ACIT, C-7, LUDHIANA vs. M/S FRANKLIN LABORATORIES (INDIA) PVT. LTD., LUDHIANA

आदेश/ORDER

Per Annapurna Gupta, Accountant Member: This appeal has been preferred by the Revenue against the order of the Commissioner of Income Tax (Appeals)-3, Ludhiana [(in short ‘CIT(A)’] dated 20.7.2018, passed u/s 250(6) of the Income Tax Act, 1961 (hereinafter referred to as ‘Act’), relating to assessment year 2014-15.

2 . G r o u n d N o . 1 , 2 & 3 r a i s e d b y t h e R e v e n u e r e l a t e t o t h e s a m e i s s u e o f d i s a l l o w a n c e o f i n t e r e s t u / s 3 6 ( 1 ) ( i i i ) o f t h e A c t a n d r e a d a s u n d e r :

2 ITA No.1230/Chd/2018 A.Y.2014-15

a s s e s s m e n t p r o c e e d i n g s t h e A s s e s s i n g O f f i c e r ( A O )

o b s e r v e d t h a t t h e a s s e s s e e h a d g i v e n a d v a n c e s t o h i s

s i s t e r c o n c e r n a m o u n t i n g t o R s . 2 , 9 0 , 1 2 , 7 6 2 / - . T h e

a s s e s s e e w a s a s k e d t o e x p l a i n t h e e x p e d i e n c y o f t h e

a d v a n c e m a d e a n d w a s f u r t h e r a s k e d t o s h o w c a u s e a s

t o w h y i n t e r e s t m a d e t o t h e r e l a t e d p a r t y i . e . M / s

F r a n k l i n L a b o r a t o r i e s ( I n d i a ) H e r b a l s , b e n o t d i s a l l o w e d

a t b a n k r a t e f o r d i v e r s i o n o f b u s i n e s s p r o f i t t o e x e m p t

u n i t . D u e r e p l y w a s f i l e d b y t h e a s s e s s e e s t a t i n g t h a t

t h e a d v a n c e w a s g i v e n f o r c o m m e r c i a l p u r p o s e s f o r t h e

p u r p o s e s o f m a k i n g p u r c h a s e o f m e d i c i n e s u s e d i n t h e

b u s i n e s s o f t h e a s s e s s e e . T h e A O w a s n o t s a t i s f i e d w i t h

t h e r e p l y o f t h e a s s e s s e e f o r t h e r e a s o n t h a t t h e

a s s e s s e e h a d m a d e h u g e b o r r o w i n g s f r o m b a n k o n w h i c h

i n t e r e s t h a d b e e n p a i d a n d c l a i m e d a s r e v e n u e

e x p e n d i t u r e a n d t h e s e b o r r o w e d f u n d s h a d b e e n d i v e r t e d

b y t h e a s s e s s e e t o i t s r e l a t e d c o m p a n y a s i n t e r e s t f r e e

a d v a n c e w h o s e i n c o m e w a s e x e m p t . A c c o r d i n g l y , t h e A O

d i s a l l o w e d t h e i n t e r e s t c o m p u t e d @ 1 2 % o n t h e a d v a n c e

o f R s . 2 , 9 0 , 1 2 , 7 6 2 / - w h i c h a m o u n t e d t o R s . 3 4 , 8 1 , 5 3 1 / - .

H e t h e r e a f t e r w o r k e d o u t t h e i n t e r e s t e x p e n d i t u r e

3 ITA No.1230/Chd/2018 A.Y.2014-15

r e l a t i n g t o t h e t a x a b l e u n i t o f t h e a s s e s s e e , o n

p r o p o r t i o n a t e b a s i s w h i c h w o r k e d o u t t o R s . 1 0 , 7 9 , 2 7 5 / -

a n d d i s a l l o w e d t h e s a m e f o r t h e p u r p o s e o f c o m p u t a t i o n

o f t h e i n c o m e o f t h e a s s e s s e e f o r t h e y e a r .

4 . A g g r i e v e d b y t h e s a m e , t h e m a t t e r w a s c a r r i e d

b e f o r e t h e L d . C I T ( A ) , w h e r e t h e a s s e s s e e r e i t e r a t e d t h e

c o n t e n t i o n s m a d e b e f o r e t h e A O a n d s t a t e d t h a t t h e

a d v a n c e w a s c o m m e r c i a l l y e x p e d i e n t a n d r e l i e d u p o n

v a r i o u s c a s e l a w s f o r t h e p r e p o s i t i o n t h a t w h e r e t h e

c o m m e r c i a l e x p e d i e n c y o f t h e a d v a n c e w a s e s t a b l i s h e d ,

n o i n t e r e s t u / s 3 6 ( 1 ) ( i i i ) o f t h e A c t w a s w a r r a n t e d . T h e

L d . C I T ( A ) f o u n d , o n t h e b a s i s o f d o c u m e n t s b e f o r e h i m

, t h a t t h e a s s e s s e e h a d e s t a b l i s h e d t h e c o m m e r c i a l

e x p e d i e n c y o f t h e a d v a n c e s a n d , t h e r e f o r e , h e l d t h a t n o

d i s a l l o w a n c e o f i n t e r e s t w a s t o b e m a d e u / s 3 6 ( 1 ) ( i i i ) o f

t h e A c t . H e f u r t h e r n o t e d t h a t t h e a s s e s s e e h a d

s u f f i c i e n t o w n f u n d s f o r m a k i n g t h e a d v a n c e s a n d t h e

p r e s u m p t i o n i n s u c h c i r c u m s t a n c e s w a s t h a t t h e

a d v a n c e w a s m a d e o u t o f t h e o w n f u n d s w a r r a n t i n g n o

d i s a l l o w a n c e o f i n t e r e s t u / s 3 6 ( 1 ) ( i i i ) o f t h e A c t . F o r t h e

a f o r e s a i d r e a s o n s , h e d e l e t e d t h e d i s a l l o w a n c e o f

i n t e r e s t m a d e b y t h e A O .

