1. The assessee has raised the following grounds against the order dt.
2nd Oct., 1991 passed by the CIT (A) for asst. yr. 1988-89 : "(1) That, on the facts and circumstances of the case and in law, the Commissioner of Income-tax (Appeals) [hereinafter called the CIT (A)] erred in not considering the submissions made before him and not giving opportunity if he disagreed with them, thus denying the principles of natural justice thereby rendering the order passed by him as bad in law.
(2) That, on the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in treating on account payments of Rs. 5,39,757 as job work receipts from Samtel India Ltd. (3) That on the facts and circumstances of the case and in law, the CIT (A) erred in confirming the disallowance of Rs. 4,75,539 out of finance charges paid to Hong Kong & Shanghai Banking Corporation.
(3.1) Without prejudice and in the alternative, on the facts and circumstances of the case and in law, the CIT (A) erred in not adjudicating upon the submission that the interest paid to Hong Kong & Shanghai Banking Corporation be allowed as deduction under s.
57(iii) of the IT Act, 1961.
(4) That, on the facts and circumstances of the case and in law, the CIT (A) erred in not allowing deduction under s. 32AB and instead restoring the matter to the file of the AO for disposal.
(5) That, on the facts and circumstances of the case and in law, the CIT (A) erred in upholding the action of the AO in not allowing any deduction under s. 80-I of the IT Act, 1961.
(6) That, on the facts and circumstances of the case and in law, the CIT (A) erred in confirming the addition of Rs. 5,000 made as income from undisclosed sources appearing in the name Master Dhruv Sethi.
(7) That, on the facts and circumstances of the case and in law, the CIT (A) erred in not disposing of the ground taken against levy of interest under ss. 216 and 217 of the IT Act, 1961 and instead sending the issue to the file of the AO for disposal." 2. Ground Nos. 1, 4 and 7 were not pressed by the learned counsel for the assessee at the time of hearing. Hence, these grounds are rejected, as not pressed.
3. Ground No. 2. - The facts relating to the aforesaid addition of Rs. 5,39,757 have been discussed by the AO in para 2 at p. 2 to 4 of the assessment order. The appellant company is engaged in the business of manufacturing of electron guns on job work basis. The appellant declared total job receipts at Rs. 95,31,024 from Samtel India Ltd. (briefly 'SIL') and Teletube Electronics Ltd. (briefly 'TEL'). However, in the TDS certificates issued by 'SIL' and 'TEL', job receipts on which tax was deducted at source was shown at Rs. 1,12,16,317.63 and Rs. 3,46,153.92 respectively. Since the gross job receipts as per the TDS certificates were more than the job receipts declared, the appellant filed a reconciliation of total job receipts shown in TDS certificate and actually declared in the IT returns. The said reconciliation statement as appearing on p. 2 of the assessment order, is reproduced hereunder :TDS certificate 1,12,16,317.63Less : Tax deducted on security payment 5,39,756.94 21,37,519.00 -------------- --------------Amount of TDS certificate 3,46,153.00Add : Tax not deducted by the Co.
617.00 --------------Total: 90,78,798.28+3,46,771.56 = 94,25,569.84Add : Provision for income 3.1. In the said reconciliation statement, it was pointed out that during the relevant year, 'SIL' made on account payments to the appellant company. These on account payments, in the final calculations, were found to be in excess over the bills raised during the year. Details of such on account payments made by 'SIL' were submitted before the AO. It was explained vide letter dt. 25th Feb., 1991 to the AO that 'SIL' deducted and deposited tax on "on account payments" of Rs. 20,50,000 made between November to December, 1986.
Thereafter, 'SIL' made a payment of Rs. 7 lakhs on which no tax was deducted. As such, total payments were made by 'SIL' between November to December, 1986, amounting to Rs. 27,50,000. However, the bills raised during this period amounted to Rs. 16,39,462. As such, there was excess payment of Rs. 11,10,539. Out of this amount of Rs. 84,815 representing opening debit balance as on 1st July, 1986 was reduced, which left the excess amounting of Rs. 10,25,723. The aforesaid excess payment is to be increased by Rs. 2,421 being the tax deducted to the account of appellant by 'SIL' on bills raised on 29th Oct., 1986, and 3rd Nov., 1986, respectively. This excess payment of Rs. 10,28,144 was paid to 'SIL' vide Cheque No. 874811 within the relevant previous year.
This excess payment of Rs. 10,28,144 included the sum of Rs. 5,39,704 on which tax was deducted and the balance was excess payment out of Rs. 7 lakhs.
