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TMI Blog2004 (1) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ratio of that decision to the facts of this case shall be discussed later. However, it may be pointed out that it was not a case where it was established that borrowed funds or any part of borrowed funds was diverted for non-business purposes and claim was made for deduction of interest u/s 36. We are unable to uphold the stand taken by the ld. CIT(A) for rejecting the claim of the assessee for deduction u/s 80M of I.T. Act. (i) The assessee had a mixed account of over-draft and other deposits wherein it deposited the profits and other accruals and out of which it also made investments for purchasing shares and bonds on which dividend was shown. The specific claim of the assessee was that the investment in shares or bonds was made out of huge funds available to it in the shape of profits of earlier years and profits of current year before depreciation and reserve etc., and not out of borrowed funds. To demonstrate it, assessee even filed charts before CIT(A) which contained details of year-wise profits and details of reserve as well as details of funds invested in securities. Thus the assessee had discharged the burden which was cast upon it. (ii) The Assessing Officer as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssing Officer for proper adjudication. Ground No. 3 is, therefore, allowed for statistical purposes and the appeal is decided accordingly. X X X X Extracts X X X X X X X X Extracts X X X X ..... , the specific plea of the assessee was that the investment in units /shares was not made out of the borrowed funds but from the excess/surplus and internal accruals of the assessee. This plea is incorporated in para 11 of the appellate order which is as under : "1. It was submitted by the AR that the investment in units/shares were made by the assessee not out of the borrowed funds but from the excess/surplus and internal accruals of the assessee of the preceding years. In support of this contention the AR also furnished a chart showing the year-wise details of investment and the net surplus (net profit before Depn.) and urged that as the investment in shares/units were made out of the surplus funds and as per the norms of Reserve Bank of India, there was no justification for the Assessing Officer to hold that the investments in shares have been made out of borrowed funds and consequently disallow the claim of the assessee under section 80M." 4.5 As revealed out on perusal of para 12, a detailed chart was also filed by the assessee before the learned CIT(A). This chart was sent by the learned CIT(A) to the Assessing Officer for his examination and comments. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he findings and observations of the Assessing Officer in his report were also discussed with the A.R. Referring to the findings and observations of the Assessing Officer in his report, the A.R. submitted that though the Assessing Officer had come to the conclusion that all the borrowed funds were not utilized for the purposes of business but in the concluding para of his report he has contradicted his own finding by stating that while making the disallowance on pro rata basis, there need not be any nexus between the borrowed funds and investment in shares. He contended that this observation of the Assessing Officer was not correct. It was well-settled that disallowance could only be made if the investment was made out of the borrowed capital. Referring to the chart filed in the course of the appeal hearing, he reiterated that as the investments were made out of the surplus and internal accruals and not out of borrowed funds, there was no justification for the Assessing Officer to make an apportionment of the interest payment between the business income and the 'income from other sources'." 4.7 After considering the findings of the Assessing Officer and the plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were made only out of the borrowed funds. According to him, the departmental authorities did not consider it proper to establish nexus between borrowed funds and funds invested in the shares and therefore the disallowance of interest under section 36 was not justified. The learned counsel explained the position of account of the assessee by making reference to various charts which have been furnished by the assessee with the misc. application and also before the learned CIT(A). The learned counsel, on the basis of the figures of opening balance, reserve and profits etc. and also on the basis of entry in the balance-sheet as on 31-3-1992 pointed out that the assessee had huge funds for investment in the shares and bonds and therefore the learned CIT(A) was not justified in upholding the action of the Assessing Officer in rejecting the claim for deduction under section 80M. According to him, the ratio in the case of H.R. Sugar Factory (P.) Ltd., on which reliance has been placed by the Assessing Officer as well as by the learned CIT(A), is not applicable to the facts of this case. The learned counsel also distinguished the decision in the case of CIT v. Motor General Finance Ltd. [20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the facts and circumstances relating to this matter, the entire matter to which our attention was invited and the rival submissions, including the case laws, to which reference was made at the time of hearing of the appeal. The assessee has claimed deduction under section 80M. The deduction is allowable. The provisions as contained in