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Income Tax Appellate Tribunal, “A” BENCH, KOLKATA
Before: Shri Waseem Ahmed & Shri S.S. Viswanethra Ravi
SHRI S.S. VISWANETHRA RAVI, JM The two appeals above by the Revenue and Assessee filed against the common order dated :22-03-2013 passed by the CIT(A), Central-I, Kolkata for the assessment year 2008-09.
Since the impugned order is same in both the appeals, both the appeals heard together with the consent of both the parties and disposed of the same by this consolidated order for the sake of convenience.
First, we take up the appeal in Revenue for the A.Y 2008-09.
The 1st ground regarding violation of Rule 46A and 2nd ground relating to 4. allowability of Rs.40,32,762/- u/s 43B of the Act is to be decided is as to whether CIT-A justified in allowing the claim of assessee without affording an opportunity to the revenue in the circumstances of the case.
Brief facts of the case are that the assessee is a company having engaged in manufacturing and trading of steel products. The assessee filed its return of income declaring a total income of Rs.17,34,087/- on 30-09-2008. Under scrutiny notices u/s. 143(2)/142(1) of the act were issued, in response to which, the AR appeared and furnished the particulars.
During the course of scrutiny proceedings the assessee furnished a revised computation of income showing its total income at loss of Rs.22,98,680/- wherein the assessee claimed payment of sales tax of Rs.40,32,762/- pertaining to A.Y 1999-2000 and filed a copy of sales tax order dt. 26-7-1999 as proof of the same. The AO observed that the Assessee did not explain the circumstances which lead to pay the sales tax in the year under consideration which is relevant to A.Y 1999- 2000 and disallowed the claim u/sec 43B of the Act and the relevant portion of which is reproduced herein below:
“… … … According to the AO, the assessee could not explain the reason for such delay in making the payment. It is also observed by the AO that the assessee do not account for sales tax in the P & L Account. The AO noted that how much sales tax was collected from the customers and how much was paid to the sales tax authority, has not been shown in the accounts of the assessee. Further, as per the AO, the assessee did not claim the payment in the 2 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd return of income. The AO was of the opinion that mere claiming by filing revised computation in the course of assessment proceedings is not sufficient for deduction to be allowed. Hence, he disallowed the claim made by the assessee u/s 43B of the Act.
Aggrieved by the order of AO, the Assessee preferred an appeal before the CIT-A and contended that the Assessee was enjoyed an exemption from levy of sales tax and was suddenly withdrawn by the Government and the demand was raised. The Assessee contested the decision made by the Government and the payment of sales tax was withheld. The sales tax authorities started mounting pressure on the Assessee for payment of tax and the Assessee started paying during the F.Y. 2007-08 and paid during the year under consideration. It is further submitted by the Assessee that the demand of sales tax of Rs.39,57,921/- and the penalty thereon of Rs.1,97,896/- totaling of Rs.41,55,817/- and the entire demand was paid during the year under appeal. The claim of Rs.1,23,055/- out of the payment of Rs.41,55,817/- was already made in the return filed by the Assessee and the balance amount of Rs.40,32,762/- i.e. (Rs.41,55,817 minus Rs.l,23,055) was claimed before the AO. It was also submitted that the Assessee is entitled for deduction of Rs.39,57,921/- under section 43B on payment basis. It was also submitted by the Assessee that the deduction of the entire amount was not claimed in the return due to inadvertence but the tax was paid by the Asseessee vide sales tax challans.
The CIT-A after considering the submissions of the Assessee, the CIT-A found that the Assessee is entitled to claim deduction u/sec 43B of the Act taking into account that the AO accepted the payment of Sales tax and gave relief to an extent of Rs.38,34,866/- and relevant portion of which is reproduced hereunder:
8. I have considered the submissions of the appellant and perused the assessment order. On careful consideration of the facts and in law, I am of the opinion that the AO was not justified in denying the claim made by the appellant u/s 43B of the Act on account of payment of sales tax. The AO has not disputed the payment of sales tax made by the appellant in the year under appeal. Hence, the deduction is allowable to the appellant u/s.43B on payment basis. However, it is observed that the appellant is entitled for deduction of Rs.39,57,921/- only which was paid toward sales tax liability. The amount of Rs.1,97,896/- paid towards penalty is not allowable as deduction. As per the own submission of the appellant, it has already claimed deduction of Rs.1,23,055/- in the original return of income, and therefore, the appellant is now entitled for deduction of balance amount of Rs.38,34,866/- i.e. (Rs.39,57,921 minus Rs. 38,34,866/- u/s. 43B of the Act. Ground no. 2 is partly allowed. “
Before us, the Revenue is challenging the order of CIT-A by way of abovementioned grounds of Appeal. The Ld. DR submits that the Assessee produced bills relating to Sales tax before the CIT-A and without giving an opportunity to the AO, the CIT-A gave relief basing on the submissions of the Assessee and without seeking remand report urged to remand the issue to the AO. In reply, the Ld.AR submits that no new evidence was produced before the CIT-A and Section 43B is overriding effect and the Assessee is entitled to claim the deduction though the demand the relevant to the A.Y. 1999--2000.