3.2. The AO did not accept the aforesaid explanations submitted on behalf of the assessee. The AO observed that the assessee has received the said sum of Rs. 5,39,757 on account of assembling charges and recovery for excise duty payment made by the assessee though the specific bills were not raised for the same in the relevant previous year. Since the tax was deducted at source by 'SIL' on the aforesaid bills, the AO treated the said sum of Rs. 5,39,757 as the amount representing job work receipts of the company. He accordingly made an addition of Rs. 5,39,757.
3.4. The learned counsel for the assessee submitted that the assessee has duly reconciled the difference between the amount on which TDS was deducted by 'SIL' and the amount of job charges receipts declared by the assessee. The AO has himself accepted the assessee's contention with regard to the sum of Rs. 15 lakhs shown in the reconciliation statement indicating that tax deducted on security deposits received from 'SIL' would not form part of the job receipts of the relevant previous year. Likewise, he also accepted the amount of TDS deducted in the year under consideration on the bills of June, 1986 which was duly accounted for in the previous year. He, however, did not accept the contention of the assessee in relation to the sum of Rs. 5,39,756.94.
being on account payments received from 'SIL' on which tax was deducted at source. He invited our attention towards the copy of account of 'SIL' and also the details of transactions carried out with them in the months of November and December, 1986.
3.5. Our attention was also invited towards the certificate dt. 20th March, 1991 given by 'SIL' confirming that the correctness of the aforestated facts explained by the assessee. The contents of the said certificate are reproduced hereunder : That the company paid on account payments of Rs. 20,50,000 to Gorawara Plastics & General Industries (P) Ltd. after deducting the tax at source during the period November, 1986 to December, 1986.
That against the above on account payment sum of Rs. 15,09,045.06 bills was received from Gorawara Plastics & General (Ind.) (P) Ltd. during the above period.
That we had debited to P&L a/c Rs. 15,09,045.06 and Rs. 5,39,756.94 as recoverable from Gorawara Plastics & General (Ind.) (P) Ltd. 3.6. The learned counsel submitted that the party to the transactions, namely, 'SIL' have confirmed the correctness of the entries recorded in the assessee's books of accounts. The Department is alleging something which is not borne out from records nor from any other material in the possession of the Department. The other parallel authorities like excise department have also not challenged the job receipts declared by the assessee. The apparent should be accepted as real unless the contrary is proved. The Department has failed to bring any evidence on record to show that the sum of Rs. 5,39,756.94. received as on account payments by the assessee, which in fact, was returned back to 'SIL' represent job charges received by the assessee. He placed reliance on judgments CIT vs. Durga Prasad More (1973) 82 ITR 540 (SC) and 76 ELT 481 to support his contention that no such addition can be validly made.
3.7. The learned Departmental Representative submitted that s. 199 of IT Act, 1961 clearly provide that the credit for TDS shall be given to the assessee for the amount so deducted at source for the assessment year for which such income is assessable. Since the assessee has claimed credit for the entire amount of TDS on such payments, the amount in question is rightly assessable as income of the relevant previous year. He relied upon the elaborate reasons given in the assessment order and in the order of CIT (A) and urged that the addition should be confirmed.
3.8. We have carefully considered the submissions made by the learned representatives of the parties. It is an undisputed fact that the excess on account payment received by the assessee in the months of November and December, 1986 was repaid by a cheque given to 'SIL' for Rs. 10,28,144.30. This amount repaid by the assessee to 'SIL' includes the said sum of Rs. 5,39,757 added by the AO in assessee's income. The contention of the learned Departmental Representative that since tax at source was deducted on the said on account of payments and, therefore, the receipt in question should be treated as income of the assessee cannot be accepted because tax at source may be deducted by way of abundant caution while making the "on account payment" by 'SIL', for whom the assessee was doing the job work. However, on finalisation of the account, if it is found by parties to contract that payments in a particular year have been made in excess, the job charges receivable by the assessee from 'SIL', the excess of payments so received in a particular year, cannot be treated as income liable to tax simply because the tax was deducted at source.
