High Court Of Madras
CIT Vs. Century Flour Mills Ltd.
Assessment Year : 1991-92
Section : 36(1)(iii)
Mrs. Chitra Venkataraman And P.P.S. Janarthana Raja, JJ.
Tax Case Appeal Nos. 1034 And 1035 Of 2004
March 14, 2011
P.P.S. Janarthana Raja, J. – The Revenue has come on appeal as against the order of the Income-tax Appellate Tribunal, Madras “B” Bench, dated June 24, 2004 made in I. T. A. Nos. 79 and 80/Mds/1998, dated April 6, 2004 for the assessment years 1991-92 and 1992-93 respectively, raising the following substantial question of law.
“Whether in the facts and circumstances of the case, the Tribunal was right in holding that the interest paid on the loan availed of from bank can be allowed as a deduction, when the said loan was advanced to the managing director without charging any interest ?”
2. The assessee is a company in which the public are not substantially interested. The assessee is engaged in the business of manufacturing and sale of maida, sooji and wheat items. The relevant assessment years are 1991-92 and 1992-93 and the corresponding financial years ended on March 31, 1991 and March 31, 1992 respectively. For the assessment year 1991-92, the assessee filed a return admitting the loss of Rs. 27,29,851. The Assessing Officer processed the same under section 143(1)(a) of the Income-tax Act. Later, it was found in the course of the assessment proceedings that the assessee had entered into an agreement for the purchase of the land owned jointly by P. Govindasamy, managing director of the assessee-company and also N. Chockalingam. The agreement was entered on October 26, 1983 and a sum of Rs. 20,00,000 was given by the assessee-company as advance to the managing director during the previous year relevant to the assessment year 1984-85. One of the clauses of the agreement stated that if the assessee-company is unable to supply the goods contemplated under the agreement on or before April 30, 1984, they should refund the amount taken as advance and also pay a consolidated damage of Rs. 5,00,000. The said agreement was renewed year after year. It is also pertinent to note that no sale had taken place and the vendor also refunded the entire amount of Rs. 30,00,000 on September 5, 1992. During the assessment year, it was found that the borrowed funds of the assessee on which interest paid, was claimed as a deduction. Therefore, the Assessing Officer was of the view that the assessee has not proved that the amount given as advance was out of its own surplus funds. Therefore, the Assessing Officer disallowed the interest to the extent of 18 per cent. on the advance of Rs. 20,00,000 and the same worked out to Rs. 3,60,000.
3. For the assessment year 1992-93, the return was filed on December 28, 1992 claiming net loss of Rs. 13,30,487. The return was processed under section 143(1)(a) and the Assessing Officer also made certain prima facie adjustments and determined the tax to the extent of Rs. 5,18,492. Later, the assessment was taken for scrutiny and he completed the assessment under section 143(3) and determined the total income at Rs. 18,35,727. While completing the assessment, he disallowed the interest payment of Rs. 4,24,800 on the ground that the assessee has diverted the borrowed funds. Aggrieved by those orders disallowing the interest, the assessee filed appeals to the Commissioner of Income-tax (Appeals). The Commissioner (Appeals) confirmed the assessment order and dismissed the appeals. Aggrieved by that, the assessee filed the appeals to the Income-tax Appellate Tribunal. The Tribunal held that the Revenue has not established the nexus between the borrowed funds and advanced money with the managing director. Therefore, the Tribunal set aside the order of the lower authorities and allowed the appeals. Aggrieved by that, the Revenue filed the present appeals raising the above questions of law.
4. Learned counsel appearing for the Revenue vehemently contended that the order passed by the Tribunal is illegal, wrong, without basis and justification. He further contended that the assessee-company has not proved that the amount given as advance to the managing director was out of its own surplus funds. He further submitted that the assessee has been paying interest on bank loan and at the same time lent the money without charging any interest and relied on the decision of the Kerala High Court reported in CIT v. V. I. Baby & Co.  254 ITR 248 / 123 Taxman 894 and the decision of the Punjab and Haryana High Court in CIT v. Abhishek Industries Ltd.  286 ITR 1/ 156 Taxman 257. Therefore, the order passed by the Income-tax Appellate Tribunal is not in accordance with law and the same has to be set aside.
5. In spite of notice having been served on the assessee, there is no representation on behalf of the assessee and his name has also appeared in the cause list.
