Allahabad High Court
Triveni Engineering Works Ltd. vs Commissioner Of Income-Tax on 30 October, 1986
Equivalent citations: [1987]167ITR742(ALL), [1987]31TAXMAN128(ALL)
Author: N.D. Ojha
Bench: N.D. Ojha
JUDGMENT R.K. Gulati, J.
1. This is a cross reference under Section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), and concerns the assessment year 1971-72 for the period ending on January 31, 1970. M/s Upper India Sugar Mills P. Limited, a company, was engaged in the business of manufacturing crystal sugar. This company was amalgamated with M/s Triveni Engineering Works Ltd., New Delhi, with effect from February 1, 1970, as a result of an order passed by the Delhi High Court under the Companies Act, 1956. As a result thereof, all the profits of M/s Upper India Sugar Mills Ltd., together with its assets, became the property of M/s Triveni Engineering Works Ltd. Return for the assessment year in dispute was filed by M/s Triveni Engineering Works Ltd. and the merged company has been assessed to tax in respect of its income as a unit of M/s Triveni Engineering Works Ltd.
2. At the instance of the Department, the following two questions have been referred to this court for its opinion :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in relying on their order dated May 21, 1975, in 1TA Nos. 3975/1972-73 and 3058/1973-74 for the assessment years 1969-70 and 1970-71 (order not served on the CIT) and in deleting the addition of Rs. 16,30,110 made by the Income-tax Officer in the closing stock of sugar ?
2. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in law in holding that interest paid on the cane purchase tax arrears under the provisions of the U. P. Sugarcane (Purchase Tax) Act, 1961, was an allowable deduction under the Income-tax Act, 1961, and in deleting thereby the disallowance of interest of Rs. 3,08,800 ? "
3. At the instance of the assessee, the following questions have been referred to this court for its opinion :
"1. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of law, the hon'ble Tribunal was justified in disallowing a sum of Rs. 4,34,827 representing the amount of interest recoverable by the applicant from the Triveni Engineering Works Limited and upholding that, to this extent, the debt had not become bad and upholding that such an action was not above collusion, is not based on any evidence and is unreasonable ?
2. Whether, on a correct interpretation of law and, on the facts and in the circumstances of the case, the hon'ble Tribunal erred by not allowing the amount of Rs. 4,34,827 as a business expense on account of commercial expediency ?
3. Whether, on the facts and in the circumstances of the case, the hon'ble Tribunal was justified in interpreting that the applicant's action in not charging interest on loan due from Triveni Engineering Works Limited in this year tantamounts to remission of interest made by the applicant is not supported by any evidence on record and is unreasonable and perverse ?
4. Whether, on the facts and in the circumstances of the case, and on a correct interpretation of law, the disallowance amounting to Rs. 1,17,412 out of interest of Rs. 14,34,065 claimed by the applicant in this year is justified ? "
4. An addition of Rs. 16,30,110 was made in the year in dispute on account of undervaluation of closing stock of sugar held by M/s Upper India Sugar Mills Ltd. (hereinafter referred to as the assessee), at the close of the year. Till the assessment year 1968-69, the closing stock of sugar was invariably valued by the assessee at market price irrespective of the fact whether sugar was controlled or decontrolled. For the first time, in the previous year relevant to the assessment year 1969-70, this method of valuation was changed whereby the valuation of closing stock of free saleable sugar was taken on the basis of cost price or market price, whichever was lower. This was not accepted by the authorities. Closing stock was found to be undervalued by Rs. 23,60,011 in the assessment year 1969-70, and likewise by Rs. 17,30,314 in the assessment year 1970-71. For the present year, similar undervaluation was found to the tune of Rs. 16,30,110. The Income-tax Officer made corresponding additions of the amounts in the respective assessment years to the income of the assessee. For the first two years, the Income-tax Appellate Tribunal, by its consolidated order dated May 21, 1975, passed in Income-tax Appeals Nos. 3975 of 1972-73 and 3058 of 1973-74 deleted those additions while accepting the change in the method of valuation adopted by the assessee. The Tribunal observed as under:
"The change in the method of valuation has wrongly been taken by the authorities below to be mala fide. The conclusion, in our opinion, is based on mere surmises and conjectures. There is no denying the fact that the new sugar policy was announced by the Government, according to which 60% of the sugar produced by a sugar factory was to be sold at controlled rates. This was known as levy sugar. The percentage of levy sugar also fluctuated as in the assessment year 1969-70 it was 60% while in the assessment year 1970-71 it was 70%. The balance 40% or 30% sugar was to be sold in the open market. The rates of sugar were virtually fluctuating. If, therefore, in these circumstances, the assessee changed the method of its valuation from market price to market price or cost, whichever is lower, there is nothing mala fide in it especially when the changed method has consistently been followed in all the subsequent assessment years. On a consideration of the facts and circumstances of the case, we are of opinion that the change in the mode of valuation was bona fide."
