THE DY. COMMISSIONER OF INCOME TAX, CIRCLE-2(3),, SURAT vs. M/S. JIVRAJ TEA COMPANY,, SURAT

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 1 of 11

आयकर अपील�य अ�धकरण,सुरत �यायपीठ, सुरत IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH, SURAT BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER आ.अ.सं./I.T.A. No.2343/AHD/2016 �नधा�रण वष�/Assessment Year : 2013-14 The Deputy Commissioner Vs. Jivraj Tea Company, of Income Tax, 5/258-259, Jivraj Chambers, Circle – 2(3), Surat. Ruwala Tekra, Bhagal, Surat. [PAN: AACFJ 2236 R] अपीलाथ� Appellant ��यथ�/Respondent �नधा�रती क� ओर से /Assessee by Shri Rasesh Shah – CA राज�व क� ओर से /Revenue by Shri Prasoon Kabra – CIT-DR

सुनवाई की तारीख/ Date of hearing: 28.02.2019 उ�घोषणा क� तार�ख/Pronouncement on: 01.03.2019 आदेश /O R D E R PER O.P.MEENA, AM: This appeal filed by the Revenue is directed against the 1. order of learned Commissioner of Income Tax (Appeals)-4, Surat(in short “the CIT (A)”) dated 29.06.2016 pertaining to Assessment Year 2013-14.

The Grounds raised by the Revenue read as under : 2. “1. On the facts and circumstances of the case and in Law, the Ld.CIT(A) has erred in deleting the additions made of

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 2 of 11

Rs.1,92,62,985/- on account of disallowance of interest expenses and Rs.15,85,876/- on account of disallowance of deduction u/s.80IA of the Act. 2. On the facts and in the circumstances of the case and in Law, Ld.CIT(A) has failed to appreciate the facts that the assessee has advanced loans to the partners of M/s. Jivraj Tea Limited, which is a related party within the meaning of section 40A(2)(b) of the Act without charging any interest out of interest bearing fund since the assessee was not having any interest free fund at all and the part of the interest bearing funds have been utilized for making loan to the partners of related party who in turn have invested for personal benefits.” Ground No.1 relates to addition made of 3. Rs.1,92,62,985/- on account of disallowance of interest expenses and Rs.15,85,876/- on account of disallowance of deduction u/s.80IA of the Act.

The AO disallowed the amount of Rs.1,92,62,985/- under 4. the interest @ 12% on debit balance capital account of partners and credit balance of capital account of third partner in respect of interest expenses paid to the creditors. The AO also disallowed the amount of Rs.15,85,876/- holding 100% profits derived from the generation of electricity from the Windmill at Satara Division.

In appeal, the ld.CIT(A) has deleted the disallowances 5. made by the AO holding that following the ‘rule of consistency’, the additions is found unsustainable on the

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 3 of 11

similar facts and reasoning the deleted the addition made by the AO of Rs.1,92,62,985/- disallowance of interest expenses. The ld.CIT(A) further deleted the addition of Rs.15,85,876/- disallowance of deduction made by AO u/s.80IA of the Act.

Being aggrieved, the Revenue has filed this appeal 6. before this Tribunal. The ld.CIT-DR relied on the order of the AO.

On the other hand, the ld.Counsel for the assessee 7. submitted that the issue is in covered by the decision of ITAT Surat in ITA No’s.2803, 2804 & 2805/Ahd/2015 dated 12.12.2018.

We have heard the rival submissions and perused the 8. material available on record. We find that the issue is covered by the order of Tribunal in ITA No’s. 2803, 2804 & 2805/Ahd/2015 dated 12.12.2018 for A.Y. 2010-10 to 2012-13 held as under :- Ground No.1 of the Revenue: “20. On this ground, we have heard the arguments of both sides and carefully perused the relevant material placed on the record of the Tribunal. The ld. DR submitted that the assessee derived profit from windmill power generation at Satara Division and claimed the same as

