Income Tax Appellate Tribunal - Agra
Torrent Financiers vs Asstt. Cit on 29 June, 2001
Equivalent citations: (2001)73TTJ(AGRA)624
ORDER
Anandilal Gehlot, A.M. The appeals under consideration are cross appeals, one by the assessee and another by the revenue. Both the appeals have been directed against the order of the Commissioner (Appeals) relating to assessment year 1990-91.
2. There are two main grounds of appeal. In case of appeal of the assessee, the first ground is relating to confirmation of Rs. 1,38,492 out of total addition of Rs. 1,74,123 on account of non-charging of interest from certain parties to whom interest-free loan was provided. The second ground related to non-charging of interest on debit balances of partners as a result of which the assessing officer made an addition of Rs. 9,083 and the same has been confirmed by the Commissioner (Appeals). The appeal of the revenue is against the relief granted by the Commissioner (Appeals).
3. The status of the assessee was a partnership firm. The assessee was engaged in the business of financing. The books of accounts were subjected to tax audit and requisite report was submitted along with the return of income. It has been noticed by the assessing officer that the assessee-firm has not charged interest on loans/advances to Torrent Investment (P) Ltd. and Shri Kumar V. Parikh and hence interest at the rate of 12 per cent was disallowed last year. The assessee has not charged interest from Torrent Investment (P) Ltd. in the current year (year under appeal) and hence the question of disallowance of interest does not arise. As regards interest in respect of Shri Kumar V. Parikh, it is stated that he was absent from India and the firm was not able to make any contact with him. The assessing officer did not accept the argument of the assessee for detailed reasons given in earlier order for assessment year 1989-90. The assessing officer noted certain loans and advances on which interest was not charged by the assessee. It was explained by the assessee before the assessing officer that advances noted by him were of the nature of funds provides to the family members and it was the usual practice to provide such funds as and when necessary without charging interest. The assessing officer rejected the argument of the assessee on following reasoning :
"(i) The business of the assessee is financing i.e. to take deposits from the various parties and then advanced with higher interest to the other parties.
(ii) If interest is not charged the correct income of the assessee cannot be computed.
(iii) In profit & loss account the assessee has claimed interest payment of Rs. 1,01,19,996 as an admissible business expenditure.
Thus in view of the facts and in view of the reasons given for the earlier assessment year interest payment at the rate of 12 per cent will be disallowed which works out to Rs. 1,74,123 as per the working filed which includes interest chargeable from Kumar B. Parikh.
4. The Commissioner (Appeals) was of the view that addition on account of interest to the extent of availability of interest-free loan was not justified and to that extent the action of the assessing officer was wrong. But the Commissioner (Appeals) was of the view that borrowed funds have been diverted partly for non-business purposes. The action of assessing officer regarding addition made on account of interest was confirmed to the extent of non-availability of interest-free loan or advances. He, accordingly, confirmed the addition calculated as under :
Rs.
Total amount of interest-free advances 16,40,723 Total amount of interest-free loan received 4,86,622 11,54,101 Addition confirmed on estimated Rs. 11, 54, 101 @ 12 per cent 1,38,492 The Commissioner (Appeals) further observed that since interest-free advances/loans have been adjusted as above, the assessing officer has correctly estimated the interest at the rate of 12 per cent on debit balances of partners and addition of Rs. 9,083 made by the assessing officer was confirmed.
5. The learned authorised representative of the assessee contended that the interest was paid mostly on the advances of which balances were carried forward from last year. He produced a chart which is reproduced hereunder TORRENT FINANCIERS Asst. yr. 1990-91 (F.Y. 1989-90) Sr. No. Name of Account Debit Op. balance Interest Additions in debit Interest Total Interest Rs.
Rs.
Rs.
Rs.
Rs.
