M/S PIONEER PESTICIDES PVT. LTD.,CHANDIGARH vs. DCIT, C-1(1), CHANDIGARH

Per Sanjay Garg, Judicial Member:

The captioned appeal has been preferred by the assessee against

the order dated 29.09.2017 of the Commissioner of Income

Tax(Appeals)-1, Chandigarh [hereinafter referred to as ‘CIT(A)’]

agitating the confirmation of penalty levied u/s 271(1)(c) of the

Income-tax Act, 1961 (in short 'the Act').

proceedings, the Assessing officer noticed that assessee had given

interest free loans to various persons without business purposes

and had claimed expenditure of Rs. 3.80 crores during the year

but the assessee did not file the reply on the issue as to from what

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 2

source amount had been paid to above parties and what business

purposes had been served with the advanced loan. The assessee

could not explain any business expediency for making interest

free advances out of interest bearing funds. The Ld. assessing

officer, therefore, made interest disallowance @ 10.30% (on

average cost of debts) amounting to Rs. 1,34,215/- invoking the

provisions of section 36(1)(iii) of the Act. Penalty proceedings

were initiated u/s 271(1)(c) of the Act for concealing the

particulars of income and furnishing of inaccurate particulars of

income.

During the penalty proceedings, the Assessing officer issued

show cause notice dated 17.9.2015 stating as to why the penalty

be imposed u/s 271(1)(c) of the Act. However, assessee failed to

explain anything in this regard but stated in its reply that the

amount was advanced out of interest free loans raised by him.

However, the Assessing officer rejected the above contention of

the assessee while relying upon the decision of the Hon'ble

Punjab & Haryana High Court in the case of ‘CIT Vs. Abhishek

Industries Ltd.’ 286 ITR 1 (P&H). The Assessing officer further

observed that as per the policy of the Department, only a small

number of returns are taken for scrutiny and that otherwise

returns are accepted without any further verification from books

of account. That in the facts and circumstances, it was evident

that the assessee had taken a chance to file wrong particulars fully

knowing the policy of the Department regarding scrutiny

assessment. That had the case not been selected for scrutiny, the

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 3

assessee would have claimed the deduction of interest expenditure

on the amount advanced for non-business purposes. He, therefore,

relying upon the decision of the Hon'ble Delhi High Court in the

case of ‘CIT Vs. Zoom Communications P. Ltd’ [2010] 327 ITR

510 (Del) and also of the decision of the Hon'ble Supreme Court

in the case ‘Union of India Vs. Dharmendra Textile Processors’

306 ITR 227 and another decision of Hon'ble Apex Court in the

case of ‘Gujrag Industries Ltd. Vs. CTO’ 293 ITR 584 concluded

that the assessee had furnished inaccurate particulars of income

and, therefore, was liable for penalty u/s 271(1)(c) of the Act.

the assessee preferred appeal before the CIT(A). Before the Ld.

CIT(A), the assessee made following submissions:-

“1. Disallowance u/s 36(1)(iii) of the Income-tax Act, 1961: During the course of assessment proceedings the Assessing officer has disallowed interest u/s 36(1)(iii) of the Income-tax Act, 1961. The assessee company had raised loans from various persons on which no interest was paid. It had advanced loan to certain parties on which no interest was charged. The amount was advanced out of interest free loan raised and out of the reserve and surplus. Disallowance of proportionate interest does not tantamount to furnishing of any inaccurate particulars of income.”

However, the Ld. CIT(A) concluded as under:-

“Penalty levied on disallowance made u/s 36(i)(iii) of the Act, it is noticed that the appellant has neither brought on record what interest free resources were

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 4

available with it for making interest free advance, nor the appellant has explained any business purpose of the advance made. Since the appellant has failed to substantiate its claim, penalty levied on this account is confirmed.”

counsel for the assessee, Shri Tej Mohan Singh has submitted that

while making disallowance u/s 36(1)(iii) of the Act, the Assessing

officer has relied upon the decision of the Hon'ble Punjab &

Haryana High Court in the case of ‘CIT Vs. Abhishek Industries

Ltd.’ ‘ (supra), wherein, the Hon'ble High Court has observed as

under:-

“Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest.

in the case of Abhishek Industries Ltd (supra) has been reversed

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 5

by the subsequent decisions of the Hon'ble High Courts and

further that where the disallowance has been made u/s 36(1)(iii)

of the Act while relying upon the decision in the case of Abhishek

Industries (supra), the penalty u/s 271(1)(c) was not held to be

justified. The Ld. counsel has further submitted that even where

the disallowance is on a debatable issue, penalty cannot be

imposed u/s 271(1)(c) of the Act.

decisions: 1. M/s Keoing Solutions Ltd Vs. DCIT – ITA No. 1554/Chandi/2017 2. CIT v Trident Infotech Corpn Ltd. - 216 Taxman 58 (P&H) 3. Pr. CIT v Rana Sugar Ltd – 812 Taxman.com 77 (P&H) 4. ACIT v Torgqe Pharmaceuticals (P) Ltd – 173 TTJ 96 (Chandigarh-Trib)

lower authorities.

authorities and have considered the rival submissions of the Ld.

