Income Tax Appellate Tribunal - Hyderabad
Ashok Brothers vs Ito on 19 April, 2002
Equivalent citations: (2002)76TTJ(HYD)427
Order J. Sudhakar Reddy, A.M. This is an appeal filed by the assessee against the order of the Commissioner (Appeals)-V, Hyderabad, dated 13-12-2001, for the assessment year 1989-90.
2. The only issue that arises for consideration in the above appeal is the disallowance of Rs. 4,00,000 out of Rs. 4,26,750 paid by the assessee to bank on its overdraft account on the ground of diversion of borrowed funds to sister-concerns.
3. The assessee is partnership concern carrying on the business of welding electrodes, equipments and gas welding accessories, etc. The firm filed its return for the assessment year 1998-99 admitting income of Rs. 68,950. An addition of Rs. 4 lakhs was made by the assessing officer on the ground that the assessee has diverted borrowed funds to sister-concerns and that there is a direct nexus between the borrowal and interest-free advances made to sister-concerns. The learned Commissioner (Appeals) upheld the order of the assessing officer. Aggrieved of the above, the assessee is in appeal before us.
4. Learned counsel for the assessee submitted that there is no nexus between the amounts borrowed by way of cash credit/overdraft from the assessee's bankers and the amounts advanced to sister-concerns. He submitted a paper book consisting of pages 1 to 15 and argued that the two loans in question advanced to sister-concern which was weighing in the mind of the assessing officer as well as the Commissioner (Appeals) are Rs. 15,96,292 advanced to M/s Ashok Brothers, Secunderabad, and Rs. 7,32,246 to M/s Ashok Brothers Gases (P) Ltd. He submitted that Ashok Brothers Gases (P) Ltd. was originally a partnership concern by name Ashok Brothers and subsequently it was converted into a private limited company. He drew the attention of the Bench to page-3 of the paper book, which consists the balance sheet of the assessee as on 31-3-1998, and submitted that on the liability side, the amount due to M/s Ashok Brothers Gasses the former partnership concern is Rs. 8,76,278. He argued that the amount of Rs. 7,32,449 appearing on the assets side of the balance sheet against the name Ashok Brothers Gases Pvt. Ltd. is to be set off against the amount appearing on the liability side, i.e., Rs. 8,76,278 as both are one and the same. He submitted that the accountant of the firm had wrongly depicted same amount both on the liabilities and asset side of the balance sheet, thus giving an impression that an interest-free loan of Rs. 7,32,249 was given to Ashok Brothers Gases (P) Ltd. Thus, he argued that it cannot be said that there is a loan at all advance to M/s Ashok Brothers Gases (P) Ltd. inasmuch as it was a discharge of a liability and not an interest-free loan given.
5. Coming to the advance of Rs. 15,96,292 appearing on the asset side of the balance sheet against the name of Ashok Brothers, Secunderabad, he submitted that he had substantial interest-free funds in the form of sundry creditors Rs. 42,89,850, amount from M/s Atul Enterprises Rs. 1,96,658 in addition to Rs. 12,75,817 being partners capital contributions. Even the loans in question are of two borrowals. He argued, one being cash credit from Bank of India and another being loans taken against deposits. He submitted that the loans taken from fixed deposits cannot be taken as borrowings diverted to sister-concerns interest-free as they were not routed through cash credit account. On a query from the Bench, he admitted that this statement requires verification and subsequently confirmed the fact that these loans from fixed deposits were in fact routed through the cash credit account of the assessee-company. Nevertheless, he argued that the loans taken from Bank of India and fixed deposits have been utilised by the assessee for business and that can be evidenced by the fact that the asset side of the balance sheet depicts assets of Rs. 7,63,127, sundry debtors Rs. 35,97,086, and stock on hand of Rs. 11,22,853 totalling to Rs. 54,83,066. He vehemently contended that the business assets are far in excess of the borrowings and that in these circumstances, it cannot be paid that there was diversion of funds. He further submitted break-up of interest and bank commission in page 9 of the paper book and argued that the last two items therein, i.e., 57,404 and Rs. 1,26,896 pertain to interest on fixed deposits loans and that these should not be considered for exclusion on diversion. He further submitted that whenever cheques were issued to the other concerns form the cash credit account of the assessee, cash was deposited and to demonstrate it, he filed copies of account copies of Ashok Brothers, forming page Nos. 11 and 13 of the assessee's paper book. To substantiate his proposition that when interest-free funds are available with assessee, such disallowance cannot be made, he relied on the judgment of the Tribunal Ahmedabad A-Bench in Torrent Financiers v. Asstt. CIT (2001) 73 TTJ (Ahd-Trib) 624. He further relied on the judgment of the A-Bench of the Ahmedabad Tribunal in the case of Gujarat Narmada Valley Fertilizers Co. v. Dy. CIT (2001) 73 TTJ (Ahd-Trib) 787.
6. The only other ground is regarding levy of interest under section 234B. He submitted that interest under section 234B should be charged only upto the date of the first assessment, i.e., under section 143(1)(a) of the Act.
