Girraj Cold Storage Pvt. Ltd. Vs ITO (ITAT Agra)

ITAT Agra held that addition towards interest paid on CC is liable to be deleted since interest free advance given to potato growers (farmers) were out of the business expediency. Accordingly, addition deleted and appeal allowed.

Facts- During reassessment proceedings, AO observed that the assessee has given interest free advances to the potato growers during the year under consideration of Rs.1,70,04,076/- ,whereas it has raised interest bearing loans from the bank and interest paid on such loan has been debited in the profit and loss account. AO observed that the assessee has paid interest on CC account amounting to Rs. 10,33,374/-, which is debited to the profit and loss account and the same was added as income in the hands of the assessee.

CIT(A) dismissed the appeal of the assessee. Being aggrieved, the present appeal is filed.

Conclusion- Held that in the instant case, the business expediency in granting interest free advances out of interest bearing funds was not accepted by authorities below. In my considered view based on records available, the addition of Rs. 10,33,374/- as was made by the authorities below is not sustainable as I accept the contention of the assessee that granting of interest free advances to potato growers in order totie the farmers for keeping their crop with the cold storage of the assessee ,so that the assessee can earn rent from the potatoes kept by the farmers in the cold storage of the assessee , is out of business expediency as stated by the assessee. The assessee has furnished list of 549 persons who have kept 169054 packets of potatoes with the assessee, wherein rent of Rs. 77,76,480/- was earned by the assessee , and duly offered to tax. No defect is pointed out by any of the authorities. Accordingly, the addition made by the Assessing Officer is directed to be deleted.

FULL TEXT OF THE ORDER OF ITAT AGRA

This appeal in ITA No.125 /Agr/2022 for the assessment year 2011-12 has arisen from the appellate order dated 17.05.2022(DIN& Order No. ITBA/NFAC/S/250/2022-23/1043044014(1)) passed by learned Commissioner of Income-tax(Appeals),NFAC, Delhi , which in turnhas arisen from the assessment order dated 29.12.2018 passed by Assessing Officer u/s. 143(3) r.w.s. 147 of the Income-tax Act, 1961.

2. Grounds of appeal raised by the assessee in the memo of appeal filed with Income Tax Appellate Tribunal, Agra Bench, Agra ,reads as under :

“1. The order passed by the learned National Faceless Appeals Centre (NFAC), Delhi is illegal and arbitrary.

2. The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the action of Assessing Officer of disallowing interest expenditure of Rs.10,33,374/-.

3. The order of leaned Commissioner of Income Tax (Appeals) being erroneous in law and on facts deserve to be quashed.

4. The Appellant craves leave to add or alter any or more grounds of appeal as may be deemed fit at the time of hearing of appeal.”

3. Brief facts of the case are that the Assessing Officer observed from the documents in possession/information that the assessee has deposited cash of Rs.74,00,000/- in its bank account maintained with Bank of India, Shikohabad during the year under consideration. The AO issued letter dated 02.02.2018 to the assessee for verification of above deposits and filing of return of income. But, the assessee neither filed return of income nor submitted any reply. Case of the assessee was reopened by the AO u/s. 147 of the Act after recording reasons u/s 147 for escaped income of Rs.74 lacs,and notice u/s. 148 was issued on 29.03.2018 and was sent to assessee by speed post. Statutory notices u/s. 142(1) were issued by the AO to the assessee, from time to time during reassessment proceedings. The assessee submitted before the Assessing Officer that PAN AAEFG1806C was in the status of firm , while the assessee is a company . It was submitted that in all the bank records, new PAN of the assessee company was incorporated , but in this particular bank account, in which cash was deposited of Rs.74 Lacs, bank has not updated the PAN, hence, AIR information of deposit of cash of Rs. 74 lacs is reflected in the old PAN. The assessee has obtained new PAN AACCG9653J, and on this new PAN AACCG9653J, the assessee is filing return of income regularly. The assessee submitted that Return of income for the impugned assessment year has also been filed on the same PAN- AACCG9653J and the assessee submitted that the Income-tax Return filed originally under PAN – AACCG9653J may be treated as the return of income filed in pursuance to notice u/s.148. Assessing Officer issued notice u/s. 143(2) of the Act on 05.12.2018. During re-assessment proceedings, the assessee submitted before the AO that the amount deposited in the bank account is out of potato rent received and repayment of advances received from the farmers. The assessee also submitted list of farmers, andproduced cash book which was test checked by the Assessing Officer. Assessing Officer observed that the assessee has given interest free advances to the potato growers during the year under consideration of Rs.1,70,04,076/- ,whereas it has raised interest bearing loans from the bank and interest paid on such loan has been debited in the profit and loss account. The assessee was required by the AO to explain as to how the amount of interest paid on borrowed capital is for the purpose of business, and as to why the same should not be disallowed as no interest has been charged on the advances given to farmers/potato growers. Assessee submitted that if it had not given interest free advances to farmers, the farmers would not store their potato in its cold storage. Hence, giving interest free advances to farmers is out of business expediency. Assessing Officer asked the assessee to produce 20 farmers for verification, and the assessee produced only three out of 20 farmers. Three farmers who appeared before the Assessing Officer were held by the Assessing Officer to have been tutored and their version was not accepted by the Assessing Officer. Assessing Officer also rejected the contention of the assessee that due to business expediency of giving interest free advances to potato growers and that too after raising interest bearing loan from the bank and paying interest on the same. Assessing Officer observed that the potato growers have to mandatorily keep their potato in the cold storage in the nearby area and in fact potato grower approaches the cold storage owner in advance to reserve space for him to keep this crop of potatoes because sometimes if there is bumper crop of potatoes, the cold storage owners deny to keep the potato crop in the cold storage and then the farmers would have suffered . The Assessing Officer observed that the assessee has paid interest on CC account amounting to Rs. 10,33,374/-, which is debited to the profit and loss account and the same was added as income in the hands of the assessee.

