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TMI Blog2001 (12) TMI 62X X X X Extracts X X X X X X X X Extracts X X X X ..... increased the total interest-free loan/advance given to its sister concern from Rs.154.40 lakhs to Rs.202.27 lakhs. The Assessing Officer further noticed that the assessee itself had from time to time borrowed money and taken loans and had paid interest on the said loans. Thus, the Assessing Officer disallowed the interest liability to the extent of Rs.10 lakhs on the aforesaid grounds and held that the interest should be charged under section 234B of the Act and assessed the total income of the assessee at Rs.6,74,56,380. The assessee preferred an appeal against the said order before the Commissioner of Income-tax (Appeals) (in short "the CIT(A)"). The Commissioner of Income-tax (Appeals) remanded the matter back to the Assessing Officer to collect details of cash flow in order to examine whether the loan of Rs.47,67,740 was given out of borrowed funds or out of profits earned during the year. The assessee was asked to furnish bank statement clearly showing as to whether the assessee had credit balance or debit balance on the dates when the loan/advances were given by the assessee. In spite of the aforesaid direc tion, the assessee did not furnish any information before the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year made a further interest-free advance to its sister concern, namely, National Air Products Ltd. At the end Of the accounting period, the amount of interest-free loan stood at Rs.202.27 lakhs (previous year Rs.154.50 lakhs). In this regard, it may be noted that the assessee from time to time is raising loan and during the year has paid interest to various parties amounting to Rs.13.57 crores. On the interest-free loan advanced to the sister concern, the Department has consistently taken the stand that in fact the interest bearing loans in a way has been utilised to make the interest-free advance to the sister concern, and which is not for the purpose of business. The interest expenditure referable to the amount advanced to the sister concern has been held to be not allowable while giving deduction for the interest expenditure." The Commissioner of Income-tax, however, was of the view that the Assessing Officer should collect the details of cash flow with a view to ascertain as to whether the loan was given out of the borrowed sum or not. Pursuant to and in furtherance of the aforesaid direction, an opportunity was given to the assessee to place additional material. The asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income as determined under sub-section (1) of section 143' shall not include the additional income-tax, if any, payable under section 143. Explanation 3.-Where, in relation to an assessment year, an assessment is made for the first time under section 147, the assessment so made shall be regarded as a regular assessment for the purposes of this section. (2) The interest payable under sub-section (1) shall be reduced by the interest, if any, paid under section 140A towards the interest chargeable under this section. (3) Where the return of income for any assessment year, required by a notice under section 148 issued after the determination of income under sub-section (1) of section 143 or after the completion of an assessment under sub-section (3) of section 143 or section 144 or section 147, is furnished after the expiry of the time allowed under such notice, or is not furnished, the assessee shall be liable to pay simple interest at the rate of one and one-half per cent. (with effect from 1st June, 2001, one and one-fourth per cent.) for every month or part of a month comprised in the period commencing on the day immediately following the expiry of the time allowed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 143 and where a regular assessment is made, to the date of such regular assessment, on an amount equal to the assessed tax or, as the case may be, on the amount by which the advance tax paid as aforesaid falls short of the assessed tax. Explanation 1.-In this section, 'assessed tax' means the tax on the total income determined under sub-section (1) of section 143 or on regular assessment as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income. Explanation 2.-Where in relation to an assessment year, an assessment is made for the first time under section 147, the assessment so made shall be regarded as a regular assessment for the purposes of this section. Explanation 3.-In Explanation 1 and in sub-section (3), 'tax on the total income determined under sub-section (1) of section 143' shall not include the additional income-tax, if any, payable under section 143. (2) Where, before the date of determination of total income under sub section (1) of section 143 or completion of a regular a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1st day of April, 1989, and subsequent assessment years. 234C. Interest for deferment of advance tax.-(1) Where in any financial year,- (a) the company which is liable to pay advance tax under section 208 has failed to pay such tax or (i) the advance tax paid by the company on its current income on or before the 15th day of June is less than fifteen per cent. of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of September is less than forty-five per cent. of the tax due on the returned income or the amount of such advance tax paid on or before the 15th day of December is less than seventy-five per cent. of the tax due on the returned income, then, the company shall be liable to pay simple interest at the rate of one and one-half per cent. (with effect from 1st June, 2001, one and one-fourth per cent.) per month for a period of three months on the amount Of the shortfall from fifteen per cent. or forty-five per cent. or seventy-five per cent., as the case may be, of the tax due on the returned