Income Tax Appellate Tribunal - Mumbai
Ruchi Soya Industries Ltd, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL "D" Bench, Mumbai Before Shri D.Manmohan (VP) and Shri Rajendra Singh(AM) ITA No.4659/M/2009 Assessment Year 2007-08 The ACIT Cent.Cir.40, M/s.Ruchi Soya Industries Ltd. Room No.653, 6th floor, 408, Tulsiani Chambers Aayakar Bhavan, M.K.Road Nariman Point, Mumbai 400 021. Mumbai 400 020. PAN : AAACR 2892 L Appellant Respondent Revenue by : Shri Jitendra Yadav Assessee by : Shri Satish Chandra ORDER
PER RAJENDRA SINGH (AM) This appeal by the revenue is directed against the order dated 4.6.2009 of CIT(A) for the assessment year 2007-08. The only dispute raised is regarding disallowance of interest of Rs.69,73,330/- by the AO under section 36(1)(iii) of the I.T.Act.
2. Briefly stated the facts of the case are that a survey under section 133A of the I.T.Act had been carried out in case of the assessee by the Investigation Wing of the department on 2.5.2008 for verifying the losses perceived to be purchased by the assessee by way of client code modification through brokers of National Board of Trade Ltd. (NBOT), Indore. Simultaneously a survey was also conducted in case of the broker Shri Susil Kumar Khowala. It was found during the survey that loss of Rs.2,14,75,281/- had been incurred by its client, M/s.Param Industries Ltd. which had merged with the assessee company w.e.f. 1.4.2005. The AO on enquiry found that M/s. Param Industries Ltd. was not registered as a non member client of Shri Susil Kumar Khowala which was necessary for doing business as a non member through the member. Further it was also found that the broker had not taken any margin in respect of transaction from which loss had arisen. The loss incurred on behalf of unregistered non member as per the exchange rules have to be treated as loss incurred by the member and the same could not be considered in case of the assessee company. The AO therefore asked the assessee to explain as to why the loss should not be disallowed. The assessee vide letter dated 7.1.2009 explained to the AO that it had made advance payment of Rs.6,33,93,759/- to Shri Susil Kumar Khowala against probable transaction of edible oil to be made through NBOT exchange. However due to abnormal fluctuation in the prices of edible oil in the local market as well as in the international market, the transaction could not be materialize. The assessee also submitted that it had not booked loss of Rs.2,14,75,281/- in its books of account on account of advances made through the broker. It was explained that advances had been given during the course of business and therefore no disallowance of interest could be made proportionate to the advances given. Moreover, it was further submitted that the assessee company had share capital and reserve and surplus to the tune of Rs.903 crore and the advances were made from own fund and not from borrowed money. The AO after verification of the books of account relating to derivative transactions noted that the assessee had not booked the loss of Rs.2,14,75,281/- as the transaction was a unilateral act on the part of the broker. However, he observed that the assessee company had made huge advance to the broker without any plausible explanation and thus the advance made by the assessee to Mr. Khowala was not for any genuine business purpose and accordingly interest in relation to the same has to be disallowed. The AO computed the interest @ 11% relating to the advance given which came to Rs.69,73,313/- which was disallowed.
2.1 The assessee disputed the decision of AO and reiterated the earlier stand taken before CIT(A) that the advance had been given during the course of business and that the same was out of own fund as the assessee had share capital as well as reserve and surplus to the tune of Rs.903/- crores. It was argued that since sufficient funds were available no disallowance could be made out of the interest paid on borrowings. The assessee referred to several decisions of the tribunal for the proposition that if there was sufficient fund on a particular date to cover the advances no disallowance could be made merely on the ground that the assessee had also taken loan. CIT(A) after considering the submissions of the assessee observed that the advances had apparently been made for hedging against any future losses and therefore the advances had been made for the purpose of business only. He did not accept the view of the AO that the advances were for non genuine purposes. CIT(A) also observed that there were no material to show that the transaction was a colorable device. CIT(A) also noted that the AO had not placed any material on record to controvert the claim of the assessee that the advances had been made out of surplus funds. He referred to the judgment of Hon'ble High Court of Mumbai in case of Reliance Utilities & Power Ltd. (178 Taxman 135) in which it was held that if there were funds available both interest free/ overdraft/ loan then a presumption should be made that the investment was made out of interest free funds generated or available with the assessee provided the said funds were sufficient to make the investment. CIT(A) further observed that the advances had been made in the earlier year which continue till the end of this year. But in the earlier year no disallowance of interest had been made and therefore no disallowance could be made in this year. In this context he referred to the judgment of Hon'ble Supreme Court in case of Munjal Sales Corporation Vs CIT (298 ITR 298) and the judgment of Hon'ble High Court of Madras in case of CIT Vs South India Corporation Agencies (293 ITR 237). Considering the entirety of facts and circumstances CIT(A) held that no disallowance of interest could be made and accordingly deleted the addition made by the AO aggrieved by which the revenue is in appeal before the tribunal.
