Full Judgment
ORDER
SHEET IN THE HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax].ORIGINAL SIDE ITA No.105 of 2004 C.E.S.C.LTD.Versus COMMISSIONER OF I.TAX, KOLKATA - II, BEFORE: The Hon'ble JUSTICE GIRISH CHANDRA GUPTA The Hon'ble JUSTICE SHIB SADHAN SADHU Date : 26th November, 2014.
For Appellant : Mr.J.P.
Khaitan, Senior Advocate with Ms.Nilanjana Banerjee (Pal).Advocate For Revenue : Md.Nizamuddin, Advocate The Court : The following question of law was framed by this Court while admitting the appeal against judgement and order dated 29th October, 2003 passed by the learned Income Tax Appellate Tribunal: Whether having regard to the settled legal proposition and having regard to the fact that the profits of the entire business and the sale proceeds were all deposited in the mixed overdraft account, the finding of the Tribunal that the sum by which the shares were purchased or the investments were made, came out of the overdraft and not out of the profits deposited with the mixed overdraft account is unreasonable and perveRs.and without any material or evidence whatsoever.” The following facts are not in dispute: A sum of Rs.99,99,800/- was invested by the assessee in the share capital of M/S.CESCo.LTD.a 100% subsidiary company in the month of July, 1991 corresponding to financial year 1991-92 and assessment year 1992-93.
The assessing officer held that borrowed funds were utilized for the purpose of the aforesaid investment and therefore, interest at the rate of 18% amounting to a sum of Rs.17,99,964/- was disallowed.
In an appeal preferred by the assessee, the CIT(A) held that the assessee had substantial reserves and has earned profits during the year under appeal.
In view of the same, the action of the Assessing Officer in adding back the said sum of Rs.17,99,964/- on the ground that the investment was made from borrowed funds, cannot be sustained.
The CIT(A) also recorded in its judgment that the company earned a profit, after taxation and appropriation to contingency reserves, a sum of Rs.12,94,47,384/-.
In an appeal preferred by the Revenue, the learned Tribunal reversed the order of the CIT(A) on the ground that “the assessee failed to furnish any evidence or material to show that the assessee’s own money accumulated out of profits has utilized in making investment in shares of its subsidiary company.
No cash flow statement at the relevant point of time has also been furnished by the assessee.
Taking into account the totality of the facts and circumstances as discussed above and in the light of our observation and discussion made hereinbefore we are of the considered view that the assessee has failed to establish or prove that the investment made in shares of M/S.CesCo.LTD.by the assessee has been made out of profits generated by the assessee-company.
Further, we are of the considered opinion that the assessee in the present case can be said to have invested interest bearing funds in the shares of M/S.CesCo.LTD.which investment is not in any way for the purpose of the assessee’s business.” Mr.Khaitan, learned Senior Advocate, appearing for the appellantassessee, has drawn our attention to a Division Bench judgment of this Court in the case of Woolcombers of India LTD.versus Commissioner of Income-Tax (Central) Calcutta, reported in 134 ITR219 The question, which cropped up for a decision in that case, was whether the expenditure disallowed by the assessing officer/ITO was sustainable in law.
The ITO disallowed the expenditure in the following facts and circumstances: “The assessee had an overdraft account with the bank.
On 12th December, 1969, i.e., a few days before the end of the assessee’s accounting year on 31st December, 1969, the account showed a debit balance of Rs.1,39,412.
The assessee paid an advance tax of Rs.18,05,000 on 15th December, 1969, which increased the overdraft to Rs.14,63,593 by 31st December, 1969.
The ITO holding that the payment of advance tax could not be treated as business expense disallowed the proportionate interest amounting to Rs.6,769 payable by the assessee to the bank.” The Division Bench, after considering a large number of authorities, came to the following conclusion: “And having regard to the facts, in our opinion, it appears from the facts that the profits were sufficient to meet the advance tax liability.
The profits were deposited with the overdraft account.
It should be presumed that in its essence and true character the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business.” Mr.Khaitan submitted that the point raised in this appeal is covered by the aforesaid judgment of this Court.
Mr.Nizamuddin, learned advocate appearing for the Revenue, however, contended that the question essentially is a question of fact.
He drew our attention to the judgment of the Tribunal which reads as follows: “As the assessee has failed to furnish the relevant informations, though the assessee was specifically asked to furnish the same, it is, therefore, reasonable and justified to draw an adveRs.inference against the assessee.” Mr.Nizamuddin contended that because of the failure of the assessee to produce the relevant evidence, the Tribunal has drawn an adveRs.inference.
He added that the judgment of the Division Bench, relied upon by Mr.Khaitan, is essentially on the basis of facts and circumstances of that case which has nothing to do with the problem which has arisen in the case before us.
We are unable to accept this submission.
The Tribunal has laid stress upon the fact that “the loan fund by way of secured loan as well as unsecured loan has increased from Rs.468,34,39,396/- to Rs.509,07,68,172/-.
On perusal of audited accounts of the assessee, we find that in overdraft account from bank the assessee had a balance of Rs.43,85,52,956/- payable as at the end of 31.3.1992 as against Rs.23,28,16,552/- as at the end of immediate preceding assessment year i.e.31.3.1991.
It is, therefore, clear that the overdraft account has also increased from Rs.23,28,16,552/- to Rs.43,85,52,956/-.
The profit earned by the assessee or any other funds accumulated by the assessee during the year under consideration has not been utilised in reducing the loan amount particularly the bank overdraft account from which the assessee had made investment against shares of M/S.CesCo.LTD.or in making investment in shares of M/S.CesCo.Ltd.” The Tribunal, however, missed the fact that in case the assessee had put in the amount of income earned during the year, which in this case was Rs.12 crores approximately, in a separate account which the assessee was entitled to do, the debit balance as at the last day of the accounting year would have been further increased by Rs.12 crores.
The fact that the liability on account of secured loan and unsecured loan increased is not ipso facto evidence of the fact that the company is running through an unhealthy financial position.
When a profit making company has increased its liability on account of secured or unsecured loan, that may be a pointer to show that the company has increased its capital asset.
In this case, there can be no denial that the company earned Rs.12 crores which was offered for taxation.
It cannot in the circumstances be said by looking at the secured or unsecured loan account or by the constant increase thereof that borrowed funds were utilized for the purpose of investment in question which was evidently for a sum of less than Rs.1 crore.
That can possibly be said if it is a loss making company.
Therefore, it has to be held that the investment was made from out of the profits of the year and not from out of the overdraft account.
There is, as such, no question of making any disallowance on account of any interest.
We make it clear that in a case where the profit of the entire business including the sale proceeds were deposited in the mixed overdraft accounts and in case the investment is less than the amount of profit earned or which could reasonably be deemed to have been earned, regard being had to the date of expenditure, it has to be presumed that the investment was from out of the profits.
For the aforesaid reasons, the question raised is answered in the affirmative.
The appeal is allowed accordingly.
(GIRISH CHANDRA GUPTA, J.) (SHIB SADHAN SADHU, J.) sm