Tax Case Appeal v. Commissioner Of Income Tax -Vii,121, Uthamar Gandhi Salai,Chennai - 600 034

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED : 09.08.2019 CORAM: THE HONOURABLE MR.JUSTICE T.S.SIVAGNANAMAND THE HONOURABLE MRS.JUSTICE V.BHAVANI SUBBAROYAN Tax Case Appeal No. 253 of 2009 Smt. R. Santha ... Appellant Vs Commissioner of Income Tax -VII,121, Uthamar Gandhi Salai,Chennai - 600 034. ... Respondent Tax Case Appeal filed under Section 260-A of the Income TaxAct, 1961, against the order of Income Tax Appellate TribunalChennai 'B' Bench, dated 16.04.2008 in ITA No.1499/Mds/2005 forthe Assessment year 2001-02 and against the O/o Commissioner ofIncome Tax (Appeals)IX, Chennai-34 and made in TT/AppealNo.384/2004-05 order dated 08/04/2005 and against the Income TaxDepartment Ward VII (1), Chennai-34 and made in PAN/GIRNo. /566720-S dated 31/03/2004. For Appellant:Mr.N. Devanathan For Respondent :Mr.S.Rajesh, SC JUDGMENT [Judgment was made by T.S.SIVAGNANAM, J] This appeal by the assessee filed under Section 260-A ofthe Income Tax Act, 1961 (hereinafter referred to as “the Act”)is directed against the order dated 16.04.2008 passed by IncomeTax Appellate Tribunal Chennai 'B' Bench (hereinafter referredto as 'Tribunal') in ITA No.1499/Mds/2005 for the AssessmentYear 2001-02. https://hcservices.ecourts.gov.in/hcservices/ 2. This Tax Case Appeal was admitted on 06.07.2009 on thefollowing substantial questions of law: “1.Whether in the facts and circumstanceof the case, the Tribunal was right inholding that the appellant is not entitledfor deduction of interest having regard tothe principles of commercial expediency? and 2. Whether in the facts andcircumstances of the case, the Tribunal wasright in holding that the appellant is notentitled for deduction of interest havingregard to application of principles ofattribution when there exists mixed funds?” 3. We have heard Mr.N.Devanathan, learned counsel for theappellant/assessee and Mr.S.Rajesh, learned Standing Counsel forthe respondent/Revenue. 4. The short issue, which falls for consideration in theinstant case is, as to whether the assessee is not entitled fordeduction of interest on the ground that she had lent money fromborrowed funds as part of commercial expediency to promote herbusiness. 5. While completing the assessment under Section 143(3) ofthe Act vide order dated 31.03.2004 upon examining the books ofaccounts of the assessee, Assessing Officer noticed that thename of Mr.S.K.Rajamanickam, assessee's husband appeared in theassessee's ledger account and the payments were shown asoutgoings. The assessee stated that these payments were made toher husband in connection with expenditure incurred towards thehead, manufacturing expenses. The husband of the assessee wasengaged in the business of manufacture of dhall and he hasestablished a dhall mill with machineries. The assessee, whiletransferring the loans to her husband, did not charge interest,but she had paid interest to the borrowers namely the bankersand other creditors from whom she had borrowed funds. Thisaccording to the Assessing Officer was diversion of funds to theassessee's husband and a sum of Rs.1,34,842/- was disallowed bythe Assessing Officer. 6. The assessee preferred an appeal before the Commissionerof Income Tax Appeals-IX,Chennai [hereinafter referred to as'the CIT(A)']. CIT(A), while affirming the order passed by theAssessing Officer, stated that there is no dearth of dhall millsand dhall is not such a technical product, which would requiresome specialized technical skills. With regard to the plea https://hcservices.ecourts.gov.in/hcservices/ raised by the assessee that her husband has given his propertyas a collateral security to the assessee for availing cashcredit facility from the bank, the CIT(A) has stated that thecollateral security given by her husband is of much lesser valuethan the money advanced by the assessee to her husband. 6. The assessee preferred an appeal before the Commissionerof Income Tax Appeals-IX,Chennai [hereinafter referred to as'the CIT(A)']. CIT(A), while affirming the order passed by theAssessing Officer, stated that there is no dearth of dhall millsand dhall is not such a technical product, which would requiresome specialized technical skills. With regard to the plea https://hcservices.ecourts.gov.in/hcservices/ raised by the assessee that her husband has given his propertyas a collateral security to the assessee for availing cashcredit facility from the bank, the CIT(A) has stated that thecollateral security given by her husband is of much lesser valuethan the money advanced by the assessee to her husband. 7. Aggrieved by the order dated 08.04.2005 passed by theCIT(A), the assessee preferred an appeal before the Tribunalcontending that assessee by using all the manufacturingfacilities established by her husband, derived commercialadvantage in the shape of timely delivery of processed dhall,high quality processing and discount on processing charges ascompared to market prize and that the assessee's husband offeredhis own property valued more than Rs.50 lakhs as collateralsecurity for the purpose of cash credit facility. Further, theassessee contended that the bank loans are utilized entirely forthe business of the assessee and they are secured byhypothecation of stock and there is no diversion and that theassessee had interest free funds, which ought to have beenconsidered by the CIT(A) and the observations of CIT(A) thatprocessing of dhall does not require technical expertise ispalpably an incorrect finding. Further, it was contended that nodisallowance could be made, when the advance was given by theassessee to her husband, purely on account of commercialexpediency, taking note of the business relationship andproperty security offered by her husband for the cash creditfacility availed by the assessee. 