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TMI Blog2004 (7) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... T(A)(C) erred in law and on facts in sustaining the disallowance of Rs. 1,80,000 being rent paid for Employees Club maintained by the company. The same being unnecessary business expenditure may be directed to be allowed. 2. That ld. CIT(A)(C) erred in law and on facts in sustaining the disallowance of Rs. 14,416 being the amount of expenditure incurred on employees at Employees Club. The same being expenses incurred exclusively for staff welfare may be directed to be allowed." 3. Brief facts relating to ground No. 1 of the revenue's appeal, as gathered from the orders of the tax authorities, are that the assessee had advanced a sum of Rs. 2.76 crores as interest-free loan to its employees for purchasing shares of the company. The assessee-company had paid a sum of Rs. 659.79 lakhs as interest on loan and claimed it deductible under section 36(1)(iii). Before the Assessing Officer, the assessee submitted that the company was having Rs. 13,535.72 crore reserves along with capital and the amount advanced to its employees may be considered as given out of the said reserve. The company had not specifically borrowed for giving loan to its employees. The Assessing Officer disallowed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds. The loan was advanced to the employees just for the purpose of purchasing shares/debentures by the company itself in the names of the employees because the company could not bought the shares in its own name. The shares/debentures were never-transferred/delivered to the employees and the interest and dividend also not paid to the employees. The CIT(A) simply followed the order of the Tribunal relating to assessment year 1992-93, without looking into the facts of the case specifically that part of loan must have been advanced during the year. Ld. DR reiterated that the Assessing Officer has rightly made the disallowance out of interest claimed under section 36(1)(iii). 3.3 Ld. AR, on the other hand, drew our attention to the balance sheet as on 31-3-1995 and submitted that the assessee is having reserve and surplus amounting to Rs. 13,535.72 lakhs, in addition to capital of Rs. 2,089.42 lakhs. The assessee was, thus, having interest-free funds and natural inference will be that these have been invested for the purpose of advancing loan to the employees. It was submitted that the case is duly covered by order for assessment year 1992-93, wherein the Tribunal deleted the disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4.63 5360.02 Current assets Loans and advances Inven- 6953.01 3380.95 tories Sundry debtors 4781.62 3608.11 Cash and bank balances 637.77 397.28 Loans and advances 2926.62 1797.77 -------- --------- 15299.02 9184.11 -------- Less: Current liabili- ties & provi- sions Liabili- 3147.93 2756.10 ties Provi- 270.62 199.99 sion -------- -------- Net 3418.55 2956.09 current -------- assets Misc. 11880.47 6228.02 expendi- 107.86 ture (to the extent not written off or adjus- ted) -------- --------- Total: 25225.10 11695.90" ------------------------------------------------ However, the assessee has not filed any statement or copy of account in its books of account before us which may depict how much loan has been advanced during the year to the employees free of interest for purchase of shares/debentures. Although there is an observation of the Assessing Officer in the order that interest-free loan amounting to Rs. 2.76 crores have been given to the employees to subscribe to the public issue of the company but when we go through the order of the Tribunal for assessment year 1994-95, we find it as a fact that the assessee has advanced interest-free loan amounting to Rs. 154.93 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied 14,029.20 ------------------------------------------ From the above, it is clear that to the extent there is increase in reserve and surplus the assessee has invested in the fixed asset as well as in the long-term investment and also reduced the unsecured loan. The increase in capital is absorbed partly by net increase in the current asset. The increase in secured loan could have been applied for investment in the current asset. From, the copy of the abstract of Balance Sheet filed before us, one cannot derive that the reserve and surplus has been utilized by the assessee for the purpose of advancing interest-free loan to its employees. The assessee has also not filed before us any detail of the bank account to prove that the loans advanced during the year have been made out of interest-free funds. The contention that the assessee was having reserve and surplus and, therefore, reserve and surplus must have been utilized for the purpose of advancing interest-free loan to the employees cannot be accepted on the ground that correspondingly there arc long-term investment made, as extracted above. 3.5 Coming to the provisions of section 36(1)(iii), it read as under:- "The amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the order of the CIT(A) to that extent and direct the Assessing Officer to disallow interest on a sum of Rs. 1.22 crores inferred to have been advanced to the employees during the year at the rate of 18 per cent, i.e., the rate which has been applied by the Assessing Officer while disallowing interest under section 36(1)(iii). Thus, this ground of the appeal of the revenue is partly allowed. 4. Coming to the second ground, the brief facts are that the assessee claimed deduction under section 80-I amounting to Rs. 63,76,256 in respect of three units, namely, SMS-III, SMS-IV and SMS-V on the basis of profit derived on the basis of separate books of account maintained in respect of each unit. The assessee was also having another unit, namely, SMS-HO. The Assessing Officer observed that though the assessee had maintained separate books in respect of each unit, yet the expenses claimed for HO were much higher than expenses debited to the other units. The assessee submitted that it was consistently following the same system of accounting as in the earlier years and also during assessment years 1992-93, 1993-94 and 1994-95 and deduction claimed was allowed by the Tribunal during asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of premises whereas it is not so in the case of section 37(4) and (5) which is very specific and pertains to a guest house alone. On a comparison