The ACIT, Circle-1,, Ahmedabad v. Anjani Synthetics Ltd.,, Ahmedabad

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE S/SHRI G. D. AGARWAL VP AND BHAVNESH SAINI JM) ITA NO.2960/AHD/2004 A. Y.: 2001-02 THE INCOME TAX OFFICER WARD-2 (1) ROOM NO. 305 ANNEXE AAYAKAR BHAVAN AHMEDABAD VS ANJANI SYNTHETICS LTD. 252 NEW CLOTH MARKET RAIPUR GATE AHMEDABAD PA NO. AABCA 2789 E (APPELLANT) (RESPONDENT) ITA NO.2407/AHD/2005 A. Y.: 200203 ANJANI SYNTHETICS LTD. 252 NEW CLOTH MARKET RAIPUR GATE AHMEDABAD PA NO. AABCA 2789 E VS THE INCOME TAX OFFICER WARD-2 (1) ROOM NO. 305 ANNEXE AAYAKAR BHAVAN AHMEDABAD (APPELLANT) (RESPONDENT) ITA NO. 163/AHD/2007 A. Y. 2003-04 ANJANI SYNTHETICS LTD. 252 NEW CLOTH MARKET RAIPUR GATE AHMEDABAD PA NO. AABCA 2789 E VS THE A. C. I. T. CIRCLE -1 JITENDRA CHAMBERS 3 RD FLOOR AHMEDABAD (APPELLANT) (RESPONDENT) ITA NO. 653/AHD/2007 A. Y. 2003-04 THE D. C. I. T. CIRCLE -1 JITENDRA CHAMBERS 3 RD FLOOR AHMEDABAD VS ANJANI SYNTHETICS LTD. 252 NEW CLOTH MARKET RAIPUR GATE AHMEDABAD PA NO. AABCA 2789 E (APPELLANT) (RESPONDENT) ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 2 DEPARTMENT BY SHRI AMARJIT SINGH DR ASSESSEE BY NONE O R D E R PER BHAVNESH SAINI: THIS ORDER SHALL DISPOSE OF ALL THE ABOVE APPEALS FILED BY THE REVENUE AND THE ASSESSEE ON ID ENTICAL ISSUES. 2. WE HAVE HEARD THE LEARNED DR AND PERUSED THE FIN DINGS OF THE AUTHORITIES BELOW AND CONSIDERED THE MATERIAL AVAIL ABLE ON RECORD. NONE APPEARED ON BEHALF OF THE ASSESSEE DESPITE SERVICE OF NOTICE. THE ASSESSEE HAS HOWEVER FILED WRITTEN SUBMISSIONS WHICH ARE TA KEN INTO CONSIDERATION. ITA NO.2960/AHD/2004: BY REVENUE 3. THIS APPEAL BY THE REVENUE IS DIRECTED AGAINST T HE ORDER OF THE LEARNED CIT(A)-III AHMEDABAD DATED 07 TH JULY 2004 FOR ASSESSMENT YEAR 2001-02 CHALLENGING THE DELETION OF DISALLOWANCE MA DE OUT OF INTEREST AMOUNTING TO RS.43 05 000/-. THE AO OBSERVED THAT T HE ASSESSEE HAD MADE INVESTMENTS IN SHARES OF COMPANIES MAINLY GRO UP COMPANIES TOTALING TO RS.2 86 41 100/- AS PER BALANCE SHEET A S ON 31 ST MARCH 2001. THE AO ALSO OBSERVED THAT SHARE CAPITAL AND R ESERVE AND SURPLUS STOOD AT RS.6 59 21 888/-. THE AO HAS ALSO MENTIONE D THAT AFTER EXCLUDING INVESTMENTS IN SHARES THE ASSESSEE WAS RE QUIRED A SUM OF RS.7 91 26 253/- AS AGAINST NET WORTH HELD AS ON 31 ST MARCH 2001 TOTALING TO RS.6 59 21 888/-. THE AO ACCORDINGLY WO RKED OUT FUNDS REQUIRED FOR BUSINESS AND RS.2.00 CRORES. THE AO AL SO OBSERVED THAT TOTAL FUNDS BORROWED BY THE ASSESSEE WERE RS.4.87 C RORES AND AFTER REDUCING RS.2.00 CRORES BEING ESTIMATED REQUIRED BU SINESS FUNDS HE WORKED OUT FUNDS NOT UTILIZED FOR BUSINESS PURPOSE AT RS.2.87 CRORES. THE AO BY APPLYING INTEREST RATE @ 15% COMPUTED THE AMOUNT DISALLOWED AT RS.43 05 000/-. ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 3 4. ADDITION WAS CHALLENGED BEFORE THE LEARNED CIT(A ) AND IT WAS SUBMITTED THAT AMOUNTS WERE BORROWED BY THE ASSESSE E FOR THE PURPOSE OF BUSINESS AND THEREFORE INTEREST PAID ON IT ARE ALLOWABLE AS BUSINESS EXPENDITURE. THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF MADHAVPRASAD JATIA VS CIT 118 ITR 200 (SC). IT WAS ALSO SUBMITTED THAT INVESTMENTS IN SHA RES WERE MADE BY THE ASSESSEE COMPANY LONG BACK AND NOT IN THE ASSESSMEN T YEAR UNDER APPEAL. IT WAS FURTHER STATED THAT THIS FACT IS ALS O EVIDENT FROM THE ASSESSMENT ORDER WHEREIN