Judgment:
These are four cross-appeals - two each filed by the revenue and the assessee against two orders of the Commissioner (Appeals), Chandigarh, dated 16-4-1993 and 15-4-1993 for the assessment years 1989-90 and 1990-91 respectively. Since the issues involved in these cross-appeals are common and interconnected, these were heard together and are being disposed of by this consolidated order for the sake of convenience.
First we take up assessee's appeals for both the assessment years. The first effective issue common to both the appeals is that the Commissioner (Appeals) was not justified in confirming the disallowance of the claim of initial security deposit of Rs. 8,14,000 (Rs. 63,11,479 for the assessment year 1990-91). The facts of the case are that the assessee is a government contractor engaged in the business of executing contracts occurred from government and other agencies. The assessee was required to furnish security deposits with the principals, which were refundable on completion of the contract. The assessee made security deposits of Rs. 8,14,000 and Rs. 63,11,479 for the assessment years 1989-90 and 1990-91 respectively. The assessee claimed deduction thereof from the contract receipts. However, the assessing officer observed that amount of security deposits represented the capital investment of the assessee, which were lying with the principals. These amounts were also refundable after completion of the contract. Thus, the assessing officer held that the assessee was not entitled to deduction of the same.
Aggrieved, the assessee carried the matter in appeals before the Commissioner (Appeals), who upheld the disallowance by relying on the appellate order for the assessment years 1985-86 to 1988-89. The assessee has now preferred these appeals before us.
Both the learned counsel for the assessee and the learned Departmental Representative conceded that this issue stood decided in favour of the revenue and against the assessee by the Tribunal, Chandigarh Bench's order dated 19-10-1994 in assessee's own case (in I.T.A. Nos. 3.13 & 453 of 1989) for the assessment year 1985-86 and the facts of the case for the assessment year under reference are identical to the facts of the case for the assessment year 1985-86. A copy of the said order was filed on our record at pages 1 to 16 of the paper book.
We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We find that the same issue came up for consideration before ITAT, Chandigarh Bench in assessee's own case for the assessment year 1985-86. This issue was decided against the assessee and in favour of the revenue by observing in para 14 of the aforesaid order as under : "14. We have carefully considered the submissions of both the sides and perused the material on record. In our opinion, the claim of the assessee has been properly and validly negatived by the revenue authorities. In the first instance, this guarantee was given before the start of the work by the assessee and could, therefore, be held to be capital in nature. Secondly, this was not an expenditure which had been ascertained and which had crystallised. It is true that the release or refund of this amount depended upon the satisfactory performance by the assessee, i.e., the contractors. This, however, does not mean that there has been as a matter of fact any unsatisfactory performance on the part of the assessee or that the assessee is certainly going to get this amount forfeited. Both possibilities are inherent in the situation. We, therefore, do not accept the proposition that this is an expenditure for an expenditure is an outgoing. Expenditure connotes any sum going out finally and permanently from the coffers of the assessee.
Though the bank guarantee has been given, the amount cannot be considered as having gone out of the hands of the assessee irretrievably and cannot, therefore, be considered as an item of deduction even under section 28 of the Act. We, therefore, hold that this item along with three earlier items discussed above have been correctly disallowed as a deduction by the revenue authorities. This ground is, therefore, rejected." The facts of the case for the assessment year under reference are similar to the facts of the case for the assessment year 1985-86.
Therefore, respectfully following the aforesaid order of the Tribunal, we hold that the Commissioner (Appeals) was justified in sustaining the disallowance of the aforesaid amounts. We confirm his orders and dismiss this common ground of appeals for both the assessment years under reference.
The next ground of appeal for the assessment year 1989-90 relates to the fact that the Commissioner (Appeals) was not justified in sustaining disallowance of Rs. 1,27,989 under section 40A(3) of the Income Tax Act. The facts of the case are that while completing the assessment for the assessment year under, reference, the assessing officer observed that the assessee had made cash payments exceeding Rs. 10,000 in violation of provisions of section 40A(3). The assessee explained that such payments had to be made because the parties from whom the assessee made these purchases insisted on cash payments and, therefore, there were exceptional circumstances justifying such cash payments. However, the assessing officer observed that the assessee did not produce any letter or evidence to substantiate its contention that such payments had been made on insistence of the parties. In addition, the assessing officer observed that the assessee made purchases of Rs. 75,295 from its sister concern, namely, M/s. Munak International (P) Ltd. and there was no justification for making such cash payments as the part from whom it made the purchasers was known to the assessee because Shri R.K. Garg was also one of the directors in M/s. Munak International (P) Ltd. Accordingly, the assessing officer disallowed an amount of Rs. 1,27,979.
Aggrieved, the assessee carried the matter in appeal before the Commissioner (Appeals). The same submissions as made before the assessing officer were reiterated. However, the Commissioner (Appeals) upheld the disallowance on the ground that assessee failed to produce any evidence from the parties that such payments had been made to them on their insistence. The findings of the Commissioner (Appeals) recorded in para 4.3 of the appellate order are reproduced as under : "4.3 I have considered the facts of the case as also the submissions made on behalf of the appellant. Apparently, the appellant has failed to produce any evidence to support the contention that the concerned parties insisted on cash payment and the case of the appellant is covered under exceptional circumstances. It is also seen that the third party, i.e., M/s. Munak International (P) Ltd. to whom cash payment of Rs. 75,295 has been made, is a sister concern of the appellant and there is no question of insisting on the cash payment. Considering all the facts of the case and also the fact that the appellant has failed to produce any evidence to support the contention that the payment in cash was insisted, I am of the considered opinion that the assessing officer was justified in making the impugned disallowance which is accordingly confirmed. Thus this ground of appeal is dismissed." The assessee is aggrieved by the order of the Commissioner (Appeals).
Hence this appeal before us.
The learned counsel for the assessee, Shri M.L. Garg, submitted that the assessee had to make the payments in cash because these purchases were made from parties at Calcutta and the assessee did not have his bank account at Calcutta. He, therefore, submitted that the case of the assessee was covered under rule 6DD(j) and Board's Circular No. 220 [F.No. 206/70/76-IT(8A-II) dated 31-5-1997. Further, the learned counsel relied on the judgment of Hon'ble Punjab & Haryana High Court in the case of CIT v. Brij Mohan Singh & Co. (1994) 209 ITR 753 (P&H). He further submitted that the very fact that one of the directors of the assessee-company was also a director in the case of M/s. Munak International (P) Ltd. does not mean that the other party was very well known to the assessee. He submitted that the director of the company was not actively managing or looking after the business of M/s. Munak International (P) Ltd. Therefore, there is no justification for sustaining the disallowance of payment of Rs. 75,295 made to M/s. Munak International (P) Ltd. The learned Departmental Representative, Smt. Rachna Singh, on the other hand, strongly relied on the orders of the lower authorities. She submitted that the assessee had not taken any such plea before the lower authorities that the assessee did not have bank account at Calcutta. She submitted that this plea has been raised for the first time. She further submitted that the only explanation given by the assessee before the authorities below that the assessee had to make payments in cash because the parties from whom it made purchases insisted on cash payments. However, neither before the assessing officer nor before the Commissioner (Appeals) the assessee adduced any evidence from the parties that they had asked for such cash payments.
She submitted that in the absence of such evidence, the disallowance was rightly sustained by the Commissioner (Appeals). In support of her contentions, she also relied on the following judgments : (i) Porwal Udhyog (India) v. CIT (1982) 135 ITR 591 (MP) - Where the High Court has held that in the absence of any evidence to show that there were exceptional and unavoidable circumstances necessitating payments in cash, disallowance under section 40A(3) was held to be justified.
