Income Tax Appellate Tribunal - Ahmedabad
Lalit Motors Ghabheni, , Surat vs Assessee on 1 April, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD ''C " BENCH - AHMEDABAD
Before Shri Rajpal Yadav, JM, & Shri Manish Borad, AM.
ITA No.2289/Ahd/2015
Asst. Year: 2008-09
Shree Lalit Motors, Vs. Income-tax Officer,
256, Near Unn Patia, Ward 6(2), Surat.
Sachin Magdalla Road,
Surat.
Appellant Respondent
PAN AAAFL9366Q
Appellant by Mr. Pallav Desai, AR
Respondent by Mr. Alok Kumar, Sr. DR
Date of hearing: 20.1.2016
Date of pronouncement: 01/04/2016
ORDER
PER Manish Borad, Accountant Member.
This appeal of the assessee is directed against the order of ld. CIT(A)-1, Surat, dated 8.5.2015 which was passed against order u/s 143(3) r.w.s. 147 of the IT Act, 1961 for Asst. Year 2008-09 framed on 21.3.2014 by ITO, Ward-6(2), Surat. Assessee has raised following grounds in this appeal:-
1. The Ld CIT-(Appeals)-1, Surat has erred in upholding jurisdiction of the AO u/s 147 for reopening of the assessment. On facts and in law the Ld Ito Ward 6(2) lacked jurisdiction for reassessment as a. The reasons are based on change of opinion, b. The reasons are vague and based on suspicion.
The appellant submits that as the reassessment proceedings initiated by Ld. Ito ward 6 (2) are not valid in law, the Asstt. Order and the consequent additions are to be quashed.
ITA No. 2289/Ahd/2015 2Asst. Year 2008-09
2. The Ld CIT-(Appeals}-1,Surat has erred in confirming disallowance of interest of Rs.
5,56,268 on Kotak Term Loans when the said borrowed funds are not used in advancing loans and advances to various parties, as per assessee's submission to AO dated 27/1/2014 Para 1 to 3 and Cash Flow statement As per Ann A to Submission dated 18/3/2014.
3. The Ld CIT-(Appeals)-1,Surat has erred in confirming disallowance of interest of Rs.
5,56,268 without distinguishing between the part of borrowed funds on which interest paid was claimed and part of the borrowed funds on which interest paid , was not claimed as explained by the assessee vide his submission to CIT(A) dated 5/5/2015.
4. The Ld CIT-(Appeals)-1, Surat has erred in confirming the addition without considering and appreciating the facts stated by the assessee vide his submissions dated 27/1/2014 Para 1 to 3 and submission dated18/3/2014 Ann A Cash Flow Statement.
5. Without Prejudice to what is stated in the above grounds appellant submits that even if the funds are assumed to be used for advancing the loans, the same are given out of commercial expediency and therefore to be considered as advanced for business purpose.
6. The Assessee craves leave to add, alter or vary any of the grounds of Appeal.
2. Briefly stated facts as culled out from the assessment records are that assessee is a partnership firm, it filed its return of income on 30.09.3008 showing total income at Rs.NIL. Thereafter assessment was completed u/s 143(3) of the Act on 10.12.2010 determining total income at Rs.NIL. Notice u/s 148 of the Act was issued on 28.03.2013 for the reason that assessee has diverted interest bearing funds towards giving loans and advances without charging any interest thereon. In reply to notice u/s 148 assessee submitted that original return of income filed may be treated as return furnished in response to notice u/s 148. The reasons for issuance of notice u/s 148 of the Act and initiation of action u/s 147 of the Act given by Assessing Officer read as below :-
"On verification of the balance Sheet annexed with the return of Income, it is seen that the assessee has taken secured loan of Rs.85,62^788/- from various banks and also obtained unsecured loan of Rs.9,84,303/- from various persons. In the profit and loss account assessee has claimed interest expenses of ITA No. 2289/Ahd/2015 3 Asst. Year 2008-09 Rs.7,27,496/- towards secured loan and Rs.37,333/-towards unsecured loans. However, assessee has not charged interest on loans and advances of Rs.41, 02,373/-.
The assessee has thus diverted its interest bearing fund for non interest bearing loans and advances. Considering the normal market rate of 15% the interest on loan amount of Rs. 41,02,373/- comes to Rs.5,56,268/-and as such income to the extent of Rs.5,56,268/-. has escaped assessment and requires to be added in the total income of the assessee."
