IN THE INCOME TAX APPELLATE TRIBUNAL
JAIPUR BENCH : JAIPUR
BEFORE SHRI R.K. GUPTA, JUDICIAL MEMBER
AND SHRI N.L. KALRA, ACCOUNTANT MEMBER
Asstt. Year : 2008-09
The Income Tax Officer, Vs. Green Fire Exports, Ward-1(2), Jaipur. Jaipur. (Appellant) (Respondent)
Appellant by : Sh. Vinod Johari, DR
Respondent by : G.G. Mundra, AR
Date of hearing : 04.01.2012
Date of pronouncement: 20.01.2012.
PER R.K. GUPTA, JM
This appeal by Department is directed against the order of CIT (A),
Jaipur, dated 22.03.2011 relating to assessment year 2008-09.
2. The Department has taken following grounds in this appeal:
"1. Deleting the disallowance of Rs.12,15,47,247/- made by the AO u/s 10AA even though the assessee does not fulfill the condition of section 10AA(4)(ii) of the I.T.Act, 1961 namely that the undertaking should not be formed by the reconstruction of business already in existence.
2. Deleting the disallowance of interest of Rs.51,85,124/- as the partner was having negative capital in the firm.
3. Deleting the addition of Rs.1,52,21,475/- calculated by the AO by treating the withdrawals by the partner as loan and interest calculated on such amount @ 12%."
3. The brief facts of the case are that the assessee is a partnership firm
carrying on business of manufacturing and exports of jewellery. There are
two partners viz. Smt. Kamlesh Dangayach and Shri Atul Dangayach. The
firm has claimed 100% deduction u/s 10AA being SEZ unit. The claim of
deduction u/s 10AA was examined by the AO who has weighted the claim
by considering various aspects and explanation offered by the AR and
finally reached conclusion that the appellant does not fulfill all the
conditions to get deduction. The condition laid down in clause (ii) of sub
section (4) of section 10AA was not fulfilled as the concern was considering
to be found splitting up or reconstruction of existing business. Claim of
deduction was therefore denied.
3.1 The AO has observed that one of the partners Smt. Kamlesh
Dangayach had a proprietary concern in the name of M/s Green Fire till
Assessment Year 2007-08. This concern was also having business of same
nature. The concern closed down its business operations in A.Y. 07-08 and
A.Y. 08-09. The expenses debited in P & L A/c were not claimed by Smt.
Kamlesh Dangayach in the computation of income.
3.2 The AO held that business operations in the name of M/s Green Fire
Exports is nothing but reconstruction of old business (in the name of M/s
Green Fire) as per Sec. 10AA(4)(ii). The AO has issued a detailed show 3
cause notice on this issue and after considering the submissions received
rejected various plea taken by the AR. The claim of the assessee that there
was no shifting of contracts and that these concerns were carrying on
business operations all over country/world was not found satisfactory. The
AO held that the transacting parties of both the concerns were same and
therefore, this was nothing but shifting of contracts.
3.3. On shifting of some of the employees of proprietary concern to the
assessee firm the AO observed that it was a mere total shift of employees of
M/s Green Fire to the appellant. That the new unit should have been
constituted of new investments which was not the case here. Substantial
funds have come from M/s Green Fire. The proprietor of M/s Green Fire is
one of the partners of the appellant concern. The new unit set up in SEZ is
actually not the same a new and identifiable unit. A business activity
normally comprises assets, employees and contracts. When any one or more
of these move from one location to another the issue for consideration is
whether such shifting is tantamount to reconstruction. In the appellant's case
there has been a transfer of assets in terms of capital introduction, human
resources, transacting parties purchase as well as sales, inventories, customer
base, nature of business itself, trademark and even the brand name of both
the concerns. The transfer however need not be of all the assets. In the 4
present case assets have been substantially transferred out of the existing
business to the new unit. Further major sales were made to M/s EMSARU
(USA) in A.Y. 06-07 as well as in the current year. Thus there has been a
mere total shift of customers base from the old business to the new one. The
AO has also observed that in A.Y. 07-08 out of the total receipts of Rs. 38
lacs 27 lacs was received from M/s Green Fire. The purchase parties of old
unit and the new units remained same. The AO therefore held that the
existence of the firm in earlier years does not prove anything about its
feasibility for deduction u/s 10AA. The AO therefore, disallowed the claim
of deduction and made addition of Rs. 121547247/-.
