M/S MITTAL TRADERS,SANGRUR vs. THE ACIT, CENTRAL CIRCLE, PATIALA

That the Ld. CIT(A) has erred in confirming the disallowance of Rs. 7,56,531/- on account of disallowance of interest on advances which are for business purposes.

That the Ld. CIT (A) has failed to appreciate that there were interest free funds available with the assessee from which, such advances were made.

That the addition has been made against the facts and circumstances of the case.

That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.

Briefly the facts of the case are that the assessee is a partnership firm engaged in the business of stationary goods, items, paper etc as a wholesale /

1 During the course of assessment proceedings, the AO on perusal of the P&L Account observed that the assessee has booked interest expenditure amounting to Rs. 9,32,288/- and at the same time, assessee has made interest free advances to M/s J.R. Printing Press and accordingly, a show cause was issued to the assessee as to why the proportionate interest expenditure amounting to Rs. 7,56,531/- may not be disallowed.

2 In response, the assessee submitted that M/s J.R. Printing Press and the asessee are related entities because of the common partners and the family relations and there was commercial expediency involved behind making such interest free advances. The submissions so filed by the assessee were not found acceptable. As per the AO, the two firms namely assessee and M/s J.R. Printing Press are two distinct entities and the assessee has failed to demonstrate commercial expediency by explaining use of the funds in the hands of M/s J.R. Printing Press. As per AO, the assessee has availed interest bearing loans from various sources and has incurred interest expenditure on which interest amounting to Rs. 7,56,531/- has been foregone. Accordingly, the interest expenditure amounting to Rs. 7,56,531/- was disallowed and brought to tax in the hands of the assessee.

Against the said findings, the assessee moved in appeal before the Ld. CIT(A) who has confirmed the order of the AO and the relevant findings reads as under: “The facts of the case, the basis of addition/disallowance made by the AO / and the arguments of the AR during the appellate proceedings have been /considered. The AR has submitted that M/s Mittal Traders & M/s J.R. Printing Press are the sister concerns, having common partner Sh. Jeet Pal Mittal and in both the firms all the partners are brother/relative. The AR mentioned that the appellant firm transferred funds to its sister concern to meet its business expenses

Being aggrieved with aforesaid findings and directions of the ld CIT(A), the assessee is in appeal before us.

During the course of hearing, the Ld. AR submitted that the advances were given to M/s J.R. Printing Press which is a sister concern of the assessee on ground of commercial expediency. It was submitted that the amount has been advanced by the assessee out of its self owned funds and not out of the borrowed funds. In this regard, it was submitted as on 31/03/2018, the total source of funds including the own capital of the assessee and interest free

1 It was further submitted that the assessee has advanced the funds to its sister concern as and when the same were required by sister concern for meeting its regular business expenditure. In this regard, the copy of the account of M/s J.R. Printing Press in the books of the assessee alongwith the copy of the justification of advances given to M/s J.R. Printing Press and its utilization was placed on record at assessee’s paper book at page no. 9-19. 6.2 It was further submitted that the unsecured loans taken by the assessee were used only for the regular business purposes of the assessee and not to advance such funds to M/s J.R. Printing Press. In this regard, our reference was drawn to a chart prepared by the assessee wherein the assessee has explained the utilization of borrowed funds raised through unsecured loans which is contained at assessee’s paper book at page 20. 6.3 It was further submitted that the said advances were given by the assessee to its group concern only as a measure of commercial expediency. It is submitted that although the phrase “commercial expediency” cannot be defined in specific terms, but, in simple terms, it can be defined as expenditure which a prudent businessman incurs for the purpose of business. In addition to this, the Act does not curtail the assessee from incurring an expenditure which the assessee feels to incur or which is required in regular course of business of the assessee. It is hereby submitted that the amount has been advanced by the assessee wholly and exclusively for business purpose which is again used by M/s. J.R. Printing Press for its regular business transactions. Moreover, the case of the assessee is not a case wherein, the Ld. AO has established a direct nexus

