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TMI Blog2004 (9) TMI 37X X X X Extracts X X X X X X X X Extracts X X X X ..... - - - Dated:- 14-9-2004 - Judge(s) : R. K. AGARWAL., K. N. OJHA. JUDGMENT The judgment of the court was delivered by R.K. Agarwal J.- The present appeal preferred by the Revenue under section 260A of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), has been admitted by this court on the following four substantial questions of law: "1. Whether, on the facts and circumstances of the case, the Tribunal was justified in deleting the interest disallowed on loan given by the assessee to its sister concern for non-business purposes? 2. Whether, on the facts and circumstances of the case, the Tribunal was justified in directing to allow investment allowance on telephone exchange installed in fertilizer unit and distillery unit which is engaged in manufacture of articles and things listed in the Eleventh Schedule of the Income-tax Act, 1961? 3. Whether, on the facts and circumstances of the case, the Tribunal was legally justified in holding that the ex gratia bonus payments made by the assessee over and above the bonus payable in accordance with the provisions of the Bonus Act, 1965 were an allowable deduction? 4. Whether, on the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in the financial year 1985 and the Department had not disallowed any of the amounts in the assessment year 1986-87 onwards till the assessment year 1990-91 on that count. Placing reliance on the decision of the Karnataka High Court in the case of CIT v. Sridev Enterprises [1991] 192 ITR 165, it has held that if the assessee-company has advanced certain sum to another company having common partners free of interest and the assessee was paying interest on the money borrowed and in the past years the assessee's claim for deduction of interest paid was allowed, then no disallowance can be made in the subsequent years as it is to be presumed that those advances were not out of borrowed funds of the assessee and that is why no disallowance was made in the earlier years and the principle of consistency required that the same point cannot be decided against the assessee in the subsequent years. The Tribunal further held that the copy of the balance-sheet filed by the assessee as on December 31, 1985, goes to show that the assessee was having sufficient funds on account of share capital, share application money, reserve and surplus and it was having sufficient funds at its disposal out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amount was advanced to the sister concern, the assessee-company had sufficient money on account of share capital, share application money, reserve and surplus, is also incorrect inasmuch as these amounts may not have been available with the assessee-company when the loan was advanced as these amounts must have been invested in fixed assets and other requirements of the assessee-company. He submitted that the Tribunal has committed a manifest error in holding that no disallowance was warranted. He further submitted that each assessment year is an independent unit of assessment and merely because in the past no disallowance was made in respect of proportionate interest, the Tribunal was not right in applying the principle of estoppel and acquiescence. He relied upon the following decisions: (i) Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC); (ii) Marolia and Sons v. CIT [1981] 129 ITR 475 (All); (iii) CIT v. H. R. Sugar Factory Pvt. Ltd. [1991] 187 ITR 363 (All); (iv) CIT v. H. R. Sugar Factory [1991] 190 ITR 643 (All); (v) CIT v. Saraya Sugar Mills (P.) Ltd. [1992] 193 ITR 575 (All); and (vi) CIT v. Saraya Sugar Mills (P.) Ltd. [1993] 201 ITR 181 (All). So far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... peal, as no question has been framed in that behalf. He, thus, submitted that the finding of fact cannot be interfered with by this court while deciding the appeal under section 260A of the Act where the appeal lies on a substantial question of law. He relied upon the following decisions: (i) Deputy CIT v. Marudhar Hotels (P.) Ltd. [2000] 245 ITR 138 (Raj); and (ii) CIT v. Navyug Oil and Dal Mills [2001] 251 ITR 535 (Raj). On the merits, he submitted that as the assessee-company was having sufficient funds with it in the form of share capital, share application money, reserve and surplus, the amount of loan of Rs. 17.19 lakhs advanced by it to its sister concern cannot be linked to borrowed money and, therefore, the Tribunal was justified in deleting the disallowance of proportionate interest. He relied upon the following decisions: (i) CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom); (ii) Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC); (iii) CIT v. H. P. Lohia [1993] 203 ITR 928 (Cal); and (iv) CIT v. Sridev Enterprises [1991] 192 ITR 165 (Karn). On the question as to whether investment allowance in respect of the telephone exchange installed at the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was having sufficient funds on account of share capital, share application money, reserve and surplus and was having sufficient funds at its disposal out of which a small sum of Rs. 17.19 lakhs could easily be diverted. It is well-settled that if an amount has been borrowed not for business purposes but for some private purposes, then the interest on such borrowings cannot be allowed as a deduction under section 36(1)(iii) of the Act. The apex court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 while considering