The provisions of s. 194C requires any person responsible for paying any sum to any resident for carrying out a job work at the time of credit of such sum to the account of the payee or at the time of payment thereof, whichever is earlier, to deduct tax at source. 'SIL', therefore, in order to ensure proper compliance of s. 194C, deducted tax at source at the time of making payment to the assessee. However, the bills for job work done by the assessee in the relevant period were for a lesser amount. The assessee thus received excess amount from 'SIL', which was refunded by a cheque issued in favour of 'SIL'. The correctness of the job charges shown by the assessee has been accepted by other concerning authority like excise department. The account of 'SIL' as appearing in the books of the assessee has been fully reconciled with the assessee's account as appearing in the books of 'SIL'. 'SIL' has given a certificate dt. 20th March, 1991 that they have not deducted the said sum of Rs. 5,39,756.94. to their P&L a/c and have shown the said amount as recoverable from the appellant company.
'SIL' has also given a certificate placed at p. 75 of the paper-book that an amount of Rs. 10,28,144.30. has been received by them from the appellant company vide cheque No. 874714 dt. 29th Dec., 1986, drawn on Punjab National Bank towards outstanding amount lying in their account.
The AO has brought no material on record to show that the facts stated in the aforesaid two certificates given by 'SIL' do not represent true and correct facts. These two certificates issued by 'SIL' confirm the correctness of the entries recorded in the books of accounts of the assessee. The income by way of job charges received by the assessee from 'SIL' would be an expenditure in the hands of 'SIL'. 'SIL' have clearly confirmed that they have not debited the said sum of Rs. 5,39,756.94. as an expenditure in its P&L a/c.
3.9. In view of the aforesaid facts and circumstances, we are of the considered opinion that the amount of Rs. 5,39,757 added by the AO as job work receipts from 'SIL' cannot be sustained. The AO is directed to delete the same.
4. The facts relating to disallowance of Rs. 4,65,539 being the amount of finance charges/interest paid by the assessee on term loan borrowed from Hong Kong & Shanghai Banking Corporation has been discussed by the AO in para 3 on p. 5-6 of the assessment order. The assessee claimed deduction of Rs. 6,26,344 as finance charges, out of which Rs. 4,65,538.79 was paid to Hong Kong & Shanghai Banking Corporation against term loan. The AO disallowed the interest paid to the said bank on the ground that the loan was not utilised for the purpose for which it was taken but was utilised for the purpose of investment in the shares of 'SIL'. The AO accordingly disallowed a sum of Rs. 4,65,539.
4.1. The CIT (A) considered the written submissions submitted on behalf of the assessee. A copy of the written submissions was sent to the AO and his comments were invited. The CIT (A) reproduced the comments given by the AO in para 4 of his order. The AO, inter alia, stated that the loan was raised by the assessee from the said bank for purposes of carrying out its business as per details mentioned in para 3 of the assessment order. However, the assessee diverted the amount borrowed from the bank to its sister-concern 'SIL' and 'TEL' for the purchase of shares of those companies. The judgment in CIT vs. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) is not applicable on the facts of the case as the amount of loan was utilised for the purpose for which it was drawn in the aforesaid case, whereas in the instant case, the borrowed funds were not utilised for the purpose for which the loan was taken from the bank. The AO also placed reliance on judgment in CIT vs.
Tamil Nadu Industrial Development Corporation Ltd. (1991) 189 ITR 670 (Mad) in which it was held that interest paid on moneys borrowed but not immediately used for the business is neither business expenditure nor the same can be adjusted against interest received. The SLP filed by the assessee against the said judgment has also been rejected by the Hon'ble Supreme Court as in 187 ITR 41 (St.). The CIT (A) agreed with the comments submitted by the AO and confirmed the said disallowance.
4.2. The learned counsel for the assessee submitted that the AO and the CIT (A) have not appreciated the facts in its true and correct perspective. The entire approach of the departmental authorities while disallowing the said amount is incorrect. He submitted that in order to consider the question relating to allowability of interest paid to the bank, it will have to be first ascertained whether there was diversion of funds for non-business purposes. If the funds have been diverted for non-business purposes, the extent thereof will have to be ascertained.
