M/s. R.M. Patel & Sons, Anand v. The Income tax Officer,Ward-2,, Anand

ITA 1845/AHD/2009 | 2005-2006
Pronouncement Date: 31-01-2011 | Result: Allowed

Appeal Details

RSA Number 184520514 RSA 2009
Assessee PAN AAEFR5572J
Bench Ahmedabad
Appeal Number ITA 1845/AHD/2009
Duration Of Justice 1 year(s) 7 month(s) 27 day(s)
Appellant M/s. R.M. Patel & Sons, Anand
Respondent The Income tax Officer,Ward-2,, Anand
Appeal Type Income Tax Appeal
Pronouncement Date 31-01-2011
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted C
Tribunal Order Date 31-01-2011
Date Of Final Hearing 25-01-2011
Next Hearing Date 25-01-2011
Assessment Year 2005-2006
Appeal Filed On 03-06-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH C AHMEDABAD BEFORE SHRI MAHAVIR SINGH JUDICIAL MEMBER AND SHRI A.N.PHAUJA ACCOUNTANT MEMBER ITA NO.1845/AHD/2009 ASSESSMENT YEAR:2005-06 DATE OF HEARING:27.1.11 DRAFTED:28.1.11 M/S. R.M. PATEL & SONS PO VALSAN TAL. &DT. ANAND PAN NO.AAEFR5572J V/S. INCOME TAX OFFICER WARD-2 ANAND (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI S.N.DIVETIA AR RESPONDENT BY:- DR. RAJA RAM SAH SR-DR O R D E R PER MAHAVIR SINGH JUDICIAL MEMBER:- THIS APPEAL BY THE ASSESSEE IS ARISING OUT OF THE ORDER OF COMMISSIONER OF INCOME-TAX(APPEALS)-IV BARODA IN APPEAL NO.CAB/IV- A-170/07-08 DATED 05-03- 2009. THE ASSESSMENT WAS FRAMED BY THE ITO WARD-2 ANAND U/S.143(3) OF THE INCOME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS T HE ACT) VIDE HIS ORDER DATED 11-12- 2007 FOR THE ASSESSMENT YEAR 2005-06. 2. THE ONLY ISSUE IN THIS APPEAL OF ASSESSEE IS AGA INST THE ORDER OF CIT(A) IN CONFIRMING THE DISALLOWANCE OF INTEREST OF RS.14 92 707/-. FOR THIS ASSESSEE HAS RAISED THE FOLLOWING EFFECTIVE GROUNDS NO.2-3 :- THE APPELLANT IS A PARTNERSHIP FIRM AND ENGAGED IN THE BUSINESS OF PROCESSING/TRADING OF TOBACCO. IT HAD FILED ITS RET URN OF INCOME ON 28.10.2005 DECLARING TOTAL INCOME OF RS.24 036/-. 2. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT THE APPELLANT HAD PAID INTEREST EXP. OF RS.38 41 241/- BUT NO INTEREST WAS CHARGED IN RESPECT OF DUES OF RS.86 49 215/- FROM I TS SISTER CONCERN M/S. R.M. PATEL. THE APPELLANT VIDE ITS REPLY DT.3.12.20 07 CONTENDED HAT THE PARTY ITA 1845/AHD/2009 A.Y. 2005-06 M/S. R.M. PATEL & SONS V. ITO WD-2 ANAND PAGE 2 WAS A TRADE DEBTOR AND IT WAS ITS BUSINESS PRACTICE NEITHER TO CHARGE NOR TO PAY INTEREST. HOWEVER THE A.O REJECTED THE AFORESA ID CONTENTION ON THE GROUND THAT THE NATURE OF TRANSACTIONS WERE OF ADVA NCE AND NOT SALE-PURCHASE OF GOODS. HENCE INTEREST AT 18% WHICH WORKED OUT R S.14 92 707/- ON PRO-RATA BASIS WAS DISALLOWED. 3. BEING AGGRIEVED THE APPELLANT PREFERRED APPEAL TO C.I.T.