7. Learned Departmental Representative on the other hand vehemently controverted the. arguments of the learned counsel for the assessee and submitted that there is clear nexus between the borrowed amounts on which interest was paid and the amounts lent to sister- concerns, which was interest free. He vehemently contended that the cheques that were issued were out of the cash credit account of the assessee and thus, there is direct nexus in this case. The issue of cheques on the bank overdraft account to the sister-concerns, he argued, thus proves that the amounts were diverted from borrowed funds. He relied heavily on the order of the assessing officer as well as the orders of the learned Commissioner (Appeals) and took this Bench through the various figures as lent by the assessee to the sister-concerns to demonstrate that there is clear diversion of borrowed funds. He referred to the opening and closing balances of the sister-concern given by the assessing officer at page 3 of the order. He vehemently contended that the cash credit account had increased substantially due to the diversion of borrowed funds and that the interest thereon was rightly disallowed as it was not incurred for business purposes. For this proposition that the said interest is not allowable under section 36(1)(iii) he relied on the following judgments, 59 ITR 17 (sic), Marolia & Sons v. CIT (1981) 129 ITR 475 (All), Triveni Engg. Works Ltd. v. CIT (1987) 167 ITR 742 (All) and CIT v. Sujanni Textiles (P) Ltd. (1997) 225 ITR 560 (Mad). On the proof of nexus, he relied on the judgment in the case reported in (sic). He vehemently contended that when the loan is not used for business purposes, interest on the same cannot be said to have been incurred for the purpose of the business of the assessee and thus, it is rightly disallowed. He distinguished the case law relied on by the learned counsel for the assessee and submitted that in those cases, there were substantial interest-free funds available and that is not the same in this case. On the issue of levy of interest under section 234B, he relied on the decision of the Commissioner (Appeals) and submitted that the same be upheld.
8. Heard both sides. Read all the papers on record, the orders of the authorities below and the case law cited. What is not disputed by both the parties is the fact that the cheques through which amounts were advanced to sister-concern were from the cash credit account of the assessee and that the disallowance can be made by the department only when nexus is proved between the amounts borrowed and the amounts advancecd. It is well settled that when there are sufficient funds available with the assessee on which no interest was paid, then diversion of such funds by way of interest-free loans to sister concern does not allow disallowance of interest paid. On the issue of advance in the name of Ashok Brothers Gases (P) Ltd. appearing on the asset side of the balance sheet dated 31-3-1998, amounting to Rs. 7,32,249, we are of considered opinion that it is discharge of a liability to the same concern which appears on the liability side of the balance sheet to the tune of Rs. 8,76,278. We are inclined to agree with the arguments of the learned counsel for the assessee, as the department has not rebutted the contention of the assessee that M/s Ashok Brothers Gases (P) Ltd. and M/s Ashok Brothers Gases appearing on both assets and liabilities side of the balance sheet are one and the same concern and that when both these amounts are netted out there would be a net credit balance on the liability side of the balance sheet to the tune of Rs. 1,44,029. Coming to the other advances made to M/s Ashok Brotehrs Secunderabad to the tune of Rs. 15,96,292 the sole fact that cheques were issued from the cash credit account of the assessee's does not advance the case of the revenue that there is a nexus, for the simple reason that the assessee does not have any other bank account. In most of the cases, where bank facilities are granted, the assessees are prohibited from operating any other account without the specific permission of the bank. It is always a condition laid down by the banks that all transactions should be routed through the account maintained by it which in this case happens to be only one account, i.e., cash credit account. A close examination of the balance sheet reveals that the assessee does not have any other bank account. Thus, the sole reason that the only bank account for the assessee has been used to advance loans to sister-concern does not, to our mind, prove the nexus in this case. What is to be seen is whether there are substantial interest-free funds with the assessee or not. On a close observation of the balance sheet, it is seen that the assessee has the following interest-free.
Rs.
1. Partners capital account 12,75,817
2. Interest free amount from M/s Atul Enterprises 1,96,658
3. Sundry creditors amount to 57,62,325 Against this, on the asset side of the balance sheet the lending to a sister-concerns, i.e., M/s Ashok Brothers, Secunderabad is Rs. 15,94,292. Even taking the total borrowal of the assessee, it is observed that they are covered by the business assets in the form of sundry debtors and stock on hand. Loans from Bank of India and the loans against fixed deposits of liquidity together amount to Rs. 28,50,924 whereas the business assets consisting of assets account, sundry debtors, stock on hand amount to Rs. 54,83,066. Even if the sundry debtors are netted off with sundry creditors it shows a net surplus of Rs. 6,92,724 which can also be considered as surplus interest-free fund. Thus, in our considered opinion, the balance sheet of the assessee as on 31-3-1998 reveals that there are sufficient interest-free funds available with the assessee to match the interest-free advances made to sister-concerns leading to a conclusion that the assessing officer is not justified in disallowing an amount of Rs. 4 lakhs out of interest amount of Rs. 4,26,750 paid and claimed by the assessee. Even otherwise, the interest in question is against a bank loan, i.e., cash credit. It is well known that banks grant cash credit facilities only against stocks and debtors. This being so, whatever amount is advanced by the bank is carefully monitored by the bank officials and released only to meet the liability towards debtors and stocks. This being so, to our mind, it should not be proper to attribute to the assessee the allegation that loan sanctioned by the bank for acquisition of stocks or financing trade debtors was diverted to sister-concerns through the very same account in violation of credit terms without any proof or comments from the bank in this regard. Thus, in our considered opinion, the claim of the assessee for interest of Rs. 4,26,750 has to be allowed in full. This ground of the assessee succeeds.
9. Coming to the second ground, i.e., charging of interest under section 234B, it is consequential in nature and has to be charged only upto the date of first assessment under section 143(1)(a) of the Income Tax Act,1961, as held by the Tribunal Bangalore Bench-B in M.G. Kalyan v. ITO (2002) 80 ITD 39 (Bang-Trib).
10. In the result, appeal of the assessee is allowed.