PHILIP ANIL CHERIAN,PATHANAMTHITTA vs. ACIT, THIRUVALLA

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.

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.

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,

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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.

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.

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.

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.

I.T.A. Nos.77 & 412/Coch/2018

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.

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

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.

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.

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.

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.

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.

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

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