Bombay High Court

Oceanic Imports & Exports ... vs Astt. Cit on 2 May, 2003

Equivalent citations: (2004) 87 TTJ Mumbai 767

ORDER

Mukul Shrawat, J.M.

This is an appeal filed by the assessee against the order of Commissioner (Appeals), Mumbai dated 13-9-1995. As per the grounds of appeal learned authorised representative has mentioned that three substantive grounds have been raised, which are decided as follows.

2. Ground No. 1 is in respect of disallowance of interest under section 36(1)(iii) of Rs. 1,06,250.

3. In brief, the facts of the case are that the assessee-firm carried on the business as importers/dealers of distillery raw materials oak, wood, etc. During the year of account, out of total sales of Rs. 1.47 crores, sales aggregating to Rs. 89.3 lakhs were to McDowell & Co. Thus, the McDowell & Co. was the major customer of the assessee-firm. It is submitted that it was agreed between the assessee-firm. and the McDowell & Co. that the later would give a loan of Rs. 40 lakhs free of interest. It is submitted that at the request of the vice president of McDowell & Co. Shri Ravi Jain, the assessee-firm gave loan to the family members of the said vice president aggregating to Rs. 10 lakhs. The loan of Rs. 10 lakhs was given interest-free on 17-7- 1989, to Kusum Jain Rs. 3 lakhs, Mr. Divraj Jain Rs.2 lakhs, Mrs. Minakshi Jain Rs. 3 lakhs and Mr. R.K. Jain Rs. 2 lakhs. The said loans were given free of interest in view of the fact that the business relation which the assessee-firm had with McDowell & Co. Ltd. and the fact that it was a major customer of the assessee-firm, that McDowell & Co. had given free of interest loan of Rs. 40 lakhs to the appellant firm and that out of commercial expediency maintained good relation with McDowell & Co., Shri Ravi Jain has been instrumental in the volume of business received by the assessee-firm from M/s McDowell & Co. and also for advancing moneys against orders yet to be executed. The assessee-firm received an advance of Rs. 20,02,500 on 8-7- 1989,. and the supplies against the said advance was made on 8-11-1989, after a lapse of about 4 months from the date of advance facility. The appellant-firm' enjoys working capital facility of Rs. 20 lakhs with State Bank of India, the only interest bearing source of funds for the assessee-firm on which it paid a total interest of Rs. 2,86,923. In the ordinary course of business, the assessee-firm borrowed loans on which it paid total interest of Rs. 3,28,131. The said loans were borrowed by the assessee-firm and utilized for the purpose of its business and out of the said loans no amount was paid as a loan to the members of Shri Ravi Jain. On these facts, the assessing officer took the view that the assessee-firm's advancement of interest-free advances to the family members of Shri Ravi Jain was not for the business purposes and consequently, made a proportionate disallowance of Rs. 1,06,250 out of the interest paid to State Bank of India.

4. In first appeal learned Commissioner (Appeals) has mentioned that it was evident from the fact that the assessee-firm has received an amount of Rs. 26,76,900 on 28-11-1989, and an amount of Rs. 21,80,500 on 23-12-1989, from M/s McDowell & Co. The assessee-firm has not produced any documentary evidence to show that the advances were given by M/s McDowell & Co. at the instance of Shri Ravi Jain and on the condition that the interest-free loan of Rs. 10 lakhs was to be given to the family members of Shri Ravi Jain. There was no obligation on the party of the assessee-firm to give interest-free loan to the family members of Shri Ravi Jain. From the Bank account of the SBI it was seen that the assessee has received advance of Rs. 20,02,500 on 8-7-1989, from M/s . McDowell & Co. just before this advance, the assessee was to pay an amount of Rs. 11,63,378 to the Bank . After the credit of Rs. 20,02,500 the assessee was to get an amount of Rs. 8,39,121 from-the Bank . The loan has been given to the family members of Shri Ravi Jain on 10-7- 1989. Immediately prior to this date, as per Bank account, the assessee was to get Rs. 7,42,882 from the Bank . Therefore, on the facts of the case finally it was held that the assessing officer was justified in disallowing the interest of Rs. 1,06,250. Being aggrieved now the assessee is further in appeal.