5 . B e f o r e u s , t h e L d . D R r e l i e d u p o n t h e o r d e r o f t h e

A O s t a t i n g t h a t u n d e n i a b l y , t h e a s s e s s e e h a d m a d e h u g e

b o r r o w i n g s f r o m b a n k o n w h i c h i n t e r e s t h a d b e e n p a i d

a n d c l a i m e d a s r e v e n u e e x p e n d i t u r e , w h i l e i t h a d

d i v e r t e d t h e s e f u n d s t o i t s r e l a t e d c o m p a n y a s i n t e r e s t

f r e e a d v a n c e a n d w h o s e i n c o m e w a s e x e m p t . T h e L d . D R

4 ITA No.1230/Chd/2018 A.Y.2014-15

r e l i e d u p o n t h e d e c i s i o n o f t h e H o n ' b l e P u n j a b &

H a r y a n a H i g h C o u r t i n t h e c a s e o f C I T V s . A b h i s h e k

I n d u s t r i e s L t d . , 2 8 6 I T R 1 f o r u p h o l d i n g t h e

d i s a l l o w a n c e . T h e L d . D R f u r t h e r s t a t e d t h a t t h e

L d . C I T ( A ) w a s n o t j u s t i f i e d i n d e l e t i n g t h e d i s a l l o w a n c e

o f i n t e r e s t i n t h e i m p u g n e d y e a r s i n c e t h e a s s e s s e e h a d

c h a r g e d i n t e r e s t o n s u c h a d v a n c e s i n a s s e s s m e n t y e a r s

2 0 1 0 - 1 1 a n d 2 0 1 1 - 1 2 . A s f a r g r o u n d N o . 3 r a i s e d b y t h e

R e v e n u e , n o a r g u m e n t s m a d e b e f o r e u s .

6 . T h e L d . C o u n s e l f o r t h e a s s e s s e e , o n t h e o t h e r

h a n d , s t a t e d t h a t i t w a s r e p e a t e d l y c o n t e n d e d b y t h e

a s s e s s e e , b o t h b e f o r e t h e A O a n d t h e C I T ( A ) , t h a t t h e

a d v a n c e s h a d b e e n g i v e n f o r b u s i n e s s p u r p o s e o n l y .

T h a t i t w a s p o i n t e d o u t t h a t t h e a d v a n c e s h a d b e e n

g i v e n t o s i s t e r c o n c e r n o f t h e a s s e s s e e f o r s e t t i n g u p i t

i s m a n u f a c t u r i n g u n i t f o r t h e m a n u f a c t u r e o f m e d i c i n e s

w h i c h w e r e p u r c h a s e d b y t h e a s s e s s e e f o r u s e i n i t s

b u s i n e s s . T h a t t h e a d v a n c e s h a d b e e n g i v e n f o r f i n a n c i a l

y e a r 2 0 0 9 - 1 0 f o r s e t t i n g u p o f m a n u f a c t u r i n g u n i t o f t h e

s i s t e r c o n c e r n a n d t i l l t h e u n i t w a s s e t u p t h e i n t e r e s t

h a d b e e n c h a r g e d o n t h e a d v a n c e s g i v e n . T h e r e a f t e r

o n c e t h e s i s t e r c o n c e r n s t a r t e d m a n u f a c t u r i n g

m e d i c i n e s , t h e a d v a n c e w a s f o r t h e p u r c h a s e o f m e d i c i n e

f r o m t h e s i s t e r c o n c e r n a n d n o i n t e r e s t w a s , t h e r e f o r e ,

c h a r g e d . T h e L d . C o u n s e l f o r t h e a s s e s s e e c o n t e n d e d

t h a t n e c e s s a r y d o c u m e n t s b y w a y o f a g r e e m e n t e n t e r e d

i n t o b y t h e a s s e s s e e w i t h i t s s i s t e r c o n c e r n f o r m a k i n g

a d v a n c e s w a s f i l e d a l o n g w i t h c o p i e s o f l e d g e r a c c o u n t o f

5 ITA No.1230/Chd/2018 A.Y.2014-15

t h e p a r t i e s , d e m o n s t r a t i n g t h e a b o v e f a c t s . O u r

a t t e n t i o n w a s d r a w n t o t h e s u b m i s s i o n s m a d e b e f o r e t h e

L d . C I T ( A ) , r e p r o d u c e d a t p a r a 2 . 2 o f t h e o r d e r a s u n d e r :

“It is submitted that the appellant is a company running the business of pharmaceuticals and Life saving Drugs. During the assessment proceedings, Ld. AO asked for the details of loans and advance of Rs. 2,90,12,762/- given by the appellant to its Sister concern M/s Franklin Laboratories (India) Herbals. The appellant duly submitted the ledger account of the party M/s Franklin Laboratories (India) Herbals along with the facts and figures why the amount was advanced by the appellant company to the party. Still, Ld. AO ignoring the facts and figures of the appellant company and documents submitted by the appellant company to Ld. AO, made addition of notional interest @ 12% on the amount of advance of Rs. 2,90,12,762/- made to party M/s Franklin Laboratories (India) Herbals by the appellant company. In this regard, it is submitted that the charging of notional interest on the advance of Rs. 2,90,12,762/- and thereby disallowing the interest of Rs. 34,81,531/- u/s 36(1) (iii) is unjustified and untenable on the following counts:- 1) As submitted by the appellant company during the assessment proceedings that the advance was given by the appellant company to the party M/s Franklin Laboratories (India) Herbals for the purpose of business only. It is to note that the party M/s Franklin Laboratories (India) Herbals is a related party of the appellant company in terms of the proprietor of this party is Mr. Ajay Sareen who is the Director in the appellant company. But, this thing had no impact on the transaction in question. As, the amount was advanced for the purchase of Medicines from the party M/s Franklin Laboratories (India) Herbals by the appellant company. The appellant company initially gave some advance to the party M/s Franklin Laboratories (India) Herbals for the setting up manufacturing plant in FY 2009-10. As per the terms between the appellant company and the party, the appellant company charged interest of Rs. 1,78,625.35 on the amount advanced. The amount was never advanced interest free. Further, it is important to note that the party M/s Franklin Laboratories (India) Herbals started business operations in FY 2009-10 itself and the appellant company started to purchase Medicines totally for the manufacturing of finished article of drugs and pharma products from this medicines from FY 2010-11 along with the advance in respect of purchase of medicines, if some of the amount was there-after advanced for the set up and run of the business to the party M/s Franklin Laboratories (India) Herbals by the appellant company, the appellant company continued to charge interest on the amount advanced by it to the party. During the FY 2010-11, the appellant company charged interest of Rs. 25,07,333/- from the party M/s Franklin