4. Assessee being aggrieved filed first appeal with ld. CIT(Appeals). Ld. CIT(Appeals) issued notices to the assessee and assessee filed replies on 10.11.2021 and 11.11.2021. Thereafter, the appeal proceedings were switched over to faceless regime and thereafter, there was no further submissions made by the assessee. Assessee has submitted before the ld. CIT(Appeals) that the assessee has submitted complete list of farmers to whom advances were given along with complete addresses with PANs and the assessee requested the Assessing Officer to summon them to examine truth, and instead of issuing summons to the farmers, the Assessing Officer has issued notice to the assessee on 26.12.2019 and directed the assessee to produce 20 farmers whose names are mentioned in the notice. The assessee submitted that out of them, two farmers had expired and one farmer was an army man and was on duty and hence, the assessee could produce 17 farmers before the Assessing Officer and after recording the statements of 3 farmers, the Assessing Officer denied to record the statement of rest of the farmers saying that all the farmers are tutored. The assessee drew attention of ld. CIT(Appeals) to the provision of section 36(1)(iii) and submitted that the assessee has given interest free advances to the farmers to bring their potatoes to assessee’s cold storage. The assessee charges rent for storing the potatoes. It was submitted that if the assessee had not given interest free advances to the farmers, they would not have stored their potatoes in assessee’s cold storage. Ld. CIT(Appeals) rejected the contention of the assessee and held that the Assessing Officer was right in holding that giving such advances to the farmers is not out of business expediency and hence, the appeal of the assessee was dismissed by the ld. CIT(Appeals).

5. Assessee being aggrieved filed second appeal with the
Tribunal. When this appeal was called for hearing, none appeared on behalf of the assessee nor any adjournment application is filed. On earlier occasions also, there was no appearance entered on behalf of the assessee and the assessment records were called from the department to be produced before the Bench vide directions dated 20.11.2024. Ld. Sr. DR has produced the assessment records before the Bench.I proceed to adjudicate this appeal in the absence of the assessee. Ld. DR has supported the orders of the authorities below and submitted that the authorities below have rightly disallowed the interest expenses. Ld. Sr. DR has also produced a written synopsis, which is placed on record along with annexures by way of affidavit filed by the farmers and the statement recorded of the farmer Shri Raj Bahadur Singh and the ledger accounts of the farmers showing advances to potato growers. On perusal of the assessment record produced before the Bench, direction was issued to the ld. Sr. DR to file details of rent received during the year which were produced by the assessee during the course of assessment proceedings, wherein the assessee has claimed to have received rent from 549 farmers for keeping 1,69,054 packets of potatoes , for which rent of Rs. 77,76,480/- is stated to be charged by the assessee. The Bench also directed ld. Sr. DR to file copy of audited financial statements. The ld. Sr DR has in compliance filed the documents as directed by the Bench, which are now part of the record of the file. The ld. Sr. DR has also filed written synopsis, which are placed on record in file.

