This income-tax appeal under s. 260A is directed against the order of Income-tax Appellate Tribunal, Jaipur Bench, Jaipur (hereinafter referred to as Tribunal) dt. 8th July, 2010 and relates to the asst. yr. 2006-07.
2. The brief facts emerging on the face of record are that the assessee is carrying on business of manufacturing and trading of pulses. The assessee declared an income of Rs. 31,30,000. 1\vo questions primarily have been raised in the instant appeal against the impugned order of the Tribunal, which according to the Revenue are substantial questions of law.
Disallowance of electricity expenses (question No.1) :
3. Insofar as the claim of electricity is concerned, it was the claim of the assessee/respondent that the assessee was using the premises of one M/s N.K. Industries for which, entire open as well as covered area was used by it for storage purposes. Though the electricity connection was in the name of M/s N.K. Industries, but since the actual user was the assessee, therefore, it was being paid by the respondent/assessee and was duly claimed accordingly. It is the claim of the AO that the premises of M/s N.K. Industries was under construction and, therefore, the assessee was not able to use the property for storage purpose and, therefore, the claim was wrongly made. Secondly it was observed by the AO that the assessee did not disclose before the District Supply Officer, Commercial Taxes Department, insurance company etc. etc. that the assessee was using the factory premises of M/s N.K. Industries and that it was a related concern in as much as the proprietor of M/s N.K. Industries is the brother of the assessee.
4. Dissatisfied with the disallowance, an appeal was preferred before the CIT(A). It was submitted by the assessee before the CIT(A) that the assessee has been claiming the said expenditure from year to year and at least from the asst. yr. 2003-04 onwards and all along the said expenditure was allowed. The CIT(A) was also not satisfied about claim of the assessee though the assessee was able to show from the very assessment records of the assessee from the asst. yr. 2003-04 almost till year under appeal that claim had always been allowed which ranged from Rs. 6.94 lacs to Rs. 8.29 lacs. However, the CIT(A) was not satisfied and rejected the claim.
5. Dissatisfied with the said disallowance, a further appeal was preferred before the Tribunal, where also the facts were reiterated. The Tribunal was satisfied about the claim of the assessee/respondent on the basis of the facts pertaining to earlier three assessment years, where the claim had been allowed all throughout. The Tribunal also arrived at a finding that if the version of the AO and the units of electricity are excluded as mentioned in the bills of Mis N.K. Industries then consumption of electricity per unit will come to 20.5 kgs. vis-a-vis 21.49 kgs. in the immediately preceding year, whereas the consumption per unit including the units of electricity will come to 15.5 kgs. vis-a-vis 17.3 per unit kg. After analysing the evidence on record, it was also observed by the Tribunal that the premises has been used by the assessee actually and no rent has been paid and for actual user of electricity, payment has been made. Accordingly, the disallowance of electricity amounting to Rs. 8,16,115 was deleted. It is this finding of the Tribunal, which has been assailed before us.
6. Mr. Nikhil Simlote, learned counsel appearing on behalf of the Revenue, submitted that there was no evidence led by the assessee that he was actually using the premises of M/s N.K. Industries and merely because the assessee had higher income, the claim was made. He would further contend that had the assessee been using the premises of M/s N.K. industries, it would have certainly informed the various government authorities namely, District Supply Officer, Commercial Taxes Department, insurance company etc. etc., who are relevant to be informed about user of premises by the businessman (assessee) and since there was no information. therefore, the claim was not correct.
