Punjab & Haryana H.C : Assessee was having interest free capital before any interest free advance was made and that there is nothing on record by any of the authorities below that the assessee had used the interest bearing funds for other than business purposes, whereas the assessee had submitted that loan raised by the assessee has been used for the purpose of business, ignoring the specific finding of the AO that the claims of the assessee that interest bearing funds were not diverted as interest free loan and that advances were given during the course of business, were factually incorrect

High Court Of Punjab And Haryana

CIT vs. Smt. Satish Bala Malhotra

Section : 36(1)(III)

Assessment Year : 2006-07

S.J. Vazifdar, CJ. And Deepak Sibal, J.

IT Appeal No. 232 Of 2012 (O&M)

August 11, 2016

JUDGMENT

S.J. Vazifdar, CJ. – This is an appeal against the order of the Tribunal pertaining to the assessment year 2006-2007.

2. The assessee was one Ashok Kumar Malhotra who carried on business in the firm name and style of M/s Modern Publishers as the sole proprietor thereof. The three respondents are his heirs.

3. Questions (i) to (v) raised in the appeal do not survive in view of an order of the earlier Division Bench of this Court dated 28.10.2013. These questions relote to the issue regarding the deletion of an addition on account of deemed dividend with respect to an amount received by the deceased assessee for the sale of an immovable property. The Division Bench held that there was no reason to differ with the opinion of the Tribunal and that the Tribunal had rightly deleted the addition. Notice of motion was issued only in respect of questions (vi), (vii) and (viii) which read as under:—

“(vi) Whether the Hon’ble ITAT is justified in deleting the addition of Rs. 34,00,000/- made on account of proportionate disallowance of interest expenditure, accepting the submission of the assessee that he was having interest free capital before any interest free advance was made and that there is nothing on record by any of the authorities below that the assessee had used the interest bearing funds for other than business purposes, whereas the assessee had submitted that loan raised by the assessee has been used for the purpose of business, ignoring the specific finding of the AO that the claims of the assessee that interest bearing funds were not diverted as interest free loan and that advances were given during the course of business, were factually incorrect?

(vii) Whether the Hon’ble ITAT is justified in deleting the addition of Rs. 34,00,000/- made on account of proportionate disallowance of interest expenditure, accepting the submission of the assessee that he was having interest free capital before any interest free advance was made and that there is nothing on record by any of the authorities below that the assessee had used the interest bearing funds for other than business purposes, whereas the assessee had submitted that loan raised by the assessee has been used for the purpose of business, ignoring the specific finding of the Ld. CIT(A) that the onus of proving that funds advances free of interest to sister concerns during the year were on account of commercial expediency, was on the assessee and merely giving of the money to the sister concern does not prove the commercial expediency, unless it is shown that the amounts have been used commercially even by the sister concerns?

(viii) Whether the order of Hon’ble ITAT is perverse as the same has been passed completely ignoring the specific findings of the AO and the Ld. CIT(A) on the issue of interest free loans to the sister concerns?”

4. In our view, a substantial question of law does not arise. The exercise entailed only an appreciation of facts. We do not find the conclusion of the Tribunal on facts to be perverse or absurd.

5. The respondent-assessee filed a return of income on 31.10.2006. On 15.12.2008, the Assessing Officer passed an assessment order under Section 144 of the Income Tax Act, 1961 (in short the Act). The assessee challenged the same before the CIT (Appeals). On 22.01.2009, a search was carried out under Section 132 of the Act at the assessee’s premises. On 23.11.2009, the assessee filed a return of income under Section 153 A. There was no difference between the two returns.

6. On 26.02.2010, the CIT (Appeals) passed an order in the assessee’s appeal against the assessment order dated 15.12.2008. On 29.12.2010, a further assessment order was passed under Section 153 A of the Act. This was in relation to the return filed under Section 153 A on 23.11.2009. The assessee challenged this order before the CIT (Appeals) by way of an appeal which was disposed of through order dated 11.08.2011. This order essentially confirmed the order dated 26.02.2010 by which the assessee’s appeal against the original assessment order had been disposed of.

The CIT (Appeals) granted limited relief to the assessee. The assessee accordingly filed two appeals against the two orders of the CIT (Appeals). The appellant-department also filed two appeals against the said orders of the CIT (Appeals) to the extent of the reliefs granted to the assessee. There were accordingly four appeals before the Tribunal and correspondingly four appeals before this Court.