IN PARA 3.1 THE AO HAS ME NTIONED INVESTMENTS WHICH STOOD ON 31 ST MARCH 2000. IT WAS SUBMITTED THAT NO PART OF THE INVESTMENTS WAS MADE IN THE RELEVANT AS SESSMENT YEAR AND FURTHER ASSESSMENTS U/S 143(3) OF THE IT ACT WERE M ADE IN EARLIER YEARS WHEREIN NO DISALLOWANCE OUT OF THE INTEREST WAS MAD E AND THEREFORE THERE WAS NO JUSTIFICATION TO DISALLOW INTEREST IN THE ASSESSMENT YEAR UNDER APPEAL. THE ASSESSEE RELIED UPON THE DECISION OF HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT VS SRIDEV E NTERPRISE 192 ITR 165 (KAR) WHEREIN IT WAS HELD THAT DISALLOWANCE WITH REFERENCE TO INTEREST FREE LOAN GIVEN IS CONFINED TO THE INTERES T FREE LOAN GIVEN DURING THE RELEVANT ACCOUNTING YEAR ITSELF AND DISA LLOWANCE CANNOT BE EXTENDED TO INTEREST FREE LOANS GIVEN IN THE EAR LIER YEAR WHEN NO DISALLOWANCE WAS MADE IN THAT REGARD . IT WAS FURTHER SUBMITTED THAT THE ASSESSEE BEING A COMPANY IS LEGALLY ENTITLED TO INVEST IN SHARES OF COMPANIES AND THERE WAS NO PROHIBITION TO INVEST IN SHARES. THE INVESTMENTS IN SHARES WERE MADE IN THE BEST INTERES T OF THE COMPANY AND THEREFORE IT IS INCORRECT TO STATE THAT THE I NVESTMENTS WERE NOT FOR BUSINESS PURPOSE. IT WAS FURTHER SUBMITTED THAT INV ESTMENTS HELD AT ANY POINT OF TIME CANNOT BE SAID TO HAVE SALE VALUE EQU IVALENT TO THE VALUE FOR WHICH IT WERE PURCHASED. THE DECISION OF SALE HAS T O BE TAKEN CONSIDERING VARIOUS FACTORS LIKE GROWTH OF THE COMP ANY DIVIDEND AND PROBABLE APPRECIATION. SINCE THE INVESTMENTS IN SHA RES WERE MADE IN THE ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 4 EARLIER YEARS FOR THE PURPOSE OF BUSINESS NO DISAL LOWANCE COULD BE MADE. THE ASSESSEE DREW ATTENTION OF LEARNED CIT(A) TO TH E NET WORTH I.E. SHARE CAPITAL AND FREE RESERVES WHICH WERE HELD BY THE AS SESSEE COMPANY AS ON 31 ST MARCH 2001. IT WAS SUBMITTED THAT THE ASSESSEE CO MPANY HAD NET WORTH OF RS.6.59 CRORES AND THEREFORE INVESTMENTS STOOD AT RS.2.86 CRORES CAN EASILY BE SAID TO HAVE BEEN MADE OUT OF OWN CAPITAL. THE ASSESSEE RELIED UPON THE DECISION OF THE HONBLE MA DRAS HIGH COURT IN THE CASE OF CIT VS HOTEL SAVERA 148 CTR 585 (MAD) W HEREIN IT WAS HELD THAT WHEN THE ASSESSEE HAS BOTH OWN MONEY AND BORR OWED MONEY A PRESUMPTION CAN ARISE THAT MONEY LENT EVEN FREE O F INTEREST COME OUT OF OWN MONEY . IT WAS SUBMITTED THAT METHOD OF COMPUTATION OF DISALLOWANCE MADE BY THE AO IS NOT SCIENTIFIC AS UN SECURED LOANS CARRIED INTEREST RATE OF 12% AND NOT 15% AS PRESUMED BY THE AO. WHEN FUNDS ARE BORROWED AND UTILIZED FOR BUSINESS PURPOSE THE RE IS NO REASON TO VARY THE INTEREST EXPENSE AS CLAIMED BY AN ASSESSEE . THE AO HAS NOT ESTABLISHED THAT ANY BORROWED FUNDS WERE UTILIZED E ITHER FOR GIVING INTEREST FREE LOANS OR FOR NON-BUSINESS PURPOSE TH EREFORE NO INTEREST CAN BE DISALLOWED. THE ASSESSEE RELIED UPON SEVERAL DEC ISIONS OF THE TRIBUNAL IN SUPPORT OF THE CONTENTION. THE ASSESSEE ALSO REL IED UPON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF SH REE DIGVIJAY CEMENT COMPANY LTD. VS CIT 138 ITR 45 (GUJ) WHEREIN IT WAS HELD THAT THE ASSESSEE COMPANY HAS MADE INVESTMENTS IN SHARES PAR TLY OUT OF BORROWED FUNDS BUT IN ABSENCE OF ESTABLISHING THE N EXUS NO PART OF THE INTEREST CAN BE DISALLOWED . IT WAS SUBMITTED THAT SINCE THE ASSESSEE COMPANY HAD SUFFICIENT OWN FUNDS TO INVEST IN SHARES OF THE COMPANIES THEREFORE NO INTEREST SHOULD BE DISALLO