6. Heard the learned counsel appearing for the Revenue and perused the documents available on record. The assessee-company entered into an agreement for purchase of land owned jointly by P. Govindasamy, managing director of the assessee-company and N. Chockalingam as per the agreement of sale dated October 26, 1983. As per the agreement, a sum of Rs. 20,00,000 was given as advance to the managing director during the previous year relevant to the assessment year 1984-85. Also, one of the clauses in the agreement contemplated that if the vendors are unable to comply with the sale as per the agreement entered on April 30, 1984, they would refund the amount taken as advance and also pay the consolidated damage of Rs. 5,00,000. The said agreement was also renewed year after year. Due to some unavoidable reasons, the sale was not effected and the Revenue has not disallowed any interest in earlier assessment years i.e., 1984-85 to 1990-91. It is also pertinent to note that the managing director refunded the entire advance amount of Rs. 30,00,000 to the assessee-company on September 5, 1992 since the sale has not been effected. So in view of the refund of the amount, it is clear that the company paid the amount only for purchase of land owned jointly by the Govindasamy, managing director and Chockalingam. It is only an advance and it is not a loan as alleged by the Assessing Officer. Only for purchase of the property, the amount was given to the land owner, who is the managing director and another person by name one Chockalingam. It is not a loan simpliciter. It is only the sale consideration paid as advance. It is also seen from the order of the Tribunal that a paper book was filed by the assessee before the Tribunal giving the details regarding advance amount and also the details of secured loan from 1983 to 1992 and even for the assessment years 1987-88 to 1990-91, there is no disallowance of interest by the Revenue. After considering the materials available on record, the Tribunal in paragraph 5 held as follows :
“We have heard the submissions of both the parties and gone through the case law cited by the assessee’s counsel. It is seen that the Assessing Officer has made the additions without going into the facts of the case. He has never tried to connect or prove the nexus with the borrowed funds and the advanced funds. In earlier years in the assessee’s own case no disallowance was made. This is a good basis for not making the disallowance for these years also. The principle of opportunity cost as enumerated by the Commissioner of Income-tax (Appeals) has not relevance when there is no nexus between the borrowed funds and advanced funds. Following the case law cited by the assessee’s counsel cited supra and going through the facts of the case, we allow the claim of the assessee and accordingly, set aside the orders of the authorities below.”
7. From a reading of the above, the Tribunal has given a categorical finding that there is no nexus established by the Assessing Officer between the borrowed fund and the advanced amount. Therefore, the Assessing Officer has failed to establish that the borrowed amount was given as a loan to the managing director. It is also pertinent to note that the borrowed fund was not diverted for non-business purposes. In the present case, the amount is given only for the purchase of the land and it is for the benefit of the business and it cannot be held that it is for the non-business purposes. The Revenue has not disallowed any interest for the period from 1984-85 to 1990-91. Only during these two years, the Revenue disallowed the interest. Considering the above factors, the Tribunal has correctly come to the conclusion that the disallowance made by the Assessing Officer is not in accordance with law and rightly set aside the order of the lower authority.
8. In the decision of the Kerala High Court in V. I. Baby & Co.’s case (supra), the assessee borrowed fund from the bank and transferred sizeable amounts to the personal accounts of its partners and advanced amounts to the relatives of the partners and sister concerns and had not charged interest and hence, the Assessing Officer disallowed the proportionate interest payment in respect of the amounts so advanced by the assessee in computing its profits. Further, it is clear from that case that the assessee had not derived any benefit out of the advances to the partners, their relatives and the sister concerns and the assessee was not the beneficiary of the investments made by the partners and their relatives. Therefore, the Kerala High Court rightly held that since the assessee was not the beneficiary of the investments made by the partners and their relatives and the advance money was interest free, the Assessing Officer was justified in disallowing the interest. In the present case, the facts are factually different and distinguished from the Kerala High Court judgment. Therefore, the judgment relied on by the Revenue does not help the case of the Revenue.
9. In the decision of the Punjab and Haryana High Court in Abhishek Industries Ltd.’s case (supra), it has been held that the borrowed fund was used for non-business purposes. Therefore, the Punjab and Haryana High Court held that the investment was made as advance for non-business purposes and hence, the said judgment is also not helpful and supports the case of the Revenue.
10. The Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals)  288 ITR 1/ 158 Taxman 74, has considered the question of payment of interest on the borrowed money. In that case, the borrowed money was lent to the sister concern without charging interest and it was held that the Revenue must look into the transaction whether the transfer of funds to the sister concern was from the point of view of commercial expediency and whether the amount was advanced for earning profits. Considering the principles in the above judgment, it is clear that in the present case, the amount was given to the managing director and other persons only for the purchase of the land and also for business purposes and there is no transaction of loan involved in this case. In these circumstances, I do not find any error or illegality in the order of the Tribunal so as to warrant interference. It is a question of fact. It is not a perverse order. The order passed by the Tribunal is based on valid materials and evidence. Accordingly, the question raised is answered in favour of the assessee and against the Revenue. The appeal is devoid of merit and the same is dismissed.
[Citation : 334 ITR 377]