3. During the course of re-assessment proceedings assessee raised objections against issuance of notice u/s 148 of the Act and taking action u/s 147 of the Act because the documents on the basis of which information mentioned in the notice u/s 148 have been accepted by ld. Assessing Officer, were all available before ld. Assessing Officer during the course of assessment proceedings u/s 143(3) of the Act and, therefore, there was no reason to believe for escapement of income for taking action u/s 147 of the Act because Assessing Officer has applied his mind while framing assessment order u/s 143(3) of the Act. During the course of assessment proceedings it was submitted by assessee that loans and advances shown in the financial statement are in relation to business transactions and also interest payable on major portion of secured loan has been charged to the capital account of the persons and not debited to the profit and loss account and therefore, assessee was having sufficient interest free funds which deemed to have been applied towards loans and advances given on which no interest has been charged by assessee. However, ld. Assessing Officer was not convinced with the reply of assessee and went ahead to disallow interest expenditure to the extent of Rs.5,56,268/- and added the same to the NIL income assessed u/s 143(3) of the Act and finally ITA No. 2289/Ahd/2015 4 Asst. Year 2008-09 framed assessment order u/s 143(3) r.w.s. 147 of the Act at Rs.5,56,268/-.
4. Aggrieved, assessee went in appeal before ld. CIT(A) who rejected the ground of assessee raised against the order u/s 143(3) r.w.s. 147 of the Act by observing that as the case was reopened within four years from the relevant assessment year, therefore, the provisions of section 147 of the Act therefore, the provisions of section 147 of the Act are applicable and dismissed the ground for disallowance of Rs.5,56,268/- and confirmed the addition made by Assessing Officer by observing as under :-
"Discussion and appellate decision:-
6.1 The submission made by the appellant is duly considered inter a[ia the facts of the case. Case laws cited by the appellant have been gone through. As a matter of factly observed by the Ld. AO (Para- 6 of assessment order) that capital of Rs.
35,65,742/- vis-a-vis outstanding debtors of Rs. 30,39,692/- does not leave any more interest free funds available for granting advance to sister/associated concerns. Sundry Creditors were outstanding to the tune of Rs. 5,64,3977- only does not support the theory of 'own funds' (capital and creditors) available for grant of advance to sister/associate concerns. On being asked to submit, the documentary evidence in support of claim that impugned loans/advances given for business purpose. Clearly, the onus is on the assessee to be discharged by leading the evidences. Even with regard to Term Loans, the assessee failed to furnish evidences to justify the purpose & utilization of loans in spite of being asked to do so by the AO. The AO has raised a genuine quarry as to why the assessee would need Term Loan at first place considering the nature of business i.e. sale of diesel & petrol on cash basis. It is seen from the details filed by the assessee that the figure of "Loans & Advances" have increased from 11.83 lakhs (in F.Y. 2006-07) to 42.81 lakhs (in F,Y. 2007-08) i.e. by approx 30 lakhs. While explaining the source of funds for advancing to sister concern the assessee has claimed interest-free funds as capital of Rs. 35.65 lakhs, unsecured loans of Rs. 9.84 lakhs and secured loans (from various Banks) at 36.85 lakhs. This is.a matter of common sense that no ITA No. 2289/Ahd/2015 5 Asst. Year 2008-09 bank/financial institution would grant loan of any kind without charging interest. Thus, the claim of the assessee is found factually incorrect.
6.2 The case was relied upon by the assessee are being factually distinguishable and not applicable to this case. Even the argument of business expediency will not provide any escape to the assessee. The appellant has given advances to sister concern but failed to demonstrate how far it is expedient for the assessee to advance such can to sister concern and what business purpose it actually served. Merely because any partner or his family member is shareholder or business is relating to automobiles or connected services, it cannot be construed that it was for serving any business purpose of the assessee concern. Thus, the business expediency test also failed in this case.
6.3 In a peculiar situation where assessee is having liquidity but diverting those funds as interest-free advances to partners/sister concern and then borrow funds from Bank on interest for business - in that case it was held in the case of ACIT Vs. Punjab Stainless Steel Ind. 128 ITD 12 (Del) that in such a situation interest on borrowed capita! has to be disallowed. Almost similar situation prevailed in this case also.
6.4 In view of the above discussion, I am of the considered view that disallowance of interest of Rs. 5,56,268/- was fully justified in this case. The ground of the assessee is dismissed."
5. Assessee is now in appeal before the Tribunal.
6. First we take ground no.1 raised against the action of ld. CIT(A) who erred in holding the jurisdiction of Assessing Officer for reopening of the assessment. Ld. AR submitted that reasons recorded for reopening of assessment fail as the balance sheet and other financial documents which were already forming part of the assessment records had been examined by the Assessing Authority during the proceedings u/s 143(3) of the Act and the same records have been taken as basis by the Revenue for initiation of proceedings ITA No. 2289/Ahd/2015 6 Asst. Year 2008-09 u/s 147 of the Act and the same should be quashed because reasons are based on change of opinion and are well based on suspicion.
