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Income Tax Appellate Tribunal, COCHIN BENCH, COCHIN
Per CHANDRA POOJARI, AM:
These two appeals filed by the assessee are directed against different orders
of the CIT(A), Kottayam and pertain to the assessment years 2008-09 and 2011-
12.
First we shall take up the appeal in ITA No.77/Coch/2018 wherein the
assessee has raised the following grounds:
1) The officers below were not justified in the disallowance of proportionate interest relying on the Kerala High Court decision.
2) The officers did not appreciate the fact that sufficient non interest bearing funds were available for making the advances to one Leslie Daniel.
3) The officers below were not justified in disallowing and confirming sales incentives expenses paid to various institutions in order to boost up sales for non production of full vouchers.
Regarding Ground Nos. 1 & 2, the facts of the case are that the Assessing
Officer disallowed the proportionate interest expenditure by relying on the
decision of High Court of Kerala in the case of V.I. Baby & Co. (254 ITR 248) .
The Assessing Officer rejected the claim of the assessee that sufficient interest
funds were available and therefore, disallowance cannot be made. According7 to
the Assessing Officer even if cash balances were available with the proprietor,
I.T.A. Nos.77 & 412/Coch/2018
since he availed interest bearing loans and at the same time gave interest free
advances, an inference can be drawn that it was the loan funds that were so
advanced.
On appeal, the CIT(A) confirmed the disallowance of proportionate interest
relating to interest free loans to Leslie Daniel by relying on the judgment of the
Kerala High Court in the case of Accelerated Freeze Drying Co. Ltd. (324 ITR
316) wherein it was held as under:
"3. The assessee is a Limited company engaged in export of marine products. On verifying the accounts, the assessing officer found that the assessee had advanced an interest free loan of Rs. 4,03,75,000 to another limited company by name M/s. Amalgam Investments P. Ltd. which is styled as a sister concern of the assessee. The assessing officer found that advances were made out of borrowed funds on which the assessee had paid an interest of Rs. 64,72,004. It was found that the term loan outstanding in the end of the previous years was Rs. 17.74 lakhs. Under section 36(1)(iii) of the Income Tax Act, 1961 (for short "the Income Tax Act"), the assessee is entitled to deduction of interest paid on borrowed funds if such funds were borrowed for business purposes. If the assessee is able to divert borrowed funds to other companies, whether it be sister concerns or not, obviously, the purpose of borrowal was not for its own business purposes, but for helping another company for that company’s business purposes. The assessing officer, by following the judgment of the various High Courts in CIT v. H. R. Sugar Factory P. Ltd. (1991) 187 ITR 363 (All.) held that diversion of borrowed fund on which interest is paid by the assessee to sister concern without collecting interest calls for proportionate disallowance. He had worked out the interest attributable to funds diverted to another company without collection of interest at Rs. 14,76,510 and disallowed the same.
When the assessee challenged the same before the Commissioner (Appeals), he, 1n principle, completely agreed with the findings of the assessing officer and following the decision of this court in CIT v. V. I. Baby and Co. (2002) 254 ITR 248, reworked the interest to be disallowed on proportionate basis after notice to the assessee and enhanced the disallowance. It is pertinent to note from the order of the Commissioner
I.T.A. Nos.77 & 412/Coch/2018
(Appeals) that the assessee did not have any case that advancing of interest free loan to another company which is a sister concern is in the interest of commercial expediency. On the other hand, the assessee’s case was that it had available funds like, surplus for giving interest free loans to another company. However, when the matter went to the Tribunal in second appeal, the assessee changed the stand of availability of surplus funds for giving Interest free advances, but took a stand that on an earlier occasion, the Tribunal allowed the assessee’s case on the same issue relying on the decision of the Supreme Court in S. A. Builders Ltd. v. CIT (Appeals) (2007) 288 ITR 1. In similar case, we have found that the decision of the Supreme Court could be applied only if commercial expediency is established with facts. Unless the interest free loan goes to advance business interest of the assessee, there cannot be any commercial expediency. For e.g., if a company or a firm supplying raw material for manufacture of products of the assessee goes into financial crisis and if assistance, rendered by the assessee, would retain their business which in turn helps the assessee to carry on business more successfully, certainly commercial expediency can be canvassed. However, prima fade in this case, from the name of the company to which assessee advanced interest free loans, it appears to be an investment company probably engaged in finance and we do not know what is the commercial expediency that the petitioner can canvass for advancing interest free loans to that concern. As already stated, the assessee has shifted the stand canvassed before the first appellate authority in second appeal before the Tribunal, and the Tribunal, without considering the facts by relying on their earlier order, allowed the claim.
