Income Tax Appellate Tribunal - Chandigarh
The A.C.I.T. vs Nahar International Ltd. on 22 April, 2004
ORDER
1. The members of the Bench have differed in their opinion while considering and deciding the captioned appeal on the following point which is being referred to the President, Income-tax Appeallate Tribunal Under Section 255(4) of the I.T. Act, 1961.
Whether, on the facts and in the circumstances of the case, CIT (Appeals) was right in deleting interest of Rs. 49,68,000 attributable to interest-free advances given to its workers for purchase of shares of the assessee company?
P.K. Bansal, Accountant Member
1. This appeal by the Revenue and Cross Objection by the assessee arise from the order dated 31.07.98 passed by ld CIT(A)(C)for a.y. 95-96.
2. The revenue has taken the following...effective grounds:-
1. The ld CIT(A) has erred both in law and on facts of the case in deleting the disallowance of Rs. 49,68,000 out of interest payments attributable to interest free advances of Rs. 2.76 crore made to its workers for the purchase of shares of the assessee-company.
2. The Id CIT(A) has further erred both in law and on facts of the case in deleting the disallowance of Rs. 63,76,256 made by the AO on account of deduction Under Section 80I of the IT Act.
2.1 The assessee did not press ground No. 1 taken in the CO and the remaining effective grounds read as under:-
1. That ld CIT(A)(C) erred in law and on facts in sustaining the disallowance of Rs. 1,80,000 being rent paid for Employees Club maintained by the company. The same being unnecessary business expenditure may be directed to be allowed.
2. That ld CIT(A)(c) erred in law and on facts in sustaining the disallowance of Rs. 14,416 being the amount of expenditure incurred on Employees at Employees Club. The same being expenses incurred exclusively for staff welfare may be directed to be allowed.
3. Brief facts relating to ground No. 1 of the revenue's appeal, as gathered from the orders of the tax authorities, are that the assessee had advanced a sum of Rs. 2.76 crore as interest free loan to its employees for purchasing shares of the company. The assessee-company had paid a sum of Rs. 659.79 lacs as interest on loan and claimed it deductible Under Section 36(1)(iii). Before the AO, the assessee submitted that the company was having Rs. 13535.72 crore reserves along with capital and the amount advanced to its employees may be considered as given out of the said reserve. The company had not specifically borrowed for giving loan to its employees. The AO disallowed the proportionate interest being paid on the money borrowed not used for the purpose of business. It was further observed that the assessee had not denied that the funds had been advanced out of interest bearing funds. The employees had subscribed for the public issue of the company, the share/debenture certificates were not handed over to the employees and even the interest/dividend was not passed over to the employees. The assessee pleaded that these funds had been set off against the loan advanced to the employees. The AO took the view that the assessee had utilized its own funds to purchase its own shares/debentures and the names of the employees had been used as a conduit to cover the real facts. It is not the assessee's business to purchase its own shares in its own name or in the names of its employees and, therefore, funds amounting to Rs. 2.76 crore were not utilized for business purposes. Relying on the decisions reported, in 121 ITR 475, 146 ITR 547 and 187 ITR 363, the AO disallowed the proportionate interest of Rs. 49.68 lacs computed @ 18% out of interest claimed Under Section 36(1)(iii).
3.1 On first appeal, the CIT(A) deleted the disallowance of Rs. 49.68 lacs observing that the ITAT deleted similar disallowance of interest vide its order in ITA No. 128/Chandi/ 96 for a.y. 92-93. It was mentioned that the disallowance made in a.y. 93-94 was also deleted in ITA No. 129/Chandi/ 96.
3.2 Before us, ld DR submitted that the impugned disallowance has rightly been made as the funds have been advanced by the assessee during the year out of interest-bearing loan. The CIT(A) has not gone into facts relating to the year. The funds advanced during a.y. 92-93, as is apparent from order of the Tribunal, were only Rs. 131.18 lacs, while the loan advanced during the year was 2.76 crore. There is a specific finding in a.y. 92-93 that the funds were advanced out of reserve and surplus with the assessee. But during the year, although the assessee claimed that it was having interest free reserve but correspondingly it had investment in its balance sheet. The application of funds towards the fixed asset and investment and net current asset was much more than the share holders' funds. The loan was advanced to the employees just for the purpose of purchasing shares/debentures by the company itself in the names of the employees because the company could not bought the shares in its own name. The shares/debentures were never transferred/delivered to the employees and the interest and dividend also not paid to the employees. The CIT(A) simply followed the order of the Tribunal relating to a.y. 92-93, without looking into the facts of the case specifically that part of loan must have been advanced during the year. Ld DR reiterated that the AO has rightly made the disallowance out of interest claimed Under Section 36(1)(iii).
3.3 Ld AR, on the other hand, drew our attention to the balance sheet as on 31.03.95 and submitted that the assessee is having reserve and surplus amounting to Rs. 13535.72 lacs, in addition to capital of Rs. 2089.42 lacs. The assessee was thus having interest free funds and natural inference will be that these have been invested for the purpose of advancing loan to the employees. It was submitted that the case is duly covered by order for a.y. 92-93, wherein the Tribunal deleted the disallowance made under similar circumstances amounting to Rs. 2.80 lacs. In ITA No. 1314/Chandi/96 etc for a.y. 9.4-95 dated 06.11.2002, when the issue came before the Tribunal relating to disallowance of interest Under Section 36(1)(iii), it noted that the assesses had advanced interest free loan amounting to Rs. 154.93 lacs to its employees, out of which a sum of Rs. 131.18 lacs were advanced by the company to its employees in February 92 for the purchase of shares of the assessee-company. The assessee was having reserve and surplus amounting to Rs. 5361.80 lacs/ which exceeded the amount advanced to its employees and, therefore, the funds advanced were out of interest free loan. Following the order of the Tribunal for a.y. 92-93, the Tribunal deleted the disallowance made by the AO. On a query from the Bench as to how much loan was advanced during the year, ld AR reiterated that the case is duly covered by the earlier order of the Tribunal and it is not a material fact.
