Commissioner Of Income-Tax, Patiala v. M/S Punjab Tractors Ltd., Mohali

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH.I.T.A. No. 150 of 2004 Date of Decision: June 14, 2010 Commissioner of Income-tax, Patiala …Appellant Versus M/s Punjab Tractors Ltd., Mohali …Respondent CORAM:HON'BLE MR. JUSTICE M.M. KUMAR HON’BLE MR. JUSTICE JITENDRA CHAUHAN Present:Ms. Urvashi Dhugga, Advocate,for the appellant-revenue. Mr. Pankaj Jain, Advocate,for the respondent-assessee. 1.To be referred to the Reporters or not? 2.Whether the judgment should be reported in theDigest?Digest? M.M. KUMAR, J. The revenue is in appeal under Section 260A of the Income-taxAct, 1961 (for brevity, ‘the Act’) against the order of the Income-tax AppellateTribunal, Chandigarh Bench ‘A’, Chandigarh (for brevity, ‘the Tribunal’)passed in ITA No. 200/Chandi/99, vide order dated 15.12.2003. The appealpertains to the assessment year 1995-96. The revenue has claimed that thefollowing two questions of law would arise for determination of this Court:- “(1)Whether on the facts and in the circumstances of the case,the ITAT was right in law in deleting the addition made onaccount of interest on interest-free loans advanced by thethe ITAT was right in law in deleting the addition made onaccount of interest on interest-free loans advanced by the assessee-company to its sister concern, M/s Swaraj MazdaLtd.? (2)Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that deduction u/s80M should be computed without apportioning any part ofinterest payment to the earning of the dividend?.” Brief facts may first be noticed. The assessee-respondent isengaged in the business of production of tractors and its spares. It filed returnin respect of the assessment year 1995-96 on 29.11.1995 declaring an incomeof Rs. 29,68,55,610/-. However, on 22.5.1996, the assessee filed a revisedreturn in which income was enhanced to Rs. 29,71,75,910/-. The AssessingOfficer completed the assessment under Section 143(3) and, inter alia, madethe following additions, vide his order dated 19.3.1998 (Annexure ‘A’):- (i)Rs. 1,52,95,000/- on account of interest on interest-freeloans advanced by the assessee to its sister concern, M/sSwaraj Mazda Ltd.loans advanced by the assessee to its sister concern, M/sSwaraj Mazda Ltd. (ii)Addition on account of excess deduction claimed by theassessee u/s 80M. The assessee-company received dividendincome amounting to Rs. 34,32,500/- from M/s SwarajEngineers Ltd. and Rs. 5,46,00,000/- from UTI.assessee u/s 80M. The assessee-company received dividendincome amounting to Rs. 34,32,500/- from M/s SwarajEngineers Ltd. and Rs. 5,46,00,000/- from UTI. The assessee had claimed deduction under Section 80M on the gross dividend income. The Assessing Officer was of the view that theassessee had incurred Rs. 1,65,76,739/- as interest on investments and Rs.1,00,000/- as administrative expenses to earn such dividend. He, thus, workedout the deduction under Section 80M after reducing expenses of Rs.1,66,76,739/- from the gross dividend income of Rs. 5,80,32,500/- (Rs. 34,32,500/- + Rs. 5,46,00,000). The assessee challenged the order of the Assessing Officer beforethe CIT(A), who held that there was no change in the facts of the case for theyear under reference with those of pertaining to the case of the assessee for theassessment years 1991-92, 1992-93 and 1993-94. Accordingly, the CIT(A)followed the orders of his predecessor and deleted the addition of Rs.1,52,95,000/- made on account of interest on interest-free loans. 34,32,500/- + Rs. 5,46,00,000). The assessee challenged the order of the Assessing Officer beforethe CIT(A), who held that there was no change in the facts of the case for theyear under reference with those of pertaining to the case of the assessee for theassessment years 1991-92, 1992-93 and 1993-94. Accordingly, the CIT(A)followed the orders of his predecessor and deleted the addition of Rs.1,52,95,000/- made on account of interest on interest-free loans. On the second issue, the CIT(A) held that the assessee hadsufficient surplus funds that were non-interest bearing. It also recorded acategorical finding that there was no nexus between any borrowing of fundsand the investment in the units. The Assessing Officer, therefore, was notcorrect in having apportioned a part of the interest payments to the earning ofthe dividend interest. However, the action of the Assessing Officer inestimating the management expenses of Rs. 1,00,000/- was found in order.Accordingly, the CIT(A) relied upon the order passed in assessee’s own casein respect of the assessment years 1993-94 and 1994-95 and directed theAssessing Officer to recompute the deduction under Section 80M withoutapportioning any part of interest payment to the earning of the dividends(Annexure A-1). Feeling aggrieved the revenue challenged the order of the CIT(A),dated 16.12.1998, before the Tribunal. The Tribunal upheld the views of theCIT(A) on question No. 1 by observing as under:- “8.We have heard both the parties and