The department has stated that the other year’s case relied on by the Tribunal pertains to loans advanced to other companies and not to the investment .company and the facts are different. We do not think, the department is barred from filing appeal against one year’s assessment merely because for another year, they have not contested the matter. The Tribunal’s order is not a precedent to be followed by the department in every year’s assessment. Since the department has filed appeal in this case, it was the duty of the Tribunal to decide the case with reference to the facts and not by just following the earlier year’s order. Strangely, the Tribunal has not bothered to consider the various High Court judgments particularly that of this court, based on which the Commissioner (Appeals.) decided the matter, As already found by us, the decision of the Supreme Court in S. A. Bullder’s case (2007) 288 ITR 1 (SC) could be applied only if, on facts, the assessee establishes commercial expediency in advancing interest free loans which the assessee has not ventured to raise or prove before the two lower authorities. We therefore hold that the
I.T.A. Nos.77 & 412/Coch/2018
Tribunal’s order is unsustainable and we therefore set aside the order and remand the case back to them to decide the case on the merits."
4.1 In view of the above judgment of the Kerala High Court, the CIT(A)
observed that availability of interest free funds cannot be taken as ground
against disallowance of interest for advancing interest free loans. Hence, the
CIT(A) confirmed the disallowance of proportionate interest made by the
Assessing Officer.
Against this, the assessee is in appeal before us. The Ld. AR submitted that
as far as the interest free advances of Rs.2,13,350/- to Leslie Daniel was
concerned, he was a close friend of the assessee and advance had been given as
a loan out of capital funds available with him and no borrowed funds can be
attributed to this. Further, according to the assessee, a suit has been filed
against Leslie Daniel for recovery of this amount. The assessee submitted that
the judgment of the Kerala High Court in the case of CIT vs. V.I. Baby & Co.
cited supra has no application to the facts of the present case. Therefore, it was
submitted that disallowance of 12% interest on both the amounts was not in
order.
The Ld. DR relied on the order of the lower authorities.
I.T.A. Nos.77 & 412/Coch/2018
We have heard the rival submissions and perused the record. The main
contention of the Ld. AR is that the assessee is having sufficient non interest
bearing funds to advance the same to Leslie Daniel and other sister concern.
However, the assessee has not demonstrated the exact availability of such funds
at the time of advancing to other parties without interest. Hence, in the interest
of justice, we remit this issue to the file of the Assessing Officer for fresh
consideration with a direction to the assessee to place fund/cash flow statement
before the Assessing Officer for his consideration and decide the issue
thereupon. Hence, this ground of appeal of the assessee is allowed for statistical
purposes.
The next ground, Ground No. 3 is with regard to disallowance of sales
incentives expenses paid to various institutions in order to boost up sales for non
production of full vouchers.
8.1 The facts of the case are that the Assessing Officer noticed that the
expenses were incurred in cash and the assessee had not maintained particulars
of the payees. According to the Assessing Officer, the assessee was not able to
produce vouchers in support of these expenses although these were specifically
called for vide order sheet entry dated 19/10/2011. The Assessing Officer found
that the incentives paid to doctors, institutions, staff of various retail stores etc.
to boost sales were high when compared to others in the same line of business.
I.T.A. Nos.77 & 412/Coch/2018
Hence, the Assessing Officer disallowed Rs.4,52,114/- out of expenditure claimed
on account of incentives.
8.2. On appeal, the CIT(A) observed that in the absence of supporting vouchers
for the expenditure incurred, the addition of Rs.4,52,114/- made by the
Assessing Officer was correct and upheld the same.
8.3 Against this, the assessee is in appeal before us. The Ld. AR submitted that
incentives were paid to doctors, institutions, staff of various retail stores in order
to boost up the sales which is a normal practice in similar line of business.
8.4 The Ld. DR relied on the order of the lower authorities.
8.5 We have heard the rival submissions and perused the record. Before us, the
assessee has not placed any vouchers in support of the above sales incentive
expenditure incurred by the assessee. In the absence of supporting evidence to
substantiate the payment of incentives, we are not in a position to hold whether
it was incurred wholly and exclusively for the purpose of business. Hence, the
disallowance made by the Assessing Officer and confirmed by the CIT(A) on this
issue is justified. Thus, this ground of appeal of the assessee is rejected.
