ACIT, CIR-50, KOLKATA, KOLKATA vs. SHRI DULAL KANTI CHOWDHURY, KOLKATA

Assessee by :Shri N. M. Bhansali, Advocate Revenue by :Shri Saurabh Kumar, Addl. CIT(Sr. DR) सुनवाईक�तार�ख/ Date of Hearing : 06/02/2018 घोषणाक�तार�ख/Date of Pronouncement : 20/04/2018 आदेश / O R D E R Per Dr. Arjun Lal Saini, AM:

The captioned cross-appeals filed by the Assessee and Revenue, pertaining to Assessment Year 2010-11, is directed against an order passed by the Commissioner of Income Tax(Appeals)-10, Kolkata, in Appeal No.649/CIT(A)-10/Cir-50/13-14/Kol, dated 10.11.2015, which arises out of an assessment order passed by the assessing officer u/s 143(3) of the Dulal Kanti Choudhury & Assessment Year: 2010-11 Income Tax Act, 1961 (hereinafter referred to as the ‘Act’), dated 20.03.2013.

“1. a) THAT on the facts and in the circumstances of the case the ld. CIT(Appeals) was not justified in confirming the disallowance u/s 40A(3) to the extent of Rs.9,47,220/-. He failed to appreciate that all the payments to Truck drivers were under prescribed limit and the provisions of sec.40A(3) were not applicable. b) THAT the ld. CIT(Appeals) was wrong in observing that the assessee has not been able to provide the necessary proof of having paid the said amount of Rs.9,47,220/- to the Agents. The upholding of the disallowance on the basis of such observation is wrong, unjustified and misconceived.

2. THAT the appellant craves leave to alter, amend, modify any of the grounds and/or take additional grounds before or at the time of hearing of this appeal.”

“1. On the facts and circumstances of the case and in law, the CIT(A) erred indeleting the addition of Rs.33,00,009/- u/s 40A(3) by relying on an agreement with a clearing & forwarding agent, Sri Dipu Banerjee, eventhough this agreement was not produced during assessment proceedingsand the AO objected to this agreement in the remand report submittingthat mere submission of copy of agreement and the submission of partialpayment vouchers on account of 'Handling charges' does not substantiatethe status of Sri Dipu Banerjee as agent of the assessee for the exception envisaged under Rule 6DD(k).

2. The CIT(A) erred in law, in admitting the agreement with Sri Dipu Banerjeewithout assessing the evidentiary value of the agreement with Sri DipuBanerjee as per Rule 46A ignoring that this agreement was produced asadditional evidence during Appeal.

3. Without Prejudice to above, the CIT(A) has also erred in deleting theaddition of Rs. 33,00,009/- considering Sri Dipu Banerjee as an agent underRule 6DD(k) ignoring the fact that as per agreement with him, he was a clearing and forwarding agent and hence, the agreement being contractualagreement , payment to him was covered u/s.194C and therefore, becauseof making payment to him in Page | 2 Dulal Kanti Choudhury & Assessment Year: 2010-11 violation of section 40A(3), as well asSec.194C due to not deducting tax on payment to him, the payment of Rs. 33,00,009/- to him is disallowable u/s 40A(3) as well as 40(a)(ia).

4. On facts and circumstances of the case and in law, the CIT(A) erred indeleting the entire amount of disallowance of interest on borrowed fund dueto giving of interest free advance to related concerns by applying the test ofsource of funds and not the purpose for which advance was given.

5.Ground Nos.1(a) & 1(b) of assessee’s appeal in and Ground Nos.1, 2 & 3 raised by the Revenue’s appeal in Assessing Officer u/s 40A(3) at ₹42,47,229/- and on appeal, the ld. CIT(A) deleted the addition of ₹33,00,009/- and confirmed the addition of ₹ 9,47,220/-,( ₹42,47,229 -₹33,00,009), u/s 40A(3) of the Act, considering Sri Dipu Banerjee as an agent under Rule 6DD(k).