income; (ii) the advance tax paid by the company on its current income on or before the 15th day of March is less than the tax due ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talments are due, by the 31st day of March of the financial year: Provided further that nothing contained in this sub-clause shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of increase in the rate of surcharge under section 2 of the Finance Act, 2000 (10 of 2000), as amended by the Taxation Laws (Amendment) Act, 2000, and the assessee has paid the amount of shortfall, on or before the 15th day of March, 2001, in respect of the instalment of advance tax due on the 15th day of June, 2000, the 15th day of September, 2000, and the 15th day of December, 2000: Provided also that nothing contained in this sub-section shall apply to any shortfall in the payment of the tax due on the returned income where such shortfall is on account of increase in the rate of surcharge under section 2 of the Finance Act, 2000 (10 of 2000), as amended by the Taxation Laws (Amendment) Act, 2001, and the assessee has paid the amount of shortfall on or before the 15th day of March, 2001, in respect of the instalment of advance tax due on the 15th day of June, 2000, the 15th day of September, 2000 and 15th day of December, 2000. Explanat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of loans to the directors, is more than rupees two lakhs in the assessment year 1968-69. With respect to the assessment year 1967-68, it is Rs.1,85,858. The court cannot shut its eyes to realities. What has actually happened is visible to the naked eye. The assessee, a private limited company closely held by three family groups, is made to lend huge amounts (up to 23 lakhs of rupees as per the compromise arrived at between the assessee and the directors/shareholders in the civil suits referred to above) at a very low rate of interest and the entire difference of interest is being charged to the assessee. The assessee is not a finance company. It is engaged in the manufacture of sugar. No business purpose of the assessee-company is served by such lendings to its directors/shareholders. It cannot be said that it is expedient in the interest of business or is laid out for the purpose of the business of the assessee. It is not even a case where employees of the company are being lent some small amounts at a lower rate of interest with a view to keep them happy and satisfied. The amount of interest paid each year payable on account of the loans to directors is very substantial and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neys borrowed were utilised for business of the subsidiary company and not for the business of the assessee as such. In this view of the matter, we hold that the Tribunal was not justified in holding that the interest on loans borrowed for advancing to its subsidiary company was allowable under section 36(1)(iii) of the Income-tax Act, 1961. The plain language of section 36(1)(iii) of the Income tax Act, 1961, militates against the submissions urged on behalf of the assessee." Yet again in Regal Theatre v. CIT [1997] 225 ITR 205 (Delhi), it has been held: "The learned judges held that the view taken by the Income-tax Officer was unsustainable, that as had been pointed out by the Madhya Pradesh High Court in Ram Kishan Oil Mills v. CIT [1965] 56 ITR 186, the only conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of the interest under section 10(2)(iii) were, firstly, that the money must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business, and, thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the law that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt and would mean that the original borrowing was utilised for other purposes and not for business purposes. The finding of the Tribunal in this behalf is surely an inference in law. It ignores the law laid down by the Supreme Court in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 and in the Bombay High Court case CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723, that once the three conditions laid down there are satisfied, the deduction under section 36(1)(iii) must be given. Again, the contention that the correct amount of debit balance to the account of the partners should be taken as Rs.1,73,643 instead of Rs.1,93,049 as calculated by the Income-tax Officer is again a figure arrived at as a matter of law." From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee. It was to be proved that a bona fide loan had been granted in favour of a sister concer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case of a finance company, such decision would not be applicable. However, we are of the opinion that such an observation is not of much significance, as indeed, the said observation would be counter to the submission of learned counsel for the assessee. As the assessee was a finance company, it could show a huge amount at its hands at any point of time, but the bank accounts of the assessee during the relevant period having not been produced, it was for the Assessing Officer to ascertain as to whether the advance had been paid out of the loan taken by it or not. At the cost of repetition, we may reiterate that it is also not expected that a financing company would advance an interest-free loan to another, when it itself takes loan and pays interest upon the principal sum. As the assessee could not produce any document in this regard, an adverse inference in terms of section 114 of the Evidence Act should be drawn to the effect that had those documents been produced, the same would have gone against the interest of the assessee, we are of the opinion that the questions of law involved in the instant case should be answered in the negative, i.e., in favour of the Revenue an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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