(*A) WHO ALSO CONFIRMED THE DISALLOWANCE MAINLY ON THE GROUND THA T THE CREDIT BALANCE WAS NOT ON ACCOUNT OF TRADING TRANSACTION NOR THE ADVA NCE WAS GIVEN FOR COMMERCIAL EXPEDIENCY. HOWEVER THE INTEREST REFERA BLE TO THE PURCHASES OF RS.5 66 927/- DURING THE F./Y. 2004-05 AND INTEREST REFUNDS WAS DIRECTED TO BE ALLOWED. HENCE THIS APPEAL. 3. THE BRIEF FACTS LEADING TO THE ABOVE ISSUE ARE T HAT ASSESSEE HAD ADVANCE A SUM OF RS.86 49 215/- AS INTEREST FREE ADVANCE TO M /S. R.M. PATEL A SISTER CONCERN AND AT THE SAME TIME PAID INTEREST OF RS.38 41 241/ - TO BANK AND SHROFFS. THE ASSESSING OFFICER ISSUED SHOW CAUSE NOTICE PROPOSIN G TO DISALLOW PROPORTIONATE INTEREST OUT OF THE INTEREST CLAIMED U/S.36(1)(III) DUE TO DIVERSION OF INTEREST BEARING FUNDS TOWARDS NON-BUSINESS PURPOSE. THE ASSESSEE S TATED THAT M/S. R.M. PATEL APPEARED ON THE BALANCE SHEET AS A SUNDRY DEBTOR I .E. DEBTOR FOR GOODS SOLD. AS PER ASSESSEE NO ADVANCE WAS GIVEN TO M/S. R.M.PATEL AN D THE PARTY WAS A TRADE DEBTOR. IT WAS FURTHER STATED THAT IT WAS NOT THE PRACTICE OF THE BUSINESS EITHER TO CHARGE OR TO PAY INTEREST FROM TRADE DEBTORS AND TRADE CREDITORS AND ON THE SAME PRINCIPLE NO INTEREST WAS CHARGED FROM M/S. R.M. PATEL ALSO. THE AO ON VERIFICATION OF BALANCE- SHEET OBSERVED THAT NO NON-INTEREST BEARING FUNDS W ERE AVAILABLE WITH THE ASSESSEE TO MAKE ADVANCE TO ANY PERSON. THE LEDGER ACCOUNT O F M/S.R.M.PATEL SHOWED RECEIPT OF RS.86.49 LAKH FROM THE ASSESSEE WHICH W AS SUBSEQUENTLY TRANSFERRED TO M/S.BHAILAL KUBERDAS SHAH A SHROFF FOR REPAYMENT OF LOAN TAKEN BY M/S R.M.PATEL AND THE NATURE OF TRANSACTION WAS THEREFORE TO REPA Y THE LOAN WAS TAKEN BY M/S. R.M. PATEL FROM M/S. BHAILAL K SHAH INTEREST BURDEN OF WHICH WAS BORNE BY THE ASSESSEE. FOR THIS REASON AND IN THE ABSENCE OF ANY DOCUMENTA RY EVIDENCE THE AO FOUND THAT THE LOAN IS NOT FOR BUSINESS PURPOSE. THE AO ACCORD INGLY WORKED OUT INTEREST OF RS.14 92 707/- ON THE ACCOUNT OF M/S. R.M. PATEL ON REDUCING BALANCE METHOD AND DISALLOWED THE SAME OUT OF INTEREST PAID @ 18%AND C LAIMED U/S.36(1)(III). AGGRIEVED ASSESSEE PREFERRED APPEAL BEFORE CIT(A). THE CIT(A) ALSO CONFIRMED THE ACTION OF ASSESSING OFFICER IN PARA-4 OF HIS APPELLATE ORDER. 4. I HAVE CONSIDERED THE SUBMISSIONS. THERE ARE SA LE PURCHASE TRANSACTIONS BETWEEN APPELLANT AND M/S. R.M PATEL SINCE LAST SEV ERAL YEARS ON ACCOUNT OF ITA 1845/AHD/2009 A.Y. 2005-06 M/S. R.M. PATEL & SONS V. ITO WD-2 ANAND PAGE 3 WHICH APPELLANT HAS PAID AS WELL AS RECEIVED FUNDS FROM M/S. R.M. PATEL. TO THE EXTEND AMOUNTS PAID AND RECEIVED WERE COMMENSUR ATE WITH THE TRADING TRANSACTIONS THE OUTSTANDING CREDIT BALANCE OF THE APPELLANT WITH M/S.R.M. PATEL COULD BE A BUSINESS ADVANCE ON WHICH NO INTE REST WAS CHARGEABLE. HOWEVER IT IS SENT HA THE FUNDS ADVANCED BY