Commissioner Of Income Tax, Kolkata-Iv v. Jct Limited

ORDER IN THE HIGH COURT AT CALCUTTASPECIAL JURISDICTION (INCOME TAX)ORIGINAL SIDE ITA/19/2013 COMMISSIONER OF INCOME TAX, KOLKATA-IVVERSUSJCT LIMITED OD – 25 BEFORE: The Hon'ble Justice SURYA PRAKASH KESARWANI The Hon'ble Justice RAJARSHI BHARADWAJ Date : 19[th] December 2023. Appearance:Mr. Smarajit Roychowdhury, Advocate… for appellant.Mr. J.P. Khaitan, Senior AdvocateMr. Akhilesh Kr. Gupta, AdvocateMr. Soham Sen, Advocate… for respondent. 1.Heard Sri Smarajit Roychowdhury, learned counsel for the appellant/ Income Tax Department and Sri J.P. Khaitan, learned senior advocateassisted by Sri Akhilesh Kr. Gupta, learned counsel for therespondent/assessee.2.This appeal was admitted by this Court by order dated 29.01.2013,on the following substantial question of law:- “Whether the Learned Tribunal erred in allowing deduction ofinterest on borrowed capital without first satisfying itself thatthe borrowed capital had been utilized for the purpose of business in accordance with Section 36(1)(iii) and Section 37(1)of the Income Tax Act, 1961?” 3.Despite full disclosure of facts regarding loans given by the assesseeto its subsidiary companies and source of funds, supported by documentaryevidences, the assessing officer made addition in the income of the assesseeon the presumption that the loan was given out of the borrowed capital bythe assessee. The assessing officer passed the said order on direction of theCommissioner of Income Tax issued under Section 263 of the Income TaxAct, 1961 [hereinafter referred to as ‘the Act 1961’]. 4.In appeal, the CIT(A) upheld the order passed by the assessing officer,which was also affirmed by the Tribunal in appeal filed by the assessee. Theassessee carried the matter to this Court in ITA No.271 of 2005, which wasdisposed of by judgment and order dated 17.06.2009, directing the IncomeTax Appellate Tribunal to decide the appeal afresh after consideration of thematerials which have been placed in the paper book and in particular withregard to the contents of the on the questions of law raised by the assessee. 5.On remand, the Tribunal passed the impugned order dated15.06.2012 in ITA No.1135/Kol/2003 (assessment year 1994-95), wherebythe appeal of the assessee was allowed. Aggrieved with the aforesaid order ofthe ITAT, the Income Tax Department has filed the present appeal. 6.We have heard learned counsel for the parties and perused the recordof this appeal. We find that the Tribunal has considered each of the loansgiven by the assessee to its subsidiaries and the source from which the loan was given. The Tribunal has recorded the findings of fact based onevidences on record that the assessee has given loan from the fundsgenerated by it by way of sale of shares etc. and the borrowed capital wasnot utilized by the assessee for giving loans to its subsidiaries. The findingsrecorded by the Tribunal in this regard, in paragraphs 5 to 10 of theimpugned order, are reproduced below:- 6.We have heard learned counsel for the parties and perused the recordof this appeal. We find that the Tribunal has considered each of the loansgiven by the assessee to its subsidiaries and the source from which the loan was given. The Tribunal has recorded the findings of fact based onevidences on record that the assessee has given loan from the fundsgenerated by it by way of sale of shares etc. and the borrowed capital wasnot utilized by the assessee for giving loans to its subsidiaries. The findingsrecorded by the Tribunal in this regard, in paragraphs 5 to 10 of theimpugned order, are reproduced below:- “5. In the light of the direction of Hon'ble High Court asreproduced above, we have taken up the appeal for hearing andwill decide the issue. We have heard Ld. counsel for the assesseeShri R. N. Bajoria along with Shri A. K. Gupta and Ld. CIT, DRShri A. K. Mahapatra. We have gone, through assessee's paperbook consisting of pages 1 to 336. We find from the facts thatduring the previous year relevant to AY 1992-93 an amount ofRs.37.56 cr. was advanced by assessee to its subsidiary PolyInvestments Co. Ld. and during the course of assessmentproceedings and even now before us Ld. counsel for the assesseedemonstrated that such advance was made out of the saleproceeds of equity shares of 62.60 lacs held