WED. IT WAS SUBMITTED THAT INVESTMENTS IN SHARES WERE MADE FOR BUSINESS P URPOSE AS PER MEMORANDUM OF ASSOCIATION. IT WAS FURTHER SUBMITTED THAT THE AO HAS NOT DISPUTED AVAILABILITY OF SUFFICIENT FUNDS WITH THE ASSESSEE. IT WAS FURTHER SUBMITTED THAT BY MAKING INVESTMENTS IN SHA RES THE DIRECTOR OR ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 5 HIS RELATIVES HAVE NOT BEEN BENEFITED IN ANY MANNER . IT WAS SUBMITTED THAT THE DECISIONS CITED BY THE AO ARE NOT APPLICAB LE TO THE FACTS OF THE CASE. THE ASSESSEE FILED CHART OF SEVERAL YEARS END ED ON 31 ST MARCH 1995 TO 31 ST MARCH 2001 TO SHOW THAT OWN FUNDS OF THE ASSESSEE WERE MORE THAN THE INVESTMENTS MADE IN THE SHARES. THE TABLE IS REPRODUCED AT PAGE 8 OF THE ORDER OF T HE LEARNED CIT(A). IT WAS ACCORDINGLY SUBMITTED THAT SINCE INVESTMENTS IN SHARES HAVE BEEN MADE IN EARLIER YEARS AND THERE WAS SUFFICIENT SURPLUS BALANCE AVAILABLE WITH THE ASSESSEE OVER THE INVESTMENTS MADE AND THE CLAIMS OF THE ASSESSEE HAV E BEEN ACCEPTED IN THE EARLIER YEARS U/S 143(3) OF THE IT ACT AND NO D ISALLOWANCE MADE THEREFORE THE DECISION OF THE HONBLE KARNATAKA HI GH COURT IN THE CASE OF SRIDEV ENTERPRISE (SUPRA) WAS CLEARLY APPLICABLE TO THE FACTS OF THE CASE. 5. THE LEARNED CIT(A) CONSIDERING THE SUBMISSIONS O F THE ASSESSEE NOTED THAT THERE WAS NO DISPUTE THAT THE ASSESSEE W AS AUTHORIZED UNDER THE COMPANIES ACT BY ITS MEMORANDUM TO INVEST IN SH ARES OF COMPANIES. THERE IS ALSO NO MATERIAL ON RECORD TO SHOW THAT IN VESTMENTS WERE NOT FOR BUSINESS PURPOSE. THE LEARNED CIT(A) ALSO FOUND THA T INVESTMENTS AS ON 31 ST MARCH 2000 AND 31 ST MARCH 2001 WERE SAME AT RS.2.86 CRORES WHICH SHOWS THAT NO INVESTMENT WAS MADE BY THE ASSE SSEE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THE DECISION I N THE CASE OF SRIDEV ENTERPRISE (SUPRA) THEREFORE CLEARLY APPLIES TO T HE FACTS OF THE CASE. THE LEARNED CIT(A) ALSO FOUND THAT NO EFFORT HAS BEEN M ADE BY THE AO TO BRING ON RECORD ANY NEXUS BETWEEN THE BORROWED MONE Y AND THE INVESTMENTS MADE FOR NON-BUSINESS PURPOSE. THE LEAR NED CIT(A) ACCORDINGLY DELETED THE DISALLOWANCE MADE OUT OF IN TEREST AND ALLOWED THE APPEAL OF THE ASSESSEE. 6. THE LEARNED DR RELIED UPON THE ORDER OF THE AO AND ALSO RELIED UPON THE DECISION IN THE CASE OF PHALTAN SUGAR WORK S LTD. VS CIT 208 ITR 989 (BOM) IN WHICH IT WAS HELD THAT BORROWED CAPITAL ADVANCED ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 6 TO SUBSIDIARY COMPANIES INTEREST NOT ALLOWABLE. HE HAS ALSO RELIED UPON THE ORDER OF THE BOMBAY BENCH OF ITAT IN THE C ASE OF SANGHVI SWISS REFILLS (P) LTD. VS ITO 85 ITD 59 (BOM) IN WH ICH IT WAS HELD THAT THE DEDUCTION CANNOT BE ALLOWED WHEN THE AMOUNT WA S DIVERTED TO SISTER CONCERNS AND ASSESSEE DID NOT PRODUCE ANY EV IDENCE TO SHOW THAT IT HAD SUFFICIENT FUNDS/NON-INTEREST BEARING F UNDS. THE LEARNED DR SUBMITTED THAT INVESTMENTS HAVE BEEN MADE TO HAV E CONTROLLING INTEREST IN THE COMPANIES IN WHICH INVESTMENTS WERE MADE. THEREFORE IT WOULD INDICATE THAT BORROWED FUNDS WERE NOT UTILIZE D FOR THE PURPOSE OF BUSINESS. THE LEARNED DR ALSO RELIED UPON THE DECIS ION OF THE HONBLE KERALA HIGH COURT IN THE CASE OF CIT VS V. I. BABY & CO. 123 TAXMAN 894 AS IS RELIED UPON BY THE AO IN WHICH IT WAS HEL D THAT IF CASH BALANCE WAS AVAILABLE THE BORROWING ITSELF WAS NOT FOR THE PURPOSE OF BUSINESS. AN ASSESSEE WITH LIQUIDITY CAN NOT CLA IM THAT IT CAN GIVE INTEREST FREE ADVANCES TO THE PARTIES AND OTHE RS THAN THE BORROWED FUNDS SUCH BORROWING WOULD NOT BE FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE CASH DIVERTED BY THE ASSESSEE WITHOUT ANY BENEFIT TO THE ASSESSEE. UNDER THE CIRC UMSTANCES NEXUS THEORY DOES NOT HOLD GOOD. DISALLOWANCE OF IN TEREST WAS UPHELD BEING INTEREST FREE ADVANCES TO THE PARTNERS AND PERSONS RELATED AND SISTER CONCERNS. 