Income Tax Appellate Tribunal - Bangalore
B.C. Nanjunda Setty, Shimoga vs Department Of Income Tax on 9 April, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
"B" BENCH : BANGALORE
BEFORE SHRI SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER
ITA No.763/Bang/2009
Assessment year : 2006-07
The Dy. Commissioner of
Income-tax,
Circle 1,
Shimoga. : APPELLANT
Vs.
Sri B.C. Nanjunda Setty,
M/s. S.G.K. Industries,
Industrial Estate,
Sagar Road,
Shimoga. : RESPONDENT
ITA No.737/Bang/2009
Assessment year : 2006-07
Sri B.C. Nanjunda Setty,
M/s. S.G.K. Industries,
Industrial Estate,
Sagar Road,
Shimoga. : APPELLANT
Vs.
The Addl. Commissioner of
Income-tax,
Shimoga Range,
Shimoga. : RESPONDENT
ITA Nos.763 & 737/Bang/09
Page 2 of 21
Revenue by : Smt. V.S. Sreelekha
Assessee by : Shri A. Shankar
ORDER
Per A. Mohan Alankamony, Accountant Member
These are two appeals - (i) one by the assessee and (ii) another of the Revenue, both are directed against the order of the Ld. CIT(A), Hubli in ITA No: 134/CIT(A) HBL/08-09 dated: 9.4.2009 for the assessment year 2006-2007.
I. ITA NO: 737/09 - [By the assessee]
2. The assessee has raised six grounds, out of which, ground Nos: 1, 5 and 6 are general and no specific issues involved and, therefore, they are dismissed as non-consequential. In the remaining grounds, the themes of issues raised are two-fold, namely -
(i) the authorities below erred in making the addition of Rs.42 lakhs as deemed dividend u/s 2 (22) (e) of the Act; &
(ii) charging of interest u/s 234B and 234C of the Act.
2.1. The assessee has also raised an additional ground of appeal with the following narration:
"Without prejudice the learned assessing officer is not justified in law in invoking the provisions of section 2(22)(e) of the Act as the sum received by the appellant from the Company is liable to be taxed u/s 115-O of the Act in the hands of the company and, thus, not taxable in the hands of the appellant u/s 2(22)(e) of the Income- tax Act 1961 under the facts and circumstances of the case".
2.2. It was submitted that the assessee is challenging the applicability of s. 2(22)(e) of the Act which is a pure question of law. This ITA Nos.763 & 737/Bang/09 Page 3 of 21 does not involve any investigation of any facts otherwise on the record of the Revenue and a pure question of law which goes into the very root of the matter of jurisdiction and validity of the assessment itself. It was prayed that the additional ground raised may be admitted and disposed of on merits.
3. After due consideration of the submissions of the assessee, the additional ground raised by the assessee is admitted for adjudication.
II. ITA NO: 763/09 [By the Revenue]
4. The Revenue has raised ten grounds in its appeal. On a perusal, the grievances of the Revenue against the order of the Ld. CIT (A) are three-folds which, for the sake of clarity, are reformulated in a concise manner as under:
The Ld. CIT(A) erred:
(i) in deleting the addition of Rs.17.18 lakhs made u/s 40 (a) ( ia ) of the Act;
(ii) in deleting the interest of Rs.200570/- admitted by the assessee as income at the rate of 12% on the money advanced to the children; &
(iii) in deleting the disallowance of Rs.45920/- made u/s 40A(3) of the Act.
Common order:
5. As the issues raised by the rival parties are inter-linked pertaining to the same assessee and the same assessment year, for the sake of clarity and convenience, both of these appeals were heard, considered together and disposed off in this common order.