considered the rivalsubmissions. We find that this issue is squarely covered in favourof the assessee and against the revenue by the order of ITATChandigarh Bench in assessee’s own case for Ays 1992-93 andsubmissions. We find that this issue is squarely covered in favourof the assessee and against the revenue by the order of ITATChandigarh Bench in assessee’s own case for Ays 1992-93 and 1993-94 (supra) where the Tribunal upheld the order of CIT(A) indeleting the impugned addition by recording following finding inpara 14 as under:- “14We have heard both the parties and considered therival submissions. We find that this issue came up beforethe Tribunal for Assessment year 1991-92 and by its orderdated 6.9.2002 (supra), the Tribunal decided the issue infavour of the assessee and against the revenue. Relevantfinding recorded in para 14 of the aforesaid order are asunder:-rival submissions. We find that this issue came up beforethe Tribunal for Assessment year 1991-92 and by its orderdated 6.9.2002 (supra), the Tribunal decided the issue infavour of the assessee and against the revenue. Relevantfinding recorded in para 14 of the aforesaid order are asunder:- 1993-94 (supra) where the Tribunal upheld the order of CIT(A) indeleting the impugned addition by recording following finding inpara 14 as under:- “14We have heard both the parties and considered therival submissions. We find that this issue came up beforethe Tribunal for Assessment year 1991-92 and by its orderdated 6.9.2002 (supra), the Tribunal decided the issue infavour of the assessee and against the revenue. Relevantfinding recorded in para 14 of the aforesaid order are asunder:-rival submissions. We find that this issue came up beforethe Tribunal for Assessment year 1991-92 and by its orderdated 6.9.2002 (supra), the Tribunal decided the issue infavour of the assessee and against the revenue. Relevantfinding recorded in para 14 of the aforesaid order are asunder:- “14We have heard both the parties and carefullyconsidered their rival submissions with reference tothe facts, evidence and material placed on record. Wefind that during the course of assessmentproceedings, the assessee had clearly furnishedmonthwise details of interest free advances availablewith the assessee. These details show that the debitbalance in the account of SML varied from Rs. 12.63lacs to Rs. 97.67 lacs during the period from 1.4.90 to31.3.91. As against the same the assessee had interestfree advanced varying from Rs. 6.19 crores to Rs.13.34 crores during the same period which farexceeded the amounts due from SML. The assesseehad also furnished complete details before the CIT(A) to show that it had sufficient interest freeadvances. In order to disallow the interest, it wasconsidered their rival submissions with reference tothe facts, evidence and material placed on record. Wefind that during the course of assessmentproceedings, the assessee had clearly furnishedmonthwise details of interest free advances availablewith the assessee. These details show that the debitbalance in the account of SML varied from Rs. 12.63lacs to Rs. 97.67 lacs during the period from 1.4.90 to31.3.91. As against the same the assessee had interestfree advanced varying from Rs. 6.19 crores to Rs.13.34 crores during the same period which farexceeded the amounts due from SML. The assesseehad also furnished complete details before the CIT(A) to show that it had sufficient interest freeadvances. In order to disallow the interest, it was duty of the AO to controvert the factual submissionby bringing further details or by calling further detailsfrom the assessee. Besides, the AO has also notestablished any direct nexus between the amountsborrowed on which interest was paid and amountgiven to SML. In the case of CIT V. FerozepurFinance (P) Ltd. supra, the Hon’ble High Court ofPunjab & Haryana has held that unless incomeaccrues to the assessee, no tax can be levied. Themere fact that the assessee had not charged anyinterest on the amounts due from another concernwould not itself justify in making the addition onnotional basis. Having regard to these facts andcircumstances of the case, we are of the opinion thatthe ld. CIT(A) was justified in deleting the impugnedaddition. We confirm his order and deleted thisground of appeal” The facts of the case for Assessment year under referenceare similar to the facts for Assessment year 1991-92. Even for theassessment year under reference the assessee had sufficientsurplus funds to cover the impugned loans. respectfully followingthe aforesaid order of the Tribunal, we hold that the CIT(A) wasjustified in deleting the impugned disallowance of interest forboth the Ays. We confirm the orders of CIT(A) and dismiss therespect grounds of appeals of the revenue for both the Ays.”On the second question also the Tribunal followed the principle of consistency because in the earlier assessment years the same course wasfollowed by the CIT(A) and the Tribunal. The view of the Tribunal in thatrespect reads thus:- The