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 4 of 11

exempt u/s. 80IA of the Act on the strength report in the Form-10CCB. The ld. DR further submitted that the AO rightly observed that as per s. 80IA(5) of the Act, the income or loss of the windmill has to be worked out on “standalone basis” and as if it is the only source of income and that the computation of the deduction u/s. 80IA of the Act should start with the initial assessment year and the unabsorbed depreciation and loss relating to the initial assessment year and subsequent assessment years up to the eligible assessment year has to be set off against the profit and loss of the eligible assessment year for which the assessee has made the claim of deduction. 21. The ld. DR further submitted that the Ld.CIT(A) has failed to appreciate the facts that the assessee was not entitled deduction u/s. 80IA(4) of the Act because after the adjustment of brought forward losses of earlier years, there remains no positive profit for allowing deduction u/s. 80IA of the Act. The ld. DR also submitted that the ld. First appellate authority has granted relief to the assessee without any justified reason and basis therefore, impugned order may kindly be set aside by restoring that of the AO. 22. Replying to the above, the ld. AR vehemently pointed out that it is not in dispute that the initial assessment year for the windmill at Bhogat is A.Y. 2001-02 and for the windmill at Satara is A.Y. 2004-05 i.e. after 01- 04-2000 and since, Hon'ble ITAT has already taken a view on aforesaid issue in earlier years in appellant's favour and the facts are identical during the year under consideration therefore, first appellate order is quite correct and justified as the findings recorded by the Tribunal are binding on the authorities below. The ld. AR also submitted that in assessee’s own appeals for AY 2007-08, 2008-09 & 2009-10 on the identical facts and circumstances the Tribunal in all three years has allowed the ground of the assessee on the issue pertaining to the disallowance u/s. 80IA(4) of the Act. The ld. AR drew our attention towards Pages 39-66 of assessee’s paper book, wherein the Tribunal in assessee’s own appeals for AY 2008-09 & 2009-10 order dated 31.10.2014 para 12 & 13; and earlier order for AY 2007-08 dated 28.08.2014 para 5 & 6 has decided the issue in favour of the assessee in assessee’s own appeals therefore, the ld. CIT(A) was right in following the Tribunal order in assessee’s own cases therefore, the same may kindly be upheld. 23. On careful consideration of above rival submissions, at the very outset, from the first appellate order, we observe that the ld. CIT(A) has granted relief to the assessee with following observations: “6.2 I have gone through the facts of the case and decisions of the Hon'ble Tribunal in assessee's case for A.Y. 2007-08, A.Y. 2008-09 and A.Y. 2009-10. It is clear from the decision of the Hon'ble Tribunal in all the above years that the issue related to the disallowance u/s. 80IA(4) has been decided in the favour of assessee. The Hon'ble ITAT has discussed the issue of disallowance u/s. 80IA(4) of the Act vide para 59 to 62 (page 63 to 79) of