4. It was contended before the Ld. CIT(A) that firm came into existence
w.e.f. 20/10/2003 with two partners Atul Dangayach and Smt. Kamlesh
Dangayach. Necessary permission was granted for the establishment of new
industrial undertaking at SEZ Sitapura for manufacturing of gem stones and
jewellery. The land was allotted in 2004 and the factory building was
constructed. Raw material was purchased in FY 05-06. The building, plant
& machinery and other investments were financed by Smt. Kamlesh and the
bank. In A.Y. 07-08 the entire sales were exported and deduction u/s 10AA
was claimed which was disallowed by the AO but was allowed in first
appeal. The ground of appeal No. 1 is covered by the CIT (A)'s order for 5
A.Y. 07-08 in favour of the appellant. Still the AR has argued his case on
4.1 The assessee-firm is a physically separate industrial undertaking
having newly purchased plot of land in SEZ constructed a complete modern
factory building thereon and installed complete new modern plant &
machinery for manufacturing of gem stones and jewellery, obtained all
approvals, licenses and new power connection.
4.2 The assessee has large capital and various investments and
various loans were advanced and, therefore, simply on account of routing of
some funds through the books of accounts of her proprietary concern M/s
Green Fire does not mean that funds invested by partner of assessee firm
has come from the business of proprietary concern M/s Green Fire. The
factual position that emerges is that funds were provided by Kamlesh
Dangayach out of her own surplus funds. The maximum investment of Smt.
Kamlesh Dangayach in the firm M/s Green Fire were Rs. 67,37,224/- while
investment in new industrial undertaking upto 31.3.06 in land, factory
building and plant & machinery are Rs. 14626947/- besides investment in
raw material. It is thus clear that substantial funds were invested in the new
industrial undertaking by Smt. Kamlesh Dangayach out of her own free 6
circulating capital. The substantial withdrawals from the business of M/s
Green Fire by Smt. Kamlesh Dangayach were for her various other
investments in shares and in advances & loans.
4.3. In law also the employment of capital of separate business of
partner in the new industrial undertaking does not mean that it hit the
condition of section 10AA (4) (ii) and a ground to hold that the new
industrial undertaking is a reconstruction of business already in existence. It
is true that employment of fresh capital in the new unit is imperative. But it
does not mean that for the employment of the capital, it should have been
newly raised. If surplus/reserve capital is available with an assessee in his
existing business, the assessee can utilize such capital for the purchase of
plant, machinery, etc. for the new unit.
4.3 The Hon'ble Supreme Court in Textile Machinery Corp. Ltd. vs.
CIT (1977) 107 ITR 173 that new undertaking may manufacture the same
articles as manufactured by the existing unit.
4.4 The Machinery & Plant installed by new unit is of bigger capacity,
new modern technique plant and not exactly same as that of M/s Green Fire.
The total plant & machinery of M/s Green Fire is of the cost of Rs.
12,28,923/- which was old indigenous plant & machinery with old 7
conventional jewellery manufacturing machines. The appellant firm on the
other hand in its new industrial undertaking installed imported plant &
machinery of latest technology at cost of Rs. 43,99,951/-. There is no
registered brand name of articles manufactured by M/s Green Fire and it is
only product code/name which can be adopted by any one.