4.3. The learned counsel contended that the assessee had explained the circumstances under which the assessee could not immediately utilise the funds borrowed from Hong Kong & Shanghai Banking Corporation for the purpose for which it was granted in the written submissions submitted before the CIT (A) as well as in the various letters submitted before the AO. It is true that the assessee obtained a loan of Rs. 30 lakhs from the said bank for acquiring fixed assets. The loan in question was sanctioned on 29th March, 1986. The appellant company had a piece of land allotted to it by UPSIDC at C-3, Sector- 22, Meerut Road Industrial Area, Ghaziabad. But it could not construct the building of its own. The business was started in a rented accommodation at R-214, Raj Nagar, Ghaziabad which was taken on rent w.e.f. 1st June, 1985. The business of the company was set up only in previous year ended on 30th June, 1986, relevant to asst. yr. 1987-88. The UPSIDC forfeited the lease rights in respect of plot allotted to the company on account of failure of the assessee to construct the factory building thereon vide its letter dt. 29th June, 1985. At the time when assessee gave application for loan to Hong Kong Bank, the assessee was trying to get the said plot reallotted. The UPSIDC allotted the land only on 19th May, 1986. The assessee thus faced with this situation, where though the loan was sanctioned, it could not utilise it immediately for acquiring the fixed assets in view of the aforesaid circumstances. The assessee, therefore, as a prudent businessman decided to utilise the funds borrowed from Hong Kong Bank for investment in shares of 'SIL' instead of keeping the surplus funds idle. Later on, when the assessee was in a position to utilise the funds for acquiring fixed assets, the assessee could either sell the shares or utilise the required amount, out of internal accruals for the purpose of purchase of fixed assets.
The appellant, in fact, acquired fixed assets till the end of the relevant previous year, aggregating to Rs. 24,84,459 out of internal accrual of the funds. The learned lawyer invited our attention towards the details of such additions in the fixed assets submitted at p. 116 of the paper-book. He submitted that the amount borrowed from bank have thus been substantially utilised for acquiring fixed assets in the year under consideration.
4.4. The learned counsel submitted that the Department could not disallow interest paid to the bank on the ground that it has been used for a purpose other than the purpose for which loan was granted. Only the Hong Kong Bank could, perhaps, have a grievance for diversion of funds for different business purpose. The amount borrowed from Hong Kong Bank was utilised for purchase of shares of 'SIL' with the tacit approval of the said bank. He contended that the payment for the purchase of said shares of 'SIL' was made by a DD to RICCO for Rs. 28,88,149 by a cheque drawn on Hong Kong & Shanghai Banking Corporation itself. Therefore, the fact relating to investment in shares of 'SIL' out of such term loan sanctioned by Hong Kong & Shanghai Bank was fully within their knowledge. Thus the ground taken by the AO for disallowance of the interest is not at all valid.
4.5. The learned counsel further submitted that investment for purchase of shares of 'SIL' was a part of business activity of the appellant company. He invited our attention towards cl. 3 of objects incidental or ancillary to the main objects contained in the memorandum of the said company. This clause empowers the company to inter alia, invest money for acquiring shares and securities of any such company-carrying any business or transactions, which may result in benefit to the assessee company. He submitted that the assessee- company is carrying on job work of 'SIL' and 'TEL'. The investment in shares of these companies was, therefore, an integral part of the business activity of the assessee. He invited our attention towards the judgment of Hon'ble Supreme Court in the case of CIT vs. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC), in which the Hon'ble Supreme Court held that though, for the purpose of computation of the income, interest on securities is separately classified as income by way of interest from securities, it would not cease to be a part of income from business, if the securities are part of the trading assets.
4.6. The learned counsel further contended that since the assessee had invested during the relevant year an amount of Rs. 24,84,459 out of its internal accruals, the amount of loan borrowed from Hong Kong Bank should be treated as having been utilised for the purpose for which it was granted. In such a case, where mixed funds are maintained, an overall analysis of funds is required to be made for deciding the allowability of interest. He relied upon the judgments in Wool Combers of India Ltd. vs. CIT (1982) 134 ITR 219 (Cal), Shree Digvijay Cements Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj), East India Pharmaceutical Works Ltd. vs. CIT (1997) 224 ITR 627 (SC), Durametallic (India) Ltd. vs. IAC (1991) 38 ITD 211 (Mad), and the decisions of the Tribunal in the case of Shri Ram Fibres Ltd., ITA No. 5753/Del/89 dt. 7th Oct., 1995, delivered by Delhi Bench 'A' to support this contention.
4.7. The learned counsel further submitted that even if the investment in shares is not considered as a business activity, the interest paid to Hong Kong Bank is clearly allowable as deduction under s. 57(iii) of IT Act, 1961. He invited our attention towards the judgment of the Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra) to support this alternative claim.
4.8. The learned counsel thus strongly urged that the disallowance out of finance charges/interest should be deleted.
4.9. The learned Departmental Representative relied upon the elaborate reasons given in the assessment order, the comments submitted by the AO before the CIT (A) and the reasons mentioned in the order of the CIT (A).