6. I have considered the entire material placed before the Bench and heard ld. Sr. DR. I have observed that the AO had the information/documents in possession that the assessee has deposited Rs. 74,00,000/- in its bank account with Bank of India, Shikohabad. The AO made verification with the assessee, but the assessee did not reply. The AO observed that the assessee has not filed any return of income for the impugned assessment year and has also not replied to the notice issued by the Assessing Officer on 02.02.2018. The case of the assessee was reopened by the AO after recording reasons by invoking provisions of Section 147. Notice u/s. 148 of the Act was issued by AO to the assessee, dated 29.03.2018. The assessee in response thereof submitted that the PAN mentioned in the notice is of the firm, i.e., AAEFG1806C, but the assessee is a company holding PAN AACCG9653J and in all the bank records the new PAN of the assessee company was incorporated, however, in this bank account wherein Rs. 74 lacs were deposited in cash, the bank did not incorporate the new PAN. Thus, the assessee was converted from the partnership firm to company, and with this conversion, the assessee got new PAN allotted in the name of the company. The account with bank of India wherein Rs. 74 lacs were deposited, was still operating under the old PAN. The assessee has filed the return of income under new PAN- AACCG9653J ,and the assessee submitted during reassessment proceedings that return of income originallyfiled may be treated as return of income filed in pursuance to notice u/s. 148 of the Act. PAN of the erstwhile firm was not updated by Bank of India with the new PAN of the company. Assessee has duly filed return of income under the new PAN of the company, while the case of the assessee was reopened u/s. 147 on the ground that the assessee has not filed return of income for the impugned assessment year and cash of Rs. 74 lacs were deposited in the bank account. Thus, it Is due to non updatation of new PAN in the bank account with Bank of India, Shikohabad , after conversion of assessee from partnership firm to Company, although it is not the case of the Revenue that Rs. 74 lacs deposited by the assessee in its bank account with Bank of India, Shikohabad were not incorporated in the books of accounts of the assessee company or it represent undisclosed income which is not accounted for or disclosed to Revenue. Proceeding further, I have observed that the assessee has claimed to have advanced interest free loan to the farmers to the tune of Rs.1,70,04,026/- , while the assessee has raised interest bearing loan from the banks. The assessee has submitted complete list of persons to whom advance of Rs. 1,70,04,026/- were advanced by the assessee. It is also not the case of the Revenue that these persons were not farmers or were not having any business dealings with the assessee. The case of the Revenue is that the assessee has paid interest of Rs.10,33,374/- in his CC Account with Bank, which stood disallowed by the Assessing Officer on the ground that interest free advances were given to potato growers out of interest bearing funds raised by the assessee. The assessee has explained that the assessee is running a cold storage and assessee has to keep the farmers tied up with the assessee so that these farmers can keep their potatoes in the cold storage of assessee, and the assessee can earn rent from the potatoes stored in the cold storage of the assessee. Thus, the assessee has claimed that out of business expediency, assessee has given interest free advances to the farmers, so that the farmers are tied up with the assessee and they can keep their crop in the cold storage of the assessee from which the assessee can earn rent. This explanation has been rejected by both the authorities below. Assessee has duly participated in the assessment as well as appellate proceedings. I called for the assessment records to be produced before the Bench. The ld. Sr. DR produced the assessment record before me. The assessee has given complete details of the advances paid to the farmers, during the course of assessment proceedings. Assessee was asked by the AO to produce 20 farmers and the assessee claimed to have produced 17 farmers, as 2 farmers died and one was an army man and was on duty. The Assessing Officer has recorded statement of three farmers produced by assessee before the AO. These farmers have also given affidavits. The assessee has claimed that the AO recorded statement of 3 farmers produced by the assessee before the AO, but did not recorded statement of remaining farmers so produced by the assessee as the AO held that the farmers are tutored. The AO rejected these statements and affidavits on the ground that farmers are tutored. The assessee asked AO to issue summons to the farmers. The AO did not issue summons to the farmers to unravel truth. Nor CIT(A) made any enquiry and/ or verification with the farmers. The powers of ld. CIT(A) are co-terminus with the powers of the AO including power of enhancement. I have perused the material from the assessment records produced before me, and I have observed that the farmers have affirmed to have received interest free advances from the assessee and they were keeping their crop of potatoes with the assessee’s cold storage and were giving rent to the assessee for storing their potato crop in the