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TMI Blog2024 (6) TMI 573X X X X Extracts X X X X X X X X Extracts X X X X ..... or business to all citizens subject of course to the restrictions that can be imposed U/A 19(2) of the constitution by the state. Since, the advances were made out of interest bearing funds, then the allowability of interest should be examined from the angle of commercial expediency. The Assessing Officer cannot be justified in view of aforesaid scenario in rejecting the appellant s explanation that the aforesaid advances were not intended for the purpose of business expediency. Learned CIT(A) was thus, right in deleting the addition of Rs. 13,08,000/ of u/s.36(1)(iii) of the Act, in view of commercial expediency with respect of the expansion of the assessee s business. The facts of Phatan Sugar Work Ltd. [ 1993 (8) TMI 41 - BOMBAY HIGH COURT] referred by the revenue are not attracted to the facts of the instant case, hence for no avail to the revenue. The second point is also determined accordingly in negative against the revenue. - Shri Girish Agrawal, Accountant Member And Shri Sunil Kumar Singh, Judicial Member For the Assessee : Shri. Prakash Pandit (Adv.) For the Revenue : Smt. Mahita Nair (Sr.DR.) ORDER PER SUNIL KUMAR SINGH (J.M): 1. This appeal has been preferred against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities were declared as non genuine entities as per the information provided by the Maharashtra Sales Tax Department. These entities were indulged in issuing all the bogus sales/purchases through hawala bills/accommodation entries without supplying any goods. Assessing Officer found that income to the tune of Rs. 5,76,30,455/ had escaped assessment within the meaning of section 147 of the Act. Notice u/s. 148 of the Act was issued and served upon the assessee. Assessee responded and prayed before Assessing Officer to treat the original return of income as response to the notice u/s. 148 of the Act. Further details were also submitted by the representative of the assessee. The genuineness of the aforesaid entities could not be established as none of the representatives of these entities responded to notice u/s. 133(6) of the Act nor produced by the assessee before the Assessing Officer. The assessee furnished his ledger accounts in the books, copies of purchase bills and bank statements showing payment made through cheques. The Assessing Officer rejected the contention of the assessee and after considering several judicial precedents, rejected the books of accounts of the assessee u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment proceedings failed to prove the genuineness of the purchase transaction? 4. Whether on the facts and in the circumstances of the case and in law, the decision of Ld CIT(A) is right in presuming that purchases have been made during the year from the unknown parties, whereas bills have been received from Hawala dealer ? 5. Whether on the facts and in the circumstances of the case and in law, the decision of Ld. CIT(A) is right by presuming that purchases have been made from unknown parties, the Ld. CIT(A) has not clarified in its order, how the payment was made and whether section 69 of the IT. Act, 1961, will be applicable ? 6. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in not appreciating the ratio of the decision of THE Hon'ble Supreme Court in the case of N.K.PROTEIN Ltd. wherein the Hon'ble Court, has held that when the purchases are from bogus suppliers, the entire purchases are liable to disallowed? 7. Whether on the facts and on the circumstances of the case, The Ld. CIT(A) is erred in deleting the addition made by the AO, and allowing the disallowance of Rs. 13,08,000/- (@12% of the interest free advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5% as against the addition of 4% of the bogus purchases contrary to the order dated 15.12.2020 passed by the Mumbai Bench of ITAT in ITA No.5917/MUM/2018 for A.Y.2011-12. He further submitted that the loan advances of Rs. 1,09,00,000/ were given to three parties by the assessee for commercial expediency with intention to expand his business. He further submitted that learned CIT(A) has rightly deleted the addition of Rs. 13,08,000/ u/s. 36(1)(iii) of the Act. Prayed to dismiss the revenue s appeal. 9. Firstly, we shall consider as to whether learned CIT(A) has committed any error in restricting the addition to 5% as against 100% of bogus purchases. This point shall cover revenue s ground no.1 to 6. 