4.10. We have carefully considered the submissions made by the learned representatives of the parties, and have carefully gone through the orders of the learned Departmental authorities as well as the various documents submitted in the compilation to which our attention was drawn during the course of hearing. We have also gone through all the judgments cited by the learned representatives of both side.
4.11. The CIT (A) while confirming the said disallowance of Rs. 4,65,539 out of finance charges had placed heavy reliance on the comments submitted by the AO before him. The AO has mentioned that the disallowance is strongly supported by the judgment of Hon'ble Madras High Court in the case of CIT vs. Tamil Nadu Industrial Development Corporation Ltd. (supra) and the judgment in Addl. CIT vs. Madras Fertilisers Ltd. (1980) 122 ITR 139 (Mad) and CIT vs. Seshasayee Paper & Boards Ltd. (1985) 156 ITR 542 (Mad). Let us examine the ratio of the aforesaid judgments. The Hon'ble Madras High Court in the case of CIT vs. Tamil Nadu Industrial Development Corporation (supra), followed its earlier judgment in (1980) 122 ITR 139 (Mad) and (1985) 156 ITR 542 (Mad) (supra). It was held that interest paid on moneys borrowed but not immediately used for business is not business expenditure and the interest expenditure cannot be adjusted against interest received when such moneys are invested in short-term bank deposits. The Supreme Court dismissed the SLP filed by the assessee against this judgment. It is a brief judgment and does not contain the relevant facts of the said case. It has simply followed the earlier two decisions.
4.12. The judgment in the case of CIT vs. Seshasayee Papers & Boards Ltd. (supra), relate to the case of an assessee who had not established its factory during the assessment year in question. It was held that interest earned by the assessee on investment of shares capital in call deposits was assessable under the head "Other sources" and there was no question of setting off or allowing interest expenditure pertaining to the pre-production period, as the assessee had not established its factory during the relevant assessment year.
4.13. The facts of the case of Addl. CIT vs. Madras Fertilisers Ltd. were also almost similar. In that case also it was held that interest paid by the assessee to the bank cannot be said to be an expenditure laid out or expended wholly and exclusively for the purpose of earning interest from the deposit the assessee had made in the special account.
In this case also, the Hon'ble Court held that the setting up of a factory may be a preliminary and essential step for the purpose of carrying on the business of the assessee, but it cannot be said to be carrying on the business itself. From the facts of the aforesaid judgments it is clear that the claim in respect of interest expenditure under s. 36(1) (iii), 37 or 57 (iii) was made in all these cases, where the assessee has not commenced their business and such interest expenditure related to the period prior to the setting up of the business by those assessees. The facts of those cases are, therefore, clearly distinguishable from the facts of the present case. The business of the assessee had already started in asst. yr. 1987-88.
Hence the question relating to allowability of interest expenditure will have to be determined in accordance with the relevant provisions of IT Act, 1961.
4.14. In the present case, the assessee has utilised the funds borrowed from Hong Kong Bank for purchase of shares of 'SIL' and 'TEL'. The assessee company has business dealings with both these companies. It is evident from the facts discussed in relation to the preceding ground No. 2 that the appellant company has declared job receipts at Rs. 95,31,024 from the 'SIL' and 'TEL'. Apart from this Annexure 'H' of the audited statement indicates that assessee had received interest/dividend income to the tune of Rs. 5,95,574 in the relevant year under consideration. The assessee in the written submissions submitted before the CIT (A) as well as in the letter dt. 18th Feb., 1991, submitted before the AO had clearly stated that the dividend income of Rs. 5,84,000 was received during the year and interest expenditure should be allowed against such dividend income in view of the clear provisions of s. 57(iii) as interpreted by the Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra).
4.15. The investment made by the assessee for purchase of shares of 'SIL' and 'TEL', on the facts and circumstances of the present case should be treated as having been made for the business purposes of the assessee. The memorandum of association of the company authorises the appellant company to invest money for acquiring shares and securities of such companies which are carrying on any business or transactions which result in benefit to the assessee-company. The appellant company is doing the job work of 'SIL' and 'TEL' and has disclosed substantial income by way of job charges from these two companies. Therefore, the decision of the appellant company to invest the funds borrowed from Hong Kong Bank, which could not be immediately utilised for the purpose for which the bank sanctioned the loan and the money was lying idle, for purchase of shares of 'SIL' and 'TEL' will have to be adjudged from the point of view of a prudent trader. If that is so examined, it will be found that such a decision was taken by the assessee-company in the best interest of its business purpose. The Directors of the appellant company carefully examined all the relevant facts and circumstances and they were of the view that the question relating to reallotment of land by UPSIDC and acquisition of other fixed assets may take a long time and it may not be beneficial to keep the funds borrowed from Hong Kong Bank idle up to that period. Therefore, keeping in view the business interest of the company, the element of security and all other factors, they decided to invest the said amount for purchase of shares of 'SIL' and 'TEL', from whom they received substantial job work. The ground on which the disallowance has been made by the AO and confirmed by the CIT (A), namely, that the amount of loan was not utilised for the purpose for which the Hong Kong Bank had sanctioned the loan, is not relevant and decisive in relation to the allowability of the said expenditure.
