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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri Joginder Singh, & Shri Ashwani Taneja
02/05/2016 सुनवाई क" तार"ख / Date of Hearing : 20/05/2016 आदेश क" तार"ख /Date of Order: आदेश / O R D E R Per Ashwani Taneja (Accountant Member): This appeal has been filed by the assessee against the order of Ld. Commissioner of Income Tax (Appeals), Mumbai-4 2 Climax Investment & Trading Co.
{(in short ‘CIT(A)’}, dated 27.06.2014 passed against assessment order u/s 143(3) dated 27.12.2012 for the Assessment Year 2010-11. “1a) The Ld. CIT(A) erred in confirming disallowance of interest paid of Rs.10,40,961/- made by the assessing officer. b) The Ld. CIT(A) failed to appreciate that interest was paid on borrowings which were used for the purpose of business. 2a) The Ld. CIT(A) erred in confirming disallowance of purchases made of Rs.48,34,250/- made by the assessing officer. b) The Ld. CIT(A) failed to appreciate the evidence filed such as purchase bills, quantify tally, payments by RTGS etc in support of the purchases.
3. The Ld. CIT(A) erred in confirming disallowance of Rs.15,167/- being debit balances written off.
4. The Ld. CIT(A) erred in confirming disallowance of Long Term Capital Loss of Rs.2,67,452/- out of loss of Rs.9,49,401/- disallowed by the Assessing Officer.”
During the course of hearing, arguments were made by Shri Dharmesh Shah, Authorised Representative (AR) on behalf of the Assessee and by Ms. Sudha Ramchandran, Departmental Representative (DR) on behalf of the Revenue.
Ground No.1: In this ground the assessee has challenged the action of lower authorities in making disallowance out of interest paid of Rs.10,40,961/-.
3.1. The brief facts as noted in detail in the orders of lower authorities are that during the course of assessment proceedings, it was noted by the AO that assessee had taken 3 Climax Investment & Trading Co. interest free loan from M/s. Shree Ranisati Enterprises which was used to repay the loan taken form M/s. Halan Finance. It was further noted that originally the loan taken from the M/s. Halan Finance was used to give loan to M/s. Prerna Syntex, and it was further observed by the AO that no interest was received by the assessee from M/s Prerna Syntex during the year under consideration. It was thus, concluded by the AO that interest bearing loans were used for giving interest free loans, and thus, interest paid by the assessee was not utilized for the business of the assessee and therefore, the same was disallowed.
3.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A) wherein no relief was given and disallowance by the AO was confirmed.
3.3. Being aggrieved, the assessee filed an appeal before the Tribunal.
3.4. During the course of hearing before us, it was submitted by the Ld. Counsel that complete facts have not been taken into account by the Ld. CIT(A) and the observations made by the AO as well as Ld. CIT(A) are not based upon full appreciation of facts.
3.5. On the other hand, Ld. DR has relied upon the orders of the AO as well as CIT(A).
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3.6. We have gone through the orders of the lower authorities, submissions made by both the parties before us as well as evidences shown to us. It has been brought to our notice by the Ld. Counsel that assessee has been regularly receiving interest from the said party namely M/s. Prerna Syntex, and in all the preceding as well as subsequent years, the interest income has always been considered as part of business activities of the assessee. It is only in the impugned year when due to extremely adverse circumstances faced by M/s. Prerna Syntex, an agreement was made between the assessee and the said party that no interest shall be paid by the said party to the assessee. The amount of loan to the said party was given from the loan received from the M/s. Halan Finance on which no interest was ever paid by the assessee. Due to adverse financial position of M/s. Halan Finance and pressure for recovery from M/s Halan, the assessee had to take interest bearing loan from M/s. Shree Ranisati Enterprises which was used to repay the loan taken earlier from M/s. Halan Finance. It was thus, shown to us that all the transactions were part of assessee’s business activities and were done as a matter of commercial expediency and reliance in this regard has been placed upon judgment of Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. CIT 288 ITR 1 (SC), for the proposition that once it was established that there was nexus between the expenditure and purpose of business, then revenue cannot justifiably claim to put itself onto the arm chair of the businessman to decide what expenditure is to be incurred and to what extent. With the assistance of the parties, it has been 5 Climax Investment & Trading Co. further noted by us that interest income has been received from M/s. Prerna Syntex, in previous as well as subsequent years. It was mentioned by the AO in the assessment order passed u/s 143(3) for A.Y. 2006-07 that the assessee was engaged in the business of trading in textiles, commission and earning of interest income. Thus, the revenue itself has accepted the factum of interest income being part of business activities of the assessee. Under these circumstances, even if interest income (i.e. business income) is not received in a particular year, then that itself it will not lead to a situation equivalent to closure of business. Under these circumstances interest paid on a loan to repay the earlier loan which was originally utilized to give loan from which interest income has been earned on earlier occasions cannot be disallowed merely on the ground that no income was earned in the impugned year. Therefore, taking into account all the facts and circumstances of the case and in view of judgment of Hon’ble supreme court in the case of S.A. Builders (supra), we find that the disallowance made by the AO was not justified and therefore, same is directed to be deleted.