4.5. The assessee - firm in its new industrial undertaking employed 74
persons. Through out o 74 persons employed some persons joined the new
industrial undertaking of assessee by leaving job from M/s Green Fire. The
new plant & machinery of assessee firm, designing of land manufacturing of
gems & stones and jewellery with modern techniques and proper working
environment was there and so employees looking their future prospectus
joined in new industrial undertaking of assessee firm. The Madras High
Court in case of Indian Aluminium Company Ltd. vs. CIT (108 ITR 367)
held that even if some employees are common to the old and the new unit, it
will not be a bar on eligibility of deduction u/s 10AA as this does not
tantamount to splitting up or reconstruction of business.
4.6. If the monthly sale and expenses and their percentage, remaining
same in new industrial undertaking do not mean that same is formed by
splitting or reconstruction of a business already in existence. The common
parties for purchases and for sales between M/s Green Fire Exports and M/s 8
Green Fire is also not a disqualification for availing deduction u/s 10AA of
4.7. It is not a case that old unit M/s Green Fire shifted the customers to
assessee firm but rather customers shifted to new industrial undertaking.
4.8. It was not the case that the new business involved diversion of assets
from the old unit. The new unit was established by procuring machinery
worth more than Rs. 43 lakhs. Whether there is reconstruction of a business
depends on facts of the case. If the alterations or changes are substantial,
there would be little scope of describing what emerges as a reconstruction of
business. There was substantial addition to the volume of business. Further
more, there was good increase in the number of customers also.
4.9 In view of above submissions the AO is wrong and has erred in law in
holding that new industrial undertaking of ssessee firm is formed by splitting
up or reconstruction of business of M/s Green Fire and so not entitled for
deduction u/s 10AA.
4.10 This issue is covered in favour of assessee from appeal order for A.Y.
2007-08 which stands confirmed by Hon'ble ITAT vide their order dated
5. After considering the submissions and perusing the materials placed
on record, the Ld. CIT(A) gave following findings:
"In the immediately preceding year i.e. A.Y. 07-08 when manufacturing in the appellant's concern stated first time and deduction u/s 10AA was claimed, the issue was decided in favour of the appellant. It was held that substantial new capital was introduced in the new unit. The plant was not set up by shifting of machinery of old units but new machinery worth more than Rs. 43 lacs were purchased. The employees of old concern M/s Green Fire Exports did not shift en-mass to the new unit but they left the job and joined the new unit keeping in mind their better prospects. It was held that employees though important part of business undertakings cannot be considered as an asset in its commercial sense. It is not a acse of reconstruction of business as the assets appearing in the b/s of old concern were not shifted to the new unit. The purchasing or selling parties may be common but it cannot amount to reconstruction of old business. As plant and machinery of the old business are lying as it is the appellant's case under the facts and circumstances was not considered case of reconstruction of existing business. As all other requirements of the section have been fulfilled, the claim of deduction u/s 10AA was found justified. The present year under consideration is only second year of continuity of business and no new facts were noticed by the AO. The deduction allowed u/s 10AA in its first year of commencement should be continued to be allowed in the second year as long as the conditions of Sec. 10AA are fulfilled. The AO is therefore, directed to allow deduction u/s 10AA in the second year as well.
The first appellate order was confirmed by Hon'ble ITAT and vide their order dt. 18/03/2011 it was held that CIT (A) was justified in holding that deduction cannot be disallowed on the ground that the unit set up was formed by the reconstruction of the business already in existence. The first ground of appeal is decided in favour of the appellant."
6. Now the Department is in appeal here before the Tribunal. The Ld.
DR placed reliance on the orders of the A.O. and some portion of the order
of the AO was read also.
7. The Ld. Counsel for the assessee, on the other hand, stated that the
issue in question is squarely covered by the decision of the Tribunal for the
immediately preceding year i.e. 2007-08. Copy of the order of the Tribunal
was also filed. On query from the Bench, it was admitted by the Ld. DR that
there is no change in facts of the case as compared to this year and earlier.