The grievance for diversion of funds borrowed from the bank for a different business purpose may give a rise to a valid grievance to the bankers but that will not be a valid ground for disallowance of the interest expenditure provided the borrowed funds have been utilised for a different business purpose. The provision of s. 36(1) (iii) clearly provides that the amount of interest paid in respect of capital borrowed for the purposes of business, will be allowable as a deduction. Diversion of funds borrowed for one particular purpose but diverted for another purpose of the same business will still be an allowable expenditure under aforesaid provisions.
4.16. Even if the matter is viewed from an overall analysis of funds, it will be found that the appellant company had already invested a sum of Rs. 24.84 lakhs for acquiring various fixed assets in the relevant financial year and a substantial part of the term loan sanctioned by Hong Kong Bank had thus been utilised for the purpose for which the loan was granted, in the relevant accounting year itself. Such investment for acquiring fixed assets has been made out of internal accrual of the funds of the appellant company itself. It is, therefore, a case where mixed and common funds are maintained wherefrom investment in shares as well as investment in fixed assets have been made from time to time. The various judgments cited by the learned counsel for the assessee will also support the allowability of interest expenditure under such facts and circumstances.
4.17. The Hon'ble Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. vs. CIT (1982) 138 ITR 45 (Guj), considered claim for deduction of interest on borrowed funds in a case where the assessee- company made investment in certain shares. The assessee had borrowed funds in overdraft account with its partners. The Hon'ble High Court held that the material on record showed that the assessee had retained earnings and thus, with the borrowings, formed a common fund for the investment in shares. It was held that entire payment of interest on borrowings was deductible under the head "Business". If the question relating to allowability of interest is viewed keeping in mind the overall analysis of funds, it would be found that the investment in fixed assets, current assets and other business assets even after excluding the investment in shares, are substantially more than the amount of term loan borrowed by the appellant company from Hong Kong Bank. A copy of the Balance Sheet as on 30th June, 1987, placed at p.
101 of the paper-book gives the relevant details of such investments made in business assets as also the amount of outstanding liabilities as on 30th June, 1987. The term loan in question was of Rs. 30 lakhs.
The amount outstanding at the end of the year was only Rs. 10,56,000.
The investment in fixed assets made in the year under consideration was Rs. 24,84,460. Apart from this, the current assets, loans and advances also increased to Rs. 26,24,863 as against the opening balance of Rs. 9,13,110. Such overall financial position also clearly supports the assessee's contention that no part of borrowed funds were diverted for non-business purposes.
4.18. Assuming that the investment for purchase of shares of 'SIL' and 'TEL' cannot be treated as investment made for business purposes of the company, the amount of interest expenditure will still be clearly allowable as deduction under s. 57(iii) of IT Act, 1961, against the dividend income of Rs. 5,84,000 received by the appellant company. The Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody (supra) has held that interest on moneys borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(iii) of IT Act, 1961 in computing its income from dividend under the head "Income from other sources". It was held by the Hon'ble Supreme Court that in order to bring a case within s. 57(iii), it is not necessary that any income should, in fact, have been earned as a result of the expenditure. What is required is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The interest expenditure in the present case is also allowable under s. 57(iii), even if the investment is regarded as having been made for non-business purposes.
4.19. In view of the aforesaid facts and discussion, we are of the considered opinion that the assessee is clearly entitled to grant of deduction of the said sum of Rs. 4,65,539 (figure wrongly typed as Rs. 4,75,539 in ground No. 3 of the assessee's appeal). The AO is directed to allow the same.
5. This ground relates to denial of deduction under s. 80-I claimed by the assessee. The appellant company claimed deduction of Rs. 6,33,270 under s. 80-I @ 25 per cent of the total eligible income i.e. Rs. 25,33,879. The AO held that the assessee was not an industrial undertaking as the same did not manufacture or produce any article or thing. The assessee was merely engaged in the job work of assembling a few parts of electron gun of other companies, namely, 'SIL' and 'TEL'.