5. Before us learned authorised representative has vehemently opposed the observations of the authorities below and argued that because of commercial expediency the loans were given free of interest and it was not upon revenue to challenge the same. He has stressed that the advance were made out of non-interest bearing funds. A sum of Rs. 20.03 lakhs were received from M/s McDowell & Co. without any interest and out of this amount the assessee has advanced the said amount of Rs. 10 lakhs to the relative of Mr. Ravi Jain. Hence, he has stressed that the advances were out of free funds and not out of the borrowed funds and the revenue has not established that the interest bearing funds were advanced as interest-free funds. In support of his arguments a paper book is also submitted containing confirmation of Mr. R.K. Jain, an affidavit of Mr. Vipin Sharma, copy of ledger account of M/s McDowell &Co., details of Bank account, details of purchase order by M/s McDowell & Co. and submissions made before the authorities below. He has relied upon the decision of CIT v. Dhanranjgiri Raja Narasinghji (1973) 91 ITR 544 (SC), Cadbury Fry (India) Ltd. v. Income Tax Officer (1982) 2 ITD 435 (Bom) and CIT v. Royal Calcutta Turf Club (1961) 41 ITR 414 (SC).

6. On behalf of the revenue learned departmental Representative has supported the orders of the revenue authorities and argued that interest-free advance was given out of the working capital and overdraft facility from the Bank on which interest was charged, therefore, rightly disallowed by assessing officer. Referring to the observations of assessing officer he has said that the firm has paid interest of Rs. 2,86,000 and if the said amount of Rs. 10 lakhs was not given as interest free advance then the proportionate burden of interest would have been reduced. He has cited the decision of Bombay High Court in the case of CIT v. Doctor & Co. (1989) 180 ITR 627 (Bom).

7. We have carefully considered the submissions of both the sides and also thoroughly perused the orders of the authorities, below in the light of the case laws cited as well as the material placed before us. The facts have already been narrated in above paras through which ' it is undisputed that M/s McDowell & Co. is the biggest client of the appellant. It is also not rebutted that the loans have been advanced at the instance of Mr. Ravi Jain as he has affirmed through an affidavit. The contention of the assessee basically was that the loans were advanced keeping in view the business relationship, and other advantages as well as the commercial expediency. Through accounts furnished before us, the assessee has also tried to establish that interest-free funds received from M/s McDowell & Co. were utilized towards interest-free advances. The assessee has explained that the interest-free funds to the extent of Rs. 8.63 lakhs were available at that relevant time when the loans were advanced and the profits of the year, if further added upto to that period then the assessee had sufficient funds available which were advanced to the family members of Mr. Ravi Jain. It was further established by the assessee which was not controverted by the revenue that the advances received from M/s McDowell & Co. were also without any interest. It was explained that the appellant was always indebted to McDowell & Co. being its major customer though the same were received against the supplies to be made. On p. 12 of the paper book the account of McDowell & Co.,is placed before us reflecting the advances received and the bills raised. The overall position of this account is that during the relevant accounting period the said company has advanced sufficient funds and as per account no interest has also been charged. In addition to these facts the assessee has established that the interest-free advances to the family members of Shri Ravi Jain were not out of the interest bearing funds. The assessee has also established that the advances were made to ensure the regular supply of materials to the said company and to maintain good business relationship because Shri Ravi Jain was vice president of McDowell & Co. An affidavit of one of the partners was also filed before the assessing officer to affirm these facts and to confirm that it was businessmen's prudence not to charge interest. In view of the above discussions and facts of the case we are of the opinion that the advances were made keeping in view the business exigency necessary to ensure the business relationship. The above judicial pronouncement also support the claim of the assessee. The case laws cited by learned departmental Representative, can be distinguished on the facts because in that appeal the assessee has borrowed money on interest, however, on the other hand, in the present appeal the appellant has non-interest bearing funds which were advanced. Resultantly, we hereby reverse the finding of learned Commissioner (Appeals) and allow this ground of the appellant.

8. Ground No. 2 is in respect of disallowance of motor car expenses.

9. The assessee has claimed Rs. 1,11,592 under the head motor car expenses. The assessing officer has disallowed 1/5th of the expenses and made an addition of Rs. 22,319. This ground was not strongly stressed and we are also of the opinion that the assessing officer was reasonable to restrict the disallowance to a fair proportion having regard to the personal user of the motor car. No interference is required in the finding of learned Commissioner (Appeals) and this ground is rejected.

10. Ground No. 3 is in respect of disallowance of telephone expenses of Rs. 5000.

11. The assessee has claimed a total expenditure of Rs. 41,976 on the telephone provided at the residence of the partners. The contention of the assessee was that the telephones were used mainly for the purpose of business and mainly the calls were made to Scotland from where the assessee used to import the material. On the ground that the element of personal use of telephone could not be ruled out a disallowance of Rs. 5,000 was made by the assessing officer which was confirmed by learned Commissioner (Appeals). Since no specific material was placed before us nor strongly stressed upon, therefore, we do not want to interfere with the findings of the revenue authorities and reject this ground of the assessee.

12. In the result the appeal of the assessee is partly allowed.