ITO 18(2)(3), MUMBAI vs. T.M. ENTERPRISES, MUMBAI

These two appeals, filed by the Revenue being are directed against the two separate appellate orders dated 29th May, 2014 and 24th April, 2015 respectively passed by the learned Commissioner of Income Tax (Appeals)-29, Mumbai (hereinafter called “the CIT(A)”) and the learned Commissioner of Income Tax (Appeals)-33, Mumbai respectively , for the assessment years 2010-11 and 2011-12 respectively, the appellate proceedings before the learned CIT(A) arising from the assessment orders dated 28th March, 2013 and 20th March, 2014 respectively , both passed by the learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called “the Act”).

The following common grounds of appeal have been raised by the Revenue in the memo of appeal (only difference in the amount) filed with the Income-tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”):-

The brief facts of the case are that the assessee is engaged in the business of printing and manufacturing of packing materials and playing cards. The A.O. observed that the assessee has paid interest of Rs. 79.05 lacs to various parties. The percentage of interest was 4.60% of the turnover and the turnover was Rs. 1720 lacs during the previous year relevant to the impugned assessment year . It was observed by the A.O. that on the first day of previous year there was an outstanding recoverable amount of Rs. 4,87,60,333/- and on the last day of the previous year the same was Rs. 4,05,26,525/- from Menghraj Sons. It was also observed by the assessee that the partner of the assessee firm is also partner of M/s Menghraj Sons. M/s. Menghraj Sons is commission agent on consignment basis. The A.O. had verified some bills of March 2010 to confirm whether any additional benefits was received by the assessee from consignment or for giving advances more than Rs. 4,05,26,526/- , but there was no additional benefit. It was observed by the AO that the assessee has paid commission of Rs. 1,07,994/- to M/s Menghraj Sons. From the above , the A.O. observed that the assessee has given Rs. 4,05,26,526/- to Menghraj Sons in which one of the partner of the assessee is one of the partners. The A.O. observed that this case is covered u/s 40A of the Act. The AO observed that the assessee has paid interest of Rs. 79.05 lacs to various parties. The rate of interest was 15% per annum. It was also observed by the AO that the assessee has paid compounding interest @16.2% to most of the parties. The assessee has advanced sum of Rs. 4,05,26,526/- to M/s Menghraj Sons for which no additional benefits have been received . The AO treated 15% of the same i.e. Rs. 60,78,950/- as expenses made in respect of person which are covered u/s 40A of the Act. Hence, the interest paid amounting to Rs. 60,78,950/- was disallowed by the AO vide assessment order dated 28/03/2013 passed u/s. 143(3) of the Act.

Aggrieved by the assessment order dated 28/03/2013 passed by the A.O. u/s 143(3) of the Act, the assessee filed first appeal before the ld. CIT(A).

Before the ld. CIT(A) the assessee submitted that the assessee appointed M/s. Menghraj Sons as consignment agent vide agreement for consignment agency on 10th August 2004 and since then was effecting part of its sales through the said consignment agent and due to continuous increase in debtors on account of sales through the said consignment agent, the assessee terminated the consignment agency agreement with M/s Menghraj Sons w.e.f. 1st May 2009. The outstanding amount due from the said consignment agent as on 1st May, 2009 on account of sales effected through them was Rs.4,74,89,808.76. It was submitted that during the year the assessee has incurred net loss of Rs. 26.40 lakhs as compared to Profit of Rs. 20.75 lakhs in financial year 2008-09. It was submitted that the entire debit balance in the said account is on account of sales of Rs. 58.48 lakhs on consignment basis in current year and consignment sales of Rs. 630.70 lakhs in previous year and as against total debtors of Rs. 639.80 lakhs the assessee also has sundry creditors of Rs. 527.32 lakhs. It was submitted that as against interest expenses of Rs. 79.05 lakhs(including interest to partners) , the assessee has also earned interest income of Rs. 8.79 lakhs from the partners. It was submitted that the amount of Rs. 84,06,109/- debited to the account of M/s Menghraj Sons on 1.5.2009 was sales value of goods costing Rs. 68,62,459.95 lying with them as stock as on 31st March, 2009 and the said value of opening stock is already shown in P&L account for the year under consideration.

Aggrieved by the appellate order dated 29-05-2014 passed by the ld. CIT(A), the Revenue is in appeal before the tribunal.

The ld. D.R. submitted that the assessee is engaged in the business of printing and manufacturing of packing materials and playing cards. Interest of Rs. 79.05 lakhs was paid by the assessee to various parties which is 4.6% of turnover. The assessee has outstanding recoverable of Rs. 4.05 crores from M/s Menghraj Sons which is a related party. The assessee should have charged interest from Menghraj Sons. The A.O. has rightly disallowed proportionate interest @ 15% on the amount of outstanding recoverable from Menghraj Sons. The A.O. has rightly disallowed the interest amount of Rs.60,78,950/- .It was submitted that the assessee has also paid interest to its suppliers for delaying payment to the tune of Rs. 40.60 lacs while the assesssee did not recover interest from Menghraj Sons which is a related party as one of partner of the assessee firm is partner in Menghraj Sons. The assessee should have recovered interest from Menghraj Sons. No effort has been made by the assessee to recover the amount from M/s Menghraj Sons despite huge amount recoverable from Menghraj Sons.

