These two appeals by the assessee involving common issues were heard together and are being disposed of by this combined order, for the sake of convenience.
ITA No. 409-At the outset, learned authorised representative did not press ground No. 1 and ground No. 6 is general in nature, therefore, the same are rejected as not pressed.
Ground No. 2 relates to upholding the disallowance of Rs. 2,31,261 under section 36(1)(iii). Facts in this regard are that the assessing officer noted that the assessee has given an interest-free advance of Rs. 28.24 lakhs on three different dates to Oswal Palms Ltd., another concern of the same group. The said advance had been held to be for non-business purposes. It was claimed that the assessee had sufficient surplus funds from where advance had been given to the sister-concern.
Assessing Officer observed that no business purpose of the assessee is served and if such advance had not been given the same would have been available for its business purposes and to that extent the borrowings as well as interest payable to bank would have been less. Following the decision in the case of CIT v. H.R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All), assessing officer made a disallowance of Rs. 2,31,261 out of interest paid by working out the same on product method. Same submissions were reiterated before Commissioner (Appeals) and reliance was placed on the decisions in the cases of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) and D & H Secheron Electrodes (P) Ltd. v. CIT (1983) 142 ITR 528 (MP). Commissioner (Appeals) upheld the impugned disallowance observing thus : ".............. I have considered the above facts and it is noted that as ascertained at the time of hearing and noted above, it is clear that interest-free advances have been given by the assessee out of CC a/c with the bank which had debit balance on which the assessee is required to pay interest to the bank and after giving of advance, the said debit balance increased further on which the assessee was required to bear additional burden of interest. Therefore, there is clear nexus between interest-bearing funds borrowed and interest-free advances given by the assessee to its sister-concern. Therefore, the decisions relied on by the assessee instead of helping the assessee, only go in favour of the department because in the said decisions, the disallowance of interest has been held to be not valid only when there is no nexus between interest bearing loans and interest-free advances given by the assessee. Hence, as per the above decisions as also provisions of section 36(1)(iii) of Income Tax Act, the disallowance of interest is fully justified. The disallowance of interest is also justified in view of the decision of Honble Allahabad High Court (supra), as relied on by the assessing officer. Therefore, the disallowance so made by the assessing officer is fully justified and the same is hereby upheld." Before us, learned authorised representative submitted that the amount of Rs. 28.24 lakhs was advanced Rs. 25.50 lakhs on 26-10-1991, Rs. 2.50 lakhs on 14-11-1991 and Rs. 24,000 on 21-3-1992. Copy of summary of bank statement is filed. The assessee was maintaining CC a/c and all proceeds from sale were being deposited in the said account. As on 26-10-1991, there was debit balance in the bank account, while as on 14-11-1991 there was credit balance. Assessing Officer disallowed interest as, according to him, funds were diverted to the sister-concern for non-business purposes. Learned authorised representative submitted that no nexus was established. The assessee has generated a sum of Rs. 18.42 crores from business during the year and out of this, funds were given to the sister-concern. Merely because funds were advanced from CC a/c, no presumption can be made that the funds were advanced to sister-concern out of interest-bearing funds.
Reliance is placed on the following decisions : (a) Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal)In this case, the assessee was maintaining overdraft and the entire profit in the relevant year was deposited in the said overdraft account. Money was withdrawn from overdraft account both for business and for payment of advance tax. Profit was sufficient to meet advance-tax liability.
The High Court held that on the facts of the case, the profits were sufficient to meet the advance-tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business; and (b) British Paints (India) Ltd. v. CIT (1991) 190 ITR 196 (Cal)In this case also, all receipts were deposited in overdraft account and all payments including taxes were made from that account. The High Court held that the Tribunal was not right in presuming that payments of the assessee-companys income-tax liability were made during the previous year out of its overdraft from the bank when all the companys sale proceeds and receipts during the year covering its profits far in excess of such tax liability were being deposited in that overdraft account and as such in holding that a proportionate part of the interest on the said overdraft was referable to the tax payments.
Thus, it was submitted that the assessee was maintaining one CC a/c and all trading receipts were deposited in the said account. Funds, no doubt, were made to sister-concern also out of the said account but it did not mean that funds are advanced out of borrowed funds. Tax authorities have not appreciated the law properly. No disallowance is called for out of interest claimed under section 36(1)(iii).
learned Departmental Representative, on the other hand, submitted that the tax authorities are right in law in holding that advance to sister-concern are made free of interest out of borrowed funds, no business purpose is served by advancing money by the company; there was debit balance when a sum of Rs. 25.50 lakhs was advanced as on 26-10-1991. The assessee is not having any profit generated during the year for the purpose of advance made to the sister-concern because the entire generation of Rs. 18.42 crores was duly invested, to increase in current assets or work-in-progress or addition to fixed assets, as is clear from the funds flow statement filed. Commissioner (Appeals) has given a clear finding that there was nexus between interest-bearing funds and interest-free advance. Reliance is placed on the following decisions : (iii) Triputi Trading Co. v. CIT (2000) 242 ITR 13 (Cal), in which it was held that interest under section 36(1)(iii) is not deducted unless the assessee is able to establish that the amount has been utilised for the purpose of business; (iv) Malwa Chemtex Udyog Ltd. in ITA No. 734/Chandi/1994 for assessment year 1992-93, in which when the money was advanced by the assessee-company to the subsidy-company out of CC a/c, the Tribunal in the absence of commercial expediency being established by the assessee disallowed interest; andS.A. Builders Ltd. v. Asstt. CIT in ITA Nos. 1052-1053 etc. 193 for assessment years 1989-90 and 1990-91, in which also the Tribunal has disallowed interest claimed under section 36(1)(iii) in respect of funds advanced without interest, relying on the decision in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) and also in the case of Asstt. CIT v. V. K. Const. Ltd. in ITA Nos. 737 and 916/93.
It was submitted that the assessing officer has rightly made the disallowance which came to be confirmed by Commissioner (Appeals).
We have heard the rival submissions, perused the orders of tax authorities and gone through the material on record as well as the case laws cited above. The issue before us is whether assessing officer was justified in disallowing interest on the amount advanced by the assessee out of CC a/c to its sister-concern Oswal Palms Ltd. on different dates amounting to Rs. 28.24 lakhs. There is no dispute about the fact that the assessee was maintaining CC a/c with Indian Bank and a sum of Rs. 25.50 lakhs was advanced on 26-10-1991, when there was debit balance in CC a/c. A sum of Rs. 2,50 lakhs was advanced on 14-11-1991, when there was credit balance in CC a/c. The claim of the assessee is that it was maintaining one CC a/c and whole of the funds which consisted of even profits from business by way of sale proceeds were being deposited in the said CC a/c. The assessee has generated cash profit from operation to the extent of Rs. 18.42 crores during the year, therefore, profits must have been deposited in the said CC a/c.
Merely because there was debit/credit balance in CC a/c does not mean that funds to sister-concern were advanced out of interest-bearing funds. For examining this plea of the assessee, it is necessary to look into the facts to decide whether cash generated from operation amounting to Rs. 18.42 crores was really available. If cash so generated was available, then it can very well be held that interest bearing funds were not diverted to the sister-concern. To appreciate this plea, we have examined the cash flow statement filed, which shows source and utilisation of various funds during financial year ending 31-3-1992, as under : From the above, it is clear that the assessee has apart from cash generated during the year amounting to Rs. 18.42 crores, got funds by way of increase in secured loans to the extent of Rs. 20.21 crores and increase in unsecured loans to the extent of Rs. 0.18 crore and there is increase in current liability by Rs. 6.06 crores. These funds have been utilised by way of additions to fixed assets Rs. 10.49 crores, increase in capital work in process Rs. 3.48 crores, increase in current assets Rs. 21.65 crores, increase in other investments Rs. 8.97 crores and advance to sister-concern Rs. 0.28 crore. Cash flow statement represents source and application of funds as on 31-3-1992.
