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TMI Blog2003 (12) TMI 268X X X X Extracts X X X X X X X X Extracts X X X X ..... facts are during the year in question the assessee had undertaken the project study for manufacturing of saw pipes for the concern Visa Petrochemicals, with which the deal could not take place. Thereafter, the assessee sold the whole project report to another company named as Welspun (India) Ltd./Stahl Rohen Ltd. for a consideration of Rs. 2 crores, which has been credited to the P&L a/c. Qua this income from project consultancy report, the assessee claimed project expenses given to following parties: Mega Safe Deposit 17 lakhs Sidharth Traders 64 lakhs Sumo Traders 68 lakhs 149 lakhs It was claimed that the amount was payable to Sidharth Traders for techno commercial feasibility study and to Sumo Sales Corporation for costing, financial viability and tying up means of financing. Regarding above project expenses, the AO asked the assessee to furnish the details like name and address, voucher and confirmation in this behalf. The assessee filed confirmation only in respect of Mega Safe Deposit and in respect of Sidharth Traders and Sumo Traders the same were not filed despite several opportunities. Therefore the expenses in respect of these two parties are disallowed, which i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oth these concerns, though have claimed engaging professionals for preparing the project reports, they have not made any payment to their professionals. Both these parties have declared small amounts of income on such big volume of transaction. The AO on these facts held that the project expenses of Rs. 1.32 crores were not genuine. The remand report was accordingly submitted. The remand report was provided to the assessee, for which following submissions were made: "Not only during the appellate proceedings the confirmations from the proprietors of the two concerns were filed, both of them were also produced in the remand proceedings before the AO. They are existing assessees having PAN and assessed at Ahmedabad. Shri Shantilal S. Jain on his own and on behalf of his wife has deposed before the AO that he had prepared the project report. He had also deposed that he had taken the services of chartered accountants, valuers, engineers, etc. for preparing the report. The appellant company had discharged its onus by producing not only the two confirmations but also the persons concerned. These two were at the relevant point existing assessees and the amounts earned by them have been a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... firms at Mumbai with adequate and competent manpower to carry out the assignment and hence there was no reason for approaching some one in Ahmedabad if the transaction was clear and above board and for the purpose it was claimed. (iii) The two persons claimed to be the assignees of the project were totally inexperienced in the filed of assignment--one being a house wife and other a full time salaried director in a company in a business nowhere connected with the work assigned. The assignees had no manpower or other resources to carryout the assignment. (iv) The assignees Sumo Sales Corporation and Sidharth Traders failed to provide any evidence through whom the work assigned to them were carried out, what was the remuneration to be paid, their individual reports, etc. (v) No payment of the consideration totalling to Rs. 1.32 crores payable was made even after a considerable period of time till date. The reason for non-payment was rather flimsy. There is no reason for a person not making effort to claim larger amounts due to them for a completed assignment, for the reason of incompleted assignment of much smaller remuneration--more so when there is no evidence produced to show t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,265 (3) Interest to directors 31,02,585 54,56,765 Whereas the assessee has received interest on loans and advances a sum of Rs. 18,58,200. It is seen that assessee company has not charged interest calculated as under: Loans and Advances: Opening balance as on 1-4-1996 6,98,30,899 Closing balance 7,74,33,779 Loan raised during the year 76,02,880 It is quite clear that opening balance remains the same even at the closing date. Apart from this during the year assessee has made additional advance of Rs. 76,02,880. If interest @ 18 per cent is charged on full years advance which is 6,98,30,899 interest comes to Rs. 1,74,29,561. Since the assessee has paid interest only of Rs. 54,57,765, the difference between interest received (18,58,200) and interest payment (54,57,765) which comes to Rs. 35,99,565 is added back to assessee's total income as interest-free advances made by the assessee or otherwise it can be disallowed on the basis that this interest is paid for non-business purpose." This issue was also raised in first appeal where the assessee made following submissions: "That opening balance of loans taken by the company and outstanding as on 1st April, 1996 was Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no dispute that a part of the old interest bearing loan has been substituted by interest free loans and some new loans, but with the outstanding brought forward more or less remaining unchanged, these get merged with the cash flow being one. Under the circumstances the claim of the appellant that some interest free advance has been made out of interest free borrowings also cannot be accepted. The reliance of the appellant to the decision in the case of Hotel Savera is rather misplaced, for in the said case, the assessee had own capital and reserve, while in the instant case there is only