1996 (7) TMI 178 - AT - Income Tax

Assessing Officer Assessment Year Interest On Borrowed Capital New Industrial Undertaking Profits And Gains

Summary

Issues Involved:
1. Confirmation of disallowance of deduction under section 80-I of the Income-tax Act.
2. Sustenance of disallowance of Rs. 2,80,000 being the alleged interest paid to the bank on account of advances/loans given to employees.
3. Non-allowance of Rs. 21,000 being the amount of fees paid to the Controller of Capital Issues for an increase in authorized capital.

Detailed Analysis:

1. Confirmation of disallowance of deduction under section 80-I of the Income-tax Act:
The assessee, a widely held company engaged in the manufacturing and sale of steel ingots and flats, claimed a deduction under section 80-I amounting to Rs. 74,18,610 for three units: SMS-III, SMS-V, and Oxygen Plant. The Assessing Officer allowed the deduction for the Oxygen Plant but disallowed it for SMS-III and SMS-V, citing sections 80-I(8) and 80-I(9). The profits for these units were recomputed, resulting in losses, thus negating any deduction under section 80-I. The CIT(A) upheld this view, noting that section 80-I(9) was not considered in previous Tribunal orders for assessment years 1990-91 and 1991-92.

The assessee argued that section 80-I(9) was inapplicable as it pertains to transactions between the assessee and another person, not between different units of the same assessee. It was emphasized that section 80-I(8) was relevant for intra-unit transactions. The Tribunal agreed, stating that section 80-I(9) addresses arrangements producing inflated profits due to close connections with another person, which was not the case here. The Tribunal found the facts of the assessee's case distinguishable from Upper India Steel Mfg. & Engg. Co. Ltd., where no separate books were maintained and job work was done externally. The Tribunal concluded that the assessee was entitled to the deduction under section 80-I as claimed, and the revenue authorities were incorrect in rejecting the claim.

2. Sustenance of disallowance of Rs. 2,80,000 being the alleged interest paid to the bank on account of advances/loans given to employees:
The assessee had advanced Rs. 1,31,18,000 to its employees for purchasing its shares, leading to a disallowance of Rs. 2,80,000 in interest by the Assessing Officer, who argued that these advances were not for business purposes. The CIT(A) upheld this view. The assessee contended that it had sufficient reserves and the advances were in line with the Companies Act and Ministry of Finance guidelines, which allowed such advances to employees for share purchases. The assessee also argued that advancing interest-free loans was a long-standing practice and a condition of service.

The Tribunal found that the assessee had sufficient reserves to cover the advances and that the loans were repaid within three days. The Tribunal noted that the advances fostered a harmonious relationship between the employer and employees, which was for business purposes. The Tribunal distinguished this case from H. R. Sugar Factory (P.) Ltd., where advances were made to directors. The Tribunal concluded that the disallowance of Rs. 2,80,000 was unjustified and deleted it.

3. Non-allowance of Rs. 21,000 being the amount of fees paid to the Controller of Capital Issues for an increase in authorized capital:
The assessee claimed that the fee paid for increasing its authorized capital was revenue in nature. The CIT(A) and the Tribunal disagreed, citing the jurisdictional High Court's decision in Groz-Beckert Saboo Ltd. v. CIT, which held that such fees were capital expenditures and not allowable as business expenses. The Tribunal upheld the disallowance of Rs. 21,000.

Conclusion:
The appeal was partly allowed, with the Tribunal granting relief on the disallowance of deduction under section 80-I and the interest disallowance but upholding the disallowance of the fee for increasing authorized capital.