3.4 We have carefully considered the rival submissions, perused the orders of the tax authorities as well as the previous orders of the Tribunal and the material available on record. We feel that each assessment year is an independent a.y. and the finding given by the Tribunal in one a.y. is applicable to the subsequent a.y. if the facts are the same. The Tribunal is the final facts finding authority, therefore, the assessee is bound to submit all the relevant papers for proper appreciation of facts and adjudication of the Issue. The assessee has filed extract of the balance sheet as on 31.03.95, giving details as under:-
Balance sheet as on 31st March,. 1995 31st March, 1995 Rs(in lacs) 31st March, 1994 Source of Funds Shareholder's Funds Capital Reserve and 2089.42 666.70 Surplus 13535/72 15625.14 5361.90 6028.50 Loan funds Secured loans 9599.96 5167.40 Unsecured 9599.96 500.00 5667.40 loans Application of 25225.10 11695.90 funds Gross block Less 9677.31 5027.59 Depreciation 2328.42 2012.60 Capital work 7348.89 3014.99 in progress 594.22 7943.11 613.42 3628.41 Investments 5401.52 173l.61 Current assets 13344.63 5360.02 Loans and advances Inventories 6953.01 3380.95 Sundry debtors Cash and 4781.62 3608.11 bank balances 637.77 397.28 Loans and Advances 2926.62 1797.77 Less: 15299.02 9184.11 Current liabilities & provisions Liabilities Provision 3147.93 2756.10
270. 62 199.99 Net current 3418.55 2956.09 assets Misc. 11880.47 6228.02 Expenditure (to the extent 107.86 not written off or adjusted) Total: 25225.10 11695.90 However, the assessee has not filed any statement or copy of account in its books of account before us which may depict how much loan has been advanced during-the year to the employees free of interest for purchase of shares/debentures. Although there is an observation of the AO in the...order that interest free loan amounting to Rs 2.76 crore have been given to the employees to subscribe to the public issue of the company but when we go through, the order of the Tribunal for a.y. 94-95 (supra), we find it as a fact that the assessee has advanced interest free loan amounting to Rs 154.93 lacs to its employees, out of which Rs 131.18 lacs advanced to its employees in February 92 for purchase of shares of the company. Since neither ld DR nor ld AR could submit details as to how much loan has been advanced by the assessee to its employees during the year, on facts we infer that a sum of Rs 1.54 crore was the opening balance and balance of Rs 1.22 crore advanced during the year. So far as fact relating to interest free loan amounting to Rs 1.54 crore balance as on 31.03.94 is concerned, we feel that the AO cannot disallow interest u/s 36(1)(iii) on this amount even on proportionate Basis as deletion of such disallowance is duly covered by the order of the tribunal dated 06.11.2002 (supra), as there is a dear cut finding that the funds advanced were not out of interest bearing loan. Once funds had been advanced not out of interest bearing loan, they cannot subsequently be said to have been advanced out of interest bearing loan. Respectfully following the aforesaid orders of the Tribunal for a.ys. 92-93, 93-94 and 94-95, we confirm the order of the CIT(A) in so far as it relates to the deletion of disallowance on proportionate interest to be computed @ 18% on Rs 1.54 crore is concerned, For balance interest disallowed which relates to the amount advanced by the assessee during the year amounting to Rs 1.22 crore, as inferred by us above, we feel that it is not covered by the orders of the Tribunal until and unless the assessee proves that the loans have been advanced out of non-interest bearing funds. We have analyzed the balance sheet and note that the assessee has received funds during the year from the following sources:-
Amount in lacs Increase in capital 1422.72 Increase in reserve and surplus 8173.92 Increase in secured loans 4432.56 Total increase in funds 14029.20 We also note that these funds have been applied by the assessee in the following manner:-
Amount in lacs
Reducation in unsecured loans 500.00
Addition in fixed assets 4314.70
Increase in long term investment 3669.59
Net increase in current assets 5544.59
Total funds applied 14029.20
From the above, it is clear that to the extent there is increase in reserve and surplus the assessee has invested in the fixed asset as well as in the long term investment and also reduced the unsecured loan. The increase in capital is "absorbed partly by net increase in the current asset. The increase in secured loan could have been applied for investment in the current asset. From, the copy of the abstract of Balance Sheet filed before us, one cannot derive that the reserve and surplus has been utilized by the assessee for the purpose of advancing interest free loan to its employees. The assessee has also not filed before us any detail of the bank account to prove that the loans advanced during the year have been made out of interest free funds. The contention that the assessee was having reserve and surplus and, therefore, reserve and surplus must have been utilized for the purpose of advancing interest free loan to the employees cannot be accepted on the ground that correspondingly there are long term investment made, as extracted above.
3.5 Coming to the provisions of Section 36(1)(iii), it read as under:-
The amount of the interest paid in respect of capital, borrowed for the purposes of the business or profession.