8. After considering the orders of the AO and the ld. CIT(A) and
submissions of the parties, we found that the issue is squarely covered by the
decision of the ITAT, Jaipur Bench, in assessee's own case for immediately
preceding year. The appeal of the department for the immediately preceding
year was decided by the Tribunal in ITA No.426/JP/2010 for A.Y.2007-08
vide order dated 18.03.2011 and the findings of the Tribunal have been
recorded in para 4 to 4.9 at pages 15 to 24, which are as under:
"4. We have heard both the parties. It is clear that the firm was constituted w.e.f 23.10.2003.
The firm got permission for the establishment of new industrial undertaking in the special economic zone and the firm was allotted in industrial plot. Possession was taken on 31.7,2004. The firm made investments in the three financial years as under:
S.No. Name of Assets 2003-04 2004-05 2005-06 Total 1 Land 962500.00 0.00 0.00 962500.00 2 Building 0.00 3679409.50 5585447.00 9264856.50 3 Plant & 0.00 0.00 4399591.00 4399591.00 Machinery
4 Other 0.00 72640.00 2434355.00 2506995.00 Investment-
5 Purchase (Raw - 0.00 0.0 30502383.00 30502383.00 11
962500.00 3752049.00 42921776.00 476363255.00
4.1 Section 10AA has been inserted by the special economic Zone Act 2005 w.e.f. 10th February, 2006. The deduction u/s 10AA is available to an assessee, being an entrepreneur as referred to in clause (j) of section 2 of the special economic Zone Act, 2005, from the unit which begins or manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after 1st day of April, 2006. Sub Section 4 of section 10AA act as introduced initially was as under:
"(4) This section applies to any undertaken being the units, which has began or begins to manufacture or produce articles or things or services during the previous year relevant to assessment year commencing on or after the 1st day of April, 2006, any special economic Zone." The above referred sub section 4 was substituted by the finance act 2007 with retrospective effect from 22 February, 2006 The substituted subsection 4 by the finance act 2007 is as under :
"(4) This section applies to any undertaking, being the Unit, which fulfils all the following conditions, namely:-
(i) It has begun or begins to manufacture or produce articles or things or provide services during the previous year relevant to the assessment year commencing on or after the 1st day of April, 2006 in any Special Economic Zone; (ii) It is not formed by the splitting up, or the reconstruction, of a business already in existence:
Provided that this condition shall not apply in respect of any undertaking, being the Unit, which is formed as a result of the reestablishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) It is not formed by the transfer to a new business, of machinery of plant previously used for any purpose.
Explanation- The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section."
4.2 In the memo explaining the provision the finance bill 2007 (289 ITR 326Statutes) it was mentioned that subsection (4) of 10AA has been amended so that new industries and new investments are promoted in special economic zone and not to facilitate migration of existining industries to avail tax concession. In the instant case the plot was obtained on 13th July, 2004 and the building has been constructed during the F.Y. 03-04 to 05-06 and substantial row material has also been purchased in the F.Y. 05-06. The investment in fixed assets upto 31.3.2007 12
was worth to the extent Rs.1.24 crores. The assessee firm was permitted to establish new undertaking in special economic zone Sitapura for the following items up to the capacities specified below on the basis of maximum utilization of plant and machinery.
Item of Producition Unit Annual capacity 1 Gem Stone Kg 6000
2. Silver Jewellery Plain & Studded Kg 2000
3. Gold Jewellery Plain & Studded Kg 50
4. Trading of Gems & Jewellery
4.3 As per the permission given by development commissioner SEZ, the assessee was to exports entire production excluding rejects and sales in the domestic tariff area. The unit was to achieve positive not foreign exchange for a period of five years from the commencement of the production. From the above facts it is clear that new unit was established in the special economic Zone.
