The ITO, Ward-4(1),, Ahmedabad v. Growth Compusoft Exports Ltd.,, Ahmedabad

ITA 2830/AHD/2007 | 2003-2004
Pronouncement Date: 26-03-2010 | Result: Partly Allowed

Appeal Details

RSA Number 283020514 RSA 2007
Assessee PAN AAACG7619L
Bench Ahmedabad
Appeal Number ITA 2830/AHD/2007
Duration Of Justice 2 year(s) 8 month(s) 27 day(s)
Appellant The ITO, Ward-4(1),, Ahmedabad
Respondent Growth Compusoft Exports Ltd.,, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 26-03-2010
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 26-03-2010
Date Of Final Hearing 24-03-2010
Next Hearing Date 24-03-2010
Assessment Year 2003-2004
Appeal Filed On 29-06-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'B' (BEFORE S/SHRI D T GARASIA JM AND A N PAHUJA AM) ITA NO.2830/AHD/2007 (ASSESSMENT YEAR:-2003-04) THE INCOME-TAX OFFICER WARD-4(1) 1 ST FOOR NAVJIVAN TRUST BUILDING NAVJIVAN PO AHMEDABAD V/S GROWTH COMPUSOFT EXPORTS LTD. B-1 SHRI KRISHNA CENTRE MITHAKHALI CROSS ROAD NAVRANGPURA AHMEDABAD [PAN:AAACG7619L] [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI H N SINGH DR ASSESSEE BY:- SHRI SAKAR SHARMA AR O R D E R A N PAHUJA: THIS APPEAL BY THE REVENUE AGAINST AN ORDER DATED 27- 04-2007 OF THE LD. CIT(APPEALS)-VIII AHMEDABAD RA ISES THE FOLLOWING GROUNDS : 1 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF THE CASE IN DELETING THE ADDITION OF RS.35 000/- BEING PROFESSIONAL FEES FOR GETTING WORKING CAPITAL WHICH IS REQUIRED TO BE TREATED AS CAPITAL EXPENSES IN VIEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE O F BROKE BOND INDIA LTD. 225 ITR 798. 2 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF T HE CASE IN DELETING THE ADDITION OF RS.2500/- BEING VALUATION FEES IN RESP ECT OF WORKING CAPITAL IN VIEW OF THE DECISION OF BROKE BOND INDIA LTD. 22 5 ITR 798. 3 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF T HE CASE IN DELETING THE ADDITION OF RS.60 100/- BEING BANK GUARANTEE RENEWA L FEES. 4 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF T HE CASE IN DELETING THE ADDITION OF RS.10 500/- BEING FEE PAID TO CLUB IN V IEW OF THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF PRAKASH COTTON MILLS P LTD. 201 ITR 684 (SC). 5 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF T HE CASE IN RESTRICTING THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.7. 75 LACS AGAINST THE ADDITION OF RS.29.87 LACS THOUGH IT IS HELD BY VARI OUS COURTS THAT ITA NO.2830/AHD/2007 2 ASSESSEE CAN NOT DIVERT ITS OWN FUNDS TO OTHER PERS ON IN FORM OF INTEREST FREE LOANS AND REPLACE THE DEFICIT BY BORROWED FUND AS HELD IN THE CASE OF TRIVENI ENGG. WORKS LTD. 167 ITR 742 (ALL) CIT VS. ORISSA CEMENT LTD. 258 ITR 365 (DEL) TIRUPATI TRADING CO. VS. CI T 242 ITR 132 CIT VS. V I BABY AND CO. 254 ITR 248 ETC. 6 THE LD. CIT(A) ERRED IN LAW AND ON THE FACTS OF T HE CASE IN DELETING THE ADDITION OF RS.9 74 702/- BEING SALARY AND WAGES. 7 ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE THE LD. CIT(A) OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. 