7. On the other land, ld. DR supported the orders of lower authorities.
8. We have heard the rival contentions and perused the material on record. To examine this aspect let us go through the provisions of section 147 of the Act:-
Income escaping assessment.
147. If the [Assessing] Officer [has reason to believe] that any income chargeable to tax has escaped assessment91 for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :
Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year: [Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:] [Provided [also] that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.] Explanation 1.--Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily96 amount to disclosure within the meaning of the foregoing proviso.ITA No. 2289/Ahd/2015 7
Asst. Year 2008-09 Explanation 2.--For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :--
(a) where no return of income has been furnished by the assessee although his total income or the total income of any other person in respect of which he is assessable under this Act during the previous year exceeded the maximum amount which is not chargeable to income-tax ;
(b) where a return of income has been furnished by the assessee but no assessment has been made and it is noticed by the Assessing Officer that the assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return ;
[(ba) where the assessee has failed to furnish a report in respect of any international transaction which he was so required under section 92E;]
(c) where an assessment has been made, but--
(i) income chargeable to tax has been underassessed ; or
(ii) such income has been assessed at too low a rate ; or
(iii) such income has been made the subject of excessive relief under this Act ; or
(iv) excessive loss or depreciation allowance or any other allowance under this Act has been computed;] [(d) where a person is found to have any asset (including financial interest in any entity) located outside India.] [Explanation 3.--For the purpose of assessment or reassessment1 under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.] [Explanation 4.--For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012.]
9. From going through the above provisions of section 147 of the Act, we find that provisions of section 147 specifically mentioned that where an assessment u/s 143(3) of the Act has been made for the relevant Assessment Year no action shall be taken in respect of assessment from the end of relevant four years. In the case of assessee the year under appeal is Asst. Year 2008-09 and four years end from the end of Asst. Year completes on 31st March, 2013 and notice u/s 148 was issued on 28th March 2013 and served on ITA No. 2289/Ahd/2015 8 Asst. Year 2008-09 31.3.2013 which is well within the prescribed time limit in the provisions of section 147 of the Act. As regards the reasons for which reassessment proceedings have been initiated, assessee could not placed on record any communication referring to discussion about the diversion of interest bearing to non-interest bearing funds which means that there was no discussion at all on this point and, therefore, there cannot be any change of opinion because there was no opinion framed on this aspect during assessing proceedings u/s 143(3) of the Act and the period of four years given in the Act specifically pertains to those aspects which may have escaped assessment during the proceedings u/s 143(3) of the Act and four years being sufficient period within which department can go ahead with re-assessment proceedings for any such escaped income arising out of the assessment records held in the possession of the department which have been gathered during the proceedings u/s 143(3) of the Act.
10. In these circumstances, we are of the view that ld. Assessing Officer has rightly initiated proceedings u/s 147 of the Act before the end of four years from the relevant assessment year. Accordingly, this ground of assessee is rejected.
11. Ground nos.2 to 5 are raised against the order of ld. CIT(A) confirming disallowance of interest of Rs.5,56,268/- out of the interest paid on Kotak Benk Term loans which have been held to be used for advancing loans and advances to various parties without charging any interest. During the course of assessment proceedings it was observed by Assessing Officer that assessee has taken secured loan ITA No. 2289/Ahd/2015 9 Asst. Year 2008-09 of Rs.85,62,788/- from various banks and also obtained unsecured loan of Rs.9,84,303/- from various persons. In the profit and loss account assessee has claimed interest expenses of Rs.7,27,496/- towards secured loans and Rs.37,333/- towards unsecured loan. However, assessee has not charged interest on loans and advances of Rs.41,02,373/- and accordingly Assessing Officer applied normal market rate of 15% and calculated the amount of deemed interest income at Rs.5,56,268/- as escaped income from assessment and accordingly disallowed the interest claimed as an expenditure in the profit and loss account to the extent of Rs.5,56,268/-.