7. We have considered the arguments advanced by the learned counsel for the appellant/Revenue. It is a finding of fact by the Tribunal supported by the fact that the claim was being regularly made right from the asst. yr. 2003-04 upto the asst. yr. 2006-07 Le. year under appeal and for the past three asst. yrs. 2003-04, 2004-05 and 2005-06, the claim was allowed in entirety and such claim in the asst. yr. 2005-06 was even higher than the year under appeal. In our view, if the premises are being used by the assessee and the assessee is the actual user of the premises and for actual user is paying electricity expenses. then certainly the claim is to be allowed. The learned counsel has not brought any material on record to dispel the finding of fact recorded by the Tribunal. It has also been observed by the Tribunal ~hat if by considering the overall consumption per unit of electricity vis-a-vis excluded units of M/s N.K. Industries then it will become abnormal. Merely because the area was under construction is no ground for disallowance of the claim. It is already a claim by the assessee that the premises was being used only for storage purpose, whether it is partly constructed or fully constructed or under construction is insignificant. Further merely because the assessee did not inform the other Government agencies about actual user of the premises owned by M/s N.K. Industries is insignificant when one is able to justify and has been able to prove that the premises were actually used by the assessee. In our view. it is finding of fact recorded by the Tribunal and no question of law can be said to arise out of the order of the Tribunal.
Disallowance of interest amounting to Rs. 19,60,313:
8. It is observed by the AO that the assessee had claimed interest payment of RS. 87,09,441 in the P&L alc and it was observed by the AO that the assessee advanced heavy amount to the concerns specified under s. 40A(2) of the Act, The AO has observed in the assessment order that the assessee advanced an amount of more than Rs. 40 lacs to one M/ s Tirupati Pulses (P) Ltd. so also to other related persons namely Geeta Devi Dangayach, ,ugal Kishore Dangayach HUF, Sant Lal Ram Kishan, Delhi and N.K. Industries on different dates and it is claim of the AO that interest had not been charged on the amounts having been advanced and thus after analysing the facts and circumstances of the case came to the conclusion that interest-free loans have been diverted for giving advantage to related personslconcems so as to reduce the income of the assessee and they have been advanced for extra commercial consideration and there was no business expediency. Accordingly, disallowed the said amount referred to hereinabove.
9. Dissatisfied with the said disallowance, an appeal was preferred before the CIT(A, who after analysing the facts and record came to the conclusion that the assessee was able to prove that on account of commercial/business expediency amounts were advanced and it was also proved that the AO was not able to come to a correct conclusion in above cases that interest-free loans had been diverted to these persons. On the contrary, the assessee was able to justify that he had huge surplus capital of his own and to that extent, he could have easily diverted. It was also submitted by the assessee that the assessee had received advance of Rs. 60,51,559 from the customers on which no interest was paid. He also had trade creditors to the tune of Rs. 1,57,91,777 on which also no interest had been paid. It was also found as a finding of fact that the assessee had a capital to the tune of Rs. 1.42 crores at the beginning of the year, which increased to Rs. 1.88 crores 'at the close of the year. r~herefore, to this extent he could have used the funds. Considering the above facts and circumstances, the CIT(A) was satisfied and thus deleted the disallowance made by the AO.
10. Dissatisfied with the deletion of disallowance of interest of Rs. 19,60,313, an appeal was preferred by the Revenue before the Tribunal, who also after a detailed analysis and relying on the judgment of the Hon'ble apex Court in the case of S.A. Builders Ltd. vs. CIT(A) (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) found the order of the CIT(A) to be justified and dismissed the appeal of the Revenue.
11. Shri Nikhil Simlote, leamed counsel for the appellant submitted that the AO was able to correctly come to the conclusion that interest-free loans had been diverted for non-business purposes and only to that extent that the amounts were diverted to the related concern/people and as defined under s. 40A(2) of the Act, the interest amount was disallowed, while the assessee had paid huge interest to the extent of Rs. 87,09,441 and no occasion arose to divert funds to closely related persons when there was heavy burden on the assessee to pay huge interest to the tune of more than Rs. 87 lacs, rather the assessee ought to have repaid to the creditors on the loans which had interest burden and to reduce its own liability of incurring heavy interest. Therefore, he submitted that on the contrary, he has diverted the business funds for non-business purposes, which ought to have not been diverted. He would further submit that had he not diverted huge funds to the tune of more than Rs. 1. 5 crores, the interest burden would have drastically reduced. He also submitted that even if the funds are to be diverted then there was no occasion for not charging the interest. He submitted that the AO was justified in coming to a right conclusion that alternatively if interest would have been charged, the burden on the assessee would have been reduced and consequently the claim was not proper on the part of the assessee. The AO has correctly disallowed the interest.
