M/S.a.murali & Co. (P) Ltd v. The Assistant Commissioner Of Income Tax Company Circle – I(1), Chennai – 600 034

In the High Court of Judicature at Madras Dated: 04.06.2013 Coram The Honourable Mrs.JUSTICE CHITRA VENKATARAMANandThe Honourable Ms.JUSTICE K.B.K.VASUKI M/s.A.Murali & Co. (P) Ltd.,# 13/2, Whannels Road,Egmore, Chennai – 600 008. .... Appellant/AppellantVs. The Assistant Commissioner of Income TaxCompany Circle – I(1),Chennai – 600 034. .... Respondent/Respondent APPEAL under Section 260A of the Income Tax Act against the orderdated 21.11.2008 made in I.T.A.No.1314/Mds/2006 on the file of theIncome Tax Appellate Tribunal 'A' Bench for the assessment year 2002-03 against the order of the Commissioner of Income Tax (Appeals)-III,Chennai-34 dated 21.3.2006 and made in ITA No.517/2004-05/A.III forthe Assessment Year 2002-03 against the order of theAsst.Commissioner of Income Tax Company Circle I(1), Chennai dated7.2.2005 and made in PA/GIR No.AX6-127 for the Assessment year 2002-2003. For Appellant : Mr.M.P.Senthil Kumar For Respondent: Mr.Arun Kurian JosephStanding Counsel for Income Tax--------- This Tax Case (Appeal), filed at the instance of the assessee asagainst the order of the Income Tax Appellate Tribunal for theassessment year 2002-03, was admitted by this Court on the followingsubstantial questions of law: "1. Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was right in https://hcservices.ecourts.gov.in/hcservices/ law in upholding the disallowance of interest on borrowedfunds merely on the ground that there was additionalamount of advances given to directors, without any nexusbeing established between the borrowed funds and theadvances made to Directors? 2. Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was right inholding that interest on borrowed funds cannot bedisallowed without any nexus between such borrowed fundsand the advances made to Directors? 3. Whether on the facts and in the circumstances ofthe case, the Income Tax Appellate Tribunal was right inlaw in not holding that interest must be allowed asdeduction on the basis of the submissions and evidencesplaced before it?" 2. The assessee is engaged in the business of export of beedileaves and food grains. The assessee is also engaged in transportcontracts. For the assessment year under consideration, the assesseedeclared a loss of Rs.3,71,680/-. When the assessment was taken upfor scrutiny, it was found that the assessee had advanced loan to theDirectors to a sum of Rs.3.91 crores as against what was given earlierat Rs.3.23 crores. The Assessing Officer viewed that the assessee hadnot utilised the borrowed funds for business purpose, but diverted thesame for advancing loans to the Directors. Hence, the claim ofinterest payment is disallowed. Aggrieved by this, the assessee wenton appeal before the Commissioner of Income Tax (Appeals). 3. Before the Commissioner of Income Tax (Appeals), the assesseecontended that the borrowed funds were used only for the purpose ofbusiness, particularly for the purchase of Masoor Dhall from SriSaravana Agency. The borrowed funds related to the earlier year andthere was no borrowal during the relevant assessment year. In thecircumstances, the assessee contended that the money advanced to theDirectors/shareholders during the year were only out of the assessee'sown funds and there was no nexus between the borrowed funds and theadvance made to the Directors. 3. Before the Commissioner of Income Tax (Appeals), the assesseecontended that the borrowed funds were used only for the purpose ofbusiness, particularly for the purchase of Masoor Dhall from SriSaravana Agency. The borrowed funds related to the earlier year andthere was no borrowal during the relevant assessment year. In thecircumstances, the assessee contended that the money advanced to theDirectors/shareholders during the year were only out of the assessee'sown funds and there was no nexus between the borrowed funds and theadvance made to the Directors. 4. Considering the documents filed before the Commissioner ofIncome Tax (Appeals), a remand report was called for from theAssessing Officer. In the remand report, the Assessing Officer hadstated that the assessee's contention that there was no nexus betweenthe borrowed funds and the advances given to the Directors, was afresh argument advanced during the appellate proceedings and furtherthe disallowance of interest paid to the Bank on borrowals diverted inthe form of loans/advances to Directors without corresponding returnthereof in the form of interest was a subject matter of assessment forthe assessment year 2001-02. The disallowance made for the assessmentyear under consideration was only a continuation of the position the Assessing Officer had taken in for the immediate preceding year. Therate of interest adopted for disallowance was raised by the AssessingOfficer from 6% to 10%, as had been agreed to by the assessee. In thecircumstances, the question of grant of relief did not arise. On goingthrough the remand report, the Commissioner of Income Tax (Appeals)rejected the appeal preferred by the assessee. Aggrieved by this, theassessee went on further appeal before the Income Tax AppellateTribunal. 