6 ITA No.1230/Chd/2018 A.Y.2014-15

Laboratories (India) Herbals. Further, it is submitted that the business of the party M/s Franklin Laboratories (India) Herbals was completely set up till FY 2010-11 and thereafter the appellant did not give any advance to the party M/s Franklin Laboratories (India) Herbals but only the advance for the purchase of medicines from the party M/s Franklin Laboratories (India) Herbals was given by the appellant. All these facts and figures are verifiable and compile-able from the ledger account of the party M/s Franklin Laboratories (India) Herbals from the books of the appellant company. Ledger account of this party M/s Franklin Laboratories (India) Herbals from the books of the appellant company for the FYs 2009-10 to FY 2013-14 i.e. year in question is enclosed. It is clear that the appellant initially gave advance to the party for setting up and initial running of his business and duly charged the interest on the advanced amount from the party. But thereafter the appellant company only purchased medicines from the party and it is submitted that in the course of business i.e. to purchase something the advancement of amount is inseparable and unavoidable. The appetent company makes its almost 95% purchase of medicines from the party M/s Franklin Laboratories (lndia) Herbals itself. Hence, advance payment for purchase of medicines is integral part of the business. In such event, making a negative inference about the advance given to the party M/s Franklin Laboratories (India) Herbals by the appellant company is not justified. 2) It is further submitted that the fact is clear that the advance given by the appellant company to the party M/s Franklim Laboratories (India) Herbals is not a loan or advance to divert interest bearing funds to related party but is simply a business advance. The advance was given in the course of business and in the business expediency only. It is a settled law that when an advance is given in business expediency, no disallowance of interest can be made by drawing provisions of section 36(l)(iii) of the Act. Hence, charging of notional interest @12% on amount of business advance/refundable security and further disallowing the interest claimed in P&L A/c is unwarranted.” 7 . T h e L d . C o u n s e l f o r t h e a s s e s s e e f u r t h e r p o i n t e d

o u t t h a t i t w a s a l s o c o n t e n d e d b e f o r e t h e L d . C I T ( A ) t h a t

n o n e o f t h e a d v a n c e s r e l a t e d t o t h e i m p u g n e d y e a r . T h a t

t h e e n t i r e a d v a n c e s r e l a t e d t o t h e p r e c e d i n g y e a r a n d n o

i n t e r e s t h a d b e e n d i s a l l o w e d i n t h o s e y e a r s . O u r

a t t e n t i o n w a s d r a w n t o t h e s u b m i s s i o n s m a d e i n t h i s

r e g a r d a t p a g e 6 o f t h e C I T ( A ) ’ s o r d e r a s u n d e r :

7 ITA No.1230/Chd/2018 A.Y.2014-15

“ 3) It is to submit that as we go through the ledger account of the party M/s Franklin Laboratories (India) Herbals in the books of appellant company for the year in question, it is clear that no amount of Rs. 2,90,12,762/- had been advanced during the year in question by the appellant company to it. It is the closing balance of the loan and advance in the name of party M/s Franklin Laboratories (India) Herbals as on ^'0,3.2014 amounting to Rs. 2,90,12,76/-. This balance of advance of Rs. 2,90,12,762/- is the result of business advances in previous years including the year in question. During the year in question, if we go through the figures in the ledger account, only an amount of Rs. 30,08,6521- (amount advanced net of purchases) only has been paid to the party M/s Franklin Laboratories (India) Herbals for the advance payment of purchases to be made and/or previous years purchases (if any). The closing balance of the year immediately preceding to the year in question of this party in the books of appellant company was Rs. 2,60,04,110.43. So, Ld. A 0 has not applied his mind anywhere to draw a right conclusion while making addition of notional interest on advance o/s of Rs. 2,90,12,762/- in respect of party M/s Franklin Laboratories (India) Herbals, but has made a haste decision of illogical addition ignoring facts. Addition made is unjustified. Further, it is submitted that when no advance has been given during the year in question, no disallowance of notional interest can be made by the assessing officer. Here in the case of appellant company amount advanced is much lower than the alleged amount of Rs. 2,90,12,762/- and that too is the amount of advance due to business necessity and in regular course of business as advance to supplier. We rely on the following judgment:- CIT vs. SR1DEVENTERPRISES IN (1991) 192 ITR 0165 OFKARNATAKA HIGH COURT Business expenditure—Interest on borrowed capital—In previous assessment years assessee 's claim regarding interest on borrowed capital allowed— will not be equitable for the Revenue to take a different stand in respect of the amounts which were the subject-matter of previous years' assessments, consistency and definiteness of approach being necessary Further, as the advance of Rs. 2,90,12,7(527- has not been given during the year in question. Because, the opening balance of the party M/s Franklin Laboratories (India) Herbals was Rs. 2,60,04,110.43. Only net addition of Rs. 30,08,651.57 had been made during the year in question balancing the amount advanced and purchases made from the party by the appellant company. So, no notional interest can be calculated on the opening balance of loans & advances and resultant disallowance of interest expense will be void. It is also a well settled law that charging of notional interest is not a provision