It does not represent the factual position as on 26-10-1991, when advance was made. Cash would have been generated from operations even if we presume it is generated evenly during the year which could not be more than Rs. 10.5 crores for seven months. Investment made by the assessee, as is apparent from cash flow statement shows that all cash generated would have been invested in increase of current assets and long-term assets. Thus, from cash flow statement, one cannot say that the assessee has advanced money to the sister-concern out of cash generated from operations. We have also gone through the decisions relied upon by learned authorised representative. We find that in the case of Woolcombers of India Ltd. (supra), no doubt, the assessee was having overdraft account and all profits being deposited in overdraft account, the assessee paid advance tax on 12-12-1969, i.e., just few days before the end of the accounting year ending on 31-12-1969. The assessee had earned a sum of Rs. 27 lakhs, therefore, on facts of the case, there was a finding that the assessees profits from business were sufficient to cover payments of advance tax made a few days before the year ended on 31-12-1969. This payment could not be regarded to be made out of overdraft account. The High Court rejected the contention of the revenue and held that interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should also have been allowed as an admissible deduction in the computation of the assessees business income, as the profits were sufficient to meet the advance tax liability. Before us, the year ending was 31-3-1992, while funds amounting to Rs. 25.5 lakhs were advanced to sister-concern on 26-10-1991, i.e., much before year ended when the profits accrued.
Secondly, the assessee has also applied funds in fixed assets, current assets and other investments which were much more than cash generated and increase in current liabilities, therefore, it is apparent that funds advanced to sister-concern are made out of secured/unsecured loans. No evidence has been filed before the tax authorities or even before us that the profits as on 26-10-1991 were sufficient to meet the money advanced to sister-concern. Thus, the ratio of this decision is not applicable to the facts of the present case. In the case of British Paints (India) Ltd. (supra), we find that similar facts were involved, money was paid by the assessee as advance tax out of overdraft account just a few days before the accounting year end and there was clear cut finding that the profits were sufficient to meet payment of advance-tax liability. High Court held that the entire interest paid by the assessee on the overdraft account was an allowable deduction. The ratio of this decision will also not assist the assessee, as the facts here are different. Distinguishing facts are, however, the same as we have laid down while discussing the facts of the case of Woolcombers of India Ltd. (supra). Thus, we are of the view from the facts of the case as well as perusal of funds flow statement that the amount advanced to Oswal Palms Ltd. was advanced by utilising secured and unsecured loans, on which the assessee paid interest. No evidence has been filed by the assessee to prove that these funds were advanced to Oswal Palms Ltd. for the purpose of business. Section 36(1)(iii) lays down three conditions. Only on complying with these conditions, the assessee is entitled to deduction of interest. These are that the assessee must have borrowed amount on interest, borrowed amount must have been utilised for the purpose of the assessees business and interest must have been paid on borrowed amount. The onus is on the assessee to prove that the borrowed funds were utilised for the purpose of business. The assessee, although borrowed funds and paid interest but could not adduce evidence that the funds were advanced to Oswal Palms Ltd. for the purpose of business. Therefore, one of the conditions mentioned in section 36(1)(iii) has not been fulfilled. In a recent judgment in the case of Triputi Trading Co. v. CIT (supra), Calcutta High Court has taken the view that the onus lies on the assessee to prove that the borrowed funds have been utilised for the purpose of business. Similar view has been taken by the Tribunal in the cases of Malwa Chemtex Udyog Ltd. and also S.A. Builders Ltd. (supra). Following decisions also support the plea taken by the revenue : (iii) Madhav Prasad Jatia v. CIT (supra), in which it was held that interest paid on borrowed amount from overdraft account utilised for making donations could not be held to be for the purpose of assessees business purpose as it was not utilised for the purpose of assessees business.
Thus, having regard to the aforesaid facts and discussion, we are of the view that the tax authorities were justified in law and facts in disallowing interest on borrowed funds to the extent the money was advanced by the assessee to its sister-concern. We uphold the disallowance of Rs. 2,31,261 made under section 36(1)(iii). Thus, ground No. 2 fails.
Ground No. 3 is against upholding the disallowance under section 43B.Assessing Officer observed that the assessee had made certain payments under ESI and PF to the Government account beyond the due dates specified in these Acts. Therefore, such payments amounting to Rs. 65,859 were disallowed. Details are given in the assessment order as under : Before Commissioner (Appeals), it was accepted that payments of Rs. 2,364 as also of Rs. 378 made on 15-7-1992 were beyond the time allowed and to this extent disallowance was upheld. With regard to balance amount of Rs. 63,117, it was claimed that the same was allowable as per decision in Hunsur Plywood Works Ltd. v. Dy. CIT (1995) 54 ITD 394 (Bang). After referring to the relevant provisions of the Income Tax Act and the circular relied upon by the assessee, Commissioner (Appeals) confirmed the impugned disallowance of Rs. 68,859 observing thus : "............. I have considered the above facts and it is noted that Tribunal has not properly appreciated the contents of clause (iii) as noted earlier of the circular as relied on by the assessee, it is observed that by said clause, due date of making the payment has not been extended but the said clause of the circular only lays down that no penalty would be levied, if the payment is made within 5 days of the due date. Thus, the said clause does not extend the due date of payment but is relevant only to the extent of assessees liability to pay damage beyond the due date. In the present case, it is not denied that the assessee has not made the payment within due date but within further grace period of 5 days and thus, even when the payment has not been made within due date, it is only for the purpose of penalty and damages that the assessee would not be penalised. It is further noted that the said circular also provide for levy of lesser penalty, if the payment is made within certain period and under these circumstances, it cannot be said that if an assessee makes the payment within that period and also pays the penalty for the same, the due date stands extended to the said date. Thus, it is observed that the said circular is of no help to the assessee at all as far as clause (b) of section 43B read with second proviso thereof is concerned. Hence, as the payment has not been made as per provisions of clause (b) of section 43B, even disallowance of Rs. 63,117 is hereby upheld. Thus, total disallowance of Rs. 68,859 stands confirmed." After hearing the rival submissions, we find that second proviso to section 43B lays down that no deduction in respect of PF, etc, shall be allowed, unless it has actually been paid before the due date as defined in the Explanation below clause (va) of sub-section 36(1). The said Explanation defines due date to mean the date by which the assessee is required as an employer to credit an employees contribution to the employees account in the relevant fund under any Act, order of notification issued thereunder or under any standing order, award, contract of service or otherwise. We find that under Circular E-II/128 dated 24-10-1973, the Central Board of Trustees of the Provident Fund has allowed grace period of five days for payment of P17 contribution, administrative charges, etc. and have laid down that no damages will be levied in this regard. Thus, in our view, due date will be taken 15 days + 5 days grace period = 20 days for payment of PR From the details, extracted above, we find that except two payments of Rs. 2,364 and Rs. 378, rest have been made within 20 days. Therefore, disallowance made under section 43B should be restricted only for two payments amounting to Rs. 2,742 and we delete balance amount of Rs. 63,117. Our aforesaid view is also supported by the decision in the case of Hitech (India) (P) Ltd. v. Union of India, etc. (1997) 227 ITR 446 (AP).