5. The assessee reiterated the same contentions before theTribunal. On a consideration of the materials placed by the assessee,the Tribunal pointed out that the assessee had not proved before theAssessing Officer that the interest bearing borrowed funds wereexclusively used for the business purpose and they have not divertedas by way of loan to the Directors. The Tribunal pointed out to thefund flow position, whereby the advances made to the Directors duringthe immediate previous year showed the increase compared to theearlier balance and also the advances made by the Directors of thecompany had come down. Thus, on an analysis of facts, the Tribunalrejected the assessee's appeal. Aggrieved by this, the present appealhas been filed by the assessee. 6. Learned counsel appearing for the assessee streneously arguedthat the assessee had borrowed a sum of Rs.1.10 crores and odd on08.05.2000 and the same was utilised for the purpose of purchase ofMasoor Dhall from Sri Saravana Agency. Having regard to the closenexus therein, the question of disallowance of interest paid to theBank does not arise. Consequently, he contended that the Tribunal hadcommitted serious error in holding that the assessee had not provedthat the interest bearing borrowed funds were exclusively used for thepurpose of business. 7. In this connection, he placed reliance on the decision of thisCourt reported in (2008) 216 CTR (Mad) 180 (Commissioner of Income TaxV. Kandagiri Spinning Mills Ltd.) and contended that the amountsadvanced by the assessee to the Directors being out of commercialexpediency and in any event, the amount advanced were not out of theborrowed funds, the claim has to be sustained. 7. In this connection, he placed reliance on the decision of thisCourt reported in (2008) 216 CTR (Mad) 180 (Commissioner of Income TaxV. Kandagiri Spinning Mills Ltd.) and contended that the amountsadvanced by the assessee to the Directors being out of commercialexpediency and in any event, the amount advanced were not out of theborrowed funds, the claim has to be sustained. 8. We do not agree with the above-said contention of the learnedcounsel appearing for the assessee, particularly for the reason thatthe issue is purely one of fact. Except for stating that the assesseehad made borrowal in the immediate preceding accounting year, nomaterials were placed before this Court or before any other authorityto show that the borrowed funds were not diverted for any purposeother than business. The mere contention that the borrowed funds wereutilised for the purchase of Masoor Dhall from Sri Saravana Agency,per se, cannot be taken as a good ground to accept the plea of theassessee, considering the fact that consistently the advances given tothe Directors had increased from Rs.3.23 crores to Rs.3.91 crores without corresponding return thereof and with no better performance inthe business of the assessee. In the circumstances, we reject thearguments placed by the learned counsel appearing for the assesseebased on the materials produced before this Court, which were alreadyconsidered by the Tribunal as well as by the Commissioner of IncomeTax (Appeals). 9. As far as the reliance placed on the decision reported in(2008) 216 CTR (Mad) 180 (Commissioner of Income Tax V. KandagiriSpinning Mills Ltd.) is concerned, the same is distinguishable for thesimple reason that the decision rested on the factual findings thereinin that case by the Commissioner of Income Tax (Appeals) as well as bythe Tribunal. 10. It may be seen that the above-said decision referred to thedecision of this Court reported in (1999) 153 CTR (Mad) 153(K.Somasundaram & Brothers V. CIT), wherein a similar question, as onebefore this Court, had arisen. In the said decision, this Courtpointed out that the capital amount so borrowed should not only beinvested in the business, but that the amount borrowed should continueto remain in the business and so long as the amount borrowed is usedin the business, the interest paid on such borrowing is an expenditurewhich is required to be deducted in the computation of income from thebusiness. 11. As rightly pointed out by the Tribunal, when the assessee hadnot showed any such nexus of the borrowed funds utilised in thebusiness and continued to be used in the business, we have nohesitation in confirming the order of the Tribunal. Accordingly, thisTax Case (Appeal) stands dismissed. No costs. Sd/-Asst.Registrar/True Copy/Sub Asst.Registrar slTo1. The Income Tax Appellate Tribunal 'A' Bench,Chennai.2. The Commissioner of Income Tax (Appeals)-III, Chennai – 34.3. The Asst. Commissioner of Income Tax, Company Circle I(1), Chennai. +1cc to Mr.Philip George,Advocate Sr 27850+1cc to Mr.T.Ravi Kumar, Advocate Sr 27578JSV(CO)km/14.6.T.C.(A) No.171 of 2010