8 ITA No.1230/Chd/2018 A.Y.2014-15

of law but is a procedure followed in assessment proceedings by the Department.” 8 . T h e L d . C o u n s e l f o r t h e a s s s e s s e e t h e r e a f t e r

p o i n t e d o u t t h a t o n c o n s i d e r i n g t h e f a c t u a l c o n t e n t i o n

m a d e b y t h e a s s e s s e e , b a c k e d a n d s u b s t a n t i a t e d d u l y

w i t h e v i d e n c e , t h e L d . C I T ( A ) f o u n d t h a t t h e a d v a n c e s t o

b e f o r b u s i n e s s p u r p o s e o f t h e a s s e s s e e a n d a c c o r d i n g l y

d e l e t e d t h e d i s a l l o w a n c e o f i n t e r e s t e x p e n d i t u r e m a d e .

I t w a s a l s o p o i n t e d o u t t h a t t h e L d . C I T ( A ) h a d a l s o n o t e d

t h e f a c t t h a t t h e a s s e s s e e h a d s u f f i c i e n t o w n i n t e r e s t

f r e e f u n d s f o r m a k i n g t h e a d v a n c e s c a l l i n g f o r n o

d i s a l l o w a n c e o f i n t e r e s t u / s 3 6 ( 1 ) ( i i i ) o f t h e A c t . O u r

a t t e n t i o n w a s a l s o d r a w n t o t h e f i n d i n g s o f t h e L d . C I T ( A )

a t p a r a s 2 . 3 , 3 . 5 & 3 . 6 o f t h e o r d e r a s u n d e r :

“2.3 I have carefully considered the appellant's submission. I have also gone through the assessment order in detail. 1 have further considered various judicial pronouncements relied upon by the appellant as well as other material placed by him on record. On careful consideration of rival contention, I am of the opinion that there considerable force in the arguments of the Ld. A.R of the appellant with regard to the advances given for only business purpose. Looking to the agreement, copy of ledger account of Franklin Laboratories(lndia) Herbals, Bills of material purchased, it has been noticed that the appellant has given advances to its sister concern for business purpose. It was found that the appellant has entered into an agreement on 01/11/2009 for the purchase of materials and the appellant company would provide the funds for setting up the manufacturing unit. Further, it is also seen that these advances have been provided long back in FY 2009-10 which were accounted for in the books of appellant company and the Revenue has not disallowed any interest in earlier A.Y. 2010-11, 2011-12 & AY 2012- 13. The appellant company has shown regular purchase of material from its sister concern. The opening balance of advances Rs. 2,60,04,110/- has increased to Rs. 2,90,12,762/- in the FY 2013-14 against which purchase of medicines of Rs.58,12,705/- has taken place, thus no fresh advances were given in the year under reference. The appellant has made payment only on account of purchase of material from its sister concern during the year under reference. The Ld. A.O. had failed to consider that the

9 ITA No.1230/Chd/2018 A.Y.2014-15

appellant company has given the advances for business purpose. It is seen that the AO has made addition without going into facts of the case. In my considered opinion the AO. has not tried to connect or prove the nexus with the borrowed funds for business purpose or non-business purpose. In earlier years in the appellant's own case, no disallowance was made. Hence Disallowance made by the A.O. is not in accordance with Law. 3.5 In my considered opinion, there is considerable force in the claim of appellant that, the appellant company submitted that advances had been given out of commercial expediency and no specific borrowing had been made for giving these advances. The claim of the appellant cannot deny just for the assumption that the appellant had diverted his borrowed funds for non-business purpose. The Id. AO has not adduced any evidence on the contrary to negate the claim of appellant. In view of the above, I am inclined to agree with the contentions of the Id. A.R. Further, I am of the opinion that there is considerable force in arguments of the appellant, with regard to the availability of interest free funds with the appellant in the form of share capital and Reserve and surplus for making advance to its sister concern. Looking to the Balance Sheet, which has been placed on record, it has been noticed that the appellant has sufficient interest free funds in the share capital and reserve and surplus to the extent of Rs. 5,25,61,189/-. I am also opinion that that in this situation when the appellant is having interest free funds of his own, to cover the advances given by the appellant to its sister concern then the presumption should be drawn that the advances have been given out of interest free funds available with the appellant. As the appellant is having sufficient interest free funds of its own in the form of share capital and reserve and surplus to make advances under reference, it cannot be said that the appellant has used borrowed funds for the making impugned addition. 3.6 In view of the above stated facts and circumstances of the case. I am of the opinion that the assessing officer is not justified in making the addition of Rs. 10,79,275/- in this case on account of disallowance out of interest expenses by invoking provisions of section 36(1)(iii) of the Act on the ground that the appellant has given the advances out of borrowed funds for non-business purpose. Whereas the advances are given on account of commercial expediency. The addition of Rs. 10,79,275/- u/s 36(1)(iii) made by the assessing officer in this case is not accordance with law and facts of the case, therefore, directed to be deleted. In result, ground no. 3 of appeal taken by the appellant company is allowed.” 9 . T h e L d . C o u n s e l f o r t h e a s s e s s e e , t h e r e f o r e ,

c o n t e n d e d t h a t t h e L d . C I T ( A ) h a d r i g h t l y d e l e t e d t h e

d i s a l l o w a n c e m a d e b y t h e A O .

