Income Tax Appellate Tribunal - Pune
Pramod S. Talwalkar (Huf) vs Assistant Commissioner Of Income Tax on 12 October, 1999
Equivalent citations: [2001]75ITD492(PUNE)
ORDER
The only issue arising out of this appeal relates to the disallowance of Rs. 18,212, under section 36(1)(iii).
2. The assessee carries on the business of construction of flats and sale thereof. He had claimed expenditure of Rs. 3,41,130 on account of interest payable to bank. In the course of the assessment proceedings, it was found by the assessing officer that assessee had advanced sum of Rs. 1,25,000 to M/s. Swaroop Developers and Rs. 2,45,000 to M/s. Talwalkar & Bal, the sister concerns of the assessee without interest. The assessee was asked to show-cause why the interest relatable to the aforesaid advances should not be disallowed since such advances were given without interest out of the overdraft account with the bank. In response to this show-cause notice, it was explained that all the receipts by the way of interest paid advances from the flat purchasers and loans from the unsecured creditors were deposited in the aforesaid account and it was out of the such amount that the said interest paid advances were given to sister concerns. Hence, it could not be said that the advances were given out of borrowed amounts bearing interest. However, this explanation was rejected by the assessing officer by observing that advance received from the flat purchasers were utilised by the assessee in the construction work as was apparent from the closing balance of work in progress. On appeal, the assessee remained unsuccessful. Hence, the present appeal was preferred by the assessee.
3. The learned counsel for the assessee Mr. Khandelwal has assailed the order of Commissioner (Appeals). He took us through the factual aspects by pointing out that an overdraft account was maintained by the assessee with Bank of India which showed opening balance of Rs. 15,02,737 in which all business receipts were deposited including interest-free advances from flat purchasers and unsecured loans. Similarly, all expenses were met out of such account. According to him, not only profits of the business, but also interest free receipts were deposited in the aforesaid account. If out of such interest free receipts, any interest free advances were given, then it could not be said that such advances were given out of interest bearing borrowed funds. According to him, the date when the advances were given to the sister concerns, overdraft balance was much lesser than what was shown in the opening balance of the year. That itself shows that amount was advanced out of interest free business receipts. It was also submitted by him that he has no objection if such facts are verified by the assessing officer. In support of his contention, he drew our attention to the judgment of Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal) which was followed by that court in various other cases as Reckitt & Colman of India Ltd v. CIT (1982) 135 ITR 698 (Cal.), Alkali & Chemical Corporation of India Ltd. v. CIT (1986) 161 ITR 820 (Cal), Indian Explosives Ltd. v. CIT (1984) 147 ITR 392 (Cal) and British Paints (India) Ltd. v. CIT (1991) 190 ITR 196 (Cal). He then drew our attention to the Supreme Court judgment in the case of East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 (SC) wherein similar contention of the assessee was found having considerable force. He also relied on the decision of the Tribunal in the case of Durametallic (India) Ltd. v. IAC (1991) 38 lTD 211 (Mad-Trib) wherein similar contention has been accepted.
4. On the other hand, the learned Departmental Representative. has relied on the factual aspects dealt with by the assessing officer. According to him, there is no dispute that amount was advanced out of over draft account which itself shows that interest bearing funds were diverted to the sister concerns without charging interest. He drew our attention that interest free advances from the flat purchasers were received under the agreement with the stipulation that either such amount had been utilised for construction of building or would be so utilised in future. That means, such funds were earmarked for a particular purpose and, therefore, the assessee was duty bound to utilise the same in that manner. Therefore, it could be said that such deposits were not available for making interest free advances to sister concerns. He had also drawn our attention to the fact that work in progress had inclined from Rs. 44.28 lakhs to Rs. 75.98 lakhs while sales in the year have declined from Rs. 53.55 lakhs to Rs. 17.64 lakhs. On the basis of these facts, it could not be said that interest free funds were available for advancing the money to the sister concerns. According to him, the judgment of Supreme Court in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) and the decision of Bombay High Court in the case of CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom) were applicable to the facts of the case. He then distinguished the decision of Calcutta High Court on the ground that payment of advance tax was connected with carrying on the business. Further, the decision of Supreme Court in the case of Madhav Prasad Jatia (supra) was not cited before the Calcutta High Court. In respect to the Supreme Court judgment as East India Pharmaceutical Works Ltd.'s case (supra) it was argued by him that such contention of the assessee though found having considerable force, the Supreme Court did not decide the issue since such contention was not raised either before the Tribunal or High Court. Hence, it was prayed that order of Commissioner (Appeals) be upheld.
5. Rival submissions of the parties and the material placed before me have been considered carefully. In my opinion, there is considerable force in the submission raised on behalf of assessee which is well supported by the decision of Calcutta High Court in the case of Woolcombers of India Ltd. (supra) and the decision of Tribunal in the case of Durametallic (India) Ltd. (supra) as well as the Supreme Court judgment in the case of East Pharmaceutical Works Ltd. (supra). In the case before the Calcutta High Court the assessee paid the sum of Rs. 14,63,593 on account of advance tax out the over draft account maintained with the bank. The assessee was of the view that payment of advance tax was not business expenditure and accordingly, he disallowed the proportionate interest paid by the assessee. The assessee remained unsuccessful before the Appellate Assistant Commissioner as well as the Tribunal. Before the High Court, it was contended by the assessee as under :
"Where the profits of the assessee's business was sufficient to cover the payment of advance tax during the relevant accounting year, if such amount was paid from an account which included the amount of profits as well as the overdraft taken for the purpose of business, the presumption was that the tax was paid out of the profits and not out of the overdraft account and since the amount of the profits for the relevant year far exceeded the liability for advance tax and the entire amount of profits of Rs. 27 lakhs was deposited in the overdraft account out of which the bank remitted the advance tax, the tax was paid out of the earning of the profits and not out of the overdraft account taken for other business purposes."
