Income Tax Appellate Tribunal - Chandigarh
Assistant Commissioner Of Income-Tax vs Nahar International Ltd. on 22 July, 2004
Equivalent citations: [2006]98ITD96(CHD), (2006)99TTJ(CHD)1320
ORDER
1. This appeal by the Revenue and Cross Objection by the assessee arise from the order dated 31-7-1998 passed by ld. CIT(A)(C) for assessment year 1995-96.
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 crores made to its workers for the purchase of shares of the assessee-company.
2. The ld. 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 Assessing Officer on account of deduction under Section 80-I 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 crores as interest-free loan to its employees for purchasing shares of the company. The assessee-company had paid a sum of Rs. 659.79 lakhs as interest on loan and claimed it deductible under Section 36(1)(iii). Before the Assessing Officer, the assessee submitted that the company was having Rs. 13,535.72 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 Assessing Officer 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 Assessing Officer 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 crores were not utilized for business purposes. Relying on the decisions in 121 ITR 475 (sic), Shankar Theatres v. CIT and CIT v. H.R. Sugar Factory (P.) Ltd. , the Assessing Officer disallowed the proportionate interest of Rs. 49.68 lakhs computed at the rate of 18 per cent 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/Chd./1996 for assessment year 1992-93. It was mentioned that the disallowance made in assessment year 1993-94 was also deleted in ITA No. 129/Chd./1996.
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 assessment year 1992-93, as is apparent from order of the Tribunal, were only Rs. 131.18 lakhs, while the loan advanced during the year was 2.76 crores. There is a specific finding in assessment year 1992-93 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 shareholders' 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 assessment year 1992-93, 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 Assessing Officer 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 31-3-1995 and submitted that the assessee is having reserve and surplus amounting to Rs. 13,535.72 lakhs, in addition to capital of Rs. 2,089.42 lakhs. 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 assessment year 1992-93, wherein the Tribunal deleted the disallowance made under similar circumstances amounting to Rs. 2.80 lakhs. In ITA No. 1314/Chd./1996, etc., for assessment year 1994-95 dated 6-11-2002, when the issue came before the Tribunal relating to disallowance of interest under Section 36(1)(iii), it noted that the assessee had advanced interest-free loan amounting to Rs. 154.93 lakhs to its employees, out of which a sum of Rs. 131.18 lakhs were advanced by the company to its employees in February 1992 for the purchase of shares of the assessee-company. The assessee was having reserve and surplus amounting to Rs. 5,361.80 lakhs, 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 assessment year 1992-93, the Tribunal deleted the disallowance made by the Assessing Officer. 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 assessment year and the finding given by the Tribunal in one assessment year is applicable to the subsequent assessment year 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 31-3-1995, giving details as under:--
Balance sheet as on 31st March, 1995 __________________________________________________________ Rs. (in lakhs) 31st March, 1995 __________________________________________________________ 31st March, 1994 Source of funds Shareholder's funds Capital 2089.42 666.70 Reserve and surplus 13535.72 15625.14 5361.90 6028.50 Loan funds Secured loans 9599.96 5167.40 Unsecured loans 9599.96 500.00 5667.40 Application of 25225.10 11695.90 funds Gross block Less 9677.31 5027.59 depreciation Net block 2328.42 2012.60 Capital work 7348.89 3014.99 in progress 594.22 7943.11 613.42 3628.41 Investments 5401.52 1731.61 13344.63 5360.02 __________________________________________________________ Rs. (in lakhs) 31st March, 1995 __________________________________________________________ Current assets Loans and advances Inventories 6953.01 3380.95 Sundry debtors 4781.62 3608.11 Cash and bank balances 637.77 397.28 Loans and advances 2926.62 1797.77 15299.02 9184.11 Less:
Current liabilities & provisions Liabilities 3147.93 2756.10 Provision 270.62 199.99 Net current 3418.55 2956.09 assets Misc. 11880.47 6228.02 expenditure 107.86 (to the extent 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 Assessing Officer in the order that interest-free loan amounting to Rs. 2.76 crores 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 assessment year 1994-95 (supra), we find it as a fact that the assessee has advanced interest-free loan amounting to Rs. 154.93 lakhs to its employees, out of which Rs. 131.18 lakhs advanced to its employees in February 1992 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 crores was the opening balance and balance of Rs. 1.22 crores advanced during the year. So far as fact relating to interest-free loan amounting to Rs. 1.54 crores balance as on 31-3-1994 is concerned, we feel that the Assessing Officer cannot disallow interest under Section 36(1)(m) on this amount even on proportionate basis as deletion of such disallowance is duly covered by the order of the Tribunal dated 6-11 -2002 (supra), as there is a clear 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 assessment years 1992-93, 1993-94 and 1994-95, we confirm the order of the CIT(A) insofar as it relates to the deletion of disallowance on proportionate interest to be computed at the rate of 18 per cent on Rs. 1.54 crores is concerned. For balance interest disallowed which relates to the amount advanced by the assessee during the year amounting to Rs. 1.22 crores, 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 lakhs