of the two provisions, viz., section 37(4) read with section 37(5) with sections 30 and 32, it would be clear that the former is more specific and the latter more general. In clear and unambiguous terms the Legislature has used the words 'rent and depreciation'. Though the latter is not covered in the expression 'expenditure' as held by the Supreme Court in the case of Pandyan Insurance Co. Ltd v. CIT [1965] 55 ITR 716, yet these expressions find a place in sub-section (4) of section 37 which goes to show that allowance relating to depreciation has been covered in the sub-section intentionally. Thus, if viewed in the light of intention, of the Legislature, the deduction in respect of rent and depreciation is not allowable as per the provisions of section 37(4) and (5). In the circumstances, the expenditure relating to rent and allowance relating to depreciation pertaining to the guest house is not allowable. Thus, the tax authorities were justified in rejecting the claims on account of rent and repairs qua guest house." The aforesaid de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest-free loans of Rs. 131.18 lakhs were given to the employees in February, 1992 relevant to assessment year 1992-93. Similar disallowance of interest of Rs. 2.80 lakhs was made for the assessment year 1992-93. On appeal, the CIT(A) had upheld the disallowance. The assessee filed an appeal before the Tribunal against the order of the CIT(A). It was contended before the Tribunal that as per provisions of section 77 of the Companies Act, the company is not allowed to purchase its own shares. However, proviso to section 77(2) of the Companies Act provided exception inasmuch as it could advance money to the members of staff for purchase or subscribing to fully paid-up shares of the company. Attention of the Tribunal was also drawn to the guidelines dated 11-2-1987 issued by the Ministry of Finance, Department of Economic Affairs as per which 5 per cent of the issued capital was reserved for the employees for which loans could be advanced by the company to its employees. Thus, it was argued that advancing of interest-free loans to its employees for purchase of shares was in accordance with the Companies Act and the guidelines issued by the Government of India. Besides, it was also a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment expenditure' but provides that expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of work was not to be included in entertainment expenditure. The case law cited by Shri Gogna also supports the view that where welfare of the employee is concerned, the legislation has to be interpreted in such a way that the purpose of legislation is advanced rather than defeated. Moreover, the amounts advanced remained with the employees only for a couple of days and came back to the assessee-firm within three days and at worst the interest could be disallowed only for a period of three days which too, in our opinion, was not disallowable. The decision of the Allahabad High Court in the case of H.R. Sugar Factory Pvt. Ltd. is distinguishable on facts. That was a case where advances had been diverted to the directors whereas in the present case, no advances had been given to the directors but to the poor employees. Taking a total view of the entire facts and circumstances of the case, we are of the opinion that there was no justification for disallowing a sum of Rs. 2,80,000. The disallowance is hereby deleted.'" 6. The Tribunal followed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT (Appeals) is quite in order and is required to be upheld. 8. It is accepted by one and all that principle of consistency is applicable and the view once taken cannot be reopened unless it is arbitrary or perverse. In the case of CIT v. Dalmia Dadri Cement Ltd. [1970] 77 ITR 410 (Punj. & Har.) a Division Bench of jurisdictional High Court observed as under: "An assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year and the decisions given in an assessment for an earlier year are not binding either on the assessee or the department in a subsequent year. But this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. No doubt in this case earlier the matter was not taken to the Income-tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advanced a sum of Rs. 2.76 crores as interest-free loans to the employees. Whereas, the assessee advanced loans to the employees, the money has returned to the company by way of share application money within a period of three days. During the course of assessment proceedings, the Assessing Officer observed that the company had paid a sum of Rs. 659.79 lakhs as interest on loans and claimed it as a deduction under section 36(1)(iii). The Assessing Officer asked the assessee as to why interest attributable to the interest-free loans advanced to the employees may not be disallowed. It was pleaded on behalf of the assessee that the company was having Rs. 13,535.72 lakhs as reserves in addition to own capital of Rs. 2,089.42 lakhs and the amount advanced to the employees may be considered as given out of the said reserves/capital. It was also pointed out that the company had not specifically borrowed for giving loans to the employees. Rejecting the explanation of the assessee, the Assessing Officer disallowed the interest paid on the money borrowed referable to the interest-free advances given to the employees. It was also pointed out that the share/debenture certificates were not ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee had advanced the loans to employees out of funds on which assessee paid interest, then also such advances were for purposes of business of the assessee as the entire amount came back to the assessee within 3 days." The ld. President has also referred to the decision of Hon'ble jurisdictional High Court in the case of Dalmia Dadri Cement Ltd., in support of the proposition of law that once a view is taken by an authority, it cannot be reopened unless it is arbitrary or perverse. He has accordingly proposed to dismiss the appeal of the revenue. Hence, the difference of opinion. 