8 IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD . CIT(A) MAY BE CANCELLED AND THAT OF THE ASSESSING OFFICER MAY BE RESTORED TO THE ABOVE EFFECT. 2. ADVERTING FIRST TO GROUND NOS.1 TO 3 IN THE APP EAL FACTS IN BRIEF AS PER RELEVANT ORDERS ARE THAT RETURN DE CLARING LOSS OF RS.1 55 26 636/-FILED ON 30.11.2003 BY THE ASSESSEE CARRYING ON THE BUSINESS OF MANUFACTURING AND TRADING IN COMPUT ERS AND SOFTWARE AFTER BEING PROCESSED U/S 143(1) OF THE I NCOME-TAX ACT 1961[HEREINAFTER REFERRED TO AS THE ACT] WAS SELECTED FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 29.11.2004. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSING OFFICER[ AO IN SHORT] NOTICED THAT THE ASSESSEE DEB ITED EXPENSES OF RS.35 000/- BEING PROFESSIONAL FEES PAID TO M/S PSR CONSULTANTS FOR ADVICE ON BANK WORKING CAPITAL LIMIT RS. 2 500/- F OR VALUATION OF PROPERTY TO IN ORDER TO MORTGAGE IT FOR WORKING CAP ITAL TERM LOAN AND RS. 60 100/- TOWARDS BANK GUARANTEE RENEWAL FEES . THE AO DISALLOWED THESE EXPENSES ON THE GROUND THAT THESE WERE DIRECTLY RELATED TO THE RAISING OF CAPITAL OF THE ASSESSEE A ND THEREFORE WAS CAPITAL EXPENDITURE RELYING INTER ALIA ON THE DE CISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF CIT VS. VALLABH G LASS WORKS LTD. (1982) 137 ITR 389 (GUJ). 3. ON APPEAL THE ASSESSEE CONTENDED THAT THE SAID EXPENDITURE WAS INCURRED FOR GETTING ADVICE AND LIAISONING WITH THE BANK FOR GETTING WORKING CAPITAL FOR REGULAR BUSINESS OPERATIONS AND DID NOT RESULT IN ITA NO.2830/AHD/2007 3 ANY CAPITAL ASSETS. IN THE LIGHT OF THESE SUBMISSIO NS THE LD. CIT(A) DELETED THE DISALLOWANCE ON THE GROUND THE EXPENDIT URE WAS INCURRED ONLY IN CONNECTION WITH NORMAL BUSINESS OPERATIONS AND T HE DECISION RELIED ON BY THE AO IN THE CASE OF VALLABH GLASS WORKS LTD.(SUPRA) W AS NOT APPLICABLE AS NO CAPITAL ASSET WAS SOUGHT TO BE ACQUIRED BY INCURRIN G THIS EXPENDITURE . 4 THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST TH E AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED ON THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASSESSEE SUPP ORTED THE ORDER OF THE LD. CIT(A). 5 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. ANY EXPENDITURE INCURRED FOR OBT AINING WORKING CAPITAL LOAN FROM THE BANK FOR THE PURPOSE OF BUSI NESS OR THE RENEWAL FEES PAID TO THE BANK IN CONNECTION WITH T HE BANK GUARANTEE GIVEN TO THE DEPARTMENT OF TELECOMMUNICATION FOR TH E LICENSE IN THE FIELD OF INTERNET SERVICES IS NOT IN THE NATURE OF CAPITAL EXPENDITURE AND IS LAID OUT WHOLLY AND EXCLUSIVELY FOR THE BUSI NESS PURPOSES. IF THE EXPENDITURE IS MADE FOR SECURING THE USE OF MON EY FOR A CERTAIN PERIOD IT IS IRRELEVANT TO CONSIDER THE OBJECT WITH WHICH THE LO AN WAS OBTAINED [INDIA CEMENTS LTD. VS. CIT 60 ITR 52(SC)]. THE WORD LOAN IMPLIES LIABILITY AND IT IS DIFFICULT TO CONCEIVE LOAN AS SOME THING WHICH BRINGS IN TO EXISTENCE AN ASSET OF ENDURING NATURE. ANY LIABILIT Y INCURRED FOR OBTAINING LOAN IS REVENUE EXPENDITURE [ISHWARI KHET AN SUGAR MILLS P LTD. VS. CIT 63 ITR 376(ALL)]. IN THE LIGHT OF VIEW TAKEN IN THESE DECISIONS WE ARE NOT INCLINED TO INTERFERE WITH TH E FINDINGS OF THE LD. CIT(A).THEREFORE GROUND NOS. 1 TO 3 IN THE APPEAL ARE DISMISSED. 