For claiming deduction, we feel that three ingredients are necessary, i.e. i) the assessee must have paid the interest during the year; ii) the interest must have been paid on the capital borrowed by the assessee; and iii) the capital borrowed must have been utilized by the assessee for the purpose of business. Since the assessee in this case claimed deduction of interest paid on the borrowed funds, the AO observed that part of the borrowed funds were not utilized for the purposes of business but for the purpose of advancing interest free loan to its employees for the purposes of shares/ debentures of the company. We feel that the onus ties on the assessee to prove that it has not utilized the borrowed funds for the purposes of advancing interest free loan to its employees. The assessee in this case has not discharged its onus, as no evidence has been filed which may prove that it has advanced money to its employees out of non-interest bearing funds during the year. Ld AR although argued that the assessee was having reserve and surplus much more than the amount advanced to the employees, therefore, a presumption may be drawn that non-interest bearing loans have been used for the purpose of advancing loan to the employees of the assessee-company. From, the application* of funds, reproduced above, we feel that no such presumption can be drawn as other long term investment made were more than increase in reserve and surplus. From the assessment order, we find that the AO has observed as under:-
... There is no denia of the fact that the interest bearing funds have been put to use for non-business purposes.
This observation of the AO has not been challenged by the assessee either before the CIT(A) or even before us. The assessee has also not produced any evidence before us to discharge its onus that non-interest bearing funds have been utilized for the purpose of advancing interest free loan to its employees. Under these facts and circumstances of the case we fee) that the assessee is not entitled for "deduction of interest on borrowed capita! to the extent it has been used for the purpose of advancing loan to its employees for subscribing to the shares/debentures of the" assessee-company. We, therefore, set aside the order of the CIT(A) to that extent and direct the AO to disallow interest on a sum of Rs. 1.22 crore inferred to have been advanced to the employees during the year @ 18%, i.e. the rate which has been applied by the AO while disallowing interest Under Section 36(1)(iii). Thus, this ground of the appeal of the revenue is partly allowed.
4. Coming to the second ground, the brief facts are that the assessee claimed deduction Under Section 80I amounting to Rs. 63,76,256 in respect of three units, namely, SMS-III, SMS-IV and SMS-V on the basis of profit derived on the basis of separate books of account maintained in respect of each unit. The assessee was also having another unit, namely, SMS-HO. The AO observed that though the assessee had maintained separate books in respect of each unit, yet the expenses claimed for HO were much higher than expenses debited to the other units. The assessee submitted that it was consistently following the same system of accounting as in the earlier years and also during a.ys. 92-93, 93-94 and 94-95 & deduction claimed was allowed by the Tribunal during a.ys. 89-90 to 91-92 accepting the system of accounting regularly followed by the assessee. The AO, however, invoking the provisions of Section 80I(6), 80I(8) and 80I(9) recomputed deduction Under Section 80I at 'nil'. In first appeal, the CIT(A) directed the AO to allow deduction following the order of the Tribunal for a.y. 92-93.
4.1 Before us, ld DR relied on the order of the AO, while Id AR relied on the order of the Tribunal dated 06.11.2002 (supra).
4.2 After, carefully considering the rival submissions, we find that the Tribunal in para 6 of its order dated 06.11.2002 (supra) has held that the provisions of Sections 80I(8) and 80I(9) were not applicable to the facts of the present case. The order of the CIT('A) is in conformity with the orders of the Tribunal for the earlier three a.ys. Respectfully following the aforesaid orders of the Tribunal, we are of the opinion that the order of the CIT(A) does not merit any interference same is upheld and revenue's ground of appeal is dismissed.
5. Coming to the CO of the assessee, we find that the AO disallowed the expenses incurred on the guest house maintained by the assessee. It seems that the assessee has not agitated the issue before the CIT(A). Before us, the assessee retied on the order of the Tribunal dated 06.11.2002. (supra) and submitted that since the rent was specifically allowable Under Section 30, therefore, the provisions of Section 37(4) will apply and no disallowance can be made. Ld DR, on the other hand, relied on the order of the AO and also. on the decisions in the case of United Catalysts India Ltd. v. CIT 229 ITR 233 (Ker).
5.1 We have carefully considered the rival submissions We find that the issue is duly covered by the decision in the case of Eicher Tractors Ltd. v. DCIT 84 ITD 49 (Del) (SB), in which the Special Bench while considering deduction of the rent paid for the guest house whether disallowable Under Section 37(4) held as under: -
Section 30 refers to rent paid by any tenant in respect of the premises used for the purposes of business or profession. Similar is the case in respect of Section 32 which makes a reference to depreciation in respect of any building, machinery, plant or furniture owned by the assessee. These sections are wide enough to cover any types of premises whereas it is not so in the case of Section 37(4) and (5) which is very specific and pertains to a guest house alone. On a comparison of the two provisions, viz. Section 37(4) read with Section 37(5) with Sections 30 and 32, it would be dear that the former is more specific and the latter more (sic) Vimal Gandhi, President
1. I have gone through the order proposed by my teamed brother but am not in a position to agree with the view taken by him on ground No. 1. I, therefore, propose to write a separate order.
2. The ground relates to deletion of 'Rs 49,68,000 out of deduction of interest claimed by the assessee. The disallowance has been made on account of the fact that the assessee advanced a sum of Rs. 2.76 crore to its employees free of interest as loan for purchasing share of the assessee company. The A.O. made disallowance in question holding that the amount was not advanced for business of assessee company and that borrowed funds were not utilized for purposes of business. He accordingly disallowed a portion of the interest calculating the same at 18% of Rs. 2.76 crores.