4.4 We have already reproduced sub section 4 of 10AA. The word formed is appearing in sub clause (ii) and (iii) of subsection (4) of 10AA. The word formed with reference to the transfer to a new business of machinery or plant previously used for any purpose has been considered by the Hon'ble Apex Court in the case of Bajaj Tempo Ltd. V/s CIT 196 ITR 188 The Hon'ble Apex Court has referred that the word formed was construed by the Hon'ble Apex Court in the case of textile machinery corporation Ltd. 107 ITR 195 in which the decision of Hon'ble Delhi High Court in the case of CIT V/s. Ganga Sugar Corporation Ltd., 92 ITR 173 was approved. The Hon'ble Apex Court observed at page 199 as under:
"Form", according to the dictionary, has different meanings. In the context in which it has been used, it was intended to connote that the body of the company or its shape did not come up in consequence of transfer of building, machinery or plant used previously for business purpose. Use of the negative before the word "formed" further strengthens it. In other words, building, machinery or plant used previously in other business should not result in the undertaking being
formed by it. The transfer, to take the new undertaking out of the purview of sub-section (1), must be such that, but for the transfer, the new undertaking could not have come into being. In our opinion, on the facts found by the Tribunal, the part played by taking the building on lease was not dominant in the formation of the company.
4.5 Conditions in section 15C (2) (i) of the I.T.Act 1922 are similar to the conditions as mentioned in section 10AA(4) of I.T. Act 1961. The Hon'ble Apex Court in case of Textile Machinery Corporation Ltd. (supra) has endorsed the view of Hon'ble Delhi High Court with regard to reconstruction of business. And the Para from the decision of Delhi High Court as appearing in the decision of 13
Hon'ble Apex Courtt in the case of Textile Machinery Corporation Ltd. is as under :
" We have given the matter our earnest consideration and are of the view that in the reconstruction of a business, as in the reconstruction of a company, there is an element of transfer of assets and of some change, however partial or restricted it may be, of ownership of the assets. The transfer, however, need not be of all the assets. It is none the less imperative that there should be continuity and preservation of the old undertaking though in an altered form. The concept of reconstruction of business would not be attracted when a company which is already running one industrial unit sets up another industrial unit. The new industrial unit would not lose its separate and independent identity even though it -20-
has been set up by a company which is already running an industrial unit before the setting up of the new unit."
4.6 After endorsing the views of the Hon'ble Delhi Court the regard to reconstruction of business the Hon'ble Apex Court has observed as under:
Reconstruction of business involves the idea of substantially the same persons carrying on substantially the same business. It is stated on behalf of the revenue that the same company in the instant case continues to do the same business of heavy engineering-no matter certain spare parts necessary as components to completion of the end-product are now manufactured in the business itself. The fact that the assessee is carrying on the general business of heavy engineering will not prevent his from setting up new industrial undertakings and from claiming benefit under section 15C if that section is otherwise applicable. However, in order to be entitled to the benefit under section 15C, the following facts have to be established by the assessee, subject always to time-schedule in the section: (i) Investment of substantial fresh capital in the industrial undertaking set up, (ii) Employment of requisite labour therein.
(iii) Manufacture or production of articles in the said undertaking. (iv) Earning of profits clearly attributable to the said new undertaking and (v) above all, a separate and distinct identity of the industrial unit set up.
We may add that there is no bar to an assessee carrying on a particular business to set up a new industrial undertaking on account of which exemption of tax under section 15C may be claimed."