6. GROUND NO.4 RELATES TO ADDITION OF RS.10 500/- BEING ANNUAL FEES PAID TO CLUB. THE AO WHILE RELYING UPON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF PRAKASH CO TTON MILLS PVT. LTD. (1993) 201 ITR 685 (SC) WAS OF THE VIEW THAT THAT ANNUAL FEES OF RS.1500/- PAID TO KARNAVATI CLUB AND RS.13 500/ - PAID TO ROTARY CLUB CANNOT BE REGARDED TO HAVE BEEN WHOLLY AND EXC LUSIVELY ITA NO.2830/AHD/2007 4 EXPENDED FOR THE PURPOSE OF THE BUSINESS OF THE ASS ESSEE AS THERE WAS AN ELEMENT OF PERSONAL BENEFIT TO THE DIRECTORS . THE AO HOWEVER ALLOWED ONLY RS.1000/- IN RESPECT OF PAYME NT TO KARNAVATI CLUB AND RS.3500/- IN RESPECT OF ROTARY CLUB HOLDI NG IT TO BE REASONABLE AND DISALLOWED THE REMAINING SUM OF RS.1 0 500/- ON BOTH THESE ACCOUNTS. 7. ON APPEAL THE LD. CIT(A) DELETED THE DISALLOWA NCE HOLDING AS UNDER: 7.3 I FIND THE CONTENTION OF THE APPELLANT TENABLE TO THE EFFECT THAT THE CLUB FACILITIES ARE AVAILED FOR THE REQUIREMENT OF DAY-TO-DAY BUSINESS AND ITS RELIANCE ON THE DECISION OF THE HONBLE GUJARAT HIG H COURT IN THE CASE OF GUJARAT STATE EXPORT CORPORATION LIMITED VS. CIT 13 1 CTR 23 AND THE DECISION OF THE HONBLE MADRAS HIGH COURT IN THE CA SE OF SUNDARAM INDUSTRIES LIMITED 240 ITR 335 IS CORRECT THE AMOU NT DEBITED IS ONLY RS.15 000/- BEING THE ANNUAL FEES AND OUT OF THIS N O SPECIFIC AMOUNT COULD BE REASONABLY HELD AS RELATABLE TO THE PERSONAL BEN EFITS OF THE DIRECTOR. IN VIEW OF THE QUANTUM AND THE NATURE NO DISALLOWANCE IS JUSTIFIABLE AND THE ADDITION IN THIS REGARD AT RS.10 500/- IS DIRECTED TO BE DELETED. 8. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR REL IED ON THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASSESS EE SUPPORTED THE ORDER OF THE LD. CIT(A). 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. WE FIND THAT THE LD. CIT(A) CATEGORICALL Y HELD THAT CLUB FACILITIES WERE AVAILED FOR THE PURPOSE OF BUSINES S OF THE ASSESSEE. NO MATERIAL HAS BEEN PLACED BEFORE US BY THE REVENU E IN ORDER TO CONTROVERT THESE FINDINGS OF THE LD. CIT(A). THE DE CISION OF HONBLE APEX COURT IN THE CASE OF PRAKASH COTTON MILLS P LT D. VS. CIT 201 ITR 684(SC) RELIED ON BY THE REVENUE IN THEIR GROUN DS OF APPEAL WAS RENDERED ON ITS OWN FACTS AND WE ARE OF THE OPINI ON THAT THE SAID DECISION DOES NOT HELP THE REVENUE. RATHER WE FIND THAT THE HONBLE JURISDICTIONAL HIGH COURT IN GUJARAT STATE EXPORT C ORPORATION LIMITED VS. CIT ITA NO.2830/AHD/2007 5 131 CTR 23 HELD THAT THE PAYMENT OF ENTRANCE FEE FOR BECOMING A MEMBER O F THE SPORTS CLUB CANNOT BE TERMED AS A CAPITAL EXPEN DITURE. IT IS IN THE NATURE OF AN ADVANTAGE IN THE COMMERCIAL SENSE BUT IT IS NOT AN ADVANTAGE IN THE CAPITAL FIELD. IN CIT V. SUNDARAM INDUSTRIES LTD. [1999] 240 ITR 335 (MAD) CIT V. NESTLE INDIA LTD. [2008] 296 ITR 682 AND OTIS ELEVATOR CO. (INDIA) LTD. V. CIT [1992] 195 ITR 682 ALSO IT HAS BEEN HELD THAT PAYMENT MADE BY AN ASSES SEE TOWARDS CLUB MEMBERSHIP FEE WAS TO PROMOTE ITS BUSINESS AND IS THUS REVENUE EXPENDITURE. IN THE LIGHT OF VIEW TAKEN IN THESE DECISIONS WE D O NOT FIND ANY ILLEGALITY OR INFIRMITY IN THE ORDER OF THE LD. CIT(A). THUS GRO UND NO.4 IS DISMISSED. 