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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 ..... is as under : "That the disallowance of the claim under section 80M is not justified as there was no co-relation between funds borrowed and investments in shares was out of surplus and internal accruals." 4. We consider it proper to narrate the relevant facts relating to the issue contained in the above referred ground which are as under : 4.1 The assessee had shown receipt of dividend income at Rs. 87,43,921 and claimed deduction under section 80M of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') on this amount. The Assessing Officer did not allow the claim on the ground that the assessee had not bifurcated the interest portion on the amount used as funds for investment in corresponding shares on which the dividend had been shown. The relevant observations of the Assessing Officer on this issue are contained in para 6 of the assessment order, which is as under : "6. The assessee has shown dividend received to the tune of Rs. 87,43,921. However, the assessee has not bifurcated the interest portion on the amount used as funds for investment in corresponding shares on which the dividend has been shown. The total investment on these shares comes out to R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer for his examination and comments. The Assessing Officer submitted report dated 21-7-1995 wherein it was stated that the interest liability had been segregated into two parts and whatever funds out of the borrowed money have been utilized for the purpose of business or profession has been allowed under section 36(1)(iii). In his report the Assessing Officer has also made reference to the decision of Hon'ble Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P.) Ltd. [1990] 53 Taxman 363 in support of the disallowance of interest made by him under section 36(1)(iii). The relevant portion of the report has also been reproduced by the learned CIT(A) in para 12 of his order which is as under : "In this regard, during the course of assessment proceedings, the issue was discussed with the representative of the assessee in the light of the decision of Hon'ble High Court of Allahabad in the case of CIT v. H.R. Sugar Factory (P.) Ltd. (All.) (1980) 87 CTR Reports 132 where the learned Judges have given a ratio that funds utilized by the assessee for non-business purposes may not have necessarily any nexus with the borrowed funds and observed that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Assessing Officer and the plea of the assessee the learned CIT(A) has made following observations in para 14 of his order : "The chart furnished by the A.R. gives the brake up of the investment from the financial year 1983-84 upto 1992-93 and also the net profit after tax. It is not disputed that the assessee had a surplus but the fact remains that the assessee had also borrowed funds to the extent of Rs. 1,26,17,56,422. There is also no dichotomy between borrowed funds and its utilization either for the purposes of business or for apportionment of the shares/units. There is no intermingling of the funds and the assessee's contention that the entire investment in shares/ units were out of the surplus funds will be far from the reality and cannot be accepted. It is also a fact that the entire surplus funds cannot be said to have been used for funding the investments and only the borrowed funds have been utilized for the purposes of business." .... "Assuming that the assessee had a surplus, if the same had not been utilized (as claimed by the assessee) for the purpose of investment in shares/units, the same would have been available to the assessee for its business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r General Finance Ltd. [2002] 254 ITR 449 (Delhi) by submitting that in that case the assessee, despite directions by the departmental authorities, could not furnish bank statements to show as to whether the assessee had a credit balance or debit balance on the date on which the loans to the sister concerns were given by it and therefore the decision of the Hon'ble Delhi High Court, which was based on the facts of that case, is not applicable to the present case where relevant information was furnished by the assessee before the learned CIT(A) in the shape of chart about which reference has also been made by him. In support of his arguments, the learned counsel placed specific reliance on the following decisions : (i) Regal Theatre v. CIT [1997] 225 ITR 205 (Delhi) (ii) East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) (iii) CIT v. Tin Box Co. [2003] 260 ITR 637 (Delhi), and (iv) Oil & Natural Gas Corpn. Ltd. v. Dy. CIT [W.P. No. 806 (M/B) of 2002, dated 26-6-2003] Uttranchal High Court. A copy of the last decision has been filed on record by the learned counsel. 6. The learned D.R., on the other hand, supported the order of the learned CIT(A) and sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years and deposits, accruals and profits of the current year. In support of this version, the assessee had submitted charts before the learned CIT(A). The learned counsel has also placed much reliance on the position of accounts as reflected in these charts, copies of which have been placed on record. For proper scrutiny of the issue, we consider it proper to reproduce some of these charts as below : "Chart I Investment for the assessment year 1992-93 (Rs.) MGF Services Ltd. 10,00,000 Telco Dealers Leasing & Fin. Co. Ltd. 5,00,000 Fairgrowth Investment Ltd. 10,00,000 Unit Trust of India 22,500 Unit Trust of India 44,19,000 Unit Trust of India 8,950 Unit Trust of India 13,50,000 Unit Trust of India 18,85,000 Total: 1,01,83,450 Chart II Financial year Ending Profits before Tax Profits after Tax Reserves Investments in Securities 30-6-1983 2,18,89,490 2,01,39,490 3,72,56,261 - 30-6-1984 2,01,88,506 1,90,38,506 5,18,90,470 4,54,025 30-6-1985 2,21,70,557 2,20,45,557 3,86,68,027 7,24,959 30-6-1986 3,88,26,571 3,55,26,571 6,26,01,381 46,61,980 30-6-1987 4,47,41,016 3,76,91,016 9,02,92,397 22,43,980 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 9-3-1992. Thus, no part of over draft had been utilized for making investment of Rs. 10,00,000. Similar is the position with respect to investment of Rs. 5,00,000 made on 18-9-1991. The opening debit balance was reduced from Rs. 2,55,24,895 to Rs. 1,60,38,356 as on 19-9-1992. Similar is the position in respect of other amounts invested by the assessee. 