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 5 of 11

its order dated 28-08-2014 in A.Y. 2007-08, para 05 to 06 (page 14 to 15) of its order dated 31-10-2014 in A.Y. 2008- 09 and para 12 to 13 (page 25 to 26) of its order dated 31-10-2014 in A.Y. 2009-10 and decided the issue in favour of assessee. Thus, the aforesaid issue has been decided by Hon'ble ITAT in the assessee' favour in its own case. It is also not disputed that the initial assessment year for the windmill at Bhogat is A.Y. 2001-02 and for the windmill at Satara is A.Y. 2004-05 i.e. after 01-04-2000 and since, Hon'ble ITAT has already taken a view on aforesaid issue in earlier years in appellant's favour and the facts are identical during the year under consideration, respectfully following the same, I decide the said issue in favour of appellant and delete the addition of Rs. 14,74,091/- (Rs. 2,77,305 + Rs. 11,96,786) made by AO u/s. 80IA(4) of the Act. This ground of appeal of the assessee is allowed. 24. Further, from the first appellate order, we also observe that the ld. CIT(A) being a cautious first appellate authority also considered the ratio of the decision of Hon'ble High Court of Madras in the case of Velayudhaswamy Spinning Mills (P.) Ltd. vs. ACIT 340 ITR 477 (Mad.) and decision of ITAT, Chennai in the case of Rangamma Steels and Malleables vs. ACIT 6 taxmann.com 47 (Chennai), wherein the issue has been decided after considering the ratio of the decision of Hon'ble Special Bench of ITAT, Ahemdabad in the case of Goldmine Shares & Finance Pvt. Ltd. 116 TTJ 705 (Ahd.) and held that the Hon'ble High Court after considering the amendment made by the Finance Act, 1999 the issue of initial year for deduction u/s. 80IA of the Act in the favor of the assessee wherein Hon'ble High Court after considering the amendment made by the Finance Act, 1999 (w.e.f. 01-04-2000) and considering the amendment in Section 80IA of the Act concluded that loss in the year earlier to the initial year already absorbed against the profit of other business cannot be nationally brought forward and set-off against the profit of eligible business as no such mandate was provided u/s. 80IA(5) of the Act. In the last part of para 6.2, the ld. CIT(A) pointed out some mathematical mistakes in the assessment order and directed the AO to modify the figures while giving and passing appeal effect order and these observations are also quite correct and justified. Finally, we have no reason to interfere with the findings recorded by the ld. CIT(A) in allowing relief to the assessee by following order of the Tribunal in assessee’s own appeals for immediately preceding three years and thus, we uphold the same. Accordingly, ground No.3 of Revenue for AY 2010-11 is also dismissed. Since the facts of the present grounds are identical as 9.

that of in A.Y. 2010-11 to 2012-13 except figures, therefore

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 6 of 11

following the reasoning given by the ld.counsel to the bench in assessee’s own case, we are of the considered opinion that the present appeal covered against the Revenue by the said order. Therefore, respectfully following the decision of Co- ordinate Bench in the assessee case the Ground no. 1 of the Revenue are dismissed. Ground No.2 relates to advancing loans to the partners 10. of assessee which is a related party within the meaning of section 40A(2)(b) of the Act without charging any interest out of interest bearing fund since the assessee was not having any interest free fund at all and the part of the interest bearing funds have been utilized for making loan to the partners of related party who in turn have invested for personal benefits.

The AO noticed that during the year under assessment, 11. the assessee has paid interest expenses to the tune of Rs.2,20,07,076/- to creditors and suppliers to a related party namely M/s.Jivraj Tea Ltd. which has been shown as sundry creditor in the accounts. The assessee made purchases of raw material which is a related party within the meaning of section 40(2)(b) of the I.T.Act. The assessee used part of interest

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 7 of 11

bearing funds for non-business purposes by giving interest free loans to two partners, therefore interest expenses corresponding to the interest chargeable on the amount so diverted for non-business purposes need to be disallowed out of total interest paid by the assessee as such interest cannot be said to be laid out wholly and exclusively for the purpose of business. Accordingly, he held that it is appropriate to compute the interest on the basis of daily balance of the amount advanced to the parties and disallowed the interest @12% per annum. In appeal, the ld.CIT(A) has deleted the disallowances 12. made by the AO holding that following the ‘rule of consistency’, the additions is found unsustainable on the similar facts and reasoning the deleted the addition made by the AO of Rs.1,92,62,985/- disallowance of interest expenses. The ld.CIT(A) further deleted the addition of Rs.15,85,876/- disallowance of deduction made by AO u/s.80IA of the Act.

Being aggrieved, the Revenue has filed this appeal 13. before this Tribunal. The ld.CIT-DR relied on the order of the AO.