3. Before us the Learned DR appearing for the revenue assailed the order of CIT(A). It was submitted that there was no material produced by the assessee to show that the advances had been given for the purpose of business. Since the assessee was not registered with the broker as a non member, he could not advance money for any hedging transaction as the same was not permitted as per rules. Further if the losses incurred had not been claimed by the assessee then the assessee could not argue that the advance had not made for any genuine business purpose. The Learned DR further argued that there was no material with the CIT(A) to hold that the advances had not been made out of borrowed funds. It was accordingly urged that the order of CIT(A) should be set aside and the addition made by the AO should be confirmed. The Learned AR for the assessee on the other hand submitted that the assessee was not required to be registered with the broker as a non member as M/s. Param Industries was itself registered as member with NBOT prior to the merger with the assessee company. It was also submitted that the advances had been given in the earlier year in which no disallowance of interest had been made. The same advance had continued this year and therefore disallowance made was not justified.
5. We have perused the records and considered the rival contentions carefully. The dispute is regarding disallowance of interest of Rs.69,73,330/- proportionate to the interest free advance of Rs.6,33,93,759/- given by the assessee to Shri Susil Kumar Khowala, a broker of NBOT. The advance had been given by M/s.Param Industries Ltd. prior to its merger with the assessee company w.e.f. 1.4.2005. The advance remained outstanding till 31.3.2007 and no interest had been charged. The AO initially suspected that advance had been given to artificially booked loss of Rs.2,14,75,281/- through transactions with the broker and since the assessee company was not registered with the said broker as a non member the loss could not be allowed in its hands. But ultimately the assessee itself admitted that it had not booked any loss through any transactions with the broker and AO on verification found the claim to be correct. The assessee explained that the advance had been given to the broker against probable transaction of edible oil to be made through NBOT but due to abnormal fluctuation in the prices of edible oil the transaction could not be materialize. However, there was no supporting evidence placed on record to substantiate the claim and as to how such huge advance remained outstanding for years. AO therefore did not find the explanation plausible and held that the advance was not for any genuine business purpose and disallowed the interest proportionate to the interest free advance. CIT(A) has held that the advance had been made apparently for hedging against any future loss and therefore the same was for business purpose. This finding of CIT(A) is not supported by any evidence as there is no material to show any hedging transaction by the assessee. The business purpose in giving the huge advance which remained outstanding for years is therefore not established and the finding of CIT(A) that advance had been made for the purpose of business is therefore set aside.
5.1 It will be pertinent to point out here that the assessee before the AO had also explained that advance had been made out of own fund as the assessee had capital as well as reserve and surplus to the tune of Rs.903 crores. The AO however did not examine this aspect. In appeal CIT(A) held that since AO did not examine the matter and gave any adverse finding the claim of the assessee that advance had been made out of own fund has to be accepted. The view taken by the CIT(A) cannot be sustained. It is a settled legal position that CIT(A) has power co-terminus with AO; he can do what the AO can do and he is also empowered to do what the AO failed to do. Therefore in case the AO has failed to examine the matter and gave any finding, CIT(A) was required to examine and record a finding that advances had been made out of own funds which he has failed to do. Moreover we also note that the assessee before AO only stated that he had capital, reserve and surplus to the tune of Rs.903 crores and only from this fact it cannot be concluded that the advances had been made from own fund unless application of capital reserve and surplus is properly examined. The assessee nowhere claimed that it had sufficient own fund on the date of making advances. The matter required examination which has not been done either by AO or CIT(A) . The finding as to whether the advances had been made from own fund is necessary because even if the advances had not been made for the purpose of business proportionate disallowance of interest can be made only when it is established that the advances were not made from own fund but from borrowed funds. We are not in a position to give any finding at this stage because finding can be given only after detailed examination which can be done at the level of AO/CIT(A).
5.2 This aspect therefore requires fresh examination. CIT(A) has also mentioned that advance had been given in the earlier year when there was no disallowance and therefore no disallowance could be made this year. Here again no clear finding has been given whether in the earlier year matter had been examined and no disallowance had been made on the ground that advance had been made out of own fund. In case in the earlier year the assessment had been completed after examination under section 143(3) and no disallowance had been made, we agree that no disallowance can be made this year because the same amount remained outstanding. However, in case in the earlier year the assessment had been accepted summarily under section 143(1)(a), no examination could have been made because AO is not empowered to make any examination and has to accept the claim made in the return and in such a case the AO in the present year is entitled to make fresh examination to find out whether the advance had been made from own fund or borrowed funds. We may also clarify the position that in case in the earlier year the assessee had mixed pool of funds and if it is shown that on the date of advances, the assessee had sufficient own fund available, then the presumption will be that the advances had been made from own funds as has been held in several judicial pronouncements.
5.3 In view of foregoing discussion, we set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination in the light of observations made above and after allowing opportunity of hearing to the assessee.
6. In the result the appeal of the revenue is allowed for statistical purpose.
7. The order was pronounced in open court on today 31.08.2010.
Sd/- Sd/-
( D. MANMOHAN ) (RAJENDRA SINGH)
VICE PRESIDENT ACCOUNTANT MEMBER
Date : 31.08.2010
At :Mumbai
Copy to :
The Appellant
The Respondent
The CIT(A), Mumbai concerned
The CIT, Mumbai City concerned
The DR "D" Bench, ITAT, Mumbai
// True Copy//
By Order
Assistant Registrar
ITAT, Mumbai Benches, Mumbai
Alk
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