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Income Tax Appellate Tribunal, ‘B’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI D.S. SUNDER SINGH
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
All the three appeals of the assessee are directed against the respective orders of the Commissioner of Income Tax (Appeals), Tiruchirapalli and pertain to assessment years 2001-02, 2002-03 and 2003-04. Since common issue arises for consideration in all these appeals, we heard these appeals together and disposing of the same by this common order.
Shri N. Quadir Hoseyn, the Ld.counsel for the assessee, submitted that for the assessment year 2002-03, the Assessing Officer made an addition of `9,12,351/- in the original assessment.
The assessee filed appeal before the CIT(Appeals). While considering the appeal of the assessee, the CIT(Appeals) confirmed the addition of `1,45,000/- being the interest receivable on the deposit of `8,10,000/-. The CIT(Appeals) has also confirmed the disallowance of `4,60,296/- being the interest paid to Shri P.
Kandasamy, the partner of the assessee-firm.
Referring to the disallowance of `1,45,000/-, the Ld.counsel for the submitted that the assessee-partnership firm is engaged in the business of yarn. In the course of its business, the assessee entered into an agreement in the year 1994 with M/s Asscard Spinners. In fact, M/s Asscard Spinners appointed assessee- partnership firm as dealer and also Depot Manager. To Act as Depot Manager, the assessee deposited a sum of `8,10,000/-. M/s Asscard Spinners has also paid interest on the deposit made by the assessee. According to the Ld. counsel, in the assessment year 1995-96, in fact, the assessee received interest of `1,10,445/-, In the assessment year 1996-97, the assessee received `1,48,230/-.
As on 31,03.1999, the depot deposit of `8,10,000/- and also the trade outstanding of `9,13,649.98 were due to the assessee from M/s Asscard Spinners. For the assessment year 2002-03, according to the Ld. counsel, the Assessing Officer made addition towards interest on accrued basis on the deposit made by the assessee and also trade outstanding. Even though the assessee recognized interest as income, according to the Ld. counsel, during the assessment years under consideration, no income was accrued to the assessee.
Referring to the paper-book, more particularly, the order of the CIT(Appeals) dated 24.03.2006, copy of which is available at page 9 of the paper-book, the Ld.counsel for the assessee submitted that M/s Asscard Spinners, an associated company of the assessee, suffered heavy financial loss and an application was also filed by one of the creditors for liquidation before the High Court.
Initially, the liquidation petition filed by the creditor was allowed by the High Court. Subsequently, the order was recalled by the High Court and the same was dismissed. In view of the financial constraint faced by M/s Asscard Spinners, the assessee made arrangement for extending loan to the said company through other financiers and financial institutions. In fact, Shri P. Kandasamy has also advanced funds to the firm which was credited in its capital account and the same was extended as loan to M/s Asscard Spinners. Initially, M/s Asscard Spinners paid interest on the loan. Subsequently, the said company could not pay even the interest on the said borrowed funds. Therefore, according to the Ld. counsel, the financiers and financial institutions, pressurized the assessee to make the payment. In fact, the assessee made payment on behalf of M/s Asscard Spinners. In view of business interest the assessee had with the said company, according to the Ld. counsel, for the purpose of continuous supply of yarn, the assessee-firm was forced to repay the money to financial institutions and other financiers, who lent money to M/s Asscard Spinners. Therefore, according to the Ld. counsel, the assessee paid interest to Shri P. Kandasamy, the partner of the assessee-company who contributed capital which was utilised for repayment of the loan.
The Ld.counsel for the assessee further submitted that when the matter came before this Tribunal in the first round of litigation in this Tribunal by an order dated 7.11.2008, a copy of which is available at page 35 of the paper- book, directed the Assessing Officer to re-examine whether the funds were advanced for business purpose or personal purpose and thereafter decide the issue, in accordance with law, in the light of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. The order of this Tribunal dated 7.11.2008 became final, therefore, according to the Ld. counsel, the Assessing Officer is bound to examine the purpose for which the loan was advanced and interest paid to the partner of the assessee-firm.
Shri N. Quadir Hoseyn, the Ld.counsel further submitted that even though the assessee was following mercantile system of accounting, the recipient company, namely, M/s Asscard Spinners could not repay the deposit made by the assessee and also the loan borrowed at the instance of the assessee-firm. Therefore, there was a doubt whether the assessee would be able to recover the deposit and trade outstanding. In view of the doubt existed for recover of funds, according to the Ld. counsel, the assessee has not recognized the interest on deposit and also trade advance from the said company, namely, M/s Asscard Spinners, therefore, interest on `8,10,000/- to the extent of `1,45,800/- was not taken as income for all the years under consideration.