section 80M are as under : "80M. (1) Where the gross total income of a domestic company, in any previous year, includes any income by way of dividends from another domestic company, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of such domestic company, a deduction of an amount equal to so much of the amount of income by way of dividend from another domestic company as does not exceed the amount of dividend distributed by the first mentioned domestic company on or before the due date." 8.1 The assessee had also received dividend income at Rs. 87,43,921. It claimed deduction of that amount. The case of the assessee before the departmental authorities was that it had made investment in the shares and bonds out of the surplus/profits of earlier years and depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16% 2,279 09 13-03-1992 18,85,000 4,23,91,150 2,91,79,479 17-03-1992 4 16% 3,305 Total Rs. 1,01,33,450 6,466 Note : S. No. 2 is paid from Bombay office Current A/c with Bank of India having credit balance. In fact, even disallowance of Rs. 219 is not called for. Sl. No. 3 is paid out of Current A/c with Bank of India, Asaf Ali Road, Delhi having credit balance. SI. No. 5 is received out of credit balance in vehicle purchase Advance Account with MGF (India) Ltd. Chart IV The final position as on 31-3-1992 profit investment in securities, free reserve and depreciation etc. has also been shown in the following chart: Financial Year Ending Profit after tax Investment in securities Free Reserve Depreciation 31-3-1992 6,73,66,197 1,01,83,450 22,62,31,180 9,87,59,012 Note : Cash profits i.e. profits before depreciation would be higher." 8.2 In view of the charts and particularly in view of the position shown m Chart III, reproduced above, it is clear that the assessee had made investment of Rs. 10,00,000 on 9-3-1992. On that date the opening debit balance was Rs. 4,20,11,878 but closing debit balance had reduced to Rs. 3,93,68,132 as on 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12 1,58,79,87,602 1,39,52,92,338 Depreciation : 9,87,59,012 7,66,11,422 Profit Available for Appropriation: 7,53,74,196 5,09,35,912 8.6 It may be pointed out that the Assessing Officer proceeded to reject the claim of the assessee for deduction under section 80M simply by observing that the assessee had not bifurcated the interest portion on the amount used as funds for investment in the corresponding shares on which dividend had been claimed. On this basis he has concluded that since total investment in the shares was at Rs. 5,04,19,723 and whereas borrowed funds were at Rs. 1,26,17,56,422 the proportionate interest has to be attributed to the funds. This approach cannot be justified, particularly because the Assessing Officer has not recorded any positive finding that any part of the borrowed funds was invested by the assessee in purchasing the shares and bonds etc. He has also not established any nexus between the borrowed funds and the funds invested. The Assessing Officer did not issue any notice to assessee to show cause as to why the investment in funds should not be treated to be out of borrowed funds. Since the Assessing Officer did not call any explanation from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter is to be decided is as to whether the amount of interest paid was, in fact, in respect of capital borrowed for the purpose of business. 9.2 In the case of Rama Kishan Oil Mills v. CIT [1965] 56 ITR 186 the Hon'ble Madhya Pradesh High Court has held that the only conditions required for allowing the claim for deduction in respect of interest under section 10(2)(iii) are - firstly, that money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose business; and thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. 9.3 In the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 the Hon'ble Bombay High Court has also considered the issue and made following observations : "In our opinion the view taken by the Tribunal is correct and must be upheld. For the facts which have been already stated, it will be clear that the balance due from the Bombay Chronicle (P.) Ltd. was not in respect of any loans advanced by the assessee to it, as considered by the Income-tax Officer and the Appellate Assistant Commissioner. The said balance was in respect of the common account between the parties ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than the income-tax liability and the tax paid, it should have been presumed that the taxes were paid out of profits of the relevant year and not out of the over-draft account for running of the business. The assessee also produced the schedule appended to the assessment order to indicate that the amount of receipts deposited in the over-draft account was much more than the tax paid. The Hon'ble Supreme Court has made the following observations : "That although there was considerable force in the appellant's contention, the question whether a presumption could be drawn that the taxes were paid out of the profits of the relevant year and not out of the over-draft account for the running of the business, would essentially depend up to whether the entire profits had been pumped into the over-draft account, whether such profits were more than the tax amount paid for the relevant year and other germane factors. Since the appellant had not advanced the contention either before the Tribunal or the High Court, and the amplitude of the question posed before the High Court did not bring within its sweep the contention advanced by the appellant, it would not be