The submissions of the assessee that similar relief was allowed in asst. yr. 1987-88 did not find favour with the AO. The AO held that the assessee in the preceding year, did produce electron guns, whereas in the year under consideration, no production at all was carried out by the assessee.
5.2. The learned counsel for the assessee submitted that the assessee is clearly entitled to grant of deduction under s. 80-I. He invited our attention towards written submissions submitted before the CIT (A). He also placed reliance on decisions in Nishit Synthetics (P) Ltd. vs. ITO (1984) 18 TTJ (Ahd) 508 : (1984) 7 ITD 486 (Ahd), and the judgment of Hon'ble Supreme Court in the case of Assessing Authority-cum - Excise & Taxation Officer, Gurgaon vs. East India Cotton Manufacturing Co. Ltd. 48 STC 239.
5.3. The learned Departmental Representative submitted that the audited statements reveal that the assessee did not carry out any production of its own. It has only done job work of its sister companies, 'SIL' and 'TEL'. He relied upon the elaborate reasons given in the assessment order and the order of the CIT (A) to support the denial of deduction under s. 80-I.5.4. We have carefully considered the submissions made by the learned representatives of the parties. The assessee has pointed out before the departmental authorities as well as before the CIT (A) that the appellant company was treated as industrial undertaking eligible for grant of deduction under s. 80-I in the preceding year, while the quantity manufactured on own account was 77,570 guns and only, the manufacturing for third parties was of 3,33,716 guns. In other words about 81 per cent of the production was done for the third parties and still the entire activity was treated as falling under the requirement of s. 80-I. This year, the only difference is that there was no manufacturing on own account. There is no distinction between the activity for manufacturing on own account as also for the third parties, because the same process was involved in the manufacturing of electron guns for the third parties as the assessee had undertaken for manufacturing of electron guns on the part of itself in the preceding year. The assessee also explained the manufacturing process of black and white electron guns. The note explaining the manufacturing process has been placed at p. 88-89 of the paper-book. The audited statements clearly indicate that current year's production completely represents outside assembling charges amounting to Rs. 95.31 lakhs.
5.5. The provisions of s. 80-I provide that where the gross total income of an assessee includes in the profit and gains derived from an industrial undertaking which manufactures or produces articles or things, to which the said section applies, it shall be entitled to grant of deduction from such profits and gains of an amount equal to 25 per cent thereof. The only requirement is that the industrial undertaking should manufacture or produce articles or things. It no- where provides that such articles or things produced in the said industrial undertaking should belong to the assessee or the same should be sold by the assessee itself. It also does not dissentitle an industrial undertaking which is engaged in the activity of manufacture or production of articles or things belonging to other parties, on job charges basis.
5.6. The Tribunal Ahmedabad Bench in the case of Nishit Synthetics (P) Ltd. vs. ITO (supra), had held as under : "To get deduction under ss. 32A and 80J, it is not necessary that the assessee should manufacture articles on its own. The assessee is supplied with flat yarn by the textile mills and after giving physical twisting under mechanical process and chemicals, it manufactures twisted yarn which is entirely a different commercial commodity from the flat yarn supplied to it. The opinion of a technical expert had also pointed out that the assessee was engaged in a manufacturing activity. The item "Textile" does not figure in Schedule XI so as to deny the benefit. It figures in Schedules V and IX. In the circumstances, the CIT was not justified in upsetting the ITO's order."Assessing Authority-cum- Excise & Taxation Officer vs. East India Cotton Mfg. Co. Ltd. (supra), was considering the question as to whether a registered dealer could purchase processing material on concessional rate of tax by giving form 'C' to the supplier, which is a declaration by the buyer that the goods purchased will be used in the manufacture of goods for sale. The goods so purchased by the assessee was actually used partly in the manufacture of buyer's own goods and partly in job work for other manufacturers for sale by them. The question was whether the 'C' forms used by the dealer in relation to the job work amounted to misuse of the declaration. The Hon'ble Supreme Court in the aforesaid judgment held as under : "Affirming the decision of the Division Bench of the High Court, that s. 8(3) (b) would clearly cover a case where a registered dealer manufactured or processed goods for a third party on a job-contract and used in the manufacture or processing of such goods, materials purchased by him against this certificate of registration and the declarations in Form C, so long as the manufactured or processed goods were intended for sale by such third party. The expression used by the legislature as well as the rule-making authority was simply "for use... in the manufacture...
of goods for sale" without any addition of words indicating that the sale must be by any particular individual. The legislature had designedly abstained from using any words of limitation indicating that the sale would be by the registered dealer manufacturing the goods. Where the legislature wanted to restrict the sale to one by the registered dealer himself, the legislature used the qualifying words "by him" after the words "for resale" in one part of s. 8(3) (b), but while enacting another part of s. 8(3) (b) the legislature did not qualify the words "for sale" by adding the words "by him".