Representatives of the parties. We have also gone through the

case laws cited by the assessee. The Ld. counsel submitted that in

the identical facts and circumstances, in the case of M/s Koeing

Solutions Ltd. (supra), the Tribunal has deleted the penalty. He

has further submitted that in that case the lower authorities have

levied the penalty while relying upon the decision of the Hon'ble

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 6

Punjab & Haryana High Court in the case of Abhishek Industries

Ltd. (supra)

8.1. The next decision relied upon by the Ld. Counsel in the case

of ‘CIT Vs. Tident Infotech Cropn Ltd’ (supra), wherein, it has

been held that where the assessee had furnished its return prior to

the judgement of the Hon'ble High Court in the case of’ Abhishek

Industries Ltd’ (supra), and the Assessing officer had made

disallowance while relying upon the decision in the case of

‘Abnhishek Industries Ltd’ (supra), and it did not establish that

the assessee had either concealed its income or furnished

inaccurate particulars of income, the levy of penalty was not

attracted.

8.2. In the case of ‘Pr. CIT Vs. Rana Sugar Ltd’(supra), the

Hon'ble High Court held that where the assessee had agreed for

disallowance of proportionate interest relating to capital work-in–

progress u/s 36(1)(iii) of the Act as details of funds utilized for

individual projects were not reconcilable, the assessee could not

be held liable for either concealing particulars of income or

furnishing of inaccurate particulars of income for levying penalty

u/s 271(1)(c) of the Act.

8.3. In the case of ‘ACIT v Torque Pharmaceuticals (P)

Ltd.’(supra) , the Coordinate Bench of the Tribunal has upheld the

findings of the CIT(A) that since there was a mere proportionate

disallowance of interest on estimation basis, that was not a case

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 7

of either concealment of particulars of income or furnishing of

inaccurate particulars of income.

Counsel for the assessee do not fit in the facts and circumstances

of the case of the assessee. So far as the reliance on the case of

M/.s ‘Koeing Solutions Ltd Vs. DCIT’ (supra) is concerned, the

Tribunal while deleting the penalty has observed that the

Assessing officer had made the disallowance following the

decision of the Hon'ble Jurisdictional High Court in the case of

Abhishek Industries Ltd (supra). However, the proposition laid

down by the Hon'ble High Court in the case of Abhishek

Industries Ltd (supra) stood reversed in its subsequent decision in

the case of ‘Bright Enterprises Ltd Vs. CIT’ (2016) 381 ITR 107

and ‘CIT Vs. Kapsons Associates’. 381 ITR 203, wherein, it has

been held that where mixed funds both interest bearing and

interest free, were available with the assessee and the interest

free funds were sufficient to make the interest free advances made

by the assessee, the presumption was that the said advances had

been made out of interest free funds and consequently no

disallowance of interest u/s 36(1)(iii) of the Act was warranted.

The Tribunal further relied upon the decision of the Hon'ble High

Court in the case of ‘CIT Vs. Trident Infotech Corporation Ltd’

(supra), wherein, it has been held by the Hon'ble High Court that

where additions were made on account of decision of the Hon'ble

High Court in the case of Abhishek Industries Ltd (supra) and it

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 8

was not established that the assessee had either concealed its

income or furnished inaccurate particulars of income, it could not

be said to be a case of concealment of income.

9.1 There is no dispute as to the proposition of law laid down by

the Tribunal in the case of ‘M/s Koeing Solutions Ltd Vs.

