Commissioner Of Income Tax, Faridabad v. M/S Steriplate Pvt. Ltd

ITA No. 136 of 2007 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH Commissioner of Income Tax, Faridabad Versus M/s Steriplate Pvt. Ltd. ITA No. 136 of 2007 Date of Decision: 20.5.2011 ....Appellant. ...Respondent. CORAM:-HON'BLE MR. JUSTICE ADARSH KUMAR GOEL,ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel,for the appellant.for the appellant. Mr. Rupesh Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1.This appeal has been preferred by the revenue underSection 260A of the Income Tax Act, 1961 (in short “the Act”) againstthe order dated 9.6.2006 passed by the Income Tax Appellate Tribunal,Delhi Bench 'D”, New Delhi (hereinafter referred to as “the Tribunal”) inITA No. 5548/Del/2003, relating to the assessment year 1997-98. 2.The appeal was admitted by this Court vide order dated5.11.2007 for determination of the following substantial question of law:- “On the facts and circumstances of the case, whetherthe Hon'ble ITAT was right in upholding the order oflearned CIT(A) deleting the disallowance of interest made by the Assessing Officer on account of theassessee using interest bearing funds for advancinginterest free loans to sister concerns, in the light ofthe judgment dated 4.8.2006 of Hon'ble Punjab andHaryana High Court in CIT Vs. Abhishek Industries?” 3.Briefly stated, the facts necessary for adjudication asnarrated in the appeal are that the assessee filed its return for theassessment year 1997-98 declaring an income of Rs.14,18,080/-.Assessment was completed on 21.3.2000 at an income ofRs.60,23,120/- by disallowing interest to the extent of Rs.45,92,000/- @14% of the amount of Rs.3,28,00,000/- advanced to subsidiarycompanies. The assessment order was set aside by the Commissionerof Income Tax (Appeals) [in short the CIT(A)”] directing the AssessingOfficer to form a fresh assessment as per law allowing the opportunityof hearing to the assessee and also investigating the issue whetherthere was any nexus between the different transacting sister companiesas decided by the Hon'ble Apex Court in Mcdowell and Company v.Commissioner of Income Tax, [1985] 154 ITR 148. Thereafter, theAssessing Officer again passed an assessment order on 26.3.2002 at atotal income of Rs.60,23,320/- including the addition of Rs.45,92,000/-on account of interest disallowed on diverted funds. On appeal by theassessee, the CIT(A) vide order dated 22.10.2003 deleted the saidaddition made on account of aforesaid disallowance. Feelingaggrieved, the department took the matter in appeal before the Tribunal.The Tribunal vide order dated 9.6.2006 upheld the order of the CIT(A)and dismissed the appeal. Hence, the present appeal by the revenue. 4.We have heard learned counsel for the parties. 5.The issue for consideration in this appeal is whether theassessee had diverted the interest bearing funds to its sister/subsidiaryconcerns and, therefore, the interest on such interest free loansadvanced by the assessee to the sister/subsidiary concerns could beadded in the hands of the assessee. 6.Learned counsel for the revenue placed reliance upon thejudgment of this Court in Commissioner of Income Tax v. AbhishekIndustries, [2006] 286 ITR 1 and that of the Hon'ble Supreme Court inMcdowell and Company's case (supra) in support of her submission. 7.Learned counsel for the assessee on the other handsupported the order passed by the CIT(A) and affirmed by the Tribunal.He submitted that a finding of fact has been recorded by the aforesaidauthorities concurrently that there was no nexus between the borrowingof the amount and advancing of interest free loan to the sister/subsidiary concerns. 8.We have given our thoughtful consideration to therespective submissions of learned counsel for the parties and do notfind any substance in the submission of learned counsel for therevenue. 7.Learned counsel for the assessee on the other handsupported the order passed by the CIT(A) and affirmed by the Tribunal.He submitted that a finding of fact has been recorded by the aforesaidauthorities concurrently that there was no nexus between the borrowingof the amount and advancing of interest free loan to the sister/subsidiary concerns. 