Increase in capital 1,422.72
Increase in reserve and surplus 8,173.92
Increase in secured loans 4,432.56
Total increase in funds 14,029.20
We also note that these funds have been applied by the assessee in the following manner:--
Amount in lakhs
Reduction in unsecured loans 500.00
Addition in fixed assets 4,314.70
Increase in long-term investment 3,669.91
Net increase in current assets 5,544.59
Total funds applied 14,029.20
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)(m), 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 Assessing Officer 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 lies 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 Assessing Officer has observed as under :--
...There is no denial of the fact that the interest-bearing funds have been put to use for non-business purposes.
This observation of the Assessing Officer 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 feel that the assessee is not entitled for deduction of interest on borrowed capital 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 Assessing Officer to disallow interest on a sum of Rs. 1.22 crores inferred to have been advanced to the employees during the year at the rate of 18 per cent, i.e., the rate which has been applied by the Assessing Officer while disallowing interest under Section 36(1)(m). 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 80-I 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 Assessing Officer 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 assessment years 1992-93, 1993-94 and 1994-95 and deduction claimed was allowed by the Tribunal during assessment years 1989-90 to 1991-92 accepting the system of accounting regularly followed by the assessee. The Assessing Officer, however, invoking the provisions of Section 80-I(6), 80-I(8) and 80-I(9) recomputed deduction under Section 80-I at 'nil'. In first appeal, the CIT(A) directed the Assessing Officer to allow deduction following the order of the Tribunal for assessment year 1992-93.
4.1 Before us, ld. DR. relied on the order of the Assessing Officer, while ld. AR relied on the order of the Tribunal dated 6-11-2002 (supra).
4.2 After carefully considering the rival submissions, we find that the Tribunal in para 6 of its order dated 6-11-2002 (supra) has held that the provisions of Section 80-I(8) and 80-I(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 assessment years. 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. The same is upheld and revenue's ground of appeal is dismissed.
5. Coming to the CO of the assessee, we find that the Assessing Officer 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 relied on the order of the Tribunal dated 6-11-2002 (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 Assessing Officer and also on the decision in the case of United Catalysts (India) Ltd. v. CIT .
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. Dy. CIT [2003] 84 ITD 49 (Delhi), 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 clear that the former is more specific and the latter more general. In clear and unambiguous terms the Legislature has used the words 'rent and depreciation'. Though the latter is not covered in the expression 'expenditure' as held by the Supreme Court in the case of Pandyan Insurance Co. Ltd. v. CIT , yet these expressions find a place in Sub-section (4) of Section 37 which goes to show that allowance relating to depreciation has been covered in the sub-section intentionally. Thus, if viewed in the light of intention, of the Legislature, the deduction in respect of rent and depreciation is not allowable as per the provisions of Section 37(4) and (5).
In the circumstances, the expenditure relating to rent and allowance relating to depreciation pertaining to the guest house is not allowable. Thus, the tax authorities were justified in rejecting the claims on account of rent and repairs qua guest house.
The aforesaid decision of the Special Bench is binding on us. Therefore, respectfully following the said decision, we confirm the disallowance made by the Assessing Officer on account of guest house expenses and reject the grounds of the CO.
6. In the result, while appeal of the revenue is partly allowed; the cross-objection filed by the assessee is dismissed.
Vimal Gandhi, President
1. I have gone through the order proposed by my learned brother but I 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 crores to its employees free of interest as loan for purchasing share of the assessee-company. The Assessing Officer 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 per cent of Rs. 2.76 crores.