This deliberate omission clearly indicated that the legislature did not intend that the sale of the manufactured goods should be restricted to the registered dealer manufacturing the goods. The word "use" was followed by the words "by him" clearly indicating that the use of the goods purchased in the manufacture of goods for sale must be by the registered dealer himself but the words "by him" were significantly absent after the words "for sale".
A statute must be construed according to its plain language and neither should anything be added nor should anything be subtracted unless there are adequate grounds to justify the influence that the legislature clearly so intended." 5.8. The provisions of s. 80-I also nowhere specifically provide that the industrial undertaking owned by the assessee should engage itself in the manufacture of its own goods and not the goods belonging to other parties. If the industrial undertaking is engaged in the activity of manufacture or production of an article or thing, regardless of the fact that such article of thing belongs to the assessee or to some third party for whom the assessee is doing such manufacturing or production activity on job basis, would be clearly entitled to grant of deduction under s. 80-I provided other conditions mentioned in the said section are fulfilled. The eligibility of the industrial undertaking belonging to the assessee for grant of deduction under s. 80-I has been accepted in asst. yr. 1987-88. Such eligibility accepted in the initial year, namely, asst. yr. 1987-88 has not been disturbed by the Revenue authorities either by initiating proceedings for reassessment under s.
147 nor by initiating revisional proceedings under s. 263. The learned Departmental Representative has not pointed out any such action taken by the Department for asst. yr. 1987-88.
5.9. In view of the aforesaid facts and circumstances, and in view of the principle of law laid down by the Hon'ble Supreme Court in the case of Assessing Authority vs. East Indian Cotton Mfg. Co. Ltd. (supra), we are of the view that the assessee is clearly entitled to grant of deduction under s. 80-I. AO is directed to compute the amount of such deduction allowable under s. 80-I of IT Act, 1961, to the assessee.
6. Ground No. 6 relates to confirmation of an addition of Rs. 5,000 as income from undisclosed sources appearing in the name of Master Dhruv Sethi.
6.1. The CIT (A) confirmed the said addition on the ground that the assessee has not produced confirmation from the party for investment made in equity shares. The confirmation of one Mrs. Prem Chadha given also remained unproved. He, therefore, confirmed the said addition.
6.2. The learned counsel invited our attention towards affidavit of Sunil Sethi submitted before the AO. He has confirmed that Master Dhruv Sethi has invested in 210 equity shares of Rs. 100 each amounting to Rs. 21,000 in the appellant company. The said investment has been made from the Savings Bank Account No. 4872 maintained at Oriental Bank of Commerce, Saket, New Delhi. The sources of aforesaid investments were gift received from friends, parental and maternal relatives. A chart showing the details of gifts received from friends and relatives has also been submitted at p. 103 of the compilation.
6.3. The learned Departmental Representative relied upon the reasons mentioned in the assessment order.
6.4. We have carefully considered the submissions made by the learned representative of the parties. In our view the addition of Rs. 5,000 made by the AO cannot be sustained.Master Dhruv Sethi invested the said sum for acquiring equity shares of the company. The appellant company submitted an affidavit of Sunil Sethi, father of Master Dhruv Sethi confirming that a sum of Rs. 21,000 was invested by him on behalf of his son, Master Dhruv Sethi in the share capital of the appellant company. The identity of the shareholder has been well proved. The amount of share money was given by way of a cheque drawn on the bank account of the shareholder maintained with the Oriental Bank of Commerce, Saket, New Delhi. The Hon'ble Full Bench of Delhi High Court in the case of CIT vs. Sophia Finance Ltd. (1994) 205 ITR 93 (Del), has held that if the shareholders are identified and it is established that they have invested money in the purchase of shares, the burden which lies on the company will stand discharged. In view of the principles laid down by the Hon'ble Full Bench of the Delhi High Court, we are of the view that the assessee has discharged the burden of proving the identity and genuineness of the share money given by Sunil Sethi on behalf of his minor son, Master Dhruv Sethi. The AO is, therefore, directed to delete the said addition of Rs. 5,000.