7. THE ASSESSEE IN THE WRITTEN STATEMENT REITERATE D THE SAME SUBMISSIONS. THE DECISION OF THE HONBLE PUNJAB & H ARYANA HIGH COURT IN THE CASE OF CIT VS INDUSTRIAL CABLES (INDIA) LTD . 209 CTR 167 IS ALSO RELIED UPON IN WHICH IT WAS HELD THAT NO DISALLOWANCE WOULD BE DONE WHEN THE INVESTMENTS WERE DONE IN THE EARLIER YEARS . 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND THE MATERIAL AVAILABLE ON RECORD. THE FACTS NOTED ABOVE CLEARLY PROVE THAT THE ASSESSEE WAS AUTHORIZED BY THE MEMORANDUM TO INVEST IN SHARE S OF THE ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 7 COMPANIES. THE AO NOTED IN THE ASSESSMENT ORDER TH AT INVESTMENTS AS ON 31 ST MARCH 2000 AND 31 ST MARCH 2001 WERE SAME AT RS.2.86 CRORES WHICH SHOWS THAT NO INVESTMENT HAS BEEN MADE BY THE ASSESSEE DURING THE ASSESSMENT YEAR UNDER CONSIDERATION. THE DECIS ION OF THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF SRIDEV ENTERPRI SE (SUPRA) WOULD THEREFORE SQUARELY APPLY TO THE CASE OF THE ASSESS EE. THE AO HAS ALSO NOT BROUGHT ANY FACTS ON RECORD IF THERE WAS ANY NEXUS BETWEEN THE BORROWED MONEY AND THE INVESTMENTS MADE FOR NON-BUSINESS PUR POSE. THE ASSESSEE SPECIFICALLY PLEADED BEFORE THE LEARNED CI T(A) THAT NO INTEREST IS DISALLOWED IN THE EARLIER YEARS U/S 143(3) OF THE I T ACT. THE SUBMISSIONS OF THE ASSESSEE HAVE BEEN ACCEPTED BY THE LEARNED C IT(A). DURING THE COURSE OF ARGUMENT THE LEARNED DR DID NOT BRING ANY CONTRARY MATERIAL ON RECORD TO REBUT THE CONTENTIONS OF THE ASSESSEE OR THE FINDINGS OF THE LEARNED CIT(A). THE ASSESSEE HAS ALSO FILED COMPLET E DATA OF THE INVESTMENTS IN SHARES STARTING FROM THE YEAR ENDED ON 31AST MARCH 1995 TO 31 ST MARCH 2001 AND HAS SPECIFICALLY PLEADED THAT THE ASSESSEE HAD SUFFICIENT FUNDS AS AGAINST THE INVESTMENTS IN SHARES. IN THE ASSESSMENT YEAR UNDER APPEAL THE ASSESSEE HAS PROVE D THAT IT HAD NET WORTH OF RS.6.59 CRORES AND THAT INVESTMENT STOOD A T RS.2.86 CRORES. IT WOULD PROVE THAT THE ABOVE STATED INVESTMENTS IN SH ARES HAVE BEEN MADE OUT OF OWN FUNDS OF THE ASSESSEE. THE AO HAS THUS N OT ESTABLISHED THAT ANY BORROWED FUNDS WERE UTILIZED EITHER FOR GIVING INTEREST FREE LOANS OR FOR NON-BUSINESS PURPOSE. THEREFORE NO PART OF THE INTEREST CAN BE DISALLOWED IN THIS MATTER. SINCE THE AO HAS FAILED TO PROVE ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE INVESTMENTS MADE FOR NON-BUSINESS PURPOSE WE DO NOT FIND ANY JUSTIFICATION TO INTERF ERE WITH THE FINDINGS OF THE LEARNED CIT(A). THE DECISIONS CITED BY THE LEAR NED DR ARE DISTINGUISHABLE ON FACTS. THE HONBLE SUPREME COURT IN THE CASE OF S. A. BUILDERS VS CIT AND ANOTHER 288 ITR 1 (SC) HELD THA T IN ORDER TO DECIDE WHETHER INTEREST ON FUNDS BORROWED BY THE AS SESSEE TO GIVE ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 8 AN INTEREST LOAN TO A SISTER CONCERN (E. G. A SUBSI DIARY OF THE ASSESSEE) SHOULD BE ALLOWED AS A DEDUCTION UNDER SE CTION 36(1) (III) OF THE