5. The aforesaid order of the Tribunal has become final and the Department has not taken any further proceedings against it. There being no change in the method of valuation during the year with which this reference is concerned, the Tribunal deleted the addition for this year also following its earlier order. It may be noted that although an addition of RS. 17,30,314 was made on revaluation of the closing stock by the Income-tax Officer for the assessment year 19/0-71, yet he gave no benefit for that amount in valuation of the opening stock in the current year. In doing so, he observed that the assessee was contesting the earlier year's addition. The Appellate Assistant Commissioner, however, allowed this adjustment to the assessee. The Department and the assessee both appealed against this order to the Tribunal. As stated earlier, addition made on account of undervaluation of stock has been deleted by the Tribunal. It further held that as in the preceding year similar addition was also deleted, it followed that the corresponding benefit in the value of the opening stock in the current year was not called for, and the addition of Rs. 17,30,314 was accordingly restored and the departmental appeal was allowed on this score.
6. It is in this background that question No. 1 has been referred to us on the plea that each year is an independent year notwithstanding that the Tribunal had followed its earlier order which has been accepted by the Department.
7. Now, the method of valuation of stock is part of the method of accounting followed by an assessee. Section 145(1) of the Income-tax Act provides that " business " or " other sources " income should normally be computed in accordance with the method of accounting regularly employed by an assessee, if the assessee has maintained accounts. The section leaves it to the assessee to adopt any system of accounting. It obliges the Income-tax Officer to compute the income, profits and gains in accordance with such method of accounting regularly employed if the profits can be properly deduced. Explaining the provisions of Section 13 of the Indian Income-tax Act, 1922 (which corresponds to Section 145 of the Income-tax Act, 1961), the Supreme Court in CTT v. A. Krishnaswami Mudaliar [1964] 53 ITR 122, observed at page 128 as under :
"Section 13......prescribes that the computation of taxable profits shall be made according to the method of accounting regularly employed. Where in the opinion of the Income-tax Officer the income, profits and gains cannot properly be deduced from the method of accounting, it is open to the Income-tax Officer to compute the income upon such basis and in such manner as he may determine......under the Indian Income-tax Act, prima facie, the Income-tax Officer has for the purpose of Sections 10 and 12 to compute the income, profits and gains in accordance with the method of accounting regularly employed by the assessee. If, therefore, there is a system of accounting regularly employed and by appropriate "adjustments from the accounts maintained, taxable profit may properly be deduced, the Income-tax Officer is bound to compute the profits in accordance with the method of accounting."
8. In Investment Lid. v. CIT [1970] 77 ITR 533, the Supreme Court observed at pages 537-38 as under :
"A taxpayer is free to employ, for the purpose of his trade, his own method of keeping accounts, and for that purpose to value his stock-in-trade either at cost or market price. A method of accounting adopted by the trader consistently and regularly cannot be discarded by the departmental authorities on the view that he should have adopted a different method of keeping accounts or of valuation. The method of accounting regularly employed may be discarded only if, in the opinion of the taxing authorities, income of the trade cannot be properly deduced therefrom. Valuation of stock at cost is one of the recognised methods. No inference may, therefore, arise from the employment by the company of the method of valuing stock at cost, that the stock valued was not stock-in-trade."