10 ITA No.1230/Chd/2018 A.Y.2014-15

1 0 . W e h a v e h e a r d t h e r i v a l c o n t e n t i o n s a n d c a r e f u l l y

p e r u s e d t h e o r d e r s o f t h e a u t h o r i t i e s b e l o w . T h e i s s u e

b e f o r e u s r e l a t e s t o d i s a l l o w a n c e o f i n t e r e s t u / s

3 6 ( 1 ) ( i i i ) o f t h e A c t , a s p e r w h i c h o n l y i n t e r e s t p a i d i n

r e s p e c t o f c a p i t a l b o r r o w e d f o r t h e p u r p o s e o f b u s i n e s s

o r p r o f e s s i o n i s t o b e a l l o w e d a s d e d u c t i o n . I n t h e

i m p u g n e d c a s e , t h e i n t e r e s t d i s a l l o w e d r e l a t e s t o

a d v a n c e s m a d e b y t h e a s s e s s e e t o i t s s i s t e r c o n c e r n M / s

F r a n k l i n L a b o r a t o r i e s ( I n d i a ) H e r b a l s a m o u n t i n g t o

R s . 2 , 9 0 , 1 2 , 7 6 2 / - w h i c h w a s e n t i r e l y i n t e r e s t f r e e . T h e

L d . C I T ( A ) , w e f i n d , h a s a f t e r c o n s i d e r i n g a l l e v i d e n c e s

p r o d u c e d b e f o r e h i m r e l a t i n g t o t h e i m p u g n e d a d v a n c e ,

i n t h e f o r m o f a g r e e m e n t e n t e r e d i n t o b y t h e a s s e s s e e

w i t h s i s t e r c o n c e r n f o r m a k i n g t h e a d v a n c e s , t h e c o p y o f

l e d g e r a c c o u n t o f t h e s i s t e r c o n c e r n , b i l l s o f m a t e r i a l

p u r c h a s e d f r o m s i s t e r c o n c e r n , h a s g i v e n a f i n d i n g o f

f a c t t h a t t h e a d v a n c e s a r e f o r m a k i n g t h e p u r c h a s e s o f

m e d i c i n e s f r o m t h e s i s t e r c o n c e r n , f o r u t i l i z a t i o n i n t h e

b u s i n e s s o f t h e a s s e s s e e . T h e R e v e n u e h a s b e e n u n a b l e

t o c o n t r o v e r t t h i s f a c t u a l f i n d i n g o f t h e C I T ( A ) . I n t h e

l i g h t o f t h e s a m e , t h e L d . C I T ( A ) , w e h o l d h a s r i g h t l y h e l d

t h e a d v a n c e s t o b e c o m m e r c i a l l y e x p e d i e n t f o r t h e

a s s e s s e e . T h e o r d e r o f t h e L d . C I T ( A ) d e l e t i n g t h e

d i s a l l o w a n c e o f i n t e r e s t , t h e r e f o r e c a l l s f o r n o

i n t e r f e r e n c e o n o u r p a r t s i n c e t h e i n t e r e s t i s

u n d i s p u t e d l y p a i d f o r t h e b u s i n e s s o f t h e a s s e s s e e o n l y .

T h e r e l i a n c e p l a c e d b y t h e L d . D R o n t h e d e c i s i o n o f t h e

H o n ' b l e J u r i s d i c t i o n a l H i g h C o u r t i n t h e c a s e o f

11 ITA No.1230/Chd/2018 A.Y.2014-15

A b h i s h e k I n d u s t r i e s L t d . ( s u p r a ) , i s w e f i n d m i s p l a c e d

s i n c e t h e r a t i o l a i d d o w n i n t h a t c a s e o f d i s a l l o w a n c e o f

i n t e r e s t e x p e n s e s w h e r e t h e r e a r e m i x e d f u n d s a v a i l a b l e

w i t h t h e a s s e s s e e , w a s b a s e d a n d p r o c e e d e d o n t h e

p r e m i s e t h a t t h e a d v a n c e w a s f o r n o n - b u s i n e s s p u r p o s e ,

w h i l e i n t h e p r e s e n t t h e a d v a n c e s h a v e b e e n h e l d t o b e

f o r b u s i n e s s p u r p o s e . A s f o r t h e R e v e n u e s c o n t e n t i o n

t h a t t h e d i s a l l o w a n c e w a s w a r r a n t e d s i n c e t h e a s s e s s e e

h a d i t s e l f c h a r g e d i n t e r e s t o n s u c h a d v a n c e s i n

a s s e s s m e n t y e a r s 2 0 1 0 - 1 1 a n d 2 0 1 1 - 1 2 , w e d o n o t f i n d

a n y m e r i t i n t h e s a m e a l s o f o r t h e r e a s o n t h a t f i r s t l y t h e

a s s e s s e e h a d e x p l a i n e d t h e r e a s o n s f o r c h a r g i n g t h e

i n t e r e s t i n t h o s e y e a r s , a s t h a t t h e a d v a n c e i n t h o s e

y e a r s w a s u t i l i z e d f o r s e t t i n g u p t h e m a n u f a c t u r i n g u n i t

o f t h e s i s t e r c o n c e r n a n d t h a t s u b s e q u e n t l y o n c e w i t h

t h e u n i t w a s s e t u p , t h e a d v a n c e w a s f o r t h e p u r p o s e o f

p u r c h a s e o f m e d i c i n e f r o m t h e s i s t e r c o n c e r n a n d n o

i n t e r e s t w a s , t h e r e f o r e , c h a r g e d o n t h e s a m e . T h e s a i d

e x p l a n a t i o n h a s n o t b e e n s h o w n t o b e i n c o r r e c t b y t h e

R e v e n u e . E v e n o t h e r w i s e , a s l o n g a s c o m m e r c i a l

e x p e d i e n c y i s e s t a b l i s h e d , t h e r e r e m a i n s n o r e a s o n f o r

m a k i n g a n y d i s a l l o w a n c e a n d i t i s e n t i r e l y t h e

p r e r o g a t i v e o f t h e a s s e s s e e t o c h a r g e o r n o t t o c h a r g e

i n t e r e s t o n s u c h a d v a n c e s m a d e . T h e A O c a n n o t s i t i n

t h e a r m c h a i r o f t h e b u s i n e s s m a n a n d d e t e r m i n e h o w t h e

b u s i n e s s i s t o b e r u n .