Ground No. 4 is against upholding Rs. 11,184 under rule 6DD. Assessing Officer noted that the assessee had made payment of Rs. 11,184 to Holiday Travel (P) Ltd. in contravention of provisions of section CA(3). The assessee was asked to show cause as to how the payment was covered under rule 6DD(j) but no reply was filed. Before Commissioner (Appeals), it was stated that one of the assessees employees Shri Beri had gone on official tour along with two more employees to Coimbatore and made payment of Rs. 11,184 for booking return tickets. Such payment could not be made by cheque and, therefore, the same was said to be covered by rule 6DD(j). However, relying on the provisions of rule 46A of Income Tax Rules, Commissioner (Appeals) upheld the impugned disallowance observing thus : "............ I have considered the facts of the case and it is observed that by not leading any evidence before assessing officer, the assessee has prevented investigation on this account at least to verify the claim that the travel undertaken by employees was for official purpose. No evidence has also been produced at the time of hearing before me that the assessee was prevented by sufficient cause in not producing the said evidence before assessing officer. Therefore, keeping in view the provisions of rule 46A of Income Tax Rules, any evidence not produced before the assessing officer cannot be entertained at appellate stage unless the assessee had a reasonable cause therefor. As no reasonable cause has been explained by the assessee nor the same was given before the assessing officer, therefore, written submissions made are not entertained and disallowance so made by the assessing officer is hereby upheld." We find that these expenses have been incurred for going on official tour to Coimbatore and payment of Rs. 11,184 was made to Holidays Travels (P) Ltd. vide receipt No. 116 dated 23-11-1991 in respect of air tickets of three employees, Rajesh Beri, A.P. Nijhawan and S. Gupta from Coimbatore to Delhi. Photocopy of the air tickets are duly filed at pp. 45-47 of the paper book. Identity of Indian Airlines cannot be doubted and genuineness of expenses also cannot be doubted. Therefore, we are of the opinion that the case is duly covered by the exception to rule 6DD(j), as payment has been made by the employees at the time of purchase of air tickets which they could not get if payment was not made in cash. Genuine transactions are outside the scope of section 4DA(3). Accordingly, on facts of the case, we delete the disallowance of Rs. 11,184.
"That learned Commissioner (Appeals) has erroneously upheld the view of the assessing officer that CST and ST collected on behalf of the State are a part of total turnover for the purpose of calculating relief under section 80HHC." In this connection, Commissioner (Appeals) order for assessment year 1991-92 which is followed for assessment year 1993-94 read as under : "Ground No. 8 : Deduction under section 80HHCAs per this ground of appeal, it is claimed that the assessing officer has erred in reducing the claim of the assessee under section 80HHC from Rs. 2,04,67,812 to Rs. 1,92,13,344.
2. As per written submissions filed, it is stated that the assessing officer has reduced the deduction for the following reasons : (ii) Misc. receipt amounting to Rs. 23,09,143 have been made a part of total turnover of the assessee,. and (iii) Insurance claims amounting to Rs. 17,09,176 have been reduced from profit of the business.
3. With regard to adjustment of total turnover on account of CST and ST, assessing officer has observed that the assessee has paid CST and ST amounting to Rs. 53,10,122 and Rs. 38,38,237 respectively. Following the decision of Supreme Court in Chowringhee Sales Bureau (P) Ltd. v.CIT (1973) 87 ITR 542 (SC) and also Sinclair Murray & Co. v. CIT (1974) 97 ITR 615 (SC), assessing officer has treated CST and ST collected by the assessee as per the sale bill, as part of total turnover.
4. As per written submissions filed, it is claimed that the CST and ST has been collected by the assessee on behalf of the State and that by no stretch of imagination it can be held to be part of business receipts of the assessee. Further, the assessee has acted only as an agent of Government to collect tax on its behalf and amount collected has been deposited to Government account. Hence, CST and ST collected do not form part of total turnover.
5. I have considered the above facts and it is observed that contention of the assessee in this respect are not correct because the assessee does not collect CST and ST on Governments behalf or as an agent of the Government but collects the same by passing on its own liability to the customer. Payment of CST and ST is liability of the assessee even if it does not collect the same from customers or collects less than amount so payable. If the amount so collected is less, it is liability of the assessee to pay additional amount and similarly if the amount collected is more, the additional amount collected forms part of assessees income. As per the decision relied on by assessing officer, the SC has held that the CST and ST collected are part of trading receipt and, therefore, by no stretch of imagination it can be said that the same do not form part of total turnover. Total turnover, as per section 80HHC, does not mean only sale or net sale but as per provisions of section 44AA, it includes even income or receipt which may or may not be in the form of sale. This view is also supported by the fact that the assessee does not have any objection as noted subsequently to inclusion of misc.
receipt in total turnover. Therefore, not accepting the assessees contention, action of assessing officer in this respect is hereby upheld.6. With regard to inclusion of misc. receipt in the total turnover, the assessee has not pressed the issue and, therefore, action of assessing officer in this respect is hereby upheld.7. With regard to treating of insurance claim of Rs. 17,09,176 as not part of profits of business, assessing officer has observed that the insurance claim receipts do not have an element of turnover and as a result the said receipts are not treated as part of turnover but it has been held that the same are required to be excluded from the business profit of the assessee to the extent of 90 per cent.
8. As per written submissions, it has been claimed that relevant provisions of section 80HHC, wherein it has been stated that 90 per cent of brokerage, commission, interest, rent, etc. have to be excluded from profits of business, since insurance claim do not come under this category, the exclusion of insurance claim receipt is outside the scope of section 80HHC.9. It appears that this issue has not been analysed by taking into account the nature of each insurance receipt and thereby, forming an opinion as to which insurance receipt would form part of total turnover and which would not. At the time of hearing, it has been ascertained that claims have been received by the assessee in respect of repairs, loss of goods, loss or profit on account of machinery break down, etc.
If any claim has been received in respect of an asset on which depreciation is allowable, such receipt would be liable to be considered while examining the claim of the assessee for depreciation allowable and as such receipt would not form part of trading and profit & loss account. But any insurance receipt on account of loss of goods or loss of profit on account of break down of machinery, would certainly form part of assessees business turnover as also its profit.
Similarly, any insurance claim receipt which is liable to be brought to tax under section 41(1) of the Income Tax Act, would form part of business receipt and the same would also constitute business profit, as per provisions of the said section. But as the issue has not been examined by assessing officer properly and after discussing the same with the assessee, it is observed that insurance receipt as noted above do not form part of profits from business as also at the same time a part of total turnover as well. Therefore, it is directed that the insurance receipt should be considered as part of business profit and at the same time a part of total turnover and accordingly, the deduction allowable to the assessee under section 80HHC should be worked out." We have considered the rival submissions and we find that this issue is duly covered in favour of the assessee by order dated 28-8-2002 in ITA Nos. 264 and 408/1996 for assessment year 1991-92, in which under paras 36 and 37 of its order, the Tribunal has observed as under : "36. We have heard both the parties on this ground. It was contended on behalf of the assessee that rebate under section 80HHC is allowed to encourage an assessee to export goods and earn foreign exchange for the country. This provision is, therefore, liable to be construed liberally. The profits of business are to be multiplied by fraction of export turnover/total turnover. When items like ST, etc. are not included in the export turnover, there is no question of including them in total turnover. Otherwise, the assessee would not get any benefit and whole purposes of section 80HHC would be defeated. It was contended that now Honble Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769 (Bom) has decided the issue in favour of the assessee. No contrary view of any other High Court was shown to us. Besides, the issue has been fully thrashed by the Tribunal in favour of the assessee as per the following decisions :Freeman Measures (P) Ltd. v. Asstt. CIT in ITA Nos. 237 etc./1992 for assessment year 1988-89, etc.Shri Dinesh Mills Ltd. v. Asstt. CIT (1999) 105 Taxman 238 (Ahd)(Mag); Learned Departmental Representative relied upon the order of Commissioner (Appeals).
37. On careful consideration of the rival submissions, we find that all the Benches of the Tribunal have decided the issue in favour of the assessee. Even the decision of Bombay High Court in the case of Sudarshan Chemical Industries Ltd. (supra) supports the claim of the assessee. Respectfully following the aforesaid decisions , we direct that ST and CST be not included in total turnover for purposes of calculating relief under section 80HHC of Income Tax Act. This ground of appeal is accepted." Respectfully following the aforesaid decision, we accept this ground and direct the assessing officer to allow CST and ST collected on behalf of the State from total turnover and to recompute relief available under section 80HHC, after excluding CST and ST from total turnover.
Ground No. 2 relates to disallowance of interest of Rs. 7,40,950 under section 36(1)(iii). Assessing Officer noted that the assessee had made advances to its sister-concerns, namely, Manipur Vanaspati and Allied Industries and Oswal Foods Ltd., but no interest on loan so given had been charged. There was outstanding balance from Oswal Palms Ltd. to whom money had been advanced in earlier assessment year. Assessing Officer disallowed interest in respect of money advanced to Oswal Palms Ltd. in earlier year. The assessee submitted that funds were advanced to Manipur Vanaspati and Allied Industries and Oswal Foods Ltd. as part of co-promoters contribution to project costs and no interest was charged because IM turned down the request of the assessee. Assessing Officer did not accept the contention and observed that meeting co-promoters contribution was personal obligation and not business obligation and, therefore, disallowed interest on these advances amounting to Rs. 7,40,950, not being borrowed for the purpose of business. Commissioner (Appeals), relying on his order dated 29-2-1996 for assessment year 1992-93 confirmed the impugned disallowance.
Before us, learned authorised representative filed copy of order dated 14-1-2003 in ITA No. 1058/1996 for assessment year 1993-94 in the case of Punjab Woolcombers and relying on the finding of the Tribunal given in respect of ground No. 1, submitted that no disallowance can be made in respect of interest, as these funds were not advanced during the year. It was also submitted that whatever view is taken in the earlier year, the same will apply to other loans. Learned Departmental Representative, on the other hand, submitted that the funds were advanced in earlier year to Oswal Palms Ltd. and disallowance made and if disallowance is confirmed for assessment year 1992-93, disallowance should be confirmed for assessment year 1993-94 also in respect of funds advanced to Manipur Vanaspati and Allied Industries and Oswal Foods Ltd. It was submitted that advances were made to these two concerns during the year and learned authorised representative did not dispute that funds were not advanced out of borrowed funds. Therefore, he relied on her arguments advanced for assessment year 1992-93 in respect of funds advanced to Oswal Palms Ltd. She submitted that the assessee has not discharged its onus that funds were advanced for business purposes. In respect of the order relied upon by learned authorised representative, she submitted that ratio in that case will apply only in case when no disallowance is made by assessing officer in earlier year and money has been advanced in earlier year.
We have considered the rival submissions and gone through the order dated 14-1-2003 (supra) and find that under para 2.1 of the order, the Tribunal has held that in earlier year when money was advanced and no disallowance was made by assessing officer in respect of interest on borrowed capital but in subsequent year assessing officer disallowed interest on borrowed capital, no disallowance can be made in subsequent year. The Tribunal ultimately held that when no finding has been recorded by the assessing officer that the money advanced was for non-business purposes in earlier year, he cannot made disallowance during the subsequent year. The facts before us are different because assessing officer has given a finding in earlier year 1992-93 in the case of Oswal Palms Ltd. that funds had not been utilised for the purpose of business and accordingly made the disallowance out of interest on borrowed capital so far it, related to funds advanced. This disallowance had been confirmed by Commissioner (Appeals) and now by us also for assessment year 1992-93. There is no dispute that advances have been made to the two parties Manipur Vanaspati and Allied Industries and Oswal Foods Ltd. during the year. Learned authorised representative did not put forth any argument on the aspect whether funds were advanced to these parties for the purpose of business or not, from which the only inference can be drawn that there is no grievance of the assessee to the finding of assessing officer that funds have not been advanced to these two concerns for the purpose of business. Thus, the finding given in the case of Punjab Woolcombers Ltd. (supra), as relied upon by learned authorised representative, will not help the assessee on facts of the case before us. We have already confirmed the disallowance in respect of funds advanced to sister-concern for non-business purposes out of borrowed funds in the case of the assessee in earlier part of this order for assessment year 1992-93. Therefore, respectfully following the same, we hold that assessing officer has rightly disallowed proportionate interest amounting to Rs. 7,40,950 out of interest claimed under section 36(1)(iii) as, in our opinion, the assessee has not complied with the condition that funds advanced have been utilised for the purpose of business nor any commercial expediency has been proved or contested before us. On facts of the case, we confirm the orders of tax authorities in this regard and reject ground No. 2.
The only other issue relates to the question whether CST and ST should form part of total turnover for the purpose of calculating relief under section 80HHC. This issue has already been dealt with by us for assessment year 1992-93. Respectfully following the same, we direct the assessing officer to recompute deduction available under section 80HHC excluding CST and ST from total turnover.
I have gone through the proposed order of my learned brother Honble AM.I agree with him except on ground No. 2 for assessment years 1992-93 and 1993-94 relating to disallowance of interest of Rs. 2,31,261 and Rs. 7,40,950, respectively under section 36(1)(iii) of the Income Tax Act. I write my separate order on these disallowances made out of interest claimed on the ground that borrowed funds were utilised for giving interest-free loans to sister concern/concerns.
I would like to take up the case for assessment year 1993-94 first. The learned Commissioner (Appeals) while upholding the disallowance has solely relied on his order for the assessment year 1992-93 dt.; 29-2-1996. The aforesaid order is also under review in these appeals.
Before the Bench, the learned representative of the assessee submitted that no fresh advances were made in the period relevant to assessment year 1993-94 and, therefore, no disallowance could be made in assessment year 1993-94. He placed reliance on decision of this Bench in the case of Punjab Woolcombers Ltd. in ITA No. 1058/Chandi/1996, dated 14-1-2003 for the assessment year 1993-94 wherein this very Bench had observed as under : "2. In respect of ground No. which relates to upholding the disallowance of interest paid during the year, the assessing officer noted that there is a debit balance of Rs. 5 lakhs each in the accounts of M/s. Manipur Vanaspati and Allied Industries and M/s. Oswal Wools Ltd., on which no interest has been charged while the assessee has paid interest of Rs. 296.25 lakhs on the loans raised by it. The assessee went in appeal before the Commissioner (Appeals) and submitted before the Commissioner (Appeals) that the assessee is a promoter of M/s.
Oswal Wools Ltd. and M/s. Manipur Vanaspati & Allied Industries. The funds to Oswal Wools were given. These loans were advanced not during the year but in the year ending 31-3-1990. The funds were advanced for the purpose of business. No nexus was established between the money borrowed and the money given by the assessee. Therefore, no disallowance should be made on the basis that the funds have been put to use for non-business purposes. The Commissioner (Appeals) confirmed the order of the assessing officer. Being aggrieved, the assessee has come in appeal before us.
2.1 We have heard the rival submissions and perused the material on record. We find force in the submissions of the assessee. The case of the assessee is duly covered by the decision of Karnataka High Court in the case of CIT v. Sridev Enterprises (1991) 59 Taxman 439 (Kar) in which the Honble High Court has held that no addition has been made in the earlier years, the opening balance could not be considered in the year in question for the purpose of computation of disallowance. The facts of the assessee are duly covered by the aforesaid decision because in the earlier years when the money was advanced by the assessee, the assessing officer did not make any disallowance and no finding has been recorded by the assessing officer that the money so advanced by the assessee to these parties was for non-business purposes. In the absence of findings by the assessing officer for the assessment year in which the money was advanced, we feel that no disallowance can be made during the year and accordingly, we allow this ground of appeal bf the assessee. Thus, first ground of appeal filed by the assessee is allowed." The aforesaid order has been held to be distinguishable in the proposed order by my learned Brother as disallowance has been upheld in assessment year 1992-93 in this case. The order for the assessment year 1992-93 has been followed to uphold proportionate disallowance of interest amounting to Rs. 7,40,950 for the assessment year 1993-94.
I have mad e reference to order of Commissioner (Appeals) as also to the proposed order of my learned Brother to emphasis that disallowance for the assessment year 1993-94 is wholly based on orders for assessment year 1992-93. I have, therefore, deemed it appropriate to take up assessment year 1992-93 in detail and apply above findings in assessment year 1993-94 without detailed discussion of the latter year.
The controversy in assessment year 1992-93 revolves round the finding of the revenue authorities that part of the borrowed interest bearing funds were diverted to give interest-free loan to sister-concern M/s.
Oswal Palms Ltd. and thus not utilised for purposes of business.
Accordingly, proportionate interest claimed was disallowed which has been worked out at Rs. 2,31,261. In this connection, reference has been made to the CC a/c maintained by the assessee with Indian Bank, Ludhiana, wherefrom the assessee withdrew and advanced Rs. 25.50 lakhs on 26-10-1991 and Rs. 2.50 lakhs on 14-11-1991 to its sister-concern M/s. Oswal Palms Ltd. The assessee while opposing the disallowance had pleaded that it had utilised its own and non-borrowed funds. Even before the learned Commissioner (Appeals), as per written submissions (copy available on record), the assessee contended that "our company have sufficient funds of its own to provide such an assistance to its sister-concern. This fact can be substantiated from the balance sheet of the company which shows that company had accumulated reserve and surplus to the tune of Rs. 39.5 crores as on 31-3-1992. Therefore, by any imagination, it cannot be said that funds advanced to M/s. Oswal Palms Ltd. were out of borrowed funds".
In support of above, the assessee has referred to cash flow statement of funds relating to utilisation of Rs. 44.87 crores in the year under reference ending 31-3-1992. The summary is as follows : In other words , it is the contention of the assessee that Rs. 0.28 crore (Rs. 28 lakhs) advanced to sister-concern were out of cash generated from assessees operations, i.e., out of business receipts (income Rs. 18.42 crores). The revenue, on the other hand, has contended that above Rs. 0.28 crore represented diverted borrowed funds, In other words, it has been held that advance to the sister-concern was given out of the borrowed funds.
As already stated, the amount was advanced to sister-concern by withdrawing it out of CC a/c of the assessee with Indian Bank. It is the contention of the assessee that profits (business receipts) were credited to above account and withdrawals were, debited to the same consolidated account and, therefore, withdrawal for making advance to the sister-concern should be presumed to be made out of profits of Rs. 18.42 crores. The assessee has filed photocopy of above account relating to all credits and debits made in the account in the relevant period. A summary of bank account from 1-10-1991 to 30-11-1991 when advance was made has also been filed. In support of above contention, that amount withdrawn for advancing to sister-concern was made out of assessees profit, the assessee has relied on the decision of the Honble Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal), which was subsequently applied by the same High Court in the case of British Paints (India) Ltd. v. CIT (1991) 190 ITR 196 (Cal).
On consideration of rival submissions and material available on record, I am of the view that diversion of borrowed funds for advancing loan to sister-concern has not been established in this case and, therefore, disallowance made is not justified. The assessee can rely upon and derive full support from the decision of the Honble Calcutta High Court in the case of Woolcombers (supra).
On perusal of statement of mixed account, it is evident that as on 14-11-1991, when advance of Rs. 2.5 lakhs was made, there was credit balance in CC a/c of the assessee, which stood at Rs. 8,88,118. This credit balance was maintained by the assessee in the above account from 7-11-1991 to 30-11-1991. Therefore, there can be no arguments that the same was made out of the assessees own funds and not out of borrowed funds. Therefore, there can be no question of disallowance of proportionate interest as for as above advance of Rs. 2.5 lakhs is concerned.
As regards other withdrawal, there is no dispute that assessee had a debit balance in the cash credit (CC) account when advance of Rs. 25.50 lakhs was made on 26-10-1991. Whether, it is possible to hold that above advance was also made out of assessees profit on business receipts and not out of borrowed funds, I proceed to examine the decision of Honble Calcutta High Court in the case of Woolcombers (supra). As per head notes, their Lordships observed as under : "The assessee had an overdraft account with the bank. On 12-12-1969, i.e., a few days before the end of the assessees accounting year on 31-12-1969, the account showed a debit balance of Rs. 1,39,412. The assessee paid advance tax of Rs. 18,05,000 on 15-12-1969 which increased the overdraft to Rs. 14,63,593 by 31-12-1969. The Income Tax Officer held that the payment of advance tax was not a business expenditure and disallowed the proportionate interest amounting to Rs. 6,769 payable by the assessee to the bank. On appeal, the Appellate Assistant Commissioner held that though the profits of the business were embedded in the combined financial transactions, yet at the time of payment of advance tax, the assessee had no adequate cash surplus and it had resorted to the overdraft facility specifically for the purpose of payment of advance-tax, and affirmed the order of the Income Tax Officer. On further appeal, the Tribunal affirmed the order of the Appellate Assistant Commissioner. On a reference, the assessee contended that where the profits of the assessees business was sufficient to cover the payment of advance tax during the relevant accounting year, if such amount was paid from an account which included the amount of profits as well as the overdraft taken for the purpose of the business, the presumption was that the tax was paid out of the profits and not out of the overdraft account and since the amount of the profits for the relevant year far exceeded the liability for advance tax and the entire amount of profits of Rs. 27 lakhs was deposited in the overdraft account out of which the bank remitted the advance tax, the tax was paid out of the earning of the profits and not out of the overdraft account taken for other business purposes.
(ii) That, on the facts of the case, the profits were sufficient to meet the advance tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business. Therefore, the interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should have been allowed as an admissible deduction in the computation of the assessees business income." The facts in the present case are parallel to the facts involved in the case of Woolcombers (supra). In fact, these are better. In the reported case, there was debit balance as on. 12-12-1969 of Rs. 1,39,412 in the overdraft account with the bank when the assessee further withdrew Rs. 18,05,000 for payment of tax and this increased the debit balance of overdraft to Rs. 14,63,593 by 31-12-1969. The profit of Rs. 27 lakhs of the relevant period was deposited in the said overdraft account. As overdraft account had a debit balance of Rs. 1,39,412 when amount was withdrawn for taxes, the debit balance had further increased. The profit of Rs. 27 lakhs stood physically withdrawn from the overdraft account. On apparent consideration of entries in account, the assessing officer as also the appellate authorities held that taxes were paid out of overdraft funds and disallowed proportionate interest payable to the bank. The assessee for the first time contended before the Honble High Court that all profits of the assessee from business were deposited in the same overdraft account wherefrom the amount for payment of taxes was withdrawn. The taxes should be taken to be paid out of assessees business profit and not out of borrowed funds. This contention of the assessee was accepted by the Honble High Court.
In order to emphasise that question in the reported case was decided on legal principles and not on the basis of physical entries, I deem it appropriate to quote the following observations from the decision : "It was urged that where the profits of the assessees business was sufficient to cover the payment of advance tax during the accounting year if such amount was paid from an account which included the amount of the profits as well as the overdraft taken for the purpose of the business, the presumption was that the tax was paid out of the profits and not out of the overdraft.
In the background of this submission, learned advocate for the assessee sought to urge that in this case the amount of profits far exceeded the liability for advance tax and the entirety of the profits of Rs. 27,00,000 having been deposited in that account which was maintained with the bank was the overdraft account out of which the bank remitted the advance as well as profits of the business were made to accrue (sic). Presumption was that the tax was paid out of the earning of the profits and not (out) of the overdraft taken for the other business purposes." After consideration of several decisions of different Courts, their Lordships held as under : "And having regard to the facts, in our opinion, it appears from the facts that the profits were sufficient to meet the advance tax liability. The profits were deposited with the overdraft account. It should be presumed that in its essence and true character, the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business." In the present case like the case of British Paints (India) (supra), the revenue authorities have merely looked at the entries of withdrawal of Rs. 25.50 lakhs made on 26-10-1991 from the CC a/c with the bank without taking into account the fact that profit to the extent of Rs. 18.42 crores was also deposited in mixed bank account and presumption was that Rs. 28 lakhs were paid out of profit and not out of overdraft.
"The profits were embedded in combined financial transactions" recorded in the mixed account. The above principle was required to be applied while considering combined effect of all the financial transactions routed through the CC a/c.
It is well settled that profit of a business does not accrue from day-to-day and till accounts are made up. But it does not follow that profits are not earned from day-to-day and these are earned only at the end of accounting year or when accounts are made up. Even in the case of British Paints (supra), the profits had not accrued nor accounts made up on 15-12-1969 when amount for payment of taxes was withdrawn.
What is required to be considered is the overall position of all the entries of the whole year and not on the particular date when withdrawal is made. The case of a mixed account where all receipts are credited or payments made are debited, a presumption is raised and benefit of withdrawals upto the extent of profits of business has to be given to the assessee. In the present case, all the incomings amounting to Rs. 44.87 crores were deposited in mixed CC a/c, wherefrom withdrawals were made and amounts utilised for different purposes. The profit of Rs. 18.42 crores was embedded in combined financial transactions. On application of principles of Woolcombers (supra) presumption was that Rs. 28 lakhs were paid out of profits. The revenue authorities on the other hand wrongly held that advances were made out of borrowed funds. The revenue authorities were not justified in disallowing part of interest paid to bank in the mixed account. The decision in the case of Woolcombers is squarely applicable to the facts of the case. I am not able to find any distinguishing features to hold that above decision is not applicable to the case in hand.
I may further add that position of profit on the date, the transaction in the mixed account is made is not relevant. The presumption referred to above was not raised in the case of Woolcombers (supra) because upto 15-12-1969, the whole of profit of Rs. 27 lakhs stood earned. This would be more than clear when cases relied upon by their Lordships (in Woolcombers) are considered. With reference to the decision in the case of Nadimuthu Pillai 8 ITR 249 where remittance from overdraft was made, it has been observed that in a case of mixed overdraft account "the account must be examined as a whole and if this was done, the remittance could not be treated merely as remittance ..................
but remittance of profit".
In the other English case of Felloves-Gordon v. IRC 19 Tax Cases 683 also where remittances were made out of account which had debit balance and "No particulars were furnished of income arising" yet on consideration of over all picture, the remittances were taken to be out of profit. Thus, it is immaterial what was the exact profit of the assessee on the date when withdrawal was made from a mixed account. The entire profits are required to be considered to decide the question.
Even if above proposition is not accepted, the summary of bank account with the Indian Bank reveals that from 1-10-1991 to 16-10-1991, the assessee had deposited more than Rs. 4 crores out of business receipts and thus, Rs. 25.50 lakhs advanced to sister-concern must be taken to be out of business receipts and not out of the borrowed funds.
Thus looked from any angle, I see no justification to uphold the disallowance of Rs. 2,31,261 out of interest claimed by the assessee.
The disallowance made be deleted in assessment year 1992-93.
I follow and apply above reasoning in assessment year 1993-94 to delete the disallowance of Rs. 7,40,950.
On a difference of opinion between the Members who heard these appeals, the following question is referred to the Honble President for nominating Third Member to obtain a majority view : "Whether, on the facts and in the circumstances of the case, disallowance of interest of Rs. 2,31,261 and Rs. 7,40,950, respectively in assessment years 1992-93 and 1993-94 is liable to be deleted in the light of decision of Honble Calcutta High Court in the case of Woolcombers India Ltd. v. CIT (1982) 134 ITR 219 (Cal), or sustained?" There was a difference of opinion between the learned Members of Chandigarh Bench A of Tribunal, who heard these appeals are referred the following point of difference to the Honble President under section 255(4) of the Income Tax Act, 1961 : "Whether, on the facts and in the circumstances of the case, disallowance of interest of Rs. 2,31,261 and Rs. 7,40,950, respectively in assessment years 1992-93 and 1993-94 is liable to be deleted in the light of decision of Honble Calcutta High Court in the case of Woolcombers India Ltd. v. CIT (1982) 134 ITR 219 (Cal), or sustained?" The Hon'ble President, Tribunal has nominated me as the Third Member in the aforesaid cases. The appeals were accordingly heard on 9-12-2003.
The assessing officer disallowed a sum of Rs, 2,31,261 out of interest expenditure claimed by the assessee under section 36(1)(iii) of the Act on the ground that the assessee had given interest-free advances aggregating to Rs. 28.24 lakhs on three different dates to M/s. Oswal Oil Palms Ltd. another concern of the same group. The assessing officer has given elaborate reasons in the assessment order for the assessment year 1992-93 in support of the aforesaid disallowance of Rs. 2,31,261.
In assessment year 1993-94, the assessing officer disallowed a sum of Rs. 7,40,950 out of interest expenditure claimed as deduction under section 36(1)(iii) in respect of advances given to (i) M/s. Manipur Vanaspati & Allied Industries, (ii) M/s. Oswal Foods Ltd. and (iii) M/s. Oswal Oil Palms Ltd. It has been observed at p. 4 of the assessment order for the assessment year 1993-94 that old balances of Rs. 9,50,000 and Rs. 10 lakhs in the accounts of M/s. Manipur Vanaspati and Allied Industries and M/s. Oswal Foods Ltd., respectively were outstanding on which no interest was charged alongwith debit balances in the account of M/s. Oswal Palms Ltd. The assessing officer made disallowance of proportionate interest of Rs. 7,40,950 on the interest-free advances outstanding against these three concerns.
The learned Commissioner (Appeals) vide his separate orders passed for these two years confirmed the aforesaid disallowances made out of interest expenditure for both the years under consideration.
The assessee filed appeals against both the orders passed by the Commissioner (Appeals) challenging the confirmation of the aforesaid disallowances made out of interest expenditure alongwith other grounds.
Shri P.K. Bansal, Hon'ble AM in the proposed order has confirmed the said disallowances of Rs. 2,31,261 in assessment year 1992-93 and Rs. 7,40,950 in the assessment year 1993-94. Shri Vimal Gandhi, the then Hon'ble Vice President (now Hon'ble President) has passed a separate dissenting order directing the assessing officer to delete the disallowances made out of interest expenditure in both the years under consideration.
The learned counsel for the assessee, reiterated the arguments as were earlier made before the Tribunal and placed reliance on judgments of Honble Calcutta High Court reported in Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal), Reckitt & Colman of India Ltd. v. CIT (1982) 135 ITR 698 (Cal), Indian Explosives Ltd. v. CIT (1983) 147 ITR 392 (Cal), British Paints (India) Ltd. v. CIT (1990) 190 ITR 196 (Cal). He also placed reliance on the judgment of the Hon'ble Supreme Court reported in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC) and submitted that the view taken by the Hon'ble Calcutta High Court has been impliedly approved by the Hon'ble Apex Court in the aforesaid judgment.