10. GROUND NO.5 RELATES TO RESTRICTION OF THE DISA LLOWANCE OF INTEREST TO THE EXTENT OF RS.7.75 LACS AS AGAINST RS.29.87 LACS DISALLOWED BY THE AO. THE REVENUE HAVE RELIED ON TH E DECISIONS IN THE CASE OF TRIVENI ENGINEERING LTD. 167 ITR 742(A LL) CIT VS. ORISSA CEMENT LTD. 258 ITR 365(DEL.) TIRUPATI TRADING CO. VS. CIT 242 ITR 132 CIT VS. V I BABY & CO. 254 ITR 248 IN THEIR GRO UND OF APPEAL.THE AO NOTICED THAT THE ASSESSEE PAID INTERE ST OF RS.71.38 LACS TO BANK INCLUDING RS.4 96 737/- TO OTHERS WHI LE THE ASSESSEE ADVANCED RS.213.40 LACS TO THE FIVE CONCERNS IN WH ICH THE DIRECTORS HAD SUBSTANTIAL INTEREST. THESE CONCERNS WERE M/S C OSMO COMPUNICATION GROWTH CENTRE COMPUTING HAWKS COMP UNICATION IMPEL COMMUNICATION. BESIDES HAVING TRANSACTIONS OF PURCHASE AND SALE WITH SOME OF THESE CONCERNS THE AO NOTICED T HAT THE ASSESSEE HAD PAID EXPENSES ON BEHALF OF THESE PARTIES OUT O F BORROWED FUNDS. TO A QUERY BY THE AO THE ASSESSEE REPLIED THAT EXP ENSES INCURRED ON BEHALF OF THE ASSOCIATE CONCERNS WERE ADJUSTED A GAINST PURCHASES WHILE OUTSTANDING AMOUNT RECEIVABLE WAS D UE AGAINST SALES MADE TO THE SAID CONCERNS.SINCE THESE WERE NO RMAL BUSINESS TRANSACTIONS NO DISALLOWANCE SHOULD BE MADE ON AC COUNT OF INTEREST. HOWEVER THE AO DID NOT ACCEPT THESE SUBM ISSIONS ON BEHALF OF THE ASSESSEE AND ACCORDINGLY DISALLOWED INTEREST @ 14% ITA NO.2830/AHD/2007 6 P.A ON THE AGGREGATE DEBIT BALANCE RS.213.40 LACS IN THE ACCOUNT OF THE AFORESAID ASSOCIATE CONCERNS. 11. ON APPEAL THE ASSESSEE WHILE RELYING UPON THE DECISION IN THE CASE OF TORRENT FINANCIERS VS. ACIT 73 TTJ 624(AHME DABAD) CONTENDED THAT THEY HAD INTEREST FREE FUNDS OF RS.2 93.59 LACS WHICH WERE SUFFICIENT TO COVER THE ADVANCE TO ASSOC IATE CONCERNS. TO A QUERY BY THE LD. CIT(A) THE ASSESSEE DID NOT FUR NISH ANY EVIDENCE AS TO HOW THE BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOSE OF BUSINESS. ACCORDINGLY THE LD. CIT(A) RESTRICTED TH E DISALLOWANCE IN THE FOLLOWING TERMS: 8.2 BEFORE ME IT WAS CONTENDED THAT THE APPELLANT HAD INTEREST FREE FUNDS OF SHARE CAPITAL AND RESERVES OF RS.433.17 LACS WHE REAS THE INVESTMENT WAS AT RS.540.49 LACS. IT WAS ALSO CLAIMED THAT THE INTEREST BEARING FUNDS TOTAL TO RS.400.19 LACS AND THEREBY THERE WAS SURPL US OF RS.293.59 LACS FREE FUNDS WHICH COULD COVER THE ADVANCE TO ASSOCIA TED CONCERNS. THE APPELLANT ALSO RELIED ON THE DECISION OF THE JURISD ICTIONAL IT AT IN THE CASE OF TORRENT FINANCIERS V. ACIT 73 TTJ 624 TO THE EFF ECT THAT WHEN THE INTEREST FREE FUNDS ARE MORE THAN THE INTEREST FREE ADVANCES THEN NO HYPOTHETICAL DISALLOWANCE SHOULD BE MADE. 8.2.1 AT THIS STAGE THE APPELLANT WAS SPECIFICALLY ASKED TO FILE A DETAILED NOTE ON UTILIZATION OF BORROWED FUNDS FOR BUSINESS PURPOSE WITH EVIDENCES. TO THIS TILL DATE