5.1The brief facts apropos this issue are that during the assessment proceedings, the Assessing Officer found that the assessee paid freight charges of ₹42,47,229/- in the violation of the provisions of section 40A(3) of the Act. The Assessing Officer, on verification of ledger account filed by the assessee, detected that the freight charges were paid by the assessee exceeding ₹20,000/-, and ₹35,000/- (from 01.10.2009) which were paid in cash by the assessee and thus violated the provisions of section 40A(3) of the Act.The Assessing Officer in his assessment order tabulated the date, voucher number, and the amount paid in cash,(vide AO order page 4 and 5) wherein he has demonstrated that since the assessee has violated the provisions of section 40A(3) of the Act, as the amount paid in cash is exceeding ₹20,000/-, and ₹35,000/- (from 01.10.2009 threshold limit was increased), therefore, he made addition of ₹42,47,229/-. Page | 3

Dulal Kanti Choudhury & Assessment Year: 2010-11 5.2 Aggrieved by the addition made by the Assessing Officer, the assessee filed an appeal before the ld. CIT(A) who has deleted ₹33,00,009/- out of ₹42,47,229/- and confirmed the addition of ₹9,47,220/-. Before the ld. CIT(A), the assessee submitted that Assessing Officer made the disallowance on the basis of the amount appearing in the ledger account of freight under one voucher, but he failed to look into the details of the voucher where it was clearly mentioned that the payments were made to the agent of the assessee, for making payment to various lorry drivers at the Bangladesh border which was below ₹20,000/- and ₹35,000/- and within the limit prescribed u/s 40A(3). The assessee also furnished before the ld. CIT(A), the copies of the vouchers along with statement of agent. The assessee, based on the vouchers and data submitted before the ld. CIT(A) contended that payments were within the limit prescribed u/s 40A(3) and the amount mentioned in the voucher was paid to agent of the assessee which falls in the exception under Rule 6DD(k) of the Act and, therefore, no disallowance u/s 40A(3) of the act is called for. During the appellate proceedings, the ld. CIT(A) also called a remand report from the Assessing Officer on this issue. In the remand report, the Assessing Officer stated that payments were made for different truck drivers at the Bangladesh border by Sri Dipu Banerjee and others which are under prescribed limit. The assessee claimed that the said person, Sri Dipu Banerjee was an agent of the assessee, through whom the payments were made to various truck drivers in the Bangladesh border. In support of his claim, the assessee has filed a copy of agreement of Sri Dipu Banerjee. In the remand report, the Assessing Officer stated that out of ₹42,47,229/- only a sum of ₹33,00,009/- has been paid to Sri Dipu Banerjee, who in turn paid the amount to truck drivers. The assessee in the remand hearing submitted that the payment made to Sri Dipu Banerjee and others in exchange of their service as agent was accounted as ‘handling charges’ paid to Sri Dipu Banerjee. The assessee could not furnish the entire payment vouchers in support of his payment as handling charges to these agents. Therefore, in remand

Dulal Kanti Choudhury & Assessment Year: 2010-11 proceedings, the Assessing Officer noted that mere submission of copy of agreement and submission of partial payment vouchers on account of 'Handling charges' does not substantiate the status of Shri Dipu Banerjee as an agent of the assessee for the exception envisaged under Rule 6DD(K) of the I.T. Rules. Moreover, the balance amount of Rs.9,47,220/- were paid to others with whom there were no agreement and, therefore, the said other persons also cannot be treated as Agent in terms of Rule-6DD(k) of I.T. Rules. About the payments of Rs. 9,47,220/- the assessee has submitted before the ld. CIT(A) that the other persons were doing job in absence of Sri Dipu Banerjee and on his instruction and therefore no separate agreement was made with them. However,they have done the same job as Dipu Banerjee and hence they should also be treated as Agent in terms of Rule- 6DD(k) of the I.T. Rules. The assessee submitted that all the vouchers for handling charges to Agents wereproduced before the A.O. All the payments are supported withvouchers and were below prescribed limit and paid to Agents. Therefore the addition of Rs.9,47,220/- should not be made.

5.3 The ld. CIT(A), after considering the remand report and submissions of the assessee, observed that the payments in question which had been tabulated were made by the assessee to different truck drivers near the Bangladesh Border.These truck drivers having been engaged to transport certain product, onions in this case on behalf of the assessee. The ld. CIT(A) observed that these payments have been verified by the Assessing Officer and a substantial portion of the amount of Rs.33,00,009/- have been verified to having been paid to one Shri Dipu Banerjee, claimed to be the agent of the assessee. The ld. CIT(A) further observed that in the remand report, the balance amount of Rs.9,47,220/- was paid to persons other than Shri Dipu Banerjee and there was no copy of agreement available with these other persons, therefore, the ld. CIT(A) restricted the addition to Rs.9,47,220/- u/s 40A(3).

