Calcutta High Court
Commissioner Of Income Tax vs Britannia Industries Ltd. on 30 June, 2005
Equivalent citations: (2005)198CTR(CAL)426, [2006]280ITR525(CAL)
Author: D.K. Seth
Bench: D.K. Seth, Maharaj Sinha
ORDER D.K. Seth, J.
1. In this case, the question that is to be answered is :
"Whether, on the facts and circumstances of the case, the Tribunal was justified in law in holding that the interest-free advances were given for the purpose of business ignoring the fact that the condition as laid down under the provision of Section 36(1)(iii) of the IT Act were not fulfilled ?"
1.1 In the facts and circumstances of the case, this question has two aspects. One is related to the transaction between the assessee and the firm alleged to be a firm of relatives, which might have some impact on the transaction. In case we find that it is not a firm of relatives, the answer would be simple and would not assume a different complexion, as it would have if the firm is found to be a firm of relatives. The other question requires to be examined in this context is that whether this interest-free advances were given for the purpose of business entitling the assessee to the benefit of Section 36(1)(iii) of the IT Act, 1961. We may now examine these questions as hereafter.
Whether the recipient of interest-free loan is a firm of relatives :
2. The AO had found that the firm to which interest-free loan was advanced was constituted by the relatives of the directors of the assessee. But the relatives as has been explained or spelt out by the AO shows that this relations did not come within the definition of relatives as defined in Section 2(41) of the IT Act, 1961. Therefore, the first point that has been urged by Mr. Banerjee, that the firm with which the assessee was dealing was a firm of the relatives, cannot be sustained.
2.1 Inasmuch as Section 2(41) defines 'relative' in relation to an individual to mean the husband, wife, brother or sister or any lineal ascendant or descendent of that individual. In this case the relation was sought to be related between the individual office-bearers of the assessee and the firm. Having regard to this definition as mentioned above, the firm can by no stretch of imagination be said to be a firm of relatives of any of the directors of the assessee.
Submission on behalf of the appellant:
3. The next point that has been urged by Mr. Banerjee is that the assessee had a packing credit sanctioned by Syndicate Bank, Nariman Point, Bombay, to the extent of Rs. 25 lakhs. This was enhanced to Rs. 175 lakhs. On the very date of enhancement of the packing credit, a sum of Rs. 165 lakhs was advanced to M/s Malabar Cashew Nut and Allied Products (MCAP) through a cheque drawn on Syndicate Bank, Nariman Point. Therefore, according to Mr. Banerjee, the capital borrowed from the Syndicate Bank was siphoned to MCAP as interest-free advance. He has pointed out from the assessment order that though it was pointed out by the assessee that the advance was made to MCAP for supplying raw materials namely, cashew nut to the assessee, but in fact, it had not supplied any raw material. On the other hand, it had returned the amount in two instalments namely, Rs. 123.8 lakhs on 11th June, 1984, and the balance of Rs. 41.2 lakhs in September, 1984. At the same time, he pointed out to the findings of the AO that the annual accounts of MCAP for the year ended 31st Dec., 1982, revealed that the firm MCAP was insolvent and had a debit balance in the partners' capital for a sum of Rs. 142 lakhs and on 31st Dec., 1983, the debit balance of Rs. 119 lakhs. He further pointed out that the advance was made to MCAP without any security and without any stipulation for payment of interest, whereas the assessee had paid 12 per cent interest on the packing credit to Syndicate Bank. On this ground Mr. Banerjee wanted to emphasize that this advance was not made for business purpose but for some extraneous reasons and, therefore, it could not satisfy the ingredients of Section 36(1)(iii). Scope of Section 36(1)(iii):
4. Section 36 provides for deductions as enumerated in Sub-section (1). Clause (iii) of Sub-section (1) permits deduction of the amount of interest paid by an assessee in respect of capital borrowed for the purpose of business or profession. Therefore, we need to examine whether the interest payable on the capital borrowed as mentioned above would be eligible for deduction under Section 36(1)(iii). The eligibility depends on three factors viz.: one is that the borrowing is a capital borrowed and second that such capital was borrowed for the purpose of business and third that interest is payable on such capital borrowed. These three ingredients are to be satisfied in order to claim deduction under Section 36(1)(iii).