facts of the case for Assessment year under referenceare similar to the facts for Assessment year 1991-92. Even for theassessment year under reference the assessee had sufficientsurplus funds to cover the impugned loans. respectfully followingthe aforesaid order of the Tribunal, we hold that the CIT(A) wasjustified in deleting the impugned disallowance of interest forboth the Ays. We confirm the orders of CIT(A) and dismiss therespect grounds of appeals of the revenue for both the Ays.”On the second question also the Tribunal followed the principle of consistency because in the earlier assessment years the same course wasfollowed by the CIT(A) and the Tribunal. The view of the Tribunal in thatrespect reads thus:- “11.We have heard both the parties and carefully considered therival submissions. We find that this issue is squarely covered byITAT, Chandigarh Bench’s order in ITA No. 1031/97,Assessment year 1992-93 and ITA No. 8/98, Assessment year1993-94 (supra) where the tribunal upheld the order of CIT(A) inapportioning the management expenses of Rs. 1.00 lakh anddeleting the disallowance of interest against dividend income byrecording the following finding in para 18 of the aforesaid order:rival submissions. We find that this issue is squarely covered byITAT, Chandigarh Bench’s order in ITA No. 1031/97,Assessment year 1992-93 and ITA No. 8/98, Assessment year1993-94 (supra) where the tribunal upheld the order of CIT(A) inapportioning the management expenses of Rs. 1.00 lakh anddeleting the disallowance of interest against dividend income byrecording the following finding in para 18 of the aforesaid order: “18We have heard both the parties and considered theirrival submissions. We find that this issue is squarelycovered in favour of the assessee and against the revenue bythe order dated 6.9.2002 of ITAT Chandigarh Bench forAssessment year 1991-92 (supra) where the Tribunal inpara 19 of the aforesaid order has held as under:rival submissions. We find that this issue is squarelycovered in favour of the assessee and against the revenue bythe order dated 6.9.2002 of ITAT Chandigarh Bench forAssessment year 1991-92 (supra) where the Tribunal inpara 19 of the aforesaid order has held as under: “19.We have heard both the parties and carefullyconsidered the rival submissions. We have also gonethrough the facts, evidence and material placed onrecord. As per provisions of section 57 of I.T. Act,1961, the deduction is allowed from dividend incomefor the expenses by way of commission or bankcharges for realization of dividend and any otherexpenditure laid out or expended wholly andexclusively for earning such income. Further theconsidered the rival submissions. We have also gonethrough the facts, evidence and material placed onrecord. As per provisions of section 57 of I.T. Act,1961, the deduction is allowed from dividend incomefor the expenses by way of commission or bankcharges for realization of dividend and any otherexpenditure laid out or expended wholly andexclusively for earning such income. Further the Hon’ble Supreme Court in the case of CIT V. UnitedTrust Ltd. supra, has held that proportionatemanagement expenses had to be deducted from thegross dividend income for the purpose of allowingrelief u/s 80 M. Admittedly, the assessee has notmaintained any such separate account for the same.Therefore, a reasonable estimate based on evidenceand material on record is required to be made. Wefind that the AO has estimated the expenses @ 5% ofthe total dividend income without due application ofmind. He has not taken into account the totaldividend income, the number of companies fromwhom such dividend income was received and theprobable expenses which could have been incurredfor earning such income. From para 8.1 of the CIT(A)’s order, it is clear that out of total dividendincome of Rs. 2,11,20,600/- the assessee had receiveddividend income of Rs. 2,02,97,000/- from UTI.Thus, only dividend income of about Rs. 8.00 lacswas received from other companies. There couldhardly be any expenditure incurred for collectingdividend income received from the UTI. As regardsthe remaining dividend income of Rs. 8.00 lacs or sothe expenses could not be as high as estimated by theA.O. Thus, in the light of these facts andcircumstances of the case, we are of the considered opinion that disallowance of Rs. 1.00 lac sustained bythe CIT(A) for allowing relief u/s 80 M is most fairand reasonable. The order of the CIT(A) does notmerit any interference. The same is upheld and thisground of appeal is dismissed.” The facts of the present case are similar to the facts of the case for assessment year 1991-92. Respectfully followingthe aforesaid order, we confirm the order of CIT(A) anddismiss the respective grounds of appeals of the revenue forboth the assessment years.” The facts of the case for Assessment year under reference are thesame. Respectfully following the aforesaid order of the Tribunal,we confirm the order of the CIT(A) and dismiss this ground ofappeal of the