Madras High Court
M/S.A.Murali & Co. (P) Ltd vs The Assistant Commissioner Of Income ... on 4 June, 2013
Author: Chitra Venkataraman
Bench: Chitra Venkataraman, K.B.K.Vasuki
In the High Court of Judicature at Madras Dated: 04.06.2013 Coram The Honourable Mrs.JUSTICE CHITRA VENKATARAMAN and The Honourable Ms.JUSTICE K.B.K.VASUKI Tax Case (Appeal) No.171 of 2010 M/s.A.Murali & Co. (P) Ltd., No. 13/2, Whannels Road, Egmore, Chennai 600 008. .. Appellant Vs. The Assistant Commissioner of Income Tax Company Circle I(1), Chennai 600 034. .. Respondent APPEAL under Section 260A of the Income Tax Act against the order dated 21.11.2008 made in I.T.A.No.1314/Mds/2006 on the file of the Income Tax Appellate Tribunal 'A' Bench for the assessment year 2002-03. For Appellant : Mr.M.P.Senthil Kumar For Respondent : Mr.Arun Kurian Joseph Standing Counsel for Income Tax --------- J U D G M E N T
(Judgment of the Court was delivered by CHITRA VENKATARAMAN,J.
This Tax Case (Appeal), filed at the instance of the assessee as against the order of the Income Tax Appellate Tribunal for the assessment year 2002-03, was admitted by this Court on the following substantial questions of law:
"1. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in upholding the disallowance of interest on borrowed funds merely on the ground that there was additional amount of advances given to directors, without any nexus being established between the borrowed funds and the advances made to Directors?
2. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in holding that interest on borrowed funds cannot be disallowed without any nexus between such borrowed funds and the advances made to Directors?
3. Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law in not holding that interest must be allowed as deduction on the basis of the submissions and evidences placed before it?"
2. The assessee is engaged in the business of export of beedi leaves and food grains. The assessee is also engaged in transport contracts. For the assessment year under consideration, the assessee declared a loss of Rs.3,71,680/-. When the assessment was taken up for scrutiny, it was found that the assessee had advanced loan to the Directors to a sum of Rs.3.91 crores as against what was given earlier at Rs.3.23 crores. The Assessing Officer viewed that the assessee had not utilised the borrowed funds for business purpose, but diverted the same for advancing loans to the Directors. Hence, the claim of interest payment is disallowed. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals).
3. Before the Commissioner of Income Tax (Appeals), the assessee contended that the borrowed funds were used only for the purpose of business, particularly for the purchase of Masoor Dhall from Sri Saravana Agency. The borrowed funds related to the earlier year and there was no borrowal during the relevant assessment year. In the circumstances, the assessee contended that the money advanced to the Directors/shareholders during the year were only out of the assessee's own funds and there was no nexus between the borrowed funds and the advance made to the Directors.
4. Considering the documents filed before the Commissioner of Income Tax (Appeals), a remand report was called for from the Assessing Officer. In the remand report, the Assessing Officer had stated that the assessee's contention that there was no nexus between the borrowed funds and the advances given to the Directors, was a fresh argument advanced during the appellate proceedings and further the disallowance of interest paid to the Bank on borrowals diverted in the form of loans/advances to Directors without corresponding return thereof in the form of interest was a subject matter of assessment for the assessment year 2001-02. The disallowance made for the assessment year under consideration was only a continuation of the position the Assessing Officer had taken in for the immediate preceding year. The rate of interest adopted for disallowance was raised by the Assessing Officer from 6% to 10%, as had been agreed to by the assessee. In the circumstances, the question of grant of relief did not arise. On going through the remand report, the Commissioner of Income Tax (Appeals) rejected the appeal preferred by the assessee. Aggrieved by this, the assessee went on further appeal before the Income Tax Appellate Tribunal.
5. The assessee reiterated the same contentions before the Tribunal. On a consideration of the materials placed by the assessee, the Tribunal pointed out that the assessee had not proved before the Assessing Officer that the interest bearing borrowed funds were exclusively used for the business purpose and they have not diverted as by way of loan to the Directors. The Tribunal pointed out to the fund flow position, whereby the advances made to the Directors during the immediate previous year showed the increase compared to the earlier balance and also the advances made by the Directors of the company had come down. Thus, on an analysis of facts, the Tribunal rejected the assessee's appeal. Aggrieved by this, the present appeal has been filed by the assessee.
6. Learned counsel appearing for the assessee streneously argued that the assessee had borrowed a sum of Rs.1.10 crores and odd on 08.05.2000 and the same was utilised for the purpose of purchase of Masoor Dhall from Sri Saravana Agency. Having regard to the close nexus therein, the question of disallowance of interest paid to the Bank does not arise. Consequently, he contended that the Tribunal had committed serious error in holding that the assessee had not proved that the interest bearing borrowed funds were exclusively used for the purpose of business.
7. In this connection, he placed reliance on the decision of this Court reported in (2008) 216 CTR (Mad) 180 (Commissioner of Income Tax V. Kandagiri Spinning Mills Ltd.) and contended that the amounts advanced by the assessee to the Directors being out of commercial expediency and in any event, the amount advanced were not out of the borrowed funds, the claim has to be sustained.
8. We do not agree with the above-said contention of the learned counsel appearing for the assessee, particularly for the reason that the issue is purely one of fact. Except for stating that the assessee had made borrowal in the immediate preceding accounting year, no materials were placed before this Court or before any other authority to show that the borrowed funds were not diverted for any purpose other than business. The mere contention that the borrowed funds were utilised for the purchase of Masoor Dhall from Sri Saravana Agency, per se, cannot be taken as a good ground to accept the plea of the assessee, considering the fact that consistently the advances given to the Directors had increased from Rs.3.23 crores to Rs.3.91 crores without corresponding return thereof and with no better performance in the business of the assessee. In the circumstances, we reject the arguments placed by the learned counsel appearing for the assessee based on the materials produced before this Court, which were already considered by the Tribunal as well as by the Commissioner of Income Tax (Appeals).
9. As far as the reliance placed on the decision reported in (2008) 216 CTR (Mad) 180 (Commissioner of Income Tax V. Kandagiri Spinning Mills Ltd.) is concerned, the same is distinguishable for the simple reason that the decision rested on the factual findings therein in that case by the Commissioner of Income Tax (Appeals) as well as by the Tribunal.
10. It may be seen that the above-said decision referred to the decision of this Court reported in (1999) 153 CTR (Mad) 153 (K.Somasundaram & Brothers V. CIT), wherein a similar question, as one before this Court, had arisen. In the said decision, this Court pointed out that the capital amount so borrowed should not only be invested in the business, but that the amount borrowed should continue to remain in the business and so long as the amount borrowed is used in the business, the interest paid on such borrowing is an expenditure which is required to be deducted in the computation of income from the business.
11. As rightly pointed out by the Tribunal, when the assessee had not showed any such nexus of the borrowed funds utilised in the business and continued to be used in the business, we have no hesitation in confirming the order of the Tribunal. Accordingly, this Tax Case (Appeal) stands dismissed. No costs.
sl To
1. The Income Tax Appellate Tribunal 'A' Bench
2. The Commissioner of Income Tax (Appeals)-III Chennai 34.
3. The Asst. Commissioner of Income Tax, Company Circle I (1) Chennai