Income Tax Appellate Tribunal - Delhi
Deputy Commissioner Of Income Tax vs Samtel Electron Devices Ltd. on 17 January, 2005
Equivalent citations: (2006)100TTJ(DELHI)706
ORDER
R.V. Easwar, Vice President
1. The only ground taken by the Department in this appeal is that on the facts and in the circumstances of the case, the CIT(A) erred in deleting the disallowance of the interest of Rs. 27,30,600.
2. The assessee-respondent is a company. We are concerned with the asst. yr. 1991-92 for which the previous year ended on 31st March, 1991. The assessment was originally framed under Section 143(3) of the IT Act, but on appeal it was set aside by the CIT(A) with the direction, inter alia, to consider afresh the disallowance of the interest. Accordingly, the assessment was reframed on 29th Feb., 1996 under Section 143(3) r/w Section 251. In this reframed assessment, the AO repealed the disallowance of the interest. The disallowance was based on the following observations of the AO.
3. He noted that the assessee had borrowed huge funds from HSBC Bank in respect of which huge interest payment was claimed as a deduction in the P&L a/c. According to the AO, these funds were utilised by the assessee for purchasing the shares of Samtel India Ltd. and Teletube Electronics Ltd., two sister-concerns of the assessee. According to the AO, the purchase of the shares of the sister-concerns was not connected in any way with the assessee's business. He noted that the term loan granted by the bank was for the infrastructure development and the plant and machinery required for the business. This purpose was, however, not achieved since the assessee diverted the funds, sanctioned for the purpose, for acquiring the shares of the sister-concerns. He, therefore, considered that the claim of interest on the borrowings from the bank was not allowable as a deduction.
4. The assessee while objecting to the disallowance also appears to have pointed out that the shares of the sister-concerns were acquired out of internal accruals and own funds of the assessee, and the borrowings from the bank were not utilised for the purpose. The AO observed that the internal accruals and the own funds were used by the assessee for acquiring the plant and machinery and, therefore, the borrowings would have been used only for the purchase of the shares. He also observed, on a perusal of the balance sheet of the assessee from the asst. yr. 1987-88, that in some of the years there were no internal accruals available for investment in the shares. He has given the details of internal accruals yearwise in the assessment order. Ultimately, he held that for the year under appeal, there were internal accruals only to the tune of Rs. 21.66 lakhs, whereas the assessee has invested a further sum of Rs. 70,88,000 during the year in the purchase of the shares of the sister-concerns. Thus, he noted that neither the internal accruals nor the interest-free funds were available to the assessee for the purchase of shares.
5. So far as the quantum of the interest to be disallowed is concerned, the AO estimated the same at 15 per cent rate of interest, which came to Rs. 27,30,000.
6. The assessee's alternative claim that the interest is allowable as deduction under Section 57(iii) was also rejected.
7. On appeal, the CIT(A) following the order of the Tribunal for the asst. yr. 1988-89 in the assessee's own case in ITA No. 7882/Del/1991 and his own order for the asst. yr. 1990-91, concluded that the investment in the shares of the sister-concerns was made for the purpose of the assessee's business and accordingly deleted the disallowance of the interest on the borrowings.
8. The Revenue is in appeal Mr. R.P. Meena, learned senior Departmental Representative assailed the order of the CIT(A) vehemently. He submitted that the AO has found that the internal accruals and own funds of the assessee are insufficient for acquiring the shares of the sister-concerns and, therefore, they could not have been available for purchase of the shares and, therefore, it followed that the assessee had utilised the borrowings from the bank for the purpose of acquiring the shares. In this connection he referred to the yearwise findings contained in p. 4 of the assessment order and strongly relied on them. He further submitted that the onus to substantiate the claim for deduction of the interest was on the assessee which has not been properly discharged. As regards the order of the Tribunal for the asst. yr. 1988-89, he submitted that the order proceeded on the factual basis that in that year there was a business connection between the assessee and the sister-concerns inasmuch as the assessee was executing certain job work for the sister-concerns, whereas in the present year there was no such business connection. In this behalf, he drew our attention to the fact that for the year under appeal, "assembling charges" shown in the income column in the P&L a/c was Re. Nil which indicated that the assessee did not carry on any job work for the sister-concerns. He also pointed out that since the factual position was different for the year under appeal, the order of the Tribunal did not apply. He further pointed out that there has been a substantial increase in the borrowings from the bank during the year under appeal. From the balance sheet (p. 3 of the paper book), he pointed out that whereas the borrowings in the year ended 31st March, 1991, increased by around Rs. 229 lakhs, the increase in the bank borrowings' has found its way towards financing the acquisition of further shares in the sister-concerns to the tune of Rs. 70,88,000 during the year under appeal. Therefore, he contended that the CIT(A) was not justified in deleting the disallowance of the interest.