6. The ld. Departmental Representative contended that it is an admitted fact that assessee had advanced interest-free loans to the employees for the purpose of purchase of shares of the assessee-company. It is also not disputed that the loans have been advanced out of cash credit/loan account of the bank in respect of which interest has been paid. According to the ld. D.R., the assessee has failed to establish the nexus between the assessee's own capital and reserves and the amount advanced to the employees free of interest. On the failure of the assessee to establish the nexus, it was obvious that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding of interest-free advances to the employees was for purposes of business. Firstly, it was compulsory for the assessee to reserve 5 per cent of additional share capital for its employees. Secondly, there was an established practice of providing interest-free advances to the employees for enabling them to purchase the shares of the company. The ld. Counsel further contended that the established practice in regard to the condition of service of the employees is enforceable in law as held by the Hon'ble Supreme Court in the case of M/s Dalmia Cement (Bharatj Ltd. v. Their Workmen AIR 1967 SC 209. Thirdly, it was in the interests of business of the assessee-company to keep the employees in good humour by providing them the facility of owning shares of the company without making any investment of their own. According to the ld. Counsel, the assessee-company was not deprived of the money for more than three days as the money had come back to the company for use in other business purposes. It was, accordingly, pleaded that the view expressed by the ld. President may be preferred to the view expressed by the ld. Accountant Member. It was, accordingly, pleaded that the appeal of the reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n but to reserve 5 per cent of the further issue of share capital for employees/ workers. It is also not disputed that in the previous year, relevant to the assessment year 1992-93, the assessee had enabled the employees/workers to acquire the shares of the company to the extent of 5 per cent of further capital by advancing loans to them for the purpose of acquisition of such shares. The money had hardly been out of assessee's chest for more than three days. It was compulsory for the employees to utilize the money for the purpose of acquisition of shares of the company and, therefore, the money had to come back to the assessee-company. On the basis of providing such facility to the employees, the Assessing Officer had made a similar disallowance in assessment year 1992-93. The issue had come up before the Tribunal by way of an appeal against the order of the CIT(A) in allowing the relief to the assessee. The relevant portion of the decision of the Tribunal in para 15 of the order for the assessment year 1992-93 has been reproduced by the ld. President in the dissenting order. For the sake of coherence and ready reference, para 15 of the ITAT's order for the assessment year 1992-93 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in such a way that the purpose of legislation is advanced rather than defeated. Moreover, the amounts advanced remained with the employees only for a couple of days and came back to the assessee-firm within three days and at worst the interest could be disallowed only for a period of three days which too, in our opinion, was not disallowable. The decision of the Allahabad High Court in the case of H.R. Sugar Factory Pvt. Ltd. is distinguishable on facts. That was a case where advances had been diverted to the directors whereas in the present case, no advances had been given to the directors but to the poor employees. Taking a total view of the entire facts and circumstances of the case, we are of the opinion that there was no justification for disallowing a sum of Rs. 2,80,000. The disallowance is hereby deleted." 10. A perusal of the relevant portion of the order of the Tribunal for the assessment year 1992-93 reproduced above reveals that the Tribunal has decided the issue in favour of the assessee for two alternate reasons. Firstly, it has been held by the Tribunal that the revenue has not been able to establish a direct nexus between the amounts borrowed by the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it cannot be said with certainty that there is a direct nexus between the money borrowed by the assessee for-purposes of business and the loan advanced to the employees for the purpose of acquisition of shares of the company. In my view, whether the money advanced to the employees has been paid out of borrowed money shall have to be viewed in the light of overall availability of funds and not merely on the basis of withdrawal from a particular account of the date of withdrawal. Assessee may advance money out of ready cash/bank balance on the date of advance but may have to borrow to meet the crunch created by such advance. Therefore, the nexus shall have to be determined with reference lo overall statement of affairs of the company. Assuming but not admitting that borrowed funds had been utilized by the assessee for the purpose of advancing loans to the employees enabling them to purchase shares of the company, then it is again relevant to ascertain as to whether such an action taken by the company was for purposes of business. The Tribunal in assessment year 1992-93 has recorded a finding that such a step taken by the company was purely for business considerations. In the year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of Dalmia Dadri Cement Ltd., is relevant where their Lordships have held that though an assessment for a particular year is final and conclusive between the parties only in relation to the assessment for that year, the decision given in an assessment for an earlier year is not binding either on the assessee or department in a subsequent year. But this rule is subject to limitations and there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act. It has further been held that if a decision has been arrived after a due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal during the earlier decision has taken into consideration all the material evidence, then it will not be possible to take a different view than the view taken by the earlier Bench. Taking the totality of the facts and circumstances of this case into consideration, I concur with the view expressed by the co-ordinate Bench of the Tribunal for the assessment years 1992-93 to 1994-95 and the learned President that the interest-free loans to the employees was purely for the purposes of business. 12. I would also li ..... X X X X Extracts X X X X X X X X Extracts X X X X
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