4.7 The Hon'ble Apex Court in the case of Textile Machinery Corporation ltd. (supra) has also approved the observations of the Hon'ble Bombay High Court in the case of CIT v/s Gaekwar Foam. and rubber company Ltd. 35 ITR 662 The Hon'ble Bombay High Court has held that reconstruction of business or industrial undertaking must necessarily involve the concept that the original business or undertaking do not cease functioning and its identity is not to be lost or 14
abandoned. The underlying idea of a reconstruction is of a "business already in existence" - there must be a continuation of the activities and business of the same industrial undertaking. The undertaking must continue to do same business though in some altered or varied form. In the instant case the earlier industrial undertaking was owned by Smt. Kamlesh Dangayach while the present undertaking is owned by the firm. The firm is separate entity under the income tax Act and the earlier industrial undertaking of the assessee must cease to the function. The deduction u/s 10AA is undertaking specific. The Hon'ble Allahabad High Court in the case of CIT V/s Modi Spinning and Manufacturing 125 ITR 361 had occasion to considere to the allowibility of deduction u/s 15C of I.T.Act 1922. The revenue argued that the assessee has expended the business and therefore the undertaking should be considered to have been formed as the result of reconstruction. The Tribunal in this case observed that the unit was bigger then the unit which the assess has already there and there were new features in the new unit. The Hon'ble Allahabad High Court observed that every new creation in business is some kind of expansion and advancement. If the undertaking is new and identitiable undertaking, separate and distinct, foom the existing business then it will not be reconstruction of business already in existence. The Hon'ble Delhi Court in the case of CIT V/s Gedore Tools India (Pvt) Ltd. 126 ITR 673 has held that the fact that the new Unit manufactured some of the items which were manufactured by the old unit will not make it an integral part of old unit, Even if new undertaking manufactures a product which is feeded to the old business even then it will not amount reconstruction of the old business. Establishment of the new unit with new separate plant and machinery by investing substantial funds is essential. If the new unit has not derived any thing foom the old unit by way of equipment or by way of factory building and no assets of the old unit have been transferred to the new unit, the new unit had not been formed by reconstruction. We feel that the ld. AR in his written submission has rightly placed reliance on the followings decisions that the new undertaking is not a formed on reconstruction of the business already in the existence. 1 CIT V/s Ambur Cooperative Sugar Mills Ltd.(Madras)127 ITR 495
2. Addl. CIT V/s Hutti Gold mines Company Ltd. 128 ITR 476 (Karnataka)
In this case existing plant and conveyer belts and old mill dismanted and the new mill and refinery covering fortunes area of factory was setup. New unit is independent unit and is entitled to deduction and it will not be reconstruction of business.
(3) CIT V/s MAhaan foods Ltd. 216 CTR 148 (Delhi)
In this case assessee setup industrial undertaking with latest technology and increased capacity with frest investment of Rs.104.88 laks as against investment 20.8 laks in old plant and it cannot be said that the unit was a result a reconstruction of old business.
(4) CIT v/s Premier Cotton Mills Ltd. 240 ITR 434 (Madras) 15
(5) CIT V/s Quality Steel Tube Ltd. 280 ITR 254 (Allahabad.) 4.8 Even if for the argument sake, it is considered that substantial persons have started the unit even then it can not be considered as reconstruction of the existing business. There is substantial investment in new plant and machinery. Details of machineries installed are available at page 15 of the paper book. Out of total investment of plant and machinery of Rs.43,99,591/- the machinery purchased from domestic market is only of Rs.31,750/- Other machineries installed have been acquired through imports from foreign countries. Purchase vouchers are available in the paperbook. We were informed that the proprietorship concern was not using the imported machinery. There is definitely advancement in the technique of making studded jewellery. Hence the unit even if relate to person having substantial interest in old unit, even then the new unit can not be considered a reconstruction of old business as new unit if independent is not to be considered as reconstruction of business. 4.9 Considering the above discussion it is clear that the assessee has set up a new unit with the substantial investments and the assesse firm is separate and distinct from the proprietorship concern. For holding that there is reconstruction of existing business than the earlier business should cease. Section 10AA(4) refers to the formation of the undertaking by the transfer to a new business of machinery or plant previously used for any purposes. There is no restriction of the human resources used in the new business in case the human resources have been previously used and therefore deduction u/s 10AA cannot be disallowed on ground that almost the same employees were employed by the firm which were earlier employed by the proprietorship concern. Hence it is held that ld. CIT (A) was justified in holding that deduction cannot be disallowed on the ground that the unit setup is formed by the reconstruction of the business already in existence."