1. U.N Mehta 1,03,280 12,394 5,000 300 12,694
2. Anita S. Mehta 1,44,555 23,841 (-) 15,000
-
23,842
3. U.N. Mehta HUF No. 2 1,92,00 23,040
-
-
23,040
4. U.N. Mehta HUF 1,133 136 22,702 2,589 2,725
5. Samir Printers 3,03,705 32,154 2,75,000 15,000 47,154 Total A 7,44,673 91,565 3,02,702 17,889 109,455
6. Sapanaben S. Mehta
-
-
50,000 3,863 3,863
7. M.S. International
-
-
1,14,200 1,206 1,206
8. Kumar B. Parikh 5,34,549 59,600
-
-
59,600 Total B 5,34,549 59,600 1,64,200 5,069 64,669 Total A+B 12,79,222 1,51,165 4,66,902 22,958 1,74,123
6. We have noticed some difference in figures given by the learned authorised representative of the assessee in the above chart and available on record. In case of Shri U.N. Mehta, the figure given in above chart is Rs. 1,08,280 (1,03,280 plus 5,000) whereas from record it is found that the same is Rs. 18,280. Further, calculation of interest at the rate of 12 per cent on Rs. 5,34,549 in case of Shri Kumar B. Parikh comes to Rs. 64,145 instead of Rs. 59,600. Further, from the relevant figures in the order of Tribunal, Ahmedabad in the case of the assessee for last year (assessment year 1989-90) ITA No. 2631/Ahd/1992, it is noticed that interest of Rs. 59,600 related to M/s. Torrent Investment (P) Ltd. and Rs. 64,145 related to Shri Kumar B. Parikh. The assessing officer is directed to verify the figures and correct figures may be adopted in all relevant calculations.
7. The learned authorised representative was fair enough to admit that the issue relating to interest to Kumar B. Parikh, has been decided against the assessee by the Tribunal in its order, ITA No. 2631/Ahd/1992. The learned authorised representative contended (i) that the assessing officer has not established direct nexus between the funds advanced without interest and interest bearing funds borrowed by the appellant, (ii) that most of these advances were old advances and no disallowance was made in the past, (iii) that the assessee was having adequate interest-free funds out of which interest-free advances have been made, (iv) that borrowed funds were utilised for business purposes. In support of his contention, he referred and relied on the order of Tribunal, Ahmedabad Bench C, ITA No. 2631/Ahd/1992 decided in assessees own case for assessment year 1989-90. He also referred CIT v. Method Trading & Investment Ltd. (2001) 246 ITR 588 (Cal) and CIT v. Sridev Enterprises (1992) 97 CTR (Karn) 80 .The brief note of these judgments are reproduced as under :
(2001) 246 ITR 588 (Cal) "IncomeAccrual of incomeReal income principleAmounts advanced against hundis dated 1-6-1983, which were co-accepted by bankBank subsequently disowning hundis and debtor company going into liquidationNo interest debited to accounts of debtors after 1-6-1983No interest accrued after 1-6-1983-Income Tax Act, 1961."
(1992) 192 ITR 165 (Karn) "Assessment-Consistency and definiteness of approach by revenue necessary-Nature of account of assessee-Assessee advancing certain sums to another firm having common partners free of interest-Assessee paying interest on money borrowed-In past years assessees claim for deduction of interest paid allowed on the assumption that those advances were not out of borrowed funds-Advance to firm shown on first day of accounting year excluded for purpose of computing disallowance of deduction-Justified."
8. The first contention of the learned authorised representative will not help the assessee as the issue under consideration is that interest bearing borrowed funds have been diverted partly for non-business purposes. In respect of second contention, it is relevant to refer the judgment of Madras High Court, K. Somasundaram & Bros. v. CIT (1999) 230 ITR 939 (Mad). It has been held in that case that interest on borrowings is allowable as deduction only when the borrowings are used for the purpose of business, and continue as such. Where the assessee paid interest on borrowings for use in his business but later on interest-free advances are given to relatives, interest relatable to sums so advanced is not deductible. The brief notes of these judgments are reproduced as under :
(1999) 238 ITR 939 (Mad).