10. We find that learned CIT(A) has based his findings on the order dated 15.12.2020 passed by ITAT Mumbai in ITA No. 5917/MUM/2018 for the A.Y. 2011 12. Learned CIT(A) has referred relevant para 7 of the aforesaid ITAT order dated 15.12.2020, which is reproduced as under: 7. After hearing the Ld. D.R. and perusing the material on record, we observe that in this case the assessee is a dealer in ferrous and non ferrous metal items. Undisputed facts are that the assessee has made bogus pur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y GP rate @5% on the said bogus purchases of Rs. 5,76,30,455/ . The facts of the judgement of Hon ble Supreme Court in N.K. Proteins Ltd. referred by the revenue in the ground no. 6 are not attracted to the facts of the present case, hence for no avail to the revenue. The aforesaid first point is accordingly determined in negative against the revenue. 12. As regard, the second point for determination, we find that learned CIT(A) has elaborately discussed this issue in para 4 of the impugned order which is reproduced as under: 4. The first issue to be decided is regarding the addition of Rs. 13,08,000/- u/s, 36(1)(iii) of the Act. The AO noted that the assessee debited interest payment of Rs. 6,33,597/- on borrowed funds of Rs. 70,53,083/- and shown interest receipts only Rs. 11,161/-. In the light of provisions of sec. 36(1)(iii) of the Act and various judicial precedents as referred to at page nos. 2 to 4 of the assessment order, the AO observed that the assessee paid interest on borrowed funds and by giving interest free advances, undue benefits to the concerned parties was provided to reduce tax liability. The AO mentioned that since loans and advances were given to concerned pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount advanced to the said three parties. Further the sald advances were given for commercial expediency and therefore no disallowance of Rs. 13,08,000/- u/s. 36(1)(iii) is called for. The assessee submits that in S. A. Builders Ltd vs. CIT 288 ITR pg 1, the Honorable Supreme Court has held that if the interest free advances are given for commercial expediency then the assessee is entitled for deduction of interest paid either u/s 36(1) (iii) or section 37 of the Act. Further Initially the sald advances were interest free, however, when deal for commercial expediency was cancelled, the said three parties have paid interest on loans which is duly disallowed by the assessee. Therefore even otherwise disallowance is uncalled for. 7. Further Honorable Andhra Pradesh High Court following the decision of S. A. Builders Ltd. as well as decision of Supreme Court in Hero Cycle Pvt. Ltd. 94 CCH 097, has held in the ease of CIT vs. Seven Hill Hospital 370 ITR pg, 69 that in absence of any folding to the effect that the loan taken on interest has straightway passed on to the others, then no disallowance u/s 36(1) (iii) is called for. 8 In view of the above legal and factual submissions t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs, clearly no interest expenditure has been incurred for making the same and, therefore, no question of allowability/disallowability of the same arises under section 36(1)(iii) of the Act, as has been held by the P H High Court in the case of Bright Enterprises Pvt. Ltd. ([2016] 381 ITR 107). In the instant case, the appellant has duly explained that initially the advances of Rs. 49,00,000/- given to Francis John, Rs. 25,00,000/- given to Haros John and Rs. 35,00,000/- given to Mokshi Industries were trade advances given for commercial expediency as the assessee with an intention to expand his business, wanted to acquire shares in Trio Fab India Pvt Ltd. from them, thus the said advances were for commercial expediency for expansion of assessee's business. The appellant has further submitted that in the subsequent assessment year when the sald deal was not materialized the said three parties have paid Interest to the assessee amounting to Rs. 12,35,979/- which the assessee has duly disclosed in subsequent assessment year and therefore provisions of section 36(1)(iii) are not attracted. The issue of allowability of interest u/s. 36(1)(iii) of the Act was considered in detail by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The above test in Atherton's case. (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal Co. [1960] 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. From the above discussion it is clear that where the advances have been made out of interest bearing funds, then the allowability of interest should be examined from the angle of commercial expediency. In the case of the instant appellant, the appellant has duly explained that said advances were given as per business expediency. In view of the above, it is held that the AO is not justified in making the addition of Rs. 13,08,000/- u/s. 36(1) (Ill) of the Act, the same is hereby directed to be deleted. The ground nos. 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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