3. On appeal, the learned 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. 1314/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 per cent 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 Government 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 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 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 out-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 and 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 out 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, while 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 dated 6-11-2002. 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. [1970] 77 1TR 410 (Punj. & Har.) 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 out 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 all other 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.
ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 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 Appellate Tribunal under Section 255(4) of the Income-tax 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?
THIRD MEMBER ORDER M.A. Bakshi, Vice President
1. The appeal of the revenue and the cross- objection of the assessee for the assessment year 1995-96 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 issue are that the assessee had offered certain percentage of shares to its employees as per the guidelines regarding Employees Stock Option Scheme issued on 1-8-1985. As per the said Scheme, the companies while proposing further issue of capital are required to reserve 5 per cent 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 assessee advanced a sum of Rs. 2.76 crores as interest-tree 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 Assessing Officer 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 Assessing Officer 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. 13,535.72 lakhs as reserves in addition to own capital of Rs. 2,089.42 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 Assessing Officer 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 Assessing Officer 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 Assessing Officer 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 at the rate of 18 per cent 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 ITA No. 128/Chd./1996 for the assessment year 1992-93 and ITA No. 129/Chd./1996 for the assessment year 1993-94, where on similar facts, the disallowance made by the Assessing Officer was deleted.
4. The revenue appealed to the Tribunal against the decision of the CIT(A). The ld. Accountant Member proposed an order partly allowing the appeal of the revenue. The disallowance of interest, as per the proposed order by the ld. 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 ld. President disagreed with the proposed order of the ld. Accountant Member in regard to the issue relating to partial disallowance of interest. The ld. President has referred to the order of the Tribunal for the assessment year 1994-95 where similar disallowance has been deleted in ITA No. 1314/Chd./1996 vide order dated 6-11-2002 rendered by following its own order for assessment years 1992-93 and 1993-94. The ld. 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 1992-93, 1993-94 and 1994-95. In the dissenting order, the ld. President has pointed out that in the assessment year 1992-93, 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 came back to the assessee within 3 days." The ld. President has also referred to the decision of Hon'ble jurisdictional High Court in the case of Dalmia Dadri Cement Ltd. (supra), in support of the proposition of law that once a view is taken by an 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 ld. 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 ld. 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 ld. 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 per cent 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 ld. 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 lime of enhancement of share capital, the assessee had reserved 5 per cent 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 Assessing Officer out of the interest paid on borrowed kinds. In assessment years 1993-94 and 1994-95 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 per cent of additional shares for the employees and advancing interest-free loans to them for the purpose of enabling them to purchase the shares. The ld. 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 ld. Counsel for the assessee has filed a statement to explain the surplus available with the company during the previous year, which ended on 31-3-1995 (placed at page 1 of the paper-book). With reference to the above statement, the ld. 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 per cent. 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 ld. 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. v. Their Workmen . 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 ld. Counsel, the assessee-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 ld. President may be preferred to the view expressed by the ld. Accountant Member. It was, accordingly, pleaded t hat 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-tree 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 per cent 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] 6l Company Cases (Statute) 163, is reproduced here-under 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 per cent of the further issue for their employees/workers on an equitable 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 per cent 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 1992-93, the assessee had enabled the employees/workers to acquire the shares of the company to the extent of 5 per cent 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 Assessing Officer had made a similar disallowance in assessment year 1992-93. 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 1992-93 has been reproduced by the ld. President in the dissenting order. For the sake of coherence and ready reference, para 15 of the ITAT's order for the assessment year 1992-93 (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 lakes 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 1992-93 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 assessee-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 the tune of Rs. 14.77 crores from which the amount could be 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 :--
NAHAR INTERNATIONAL LIMITED CALCULATION OF SURPLUS AVAILABLE WITH THE COMPANY DURING THE YEAR 1994-95 Year ended on 31-3-1995 Rs. In lakhs 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 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 1992-93 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. (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 , it has been held that the State Government 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 assessee 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 1992-93 and followed in assessment years 1993-94 and 1994-95. 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 1992-93 to 1994-95 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 ld. 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.
ORDER 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.