Dulal Kanti Choudhury & Assessment Year: 2010-11 5.4 Not being satisfied with the order of ld. CIT(A), the assessee is in appeal before us.The ld. Counsel for the assessee submitted before us that payment made to other persons at Rs.9,47,220/- was also below the prescribed limit u/s 40A(3) of the Act, therefore, no disallowance should be made. The counsel has pointed out that the ld. CIT(A) has failed to observe that the payment to other persons at Rs.9,47,220/- were below the prescribed limit u/s 40A(3) of the Act, therefore, there was no necessary to make an agreement with the other persons. The amount paid to other persons at Rs.9,47,220/-, therefore, does not attract the provisions of section 40A(3) of the Act, as the amount was paid below the prescribed limit to other persons. Therefore, the addition restricted by ld. CIT(A) should be deleted.

5.5 On the other hand, the Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity.

5.6 We have given a careful consideration to the rival submissions and perused the materials available on record, we note that out of ₹42,47,229/-, the ld. CIT(A) deleted the addition at ₹33,00,009/- holding that the payments were made to one Sri Dipu Banerjee who was the agent of the assessee and claim has allowed under Rule 6DD(k) of I.T. Rules. We note that balance amount which was paid to other persons by the assessee to do the same job and the said amount was paid by the assessee below the prescribed limit u/s 40A(3) of the Act. The ld. CIT(A) did not examine that the amount paid to others at Rs.9,47,220/-, was below the prescribed limit u/s 40A(3) of the Act. Therefore, we note that the ld. CIT(A) neither examined the aspect that the payments were below the prescribed limit and nor he verified the vouchers in respect of the payments made to others at Rs. 9,47,220/-. The assessee had submitted during the assessment proceedings that the payments made to others are below the prescribed limit but the same has not been examined by the ld. CIT(A). Therefore, we

Dulal Kanti Choudhury & Assessment Year: 2010-11 are of the view that the assessee has discharged its onus by submitting that the payments at Rs. 9,47,220/- made to other persons was below the prescribed limit mentioned in section 40A(3) of the Act and the ld. DR for the Revenue could not bring any evidence on the report to show that the said amount was paid by the assessee in violation of section 40A(3) of the Act. Therefore, based on the factual position explained above, we delete the addition of Rs.9,47,220/-.

5.7 In the result, the appeal filed by the assessee [in Ground Nos.1(a) & 1(b)] are allowed and whereas appeals filed by the Revenue [in Ground Nos.1,2 & 3] are dismissed.

6.Ground Nos.4, 5 & 6 raised by the Revenue (in Appeal No.188/Kol/2016) relates to disallowance of interest on borrowed fund, as the assessee provided interest free advance to related business entities/concern at Rs.11,41,000/-.

6.1The brief facts qua the issue are that during the course of assessment proceedings, on verification of the balance sheet as on 31.03.2010, the Assessing Officer observed that assessee has given loans and advances to the following parties:

(i) M/s. S.S. Tyre World Rs.13,80,243/- (ii) M/s. Sunny International Rs.5,98,243/- Rs.19,78,243/- The Assessing Officer observed that assessee has given the loans and advances to these parties without charging any interest from them. The Assessing Officer also noted that assessee took loan from bank for his business purposes and the details of the said loans are given below:

Loan Period Amount PCL 31.03.2010 Rs.77,70,037/- Term Loan 31.03.2010 Rs.27,88,713/- Other 31.03.2010 Rs.64,348/- Page | 7

Dulal Kanti Choudhury & Assessment Year: 2010-11 The Assessing Officer noted that an amount of Rs.22,05,408/- was shown by the assessee in his Profit & Loss A/c as bank interest. During the assessment proceedings, the assessee submitted that he had given the loans and advances to his two sons, namely, (i) Sri Saikat Chowdhury and (ii) Sri Saibal Chowdhury. The Both sons are connected with Business. Shri Saikat Chowdhury is running a proprietorship business under the name and style M/s. S.S. Tyre World and both sons are the partners of M/sSunny International, a Partnership Business. The assessee submitted before the Assessing Officer that mother of Sri Saibal Chowdhury and Sri Saikat Chowdhury had expired and because of the sad demise both the sons needed additional capital to survive. Therefore, in these circumstances, the assessee had given interest free advance to help them. After considering the submissions of the assessee, the Assessing Officer noted that assessee has claimed bank interest of Rs.22,05,408/- and no interest had been charged on the loans and advances given to their sons. Therefore, the Assessing Officer noted that the interest bearing secured loan has been diverted from advancing interest free loan, therefore, the interest payment claimed of Rs.22,05,408/- was not full allowable. Hence, interest should be charged @ 11% p.a. i.e. on Rs.19,78,243/- given by the assessee to their sons and worked out the interest to the tune of Rs.2,17,606/-. This way, the Assessing Officer made the disallowance of interest at Rs.2,17,606/- for diversion of interest bearing loan taken from bank to advance interest free loan.

