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Income Tax Officer 18 (2) (3) , Mumbai Versus M/s. T.M. Enterprises

Disallowance of interest on account of interest fee advances - Held that:- Documents of transactions with Menghraj Sons and outstanding debtors details of Menghraj Sons were all filed by the assessee before the AO/CIT(A) as per certificate furnished by the assessee along with paper book filed with the tribunal. We donot find any perversity in the order of learned CIT(A) which we affirm and sustain. No incriminating material has been brought on record by the Revenue to disprove or demolish findin .....

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ded in favour of assessee - I .T.A. No. 4817/Mum/2014, I .T.A. No. 4225/Mum/2015 - Dated:- 11-11-2016 - SHRI C.N. PRASAD, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER For The Revenue : Shri Siurabh Deshpande, DR For The Assessee : Shri B.V. Jhaveri ORDER PER RAMIT KOCHAR, Accountant Member These two appeals, filed by the Revenue being ITA No. 4817/Mum/2014 & ITA No. 4225/Mum/2015, are directed against the two separate appellate orders dated 29th May, 2014 and 24th April, 2015 res .....

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Act,1961 (Hereinafter called the Act ). 2. The following common grounds of appeal have been raised by the Revenue in the memo of appeal (only difference in the amount) filed with the Income-tax Appellate Tribunal, Mumbai (hereinafter called the Tribunal ):- 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 60,78,950/- (for A.Y. 2011-12 ₹ 48,63,183/-) made in respect of disallowance of interest on account of interest fee advan .....

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60.78,950/- (for A.Y. 2011-12 ₹ 48,63,183/-) by holding that the advance made by the assessee to its sister concern M/s. Menghraj Sons was as a result of business transaction. 4 For these and other reasons it is submitted that the order of the CIT(A) may be set-aside and that of the A.O. restored." First, we shall take Revenue s appeal in ITA No.4817/Mum/2014 for assessment year 2010-11 3. The brief facts of the case are that the assessee is engaged in the business of printing and man .....

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377; 4,05,26,525/- from Menghraj Sons. It was also observed by the assessee that the partner of the assessee firm is also partner of M/s Menghraj Sons. M/s. Menghraj Sons is commission agent on consignment basis. The A.O. had verified some bills of March 2010 to confirm whether any additional benefits was received by the assessee from consignment or for giving advances more than ₹ 4,05,26,526/- , but there was no additional benefit. It was observed by the AO that the assessee has paid comm .....

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6.2% to most of the parties. The assessee has advanced sum of ₹ 4,05,26,526/- to M/s Menghraj Sons for which no additional benefits have been received . The AO treated 15% of the same i.e. ₹ 60,78,950/- as expenses made in respect of person which are covered u/s 40A of the Act. Hence, the interest paid amounting to ₹ 60,78,950/- was disallowed by the AO vide assessment order dated 28/03/2013 passed u/s. 143(3) of the Act. Without prejudice, it was also observed by the AO that t .....

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.O. u/s 143(3) of the Act, the assessee filed first appeal before the ld. CIT(A). 5. Before the ld. CIT(A) the assessee submitted that the assessee appointed M/s. Menghraj Sons as consignment agent vide agreement for consignment agency on 10th August 2004 and since then was effecting part of its sales through the said consignment agent and due to continuous increase in debtors on account of sales through the said consignment agent, the assessee terminated the consignment agency agreement with M/ .....

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ear and consignment sales of ₹ 630.70 lakhs in previous year and as against total debtors of ₹ 639.80 lakhs the assessee also has sundry creditors of ₹ 527.32 lakhs. It was submitted that as against interest expenses of ₹ 79.05 lakhs(including interest to partners) , the assessee has also earned interest income of ₹ 8.79 lakhs from the partners. It was submitted that the amount of ₹ 84,06,109/- debited to the account of M/s Menghraj Sons on 1.5.2009 was sales .....

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date, the outstanding amount from M/s. Menghraj Sons was ₹ 4,74,89,808/- on account of the sales effected through them in the previous year as well as in the current year. Thus the outstanding balance as at the beginning of the year as well as at the end of the year represents the sales transaction of goods of the assessee firm through M/s Menghraj Sons and to prove this, the copy of the ledger account of M/s Menghraj Sons was placed by the assessee on record which shows that the transact .....

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utstanding from Menghraj Sons is as a result of business transactions, therefore, this outstanding amount of ₹ 4,05,26,526/- from M/s Menghraj Sons cannot be treated as an interest free advances. The ld. CIT(A) observed that in order to disallow the proportionate interest paid by the assessee during the year the A.O. has to establish that the assessee had advanced the money to the sister concern out of the borrowed funds, however, the A.O. has not established any direct nexus between the f .....

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Menghraj Sons cannot be treated as the interest free advances and hence the learned CIT(A) held that proportionate disallowance of interest to the tune of ₹ 60,78,950/- cannot be made , vide appellate orders dated 29-05-2014. 6. Aggrieved by the appellate order dated 29-05-2014 passed by the ld. CIT(A), the Revenue is in appeal before the tribunal. 7. The ld. D.R. submitted that the assessee is engaged in the business of printing and manufacturing of packing materials and playing cards. I .....

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assessee has also paid interest to its suppliers for delaying payment to the tune of ₹ 40.60 lacs while the assesssee did not recover interest from Menghraj Sons which is a related party as one of partner of the assessee firm is partner in Menghraj Sons. The assessee should have recovered interest from Menghraj Sons. No effort has been made by the assessee to recover the amount from M/s Menghraj Sons despite huge amount recoverable from Menghraj Sons. 8. The ld. Counsel for the assessee s .....

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has been made in the earlier years w.r.t. proportionate interest on these outstanding amounts. The agreement for consignment agent with M/s Menghraj Sons was terminated by the assessee w.e.f. 1st May, 2009 and the outstanding amount from M/s Menghraj Sons was ₹ 4.75 crores as at 01-05-2009 lacs on account of the sales made through them, which was ₹ 4.05 crores as at 31-3-2010. This amount as at 31-03- 2014 is further reduced to ₹ 3.44 lacs at 31-3-2014/pb page 72. The learned c .....

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ontentions and also perused the material available on record . We have observed that the assessee is engaged in the business of printing and manufacturing of packing materials and playing cards. We have observed that M/s Menghraj Sons is the consignment agent for the products of the assessee since 2004 vide agreement for consignment dated 10th August, 2004 and this agreement was terminated by the assessee w.e.f. 1st May, 2009 and as on this date, the outstanding amount from M/s. Menghraj Sons wa .....

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rm was further reduced to ₹ 3.44 lacs as on 31st March, 2014.Thus the outstanding balance as at the beginning of the year as well as at the end of the year represents the sales transaction of goods of the assessee firm through M/s Menghraj Sons and the learned DR could not point any perversity in such findings. Hence, it is not in the nature of interest free funds but the outstanding were on account of sales conducted by the assessee on consignment basis through Menghraj Sons which was as .....

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disallow the proportionate interest paid by the assessee during the year the A.O. has to establish that the assessee had advanced the money to the sister concern out of the borrowed funds, however, the A.O. nor the learned DR could not establish any direct nexus between the funds borrowed and the interest free advances given to the sister concern. Thus, it was observed by learned CIT(A) that the assessee had direct business connections with the sister concern M/s Menghraj Sons and the funds outs .....

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