9. From these decisions, it is clear that profits of a business are to be computed in accordance with the method of accounting employed by an assessee. The Income-tax Officer is bound to follow that method unless he comes to a finding that although' the accounts are correct and complete to his satisfaction, yet the method employed is such that in his opinion, the income cannot properly be deduced therefrom. In such a situation, the law permits him to compute the profits in the manner he may determine.
10. It is also settled law that the purpose of entering the value of the closing stock in the account of an assessee is not to taring to charge any appreciation in the value of the stock. The purpose of crediting the unsold stock (the closing stock) is to balance the cost of those goods entered on the other side of account at the time of their purchase so as to work out the profits for a given period on the stock sold. The import of entering the value of unsold stock in the balance-sheet of a trader and his right to value the same on cost or market price has been explained by the Supreme Court in Chainrup Sampatram v. CIT [1953] 24 ITR 481. At page 485 of the report, it is observed:
"It is wrong to assume that the valuation of the closing stock at market rate has, for its object, the bringing into charge any appreciation in the value of such stock. The true purpose of crediting the value of unsold stock is to balance the cost of those goods entered on the other side of the account at the time of their purchase, so that the cancelling out of the entries relating to the same stock from both sides of the account would leave only the transactions on which there have been actual sales in the course of the year showing the profit or loss actually realised on the year's trading......
From this rigid doctrine, one exception is very generally recognised on prudential grounds and is now fully sanctioned by custom, viz., the adoption of market value at the date of making up accounts, if that value is less than cost. It is of course an anticipation of the loss that may be made on those goods in the following year, and may even have the effect, if prices rise again, of attributing to the following year's results a greater amount of profit than the difference between the actual sale price and the actual cost price of the goods in question '. While anticipated loss is thus taken into account, anticipated profit in the shape of appreciated value of the closing stock is not brought into the account, as no prudent trader would care to show increased profit before its actual realisation. This is the theory underlying the rule that the closing stock is to be valued at cost or market price, whichever is the lower, and it is now generally accepted as an established rule of commercial practice and accountancy."
11. Now, under the Income-tax Act, there is no provision providing for a method for valuing the closing stock. However, the ordinary principles of commercial accounting require that while drawing the profit and loss account, a trader or manufacturer may take the value of the stock-in-trade at the beginning and at the end of the period covered by the account either at cost or market price, whichever is the lower. In the present case, this is what has been done by the assessee when it changed its method of valuing the stock for the first time in the assessment year 1969-70. The Income-tax Appellate Tribunal has granted approval to this method by its consolidated order for the earlier two years. The objection of the Department in the present case is that once the assessee has exercised its option in respect of valuing its closing stock on market value, it cannot be permitted to change such method in any circumstances at any subsequent point of time. The case set up by the Department cannot be accepted. In this connection, we refer to a decision of this court. In New Victoria Mills Co. Ltd. v. CIT [1966] 61 ITR 395, this court held (headnote):
"Though it is open to an assessee to change his method of accounting, the change should be bona fide and not a casual departure from the regular method which has hitherto been accepted by him for a number of years."
12. Similar view has also been expressed by the Madras High Court in Indo-Commercial Bank Ltd. v. CIT [1962] 44 ITR 22.
13. The Kerala High Court in Forest Industries Travancore Ltd. v. CIT [1964] 51 ITR 329, relying upon the decision of the Madras High Court referred to above, held (as would be evident from the headnote of the report):
"The assessee was entitled to change his method of valuation of stock in this manner even though the Revenue may be affected adversely by such change. It is a concession given to the assessee based on the well recognised usage of the trade, and the principle underlying that concession is in no way violated when the assessee changes his method of valuation from cost to market value, when the latter is less than the cost price, provided the change is bona fide and the new system is continued in subsequent years."
