SHAMIM YAHYA,A.M. -
(1.) THIS appeal by the assessee is directed against the order of the learned CIT(A), dt. 26th Dec., 2008 and
pertains to asst. yr. 2004 -05.
(2.) THE effective issues raised are as under :
"(i) That having regard to the facts and circumstances of the case, learned CIT(A) has erred in law and on facts in confirming the action of AO in disallowing a sum of Rs. 39,85,661 being the amount of interest paid to the bank on the ground that the expenses were not incurred for the business purpose of the assessee.
(ii) That in any case and without prejudice to the abovesaid ground, learned CIT(A) has erred in confirming the disallowance on account of interest paid to the banker for Rs. 39,85,551 despite the fact that in the order passed under s. 154 by the AO dt. 11th Jan., 2007, the said disallowance was rescued by AO for Rs. 11,02,228 and therefore, in any case the amount of impugned disallowance could not have been sustained for more than Rs. 11,02,338."
(3.) IN this case the AO observed that assessee has diverted his own capital to associate concerns which although not fetching him any return also necessitated him to borrow interest -bearing funds from bank for
his business requirements. AO further noted that assessee in P&L a/c has claimed Rs. 39,85,551 towards
interest payment towards borrowed capital to the bank. He found that there was the post -shipment bill
discounting by the UCO Bank and interest paid for intervening period until realization of the sale proceeds
to the foreign buyers. AO proceeded to hold (a) bank borrowing was not necessitated on account of capital
constraint, (b) that bank borrowing was not necessitated exclusively for the purpose of payment to M/s
Pashupati Fabrics Ltd.; on the contrary, extended credit facility to the assessee very generously despite its
poor financial health and (c) utilization of bank borrowing is not for purposes of business. Further, (he
relied on) the order of the Hon'ble Punjab & Haryana High Court in the case of CIT. vs. Abhishek
Industries Ltd. (2006) 205 CTR (P&H) 304 : (2006) 156 Taxman 257 (P&H) and proceeded to disallow a
sum of Rs. 39,85,551.
Before the learned CIT(A) assessee submitted that the assessee in his capacity as Karta of HUF is a proprietor of M/s Krishna Enterprises and is engaged in the business of export of home furnishing
material. During the year under consideration, he had paid the interest to UCO Bank on discounting limits.
The interest was paid in regard to the post -shipment documents discounting with the bank for the period,
UCO Bank was used for business purposes. These funds were utilized for making payment to various
suppliers and no amount was given to any sister concern. The advances were given to the sister concerns
out of his own capital and borrowed funds were not utilized for these advances. Moreover, M/s Sun Exim
Links had given its premises for business use to the appellant and that too without rent. Bank statement
of UCO Bank shows that the funds deposited in this account were used for business purposes. It is
submitted that since no borrowed funds on which interest has been paid have been utilized for making
advances to sister concerns, the disallowance made by the AO was totally unwarranted. The appellant in
this regard also relied on the decisions reported at Woolcombers of India Ltd. vs. CIT (1981) 23 CTR (Cal)
204 : (1982) 134 ITR 219 (Cal) and Indian Explosives Ltd. vs. CIT (1983) 35 CTR (Cal) 244 : (1984) 147 ITR 392 (Cal) etc.
4.1 Learned CIT(A) in this regard obtained report from the AO and considered the assessee's submissions and AO's rejoinder. He decided the issue as under :
"In his rejoinder the appellant stated that the AO has only reiterated the contention raised in the assessment order. Moreover, it has been accepted by the AO that the funds given to M/s Sun Exim Link, M/s Sun Enterprise and Khandelwal Enterprises were given out of own funds and hence, there was no question of any disallowance of interest under s. 36(i)(iii). It is also stated that the AO has not commented on the contention of the appellant that the funds borrowed from UCO Bank on which interest of Rs. 39,85,551 was paid were used for the purpose of assessee's own business. Hence, it is submitted that the disallowance made by the AO should be deleted.
I have considered facts of the case. As stated earlier, the appellant is an exporter of home furnishing items. In the course of assessment proceedings, the AO had noticed that the appellant had diverted business funds to his associate concerns namely, Sun Enterprises, Sun Exim Link and Khandelwal Enterprise. This fact has not been denied by the appellant. The contention of the appellant is that since the funds diverted by him were not borrowed from bank, the interest paid by him cannot be disallowed. This plea of the appellant cannot be accepted.
It is obvious from the facts mentioned by the AO that had the interest -free funds available with the appellant been utilized for the purposes of business, there would not have been any need to go for bill discounting and pay interest thereon. As held by the Punjab and Haryana High Court in the case of CIT. vs. Abhishek Industries Ltd. (2006) 205 CTR (P&H) 304 : (2006) 286 ITR 1 (P&H), all the funds available with the assessee form part of a single kitty and are to be used for the purposes of the business. The contention of the appellant that the interest -free funds available with him were to be utilized for giving interest -free loans and not for the purposes of business is, therefore, not acceptable. Moreover, it has not been explained that when the appellant's coffers were flush with interest -free funds, why he had to avail the bill discounting facility from the bank, where he had to pay interest, Heavy burden lies on the assessee to explain such an apparently anomalous position. This burden has not been discharged. The appellant has also failed to show the business purpose or commercial expediency for which the interest - free loan was granted to various associate concerns. No nexus has been shown between the granting the interest -free loans to the associate concern and its use for business purposes. Hence, in view of the decisions of the Hon'ble Punjab and Haryana High Court (supra) and the apex Court in the case of S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC), the disallowance made by the AO appears to be correct and is, accordingly, upheld."