8.We have given our thoughtful consideration to therespective submissions of learned counsel for the parties and do notfind any substance in the submission of learned counsel for therevenue. 9.The Tribunal while affirming the finding of the CIT(A) hadarrived at a conclusion that the assessee had advanced loan to itssubsidiary companies, namely, M/s Falshajam Investments and FinanceCo. Pvt. Ltd. of Rs.1.30 crores and M/s Expo Leasing Private Limited ofRs.1.98 crores on 1.2.1995 out of the sale proceeds of Rs.7.30 croreswhich was received by it from M/s Kelvinator India Ltd. on 30.1.1995. The Tribunal had also recorded that the interest free advances weregiven by the assessee on 1.2.1995 out of the aforesaid amountwhereas the borrowings were made by the assessee amounting to Rs.9crores in November, 1996. It was also observed that the assessee hadpaid tax on interest income of Rs.64.40 lacs which was earned by it ondeposits with intercorporate bodies. On the basis of the aforesaidfindings, it was concluded by the Tribunal that there was no nexusbetween the borrowings made by the assessee with the advances ofinterest free loans to the sister/subsidiary concerns. The findingsrecorded by the Tribunal in paras 4 and 5 of its order read thus:- “4.We have perused the orders of AO andlearned CIT(A). We have also perused the paperbook filed by assessee. We find that interest freeadvances of Rs.3.28 crores were given to subsidiarycompanies, namely, M/s Falshajam Investments andFinance Co. Pvt. Ltd.-Rs.1.30 crores and M/s ExpoLeasing Private Ltd.-Rs.1.98 crores on 1.2.95 out ofthe proceeds of the sales of the undertakingamounting to Rs.7.30 crores received from Kelvinatorof India Ltd. on 30.01.1995. Interest free advanceswere given much before the company borrowed Rs.9crores from Desai in November, 1996. There is nonexus between the interest free advances given on1.2.1995 and the borrowing of Rs.9 crores inNovember, 1996. 5.We have also perused the remand report furnished by the AO wherein it is clearly reported thatthe borrowed funds have not been diverted for nonbusiness purpose but were invested in intercorporate bodies with various companies and onwhich interest income of Rs.64.40 lacs has beenearned. The interest free advance were given inearlier year out of the sale proceeds of itsmanufacturing division. In view of the above finding,we hold that since the interest has been paid on theamounts borrowed for the purpose of business andwhich has been utilized for the purpose of business,no disallowance is called for. There is no provisionunder the Act to charge notional income to tax.Under the ambit of Act if interest paid by thecompany is not wholly and exclusively for thepurpose of business, the same can be disallowed.However, in the present case, it is seen that theamount borrowed has been utilized for the purpose ofadvancing the same at a higher rate of interest andthe interest income from such advances are alsotaxed. Since there is no nexus between the borrowerof sum and advancing on interest free basis andsince there is specific finding that amount borrowedhas been utilized for further advancing in the courseof business, no part of interest is disallowable. Weaccordingly do not find any merit in this appeal.” ITA No. 136 of 2007 -6- ITA No. 136 of 2007 -6- 10.No perversity or illegality could be pointed in the aforesaidfindings recorded by the Tribunal which may warrant interference by thisCourt. Referring to the judgments in Abhishek Industries andMcdowell and Company's cases (supra), relied upon by the learnedcounsel for the revenue, suffice to say that in view of the findingsrecorded by the CIT(A) and affirmed by the Tribunal, the same do notadvance the case of the revenue. 11.Accordingly, the substantial question of law is answeredagainst the revenue and in favour of the assessee. The appeal standsdismissed. (AJAY KUMAR MITTAL) JUDGE May 20, 2011gbs (ADARSH KUMAR GOEL)ACTING CHIEF JUSTICE