14. There are numerous other decisions to support this proposition. What follows from those decisions as well as from the established rules of practice and accountancy is that the stock-in-hand at the end of the year is to be valued either at cost price or market value, whichever is lower. It is a concession given to the assessee and he is entitled to use any method he chooses to adopt, the limitation being that he must regularly adhere to it and follow that system consistently in the subsequent years. In other words, the change should not be casual for temporary gain or for temporary purpose. It must be a bona fide change motivated by business considerations. In the instant case, there is no allegation of lack of bona fides or a statement to the effect that the changed method was not followed in the subsequent years. We have extracted in extenso the findings of the Income-tax Appellate Tribunal in this regard. The assessee had changed its method of valuing its closing stock from market price to cost price or market value, whichever is lower, on bona fide business considerations and to ward off a notional hike in the profit and loss on account of fluctuation in decontrolled sugar which was the subject-matter of valuation at the end of each year. There is a further finding that this change over adopted by the assessee has been regularly followed. The learned standing cousel has not disputed these findings. Another submission made before us by the standing counsel is that the assessee cannot unilaterally change the method of valuation. In support of this proposition, he relied upon a decision of this court in Shiv Prasad Ram Sahai v. CIT [1966] 61 ITR 124. In our opinion, that case is clearly distinguishable and has no application to the present case. That was a case where the assessee carried on, inter alia, business of money-lending. In respect of a particular loan advanced by the assessee, interest income was being returned on the mercantile system, that is, on accrual basis. For the relevant year, the interest income which had accrued was not debited to the debtor's account nor was the interest income returned for assessment purposes. The stand taken by the assessee was that the debtor firm was in an embarrassed financial condition, and, therefore, the assessee wanted to be assessed on receipt basis. Dealing with such a situation, this court held that it may be open to an assessee to vary the terms of a particular contract but the variation must be by mutual agreement. It is not open to him to keep alive the contract and his rights thereunder, but, for the purposes of income-tax, to say that he will not debit the interest which may have accrued as a debt in its accounts for any reason whatsoever. As stated earlier, we are not concerned with that proposition. Moreover, the year in dispute is not the year in which the assessee has changed its method of valuing its closing stock. The change had been effected in the assessment year 1969-70 which was approved by the Income-tax Appellate Tribunal and was allowed to be followed in 1970-71. The decision of the Tribunal has become final as we are informed at the bar that the Department has not taken any reference proceedings, etc., against that order. The Tribunal, for this year, has merely followed its earlier year's order. In the question referred, there is a mention whether the Tribunal was right in following its earlier order for the year in dispute (order not served on the CIT). We have not been able to appreciate the significance of remarks " order not served on the CIT ". From the Tribunal's order, it does not appear that any such objection was taken before the Tribunal when the appeal was heard and what was its effect. In fact, in the statement of the case drawn up by the Tribunal also, there is no reference to this fact. However, proceeding on the footing that the earlier order was not served on the Department when the Income-tax Appellate Tribunal decided the appeal for the present year, in our opinion, it would not make any difference in binding effect of the findings recorded therein so long as it is not disputed that the said order has been accepted by the Department although it was served later. Having regard to the aforesaid discussion and in the circumstances of the case, we are of the opinion that the Tribunal did not commit any error of law in following its order for the earlier years and in deleting the addition of Rs. 16,30,110 made by the Income-tax Officer on account of undervaluation of closing stock of sugar. In doing so, the Tribunal only permitted the assessee to follow a method of accounting for valuation of its stock which the assessee was allowed to change in the assessment year 1969-70. The assessee was obliged to follow it. The view taken by the Tribunal on the deletion of Rs. 16,30,110 in the circumstances of the case cannot be assailed with any justification whatsoever.