by it of JCTElectronics Ltd. to Chohal Investments Ltd. These details areavailable at assessee's paper book pages 313 to 316. Even thedetails of this amount is also enclosed by assesee in its paperbook at page 210 i.e. the statement of accounts of PolyInvestments Ltd. It was confirmed by assessee that the sale ofsaid shares was disclosed in the schedule of investment andBalance Sheet of the assessee for the year ended on 31.03.1992.This information is available in assesee's paper book at page 297.The assessee has enclosed these papers and these wereavailable before AO during the course of assessment proceedings. It was also explained that in the computation of total income ofassessee for AY 1992-93 the capital gain earned on the sale of theabove shares of JCT Electronics Pvt. Ltd. was disclosed. Thecomputation of income is filed at assessee's paper book pages 310and 311. 6. Further, in the previous year relevant to AY 1993-94 theassessee advanced a sum of Rs. 12.30 cr. to its subsidiaryChohal Investments Co. Ltd. out of sale proceeds of shares ofBallarpur Industries Ltd. held by it. The assessee has enclosedcopy of bank statement of HSBC in which sale proceeds of suchsale were deposited and from which the advance was made toChohal Investments Ltd. These details are available at assessee'spaper book page 334. The assessee has disclosed profit arisingfrom sale of shares of Ballarpur Industries Ltd. for AY 1993-94and these are included in Balance Sheet for the year ending31.03.1993. These details are enclosed at assessee's paper bookpages 332 and 333. The Balance Sheet and Schedule of assetsare also enclosed at assessee's paper book pages 319 and 320. Itwas the argument of assessee that in such circumstances, nodisallowance in respect of any interest on borrowed fund can bemade. We find that the AO during the course of originalassessment proceedings for AY 1993-94 examined the aforesaidfacts and made assessment vide order dated 20.03.1997 and nosuch disallowance was made by AO in respect of this amount ofborrowed funds. The assessee has enclosed copy of assessmentorder at page 240 of assessee's paper book. 7. In respect to amount advanced to Chohal investment Ltd.of Rs.5.65 cr., we find that this is part of outstanding advanceduring the year from the same concern. The facts are that duringthe year ended 31.03.1994, the assessee sold 2 lacs equity 7. In respect to amount advanced to Chohal investment Ltd.of Rs.5.65 cr., we find that this is part of outstanding advanceduring the year from the same concern. The facts are that duringthe year ended 31.03.1994, the assessee sold 2 lacs equity shares of Ballarpur Industries Ltd. for an amount of Rs.5.65 cr. toChohal Investment Ltd. and the sale proceeds of these shareswere part of outstanding advance during the year from ChohalInvestment Ltd. These facts are disclosed in the Income tax returnand computation of income filed for the relevant assessment year1994-95 and even the profit derived from sale of the said shareswas duly recorded and disclosed in the return of income. Thesedetails are available at assessee's paper book page 202. Theassessee has disclosed the sale of such shares in the BalanceSheet which is at page 188 of assesee's paper book and thistransaction of sale of shares was duly accepted by AO during theassessment proceedings for AY 1994-95. Further, the advance toGupta & Syal Ltd. during the year was only Rs. 15,000/- and restwas opening balance which is verified from assessee's paper bookpage 7. The amount advanced to Kishan Chand Spinning MillsLtd. during the year was at Rs.85,981/- on various dates forsmaller expenses and the rest Rs.25.62 lacs was the openingbalance of earlier years. This fact also we have verified fromassesee's paper book page 9. From the accounts of the KedernathKishan Chand Finance & Investment Ltd., we find that noadvance was made during the year and entire amount relates tothe earlier year's balances i.e. the opening balance. We findanother interesting fact that in the case of Poly Investment Ltd. thetotal advance during the year reduced and this we have verifiedfrom page 3 of assessee's paper book. Even from the statement ofaccounts of the assessee for the year ended 31.03.1994 relevantto assessment year under appeal, the details are available atpage 4 of assessee's