the provisions of section 10(2)(iii) of the Indian Income-tax Act, 1922, which is analogous to section 36(1)(iii) of the Act, has held that for claiming a deduction under section 10(2)(iii) of the Act, three conditions are required to be satisfied in order to enable the assessee to claim a deduction on interest on borrowed capital, namely, (a) that the money (capital) must have been borrowed by the assessee; (b) that it must have been borrowed for the purpose of business; and (c) that the assessee must have paid interest on the said amount and claimed it as a deduction. The apex court has held that the expression "for the purpose of business" is wider in scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has rightly been disallowed under section 36(1)(iii) of the Act. The aforesaid decision has been followed by this court in the cases of H.R. Sugar Factory (P.) Ltd. [1991] 190 ITR 643 and CIT v. Saraya Sugar Mills (P.) Ltd. [1992] 193 ITR 575. In the case of Bombay Samachar Ltd. [1969] 74 ITR 723, the Bombay High Court has held as follows: "As we have already pointed out, it is undisputed that the amounts borrowed from outsiders on which interest has been paid have been used for the purpose of the business of the assessee. It appears to have been the view of the Income-tax Officer that if the assessee had collected the outstandings which were due to it from others, it would have been able to reduce its indebtedness and thus save a part of the interest which it had to pay on its own borrowings. The assessee, therefore, was not justified in allowing its outstandings to remain without charging any interest thereon while it was paying interest on the amounts borrowed by it. To the extent, therefore, to which it would have been in a position to collect interest on the outstandings due to it from others, it could not be permitted to claim interest paid by it to outsiders. In our opin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aforementioned cases, the principle which emerges for allowing the amount of interest paid in respect of capital borrowed is that the following three conditions should be fulfilled: (i) the capital must have been borrowed or taken for the purpose of the business or profession; (ii) the interest should have been payable; and (iii) if the borrowing is not for the business purpose and is for private purpose or is not connected with the business, interest paid on such borrowings cannot be allowed as a deduction under section 36(1)(iii) of the Act. Applying the aforesaid principle to the facts of the present case, we find that the Tribunal has recorded a finding that there were sufficient funds available with the assessee-company in the form of share capital, share application money, reserve and surplus other than the borrowed money for diverting a sum of Rs. 17.19 lakhs. Thus, it cannot be said that the amount of loan advanced to the sister concern, namely, M/s. Rampur International Private Limited, was out of the borrowed funds. In the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627, the apex court while holding that the payment of interest of Rs. 28, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Eleventh Schedule was not raised but being a pure question of law which does not involve any investigation of facts, the Revenue has been permitted to raise this plea in the present appeal. In view of the specific provisions, the assessee-company is not entitled to any investment allowance in respect of the plant and machinery installed for the manufacture of items mentioned in the Eleventh Schedule. However, in respect of the telephone exchange installed in its fertilizer unit, it would be entitled for investment allowance as the telephone exchange will not be an office appliance but would fall under the term plant, as held by the Karnataka High Court in the case of Electronics Research Industries Pvt. Ltd. [1991] 192 ITR 20, with which we respectfully agree. Question No. 3: The assessment year involved in the present appeal is 1990-91. The proviso to clause (ii) of sub-section (1) of section 36 of the Act, which has been omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, reads as follows: "Provided that the deduction in respect of bonus paid to an employee employed in a factory or other establishment to which the provisions of the Paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific heads, the charge under that head exhausts the taxability of the income, and no part of such income can be brought to charge again under the residuary head. The apex court in the case of CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881, has held that the interest can be assessed under the head "Income from other sources" only if it cannot be brought within one or the other specific heads of charge. In the case of Murli Investment Co. v. CIT [1987] 167 ITR 368, the Rajasthan High Court has held that the company was investing its surplus funds and was deriving interest thereon instead of keeping that idle and the income from such investment would be assessable only under section 56 of the Act and not as business income. Similar view has been taken by the hon'ble Supreme Court in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. [1997] 227 ITR 172. The apex court has held as follows: "The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to income-tax. Profits and gains of business or profession is only one of heads under which the co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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