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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI S. RIFAUR RAHMAN
The aforesaid appeal has been filed by the assessee challenging the impugned order dated 22.5.2019, passed by the learned Commissioner (Appeals)–32, Mumbai, pertaining to the assessment year 2011–12.
Brief facts of the case are, assessee is engaged in business of manufacturing and trading of garments, filed its return of income for assessment year 2011–12 on 29.09.2011 declaring total income ’Nil’
2 Mascot International and claimed loss of ₹ 38,88,580/– for the current assessment year. The Assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short’ Act’). The only issue raised by the assessee is the disallowance of interest expenditure to the extent of ₹ 8,06,537/– under section 36(1)(iii) of the Act. The relevant fact relating to this disallowance are, assessing officer observed that assessee has taken unsecured loan of ₹ 8,29,19,586/– and claimed interest expenditure in profit and loss account to the extent of ₹ 94,11,600/–. He observed that assessee had paid advance of ₹ 34,45,521/– to M/s Prime International and shown investment in fictitious assets of ₹ 36,60,361/–. The AO treated the above said advances were made out of borrowed funds therefore these are not incurred for the purpose of business and accordingly disallowed the proportionate interest amounting to ₹ 8,06,537/– by treating the same as non–business expenditure.
2. Aggrieved with the above order assessee preferred an appeal before Ld CIT(A) and before him assessee filed a detailed submission that assessee has placed order for purchase of Ayurvedic cosmetic material for the purpose of export market. It was submitted that the investment is made in Aromatherapy International Ltd for purchase of cosmetic material and paid in advance to the extent of ₹ 36,60,361/–. Since the supplier could not supply the material and agreed to return
3 Mascot International the money, it was treated as investment. Assessee has submitted the Ledger accounts and also submitted details of the supplier i.e., PAN and GST details along with annual return filed before ROC. Further it was submitted that assessee has paid an advance of ₹ 34,45,521/– to M/s Prime International and it was submitted that they are doing labour job for the assessee and they involved in manufacturing of garments. In support of the above claim assessee has filed Ledger copy of the labour charges paid to them to the extent of ₹ 1,13,30,530/– paid during the year along with the confirmation received from them. It was submitted that advances were given against the labour job charges payable to them. It was submitted that the above advances paid by the assessee for the purpose of business only. After considering the submissions of the assessee Ld CIT(A) rejected the submissions made by the assessee by observing that the advance paid to Aromatherapy for purchase of ayurvedic cosmetic material for export market was not supported with proper evidence, he observed that the correspondence submitted by the assessee do not reflect adequately that advances were given for the business purpose. Accordingly he sustained the disallowance of interest relating to this transaction and further, with regard to advances paid to Prime International, he observed that the above said company is a related party as the partner of the assessee firm is director of the company.
4 Mascot International The advance account submitted by the assessee discloses that the debit balance of ₹ 65,66,747/– whereas the labour job Ledger account shows a credit balance of ₹ 31,32,226/– as on 31.3.2011 resulting in net debit balance of ₹ 34,34,521/–. The assessee had made separate payments for the labour job work to Prime International, as reflected in the Ledger account which is not out of advances made. According to Ld CIT(A), there appears to be no correlation between the amount given as advance and the payments made towards the labour charges. Accordingly, he sustained the disallowances of interest made by the AO.
Aggrieved with the above order assessee preferred an appeal before us raising following grounds of appeal:–
i) Whether Commissioner of Income Tax (Appeals) is correct in law and in fact in confirming disallowance of interest expenses of ` 8,06,537 u/s 36(1)(iii) of the I.T. Act, 1961. a) Where the advances are made to parties for business purpose on which assessee is not charging interest; and b) Where the assessee form has own partners interest free capital contribution more than interest free fund granted parties for business purpose.”
Before us, Ld AR brought to our notice the findings of Ld CIT(A) and submitted that all the advances made by the assessee only towards business purpose. He brought to our notice the purpose for which these advances were paid to the respective parties. He
5 Mascot International submitted that the revenue authorities wrongly treated these advances were incurred for the purpose other than business. On the other hand Ld DR relied on the findings of lower authorities and submitted that the transactions are with related parties and the balance sheet clearly indicates that the funds were diverted for the purpose other than business.
Considered the rival submissions and material on record. We notice that assessee has paid certain advances for purchase of Ayurvedic cosmetic material in earlier assessment years and since the party could not honour the commitment and agreed to return the advances. The assessee has submitted the relevant Ledger accounts and confirmation from them. In our view, there seems to be a business transaction carried on by the assessee but however it could not materialise. Moreover the transactions carried on by the assessee is not with related party. Therefore this transaction can be considered as genuine business transaction. However, the Assessing Officer has not disputed the fact that the assessee has paid advance to the said party. With regard to advances paid to Prime International, we notice that assessee is dealing with this party for the purpose of job work. It is not denied by the revenue authorities that the assessee has paid job work charges to the above party during this assessment year. Just because the parties related to one of the director, it does not mean
6 Mascot International that there is no commercial transaction carried on by the assessee with them. Since there is no dispute with the fact that assessee is having business with Prime International, the advances given to them can be treated as business advances. Therefore, in our considered view both the transactions carried on by the assessee can only be treated as business transactions. The assessing officer cannot disallow the proportionate interest on these advances. Therefore the ground raised by the assessee are allowed.