The learned senior Departmental Representative relied on the elaborate reasons given in the assessment orders and the orders of the Commissioner (Appeals) for both the years under consideration. He relied on the judgment reported in Indian Metals & Ferro Alloys Ltd. v.CIT (1992) 193 ITR 344 (Orissa) and K. Somasundaram Brothers v. CIT (1999) 238 ITR 939 (Mad) to support the view proposed by the learned AM. He also placed strong reliance on the elaborate reasons given in the order proposed by the learned AM.The learned Departmental Representative was requested to verify from his record the fact as to whether the amount advanced to M/s. Manipur Vanaspati & Allied Industries and to M/s. Oswal Foods Ltd. represented old loans, given in earlier years as contended by the assessee and as recorded in the assessment order or fresh advances were also given to these two parties as observed in para 8.1 of the order proposed by the learned AM. The learned Departmental Representative submitted a letter alongwith copy of letter dated 14-2-1996 submitted by the assessee before the assessing officer during the assessment proceedings for assessment year 1993-94. This letter showed that the assessee-company had given loans to M/s. Oswal Foods Ltd. and M/s. Manipur Vanaspati and Allied Industries Ltd. as reflected in note No. 4(a) at p. 15 of the printed balance sheet. The relevant extract from the notes on accounts given in the printed balance sheet is reproduced below : (a) Unsecured loans of Rs. 9,50 lakhs given to Manipur Vanaspati & Allied Industries Ltd. (MVAL) and Rs. 10.00 lakhs to Oswal Foods Ltd. (OFL) in terms of the conditions stipulated by Industrial Finance Corporation of India (IFCI), etc. These are subordinated loans and shall be repaid with the approval of IFCL Terms of these loans have not been approved by IFCI as such no provision for interest on these loans has been made." The learned counsel appearing for the assessee invited my attention to note 4 given in the notes on accounts of the printed balance sheet relating to financial year 1990-91 relevant to assessment year 1991-92 which is also reproduced below : (a) Loans to other bodies corporate Shown in Sch. 12 consists of unsecured loans of Rs. 9.00 lakhs given to Manipur Vanaspati & Allied Industries Ltd. (MVAL) and Rs. 15.00 lakhs to Oswal Foods Ltd. (OFL) in terms, of the conditions stipulated by Industrial Finance Corporation of India (IFCI), etc. These are subordinated loans and shall be repaid with the approval of IFCI. Terms of these loans have not been approved by IFCI, as such no provision for interest on these loans has been made." The learned counsel for the assessee contended that the assessing officer has himself specifically mentioned at p. 4 of the assessment order that there were old balances of Rs. 9.50 lakhs and Rs. 10 lakhs in the accounts of these two concerns, respectively. He once again confirmed that no fresh loans were advanced to these two parties in the year under consideration. It was also pointed out that the loan of Rs. 28.24 lakhs given to M/s. Oswal Palms Ltd. in assessment year 1992-93 was received back by DD dated 30-6-1992 and the balance was squared to nil amount.
The learned representatives of both the sides reiterated their respective arguments as were earlier made before the Tribunal during the course of hearing of these appeals.
The assessee in assessment year 1992-93 submitted a cash flow statement which has been reproduced by the learned AM in para 3.3 at p. 5 of his proposed order. On the strength of the aforesaid cash flow statement, it was contended that the cash profit generated during the year amounting to Rs. A.42 lakhs were also deposited in the CC a/c with the same bank out of which advances aggregating to Rs. 28.24 lakhs were given to M/s. Oswal Palms Ltd. Since the cash profit generated during the year was substantially more than the amount of interest-free advances given to the sister concern. It was contended that disallowance made out of interest should be deleted in view of the judgment of the Honble Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (supra). The learned AM has observed that even if it is presumed that cash profit was generated evenly during the year, it would not be more than Rs. 10.5 crores for 7 months when the first advance of Rs. 25.50 lakhs was given to the said sister-concern on 26-10-1991. The amount of Rs. 10.5 crores, according to the learned AM, would be exhausted by the corresponding investment reflected by way of increase of current assets and long-term assets. While making such observations, the learned AM has not required the parties to give the figures of increase in current assets, additions to fixed assets upto 26-10-1991. If the sources available with the assessee are proportionally reduced for a period of 7 months, the increase in investment during the year will also have to be apportioned for a period of 7 months. It would be worthwhile to reproduce the said cash flow statement pertaining to assessment year 1992-93 : The interest bearing loans are only of Rs. 20.21 crores plus 0. 18 crores, i.e., Rs. 20.39 crores. As against this, the investment made for business purposes is Rs. 44.87 crores minus Rs. 0.28 crores being advance to sister-concern, i.e., Rs. 44.59 crores. Thus, the assessee has made investment for business purposes to the tune of Rs. 44.59 crores during the year as against fresh borrowing aggregating to Rs. 20.39 crores made in the year under consideration. The cash profit of Rs. 10.5 crores for the first 7 months, as observed by the learned AM, was substantially more than the amount of Rs. 28.24 lakhs advanced by the assessee to M/s. Oswal Palms Ltd. on different dates during the year under consideration.
It may also be pertinent to observe that assessees own share capital and reserves and surplus as on 31-3-1992 were Rs. 4,445.62 lakhs as against Rs. 3,691.63 lakhs as at the end of the preceding year. Thus, there was an increase in the share-holders funds represented by reserves and surplus of Rs. 753.99 lakhs. This amount is also substantially more than the interest-free advances of Rs. 28.24 lakhs given to the sister-concern during the year under consideration.
I may now refer to various judgments cited by the learned representatives of both the sides keeping in view the aforementioned facts, The facts in the case of Woolcombers of India Ltd. v. CIT (supra) were that the assessee paid advance tax of Rs. 18,05,000 on 15-12-1969, which increased the overdraft to Rs. 14,63,593 by 31-12-1969. The Income Tax Officer held that the payment of advance tax was not a business expenditure and disallowed proportionate interest amounting to Rs. 6,769 payable by the assessee to the bank. It was held by the Honble Calcutta High Court that the profits of the assessee were sufficient to meet the advance-tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character, the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business. The Honble High Court directed the assessing officer to delete the disallowance of Rs. 6,769 made out of interest paid on bank overdraft account. In the present case, it is true that the assessee gave interest-free advances to the sister-concerns out of CC a/c with the bank. But it is also an uncontroverted fact that the entire profits of the current year were also deposited by the assessee in the same CC a/c with the same bank as the appellant had only one bank account. This shows that the entire cash profits earned during the year under consideration were also deposited in the same bank account which adequately cover the amount of interest-free loans given to the sister-concerns.
The Honble Calcutta High Court in the subsequent judgments in the cases of Reckitt & Colman of India Ltd. v. CIT (supra), Indian Explosives Ltd. v. CIT (supra) and British Paints (India) Ltd. v. CIT (supra) has followed its earlier judgment in the case of Woolcombers of India Ltd. (supra).
The Honble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT (supra), also considered the question relating to interest on overdraft for payment of income-tax. It has been observed by the Honble Supreme Court at p. 632 that Calcutta High Court in the case of Woolcombers of India (supra) came to the conclusion that where profits were sufficient to meet the advance tax liability and profits were deposited into the overdraft account of the assessee, then it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for running the business. The Honble Supreme Court, however, further observed that to raise the presumption in that particular case, there were sufficient materials and the assessee had urged the contention before the High Court. The Honble Supreme Court in the aforesaid case confirmed the disallowance of interest of Rs. 28,488 on money borrowed for payment of income-tax and held that it was not an expenditure laid out wholly and exclusively for purposes of business as contemplated under section 37(1) of the Act.
However, the Honble Supreme Court further observed that there was considerable force in the appellants contention, the question whether a presumption could be drawn that the taxes were paid out of the profits of the relevant year and not out of the overdraft account for running of the business, would essentially depend upon the fact whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for the relevant year and other germane factors. Since in that case, the appellant had not advanced the contention either before the Tribunal or the High Court and the amplitude of the question posed before the High Court did not bring within its sweep the contention advanced by the appellant, the Honble Apex Court observed that it would not be appropriate for the court to look into the additional papers produced by the appellant for answering the question. However, in the present case, the assessee has consistently stated before the assessing officer as well as before the Commissioner (Appeals) that the entire profits of the current years have also been deposited in the same CC a/c with the bank, out of which interest-free loan was advanced to the sister-concern. Therefore, the fact that the entire cash profits have been pumped into the same CC a/c (overdraft account with the bank) is a well established fact in the present case. It is also apparent from copies of audited statements submitted before the departmental authorities as well as from the cash flow statement submitted that cash profits to the tune of Rs. 18.42 crores had been generated during the year under consideration. Even if the proportionate amount of cash profit estimated upto the date of first loan of Rs. 25.50 lakhs given on 26-10-1991, is taken into consideration, the said amount has been worked out by, the learned AM at Rs. 10. 5 crores which adequately covers the loan of Rs. 28.24 lakhs given to sister-concern. It is, therefore, clear beyond doubt that interest-free advance aggregating to Rs. 28.24 lakhs was not given out of funds borrowed on interest but the amount should be treated to have been given out of cash profits generated during the year under consideration.
The learned Departmental Representative placed reliance on the judgment of the Honble Orissa High Court in the case of Indian Metals & Ferro Alloys Ltd. v. CIT (supra). In this case, the assessing officer disallowed interest amounting to Rs. 1,97,616 in view of loan advanced by the assessee to the subsidiary company. The Honble High Court held that the assessee was required to show that the amounts advanced to the subsidiary company came out of the assessees own funds. The Tribunal with reference to the factual aspects came to hold that the money utilised was from the borrowed funds. Strong reliance had been placed on the accepted position that the assessee earned profit of more than Rs. 70 lakhs during the year, which was much more than the investment in advances. It was observed by the Honble High Court that the substance of this argument could have been countenanced had the assessee placed material to show that it had generated surplus, in excess of investment in advances, prior to such investment and advance.
No material was placed in this regard by the assessee. It was, therefore, held that the Tribunal was justified in holding that the assessee was not entitled to deduction of interest in respect of advances made to the subsidiary company. However, in the present case, it is an undisputed fact that the assessee had only one bank account which was the CC a/c with the same bank. The entire cash profits earned during the year were also deposited in the same bank account. The total cash profit during the year was Rs. 18.42 crores. The proportionate amount for 7 months computed by the learned AM upto the date of first advance has been estimated at Rs. 10.5 crores. It has not been disputed by the departmental authorities nor by the learned Departmental Representative that the entire cash profits were pumped into the same bank account. The facts of the present case are, therefore, clearly distinguishable with the facts of the aforesaid judgment of the Honble Orissa High Court. The learned Departmental Representative had also placed reliance on the judgment of the Honble Madras High Court in the case of K. Somasundaram & Bros. v. CIT (supra). In this case, the assessee claimed deduction in respect of interest of Rs. 1,58,354 in assessment year 1978-79 and of Rs. 2,26,180 in assessment year 1979-80.
The assessing officer observed that the assessee had been advancing money to close relatives of the partners without charging any interest.
The advances made during the previous year relevant to assessment year 1978-79 were to the tune of Rs. 6,08,408. The assessee claimed that the amount so lent had not been lent out of the borrowed funds, but only at a time when the firm had sufficient funds at its disposal. According to the assessee, the advance was made when it received substantial contract receipts. The assessing officer on these facts held that there was diversion of borrowed funds and, therefore, the interest claimed to the extent relatable to the amount diverted was to be disallowed. The Commissioner held that the assessee was entitled to adjust the credit balances of the partners in the capital accounts to the tune of Rs. 2,46,252. He also determined the average rate of interest at 12.3 per cent and held that amount diverted was only Rs. 3.02 lakhs. The disallowance was reduced accordingly. The Tribunal confirmed the orders of the Commissioner. The assessee preferred further appeals against the order of the Tribunal. On these facts, the Honble High Court held that the assessee had clearly diverted the borrowed funds. The disallowance sustained by the Tribunal after adjusting the partners capital out of the funds advanced to close relatives of the partners without interest was thus confirmed. It is noteworthy to mention that the Commissioner and the Tribunal in the aforesaid case had granted the benefit to the extent of credit balances of the partners in their capital accounts while working out the amount diverted out of borrowed funds for advancing interest-free loans to the relatives. In the present case, the assessees own capital and reserves and surplus was of the order of Rs. 4,445 crores as on 31-3-1992. The assessee had generated cash profits to the tune of Rs. 18.42 crores during the current year. The apportioned amount upto the date of advancing the loan has been worked out at Rs. 10.5 crores. Any of these figures is substantially more than the amount of interest-free advance of Rs. 28.24 lakhs given by the assessee to its sister-concern. This judgment also, therefore, does not in any manner support the departments contention.
I have given very thoughtful consideration to the entire relevant material and the orders proposed by the learned AM and the learned Vice President. In my view, the learned Vice President has given convincing reasons to hold that there was no justification to uphold the disallowance of Rs. 2,31,261 out of interest claimed by the assessee for the assessment year 1992-93. I concur with his view.
In assessment year 1993-94, the learned counsel appearing for the assessee placed reliance on the decision of the same Bench of the Tribunal in the case of Punjab Woolcombers Ltd. v. Asstt. CIT in ITA No. 1058/Chandi/1996, dated 14-1-2003 for assessment year 1993-94. The learned Vice President has reproduced I the extract from the said decision in para 2 of his proposed order. It has been held in the aforesaid case that where no disallowance out of interest expenditure had been made in earlier years, no disallowance out of interest expenditure can be made on those old loans outstanding in subsequent years. The learned counsel for the assessee on the strength of the said decision contended that loans to all the three sister-concerns in the assessment year 1993-94 were loans advanced in earlier years. No disallowance out of interest expenditure was made in the assessment years 1991-92 and 1992-93 in relation of advances given to M/s. Manipur Vanaspati & Allied Industries Ltd, and M/s. Oswal Foods Ltd. The disallowance out of interest expenditure for assessment year 1992-93 has been made by the assessing officer only in respect of advance given to M/s. Oswal Palms Ltd. The decision of the Tribunal in relation to the said disallowance in assessment year 1992-93 may be followed in assessment year 1993-94. He, however, pointed out that loan of Rs. 28.24 lakhs advanced to the aforesaid party was received back in the next year on 30-6-1992.
The learned Departmental Representative relied on the reasons given in the assessment order. Order of the Commissioner (Appeals) and the proposed order of the learned AM.I have carefully considered the submissions made by the learned representatives of the parties and have gone through all the other relevant documents, to which my attention was drawn during the course of hearing. I have also gone through all the judgments cited by the learned representatives and the cases referred to in the proposed orders of the learned AM and the learned Vice President.
It is an undisputed fact that loan given to M/s. Manipur Vanaspati & Allied Industries Ltd. and to M/s. Oswal Foods Ltd. are old loans which are outstanding since the financial year 1990-91. The learned Departmental Representative has brought no material or evidence to my notice to show that any fresh advances were given to these two parties.
It is also an undisputed fact that no disallowance out of interest expenditure was made in assessment years 1991-92 and 1992-93. A perusal of the audited profit & loss account for the year ended on 31-3-1991 shows that profit after taxes as per final account was Rs-. 1,003.20 lakhs. If depreciation of Rs. 357.37 lakhs is added back, the cash profit. derived during the year ending 31-3-1991 will be Rs. 1,360.57 lakhs which adequately covers the advances given to these two parties in financial year 1990-91 (assessment year 1991-92).
The advance to the third party, namely, M/s. Oswal Palms was given in assessment year 1992-93. I have already held that disallowance made out of interest expenditure in assessment year 1992-93 in relation to advance given to the aforesaid sister-concern has rightly been deleted by the learned Vice President.
The aforesaid facts clearly establish the fact that the assessees own capital, current years profits were substantially more than the advances given to these three sister-concerns which proves the absence of any nexus between the funds borrowed on interest and interest-free advances given to these three parties. The same Bench of the Tribunal in the case of Punjab Woolcombers, vide its order dated 14-1-2003 (supra) have held that disallowance out of interest expenditure cannot be sustained in relation of interest-free advances given in earlier years in cases where no such disallowance out of interest expenditure was made in those earlier years.
On careful consideration of the entire relevant facts, I am of the considered opinion that the learned Vice President has rightly directed the assessing officer to delete the disallowance of Rs. 7,40,950 in the assessment year 1993-94 also.
In view of the facts and discussions, I agree with the view taken by the learned Vice President for both the years under consideration.
The matter will now go to the Regular. Bench for passing an order according to the majority opinion.