DCIT’(supra) as per the proposition laid down by the Hon'ble

High Court in the case of ‘CIT Vs. Abhishk Industries Ltd’.,

(supra) where the assessee has both interest free and interest

bearing funds available with it and the interest free advances have

been made out of the mixed funds, the disallowance u/s 36(1)(iii)

is attracted on account of proportionate use of interest bearing

funds for interest free advances. However, in the subsequent

decisions, in the case of ‘Kapsons Associates’ (supra) and ‘Bright

Enterprises Pvt Ltd’. (supra), the disallowance u/s 36(1)(iii) of

the Act was held to be not justified on the proposition that where

the assessee on the date of investment had its own funds /

interest free funds sufficient to meet the investment made /

interest free advances given, then the presumption would be that

the assessee has used his own funds / interest free funds for the

said investment / advances. However, the moot point is that the

issue becomes debatable only if the assessee has his own funds /

interest free funds in its kitty as on the date of advancement

interest free advances. If the assessee did not have interest free

funds available with it, neither there will be any question of

mixed funds nor there can be any such presumption arrived at

about advancement out of own funds. In the case in hand, during

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 9

quantum assessment proceedings, despite specifically required by

the Assessing officer to explain, the assessee neither filed any

reply nor any explanation or evidence to show that as on the date

of making interest free advances, the assessee was possessed of

his own / non-interest bearing funds. Further, Ld. CIT(A) has

also made categorical observation in para 3.3 of his order that

assessee has neither brought on record what interest free

resources were available with it for making interest free advance

nor the appellant has explained any business purpose of the

advance made.

Counsel for the assessee to show us from the record, if the

assessee had any interest free funds available with it for making

investment, but the argument of the Ld. counsel was concentrated

on the point that if the disallowance has been made by the

Assessing officer while relying upon the decision of the Hon'ble

High Court in the case of Abhshik Industries Ltd (supra), penalty

cannot be levied in respect of that disallowance u/s 271(1)(c) of

the Act. We have specifically invited attention of the Ld. Counsel

to the facts of the case and brought to his knowledge that there

was no evidence furnished by the assessee even of the mixed

funds available with it. Even if the decision of the Hon'ble

Jurisdictional High Court in the case of Abhishek Industries

(supra) is not applied or considered, and decisions of the Hon'ble

Jurisdictional High Court in the case of ‘Bright Enterprises Pvt

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 10

Ltd Vs. CIT (supra)’ and ‘Kapsons Associates’ (supra) are

applied, even then the disallowance on interest in this case was

attracted. The assessee in this case has claimed huge interest

expenditure of more than Rs. 3.80 crores. The assessee despite

being asked for, did not show business exigency or business

purposes for making interest free advances. As per the provisions

of section 37(1) of the Income Tax Act, the expenditure laid down

or expanded wholly and exclusively for the purpose of business or

profession is allowable. So when the assessee, on the one hand

has claimed interest expenditure in relation to its business

activity but at the same time could not show that the said

expenditure was incurred for business purposes, then obviously,

it was a wrong & false claim of the expenditure. Hence, the

provisions of section 36(1)(iii) are squarely applicable. So far as

the reliance on the case laws by the counsel for the assessee is

concerned, as observed above, the said case laws would be

applicable if the assessee would be able to show that it had the

availability of own funds / interest free funds with it. The facts on

the face of it show that the assessee had used borrowed funds for

non-business purposes, but claimed the interest expenditure as

business expenditure. Had the case of the assessee not come into

the scrutiny of the Assessing officer, the assessee would have

escaped paying lesser tax than that it was actually required to

pay. The assessee is not a layman but it is a company incorporated

under the Companies Act and has the services available of legal

and professionals C.A.s. It is also not a case of bonafide mistake

ITA No. 1553/Chd/2017- M/s Pioneer Pesticides Pvt. Ltd, Chandigarh 11

or bonafide claim. Even no debatable issue is involved on this issue. The disallowance apparently be attracted in the case of the assessee u/s 36(1)(iii) of the Act. 11. Now coming to the other case laws relied upon by the Ld.

counsel, we find that the aforesaid case laws are either related to the mixed funds theory applying presumption of use of own funds or disallowance not warranting penalty in the facts and circumstances of those cases. However, in the case in hand, the assessee, in our view, has furnished inaccurate particulars of income by way of calming interest expenditure, which otherwise the assessee was not justified to claim and per chance the case of

the assessee was chosen for scrutiny during which the Assessing officer found that the aforesaid act on the part of the assessee in furnishing of inaccurate particulars of income. We, therefore, do not find any infirmity in the orders of the CIT(A) in upholding the penalty so levied by the Assessing officer u/s 271(1)(c) of the Act. There is no merit in the appeal of the assessee and the same is accordingly dismissed.

Sd/- Sd/- (B.R.R. KUMAR) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated :07.06.2018 Rkk Copy to: • The Appellant • The Respondent • The CIT • The CIT(A) • The DR