THERE WAS NO RESPONSE. ACCORDINGL Y I PROCEED TO DISPOSE OFF THIS GROUND ON THE BASIS OF INFORMATION CONTAIN ED IN THE WRITTEN SUBMISSIONS : 8.2.2 INTEREST CLAIMED AS EXTRACTED BY THE AO AT PAGE 3 OF HIS ORDER ARE AS UNDER: BANK INTEREST RS. 9 08 141 BANK CHARGES AND COMMISSION RS. 1 50 259 TERM LOAN INTEREST RS. 55 83 734 OTHER INTEREST RS. 4 96 737 ------------------ RS. 7 38 871 8.2.3 AS SEEN FROM THE ABOVE THE MAJOR PART OF INT EREST PAYMENT WAS ON TERM LOAN WHICH IS GRANTED FOR SPECIFIC PURPOSE OF INVESTMENT IN SPECIFIC ASSETS. ACCORDINGLY THE UTILIZATION OF THE TERM LO AN IN THIS REGARD IS NOT IN DOUBT. AS REGARDS THE BALANCE INTEREST OF ABOUT RS. 16 LACS THE APPELLANT DID NOT FURNISH ANY COMPREHENSIVE EXPLANATION. THOU GH THE AVAILABILITY OF FREE FUNDS AS SHARE CAPITAL AND RESERVES IS NOT DIS PUTED THE SAME WAS ITA NO.2830/AHD/2007 7 UTILIZED FOR FIXED ASSETS AND OTHER CURRENT ASSETS OF THE BUSINESS. IN THAT VIEW OF THE MATTER IT CANNOT BE SAID THAT ONLY FRE E FUNDS WERE GIVEN TO THE ASSOCIATED CONCERNS. IT IS A MIXED BASKET AND ACCOR DINGLY I HOLD THAT 50% OF THE BALANCE INTEREST OUT OF THE MIXED FUNDS IS R ELATABLE TO ADVANCES TO SISTER CONCERNS ON WHICH NO INTEREST WAS CHARGED. I T IS ALSO TO BE STATED THAT THE APPELLANT HAS NOT PROVED THE APPLICATION O F BORROWED FUNDS FOR BUSINESS PURPOSE AND THE DECISION OF THE HON'BLE PU NJAB AND HARYANA HIGH COURT REPORTED IN 286 1TR 1 AS TO THE CLAIM U/ S. 36(L)(III) IS QUITE RELEVANT. TAKING AN OVER ALL PERSPECTIVE OF THE FAC TS ON RECORDS AND THE FUNDS BEING INTER MIXED I CONSIDER 50% OF THE BALA NCE INTEREST AT RS.7.75 LACS IS DISALLOWED AS NOT PROVED U/S. 36(L)(III) AN D THE ADDITION IS RESTRICTED TO RS.7.75 LACS AS AGAINST RS.29.87 LACS. THIS GROU ND IS PARTLY ALLOWED. 12. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR REL IED ON THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASSESS EE SUPPORTED THE ORDER OF THE LD. CIT(A) CONTENDING INTER ALIA THAT NO DISALLOWANCE WAS MADE IN THE PRECEDING YEARS WHILE IN THE YEAR UNDER CONSIDERATION THE ASSESSEE INCURRED LOSS AND THEREFORE BORROWED CAPITAL HAD BEEN APPLIED FOR THE PURPOSE O F BUSINESS. 13 WE HAVE HEARD BOTH THE PARTIES AND GONE THROU GH THE FACTS OF THE CASE. WE FIND THAT DESPITE SPECIFIC REQUEST MADE BY THE LD. CIT(A) THE ASSESSEE DID NOT PLACE ANY EVIDENCE BEFORE HIM AS TO HOW THE FUNDS B ORROWED BY IT HAD BEEN UTILIZED. IN THIS CONNECTION THE RELEVANT PROVISIO NS OF SECTION 36(1)(III) OF THE ACT PROVIDE FOR DEDUCTION OF INTEREST ON THE BORROWED F UNDS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTI ON THE ONUS IS ON THE ASSESSEE TO SATISFY THE AO THAT LOANS RAISED BY T HE ASSESSEE WERE USED FOR BUSINESS PURPOSES. IF IN THE PROCESS OF EXAMINATION OF CLAIM FOR SUCH A DEDUCTION IT TRANSPIRES THAT THE ASSESSEE HAD ADVANCED CERTAI N FUNDS TO ANY OTHER PERSON WITHOUT ANY INTEREST THERE WOULD BE A VERY HEAVY O NUS ON THE ASSESSEE TO BE DISCHARGED BEFORE THE AO TO THE EFFECT THAT IN SPIT E OF PENDING LOANS ON WHICH THE ASSESSEE IS INCURRING THE