8.3 From the Chart No. II also it is clear that as on 31-3-1992 the assessee had profit before tax at Rs. 6,73,66,197 and profit after tax was at Rs. 6,73,66,197. The assessee also had reserve of Rs. 2,26,23,180 and against these amounts the total investment in securities was only at Rs. 1,51,63,451. Although the total investment in shares and bonds was at Rs. 1,51,63,450 but this amount included a sum of Rs. 49,80,000 which related to investment in Central Government Bonds 1994 on which amount no dividend was claimed under section 80M. Thus, the total investment relating to dividend income was only at Rs. 1,01,83,450, details of which have been gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ished 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 the assessee, the assessee was not required to show that no part of the borrowed funds was invested for purchasing the shares and bonds etc. It may be pointed out that the assessee did not claim deduction under section 36(1)(iii). 8.7 Coming to the stage of learned CIT(A) the assessee had submitted a detailed chart as observed by him. On this chart comments of Assessing Officer were also obtained, but neither the Assessing Officer nor the learned CIT(A) could point out any mistake in the chart or in the figures shown in the chart. As observed earlier, before the learned CIT(A) the assessee took specific pleas which have been reproduced above. In view of these pleas, the clear and categorical stand of the assessee was that it had huge funds for making investment in the purchase of shares and bonds. This stand has not been properly examined nor rejected. The learned CIT(A) has gone to the extent of ob ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 in connection with the expenditure in relation to the business agreed to be incurred in common and allocated in shares at the end of the year. Similarly the amount due from Messrs. Cama Norton & Co., in the calendar year 1954, did not constitute any loan advanced by the assessee to Messrs Cama Norton & Co., but constituted the outstandings in connection with certain business transactions. The capital borrowed by the assessee from outsiders on the other hand was admittedly used by the assessee for the purpose of the business and it was also undisputed that no part of the borrowed capital had been utilized for the purpose of advancing loans either to Messrs Bombay Chronicle (P.) Ltd. or to Messrs Cama Norton & Co. In these circumstances, it is difficult to see how the assessee's claim for the interest actually paid by it could be disallowed." 9.4 The Hon'ble Supreme Court in the case of Madhav Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 for the Court to look into the additional papers produced by the appellant for answering the question." 9.6 It may be pointed out that theApex Courthad upheld the contention of the assessee, though the same was not entertained on the ground that it was not taken before the Tribunal and the High Court. However, it clearly shows that such contention would have been allowed, had it been raised before the Tribunal and the High Court. 9.7 In the case of CIT v. Tingri Tea Co. Ltd. [1971] 79 ITR 294 (Cal.) the claim of the assessee was rejected on the ground that over-draft from the bank were not incurred wholly and exclusively for the purpose of business of the assessee. The AAC also found that the company had made remittances to U.K.by taking over-drafts from the banks inIndiaand the borrowings from the banks inIndiawere partly invested in earning interest income in U.K.The Tribunal was of the opinion that correct way to inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance 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 purposes. The Hon'ble High Court after following its decision in the case of Tingri Tea Co. Ltd. as also the decision of Hon'ble Supreme Court in the case of Madhav Prasad Jatia held as under : "That, on the facts of the case, the profits were sufficient to meet the advance tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character 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. Therefore, the interest amounting to Rs. 6,769 paid by the assessee on the bank over-draft account which was disallowed as being relatable to payment of advance tax should also have been allowed as an admissible deduction in the computation of the assessee's business income." 9.9 Similar view was taken by the Hon'ble Calcutta High Court in the case of Indian Explosives Ltd., wher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 that one of the three conditions laid down in section 36(1)(iii) were satisfied, the deduction under the section must be given. Again the contention that the correct amount of debit balance to the account of the partners should be taken on Rs. 1,73,643 instead of Rs. 1,93,049 as calculated by the Income-tax Officer was again a figure arrived at as a matter of law. Therefore, the Tribunal was not correct in holding that a part of the borrowings had been diverted by the assessee for its non-business purposes and that the assessee was not entitled to claim deduction of the interest on those borrowings under section 36(1)(iii) of the Act." 9.11 In the next case i.e. CIT v. Sahni Silk Mills (P.) Ltd. [2002] 253 ITR 294 (Delhi) also a similar view was taken. In the case of CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi), the Assessing Officer had made a reduction in the allowance of interest o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 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'ble Kerala High Court has also taken similar view in the case of Dr. K. Thomas Varghese v. CIT [1986] 161 ITR 21. 