borrowings. Since the appellant's representative has not made available the cash flow statement, to show categorically that interest free advance has been utilised for advancing interest free advances, following the decision in the case of CIT vs. V.I. Baby & Co. (2002) 174 CTR (Ker) 164 : (2002) 254 ITR 248 (Ker), it is held that prorate disallowance of interest is called for. Coming to the quantification of the amount of interest disallowable, in the absence of cash flow statement identifying the source of each specific advances, and investments, it is to be held that in the absence of any self c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iculars. Therefore the identity of the parties, rendering of services and the amount of consideration are established by the assessee. Therefore no inference can be drawn that the transactions were not genuine. The onus cast on the assessee has been discharged in this behalf. It is abundantly clear that both these persons are not related to the assessee. Besides, the Welspun (India) Ltd., to which the project report for saw pipes was provided by the assessee for Rs. 2 crores, is also not a related concern. It clearly emerges from the record that the party from whom the assessee received project consultancy charges as well as the above two concerns, to whom project expenses were paid, were not related at all. With all these above facts, it is clear that the transaction cannot be held as non-genuine or sham. These transactions were made to both these concerns by written contracts, copies whereof are placed on paper book pp. 1 to 7. It stands confirmed on behalf of both the parties that they supplied the relevant project reports and the relevant amounts were raised by them by debit note dt. 12th Aug., 1996 in the case of Sidharth Traders and dt. 10th Aug., 1996 in the case of Sumo Sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of various professionals in this behalf. A person can prepare the report himself or can have various agencies in this behalf. (iv) Shri Shantilal Jain has explained in detail about professional charges paid in answer to question No. 23 of his statement placed at paper book p. 21 giving particulars of professional charges payable at Rs. 67,71,800. Therefore, the observation of CIT(A) is not borne out from the record. (v) The payments have ultimately been made, the same were withheld pending dispute for non-performance of the additional contract, which caused damages to the assessee and which was ultimately accepted and settled by both these concerns. (vi) The reply is same as in (iv). (vii) The observation is not correct. The accounts/records of Sidharth Traders and Sumo Sales Corporation were produced before AO along with assessment records, which are verified by the AO in his remand report. The learned counsel contended that all the seven objections raised by the CIT(A) stand answered from the record. Besides, the AO has carried out the terms of remand report, i.e., the AO examined the confirmations, verified that both the recipients were income-tax assessees and the respecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are concerned, it is clear that in pursuance to the directions of the CIT(A) in remand proceeding, the confirmations filed by the assessee were examined. The confirmations contained various details. The AO summoned the parties in response to which both the parties, i.e., Shri Shantilal Jain and Smt. Sukhidevi appeared. It is undisputed that the assessee has earned Rs. 2 crores by way of project report from Welspun. The assessee is following mercantile system of accounting. The assessee produced the above parties, who were examined on oath under s. 131. They confirmed having supplied the project report for the agreed consideration. The details of expenditure incurred by them have been given in response to question No. 23. Shri Shantilal Jain confirmed having deployed various professionals. In effect, it emerges from the record that the recipients of the project expenses confirmed having rendered services, i.e., supply of project reports and raised the debit notes. Both of them are assessed to tax. Their details about permanent account number, filing of return, etc. have been answered in the above statement. It shall be pertinent here to mention that there is no adverse inference or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rest bearing and partly without interest. Certain new advances were also given again on the same basis, i.e., partly interest-bearing and partly without interest. In the entirety of circumstances, the claim of the assessee that some interest-free advances have been made out of interest-free borrowings cannot be accepted. There is no dispute that part of the old interest-bearing loan has been substituted by interest-free loans and some new loans. However, with the outstandings brought forward more or less remaining unchanged, these get merged with the regular cash flow of the assessee. The fact that there existed no reserves of the assessee and the share capital of the company being nominal, give a fair indication that interest-bearing loans were utilised for all purposes, which include investment in shares, advancing loans both with interest or interest-free and carrying out the own business. Therefore it cannot be held that the borrowed capital was used for the purposes of business of the assessee in entirety as well as the interest was not paid for the purposes of earning of the interest. The assessee's plea of considering only the point of utilisation cannot be held to be an act ..... X X X X Extracts X X X X X X X X Extracts X X X X
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