THE AP PELLANT TO M/S. R. M. PATEL IN THIS PREVIOUS YEAR I.E. F.Y. 2004-05 CANNOT BE SAID TO BE ON ACCOUNT OF SALE PURCHASE TRANSACTIONS. APPELLANT ALREADY HAD A CRED IT BALANCE OF RS.60 12 809/- ON 1.4.2005 WITH M/S. R.M. PATEL AN D DURING THE YEAR I.E F.Y. 2004-05 PURCHASES OF ONLY RS.5 66 927/- WERE MADE BY THE APPELLANT FROM M/S. R. M. PATEL. OVER AND ABOVE FURTHER SUMS OF R S.86 49 215/- WERE ADVANCED BY THE APPELLANT TO M/S. R.M. PATEL DURING THE YEAR ON WHICH NO INTEREST WAS CHARGED. APPELLANTS CLOSING BALANCE A S ON 31.3.2005 WAS RS.21 46 62 023/- A(CREDIT). THUS APPELLANTS CONT ENTION THAT ITS CREDIT BALANCE WITH M/S. R. M.PATEL WAS ON ACCOUNT OF TRAD ING TRANSACTIONS IS NOT ACCEPTABLE. APPELLANTS CONTENTION THAT THE MONEY W AS ADVANCED FOR PURCHASES IN FUTURE IS ALSO SNOT SUBSTANTIATED SIN CE SALES AND PURCHASES DURING THE NEXT YEAR I.E. F.Y. 2005-06 WERE RS.29 50 000/- AND RS.43 73 073/- RESPECTIVELY. THE TIME GAP BETWEEN A DVANCE OF MONEY DURING JUNE TO OCTOBER 2004 AND PURCHASES IN THE NEXT YEAR IS ALSO MORE THAN 6 MONTHS AND THUS THE MONEY ADVANCED IN F.Y. 2004-05 COULD NOT BE SAID TO BE ADVANCED FOR PURCHASES. MOREOVER APPELLANT ALREADY HAD CREDIT BALANCE OF RS.60 12 808/- AS ON 1.4.2004 WHICH ITSELF WAS SUF FICIENT TO FINANCE PURCHASES OF RS.5 66 927/- DURING F.Y. 2004-05 AS W ELL AS THE NET PURCHASES (I.E. DIFFERENCE OF SALES AND PURCHASES) IN F.Y. 20 05-06. NEXT CONTENTION OF THE APPELLANT IS THAT M/S R.M. PATEL AND ITS GOODWI LL FACILITATED MAKING OF PURCHASES BY APPELLANT. THIS CONTENTION HAS FIRSTLY NOT BEEN SUBSTANTIATED AND SECONDLY EVEN IF M/S. M.R PATEL BEING A FAMILY CON CERN ASSISTED IN SOME MANNER IN THE PURCHASES OF THE APPELLANT. THE SAME CANNOT BE A JUSTIFICATION FOR DIVERSION OF INTEREST BEARING FUNDS WITHOUT CHA RGING INTEREST. THUS THE FUNDS ADVANCED BY THE APPELLANT TO M/S. R.M. PATEL FREE OF INTEREST ARE AT LEAST TO A LARGE EXTENT NOT FOUND TO BE FOR BUSINE SS PURPOSE AND CONSTITUTE DIVERSION OF INTEREST BEARING FUNDS. REGARDING APPE LLANTS CONTENTION THAT IT HAD INTEREST FREE FUNDS AVAILABLE WITH IT BY WAY OF PARTNERS CAPITAL OF RS.7 90 517/- AND UNSECURED LOANS OF RS.6 29 414/- ON 31.3.2005 CREDIT FOR THE SAME IS TO BE ALLOWED FOLLOWING THE DECISION OF ITAT AHMEDABAD IN THE CASE OF TORRENT FINANCIERS (2001) (073) TTJ 0624 (TAHD). FURTHER CREDIT OF RS.5 66 927/- BEING PURCHASES MADE IN F.Y. 2004-05 ALSO NEEDS TO BE ALLOWED WHILE WORKING THE INTEREST TO BE DISALLOWED AS PER THE DATE OF PURCHASE TRANSACTION. THE ASSESSING OFFICER IS DIRE CTED TO RECOMPUTED THE INTEREST TO BE DISALLOWED BY GIVING CREDIT FOR PURC HASES OF RS.5 66 927/- DURING F.Y 2004-05 AND PARTNERS CAPITAL AND INTEREST FREE UNSECURED LOANS AS PER THE DATES IN THESE