Case Law Details
H.I. Tamboli & Co. Vs Asstt. CIT (ITAT Pune)
The issue in the present case is with respect to disallowance of interest on the interest free amounts advanced to sister concern. We find that learned Commissioner (Appeals) while granting partial relief to the assessee has noted that as against the interest free advance of Rs. 1.27 crores to its sister concern M/s. Hira Enterprises, the average balance of partner capital stood at around Rs. 21,00,000 meaning thereby that the assessee did not have sufficient interest free funds at its disposal for advancing the amount. We further find that learned Commissioner (Appeals) while granting partial relief has noted that no reasons were provided by the assessee for advancing interest free advances. Before us also assessee has not placed any material on record to demonstrate the commercial expediency. We further find that learned Commissioner (Appeals) has noted that on perusal of the ledger account of M/s. Hira Enterprises as well as the copy of bank statement of Kharad Urban Co-operative Bank that amount advanced to sister concern was through the cash credit account. We further find that learned Commissioner (Appeals) by a well reasoned and detailed order has decided the issue and granted partial relief to assessee. Learned Commissioner (Appeals) further directed to disallow the proportionate interest. Before us, assessee has not placed any material on record to controvert the findings of learned Commissioner (Appeals). In view of the aforesaid facts, we find no reason to interfere with the order of learned Commissioner (Appeals) and thus this ground of the assessee is dismissed.
FULL TEXT OF THE ITAT ORDER IS AS FOLLOWS:-
1. This appeal filed by the assessee is emanating out of the order of Commissioner (A)–III Pune dated 9-10-2014 for the assessment year 2007-08.
2. The relevant facts as culled out from the material on record are as under :–
Assessee is a partnership firm stated to be engaged in the business of manufacturing and selling of tobacco products. Assessee electronically filed its return of income for assessment year 2007-08 on 31-10-2007 declaring total income of Rs. 15,20,628. The case was selected for scrutiny and thereafter the assessment was framed under section 143(3) of the Act vide order dated 1-12-2009 and the total income was determined at Rs. 58,18,120. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals) who vide order dated 9-10-2014 granted partial relief to the assessee. Aggrieved by the order of learned Commissioner (Appeals), assessee is now in appeal before us and has raised the following grounds :-
“1. On the facts and in the circumstances of the case and in the law the Lower authorities have erred in making a disallowance on proportionate interest on loan by disregarding appellant’s contention in this regards.
2. On the facts and in the circumstances of the case and in the law the Lower Authorities have erred in making a disallowance under section 40(a)(ia) of the Income Tax Act, 1961 for alleged defaults of non-deduction of TDS by disregarding appellants contention in this regards.”
3. Ground No. 1 is with respect to disallowance of proportionate interest.
3.1 During the course of assessment proceedings, on perusing the details furnished, assessing officer noticed that assessee had debited bank interest of Rs. 8,59,079 on the bank loans aggregating to Rs. 74,96,527 obtained by assessee and at the same time assessee had granted interest free advance of Rs. 1,27,34,934 to its sister concern, M/s. Hira Enterprises. The assessee was asked to explain as to why the interest on the interest free amount advanced sister concern not be disallowed. The submission of the assessee that there was no diversion of funds of business was not found acceptable to the assessing officer. Assessing officer noted that the capital of the firm was not sufficient to cover the interest free advances and therefore the advances were out of borrowed funds. He accordingly worked out the interest disallowance on the amount of interest free advance to sister concern at Rs. 8,59,079. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals), who upheld the order of assessing officer by holding as under :–
“2.1 The appellant is a firm stated to be engaged in manufacturing and selling of tobacco products. The assessing officer found that during the year, the appellant had debited bank interest of Rs. 8,59,079 on bank loan availed by it. However, he also found that the appellant had given huge interest free advances amounting to Rs. 1,27,34,934 to its sister concern, namely, Heera Enterprises. Drawing the inference that interest bearing funds availed from banks may have been diverted for making such interest free advances, the appellant was called upon by the assessing officer to explain reason for not disallowing the interest expenditure claimed, holding that such funds availed were not used for the purpose of business. Responding to the assessing officer’s query, the appellant denied that interest bearing funds were diverted for giving advances to the sister concern, citing that the firm had sufficient capital to the tune of Rs. 21,05,598. However, the assessing officer rejected the contention of the appellant noting that the capital balance available with the appellant could not have been sufficient to fund the advances given on which no interest was charged. Accordingly, interest expenditure claimed of Rs. 8,59,079 was disallowed by the assessing officer.
