RADHA SHYAM PANDA Versus INCOME-TAX OFFICER

ITAT CUTTACK

Citation: [2015] 37 ITR (Trib) 386 (ITAT [Ctk])

RADHA SHYAM PANDA Versus INCOME-TAX OFFICER

I. T. A. No 18 /ctk/ 2013

Dated.- October 17, 2014

Ratio

Disallowance under section 40A(3) - Where payments are made against purchase of traded goods exceeding ₹ 20,000 and assessee's claim is not covered by any of the exceptions provided under rule 6DD, still rule 6DD cannot be mechanically applied.

The first proviso below section 40A(3) clearly takes into consideration the nature of expenses, banking facilities, consideration of business expediency and other relevant factors. Rule 6DD in intent and purpose takes into consideration all these aspects for prescribing various exceptional circumstances. Therefore, the overall explanation of the assessee having regard to the business consideration has to be considered. The assessee's explanation was that the assessee had no bank account at Cuttack and seller was insisting for cash payments. The payments had been made to the seller because of that reason. The genuineness of the purchases had not been doubted by the Assessing Officer. Under such circumstances, the disallowance of these expenses by applying to section 40A(3) would not be justified.

Full Text

S. V. MEHROTRA AND GEORGE MATHAN, JJ.

For the Appellant : S. N. Sahu

For the Respondent : S. C. Mohanty

ORDER

S. V. Mehrotra (Accountant Member).-

This appeal filed by the assessee is directed against order dated November 14, 2012 of the learned Commissioner of Income-tax, Cuttack, for the assessment year 2008-09.

2. The assessee has raised the concise grounds as under :

"1. That the addition of ₹ 55,157 under section 40A(3) of the Income-tax Act, is illegal, uncalled for, excessive and not justified in accordance with law.

2. That the disallowance of interest to a tune of ₹ 2,01,991 is illegal, excessive and against the facts on record because the assessee had given advance loan out of his capital."

3. Brief facts of the case are that the assessee, an individual, derived income from wholesale of iron and steel and G. C. sheets. He had filed return of income declaring total income at ₹ 3,64,740. The assessment was completed at a total income of ₹ 13,36,843, inter alia, making following disallowances :

"1. Disallowance under section 40A(3) : ₹ 55,157

2. Charge of interest on interest-free loan : ₹ 2,01,991."

4. The learned Commissioner of Income-tax (Appeals), while partly allowing the assessee's appeal confirmed the aforementioned two disallowances. Being aggrieved by the order of the learned Commissioner of Income-tax (Appeals), the assessee is in appeal before us.

5. Apropos ground No. 1, brief facts of the case are that on verification of cash book, the Assessing Officer noticed that following payments were made against purchase of traded goods exceeding ₹ 20,000 :

Date	Amount	To whom paid
9-6-2007	30,782	Laxmi Steel and Pipes
18-3-2008	24,375	Bharatiya Distributors

6. He observed that these payments were made in contravention of provisions of section 40A(3) and, accordingly, made the addition.

7. Before the learned Commissioner of Income-tax (Appeals), it was submitted that both M/s. Laxmi Steel and Pipes and M/s. Bharatia Distributors Ltd., were at Pilgrim Road, Cuttack. These payments were against the demand of the seller for cash payment. There was no bank account of the assessee at Cuttack. The payment had not been made violating the provisions of rule 6DD. Further, it was submitted that, in any view of the matter, only 20 per cent. of the same should have been added. The learned Commissioner of Income-tax (Appeals) confirmed the Assessing Officer's action, inter alia, observing that the assessee had not established the exceptional and unavoidable circumstances as delineated in rule 6DD.

8. At the time of hearing, learned counsel for the assessee reiterated the submissions made before the learned Commissioner of Income-tax (Appeals).

9. The learned Departmental representative pointed out that the assessee's case does not fair within any of the exception of clauses provided under rule 6DD.

