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TMI Blog2013 (9) TMI 303X X X X Extracts X X X X X X X X Extracts X X X X ..... ion payment and thereby making the assessee liable for deduction of tax at source. Under the facts and circumstances of the case the assessee is not liable to deduct tax at source as the expenses reimbursed to the consignee agent are the expenses incurred by them on behalf of the assessee company on sales made by them as consignee agent on behalf of assessee company. Hence the Ld. CIT(A) has erred in confirming the Assessing Officer's observation in invoking the provisions of section 40(a)(ia) of the Act. 3. Because the Ld. Assessing officer as well as Ld. CIT(A) has erred in ignoring the legal position that the expenses incurred by the consignee agents on behalf of assessee company are met out by the consignee agent out of sale proceed with them and the expenses incurred are always more than the expenses reimbursed to them by the assessee company, there is no element of income in the hands of consignee agents and hence on this ground also tax at source is not required to be deducted. 4. Because the addition is also wrong and illegal considering the amendment made in section 40(a)(ia) of the Act by the Finance Act, 2011. The amendment in section 40(a)(ia) of the Act is remedial a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invoked section 40a(ia) of the Act and made addition of Rs.21,33,377/-. The CIT(A) confirmed the action of the A.O. 5. The Ld. Authorised Representative of the assessee submitted that the issue is squarely covered by the order of I.T.A.T. in another case of M/s. Pee Cee Cosma Sope Limited vs. JCIT in ITA Nos.54/Agra/2013 and 55/Agra/2013 vide order dated 30.04.2013. The ld. Authorised Representative drew our attention on the finding of CIT(A) and submitted that the finding of CIT(A) in the case under consideration and in the case of M/s. Pee Cee Cosma Sope Limited vs. JCIT (supra) are identical. 6. The ld. Departmental Reprehensive relied on the order of A.O. 7. We have heard the ld. Representatives of the parties and records perused. We find that on identical set of facts the issue has already been decided by I.T.A.T., Agra Bench in ITA Nos.54/Agra/2013 and 55/Agra/2013 in the case of M/s. Pee Cee Cosma Sope Limited vs. JCIT (supra). The relevant finding of the I.T.A.T. is reproduced as under :- (Paragraph nos.5 & 6) "5. We have heard the learned Representatives of the parties and records perused. The issue under consideration whether the impugned expenditures are in nature of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he consignee agents till the sales made by them, the consignee agents incur certain expenses on behalf of the assessee company which are otherwise to be incurred by the assessee company if the assessee company make direct sale at these places. The nature of expenses incurred by the consignee agents and reimbursed by the assessee company as per the agreement executed between them are :- a) Unloading expenses on receipt of goods from the assessee company. b) Loading expenses when the goods are sent by the consignee agents for sale to distributor/dealer/retailer. c) Cartage paid on dispatch of goods/sale to distributor/dealer/retailer. d) Traveling expenses of the staff kept by consignee agents or salary of the sales staff. The consignee agents sent the monthly details of sales on "Sale Patti. On the sale patti the consignee agent deducts their commission on sales and the expenses at the fixed cost rate structure as per Agreement. The assessee company by way of credit note amount for their expenses as pr Sale Patti, though the expenses incurred by the, are much more than the expenses accounted for by the assessee company. Copies of their Ledger Account of expenses incurred by them ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le to distributor/dealer/retailer. c) Cartage paid on dispatch of goods/sale to distributor/dealer/retailer. d) Traveling expenses of the staff kept by consignee agents or salary of the sales staff. 1.6 That the consignee agents sent the monthly details of sales on "Sale Patti", copy enclosed (Page No.5 to 29) for kind perusal of your goodself. On the sale patti the consignee agent deducts their commission on sales and the expenses at the fixed cost rate structure as per Agreement. The assessee company by way of credit note amount for their expenses as pr Sale Patti, though the expenses incurred by the, are much more than the expenses accounted for by the assessee company. Copy of their Ledger Account of expenses incurred by them on behalf of assessee company are enclosed (Page No. 30 to 50) in support of the submission that the expenses incur by them are much more than the expenses reimbursed to them by way of credit note. 1.7. It is important to mention here that the expenses incurred by the consignee agents on behalf of the assessee company are from the sale amount collected by them as there always remain outstanding balance. 1.8. That the Assessing Officer has treated the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cosma Sope Ltd. (Supra) and that case has been decided after detailed discussion made in Para nos.5 to 5.4 of this order, in the light of the above discussion, the addition of Rs.21,94,506/- and Rs.16,48,186/-are deleted." 