ITA Nos.763 & 737/Bang/09 Page 4 of 21 Let us now address to the grievance of the assessee. Brief:
6. The assessee, an individual, is the proprietor of SGK Industries which was engaged in manufacturing and marketing of suspension cylinder, hydraulic aggregates and automobile components. During the AY under dispute, while concluding the assessment, the AO, among others, added Rs.42 lakhs as deemed dividend u/s 2(22)(e) of the Act for the reasons that -
The assessee had received unsecured loan of Rs.42 lakhs from Perfect Alloy Components Pvt. Ltd. [PACPL] wherein the assessee was a director, holding more than 10% of voting power. The loan was given to the assessee by the company and s.2(22)(e) of the Act squarely applicable. The deposit given by the assessee to the company of Rs.46 lakhs was a different entry altogether and still appearing in the Balance sheet of the company as on 31.3.2006. The loan was taken by SGK Industries - the proprietary concern of the assessee.
7. Aggrieved, the assessee took up the issue with the CIT (A) for redressal. After duly considering the rival submissions and also analyzing the various case laws on which either party have placed their stout reliance; the Ld. CIT(A) has concluded thus -
"5.1. (On page 7 ............................................................. It is necessary on part of revenue to prove that payment was made on behalf or for benefit of share holder. In case of Subrata Roy Sahara decision of Hon'ble ITAT, Lucknow Branch (sic) Bench has taken into consideration various case laws on issue and matter was also referred to a third Member where third Member following decision of Supreme Court in case of Mukund Roy K. Shah is of opinion that burden of proof is on revenue to prove that ITA Nos.763 & 737/Bang/09 Page 5 of 21 presumption included in provisions of section 2(22)(e) lies on revenue and burden is said to be discharged on establishing fact that benefit goes to share holder having substantial interest, thus, matter has under gone test that burden of proof lies on revenue that said share-holder has received benefit.
AO has not discussed in detail in view of judicial decisions that an amount of Rs.42 lakh is a benefit available to share holder from profits of company. However, it is seen that appellant has also not established or discharged his burden of proof to shift onus to AO. AO has stated that payment of Rs.42 lakh from company has no direct nexus made by appellant to company of Rs.46 lakh in past. Thus, failure of appellant to shift onus to revenue, there is no reason to hold that AO has failed to discharge burden of proof, since same has not been shifted to AO and appellant has failed initially to shift burden to AO by establishing facts that payments are made by company with intention to distribute profits in form of advances to appellant but not out of advances made by appellant in the past to company of Rs.46 lakh. In view of same addition made by AO is hereby confirmed after going into legal aspect which AO should do in such issues."
8. Agitated, the assessee has come up before us with the present appeal. The arguments of the Ld. A R are summarized as under:
(i) The assessee had paid Rs.46 lakhs in aggregate to PACPL where the assessee had held more than 20% of voting rights during the period from 1.4.2001 to 31.3.2005;
- PAPCL had returned Rs.42 lakhs out of Rs.46 lakhs which was advanced by the assessee to PACPL;
- the assessee has been maintaining separate books of account for the advances made to PACPL;
- without appreciating the fact that the PACPL had only returned a part of the loan advanced by the assessee, the authorities below resorted to bring the said amount to the tax net by invoking the provisions of s.2(22)(e) of the Act;
(ii) it is settled law that entries in the books of account do not decide the nature of income and the same has to be looked into from the provisions of the Act. There are various decisions which say that nomenclature of the entry was not ITA Nos.763 & 737/Bang/09 Page 6 of 21 important but the pith and substance of the entry should be look into;
(a) Shoorji Vallabhdas & Co. 46 ITR 144 (SC);
(b) Prakash Cotton Mills (P) Ltd. 201 ITR 684;
(c) Godhra Electricity Co. Ltd. 225 ITR 746 (SC)