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 8 of 11

On the other hand, the ld.Counsel for the assessee 14. submitted that the issue is in covered by the decision of ITAT Surat in ITA No’s.2803, 2804 & 2805/Ahd/2015 dated 12.12.2018. We have heard the rival submissions and perused the 15. material available on record. We find that the issue is covered by the order of Tribunal in ITA No’s. 2803, 2804 & 2805/Ahd/2015 dated 12.12.2018 for A.Y. 2010-10 to 2012-13 held as under :-

Ground No.2 of Revenue: 12. On careful consideration of above rival submissions and careful and vigilant perusal of the relevant part of the assessment order as well as first appellate order, first of all, we place our concurrence on the finding of the ld. CIT(A) that actually no interest was received by the assessee then, the law does not remit the Assessing Officer to work out the chargeable interest on amount withdrawn by the partners on notional basis and owing by the real own theory. We are also in agreement with the conclusion drawn by the ld. First appellate authority that if the assessee has not earned any income then the same cannot be brought to tax as held by Hon’ble Supreme Court in the case of CIT vs. A. Rehman & Co. reported in 67 ITR 11 (SC), wherein their lordship is speaking for the Apex Court held that no provision and law permits the taxing authority to remit on ‘notional basis’ interest which ought to have been charged by the assessee. 13. Further, we may point out that as per the provision of s. 40A(2)(b) of the Act interest paid by the firm to a partner is not allowable as an expenditure in the hands of firm unless it is provided in the terms and conditions of the partnership deed and the same is allowable only up to 12% per month simply interest and as a corollary date the Assessing Officer cannot grant interest on the debit balance on the partners unless it is provided in the partnership deed. 14. In view of above, in the present case, we find that undisputedly there is no clause in the partnership deed for charging interest and the

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 9 of 11

interest on partners’ capital account is governed by provision of s. 40A(2)(b) of the Act. We cannot ignore that during previous years partners were having credit balance due to the firm and no interest was paid to them by the firm and in AY 2009-10 no disallowance has been made by the Assessing Officer on the debit balance outstanding to the partners even in the scrutiny assessment proceedings. This fact regarding AY 2009-10 have not been controverted by the AO or by the ld. DR during arguments before us. 15. Further, in the present case, the impugned amount of interest of Rs. 78,33,765/- has been paid as interest to M/s. Jivraj Tea Ltd. and the ld. CIT(A) noted the fact that it was not a payment in respect of borrowed capital but it represents as interest paid to the supplier of tea on the unpaid purchase price of goods i.e., Tea and the same was paid as a part of “cost of goods” and not interest on borrowed capital. Furthermore, the account of the assessee shows that there was opening balance of Rs. 7.02 crores, which was paid during the relevant financial period. The assessee purchased goods of Rs. 17.77 crores and paid Rs. 9.99 crores against this purchase and closing balance at the end of year was Rs. 7.78 crores and impugned interest was paid on the outstanding amount of purchases due to the assessee. The ld. CIT(A) has relied on the decision of Hon'ble High Court of Bombay in the case of CIT vs. Hindustan Conductors Pvt. Ltd. reported in 240 ITR 762 (Bom.), wherein it has been held that ‘interest’ is the return or compensation for the retention by one person of a sum of money belonging to or owed to another. The essence of interest is that it is a payment which becomes due because the creditor has not had his money at the due date. The basis purchase of making payment of interest is entitlement to compensation for the deprivation from the amounts due to the purchaser and such interest is allowable u/s. 36(i)(iii) of the Act as the same is being paid under commercial expediency to compensate the seller from the delayed payment of purchase price. 16. From the relevant part of the first appellate order, we also find that the ld. CIT(A) has also considered the fact that the assessee furnished the cash book and fund flow statement before the AO to establish that fund withdrawn by the partners were from the sale proceeds, which was not interest bearing funds or borrowed funds and this fact has been admitted by the AO in the assessment order. In our considered view, when the assessee has proved the nexus that the funds withdrawn by the partners were from the sale proceeds and the same was not from borrowed funds then, the onus shifts on the AO to establish that the borrowed funds have been used for advancing amounts to the partners, which has not been discharged. The ld. CIT(A) has relied on the decisions of Hon’ble Jurisdictional High Court of Gujarat in the cases of Shri Digvijay Cement Co. Ltd. vs. CIT 138 ITR 45 (Guj.) and CIT vs. Arihant Avenue and Credit Ltd. 36 taxmann.com 14 (Guj.), wherein it was held that where the assessee had given interest free advances to its sister concern but it was not the case of the revenue that interest bearing borrowed funds were given as interest free advances to sister concern then no addition on account of notional interest income can be made.