8.1. There is no change in material facts of the year under consideration as
compared with the earlier year. Therefore, without going into detail further,
we see no reason to interfere in the findings of the ld. CIT(A), who has also
taken a note that the Tribunal for the immediately preceding year has
allowed the issue in favour of the assessee and thereafter, he allowed the
claim of the assessee.
8.2. In view of the above facts and circumstances and in view of the rule
of consistency, we confirm the order of the ld. CIT(A) for the year under
9. Ground No.2 relates to disallowance of interest on the negative capital in the account of the partner.
9.1. The brief facts noted by the ld. CIT(A) in his order in this respect are as under:
"Interest of Rs. 5185124/- was paid. Due to withdrawals by the partners of Rs. 291571346/- there was a negative capital balance. The appellant failed to provide any documentary evidence such as fund flow statement which could prove that there was no nexus between interest bearing loans and drawings by partners. The appellant failed to discharge its onus of proving the purpose of expenses debited to P & L A/c and therefore, interest payment of Rs. 5185124/- was disallowed considering it not related to business purposes. Further in the withdrawals by the partners of Rs. 20406599/- if interest would have been charged @ 12% there would be interest income of Rs. 15221475/-. That deemed interest income of Rs. 15221475/- was added besides disallowing Rs. 5185124/-."
10. It was contended before the ld. CIT(A) that in the year under
consideration two secured loans from Bank of Rajasthan have reduced. First
loan is reduced to Rs. 11254170/- from Rs. 13127043/- last year. Similarly
the secured loan against export invoice is also reduced to Rs. 32830796/-
from Rs. 38700000/-. The total interest payment of Rs. 5185124/- was made
to the bank on these two advances.
10.1 In the capital a/c of partner Smt. Kamlesh there was a debit balance of
Rs. 44848295/- as on 31/3/07 but as cheque of Rs. 2,50,00,000/- issued on
23/3/07 was not encashed till the end of the year the actual debit balance was
Rs. 19848295/- and as on 31/3/08 it was Rs. 291571346/-. There was no
nexus between the borrowed funds from the bank and drawings made by
Smt. Kamlesh as evident from bank credits as on 31/3/07 and 31/3/08. In the
year under consideration the bank credits/borrowings have been reduced as
compared to last year and thus there is no withdrawal by Smt. Kamlesh out
of borrowings from bank on which interest was paid. The drawings and
resultant debit balance is out of current profits and interest free business
funds. The finding of the AO is therefore, incorrect. The interest paid by the
appellant firm to the bank amounting to Rs. 5185124/- was wholly and
exclusively for business purpose and same is allowable.
10.2 The addition of deemed interest of Rs. 15221475/- is also wrong and
bad in law as no notional income or deemed income can be assessed unless
it is so assessable as per provisions of Income-tax Act, 1961. In A.Y. 07-08
similar disallowance on similar lines were made which had been deleted in
appeal and the department accepted the appeal order as no appeal before
ITAT was filed by it. In view of the fact it was submitted that the
addition/disallowance made by the AO may be deleted. 18
11. After considering the submissions of the assessee as well as the order
of the AO, the Ld. CIT(A) gave following findings:
"Contention of the AR is considered. Interest payment of Rs. 5185124/- has been made to the bank. The AR by giving comparable figure of net outstanding at the end of current year as well as earlier year has tried to submit that no fresh borrowings are made. As no borrowings are made in the year under consideration and the only interest is paid to the Bank, no disallowance out of interest paid is justified. Partner has withdrawn not from the bank loans but out of the creditors or funds otherwise available. Interest account does not show any nexus between interest bearing funds and partner's withdrawal. Further partner's withdrawal is much more than interest bearing funds and therefore presumption would be that the interest free funds have been advanced out of own funds. [CIT Vs. Hotel Savera 299 CTR 795 (Mad) & CIT Vs. Tri Box Packs 260 ITR 637 (Del)]. Disallowance of Rs. 5185124/- by the AO is not justified and therefore addition of Rs. 5185124/- is hereby deleted."