(iii) s.115-O of the Act starts with "notwithstanding anything contained in any other provisions of this Act" and, hence, all other provisions of the Act have to be ignored for the purpose of interpretation of the said section. Ass the section covers dividend declared, distributed and paid and the dividend is paid, the dividend u/s 2(22)(e) was squarely covered u/s 115- O of the Act. In view of non-obstinate clause the Explanation to s.115-Q cannot be invoked by the assessing officer to justify the tax liability;
- as far as s.115-O is concerned, it is a stand alone code and it is clear from the opening words of the section i..e, with "notwithstanding anything contained in any other provisions of this Act" and, thus, the AO was precluded from looking at any other section and that the reading of s.115-O does not indicate as to why dividend classified in terms of s.2(22)(e) should be excluded from the application to s.115-O;
(a) Chandavarkar Sita Ram v. Ashalata S guram AIR 1987 SC 117 at page 134(para 68);
(b) Union of India v. G.M.KOKIL 1984 Supp SCC 196 at para 203(Para 11)
(c) CIT v. Badiani (P.K) (1970) 76 ITR 369 (Bom) 8.1. During the course of hearing, the Ld. A R furnished a paper book containing 1 - 80 pages which consists of, inter alia, copies of (i) balance sheet of SGK Industries; (ii) extract of ledger of SGK Industries in PACPL;
(iii) extract of ledger of account of the assessee in PACPL etc., 8.2. On her part, the Ld. D R submitted that the AO's stand was in conformity with the provisions of s.2 (22) (e) of the Act which has been rightly sustained by the Ld.CIT(A) for the reasons set-out in the impugned ITA Nos.763 & 737/Bang/09 Page 7 of 21 order. It was, therefore, pleaded that the argument of the assessee doesn't carry any conviction which requires to be rejected out-rightly.
9. We have carefully considered the rival submissions, duly perused the relevant records and also the documentary evidences furnished during the course of hearing by either party.
9.1. On a close scrutiny of the impugned order of the AO, as remarked by the Ld. CIT (A), the assessing authority had, in fact, not applied his mind and also not brought on record any discreet documentary evidence coupled with strong circumstantial proof to suggest that the alleged loan was not given by the Company against the deposit made by the assessee in his individual capacity. In fact, the AO's cryptic presumption "Naturally, this loan is not given by the company against the deposit given by the assessee in his individual capacity to the company." in our considered view, doesn't stand the testimony of law. The AO's other reasoning that "The loan was taken by M/s. SGK Industries, the proprietary concern of the assessee..." for treating the sum of Rs.42 lakhs as deemed dividend also not on the sound footing since the assessee being an individual who had advanced Rs.46 lakhs during the period from 30.3.2002 to 12.11.2004 to PACPL [Source: P 39 & 40 of PB] and the loan of Rs.42 lakhs received during the AY under dispute from PACPL by the assessee, had pumped in to SGK Industries - a proprietary concern wherein the assessee was the sole proprietor, for commercial expediency. Unfortunately, the AO had not rebutted the assessee's contention with any justifiable reasoning [documentary proof] that the loan was not given by the company against the deposit made by the assessee.
ITA Nos.763 & 737/Bang/09 Page 8 of 21 How does the AO affirm that "The loan was taken by M/s. SGK Industries, the proprietary concern of the assessee" without any proof? On the contrary, the assessee has come up with a proof that he had lent loan to PACPL from which he had availed a loan of Rs.42 lakhs in an individual capacity and the loan so availed from PACPL was utilized in SGK Industries, a proprietary concern of the assessee. While making any disallowance or adding any claim of the assessee, the assessing authorities should invariably record the reason(s) and such reasoning should be in the form of a speaking order within the parameter of law.
9.2. The assessee had, in fact, discharged his onus that he had advanced the loan for the period spread over from 30.3.2002 to 12.11.2004 to the tune of Rs.46 lakhs, out of which, during the year under dispute, he had received a loan of Rs.42 lakhs from PACPL [source: Nanjunda Setty's Deposit A/c Pages 39 & 40 of PB and Sree SGK Industries Ledger account
- Page 38 of PB]. How does the AO say that this loan was not given by the company against the deposit given by the assessee in his individual capacity to the company?