LIABILITY TO PAY INTERES T STILL THERE WAS JUSTIFICATION TO ADVANCE LOANS TO OTHER PERSONS FOR NON-BUSINESS PUR POSES WITHOUT ANY INTEREST. IN MADHAV PRASAD JATIA V. CIT [1979] 118 ITR 200 (SC) HONBLE SUPREME COURT OBSERVED THAT UNDER S. 10(2)(III) OF THE 1922 ACT( NOW SEC. 36(1)(III) OF THE 1961 ITA NO.2830/AHD/2007 8 ACT) THREE CONDITIONS ARE REQUIRED TO BE SATISFIED IN ORDER TO ENABLE THE ASSESSEE TO CLAIM A DEDUCTION IN RESPECT OF INTEREST ON BORR OWED CAPITAL NAMELY (A) THAT MONEY (CAPITAL) MUST HAVE BEEN BORROWED BY THE ASSE SSEE (B) THAT IT MUST HAVE BEEN BORROWED FOR THE PURPOSE OF BUSINESS AND (C) THAT THE ASSESSEE MUST HAVE PAID INTEREST ON THE SAID AMOUNT AND CLAIMED IT AS A DEDUCTION. IT WAS ALSO HELD THAT THE EXPRESSION 'FOR THE PURPOSE OF BUSINESS' O CCURRING UNDER THE PROVISION IS WIDER IN SCOPE THAN THE EXPRESSION 'FOR THE PURPOSE OF EARNING INCOME PROFITS OR GAINS'. IN THE CASE UNDER CONSIDERATION THERE IS NOTHING IN THE ORDER OF LOWER AUTHORITIES TO SUGGEST THAT THE ASSESSEE DISCHARGED THE ONUS LAID DOWN UPON HIM THAT BORROWED FUNDS HAD INDEED BEEN UTILIZED FO R THE PURPOSE OF ITS BUSINESS SO AS TO ENTITLE IT TO CLAIM DEDUCTION U/S 36(1)(II I) OF THE ACT. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON THE BOR ROWING TO THE EXTENT THE AMOUNT IS ADVANCED TO A SISTER CONCERN OR OTHER PERSONS WITH OUT CARRYING ANY INTEREST FOR NON-BUSINESS PURPOSES WOULD BE THAT THE ASSESSEE HA D SOME LOANS OR OTHER INTEREST BEARING DEBTS TO BE REPAID. IN CASE THE AS SESSEE HAD SOME SURPLUS AMOUNT WHICH ACCORDING TO HIM COULD NOT BE REPAID PREMATURELY TO ITS CREDITORS STILL THE SAME IS EITHER REQUIRED TO BE CIRCULATED AND UTILISED FOR THE PURPOSE OF BUSINESS OR TO BE INVESTED IN A MANNER IN WHICH IT GENERATES INCOME AND NOT THAT IT IS DIVERTED TOWARDS SISTER CONCERNS OR OTHER PER SONS FREE OF INTEREST. THIS WOULD RESULT IN NOT PRESENTING THE TRUE AND CORRECT PICTU RE OF THE ACCOUNTS OF THE ASSESSEE AS AT THE COST BEING INCURRED BY THE ASSES SEE THE SISTER CONCERN OR THE OTHER PERSON WOULD BE ENJOYING THE BENEFITS THEREOF . IT CANNOT BE HELD THAT THE FUNDS TO THE EXTENT DIVERTED TO SISTER CONCERNS OR OTHER PERSONS FREE OF INTEREST WERE REQUIRED BY THE ASSESSEE FOR THE PURPOSE OF IT S BUSINESS AND LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED. AS IS APPARENT F ROM THE IMPUGNED ORDERS THERE IS NOTHING TO SUGGEST AS TO WHETHER OR NOT THE AO/L D. CIT(A) EXAMINED THE COMMERCIAL EXPEDIENCY IN ADVANCING FUNDS TO VARIOUS PERSONS WITHOUT CHARGING ANY INTEREST NOR THE ASSESSEE ESTABLISHED AS TO HO W BORROWED FUNDS HAD BEEN UTILIZED. IT MAY BE TRUE THAT THE QUESTION AS TO WH ETHER ADVANCE TO THE ASSOCIATE CONCERNS WAS GIVEN OUT OF THE INTEREST FREE FUNDS O R SALE PROCEEDS OR OUT OF THE BORROWED FUNDS FROM THE DEPOSITORS OR FROM THE BANK S IS ESSENTIALLY A QUESTION OF FACT BUT SUCH QUESTION OF FACT MUST BE DETERMINED ON THE BASIS OF THE MATERIAL WHICH IS AVAILABLE WITH THE ASSESSEE ALONE. SECTIO N 106 OF THE INDIAN EVIDENCE ITA NO.2830/AHD/2007 9 ACT OR THE PRINCIPLES