Per contra, the Ld. DR relied on the findings of the Ld. CIT(A). It was submitted that the findings of the Id. CIT(A) are in para 3.4 at page 10 to page 13 of the impugned order. Besides taking note of assessee's submissions, it was submitted that the Id. CIT(A) noted the utilization of funds by sister concern. It was noticed that funds of Rs.19,00,000/- transferred on 28.11.2017 & Rs.25,00,000/- on 09.02.2018 have been utilized for payment of advance tax. Rs.4,00,000 on 25.04.2017 & Rs.1,00,000 on 29.04.2017 were used for purchase of commercial vehicle. The other funds transferred were used for purchases of sister concern. The Id. CIT(A) held that meeting the obligation of sister concern to pay taxes cannot be held as commercial expediency as it is legal obligation of sister concern to pay its taxes. The purchase of vehicles, payments of goods for sister concern etc. are not for commercial expediency of the assessee firm. The payment for sister concern may have emotional value but it has no legal benefit to the assessee firm. It was also held that both the firms have distinct existence and separate obligations to meet independent of each other It was also held that it is settled principle of law that income has to be assessed in the hands of person to which it belongs and income has to be assessed in the hands of right person and for particular year and cannot be shifted at will. It was submitted that in view of the clear cut findings of the ld. CIT(A) to the effect that there was no commercial expediency involved in the case and various other judgments explained and relied upon, it was submitted that the assessment order of AO

We have heard the rival contentions and perused the material available on the record. As per Section 36(1)(iii), the amount of interest paid in respect of capital borrowed for the purpose of the business is allowed as deduction. In this regard, one of the contentions which has been advanced by the Ld. AR is that the unsecured loans taken by the assessee were used only for the regular business purposes of the assessee and not to advance the said funds to M/s J.R. Printing Press and therefore, the question of disallowance of any proportionate interest u/s 36(1)(iii) doesn’t arise for consideration. Our reference was drawn to the chart placed at assessee’s paper book at page 20. On perusal of the said chart, we find that there are borrowing to the extent of Rs. 70,33,383/- which are carried over from the last year and outstanding as on 01/04/2017 and which have been stated to be utilised for the purposes of the assessee’s business. Further, there are fresh borrowings to the extent of Rs. 25,05,000/- which have been made by the assessee during the year under consideration and which have been stated to be utilized in payment of advance tax except for an amount of Rs. 1,30,000/-. In so far as the opening balance of the borrowings is concerned which have been stated to be utilized for the purpose of the assessee’s business and therefore not available for further lending to the related entity, M/s J.R. Printing Press during the year, the said contention can be accepted. However as far as the additional borrowings during the year except for an amount of Rs. 1,30,000/- is concerned, it is a stated position of the assessee that the said borrowing has been utilized for the purpose of payment of advance tax on account of tax survey carried at the business premises of the assessee.

The question that arise for consideration is where the interest has been paid on borrowings and such borrowing are stated to be utilized for payment of advance tax, can the said claim be allowed for the purpose of section 36(1)(iii) of the Act. In this regard, we find that it is a settled position that where the borrowed money are not used for the purposes of the business but are utilized for paying its tax liability, the claim for interest is not allowable but for such disallowance, the findings of fact based on relevant material is necessary.

In this regard, useful reference can be drawn to the decision of Hon’ble [1978] 114 ITR 591. The issue for consideration before the Hon’ble Calcutta High Court was whether payment of interest on money borrowed for payment of Income Tax is an expenditure laid out wholly and exclusively for the purpose of business as contemplated under section 37(1) of the Act. In the said case, the assessee company had an overdraft account with the bank and utilized this account for payment of Income Tax and claim the proportionate interest paid on the said amount as an allowable expenditure under section 37(1) of the Act. The AO disallowed the said claim which was upheld by both the appellate authorities and thereafter the matter reached the Hon’ble High Court.

It was held by the Hon’ble High Court that it is a settled law that the expression ‘for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’. It was held that it is also a settled law that an expenditure cannot be allowed as business expenditure under section 37(1) of the Act unless it was incurred or laid out directly or indirectly by the assessee wholly and exclusively for the purposes of his business. It was held that a trader carries on business for the purpose of earning profits and not for the purpose of paying income tax. No business is ever carried on nor it can be carried on for the object of paying income tax though the earning of profit and payment of taxes are not isolated and independent activities of a business. It cannot be said that the expenditure claimed or laid out for the purposes of payment of income

In the instant case, since it is an admitted position on behalf of the assessee that the fresh borrowings to the extent of Rs. 25,05,000, except for an of Rs 1,30,000, has been utilized for payment of advance tax, there is a clear

In view of the same, the other contentions raised by the ld AR are left open as the same have become academic in nature. The disallowance made by the AO is restricted to the amount of Rs. 1,11,590/- and the remaining addition is hereby directed to be deleted.

In the result, appeal of the Assessee is partly allowed. Order pronounced in the open Court on 23/02/2024. आकाश दीप जैन िव"म "सह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा"य" / VICE PRESIDENT लेखा सद"य/ ACCOUNTANT MEMBER AG Date: 23/02/2024

""यथ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File