paper book of Chohal Investment Ltd. page 3of assessee's paper book of Poly Investment Ltd., page 7 of Gupta& Syal Ltd., page 9 of Kishan Chand Spinning Mills Ltd., page 8of Kedernath Kishan Chand Finance & Investments Ltd. As pointed out by Ld. counsel for the assessee that in the followingassessment years i.e. AY 1995-96 to 1997-98 no suchdisallowance was made by revenue of the interest on borrowedfunds with reference to the above said advances, we find that thestatement is correct. The assessee has enclosed copies ofassessment orders for these three assessment years at pages256, 265 and 274 of assessee's paper book. The Ld. counsel hasdrawn our attention to the fact that the amounts outstandingagainst various concerns are most of it were brought forward fromearlier years. This fact can be clear from the statement of openingbalance and closing balance in respect of various concerns whichhas been reproduced from the records of the assessee as under: 8. From the above facts and circumstances, we find that theamount outstanding against the two subsidiaries i.e. ChohalInvestment Ltd. and Poly Investment Ltd. was substantiallyreduced during the year and there is no addition of advance at all.In the case of subsidiary Gupta & Syal Ltd., there was increase ofRs. 15,000/- only and in case of Kishanchand Spinning Mills Ltd.there is increase of Rs.85,981/-. In the case of KedernathKishanchand Finance & Investment Ltd. there is no increase atall. We find from the above facts and circumstances that the total 8. From the above facts and circumstances, we find that theamount outstanding against the two subsidiaries i.e. ChohalInvestment Ltd. and Poly Investment Ltd. was substantiallyreduced during the year and there is no addition of advance at all.In the case of subsidiary Gupta & Syal Ltd., there was increase ofRs. 15,000/- only and in case of Kishanchand Spinning Mills Ltd.there is increase of Rs.85,981/-. In the case of KedernathKishanchand Finance & Investment Ltd. there is no increase atall. We find from the above facts and circumstances that the total sum of Rs.46.95 lacs given to Chohal Investment Ltd. during June,1993 to October 1993 is on account of sale of shares the sum ofRs.46.95 lacs and balance Rs.19.38 lacs was adjusted inOctober, 1993 against the sale value of shares of Rs.19.38 lacsallotted to assessee and the said concern. On March 31, 1994, asum of Rs.5.65 cr. was advanced to Chohal Investment Ltd. out ofsale proceeds of 2 lacs shares of Ballarpur Industries Ltd. Theprofit on sale of share of Ballarpur Industries Ltd. is disclosed bythe assessee and apart from the above, an amount of Rs.50,000/- was debited on account of rent receivable and Rs. 500/-was paid to an employee. Accordingly, we are of the view that nopart of borrowed sum was utilised during the year for making anyadvance to sister concern Chohal Investment Ltd. 9.Similarly, in the case of Poly Investment Ltd. in June andJuly, 2003 Rs.90.30 lacs was paid and in September, 1993 a sumof Rs. 2.45 cr. was paid. We find that the sum of Rs. 2.45 cr. wasreceived back from Poly Investment Ltd. on 28[th] October, 1993and a further sum of Rs. 30,000/- was debited on account ofservice charges and this sum was interest free for only five weekswith that concern. As regards to the sum of Rs. 19.30 lacs therewas no other fresh advance and this sum was given out ofinternal accrual of the assessee. We find that in the three priorAYs i.e. 1991-92, 1992-93 and 1993-94 no such disallowancewas made with reference to above such advance. In suchcircumstances, whether the revenue can make disallowance ornot. 10.From the above facts it is clear that the amounts advancedby assessee to the abovementioned five concerns are out ofinternal accruals or out of profits earned by assessee by way ofsale of shares or by way of consideration received on account of 10.From the above facts it is clear that the amounts advancedby assessee to the abovementioned five concerns are out ofinternal accruals or out of profits earned by assessee by way ofsale of shares or by way of consideration received on account of sale of shares. From the facts and circumstances it is also clearthat during the year except the amount of Rs. 15,000/- in the caseof Gupta Syal Ltd. and Rs.85,981/- in the case of Kishan ChandSpinning Mills