9.3. Turning to the observation of the CIT (A) that "(on page 7) However, it is seen that appellant has also not established or discharged his burden of proof to shift onus to AO", we find no substance in the said remark. As a matter of fact, the assessee did establish that he had advanced the money to the extent of Rs.46 lakhs to PACPL, out of which, the company had advanced an amount of Rs.42 lakhs to the assessee who had pumped in SGK Industries which was the proprietary concern and, thus, the assessee ITA Nos.763 & 737/Bang/09 Page 9 of 21 had put the onus at the doorstep of the Revenue which had, in our view, failed to cash it by way discharging its burden of proof. Even on close reading of the observations of the Ld. CIT(A) [para 5.1. of the impugned order], one could infer that the AO had not brought on any clinching evidence to hammer it that the issue falls within the ambit of s.2 (22)(e) of the Act instead as in the CIT(A)'s version, "AO has stated that payment of Rs.42 lakh from company has no direct nexus with advances made by appellant to company of Rs.46 lakhs in past."
9.4. However, either the Ld. CIT (A) or the AO had failed to subscribe/highlight the reasons which drove them to arrive at a conclusion that there was no direct nexus between with the advances made by the assessee to company of Rs.46 lakhs and the payment of Rs.42 lakhs by the company to the assessee.
9.5. Turning to the legal aspects, the Hon'ble ITAT, Mumbai 'A' Bench in the case NH Securities Ltd. v. DCIT reported in (2007) 11 SOT 302 (Mumbai) was ardent in its finding that -
"Wherever payments made by a Limited Company to its shareholder is proved by its characteristic as other than loan/advance; in other words, the payment is for the purposes of repayment of loan or such other existing liability, the question of s.2(22)(e) applying does not arise. The nature and character of the payments made by a company is very important in examining whether a payment made by the company falls under s.2(22)(e) or not. Where a company pays to its shareholder any amount against repayment of an existing loan or advance or against purchase or availing of service or paying on account on any other ground, such payments made in the ordinary course of carrying on of the business of that company cannot be brought under the purview of s.2(22)(e). that is why s.2(22)(e)provides that any payment by a company by way of advance or loan to a shareholder alone is to be considered for the ITA Nos.763 & 737/Bang/09 Page 10 of 21 purpose of deemed dividend. Payments made by a company through a running account in discharge of its existing debts or against purchases or for availing services, such payments made in the ordinary course of business carried on by both the parties could not be treated as deemed dividend for the purpose of s.2(22)(e). the deeming provisions of law contained in s.2(22)(e) apply in such cases where the company pays to a related person an amount as advance or a loan as such and not in any other context. The law does not prohibit business transactions between related concerns, and therefore, payments made in the ordinary course of in the facts business cannot be treated as loans and advances. Therefore, payments made by a company in the course of carrying on of its regular business through a mutual, open and current account to a related party do not come under the purview of s.2(22)(e).................."
9.7. As highlighted by the Ld. CIT (A) [at the cost of repetition], -
"5.1................................Provisions of section 2(22) (e) are introduced to bring to tax 3 types of payments like....(i) any payment or any sum by way of advance or loan to a share holder; (ii) any payment on behalf of share-holder and (iii) payment for individual benefit of a shareholder.
It is necessary on the part of revenue to prove that payment was made on behalf or for benefit of share holder. In case of Subrata Roy Sahara decision of Hon'ble ITAT, Lucknow Branch (sic) Bench has taken into consideration various case laws on issue and of Supreme Court in case of Mukund Roy K.Shah is of opinion that burden of proof is on revenue to prove that presumption included in provisions of section 2(22)(e) lies on revenue and burden is said to be discharged on establishing fact that benefit goes to share holder having substantial interest, thus, matter has undergone test that burden of proof lies on revenue that said share holder has received benefit."
9.8. Thus, the Revenue had, precisely, failed to discharge the onus cast on it that the share-holder (the assessee) has received the benefit.