(ii) Bhilai Motors v. CIT (1987) 167 ITR 147 (MP) - Where the High Court upheld the order of the Tribunal in sustaining the disallowance under section 40A(3) on the ground that no question of law arose for reference.
(iii) Associated Engg. Enterprise v. CIT (1995) 216 ITR 366 (Gau) -Where the High Court upheld that the mere fact that payments were genuine is not sufficient and the assessee is required to establish exceptional circumstances warranting cash payments.
(iv) Narayan Bijoy Kumar v. CIT (1987) 163 ITR 695 (Pat) - Where the High Court upheld the disallowance under section 40A(3) on account of assessee's failure to prove the reasonable cause for making such payments.
We have heard both the parties and given our utmost consideration to the rival submissions. We have also examined the facts, evidence and material on record. From the facts detailed above, it is obvious that the only plea taken by the assessee before the lower authorities was that such cash payments had been made at Calcutta because the parties from whom such purchases were made insisted on cash payments. However, no evidence in the form of confirmatory letters from those parties that they insisted on such cash payments was produced. The assessee had not taken the plea before the lower authorities that cash payments were made to the abovementioned parties because the assessee did not have any bank account. The Hon'ble Punjab & Haryana High Court in the case of Brij Mohan Singh & Co. (supra) has held that cash payments made to the party at a place where the seller or purchaser does not have bank account would not call for disallowance under section 40A(3). The Hon'ble High Court has referred to the Board's Circular No. 220 dated 31-5-1977, where the Central Board of Direct Taxes has mentioned that all the circumstances in which the condition laid down in rule 6DD(j) would be applicable cannot be spelt out. However, some of them, which would seem to meet the requirements of the said rule areas under: (b) the transactions are made at place where either the purchaser or the seller does not have a bank account; or (d) the seller is refusing to accept the payment by way of cross cheque/draft and the purchaser's business interest would suffer due to non-availability of goods otherwise than from this particular seller; or (e) the seller, acting as a commission agent, is required to pay cash in turn to persons from whom he has purchased the goods; or (f) specific discount is given by the seller for payment to be made by way of cash." From the above it is obvious that payments made in violation of provisions of section 40A(3) at a place where neither the purchaser nor the seller does have the bank account would fall in the exceptional circumstances mentioned therein. But the abovementioned circular of the Board also mentions that all the circumstances spelt out therein are not exhaustive. These are only some of the exceptional circumstances where it could be said that such payments are covered under rule 6DD(J). However, in response to specific query from the Bench, the learned counsel submitted that the registered office of the assessee is located at Chandigarh. The contract work for which such purchases were made from Calcutta was being carried out at Port Blair. There is no material placed on record to show that the assessee had his branch office at Calcutta. These facts show that material purchased at Calcutta was to be transported to Port Blair where one has also to see the availability of the transport. No material has been placed on record to show that the parties from whom the assessee made purchases were known to the assessee or the assessee had regular transactions with them even in the past. The mere fact that one of the directors of the company was the same from whom it made the purchases of Rs. 75,000 or so does not mean that party was known to the assessee. One has to see the urgency and the circumstances under which such payments were made. Therefore, under these facts and circumstances, it could be said that the impugned payments were covered under exceptional circumstances mentioned in rule 6DD(j) and the Commissioner (Appeals) was not justified in sustaining the disallowance of the same. As regards the various judgments relied on by the learned Departmental Representative those have been rendered with reference to the facts of individual cases and could not be applied to the facts of the present case. We, therefore, set aside the order of the Commissioner (Appeals) on this issue and delete the impugned disallowance. This ground of appeal is allowed.
The assessee also sought to raise two additional grounds for the assessment year 1989-90 and one additional ground for the assessment year 1990-91. The first additional ground for the assessment year 1989-90 relates to in not allowing the benefit of carry forward of loss of Rs. 12,33,768. The facts of the case are that income from business was computed at Rs. 1,09,81,399 as per normal provisions of the Act.
Thereafter, the assessee was allowed benefit of brought forward business loss of the earlier assessment year of Rs. 85,51,607. As a result, the net business income was computed at Rs. 24,29,792. No carry forward of business loss remained to be given set off. But the claim of the assessee is that as per provisions of section 115J, 30 per cent of book profit was computed at Rs. 36,63,560, which meant that the assessee was allowed the benefit of brought forward loss only to the extent of Rs. 73,17,839 (i.e., 1,09,81,399, 36,63,560) and, therefore, the balance loss of Rs. 12,33,768 (85,51,607-73,17,839) still remained to be carried forward. However, the assessee submitted that no doubt this claim was not preferred either in the return of income or before the lower authorities yet the assessee was entitled to such benefit in view of the judgment of Gauhati High Court in the case of Lallacherra Tea Co. (P) Ltd. v. CIT (1999) 239 ITR 611 (Gau), and the decision of the Tribunal, Madras in Fab Export (P) Ltd. v. Asstt.CIT (1996) 56 ITD 132 (Mad-Trib). The learned counsel further submitted that the assessee was entitled to raise such legal ground in view of the judgment of the Supreme Court in the case of National Thermal Power Co. Ltd. v. CIT (1998) 229 ITR 383 (SC). He further submitted that recently Punjab & Haryana High Court in its Full Bench judgment in the case of CIT v.Smt. Aruna Luthra (2001) 252 ITR 761 (P&H), has considered the issue as to what constitutes mistake apparent from record. The Hon'ble High Court has held that records include everything including the subsequent judgment of the jurisdictional High Court or the Supreme Court. He submitted that in this case the judgment of Gauhati High Court being of subsequent date, the same would constitute mistake apparent from record and, therefore, the additional ground, which is based on the facts already on record, can be allowed to be admitted.
The learned Departmental Representative Smt. Rachna Singh, on the other hand, strongly opposed the admission of additional grounds of appeal.
She submitted that additional grounds of appeal could be admitted only if the facts of the case were already on record and the same did not require any further investigation. She relied on the judgment of Punjab & Haryana High Court in the case of CIT v. Dehati Co-op.
Marketing-cum-Processing Society (1981) 130 ITR 504. She further relied on the judgment of Supreme Court in the case of Hukumchand Mills Ltd. v. CIT (1967) 63 ITR 232 (SC), where the Hon'ble Supreme Court has held that the Tribunal has wide powers to entertain additional ground of appeal. She further relied on the judgment of Supreme Court in the case of CIT v. Manick Sons (1969) 74 ITR 1 (SC), where the Hon'ble Supreme Court has held that the Tribunal has wide powers to entertain the additional ground of appeal, but it is still a judicial power which must be exercised in respect of matters that arise in the appeal and according to law. The Income Tax Appellate Tribunal must deal before it the questions of law, which arose out of the order of assessments made by the Income Tax Officer and the order of the first appellate authority. It cannot assume powers, which are inconsistent with the provisions of the Act or its scheme. She further relied on the judgment of Supreme Court in the case of Addl. CIT v. Gurjargravures (P) Ltd. (1978) 111 ITR 1 (SC), where the Hon'ble Supreme Court has held that the Tribunal was not competent to entertain the question of relief or to direct the Income Tax Officer to allow such relief. She therefore, strongly urged that the issues, which were not raised before the assessing authority, could not be raised at this stage before the Tribunal.