8. Since the facts of the case under consideration and the facts of the case decided by the I.T.A.T., Agra Bench in case of M/s. Pee Cee Cosma Sope Limited vs. JCIT (supra) vide order dated 30.04.2013, are identical, to maintain consistency, we follow the above order of I.T.A.T. and in the light of the fact, we set aside the order of Revenue Authorities and delete the addition of Rs.21,33,377/- made by the A.O. invoking provisions of section 40a(ia) of the Act. 9. In the result, appeal of the assessee is allowed. 10. Now we take up ITA No.152/Agra/2013 filed by the Revenue. The brief facts of the case are that the during the assessment proceedings, the A.O. noticed that the assessee has paid interest of Rs.44,43,291/- on loans raised by it. The A.O. further noticed that the assessee has made investment of Rs.5,31,40,782/- in purchase of shares. The A.O. was of the view that the investment to the above extent made prior to 31.03.2008 and continued upto the end ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e nos.9 & 10 which are as under :- "1. The relevant figures as on 31.03.2009 for consideration of your good self are as under :- Share Capital Rs. 44,50,000/- Reserve and Surplus Rs.16,09,74,771/- Unsecured Loan Nil Secured Loan :- O.D. Limit Rs.3,10,24,143/- Vehicle Loan Rs. 23,06,233/- Rs.3,33,30,376/- Loan Given Rs.1,82,19,091/- Interest received Rs. 79,32,145/- Interest paid Rs. 44,43,291/- Investment in shares Rs.5,31,40,782/-" 14. The ld. Departmental Representative, on the other hand, relied upon the order of A.O. and submitted that own capital and reserve has already been invested in fixed assets/loans, advances, stock in trade and trade debtors etc. as stated in the grounds of appeal. Ld. Departmental Representative submitted that when the owncapital has already been exhausted in investment and the investment made in shares was out of the borrowed fund on which the assessee is not entitled forinterest under section 36(1)(iii) read with section 14A of the Act. 15. We have heard the ld. Representatives of the parties and records perused. We notice that the issue is squarely covered by the order of I.T.A.T., Agra Benchin assessee's own case for A.Y. 2006 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of interest paid in respect of capital borrowed for the purpose of business or profession is allowable expenses 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 computation of the income from business. To examine the problem in cases where funds are pumped out of the business which are comprised of both type of funds i.e. borrowed as well as own funds, for non-business purpose. In all such cases where mixed funds are used for business and other than business purposes in such circumstances the I.T.A.T., Mumbai Bench in the case of ACIT vs. H.P. Shah & Co. ITA No.3694/M/2006 order dated 15.01.2009 held that there is no presumptions that money used for other purposes came out of borrowed funds. It can be said that interest free funds given on investment if are out of own funds, i.e. own capital and reserves is sufficient to cover such interest free investment. In that circumstances, it is presumed that the investment in interest free funds were out of own capital and reserves and under such circumstances, the Revenue cannot disallow interest claim of the assessee under section 36(1)( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in respect of allowability of interest expenditure under section 36(1)(iii) of the Act where interest bearing borrowed funds and own capital has lost it's separate identity as both are mixed. Section 36 of the Act occurs in Chapter IV which deals with the computation of total income and it is a provision which relates to the computation 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. 4.1 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts diverted not being used for the purposes of the business, interest relating to the amount diverted out of the business cannot be treated as a permissible deduction in the computation of income. On many occasions the assessee take stand that once the amount borrowed is found to have been used for some time in the business, then subsequent diversion is of no consequence, but such stand of the assessee cannot be accepted. The legislative language of sec. 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 sec.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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the assessee is a Hindu undivided family carrying on business on an extensive scale with a capital of nearly Rs. 20,00,000 (twenty lakhs). During the year ended 9th November, 1950, the assessee made large borrowings for purposes of his business and paid interest amounting to Rs. 93,611 on said borrowings. During 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 prorata, 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. 4.5 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 tim ..... X X X X Extracts X X X X X X X X Extracts X X X X
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