High Court Of Delhi
CIT vs. Dalmia Cement (Bharat) Ltd.
Section 36(1)(iii),
Asst. Year 1976-77, 1977-78,
A.K. Sikri & Valmiki J. Mehta, JJ.
IT Ref. Nos. 249 & 250 of 1987
24th July, 2009
Counsel appeared :
Ms. Prem Lata Bansal, for the Appellant : R.M. Mehta, for the Respondent
JUDGMENT
Valmiki J. Mehta, J. :
The following question of law has been referred to this Court for opinion by the Income-tax Appellate Tribunal (Tribunal), Delhi : “Whether, on the facts and circumstances of the case, the Tribunal was correct in holding that no portion of the interest paid by the assessee on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company.”
2. The facts of the case on the basis of which the above question has been referred are that the assessee company M/s Dalmiya Cement (Bharat) Ltd. manufactures and deals in cement and dead burnt magnesite. Its method of accounting is mercantile and the accounting year for the asst. yrs. 1976-77 and 1977-78 ended on 31st Dec.,1975 and 31st Dec., 1976, respectively. The assessee company had advanced an interest-free loan to the tune of Rs. 40,00,000 to its 100 per cent subsidiary company, namely, M/s Srirangam Investment Company, Ltd. The Income-tax Officer (ITO) noted from the accounts that the interest bearing borrowings from banks and public had increased during the year 1976-77 to Rs. 1,14,46,904 and Rs. 68,16,000 against Rs. 3,78,797 and Rs. 53,81,000, respectively in the immediately preceding previous year. The ITO concluded that the additional loans had been raised by the assessee company to advance loan to its subsidiary company. Accordingly, AO disallowed part of the interest amounting to Rs. 2,26,973 in respect of the claim of interest debited by the assessee for the year 1976-77 and Rs. 3,70,392 in respect of the assessing year 1977-78. The order of the AO was upheld by the CIT(A) wherein the view of the ITO was upheld holding that no interest is allowable for amount of moneys which have been loaned to the subsidiary company and consequently an appeal was preferred to the Tribunal by the assessee. The Tribunal after discussing the rival contentions of the parties held as under : “11. The learned AO and the first appellate authority appear to have gone for the mere presumption that the assessee’s own funds were being utilised for the business purposes and the interest borrowings were directed towards interest-free lending. However, the authorities have not established any nexus between these transactions. On the other hand, the assessee vide p. 4 has given the various dates on which interest-free loans were advanced, the cheque numbers and the amounts. The details of entire amount of Rs. 40 lakhs are given from pp. 5 to 9 where the loan transactions to M/s Shri Rangam are adumbrated. In these pages, it is seen that these advances are preceded by the sufficient funds of the assessee from sale proceeds, encashment of FDRs or sale of assets. It is nowhere shown in the said pages that the amounts standing ready for being advanced free of interest were at all inclusive of the interest bearing loans. The correctness of the pp. 4 to 9 of the assessee’s paper book were not doubted even by the learned senior Departmental Representative as is discussed earlier.”
3. Before us the counsel for the Revenue and the assessee on facts have raised same arguments as raised before the authorities below. The counsel for the assessee has taken us through a detailed chart filed by the assessee before the Tribunal showing for different months such as 1st Jan., 1975, 1st May, 1975, 9th April, 1975 etc. till end of the financial year to show as to how credits, bank balance, fixed deposits from the public and so on which were available with the assessee company and as to how the loan which was advanced to the subsidiary company was not in lump sum of Rs. 40,00,000 but consisted of advances at different dates of different amounts of Rs. 1,80,000, Rs. 1,00,000, Rs. 1,20,000 and so on and that on each date of such loan, there was sufficient credit balance available with the assessee company, independent of loan from the banks, so as to give further loan to its subsidiary company. The counsel accordingly contended that it could not be said that the loans which are given to the subsidiary company have been diverted from the loan taken by the assessee company from its bank. The learned counsel further contended that this chart was not disputed by the Revenue before the CIT(A) and was also accepted by the Tribunal and duly considered before arriving at its findings of para 11 as stated above. The counsel of the assessee then relied upon the afore-stated para 11 of the judgment of the Tribunal which he contended is final, the Tribunal being the final fact finding authority. The learned counsel for the assessee has placed strong reliance upon the various decisions : S.A. Builders Ltd. vs. CIT(A) (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC), CIT vs. Tin Box Co. (2003) 182 CTR (Del) 171 : (2003) 260 ITR 637 (Del), K. Ravindranathan Nair vs. CIT (2000) 164 CTR (SC) 498 : (2001) 247 ITR 178 (SC) and Sudarshan Silks & Sarees vs. CIT (2008) 216 CTR (SC) 12 : (2008) 300 ITR 205 (SC) to canvass the propositions that firstly the Tribunal is the final fact-finding authority and the findings of the Tribunal as recorded in its para 11 of its judgment cannot be challenged by the Revenue and secondly the counsel further contended that unless the Revenue is able to show that the loans given to the subsidiary company are not for any individual use for any director or some such similar personal purpose which cannot be said to be a personal purpose, then, the loan is deemed to be given for the commercial expediency/purpose and cannot be questioned by the assessing authority.
