2017 (5) TMI 263 - HC - Income Tax

Diversion of business funds to an associate concern without interest - Tribunal held that the assessee failed to point out any service having been rendered by the associate company to the assessee firm - Held that - We do not find that the Tribunal arrived at the conclusions on basis of surmises and conjectures, but the Tribunal noticed that an agreement between the assessee and M/s Singhal s Resourcing and Marketing Pvt. Ltd. was there and further that the profit and loss account of M/s Singhal s Resourcing and Marketing Pvt. Ltd. discloses that it incurred revenue expenditure for giving the said service, but except that no other material was available and the assessee was not at all in position to express even about the services which were availed. The Tribunal after examining all aspects of the matter held that the assessee failed to establish the factum of having service from M/s Singhal s Resourcing and Marketing Pvt. Ltd. and while doing so also observed that the agreement may be a device adopted to ignore the tax liability. Pertinent to notice that the assessee and M/s Singhal s Resourcing and Marketing Pvt. Ltd. though are separately assessed to tax, but are closely knitted concerns and the partners are either close relatives or the same persons. In entirety, we do not find any wrong with the findings arrived by the Income Tax Appellate Tribunal. We find force in the argument advanced by learned counsel that the appeal as a matter of fact is having no substantial question of law. - Decided against assessee.

Summary

Issues:
1. Whether the payments made to certain companies were a device to raise capital for associates of the assessee firm?
2. Whether the expenses incurred for expanding business fall within the domain of the assessee or the Assessing Officer?

Analysis:
1. The case involved three appeals with similar questions. The appellant, a partnership firm, filed a return of income for the assessment year 1993-94. The Assessing Officer disallowed interest-free advances made to associate concerns, resulting in an increased income assessment. The appellant challenged this decision, and the first appellate authority deleted the addition. However, the revenue appealed to the Tribunal, which partially accepted the appeal, emphasizing the lack of evidence of services rendered by the associate company. The Tribunal observed that despite detailed calculations, the appellant failed to prove the exact services provided, leading to suspicions of capital-raising devices. The High Court upheld the Tribunal's decision, stating that the findings were not based on conjectures but on the failure to establish services rendered, indicating a lack of substantial legal questions.

2. The second issue pertained to whether expenses for business expansion were rightfully incurred by the assessee or subject to the Assessing Officer's scrutiny. The Tribunal's decision was based on the lack of evidence regarding services provided by the associate company, leading to doubts about the legitimacy of expenses. The High Court concurred with the Tribunal's findings, emphasizing the closely knit nature of the concerns involved and the failure to prove the actual services rendered. Consequently, the appeals were dismissed as no substantial legal questions were identified, and the revenue's arguments were accepted under Section 260A(4) of the Income Tax Act, 1961.