INCOME-TAX ACT 1961 ONE HAS TO ENQUIRE WHE THER THE LOAN WAS GIVEN BY THE ASSESSEE AS A MEASURE OF COMMERCIA L EXPEDIENCY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WI DE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS-MAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HA VE 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 APPLICABLE TO SECTION 36(1) (III) BECAUSE IN SECTION 37 ALSO T HE EXPRESSION USED IS FOR THE PURPOSE OF THE BUSINESS. FOR THE PURP OSE OF BUSINESS INCLUDES EXPENDITURE VOLUNTARILY INCURRED FOR COMME RCIAL EXPEDIENCY AND IT IS IMMATERIAL IF A THIRD PARTY A LSO BENEFITS THEREBY. WHILE HOLDING SO THE HONBLE SUPREME COURT OVERRUL ED THE DECISION OF THE HONBLE BOMBAY HIGH COURT IN THE CA SE OF PHALTAN SUGAR WORKS LTD. VS CIT 208 ITR 989 (BOM) AS IS RELIED UP ON BY THE LEARNED DR. THE HONBLE ALLAHABAD HIGH COURT IN THE CASE O F CIT VS DHAMPUR SUGAR MILLS LTD. (NO.2) 274 ITR 370 (ALL) HELD THAT THE ASSESSEE HAD NOT ADVANCED THE MONEY OUT OF THE BORROWINGS HENCE INTEREST COULD NOT BE ADDED. THE HONBLE ALLAHABAD HIGH COURT IN THE CASE OF CIT AND ANOTHER VS RADICO KHAITAN LTD. 274 ITR 354 HELD THAT HELD (I) THAT IN VIEW OF THE FINDINGS RECORDED BY THE TRIBUN AL THAT THE ASSESSEE-COMPANY HAD SUFFICIENT FUNDS OTHER THAN TH E BORROWED MONEY FOR GIVING THE AMOUNT IN QUESTION AS LOAN TO ITS SISTER CONCERN WHICH FINDING HAD NOT BEEN SPECIFICALLY CH ALLENGED IN THE PRESENT APPEAL THE CONDITIONS OF SECTION 36(1) (II I) OF THE ACT HAD BEEN COMPLIED WITH AND THEREFORE THE ASSESSEE-COM PANY WAS ENTITLED TO FULL ALLOWANCE OF THE AMOUNT OF INTERES T PAID BY IT ON ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 9 BORROWED CAPITAL. THE HONBLE MADHYA PRADESH HIGH COURT IN THE CASE OF R. D. JOSHI AND CO. VS CIT 251 ITR 332 (MP) HELD AS UNDER: THE ASSESSEE WAS A PARTNERSHIP FIRM ASSESSED IN THE STATUS OF A REGISTERED FIRM. FOR THE ASSESSMENT YEAR 1978-79 1979-80 1880-81 AND 1981-82 THE ASSESSEE CLAIMED DEDUCTION OF INTEREST ON BORROWINGS. THE INCOME-TAX OFFICER HELD THAT THE BORROWINGS TO THE EXTENT OF THE OVERDRAWINGS AND CONSEQUENT DEBIT BALANCE TO THE PARTNERS ACCOUNT WERE NOT UTILISED FOR THE PURPOSE OF THE BUSINESS THEREFORE DISALLOWED TH E INTEREST PAID TO THE CREDITORS TO THE EXTENT OF THE BORROWINGS NOT UTILISED FOR THE BUSINESS. ON APPEAL THE COMMISSIONER OF INCOME-TAX (APPEALS) HELD THAT DEPARTMENT FAILED TO ESTABLISH A DIRECT NEXUS BETWE EN THE BORROWINGS AND THE WITHDRAWALS MADE BY THE PARTNERS AND THAT THE ORDER OF THE ASSESSING OFFICE R WAS NOT SUSTAINABLE. THE TRIBUNAL HELD THAT THE ORDER O F THE COMMISSIONER OF INCOME-TAX (APPEALS) WAS INCORRECT AND ERRONEOUS AND CONFIRMED THE ORDER OF THE ASSESSING OFFICER. ON A REFERENCE: HELD THAT WHEN THE TRIBUNAL WAS TO DISLODGE THE ORDER PASSED BY THE APPELLATE AUTHORITY IT WAS OBLIGATORY ON THE PART OF THE TRIBUNAL TO DEMONSTRA TE AS TO HOW THE FINDINGS RECORDED BY THE APPELLATE AUTHO RITY WERE NOT CONSISTENT WITH T4HE FACTS AND THE PROVISI ONS OF LAW. IT WAS OBLIGATORY ON THE PART OF THE TRIBUN AL TO DEMONSTRATE AS TO HOW THE DEPARTMENT PROVED A NEXUS BETWEEN THE BORROWINGS AND WITHDRAWALS MADE BY THE PARTNERS. IT WAS OBLIGATORY ON THE PART OF EVERY APPELLATE AUTHORITY TO POINT OUT BY GOOD AND ACCEPT ABLE REASONING AS TO HOW THE FACTS AND CIRCUMSTANCES OF ONE CASE HAPPENED TO BE DIFFERENT FROM OTHER CASES. IT