We have heard both the parties and carefully considered the rival submissions. From the facts detailed above, it is obvious that none of the two issues for which additional grounds are now being raised was contested before the authorities below. The assessee had not claimed benefit of carry forward of loss either in the return of income or in the proceedings before the assessing officer and the Commissioner (Appeals). Therefore, the authorities below had no occasion to examine the claims while completing/deciding the assessment/ appeal. In the case of National Thermal Power Co. Ltd. (supra), Hon'ble Supreme Court has held that power of the Tribunal in dealing with the appeals is expressed in the widest possible terms and, therefore, the Tribunal is not prevented from considering the questions of law arising in the assessment proceedings, although not raised earlier. The Tribunal has the discretion to allow or not to allow a new ground of appeal to be raised. However, the Tribunal is only required to consider the question of law arising from facts, which are on record in the assessment proceedings. It was finally held that the Tribunal had jurisdiction to examine a question of law, which arose from the facts as found by the income-tax authorities and having a bearing on the tax liability of the assessee. The Hon'ble Punjab & Haryana High Court has also taken a similar view in the case of Dehati Co-op. Marketing-cum-Processing Society (supra), where the Hon'ble Court has held that Income Tax Appellate Tribunal can admit the additional ground, which had not been taken before the Income Tax Officer, so long as that does not require a further investigation into facts.
Now, what we have to consider is whether, all the relevant facts necessary for deciding the additional ground of appeal were on record or the case required further investigation into the facts. The learned counsel has drawn our attention to page 6 of the assessment order where income from business was computed at Rs. 1,09,44,240 and after allowing benefit of brought forward loss of Rs. 85,51,607, net income was computed at Rs. 24,29,792. He further drew our attention to page 6 of the assessment order where 30 per cent of the book profit under section 115J was computed at Rs. 36,63,560 on which tax was charged. Thus, it is obvious that all the relevant facts for admission of the first additional ground of appeal are already on record and the same does not require any investigation into the facts. Therefore, the first additional ground raised by the assessee arises from the facts, which are already on record, and which do not require any further investigation and also the same is purely a legal ground. Accordingly, by relying on the judgment of Hon'ble Supreme Court in the case of National Thermal Power Co. Ltd. (supra), we are of the considered opinion that the first additional ground relating to benefit of carried forward loss deserves to be admitted even though such ground was not raised before the authorities below. In the light of these facts, we reject the objections raised by the learned Departmental Representative and admit the first additional ground.
However, the question still requires to be considered is whether, the assessee would be entitled to the carry forward of unabsorbed business loss of Rs. 12,33,768 As discussed above, the claim of the assessee is that as per income computed under section 115J at Rs. 36,63,560, it could be considered that the assessee was allowed benefit of carried forward of loss only to the extent of Rs. 73,17,839 as against loss of Rs. 85,51,607. In this regard, we wish to mention that provisions of section 115J were introduced in the statute whereby a company was made liable to pay tax on at least 30 per cent of its book profit as shown in its account to be prepared in accordance with Parts II & III of VIth Schedule of the Companies Act. For this purpose, the assessing officer is first required to compute the income or loss as per normal provisions of the Income Tax Act. The provisions of section 115J shall come into operation only if the income so computed under the normal provisions of the Act falls short of 30 per cent of the book profit computed as per Parts II & III of VIth Schedule of the Companies Act.
The provisions of section 115J lay down a separate code in itself in regard to computation of book profit. Sub-section (2) of section 115J further provides that computation of income under section 115J does not affect the determination of the amounts in regard to claims under sections 32(2), 32A(3), sub-section (1) of section 72, section 73 or section 74 or sub-section (3) of section 74A, etc. In this regard, it would be appropriate to reproduce herein the provisions of sub-section (2) of section 115J : "(2) Nothing contained in sub-section (1) shall affect the determination of the amounts in relation to the relevant previous year to be carried forward to the subsequent year or years under the provisions of subsection (2) of section 32 or sub-section (3) of section 32A or clause (ii) of sub-section (1) of section 71 or section 73 or section 74 or subsection (3) of section 74A or sub-section (3) of section 80J." A bare reading of sub-section (2) of section 115J shows that the benefit of carried forward of loss of the relevant accounting year would be covered by the computation of income as per normal provisions of the Act and determination thereof would not be dependent on the income computed under section 115J. Now, in this case, the income was first computed under the normal provisions of the Income Tax Act and after allowing the benefit of entire brought forward business loss of Rs. 85,51,607, the assessing officer determined the net business income under the normal provisions of the Act at Rs. 24,29,792. Thereafter, the assessing officer worked out 30 per cent of the book profit at Rs. 36,63,558, which was greater than the income computed under the normal provisions of the Act. Therefore, as per provisions of section 115J of the Income Tax Act, net taxable income was determined at Rs. 36,63,560.
Now the question to be considered is that whether the assessee would be entitled to carry forward of loss of Rs. 12,33,768, though as per computation of income made under the normal provisions, the entire loss was given set off against the income of the current assessment year This issue also came to be considered by the Hon'ble Andhra Pradesh High Court in the case of Suryalalha Spinning Mills Ltd. v. Union of India (1997) 237 ITR 713 (AP), where similar contention was made that brought forward loss could not be considered to be given set off to the extent income was computed as per provisions of section 115J and subjected to tax. It was also contended that it amounts to double taxation if the income computed under section 11 5J(1) is again subjected to tax by not reducing the unabsorbed business loss to the extent such income is subjected to tax. Their Lordships of the Hon'ble Andhra Pradesh High Court after referring to the provisions of section 115J(2) have held that the quantum of unabsorbed losses, unadjusted depreciation, etc., for the purpose of carrying forward loss has to be determined under the normal provisions of the Act, irrespective of the quantum of income determined under the provisions of sub-section (1) of section 115J. The Hon'ble High Court based its decision on the following reasoning: (i) For the purpose of arriving at the total taxable income under the normal provisions of the Act, the brought forward loss and unabsorbed depreciation has to be given set-off and if any such business loss remained to be carried forward, the same alone is allowed to be carried forward irrespective of the book profit computed under section 115J.(ii) Sub-section (2) of section 115J of the Income Tax Act is a saving provision and does not confer any further right. The amount of income arrived at for the purpose of exigibility of income-tax under sub-section (1) of section 115J cannot be taken note of, while considering the question of carrying forward of unadjusted loss.
(iii) The very object of the provisions of section 115J is to tax such companies which are making huge profits and also declaring substantial dividends but are managing their affairs in such a way as to avoid payment of income-tax, as a result of various tax concessions and incentives and for that purpose, the taxable income is determined under sub-section (1) of section 115J. If any loss equals to the income thus determined is allowed to be adjusted, then that would defeat the very purpose of enacting the provisions.
As regards the contention of the assessee that it would amount to double taxation, the Hon'ble High Court by referring to the judgment of Hon'ble Supreme Court in the case of Jain Bros. v. Union of India (1970) 77 ITR 107 (SC), rejected such contention because what is being taxed is income determined on the basis prescribed under the provisions of the Income Tax Act and there is no provision to retax the same income as such and, therefore, there was no double taxation. Thus, we find that the judgment of the Hon'ble Andhra Pradesh High Court clearly takes into account the provisions of section 115J(2) and is very well reasoned. As regards the judgment of Hon'ble Gauhati High Court in the case of Lallacherra Tea Co. (P) Ltd. (supra), we find the same does not refer to the judgments of Andhra Pradesh High Court and the Supreme Court in the aforesaid cases. With utmost respect to the judgment of Hon'ble Gauhati High Court, we wish to add that the judgment of Andhra Pradesh High Court contains a detailed analysis of the statutory provisions and has cited various judgments of the Apex Court in support of the view taken. Besides, the judgment is very well reasoned and deals with various aspects of the issue including the objects of incorporation of section 115J. Therefore, with due deference to the judgment of Hon'ble Gauhati High Court we prefer to follow the view taken by the Hon'ble Andhra Pradesh High Court.
