TMI Blog2012 (3) TMI 43X X X X Extracts X X X X X X X X Extracts X X X X ..... ls)-II, Rajkot dated 14-71-2010 (sic) for assessment year 2005-06. 2. The effective grounds raised by revenue in its appeal are reproduced as under:- (1) The learned CIT(A) has wrongly confirmed the addition of Gross Profit of Rs. 6,21,368/-. (2) The learned CIT(A) has wrongly confirmed the disallowance of interest expenses of Rs. 1,80,000/-. 3. The brief facts of the first ground are that the assessee derives income from import and trading in timber. During the assessment proceedings, the AO noticed that the assessee was having turnover of Rs. 2.48 crores and final result is net loss for Rs. 1,07,07,108/-. The AO in order to examine the purchase and sales issued a notice u/s. 133(6) to following parties:- 1. Dadu Timber Traders, Indore, MP No reply received. 2. Aggarwal Traders No reply received. 3. Annapurna enterprises No reply received. 4. Ashit Shipping Services No reply received. 5. Dadu Timber Traders No reply received. 6. Spee Industries No reply received. 7. Amirsingh Sons No reply received. 8. Arih ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s wherein, they did not find any discrepancies. The ld. A.R. submitted that the assessee has given reasons for lowering down of sales receipts and also the market position on each and every product during assessment proceedings. The rate of goods was fallen down in international market and in support of that, the assessee furnished certain bills of other parties which shows that the assessee has sold the goods at market rate and due to rate of goods coming down in the international market as compared to their high price, there was a loss. The ld. A.R. submitted that timber was imported in log form and kept open in log for a long time. The goods kept in godown as the goods are in bad shape and of poor quality. The goods damaged due to direct sunlight and climate condition. The ld. A.R. submitted that most of the goods which were remaining in stock were purchased from PEC Limited through using their import license. The PEC Limited is Government Entrepreneurs and has put many restrictions on the assessee. The ld. A.R. while explaining the loss in teak wood submitted that rate of goods was fallen down in international market. The other reasons of loss were same as stated above in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s including quantitative details and situation of fixed assets. The AO on the basis of audit note, found that inventory of stock was taken as explained by the assessee but frequency of verification was not reasonable. The assessee-company did not maintain proper record of inventory. The discrepancies noticed on verification between the physical stocks and the books of account but same was not found material. There as not initial control procedure adopted by the assessee-company with regard to purchase of inventory, fixed assets and sale of goods. In the light of detailed discussions made by the AO and in the light of auditor's objection, we find that the CIT(A) has rightly confirmed the action of AO for rejecting the books of account. After rejecting the books of account, the AO estimated profit by applying 3% GP on the basis of one comparable case in the case of Prime Lumber Pvt. Ltd. for AY 2005-06 wherein, GP was declared at 3.63%. We find that the CIT(A) while estimating gross profit found that GP at the rate of 2.5% will meet the ends of justice instead of 3% adopted by the AO. In principle, the CIT(A) was of the view that the estimation made by the AO was on higher side. Afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of income earned under the head "Profits and gains of business or profession". The deduction contemplated by the section is in relation to the expenditure which could properly be regarded as necessary for the purpose of the business or profession. Expenditure incurred on account of commercial expediency for the purpose of business would be allowable under this provision. The expenditure to be allowed must have a nexus with the business of the Assessee. If the expenditure incurred is ostensibly incurred for the business, but if in reality is not for the purpose of business then such expenditure is not allowable. 11.2 Section 36(1)(iii) of the Act refers to "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession". The capital borrowed should be for the purposes of the business or profession. It is implicit in this provision that the capital so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business. So long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then subsequent diversion is of no consequence, but such stand of the assessee cannot be accepted. The legislative language of section 36(1)(iii) of the Act is very as clear expression "borrowed for the purpose of the business" is used. The amount borrowed must continue to be used for the purposes of the business and the fact that it was used for some point of time, but later diverted would not entitle the assessee to claim the interest paid on the borrowing as a deduction under section 36(1)(iii) even after such diversion. In cases where diversion occurs immediately after the borrowing and the borrowed amounts are not invested in the business at all, but diverted for other purposes, then there should not be any cloud of doubt that interest paid on such borrowed amounts is not allowable deduction. The factum of deferment, in cases where such diversion of funds from the business is clearly established from the facts on record, does not entitle the assessee to claim the benefit of deduction in respect of interest paid on the amounts borrowed but not presently used in its business. The time at which the diversion takes place is not the only relevant criterion but it is the fact of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the course of that year, the assessee withdrew from the business from time to time amount of Rs. 1,77,984 for his personal expenses. The Income-tax Officer disallowed a sum of Rs. 13,500 on pro rata , representing the interest element relating to Rs. 1,77,984, since he was of view that amount of Rs. 1,77,984 withdrew was made in the name of the business but used for his personal purposes. According to him, money was withdrawn from the books of account to meet the personal expenditure of the assessee and, as this sum of money was not actually used for the business, the interest paid thereon could not be allowed as permissible deduction. 11.6 The relevant finding of the Court is reproduced below: "We do not think that we can give effect to this argument. Indisputably, these amounts were borrowed only for the purpose of business of the family. The assessee drew out from time to time various sums of money aggregating to Rs. 1,77,984 from the business. It is not a case where any particular sum purporting to be borrowed on behalf of the business was spent for household expenses. This is a case where the loans were taken for carrying on the business but the family used to withdraw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the assessee. The presumption of availability of interest-free funds in the form of capital in case of company can be drawn on above material furnished by the assessee-company. 11.8 On the basis of above discussion a proposition/formula can be laid down that if an assessee having sufficient interest-free funds, in the form of capital reserves and other funds without interest bearing from relatives and friends not related to business, to cover funds given interest-free or utilized other than for business purposes, no disallowance is warranted. If the own funds are not sufficient to cover interest-free advances, a proportionate disallowance is warranted. While examining interest-free funds available with assessee and interest-free funds given a care is required to be taken that these funds were not related to business of the assessee. Capital and Reserves are certainly assessee's own interest funds. This proposition is fortified by the decision of ITAT in the case of Torrent Financiers ( supra ), judgment of Allahabad High Court in the case of Prem Heavy Engg. Works (P.) Ltd. ( supra ) and the judgment of Hon'ble Supreme Court in the case of Munjal Sales Corpn. ( supr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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