Db Income Tax Appeal v. M/S. Vijay Solvex Limited

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHANBENCH AT JAIPUR **** JUDGMENT DB Income Tax Appeal No.147/2004The Commissioner of Income Tax, AlwarVsM/s. Vijay Solvex Limited Judgment reserved on 2[nd] December, 2014 Judgment pronounced on 10[th] December, 2014 PRESENTHON'BLE THE ACTING CHIEF JUSTICE MR. SUNIL AMBWANI HON'BLE MR. JUSTICE J.K. RANKA Mrs. Parinitoo Jain, counsel for appellantMr. Sanjay Jhanwar, counsel for respondent Reportable BY THE COURT (Per Hon'ble Ranka, J.): 1.This Income Tax Appeal by the appellant-revenue u/s260A of the Income Tax Act (for short, “IT Act”) is directedagainst the order dt.12/01/2004, passed by the Income TaxAppellate Tribunal, Jaipur Bench, Jaipur (for short, “ITAT”) inITA No.1296/JP/96 by which the ITAT has partly allowed theappeal filed by the respondent-assessee. It relates toassessment year 1992-93. 2.The appeal was admitted on the following substantialquestion of law:- “.Whether under the facts and circumstances ofthe case and in law the findings of the Tribunalare perverse on account of deletion of addition ofRs.5,80,215/- confirmed by the CIT(A) towards disallowance of interest as interest free advanceswere given to its sister concerns ?” 3.The brief facts, which can be noticed on perusal of theorder impugned and the orders of the lower authorities are thatthe respondent-assessee is a limited company and hadfurnished Return declaring income of Rs.1,22,05,430/-. Duringthe course of the assessment proceedings, the AssessingOfficer (for short, “AO”) noticed that the respondent-assesseehad claimed a total amount of Rs.18,69,880/- out of which anamount of Rs.13,99,733/- had been charged to revenue asinterest and the remaining balance amount of Rs.3,52,962/-,Rs.70,097/- and Rs.47,088/- represent Bank charges,commission, insurance premium and commitment charges. Onfurther scrutiny, the AO noticed that the assessee paid interestto RIICO, RFC, Bank of Baroda and other debtors from whomthe assessee had raised loans. It was also noticed that theassessee had received interest from some of the debtors andafter analyzing the material on record, the AO was of the viewthat on the one hand, the assessee is making payment ofinterest to RIICO, RFC Banks and debtors but on the otherhand, had advanced money to other sister concerns, on whichno interest was charged and after calculating the interest onthe debtors as well as creditors, came to the conclusion thatout of the total claim of interest of Rs.11,67,756/-, which hasbeen claimed to have been paid to RIICO, RFC and Bank and interest bearing loans have been diverted to non-businesspurposes accordingly disallowed an amount of Rs.5,80,215/-. 4.The disallowance was challenged in appeal by therespondent-assessee before the Commissioner of Income Tax(Appeals) [for short, “CIT(A)” who also agreed with the findingsof the AO and approved the disallowance made by the AO. 5.On a further appeal before the ITAT, the ITAT, afteranalyzing the evidence on record, particularly, in view of thefact that the assessee was having its own sufficient funds andwas maintaining a composite account and the revenue wasunable to prove the nexus between the borrowed funds and theadvances given, came to the conclusion that the disallowanceis not proper and deleted the notional/hypothetical interestdisallowed by the AO. 6.Learned counsel for the appellant-revenue contendedthat the AO so also the CIT(A), after detailed analysis of thematerial on record, had correctly come to the conclusion thatthe assesseee had diverted money to sister concerns fromwhom either interest was not charged or if charged, was atlower rate of interest and on the one hand, the assessee paidhuge amount of interest to RIICO, RFC and Bank but on theother hand, did not receive amount from the sister concernsand contended that the disallowance by the AO was just and 6.Learned counsel for the appellant-revenue contendedthat the AO so also the CIT(A), after detailed analysis of thematerial on record, had correctly come to the conclusion thatthe assesseee had diverted money to sister concerns fromwhom either interest was not charged or if charged, was atlower rate of interest and on the one hand, the assessee paidhuge amount of interest to RIICO, RFC and Bank but on theother hand, did not receive amount from the sister concernsand contended that the disallowance by the AO was just and proper and the ITAT, in view of this fact that the interest wasnot charged from the sister concerns, was not justified inholding that the assessee had sufficient funds at its disposaland by this diversion of interest free loans, in-fact, has bornethe burden of interest more which is not proper and accordinglycontended that the finding of the ITAT is unjustified anddeserves to be reversed. 