were given to the sister concern without interest and out of the said amount of Rs.5.03 crores loans and advances given to M/s Trend Setters KFTZ amounting to Rs.2.01 crores and to M/s Shruti Corporation amounting to Rs.27.62 lakhs were given during the course of business. It was submitted that the said two concerns were regular suppliers of the assessee firm and the advances were given to them against supply of goods. As regards the remaining loans given to others, it was contended before the learned CIT(Appeals) that the assessee had sufficient own funds in the form of partners' capital and reserve and surplus to give the said advances free of interest and there being no diversion of borrowed funds for giving the said advances, disallowance on account of interest made by the AO was not justified.

4. The above submissions made by the assessee were forwarded by the learned CIT(Appeals) to the AO for his examination and comments. Accordingly a remand report was submitted by the AO to the learned CIT(Appeals) offering his comments on the submissions made before the learned CIT(Appeals). After taking into consideration the submissions made by the assessee as well as by the AO in the light of material available on record, the learned CIT(Appeals) found that interest paid by the assessee on bill discounting facility, packing credit limit and temporary overdraft availed from the bank was the expenditure essentially incurred for the purpose of business going by the very nature of credit facility availed from the bank. He noted that there was nothing brought on record by the AO to dispute this position which was clearly apparent from the record. As regards interest free 4 ITA No.1063/Mum/2008 loans and advances amounting to Rs.9.04 crores given by the assessee, the learned CIT(Appeals) found that only a sum of Rs.5.30 crores out of the same represented advances given by the assessee to its 8 sister concerns. He also found that out of the said amount of Rs.5.30 crores, advances given to M/s Trend Setters KFTZ and M/s Shruti Corporation aggregating to Rs.2.29 crores were given by the assessee for the purpose of its business as the said two sister concerns were regularly supplying goods to the assessee and the said advances were given against supply of goods. As regards the balance amount of Rs.3.01 crores given by the assessee firm its sister concerns without any interest, the learned CIT(Appeals) held that although the assessee firm had its own funds to the extent of Rs.12.51 crores in the form of partners' capital and reserve and surplus, it was a case of mixed funds whereby all resources were mixed together and utilization for the different purposes was from common funds. He, therefore, worked out the disallowance to be made out of balance interest of Rs.54.23 lakhs on proportionate basis in the ratio of the amount of Rs.3.01 crores given by the assessee to its sister concern without any interest to total funds available at Rs. 17.13 crores. Accordingly, the quantum of disallowance to be made out of interest was worked out by the learned CIT(Appeals) at Rs.9,52,000/- and the addition made by the AO on this issue was restricted by him to that extent.

5. Aggrieved by the order of the learned CIT(Appeals), the Revenue has preferred this appeal before the Tribunal on the following grounds :

1. The order of the CIT(A) is opposed to law and facts of the case.

2. The CIT(A) erred in deleting the addition on account of interest of Rs.26,12,641/- on bill discounting, interest of Rs.55,46,238/- on packing credit loan and interest of Rs.2,13,768/- on temporary overdraft without appreciating the fact that assessee could not prove the commercial expediency of the same even at the appellate stage.

3. The CIT(A) failed to appreciate the fact that no evidence was produced by the assessee to prove that the loans fir bill discounting, packing credit and temporary overdraft were used exclusively for the purpose of business.

4. The CIT(A) erred in deleting the interest of Rs.44,78,424/- on the loans taken for business purposes diverted for non-business purposes to sister concerns.

5. The CIT(A) erred in working out the diversion of fund for non-

business purposes to sister concerns at only Rs.9,52,000/- without appreciating the fact that there is a diversion of funds to sister concerns to the tune of Rs.5.30 crores free of interest.

6. We have heard the arguments of both the sides and also perused the relevant material on record. As agreed by the learned representatives of both the sides, ground No. 1 raised by the Revenue in this appeal is general seeking no specific decision from us.

7. As regards ground Nos. 2 and 3, the learned representatives of both the sides have agreed that the common issue covered therein is squarely covered in favour of the assessee and against the Revenue by the decision of coordinate bench of this Tribunal rendered in assessee's own case for assessment year 2005-06 vide an order dated 05-02-2010 passed in ITA No. 3801/Mum/2008 wherein it was held that credit limits availed from the bank for specific purposes such as packing credit limit, bill discounting limit etc. could not be used for non business purposes and the said limits being meant only for the purpose of business, interest paid thereon could not be disallowed. Respectfully following the said decision of the coordinate bench of this Tribunal in assessee's own case for assessment year 2005- 06, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on a similar issue in the year under consideration and dismiss ground Nos. 2 and 3 of the Revenue's appeal.

8. As regards the common issue raised in ground No. 4 and 5 relating to the disallowance of balance amount of interest made by the AO at Rs.54,23,923/- which has been sustained by the learned CIT(Appeals) to the extent of Rs.9,52,000/-, it is observed that although loans and advances amounting to Rs.5.30 crores were given by the assessee firm to its sister concerns without interest, the said advances to the extent of Rs.2.29 crores were given to the two sister concerns, namely, M/s Trend Setters KFTZ and M/s Shruti Corporation for the purpose of assessee's business. The said two firms were regular suppliers of the assessee firm and as accepted by the AO himself in the remand report, supply of substantial goods was made by the said two concerns to the assessee in the earlier year as well in the year under consideration. The amount of Rs.2.29 crores advanced by the assessee to the said sister concerns thus was for the purpose of its business being advanced against supply of goods and it cannot be said that there was a diversion of borrowed funds by the assessee for non business purpose to that extent. The remaining amount of Rs.3.01 crores given as advances to the other sister concerns without any interest was claimed to be given by the assessee out of its own funds available at the relevant time. As claimed by the assessee, own funds to the extent of Rs.12.51 crores were available with it in the form of partners' capital of reserves and surplus and this position has not been disputed either by the AO or by the learned CIT(Appeals). The assessee thus had sufficient own funds to give advances of Rs.3.01 crores to its sister concerns without any interest and in our opinion, it cannot be said that there was a diversion of borrowed funds by the assessee for giving the said advances. The learned CIT(Appeals), however, has sustained the disallowance out of interest to the extent of Rs.9,52,000/- on proportionate basis keeping in view that it was a case of mixed funds where assessee's own funds and the borrowed funds were pulled in a common account and also utilized from that common account making it difficult to establish the 7 ITA No.1063/Mum/2008 nexus between own funds and advances given to the sister concerns without any interest. Having regard to all the facts of the case, we find no infirmity in the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue by restricting the disallowance of Rs.54,23,923/- made by the AO out of interest to Rs.9,52,000/- and upholding the same, we dismiss ground Nos. 4 and 5 of the Revenue's appeal.

9. In the result, the appeal of the Revenue is dismissed.

Order pronounced on this 24th day of February, 2012.

                 Sd/-                                 Sd/-
             (D.K. Agarwal)                       (P.M. Jagtap)
            Judicial Member.                    Accountant Member

Mumbai,
Dated: 24th February, 2012.

Copy to :

     1.   Appellant
     2.   Respondent
     3.   C.I.T.
     4.   CIT(A)
     5.   DR, J-Bench.
                             (True copy)                   By Order


                                                       Asstt. Registrar,
                                               ITAT, Mumbai Benches, Mumbai.
 Wakode




                         .