Ltd. there is no increase in the outstandingamounts of above five concerns. This being a very negligible andsmall amounts and by taking the clue from this no disallowance ofinterest on borrowed capital can be made. Apart from that the AOfrom the very beginning i.e. from AYs 1991-92, 1992-93 and1993-94 and even in subsequent assessment years 1995-96 to1997-98 the advances were there but no disallowance of intereston borrowed capital is made by AO and accepted as it is. Fromthe records it is noticed that assessment orders are available inassessee's paper book as mentioned above, it established that theadvance to subsidiary companies or other concerns as mentionedabove, are given out of sale proceeds of shares or the profits ofshares or the internal accruals. In the instant case, the assesseewho for the purpose of running of its business required funds andborrowed money from banks and other financial institutions andused for the purpose of business as is evidently clear from theabove discussion because the amount advanced to itssubsidiaries and others is out of its own funds. While making adisallowance or while arriving at a finding that the interestbearing funds are used for the purpose of interest free advancesthere should be a finding that there is a nexus between theborrowings from the bank and other financial institutions by theassessee and lending it to its subsidiaries and others free ofinterest must be found out but such nexus must be found out fromthe material available on records only. We are of the view thatinterest on money borrowed for the purpose of business is anecessary item of expenditure in a business. For allowance of aclaim for deduction of interest under this provision, all i.e. necessary is that, firstly, the money as that of capital, must havebeen borrowed by the assessee, secondly, it must have beenborrowed for the purposes of business. And thirdly, the assesseemust have paid interest on the, so borrowed, amount. It is not therequirement of the law that the assessee must have shown thatthe borrowing of the capital was necessary for the purpose ofbusiness and so that if at the time of borrowing the assessee hadsufficient amount of its own fund and for that purpose deductioncould not be allowed. Even otherwise, this case is squarelycovered by the decision in the case of J. K. Industries Ltd. Vs. CIT61 DTR 153 wherein it is held that in a situation in which interestfree advances granted by the assessee to the subsidiarycompanies are less than cash profit generated by the assessee itshould be presumed that the subsidiaries were paid out of theprofits of the assessee which is far in excess of amount paid to thesubsidiaries" In view of the above facts and circumstances and abovereferred authorities, we are of the view that the assessee isentitled for allowance of interest on borrowed capital which isused for the purpose of business, we allow the claim of assesseeand reverse the orders of the lower authorities.” 7.We requested learned counsel for the appellant to point out anyperversity in the findings of fact recorded by the Tribunal as afore-quoted,but no illegality or perversity could be pointed out. We also find that thefindings recorded by the Tribunal are findings of fact based on evidences onrecord. Therefore, the findings so recorded cannot be interfered with. 8.For all the reasons afore-stated, we do not find any error of law orfact in the impugned order of the Tribunal. Consequently, the substantialquestion of law is answered against the revenue and in favour of theassessee. The appeal being totally devoid of merit is hereby dismissed. 7.We requested learned counsel for the appellant to point out anyperversity in the findings of fact recorded by the Tribunal as afore-quoted,but no illegality or perversity could be pointed out. We also find that thefindings recorded by the Tribunal are findings of fact based on evidences onrecord. Therefore, the findings so recorded cannot be interfered with. 8.For all the reasons afore-stated, we do not find any error of law orfact in the impugned order of the Tribunal. Consequently, the substantialquestion of law is answered against the revenue and in favour of theassessee. The appeal being totally devoid of merit is hereby dismissed. (SURYA PRAKASH KESARWANI, J.) S. Kumar (RAJARSHI BHARADWAJ, J.)