ITA Nos.763 & 737/Bang/09 Page 11 of 21 9.9. The Revenue has placed strong reliance on the finding of Hon'ble ITAT, Mumbai 'I' Bench in the case of Income-tax Officer v. Kalyan M. Gupta reported in 107 ITD 34 (Mumbai) We have duly perused the finding of the Hon'ble Tribunal cited supra wherein the issue before the Tribunal was: Whether the deemed dividend u/s 2 (22)(e) of the Act was allowable as exemption u/s 10(33)? However, the issue on hand is whether the alleged loan of Rs.42 lakhs is to be treated as deemed dividend u/s 2(22)(e) or otherwise? With due respects, we are of the view that the case law relied on by the Revenue has no relevance to the issue on hand.
9.10. In an overall consideration of the facts and circumstances of the issue and also in conformity with the finding of the Hon'ble ITAT, Mumbai 'A' Bench referred supra , the ratio laid down by the Hon'ble Bombay High Court in the CIT (Central) Bombay v. P.K.Badiyani reported in (1970) 76 ITR 369 and also the Hon'ble Tribunal of Lucknow Bench's finding in the case of Subrata Roy Sahara v. ACIT (2007) 294 ITR (AT) 235, we are of the firm view that the authorities below were not justified in making an addition of Rs.42 lakhs u/s 2 (22)(e) of the Act. It is ordered accordingly.
10. The other grievance of the assessee is with regard to the charging of interest u/s 234B and 234C of the Act. Charging of interest u/s 234B and 234C of the Act are mandatory and consequential in nature; this ground is dismissed as not maintainable.
ITA Nos.763 & 737/Bang/09 Page 12 of 21
11. The issue of taxability of Rs.42 lakhs u/s 2 (22)(e) of the Act has since been decided in favour of the assessee in the fore-going paragraphs, the additional ground of appeal raised by the assessee with regard to the applicability of s.2 (22) (e) of the Act has become obsolete and, as such, the same has not been addressed to.
II. ITA NO: 763/09 [By the Revenue]
12. We shall now deal with the grievances of the Revenue. Deletion of the addition of Rs.17.18 lakhs made u/s 40 (a) ( ia ) of the Act:
The assessee was manufacturing machinery parts which were used in tippers, deep drill equipments etc. had shown a total sale of Rs.3.83 crores.
Raw materials were manufactured out of cast iron, SG iron, special bars and seamless tubes and then raw material undergoes processing like cutting, turning, milling, honing, heat treatment etc., As certain facilities were not available in the assessee's factory, such jobs were got done from outside parties and paid machine charges which were debited to contract job work. However, the AO was of the view that 30% of such payments as got done by outsiders which was nothing but sub-contract and since the assessee had failed to deduct TDS u/s 194C(2) of the Act, he had resorted to disallow a sum of Rs.17.18 lakhs u/s 40(a) (ia) of the Act.
12.1. On an appeal before the CIT(A), it was contended by the assessee that the machining charges were nothing but direct job work payments by the assessee and sold directly to the customers, and thus, the applicability of TDS in his case doesn't arise. After due consideration of the ITA Nos.763 & 737/Bang/09 Page 13 of 21 assessee's version and also the details furnished by him, the Ld. CIT (A) had observed thus -
"5.4.........provisions of sub-contract are applicable only in case of machining charges paid by the appellant of Rs.2643456/- but not to the machining charges receives of Rs.17807929/-. Though it is agreed before AO but requested to consider actual facts and apply provisions in relevant case of machining charges paid by appellant but not in case of machining charges received by the appellant where parties concerned are required to deduct the tax on contract/sub-contract. It is held that provisions are applicable to machineries hire charges paid by appellant. At this stage, it was argued by AR since appellant is paying machinery charges he is treated as contractor but as per section 194C(1) for the year under consideration contractors are not subject to deduct the tax but as per section 194C(2) sub-contractors are eligible. Since appellant is directly given the contract his case is treated as a contractor but the provisions of deducting the tax at source will not apply for the current year. I have considered the argument and see that technically for the year under consideration appellant though he has paid machinery hire charges of Rs.2643456/- is not covered by the provisions of the Act, therefore, AO is directed to delete the addition in this respect."