6.2 Aggrieved by the order of the Assessing Officer, the assessee filed an appeal before the CIT(A) who has deleted the addition made by the Assessing Officer. Before the ld. CIT(A), the assessee submitted that out of total advances of Rs.19,78,243/-, a sum of Rs.8,37,243/- is brought forward balance from earlier years and, therefore, addition during the year is Rs.11,41,000/- (Rs.19,78,243 – Rs.8,37,243/-) only. The assessee also Page | 8

Dulal Kanti Choudhury & Assessment Year: 2010-11 submitted that he has sufficient balance in his capital account, that is, own funds were sufficient to give the interest free advances, therefore, no addition should be made on account of interest free advances. The assessee has its own funds at Rs.1,23,06,344/- and interest free advances given were to the tune of Rs.11,41,000/- only. Therefore, interest free advances has been given out of own capital and assessee has not utilized the secured loan from bank to provide these interest free advances. The assessee submitted that if own funds available with the assessee then presumption would be that investment would be out of interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. Therefore, the interest free advances were given out of its own funds available with the assessee and, hence, addition on that account should be deleted. Moreover, the advances were given to related concerns for business expediency and the assessee has sufficient capital balance of Rs.1,23,06,344/-. Therefore, Ld CIT(A), considering these facts deleted the addition of Rs. 2,17,606/- 6.3 Not being satisfied with the order of ld CIT(A), the Revenue is in appeal before us. The Ld. DR for the Revenue has primarily reiterated the stand taken by the Assessing Officer, which we have already noted in our earlier para and is not being repeated for the sake of brevity. On the other hand, ld Counsel for the assessee has defended the order passed by the ld CIT(A).

6.4 We have given a careful consideration to the rival submissions and perused the materials available on record, we note that the assessee has its own capital as on 31.03.2010 to the tune of Rs.1,23,06,344/-, the details of own funds and application of funds are given below for ready reference: Application of funds Capital account 1,23,06,344/- Fixed assets 6,13,752/- Secured loan Deposit 5,000/- From bank 1,06,23,098/- Advances to 19,78,243/- relatives Current liabilities 52,74,878/- Sundry debtors 2,55,55,468/- Cash & bank 51,857/- balances 2,82,04,320/- 2,82,04,320/- Page | 9

Dulal Kanti Choudhury & Assessment Year: 2010-11 From the above details, we note that total advances given were to the tune of Rs.19,78,243/- and out of these total advances, a sum of Rs.8,37,243/- is brought forwards as opening balance from earlier years. Therefore, net addition, if any, during the year may be made at Rs.11,41,000/- (Rs.19,78,243 – Rs.8,37,243/-) only. It is evidently clear from the above cited statement of own funds and application of funds that assessee has its own capital to the tune of Rs.1,23,06,344/-. Therefore, presumption would be made that the advances of Rs.11,41,000/- would be given by the assessee out of its own capital of Rs.1,23,06,344/-. Therefore, it appears from the facts narrated above that there should not be any disallowance on account of interest free loans. We note that interest bearing loan from bank were not utilized for providing interest free advances. In the assessee’s case under consideration, the assessee has its own funds at Rs.1,23,06,344/- and advances and interest free loans given by the assessee only at Rs.11,41,000/-, which is much lesser than the own funds, therefore, it would be deemed that these advances are given out of own capital of the assessee and, therefore, the disallowances on account of interest free advances should not be made. For that we rely on the judgment of Hon’ble Bombay High Court in the case of Reliance Utilities 313 ITR 340(2009) wherein it was held that if there were funds available, both interest-free and overdraft and/or loans taken, then a presumption would be that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In the assessee’s case under consideration, presumption was established considering the fact that assessee has its own capital at Rs.1,23,06,344/- whereas the interest free advances were given to the tune of Rs.11,41,000/-. Therefore, it would be presumed that these interest free advances have been given out of its own capital and hence, no disallowance should be made. That being so, we decline to interfere in the Dulal Kanti Choudhury & Assessment Year: 2010-11 order passed by the ld. CIT(A). The order of the ld. CIT(A) deleting the aforesaid addition is hereby upheld.

6.5 In the result, the appeals filed by the Revenue (in Ground Nos.4, 5 & 6) are dismissed.

Order is pronounced in the open court on 20.04.2018.