10. Heard rival submissions and perused the material on record regarding the plea of violation of Rule 46A, the revenue was unable to show any material evidence produced by the assessee before the CIT-A for the first time as additional evidence which resulted the CIT-A to pass the impugned order. We find that the CIT-A considered the only material which was available before the AO. We could not see any material evidence as relied on by the CIT-A in giving relief to assessee. Thus, we are of the opinion that there 4 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd was no additional evidence produced before the CIT-A. The ground no-1 raised by the revenue fails and accordingly, it is dismissed.
11. Heard rival submissions and perused the material on record regarding ground no-2. We find that the Assessee paid the sales tax amount as demanded by the such department in the year under consideration and the claim to an extent of Rs.1,23,055/- was already made in the return filed by the Assessee and besides of which the AO accepted the payment of sales tax to the respective Government was paid during the year under consideration. In this regard, we may refer to the relevant provision Section 43B relevant to the A.Y 08-09 under which the Assessee claimed deduction and it is reproduced for ready reference as under:
Section - 43B, Income-tax Act, 1961-2008 Certain deductions to be only on actual payment.
43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of (a) any sum payable by the assessee by way of tax , duty, cess or fee, by whatever name called, under any law for the time being in force, or Provided that nothing contained in this section shall apply in relation to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
Explanation [ 1].—For the removal of doubts, it is hereby declared that where a deduction in respect of any sum referred to in clause 5 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd
(a) or clause (b) of this section is allowed in computing the income referred to in section 28 of the previous year (being a previous year relevant to the assessment year commencing on the 1st day of April, 1983, or any earlier assessment year) in which the liability to pay such sum was incurred by the assessee, the assessee shall not be entitled to any deduction under this section in respect of such sum in computing the income of the previous year in which the sum is actually paid by him.
Explanation 2.—For the purposes of clause (a), as in force at all material times, "any sum payable" means a sum for which the assessee incurred liability in the previous year even though such sum might not have been payable within that year under the relevant law.
A plain reading of the proviso suggests that the deductions is allowable otherwise that in respect of any sum payable towards any tax, duty, cess or fee, but, however, aforesaid section does not apply to any sum which is actually paid by the assessee on or before the due date applicable in his case for furnishing the return of income under sub-section (1) of section 139 in respect of the previous year in which the liability to pay such sum was incurred as aforesaid and the evidence of such payment is furnished by the assessee along with such return.
With regard to the issue raised by the Revenue for deletion of the disallowance of sales tax liability, we find that the allowability of the sales tax liability is governed by the provisions of section 43B of the Act i.e. on actual payment basis. In the instant case the assessee has not brought anything on record which justified that the sales tax liability was taxed in the earlier years. The ld. AR before us submitted that the sales tax was exempted by the West Bengal Government. Therefore there was no collection of sales tax during the period of the exemption on the sales of the goods. The entire sale price has been offered to tax in 6 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd the year 1998-99. It is well settled law that the sales tax liability is allowed in the year of the payment by virtue of the provisions of section 43B of the Act. The ld. AR drew our attention to the schedule 10 of the balance sheet to demonstrate that no sales tax liability is appearing in the audited financial statements as on 31.3.1998. Our attention was also drawn to pages 20 to 21 of the paper book where the order of the Sales Tax Department was also placed demanding the outstanding amount of sales tax pertaining to the year 1998-99. In view above we conclude that the payment of the sales tax demand is very much covered under the provisions of section 43B of the Act. Accordingly we do not find reasons to interfere in the order of ld. CIT(A). Hence this ground of Revenue’s appeal is dismissed. AY 2008-09 (by the assessee)
The only ground in Assessee’s appeal is against the action of the AO in making the disallowance of interest amounting to Rs.38,63,307/- which paid to the bank against the O.D. account. The observation of the AO is as under:
“The assessee has made advance of Rs.10.7 crores to its Group Company, M/S Super Smelters Ltd. The assessee run its business on borrowed capital and has incurred interest expenses on O.D Account at Rs.38,63,307/-. The A/R has explained that the assessee had business transaction sale as well as purchase with M/s. Super Smelters Ltd. And had a closing debit balance of Rs.6,32,541/- only due to sale on 31.03.2008. It was argued that C.C. Account balance had been reduced during the year in comparison to earlier years. No unsecured loan-was taken. It is, therefore, clear that borrowed fund had not been paid to M/S. Super Smelters Ltd. Hence, no interest should be disallowed. The account of Super Smelters Ltd. have been furnished. Purchase of raw materials was made during the year only at Rs.93.2 lakhs and sales and others were made only amounting to Rs.48,12,869/-. Therefore, it is not true that the advances made on different times for the purpose of business. 7 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd
The assessee however explained that this advance does not attract provisions of Deemed Dividend because there was no holding of shares. The argument of the assessee that borrowed capital was not utilized for the purpose of advancing fund to M/S Super Smelters Ltd. is also not acceptable. Had it not made the advance, it could have saved the interest payment to C.C. Account. On verification, it has been found that in almost every month, it has paid interest-free advance to M/S Super Smelters Ltd. On the other hand, it is stated that had the assessee not paid the advance to Super Smelters, its business fund would have increased so much to liquidate the debit of the C.C. Account. The deduction for interest expense claimed by the assessee amounting to Rs. 38,63,307/- is, therefore, disallowed in terms of section 36 of the Act being incurred not for the purpose of business.
Before the AO the assessee submitted that it had business transactions with M/s. Super Smelters Ltd in respect of sale as well as purchase. But, however, the AO on examination of the account of Super Smelters Ltd and found that Purchase of raw materials at Rs.93.2 lakhs and sales and others were at Rs.48,12,869/- and thereby doubted the version of the Assessee and disallowed the amount of Rs. 38,63,307/- under section 36 of the Act by observing that the said was not incurred for the purpose of business.
The Assessee challenged the order of AO before the CIT-A and submissions made through letter dt:23-12-2010 is reproduced hereunder:
During the course of appellate proceedings, the appellant reiterated the submissions made before the AO vide letter dated 23.l2.2010 that the appellant company has business transactions with the company namely as Super Smelters Ltd. During the FY 2007-08, the appellant has purchased iron and steel products for trading and has also purchased raw materials from the said party. The appellant company has also sold finished goods to said party. The advances given during the year are in the normal course of the business as the appellant has purchase as well as sale transactions with the said party. It is submitted by the appellant that it was having a running account with the party, and as such, the advance given and taken are part of the business transactions. The opening balance with the said party was nil and at the year end Rs.6,32,54l/- was receivable on account of sale made on 31.03.2008. It is contended by the appellant that on perusal of the Balance Sheet, it may be observed that the secured loan has been reduced from Rs.3.20 crore to Rs.1.74 crore. The sundry debtors reduced from Rs.52 lakh to Rs.36.79 lakh. Further, the company was having its own fund of Rs.2.05 crore. Thus, it indicates that the appellant has not taken any loan to give advance and only own fund and internal accrual has been used for giving advances. As such , no part of the interest is disallowable. It is also contended by the appellant that it has not paid Rs.10.7 crore at a time to the said party which is evident from the ledger account. The appellant had given as well as taken the advance from the said patty. The reliance is placed on the decisions in the case of CIT vs Reliance Utilities and Power Ltd 313 ITR 340 (Bom.) and CIT vs Britannia Industries Ltd 280 ITR 525 (Cal). In view of the above, the appellant pleaded that the AO be directed to delete the disallowance made by him on account of payment of interest.
The CIT-A considering the submissions of the Assessee and disposed of the appeal by stating as under:-
I have considered the submissions of the appellant and perused the assessment order. I have also gone through the balance sheet for the year under consideration as well as the ledger account of Super Smelters Ltd. On careful consideration of the facts and perusal of the ledger account of Super Smelters Ltd. I am not inclined to agree with the submission of the appellant that no borrowed fund was utilized for making advances to the group concern on various dates of the financial year. It is observed that as on 1.4.2007, the opening balance in the account of the said party was nil. From 03.04.2007 to 02.05.2007, the appellant company made advances of Rs.1.90 crore, out of which advance of Rs.60 lakhs was refunded by the said party. Thus as on 02.05.2007, there was debit balance of Rs.1.30 crore. For the first time, the appellant company made purchases of Rs.13,14,500/- from the said party on 12.05.2007. Thereafter, there were regular transactions of 9 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd advancing the money to the group concern and refund of advances. In between, there were occasionally transactions of purchase and sale. The claim of the appellant that it had given as well as taken the advances from Super Smelters Ltd is not correct because there was never a credit balance in the account. The appellant kept on advancing the money to the said company and out of that, repayments were made to the appellant. Thus, the contention of the appellant that the advances were given in the course of normal business activities is not correct. The appellant has failed to prove that the borrowed fund was not utilized for making advances to the group concern. Under the circumstances, I am of the opinion that the AO has rightly disallowed the interest payment of Rs.38,63,307/-. The disallowance as made by the AO in the assessment order is upheld. The judicial pronouncements relied upon by the appellant are not applicable as they are distinguishable on facts. Ground no. 1 is dismissed.