7. This brings us back to the above questions raised in the appeal. The Assessing Officer disallowed the deduction under Section 33(1)(iii) in relation to interest paid by the assessee. Secured loans of Rs. 15.32 crores were outstanding as on 31.03.2006. This appeal pertains to the assessment year 2006-2007. The assessee had admittedly advanced loans of Rs. 11.19 crores to his sister concerns. He, however, charged interest in respect of the loans to two sister concerns aggregating to Rs. 3.82 crores. No interest was charged in respect of the loans to six other sister concerns aggregating to Rs. 7.37 crores. As recorded by the Assessing Officer, the assessee paid various amounts of interest of which interest of an amount of Rs. 46.63 lacs is relevant in this appeal. The said amount of Rs. 46.63 lacs was paid as interest during the accounting year from the assessee’s overdraft account. The Assessing Officer disallowed interest on a proportionate basis.

8. The assessee established that he had capital of Rs. 12.69 crores, received an interest free loan from his wife in the sum of Rs. 1.18 crores and earned profit of Rs. 11.11 crores for the assessment year in question. He had accordingly contended that he had sufficient free reserves from which he advanced the amount of Rs. 7.37 crores to his sister concerns free of interest. If the assessee established the same, he would be entitled to succeed. The CIT (Appeals), however, dismissed the appeal except to the extent of the interest free loans made to certain sister concerns. The assessee succeeded in respect of the loans to certain sister concerns as the CIT (Appeals) found that he had made out a case of commercial expediency.

9. The Tribunal, however, did not consider the issue of commercial expediency having come to the conclusion that the assessee in any event had established that the interest free loans were made from the free reserves available to him. Had we decided this issue in favour of the revenue, it would have been necessary to remand the matter to the Tribunal to consider the case of commercial expediency both on behalf of the revenue as well as on behalf of the assessee. However, as we are in agreement with the decision of the Tribunal on the first issue, it is not necessary to remand the matter.

10. The Tribunal after considering these facts came to the conclusion that the assessee had interest free capital from which he was entitled to make an interest free advance to his sister concerns. It was also rightly observed that there was nothing on record to show that the assessee had used the interest bearing funds for other than business purposes. Mr. Katoch, learned counsel appearing on behalf of the appellant was also unable to establish the same. Further, even before us, it has not been established that the assessee did not have sufficient interest free capital to the extent of Rs. 7.37 crores which is the amount advanced by him free of interest. Nor was our attention invited to any material to indicate that it is the interest bearing loan which was in turn advanced free of interest to the assessee’s sister concerns.

11. This exercise by the Tribunal was one of appreciation of facts. We are unable to hold that the same was absurd or perverse.

12. The findings of the CIT (Appeals) in the order dated 26.02.2010 were confirmed in the order of the CIT (Appeals) dated 11.08.2011. The order dated 11.08.2011 merely confirmed the findings and the decision in the order dated 26.02.2010. Mr. Katoch, therefore, relied upon the observations and findings of the CIT (Appeals) in the order dated 26.02.2010. The CIT (Appeals) noted the assessee’s contention that he had his own capital and interest free loans and profits. It was, however, observed that a perusal of the balance-sheet showed that the capital of the assessee included the profit earned during the year and that, therefore, both the closing capital and the profit earned during the year could not be considered as being available separately for advancing the interest free loans. Even assuming that to be so, it would make no difference. This is for the reason that even otherwise the assessee had sufficient amounts available to him to advance the interest free loan of Rs. 7.37 crores. As mentioned earlier, the assessee had available with him Rs. 11.78 crores on account of capital itself. Moreover, he also had an interest free loan of Rs. 1.18 crores from his wife.

13. The CIT (Appeals) also observed that the assessee had not rebutted the Assessing Officer’s contention that he had also made investment out of his capital during the year which exceeded the capital of the assessee. However, Mr. Katoch was unable to invite our attention to any part of the record which established this assertion. He merely relied upon the observation. Further, the nature of this investment is also not indicated. Nor is there anything to indicate that such investment was made out of the capital. There is no co-relation of the investment made and the interest bearing loan and the capital available to the assessee. In these circumstances, the Tribunal’s appreciation of the facts to the contrary cannot be held to be absurd or perverse.

14. In our view, therefore, the questions sought to be raised are not substantial questions of law.

15. The appeal is, therefore, dismissed.

[Citation : 387 ITR 403]