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आयकर अपीलीय अिधकरण,च"डीगढ़ "यायपीठ “बी” , च"डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH “B”, CHANDIGARH "ी आकाश दीप जैन, उपा"य" एवं "ी िव"म "सह यादव, लेखा सद"य BEFORE: SHRI. AAKASH DEEP JAIN, VP & SHRI. VIKRAM SINGH YADAV, AM आयकर अपील सं./ िनधा"रण वष" / Assessment Year : 2018-19 M/s Mittal Traders बनाम The Asst. CIT Nabha Gate Sangrur-148001 Central Circle, Patiala "थायी लेखा सं./PAN NO: AAGFM8686E अपीलाथ"/Appellant ""यथ"/Respondent िनधा"रती क" ओर से/Assessee by : Shri Sudhir Sehgal, Advocate राज"व क" ओर से/ Revenue by : Shri Dharam Vir, JCIT, SR. DR सुनवाई क" तारीख/Date of Hearing : 13/12/2023 उदघोषणा क" तारीख/Date of Pronouncement : 23/02/2024 आदेश/Order PER VIKRAM SINGH YADAV, A.M. :
This is an appeal filed by the Assessee against the order of the Ld. CIT(A)-5, Ludhiana dt. 14/09/2022 pertaining to Assessment Year 2018-19. 2. In the present appeal, Assessee has raised the following grounds:
1. 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. 3. That the addition has been made against the facts and circumstances of the case. 4. That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.
3. 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 / retail trader. The return of income filed by the assessee was taken up for scrutiny and notices under section 143(2) and 142(1) were issued. 3.1 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. 3.2 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.
4. 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 & payment towards tax, which as per the AR are covered under 'commercial expediency' and submitted copy of account and argued that the perusal of the same reveals that as and when the funds were required by M/s J.R. Printing Press, the same were transferred by the appellant firm and received back when the funds were surplus with M/s J.R. Printing Press. The AR enclosed detailed chart showing date wise details of amount advanced by the appellant & further use of the funds by M/s. J.R. Printing, Press. It is also mention that the appellant had advanced these amounts from its sale proceed or day to day business activities and not by taking interest-bearing loan from any person, bank or other financing institution and the sister concern has utilized the money for its business purpose only. The main issue as per the AR, fn this case is whether the interest-free advances were given by the assessee to its group concern as a measure of ‘commercial expediency' or not and argued that the expression "commercial expediency" refers to those transactions/ expenditures which are not required to be incurred under any provisions of the law but it refers to such expenditure, a prudent businessman incurs for the purpose of business. The AR further argued that the "commercial expediency" depends upon the wisdom of the businessman and the Revenue has no role to play to decide as to what is "commercial expediency". Further the AR contended that the Revenue cannot occupy the position of the assessee and assume the role to decide whether a particular expenditure is required to be incurred, having regard to the facts and circumstances of the case. As per the AR, there cannot be any compulsion on the assessee to maximize his profit. The Income-Tax Authorities should enter into the shoes of the assessee, to see how a prudent businessman would act in the given facts and circumstances, it is because the Revenue does not seem to have understood the market conditions in which businesses are carried on, but at the same time, the Income-tax Department (Revenue), beyond doubt, is not precluded from assuming powers against those who try to circumvent law through unacceptable and prohibited means. Likewise, the provisions of section 37(1) of the Act does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Various courts have held that as long as the expenditure incurred is "wholly and exclusively" for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not. Courts have also held that if the expenditure is incurred for the purposes of the business, incidental benefit to some other person would not take the expenditure outside the scope of Section 37(1) of the Act. The AR referred to various judgments in support of his contentions. A perusal of the details filed by, the AR during the course of appellate proceedings, showing the utilization of funds by M/s, J. R. Printing Press which were received as interest-free advance from the assessee, reveals that a sum of Rs. 19,00,000/- received on 28.11.2017 was used for making payment of Advance Tax. Similarly, a sum of Rs. 25,00,000/- received on 09.02.2018 was also used for making payment of Advance Tax. Some of the other funds i.e. Rs. 4,00,000/- on 25.04.2017 and Rs. 1,00,000/- on 29.04.2017 were used for making payment to M/s. Raj Vehicle Pvt. Ltd. for purchase of 'Commercial Vehicle' for transportation of goods. Also, payment of Rs. 5,00,000/- on 03.04.2017, Rs. 15,00,000/- on 01.06.2017, Rs. 2,00,000/- on 13.06.2017, Rs. 10,00,000/- on 13.06.2017, Rs. 3,00,000/- on 07.12.2017, Rs. 3,00,000/- on 15.12.2017 were made to M/s. Setia Industries for purchase of goods. Similarly other payments were made to M/s. Setia Industries, M/s. Century Pulp & Paper, M/s. R.K. Trader Co. and M/s. New Pioneer Paper Agency etc. for purchase of goods by M/s. J. R. Printing Press. It has been clearly held that payment of tax by M/s. J. R. Printing Press cannot be said to be covered commercial expediency on the part of the assessee M/s. Mittal Traders and hence the argument of payment being made to group concern as a measure of ‘commercial expediency' is not found acceptable on the facts of the case. Because it was a legal obligation of M/s. J. R. Printing Press to pay the taxes and the same cannot be said to have been incurred on the grounds of ‘commercial expediency' in relation to the assessee. Similarly, the purchase of fixed asset in the shape of vehicles by M/s. J. R. Printing Press is not covered under commercial expediency on the part of the assesse. The same is the position with regard to the other payments made by M/s. J.R. Printing Press for purchase of goods or as advance payments for purchase of goods. The argument of the AR that if one sister concern does not help its sister concern especially when the partners are brothers and close relatives then a wrong signal goes in the society and there will dent in the family, is also not found legally tenable because it may have emotional appeal/value but cannot be a basis for any legal benefit to the assessee. The AO has also rightly mentioned that the two firms i.e. M/s. Mittal Traders and M/s. J. R. Printing Press are two distinct entities. Hence they have their separate obligations to meet independent of each other. The argument of the AR regarding the same status and same rate applicable on both the concerns, is also not tenable because it is a settled principle of law that the income has to be assessed in the hands of the person to which it belongs to and the income has to be assessed under right head, in the hands of the right person and for particular year and cannot be shifted at will. The assessee is required to pay the legitimate tax and cannot lower its tax liability by shifting the interest burden by way of paying interest-free advance to its sister concern (who has used it for making payment of advance tax and payment for purchases). Under the facts & circumstances of the case, the arguments of the AR are not found acceptable and the disallowance of Rs. 7,56,531/- made by the AO is upheld.”
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 advances were Rs. 4,36,83,852/- and peak balance of advances given to M/s J.R. Printing Press was Rs. 1,32,33,533/- which clearly demonstrate that the assessee has sufficient interest free funds and which has been given to its sister concern. 6.1 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 between the amount of loan taken and advance given. Hence, when the revenue has failed to establish the nexus between the loan taken and advances given, then it is not a correct position to disallow the expenditure on account that the expenditure was for non-business purpose. Further reliance was placed on the various Court and the Coordinate Benches decisions in support of his aforesaid contentions.
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 and the order of the ld CIT(A) may kindly be upheld and appeal of the assessee may kindly be dismissed.
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 Calcutta High Court in case of East India Pharmaceutical Works Ltd. Vs. CIT [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 tax shall fall within the scope of the expression “for the purpose of business”. It was further held that however wide may be the term “commercial expediency”, the expenditure cannot be allowed as an business expenditure under section 37(1) of the Act unless it is directly or indirectly incurred or laid out wholly and exclusively for the purpose of the business i.e; to say for the purpose of carrying on or carrying out of the business and it is futile to argue that each and every expenditure incurred by a trader is a deductible expenditure. It was further held that since the amount paid as income tax is not an expenditure at all nor even a business expenditure, it cannot even be argued that the interest paid by a trader on the money borrowed for payment of income tax is a business expenditure on any commercial principle nor even on the ground of commercial expediency. It was further held that the payment of income tax on the interest paid on the money borrowed for the payment of income tax is not at all related to the purpose and the object of the business and no element of trade in its commercial sense being involved in its, the commercial principle and the commercial expediency must be left out of consideration in determining this issue. The said decision of the Hon’ble Calcutta High Court has since been affirmed by Hon’ble Supreme Court in East India Pharmaceutical Works Ltd. Vs. CIT [1997] 224 ITR 627.
The aforesaid legal proposition so laid down by the Hon’ble Calcutta High Court as affirmed by the Hon’ble Supreme Court applies with equal force in the context of section 36(1)(iii) of the Act which again talks about “the amount of interest paid in respect of capital borrowed for the purpose of the business” and the concept of commercial expediency doesn’t fall for consideration in the facts of the present case.
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