M/S. LIBERTY MARKETERS,ERNAKULAM vs. THE ACIT, COCHIN

Per Bench:

These appeals filed by the assessee are directed against different orders of the

CIT(A)-II, Kochi and pertain to assessment years 2009-10, 2010-11 and 2011-12.

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 2. Since the issue involved in these appeals is common, hence they were heard

together and are being disposed of by this consolidated order for the sake of

convenience.

the interest paid on secured loans from banks as proportionate interest

pertaining to personal drawings made by the partners.

emanating from the appeal for the assessment year 2009-10. The Assessing

Officer while making the assessment had gone into the details of drawings made

by various partners from the firm and the secured loan taken by the assessee by

bringing out the working of interest on debit balance and drawings in respect of

three partners. Interest chargeable on their withdrawals was worked out by the

Assessing Officer as:-

i) Shri Fisel : Rs. 4,08,649/- ii) Shri Siyaj : Rs. 3,96,558/- iii) Shri Zulfikar : Rs.18,24,738/- Total amount of interest chargeable : Rs.26,29,945/-

4.1 This total interest of Rs.26,29,945/- was disallowed u/s. 36(1)(iii) by the

Assessing Officer relying on the decision of Madras High Court in the case of

Milapchand R. Shah vs. CIT (58 ITR 525) and Roopchand Chanbildass & Sons vs.

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 CIT (63 ITR 166) and that of Allahabad High Court in the case of Marolia & Sons

vs. CIT (129 ITR 475). Similar disallowance was made for the assessment year

2010-11 at Rs.24,37.980/- and for 2011-12 at Rs.27,93,606/-.

by the assessee, the same are to be disallowed u/s 36(1)(iii). Since in this case

the three partners have made these drawings from the partnership firm and

these drawings have not been used for any business purposes, therefore

according to the CIT(A), the provisions of section 36(1)(iii) are squarely

applicable. The CIT(A) observed that the assessee tried to contend that while

making these advances to the partners the assessee had enough credit in its

books so as to allow interest free credit to its partners but since it was noticed

from the detailed working made out by the assessing officer about the debit

balance and drawings in respect of three partners that various amounts as

brought out in the tables in the assessment order have been given to the

partners, the assessee was asked to show that such payments were made from

the surplus funds available with the assessee as contended in the submissions

made.

5.1 In this connection, the CIT(A) observed that the assessee furnished a copy

of its bank statement to show that the various payments were made from the

credit balance received from sales etc., which were received just before making

these advances to the partners. However, the CIT(A) did not justify the

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 explanation of the assessee as it was seen that the bank statement of assessee

is a continuous over draft facility where balance on any particular day in the

whole year in the bank statement was more than a 2 crores debit figure. Thus

according to the CIT(A), even if a payment is received from the business

transactions/sales, the same goes into the bank account and it only has the

effect of reducing the over draft balance in the bank. Thus the CIT(A) observed

that it was clear that if the bank balance of the assessee was a continuous debit

balance then the assessee was making regular payment of interest on such debit

balance to the bank and hence any payments made out of this bank statement

has the character of interest being funds which was diverted to the partners of

the assessee for non business purposes. According to the CIT(A), all the

payments that was made to the partners were seen and they had gone from this

bank account showing continuous debit balance. For the sake of record and

clarity, the CIT(A) observed that for one entry made on 1.11.2008 to Shri Fisel of

Rs.7,00,000/-, various entries in the bank on that day are as follows:

Date Reference Cheque No. Debit Credit Balance 1 Nov2008 Outward clg 23943865 - 1,46,713.00 -2,66,55,446.20 1 Nov2008 Outward clg 23943890 - 64,454.00 -2,65,90,992.20 1 Nov 2008 Outward clg 23943920 - 20,668.00 -2,65,70,324.20 1 Nov 2008 Outward clg 23943958 - 10,00,000.00 -2,55,70,324.20 1 Nov 2008 Outward clg 23946744 - 15,000.00 -2,55,55,324.20 1 Nov 2008 Outward clg 23944301 - 19,386.00 -2,55,35,938.20 1 Nov 2008 FISEL 1303 7,00,000.00 -2,62,35,938.20