I.T.A. Nos.77 & 412/Coch/2018
At the time of hearing, Ground Nos. 4 & 5 were not pressed which read as
follows:
4) The officers below were not justified in invoking s. 40a(ia) on the interest for the reason that this is an agreed addition.
5) The assessee claimed that he has not agreed for any addition in this regard.
9.1 Accordingly, the above grounds are dismissed as not pressed. Thus, the
appeal of the assessee in ITA No. 77/Coch/2018 is partly allowed for statistical
purposes.
Regarding the appeal in ITA No. 412/Coch/2018, the assessee has raised
the following grounds:
i) The officers below were not justified in taxing various credit in capital account u/s. 68 of the Act.
ii) Should have taken available agricultural income as source for various credits.
The facts of the case are that the during the relevant previous year
additional capital to the tune of Rs.7,23,457/- was introduced into proprietor’s
capital account. The Assessing Officer called for details in this regard but the
assessee was not able to substantiate the genuineness of the credits with
supporting documents. For example, Rs.40,000/- received from Shri Sunil
Kuzhiyil was stated to be a loan advanced two years ago and returned during
I.T.A. Nos.77 & 412/Coch/2018
relevant previous year. Similar was the case with Rs.8,600/- from Shri
Gopakumar, Rs.5,000/- from Shri Leju and Rs.3,687 from Shri Shiva Kumar.
According to the Assessing Officer, no documentary proof could be submitted so
as to prove the genuineness of these transactions and the advances were not
reflected in the books for the period they were claimed to be advanced. The
Assessing Officer noticed that the assessee could not produce any documents so
as to prove the genuineness of credits in the capital account from Glenmark
Rs.8,000/-, Marthoma School Rs.15,000/- which were credited on 15/12/2010,
Rs.1,25,000/- credited on 18/02/2011, Rs.53,362/- credited on 15/03/2011 and
Rs.60,112/-. Thus, out of the total credits in the capital account, the assessee
could offer no satisfactory explanation about the nature and source of credits to
the tune of Rs.3,31,761/-. Thereforew, the Assessing Officer made an addition
of Rs.3,31,761/- on account of unexplained credits out of the capital introduced
during the previous year u/s. 68 of the Act.
On appeal, the CIT(A) observed that assessee had not proved the source
of these credits by producing necessary evidence. In the absence of such
evidence, the CIT(A) confirmed the addition of R.3,31,761/- made by the
Assessing Officer.
Against this, the assessee is in appeal before us. The Ld. AR submitted that
in so far as addition u/s. 68 was concerned, for each of the credit, explanation
I.T.A. Nos.77 & 412/Coch/2018
was given during assessment stage and all these amounts were out of drawings
in the earlier years. It was also submitted that the assessee had sufficient
agricultural income for explanation of these credits. It was submitted that
having regard to the huge agricultural income of about Rs.24,69,442/-, the
addition of Rs.3,312,761/- u/s. 68 was not warranted.
The Ld. DR relied on the order of the lower authorities.
We have heard the rival submissions and perused the record. The main
contention of the assessee is that the assessee had declared agricultural income
of Rs.24,69,442/-. However, no telescoping benefit has been given towards
this exempted income. According to him, if this exempted income is considered
as source for introduction of capital, there could not be any addition u/s. 68 of
the Act. We find merit in the plea of the assessee. Being so, if the assessee has
not already added any amount out of Rs. 24,69,442/- to the capital account,
telescoping benefit is to be given towards exempted income of the assessee.
Accordingly, for the purpose of considering telescoping benefit, we remit this
issue to the file of the Assessing Officer for fresh consideration and decide the
issue thereupon. Hence, this ground of appeal of the assessee is allowed for
statistical purposes.
I.T.A. Nos.77 & 412/Coch/2018
In the result, the appeals of the assessee are partly allowed for statistical
purposes. Order pronounced in the open Court on this 5th February, 2019
sd/- sd/- (GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER
Place: Kochi Dated: 5th February, 2019 GJ
Copy to: 1. Shri Philip Anil Cherian, M/s. Bigfield Drug Links, Pathanamthitta, 2. The Assistant Commissioner of Income-tax, Circle-1, Thiruvalla. 3. The Deputy Commissioner of Income-tax, Circle-1, Thiruvalla. 4. The Commissioner of Income-tax(Appeals), Kottayam. 5. The Pr. Commissioner of Income-tax, Kottayam. 6. D.R., I.T.A.T., Cochin Bench, Cochin. 7. Guard File. By Order
(ASSISTANT REGISTRAR) I.T.A.T., Cochin
I.T.A. Nos.77 & 412/Coch/2018