This issue also came to be considered by Hon'ble Karnataka High Court in the case of Widia (India) Ltd. v. CIT (2000) 242 ITR 678. The Hon'ble High Court after referring to the provisions of section 115J(2) has held that amount of brought forward losses/ allowances were required to be adjusted to the extent to which such adjustments would be necessary by way of set-off of such losses/ allowances against the current year's net profit, computed in accordance with the regular method of determination of income of the assessee as per the normal provisions of the Income Tax Act (sections 28 to 43) for the purpose of carrying forward such losses/ allowances to the next year, without paying any attention to the fact that actually the assessee was charged to tax in this year in accordance with the provisions of section 115J.For taking such view, the Hon'ble Karnataka High Court has referred to the judgment of Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. (supra), and many other judgments, including that of the Hon'ble Supreme Court. Therefore, this judgment also supports our finding on this issue.
Besides, this matter also came to be considered by Income Tax Appellate Tribunal, Chandigarh Bench in the case of Shivalik Fuels (P) Ltd. v.Asstt.CIT (IT Appeal Nos. 89 and 90 of 1994) for the assessment years 1990-91 and 1991-92. By referring to the provisions of section 115J(2) and the judgment of Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. (supra) and the judgment of Karnataka High Court in the case of Widia (India) Ltd. (supra), the Tribunal vide its order dated 14-12-2000 has held that the assessee is entitled to the benefit of carry forward of losses as determined in accordance with the normal provisions of the Income Tax Act by ignoring the income computed under section 115J. The relevant findings of the Income Tax Appellate Tribunal contained in para 5 of the aforesaid order are reproduced hereunder: "5. We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We have also perused orders of authorities below. The provisions of section 115J were introduced in Income Tax Act with a view to ensure levy of minimum tax on what were known as prosperous 'zero tax companies'. This Chapter is a self-contained Code and is applicable to companies whose total income computed under the provisions of Act in respect of previous year is less than 30 per cent of their book profit. The provisions of section 115J contemplate two stages. First, the assessing officer has to determine income of the company under the provisions of the Act and secondly the book profit has to be worked out in accordance with the Explanation below section 115J(1A). Thereafter, one has to see whether total income determined under the provisions of the Act is less than 30 per cent of the book profit. If so, sub-section (1) of section 115J would be invoked and total income of such a company would be equal to 30 per cent of book profit computed in accordance with the provisions of section 115J(l).
Sub-section (2) of section 115J provides that book profit computed as per provisions of section 115J(1) shall not effect the determination of the amounts in relation to relevant previous year to be carry forward to subsequent year/s under the provisions of sub-section (2) of section 34 or sub-section (3) of section 32A or section 72 or 73 or 74 or 74A(3) or section 80J. The simple interpretation of this section is that it does not permit the assessee to c/f unabsorbed loss or unadjusted allowance of an amount equal to notional income computed as per provisions of section 115J(1). In other words, the application of section 115J is restricted to charging of tax at 30 per cent of book profit and it does not mean that the assessee would be entitled to claim set off unabsorbed depreciation or business loss to the extent of taxed income in subsequent years. Otherwise, it would only negate the object for which these provisions have been enacted. Now, in this case there is no dispute about the quantum of income computed as per provisions of the Act at Rs. 8,808 for assessment year 1990-91 and computation of 30 per cent of book profit at Rs. 4,85,320. Income of Rs. 8,808 computed in accordance with provisions of the Act is after allowing complete set-off of brought forward business loss and unabsorbed depreciation. There was no unabsorbed depreciation or business loss which remained to be set off as per income computed under the Act. Income of Rs. 4,85,320 is only as per provisions of section 115J, which does not effect the issue of carry forward of business loss or unabsorbed depreciation, which has to be as per income computed in accordance with provisions of the Act. Therefore, in view of the clear provisions of section 115J(2), we hold that the assessee is not entitled to claim of set-off of unabsorbed depreciation for assessment year 1990-91, as the same had already been set off while computing income as per provisions of the Act. The judgment of Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. (supra) supports this view. The relevant paragraph at page 7 15 of the report is reproduced as under : 'From a plain reading of sub-section (2) of section 115J, it is clear that the quantum of unabsorbed losses, unadjusted depreciation, etc., for the purpose of carrying forward has to be under the provisions of the Act, irrespective of the quantum of income determined under the provisions of sub-section (1) of section 115J. There would be no scope for the revenue to contend that in view of the provisions of sub-section (1), the unabsorbed depreciation allowance, unadjusted loss or deficiency, etc., as the case may be, can no longer be carried forward to the subsequent year or years. On the determination of the taxable income, under the relevant provisions of the Act, whatever amounts remain to be carried forward under the regular computation, either by way of unabsorbed losses or unabsorbed allowances have to be carried forward to the next year ignoring the fact that a notional income is made taxable under sub-section (1) of section 115J.' It may be mentioned that while taking the above view, Hon'ble High Court has also followed the judgment of the Delhi High Court in the case of National Thermal Power Corpn. Ltd. v. UOI 192 ITR 187 (Del).
Apart from two judgments of Andhra Prasad and Delhi High Courts, Karnataka High Court has also taken the same view in the case of Widia (India) Ltd. & Ors.. These High Courts have held that the fact that notional income has to be subjected to tax under section 115J does not amount to double taxation. No doubt, Gauhati High Court in the case of Lallacherra Tea Co. (P) Ltd. (supra) has taken a view in favour of the assessee but, with due respect, it is submitted that such view is contrary to judicial opinion expressed by the three High Courts.
Besides if the view taken by the Gauhati High Court is followed, it would result negating the very object for which the provisions of this Chapter have been enacted. Respectfully following the above-mentioned three judgments of Andhra Pradesh, Delhi and Karnataka High Courts and also by referring to the provisions of the Act, we hold that Iearned Commissioner (Appeals) was justified in confirming orders of assessing officer. We confirm the orders of Commissioner (Appeals) and reject the grounds of appeals." The facts of the present case are at par with the facts of the aforesaid case already decided by the Income Tax Appellate Tribunal.
This issue also came to be considered by the Income Tax Appellate Tribunal, Ahmedabad Bench in the case of Guiarat Petrosynthese Ltd. v.Dy. CIT (2001) 76 ITD 257 (Ahd-Trib), where by referring to the provisions of section 115J(2) and the various judgments on the issue, including the judgment of the Hon'ble Gauhati High Court in the case of Lallacherra Tea Co. (P) Ltd. (supra), the Tribunal held that in view of the clear and unambiguous provisions of section 115J(2), the assessee would not be entitled to the benefit of carry forward of loss after adjusting income computed under section 115J(1). Even though the judgment of Gauhati High Court in the aforesaid case was referred to, yet the view taken by the Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. (supra), was preferred in view of the reason that it contained detailed analysis of the statutory provisions and the various judgments relied upon in this order. The learned counsel further relied on the decision of the Income Tax Appellate Tribunal, Madras Bench in the case of Fab Export (P) Ltd. (supra). We have referred to this decision and we find that the same is dated 25-7-1995 when the Tribunal did not have the benefit of the subsequent judgment dated 20-2-1996 of the Andhra Pradesh High Court in the case of Suryalatha Spinning Mills Ltd. (supra) and the judgment dated 29-9-1999 of Karnataka High Court in the case of Widia (India) Ltd. (supra). In any case, the Division Bench of ITAT, Chandigarh has already decided this issue and judicial discipline and propriety demand that we must follow our own order. Therefore, in the light of these facts and circumstances of the case and the legal position discussed above, we find that the decision of the authorities below is in conformity with the provisions of the Act. Therefore, the same does not merit any interference. Accordingly, while we admit the additional ground, yet the same is rejected on merits.