The High Court accepting the contention of the assessee held as under :
"That on the facts of the case, the profits were sufficient to meet the advance tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business. Therefore, the interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should also have been allowed as an admissible deduction in the computation of the assessee's business income."
6. In the case before Madras Bench of the Tribunal Durametallic (India) Ltd.'s case (supra), the assessee had advanced the sum of Rs. 25 lakhs to its subsidiary company without interest from its overdraft account with Hong Kong Bank. The assessing officer had disallowed the interest under section 36(1)(iii) on the ground that there was diversion of interest bearing funds to its subsidiary company without interest for non-business purpose. Similar contention was raised by the assessee as has been raised in the present case. After considering the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. (supra) and the decision of Supreme Court in the case of Madhav Prasad Jatia (supra), it was held as under :
"The alternative submission of the assessee is that it had Rs. 114.53 lakhs as profits embedded in the current accounts including the overdraft account. The assessee has been crediting all the sale proceeds in its overdraft account and the assessee was having overdraft limits. These are the facts and in view of the mixture of funds in the overdraft account, the assessee's contention that to the extent of Rs. 25 lakhs the assessee should be deemed to have drawn from the sale proceeds credited into the overdraft account seems to be reasonable and the fund-flow statement relied upon by the assessee and thoroughly discussed in the order of the Commissioner (Appeals) clearly demonstrates how in this situation an amount of Rs. 25 lakhs though apparently drawn from the overdraft account is financed through the revenue receipts embedded in the overdraft account. In these circumstances, we hold that the Commissioner (Appeals) has rightly approved the matter from the businessman's point of view. The disallowance, therefore, in our view, is rightly deleted in the facts and circumstances of the case. In the result, we do not find any reason to interfere with the finding of the Commissioner (Appeals). We uphold his order on this point."
7. It would be now useful to refer to the decision of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. (supra). In this case, the assessee has paid certain amounts of advance tax out of its overdraft account and claimed interest paid on such account as business expenditure under section 37. The claim was rejected on the ground that amount of income-tax paid was not an expenditure laid out for the purpose of business. The assessee remained unsuccessful before the Tribunal as well as High Court. On appeal to Supreme Court, it was contended by the assessee "that the assessee having deposited the entire profits in the overdraft account and the amount thus deposited being much more than the income-tax liability and the tax paid, it should have been presumed that the taxes were paid out of the proceeds of the relevant year and not out of overdraft account for the running of the business. The assessee also produced the schedule appended to the assessment order to indicate that the amount of receipts deposited in the overdraft account was much more than the tax paid". The Hon'ble Supreme Court held as under:
"That although there was considerable force in the appellant's contention, the question whether a presumption could be drawn that the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business, would essentially depend upon whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for the relevant year and other germane factors. Since the appellant had not advanced the contention either before the Tribunal or the High Court, and the amplitude of the question posed before the High Court did not bring within its sweep the contention advanced by the appellant, it would not be appropriate for the court to look into the additional papers produced by the appellant for answering the question." (Head Note).
8. The aforesaid observations of the Hon'ble Supreme Court clearly upholds the contention of the assessee though it was not entertained on the ground that it was not taken before the Tribunal and High Court. It impliedly shows that such contention would have been allowed had it been raised before the Tribunal and High Court. The case was decided against the assessee on the ground that payment of income-tax did not amount to business expenditure in view of earlier Supreme Court judgments in the case of Madhav Prasad Jatia's case (supra) and Smt. Padmavati Jai Krishna v. Addl. CIT (1987) 166 ITR 176 (SC). In view of the above judgment of the Supreme Court and other decisions discussed above, in my view, the contention of the learned counsel for the assessee has merit and is accordingly accepted. However, the question whether payment to sister concerns paid out of profits of business and interest free receipts by way of unsecured loans or advances from flat purchasers can be decided only after investigations of facts by looking into the details of the overdraft account. Accordingly, the order of the Commissioner (Appeals) is set aside and the matter is restored to the file of the assessing officer with the direction to allow the claim of the assessee if it is established that payments to sister concerns were made out of business profits and interest free receipts deposited in the overdraft account.
9. Before parting with this order, I would like to mention the case-law referred to by the learned Departmental Representative. Heavy reliance was placed on the decision of Supreme Court in the case of Madhav Prasad Jatia (supra). In that case, the question before the court was whether payment of Rs. 5.5 lakhs to the college was business expenditure so as to claim payment of interest to bank as business expenditure. The answer to the question was in the negative. The contention as raised before this Bench was neither raised nor considered before/by the court. Therefore, the case is distinguishable on the facts. On similar basis, the decision of Bombay High Court in the case of Bombay Samachar Ltd. (supra) is distinguishable.
10. In the result, appeal of the assessee is allowed for statistical purposes.