10. Having heard both sides, we find that the assessee's claim is not covered by any of the exceptions provided under rule 6DD. However, the first proviso below section 40A(3) clearly takes into consideration the nature of expenses, banking facilities, consideration of business expediency and other relevant factors. Rule 6DD in intent and purpose takes into consideration all these aspects for prescribing various exceptional circumstances. Therefore, rule 6DD cannot be mechanically applied and we have to consider the overall explanation of the assessee having regard to the business consideration (the assessee's explanation is that the assessee had no bank account at Cuttack and seller was insisting for cash payments. The payments had been made to the seller because of that reason. The genuineness of the purchases had not been doubted by the Assessing Officer. Under such circumstances, we are of the opinion that the disallowance of these expenses by applying to section 40A(3) would not be justified. We, accordingly, set aside the order of the learned Commissioner of Income-tax (Appeals) on this count.

11. Apropos ground No. 2, brief facts are that the assessee had given loan to another business concern i.e., M/s. Panda Enterprises, which happened to be the proprietary concern of his wife without interest on the said advance. He further observed that the total interest-free loans was advanced to the tune. of ₹ 50,70,692 on different dates from cash credit account of the assessee against which repayment was received on different dates for ₹ 21,86,024 resulting into outstanding loan as on March 31, 2008 at ₹ 28,84,668. He has produced the ledger account of M/s. Panda Enterprises in the books of the assessee at page 6 of the assessment order. He show caused the assessee as to why the interest relating to outstanding amount be not disallowed. The assessee in his explanation pointed out that two firms being run by husband and wife, hence were sister concerns. The assessee relied on the decision of the hon'ble Supreme Court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC), wherein, it has been held that interest on money borrowed from bank lent to sister concern without charging interest is an allowable expenditure if used for the purpose of business-commercial expediency. The Assessing Officer after considering the assessee's submission pointed out that though the assessee was closely related in personal life but there was no business nexus between the two business concerns. He, accordingly, computed the interest at 12 per cent. as applicable for cash credit loans and made disallowance amounting to ₹ 2,01,991.

12. Before the learned Commissioner of Income-tax (Appeals), the assessee reiterated the submissions made before the Assessing Officer. The learned Commissioner of Income-tax (Appeals) confirmed the addition, inter alia, observing that there was no commercial expediency in respect of such interest-free advance. He relied on the decision of the hon'ble Kerala High Court in the case of CIT v. Accelerated Freeze Drying Co. Ltd. [2010] 324 ITR 316 (Ker) and the decision of the hon'ble Delhi High Court in the case of Punjab Stainless Steel Inds. v. CIT [2010] 324 ITR 396 (Delhi).

13. Learned counsel for the assessee submitted that the assessee had sufficient interest-free funds to advance the loan to M/s. Panda Enterprises. Learned counsel referred to the balance sheet of M/s. Panda and Co., which is the proprietary concern of the assessee to demonstrate that the assessee had sufficient interest-free funds to advance the loan, learned counsel for the assessee also relied, inter alia, on the decision of the hon'ble Madras High Court in the case of CIT v. Hotel Savera [1999] 239 ITR 795 (Mad) to submit that in absence of any material or evidence to indicate that firm had advanced moneys out of borrowed funds, the presumption would arise that money was advanced out of its own funds.

14. The learned Departmental representative submitted that the entire advance had been given from cash credit account and, therefore, the nexus of payment between the borrowed funds and advance was duly established.

15. Having heard both parties, we are of the opinion that if the assessee is able to substantiate its claim, that the advance was given out of its own funds, then no addition is called for. It is well-settled law that if the assessee has advanced interest-free loan out of its own funds, then no disallowance can be made under section 36(1)(iii) of the Act. We find this aspect has not been examined by the lower revenue authorities and, therefore, we restore the matter to the file of the Assessing Officer to decide the issue de novo in the light of our observations.

16. In the result, the appeal of the assessee is allowed for statistical purposes.

Pronounced in the open court on the 17th October, 2014.

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