9.14 So far as the latest decision in the case of Tin Box Co. is concerned, in that case a registered firm was engaged in the business of manufacture and sale of tin containers and printers. This firm was advancing interest free loans to its sister concern, namely, P. since the assessment year 1984-85. At the same time it had been availing of overdraft loan facilities from the State Bank of India against hypothecation of stocks etc., and was also paying interest to the bank. The Assessing Officer disallowed a sum of Rs. 3 lakhs out of the total interest paid by the assessee to the State Bank of India in its over-draft account. The Tribunal found that the assessee had substantial capital and interest-free funds available with it, not only in the preceding years but also in the years under consideration, which far exceeded the interest-free advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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 appeal was decided in its favour by the CIT(A) and also by the Tribunal. The case of the petitioner was that it had huge capital reserve and profit out of which it made the investment in tax free bonds and no part of the borrowed funds was utilized in the said investments. It was submitted that the interest on the said bonds was fully exempt from tax. The Assessing Officer in making the assessment for the relevant years was of the view that as the income from bonds was exempt, the corresponding expenditure was disallowable as no separate accounts were maintained by the assessee hence 10 per cent of such interest was considered fair and reasonable as allocable to such interest. While reopening the assessment, the case of the Department was that assessee had not made truthful disclosure of his income in as much it had paid interest on borrowings on one hand and on the other hand investments were made to earn tax free income from bonds. 9.17 The Hon'ble High Court considered the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 between the borrowed capital and interest free advances or in absence of any finding that borrowed funds or part thereof, was diverted towards interest free advances made by the assessee. 9.20 The other important case in which the issue was considered by the Hon'ble Allahabad High Court was that of H.R. Sugar Factory (P.) Ltd. In that case, the assessee, a private limited company, which carried business of manufacturing of sugar, had advanced huge amount of loan to its Directors at the rate of 5 per cent per annum whereas it was paying interest at the rate of 8 per cent per annum on the moneys borrowed by it from Banks. In the previous year relevant to assessment year 1963-64, the interest payable by the Directors on the amount borrowed by them from the assessee was reduced to 2.5 per cent in pursuance of a compromise decree ofCivil Court. The Bank continued to charge interest @ 8 per cent on the loans advanced to the assessee. The ITO as well as the First Appellate Authority held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that in the case of H.R. Sugar Factory (P.) Ltd. it was not the case of the assessee that it had other funds with it, which were interest free or it had advanced loans to the Directors, which were not out of the borrowed funds. Thus, there was clear-cut nexus between the borrowed funds and funds advanced to the Directors on which lesser rate of interest was charged. The present case is, therefore, distinguishable on facts, inasmuch as in this case the specific plea of the assessee was that interest bearing funds were utilized for business purposes and advances without charging interest were made out of interest free amount available with it. 9.23 Thus it may be pointed out that the facts in the case of H.R. Sugar Factory (P.) Ltd., were totally different as in that case direct nexus was found to have been established between the borrowed funds and the advances made free of interest by the assessee and there was a categorical finding by the Assessing Officer that a part of the borrowed funds was d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 that the present case is totally distinguishable because in this case the assessee had adduced sufficient material and also submitted detailed chart, as observed by the learned CIT(A), to demonstrate that it had huge funds for making investment in share etc. 9.26 It may be pointed out that in the case of assessee itself the issue has been considered in various assessment years. For assessment year 1982-83 the ITAT vide order dated March 1989 rendered in ITA No. 804/Del./ 86, copy available on record, decided the issue in favour of the assessee by observing as under : "13. We have considered the rival submissions as also the decisions referred to above. The IAC was unduly influenced by the fact that the increase in the over-draft of Rs. 1.25 crores would have been lower by Rs. 27,00,860 if there was no increase in the advance to M/s. National Air Products Ltd. However, the decision of the Bombay High Court in the case of Bombay Samachar was to the fact that interest on over-draft could not be disallowed on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder : "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 us including the latest judgment of ITAT in the assessee's own case for the assessment years 1993-94, 1995-96 and 1996-97 as well as reference application filed by the department before the High Court and also the chart showing profits and available surplus. We find that every year there is a huge profit in excess of investment in specified securities. Therefore, on facts it is quite clear that no borrowed funds are utilized in making investments in purchasing securities. In such a situation there is no question of bifurcating interest. Accordingly the ground of appeal raised by the assessee is allowed." 10. On the basis of the propositions and ratio laid down in the above referred decisions, following postulates can be culled out and laid down : (a) If the assessee claims any deduction on account of interest paid on borrowed funds or claims any other deduction, then the initial burden is upon the assessee to show that borrowed funds were utilized for business purposes and thus the assessee is required to substantiate its cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 well as learned CIT(A) were not justified in presuming that investment in shares and bonds was made out of borrowed funds merely on the ground that the assessee had not bifurcated interest paid on the borrowed amount used for business purposes and the amount invested in shares etc. (iii) Neither the Assessing Officer, nor the learned CIT(A) disputed the facts and figures given in the chart by the assessee nor found such figures to be incorrect, nor asked the assessee to furnish further details to substantiate the claim for deduction under section 80M. Thus the assertion of the assessee remained unrebutted and undisputed. (iv) The department has not established any nexus between the borrowed funds and the funds invested in shares and bonds etc. Neither the Assessing Officer nor the learned CIT(A) recorded a positive and categorical finding that borrowed funds or any part thereof was used or invested by the assessee in the ..... 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