assessee’s cold storage. I directed the ld. Sr. DR to produce assessment records, which was produced before the Bench. On perusal of the assessment records, I directed ld. Sr. DR to file with the Bench, details of rent received by the assessee from 549 persons as submitted by the assessee before the AO during assessment proceedings which was part of assessment record, and ld. Sr. DR has filed the details of rent received containing names of 549 persons from whom the assessee has received rent for keeping 169054 packets of potatoes thereby earning rent of Rs.77,76,480/-. No defect or deficiency is pointed out in these details by any of the authorities below. I also directed ld. Sr. DR to file audited financial statements, on perusal of which, I have observed that the assessee has realised potato rent of Rs.77,76,480/- which is reflected in the income side of the profit and loss account. I have observed that the assessee has also declared that the assessee has given advances to the potato growers to the tune of Rs. 1,70,04,026/-, which is reflected in the audited Balance Sheet. The details of such advances were submitted by the assessee before the authorities below. Assessee’s cold storage has installed capacity of 66317 quintals. On perusal of the audited financial statements, I have observed that Assessee has raised interest bearing funds from the Banks which were used for granting these advances, as the own funds available are not sufficient. The assessee has paid interest on CC Account to the tune of Rs.10,33,374/-, which was disallowed by the Assessing Officer. I have observed that the assessee has explained that out of business expediency, the assessee has given interest free advances to the potato growers. The business expediency explained by the assessee being to tie up with the farmers by giving advances so that the farmersbecome committed to keep their crop of potato at the cold storage of the assessee, so that the assessee can then earn rent from the potatoes kept by the farmers in the cold storage of the assessee. There is no discrepancy pointed out by the AO in the details of rent received by the assessee from the farmers for keeping potato in the cold storage. The AO asked assessee to produce 20 farmers. The 3 farmers were produced by the assessee before the AO who supported the stand of the assessee. The affidavits of the farmers were also filed, which supported the stand of the assessee. The assessee has claimed that 2 farmers had died while one was on army duty and hence could not be produced. The assessee has claimed that he produced the rest of farmers before the AO, but the AO did not record their statement. The assessee has in one of the submissions submitted that the remaining farmers out of 20 , were either not having dealing with the assessee now or are defaulters and have refused to come forward to give statements before the AO. This is contrary to earlier stand . However, any case , the assessee has requested AO to issue summons directly to the farmers. It was incumbent on the AO to have issued summons to the remaining farmers u/s 131 or could have called for information u/s 133(6) , if he is not satisfied with the contentions of the assessee. Similar powers are vested with ld. CIT(A), which are co-terminus with the AO. None of the authorities below exercised their powers to get to the bottom of the matter to unravel truth. The objective being to bring to tax the correct income in the hands of the correct assessee and for the correct assessment year, which is the mandate of the 1961 Act. I am of the considered view that assessee has duly explained the business expediency for giving interest free advances to potato growers ieto tie up with the farmers so that the farmers keep their potato crop/produce in the cold storage of the assessee, and the assessee can earn rent from potatoes kept by the farmers in the cold storage of the assessee. Revenue cannot sit in the arm chair of businessman and then decide how the business is to be run. Rather, it is the businessman who has to arrange their business affairs keeping in view the business expediencies in order to maximise their revenues and profits. Reference is drawn to the judgment and order of Hon’ble Supreme Court in the case of S.A. Builders (2007) 158 Taxman 74(SC).In the instant case, the business expediency in granting interest free advances out of interest bearing funds was not accepted by authorities below.In my considered view based on records available, the addition of Rs. 10,33,374/- as was made by the authorities below is not sustainable as I accept the contention of the assessee that granting of interest free advances to potato growers in order totie the farmers for keeping their crop with the cold storage of the assessee ,so that the assessee can earn rent from the potatoes kept by the farmers in the cold storage of the assessee , is out of business expediency as stated by the assessee. The assessee has furnished list of 549 persons who have kept 169054 packets of potatoes with the assessee, wherein rent of Rs. 77,76,480/- was earned by the assessee , and duly offered to tax. No defect is pointed out by any of the authorities. Accordingly, the addition made by the Assessing Officer is directed to be deleted. The assessee succeeds in its appeal. I order accordingly.

7. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 06/12/2024.