The last additional ground raised by the assessee relates to deduction under section 32AB. The facts of the case are that the assessee is engaged in the business of execution of contracts procured from the government and other agencies. In the return of income, the assessee had claimed deduction for investment allowance under section 32A. The assessee being engaged in the business of civil construction, such deduction is not admissible to the assessee in view of the judgment of Hon'ble Supreme Court in the case of CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412 (SC). The assessee has now raised additional ground for both the assessment years claiming deduction under section 32AB being investment deposit account. This claim was neither made before the assessing officer nor before the Commissioner (Appeals). For admission of this ground of appeal, the learned counsel has relied on the same submissions as made for admission of first additional ground relating to carry forward of business loss, as discussed above. The learned counsel relied on the Special Bench decision of Income Tax Appellate Tribunal, Chandigarh in the case of Highway Cycle Industries Ltd. v.Asstt. CIT (2002) 255 ITR (AT) 105. He submitted that even if such ground was not taken before the authorities below, the same should be admitted and case remanded to the lower authorities for readjudication.
The learned Departmental Representative, on the other hand, strongly opposed the admission of additional ground and reiterated the submissions made before us while arguing the first additional ground.
She submitted that admittedly, the assessee had claimed deduction only for investment allowance before the authorities below. Therefore, the issue whether, the assessee was entitled to such deduction or not could not be examined with reference to various conditions laid down in section 32AB. She submitted that deduction under section 32AB is not automatic; it is subject to the conditions laid down therein. From the facts placed on record, it is not clear whether the assessee fulfilled the conditions under sub-sections (2) and (4) of section 32AB or not.
Therefore, the case requires further investigation into facts.
Accordingly, learned Departmental Representative contended that additional ground in this regard could not be admitted at this stage.
We have heard both the parties and given our utmost consideration to the rival submissions. Our findings recorded in regard to admission of first additional ground and the conditions necessary for admission of the additional ground of appeal would equally hold good to the present additional ground of appeal. There, the claim is found to be purely legal and based on facts and material already on record and, therefore, additional ground is admitted. However, we find that the claim for deduction under section 32AB is not based on facts already on record.
The case further requires investigation into the facts. The deduction under section 32AB is not automatic and is subject to the various conditions laid down therein. Now in this case, whether the assessee fulfils the conditions for claiming deduction under section 32AB or not requires examination into facts, which are not on record. Even before us, the assessee has not placed any material to show as to how the assessee is entitled to such deduction and all the relevant facts are already on record. As mentioned above, the additional ground could only be admitted if the facts relating to the same are already on record, which we find are missing in this case. We, therefore, hold that the additional ground raised by the assessee cannot be admitted. We rely on the judgment of Punjab & Haryana High Court in the case of Dehati Co-op. Marketing-cum-Processing Society (supra) and the judgment of Supreme Court in the case of National Thermal Power Co. Ltd. (supra).
Accordingly, we decline to admit this additional ground, common to both the assessment years under reference.
We now take up the revenue's appeals. The first common issue raised in both the appeals is that the Commissioner (Appeals) was not justified in deleting the disallowance of Rs. 44,80,490 (Rs. 58,68,700 for the assessment year 1990-91) on account of the retention money. The facts of the case are that the principals retained part of the amount out of running bills of the assessee by way of retention money. The amount is paid to the assessee after completion of the contract. The assessee has been consistently following the practice of offering retention money to tax in the year in which the same is received. It was claimed that prior to the receipt, the assessee did not have any right to receive the same. The assessing officer disallowed the claims of the assessee for both the assessment years on the ground that the assessee was following mercantile system of accounting and since the work had been completed, it could be said that amount covered by retention money actually accrued to the assessee.
Being aggrieved, the assessee filed appeals before the Commissioner (Appeals). The Commissioner (Appeals) deleted the addition by relying on the appellate order for the assessment years 1985-86 to 1988-89. The revenue is aggrieved by the orders of the Commissioner (Appeals) and hence these appeals before us.
The learned Departmental Representative was fair enough to concede that this issue stands decided in favour of the assessee and against the revenue by the Tribunal, Chandigarh Bench's order dated 19-10-1994 in assessee's own case in I.T.A. Nos. 313 and 453 of 1989 for the assessment year 1985-86, supra. The learned counsel also relied on the said order of the Tribunal.
We have heard both the parties and carefully considered the rival submissions. We have referred to the aforesaid order of the Tribunal for the assessment year 1985-86, where the issue was decided in favour of the assessee by observing in paragraphs 40 and 41 on pages 13 to 15 of the aforesaid order as under: "40. We have carefully considered the submissions made by the parties.
in the case of Chanchani Brothers (Contractors) (P) Ltd. (supra), the facts were that for assessment year 1970-71, the assessee did not include a sum of Rs. 1,64,428 in the bills shown as receivable. It was explained by the assessee that this amount had been withheld by the irrigation department pending verification of the satisfactory conclusion of the work for which the payment related. Ultimately, the High Court held that since the assessee had no right to claim the amount in question, the amount had not become a debt in the assessment year 1970-71 and hence could not be treated as the income of the assessee for that year. Similarly in the case of Simllex Contreste Piles (India) (P) Ltd. (supra), the assessee claimed deduction of retention money from its total income and the High Court held that having regard to the terms and conditions of the contract, it could not be said that retention money legally became due to the assessee on the completion of the work. It was further observed that only after the assessee fulfilled the obligations under the contract, the retention money would be released and the assessee will acquire the right to receive such retention money. It was held that on the date when the bills were submitted, it could not be said that the assessee had any right to receive the entire amount on the completion of the work or on the submission of the bills. We find that a similar question had arisen before the Chandigarh Bench of the Tribunal in the case of M/s. Brij Mohan Surinder Kumar for assessment year 1985-86 in I.T.A. No 255 and C.O. No. 35/Chd./1989 and the Tribunal vide order dated 9-5-1994 held that the retention money was not the income of the assessee unless the assessee actually received it. We also find that in the case of Associated Cables (P) Ltd. v. Dy. CIT (1994) 119 CTR (Trib)(Bom)(TM) 66, it was held that the retention money could not be considered as the income of the assessee and had to be excluded in computing the total income.
41. Since in the present case, the retention money of Rs. 1,80,000 had not actually been paid to the assessee and its refund depended upon the satisfactory performance of the assessee in its contract work, it could not be said that this amount had actually accrued to the assessee in the year under consideration. We, therefore, accept the conclusion of the learned Commissioner (Appeals) that this amount was not taxable in the year under consideration and would be taxable only when the whole or part of Rs. 1,80,000 actually became receivable by the assessee.
This ground is, therefore, rejected." The facts of the present cases are similar to the facts of the case for the earlier assessment year. Therefore, respectfully following the aforesaid order of the Tribunal, we confirm the orders of the Commissioner (Appeals) in deleting the impugned additions. Accordingly, the grounds of appeal are dismissed.
The next common ground of revenue's appeals for both the assessment years relate to the fact that the Commissioner (Appeals) was not justified in directing the assessing officer to allow deduction for investment allowance under section 32A. In addition to this common ground, the revenue has also disputed the directions of the Commissioner (Appeals) in allowing deductions under sections 80HH and 80-I for the assessment year 1990-91. The facts of the case are that the assessee is engaged in the business of civil construction. The assessing officer disallowed the claims of the assessee for investment allowance and deductions under sections 80HH and 80-I for the assessment year 1990-91 on the ground that the assessee was not an industrial undertaking engaged in the business of manufacture or production of goods or things. On appeals, the Commissioner (Appeals) allowed the claims of the assessee for investment allowance and deductions under sections 80HH and 80-I by relying on ITAT's order for the assessment years 1981-1982 and 1982-83. Revenue is aggrieved by the order of the Commissioner (Appeals).
The learned Departmental Representative submitted that this issue is squarely covered by the judgment of Supreme Court in the case N.C.Budharaja & Co. (supra), where the Hon'ble Supreme Court has held that contractors engaged in the business of civil construction are not engaged in the business of manufacture or production of goods or things, as construction of building does not amount to manufacture or production of articles.
The learned counsel for the assessee was fair enough to concede that this issue is fully covered by the aforesaid judgment of Hon'ble Supreme Court.
We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We find that this issue is squarely covered in favour of the revenue and against the assessee by the above-mentioned judgment of Hon'ble Supreme Court. Therefore, respectfully following the judgment of Hon'ble Supreme Court in the case of N.C. Budharaja & Co. (supra), we set aside the orders of Commissioner (Appeals) for both the assessment years under reference and restore those of the assessing officer in disallowing the claims of the assessee for investment allowance and deductions under sections 80HH and 80-I. Respective grounds of appeals are accordingly allowed.
The next ground of appeal for the assessment year 1990-91 relates to deletion of disallowance of Rs. 3 lakhs made by the assessing officer on account of fee paid to Shri H.P. Sharma, Advocate. The facts of the case are that in the profit & loss account, the assessee had claimed deduction in respect of payment of Rs. 3 lakhs to Shri H.P. Sharma, Advocate on account of professional charges. While examining the details, the assessing officer observed that the impugned payment was made on 16-2-1989 relating to assessment year 1989-90. The assessing officer disallowed the claim on the ground that the same did not relate to assessment year under reference.
Aggrieved, the assessee impugned the disallowance in appeal before the Commissioner (Appeals). It was submitted before the Commissioner (Appeals) that as per the terms of contract with Shri H.P. Sharma, advocate, he was paid an advance of Rs. 3 lakhs on 16-2-1989 with a stipulation that in case the award regarding the claim will be nil then Shri Sharma shall return the amount of advance. The arbitration award was given vide order 30-1-1990 dismissing the claim of the assessee.
The assessee asked the Advocate to refund the amount of advance of Rs. 3 lakhs paid on 16-2-1989. Shri H.P. Sharma declined to refund the amount for which a suit was also filed against him. Since an amount of Rs. 3 lakhs was paid for the professional services rendered by Shri Sharma, the amount was debited to the profit & loss account for the assessment year under reference. Therefore, it was contended that the liability of the amount of Rs. 3 lakhs related to assessment year under reference and the same was rightly claimed. Accepting the contentions of the assessee, the Commissioner (Appeals) allowed the deduction by observing in para 6.3 of his order as under : "6.3 I have considered the facts of the case as also the submissions made on behalf to the appellant. From the facts and documents produced regarding suit filed and payment to the advocate, it is seen that the amount of Rs. 3 lakhs was indeed an advance to the Advocate on the condition that if the award regarding claim will be nil then no charges would be payable to the advocate and the payment made to the advocate would be refunded with interest. The appellant had treated this amount as advance during the year ending 31-3-1989 to be adjusted after the award. The arbitration award was given on 30-1-1990 and claim of the appellant was refused. Therefore, the appellant claimed back the advance given to the advocate which the advocate refused and the appellant subsequently filed a suit in the High Court for refund of this advance. As the arbitration award was given in the year under consideration and the Advocate refused to make the payment thereafter, the liability in respect of this payment would certainly accrue in the year under consideration as in the earlier year the amount was treated as advance. In these circumstances, the appellant is entitled for deduction of Rs. 3 lakhs is refunded, it will be taxable in the year of refund. With these observations, the addition /disallowance of Rs. 3 lakhs is deleted and this ground of appeal is allowed. Thus the appellant gets relief of Rs. 3.00 lakhs." Revenue is aggrieved by the order of the Commissioner (Appeals) and hence the present appeal before us.
While the learned Departmental Representative simply relied on the order of the assessing officer, she submitted that the assessee did not file any evidence to show that Shri H.P. Sharma, Advocate had violated the terms of the agreement. Moreover, deduction could have been allowed in the year when the suit filed by the assessee against Shri Sharma had become final. She submitted that the matter may be remanded to the file of the assessing officer.
The learned counsel, on the other hand, heavily relied on the order of the Commissioner (Appeals) and reiterated the submissions, which were made before the Commissioner (Appeals).
We have heard both the parties and carefully considered the rival submissions. We have also examined the facts, evidence and material on record. We find that the assessing officer has made the addition in a summary manner without making any in-depth examination of the claim of the assessee. The assessee had clearly mentioned that amount of Rs. 3 lakhs paid to Shri H.P. Sharma, Advocate on 16-2-1989 was merely an advance with a stipulation in the agreement that if the award is not in favour of the assessee then Shri Sharma shall refund the amount of advance. Therefore, the mere fact that payment of Rs. 3 lakhs was made as an advance on 16-2-1989 does not mean that this was a liability of the assessment year 1989-90. The arbitration award was given on 30-1-1990, i.e., relevant to assessment year under reference whereby the claim of the assessee was dismissed. Shri Sharma declined to refund the amount of advance. Therefore, liability of Rs. 3 lakhs related to assessment year under reference, i.e., when the arbitrator decided the issue against the assessee. The mere fact that the assessee had filed a suit against Shri Sharma does not mean that the liability had not accrued to the assessee. Therefore, the Commissioner (Appeals) was justified in deciding the issue in favour of the assessee. If any amount is subsequently recovered, the same would be liable to tax under section 41(1) in the year of receipt. We, therefore, do not find any legal or factual infirmity in the order of the Commissioner (Appeals) and the same is confirmed. This ground of appeal is dismissed.
The last ground of appeal for the assessment year 1990-91 relates to the fact that the Commissioner (Appeals) was not justified in directing the assessing officer to calculate and disallow the interest on account of diversion of borrowed funds to the extent of Rs. 18 lakhs as against disallowance of interest of Rs. 5,66,729 made by the assessing officer on account of diversion of funds of Rs. 82 lakhs, to a subsidiary company. The facts of the case are that the assessee had borrowed huge amounts from bank on interest. The assessing officer observed that the assessee had advanced a sum of Rs. 82 lakhs to M/s. S.A.B. Credits Ltd., a company under the same management, by utilizing cash credit account. He also observed that there was a clear nexus between the amounts borrowed and advanced to above-mentioned sister concern. The assessing officer also noted the specific dates on which the amounts were advanced and the debit balance in the bank account. These details are as under : The assessing officer, therefore, observed that the assessee had diverted interest bearing loans to its sister concern from whom no interest was charged. Therefore, it could be said that the assessee had not utilized the borrowed funds for the purpose of its business. The assessing officer also relied on the following judgments : (i) Triveni Engg. Works Ltd. v. CIT ( 1987) 167 ITR 742 (All) - Where the High Court has observed that the assessee had not been able to prove that the disputed part of the amount taken as a loan from the bank was used for the purpose of its business or that the advance made to other concern had been made for the purpose of its business. The disallowance of part of the interest under section 36(1)(iii) of the Act was, therefore, held to be justified.
(ii) CIT v. H.R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All) - The facts of the case before the High Court were that the assessee had taken huge loans from banks for the business of sugar manufacture and substantial amounts were advanced to the directors on a very nominal rate of interest. The difference in interest recovered from the directors and paid to bank was held not allowable under section 36(1)(iii).
(iii) CIT v. Sujani Textiles (P) Ltd. (1985) 151 ITR 653 (Mad.) - In this case, borrowed amounts were advanced to directors. Interest paid on borrowed amounts was held to be not allowable under section 36(1)(iii).