12 ITA No.1230/Chd/2018 A.Y.2014-15

I n v i e w o f t h e a b o v e , w e u p h o l d t h e o r d e r o f t h e

L d . C I T ( A ) i n d e l e t i n g t h e d i s a l l o w a n c e o f i n t e r e s t

a m o u n t i n g t o R s . 1 0 , 7 9 , 2 7 5 / - .

T h e g r o u n d o f a p p e a l N o s . 1 , 2 & 3 r a i s e d b y t h e R e v e n u e

a r e , t h e r e f o r e , d i s m i s s e d .

1 1 . G r o u n d N o . 4 , 5 & 6 r a i s e d b y t h e R e v e n u e r e l a t e t o

d i s a l l o w a n c e o f s a l a r y , w a g e s m a d e a n d r e a d a s u n d e r :

c o u r s e o f a s s e s s m e n t p r o c e e d i n g s , t h e a s s e s s e e w a s

a s k e d t o p r o d u c e w a g e s a n d s a l a r y r e g i s t e r . F r o m t h e

s a m e , t h e A O o b s e r v e d t h a t t h e r e w e r e n u m e r o u s

p a y m e n t s a g a i n s t s a l a r y a n d w a g e s w h e r e n o p a y m e n t

p r o o f b y w a y o f s i g n a t u r e o r t h u m b i m p r e s s i o n o f t h e

r e c i p i e n t w a s r e c o r d e d . I n t h e a b s e n c e o f a n y

e x p l a n a t i o n f i l e d b y t h e a s s e s s e e t h e s a i d p a y m e n t s ,

a m o u n t i n g i n a l l t o R s . 7 0 , 2 0 , 6 5 4 / - w e r e h e l d t o b e

13 ITA No.1230/Chd/2018 A.Y.2014-15

b o g u s a n d t h e c l a i m o f t h e a s s e s s e e t o t h i s e x t e n t

d i s a l l o w e d b y t h e A O .

1 3 . B e f o r e t h e L d . C I T ( A ) , t h e a s s e s s e e c o n t e n d e d t h a t

t h e d i s a l l o w a n c e w a s u n j u s t i f i e d b e c a u s e a l l t h e

e m p l o y e e s w h o s e s a l a r y a n d w a g e s w e r e d i s a l l o w e d w e r e

r e g u l a r e m p l o y e e s o f t h e a s s e s s e e t o w h o m p a y m e n t s

h a d b e e n m a d e y e a r t o y e a r a n d E S I a n d P F d e d u c t e d o n

t h e s a m e a n d e v e n T D S d e d u c t e d . I t w a s a l s o c o n t e n d e d

t h a t t h e s a l a r y a n d w a g e s p a i d t o t h e s e e m p l o y e e s o n l y

f o r s o m e m o n t h s w a s d i s a l l o w e d f o r w a n t o f t h u m b

i m p r e s s i o n o r s i g n a t u r e , w h i l e i n o t h e r m o n t h s i t w a s

a l l o w e d , w h i c h m e a n t t h a t t h e s a i d p e r s o n s w e r e n o t

b o g u s . T h e a s s e s s e e s u b s t a n t i a t e d i t s s u b m i s s i o n s b y

f i l i n g d o c u m e n t s i n t h e f o r m o f s a l a r y a n d w a g e s

r e g i s t e r , v o u c h e r s c o n t a i n i n g t h e s i g n a t u r e o r t h u m b

i m p r e s s i o n o f t h e e m p l o y e e s w h o s e s a l a r y a n d w a g e s h a d

b e e n d i s a l l o w e d , E S I a n d P F r e t u r n s f i l e d d u r i n g t h e

y e a r s h o w i n g E S I a n d P F d e d u c t e d o n p a y m e n t s m a d e t o

t h e s e e m p l o y e e s a n d T D S r e t u r n s s h o w i n g T D S d e d u c t e d

o n p a y m e n t s m a d e t o t h e m . T h e a s s e s s e e f u r t h e r f i l e d

a n a p p l i c a t i o n u n d e r R u l e 4 6 A o f t h e I n c o m e T a x

R u l e s , 1 9 6 1 , f o r a d m i s s i o n o f t h e a d d i t i o n a l e v i d e n c e i n

t h e f o r m o f p a y m e n t p r o o f o f s a l a r y a n d w a g e s . T h e s a m e

w a s f o r w a r d e d t o t h e A O f o r h i s c o m m e n t s , w h o o b j e c t e d

t o t h e a d m i s s i o n o f t h e s a m e . T h e r e a f t e r t h e L d . C I T ( A )

f o r w a r d e d t h e c o m m e n t s o f t h e A O t o t h e a s s e s s e e , w h o

c o n t e n d e d t h a t t h e e v i d e n c e s s u b m i t t e d w e r e o n l y

c l a r i f i c a t o r y i n n a t u r e s u p p o r t i n g t h e e v i d e n c e s w h i c h

14 ITA No.1230/Chd/2018 A.Y.2014-15

w e r e a l r e a d y s u b m i t t e d d u r i n g a s s e s s m e n t p r o c e e d i n g s .