3. On appeal, the teamed CIT( Appeals) held that similar disallowances were made in assessment year 1992-93 but on appeal, the ITAT Chandigarh Bench deleted the disallowance. Similar order was passed by the ITAT in the assessment year 1993-94. Respectfully following the aforesaid order, the disallowance of interest in question was deleted.
4. Before us during the course of hearing of appeal, the learned counsel for the assessee had placed on record copy of order of ITAT in the case of the assessee for assessment year 1994-95 wherein order of Tribunal for assessment year 1992-93 was applied. The learned D.R. did not oppose above submission nor advanced any other argument before the Bench.
5. I find from records that while deleting the addition in assessment year 1994-95 in ITA No. l314/Chd/1996 as per its order dated 6 November, 2002, the Tribunal observed as under:
12. We have heard both the parties at some length and carefully considered their rival submissions. We have also examined the facts, evidence and material on record and referred to the above mentioned two orders of ITAT, Chandigarh Bench for the assessment years 1992-93 and 1993-94. From the facts discussed above, it is obvious that interest-free loans of Rs. 131.18 lakhs were given to the employees in February, 1992 relevant to assessment year 1992-93. Similar disallowance of interest of Rs. 2.80 lakhs was made for the assessment year 1992-93. On appeal, the. CIT(A) had upheld the disallowance. The assessee filed an appeal before the Tribunal against the order of the CIT(A). It was contended before the Tribunal that as per provisions of Section 77 of the Companies Act, the company is not allowed to purchase its own shares. However, proviso to Section 77(2) of the Companies Act provided exception inasmuch as it could advance money to the members of staff for purchase or subscribing to fully paid up shares of the company. Attention of the Tribunal was also drawn to the guidelines dated 11.2.1987 issued by the Ministry of Finance, Department of Economic Affairs as per which 5% of the issued capital was reserved for the employees for which loans could be advanced by the company to its employees. Thus, it was argued that advancing of interest free loans to its employees for purchase of shares was in accordance with the Companies Act and the guidelines issued by the Govt. of India. Besides, it was also argued that assessee had sufficient reserves and surpluses out of which these loans could have been advanced to its employees. Further, it was submitted that the entire amount came back to the company within a period of three days when the employees of the company subscribed to such shares. After considering these submissions, the ITAT deleted the disallowance by recording the following findings in para 15 of its order for the assessment year 1992-93:
15. We have carefully considered the submissions of both the sides. The assessee company has advanced interest-free loans only to its employees and not to any of its directors. Such an advance is neither in violation of the Companies Act nor of the guidelines issued by the Ministry of Financed In fact, the law encourages, such advances to be made to the employees. In the first instance, the revenue authorities have not been able to establish a direct nexus between the amounts borrowed by the assessee company on which interest was paid by it and the amounts advanced by the assessee company to its employees free of interest. The assessee company had reserves and surplus to the extent of Rs. 14.77 crores from which the amounts could be said to have been advanced interest free to the employees. Assuming though not admitting that the advances had been made from out of funds on which assessee paid interest, then also such an advance was for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. If the assessee had not advance interest-free loans to the employees, then it is quite likely that some of the employees may not have applied for the shares of the assessee company and those shares would have remained unsubscribed. By advancing interest-free loans to the employees, the assessee created a happy and harmonious relationship between it and the employees which was for business purposes of the assessee. In our opinion, if the assessee spent any money for the welfare of the employees, then such expenditure is to be allowed rather than disallowed. The Income-tax Act also takes due recognition of such a principle. Section 37(2A) for instance provides for disallowance of entertainment expenditure. The Explanation to the said section enlarges the scope of "entertainment expenditure" but provides that expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of work was not to be included in entertainment expenditure. The case law cited by Shri Gogna also supports the view that where welfare of the employee is concerned, the legislation has to be interpreted in such a way that the purpose of legislation is advanced rather than defeated. Moreover, the amounts advanced remained with the employees only for a couple of days and came back to the assessee firm within three days and at worst the interest could be disallowed only for a period of three days which too, in our opinion, was not disallowable. The decision of the Allahabad High Court in the case of H.R. Sugar Factory Pvt. Ltd. (supra) is distinguishable on facts. That was a case where advances had been diverted to the directors whereas in the present case, no advances had been given to the directors but to the poor employees. Taking a total view of the entire facts and circumstances of the case, we are of the opinion that there was no justification for disallowing a sum of Rs. 2,80,000. The disallowance is hereby deleted.
6. The Tribunal followed this order for the assessment year 1993-94. NOW, the only question that requires to be considered by us is whether the facts of the case for the assessment year are distinguishable from the facts of the case for the assessment years 1992-93, 1993-94 1994-95. The only line of distinction drawn by the ld. D.R. is that for this year the CIT(A) has recorded a finding that the impugned loans were given but of overdraft accounts. However, the fact remains that loans were given in February, 1992 relevant to assessment year 1992-93. Therefore, there is no change in the facts. Moreover white deleting the disallowance of interest, the Tribunal also observed that even if it is assumed that assessee had advanced the loans to employees out of funds on which assessee paid interest, then also such advances were for business purposes of the assessee as the entire amount came back to the assessee within three days. Thus, in "the light of these facts, we are of the considered opinion that the facts of the case for the assessment year under reference are similar to the facts of the case for the assessment years 1992-93 and 1993-94 and, therefore, the ratio of the aforesaid decision for the above mentioned assessment years would equally apply to the facts of the present case. Respectfully, following the orders of the Tribunal for the assessment years 1992-93 and 1993-94, supra, we set aside the order of the CIT(A) and delete the impugned disallowance. This ground of appeal of the assessee is allowed."