appropriate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the business were embedded in the combined financial transactions, yet at the time of payment of advance tax the assessee had no adequate cash surplus and it had restored to the over-draft facility specifically for the purpose of payment of advance tax and thus on this basis the AAC affirmed the order of ITO. On further appeal, the Tribunal affirmed the order of AAC. On reference, it was contended on behalf of the assessee before the Hon'ble High Court that where the profits of the assessee's business was sufficient to cover the payment of advance tax during the relevant accounting year, if such amount was paid from an amount which included the amount of profits as well as the over-draft taken for the purpose of the business, the presumption was that the tax was paid out of the profits and not out of the over-draft account and since the amount of the profits for the relevant year far exceeded the liability for advance tax and the entire amount of profits of Rs. 27 lakhs was deposited in the over-draft account of which the bank remitted the advance tax, the tax was paid out of the earning of the profits and not out of the over-draft account taken for other business p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble Delhi High Court in the case of Regal Theatre. In that case the assessee-firm which was carrying on business of cinema theatre and was also running a restaurant, claimed deduction under section 36(1)(iii) of the Act. The claim was disallowed by the Assessing Officer as well as the CIT(A) and was also confirmed by the ITAT. The Hon'ble Delhi High Court, however, reversed the view of the Tribunal by observing as under : "Held, that the finding arrived at by the Tribunal that a part of the borrowings had been diverted by the assessee to its non-business purposes was not a finding of fact, but was an inference drawn by the Tribunal on the basis that the interest paid on the capital borrowed was not in law an allowable deduction from the profit, in case the profit minus depreciation was not in excess of the withdrawals made by the partners and in such a case, the withdrawals should be deemed to be in part from the capital account and would mean that the original borrowings were utilized for other purposes and not for business purposes. The Tribunal ignored the law laid down by the Supreme Court in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 and the Bombay High Court in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... diverted partly for non-business purposes, therefore, the Assessing Officer was justified in making disallowance. It has been further found by CIT(A) that in view of the fact that the assessee was also having interest free loans, the disallowance made by the Assessing Officer cannot be sustained in totality. Therefore, it was concluded by ld. CIT(A) that interest has to be disallowed only in respect of amount representing the difference between the interest free advances made by assessee and interest free funds available to the assessee and accordingly amount was calculated and the disallowance was restricted to Rs. 1,38,492. We uphold the above view of CIT(A) with an exception about the interest free loans available with the assessee is to be considered, with this modification, the finding of ld. CIT(A) is confirmed. The entire interest-free funds include owner's own capital, accumulated profits and other interest free creditors and loans, if total interest free advances including debit balances of partners do not exceed the total interest free utilization of funds for non-business purposes and if it exceeds, the proportionate disallowance can be made." 9.13 The Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concern in all the years under appeal a fact neither controverted nor disproved by the learned Departmental Representative also." 9.15 The Hon'ble High Court upheld the view taken by the Tribunal by observing as under: "Held, dismissing the appeal, that the Tribunal had found that the capital of the firm and interest free unsecured loans with the appellant far exceeded the amounts advanced to the sister concern in all the years under appeal. Additionally the Tribunal has also noted that the Department could not point out any specific interest bearing borrowed funds, which had been diverted by the assessee to its sister concern. The findings of the Tribunal being based on the relevant evidence on record, no question of law much less a substantial question of law, arose from the orders of the Tribunal." 9.16 The Hon'ble Uttaranchal High Court has also considered the matter in the case of Oil & Natural Gas Corpn. Ltd. In the case also the Assessing Officer made disallowance of 10 per cent of the tax free interest earned on bonds on the ground that it related to the expenditure incurred by the petitioner in earning the said interest. The petitioner's appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rected the matter to be restored to the file of Assessing Officer as under : "Therefore, the assessee would be entitled to deduction. However, the question whether payment to sister-concerns were made out of profits of business and interest-free receipts by way of unsecured loans or advances from flat purchasers could be decided only after investigation of facts by looking into the details of the over-draft account. Accordingly, the order of Commissioner (Appeals) was to be set aside and the matter was to be restored to the file of the Assessing Officer with a direction to allow the claim of the assessee if it was established that payments to the sister-concerns were made out of business profits and interest-free receipts deposited in the over-draft account." 