revenue.” We have heard learned counsel for the parties at considerable length and have perused the paper book with their able assistance. RE: QUESTION NO. 1 The first question does not need any detailed discussion because when the matter was admitted, ITA Nos. 16 and 17 of 2004 pertaining toAssessment Years 1992-93 and 1993-94 between the same parties on theaforesaid question of law were already admitted. Accordingly, this appeal wasalso admitted to be heard along with ITA Nos. 16 and 17 of 2004. Thoseappeals have been disposed on the aforesaid question by a Division Bench ofthis Court vide order dated 21.1.2009 and the matter has been remitted back tothe Tribunal for decision afresh in accordance with the judgment of Hon’blethe Supreme Court rendered in the case of S.A. Builders Ltd.v. Commissioner of Income-Tax (Appeals), [2007] 288 ITR 1. The order ofthe Division Bench reads thus:- “During the course of hearing learned counsel for the rivalparties are agreed that the deduction available to an assesseeunder Section 36(1)(iii) of the Income Tax Act, 1961 in respect ofthe interest component on capital borrowed is to be determined inconsonance with the judgment rendered by the Apex Court in S.A.Builders Ltd.vs. Commissioner of Income-Tax (Appeals) andanother(2007) 288 ITR 1 so as to determine the commercialexpediency of the assessee, in extending interest free loan. Sincethe needful had not been done by the Assessing Officer, as also,the Appellate Authorities, learned counsel for the parties areagreed that the orders passed by the Assessing Officer as well asthe Appellate Authorities be set aside. Ordered accordingly. “During the course of hearing learned counsel for the rivalparties are agreed that the deduction available to an assesseeunder Section 36(1)(iii) of the Income Tax Act, 1961 in respect ofthe interest component on capital borrowed is to be determined inconsonance with the judgment rendered by the Apex Court in S.A.Builders Ltd.vs. Commissioner of Income-Tax (Appeals) andanother(2007) 288 ITR 1 so as to determine the commercialexpediency of the assessee, in extending interest free loan. Sincethe needful had not been done by the Assessing Officer, as also,the Appellate Authorities, learned counsel for the parties areagreed that the orders passed by the Assessing Officer as well asthe Appellate Authorities be set aside. Ordered accordingly. Learned counsel for the parties are also agreed that theadjudication of the present controversy be remanded back to theIncome Tax Appellate Tribunal, Chandigarh, requiring it to re-adjudicate the issue whether the respondent-assessee is entitled todeduction under Section 36(1)(iii) of the Income Tax Act, 1961,on the interest component in respect of capital borrowed, based onthe parameters laid down in S.A. Builders Ltd.’s case (supra), andwhile doing so, to grant liberty to the rival parties to leadevidence, if they so desire.” Therefore, we adopt the same course for the sake of consistencyand set aside the order of the Tribunal on the first question of law. Accordingly, the matter is remanded back to the Tribunal in terms of order ofthis Court passed in ITA Nos. 16 and 17 of 2004, dated 21.1.2009. The partiesthrough their counsel are directed to appear before the Tribunal on 12.7.2010. RE: QUESTION NO. 2 It has come on record that in respect of question No. 2, theTribunal has followed its earlier order in ITA No. 1031/97 (assessment year1992-93) and ITA No. 8/98 (assessment year 1993-94). The Tribunal hasupheld the order of the CIT(A) in apportioning the management expenses ofRs. 1,00,000/- and deleting the disallowance of interest against dividendincome by recording the finding that out of total dividend income of Rs.2,11,20,600/-, the assessee had received dividend income of Rs. 2,02,97,000/-from the UTI. Thus, it has received dividend income of Rs. 8,00,000/- fromother companies. The CIT(A) had inferred that there could hardly be anyexpenditure incurred for collecting dividend income received from the UTIand for the remaining dividend income of Rs. 8,00,000/- or so the expensescould not be as high as estimated by the Assessing Officer. The aforesaidfindings of the CIT(A) have been duly affirmed by the Tribunal upholding thedisallowance of Rs. 1,00,000/- sustained by the CIT(A) for allowing reliefunder Section 80M. Against the order of the Tribunal the revenue hascategorically stated in para 4.1 that the department has accepted the order ofthe Tribunal and has preferred no appeal before this court. Following theprinciple of consistency, as laid down in the case ofRadhasoami Satsangv.CIT, [1992] 193 ITR 321 (SC); Berger Paints India Ltd.v. CIT, [2004] 266ITR 99; CITv. J.K. Charitable Trust, (2009) I SCC 196; andC.K.Gangadharanv. CIT, (2008) 8 SCC 739, we are of the view that the secondquestion deserves to be answered against the revenue and in favour of the assessee. The instant appeal stands disposed of in the above terms. (M.M. KUMAR)JUDGE June 14, 2010 (JITENDRA CHAUHAN) JUDGE Pkapoor