(iv) Madhav Prasad Jatia v. CIT ( 1979) 118 ITR 200 (SC) - Wherein it was held that interest paid on borrowed amount from the overdraft account utilized for making donations could not be held to be for the purpose of assessee's business and, therefore, disallowance of interest under section 36(1)(iii) of the Income Tax Act was justified.
Accordingly, the assessing officer disallowed interest of Rs. 5,66,729 at the rate of 18% of the amounts advanced to its sister concern.
Being aggrieved, the assessee filed an appeal before the Commissioner (Appeals). It was contended before the Commissioner (Appeals) that the assessee had advanced an amount of Rs. 82 lakhs to M/s. S.A.B. Credits Ltd. out of the payments received from various clients and there being no direct nexus between the amounts borrowed and advanced to its sister concern, the disallowance of interest was not called for. The Commissioner (Appeals) examined these facts and found that out of the amounts of Rs. 82 lakhs, the assessee had advanced a sum of Rs. 64 lakhs on 16-9-1989, 27-12-1989 and 12-1-1990 out of the receipts of equal amount from its clients and only an amount of Rs. 18 lakhs was given to its sister concern by utilizing the overdraft account. Thus, the Commissioner (Appeals) held that while the disallowance of interest in respect of amount of Rs. 18 lakhs given to its sister concern was justified, there was no justification for disallowing interest on amount of Rs. 64 lakhs advanced out of the receipts from assessee's clients. Accordingly, the Commissioner (Appeals) directed the assessing officer to recompute the interest and restrict the disallowance to an amount of Rs. 18 lakhs. Revenue is aggrieved by the order of the Commissioner (Appeals) and hence the present appeal before us.
The learned Departmental Representative heavily relied on the order of the assessing officer. She submitted that from the facts discussed by the assessing officer in his order, it was obvious that the .4mounts were given to its sister concern by utilizing the overdraft from the bank. On page 4, para 15 of the order, the assessing officer has pointed out substantial amounts on debit balances on the dates when amounts were given to its sister concern. Thus, the Commissioner (Appeals) was not justified in deleting the disallowance of interest on amounts of Rs. 64 lakhs on the ground that these were given out of the receipts from its clients. Apart from the judgments relied upon by the assessing officer in making the impugned disallowance, the learned Departmental Representative further relied on the below mentioned judgments : (i) Indian Metals & Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344 (Ori) Wherein it was held that interest in respect of investment in an advanced to a subsidiary company was not deductible under section 36(1)(iii).
(ii) CIT v. United Breweries (1973) 89 ITR 17 (Mys) - In this case, amount was advanced to a subsidiary company and no interest was charged. It was held that there was no material for the Tribunal to come to the conclusion that the assessee-company carried its business through the agency of its subsidiary and that the business carried on by the subsidiary was not there own but that of the assessee-company.
It was thus held that part of capital borrowed by the assessee and advanced by it to its subsidiary free of interest was not borrowed for the purpose of its own business and the interest on such borrowing was not an admissible deduction under section 36(1)(iii).
(iii) Milapchand R. Shah v. CIT (I965) 58 ITR 525 (Mad.) - In this case, amounts borrowed on interest were advanced to the partners without charging any interest. It was held that the amounts advanced by the firm to its partners were not for the purpose of its business and, therefore, interest paid on the amounts borrowed could not be allowed as deduction.
She further submitted that the Commissioner (Appeals) deleted the disallowance of interest on amounts of Rs. 64 lakhs without allowing an opportunity to the assessing officer to verify whether the amounts received from clients were actually given to sister concern. She, therefore, pleaded that the order of the Commissioner (Appeals) be set aside and that of the assessing officer restored.
The learned Counsel for the assessee, on the other hand, strongly relied on the order of the Commissioner (Appeals). He further relied on the judgment of Delhi High Court in the case of CIT v. Orissa Cement Ltd. (2001) 119 Taxman 744 (Del) where amounts advanced to a subsidiary company out of the sale proceeds and disallowance of interest was held to be not justified. He further relied on the decision of the Income Tax Appellate Tribunal, Chandigarh Bench in the case of Addl CIT v.Steel Strips Ltd. (IT Appeal No. 1672 (Chd.) of 1992 dated 20-4-2000) for the assessment year 1989-90, where the disallowance of interest was held to be not justified in view of the fact that the assessee had sufficient surplus interest-free funds to cover advances given to its sister concern. A copy of the decision was placed at pages 17 to 21 of the paper book.
We have heard both the parties and given our utmost consideration to the rival submissions. We have also examined the facts, evidence and material on record. From the facts detailed above, it is clear that the assessee had borrowed huge amounts from the bank. The assessing officer has mentioned in the assessment order that amount of Rs. 3.53 crores was borrowed from the bank. Facts also show that amount of Rs. 82 lakhs was advanced by utilizing the overdraft account. In fact, the assessing officer has mentioned on page 4 of the assessment order that debit balance in the bank account on the dates when impugned amounts were advanced to its sister concern varied from Rs. 87 lakhs to Rs. 1.83 crore on the respective dates. He has thus pointed out that on the dates when the amounts were advanced to the sister concern, there was no credit balance in the bank account. Besides, the assessee has not been able to explain the purpose for which amount of Rs. 82 lakhs was given to its sister concern without charging any interest. There is no material on record to show that assessee derived any business advantage by advancing an interest-free amount of Rs. 82 lakhs to its sister concern. The assessee has also not established that the impugned amount was advanced during the course of its business. The Commissioner (Appeals) has deleted the interest in respect of amount of Rs. 64 lakhs on the ground that the assessee had utilized the receipts from the customers for advancing the amounts to its system concern. Considering the fact that the debit balance on the dates when amounts were advanced to its sister concern far exceeded the amounts received from the clients, it could not be said that the assessee had utilized the receipts from its clients for advancing the amounts to the sister concern because even if we take into account these amounts, there would still remain a debt balance in the overdraft account. This would be clear from the following facts: Thus it is clear that even after taking into account receipts from clients, there still remained huge debit balance in the bank account.
Therefore, it could not be said that amounts advanced to sister concern were out of the receipts from clients. Even otherwise, we find that as per page 6 of the assessment order, the assessee advanced an amount of Rs. 24 lakhs to its sister concern on 15-9-1989, whereas page 6 of the Commissioner (Appeals)'s order shows receipt from client on 16-9-1989, i.e., a day later than the date on which amount was advanced. This amount, in any case, cannot be considered out of receipt from clients.
Moreover, in the cash credit account, the assessee is allowed overdraft facility subject to limit fixed. In order to ensure that amount of overdraft does not exceed the limit, the assessee does deposit therein receipts. But that does not mean that amounts advanced could be considered from such receipts when there still remained huge debit balance even after taking into account the receipts.
In this case, huge amounts borrowed on interest have been utilized in the business. Therefore, receipts from the clients are also business funds. It is only a part of the income on such receipts, which could be considered interest free. Remaining amounts which represent the business funds could also be considered to relate to the borrowed funds, Therefore, interest on amount advanced out of interest bearing business funds cannot be allowed.
Their Lordships of Honble Supreme Court in the case of Madhav Prasad Jatia (supra) have held that interest paid on borrowed amounts from the overdraft account utilized for making donations could not be held to be utilized for the purpose of assessee's business and, therefore, disallowance of interest on such amounts is called for. The same view has been taken by Mysore High Court in the case of United Breweries (supra), and Madras High Court judgment in the case of Sujam Textiles (P) Ltd. (supra). The Allahabad High Court judgment in the case of H.R.Sugar Factory (P) Ltd. (supra) also supports the view that disallowance of interest on amounts advanced to directors of the company on nominal interest, whereas the assessee had borrowed huge amounts from bank on higher rate of interest would be justified because the assessee cannot be said to have utilized the amounts for the purpose of its business.