Business expenditure-Interest on borrowed capital-Condition precedent for deduction-Capital must be used in business-Borrowed capital invested in executing contracts-From contract receipts, sums advanced interest-free to relatives of partners-Interest paid on borrowed capital to extent relatable to sums advanced to relatives not deductible-Income Tax Act, 1961, section 36(1)(iii)."
Reliance can also be placed on other judgments of Madras High Court P.R.M.S. Ramanathan Chettiar v. CIT (1969) 72 ITR 534 (Mad), M.S.P. Raja v. CIT (1976) 105 ITR 295 (Mad) and the Judgment of Bombay High Court, Kishanchand Chellaram v. CIT (1978) 114 ITR 654 (Bom). The relevant headnote of the judgment of Bombay High Court is reproduced as below :
"Held, (1) that, so far as the Bombay High Court is concerned, it is quite clear that, under section 10(2)(iii), interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for the purposes of business and that if it is used for a purpose other than that of business, then interest to the extent to which the capital was so used, will not be allowed as a permissible deduction under section 10(2)(iii); Calico Dyeing & Printing Works v. CIT (1958) 34 ITR 265 (Bom) and CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) followed."
The third contention of learned authorised representative has force and requires attention. The contention is that the assessee was having adequate interest-free funds out of which interest-free advances were made. The learned Commissioner (Appeals) has considered the contention of the appellant and allowed relief by considering only interest-free loans received by the assessee. In respect of fourth contention that interest-free advances given to family members, relatives and sister, concerns will amount to utilisation of funds for business purposes is apparently not acceptable.
9. The learned Departmental Representative relied on the order of assessing officer and contended that the business of the assessee was business of finance and not trading or manufacturing, therefore, interest-free advance cannot be given because the assessee himself is claiming Rs. 1,01,19,996 as interest expenditure of his business for the year under appeal. Under the circumstances, the assessing officer rightly disallowed Rs. 1,74,123 as fund borrowed on which interest paid was not for the purpose of business of the assessee. The learned Departmental Representative vehemently argued that the case of assessee under appeal is not a case of taxing of notional income but it is a case of accrual of interest. He relied on the order of assessing officer and referred two judgments CIT v. H.R. Sugar Factory Ltd. (1991) 187 ITR 363 (All) and Triveni Engg. Works Ltd. v. CIT (1987) 167 ITR 742 (All).
The brief notes of these judgments are as under :
(1990) 187 ITR 363 (All).
"Interest on borrowed capital-Loans taken from banks by private limited company carrying on business of sugar manufacture-Huge amounts advanced to directors at very low rate of interest-Difference between interest paid to banks and interest recovered from directors not allowable under section 36(1)(iii)-Income Tax Act, 1961, section 36(1)(iii)."
(1987) 167 ITR 742 (All).
"(iv) that the assessee had not been able to prove that the disputed part of the amount taken as a loan from the bank was used for business purposes or that the advance to the other concern had been made for purposes of business. The disallowance of part of the interest under section 36(1)(iii) of the Income Tax Act, 1961 was justified."
10. We have heard the representatives of both the parties, perused the records and gone through the cases referred/cited by both the parties. Under the facts and circumstances, the learned Commissioner (Appeals) has found that borrowed funds have been diverted partly for non-business purposes, therefore, the assessing officer was justified in making disallowance. It has been further found by Commissioner (Appeals) that in view of the fact that the assessee was also having interest-free loans, the disallowance made by the assessing officer cannot be sustained in totality. Therefore, it was concluded by Commissioner (Appeals) that interest has to be disallowed only in respect of amount representing the difference between the interest-free advances made by assessee and interest-free funds available to the assessee and accordingly, amount was calculated and the disallowance was restricted to Rs. 1,38,492. We uphold the above view of Commissioner (Appeals) with an exception about the interest-free loans available with the assessee, instead of it we are of the view that entire interest-free funds available with the assessee is to be considered, with this modification, the finding of Commissioner (Appeals) is confirmed. The entire interest-free funds include owners own capital, accumulated profits and other interest-free creditors and loans, if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assessee, no interest is disallowable on account of utilisation of fund for non-business purposes and if it exceeds, the proportionate disallowance can be made. In support of this view, we refer a judgment of Calcutta High Court CIT v. Tingri Tea Co. Ltd. (1971) 79 ITR 294 (Cal) (headnote of judgment) which is as follow :
"If the test of "the purpose of the business" is satisfied in respect of the capital borrowed on which the amount of interest is earned, then the court should not impose any further conditions or considerations for allowing that interest in computing the profits. The subsequent fact that those monies after paying such dividends had a remnant or residue in the bank, which produced interest, cannot alter or modify the purpose of the business for which it was sent.
