2006 (12) TMI 499 - HC - Income Tax

Allowed/disallowed of Interest on interest-free loans - Interest on interest-free loans advanced by the assessee-company to its subsidiary and associate companies in which the directors were interested? - interest on investment in shares by the assessee company in its subsidiary and associate companies - HELD THAT - Tribunal has followed its own decision in the case of the assessee for the earlier assessment years, which view has also been upheld by this Court vide CIT v. Industrial Cables (India) Ltd. on the ground that the Tribunal had only followed its view in the case of the assessee, which had become final. We may notice that although the principle of consistency is applicable and the decision on the issue having been taken in favour of the assessee for the previous year, the same has to be followed, but each assessment year being an independent one, in view of conscious judgment of this Court on the issue after referring to other judgments and in absence of any direct judgment of the Hon ble Supreme Court in New Jehangir Vakil Mills Co. Ltd. v. CIT 1963 (4) TMI 60 - SUPREME COURT , we are of the view that the earlier order of this Court dismissing appeal of the revenue in limine cannot be taken to be conclusive. Thus, we partly allow this appeal in relation to question No. 1 and set aside the finding of the Tribunal and uphold the order of the Assessing Officer. As far as other issues are concerned, the appeal is dismissed.

Summary

Issues:
1. Deletion of addition made on interest-free loans to subsidiary and associate companies.
2. Deletion of addition made on interest on investments in shares.
3. Allowance of fees paid to Punjab Pollution Board for enduring benefit.

Analysis:

Deletion of Addition on Interest-Free Loans:
The AO had made additions to the declared income of the assessee for interest on interest-free loans to subsidiary and associate companies. The CIT(A) partly allowed the appeal, stating that additions in respect of advances made out of overdraft account are justified. However, the Tribunal set aside the CIT(A)'s finding, emphasizing that there was no nexus between borrowed capital and investments in subsidiaries. The High Court held that the onus is on the assessee to prove that loans raised were used for business purposes. The Court emphasized that funds diverted to sister-concerns without interest must be disallowed, as it distorts the true financial picture. The Court disagreed with the plea of nexus between borrowings and diversion for non-business purposes, ultimately deciding in favor of the Revenue.

Deletion of Addition on Interest on Investments:
The Tribunal, following its previous decisions, ruled in favor of the assessee, stating that no fresh investment had been made, and there was no change in facts. Citing the principle of consistency, the High Court upheld the Tribunal's decision, ruling against the Revenue and in favor of the assessee.

Allowance of Fees Paid to Punjab Pollution Board:
Regarding the fees paid to the Punjab Pollution Board, the Tribunal held that incurring liability in the current year does not justify spreading the expenditure over 15 years. The High Court referenced Supreme Court judgments to support the assessee's defense, emphasizing that expenditure for enduring benefit may still be on revenue account. Citing relevant case law, the Court ruled against the Revenue and in favor of the assessee.

In conclusion, the High Court partly allowed the appeal by upholding the addition on interest-free loans and setting aside the Tribunal's finding. The Court dismissed the appeal on other issues, maintaining the order of the AO.