7.Learned counsel for the respondent-assessee, on thecontrary, contended that it is an admitted fact that theassessee had its own funds and when the assessee had itsown funds, at least to the extent of the amount available at itsdisposal, the assessee was certainly capable of doingwhatever it liked. In support of his submission, counsel for therespondent-assessee relied upon judgments in the case of CITVs. Navyug Oil & Dal Mills: (2001) 251 ITR 535 (Raj.); CIT Vs.Banswara Fabrics Ltd.: (2004) 267 ITR 398 (Raj.); CIT Vs.Prem Heavy Engineering Works (P) Ltd.: (2006) 150 Taxman90 (All); CIT Vs. Indo Kopp Ltd.: (2008) 167 Taxman 172 (Del);Elmer Havell Electrics & ors Vs. CIT: (2005) 277 ITR 549(Del); CIT Vs. Tin Box Co.: (2003) 260 ITR 637 (Del) andMunjal Sales Corporation Vs. CIT: (2008) 298 ITR 298 (SC)and while relying upon the aforesaid judgments, contendedthat the Hon'ble Apex Court and this Court as well as otherHigh Courts, in such facts and circumstances, have come tothe conclusion that once the assessee has its own capital, to that extent it is for the assessee to manage its own affairs. Hefurther contended that the AO has not been able to prove thenexus in between the amount borrowed and diverted towardsnon-business/ interest bearing funds. 8.After hearing counsel for the parties and going throughthe material on record, we notice that it is an admitted fact thatthe assessee had its own capital balance to the tune of Rs.80lacs in addition to reserve and surplus of Rs.446.80 lacs andto this extent the said funds were available with the assesseefor advancing or acting in accordance with the businessexpediency. It is also a fact that the amount, on which theinterest has been paid by the assessee, is even otherwiselower than what was available with the assessee in the shapeof its own capital balance and reserve & surplus, referred toherein above. 9.It may be that the assessee on account of businessexpediency advanced money to sister concerns or otherconcerns at a lower rate of interest or did not charge interestthat by itself does not prove that the assessee diverted interestbearing loans to the said firms. An assessee is required to runbusiness looking to the commercial expediency and severalother factors. (2007) 288 ITR 1 (SC), after considering what iscommercial/business expediency, has observed as under:- “The expression “commercial expediency” is anexpression of wide import and includes suchexpenditure as a prudent businessman incursfor the purpose of business. The expendituremay not have been incurred under any legalobligation, but yet it is allowable as a businessexpenditure if it was incurred on grounds ofcommercial expediency.” 10.1 The Hon'ble Apex Court further observed in the abovejudgment as under:- (2007) 288 ITR 1 (SC), after considering what iscommercial/business expediency, has observed as under:- “The expression “commercial expediency” is anexpression of wide import and includes suchexpenditure as a prudent businessman incursfor the purpose of business. The expendituremay not have been incurred under any legalobligation, but yet it is allowable as a businessexpenditure if it was incurred on grounds ofcommercial expediency.” 10.1 The Hon'ble Apex Court further observed in the abovejudgment as under:- “To consider whether one should allowdeduction under Section 36(1)(iii) of interestpaid by the assessee on amounts borrowed byit for advancing to a sister concern, theauthorities and the courts should examine thepurpose for which the assessee advanced themoney and what the sister concern did with themoney. That the borrowed amount is notutilized by the assessee in its own business buthad been advanced as interest free loan to itssister concern is not relevant. What is relevantis whether the amount was advanced as ameasure of commercial expediency and notfrom the point of view whether the amount wasadvanced for earning profits. Once it is established that there was nexusbetween the expenditure and purpose of the business (which need not necessarily be thebusiness of the assessee itself) the Revenuecannot justifiably claim to put itself in the arm-chair of the businessman or in the position ofthe board of directors and assume the role todecide how much is reasonable expenditurehaving regard to the circumstances of the case.No businessman can be compelled to maximizehis profits.” 