4.1 In this case that the interest is paid on the borrowing is not in dispute. That the borrowing was a capital is also not in dispute. What is disputed in this case is that this borrowed capital was not utilized for the purpose of assessee's business. The learned counsel for the Department Mr. Shibdas Banerjee, senior counsel, pointed out that this borrowing was siphoned off to the firm MCAP. Therefore, it is not a capital borrowed for the purpose of business. According to him, it was borrowed for the purpose of helping the firm. It was not utilized for the purpose of business.
4.2 We do not find that the question is so simple as has been sought to be presented by Mr. Banerjee in order to ascertain the characteristics of the borrowing in relation to the business of the assessee as appears from the facts disclosed in the present case. Admittedly, the borrowing was made for the purpose of extending the packing credit. The amount of packing credit is definitely a capital borrowed. But the question is as to whether this capital was utilized for the purpose of business or not. For this purpose, we may examine the scope of Section 36(1)(iii).
4.3 We had occasion to deal with this question in Tetron Commercial Ltd. v. CIT . In the said decision, it was held that in order to avail of the benefit under Section 36(1)(iii), the assessee has to show that it was borrowed for the purpose of business of the assessee. It is immaterial whether it is utilized for capital expenditure or revenue expenditure. It is permissible if it relates to any of the stages of the business activity, even if it is an isolated adventure. It is the nature of the expenditure that requires determination. Applying the above ratio, we may examine in the facts and circumstances of the case whether the assessee could claim the benefit of deduction under Section 36(4)(iii) as hereafter. Similar question in relation to deduction under Section 36(1)(iii) came up in Consolidated Fibres and Chemicals Ltd. v. CIT, 2005 (26) AIC 364 (Cal). In the said decision, it was held that the purpose of the business would be satisfied if the advancement of the money is made in course of the assessee's business. It is to be examined in the facts discussed whether this advance made to the firm MCAP by the assessee was made in course of business or not. The taxability of the income is not dependent upon its destination or manner of its utilization. It has to be seen at the point of accrual. It is not necessary that there should be a direct connection, but still then it has to be seen whether the amount was borrowed for the purpose of business.
Whether the advance was made for business purpose within the meaning of Section 36(1)(iii):
5. On this point, the findings of the learned CIT(A) and the learned Tribunal are otherwise. The CIT(A) found that the finding by the AO was totally incorrect (paper book p. 55). Dr. Pal pointed out from para 6 of the decision by the CIT(A) that out of the interest-free advance of Rs. 165 lakhs, MCAP supplied cashew nut kernels to the assessee-company between the period December, 1983 and June, 1984 amounting to Rs. 91.45 lakhs out of the total cashew nut export of the assessee of Rs. 120.75 lakhs for the period ended 30th June, 1984, which accounted for 70.45 per cent of the total cashew nut kernels exported by the assessee in that year. At para 9 (paper book p. 57) the CIT(A) found that the AO had misstated the facts in his order. This finding was affirmed by the learned Tribunal at para 7 of its order where it had found that out of the total export of the cashew nut kernels of Rs. 129 lakhs in the asst. yr. -1985-86, an extent of Rs. 91 lakhs was supplied by MCAP to whom advance was made by the assessee. Thus, the finding, which is a finding of fact, becomes a concurrent finding of fact concluded by the CIT(A) and the learned Tribunal.
5.1 Mr. Banerjee attempts to point out that this concurrent finding is based on no materials and as such is perverse. But Mr. Banerjee has not been able to show from the record that there is any material to contradict the finding of CIT(A) and those of the learned Tribunal. The Department has also not filed any cross-objection nor appeal against this particular finding before the learned Tribunal. On the other hand, Dr. Pal points out that no such ground has since been taken even in this appeal. Admittedly, the order of the AO merges in those of the CIT(A) and those of the learned Tribunal and it is the decision of the last Court that becomes the ultimate finding of facts and in this case the finding being a concurrent finding of fact, we do not think, in the absence of any material to hold the finding as perverse, that this Court can interfere with such findings.