T h e C I T ( A ) a f t e r c o n s i d e r i n g t h e r e p l y o f t h e a s s e s s e e

a d m i t t e d t h e a d d i t i o n a l e v i d e n c e s h o l d i n g t h e m t o b e

c l a r i f i c a t o r y e v i d e n c e s o n l y a n d t h e r e a f t e r p r o c e e d e d t o

d e c i d e t h e c a s e o n m e r i t s . T h e L d . C I T ( A ) f o u n d f o r c e i n

t h e a r g u m e n t s o f t h e a s s e s s e e a n d , t h e r e f o r e , d e l e t e d

t h e d i s a l l o w a n c e m a d e b y t h e A O . T h e r e l e v a n t f i n d i n g s

o f t h e L d . C I T ( A ) a t p a r a s 4 . 4 a n d 4 . 5 o f t h e o r d e r a r e a s

u n d e r :

“4.4 I have carefully considered the appellant's submission. I have also gone through the assessment order in detail. I have further considered various judicial pronouncements relied upon by the appellant as well as other material placed by him on record. I have considered remand report of AO in pursuance of assesses application for admission of additional evidence U/r 46 A . Under the given facts and circumstances I find that additional evidence given by the assessing proceedings are of only clarifactory nature in continuation of the facts stated by the assessee in the course of assessment proceedings. Accordingly after considering all the facts of the request of the assessee for admission of additional evidence under rule 46 A is hereby accepted. 4.5 In view of the above stated facts and in the circumstances of the case. I am of the opinion that the assessing officer is not justified in making the addition of Rs. 70,20,654/- in this case on account of disallowance of Wages and salary expenses by invoking suspicion that these payments are bogus just because there were no signature or thumb impression of employees without getting into detailed understanding of the nature of expenditure. All these employees are duly registered with ESI/PF authorities and appellant keep on depositing the ESI/PF/TDs on regular basis. The same register was also produced before the A.O. in which the PF/ESI number of all employees was specifically written which shows that the expenditure claimed is completely genuine in nature. In result, ground no. 3 of appeal taken by the appellant company is allowed.” 1 4 . B e f o r e u s , o n e o f t h e c o n t e n t i o n s r a i s e d b y t h e L d .

D R w a s t h a t t h e L d . C I T ( A ) h a d e r r e d i n d e c i d i n g t h e

a p p e a l o n m e r i t s b y s u o m o t o c o n s i d e r i n g t h e e v i d e n c e s

15 ITA No.1230/Chd/2018 A.Y.2014-15

f i l e d b y t h e a s s e s s e e w i t h o u t c o n f r o n t i n g t h e s a m e t o

t h e A O . T h e L d . D R c o n t e n d e d t h a t a f t e r t h e A O h a d

o b j e c t e d t o t h e a d m i s s i o n o f t h e a d d i t i o n a l e v i d e n c e s ,

t h e L d . C I T ( A ) a f t e r o v e r r u l i n g t h e o b j e c t i o n s o f t h e A O

o u g h t t o h a v e f o r w a r d e d t h e e v i d e n c e s t o t h e A O f o r h i s

c o m m e n t s o n t h e s a m e . T h e L d . D R r e l i e d u p o n t h e

d e c i s i o n o f t h e H o n ' b l e D e l h i H i g h C o u r t i n t h e c a s e o f

C I T v s M a n i s h B u i l d w e l l ( P ) L t d . ( 2 0 1 1 ) 2 4 5 C T R

0 3 9 7 ( D e l ) . . I t w a s t h e r e f o r e p l e a d e d t h a t t h e i s s u e b e

r e s t o r e d b a c k t o t h e C I T ( A ) t o g r a n t o p p o r t u n i t y t o t h e

A O t o v e r i f y t h e e v i d e n c e s a n d g i v e h i s c o m m e n t s o n t h e

s a m e a n d t h e r e a f t e r a d j u d i c a t e t h e i s s u e .

1 5 . T h e L d . C o u n s e l c o n t r o v e r t e d b y s t a t i n g t h a t t h e

e v i d e n c e s w e r e n o t i n t h e n a t u r e o f a d d i t i o n a l e v i d e n c e s

b u t w e r e c l a r i f i c a t o r y e v i d e n c e s a n d t h e r e f o r e d i d n o t

r e q u i r e b e i n g c o n f r o n t e d t o t h e A O . L d . C o u n s e l p o i n t e d

o u t t h e f i n d i n g o f t h e L d . C I T ( A ) i n t h i s r e g a r d a n d

p l e a d e d t h a t t h e s a m e h a v i n g b e e n d u l y t a k e n n o t e o f b y

t h e L d . C I T ( A ) w a s s u f f i c i e n t c o m p l i a n c e w i t h t h e

r e q u i r e m e n t s o f R u e s / L a w .

1 6 . W e h a v e h e a r d t h e r i v a l c o n t e n t i o n s . T h e i s s u e t o

b e a d j u d i c a t e d i s w h e t h e r t h e e v i d e n c e s f i l e d b e f o r e t h e

L d . C I T ( A ) b y t h e a s s e s s e e w e r e t o b e c o n f r o n t e d t o t h e

A O a s p e r R u l e 4 6 A o f t h e I n c o m e T a x R u l e s , 1 9 6 1 a n d i f

s o w h e t h e r t h e o r d e r p a s s e d b y t h e L d . C I T ( A ) i n

c o n t r a v e n t i o n o f t h e R u l e s , w a s a g a i n s t l a w . T o

a p p r e c i a t e t h e i s s u e i t i s n e c e s s a r y t o f i r s t p o i n t o u t

t h e c o n t e x t i n w h i c h i t a r o s e , b e i n g i n r e l a t i o n t o

16 ITA No.1230/Chd/2018 A.Y.2014-15

c e r t a i n p a y m e n t s o f s a l a r y a n d w a g e s f o u n d b o g u s b y

t h e A O i n t h e a b s e n c e o f s i g n a t u r e s b e f o r e t h e i r n a m e s

i n t h e s a l a r y r e g i s t e r w h e r e p a y m e n t w a s r e c o r d e d . T h e

a s s e s s e e h a d f i l e d s a l a r y r e g i s t e r a n d t h e s a l a r y

v o u c h e r s b e f o r e t h e A O . T h e e v i d e n c e s s u b s e q u e n t l y

f i l e d i n a p p e l l a t e p r o c e e d i n g s b e f o r e t h e L d . C I T ( A ) w e r e