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016

5.2 The CIT(A) observed that although assessee tried to explain that payment

of Rs. 7,00,000/- was made from Rs. 10,00,000/- credit coming on the same

day, but the fact remains that the credit of Rs. 10,00,000/- only had the effect of

reducing overdraft facility of more than 2 crores, and hence for the payment of

Rs.7,00,000/- to Shri Fisel, interest bearing funds was utilized. The CIT(A) found

that it was exactly the same pattern that was repeated for all the payments to

these partners. Thus according to the CIT(A) it was established that the

payments to the partners have been made for non-business purposes from

interest bearing funds. Hence, according to the CIT(A), the assessing officer

was right in working out the interest on debit balances and total drawings in

respect of these partners and making the disallowance u/s. (1)(iii) of the IT Act

and confirmed the same.

5.3 Further, the CIT(A) noticed that in the additional ground of appeal, the

assessee contended that even if any disallowance u/s 36(1)(iii) was made, this

could only be made for the increase in advances during the year and not on the

debit balance, in this regard, the assessee relied on the case law of CIT Vs Sridev

Enterprisies, 192 ITR l15(Kar). However, according to the CIT(A), it was seen

that in that case such observation that disallowance could not be made for

interest on debit balance was made in the light of the fact that there was no

nexus that was shown that such payments were made from interest bearing

funds in the earlier years. In the present case, the CIT(A) noticed that since the

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 payments to the partners were made from interest bearing funds, and such

nexus was also evident from the bank statement filed, therefore the CIT(A)

dismissed all the grounds of appeal filed by the assessee.

ratio of the judgments relied on by the Assessing Officer would not apply in the

facts of the case as in those matters there were maximum funds both interest

and non interest bearings. The Ld. AR objected to the finding of the Assessing

Officer that as per the balance sheet, the assessee had substantial interest free

funds being credit balance in respect of two partners, supply credit of

Rs.6,46,40,000/- in the sundry creditors accounts and the profitability of the

current year. It was submitted that the statement that interest free funds

exceeded interest bearing funds in the relevant year was not controverted by the

authorities below.

6.1 The Ld. AR relied on the judgments of the Supreme Court to contravene

the disallowance:

1) S.A. Builders vs. CIT (288 ITR 1) (SC) 2) CIT vs. Hotel Savera (239 ITR 795) (Mad.) 3) Chanchal Katyal vs. CIT (298 ITR 182) (All) 4) CIT vs. Prem heavy Engineering Works (P) Ltd. (285 ITR 554) (All) 5) ONGC vs. DCIT (262 ITR 648) (Uttaranchal) 6) CIT vs. Raghuvir Sythetics Ltd. (36 Taxman.com 275) (Guj) 7) CIT vs. Reliance Utilities & Power Ltd. (178 Taxman 135) (Bom)

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 Therefore, by applying the ratios of the above mentioned judgments, it was

submitted that since the assessee had common funds both interest bearing and

non interest bearing and the same was found in one account, the withdrawals

made for non business purpose were out of non interest bearing own funds.

6.2 Further the Ld. AR by way of additional grounds submitted that on similar

facts, no disallowance was made in respect of this issue in earlier assessment

years upto 2008-09. The ld. AR submitted that since no disallowance was made

in respect of the debit balances of the partners in the earlier assessment years as

it was utilizing the borrowed money, otherwise than for business purpose, the

opening debit balance of the partners could not be considered during the current

year and disallowance was to be limited to the increase in the partners debit

balance of the current year only. The Ld. AR placed reliance on the judgment of

the Karnataka High Court in the case of CIT vs. Sridev Enterprises (192 ITR

165).

bearing funds for non-business purpose by way of allowing withdrawals by the

partners of the assessee-firm. Hence, interest expenditure is not wholly and

exclusively laid out for the purpose of business. Accordingly, he supported the

disallowance made by the Assessing Officer u/s. 36(1)(iii) of the Act and

confirmation of the same by the CIT(A). He relied on the following judgments:

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 i) Madhav Prasad Jatia vs. CIT (118 ITR 200 (SC) ii) CIT vs. V.I. Baby (254 ITR 248 (Ker.) iii) Somasundaram & Brothers vs. CIT (239 ITR 795) (Mds.)