12.2. It was contended by the Ld. D R that the CIT (A) had failed to appreciate that the total turnover of the assessee includes 30% of the contractual receipts and, hence, for the purpose of contractual payment on the debit side of the P & L account to the extent of 30% becomes sub- contractual payment and that the assessee had admitted the addition of Rs.13.47 lakhs under this section. It was, further, contended that the CIT(A) had failed to appreciate the very fact that the assessee was making payments to the sub-contractors to the extent of 30% of the machining charges and contract labour charges and that the deduction of tax u/s 194C(2) of the Act was mandatory. It was, therefore, pleaded that as the Ld. CIT(A) was not justified in deleting the addition made by the AO, the order of the AO requires to be sustained.
ITA Nos.763 & 737/Bang/09 Page 14 of 21 12.3. On the other hand, the Ld. A R came up with a spirited argument which is summarized as under:
(i) During the year under dispute, the assessee had debited in the P & L account (a) machining charges of Rs.26.43 lakhs and contract workers salary of Rs.30.83 lakhs. However, the AO had estimated that 30% of the above sums i.e., Rs.17.18 lakhs belong to sub-contract work and the same was added u/s 40(a)(ia) on the ground that no TDS was effected in respect of sub-contract payment. Two vital points have not been appreciated by the AO, viz.:
- (a) the entire amount of machining charges was in relation to items manufactured and sold and in no way related to machining charges received and credited to P & L account;
(b) the expenditure referred to above were of the nature of contract expenses and NOT sub-contract expenditure;
- the assessee was the proprietor of an industrial unit manufacturing of hydraulic aggregates like cylinders parts, pump components etc. which were used for tippers and deep drill hole solutions like piston, ware sleeve and lock nuts, spacer's washers for heavy vehicle sub axles. The produces were manufactured out of raw materials were purchased from various parties from Bhadravathi, Pune, Kholapur etc.
- the raw materials were subjected to various process in the manufacture of products, viz., cutting, turning, honing, heat treatment etc. As the facilities were not available with the assessee, the same got done from the outside parties at Shimoga, Bangalore etc., All these machining charges were the direct contract being job work given by the assessee to various parties for manufacturing products and sold the same directly to the customers and as such, the provisions of TDS were not applicable;
ITA Nos.763 & 737/Bang/09 Page 15 of 21
- the nature of job works done to various parties were machining and honing charges. The major works done were for M/s.Tata Motors Limited, M/s. TAL Manufacturing Limited, Pune, PACPL etc. All the jobs entrusted to the assessee was done by the assessee's unit only and, thus, there was no sub-contract in all these cases;
- out of the labour contract salary debited to P& L account, the AO had disallowed 30% treating the same as sub-contract payment. Part of the salary contract workers salary was considered as sub- contract since there was machining charges received and credited to profit and loss account;
- since the assessee had not given any specific portion of machining work order he had received, the question of treating a portion of labour contract work as sub-contract work doesn't arise;
- the contract workers were basically helpers who assist the skilled workers on the shop floor ie., loading of product on machine, their movement to the other machine and unloading etc., Sree Gajanana Enterprises, Shimoga was paid as per its bill on the basis of number of labourers supplied and, thus, there was no material which constitutes sub-contract element in the transaction.
13. We have carefully considered the rival submissions and also perused the provisions of Act [194C(1) and (2) of the Act] during the relevant period under dispute. As rightly highlighted by the Ld. CIT (A), the provisions of sub-contract would not be applicable in the case of machining charges received by the assessee to the tune of Rs.1.78 crores since the parties who had made the payments were required to deduct he tax on contract/sub-contract. With regard to the machining charges paid by the assessee, as rightly pointed out by the assessee that though he was treated as contractor but as per s.194C(1) for the year under dispute, the ITA Nos.763 & 737/Bang/09 Page 16 of 21 contractors were not required to deduct tax. Since the assessee had given the job work directly his case was to be treated as contractor, however, the provisions for deducting the tax at source have no role to play as far as the assessee was concerned for the assessment year under dispute. 13.1. In view of the above, we are of the considered view that the finding of the Ld. CIT(A) doesn't suffer from any infirmity which requires our interference. We are, therefore, in total agreement with the CIT(A)'s stand. It is ordered accordingly.
