MADHAV COTTON GINNING & PRESSING FACTORY,,BOTAD vs. THE INCOME TAX OFFICER,WARD-2(3),, BHAVNAGAR

This is an appeal filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-XX, Ahmedabad in Appeal no. CIT(A)-XX/158/12-13 vide order dated 23/01/2014 passed for the assessment year 2010-11.

The assessee has taken the following grounds of appeal:-

The brief facts of the case are that during the course of assessment proceedings for the impugned assessment year 2010-11, the assessing officer noticed that on verification of the balance sheet for the immediately preceding financial year 2008-09, it is noticed that the closing balance under Page No. 3 Madhav Cotton Ginning & Pressing Factory vs. ITO the head “Loans and Advances” in the name of M/s Om Kailash Cotton is shown at � 3,07,88,727/-. However, the closing balance of Loans and Advances in the name of M/s Om Kailash Cotton has been transferred under the head Sundry Debtors in financial year 2009-10 i.e. the impugned assessment year. The assessing officer noticed that no trading activity was carried out with M/s Om Kailash Cotton and the entries in the ledger account clearly state that it is only on account of “loans and advances” as appearing in financial year 2008-09. Therefore, the closing balance for financial year 2008-09 of M/s Om Kailash Cotton under the head “Loans and Advances” should appear as opening balance for financial year 2009-10 under the head “Loans and Advances” and not “Sundry Debtors”. By transferring funds from the head “Loans and Advances” to “Sundry Debtors”, the assessee has changed the type of fund which in fact was not in financial year 2008-09 as such the transfer of funds is a clear motive and an afterthought attempt to evade tax. The AO further noticed that the assessee had taken interest- bearing loans on which interest to the tune of � 1,55,11,995/-was paid during the impugned assessment year 2010-11 . Against this, assessee had given loans and advances to M/s Om Kailash Cotton of � 5,84,19,065/- on which no interest was charged. In view of the above facts and circumstances, the AO disallowed interest expense amounting to � 36,84,544/- out of interest expenses claimed of � 1,55,11,995/- and added the same to the total income of the assessee.

In appeal before first appellate authority, the assessee contended that it had sufficient interest-free funds since it was a cash-rich company having huge cash balances and net profits before depreciation and hence it cannot Page No. 4 Madhav Cotton Ginning & Pressing Factory vs. ITO be presumed that interest-bearing loans were utilised for giving interest free advances. However, Ld. CIT(Appeals) rejected the assessee’s contention by holding that the assessee has claimed that the closing balance of the cash and net profits were available at the end of the year, however same was not relevant as loans and advances have been given during the year. It is not on record that cash balances were available with the assessee throughout the year and were utilised for advances to sister concern. The assessee has not submitted the supporting details that the advances were made out of interest- free funds available with the assessee and therefore the assessee submissions were only self-serving contention. However, Ld. CIT(Appeals) observed that during the impugned assessment year, the assessee was also having trading transactions with M/s Om Kailash Cotton, which were not considered by the AO while making the interest disallowance. During appellate proceedings, the assessee produced a separate ledger excluding the trading transactions and showing only the financial transactions and worked out the interest disallowance @ 12% amounting to �19,13,491/-. Accordingly, Ld. CIT(Appeals) held that no disallowance of interest on trading activities are called for and accordingly directed the AO to rework the interest disallowance after excluding therefrom the trading activities, after carrying out due verification. In the appeal effect order, the AO again reconfirmed the earlier disallowance of � 36,84,544/- by holding that the appeal effect proceedings before him, the assessee has changed and reduced the amount of opening balance receivable on the account of M/s Om Kailash Cotton as on 01.04.2009 from � 3,07,88,727/- to � 5,24,388/- for no justifiable reason, for the purpose of computing the interest disallowance on financial transactions amounting to Rs. 19,13,491/-. Further, the assessee has not Page No. 5 Madhav Cotton Ginning & Pressing Factory vs. ITO submitted the bifurcation of opening balance of � 3,07,80,727/- due from M/s Om Kailash Cotton between trading account and financial transactions account, as directed by Ld. CIT(Appeals). Also, the assessee also did not dispute the classification of the opening balance amount of � 3,07,80,727/- as “Loans and Advances”.

