ITO,, PUDUCHERRY vs. SHRI S.MUTHUKUMARASAMY,, PONDICHERRY

The appeal filed by the Revenue is directed against the order of the Commissioner of Income Tax (Appeals)-XII, Chennai, dated 15.02.2012 and pertains to assessment year 2007-08. The assessee has filed cross-objection to support the order of the cross-objection, we heard both together and disposing of the same by this common order.

Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the first issue arises for consideration is with regard to disallowance of proportionate interest on the funds diverted for non-business purpose. The Ld. D.R. submitted that the Assessing Officer found that the assessee has diverted the borrowed funds for non-business purpose by making interest-free deposits to various persons. According to the Ld. D.R., the interest payment was calculated @ 16% in respect of the funds which were diverted. The CIT(Appeals), however, restricted the disallowance to `62,315/- instead of `7,56,800/-. According to the Ld. D.R., the CIT(Appeals) ought not to have restricted the interest to 11.5%. He ought to have charged interest @ 16% on the entire amount diverted. The Ld. D.R. further submitted that the CIT(Appeals) has also reduced `11,40,100/- on the ground that the opening balance of capital as on 01.04.2006 is `11,40,100/-. According to the Ld. D.R., the CIT(Appeals) ought to have confirmed the addition made by the Assessing Officer. the assessee, submitted that the assessee had interest-free capital to the extent of `15,27,009/- for the assessment year 2007-08. The opening balance as on 1.04.2006 is `11,40,100/-. Therefore, the interest-free fund available for making advance is to the extent of `11,40,100/-. This amount of `11,40,100/- was confirmed by the CIT(Appeals) as advanced from capital balance. The CIT(Appeals) restricted the disallowance only in respect of the funds diverted for non-business purposes from the borrowed funds. The assessee admittedly paid @ 11.5% as interest, therefore, what could be disallowed is only interest portion @ 11.5% on the borrowed funds diverted. Therefore, the CIT(Appeals) has rightly restricted the disallowance to `62,315/- instead of `7,56,800/-.

We have considered the rival submissions on either side and perused the relevant material on record. What is to be disallowed is in respect of the expenditure which was not incurred for the purpose of business. If the assessee made advance from the funds available with him, then there is no question of disallowance. The availability of funds to the extent of `15,27,009/- including the current year’s profit of `3,85,910/- is not in dispute. The opening balance as on 1.4.2006 was `11,40,100/-. Therefore, the question of making any disallowance. In respect of the remaining portion, the CIT(Appeals) found that the interest has to be charged only at 11.5% when the assessee is paying interest at 11.5% on the borrowed funds. This Tribunal is of the considered opinion that the interest has to be considered only at 11.5% and not at 16%. Therefore, the CIT(Appeals) has rightly restricted at `62,315/-. This Tribunal do not find any infirmity in the order of the CIT(Appeals) and accordingly, the is confirmed.

The next issue is with regard to unexplained cash credit to the extent of `2,50,000/-.

Sh. P. Radhakrishnan, the Ld. Departmental Representative, submitted that the Assessing Officer found that the assessee has received a sum of `25,000/- from M/s Khanna Brothers and another sum of `25,000/- from M/s Khanna & Co. However, M/s Khanna Brothers and M/s Khanna & Co. informed the Assessing Officer that they gave funds only to M/s Spectrum Maruthi Spares and not to the assessee. Therefore, the Assessing Officer treated the same as unaccounted cash credit in the hands of the assessee. Similarly, a sum of `6,90,000/- out of which `4,40,000/- was claimed to have transfer of funds from the assessee’s own bank account at Union Bank of India. For the balance `2,00,000/-, the assessee explained that the amount was received from one Smt. T. Ramalakshmi by account payee demand draft. On the examination, the Assessing Officer found that the explanation of the assessee that he received `2,00,000/- from Smt. T. Ramalakshmi is not tenable. The CIT(Appeals), however, found that the loan was received by way of account payee demand draft, hence, it is a verifiable transaction.

On the contrary, Shri V. Jagadisan, the Ld. representative for the assessee, submitted that the assessee is a partner in M/s Spectrum Maruthi Spares. In fact, M/s Khanna Brothers and M/s Khanna & Co. gave `25,000/- each to the assessee. However, this cheque was issued in the name of M/s Spectrum Maruthi Spares.

We have considered the rival submissions on either side and perused the relevant material on record. The Assessing Officer added `50,000/- which was claimed to have been received from M/s Khanna Brothers and M/s Khanna & Co. The assessee claims that the advances were made to him. However, the cheque was issued in the name of M/s Spectrum Maruthi Spares. The fact remains that there was a transfer of funds from M/s Khanna Brothers and M/s Khanna & Co. to M/s Spectrum Maruthi Spares where the assessee is a partner. Therefore, this Tribunal is of the considered opinion do not find any infirmity in the order of the lower authority and accordingly, the same is confirmed.

Now coming to the addition of `2,00,000/- said to have been received from Smt. T. Rajalakshmi, it is not in dispute that the assessee has received the funds through account payee demand draft. The only contention of the Ld. D.R. is that the details were produced before the CIT(Appeals). However, he has not taken any specific ground with regard to violation of Rule 46A. The fact remains that the Assessing Officer made an addition of `2,00,000/- and the CIT(Appeals) found that the payment was made through DD and therefore, there is no question of any addition. In those circumstances, this Tribunal do not find any reason to interfere with the order of the lower authority and accordingly, the same is confirmed.

On the contrary, Shri V. Jagadisan, the Ld. representative for the assessee, submitted that the additional income offered by the partnership firm was `13,56,817/-. The income telescoped was `4,46,781/-. Referring to the order of this Tribunal in I.T.A.

In the result, the appeal of the Revenue is dismissed.

In view of the above discussion, this Tribunal do not find any merit in the cross-objection filed by the assessee. Accordingly, the cross-objection also stands dismissed.