2.2 During the appellate proceedings, the appellant submitted that out of the total interest expenditure claimed of Rs. 8,59,079, interest amounting to Rs. 3,59,152 pertained to loan obtained from Bank of Baroda while interest of Rs. 4,99,929 relates to cash credit facility availed from The Karad Urban Co-op. Bank. The learned Authorised Representative submitted that no part of the loan availed from Bank of Baroda was diverted for making any interest free loan and no nexus of such fund to the advances given to sister concern could be established by the assessing officer and pleaded that the interest expenditure of Rs. 3,59,152 pertaining to the said loan needs to be fully allowed. Explaining the other part. of the expenditure relating to cash credit facility availed from Karad Urban Co-op Bank Ltd., the Authorised Representative conceded that the said facility was used by the appellant for making advances to the sister concern. Drawing attention to the relevant bank extracts, he however, stressed that the facility was utilized only for 2/3 days and was repaid out of the firm’s resources. Explaining the position of capital balances of the partners during the year, the learned Authorised Representative submitted that the partners had a collective credit balance of Rs. 21,05,597 during the year. Thus, emphasizing that the cash credit facility of the Karad Co. op. Bank Ltd. was utilized for a very short period and that the partners had positive credit balance on which no interest was being paid, the learned Authorised Representative pleaded that only a nominal part of the interest paid of Rs. 4,99,927 paid to the Karad Co-op. Bank needed to be disallowed.
2.3 I have given the appellant’s submissions the most careful consideration. As per provisions of section 36(1)(iii) of the Act, the interest on loans raised by the assessee for business purposes is available as a business deduction. If the assessee makes a claim to deduction in terms of section 36 for the purpose of computation of income referred to in section 28, he has to place materials in support of his claim of entitlement to the deduction. Section (1)(iii) relates to the amount of interest paid on capital borrowed for the purposes of the business, profession or vocation. The assessee has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute. The burden is on the assessee to. prove that a particular class of income is exempt from taxation. The burden is on the Revenue authorities to show that the income is liable to tax under the statute; but the onus of showing that a particular class of income is exempt from taxation lies on the assessee. To earn the exemption, the assessee has to establish that his case clearly and squarely falls within the ambit of the exempting provisions of the Act. The principles equally apply in cases of deductions claimed. Once the assessee claims any such interest as deduction in their books of account the onus is always on the assessee to satisfy the assessing officer that whatever loans were raised by the assessee were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the assessee has advanced certain funds to sister concerns charging no interest, there would be a very heavy onus on the assessee to discharge before the assessing officer to the effect that in spite of outstanding loans o which the assessee is incurring liability to pay interest, there would be sufficient justification to advance the loans to sister concerns for non-business purposes without charging any interest. This was the finding of the Honourable Allahabad High Court in 352 ITR 8 (CIT v. Sahu Enterprise (P) Ltd).
2.3.1 The Honourable Punjab and Haryana High Court in Abhishek Industries Ltd. reported in 286 ITR 1 came to a finding that once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay interest 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). 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. It was held :–
“The entire money in a business entity comes in a common kitty and the appellant’s business is no different. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilized for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. Therefore, direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes is not at all a factor in considering the issue of allowability of section 36(1)(iii). Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under section 36(1)(iii) of the Act”.
2.3.2 It is the matter of record that the appellant has taken term loans and cash credit loans from the bank amounting to Rs. 74,96,527 which are outstanding as on 1-4-2007 and the appellant has claimed interest expenditure of Rs. 8,59,079 which has been debited to the P&L account. Interest amounting to Rs. 2,76,021 has also been paid to other financial institutions. Thus, the total interest outgoing are to the tune of Rs. 11,35,100. The appellant owns fixed assets amounting to Rs. 1,13,63,260 after depreciation as on 31-3-2007. However, huge interest free advance Rs. 1,27,34,934 has been made to its sister concern, M/s. Hira Enterprises. As against the same, the average balance of partners capital stands at Rs. 21,05,597. The figures therefore, clearly show that the appellant did not have sufficient interest free funds at its disposal and the bank loans of Rs. 74,96,527 have been utilized towards making the impugned interest free advances. That being the position, there would be no escape from the finding that interest being paid by the appellant to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. The view that where the amount is advanced from a mixed account or share capital or sale proceeds or profits, it would not be deemed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds, is not correct. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been advanced to sister concerns or other 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. In fact, the Delhi High Court in Punjab Stainless Steel Industries v. CIT 324 ITR 396 held that it may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which include borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances are extended. It was also held that the question to be applied in each case was to see whether the interest free advance was commercially expedient for the assessee or not. It was held that the commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm and working solely in the interest of the assessee-firm/company, would have extended such interest free advances. In that view of the matter, the appellant’s claim that it had sufficient interest-free funds at its disposal is not acceptable nor material to the facts of the case.
2.3.3 Coming to the legal precedents on the issue, it is seen that the highest court of the land, namely the Hon’ble Supreme Court in S.A. Builders Ltd. v. CIT (288 ITR 1) has held that the correct approach to the issue of grant of deduction under section 36(1)(iii) would be to examine whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. It was held that if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes (which need not necessarily be the business of the assessee itself), the assessee would, ordinarily be entitled to deduction of interest on its borrowed loans. Having laid down the test for determination of the allowability of deduction under section 36(1)(vii) the Apex Court set aside the matter to be decided afresh. This decision of the Supreme Court overruled a host of High Court decisions to the contrary which gave a limited interpretations to the scope of the phrase “for the purposes of business or profession” used in section 36(1)(iii). This decision overruled the Bombay High Court decisions in the case of Phaltan Sugar Works Ltd. 208 ITR 989 and 215 ITR 582, and approved the Delhi High Court decision in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377.
2.3.4 Subsequent to this decision of the Apex Court, the Dept. filed an SLP against the Delhi High Court’s decision in Addl. CIT v. Tulips Star Hotels Ltd. reported in 338 ITR 482 wherein the High Court had held that the interest liability on loans borrowed to acquire the equity capital of a subsidiary company which was in the same line of business was allowable deduction under section 36(1)(iii). While admitting the SLP of the Department, the Supreme Court vide order dated 30-4-2012 directed that the earlier view of the Court in S.A. Builders Ltd. v. CIT should be referred for reconsideration to another Bench of the Court.
2.4 Based on these decisions of the Apex Court, it needs to be examined whether the amounts in question that were advanced to sister concerns without any interest were justified by reasons of commercial expediency or not. No justification has been provided by the appellant for the amounts advanced and the examination of the written submission filed 3-11-2011 do not touch upon the issue at all. In reaching these conclusions, I m guided by the fact that while a businessman is normally expected to take sound and prudent business decisions (in CIT v. Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC) it was observed that yardstick will have to be taken from the businessman point of view but the businessman must be a prudent businessman), the tax authorities are still entitled to examine the business expediency. This was the ratio of the Punjab and Haryana High Court decision in CIT v. Rockman Cycle Industries (P) Ltd. 326 ITR 291 as well as the Apex Court decision in SA Builders case (supra). Accordingly, the interest expenditure incurred by the appellant that have been claimed under section 36(1)(iii), cannot be allowed in its entirety. However it is seen that the assessing officer has disallowed the entire bank interest amounting to Rs. 8,59,079 which is, not justified. The ledger account of Hira Enterprises as well as Xerox copy of the Karad Urban Co-operative Bank account have been filed which show that the advances made to the sister concern are through this cash credit account. The assessing officer is directed to disallow the proportionate interest expenditure relating to the interest free advance made to sister concern. Ground of appeal No. 1 is thus partly allowed, subject to these remarks.’
Aggrieved by the order of learned Commissioner (Appeals), assessee is now in appeal before us.
4. Before us, learned Authorised Representative reiterated the submissions made before assessing officer and learned Commissioner (Appeals). He further placed reliance on the decision of Hon’ble Apex Court in the case ofS.A. Builders v. CIT (2007) 288 ITR 1/158 Taxman 74. Learned Departmental Representative on the other hand, supported the order of assessing officer and learned Commissioner (Appeals) and further submitted that assessee has not pointed out any commercial expediency and the necessity of advancing the loan to its sister concern. He thus supported the order of lower authorities.
5. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance of interest on the interest free amounts advanced to sister concern. We find that learned Commissioner (Appeals) while granting partial relief to the assessee has noted that as against the interest free advance of Rs. 1.27 crores to its sister concern M/s. Hira Enterprises, the average balance of partner capital stood at around Rs. 21,00,000 meaning thereby that the assessee did not have sufficient interest free funds at its disposal for advancing the amount. We further find that learned Commissioner (Appeals) while granting partial relief has noted that no reasons were provided by the assessee for advancing interest free advances. Before us also assessee has not placed any material on record to demonstrate the commercial expediency. We further find that learned Commissioner (Appeals) has noted that on perusal of the ledger account of M/s. Hira Enterprises as well as the copy of bank statement of Kharad Urban Co-operative Bank that amount advanced to sister concern was through the cash credit account. We further find that learned Commissioner (Appeals) by a well reasoned and detailed order has decided the issue and granted partial relief to assessee. Learned Commissioner (Appeals) further directed to disallow the proportionate interest. Before us, assessee has not placed any material on record to controvert the findings of learned Commissioner (Appeals). In view of the aforesaid facts, we find no reason to interfere with the order of learned Commissioner (Appeals) and thus this ground of the assessee is dismissed.
6. Second ground is with respect to disallowance under section 40(a)(ia) of the Act.
6.1 Assessing officer on perusing the details of expenses noticed that assessee had made payments to various persons (the details of which are listed at page 2 of the assessment order). The payment aggregating to Rs. 34,28,931 inter alia on account of printing charges, loading and unloading charges, payment of rent and interest on which assessee had not deducted TDS. The assessee was show caused and asked to explain as to why the expenses not be disallowed under section 40(a)(ia) of the Act. Assessee inter alia submitted that provisions of section 40(a)(ia) of the Act are not applicable. The submission of the assessee was found not acceptable to the assessing officer. Assessing officer was of the view that the provisions of section 194C are attracted and since assessee has not deducted TDS the amount was liable for disallowance under section 40(a)(ia) of the Act. He accordingly disallowed Rs. 34,28,931. Aggrieved by the order of assessing officer, assessee carried the matter before learned Commissioner (Appeals) who granted partial relief to the assessee by holding as under :–
“3.2 During the appellate proceedings, explaining the nature of the various expenditures which were subjected to disallowance by the assessing officer citing non-deduction of tax, the learned Authorised Representative for the appellant made following clarifications :–
(i) Printing Charges :–
The learned Departmental Representative reiterated the contention raised before the assessing officer that there was no specific contract for the printing work and the charges were being paid as per work done on rate basis. It is stated that for different types of work, different rates were offered and charged. He insisted that these transactions were of routine nature and no contract was involved and therefore, TDS provisions were attracted.
(ii) Tobaco Processing charges :–
The learned Authorised Representative submitted that the Tobacco processing charges of Rs. 3,11,134 was paid to M/s. Fulabai Govindchand of Bhardan (Gujarat State) and break of such charges was furnished as under:
Rs. 10,160/- Processing Dalali
Rs. 2,13,360/- Processing charges
Rs. 800/- Sutali
Rs. 73,660/- Transportation charges
Rs. 2,994/- Truck loading charges
Rs. 10,160/- Processing Dalali
Rs. 3,11,134/- Total
The learned Authorised Representative pointed out that out of total charges paid of Rs. 3,11,134 processing charges were only to the extent of Rs. 2,13,360 while expenditure to the tune of Rs. 97,774 pertained to other charges as above. According to the Authorised Representative the said amount of Rs. 97,774 needed to be excluded from the disallowance made.
(iii) Transport charges (Rs. 1,18,333)
It was stated that this amount was paid to M/s. Deepak Transport Agency Ltd., Hyderabad. Justifying the non-deduction of tax out of this amount, it is stated that in its bill raised, the said firm had specifically asked not to deduct tax and therefore, no tax was deducted by the appellant firm. The Authorised Representative pleaded that considering this aspect, the disallowance of this expenditure be deleted.
3.3. I have given careful consideration to the submissions of the learned Authorised Representative At the outset, the Authorised Representative has clarified that the entire disallowance of Rs. 34,28,931 which were found to have been payments made without deducting tax, are not being contested. Only specific payments relating to printing charges of Rs. 11,78,925, tobacco processing charges of Rs. 97,774 (out of total disallowance of Rs. 3,11,134 and transport charges of Rs. 1,18,333 are being contested. I have examined the sample copies of the printing bills of M/s. Shiv Offset Printers, Sangli, M/s. Prakash Offset Printers, Ichalkaranji and M/s. Ashok Print Pack, Sangi filed by the appellant at pages 8 to 10 of the paper book. Perusal of the same reveals that the amounts are charged as a consolidated figure inclusive of printing of zarda labels, kacchi misri labels, plate charges as well as packing and forwarding charges. Thus, the printing charges are fixed per ream of plastic-coated color printing done for packaging the end-product i.e., zarda which is manufactured by the appellant. The work done by these printers falls within the definition of a works contract/sub-contract as specified in section 194C. The fact that there is no written contract is immaterial or that the transactions were routine transactions has no bearing to the applicability of section 194C and consequently, the disallowance made under section 40(a)(ia). So far as the tobacco processing bills are concerned, again, it is found that the composite charges are paid, inclusive of the sutli, dalali, transportation and truck loading charges of the tobacco processed on behalf of the appellant In fact, the bill of M/s. Fulabhai Govindbhai filed at page 11 of the paper book clearly states that it is a ‘process bill’ and dalali, transportation etc incurred are to facilitate the processing of the tobacco done for the appellant. The appellant has paid a lump sum amount of Rs. 3,11,134 to M/s. Fulabhai Govindbhai on account of processing work, which squarely falls within the definition of a works contract/sub-contract as specified in section 194C. No relief as sought for can be accorded to the appellant on account of these two additions.
3.3.1 Regarding the transportation charges paid to Deepak Transport Agency Ltd. of Rs. 1,18,333, the original copies of the bills that were shown to me and photocopies of which are placed at pages 12–17 of the paper book, show that there is mention of letter dated 15-5-2006 of ACIT, Circle 1(2) Hyderabad, directing non-deduction of TDS for the period 1-4-2006 to 31-3-2007. In view of these facts, the appellant was fully justified in not deducting the TDS on transportation charges paid to this party. Thus, the appellant is held entitled to relief of only Rs. 1,18,333 out of the total disallowance made under section 40(a)(ia). Ground of appeal No. 2 is thus partly allowed, subject to these remarks.”
Aggrieved by the order of learned Commissioner (Appeals), assessee carried the matter before learned Commissioner (Appeals).
7. Before us, learned Authorised Representative reiterated the submissions made before assessing officer and learned Commissioner (Appeals) and with respect to disallowance of printing charges submitted that in the present case the assessee had purchased printing packing material from manufacturer for packaging of the finished product and no raw material was supplied by it to the manufacturer for making such packet material and the transaction was a “contract of sale” and not a “works contract” and therefore provisions of section 194C are not applicable and for this proposition, he relied on the decision of Hon’ble Punjab and Haryana High Court in the case ofCIT v. Dy. Chief Accounts Officer, Markfed Khanna Branch (2008) 304 ITR 17/173 Taxman 149 (Punj. & Har.). Learned Departmental Representative on the other hand, supported the order of assessing officer and learned Commissioner (Appeals).
8. We have heard the rival submissions and perused the material on record. The issue in the present case is with respect to disallowance of expenditure under section 40(a)(ia) of the Act with respect to the disallowance on account of the printing charges paid by the assessee, before us, it is assessee’s submission that no material was supplied by the assessee for printing of the packaged products and it was a “contract of sale”. The aforesaid submission of the assessee has not been controverted by Revenue. We find that Hon’ble Punjab and Haryana High Court in the case ofDeputy Chief Accounts Officer, Markfed Khanna Branch (supra) has held that when assessee had purchased printed packing material from manufacturer for purpose of packing of its finished products and no raw material was supplied by it to manufacturer for manufacturing such packing materials transaction was a “contract of sale” and not a “works contract” and therefore it was outside the purview of section 194C of the Act. We further find that Bombay High Court in the case of BDA Ltd. v. ITO (2006) 281 ITR 99/153 Taxman 386 has held that when a manufacturer purchases material on his own and manufactures the products as per the requirement of the specific customer, it is a case of sale and not a contract for carrying out any work and the fact that the goods manufactured were according to the requirement of the customer does not mean or imply that any work was carried out on behalf of the customer. Before us, Revenue has not placed any contrary binding decision in its support. In such a situation, we are of the view that the decision of Bombay High Court in BDA Ltd. (supra) are applicable to the present facts of the case. In view of the aforesaid facts, we are of the view that no disallowance under section 40(a)(ia) of the Act was called for on the payment of printing charges paid by the assessee. With respect to the other expenses on which the disallowance has been confirmed by learned Commissioner (Appeals), before us, assessee has not placed any material to controvert his findings and therefore to the extent of such disallowance, no interference to the order of learned Commissioner (Appeals) is called for. Thus, this ground of the assessee is partly allowed.
9. In the result, the appeal of the assessee is partly allowed.
