Dy. CIT, Circle-2(1), Vijayawada v. Friends Shoe Company
[Citation -2016-LL-0922-29]

Citation 2016-LL-0922-29
Appellant Name Dy. CIT, Circle-2(1), Vijayawada
Respondent Name Friends Shoe Company
Court ITAT-Visakhapatnam
Relevant Act Income-tax
Date of Order 22/09/2016
Assessment Year 2009-10
Judgment View Judgment
Keyword Tags interest free advance • interest expenditure • notional interest • sister concern • business loss
Bot Summary: In response to notice, the assessee vide its letter dated 23.12.2011 submitted that it had written off the balance standing to the debit of M/s. Universal Footwear, M/s. Harini Footwear and M/s. Magic Lantern, all of them were suppliers of the assessee and the advances are given in the normal course of business which were turned bad. The assessee further submitted that it has given advances to suppliers towards supply of raw materials and the suppliers neither supplied the goods nor returned the advances after putting its best effort to recover the money, decided to write off as advances irrecoverable. The A.O. further observed that the above advances are not in the nature of trade advances but advances in the nature of capital advances. As regards advances given to sister concerns, the CIT(A) held that the assessee has given advances to its sister concerns in the normal course of business and the advances are in the nature of trade advances on which charging of interest is not correct. As regards write off of advances given to suppliers, the CIT(A) held that the assessee has given advances to suppliers towards supply of materials in the normal course of business and the advances turned bad because the suppliers neither supplied the 5 ITA No.41/Vizag/2013 CO 46/Vizag/2013 Friends Shoe Company, Vijayawada goods nor returned the advances. The assessee further contended that it has given advances to its sister 7 ITA No.41/Vizag/2013 CO 46/Vizag/2013 Friends Shoe Company, Vijayawada concern in the normal course of business and the advance given to sister concerns is having business nexus the A.O. was not correct in holding that the assessee has given interest free advances to sister concerns out of borrowed funds. The A.O. has made additions of Rs.20,20,763/- towards advances turning bad. The A.O. was of the opinion that advances to suppliers are in the nature of capital advances and hence, the assessee is not eligible to write off capital advances either under the provisions of section 36(1)(v) or Section 37 of the Act. The assessee further contended that it has given advances to suppliers towards purchase of raw materials and the advances turning bad, because the suppliers neither supplied the raw materials nor returned advances.


ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada IN INCOME TAX APPELLATE TRIBUNAL, VISAKHAPATNAM BENCH, VISAKHAPATNAM BEFORE SHRI V. DURGA RAO, JUDICIAL MEMBER & SHRI G. MANJUNATHA, ACCOUNTANT MEMBER I.T.A.No.41/Vizag/2013 ( Assessment Year: 2009-10) Dy. CIT, Circle-2(1), Friends Shoe Company, Vijayawada Vs. Vijayawada PAN: AAAFF4033C] ( Appellant) (Respondent) C.O. No.46/Vizag/2013 (Arising out of I.T.A.No.41/Vizag/2013) (Assessment Year: 2009-10) Friends Shoe Company, Dy. CIT, Circle-2(1), Vijayawada Vs. Vijayawada (Appellant) ( Respondent) Appellant by : Shri M.K. Sethi, DR Respondent by : Shri C. Subrahmanyam,AR Date of hearing : 08.09.2016 Date of Pronouncement : 22.09.2016 1 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada O R D E R PER G. MANJUNATHA, Accountant Member: This appeal filed by revenue and cross objection filed by assessee are directed against order of CIT(A), Vijayawada dated 27.11.2012 and it pertains to assessment year 2009-10. Since, facts are identical and issues are common, they are clubbed, heard together and disposed off, by way of this common order for sake of convenience. 2. brief facts of case are that assessee is partnership firm, which is engaged in business of dealer in footwear filed its return of income for assessment year 2009-10 on 29.9.2010 declaring total income of Rs.68,58,677/-. case has been selected for scrutiny under CASS and accordingly, notices u/s 143(2) and 142(1) of Act were issued. In response to notices, authorized representative of assessee appeared from time to time and produced books of accounts and other relevant information as called for. 3. During course of assessment proceedings, A.O. noticed that assessee has advanced interest free advance to partners and M/s. Friends Consolidation Limited, sister concern of assessee without charging any interest. A.O. further observed that 2 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada assessee has borrowed funds on which it has paid huge interest, however diverted funds to partners and sister concerns without interest, therefore, issued notice and asked to explain why notional interest shall not be charged on interest free advances given to partners of firm and sister concern. Similarly, A.O. noticed that assessee has claimed Rs.20,20,763/- under head Advance turning bad . To ascertain nature of expenditure debited to profit & loss account, show cause notice was issued and asked to explain nature of advances written off. In response to notice, assessee vide its letter dated 23.12.2011 submitted that it had written off balance standing to debit of M/s. Universal Footwear, M/s. Harini Footwear and M/s. Magic Lantern, all of them were suppliers of assessee and advances are given in normal course of business which were turned bad. assessee further submitted that it has given advances to suppliers towards supply of raw materials and suppliers neither supplied goods nor returned advances, therefore, after putting its best effort to recover money, decided to write off as advances irrecoverable. To support his arguments, assessee has taken support from decisions of Hon ble High Court of J&K, in case of Chenab Forest Company Vs. CIT (1974) 96 ITR 568 and High 3 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada Court of Delhi, in case of Mohan Meakin Limited Vs. CIT in ITA No.405/2007. 