12. We have considered the arguments advanced by the learned counsel for the Revenue and in our view this is also a finding of fact as recorded by the Tribunal as well as CIT(A). It is not disputed that the assessee had an opening capital of Rs. 1.42 crores at the beginning of the year and Rs. 1.88 crores at the end of the year. It is also an admitted fact that the assessee had trade credits to the extent of Rs. 1.57 crores on which no interest was being paid. It is also an admitted fact that the assessee had received more than Rs. 60 lacs as advance from the customers on which no interest was paid. Therefore, when to this magnitude on which no interest was payable, the AO was not justified in disallowing interest. Further apart from it the assessee has been able to prove that the assessee had trade dealings with M/s Tirupati Pulses (P) Ltd. to whom it is alleged by the AO that the assessee advanced more than Rs. 80 lacs. It is an admitted position that the assessee made purchases to the tune of Rs. 21,24,06,662 from M/s Tirupati Pules (P) Ltd., which is based on the audit report and advances, if any, were towards the aforesaid purchases made by the respondent/assessee. So there was no occasion for the assessee to have charged any interest from a concern with whom it had trade dealings, may be the concern is related or not, it does not make any difference. Once it had been proved by the assessee that it had trade transactions with persons to whom advances are made, then in our opinion, looking to the commercial and business expediency, one is not required to charge the interest. The assessee is to manage its own affairs looking to the commercial/business expediency and decide whether to charge interest or not.
13. Insofar as advance to M/s N.K. Industries to the tune of Rs. 87 lacs is concerned, it was claim of the assessee that there was opening debit balance ofRs. 61.41 lacs and at the close of the year the debit balance was Rs. 87.35 lacs and it increased by Rs. 26.01 lacs during the previous year on account of trading transactions. It is admitted fact that even with the said concern, the assessee had trade transactions. It is also a finding of fact that for other relatives the advance was out of own capital of the respondent/assessee and interest-free trade creditors or customers and in our view if we analyse these facts after considering the evidence on reco,d that a finding of fact had been reached by the Tribunal so also the CIT(A) and when this is a fmding of fact, no question of law can be said to arise.
14. We may only refer to some of the authorities on this subject, which have come to the conclusion that once the assessee proved that it was for business consideration and as a measure of commercial expediency then interest need not be charged or cannot be disallowed.
15. The Hon'ble apex Court in the case of S.A. Builder's Ltd. us. CIT(A) & Anr. (supra) after considering what is commercial expediency observed as under:
"The expression 'commercial expediency' is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency."
15.1 The Hon'ble apex Court further observed in the above judgment as under:
"To consider whether one should allow deduction under s. 36(I)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the Courts should examine the purpose for which the assessee advanced the money and what the sisterconcern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest-free loan to its sister-concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount advanced for earning profits.
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits."
16. The Delhi High Court in the case of CIT us. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) has held that once it is established that there was nexus between the expenditure and the purpose of the business, Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case.
17. The Calcutta High Court in the case of CIT us. Britannia Industries Ltd. (2005) 198 CTR (Cal) 426 : (2006) 280 ITR 525 (Cal)held as under:
"Held, dismissing the appeal, that in relation to each of the assessment years involved in the appeal, the recipient of interest-free loan was not a firm of relatives; the advance was made for obtaining supply of raw material and the advance was made for the purpose of business within the meaning of s. 36(1)(iii) and not for any other consideration; there was regular course of business between the assessee and the firm; and the advances were made to M in the regular course of business; such advances were made in the course of business for commercial expediency and for the purpose of business; the findings arrived at by the Tribunal were not perverse; the entire expenditure was made from the mixed account. Therefore, there would be a presumption that the advance was made out of the assessee's own funds and not from the borrowed capital. Therefore, the CIT(A) and the Tribunal were right in presuming that the assessee was eligible for the benefit of s. 36(1)(iii)."