WAS IMPROPER TO CLOSE THE DOORS TO A LITIGANT BY A CASU AL TREATMENT OF SOME STATEMENTS MOVING TOWARDS A CONCLUSION THAT THE PRECEDENTS ON WHICH SUCH LITIGA NT RELIED WERE DIFFERENT FROM HIS CASE. THEREFORE THE TRIBUNAL WAS NOT JUSTIFIED IN LAW IN DISALLOWING TH E INTEREST ON THE ENTIRE DEBIT BALANCES INCLUDING TH E OPENING BALANCES OF THE PARTNERS. ITAT CHANDIGARH BENCH A (THIRD MEMBER) IN THE CAS E OF MALWA COTTON SPINNING MILLS VS ACIT 89 ITD 65 (CHD) (TM) HELD AS UNDER: ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 10 SECTION 36(III) OF THE INCOME-TAX ACT 1961 INTEREST ON BORROWED CAPITAL ASSESSMENT YEARS 199 2- 93 AND 1993-94 WHETHER WHERE ASSESSEES OWN CAPIT AL AND CURRENT YEARS PROFITS ARE SUBSTANTIALLY MORE T HAN INTEREST-FREE ADVANCES GIVEN BY IT TO ITS SISTER CO NCERNS IT PROVES ABSENCE OF ANY NEXUS BETWEEN FUNDS BORROW ED ON INTEREST AND SUCH INTEREST-FREE ADVANCES HELD YES WHETHER NO DISALLOWANCE OUT OF INTEREST EXPENDITURE CAN BE MADE UNDER SECTION 36(1) (III) IN RELATION T O INTEREST-FREE ADVANCES GIVEN IN EARLIER YEARS IN CA SES WHERE NO SUCH DISALLOWANCE WAS MADE IN THOSE EARLIE R ASSESSMENT YEARS HELD YES. THE HONBLE PUNJAB & HARYANA HIGH COURT IN THE CASE OF CIT VS INDUSTRIAL CABLES (INDIA) LTD. (SUPRA) HELD THAT INTEREST ON INVESTMENTS IN SHARE CAPITAL OF SUBSIDIARY COMPANIES COULD NOT BE DISALLOWED WHERE NO FRESH INVESTMENT HAD BEEN MADE DURING THE YEAR. CONSIDERING THE FACTS NOTED ABOVE IT IS CLEAR THAT NO INVESTMENT HAS BEEN MADE IN THE ASSESSMENT YEAR UNDER APPEAL. THE AO HA S ALSO NOT BROUGHT ANY EVIDENCE ON RECORD IF THERE WAS ANY NEXUS BETWE EN THE BORROWED FUNDS AND THE INVESTMENTS MADE FOR NON-BUSINESS PUR POSE. ACCORDINGLY WE DO NOT FIND ANY ERROR IN THE ORDER OF THE LEARNE D CIT(A) IN DELETING THE ADDITION. WE CONFIRM HIS FINDINGS AND DISMISS THE A PPEAL OF THE REVENUE. 9. AS A RESULT THE DEPARTMENTAL APPEAL IS DISMISS ED. ITA NO.2407/AHD/2005 (BY ASSESSEE) 10. THIS APPEAL BY THE ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-III AHMEDABAD DATED 16-08-2005 FOR ASSESSMENT YEAR 2002-03 CHALLENGING THE DISALLOWANCE OF INTEREST TO THE EXTENT OF RS.21 25 450/-. 11. THE AO DISALLOWED PROPORTIONATE INTEREST OF RS. 52 95 000/- ON THE BORROWED FUNDS DIVERTED FOR NON-BUSINESS PURPOSE. I T WAS SUBMITTED THAT THE ASSESSEE COMPANY IS ENGAGED IN PROCESSING OF CL OTHES OF ITS OWN AND ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 11 ALSO ON JOB WORK BASIS. THE ASSESSEE COMPANY HAS BO RROWED FUNDS FROM BANKS AND OTHER PARTIES IN ORDER TO MEET ITS WORKIN G CAPITAL AND OTHER BUSINESS REQUIREMENTS. THE INTEREST PAID ON SUCH BO RROWED FUNDS IS DEDUCTIBLE U/S 36(1) (III) OF THE IT ACT. IT WAS SU BMITTED THAT THE ASSESSEE HAS INTEREST FREE FUNDS COMPRISING OF SHARE CAPITAL RESERVES AND SURPLUS WORKED OUT TO RS.6 57 59 011/- AS ON 31 ST MARCH 2002. WHEREAS TOTAL INVESTMENTS IN SHARES OF THE GROUP COMPANIES WORKED OUT TO RS.2 36 16 100/- AS ON THAT DATE AND THEREFORE IT CANNOT BE SAID THAT ANY PART OF THE BORROWED FUND WAS DIVERTED FOR INVE STMENT IN SHARES OF OTHER GROUP COMPANIES. IT WAS STATED THAT THE INVES TMENT IN SHARES OF GROUP COMPANIES WAS MADE SINCE FINANCIAL YEAR 1994- 95 AND NO INVESTMENT IN SHARES OF THESE COMPANIES WAS MADE IN THE YEAR UNDER CONSIDERATION. IN FACT THE ASSESSEES INVESTMENT I N SHARES OF THESE COMPANIES HAS COME DOWN TO RS.2.36 