Looking to the facts of the case, the Honble High Court has held that even the direct nexus need not be established. The various other judgments cited by the revenue and discussed above also support the case of the revenue. The learned counsel has relied on the judgment of Delhi High Court in the case of Orissa Cement Ltd. (supra), where the Tribunal had deleted the disallowance of interest on the ground that the assessee had advanced the same out of the sale proceeds and on the basis of facts of the case Hon'ble Delhi High Court has held that no question of law was involved. This judgment was given in the light of its own facts. But in the present case, the fact that on the dates when amounts were advanced, there was a substantial debit balance in the overdraft account has not been controverted by the learned counsel.
Therefore, the judgment of Hon'ble Delhi High Court would not be applicable to the facts of the present case.
Besides, the learned counsel has also relied on the decision of Income Tax Appellate Tribunal Chandigarh Bench in the case of Steel Strips Ltd. (supra). We have referred to the aforesaid decision. We find that in that case, disallowance of interest was only of Rs. 98,064 and the amounts advanced to a subsidiary company was Rs. 60,54,928. The assessee had placed before us details to show that there were interest-free loans amounting to Rs. 2,89,95,071 from a sister concern to whom no interest had been paid. Thus, the interst-free funds available with the assessee far exceeded the amounts advanced to its sister concern. In the light of these facts, disallowance of interest was held to be not justified. No such facts have been placed before us to show that in this case the assessee had substantial amount of interest-free loans to cover the amount advanced to its sister concern.
Therefore, the decision of the Tribunal in the case of Steel Strips Ltd. (supra), would not be applicable to the facts of the present case.
We may further add that the facts of the present case are in pari materia with the decision of the Tribunal, Chandigarh Bench in the case of Addl. CIT v. V. K. Construction Ltd. (IT Appeal Nos. 737 and 916 of 1993) for the assessment years 1989-90 and 1990-91, where disallowance of interest was upheld. It would be appropriate to reproduce hereunder the findings recorded in paras 7 to 10 of the said order : "7. We have carefully considered the submissions of the learned Departmental Representative and the submissions of the assessee made before the authorities below. We have also examined the facts, evidence and material on record. Now the issue before us is, whether the assessing officer was justified in disallowing interest on the amounts borrowed from M/s. V. K. Credit & Investment (P) Ltd. on the ground that assessee had diverted interest bearing loan to its sister concern M/s. Munak Galvasheet Ltd. from whom no interest was charged. It is no doubt true that the assessee had taken a plea before the authorities below that amount of Rs. 1,03,50,000 was given to M/s. Munak Galvasheet Ltd. for allotment of shares but it is also a fact that amount was borrowed on 1-4-1988 and 14-4-1988 on interest. The assessee had advanced these amounts to M/s. Munak Galvasheet Ltd. during the period from 26-4-1988 to 18-8-1988 and the shares were allotted on 31-3-1990, i.e., after a period of 19 months. As per provisions of Companies Act, M/s. Munak Galvasheet Ltd. could have not kept the share application money for more than 120 days if the amount advanced by the assessee was really a share application money. Further, the assessee had itself shown the amount given to M/s. Munak Galvasheet Ltd. as loan to company under the same management. These facts clearly show that amount advanced to M/s. Munak Galvasheet Ltd. was not for the purpose of allotment of shares and, therefore, the same was in the nature of interest-free loan.
8. Now, the next issue that needs to be considered is, whether the assessee was justified in advancing an amount of Rs. 1,03,50,000 to its sister concern without charging any interest when, in fact, the assessee had borrowed a sum of Rs. 1,03,24,000 from its sister concern, namely, M/s. V.K. Credit & Investment (P) Ltd. on interest at the rate of 20%. It may be mentioned that nowhere the assessee has taken the plea before the authorities below that assessee had sufficient interest-free funds available with it, which could be considered to have been utilized for the purpose of giving interest-free loan to M/s.
Munak Galvasheet Ltd. 9. The facts detailed above clearly show that amounts advanced to M/s.
Munak Galvasheet Ltd. were partly by utilizing the overdraft account on which the assessee had directly paid the interest. Further, the amounts were advanced to M/s. Munak Galvasheet Ltd. from the cash credit account. The mere fact that on certain days the assessee had deposited receipts from its business would not, by itself, justify that amounts were advanced out of its own funds. It may be noted that in the cash credit accounts the assessee is allowed overdraft facility subject to the limit fixed by the bank. In order to ensure that assessee's overdraft does not exceed the prescribed limit, the assessee did deposit certain receipts in that account but that does not mean that the assessee had utilized its own funds for advancing the loans. From the facts detailed above, it is obvious that on several dates when the amounts were advanced, there was debit balance in the overdraft account and by advancing the amounts to M/s. Munak Galvasheet Ltd., such debit balance further increased. Besides, the entire loan of Rs. 1,03,24,000 was borrowed by the assessee before the amounts were advanced to the sister concern. The borrowed amounts were obviously utilized for the purpose of assessee's business and, therefore, even business funds utilized for giving loans to the sister concern could be said to be out of such business funds. Moreover, the nature of transactions of the amounts borrowed on interest and given to sister concern is such that it is not necessary to establish the direct link for the amounts borrowed and advanced to M/s. Munak Galvasheet Ltd. when a combined account is maintained. Reliance in this regard is place on the judgments of Allahabad High Court in the cases of M/s. Triveni Engineering Works Ltd. and M/s. H. R. Sugar Factory (P) Ltd., both cited supra, where the court has held that where the borrowed funds on interest have been diverted to directors at low rate of interest, the difference between the interest paid by the assessee and received from the directors would not be an allowable deduction under section 36(1)(iii) of the Act. The judgments of Mysore High Court in the case of CIT v. United Breweries and Madras High Court in CIT v. Sujani Textiles (P) Ltd., both cited supra, also support the case of the revenue. Even the Supreme Court in its judgment in the case of Madhav Prashad Jatia (supra) has held that interest paid on borrowed amount from the overdraft account utilized for making donations cannot be held to be for business purposes as it was not utilized for the purpose of assessee's business. As per provisions of section 36(1)(iii) of the Act, the assessee is entitled to deduction of interest only if the three conditions are satisfied, namely (i) assessee must have borrowed amount on interest, (it) borrowed amount must have been utilized for the purpose of assessee's business and (iii) interest must have been paid on the borrowed amount. Now in this case, the interest paid on amounts borrowed and diverted to a sister concern M/s. Munak Galvasheet cannot be considered having been utilized for the purpose of assessee's business. Therefore, one of the conditions mentioned in section 36(1)(iii) has not been fulfilled. Moreover, the assessee has not adduced any explanation before either of the authorities below justifying the advancing of amount to M/s. Munak Galvasheet Ltd. for the purpose of assessee's business or to some business advantage obtained by giving suchloan.
10. Having regard to the aforesaid facts and circumstances of the case, we are of the view that Commissioner (Appeals) was not justified in deleting the disallowance of proportionate interest of Rs. 15,97,753 and Rs. 15,25,562 for the assessment years 1989-90 and 1990-91 respectively. We set aside the order of the Commissioner (Appeals) and restore that of the assessing officer for both the assessment years.
Therefore, this ground of appeal of the revenue is allowed." In the light of the aforesaid facts and circumstances of the case and the detailed reasons and the legal position discussed above, we are of the considered view that the Commissioner (Appeals) was not justified in deleting the disallowance of interest. We, therefore, set aside the order of the Commissioner (Appeals) on this issue and restore that of the assessing officer. This ground of appeal is allowed.
In the result, appeals of both the assessee and the revenue are partly allowed.