18. The Allahabad High Court in the case of CIT us. Motor Sales Ltd. (2008) 304 ITR 123 (All) has held that it was finding of fact as found in the case that respondent-assessee had capital/reserve/surplus of Rs. 6.10 crores on which no interest was being paid and therefore interestfree advances made by it are covered and ultimately held that there is no question of any disallowance of notional interest on loan taken by it. It was further held that the Tribunal had also recorded a finding that the assessee had not diverted any borrowed fund on which interest was paid for non-commercial purposes and therefore there is no question of disallowance of interest out of the interest paid by the assessee.
19. The Allahabad High Court in the case of CIT us. Prem Heauy Engineering Works (P) Ltd. (2006) 285 ITR 554 (All) held that the assessee company had advanced about a sum of Rs. 37 lacs to its sister-concern and that the sister-concern provided services for job work to the extent of Rs. 21,58,191 and the assessee had opening debit balance of Rs. 30,34,337 in the name of said sister-concern. The AO disallowed by holding that the assessee having paid interest on overdraft facilities, it should not make any interest-free advances to its sister-concern. However, it was found as a finding of fact that the assessee had got interest-free advances from its customers and had reserve and share capital sufficient to cover the advances to the sisterconcern and accordingly held that the assessee had sufficient amount of money towards share capital, surplus and reserve as also interest- free advances by the two companies, thus the interest-free advances made to the sister-concern were fully covered from the interest-free advances which were share capital, surplus and reserve with the respondent-assessee.
20. The Madras High Court (sic-Supreme Court) in the case of Munjal Sales Corporation us. CIT & Anr. (2008) 215 CTR (SC) 105 : (2008) 3 DTR (SC) 21 7 : (2008) 298 ITR 298 (SC) held as under :
"As stated above, for the asst. yr. 1992-93 and the asst. yr. 1993-94, the Tribunal held that the loans given to the sister-concerns were out of the firm's funds and that they were advanced for business purposes. Once it is found that the loans granted in August/September, 1991 continued upto the asst. yr. 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12 per cent per annum, the assessee was entitled to deductions under s. 36(I)(iii) r/w s. 40(b)(iv) of the 1961 Act.
One aspect needs to be mentioned during the asst. yr. 1995-96, apart from the loan given in August/September, 1991, the assessee advanced interest-free loan to its sister-concern amounting to Rs. 5 lacs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister-concern by the assessee-firm out of its own funds and, therefore, it was not entitled to claim deduction under s. 36(I)(iii). This finding is erroneous. The opening balance as on 1st April, 1994, was Rs. 1.91 crores whereas the loan given to the sister-concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5lakhs."
21. The Hon'bIe Allahabad High Court in the case of CIT us. Radico Khaitan Ltd. (2005) 194 CTR (AU) 451 : (2005) 274 ITR 354 (AU) has held that t.he: assessee-company had sufficient fund other than the borrowed money for giving the amount in question as loan to its sister-concern, which finding had not been specifically challenged in the present appeal. The conditions of s. 36(I)(iii) of the Act had been complied with and, therefore, the assessee company was entitled to full allowance of the amount of interest paid by it on borrowed capital.
22. In view of above facts and circumstances of the case, the Tribunal has correctly come to the conclusion that the interest was rightly allowable on the basis of the facts found and which have been referred to hereinabove. We do not find any question of law much less substantial question of law which could be said to emerge out of this case. We find no illegality or perversity in the impugned order.
23. The appeal being devoid of merits is accordingly dismissed.