Aggrieved by the order of CIT-A, in second appeal before us the ld.AR submits that the entire interest was paid to bank and referred to pages 3-4 of the paper book to support the contentions of the assessee as reflected in the ledger account of sales account of M/s. Super Smelters. The ld.AR also further argued that the entire interest cannot be disallowed and disallowance, if any, may be restricted to Rs. 1.23 lacs. He drew our attention to the statement showing calculation of interest as available at pages 15-17 of the paper book. The Ld. AR explained that on 03-04-2007 an amount of Rs.45,00,000/- was debited from account of assessee and again on 7-4-07 an amount of Rs.27,00.000/- was credited to the account of assessee and such amount was available with M/s. Super Smelters for four days and at the same time the ld.AR explained that the assessee had own funds of Rs.2,05,05,4334/-. Further, he has drawn our attention the page 16 referring to a transaction from 29-8-2007 onwards. Whereas its own fund was paid being interest to bank upto 31-03-2008 totaling to Rs.1,23,476/- and prayed before us to disallow the same.
In reply, the ld.DR submits that the assessee primarily indulged in diversification of funds and further submits that there were occasional sales. However, he relied on the order of the AO.
Heard rival submissions and perused the material on record. Primarily we find that the transactions with regard to the sale & purchase with the M/s Super Smelters were minimal considering the flow of money between the two. Therefore the issue of the diversion of the interest bearing fund cannot ignored/ diverted. However from the submission of the assessee we find that there is regular outflow and inflow of funds in the account of M/s Super Smelters. The fund is going to the account of M/s Super Smelters from the bank of the assessee and after some days the amount is also coming back to the account of the assessee from M/s Super Smelters. This regular activity of the fund transfer shows that the borrowed money has not been utilized solely by M/s Super Smelters for the entire year. For part of the year the assessee has utilized the fund and for part of the year M/s Super Smelters has utilized the fund. Therefore in our considered view the interest on borrowed money needs to be allocated on proportionate basis depending on the utilization of funds. In support of this the ld. AR has allocated the interest amount which is enclosed as annexure 1 in this order.
Now the issue arises whether the disallowance of the interest shall be worked after considering the capital of the assessee. The ld. AR before us submitted that the amount given to M/s Super Smelters first needs to be adjusted with the owned fund of the assessee and the amount which is over and above of the owned fund of the assessee given to M/s Super Smelters should only be taken for the purpose of the disallowance of the interest. We are finding the force in the submission of the assessee therefore we are inclined to disallow the interest on the 11 & 1669/Kol/2013 M/s. Sai Iron (I) Ltd borrowed fund only for the period utilized by M/s Super Smelters and only that amount shall be considered which is over and above of the owned fund of the assessee. In this connection we also rely in the order of Hon’ble Tribunal of Chennai in the case of DCIT vs. Alliance retreat (p) ltd. 61 taxmann.com 249. The relevant portion of the order is reproduced below :
Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital (Interest free loans to sister concerns) - Assessment year 2009-10 - Assessee, a real estate company, had taken a term loan and paid interest on it - Assessing Officer made disallowance on account of diversion of interest- bearing borrowed funds to group companies - Assessee had been able to explain that entire secured loan was used for business purpose as assessee had given details of borrowings and utilisation of same - Further, Assessing Officer failed to establish that loan amount advanced to sister concerns was out of interest bearing funds only - Whether disallowance made by Assessing Officer was unjustified - Held, yes [Paras 8 and 9] [In favour of assessee].
Respectfully following the aforesaid order we partly allow the ground of the assessee’s appeal and accordingly directs to AO in terms of above. Hence this ground of Assessee’s appeal is partly allowed.
In the result, the appeal of the Revenue in AY 2008-09 is partly allowed.
Order Pronounced in the Open Court on 26th August, 2016.