2003 (12) TMI 274 - AT - Income Tax

Disallowance u/s 36(1)(iii) - Interest On Borrowed Capital - non-business purposes - sister-concern - disallowance u/s 43B - payments under ESI and PF to the Government account beyond the due dates - Disallowance under Rule 6DD - Disallowance of interest - difference of opinion between the learned Members - Third Member Orde. Whether disallowance of interest of Rs. 2, 31, 261 and Rs. 7, 40, 940 respectively in assessment years 1992-93 and 1993-94 is liable to be deleted in the light of decision in the case of Woolcombers of India Ltd. v. CIT 1981 (2) TMI 36 - CALCUTTA HIGH COURT or sustained? - HELD THAT - No evidence has been filed by the assessee to prove that these funds were advanced to Oswal Palms Ltd. for the purpose of business. Section 36(1)(iii) lays down three conditions. Only on complying with these conditions the assessee is entitled to deduction of interest. These are that the assessee must have borrowed amount on interest borrowed amount must have been utilized for the purpose of the assessee s business and interest must have been paid on borrowed amount. The onus is on the assessee to prove that the borrowed funds were utilized for the purpose of business. The assessee although borrowed funds and paid interest but could not adduce evidence that the funds were advanced to Oswal Palms Ltd. for the purpose of business. Therefore one of the conditions mentioned in section 36(1)(iii) has not been fulfilled. In a recent judgment in the case of Tirupati Trading Co. 1999 (8) TMI 19 - CALCUTTA HIGH COURT has taken the view that the onus lies on the assessee to prove that the borrowed funds have been utilized for the purpose of business. Disallowance u/s 43B - From the details extracted we find that except two payments of Rs. 2, 364 and Rs. 378 rest have been made within 20 days. Therefore disallowance made under section 43B should be restricted only for two payments amounting to Rs. 2, 742 and we delete balance amount of Rs. 63, 117. Our aforesaid view is also supported by the decision in the case of Hitech (India) (P.) Ltd. v. Union of India 1996 (12) TMI 23 - ANDHRA PRADESH HIGH COURT . Disallowance under Rule 6DD - We find that these expenses have been incurred for going on official tour to Coimbatore and payment made to Holidays Travels (P.) Ltd. vide receipt No. 116 dated 23-11-1991 in respect of air tickets of three employees Rajesh Beri A.P. Nijhawan and S. Gupta from Coimbatore to Delhi. Photocopy of the air tickets are duly filed at pages 45-47 of the paper book. Identity of Indian Airlines cannot be doubted and genuineness of expenses also cannot be doubted. Therefore we are of the opinion that the case is duly covered by the exception to rule 6DD(j) as payment has been made by the employees at the time of purchase of air tickets which they could not get if payment were not made in cash. Genuine transactions are outside the scope of section 40A(3). Accordingly on facts of the case we delete the disallowance. Disallowance of interest - We have already confirmed the disallowance in respect of funds advanced to sister-concern for non-business purposes out of borrowed funds in the case of the assessee in earlier part of this order for assessment year 1992-93. Therefore respectfully following the same we hold that Assessing Officer has rightly disallowed proportionate interest amount out of interest claimed u/s 36(1)(iii) as in our opinion the assessee has not complied with the condition that funds advanced have been utilized for the purpose of business nor any commercial expediency has been proved or contested before us. Thus we confirm the orders of tax authorities in this regard and reject ground No.2. In the result both the appeals are partly allowed. Whether disallowance of interest of Rs. 2, 31, 261 and Rs. 7, 40, 940 respectively in assessment years 1992-93 and 1993-94 is liable to be deleted in the light of decision of Hon ble Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT 1981 (2) TMI 36 - CALCUTTA HIGH COURT or sustained? Third Member Order - In the present case the assessee own capital and reserves surplus was of the order of Rs.4445 crores as on 31st March 1992. The assessee had generated cash profits to the tune of Rs. 18.42 crores during the current year. The apportioned amount up to the date of advancing the loan has been worked out at Rs. 10.5 crores. I have given very thoughtful consideration to the entire relevant material and the orders proposed by the ld. Accountant Member and the ld. Vice-President. In my view the ld. Vice-President has given convincing reasons to hold that there was no justification to uphold the disallowance of Rs. 2, 31, 261 out of interest claimed by the assessee for the assessment year 1992-93. In concur with his view. In assessment year 1993-94 the ld. Counsel appearing for the assessee placed reliance on the decision of the same Bench of the ITAT in the case of Punjab Woolcombers Ltd. for the assessment year 1993-94. The ld. Vice-President has reproduced the extract from the said decision in para 2 of his proposed order. It has been held in the aforesaid case that where no disallowance out of interest expenditure had been made in earlier years no disallowance out of interest expenditure can be made on those old loans outstanding in subsequent years. The ld. counsel for the assessee on the strength of the said decision contended that loans to all the three sister-concerns in the assessment year 1993-94 were loans advanced in earlier years. No disallowance out of interest expenditure was made in the assessment years 1991-92 and 1992-93 in relation of advances given to M/s. Manipur Vanaspati Allied Industries Ltd. and M/s. Oswal Foods Ltd. The disallowance out of interest expenditure for assessment year 1992-93 has been made by the Assessing Officer only in respect of advance given to M/s. Oswal Palms Ltd. The decision of the Tribunal in relation to the said disallowance in assessment year 1992-93 may be followed in assessment year 1993-94. He however pointed out that loan of Rs. 28.24 1akhs advanced to the aforesaid party was received back in the next year on 30th June 1992. I have carefully considered the submissions made by the ld. representatives of the parties and have gone through all the other relevant documents to which my attention was drawn during the course of hearing. I have also gone through all the judgments cited by the ld. representatives and the cases referred to in the proposed orders of the ld. Accountant Member and the ld. Vice-President. It is an undisputed fact that loan given to M/s. Manipur Vanaspati Allied Industries Ltd. and to M/s. Oswal Foods Ltd. are old loans which are outstanding since the financial year 1990-91. The ld. D.R. has brought no material or evidence to my notice to show that any fresh advances were given to these two parties. It is also an undisputed fact that no disallowance out of interest expenditure was made in assessment years 1991-92 and 1992-93. A perusal of the audited profit and loss account for the year ended on 31 st March 1991 shows that profit after taxes as per final account was Rs. 1003.20 lakhs. If depreciation of Rs. 357.3 7 lakhs is added back the cash profit derived during the year ending 31 st March 1991 will be Rs. 1360.57 lakhs which adequately covers the advances given to these two parties in financial year 1990-91 (assessment year 1991-92). The advance to the third party namely M/s. Oswal Palms was given in assessment year 1992-93. I have already held that disallowance made out of interest expenditure in assessment year 1992-93 in relation to advance given to the aforesaid sister-concern has rightly been deleted by the ld. Vice-President. The aforesaid facts clearly establish the fact that the assessee s own capital current year s profits were substantially more than the advances given to these three sister-concerns which proves the absence of any nexus between the funds borrowed on interest and interest free advances given to these three parties. The same Bench of the Tribunal in the case of Punjab Woolcombers Ltd. 2003 (1) TMI 642 - ITAT CHANDIGARH . have held that disallowance out of interest expenditure cannot be sustained in relation of interest free advances given in earlier years in cases where no such disallowance out of interest expenditure was made in those earlier years. I am of the considered opinion that the ld. Vice-President has rightly directed the Assessing Officer to delete the disallowance of Rs. 7, 40, 950 in the assessment year 1993-94 also. Thus I agree with the view taken by the ld. Vice-President for both the years under consideration - The matter will now go to the regular Bench for passing an order according to the majority opinion.