9. In support of his submissions, the learned senior Departmental Representative relied on the following authorities :
(1) CIT v. Motor General Finance Ltd. (2002) 173 CTR (Del) 123 : (2002) 254 ITR 449 (Del) (2) CIT v. V.I. Baby & Co.
(3) K. Somasundaram & Brothers v. CIT (4) CIT v. H.R. Sugar Factory (P) Ltd. (5) M.S.P. Raja and Anr. v. CIT (6) P.RM.S. Ramanathan Chettiar v. CIT .
10. On behalf of the assesses, Mr. Vohra, learned Counsel for the assessee submitted that there was no factual difference between the asst. yr, 1988-89 in which the Tribunal accepted the assessee's claim and the year now under appeal. He pointed out that, while in the asst. yr. 1988-89, the assessee did job work for the two sister-concerns, in the present case around 75 per cent of the sales of Rs. 1,483.63 lakhs has been made to these sister-concerns. Thus, according to the learned Counsel, the business connection between the assessee on the one hand and the sister-concerns on the other continued even during the year under appeal and therefore, the ratio of the order of the Tribunal continued to apply. It was explained further that the assessee had a captive market for its products in the form of the sister-concerns and, therefore, it was in the interests of its business to ensure that it acquires the shares of the sister-concerns so that it can influence the decisions taken by the sister-concerns regarding sourcing of their supplies. He pointed out that in the year under appeal, no doubt, there was an increase of Rs. 229 lakhs in the aggregate borrowings from HSBC Bank, but the additions to the fixed assets during the year themselves amounted to Rs. 847.28 lakhs which were partly financed by the bank borrowings and partly by own funds and internal accruals. Therefore, no funds out of the bank borrowings were left with the assessee for being invested in the purchase of shares of the sister-concerns for Rs. 70,88,000 and the obvious conclusion was that those shares were purchased only out of internal accruals and own funds. It was pointed out by the learned Counsel for the assessee that during the year under appeal, the total interest-free funds available to the assessee were the share capital of Rs. 35 lakhs and the reserves of Rs. 152 lakhs, thus aggregating to Rs. 187 lakhs. Further, interest-free funds generated,by the assessee through share application monies for Rs. 15 lakhs and cash profit of Rs. 59 lakhs aggregated to Rs. 74 lakhs. Thus sufficient internal accruals and own funds were available to the assessee for investment in the shares of the sister-concerns for the year under appeal, As regards the onus, the learned Counsel for the assessee submitted that the initial onus to substantiate the claim of deduction for interest, no doubt, lay upon the assessee, but once it was shown that the assessee either had sufficient interest-free funds available with it or that the borrowings were utilised only for business purposes, then the onus shifted to the AO and it is incumbent upon him to establish a nexus between the borrowings for interest and the diversion of the funds. This onus, which is a shifting onus has not been discharged by the AO. In support of his contentions, the learned Counsel for the assessee drew our attention to the following authorities :
(i) CIT v. Tin Box Co.
(ii) Motor & General Finance Ltd. v. Dy. CIT (2004) 38 TTJ (Del) 1059 : (2004) 90 ITD 449 (Del)
(iii) CIT v. Hotel Savera .
11. He also pointed out that the judgment of the Hon'ble Delhi High Court in the case of MGF Ltd. (supra) cited by the learned Departmental Representative has been set aside by the Supreme Court in Motor General Finance Ltd. v. CIT and the matter has been remanded to the Hon'ble High Court for fresh disposal with the result that the judgment of the Hon'ble High Court no longer exists.