8. Though the above ground was raised by the assessee, theTribunal confirmed the order passed by the CIT(A) stating thatthe role played by the assessee was only that of a miller andjob of a miller does not call for huge amount of working capitaldeployment as understood in ordinary commercial parlance. At theoutset, we wish to point out that the observations made by theCIT(A) was confirmed by the Tribunal with regard to nature ofthe business of the assessee's husband namely manufacture ofdhall is the personal opinion of the CIT(A) and that of theTribunal and there was no material placed either before the CIT(A) or before the Tribunal to belittle the processing of dhall. 9. We do not find any material, which was referred by theCIT(A), to come to a conclusion that manufacturing of dhall doesnot require heavy work and technical skill. Unfortunately, theCIT(A) and the Tribunal lost sight of the legal submission madeby the assessee. In the case of CIT Vs. Kandagiri Spinning MillsLtd. [reported in (2008) 298 ITR 306], a Division Bench of thisCourt held that amounts given by the assessee to its sisterconcern from the profits earned by it during the relevantassessment years and not by diverting the funds borrowed fromthe financial institutions and banks, interest paid on borrowed https://hcservices.ecourts.gov.in/hcservices/ capital cannot be disallowed more so as the amounts wereadvanced by the assessee as a measure of commercial expediencyin as much as the employees of the assessee company and theirfamily members are being given concessional treatment at thehospital. 10.In S.A.Builders Ltd. Vs. CIT [reported in (2007) 288 ITR1], Hon'ble Supreme Court has held that interest on borrowedfunds cannot be disallowed if the assessee has advancedinterest-free loan to her sister concern as a measure ofcommercial expediency; what is to be seen is "business purpose"and what the sister concern did with the money advanced. https://hcservices.ecourts.gov.in/hcservices/ capital cannot be disallowed more so as the amounts wereadvanced by the assessee as a measure of commercial expediencyin as much as the employees of the assessee company and theirfamily members are being given concessional treatment at thehospital. 10.In S.A.Builders Ltd. Vs. CIT [reported in (2007) 288 ITR1], Hon'ble Supreme Court has held that interest on borrowedfunds cannot be disallowed if the assessee has advancedinterest-free loan to her sister concern as a measure ofcommercial expediency; what is to be seen is "business purpose"and what the sister concern did with the money advanced. 11. There can be no allegation against the assessee ofdiversion of funds, considering the relationship between theassessee and her husband, who had established the dhall mill andthat the assesee is at an advantage in obtaining finishedproduct from her husband's dhall mill and she will be assured oftime delivery of the processed dhall and assured of qualityprocessing and obviously at discounted rates. Furthermore, thereis no endeavour made by the Tribunal to examine the specificstand of the assessee that the assessee had interest free funds. 12. Thus, we find that CIT(A) decided the case against theassessee based on its own personal opinion without any materialavailable on record. Therefore, we hold that the findingrendered by the CIT(A) is perverse. This perverse findingaffirmed by the Tribunal was without any material placed beforeit to come to a conclusion that the role played by theassessee's husband as a miller is virtually insignificant.Decisions have to be taken based on the return of income filedby the assessee and the documents that may be called for by theAssessing Officer. There is no room for the authority toincorporate their personal opinion while completing theassessment, which precisely was done by the CIT(A) andtherefore, has to necessarily held to be perverse andunsustainable. In fact, the assessee's husband stood as aguarantor to the assessee for obtaining cash credit facility wasnot disbelieved. The CIT(A) rejects it by stating that the valueof the property was not equal to that of the amount borrowed.This is not the concern of the CIT(A), it is for the bank, whichextended the loan to be worried about the adequacy of thesecurity offered by the borrower. In any event, the assessee'shusband stood as a guarantor for the loan transaction making himjointly and severally liable along with the assessee. 13. Thus for all the above reasons, we have no hesitationto hold that the findings rendered by the two authorities andthe Tribunal are perverse and call for interference. 14. For the above reasons, the appeal filed by the assesseeis allowed and the substantial questions of law are answered infavour of the assessee. No costs. Sd/-Assistant Registrar(CS-VI)//True copy//Sub Assistant RegistrarmpTo1. The Income Tax-Appellate Tribunal, Bench 'B', Chennai2. The Commissioner of Income Tax (Appeal) -IX, Chennai-343. The Income Tax Department, Ward VII (1), Chennai-34.+1cc to Mr.N. Devanathan, Advocate SR.No.68789+2cc to Mr.S.Rajesh, Advocate SR.No.68535Tax Case Appeal No. 253 of 2009RR(CO)GMY(26/09/2019)