7.1 The Ld. DR distinguished the judgments relied upon by the assessee. The

Ld. DR submitted that the facts in the case of CIT vs. Hotel Savera (supra) are

that the advance was made with assessee-firm’s own funds and interest paid on

borrowed capital was deductible. Similarly, according to the Ld. DR, the facts in

the case of Chanchal Katyal vs. CIT (supra) is different since the assessee in that

case had sufficient funds other than borrowed money. The facts in the case of

CIT vs. Prem Heavy Engineering Works (P) Ltd. (supra), according to the Ld. DR

are different as in that case, the assessee had sufficient interest free funds.

Similarly, it was submitted that the facts in the case of ONGC vs. CIT are

different since the issue in that case was reopening of the assessment u/s. 147

of the Act.

this case, the partners of the assessee-firm had withdrawn amount from the

assessee-firm only for personal purpose. The assessee has been paying interest

on borrowed funds. The withdrawals made by the partners was not utilized for

the purpose of business and the assessee-firm has not derived any business

advantage from such withdrawals by the partners. The assessee-firm has not

charged any interest on the withdrawals made by the partners by way of paying

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 interest on its borrowings. However, at the same time, the assessee has

incurred interest expenditure on the borrowals made by the partners of the

assessee-firm.

8.1 The main contention of the Ld. AR is that the assessee is having sufficient

cash balance to meet the withdrawals made by the partners. In our opinion, if

the cash balance is available, it should be meant for the business purpose of the

assessee-firm and not for the personal purpose of the partners of the assessee-

firm. The assessee with liquidity cannot claim that it could give such cash

balance for the benefit of the partners of the assessee-firm. Such advance made

by the partners has not been used for the business purpose but for the personal

benefit of the respective partners. Had the assessee-firm used such cash

balance for the business purpose or for payment of borrowals made by the

partners of the assessee-firm, it could have saved interest expenditure.

8.2 Further, the Ld. AR made an argument that only the withdrawals of the

present assessment years is to be considered for computation of interest

expenditure and the earlier old balance of advance in the name of the partners

which was carried forward from the earlier years cannot be considered. In our

opinion, this argument of the assessee’s Counsel has no merit as the assessee is

paying interest on such carried forward opening balance and incurred interest

expenditure on it. Therefore, the total advance outstanding in the name of the

I.T.A. Nos. 409/C/2014 & 85&86/Coch/2016 partners is to be considered for computation of interest disallowance in the case

of the assessee-firm. Accordingly, we do not find any infirmity in the orders of

the lower authorities. This common ground for all the assessment years is

dismissed.

Order pronounced in the open Court on this 03, April, 2018.

sd/- sd/- ( GEORGE GEORGE K.) (CHANDRA POOJARI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Place: Dated: 03 April, 2018 GJ Copy to: 1. M/s. Liberty Marketers, 44/356,Liberty Towers, Manapatti Parambu Road, Kaloor, Ernakulam, Kochi-682 017. 2. The Assistant Commissioner of Income Tax, Circle-2(2), Kochi. 3. The Commissioner of Income-tax(Appeals)-II, Kochi 4. The Pr. Commissioner of Income-tax, Kochi 5. D.R., I.T.A.T., Cochin Bench, Cochin. 6. Guard File. By Order

(ASSISTANT REGISTRAR) I.T.A.T., Cochin