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 10 of 11

Finally, we hold that when the assessee has proved by way of furnishing cash flow statement along with supporting bank statement that the money withdrawn by the partners’ was from the sale proceeds of the business and the same was not amount borrowed on interest then, the impugned interest amount cannot be disallowed. 17. The ld. CIT(A) also verified and examined the computation of income of the assessee as well as payee concerned M/s. Jivraj Tea Ltd. to whom interest has been paid on the purchases made by the assessee and it is seen that the returned income of the assessee was Rs. 27,38,028/- and the returned income of Jivraj Tea Ltd. was Rs. 7,75,98,642/- and tax has been paid thereon on the higher tax rate thus, we safely presume that the assessee does not secure any benefit or gain by debiting interest expenses in its account and offering the same in the hands of sister concern M/s. Jivraj Tea Ltd. Therefore, it is clear that the assessee has not paid impugned interest on outstanding amount of purchases with an intention to reduce its tax liability as the assessee and payee sister concern are assessed to tax at the maximum tax rate. 18. It is a well-accepted principle of tax jurisprudence that whether any expenditure to be incurred was justified from the point of view of commercial expediency has to be seen from the view point of a businessman, who is the best judge to decide his commercial expediency. The ld. CIT(A) has relied on the decision of Hon'ble High Court of Bombay in the case of Ramanand Sagar vs. DCIT 255 ITR 134 (Bom.) and decision of Hon'ble High Court of Gujarat in the case of CIT vs. Voltam Transformers Pvt. Ltd. 129 ITR 105 (Guj.), wherein the Hon’ble Jurisdictional High Court held that so far as legitimate business needs of assessee or the benefit derived by /accrued to the assessee from goods/services/facilities are concerned these are not be judged from the view point of Revenue Officer but from a view point of a businessman. 19. While granting relief to the assessee, the ld. CIT(A) at Page 28 clearly noted that the Department has allowed the interest expense in immediate preceding year then, any disallowance in subsequent years in similar facts and circumstances is not sustainable being against the “rule of consistency”. We are also in agreement with the conclusion drawn by the ld. CIT(A) that as per real income theory if the assessee has not earned any income then, the same cannot be brought to tax without any deeming provision on the basis of imaginary facts and basis. Therefore, respectfully taking into consideration ratio laid down by various Hon'ble High Courts including Hon’ble Jurisdictional High Court of Gujarat in the cases of Shri Digvijay Cement Co. Ltd. vs. CIT and CIT vs. Arihant Avenue and Credit Ltd. (supra) in our considered opinion, the conclusion drawn by the ld. CIT(A) is quite correct and justified and there is no valid reason to interfere with the same hence, we uphold the first appellate order on this issue. Accordingly, ground No.2 of Revenue for AY 2010-11 is dismissed.”

DCIT, Circle – 2(3), Surat Vs. Jivraj Tea Company /ITA No.2343/Ahd/2016/A.Y. 2013-14 Page 11 of 11

Since the facts of the present grounds are identical as 16. that of in A.Y. 2010-11 to 2012-13 except figures, therefore following the reasoning given by the ld.counsel to the bench in assessee’s own case, we are of the considered opinion that the present appeal covered against the Revenue by the said order. Therefore, respectfully following the decision of Co- ordinate Bench in the assessee case the Ground no. 2 of the Revenue are dismissed.

In the result, appeal of the Revenue is dismissed. 17.

The order pronounced in the open court on 01.03.2019. 18.

Sd/- Sd/- (KUL BHARAT) (O.P.MEENA) (�याियकसद�यतथा/JUDICIAL MEMBER) (लेखासद�यकेसम� /ACCOUNTANT MEMBER) सुरत/ Surat, �दनांक Dated: 1ST March, 2019/S.Gangadhara Rao, Sr.PS Copy of order sent to- Assessee/AO/Pr. CIT/ CIT (A)/ ITAT (DR)/Guard file of ITAT. By order / / TRUE COPY / / Assistant Registrar, Surat