12. Ld. AR submitted that out of the total oans and advances of Rs.41,02,373/- , major amount is pertaining to five parties namely -
i) Desai Automobiles 1421873.00
ii) Desai Automobiles P. Ltd. 1600000.00
iii) Riddhi Siddhi Auto 825000.00
iv) Sagas Autotech P. Ltd. 100000.00
v) Shraddha Motors P. Ltd. 50000.00
------------------
Total - 39,96,873/-
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Ld. AR submitted that assessee is a dealer in petrol, diesel and lubricant oils and above referred advances are for business purpose as the assessee has regular business transactions with these parties. Ld. AR further submitted that out of the total secured loans of Rs. 85,62,788/- Kotak Bank term loan amounted to Rs.48,77,184/- and remaining amount of secured loan was from following banks :-
ITA No. 2289/Ahd/2015 10Asst. Year 2008-09
i) ICICI Bank Ltd. Rs.7,54,078.13
ii) Barklays Bank Rs.12,81,652.00
iii) HDFC Bank Rs.3,96,108.59
iv) Indiable Credit Service Bank Rs.12,53,766.00 Rs.36,85,604.72 Referring to all the above details of secured loans, ld. AR submitted that interest debited in the profit and loss account was pertaining to secured loan is only limited to Kotak Bank term loan of Rs.48,77,184/- whereas interest payable on the balance secured loan from four banks at Rs.36,85,604/- has not at all been debited to the profit and loss account but has been debited to the partners capital account. In other words interest on Rs.36,85,604/- has not been claimed against the income of assessee firm. However, the funds were available with the assessee firm which if necessary may be deemed to have been applied to the interest free loans and advances given during the year, and therefore as the assessee was having sufficient interest free funds, addition for disallowance of interest of Rs.5,56,268/- was wrongly made.
13. Ld. DR supported the orders of lower authorities.
ITA No. 2289/Ahd/2015 11Asst. Year 2008-09
14. We have heard the rival contentions and perused the material on record. The only issue for adjudication in ground no.2 to 5 is against confirmation of addition of Rs.5,56,268/- made by Assessing Officer for diversion of interest bearing funds to non-interest bearing loans and advances. Ld. AR has tried to demonstrate in detail about the bifurcation of funds available with the assessee as interest bearing funds and non-interest bearing funds. The only basis taken by Assessing Officer for making addition of Rs.5,56,268/- was that assessee has claimed interest on secured loans of Rs. 85,62,788/- and interest on unsecured loan of Rs.9,84,303/- and on the other side assessee has given loans and advances of Rs.41,02,373/- without charging interest. However, going from the facts of the case produced before us, we find that secured loan of Rs.85,62,788/- has been taken from following six parties :-
i) ICICI Bank Ltd. Rs.7,54,078.13
ii) Barklays Bank Rs.12,81,652.00
iii) HDFC Bank Rs.3,96,108.59
iv) Indiable Credit Service Bank Rs.12,53,766.00
v) Kotak Bank term loan Rs.21,97,486.00
vi) Kotak Bank term loan Rs.26,79,698.00
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Total Rs.85,62,788/-
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Out of the above six secured loans interest debited to profit and loss account on loans is only in relation to term loans taken from Kotak ITA No. 2289/Ahd/2015 12 Asst. Year 2008-09 Bank, which is shown at Rs.7,27,496/- in the profit and loss account whereas interest payable on the remaining four secured loans of Rs. 36,85,604/- has not been claimed as an expenditure in the profit and loss account, but has been debited to the partners' capital account, which are placed on record at pages 43 to 45 of the paper book. This fact of not charging interest on Rs.36,85,604/- on secured loan brings assessee in possession of interest free funds.
15. Further on perusal of list of loans and advances as given as on the close of the financial year 2007-08 we observe that most of the loans and advances are in the nature of trade and commerce which the assessee might have given during the course of normal business. However, one cannot ignore the possibility that list of loans and advances may also include sister concern of the assessee from whom interest might not have been charged. However, in the given circumstances wherein we have examined that assessee was having sufficient interest free funds in the form of partners' capital at the year end of Rs. 36,65,742/- as well as interest free secured loans of Rs.36,85,604/-, disallowance of interest at Rs.5,56,268/- on the loans and advances given of Rs. 41,02,373/- is uncalled for as the assessee had sufficient interest free funds available to apply to the loans and advances given. We are of the view that no addition for disallowance of interest expenses is to be sustained. We delete the same. The grounds are allowed.
16. Ground no.6 is general in nature which needs no adjudication.
ITA No. 2289/Ahd/2015 13Asst. Year 2008-09
17. In the result, appeal is partly allowed.
Order pronounced in the open Court on 01/04/2016
Sd/- Sd/-
(Rajpal Yadav) (Manish Borad)
Judicial Member Accountant Member
Dated 1/4/16
Mahata/-
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, Ahmedabad
6. Guard File
BY ORDER
Asst. Registrar, ITAT, Ahmedabad
1. Date of dictation: 21/03/2016
2. Date on which the typed draft is placed before the Dictating Member: 31/03/2016 other Member:
3. Date on which 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.:
6. Date on which the file goes to the Bench Clerk: 1/4/16
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: