Punjab-Haryana High Court
Commissioner Of Income Tax vs Industrial Cables (India) Ltd. on 21 December, 2006
Equivalent citations: (2007)212CTR(P&H)513
Bench: Adarsh Kumar Goel, Rajesh Bindal
ORDER
1. This appeal has been preferred by Revenue against the order dt. 23rd Sept., 2004 of Tribunal, Chandigarh Bench 'A', Chandigarh passed in ITA Nos. 1221/Chd/1998 and 1034/Chd/1999 in respect of the asst. yr. 1995-96, proposing the following substantial questions of law:
(i) Whether, on the facts and circumstances of the case, the Tribunal was right in law in deleting the addition made on account of interest on interest-free loans advanced by the assessee company to its subsidiary and associate companies in which the directors were interested ?
(ii) Whether, on the facts and circumstances of the case, the Tribunal was right in law in deleting the addition made on account of interest on investment in shares by the assessee company in its subsidiary and associate companies ?
(iii) Whether, on the facts and circumstances of the case, the Tribunal was right in law in allowing the fees paid by the assessee company to the Punjab Pollution Board, Patiala in the year of payment even though the payment resulted in enduring benefit to the assessee company for the period of 15 years ?
2. During the course of assessment for the asst. yr. 1995-96, the AO made following additions to the income declared by the assessee:
(i) Rs. 23,02,891 on account of interest on interest-free loans advanced by the assessee company to its subsidiary companies and associate companies in which the directors were interested.
(ii) Rs. 44,89,890 on account of interest on investments in the share capital of subsidiary companies.
(iii) Rs. 1,86,667 on account of disallowance of fee paid to the Punjab Pollution Board, Patiala holding that it was fee paid for subsequent years and was thus not allowable for the assessment year under reference.
3. The CIT(A) partly allowed the appeal and held that additions in respect of advances made by the assessee out of overdraft account only, are justified. Reliance was placed on judgment of the Hon'ble Supreme Court in CIT v. Rajendra Kumar Moody and also the decision of the Tribunal in the case of the assessee for the earlier assessment years. It was further held that there was no nexus between borrowed capital and the investment in subsidiaries and additions on that account was set aside. Disallowance of fee paid to the Pollution Board was, however, sustained. The Tribunal set aside the finding of CIT(A) on the issue of disallowance in respect of payments made to the Pollution Board and held that spreading over of the expenditure for 15 years, the period of validity of the certificate was not called. Reliance was placed on judgments of Madras High Court in CIT v. Hotel Savera and Madhya Pradesh High Court in D&H Secheron Electrodes (P) Ltd.
4. We have heard learned Counsel for the parties and perused the record.
5. The findings on the substantial question raised are as under:
Re. Question No. (i):
Learned Counsel for the assessee submits that the Tribunal has followed its own decision in the case of the assessee for the earlier assessment years, which view has also been upheld by this Court vide order dt. 28th March, 2006 in ITA No. 88 of 2004, CIT v. Industrial Cables (P) Ltd. on the ground that the Tribunal had only followed its view in the case of the assessee, which had become final.
Learned Counsel for the Revenue pointed out that subsequently, this Court had examined the matter in great detail in its judgment in CIT v. Abhishek Industries Ltd. and after noticing different view points on the issue, respectfully disagreed with the view taken by Delhi High Court in CIT v. Tin Box Co. and CIT v. Orissa Cement Ltd. , Allahabad High Court in CIT v. Radico Khaitan Ltd. and CIT v. Prem Heavy Engineering Works (P) Ltd. (2006) 150 Taxman 90 (All), Calcutta High Court in CIT v. Britannia Industries Ltd. High Court in R.D. Joshi & Co. v. CIT and inter alia concurred with the view taken by Madras High Court in K. Somasundaram & Brothers v. CIT v. M.S. Venkateswaran and CIT v. P. Ganu Rao & Sons , Kerala High Court in CIT v. V.I. Baby & Co. , Delhi High Court in CIT v. Motor General Finance Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del), Allahabad High Court in CIT v. H.R. Sugar Factory (P) Ltd. and CIT v. H.R. Sugar Factory (1991) 190 ITR 643 (All), Orissa High Court in Indian Metals & Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344 (Ori) and this High Court in S.A. Builders Ltd. v. CIT and Anr. . It was held:
As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concerns on interest-free basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister-concerns without interest is on the Revenue is not correct. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the AO that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister-concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the AO to the effect that inspite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister-concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister-concerns on interest-free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted.
Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister-concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister-concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister-concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister-concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister-concerns on interest free basis are to be disallowed.
If the plea of the assessee is accepted that the interest-free advances made to the sister-concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister-concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case.
Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries.
We may notice that although the principle of consistency is applicable and the decision on the issue having been taken in favour of the assessee for the previous year, the same has to be followed, but each assessment year being an independent one, in view of conscious judgment of this Court on the issue after referring to other judgments and in absence of any direct judgment of the Hon'ble Supreme Court, we are of the view that the earlier order of this Court dismissing appeal of the Revenue in limine cannot be taken to be conclusive. Reference may be made to the law laid down in New Jehangir Vakil Mills Co. Ltd. v. CIT , wherein, the Hon'ble Supreme Court referring to Privy Council judgment in Hoystead v. Commissioner of Taxation (1926) AC 155 and its earlier judgment in Instalment Supply (P) Ltd. v. Union of India , observed as under:
... As to the decision in Hoystead's case it was stated:
Their Lordships are of opinion that it is impossible for them to treat Hoystead's case as constituting a legal authority on the question of estoppels in respect of successive years of tax assessment. So to treat it would bring it into direct conflict with the contemporaneous decision in the Broken Hill case; and to follow it would involve preferring a decision in which the particular point was either assumed without argument or not noticed to a decision, in itself consistent with much other authority, in which the point was explicitly raised and explicitly determined.
In Instalment Supply (P) Ltd. v. Union of India, the Court referred to the decisions just mentioned and said that it was well settled that in matters of taxation there would be no question of res judicata.
In view of above, question No. (i) is decided in favour of the Revenue and against the assessee.
Re. Question No. (ii):
6. The Tribunal has followed its own decision in respect of asst. yrs. 1993-94 and 1994-95, which were not challenged by the Revenue in appeals filed against those orders. It has been noticed that no fresh investment had been made by the assessee and there was no change in the facts. Thus, following the principle of consistency, as reiterated by the Hon'ble Supreme Court in Radhasoami Satsang v. CIT , the question is answered against the Revenue and in favour of the assessee.
Re. Question No. (iii):
7. The Tribunal held in para 32 of its own decision that the assessee having incurred the liability in the year in question and mere fact that certificate was valid for 15 years, did not justify spreading over its expenditure.
Learned Counsel for the assessee defended the finding recorded by referring to judgment of the Hon'ble Supreme Court inter alia in CIT v. Associated Cement Companies Ltd. , wherein the assessee was given the benefit not to pay municipal tax for 15 years, on its providing water pipelines and electricity facilities to the municipality, following its earlier judgment in Empire Jute Co. Ltd. v. CIT , wherein, Hon'ble Supreme Court held as under:
... there may be cases where expenditure, even if incurred for obtaining an advantage of enduring benefit may, none the less, be on revenue account and the test of enduring benefit may break down. It is not every advantage of enduring nature acquired by an assessee that brings the case within the principles laid down in this test. What is material to consider is the nature of the advantage in a commercial sense and it is only where the advantage is in the capital field that the expenditure would be disallowable on an application of this test. If the advantage consists merely in facilitating the assessee's trading operations or enabling the management and conduct of the assessee's business to be carried on more effectively or more profitably while leaving the fixed capital untouched, the expenditure would be on revenue account, even though the advantage may endure for an indefinite future....
In view of above, the question referred is answered against the Revenue and in favour of the assessee.
8. For the above reasons, we partly allow this appeal in relation to question No. 1 and set aside the finding of the Tribunal and uphold the order of the AO. As far as other issues are concerned, the appeal is dismissed.