15. We now take up question No. 2. A sum of Rs. 3,08,800 was disallowed out of revenue expenses claimed by the assessee. This represented interest paid by the assessee on cane purchase tax arrears. According to the provisions of the U.P. Sugarcane (Purchase Tax) Act, 1961, if the purchase tax is not paid by the prescribed date, the defaulter is liable to pay it together with interest at the rate of 6% per annum till the dues are paid by him. The disputed amount was disallowed on the ground that payment of interest under the aforesaid provision of the said Act is on account of infringement of law and thus it could not be treated as revenue expenditure. Reliance for this view was placed on the decision of the Delhi High Court in CIT v. Mahalaxmi Sugar Mills Ltd. [1972] 85 ITR 320. The Income-tax Appellate Tribunal, however, allowed the assessee's claim relying upon a decision of this court in Kamlapat Motilal v. CIT [1976] 104 ITR 783. Pending decision in this reference, the view taken in Kamlapat Motilal's case [1976] 104 ITR 783 (All) was overruled by a Full Bench of this court in Saraya Sugar Mills (P.) Ltd. v. CIT [1979] 116 ITR 387. When this reference came up for hearing earlier before another Division Bench of this court, it felt that in view of a later decision of the Supreme Court in Mahalaxmi Sugar Mills Co. v. CIT [1980] 123 ITR 429, the decision in the case of Saraya Sugar Mills (P.) Ltd. [1979] 116 ITR 387 required reconsideration and the matter was referred to a larger Bench, The decision of the larger Bench is Triveni Engineering Works Ltd. v. CIT [1983] 144 ITR 732, The view now taken by this court is that the Full Bench decision in Saraya Sugar Mills (P.) Ltd.'s case [1979] 116 ITR 387 (All) does not lay down the correct law. The correct law was laid down in the Division Bench decision of this court in Kamlapat Motilal's case [1976] 104 ITR 783. As stated earlier, the Income-tax Appellate Tribunal, while allowing the claim of the assessee, had followed the Division Bench decision in Kamlapat Motilal's case [1976] 104 ITR 783 (All) which has since been approved by a Bench of five judges of this court and we are bound by it. In the circumstances, no fault can be found in the decision of the Income-tax Appellate Tribunal. The Tribunal is right in holding that a sum of Rs. 3,08,800 paid by the assessee by way of interest on cane purchase tax arrears under the provisions of the U.P. Sugarcane (Purchase Tax) Act, 1961, is an allowable deduction under the Income-tax Act, 1961.
16. Coming to the questions referred at the assessee's instance, the first three questions are concerned with the taxability of Rs. 4 34,827 being the amount of interest due to the assessee from M/s. Triveni Engineering Works Ltd. Rs. 18'34 lakhs were due as principal amount which the assessee had advanced as interest-bearing loan to M/s. Triveni Engineering Works Ltd. The assessee had been charging interest on the aforesaid amount by debiting the amount of the debtor. The assessee was also being assessed every year on such interest on accrual basis. In the accounts relating to the year in dispute, the assessee had debited the account of the debtor company as in the past but subsequently this entry, which amounted to Rs. 4,34,827 was reversed with a narration " irrecoverable ". The assessee also did not return Rs. 4,34,827 as part of its income on accrual basis as it had done in the past. When called upon by the Income-tax Officer to show cause why the accrued amount of interest be not brought to tax, the assessee gave the following explanation :
" In short, we again repeat that advance of money made by the company were business transactions and seeing that the Triveni Engineering Works Ltd. would not be able to pay back the original loans, there was no point to continue charging them interest. In fact, not charging interest from them was in the longer run in the interest of the company and it enabled the said Triveni Engineering Works Ltd. to come on its own footing and thus it was in a position to repay the loans to its creditors which included the loan given by this company."
17. This explanation given by the assessee did not find favour either with the Income-tax Officer or the Appellate Assistant Commissioner. Before the Income-tax Appellate Tribunal, the assessee claimed that the disputed amount was in the nature of remission in favour of Triveni Engineering Works Ltd. on account of commercial expediency and thus it was not taxable. The assessee's contention has been noticed by the Tribunal in paragraph 18 of its order in the following manner :
"The assessee has, however, pleaded before us that the Triveni Engineering Works Ltd. was running in loss for a number of years and there was hardly any likelihood of recovery of this amount from that concern. In the circumstances, the judgment of the assessee in allowing the remission was claimed to be the result of commercial expediency."
18. The Income-tax Appellate Tribunal has disposed of the appeal on this point in the following manner :
"The question is whether to this extent the debt due from the Triveni Engineering Works Ltd. could be held as having become bad. We are unable to hold so when the principal amount of over Rs. 18 lakhs was itself treated as good debt and recoverable. It thus shows that the assessee had full hope of recovery of that amount. It, therefore, could not be said that for such smaller amount of over Rs. 4 lakhs, the possibility of recovery was entirely ruled out. It might be that Triveni Engineering Works Ltd. had for some years undergone losses. However, the Upper India Sugar Mills Ltd. had chosen to get itself merged with that company. It could not be that thereby the merger was being sought with a sinking concern. The Upper India Sugar Mills Ltd. must have found some advantage in that merger. There was thus a likelihood of the Triveni Engineering Works Ltd. turning over a better leaf. We, therefore, are unable to hold that the interest of Rs. 4,34,827 had become a bad debt during this year which could justify its being written off by the Upper India Sugar Mills Ltd. Its action in doing so before the merger was thus not above collusion.