12. The alternative contention of the learned Counsel for the assessee that the internal accruals and the profits of the business were by themselves sufficient to cover the investment made during the year in the shares of the sister-concerns was sought to be supported by the following judgments :
(i) Woolcombers of India Ltd. v. CIT
(ii) Indian Explosives Ltd. v. CIT
(iii) Alkalies & Chemicals Corporation v. CIT
13. It was pointed out further that all the above judgments of the Calcutta High Court have been approved by the Supreme Court in the case of East India Pharmaceutical Works v. CIT .
14. We have carefully considered the contentions. So far as the purpose of the investment in the shares of the sister-concerns is concerned, the Tribunal has held in the asst. yr. 1988-89 that the shares were acquired for the purpose of the assessee's business and, therefore, deleted the disallowance of the interest on the borrowings. No doubt, in that year, the finding was rendered on the basis that the assessee was carrying on job work for the sister-concerns in that year. Though, for the year under appeal, the assessee is not carrying on any job work for the sister-concerns, that does not change the ratio of the previous order. In our understanding the ratio is that the funds must flow floated out of the business of the assessee in connection with the assessee's business and such a connection may change from year to year. The only requirement is that the funds must be deployed for the purpose of the assessee's business. This condition of Section 36(1)(iii) is satisfied in the year under appeal also because the assessee has effected substantial sales to the sister-concerns. The acquisition of shares with the help of the borrowed funds, it is reasonable to think, has helped the assessee in influencing the purchase decisions of those companies. The learned Counsel for the assessee had submitted at the time of the hearing that 75 per cent of the assessee's sales for the year under appeal was to these two companies. We had directed him to substantiate the same with the figures and in response thereto, he has submitted the relevant details which show that out of the sales of Rs. 1,484.63 lakhs, sales of Rs. 1,173.03 lakhs were to the sister-concerns. Thus, the condition that the funds borrowed must be deployed for the purpose of the assessee's business is satisfied in the year under appeal also. Therefore, the ratio of the order of the Tribunal is attracted and we hold that the CIT(A) committed no error in directing the AO to allow the interest.
15. The first alternative submission of the assessee before us was that the internal accruals and profits of the business for the year under appeal were themselves sufficient to cover the investment of Rs. 70.88 lakhs in the shares of the sister-concerns. We find from the P&L a/c for the year under appeal that the operating profit is Rs. 21.66 lakhs. This is after charging depreciation of Rs. 37.40 lakhs, which is non-cash charge. Thus, the cash profit is Rs. 59.06 lakhs. The share application monies of Rs. 15 lakhs were received during the year under appeal and this is seen from the balance sheet for the year. Thus, the aggregate funds available out of internal accruals are Rs. 74 lakhs which are sufficient to cover the investment in the shares during the year. We also find force in the submission of the learned Counsel for the assessee that though, as pointed out by the learned Departmental Representative, there was an increase in the aggregate borrowings from the bank by Rs. 229 lakhs during the year, the entire borrowings were used up in making additions in the fixed assets held by the assessee-company. From. p. 5 of the paper book, which is the schedule to the balance sheet showing fixed assets, it is seen that the additions thereto are much more than the increase in the bank borrowings. This shows that the entire bank borrowings which consisted of term loans, cash credits, import loans and the interest accrued thereon were all used up in making the additions to the, fixed assets. Thus, the claim of the assessee that the investment in the shares during the year of account came from internal accruals or that at any rate they could not have come out of the bank borrowings stands established.
16. The second alternative contention was to the effect that at any rate the claim of interest, if it is not allowable under Section 36(iii) of the Act in computing the business income, is allowable under Section 57(iii) while computing the income from other sources. This claim has found favour with the Tribunal in its order for the asst. yr. 1988-89. Para 4.18 of the order deals with this contention. It has been held, following the judgment of the Supreme Court in CIT v. Rajendra Prasad Moody , that even if it is assumed that the borrowings were utilised for the investment in the shares of the sister-concerns, the interest paid thereon would be allowable under Section 57(iii) in computing the dividend income from the said shares. It was further held, on the basis of the above judgment, that the position would be so even if the assessee did not derive any dividend income in any particular year. This alternative contention is also accepted, respectfully following the order of the Tribunal.
17. In the result, we confirm the decision of the CIT(A) and dismiss the appeal.