High Court Of Calcutta
Caldern Pharmaceuticals Ltd. vs. CIT
Sections 36(1)(iii)
Asst. Year 1993-94, 1994-95
Altamas Kabir & Alok Kumar Basu, JJ.
IT Appeal No. 264 of 2002
24th September, 2003
Counsel Appeared
J.P. Khaitan with C.S. Das, Sanjoy Bhowmick & Md. Salamuddin, for the Appellant : R.K. Chowdhury with Ms. Soma Chatterjee, for the Respondent
JUDGMENT
By the court :
This appeal, at the instance of the assessee, is directed against the judgment and order dt. 30th July, 2002, of the learned Tribunal in ITA Nos. 507 and 508 (Cal) of 1993 in respect of the asst. yrs. 1993-94 and 1994-95, upholding the views expressed by the AO and the CIT(A) upon holding that the facts disclosed is a clear case of diversion of funds to the assessee’s sister concern.
2. Appearing in support of the appeal, Mr. J.P. Khaitan, learned counsel, submitted that the assessee was a manufacturer of drugs, medicines, chemicals and other pharmaceutical products and was marketing the same prior to the month of February, 1986, throughout India by its own efforts and through its own organisation. However, finding it difficult to look after both the manufacture and marketing of the aforesaid goods, the assessee entered into an agreement on 20th Feb., 1986, with its sister concern, M/s Caldern (Marketing) (P) Ltd., whereunder the assessee awarded the responsibilities for assessing the sale of its products and marketing activities all over India to its sister concern on the terms and conditions set out in the agreement. The specific features of the agreement were that the marketing agency would act as selling agents of the products to be supplied by the assessee for the purpose of executing the orders procured by them from the market. Bills and invoices were to be raised by the assessee on the marketing agents in respect of the supplies made and the marketing agents would be given one month’s credit for payment of the said bills/invoices. It was also stipulated that the property in the goods so sold by the assessee to the marketing agents would pass immediately upon delivery being effected. Clauses X and XI of the agreement provided that the marketing agents would be allowed a commission calculated at the rate of 12 per cent of the price of the product as printed in the price list published by the assessee from time to time for distribution of the products, and a further commission calculated at the rate of 13 per cent of the price of each product as printed in the price list from time to time, for the propaganda, sales promotion and market development in respect of the products of the assessee. The agreement, therefore, provided for a total amount of 25 per cent commission to the marketing agency which as indicated hereinabove is a sister concern of the assessee.
3. Mr. Khaitan also pointed out that since collection of outstanding dues from the market was slow, the assessee had to borrow large amounts from the market for the purpose of its business and on account of such borrowing it had to pay interest which was claimed as deductible under s. 36(1)(iii) of the IT Act, 1961. Mr. Khatian pointed out that the said provision provided for deduction of the amount of interest paid in respect of capital borrowed for the purpose of the business or profession. The AO disallowed the claim on the ground that the assessee had wilfully and deliberately chosen not to collect its outstanding dues from the sister concern in order to accommodate the sister concern and had, on the other hand, borrowed capital from the market and paid interest thereon for which deduction had been claimed. The AO was of the view that this amounted to diversion of funds by the assessee to its sister concern to the detriment of the Revenue and, accordingly, disallowed the claim of the assessee under s. 36(1)(iii) of the aforesaid Act. On appeal, the CIT(A) upheld the order of the AO which resulted in the assessee filing the appeal before the learned Tribunal. The learned Tribunal, as indicated hereinbefore, upheld the finding of the AO as also the CIT(A) upon holding that the facts revealed a clear case of diversion of funds to the sister concern. Mr. Khaitan, learned counsel, appearing for the assessee, urged that the decisions of all the three forums below and, in particular the learned Tribunal, suffered from a misunderstanding and/or misconstruction of the provisions of s. 36(1)(iii) of the aforesaid Act since the same have neither given a discretion nor any authority to the IT authorities to hold that there had been a diversion of funds, without any evidence to show that the sister concern or the assessee had in any way benefited in the circumstances. Mr. Khaitan also urged that whether the assessee was unable to collect its dues from the market or not had no nexus whatsoever with the deduction available under s. 36(1)(iii) of the above Act, which, merely provides that such deduction would be available in a case where borrowings were made and interest was paid for the purposes of the assessee’s business. Mr. Khaitan submitted that it was nobody’s case that the capital borrowed from the market had not been used by the assessee for its business or that it had been used to benefit the sister concern in any way. Mr. Khaitan urged that questions identical to those raised in this appeal had fallen for the consideration of the Bombay High Court in the case of CIT vs. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom). On almost identical facts the Bombay High Court held that the conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital are: firstly, that money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It was observed further that it is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed.
It was specifically observed that the view that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings and that the assessee would not be justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it, and that to the extent to which it would have been in a position to collect interest on the outstandings due to it from others, it could not be permitted to claim as an allowance interest paid by it, was not correct. Mr. Khaitan urged that on the same reasoning, the learned Tribunal as also the other lower authorities had erred in law in disallowing the assessee’s claim under s. 36(1)(iii) of the Act upon an erroneous conclusion that this was a case of diversion of funds by the assessee to the sister concern. Mr. Chowdhury, learned counsel, appearing for the Revenue, however, urged that since there was a provision in the agreement between the parties for one month’s credit, the assessee by not charging interest upon the failure of the sister concern to pay the dues had forfeited its right to claim any deduction under s. 36(1)(iii) of the aforesaid Act. Mr. Chowdhury urged that the assessee had benefited its sister concern by making an accommodation beyond the stipulated period and by not charging interest on the outstandings, had, in fact, reduced its capital for the purpose of investment of its own business. Mr. Chowdhury urged that this was not a case of the assessee applying the borrowed capital for its business but for the purposes of accommodating its sister concern as had been held by the Tribunal and the other authorities. Mr. Chowdhury submitted that no interference was called for with the order of the Tribunal and the appeal was liable to be dismissed.
We are unable to agree with Mr. Chowdhury on all the points urged by him, since all the said points are duly covered by the decision of the Bombay High Court, referred to above, which is also the view which we are inclined to take. We are fully convinced that s. 36(1)(iii) of the Act does not contemplate a situation where an assessee is required to take positive steps for realising its outstanding dues in order to be eligible for the claim for the deduction of interest under the aforesaid provision. The language of s. 36(1) (iii) is very clear in that, that an assessee would be entitled to deduction of interest paid on capital borrowings for the purpose of its business. No case has been made out before any of the forums below that the capital borrowing had not been utilised by the assessee for its business. Mr. Chowdhury’s attempt to embellish the case of the Revenue cannot in any way salvage the position as far as the Revenue is concerned, having regard to the plain understanding of the language of s. 36(1)(iii) of the IT Act, 1961.
17. For the foregoing reasons, we are inclined to allow the appeal. The appeal is, accordingly, allowed. The orders passed by the AO on 30th July, 2002, as upheld by the CIT(A) and the learned Tribunal are hereby set aside with a direction upon the authorities to allow the benefit of s. 36(1) (iii) of the IT Act, 1961, to the appellant/assessee on the interest paid on its capital borrowings for the asst. yrs. 1993-94 and 1994-95.
18. There will be no order as to costs.
[Citation : 265 ITR 244]