We, therefore, maintain the disallowance."
19. The learned counsel for the assessee submitted before us that the Income-tax Appellate Tribunal misdirected itself in maintaining the addition on grounds, inter alia, that it did not advert itself to the question raised on behalf of the assessee, namely, that the amount is not liable to be included in the assessee's assessment on the principle that the amount of interest was forgone on grounds of commercial expediency. Whether the assessee could be exonerated from the taxability of Rs. 4,34,827 on the grounds, inter alia, (a) no income accrued to the assessee, (b) the amount in question constituted a loss incidental to the carrying on of the business, and (c) even otherwise the remission was justified and could be claimed as a business expense. Learned counsel for the assessee further submitted that it was not the case of the assessee that the amount in question was a bad debt and thus irrecoverable. In fact, no argument was addressed to us on behalf of the assessee to the effect that the disputed amount could be claimed as a bad debt in terms of the provisions contaned in Section 36(1)(vii) read with Sub-section (2) thereof. In view of the assessee having abandoned its claim of interest being allowed as bad debt, it is not necessary for us to express any opinion on this point and accordingly we record no answer to question No. 1 referred at the assessee's instance.
20. Now, we are left to deal with questions Nos. 2 and 3 which are interconnected and based on the contention that the amount in question should have been allowed either as loss or expenditure or even as forgoing income on the basis of commercial expediency. This question was raised before the Tribunal as already shown earlier. Unfortunately, the Tribunal has not dealt with it. Of course, it is a question arising out of the order of the Tribunal and we are competent to deal with it on merits but as the Tribunal has not brought all the necessary facts on record showing how and what commercial expediency the assessee had in mind except that it would have lost the principal amount also if the claim for interest was pressed against the debtor company in view of its financial difficulties. This fact either has not been investigated by the Tribunal. There might be other material relevant to the enquiry which has not been brought on record as the Tribunal has not dealt with the case from that angle. In the circumstances, we do not propose to answer these questions but remand the matter to the Tribunal to rehear and decide afresh the appeal on this point. The Tribunal, if necessary, may take further evidence. The course we have adopted on these two questions was taken by the Supreme Court and it considered it fit to remand the case to the Tribunal with a direction that it should rehear the appeal (see CIT v. George Henderson & Co. Ltd. [1967] 66 ITR 622 (SC) and CIT v. Greaves Cotton & Co. Ltd. [1968] 68 ITR 200 (SC)). This course was adopted by this court in Asharfi Lal Radhey Shyam, Hathras v. CIT [1978] UPTC 317.