9.19 In the case of Meenakshi Synthetics (P.) Ltd. v. Asstt. CIT [2003] 84 ITD 563, the Lucknow Bench of the ITAT has considered the issue and after considering various judgments it is held that charging of interest on loans given by the assessee cannot by itself, be a sufficient ground for disallowing the interest paid by the assessee on the loans taken by it in absence of any nexus having been brought on record ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6(1)(iii) of the Income-tax Act, 1961." 9.21 It may be pointed out that in the case of H.R. Sugar Factory (P.) Ltd., there was a direct nexus between the borrowed funds and the funds advanced at a very low rate to its directors. After examining the scheme and device adopted by the assessee and also the volume of advances made by it and rate of interest charged from directors, it was found that the amount of interest paid each year payable on account of the loans to Directors, was substantial and by the compromise decree, the limit of amounts to be lent to the Directors was further raised and at the same time the rate of interest was also drastically reduced. The Hon'ble High Court also observed that in view of these facts, it is clear that the Directors/shareholders were taking unfair advantage of their control over the assessee and they were exploiting it for their private ends. It was also held that what has happened in this case was self-evident i.e. the assessee was made to pay huge amounts by way of interest on account of heavy amounts advanced to its Directors bearing no relation whatsoever with the business purpose of the assessee. 9.22 It may also be pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed funds or out of profits earned during the year. The assessee was asked to furnish bank statements showing as to whether the assessee had a credit balance or a debit balance on the dates on which the loans to the sister concern were given by the assessee, but the assessee did not furnish any information. The Assessing Officer drew an adverse inference against the assessee and held that the loans taken by the assessee were utilized for giving the advances to its sister concern. The CIT(A) affirmed the order of the Assessing Officer. The ITAT allowed the assessee's appeal. On appeal the Hon'ble High Court has held that : "since the assessee, despite several opportunities granted, did not produce the relevant documents, an adverse inference had to be drawn against the assessee. As the assessee could not produce any document, an adverse inference in terms of section 114 of the Evidence Act, 1872, had to be drawn to the effect that, had those documents been produced, they would have gone against the interest of the assessee." 9.25 In view of these facts, the Hon'ble High Court had decided the issue against the assessee. At this stage it may be mentioned tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, even if the onus were on the assessee, it could not be said that there was such nexus as was presumed by the IAC (Assessments). The fact that no disallowances were made in the earlier orders, is also relevant. Therefore, we find no force in this ground of appeal either." 9.27 In the case of MGF (I) Ltd. for assessment year 1992-93, ground No. 2 raised before the Tribunal being ITA No. 6818/Del./95 was as under: "2. That the learned CIT(A) erred in rejecting the claim under section 80M ignoring the facts on record that the Investments in units/shares were not made out of borrowed funds and the report of the Assessing Officer that borrowed funds to the extent of Rs. 2,26,46,621 were invested in shares with a view to earn Dividend Income is not correct." 9.28 The Tribunal vide order dated 20-12-2000 has decided this ground by following the orders in the case of that assessee for subsequent assessment years i.e., 1993-94, 1995-1996 and 1996-97 and allowed the ground in favour of the assessee by observing as under : "13. We have heard the rival submissions and have gone through the relevant material available on record as well as the case laws cited before u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... examined for allowing or disallowing the claim for deduction and no general presumption can be drawn in absence of specific findings recorded by the Assessing Officer or the CIT(A). 11. In view of the factual position and the background of the instant matter and in view of the legal prepositions as culled out from the judicial pronouncements refered to above, we are unable to uphold the stand taken by the ld. CIT(A) for rejecting the claim of the assessee for deduction under section 80M of I.T. Act. We do so on the following grounds also : (i) The assessee had a mixed account of over-draft and other deposits wherein it deposited the profits and other accruals and out of which it also made investments for purchasing shares and bonds on which dividend was shown. The specific claim of the assessee was that the investment in shares or bonds was made out of huge funds available to it in the shape of profits of earlier years and profits of current year before depreciation and reserve etc., and not out of borrowed funds. To demonstrate it, assessee even filed charts before CIT(A) which contained details of year-wise profits and details of reserve as well as details of funds invested i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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