7. Unfortunately, I am party to above order besides I do not see any good ground to deviate from consistent view taken by the Tribunal on identical facts of the case. We were not even asked to take a different view. The learned Accountant Member while not following the decision cited before us has merely observed that each assessment year is an independent assessment year and finding in one assessment year is to be followed when facts are the same. The Bench in the earlier year had clearly recorded that advance to the employees of the company was for business purposes and had allowed the deduction. In the assessment year under consideration, there are no different circumstances nor it is possible to hold that advances made are not for purposes of business. Therefore, in line with the earlier view taken by the Tribunal, I hold that deletion of interest by the learned CIT(Appeals) is quite in order and is required to be upheld.
8. It is accepted by one and all that principle of consistency is applicable and the view once taken cannot be reopened unless it is arbitrary or perverse. In the case of CIT v. Dalmia Dadri Cement Ltd. 77 ITR 410, a Division Bench of jurisdictional High Court observed as under:
An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising but of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. No doubt in this case earlier the matter was not taken to the Income-tax Appellate Tribunal, but then, as pointed out, it was never questioned by the Commissioner of Income-tax in exercise of his powers of revision which was the mode open to the revenue for re-consideration of the decisions of the Income-tax Officer year after year.
9. Similar view has been taken by another High Courts and by the Hon'ble Supreme Court in a large number of cases.
10. In the light of above discussion, I uphold the order of learned CIT(Appeals) on ground No. 1.
11. On other points I agree with the decision of the learned Accountant Member.
M.A. Bakshi, Vice President
1. In this case, the appeal of the Revenue for the assessment year 1995-96 was heard by the Division Bench of the Tribunal. As a result of difference amongst the Members in regard to the following ground of appeal, the issue was referred to the Third Member :-
1. The learned Commissioner of Income-tax (Appeals) has erred both in law and on facts of the case in deleting the disallowance of Rs. 49,68,000/- out of interest payments attributable to interest free advances of Rs. 2.76 crores made to its workers for the purchase of shares of the assessee company.
2. The learned Accountant Member of the Division Bench had restored the disallowance of interest of Rs. 49,68,000/- out of interest payments attributable to interest free advances of Rs. 2.76 crores made to its workers for the purchase of shares of the assessee company.
3. The learned Judicial Member following the earlier orders of the Tribunal in assessee's own case for assessment years 1992-93, 1993-94 and 1994-95, upheld the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance.
4. The third Member vide order dated 22.4.2004 agreed with the view of the Judicial Member and thus, by majority view, the decision of the Commissioner of Income-tax (Appeals) in deleting the disallowance of Rs. 49,68,000/- out of interest payments is upheld. Since there is already an agreement between the Members of the Division Bench in regard to other issues involved in the appeal of the Revenue and the Cross Objection of the assessee, no further order is required by the Bench in regard to such issues.
5. In the result, the appeal of the Revenue as well as the Cross Objection filed by the assessee are accordingly dismissed.
1. The appeal of the revenue and the cross objection of the assessee for the assessment year 95-96 were heard by the Division Bench of this Tribunal. As a result of difference of opinion between the Members of the Bench, I have been nominated as Third Member for a decision in regard to the following point of difference:-
Whether, on the facts and in the circumstances of the case, CIT(Appeals) was right in deleting, interest of Rs. 49,68,000 attributable to interest-free advances given to its workers for purchase of shares of the assessee company?
2. Parties have been heard and record perused. Brief facts relating to this issue ace that the assessee had offered certain percentage of shares to its employees as per the guidelines regarding Employees Stock Option Scheme issued on 1.8.85. As per the said Scheme, the companies while proposing further issue of capital are required to reserve 5% of the further issue for their employees/workers on an equitable basis. The shares so allotted are subject to the condition that these will not be transferred/sold/hypothecated for a period of three years from the date of allotment. In order to enable the employees to purchase the shares reserved for the employees, the assesses advanced a sum of Rs. 2.76 crores as interest-free loans to the employees. Whereas, the assessee advanced loans to the employees, the money has returned to the company by way of share application money within a period of three days. During the course of assessment proceedings, the AO observed that the company had paid a sum of Rs. 659.79 lakhs as interest on loans and claimed it as a deduction Under Section 36(1)(iii). The AO asked the assessee as to why interest attributable to the interest-free loans advanced to the employees may not be disallowed. It was pleaded on behalf of the assessee that the company was having Rs. 13535.72 lakhs as reserves in addition to own capital of Rs. 2089.42 lakhs and the amount advanced to the employees may be considered as given out of the said reserves/capital. It was also pointed out that the company had not specifically borrowed for giving loans to the employees. Rejecting the explanation of the assessee, the AO disallowed the interest paid on the money borrowed referable to the interest-free advances given to the employees. It was also pointed out that the share/debenture certificates were not handed over to the employees. Even the interest/dividend was not passed over to the employees. It was pointed out that the said amount was set off against the loan advanced to the employees. The AO took the view that the assessee had utilized its own funds to purchase its own shares/debentures and the names of the employees had been used as a conduit to cover the real facts. The AO further held that it is not the assessee's business to purchase its own shares in its own name or in the names of its employees and, therefore, funds amounting to Rs. 2.76 crores were not utilized for purposes of business. The proportionate interest worked out at Rs. 14.68 lakhs computed @ 18% from the date of advance till the end of previous year was disallowed out of the claim of interest made Under Section 36(1)(iii).