Deletion of interest of Rs.200570/-:
14. The AO had added to the income of the assessee, a sum of Rs.200570/- being interest at 12%, according to the AO, with the consent of the assessee, for having lent interest free loan to the assessee's children to the tune of Rs.18.62 lakhs.
14.1. After due consideration of the assessee's contention that the AO had not established nexus between interest bearing loans availed by him and the interest free loans advanced to his children, the AO cannot make disallowance of interest on loan amount and that as per the day-to-day current account the closing balance was Rs.2.08 crores and after considering the net profit and O.B in current account as on 1.4.2005 was Rs.1.33 crores which was more than sufficient to take care of the loan advanced to his children without charging any interest, the CIT(A) was of the view that since the AO had failed to establish any nexus between the interest bearing loans availed by the assessee and the interest free loan advanced to his children and also there was sufficient credit balance in the capital account of the assessee, there was no justification on ITA Nos.763 & 737/Bang/09 Page 17 of 21 the part of the AO to add the said interest amount to the assessee's total income.
14.2. Before this Bench, it was the case of the Revenue that the CIT(A) had grossly erred in deleting the same which was admitted by the assessee as income and he had erred in holding that the AO had not established the nexus between the interest bearing loan availed by the assessee and the interest free loan advanced to the children. As there was no justification on the part of the CIT(A) to delete the same, it was pleaded that the stand of the AO be sustained on this count. 14.3. On his part, the ld. A R's contention was revolved that there was no nexus between the O.D. availed and the loan(s) advanced. It was not the case that the assessee had availed the O.D from the bank and had directly advanced a part of the amount as interest free loans to his children. These loans were, in fact, advanced over a period of more than six years and during the same period he had also brought in additional capital. As a matter of fact, the credit balance in the capital account of the assessee had far exceeded the loan advanced as on 31.3.2006 and the credit in the capital account was Rs.2.33 crores as against the paltry advance of Rs.18.62 lakhs. To drive home his point, he had placed strong reliance on the case laws reported in 285 ITR 554 (All) and 260 ITR 637 (Del).
15. We have duly considered the rival submissions. We find force in the argument of the Ld. A.R. As contended by the A.R., the loans were advanced over a period of years and that the assessee's credit balance in the capital account as on 31.3.2006 was rather on a sound footing [Source:
ITA Nos.763 & 737/Bang/09 Page 18 of 21 Page 49 of PB]. On a close scrutiny of the impugned order of the AO, we find that the AO had not brought on record any tangible proof which would justify his addition.
15.1. Let us now turn our attention to look into the legal pronouncements:
(i) CIT v. Prem Heavy Engineering Works Pvt. Ltd. (2006) 285 ITR 554 (All):
It was held by the Hon'ble High Court that "Where the amount of any interest-free loan is sufficiently covered by the non-interest-bearing funds available with the assessee, the question of disallowance of interest on borrowed funds does not arise. It is also not the case of the Revenue that any amount borrowed from the bank on which the liability for payment of interest-free advance was there with the respondent-assessee, had not utilized for the purposes of business".
(ii) The Hon'ble High court of Delhi in the case of CIT v. Tin Box Co.