5.2 As soon it appears that the advance was made for obtaining supply of raw materials and out of which certain portion of raw materials representing almost 70 per cent of the total advance is made, in that event, it cannot but be held that the advance was made for the purpose of business and the advance cannot be said to have been made for any other consideration extraneous or otherwise.
5.3 Mr. Banerjee had relied on the decision in CIT v. Orissa Cement Ltd., (2002) 258 ITR 365 (Del) to support his contention. In the said decision reliance was placed on CIT v. Motor General Finance Ltd., (2002) 254 ITR 449 (Del), where it was held that it was for the assessee to prove that the bona fide loan has been granted in favour of a sister-concern and it is the assessee's duty to place the requisite material on record. In the present case, both the learned CIT(A) and the learned Tribunal had found on the basis of the materials placed by the assessee that 70 per cent of the total export was met by the supply of cashew nut by MCAP. Therefore, this decision does not help Mr. Banerjee, having regard to the facts and circumstances of the case. Mr. Banerjee also relied upon CIT v. H.R. Sugar Factory (P) Ltd. . There it was found that the sugar factory had advanced various sums to its directors and shareholders at a very low interest without being financing company but engaged in the manufacture of sugar and on facts it was held that these advances were made not for the purpose of business of the assessee. Thus, this decision has not laid down any principle, which can support Mr. Banerjee in his contention.
5.4 On the other hand, Dr. Pal relied on the decision in CIT v. Gillanders Arbuthnot and Co. Ltd. . There it was held that the assessee was engaged in the business as a holding company of financing its subsidiaries and, therefore, the money lent to such subsidiaries were held to be lent and advanced in course of its business. In the present case, MCAP might be a partnership firm constituted of some near relations outside the purview of the definition of relatives under Section 2(41), yet the advance was made for the purpose of its business for exporting cashew kernels in order to secure consistent supply of quality cashew nuts for export business of the assessee, a fact similar to the facts considered in the said case.
5.5 Dr. Pal then relied on CIT v. Gillanders Arbuthnot and Co. Ltd. . There also the assessee-company had financed one Burlow and Co. which in turn had financed various other companies managed by Gillanders Arbuthnot and Co. and after the Burlow and Co. was taken over by Gillanders Arbuthnot and Co., the balance sheet of Burlow and Co., the advances given by Gillanders Arbuthnot and Co. and also the loan given to the different subsidiary companies by Burlow and Co. was wiped off. In such circumstances, it was held that the finance was really made by Gillanders Arbuthnot and Co. and that such financing to the managed company was incidental to the business of managing agency. Dr. Pal then relied on the decision in CIT v. Gwalior Sugar Company Ltd. which had also taken the similar view.
5.6 On fact, if it appears that the advances were made in course of business or are incidental to the business, in that event, the same satisfies the ingredients of Section 36(1)(iii). In this case, this interest-free loan or advance was given to the MCAP in course of or incidental to the business of the assessee: The phrase 'purpose of business' was explained in the case of CIT v. Malayalam Plantations Ltd. . There it was held that the expression 'for the purpose of the business' is wider in scope than the expression 'for the purpose of earning profits'. Its range is wide; it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes-imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. If this test is applied in the present case, in that event, we cannot but, in the absence of any material to the contrary, hold that this amount was spent for the purpose of business.
Mixed account: Own fund : Presumption :
6. However, this question would be redundant if, as contended by Dr. Pal, it is held that it was not the sum, which, borrowed as capital, was advanced as interest-free loan to MCAP. Inasmuch as Mr. Banerjee had relied on the making of the advance on the same date on which the packing credit was enhanced from Rs. 0.25 crores to Rs. 1.75 crores by the bank; but from the accounts, it appears, as was found by the learned Tribunal, that the total sale proceeds of the relevant financial year was Rs. 114.08 crores and that the entire sale proceeds used to be deposited in the mixed account and the advance was also granted from the mixed account. Therefore, there were sufficient fund for making advance of Rs. 1.65 crores out of total transaction of Rs. 114.08 crores. If there are surplus and the advance is made out of the mixed fund, in that event, it cannot be said that the amount borrowed as capital from the bank was advanced, in order to deny the benefit of Section 36(1)(iii) in the present case. If it is established that the payment was made from the mixed account and the assessee had sufficient fund then it is to be presumed that the payment was made out of the assessee's own fund and that the borrowed capital was not siphoned out.