4. A.O. after considering explanations of assessee, held that assessee has given interest free advances out of interest bearing funds to its partners and sister concern without charging any interest. A.O. further held that assessee had borrowed huge funds from banks and without charging any interest diverted its interest bearing funds to Managing partners and sister concerns. If assessee had not given interest free advances, there would not have been any necessity for assessee to borrow funds and pay huge interest. As it is evident that interest bearing funds have been extended to its partners and sister concerns, charged notional interest of 12% per annum on total amount advanced to partners and sister concerns and brought to tax. As regards advances turning bad, A.O. observed that assessee claims to have given advances to suppliers towards purchase of raw materials, however, on verification of details of trade debtors in financial year 2007-08 relevant to assessment year 2008-09, names of above suppliers were not reflected in debtors list, but same was reflected in current assets. A.O. further observed that above advances are not in nature of trade advances but advances in nature of capital advances. assessee 4 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada is not eligible to write off capital advances as bad debt. With these observations, made additions of Rs.20,20,673/- and added back to total income of assessee. 5. Aggrieved by assessment order, assessee preferred appeal before CIT(A). Before CIT(A), assessee reiterated submissions made before A.O. CIT(A) after considering explanations of assessee held that partners have withdrawn funds from their earlier contributions, therefore, A.O. was not correct in charging notional interest on amount withdrawn by partners from their capital account. As regards advances given to sister concerns, CIT(A) held that assessee has given advances to its sister concerns in normal course of business and advances are in nature of trade advances on which charging of interest is not correct. There is no finding by A.O. that such advances have no business nexus, therefore, A.O. was not correct in charging interest on advances given to sister concerns. With these observations, directed A.O. to delete notional interest charged on advances given to partners and sister concerns. As regards write off of advances given to suppliers, CIT(A) held that assessee has given advances to suppliers towards supply of materials in normal course of business and advances turned bad because suppliers neither supplied 5 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada goods nor returned advances. Thus, advances were made in ordinary course of business with intention to carry on business operations smoothly and without any hitch. Since whereabouts of persons to whom advances were given were not known, after making due efforts, assessee has come to conclusion that it is prudent on its part to write off impugned advances. With these observations, held that assessee is entitled to deduction in respect of these advances as expenditure as contemplated in terms of provisions of section 37 of Act and A.O. is directed to delete additions made towards write off of trade advances. Aggrieved by CIT(A) order, revenue is in appeal before us. 6. Ld. D.R. submitted that CIT(A) erred in deleting charging of interest on advances given to sister concerns and partners terming them as trade advances, since these funds are originated from interest bearing funds. D.R. further submitted that assessee has borrowed funds from bank on which it has paid huge interest. If advances are not given to partners and sister concerns, assessee would not have suffered interest expenses, consequently, tax payable to Government would enhance. Since assessee has given interest free advances to partners and sister concerns, A.O. has rightly charged interest and his order should be upheld. As regards 6 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada advances written of, D.R. submitted that Ld. CIT(A) ought to have appreciated that expenditure of Rs.20,20,763/- towards advance to suppliers is capital in nature and not allowable as per provisions of section 37 of Act. D.R. further argued that CIT(A) erred in holding that same is business loss as such advances do not reflect in profit & loss account. On other hand, Ld. A.R. for assessee strongly supported order of CIT(A). 