3. On appeal, the CIT(A) deleted the addition on the basis of the decision of the Tribunal in I.T.A. No. 128/Chandi/96 for the assessment year 92-93 and I.T.A. No. 12.9/Chandi/96 for the assessment year 93-94, where on similar facts, the disallowance made by the AO was deleted.
4. The revenue appealed to the Tribunal against the decision of the CIT(A). The Id. Accountant Member proposed an order partly allowing the appeal of the revenue. The disallowance of interest, as per the proposed order by the Id. Accountant Member, has been restricted to the loan of Rs. 1.22 crores being the amount advanced to the employees in the year under appeal. The disallowance with reference to the advances made in the preceding years has, however, been held to be not justified.
5. The Id. President disagreed with the proposed order of the Id. Accountant Member in regard to the issue relating to partial disallowance of interest. The Id. President has referred to the order of the Tribunal for the assessment year 94-95 where similar disallowance has been deleted in I.T.A. No. 1314/Chandi/96 vide order dated 6th Nov., 2002 rendered by following its own order for assessment years 1992-93 and 1993-94. The Id. President has also pointed out that there are no distinguishable facts in the year under appeal from the facts of the case for the assessment years 92-§3, 93-94 and 94-95. In the dissenting order, the Id. President has pointed out that in the assessment year 92-93, the Tribunal has observed, "Even if it is assumed that assessee had advanced the loans to employees out of funds on which assessee paid interest, then also such advances were for purposes of business of the assessee as the entire amount cam back to the assessee within 3 days." The Id. President has also referred to the decision of Hon'ble jurisdictional High Court in the case of CIT v. Dalmia Dadri Cement Ltd., 77 ITR 410, in support of the proposition of law that once a view is taken by and authority, it cannot be reopened unless it is arbitrary or perverse. He has accordingly proposed to dismiss the appeal of the revenue. Hence the difference of opinion.
6. The Id. Departmental Representative contended that it is an admitted fact that assessee had advanced interest-free loans to the employees for the purpose of purchase of shares of the assessee-company. It is also not disputed that the loans have been advanced out of cash credit/loan account of the bank in respect of which interest has been paid. According to the Id. D.R., the assessee has failed to establish the nexus between the assessee's own capital and reserves and the amount advanced to the employees free of interest. On the failure of the assessee to establish the nexus, it was obvious that the borrowed money has been advanced to the employees for the purchase of shares of the assessee-company. The disallowance is therefore, justified, it was contended.
7. The Id. Counsel for the assessee, on the other hand, contended that as per the guidelines issued by the Ministry of Finance, Department of Economic Affairs, the assessee while proposing enhancement of share capital was required to reserve 5% of the additional capital for the employees/workers on equitable basis. As a matter of policy of the company, all the employees were given the option of purchasing shares for the purpose of which temporary loans were advanced to them. According to the Id. Counsel, the advancing of loans to the employees was in accordance with the policy of the company to keep them in good humour and faithful to the company. The money has remained out of the company only for a period of three days and has been returned to the company for being utilized for purposes of business. It was further contended that in 1992-93, at the time of enhancement of share capital, the assessee had reserved 5% for the employees and offered interest-free advances enabling them to purchase the shares. The Tribunal had upheld the decision of the CIT(A) in deleting the addition made on account of interest disallowed by the AO out of the interest paid on borrowed funds. In assessment years 93-94 and 94-95 also, the disallowance stands deleted and in the year under appeal, there is no difference in facts. The assessee has followed the established practice of reserving 5% of additional shares for the employees and advancing interest-free loans to them for the purpose of enabling them to purchase the shares, the Id. Counsel contended that firstly the assessee had its own capital and reserves out of which the money could be said to have been advanced to the employees and, therefore, no disallowance is warranted on account of interest paid on borrowed money utilized for purposes of business. The Id. Counsel for the assessee has filed a Statement to explain the surplus available with the company during the previous year, which ended on 31.3.95 (placed at page 1 of the paper-book). With reference to the above statement, the Id. Counsel contended that the borrowed funds have not been utilized for giving interest-free advances to the employees.
8. In the alternative, it was contended that providing of interest-free advances to the employees was for purposes of business. Firstly, it was compulsory for the assessee to reserve 5% of additional share capital for its employees. Secondly, there was an established practice of providing interest-free advances to the employees for enabling them to purchase the shares of the company. The Id. Counsel further contended that the established practice in regard to the condition of service of the employees is enforceable in law as held by the Hon'ble Supreme Court in the case of Dalmia Cement (Bharat) Ltd., New Delhi v. Their Workmen and Anr., . Thirdly, it was in the interests of business of the assessee-company to keep the employees in good humour by providing them the facility of owning shares of the company without making any investment of their own. According to the Id. Counsel, the assesses company was not deprived of the money for more than three days as the money had come back to the company for use in other business purposes. It was accordingly pleaded that the view expressed by the Id. President may be preferred to the view expressed by the Id. Accountant Member. It was accordingly pleaded that the appeal of the revenue may be dismissed in toto.