E S I / P F r e t u r n s a n d T D S r e t u r n s s h o w i n g s t a t u t o r y

d e d u c t i o n s m a d e f r o m t h e s e p a y m e n t s a n d s a l a r y

v o u c h e r s w i t h s i g n a t u r e s o f t h e s p e c i f i c e m p l o y e e s

w h o s e s a l a r y / w a g e s w e r e f o u n d b o g u s . T h e a s s e s s e e

h a s c l a i m e d t h e d o c u m e n t s f i l e d b e f o r e t h e A O t o b e

e v i d e n c e s o f p r o o f o f p a y m e n t o f t h e s p e c i f i c i n s t a n c e s

o f s a l a r y / w a g e s d i s a l l o w e d . T h i s h a s b e e n a c c e p t e d b y

t h e L d . C I T ( A ) , w h o a s a c o n s e q u e n c e h a s h e l d t h e

e v i d e n c e s s u b s e q u e n t l y f i l e d t o b e c l a r i f i c a t o r y i n

n a t u r e , i n c o n t i n u a t i o n o f t h e f a c t s s t a t e d b y t h e

a s s e s s e e i n a s s e s s m e n t p r o c e e d i n g s . T h e L d . C I T ( A )

t h e r e f o r e a d m i t t e d t h e s u b s e q u e n t l y f i l e d e v i d e n c e s ,

d e s p i t e o b j e c t i o n o f t h e A O t o a d m i s s i o n o f t h e s a m e a n d

a f t e r c o n s i d e r i n g t h e m s u o m o t o a l l o w e d t h e a s s e s s e s

c l a i m o f t h e e x p e n s e s b e i n g g e n u i n e .

C l e a r l y t h e L d . C I T ( A ) f o u n d t h e e v i d e n c e s t o b e

c l a r i f i c a t o r y o n l y a n d t h e r e f o r e d i d n o t c o n f r o n t t h e m t o

t h e A O . A s p e r t h e L d . C I T ( A ) t h e y w e r e n o t i n t h e n a t u r e

o f a d d i t i o n a l e v i d e n c e s , s i n c e e v i d e n c e h a d a l r e a d y b e e n

f i l e d d u r i n g a s s e s s m e n t p r o c e e d i n g s a n d t h e r e f o r e i t w a s

n o t c o n f r o n t e d t o t h e A O a s p e r t h e r e q u i r e m e n t s o f R u l e

4 6 A o f t h e R u l e s .

17 ITA No.1230/Chd/2018 A.Y.2014-15

W e a r e n o t i n a g r e e m e n t w i t h t h e L d . C I T ( A ) t h a t t h e

e v i d e n c e s f i l e d d u r i n g a p p e l l a t e p r o c e e d i n g s w e r e m e r e l y

c l a r i f i c a t o r y . U n d i s p u t e d l y t h e s a l a r y r e g i s t e r f i l e d

d u r i n g a s s e s s m e n t p r o c e e d i n g s , a n d c l a i m e d a n d h e l d t o

b e a p i e c e o f e v i d e n c e b y t h e L d . C I T ( A ) , w a s t h e o n e

f r o m w h i c h i t w a s n o t e d t h a t t h e r e w e r e n o s i g n a t u r e s

a g a i n s t s a l a r y / w a g e s p a i d t o c e r t a i n e m p l o y e e s .

T h e r e f o r e , w e h o l d , i t c a n n o t b e s a i d t o b e e v i d e n c e o f

p a y m e n t o f s a l a r y / w a g e s a t a l l . H a v i n g h e l d s o , t h e

e v i d e n c e s s u b s e q u e n t l y f i l e d w e r e t h e r e f o r e n o t

c l a r i f i c a t o r y e v i d e n c e s b u t w e r e i n f a c t a d d i t i o n a l

e v i d e n c e s f i l e d . A s p e r R u l e 4 6 A o f t h e R u l e s , t h e s e

e v i d e n c e s c o u l d b e t a k e n n o t e o f b y t h e C I T ( A ) o n l y a f t e r

g i v i n g t h e A O r e a s o n a b l e o p p o r t u n i t y t o e x a m i n e a n d o r

r e b u t t h e m . T h e H o n ’ b l e D e l h i H i g h C o u r t i n t h e c a s e o f

M a n i s h B u i l d w e l l ( s u p r a ) h a s c a t e g o r i c a l l y h e l d t h a t

a d d i t i o n a l e v i d e n c e s f i l e d b y a s s e s s e s a n d a d m i t t e d f o r

a d j u d i c a t i o n b y C I T ( A ) , a s p e r R u l e 4 6 A , h a v e n e c e s s a r i l y

t o b e c o n f r o n t e d t o t h e A O f o r t h e p u r p o s e s o f t a k i n g

a c c o u n t o f t h e s a m e .

I n v i e w o f t h e a b o v e , W e t h e r e f o r e c o n s i d e r i t f i t t o

r e s t o r e t h e i s s u e b a c k t o t h e C I T ( A ) , d i r e c t i n g h i m t o

c o n f r o n t t h e a d d i t i o n a l e v i d e n c e s t o t h e A O a n d

t h e r e a f t e r a d j u d i c a t e t h e i s s u e i n a c c o r d a n c e w i t h l a w

a f t e r o b t a i n i n g t h e c o m m e n t s o f t h e A O .

1 7 . G r o u n d N o . 4 , 5 & 6 r a i s e d b y t h e R e v e n u e a r e

a l l o w e d f o r s t a t i s t i c a l p u r p o s e s .

18 ITA No.1230/Chd/2018 A.Y.2014-15

1 8 . In the result, the appeal of the Revenue is partly allowed for statistical purposes.

Order pronounced in the Open Court. Sd/- Sd/- �दवा �संह अ�नपूणा� गु�ता (ANNAPURNA GUPTA) (DIVA SINGH ) �याय�क सद�य/Judicial Member लेखा सद�य/Accountant Member �दनांक /Dated: 25th July, 2019 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar