2002-VIL-186-ITAT-MUM

Equivalent Citation: [2003] 85 ITD 59

Income Tax Appellate Tribunal MUMBAI

IT Appeal No. 3593 (Mum.) of 1999

Date: 09.04.2002

SANGHVI SWISS REFILLS (P.) LTD.

Vs

INCOME-TAX OFFICER

For the Appellant : Vishwas Mohendale
For the Respondent : Joe Sebastian

BENCH

D. Manmohan (Judicial Member)

JUDGMENT

1. This appeal by the assessee-company pertains to the assessment year 1996-97. Only two issues are involved in this appeal which are taken up in seriatim.

2. Ground No. 1 is with regard to the addition of Rs. 7,11,029 referable to the claim of deduction on account of payment of hire-purchase charges. The assessee is engaged in the business of manufacture and sale of ball pens, refill etc. On a total turnover of Rs. 2.33 crores, the assessee incurred a commercial loss of Rs. 13.41 lakhs and the sundry debtors were to the tune of Rs. 7.04 crores. For the assessment year 1996-97, the assessee filed a return showing loss of Rs. 10,33,885 which was originally processed under section 143(1)(a) of the Act but later taken up for scrutiny and accordingly notices were issued under sections 143(2) and 142(1) of the Income-tax Act. During the course of the assessment proceedings, the Assessing Officer noticed that the assessee claimed deduction of hire-purchase charges of Rs. 7,11,029 towards amount payable to sister concern M/s. Samy Metal Tech Pvt. Ltd. The assessee submitted that the plant and machinery available with the assessee-company was originally intended to be sold to the sister concern. M/s. Samy Metal Tech Pvt. Ltd. with an understanding that the machinery sold to the sister concern would be given to the assessee on hire purchase basis. M/s. Samy Metal Tech Pvt. Ltd. had raised finance of more than Rs. 60 lakhs from M/s. Lloyd Finance Ltd. M/s. Lloyd Finance Ltd. has directly paid a sum of Rs. 60 lakhs to the assessee-company. However, M/s. Samy Metal Tech Pvt. Ltd. did not purchase the machinery from the assessee for some reason and thus the assessee had to repay the loan to M/s. Lloyd Finance. Since the assessee had no money to repay the financier, it continued to carry on the amount in its book as loan and continued to bear the interest and finance charges for this year. It was, therefore, submitted that the amount paid to the financier is allowable as deduction from its business income.

3. The Assessing Officer noticed that the balance sheet of the company as well as Samy Metal Tech Pvt. Ltd. do not show any entry in respect of finance raised for this transaction and the assessee-company could not produce its books of account on the ground that the sales-tax authorities had impounded the books. Thus, he concluded that prima facie the transaction was with a view to raise the finance of Rs. 60 lakhs and thus the claim of deduction of hire purchase charges is, in fact, regarding payment of finance charges to M/s. Lloyd Finance. He also noticed that soon after receiving the fund, the assessee-company had passed on the funds on the same date to its sister group of concern free of interest. He also observed that a perusal of details of interest-free loans and advances clearly indicate that there was absolutely no necessity for the assessee-company to raise a sum of Rs. 60 lakhs from Lloyd Finance through Samy Metal Tech Pvt. Ltd., except for funding its sister group of concerns by way of interest-free loan. Under these circumstances, the Assessing Officer concluded that the borrowal of fund was not for the purpose of carrying on the business of the assessee-company but for the purpose of giving interest-free loan to the sister concern.

4. Before the ld. CIT(A), the assessee contended that the Assessing Officer erred in disallowing the hire purchase charges without clearly establishing that the fund was utilised for other than business purposes. Without prejudice to the above contention, it was submitted that interest-free loan and long credits to debtors were wholly financed through the interest-free loans received by the assessee from the other group concerns and the loans so granted were more than compensated by the loans so received. Hence, no part of the hire purchase finance obtained was utilised for the purpose of granting loan. The ld. CIT(A) rejected the contention of the assessee for the reasons given by him in the orders dated 24-3-1999 in the case of the assessee for the assessment year 1995-96.

5. Further aggrieved, the assessee is in appeal before the Tribunal. The ld. Counsel referred to page-1 of the Paper Book to submit that when the amount was received by the assessee, it was considered by the assessee as the sale proceeds referable to the sale of plant and machinery to M/s. Samy Metal Tech Pvt. Ltd. and, therefore, the amount received thereon was treated as the own fund and not as borrowed fund. Thus, there was no need to utilise the same exclusively for the purpose of business. However, due to certain technical problem M/s. Samy Metal Tech Pvt. Ltd. did not proceed further with the purchase of the machinery but in the meantime the assessee having utilised the fund for certain other purposes, it was unable to repay the financier and hence it continued to carry on the amount in its books as loan and continued to bear the interest and finance charges on the same. He further submitted that the amount received from Lloyd Finance was utilised for repayment to its customers and thus it cannot be said to be a non-business purpose. On the other hand, the ld. D.R. strongly relied upon the orders of the tax authorities.

6. I have carefully considered the rival submissions and perused the record. Admittedly the payment made by the assessee is referable to the amount of Rs. 60 lakhs taken from Lloyd Finance. Whatever may be the circumstances, after the cancellation of the deal between the assessee and its sister concern, the amount remained with the assessee as a loan repayable to M/s. Lloyd Finance. It is well-settled that under section 36(1)(iii) of the Income-tax Act interest payable on the amount borrowed, by whatever name it is called, is allowable as deduction only if it is used for the purpose of the business. It is also well-settled that the initial onus is on the person who claims the deduction. Thus, it is for the assessee to prove that the amount of Rs. 60 lakhs was utilised for the purpose of business. The Assessing Officer has categorically stated that on the same date the amount of Rs. 60 lakhs was diverted to its group concerns and no interest was charged on the said amount. The assessee has not furnished any evidence to show that on the date when the amount of Rs. 60 lakhs was diverted to its sister concerns, the assessee had own fund/non-interest bearing fund. For example, on 10th March of a particular year an assessee may have Rs. 10 lakhs. On 11th March, the assessee obtains interest-bearing loan of Rs. 15 lakhs and on the same day gives a loan of Rs. 25 lakhs to the sister concern without charging interest. On 12th March, the assessee might receive Rs. 15 lakhs on the sale of goods and also from various other sources where no interest is payable. The assessee cannot plead that since it had overall excess funds where no interest is payable, the amount of Rs. 25 lakhs given to the sister concern is out of the own fund because the fact remains that on the date of advancing interest-free loan the assessee did not have sufficient own fund. Thus, the assessee, in the case before me, cannot make a general claim that he had sufficient non-interest-bearing fund/own fund which is more than the interest-free loan given by it. In fact, it is for the assessee to prove precisely, by referring to the Bank and cash balance available on the date when interest-free loan is given, and at best the benefit of doubt would be given to the assessee when in the common pool account there is sufficient balance which would cover the interest-free loan. For example, if the assessee had own funds of Rs. 10 lakhs and interest-bearing funds of another Rs. 10 lakhs, whereas on the same day interest-free loan of Rs. 8 lakhs is given to ';X';, the assessee can take a plea that this Rs. 8 lakhs is out of non-interest-bearing fund available with the assessee. This exercise was not done by the assessee at any stage and there is no evidence to prove that the assessee had sufficient non-interest-bearing funds so as to advance Rs. 60 lakhs to its group concern. In fact, the very fact that on the date when Rs. 60 lakhs was received, the same was transferred to the group concerns, indicates that this amount was not utilised for the purpose of business. Under these circumstances, I do not find any infirmity in the order of the CIT(A) in confirming the addition of Rs. 7,11,029.

7. Ground No. 2 is with regard to the addition of Rs. 7,03,546 referable to the disallowance of Bank interest, bill discounting charges etc. paid by the assessee. The Assessing Officer noticed that the assessee borrowed funds either from the Bank or from other parties by way of bill discounting etc. and the said amount was utilised directly or indirectly for giving interest-free loan to its sister concerns without charging any interest. A show cause notice was issued to the assessee in this regard but the assessee-company has not replied to the show cause notice dated 4-1-1999. Therefore, the Assessing Officer concluded that the interest-bearing funds were diverted for non-business purposes and accordingly disallowed the claim of deduction of bill discounting charges, Bank charges etc. In coming to this conclusion, the Assessing Officer has also taken into account other fact that on sales turnover of Rs. 2.33 crores, the assessee had sundry debtors of Rs. 7.04 crores which clearly indicate that the assessee-company was extending credit to its sister concerns which cannot be said to be a business transaction. But for such non-business transactions, the assessee-company could not have incurred a commercial loss of Rs. 13.41 lakhs on such huge turnover. He, therefore, disallowed under section 36(1)(iii) of the Act a sum of Rs. 7,03,546. The ld. CIT(A) affirmed the action of the Assessing Officer by observing that an identical issue was considered by him in the order for the assessment year 1995-96. Before the ld. CIT (A), the assessee contended that interest- free advances had been given and also taken from the sister group of concerns. Since the amount of interest-free advances received from group concerns is much more than the advances given, there cannot be any disallowance because the totality of the circumstances show that the loans taken by the assessee were for the purpose of business. The ld. CIT(A) rejected the contention of the assessee on the ground that there is no evidence to establish that the advances to the sister concerns were actually made out of the advances taken from the sister concerns. Since the assessee failed to establish any nexus between the funds taken from the sister concerns and the funds advanced to them, the ld. CIT(A) concluded that the assessee-company had borrowed funds from the bank and others and it was not utilised for the purpose of business of the company but was actually advanced to its sister concerns free of interest.

8. Further aggrieved, the assessee is in appeal before the Tribunal. The ld. counsel referred to pages 10 and 11 of the Paper Book and stated that the assessee had a surplus of interest-free loan/advances to the tune of Rs. 3.9 crores whereas the assessee borrowed loans of Rs. 23 lakhs from Bank and Rs. 43 lakhs from Lloyd Finance. Here also it was submitted that the loans were given from common pool account and since the interest-free funds available with the assessee were in excess of the interest-free loans given by the assessee, it cannot be said that the interest bearing funds were utilised for non-business purposes. On the other hand, the ld. D.R. strongly relied on the observations of the Assessing Officer as well as the CIT(A) and also relied on the following decisions:

(1) K. Somasundaram &; Bros. v. CIT (1999) 238 ITR 939(Mad.),

(2) Bennet Coleman &; Co. Ltd. v. Dy. CIT (1997) 60 ITD 527(Bom.).

9. Joining the issue, the ld. counsel submitted that the issue needs to be considered in the light of the decision of the Hon';ble Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723. He also relied upon the decision of the Hon';ble Madras High Court in the case of CIT v. Hotel Savera (1999) 239 ITR 795 as well as on an unreported decision of the ITAT, Bombay Bench SMC-I, in the case of ITO v. Vardhman Financier [IT Appeal No. 8039 (Bom.) of 1993] wherein it was held that if there are sufficient funds with the assessee to cover this advance, disallowance is not permissible.

10. I have carefully considered the rival submissions and perused the record. The principles enunciated in the aforecited decisions are that if there are sufficient funds on a particular date to cover the advance, merely because the assessee has also taken some loan, it cannot be attributed that the interest-bearing funds were diverted for non-business purposes. In other words, the benefit of doubt, of utilising the own fund from the common pool account, should be given to the assessee. However, the primary burden of establishing that on the date when each interest-free loan is civen by the assessee there were sufficient non-interest-bearing/own fund available with the assessee to advance the money to the sister concern without charging interest, is on the assessee whereas in the instant case the assessee had not lead any evidence in that regard. Merely because the overall interest-free funds available with the assessee were more than the interest-free loan given by the assessee, it cannot be said that the interest-free loans given by the assessee were out of its own funds. What needs to be seen is the position available on the date when the loan is given by the assessee and if the common pool account shows that the own funds are more than the amount advanced, a benefit of doubt can be given to the assessee. In the instant case, the assessee has not done this exercise and nowhere the assessee has discharged the primary burden of proving that the interest paid by the assessee was utilised for the purpose of business. In the light of section 36(1)(iii) of the Act, the primary burden of proving that the expenditure was incurred for the purpose of business is on the assessee. In the absence of any evidence on record to discharge the primary burden, I do not find any infirmity in the order of the Ld. CIT(A) and accordingly reject the ground No. 2 of the assessee.

10.1 Before parting with the issue in hand, it may be worthwhile to extract the observations of the Hon';ble Kerala High Court in the case of CIT v. V.I. Baby &; Co. (2002) 254 ITR 248, at page-250 :

"The claim of the assessee';s counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee';s case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest-free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and sister concerns, and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made."

11. In the result, the appeal filed by the assessee-company is dismissed.

 

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