The assessee, a sterling company, owned tea gardens in India. As a non-resident company, it had remitted profits from time to time to the United Kingdom for the purpose of declaration of dividends to its shareholders and the surplus balance, after paying dividends, was kept with the bank in the United Kingdom as deposits. During the relevant accounting years the assessee-company paid interest accruing on its overdrafts to the banks in India and the assessee claimed deduction of the amounts paid, as interest paid on money borrowed for the purpose of its business. The Income Tax Officer rejected the claim for each of the aforesaid years on the ground that the overdrafts from the banks were not incurred wholly and exclusively for the assessees business. The Appellate Assistant Commissioner found that the assessee-company made remittances to the United Kingdom by taking overdrafts from the banks in India and the borrowings from the banks in India were partly invested in earning interest income in the United Kingdom. He sustained a disallowance of Rs. 18,920 for the assessment year 1958-59 and also maintained in full the disallowance by the Income Tax Officer of the claims for interest for the other years. The Tribunal was of the opinion that, on the facts, the correct way to interpret the transaction would be that the remittances to the United Kingdom came out of the profits earned in India and that the bank overdrafts in India had in fact been utilised in carrying on the assessees business and the income-tax authorities were not justified in disallowing any part of the bank interest paid by the assessee in India on its bank overdrafts :"
Held, that the inference of the Tribunal that remittances to United Kingdom came out of the profits earned in India and the bank overdrafts in India had, in fact, been utilised in carrying on the assessees business was sustainable in law, and on such inference of finding of fact, the Tribunal was right in holding that the income-tax authorities were not justified in disallowing any part of the banks interest on the overdrafts."
(Emphasis, hereitalicised in print, supplied) From the above observations of the Calcutta High Court, it can be said that profits earned, own capital and interest-free loans received can be given advances as interest-free advances, to that extent question of disallowance of interest on borrowed funds does not arise.
11. With above observations and after considering all facts, we are of the view that the assessing officer is required to recalculate the figures of disallowance of interest paid on borrowed funds, therefore, the order of Commissioner (Appeals) on this issue is set aside and the issue is restored back to the file of assessing officer for the limited purpose to recalculate disallowance of interest paid on borrowed funds, if any in accordance with the above observations and as per provisions of Income Tax Act. Both the grounds of appeal stand disposed of by above observations. However, as regards the disallowance of interest related to Shri Kumar B. Parikh, we respectfully follow the order of the Ahmedabad Tribunal (supra) for assessment year 1989-90 and action of revenue authorities is confirmed because of different facts involved and disallowance admitted by the assessee in this particular case of Shri Kumar B. Parikh. As regards the second ground regarding interest on debit balances in partners capital account, this ground will be covered by the above observations.
12. Accordingly, the disputed amounts are decided as under :
Particulars Amount Result Total amount of interest in dispute 1,74,123 Addition made by assessing officer, partly relief given by Commissioner (Appeals).
(i) interest amount related to Kumar B. Parikh 59,600 Addition confirmed (also read para 6 of this order)
(ii) Interest-free advances to family members 1,05,440 Set aside
(iii) Interest on debit balances of partners 9,083 Set aside
13. The appeal of the revenue is dismissed and the appeal of the assessee is allowed, for statistical purposes.