reported in (2003)260 ITR 637 concurred with the view of the Tribunal which had recorded its finding thus -
"We are in agreement with the submissions made by ld counsel for the appellant because the factual position as submitted before us by ld counsel for the appellant has not been controverted by the ld. D R. The admitted facts are that the appellant firm has been enjoying overdraft facilities from the SBI, Chandni Chowk Delhi, since long time past against the hypothecation of goods, etc., and pledge of land, building, plant and machinery and the interest paid on such overdraft account has been allowed by the Revenue year after year. Even in the assessment year 1982-83, no such disallowance had been made when admittedly substantial interest-free funds had been advanced to the sister concern. The appellant has not paid any interest to any other party either in the past or during the year under appeal. Further in the years under appeal, either the fresh advances to ITA Nos.763 & 737/Bang/09 Page 19 of 21 PNSMPL have been quite insignificant or there have been absolutely no fresh advances made by the appellant, rather during the assessment years 1990-91 to 1992-93 the appellant had received back from the sister concern more than Rs. 10 lakhs. The capital of the firm and interest-free unsecured loans with the appellant far exceeds the amounts advanced to the sister concern in all the years under appeal a fact neither controverted nor disproved by the ld D R also."
The present issue is similar to that of the issues dealt by the Hon'ble High Courts cited supra. With respects, we are in total agreement with the rulings of the Hon'ble Courts.
15.2. Turning to the issue on hand, as pointed out in the fore-going paragraphs, the AO had not brought on record any tangible proof that there was a nexus between the loan(s) availed and the interest free loans advanced to the assessee's children which justify his stand in charging of interest of Rs.200570/- .
15.3. In view of the above and also in conformity with the ruling of the Hon'ble Courts cited supra, we are in agreement with the CIT(A) in deleting this addition. It is ordered accordingly.
(iii) Deletion of the disallowance of Rs.45920/- made u/s 40A(3):-
16. On a verification of the books of account, the AO found that the assessee had made cash payments of Rs.2.29 lakhs to M/s.Ruby Enterprises, Bombay which, in his view, was in contravention of the provisions of s.40A(3), he resorted to disallow 20% of the same. 16.1. The issue, in brief, is that the assessee had directly credited a sum of Rs.2.29 lakhs to the account of M/s.Ruby enterprises, Bombay, which in ITA Nos.763 & 737/Bang/09 Page 20 of 21 the eyes of the Revenue, the assessee had contravened the provisions of s.40A(3) and, thus, he has been penalized by way of disallowance of Rs.45920/-.
16.2. In an identical issue, the jurisdictional Hon'ble Tribunal in the case of Sri Renukeshwara Rice Mills v. ITO reported in (2005) 93 TTJ 912, has ruled thus -
"Instead of issuing cheque/DD, the assessee prepared a challan and along with the cash the challan was presented to the bank of the payee for the credit of the same in the account of payee. In the result, it is ensured that the payee and payee alone receives the payment and he origin and conclusion of transaction is traceable. Thus, payment of sum directly in the bank account of payee fulfils the criteria for ensuring the objection of introduction of s.40A(3). This is not a direct payment to the payee but only to the credit of its bank account without the payee actually receiving the cash. Accordingly, such payment is not in violation of the provisions of s.40A(3) and, hence, no disallowance is called for-Attar Singh Gurmukh Singh etc. v. ITO (1991) 191 ITR 667 (SC) relied on."
16.3. However in the instant case, there is nothing on record to establish genuineness of direct remittance by the assessee to the payee's bank account. Further in the case referred supra the payment was made for purchase of agricultural produce to the agent operating in the market yard set up under the State RMC Act and accordingly fell within the scope of exclusionary cls. (f) and (l) of r. 6DD. Therefore, we uphold the order of the ld. AO on this count.
17. In the result -
(i) the assessee's appeal is partly allowed
(ii) the Revenue's appeal is also partly allowed.
ITA Nos.763 & 737/Bang/09
Page 21 of 21
Pronounced in the open court on this 26th day of February, 2010.
Sd/- Sd/-
(SHAILENDRA KUMAR YADAV ) (A. MOHAN ALANKAMONY )
Judicial Member Accountant Member
Bangalore,
Dated, the 26th February, 2010.
Ds/-
Copy to:
1. Appellant
2. Respondent
3. CIT
4. CIT(A)
5. DR, ITAT, Bangalore.
6. Guard file (1+1)
By order
Assistant Registrar
ITAT, Bangalore.