4. Per contra, the counsel for the Revenue has placed reliance upon the decision of the CIT(A) which gave the following findings : “To conclude—(i) money available from all sources including current profits and increase in current liabilities is reflected in the overall bank balance position and is shown by item No. 3 of the annexed chart No. 2; (ii) money in fixed deposits was not available for making the advances to Sri Rangam on the dates when these advances were made; (iii) on all the dates and throughout the period during which the loans were being advanced to Sri Rangam the assessee’s bank balance were in the ‘red’. It must, therefore, be concluded that the funds advanced to Sri Rangam could have possibly come and did actually come from borrowed interest- bearing funds. As a corollary to this finding, interest to the extent if financed the loan to Sri Rangam must be held to be disallowable as it relates to money borrowed but not for the purposes of the company’s business. In compliance with the directions of the Tribunal and on reconsideration of the totality of the relevant fact, the disallowance of Rs. 2,26,973 is confirmed.” The counsel for the Revenue has further taken us in detail through pp. 4 to 6 of the order of the CIT(A) and has referred to Elmer Havell Electrics & Ors. vs. CIT (2005) 197 CTR (Del) 316 : (2005) 277 ITR 549 (Del).
5. Two main issues, therefore, arise in the present case as to whether the loans which have been given by the assessee company to its subsidiary company can be said to be from the funds of the assessee company which it borrowed from its bank and consequently, the assessee company is not entitled to that portion of the interest as deduction as revenue expenditure to the extent that such loan of Rs. 40,00,000 has been routed to the subsidiary company. Secondly, the issue is as to whether there was commercial expediency for grant of the loan to the subsidiary company and Revenue has not taken up a stand and failed to discharge the onus that loan given to the subsidiary company was for only personal purposes and it should not be held that the loan as given in the ordinary course of business for commercial expediency by the assessee company to the subsidiary company.
6. (i) We may straightway refer to the Supreme Court judgment in S.A. Builders Ltd. (supra). In the said case almost on the similar facts, the High Court had affirmed the findings of the ITO and Tribunal and disallowed the interest with respect to the loan advanced to the sister concern. The Supreme Court noted this position in its judgment as under : “The High Court held that since it stands established that the amounts of Rs. 82 lakhs and
Rs. 37.85 lakhs had been advanced by the assessee to its sister concern from out of the overdraft account with the bank in which there was already a debit balance, the order of the Tribunal does not suffer from any factual or legal infirmity. Accordingly, the High Court dismissed the appeal” (placitum 13, p. 7) (ii). Before the Supreme Court, the issue which arose was whether loan given by the assessee company to its sister concern would disentitle the assessee company from debiting the interest paid to the banks as revenue expenditure. The Supreme Court held that the loan was given for the business purposes and in this regard held at placitum 35 and 36 as under :
“We agree with the view taken by the CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.” (iii) The Supreme Court further relied upon the concept of ‘for the purpose for business’ and held as under in placitum 20 to 23 of the judgment at p. 7 of the report as under : “In this connection we may refer to s. 36(1)(iii) of the IT Act, 1961 (hereinafter referred to as the “Act”) which states that ‘the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession’ has to be allowed as a deduction in computing the income under s. 28 of the Act.
In Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC) : AIR 1979 SC 1291, this Court held that the expression ‘for the purpose of business’ occurring under the provision is wider in scope than the expression ‘for the purpose of earning income, profits or gains’, and this has been the consistent view of this Court.
In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the IT authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency.
In our opinion, the decisions relating to s. 37 of the Act will also be applicable to s. 36(1)(iii) because in s. 37 also the expression used is ‘for the purpose of business’. It has been consistently held in the decisions relating to s. 37 that the expression ‘for the purpose of business’ includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.” (iv) The Supreme Court further held at placitum 26 at p. 8 of the report as under : “The expression ‘Ecommercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.”
In view of the aforesaid ratio as laid down by the Supreme Court in the S.A. Builder’s case (supra) and the fact that it has not been the stand of the Revenue and the onus so discharged that the loan was given for any personal benefit for any director or for any other personal reason, clearly the loan given by the assessee company to its subsidiary company was for the purpose of business and commercial expediency and therefore the AO was not justified in disallowing the claim of interest for being debited as a revenue expenditure. Additionally, though not necessary in view of the law as laid down in S.A. Builders’s case (supra) we note that the judgment in Tin Box Company’s case (supra) clearly holds that it was necessary for the Revenue to point out any specific interest- bearing borrowed funds, which have been diverted to the sister concern and which the Revenue has failed to do so in the facts of this case. (i) We also agree with the contention of the counsel for the respondent/assessee that the Tribunal is the final fact-finding authority and would refer to judgment of the Supreme Court in K. Ravindranathan Nair vs. CIT (supra) which held as under : “The High Court overlooked the cardinal principle that it is the Tribunal which is the final fact-finding authority. A decision on fact of the Tribunal can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal on facts is perverse, in the sense that it is such as could not reasonably have been arrived at one of the material placed before the Tribunal. In this case, there was no such question before the High Court. Unless and until a finding of fact reached by the Tribunal is canvassed before the High Court in the matter set out above, the High Court is obliged to proceed upon the findings of fact reached by the Tribunal and to give an answer in law to the question of law that is before it.
The only jurisdiction of the High Court in a reference application is to answer the questions of law that are placed before it. It is only when a finding of the Tribunal on fact is challenged as being perverse, in the sense set out above, that a question of law can be said to arise.” (ii). Similarly, it has been further held in Sudarshan Silks & Sarees vs. CIT (supra) at p. 6 of the report as under : “In the present case, the question of law referred to the High Court for its opinion was, as to whether the Tribunal was right in upholding the findings of the CIT(A) in cancelling the penalty levied under s. 271(1)(c). Question as to perversity of the findings recorded by the Tribunal on facts was neither raised nor referred to the High Court for its opinion. The Tribunal is the final Court of fact. The decision of the Tribunal on the facts can be gone into by the High Court in the reference jurisdiction only if a question has been referred to it which says that the finding arrived at by the Tribunal on the facts is perverse, in the sense that no reasonable person could have taken such a view. In reference jurisdiction, the High Court can answer the question of law referred to it and it is only when a finding of fact recorded by the Tribunal is challenged on the ground of perversity, in the sense set out above, that a question of law can be said to arise. Since the frame of question was not as to whether the findings recorded by the Tribunal on facts were perverse, the High Court was precluded from entering into any discussion regarding the perversity of the finding of fact recorded by the Tribunal.”
We therefore hold that the Revenue is bound by the finding of fact recorded in para 11 of the judgment of the
Tribunal and as reproduced in detail above.
The judgment cited by the Revenue in the case of Elmer Havell (supra) is distinguishable on the facts of its case where the decision of the Tribunal was held as final being a final-fact-finding authority. In any event of the matter the judgment in S.A. Builder’s case (supra) is of the Supreme Court of 2007 and would overrule, to the extent of any divergence, the decision of the Division Bench in Elmer Havells (supra) which is of 2005. We, therefore, answer the reference by holding that the Tribunal was correct in holding that no portion of the interest paid by the assessee on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to the subsidiary company and that the AO was not justified in disallowing the assessee company in debiting the interest paid to the bank as a revenue expenditure merely because it had given further loan of Rs. 40,00,000 to its subsidiary company.
[Citation : 330 ITR 595]
