9911796707
TMI Blog1996 (9) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in confirming the addition on notional basis that the assessee could have saved interest expenditure had it utilised its funds to reduce Bank Overdraft instead of loaning to Dharmayug Investment Limited. There is a mistake in working." 3. The Assessing Officer made the disallowance of Rs. 19,17,643 with the following remarks :-- "Disallowance of excess payment of interest.--During the year, it is observed that the assessee gave interest-free loans as detailed below to Dharmayug Investments Ltd. : Date Amount Rs. 27-10-1983 50,00,000 11-11-1983 50,00,000 1-12-1983 5,00,000 9-12-1983 4,00,000 19-12-1983 50,00,000 23-12-1983 7,00,000 2-1-1984 20,00,000 27-4-1984 10,00,000 --------------------- Total 1,96,00,000 --------------------- It is contended that Dharmayug Investments Ltd. is a wholly subsidiary company and the loan given is not from borrowings but from the profits of the company and, therefore, there is no loss to the revenue. I have carefully considered the contentions of the assessee. During the year, the assessee has shown the figures of interest receipt and interest payment as follows : Rs. (1) Interest receipts 19,04,700 (2) Int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er advancing the amount in question of Rs. 1,96,00,000 to the subsidiary company and, that the other borrowals on which substantial interest payments made were effected for the purposes of the business of the assessee and as these borrowals were not diverted to the subsidiary company or any other sister concern, the interest paid on these borrowals has to be allowed as a deduction in terms of the provisions of section 36(1)(iii) of the Income-tax Act. In other words, as the advances to the subsidiary company were made out of the gross revenues of the assessee-company, no interest could be disallowed as attributable to the diversion of borrowed funds to a subsidiary or a sister concern for non-business purposes. The Tribunal disposed of this argument with the following observations :-- "The next point to be considered is whether having regard to the fact that the amounts were advanced from an account which had through out a credit balance, would support the claim of the assessee or not. We may in this connection recall that the claim of the assessee before the revenue authorities had been that the amounts were advanced out of the assessee's revenue from advertisement and the like. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of business, there could not be any notional disallowance. This was lost sight off by the Tribunal while upholding the order of the CIT(A). After hearing the parties to the dispute we find that there is a mistake apparent in the order of the Tribunal. The Tribunal has given a clear out finding that the borrowings of the assessee were utilised for the purpose of business carried on by the assessee. Thereafter the Tribunal disgressed a little and held that since there were huge interest-free advances, the revenue was justified in disallowing interest on notional basis. There seems to be some apparent contradiction in the order passed by the Tribunal and this gives rise to a mistake. We, in the circumstances, recall the order of the Tribunal for the limited purpose of adjudicating whether the notional interest disallowed by the revenue was justified or not." 7. In the course of the present hearing, the learned counsel for the assessee has again reiterated the contentions made out on the earlier rounds. It is pleaded that first, as the borrowed funds were utilised for business purposes, interest payments on the borrowed funds should be allowed under the provisions of section 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s revenues are not the same thing as profit and profit may not be available when the advances in question are made. The assessee bases its case only on the expedient of opening a separate bank account in which gross revenues were credited and the advances were made out of that account. We are of the view that liability to taxation does not depend on such, what we may call, sleight of hand, exhibited in opening a separate bank account for the purpose. The assessee admitted that the advance to the subsidiary company was not a trade advance and as a matter of fact, it did not have sufficient profits or own funds to make the advance. So, obviously, the advance is made only out of the borrowed funds and as such we are of the view that the assessee is squarely hit by the decision of the Hon'ble Bombay High Court in the case of Kishinchand Chellaram v. CIT [1978] 114 ITR 654. The relevant head note of this decision reads as follows :-- " Held , (1) that, so far as the Bombay High Court is concerned, it is quite clear that, under section 10(2)(iii), interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for the purposes of business and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the funds are not mixed up. However, that does not mean, as we have noted, that the assessee can escape by the simple expedient of opening a separate bank account. If such an argument is allowed to pass muster, as noted by the Tribunal in the original order, it would open the flood gates of evasion. In this context, we can do no better than to recall the following head note in the decision of the Apex Court in the case of McDowell Co. Ltd v. CIT [1985] 154 ITR 148/22 Taxman 11 : "The proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax and whether the transaction is such that the judicial process may accord its approval to it. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and to expose the devices for what really are and to refuse to give judici ..... X X X X Extracts X X X X X X X X Extracts X X X X
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