7. We have heard both parties, perused materials available on record and gone through orders of authorities below. first issue that came up for our consideration is additions towards notional interest on advances given to partners and sister concerns. A.O. observed that assessee has diverted its interest bearing funds to partners of firm and sister concerns without charging any interest. A.O. further observed that assessee has paid huge interest and diverted interest bearing funds to partners. If funds were not given to partners and sister concerns, assessee would not have borrowed funds from banks, consequently, burden of interest expenditure should have come down. It is contention of assessee that partners have drawn amount out of funds standing credit in their capital account and no interest bearing funds has been given to partners. assessee further contended that it has given advances to its sister 7 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada concern in normal course of business and advance given to sister concerns is having business nexus, therefore, A.O. was not correct in holding that assessee has given interest free advances to sister concerns out of borrowed funds. 8. Having heard both sides, we find force in arguments of assessee for reason that partners have withdrawn amount of Rs.59,73,600/- during financial year 2006-07, relevant to assessment year 2007-08 out of amount standing to credit of their capital account. Though assessee is having borrowed funds, borrowed funds represent deployment of funds in business assets in form of stock in trade and receivables. assessee has not diverted any interest bearing funds to its partners or sister concerns. amount of advance given to partners and sister concerns is debited to capital account of partners, still there is credit balance in partners capital account, therefore, A.O. was not correct in holding that assessee has diverted its interest bearing funds to its partners and sister concerns. CIT(A) after considering relevant details rightly deleted additions made by A.O. We do not see any reasons to interfere with order of CIT(A). Hence, we direct A.O. to delete additions towards notional interest and reject ground raised by revenue. 8 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada 9. next issue that came up for our consideration is advances written off of Rs.20,20,763/-. A.O. has made additions of Rs.20,20,763/- towards advances turning bad. A.O. was of opinion that advances to suppliers are in nature of capital advances and hence, assessee is not eligible to write off capital advances either under provisions of section 36(1)(v) or Section 37 of Act. It is contention of assessee that advances are in nature of trade advances. assessee further contended that it has given advances to suppliers towards purchase of raw materials and advances turning bad, because suppliers neither supplied raw materials nor returned advances. assessee after putting its best efforts to recover money from supplier, written off advances as irrecoverable, therefore, A.O. was not correct in holding that these advances are capital in nature. 10. Having heard both sides and having considered materials, we find force in argument of assessee for reason that assessee has given advances in normal course of business towards purchase of raw materials. When suppliers neither supplied goods nor returned advances, assessee has written off advances as irrecoverable. A.O. disallowed amount for reason that these advances are appearing under head current assets , but not 9 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada under head sundry debtors . assessee has filed paper book wherein he has furnished copies of ledger account of parties and also financial statements. On perusal of paper book filed by assessee, we find that these advances were given in normal course of business towards purchase of raw materials. When suppliers not supplied goods, assessee has classified these advances under head advances to suppliers and kept under current assets. assessee has written off these advances in books of accounts as bad debts. Even if these amounts are not allowed as deduction u/s 36(1)(v) of Act, assessee can always claim deduction u/s 37 of Act, as scope of section 37 of Act is vide enough to include all such amounts paid for purpose of business and are to be allowed unless and otherwise advance is capital in nature. In present case on hand, on perusal of details available on record, we noticed that these advances are given for purpose of purchase of raw materials. assessee has written off these advances in books of accounts. Therefore, we are of view that A.O. was erred in holding that advances are in nature of capital advances and hence, not allowable as deduction u/s 37 of Act. CIT(A) after considering relevant details rightly deleted additions made by A.O. We do not see any reasons to interfere with order of Ld. CIT(A). Hence, 10 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada we inclined to uphold CIT(A) order and reject ground raised by revenue. 11. In result, appeal filed by revenue is dismissed. 12. assessee has filed cross objection in support of order of Ld. CIT(A). Therefore, for reasons recorded in preceding paragraph, we dismiss cross objection filed by assessee as not maintainable. 13. In result, appeal filed by revenue and cross objection filed by assessee are dismissed. above order was pronounced in open court on 22nd Sept 16. Sd/- Sd/- (V. DURGA RAO) (G. MANJUNATHA) JUDICIAL MEMBER ACCOUNTANT MEMBER Visakhapatnam Dated : 22.09.2016 VG/SPS Copy of order forwarded to:- 1. Appellant DCIT, Circle-2(1), Vijayawada 2. Respondent M/s. Friends Shoe Company, 14-14-24, Mallikarjuna Street, Hanumanpet, Vijayawada 3. CIT, Vijayawada 4. CIT (A), Vijayawada 11 ITA No.41/Vizag/2013 & CO 46/Vizag/2013 Friends Shoe Company, Vijayawada 5. DR, ITAT, Visakhapatnam 6. Guard file BY ORDER // True Copy // (Sr.Private Secretary) ITAT, VISAKHAPATNAM 12 Dy. CIT, Circle-2(1), Vijayawada v. Friends Shoe Company
Report Error