9. I have given my careful consideration to the rival contentions. The issue as to whether the disallowance of interest with reference to the sum of Rs. 1.22 crores provided to the employees for the purpose of enabling them to acquire the shares of the company is justified or not can be viewed from two angles. In my considered view, it will be relevant to first determine as to whether the action of the assessee-company to provide interest-free advance to the employees for the purpose of acquisition of shares of the company was purely for business considerations or for extraneous considerations. If the decision of the company to allow interest-free advance to the employees for the aforementioned purpose is found to be purely for business consideration, in that case the controversy as to whether the borrowed money has been utilized for the said purpose or the assessee-company has utilized its surplus funds for the said purpose, would be irrelevant. It is not disputed that as per the guidelines issued by the Ministry of Finance, Department of Economic Affairs, the assessee was required to reserve 5% of the further issue capital to be raised for the employees/workers on equitable basis. The Press release issued by the Ministry of Finance, Department of Economic Affairs on 11.2.1987, reported in (1987) 61 Company Cases(Statute) 163, is reproduced hereunder for the sake of reference:-
Loans by Companies to Employees to buy Shares -Clarification dated 11.2.1987:
Attention is invited to the guidelines regarding Employees' Stock Option Scheme issued on 1.8.1985.
According to these guidelines the companies while proposing a further issue of capital are required to reserve 5% of the further issue for their employees/workers on an oquitable basis. The shares so allotted are subject to the condition that these shares shall not be transferred/sold/hypothecated for a period of 3 years from the date of allotment.
It has been decided that in cases where the employees are granted loans by their companies for the purpose of buying shares under the Stock Option Scheme, these shares may be allowed to be hypothecated against such loans, to the companies themselves. The prior approval of the Controller of Capital Issues should be obtained for such arrangements.
In the light of the above guidelines, the company had no option but to reserve 5% of the further issue of share capital for employees/workers. It is also not disputed that in the previous year, relevant to the assessment year 92-93, the assessee had enabled the employees/workers to acquire the shares of the company to the extent of 5% of further capital by advancing loans to them for the purpose of acquisition of such shares. The money had hardly been out of assessee's chest for more than three days It was compulsory for the employees to utilize the money for the purpose of acquisition of shares of the company and, therefore, the money had to come back to the assessee-company. On the basis of providing such facility to the employees, the AO had made a similar disallowance in assessment year 92-93. The issue had come up before the Tribunal by way of an appeal against the order of the CIT(A) in allowing the relief to the assessee. The relevant portion of the decision of the Tribunal in para 15 of the order for the assessment year 92-93 has been reproduced by the Id. President in the dissenting order. For the sake of coherence and ready reference, para 15 of the ITAT's order for the assessment year 92-93 (supra) is reproduced hereunder:-
15. We have carefully considered the submissions of both the sides. The assessee company has advanced interest-free loans only to its employees and not to any of its directors. Such an advance is neither in violation of the Companies Act nor of the guidelines issued by the Ministry of Finance. In fact, the law encourages such advances to be made to the employees. In the first instance, the revenue authorities have not been able to establish a direct nexus between the amounts borrowed by the assessee company on which interest was paid by it and the amounts advanced by the assessee company on which interest was paid by it and the amounts advanced by the assessee company to its employees free of interest. The assessee company had reserves and surplus to the extent of Rs. 14.77 crores from which the amounts could be said to have been advanced interest free to the employees. Assuming though not admitting that the advances had been made from out of funds on which assessee paid interest, then also such an advance was for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. If the assessee had not advanced interest-free loans to the employees, then it is quite likely that some of the employees may not have applied for the shares of the assessee company and those shares would have remained unsubscribed. By advancing interest-free loans to the employees, the assessee created a happy and harmonious relationship between it and the employees which was for business purposes of the assessee. In our opinion, if the assessee spent any money for the welfare of the employees, then such expenditure is to be allowed rather than disallowed. The Income-tax Act also takes due recognition of such a principle. Section 37(2A) for instance provides for disallowance of entertainment expenditure. The Explanation to the said section enlarges the scope of entertainment expenditure" but provides that expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of work was not to be included in entertainment expenditure. The case law cited by Shri Gogna also supports the view that where welfare of the employee is concerned, the legislation has to be interpreted in such a way that the purpose of legislation is advanced rather than defeated. Moreover, the amounts advanced remained with the employees only for a couple of days and came back to the assessee firm within three days and at worst the interest could be disallowed only for a period of three days which too, in our opinion, was not disallowable. The decision of the Allahabad High Court in the case of H.R. Sugar Factory Pvt. Ltd. (supra) is distinguishable on facts. That was a case where advances had been diverted to the directors whereas in the present case, no advances had been given to the directors but to the poor employees. Taking a total view of the entire facts and circumstances of the case, we are of the opinion that there was no justification for disallowing a sum of Rs. 2,80,000. The disallowance is hereby deleted.
10. A perusal of the relevant portion of the order of the Tribunal for the assessment year 92-93 reproduced above reveals that the Tribunal has decided the issue in favour of the assessee for two alternate reasons. Firstly, it has been held by the Tribunal that the revenue has not been able to establish a direct nexus between the amounts borrowed by the assesee-company on which interest was paid by it and the amounts advanced by the assessee-company to its employees free of interest. The Tribunal has further observed that the assessee-company had reserves and surplus to then tune of Rs. 14.77 crores from which the amount could he said to have been advanced interest free to the employees Another reason given by the tribunal in deciding the issue in favour of the assessee is that the advance had been given by the assessee for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. The Tribunal further observed that the assessee had not advanced interest-free loans to the employees, then it was quite likely that some of the employees may not have applied for the shares of the assessee company and those shares would have remained unsubscribed. In my view, it would be reasonable to test the facts of the case on the basis of above principles laid down by the Bench.