ACCOUNTS. THE AMOUNT OF INTEREST SO RECALCULATED MAY BE DISALLOWED OUT OF THE INTEREST PAID AND CLAIMED U/S .36(1)(III). AGGRIEVED NOW ASSESSEE CAME IN SECOND APPEAL BEFO RE US. 4. WE HAVE HEARD RIVAL CONTENTIONS AND GONE THROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. WE FIND FROM THE ABOVE F ACTS AND ARGUMENTS OF BOTH THE ITA 1845/AHD/2009 A.Y. 2005-06 M/S. R.M. PATEL & SONS V. ITO WD-2 ANAND PAGE 4 SIDES THAT ASSESSEE HAS ADVANCED A SUM OF RS.86 49 250/- TO M/S. R.M. PATEL A SISTER CONCERN AS A TRADE DEBTOR AND BOOKS OF ACCOU NT OF ASSESSEE PARTICULARLY LEDGER ACCOUNT OF M/S. R.M. PATEL SHOWED A RECEIPTS OF RS.86.49 LAKH FROM THE ASSESSEE WHICH WAS TRANSFERRED TO M/S.BHAILAL KUBER DAS SHAH A SHROFF FOR REPAYMENT OF LOAN TAKEN BY M/S. R.M.PATEL AND THE N ATURE OF TRANSACTION WAS IS IN THE SHAPE OF REPAYMENT OF LOAN TAKEN BY M/S. R.M. P ATEL FROM M/S.BHAILAL KUBERDAS SHAH A SHROFF. IT IS ALSO A FACT AS DISCUSSED BY LOWER AUTHORITIES TO THE EXTENT AMOUNT PAID AND RECEIVED COMMENSURATE WITH THE TRAD ING TRANSACTION BUT OUTSTANDING CREDIT BALANCE OF THE ASSESSEE OF M/S. R.M. PATEL COULD BE BUSINESS ADVANCE ON WHICH NO INTEREST WAS CHARGEABLE. THE CI T(A) HAD DISCUSSED THE FACTS THAT THE FUND ADVANCED BY ASSESSEE CANNOT BE SAID T O BE ON ACCOUNT OF SALE/PURCHASE TRANSACTION AS IT HAD ALREADY A CREDI T BALANCE OF RS.60 12 809/- AS ON 01-04-205 WITH M/S. R.M. PATEL WHEREAS DURING THE FINANCIAL YEAR 2004-05 PURCHASES WERE TO THE TUNE OF RS.5 66 927/- AND CIT (A) HAS ALSO DISCUSSED THE PURCHASES IN FUTURE YEARS THAT SALES AND PURCHASES DURING FINANCIAL YEARS 2004-05 AND 2005-06 WERE TO THE TUNE OF RS.29.50 LAKH AND R S.43 73 073/- RESPECTIVELY. WE FURTHER FIND THAT NO DOUBT THE AMOUNTS ARE NOT COMM ENSURATE WITH THE ADVANCE OF PURCHASES AND SALES BUT THERE IS A DIRECT BUSINESS NEXUS WITH THE TRANSACTIONS AND ONCE THERE IS A BUSINESS EXPEDIENCY AND BUSINESS NE XUS THE INTEREST CANNOT BE DISALLOWED. THIS VIEW OF OURS IS FORTIFIED BY HONB LE SUPREME COURT IN THE CASE OF S.A. BUILDERS LTD. V. CIT AND ANOTHER (2007) 288 ITR 1 (SC) WHEREIN IT IS HELD AS UNDER:- TO DECIDE WHETHER INTEREST ON FUNDS BORROWED BY TH E ASSESSEE TO GIVE AN INTEREST FREE LOAN TO A SISTER CONCERN (E.G. A SUBS IDIARY OF THE ASSESSEE) SHOULD BE ALLOWED AS A DEDUCTION UNDER SECTION 36(1 )(III) OF THE INCOME TAX ACT 1961 ONE HAS TO ENQUIRE WHETHER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. TH E EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. DECISIONS RELATING TO SECTION 37 WILL ALSO BE APP LICABLE TO SECTION 36(1)(III) BECAUSE IN SECTION 37 ALSO THE EXPRESSION USED IS FOR THE PURPOSE OF THE BUSINESS. FOR THE PURPOSE OF BUSINESS INCLUDES E XPENDITURE VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY AND IT IS IMMAT ERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. ITA 1845/AHD/2009 A.Y. 2005-06 M/S. R.M. PATEL & SONS V. ITO WD-2 ANAND PAGE 5 THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS WID ER IN SCOPE THAN THE EXPRESSION FOR THE PURPOSE OF EARNING PROFITS. IN ORDER TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUC TION UNDER SECTION 36(1)(III) OF INTEREST PAID BY THE ASSESSEE ON AMOU NTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN THOSE AUTHORITIES AN D THE COURTS SHOULD EXAMINE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY AND WHAT THE SISTER CONCERN DID WITH THE MONEY. THAT THE BOR ROWED AMOUNT IS NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS BUT HA D BEEN ADVANCED AS INTEREST FREE LOAN TO ITS SISTER CONCERN IS NOT REL EVANT. WHAT IS RELEVANT IS WHETHER THE AMOUNT WAS ADVANCED AS A MEASURE OF COM MERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER THE AMOUNT I NTEREST FREE LOAN TO ITS SISTER CONCERN IS NOT RELEVANT. ONCE IT IS ESTABLIS HED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF) THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM-CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE R OLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMS TANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT S. WE FIND THAT THERE IS OF BUSINESS EXPEDIENCY IN ADV ANCING THE INTEREST FREE DEPOSIT AS DISALLOWED BY THE ASSESSING OFFICER. FURTHER THE A SSESSEE HAS ALSO OPTION OF CONVERT LOANS INTO PURCHASE OF ITS LAND AND THE INT EREST FREE ADVANCES CAN BE TREATED AS CONSIDERATION PAID IN LIEU OF THE SAME. WE FIND THAT THE CIT(A) HAS ERRED IN NOT ALLOWING BUSINESS EXPEDIENCY IN THIS CASE AS THE H ONBLE APEX COURT HAS HELD IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) LAID DOWN THE PRINCIPLE THAT BUSINESS EXPE DIENCY IS ONE OF THE CONSIDERATION FOR ALLOWANCE OR DISALL OWANCE OF INTEREST U/S.36(1)(III) OF THE ACT. RESPECTFULLY FOLLOWING THE HONBLE APEX COURTS DECISION IN THE CASE OF S.A. BUILDERS LTD. (SUPRA) WE DELETE THE DISALLOWANCE MADE BY LOWER AUTHORITIES AND HOLD THAT THERE WAS BUSINESS EXPEDIENCY IN ADVANCING THI S INTEREST FREE LOAN BY THE ASSESSEE TO ITS SISTER CONCERN 5. IN THE RESULT ASSESSEES APPEAL IS ALLOWED. ORDER PRONOUNCED IN OPEN COURT ON 31/01/2011 SD/- SD/- (A.N.PHAUJA) (MAHAVIR SINGH) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD DATED : 31/01/2011 *DKP COPY OF THE ORDER FORWARDED TO :- ITA 1845/AHD/2009 A.Y. 2005-06 M/S. R.M. PATEL & SONS V. ITO WD-2 ANAND PAGE 6 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)- 4. THE CIT CONCERNS. 5. THE DR ITAT AHMEDABAD 6. GUARD FILE. BY ORDER /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT AHMEDABAD