ANALOGOUS THERETO PLACES THE BURDEN IN RESPECT THEREOF UPON THE ASSESSEE AS THE FACTS ARE WITHIN ITS SPECIAL K NOWLEDGE. HOWEVER A PRESUMPTION MAY BE RAISED IN A GIVEN CASE AS TO WHY AN ASSESSEE WHO FOR THE PURPOSE OF RUNNING ITS BUSINESS IS REQUIRED TO BORR OW MONEY FROM BANKS AND OTHER FINANCIAL INSTITUTIONS WOULD BE GIVING INTERE ST FREE ADVANCES TO ASSOCIATE CONCERNS AND THAT TOO WHEN IT PAYS A HEAVY INTEREST TO ITS LENDERS. WE ARE NOT OBLIVIOUS OF THE FACT THAT WHILE ARRIVING AT SUCH A FINDING A NEXUS BETWEEN THE BORROWINGS FROM THE BANKS AND OTHER FINANCIAL INSTI TUTIONS BY THE ASSESSEE AND LENDING IT TO ITS SUBSIDIARY COMPANIES MUST BE FOUN D OUT BUT SUCH NEXUS MUST ALSO BE FOUND OUT FROM THE MATERIAL AVAILABLE WITH THE ASSESSEE. IN THIS CASE THE AO FOUND THAT THE ASSESSEE HAD NOT CHARGED ANY INTE REST FROM THE PARTIES FROM WHOM AMOUNT OF RS. 2 13 40 451/- WAS DUE. BEFORE TH E LD. CIT(A) THE ASSESSEE PLEADED THAT HUGE AMOUNT OF INTEREST FREE FUNDS AGG REGATING TO RS.293.59 LACS WAS AVAILABLE WITH HIM. BUT THEN THE LD. CIT(A) OBS ERVED THAT THE ASSESSEE DID NOT PLACE ANY MATERIAL BEFORE HIM REGARDING UTILIZA TION OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS. INSTEAD OF ASCERTAINING THE C ORRECT FACTS THE LD. CIT(A) REDUCED THE DISALLOWANCE ON ESTIMATES. BEFORE US T HERE IS NO MATERIAL AS TO WHEN THE AFORESAID INTEREST FREE ADVANCES OF RS. 2 13 40 451/- WERE GIVEN AND WHAT WAS THE PURPOSE OF THE VARIOUS TRANSACTIONS A ND AS ON THE DATE WHEN ADVANCES WERE GIVEN WHAT WAS THE CASH FLOW POSITI ON I.E AS TO WHETHER THE ASSESSEE HAD IN FACT INTEREST FREE FUNDS AVAILABL E WITH HIM FOR MAKING THESE ADVANCES. THE LD. CIT(A) WITHOUT RECORDING ANY FI NDINGS AS TO WHETHER OR NOT BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PUR POSE OF BUSINESS REDUCED THE DISALLOWANCE ON ESTIMATES EVEN WHEN THE ASSESS EE FAILED TO DISCHARGE ONUS LAID DOWN UPON HIM . IN THESE CIRCUMSTANCES ESPECI ALLY WHEN THERE IS NO MATERIAL BEFORE US AS TO THE AVAILABILITY OF INTEREST FREE F UNDS WITH THE ASSESSEE AS ON THE DATE WHEN FUNDS TO THE TUNE OF RS. 2 13 40 451/- WERE ADVANCED NOR EVEN THE DATE WHEN SUCH FUNDS WERE ADVANCED IS AVAILABLE ON RECORDS WHILE THE ASSESSEE DID NOT FURNISH ANY FUND FLOW STATEMENT EVIDENCING NEXUS OR UTILIZATION OF BORROWED FUNDS FOR THE PURPOSE OF BUSINESS WE CONS IDER IT FAIR AND APPROPRIATE TO VACATE THE FINDINGS OF THE LEARNED CIT(A) AND RESTO RE THE ISSUE TO THE FILE OF THE AO WITH THE DIRECTIONS TO ALLOW ADEQUATE OPPORTUNIT Y TO THE ASSESSEE TO ESTABLISH THAT THE SUFFICIENT INTEREST FREE FUNDS WERE AVAILA BLE WITH HIM ON THE DATE WHEN ITA NO.2830/AHD/2007 10 INTEREST FREE ADVANCES OF RS. 2 13 40 451/- WERE GIVEN AND THE ENTIRE BORROWED FUNDS HAD INDEED BEEN UTILIZED FOR THE PURPOSE OF THEIR BUSINESS. WHILE KEEPING THESE ASPECTS IN MIND THE AO IS DIRECTED TO READJU DICATE THE MATTER IN ACCORDANCE WITH LAW IN THE LIGHT OF VARIOUS JUDIC IAL PRONOUNCEMENTS. WITH THESE DIRECTIONS GROUND NO.5 IS DISPOSED OF. 14 GROUND NO.6 RELATES TO DISALLOWANCE OF RS.9 74 