CRORES DURING TH IS YEAR AS AGAINST THE INVESTMENTS IN THE FINANCIAL YEAR ENDED AS ON 3 1 ST MARCH 2000 AND 31 ST MARCH 2001. IT WAS SUBMITTED THAT DISALLOWANCE CA NNOT BE MADE DURING THIS YEAR FOR INVESTMENTS MADE IN EARLIER YE ARS. THE INVESTMENT IN EARLIER YEARS WAS MADE IN THE BUSINESS INTEREST OF THE COMPANY AND AS PER MEMORANDUM OF ASSOCIATION THE ASSESSEE IS AUTHO RIZED TO MAKE SUCH INVESTMENTS. IT WAS CONTENDED THAT NO AMOUNT OF FUN DS OF THE COMPANY WAS DIVERTED TO THE BENEFIT OF ANY DIRECTOR OR HIS RELATIVES OR ANY OTHER PERSONS CONNECTED WITH THE DIRECTOR OR OTHER PERSON S. IT WAS THEREFORE SUBMITTED THAT DISALLOWANCE OF PART OF THE INTEREST IS UNJUSTIFIED. IT WAS ALSO CONTENDED THAT THE ASSESSEE PAID INTEREST ON F UNDS BORROWED FROM THE PARTIES OTHER THAN BANK @9%. THEREFORE DISALLO WANCE OF THE INTEREST BY APPLYING 15% INTEREST IS INAPPROPRIATE. IT WAS S UBMITTED THAT THE LEARNED CIT(A) DELETED THE ADDITIONS OF SIMILAR NAT URE IN THE ASSESSMENT YEAR 2001-02. 12. THE LEARNED CIT(A) ON CONSIDERATION OF THE SUBM ISSIONS NOTED THAT THE SHARE CAPITAL RESERVES AND SURPLUS OF THE ASSE SSEE AMOUNTED TO ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 12 RS.6.57 CRORES; WHEREAS INVESTMENT IN THE FIXED AND CURRENT BUSINESS ASSETS AS ON THAT DATE WORKED OUT TO RS.9.64 CRORES . IT THEREFORE CANNOT BE SAID THAT THE INVESTMENT OF RS.2.36 CORES IN THE SHARES OF OTHER GROUP COMPANIES AS ON 31 ST MARCH 2002 HAD COME OUT OF THE INTEREST FREE FUNDS. THE LEARNED CIT(A) NOTED THAT NO DOUBT THE I NVESTMENT IN THE SHARES OF GROUP COMPANIES WAS MADE IN THE EARLIER Y EARS BUT AT THE SAME TIME THE FIXED ASSETS OF THE BUSINESS WERE ALSO ACQ UIRED IN THE EARLIER YEARS. THE LEARNED CIT(A) THEREFORE REJECTED THE ARGUMENTS OF THE ASSESSEE THAT THE INVESTMENT IN SHARES OF GROUP COM PANIES WAS MADE IN THE EARLIER YEARS THEREFORE NO DISALLOWANCE COULD BE MADE IN THE ASSESSMENT YEAR IN QUESTION. THE LEARNED CIT(A) DID NOT FOLLOW THE ORDER OF THE LEARNED CIT(A) FOR ASSESSMENT YEAR 2001-02. THE LEARNED CIT(A) ACCORDINGLY CONFIRMED THE DISALLOWANCE OF THE INTER EST BUT DIRECTED TO APPLY RATE OF 9% ON THE BORROWED FUNDS HELD UP IN T HE SHARES OF OTHER GROUP COMPANIES AND DIRECTED TO DISALLOW RS.21 25 4 50/-. IT IS STATED BY THE LEARNED DR THAT THE FACTS ARE SAME AS CONSIDER ED IN ASSESSMENT YEAR 2001-02. THE LEARNED DR AGAIN REITERATED THAT THE F INDINGS OF THE LEARNED CIT(A) IN ASSESSMENT YEAR 2001-02 ARE NOT CORRECT. THEREFORE LEARNED CIT(A) WAS JUSTIFIED IN TAKING CONTRARY VIEW IN THE ASSESSMENT YEAR IN QUESTION. THE SUBMISSIONS OF THE LEARNED DR ARE SAM E AS HAVE BEEN ARGUED IN EARLIER APPEAL. THE ASSESSEE IN THE WRITT EN SUBMISSIONS REITERATED THE SAME SUBMISSIONS AND IT IS REITERATE D THAT NO INVESTMENT HAS BEEN MADE IN THE ASSESSMENT YEAR IN QUESTION AN D THAT THE INVESTMENT AS COMPARED TO THE EARLIER YEARS HAVE CO ME DOWN. IT IS ALSO STATED THAT AS PER THE DECISION OF THE HONBLE SUPR EME COURT IN THE CASE OF RADHASOAMI SATSANG VS CIT 100 CTR 267 (SC) THE C ONSISTENCY HAS TO BE MAINTAINED WITHOUT MAKING FURTHER ADDITION ON TH E SAME ISSUE. 