11.The Hon'ble Apex Court, in the case of Munjal SalesCorporation (supra) observed as under:- “As stated above, for the assessment year1992-93 and the assessment year 1993-94,the Tribunal held that the loans given to thesister concerns were out of the firm's funds andthat they were advanced for businesspurposes. Once it is found that the loansgranted in August/September, 1991 continuedup to the assessment year 1997-98 and thatthe said loans were advanced for businesspurposes and that interest paid thereon did notexceed 18/12 per cent per annum, theassessee was entitled to deductions underSection 36(1)(iii) read with section 40(b)(iv) ofthe 1961 Act. One aspect needs to be mentioned during theassessment year 1995-96, apart from the loangiven in August/September, 1991, theassessee advanced interest-free loan to itssister concern amounting to Rs.5 Lacs. According to the Tribunal, there was nothing onrecord to show that the loans were given to thesister concern by the assessee-firm out of itsown funds and, therefore, it was not entitled toclaim deduction under Section 36(1)(iii). Thisfinding is erroneous. The opening balance ason April 1, 1994, was Rs.1.91 crores whereasthe loan given to the sister concern was asmall amount of Rs. 5 Lakhs. In our view, theprofits earned by the assessee during therelevant year were sufficent to cover theimpugned loan of Rs.5 Lakhs.” 12.Allahabad High Court in the case of CIT vs. RadicoKhaitan Ltd. (2005) 274 ITR 354 has held that the assesseeCompany had sufficient fund other than the borrowed moneyfor giving the amount in question as loan to its sister concern,which finding had not been specifically challenged in thepresent appeal. The conditions of Section 36(1)(iii) of the Acthad been complied with and, therefore, the assessee companywas entitled to full allowance of the amount of interest paid byit on borrowed capital. 13.Delhi High Court, in the case of CIT vs. Dalmia Cement(Pvt.) Ltd. (2002) 254 ITR 377 has held that once it isestablished that there was nexus between the expenditure andthe purpose of the business, Revenue cannot justifiably claimto put itself in the arm-chair of the businessman or in theposition of the board of directors and assume the role to decide 13.Delhi High Court, in the case of CIT vs. Dalmia Cement(Pvt.) Ltd. (2002) 254 ITR 377 has held that once it isestablished that there was nexus between the expenditure andthe purpose of the business, Revenue cannot justifiably claimto put itself in the arm-chair of the businessman or in theposition of the board of directors and assume the role to decide how much is reasonable expenditure having regard to thecircumstances of the case. 14.The Calcutta High Court in the case of CIT vs. BritanniaIndustries Ltd.(2006)280 ITR 525 held as under:- “From the above discussion, we find in relation toeach assessment years involved in this appeal thatthe recipient of interest-free loan was not a firm ofrelatives; the advance was made for the purposeof business within meaning of section 36(1)(iii);that there was regular course of business betweenthe assessee and the firm; and that the advanceswere made to MCAP in the regular course ofbusiness; such advances were made in the courseof business for commercial expedience and for thepurpose of business; the findings arrived at by thelearned Tribunal were not perverse; the entireexpenditure was made from the mixed account;therefore, there would be a presumption that theamount was made out of the own fund of theassessee and not from the borrowed capital; thatthere were sufficient funds and that the advancewere made from the mixed account. Therefore, theCommissioner (Appeals) and the learned Tribunalboth were right in presuming that the advance wasmade out from the assessee's own fund eligible forthe benefit of section 36(1)(iii).” 15. The Allahabad High Court in the case of CIT vs. MotorSales Ltd. (2008)304 ITR 123 (Allahabad) has held that itwas finding of fact as found in the case that respondent-assessee had capital/reserve/surplus of Rs.6.10 Crores on which no interest was being paid and therefore interest freeadvances made by it are covered and ultimately held that thereis no question of any disallowance of notional interest on loantaken by it. It was further held that the Tribunal had alsorecorded a finding that the assessee had not diverted anyborrowed fund on which interest was paid for non-commercialpurposes and therefore, there is no question of disallowance ofinterest out of the interest paid by the assessee. 16.In view of the authoritative pronouncement of the ApexCourt and other judgments referred supra, in our view, theassessee admittedly had its own funds, as referred to earlier,and admittedly such funds/reserves being substantially higherthan, even otherwise, the advances to the debtors, no notionalinterest or hypothetical interest could have been disallowed onsuch facts. The revenue has failed to prove nexus. In our view,the ITAT has correctly appreciated the facts and law. 17.In view of our observations herein above, the ITAT wascorrect in deleting the notional interest, disallowed by the AO atRs.5,80,215/- and accordingly the appeal is decided againstthe revenue and in favour of the assessee. No costs. [J.K. RANKA],J. , ACTING C.J. Raghu/p.10/ All corrections made in the judgment/order have been incorporated in the judgment/orderbeing e-mailed. Raghu, Sr. PA.