Ground No.2: This ground deals with disallowance of purchase of Rs.48,34,250/-. During the course of assessment proceedings, it was noted by the AO that purchases made by the assessee aggregating to Rs.48,34,250/- from three parties namely M/s. Raj Traders, M/s P.K. Trading Co. & M/s. N.B. Enterprises could not be substantiated by the assessee. It was noted by him that notices were sent u/s 133(6) which 6 Climax Investment & Trading Co. remained un-served. It was further noted that PAN numbers given by the assessee were of the different persons. The assessee tried to explain the purchases with the help of bill and copy of bank statement showing that payment was made by the cheque but AO was not satisfied and he disallowed entire amount of purchase form three parties holding the same to be non-genuine. The Ld. CIT(A) confirmed the order of the AO. 4.1. During the course of hearing before us, it was stated by the Ld. Counsel that it was submitted to the AO that these three parties are proprietorship units of three different proprietors and the PAN Nos. were issued in the individual name of these proprietors and not in the name of their units, which lead to total confusion in the mind of the AO. It was further submitted that payment was made by cheque and AO could have easily verified these parties through respective bankers of all these persons. It was alternatively argued that quantitative reconciliation is available showing that items purchased were sold. The sales have been accepted by the AO, and therefore, even if purchases were held as bogus, the entire amount could not have been disallowed. On the other hand, Ld. DR submitted that another opportunity may be given to AO as well as the assessee to make proper verification of facts and figures so as to enable the AO to examine as to how much amount of purchase can be allowed as per prevailing market rates.
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4.2. We have gone through the orders of the lower authorities and documentary evidences shown before us. It is noted that PAN Nos. were issued in the name of three individuals. It was claimed by the Ld. Counsel of the assessee before us that these three persons namely Yusuf Daginawala, Francis Pascal Fernandes & Ashok Gokuladas Lakhani are proprietors of three proprietorship units Namely M/s. Raj Traders, P.K. Trading Co. & N.B. Enterprises respectively. But, no evidences were shown by the Ld. Counsel to prove that these three persons were proprietors of these three units. On the confirmations also, signatures have been done by some different persons. However, it has been shown by the Ld. Counsel that bank statements were submitted before lower authorities showing that payments were made by account payee cheques. It was further submitted that these suppliers were not in total control of the assessee. Under these circumstances, we find it appropriate to send this ground back to the file of the AO with the direction that the AO shall exercise his powers under the law to examine these persons through respective bank of these persons. The AO should also verify the copies of income tax returns of all these parties which would show proper facts regarding names and other particulars of proprietors of the impugned parties. The AO is also free to use any other channel to make requisite examination. We direct the assessee to extend all requisite cooperation by submitting all the evidences as are expected to be in the possession of the assessee with regard to these purchases namely bills, invoices, bank statement, 8 Climax Investment & Trading Co. confirmations, copies of ledger accounts, delivery proof, transportation proof etc. or any other evidences as may be required by the AO as per law and facts. It is further directed that in case the AO finds that these purchases are not still substantiated by the assessee despite the efforts made by the AO to make direct inquiries with the aforesaid channels, then the AO shall also consider alternative submissions made by the assessee before us wherein the assessee has submitted before us quantitative reconciliation to show that purchase done from these parties have been sold to M/s. Midland Animal Nutrition Pvt. Ltd. The assessee shall also present requisite quantitative records in support of the quantitative reconciliation statement submitted before us. In case the quantitative reconciliation is found to be correct as per facts, then total amount of purchase cannot be disallowed in our view. In that eventuality, the AO shall work out appropriate amount of purchase that can be allowed to the assessee keeping in view market rates and also keeping in view past history and gross profits rates of the industry. The AO shall give adequate opportunity to the assessee to justify its claim before taking fresh decision on this issue. The assessee shall extend all requisite cooperation in this regard. Thus, with these directions, this issue is sent back to the file of the AO with the direction as given above. These grounds may be treated as partly allowed for statistical purposes.
Ground No. 3: This ground was not pressed and the same is therefore, dismissed.
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Ground No. 4: In this ground, the assessee has challenged the action of lower authorities in making disallowance of Long Term Capital Loss of Rs.2,67,452/-.
6.1. The brief facts are that the assessee incurred loss on sale of shares of two companies namely Mahendera Cement Ltd. & Supplementary Foods (I) Ltd. to Ms. Sangeeta Jatia. It was noted by the AO that this transaction was an ‘off market’ transactions without invoking any programme. The transaction was done in cash and no evidences of sale of shares or holding of shares was submitted by the assessee except a debit note issued in the name of Ms. Sangeeta Jatia.
6.2. Ld. DR submitted that this issue should also go back for proper verification of facts. Ld. Counsel also agreed that if one more opportunity is given then proper evidences can be brought on record.
6.3. We have gone through the facts of the case. It is noted that assessee submitted merely a debit noted issue in the name of Ms. Sangeeta Jatia containing name & address of the buyers. Although no other evidence was submitted by the assessee but before rejecting the said transactions it was mandatory upon the part of the AO to make direct verification with M/s. Sangeeta Jatia before disbelieving the transactions at the very threshold. Therefore, we send this issue back to the file of the AO. The assessee is directed to submit all the evidences pertaining to acquisition, holding and sale of 10 Climax Investment & Trading Co. impugned shares. The AO is directed to make verification on the basis of whatsoever evidences are submitted by the assessee before disbelieving the transactions. The AO shall give adequate opportunity of hearing to the assessee. The assessee is directed to extend requisite cooperation to the AO by submitting details and evidences to justify its claim. This ground may be treated as allowed for statistical purposes.
In the result, this appeal filed by the assessee may be treated as partly allowed.