The assessee again approached the Ld. CIT(Appeals) against the appeal effect order passed by the AO, who vide order dated 02.07.2014 directed the AO to work out the interest disallowance at the rate of 8.36% per annum by excluding therefrom the amount pertaining to trading transactions. Regarding the opening balance of � 3,07,80,727/-, the Ld. CIT(Appeals) held that even in appeal effect proceedings, no bifurcation has been furnished regarding the apportionment between financial transactions and trading transactions with M/s Om Kailash Cotton. Rather, the assessee for the purpose of computation of interest disallowance of � 19,13,491/- offered for taxation, has incorrectly taken the opening balance as � 5,24,388/- instead of � 3,07,80,727/-and therefore the computation presented by the assessee cannot be relied upon. Accordingly, Ld. CIT(Appeals) again directed the AO to work out the interest disallowance on the opening balance of � 3,07,80,727/- taking into consideration only the financial transactions, and in the event the assessee is again unable to give any further bifurcations of the opening balance of � 3,07,80,727/-then the entire opening balance may be presumed to be relating to financial transactions only.

The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) in the second round of appellate proceedings. We note that the ITAT in in the assessee’s own case for the immediately preceding assessment year 2009-10, has dismissed the assessee’s appeal with the following observations (though the assessee has informed us that the miscellaneous application has been filed and case has been recalled, and therefore the same are being reproduced only for reference purposes for better understanding of history of on-going litigation):

Before us, the counsel for the assessee has reiterated the arguments taken in appellate proceedings before Ld. CIT(Appeals). He has submitted that it is a composite account consisting of both financial and trading transactions with M/s Om Kailash Cotton. He further reiterated that since the assessee was having sufficient interest-free funds, it cannot be presumed that interest-bearing funds for use for purpose of granting interest free advances to M/s Om Kailash Cotton. He further drew attention to pages 11 to 16 of the paper book and contended that the same relates to interest disallowance computed at 12% in respect of financial transactions with M/s Om Kailash Cotton. In response, the Ld. DR relied upon the observations made by Ld. CIT(Appeals) in the appellate order.

We have heard the rival contentions and perused the material on record. We note that that the assessee, at any stage the proceedings, has been Page No. 8 Madhav Cotton Ginning & Pressing Factory vs. ITO unable to produce bifurcation between financial and trading transactions with M/s Om Kailash Cotton, despite having been given several opportunities to produce the same. Neither has the assessee given bifurcation of opening balance of Rs. 3,07,80,727/- between trading transactions and financial transactions, nor has the assessee furnished such bifurcation in respect of amounts advanced to M/s. Om Kailash Cotton during the year under consideration. The assessee has not been able to produce any justifiable reason why the closing balance in “loans and advances account” of financial year 2008-09 of � 3,07,80,727/-was converted opening balance of the “sundry debtors” account for the impugned assessment year. As correctly noted by the Ld. CIT(Appeals) in the appellate proceedings, the assessee has not been able to demonstrate that interest-free funds were available with the assessee during the year under consideration out of which interest-free advances had been given to M/s Om Kailash Cotton. Also, we note that Ld. CIT(Appeals) also observed specifically that the interest disallowance of � 19,13,491/- on account of financial transactions with M/s Om Kailash Cotton offered for taxation by the assessee (at pages 11 to 16 of the paper book) is also not reliable for the reason that it has taken the opening balance of � 5,24,388/- instead of � 3,07,80,727/- for which no justification has been given. The argument of the assessee that the opening balance of � 3,07,80,727/-should not be considered for disallowance of interest is also not acceptable since firstly, the assessee has been unable to demonstrate that a part of this relates to trading transactions with M/s Om Kailash Cotton despite being given several opportunities and secondly, since assessee has been unable to demonstrate with any supporting evidence that interest-free funds were utilised for giving advances to M/s Om Kailash Page No. 9 Madhav Cotton Ginning & Pressing Factory vs. ITO Cotton, and since the assessee has claimed deduction of interest on the aforementioned interest bearing funds made available to M/s Om Kailash Cotton during the impugned assessment year, interest on the same is liable to disallowed. In the result, we are of the view, that in the instant set of facts, the assessee’s appeal is liable to be dismissed.

In the result, the appeal of the assessee is dismissed.