12. The Ld. DR placed reliance on the order of the Assessing Officer.
13. On the other hand, the ld. Counsel for the assessee placed reliance on
the order of the CIT(A). It was further submitted that on similar basis, the
AO made addition for earlier year i.e. 2007-08. The Ld. CIT(A) deleted the
disallowances and no appeal was preferred by the Department against the
order of the CIT(A). Attention of the Bench was drawn on the ground of the
department taken in earlier year i.e. 2007-08. It was also submitted that the
assessee-firm was having sufficient capital balance on which no interest was
paid and from that capital of the partner was returned. It was also submitted
that this amount has been used for commercial expediency by investing in 19
another firm where no interest has been charged by the partner. Therefore,
commercial expediency cannot be doubted.
14. After considering the orders of the authorities below and submissions
of both the parties, we found that the Ld. CIT(A) was justified in deleting
the addition made. The Ld. CIT(A) has noted that the assessee has given a
comparable figure of net outstanding at the end of the current year as well as
earlier year and it was found that no fresh borrowings were made. Bank loan
was also reduced. Therefore, it is not a case that the assessee has paid more
interest to the bank. It was ascertained by the ld. CIT(A) that partner has
withdrawn not from the bank loans but out of the funds available with the
firm and no interest was paid by the firm. Profit & Loss account is placed on
record and it is seen that interest liability of the firm was less than interest
liability as compared to earlier year. In earlier also, similar addition was
made and the ld. CIT(A) deleted the same. However, no appeal was
preferred by the Department before the Tribunal. In view of these facts and
circumstances of the case and in view of the reasoning given by the ld.
CIT(A), which reproduced somewhere above in this order, we hold that the
Ld. CIT(A) was justified in deleting the addition. Accordingly, we confirm
the order of the ld. CIT(A) in this respect also.
15. Remaining issue is against deleting the addition of Rs.1,52,21,475/-
calculated by the AO by treating the withdrawals by the partner as loan and
interest and calculated on such amount @ 12%.
15.1. The Ld. CIT(A) deleted this addition by observing that there is no
provision in the Income-tax Act to charge notional interest. It has been
observed that any addition on account of deemed income can be made as per
provision of the Act and there is no such provision in the law. Therefore,
addition made by the AO was deleted.
16. After considering the orders of the AO as well as the ld. CIT(A),
again we find no infirmity in the findings of the ld. CIT(A), which remained
uncontroverted. It is also a matter of fact that no excess interest was paid to
the bank in the year under consideration as loan facility availed from the
bank was reduced in the year under consideration as compared to earlier
year. No interest was paid to the creditors on their credit balance and there
was surplus fund of the firm which was amounting to Rs.10 crores on which
also no interest was payable or paid. The money given to the partner was out
of funds available with the firm, on which no interest was paid. Therefore,
we are of the view that the ld. CIT(A) was justified in deleting the addition
by observing that no notional interest can be charge on negative balance of 21
the bank given by the firm. Accordingly, this ground of appeal of the
department is also dismissed.
17. In the result, appeal of the Department is dismissed.
The order is pronounced in the open court on 20.01.2012.
(N.L. KALRA) ( R.K. GUPTA ) ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 20.01.2012.
Copy forwarded to :-
The Assessee:M/s. Green Fire Exports, Jaipur.
The ITO, Ward-1(2), Jaipur.
The CIT (A), Jaipur
The CIT, Jaipur
The D/R, ITAT, Jaipur.
Guard file (ITA No.477 /JP/2011) By Order,