11. For the year under appeal, as per the details available, the assessee had surplus of Rs. 21.48 crores as per the statement at page 1 of the paper book reproduced hereunder:-
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"NAHAR INTERNATIONAL LIMITED CALCULATION OF SURPLUS AVAILABLE WITH THE COMPANY DURING THE YEAR 1994-95 Year ended on 31.03.1995 Rs. In lacs Share capital 2089.42 Reserves & Surplus 13535.72 15625.14 Less: Fixed Assets (Net block + Capital work in progress) Less: Term Loans PSIDC 475.00 IFCI 177.63 PNB 2000.00 2652.63 5290.48 10334.66 Less: Investments 5401.52 Net owned funds available with co. for working Capital A 4933.14 Current Assets Inventory 6953.01 Sundry Debtors 4781.62 11734.63 Less: Creditors 3147.93 B Net current Assets 8586.70 C Margin Money Required 2146.68 D Balance of funds available with Co. after margin money (A-C) 2786.46 E Cash & Bank Balance 637.77 F Net Surplus (D-E) 2148.69
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As is evident from the above statement, the assessee had surplus funds/own capital available which has been worked out after setting off the amount utilized for fixed assets, work-in-progress, business creditors etc. Therefore, it cannot be said with certainty that there is a direct nexus between the money borrowed by the assessee for purposes of business and the loan advanced to the employees for the purpose of acquisition of shares of the company. In my view, whether the money advanced to the employees has been paid out of borrowed money shall have to be viewed in the light of overall availability of funds and not merely on the basis of withdrawal from a particular account of the date of withdrawal. Assessee may advance money out of ready cash/bank balance on the date of advance but may have to borrow to meet the crunch created by such advance. Therefore, the nexus shall have to be determined with reference to overall statement of affairs of the company. Assuming but not admitting that borrowed funds had been utilized by the assessee for the purpose of advancing loans to the employees enabling them to purchase shares of the company, then it is again relevant to ascertain as to whether such an action taken by the company was for purposes of business. The Tribunal in assessment year 92-93 has recorded a finding that such a step taken by the company was purely for business considerations. In the year under appeal, there are no distinguishing facts. In fact, by providing a facility to the employees in the year 1992-93, the assessee-company was duty bound to provide the same facility to them in the year under appeal. Their Lordships of the Supreme Court in the case of Dalmia Cement (Bharat) Ltd., New Delhi v. Their Workmen and Anr. (supra) have laid down that when there is a continued and uninterrupted practice for providing a privilege to the employees, such practice ripens into a condition of service and that there should not be a departure from such practice without lawful reasons. In the case of Alembic Chemical Works Co. Ltd. v. The Workmen, reported as , it has been held that the State Govt. should facilitate the providing of better amenities to the employees and that in construing the provisions of a welfare legislation, courts should adopt a beneficent rule of construction. In the present case, the assessee has provided benefit to its employees. In deciding the issue whether the action of the company for the benefit of the employees was for business considerations or not, the principle of beneficial rule of construction should be preferred than the interpretation which goes against the welfare of the employees. In my considered view, the action of the company in providing interest-free loans to the employees for acquisition of shares of assessee-company for meeting the guidelines issued by the Ministry of Finance, Department of Economic Affairs was a prudent decision backed by business considerations. Any expenditure laid out or incurred by the assesses for purposes of business is allowable as a deduction in computing the profits and gains of the business. Therefore, assuming for arguments sake that assessee has utilized the borrowed money for providing the same to the employees for the purpose of acquisition of shares, since the amounts have been utilized purely for business considerations, no disallowance is warranted. As pointed out earlier, the view that money has been advanced to the employees purely for business considerations is supported by the view taken by this Bench in assessee's own case for the assessment year 92-93 and followed in assessment years 93-94 and 94-95. Therefore, such a view is bound to be followed unless such a view is established to be perverse or arbitrary. Reference to the decision of the Hon'ble jurisdictional High Court of Punjab & Haryana in the case of Dalmia Dadri Cement Ltd. (supra), is relevant where their Lordships have held that though an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year, the decision given in an assessment for an earlier year is not binding either on the assessee or department in a subsequent year. But this rule is subject to limitations and there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act. It has further been held that if a decision has been arrived after a due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal during the earlier decision has taken into consideration all the material evidence, then it will not be possible to take a different view than the view taken by the earlier Bench. Taking the totality of the facts and circumstances of this case into consideration, I concur with the view expressed by the co-ordinate Bench of the Tribunal for the assessment years 92-93 to 94-95 and the learned President that the interest-free loans to the employees was purely for the purposes of business.
12. I would also like to point out that assessee has amply demonstrated that it had surplus funds/capital for utilization by advancing interest-free loans to the employees. This is evident from the statement reproduced in para 11 of this order. Therefore, it cannot be said with some amount of certainty that the borrowed money has been diverted by the assessee for advancing loans to the employees. It is also relevant to mention that the money advanced to the employees has remained out of the control of the assessee-company for not more than three days. Therefore, if at all any disallowance is warranted, that would have to be calculated with reference to the said period of three days only.
13. In the ultimate analysis, I concur with the view expressed by the Id. President and on the basis of my view, the appeal of the revenue is liable to be dismissed.
14. The matter may be placed before the regular Bench for passing consequential order in accordance with the majority view.