13. ON CONSIDERATION OF THE RIVAL SUBMISSIONS WE AR E OF THE VIEW THAT THE LEARNED CIT(A) WAS NOT JUSTIFIED IN MAKING PROP ORTIONATE DISALLOWANCE OF THE INTEREST. IT IS ADMITTED FACT THAT NO INVEST MENT HAS BEEN MADE IN ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 13 THE SHARES OF GROUP COMPANIES IN THE ASSESSMENT YEA R UNDER APPEAL. THE AO HAS ALSO NOT BROUGHT ANY EVIDENCE ON RECORD IF T HERE WAS ANY NEXUS BETWEEN THE BORROWED FUNDS AND THE AMOUNT INVESTED IN THE SHARES OF OTHER COMPANIES. ON IDENTICAL FACTS WE HAVE CONFIRM ED THE ORDER OF THE LEARNED CIT(A) IN EARLIER ASSESSMENT YEAR 2001-02 I N ITA NO.2960/AHD/2004. THE HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG (SUPRA) THEREFORE CLEARLY APPL IES BECAUSE THE CONSISTENCY SHALL HAVE TO BE MAINTAINED BY THE INCO ME TAX AUTHORITIES. THE HONBLE M. P. HIGH COURT IN THE CASE OF CIT VS GODAVARI CORPORATION LTD. 156 ITR 835 (MP) ALSO HELD THAT THOUGH IT IS TRUE THAT THE PRINCIPLES OF RES JUDICATA DO NOT APPLY THE RULE O F CONSISTENCY WOULD APPLY. SINCE IT IS ADMITTED FACT THAT FACTS ARE SAME AS CONSIDERED IN EARLIER YEAR THEREFORE FOLLOWING TH E SAME REASON FOR DECISION IN ITA NO.2960/AHD/2004 WE SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ENTIRE ADDITION. 14. AS A RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED. ITA NO.163/AHD/2007: (BY ASSESSEE) ITA NO.653/AHD/2007: (BY REVENUE ) 15. BOTH THE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A)-V AHMEDABAD DATED 15-11-2006 FOR ASSESSMENT YEAR 2003-04. THE ASSESSEE CHALLENGED THE DISALLOWANCE OF INTERES T TO THE EXTENT OF RS.19 28 304/- OUT OF DISALLOWANCE MADE BY THE AO I N A SUM OF RS.32 13 839/-. THE REVENUE CHALLENGED THE ORDER OF THE LEARNED CIT(A) IN RESTRICTING THE DISALLOWANCE OF INTEREST @9% INS TEAD OF 15%. THE LEARNED CIT(A) NOTED THAT FACTS OF THE CASE ARE SAM E AS CONSIDERED IN ASSESSMENT YEAR 2002-03. THE LEARNED CIT(A) FOLLOWI NG THE ORDER OF THE CIT(A) FOR ASSESSMENT YEAR 2002-03 DIRECTED TO REST RICT THE DISALLOWANCE OF INTEREST @9% AND RESTRICTED THE DISALLOWANCE TO RS.19 28 304/-. IT IS THEREFORE ADMITTED FACT THAT FACTS ARE SAME AS HAV E BEEN CONSIDERED IN ITA NO.2960/AHD/2004 2407/AHD/2005 AND ITA NO.163 AND 653/AHD/2007 ANJANI SUNTHETICS LTD. 14 ASSESSMENT YEAR 2002-03. THE ASSESSEE IN THE WRITTE N SUBMISSIONS MADE THE SAME SUBMISSIONS AS WERE MADE IN ASSESSMENT YEA R 2002-03 THAT THE INVESTMENT IN SHARES HAS COME DOWN TO RS.1.58 C RORES AS AGAINST OWN FUNDS OF RS.6.84 CRORES. IT WAS ALSO SUBMITTED THAT INVESTMENTS IN SHARES HAVE BEEN MADE IN THE EARLIER YEARS. 16. ON CONSIDERATION OF THE ABOVE FACTS WE ARE OF THE VIEW THAT THE ISSUE IS SAME AS IS CONSIDERED IN THE ASSESSMENT YE AR 2002-03 IN ITA NO.2407/AHD/2005. THE LEARNED CIT(A) HAS FOLLOWED T HE ORDER OF THE LEARNED CIT(A) FOR ASSESSMENT YEAR 2002-03 AND NO I NDEPENDENT FINDING IS GIVEN. WE THEREFORE FOLLOWING THE ORDER OF THE ASSESSMENT YEAR 2002- 03 IN ITA NO.2407/AHD/2005 SET ASIDE THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ENTIRE DISALLOWANCE OF THE INT EREST. 17. AS A RESULT THE APPEAL OF THE ASSESSEE IS ALLO WED AND THE DEPARTMENTAL APPEAL IS DISMISSED. 18. IN THE RESULT BOTH THE APPEALS OF THE ASSESSEE ARE ALLOWED WHEREAS BOTH APPEALS OF THE REVENUE ARE DISMISSED. ORDER PRONOUNCED ON 07-05-2010 SD/- SD/- (G. D. AGARWAL) VICE PRESIDENT (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 07- 05-2010 LAKSHMIKANT/- COPY OF THE ORDER FORWARDED TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT CONCERNED 4. THE CIT(A) CONCERNED 5. THE DR ITAT AHMEDABAD 6. GUARD FILE BY ORDER D Y. REGISTRAR ITAT AHMEDABAD