21. Coming to the last question referred at the instance of the assessee, the brief facts are that the assessee had borrowed from the bank interest-bearing loans. In respect of the interest paid to the bank on such loans, the assessee claimed deduction thereof under Section 36(1)(iii) of the Act. The Income-tax Officer disallowed part of such claim on the ground that the loans so borrowed were diverted in part for purposes other than the assessee's own business. The funds so diverted included an amount of Rs. 15,99,537.74 given to M/s. Triveni Engineering Works Ltd. There were certain other amounts which were given to the near relations of the directors of the assessee-company. On the loans given to the near relations of the directors, the assessee charged interest though at a rate lower than what the assessee was paying to the bank on such borrowings. No interest was charged on the loans advanced to M/s. Triveni Engineering Works Ltd. The disallowance was worked out at Rs. 1,41,861 by the Income-tax Officer which was proportionate to the interest which could have been charged by the assessee on the money due to it from the aforesaid debtors. The assessee appealed to the Appellate Assistant Commissioner. One of the contentions raised was that the assessee had taken no loan for the purpose of advancing money to the persons in respect of which the disallowance has been made by the Income-tax Officer. This part of the case was not accepted by the Appellate Assistant Commissioner and was eventually given up before the Tribunal inasmuch as the claim for reduction of interest was pressed on altogether different grounds. The action of the Income-tax Officer was sustained in the first appeal, but some relief was allowed in the quantum of disallowance made by the Income-tax Officer. The Income-tax Appellate Tribunal, on second appeal, deleted the disallowance of interest, following its earlier order on loans advanced to near relations of the directors. As regards the disallowance on account of loans advanced to M/s. Triveni Engineering Works Ltd., the Tribunal sustained the disallowance. Before the Tribunal, the only argument advanced on behalf of the assessee was that in the immediately preceding year, no such disallowance was sustained. The assessee referred to a letter dated May 24, 1968, whereby M/s. Triveni Engineering Works Ltd. had requested for remission of accrued interest in full on account of its adverse financial position and in pursuance of such, a request, the interest was remitted and it was confirmed by the board of directors of the assessee-company by a resolution which was to the following effect:
" Resolved that the action of the company in not charging any interest on loan of Rs. 15,99,537'74 standing against the Triveni Engineering Works Ltd. as on April 30, 1968, be and is hereby confirmed."
22. The contention which was pressed before the Tribunal was that as a result of the letter dated May 24, 1968, and the resolution extracted above, the action in not charging interest from the debtor company was justified and no exception could be taken to it. However, the Tribunal held as under:
" In our opinion, both these documents when read together make it clear that remittance of the interest accrued in the past only was sought, and the same was allowed. There is, therefore, nothing to assume that the interest for the present year was also waived. We are, therefore, unable to accept the assessee's case so far as this interest remission is concerned."
23. Learned counsel for the assessee contended before us that there was no justification for the Tribunal to sustain the disallowance in view of the fact that the Tribunal had deleted such disallowance where the assessee had charged a lesser rate of interest on the loans advanced to near relations of the directors. Whether the Tribunal was right in giving the relief to the assessee to the extent it did, we are not called upon in this reference to examine. As stated earlier, the claim for deduction of the interest paid to the bank was based under Section 36(I)(iii) of the Act and the relevant provisions read as under :
" 36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28--......
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession."
24. From a bare reading of the aforesaid provisions, it is evident that before a deduction of a claim under the aforesaid section could be allowed, the following conditions must be satisfied :
1. That money must have been borrowed by the assessee.
2. It must have been borrowed for the purposes of the assessee's own business.
3. The assessee must have paid interest on the said amount and claimed it as deduction,
25. In other words, borrowing of capital should be genuine and not a colourful or illusory transaction. Interest on such loans can be allowed under the aforesaid provision only if it is proved that the loans were utilised in the accounting year for the assessee's own business. If the loan was incurred not for the purpose of the assessee's business but for the benefit of someone else, the interest on such loans cannot legitimately be claimed under Section 36(1)(iii) of the Act. Such a claim would only be a device adopted to reduce the tax liability of the assessee. As noticed earlier, the findings of the tax authorities are that part of the loans borrowed from the bank were diverted. The assessee has not been able to prove that the disputed loans were taken for its own business purpose or that advancing loans to M/s. Triveni Engineering Works Ltd. was in connection with the assessee's business. In fact, no such case was pleaded before the Tribunal. The deduction was sought on the ground that in view of the embarrassed financial condition, there was justification for not charging interest from the debtor. Such a consideration is not germane to the allowance of deduction within the scope of the provisions contained in Section 36(1)(iii) of the Act. In view of the aforesaid discussion, the disallowance sustained by the Income-tax Appellate Tribunal cannot be assailed.
26. In the result, the questions referred at the instance of the Department are answered in the affirmative, in favour of the assessee and against the Department. Questions referred at the instance of the assessee are answered as under:
Question No. 1.--No answer is returned for the reasons stated earlier.
Question Nos. 2 and 3.--They are returned unanswered with the direction that the Income-tax Appellate Tribunal may rehear the appeal as indicated earlier in this judgment.
Question Nos. 4.--It is answered in the affirmative, against the assessee and in favour of the Department.
27. In view of the divided success of the parties, we make no order as to costs.