Summary

Issues Involved:
1. Disallowance of interest u/s 36(1)(iii)
2. Disallowance under section 43B
3. Disallowance under Rule 6DD
4. Inclusion of CST and ST in total turnover for section 80HHC

Summary:

1. Disallowance of interest u/s 36(1)(iii):
The primary issue was whether the interest-free advances given by the assessee to its sister-concern Oswal Palms Ltd. were for non-business purposes, thereby justifying the disallowance of Rs. 2,31,261 u/s 36(1)(iii). The Assessing Officer (AO) and CIT(A) upheld the disallowance, citing a clear nexus between interest-bearing funds and the interest-free advances. The assessee argued that the advances were made from surplus funds and not borrowed funds, relying on the decisions in Woolcombers of India Ltd. and British Paints (India) Ltd. The Tribunal, after examining the cash flow statement and relevant case laws, concluded that the advances were made out of the assessee's own funds and not borrowed funds, thus deleting the disallowance.

2. Disallowance under section 43B:
The AO disallowed Rs. 65,859 for late payment of ESI and PF beyond the due dates specified in the respective Acts. CIT(A) upheld the disallowance, rejecting the assessee's reliance on a circular allowing a grace period for payment. The Tribunal, however, found that the payments were made within the grace period allowed by the Central Board of Trustees of the Provident Fund and restricted the disallowance to Rs. 2,742, deleting the balance amount of Rs. 63,117.

3. Disallowance under Rule 6DD:
The AO disallowed Rs. 11,184 paid to Holiday Travel (P.) Ltd. for air tickets, citing a contravention of section 40A(3). The CIT(A) upheld the disallowance due to lack of evidence. The Tribunal found that the payment was made for official purposes and was covered by the exception to Rule 6DD(j), thus deleting the disallowance.

4. Inclusion of CST and ST in total turnover for section 80HHC:
The issue was whether CST and ST collected should be included in the total turnover for calculating relief u/s 80HHC. The CIT(A) included CST and ST in the total turnover, following the Supreme Court decisions in Chowringhee Sales Bureau (P.) Ltd. and Sinclair Murray & Co. The Tribunal, however, followed its earlier decision and the Bombay High Court's ruling in Sudarshan Chemicals Industries Ltd., directing the AO to exclude CST and ST from the total turnover for computing relief u/s 80HHC.

Separate Judgment by Third Member:
The Third Member concurred with the Vice-President, holding that the disallowance of interest u/s 36(1)(iii) for both assessment years 1992-93 and 1993-94 should be deleted, as the advances were made out of the assessee's own funds and not borrowed funds. The matter was referred to the regular Bench for passing an order according to the majority opinion.