2009 (11) TMI 566 - AT - Income Tax

Fund borrowed from bank - Interest free advance to sister concern - In the first ground of appeal, the issue involved is regarding the disallowance of interest paid to the bank - AO observed that it cannot be held that the money borrowed by the assessee and later on advanced by its sister concern and others free of interest was not utilized for the purposes of its own business and the assessee has not derived any benefit of the same. - Disallowance made by AO confirmed by CIT(A) - Held that - if an issue under consideration before a Bench of a Tribunal on same facts has already been considered and adjudicated upon by a co-ordinate Bench in the case of same assessee for an earlier assessment year, the Tribunal is bound to follow the decision of the co-ordinate Bench. As a result of the discussion hereinabove, the ground No. 1 of the cross-objection filed by the assessee is rejected. Polishing expenses - disallowance of Rs. 3,03,54,472 at the rate of 15 per cent of the polishing charges - In its reply, the assessee submitted that the polishing workers are petty artisans moving from place to place and have mostly no permanent residential addresses - Assessing Officer observed that from the reply of the assessee, the assessee has not been able to satisfactorily explain the identity and genuineness of the transactions - From the orders of tax authorities below, it becomes clear that they have not disputed that in the manufacturing business of utensils, the assessee has to incur the polishing expenses - the order of the ld. CIT(A) in restricting the disallowance at the rate of 15 per cent as detailed in his order is upheld - In the result, the appeal filed by the assessee and the appeal filed by the revenue are dismissed

Summary

Issues Involved:
1. Disallowance of interest paid to the bank.
2. Disallowance of polishing charges.

Detailed Analysis:

1. Disallowance of Interest Paid to the Bank:
The first issue pertains to the disallowance of Rs. 2,69,637 out of the interest paid to the bank by the assessee. The Assessing Officer (AO) observed that the assessee had made interest-free advances to its sister concern, M/s. Kesho Ram Industries, while simultaneously paying a substantial amount of interest on borrowed funds. The AO argued that the interest-bearing funds should remain within the business for the interest to be claimed as an allowable expense. The AO noted a direct nexus between the interest-bearing funds and the interest-free advances, leading to the disallowance of a proportionate amount of interest.

The CIT(A) upheld the AO's decision, referencing previous assessment years (2001-02 and 2002-03) where similar disallowances were confirmed by the Tribunal. The Tribunal, in this case, also upheld the CIT(A)'s order, citing the principle of judicial discipline and consistency with prior rulings. The Tribunal emphasized that the facts and issues were identical to those in the earlier assessment years, and thus, the decision of the coordinate Bench must be followed. The Tribunal rejected the assessee's written submissions for re-adjudication, noting that no miscellaneous application was filed for rectification of the earlier order.

2. Disallowance of Polishing Charges:
The second issue involves the disallowance of polishing charges. The assessee claimed Rs. 3,02,74,918 towards polishing charges paid to various artisans. The AO, finding the assessee's explanation unsatisfactory and lacking sufficient evidence to prove the identity and genuineness of the transactions, disallowed 50% of the claimed amount, resulting in a disallowance of Rs. 1,01,18,242.

On appeal, the CIT(A) reduced the disallowance to 15% of the total amount, following a similar approach taken in the previous assessment year (2002-03) for another manufacturer in a comparable situation. The CIT(A) allowed a relief of Rs. 70,82,770.

The Tribunal reviewed the case and noted that the assessee failed to provide complete addresses and confirmations for the majority of the workers. The Tribunal underscored the importance of proving the identity of the workers, the genuineness of the transactions, and the documentary evidence supporting the payments. The Tribunal found the assessee's explanations insufficient and emphasized that the burden of proof lies with the assessee.

The Tribunal acknowledged the necessity of incurring polishing expenses in the manufacturing business but found the AO's 50% disallowance excessive without a solid basis. The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 15%, deeming it fair and reasonable given the circumstances.

Conclusion:
Both the appeal filed by the assessee and the appeal filed by the revenue were dismissed. The Tribunal upheld the CIT(A)'s decisions regarding the disallowance of interest paid to the bank and the polishing charges, maintaining consistency with prior rulings and emphasizing the need for sufficient evidence to support the claims.