Now coming to the disallowance of interest paid to partner, namely, Shri P. Kandasamy, the Ld.counsel for the assessee submitted that the interest was paid on the capital contribution made by Shri P. Kandasamy, which was utilised for repayment of loan borrowed by M/s Asscard Spinners. In view of order of this Tribunal dated 7.11.2008, it is obligatory on the part of the Assessing Officer to examine whether the advancement of loan and repayment of the same were for commercial purpose. According to the Ld. counsel, it is not in dispute that the assessee is a dealer nominated by M/s Asscard Spinners for the purpose of sale of yarn. But for the supply made by M/s Asscard Spinners, the assessee would not have earned any income at all. Therefore, according to the Ld. counsel, the partnership firm has advanced funds to M/s Asscard Spinners for the purpose of its own business. In other words, such advance would ensure continuous supply of yarn to the assessee-firm. Therefore, according to the Ld. counsel, the advance was made for the purpose of business only. Since the partner Shri P. Kandasamy contributed the capital which was, in fact, used for repayment of loan availed by M/s Asscard Spinners, according to the Ld. counsel, the assessee-firm has to necessarily pay interest to Shri P. Kandasamy. In fact, the interest was paid to the extent of `4,60,296/-. Since the interest payment made to partner Shri P.
Kandasamy was for the purpose of business, according to the Ld. counsel, both the authorities below are not justified in disallowing the claim of the assessee. The Ld.counsel placed his reliance on the judgment of Apex Court in Hero Cycles Pvt. Ltd. v. CIT (2015) 379 ITR 347.
On the contrary, Shri B. Sahadevan, the Ld. Departmental Representative submitted that the assessee, in fact, recognized income on the deposit of `8,10,000/- for assessment year 1996-97 and 1997-98. Therefore, there is no justification for not recognizing the interest income for the year under consideration. Moreover, the interest paid to partner Mr. Kandasamy is not for business purpose.
We have considered the rival submissions on either side and perused the relevant material available on record. For all the three years, common issue arises for consideration. The first addition was `1,45,800/- towards interest on the deposit of `8,10,000/-. It is not in dispute that in the earlier years, the assessee recognized for such interest. For the years under consideration, the assessee has not recognized any interest. Since the assessee was following mercantile system of accounting, the Assessing Officer found that the interest income has to be included in the total income on accrual basis. No doubt, when the assessee was following mercantile system of accounting, the interest income has to be included in the total income on accrual basis. In this case, M/s Asscard Spinners faced severe financial difficulty and the matter travelled even to the High Court in a liquidation proceeding. Even though the High Court initially allowed the liquidation petition, subsequently, the order was recalled. Even the assessee made arrangement for borrowing loan for the company M/s Asscard Spinners. In those circumstances, this Tribunal is of the considered opinion that there was a doubt whether M/s Asscard Spinners would pay even the deposit of `8,10,000/-. When there was a doubt about the recovery of deposit of `8,10,000/- itself, this Tribunal is of the considered opinion that even on accrual basis, there cannot be any addition towards interest.
The concept of accrual basis or the mercantile system of accounting cannot override the theory of real income. The Income- tax Act does not expect to offer the income which could not otherwise be earned by the assessee. Therefore, this Tribunal is of the considered opinion that when the assessee could not recover the deposit of `8,10,000/- or there was a doubt whether the assessee would be able to recover the deposit of `8,10,000/-, the interest on such deposit cannot be treated as income on accrued basis for all the three years under consideration. Therefore, we are unable to uphold the orders of the lower authorities. Accordingly, the orders of both the authorities below, for all the three years, are set aside and the addition made by the Assessing Officer is deleted.
Now coming to disallowance of `4,60,296/-, admittedly this amount was paid to Shri P. Kandasamy, partner of the assessee- firm. When the matter travelled before this Tribunal in the earlier occasion, for assessment year 2002-03, this Tribunal found that the matter needs to be examined and purpose for which the funds were given to related party has to be ascertained. In fact, this Tribunal held at para 5 of its order as follows:-
“We have considered the rival submissions carefully. We find that the Assessing Officer has not given any finding whether the funds were given for the purpose of business or personal purpose and whether the parties to whom funds were given related to the assessee. Therefore, we set aside the order of the CIT(Appeals) and remit the matter back to the file of the Assessing Officer with a direction to ascertain whether the funds were given for business purpose or not and then decide the issue in accordance with law particularly in the light of the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra)”
It is not in dispute that the order of this Tribunal attained finality. Therefore, the direction of this Tribunal cannot be ignored by both the authorities below. The material available on record suggests that M/s Asscard Spinners was supplying yarn to the assessee. In fact, the assessee was nominated as dealer and Depot Manager. When M/s Asscard Spinners faced financial difficulty, in order to ensure business of the assessee and continuous supply of yarn, the assessee made arrangement to advance funds to M/s Asscard Spinners. The said company could not repay the money. Therefore, due to pressure from the financiers and financial institutions, the assessee-firm was forced to repay the same. It is not in dispute that advance paid by Shri P.
Kandasamy, one of the partners, which was part of capital account, was also used in repayment of such loan. All this was done with an intention that M/s Asscard Spinners would ensure continuous supply of yarn to the assessee and assessee could continue its business as dealer of M/s Asscard Spinners. In those circumstances, this Tribunal is of the considered opinion that the loan was given for the purpose of business and not for personal purpose. As observed by this Tribunal in the earlier round of litigation, when the advance was made for business purpose, this Tribunal is of the considered opinion that there cannot be any disallowance of interest. Accordingly, the orders of the authorities below are set aside and disallowance made by the Assessing Officer for all the three years is deleted.
In the result, the appeals filed by the assessee for all the three years stand allowed.
Order pronounced on 23rd March, 2017 at Chennai.