The ld. Counsel for the assessee submitted that the assessee has appointed M/s Menghraj Sons as consignment agent to whom the goods are given on consignment basis . The assessee is effecting part of its sales which were made through this agent and there are outstanding receivable from Menghraj Sons being sundry debtor of the assessee which is also reflected as such in the books of the assessee. The consignment agent agreement was executed on 10th August, 2004 between the assessee and the M/s Menghraj & Sons. No disallowance has been made in the earlier years w.r.t. proportionate interest on these outstanding amounts. The agreement for consignment agent with M/s Menghraj Sons was terminated by the assessee w.e.f. 1st May, 2009 and the outstanding amount from M/s Menghraj Sons was Rs. 4.75 crores as at 01-05-2009 lacs on account of the sales made through them, which was Rs. 4.05 crores as at 31-3-2010. This amount as at 31-03- 2014 is further reduced to Rs. 3.44 lacs at 31-3-2014/pb page 72. The learned counsel for the assessee submitted that provision of Section 40A(2) of the Act were invoked. It was submitted that the assessee firm and M/s Menghraj Sons are separate entities and the assessee has not incurred any expenses which could be covered u/s 40A(2) of the Act. The agreement for consignment agent is placed on record. The assessee has also submitted written submissions. It was submitted that the Revenue has not made any disallowance in the preceding years.

We have considered the rival contentions and also perused the material available on record . We have observed that the assessee is engaged in the business of printing and manufacturing of packing materials and playing cards. We have observed that M/s Menghraj Sons is the consignment agent for the products of the assessee since 2004 vide agreement for consignment dated 10th August, 2004 and this agreement was terminated by the assessee w.e.f. 1st May, 2009 and as on this date, the outstanding amount from M/s. Menghraj Sons was Rs.4,74,89,808/- on account of the sales effected through them in the previous year as well as in the current year. The assessee has sold goods through M/s Menghraj Sons against which payments are due. It was the duty of the M/s Menghraj Sons to collect the amount from debtors and pay the assessee . The outstanding as on 01-05-2009 was Rs. 4.75 crores which was reduced to Rs. 4.05 crores as at 31-3-2010 . The amount outstanding payable by M/s Menghraj & Sons to the assessee firm was further reduced to Rs. 3.44 lacs as on 31st March, 2014.Thus the outstanding balance as at the beginning of the year as well as at the end of the year represents the sales transaction of goods of the assessee firm through M/s Menghraj Sons and the learned DR could not point any perversity in such findings. Hence, it is not in the nature of interest free funds but the outstanding were on account of sales conducted by the assessee on consignment basis through Menghraj Sons which was as a result of business transactions, therefore, this outstanding amount of Rs.4,05,26,526/- as at year end on 31-03-2010 from M/s Menghraj Sons in our considered view cannot be treated as an interest free advances . The learned DR could not show that these outstanding were not out of the business transactions of sale and purchase between both the parties but were in the nature of interest free advances granted by the assessee to M/s Menghraj Sons. The ld. CIT(A) had observed that in order to disallow the proportionate interest paid by the assessee during the year the A.O. has to establish that the assessee had advanced the money to the sister concern out of the borrowed funds, however, the A.O. nor the learned DR could not establish any direct nexus between the funds borrowed and the interest free advances given to the sister concern. Thus, it was observed by learned CIT(A) that the assessee had direct business connections with the sister concern M/s Menghraj Sons and the funds outstanding in their account were on account of sales effected by them during the preceding year as well as during the year under consideration. Thus the outstanding receivable from Menghraj Sons cannot be treated as the interest free advances and hence the learned CIT(A) held that proportionate disallowance of interest to the tune of Rs. 60,78,950/- cannot be made . The ledger account of Menghraj Sons in the books of the assessee for the impugned assessment year and also for preceding year are placed on record in paper book filed with the tribunal by the assessee to show that the transactions with Menghraj Sons were towards sale of goods(page 42-53 & 56-57/pb) . No perversity in these ledger account was pointed out by learned DR. It is the contention of the assessee that Menghraj Sons could realize payments belatedly from the parties to whom sales were made by it and hence consequently the assessee’s payment got delayed. The list of debtors of Menghraj Sons as at 31-03-2010 amounting to in aggregate Rs. 4.44 crores is placed in paper book/page 58-69. These above stated documents of transactions with Menghraj Sons and outstanding debtors details of Menghraj Sons were all filed by the assessee before the AO/CIT(A) as per certificate furnished by the assessee along with paper book filed with the tribunal. We donot find any perversity in the order of learned CIT(A) which we affirm and sustain. No incriminating material has been brought on record by the Revenue to disprove or demolish findings recorded in learned CIT(A) order. The outstanding amount is receivable from M/s Menghraj & Sons on account of normal business transactions between the two entities, although payments were received belatedly. In our considered view, no disallowance of interest of Rs. 60,78,950/- towards proportionate interest paid by the assessee on borrowings made by it can be made u/s 40A(2) of the Act as was made by the AO and we order deletion of the said addition by confirming/sustaining the order of learned CIT(A) . We order accordingly.

Our above decision in 2010-11 shall apply mutatis mutandis to the Revenue’s appeal in for the assessment year 2011-12.

In the result, the appeal filed by the Revenue in 2010-11 and for the assessment year 2011-12 are dismissed.