702/- OUT OF SALARY AND WAGES. THE AO NOTICED THAT THERE WAS INCREASE IN THE SALARY WAGES AND BONUS BY ABOUT RS.2.5 LACS[RS.14 60 429- 12 05 194] IN THE YEAR UNDER CONSIDERATION WHEREAS THE SALES DECREASED FROM RS.12.5 CRORE TO RS.5.05 CRORES SIN CE THE ASSESSEE CLAIMED THAT NO SALARY REGISTER WAS BEING MAINTAIN ED AND THE EXPENDITURE WAS BOOKED ON THE BASIS OF VOUCHERS AN D THUS WAS NOT VERIFIABLE THE AO DISALLOWED THE EXPENDITURE IN EXCESS OF 0.96% OF THE SALES AS IN LAST YEAR AS AGAINST 2.88% CLAIMED IN THE YEAR UNDER CONSIDERATION RESULTING IN DISALLOWANCE OF RS.9 74 702/-. 15. ON APPEAL THE ASSESSEE CONTENDED THAT THE ACCOU NTS WERE AUDITED AND THERE WAS NO BOGUS PAYMENT AND THE EXPE NDITURE FOR DEVELOPMENT OF SOFTWARE WAS ADDED TO COST OF WORK I N PROGRESS OF SOFTWARE AND THE CLOSING STOCK ON SUCH SOFTWARE AS ON 31.3.2003 WAS RS.84.27 LACS AS AGAINST RS.16.41 LACS AS ON 31 .03.2002. THUS INSTEAD OF PASSING A CREDIT ENTRY IN THE SALARY ACC OUNT THE COST OF SOFTWARE WAS INFLATED WITH SALARY AND WAGES AND THE RE WAS NO SUPPRESSION OF INCOME. IN THE LIGHT OF THESE SUBMIS SION THE LD. CIT(A) CONCLUDED AS UNDER: 10.3 I FIND THE CONTENTION OF THE APPELLANT TENAB LE IN VIEW OF ENTRIES EXPLAINED AND IN ANY CASE DISALLOWANCE OF RS.9.74 L ACS OUT OF TOTAL SALARY CLAIMED AT RS.14.60 LACS IS DISPROPORTIONATE AND TH E DISALLOWANCE CANNOT BE SUSTAINED. IN VIEW OF THE WORK IN PROGRESS OF CO MPUTER SOFTWARE BEING ADJUSTED IN THE SALARY ACCOUNT NO DISALLOWANCE IS CALLED FOR. THIS GROUND IS THUS ALLOWED. ITA NO.2830/AHD/2007 11 16. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A).THE LD. DR RELIED ON THE ORDER OF THE AO WHILE THE LEARNED AR ON BEHALF OF THE ASSESSEE SUPP ORTED THE ORDER OF THE LD. CIT(A) MENTIONING THAT WHEN THE AMOUNT OF SLARY AND WAGES HAD BEEN CAPITALIZED WITH THE SOFTWARE THERE COULD NOT BE ANY DISALLOWANCE. . 17. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUG H THE FACTS OF THE CASE. UNDISPUTEDLY THE AMOUNT OF SALA RY AND WAGES HAVE BEEN CAPITALIZED ALONG WITH SOFTWARE AND FORMS PART OF CLOSING STOCK OF RS.84.27 LACS AS ON 31.3.2003. THE REVENUE HAVE NEITHER CONTROVERTED THE FINDINGS OF FACTS RECORDED BY THE LD. CIT(A) NOR PLACED BEFORE US ANY MATERIAL SO AS TO ENABLE US T O TAKE A DIFFERENT VIEW IN THE MATTER. IN THESE CIRCUMSTANCES WE HAVE NO ALTERNATIVE BUT TO UPHOLD THE FINDINGS OF THE LD. CIT(A). THERE FORE GROUND NO.6 IS DISMISSED. 18. GROUND NOS. 7 &8 BEING GENERAL IN NATURE DO NO T REQUIRE ANY SEPARATE ADJUDICATION AND ARE THEREFORE DISMISSED . 19. IN THE RESULT APPEAL IS PARTLY ALLOWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT TODAY ON 26-03-2 010 SD/- SD/- (D T GARASIA) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATE : 26-03-2010 COPY OF THE ORDER FORWARDED TO : 1. GROWTH COMPUSOFT EXPORTS LTD. B-1 SHRI KRISHNA CENTRE MITHAKHALI CROSS ROAD NAVRANGPURA AHMEDABAD ITA NO.2830/AHD/2007 12 2. THE ITO WARD-4(1) AHMEDABAD 3. CIT CONCERNED 4. CIT(A)-VIII AHMEDABAD 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT AHMEDABAD