6.1 Dr. Pal relied on other decisions in Woolcombers of India Ltd. v. CIT ; CIT v. Samuel Osbom (India) Ltd. , Indian Explosives Ltd. v. CIT and Alkali and Chemical Corporation of India Ltd. v. CIT . In Alkali and Chemical Corporation of India Ltd. (supra), this Court had considered the decisions in Woolcombers of India Ltd. (supra), Reckitt and Colman of India Ltd. v. CIT and Indian Explosives Ltd. v. CIT (supra). Following the earlier three decisions in Woolcombers of India Ltd. (supra), Reckitt and Colman of India Ltd. (supra) and Indian Explosives Ltd. (supra), this Court had held, having regard to the facts and circumstance of the case in Alkali and Chemical Corporation of India Ltd. (supra), that the entire profits of the assessee during the relevant accounting year was deposited in the overdraft account from which all expenses of the assessee including all amount of payments of income-tax were incurred and, therefore, the amount cannot be said to have been spent from the overdraft account. Even if the overdraft account had a debit balance, the same would not make any difference in the presumption. Relying on the earlier three decisions, it was held that there would be a presumption that this amount was paid out of the own fund of the assessee. All these four decisions of the Calcutta High Court were considered by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT with the observation at p. 632 that there was considerable force in the argument advanced by the learned counsel for the appellant. However, the apex Court did not lay down any principle and had decided the case on some other technical ground.
6.2 Be that as it may, having regard to the principles enunciated in these decisions and having regard to the facts and circumstances of this case and the concurrent findings of the CIT(A) and the learned Tribunal, it appears that there were sufficient fund and that the advance was made from mixed account and as such in this case the learned Tribunal and the CIT(A) both were right in presuming that the advance was made out of the assessee's own fund.
Asst. yrs. 1986-87, 1987-88, 1988-89 and 1989-90 :
7. In respect of the asst. yrs. 1986-87, 1987-88, 1988-89 and 1989-90, the learned Tribunal had found that MCAP to whom the assessee had made advances had supplied Rs. 19.90 crores of materials out of total export of cashew nut of Rs. 22.61 crores, Rs. 11.52 crores out of Rs. 13.22 crores, Rs. 16.75 crores out of Rs. 20.86 crores, Rs. 17.95 crores out of Rs. 42.39 crores, respectively. Thus, on facts, it had found that there was regular course of business between the assessee and the MCAP and the advances were made to MCAP in regular course of business. In other words, such advances were made in course of business for commercial expedience for the purpose of business. These findings have not been proved to be perverse.
7.1 Therefore, the same principle as enunciated above would apply in respect of these relevant assessment years involved in the respective orders of the learned Tribunal.
Conclusion :
8. From the above discussion, we find in relation to each assessment years involved in this appeal that: the recipient of interest-free loan was not a firm of relatives; the advance was made for the purpose of business within the meaning of Section 36(1)(iii); that there was regular course of business between the assessee and the firm; and that the advances were made to MCAP in regular course of business; such advances were made in course of business for commercial expedience and for the purpose of business; the findings arrived at by the learned Tribunal were not perverse; the entire expenditure was made from the mixed account; therefore, there would be a presumption that the amount was made out of the own fund of the assessee and not from the borrowed capital; that there were sufficient fund and that the advances were made from the mixed account. Therefore, the CIT(A) and the learned Tribunal both were right in presuming that the advance was made out from the assessee's own fund eligible for the benefit of Section 36(1)(iii).
Order:
9. As such, we find no merit in this appeal. We answer the question in the affirmative in respect of the respective assessment years involved in this appeal.
9.1 In the result, the appeal fails and is accordingly hereby dismissed.
9.2 It is pointed out that separate Court fee has been paid for each of the assessment year, which the Department shall check.
9.3 There will, however, be no order as to costs.
Maharaj Sinha, J.
10. I agree.