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Commissioner of Income-tax, Patiala v. M/s Punjab Tractors Ltd., Mohali - ITA-162-2006  RD-P&H 5344 (8 August 2006)
Income Tax Appeal No.162 of 2006
Date of Decision 18.8.2006.
Commissioner of Income-tax, Patiala
Mr. Yogesh Putney, Advocate
M/s Punjab Tractors Ltd., Mohali
Mr.P.C.Jain Advocate with,
Hon'ble Mr. Justice Jasbir Singh
Hon'ble Mr. Justice Rajesh Bindal
RAJESH BINDAL J.
The revenue has approached this court by filing the present appeal against the order dated 09.08.2005 passed by Income-tax Appellate Tribunal, Chandigarh Bench `B' (for short, `the Tribunal') in I.T.A.
No.107/Chandi/2004,for the assessment year 2000-01 raising the following substantial questions of law:
"(1)Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting the addition made on account of interest on interest-free loans advanced by the assessee-company to its sister concern, M/s Swaraj Mazda Ltd.?
(2)``Whether on the facts and in the circumstances of the case, the ITAT was right in law in holding that for the purpose of calculation of deduction u/s 80 HHC of the Income-tax Act, 1961, excise duty and sales-tax should not be included in the `total turnover'?" While issuing notice on Aug 8,2006, the following order was passed:
"This appeal has been preferred proposing following questions of law:-
"(1) Whether on the facts and in the
circumstances of the case, the ITAT was
right in law in deleting the addition made on account of interest on interest-free loans advanced by the assessee-company to its
sister concern, M/s Swaraj Mazda Ltd.?
(2)Whether on the facts and in the
circumstances of the case, the ITAT was
right in law in holding that for the purpose of calculation of deduction u/s 80 HHC of the Income Tax Act, 1961, excise duty and sales-tax should not be included in the `total turnover'?
Question No.2 is covered against the revenue in view of judgment dated 22.5.2006 in I.T.A. No.293 of 2005, Commissioner of Income Tax-I, Ludhiana V. M/s Vardhman Polytex Ltd.
Accordingly, the same is declined.
Issue notice, confined to question No.1 only, which is stated to be covered by a judgment of this Court dated 4.8.2006 in I.T.A. No.110 of 2005 (C.I.T., Ludhiana v. M/s Abhishek Industries Ltd.
Mr. Prakul Khurana, Advocate accepts notice on behalf of the respondent.
List again on 18.8.2006 for final disposal." We have heard learned counsel for the parties on Question No.1, for determination of which the notice was issued to the assessee.
Briefly the facts of the case are that the assessee filed its return of income, for the assessment year in question, declaring its income at Rs. 1,44,79,43,270/- on 28.11.2000. It was processed under Section 143(1) (a) of the Act on 8.1.2001. Thereafter the assessee filed revised return on 12.4.2001 by declaring revised income at Rs. 1,44,84,10,160/-. The same was again processed on 26.2.2003. The case of the assessee was taken up for scrutiny. Accordingly, a detailed questionnaire along with statutory notices under Section 143(2) and 142(1) of the Act were issued to the assessee on 31.12.2001. During the course of assessment, the Assessing Officer found from Para 8 of Annexure in the Auditor's Reports that the assessee had granted unsecured loans aggregating to Rs. 24.30 crores to M/s Swaraj Mazda Ltd., the sister concern. As per details available this amount was given in discharge of the obligations and responsibilities vested on the company in terms of the relief package for Swaraj Mazda Ltd. as directed by Board of Industrial and Financial Reconstruction (BIFR). While some interest was being charged on Rs. 14 Crores in line with the package of BIFR whereas no interest was being charged on the amount of Rs. 10.30 crores.
Finding this to be diversion of fund without interest to sister concern for non-business purposes, the assessee was issued a show cause, to explain as to why the interest at the market rate, i.e. at the rate of 15%, should not be disallowed out of the interest paid by the assessee on various loans raised by it. In response to the notice, the assessee submitted that the loan was advanced to M/s Swaraj Mazda Ltd., out of surplus funds generated by it on which no interest costs was incurred. Finding the explanation given by the assessee to be not convincing, the Assessing Officer disallowed interest on interest free advance to the tune of Rs. 10.30 crores given by the assessee to its sister concern namely M/s Swaraj Mazda Ltd. for non business purposes. Accordingly for dis-allowance the interest was calculated @ 15% per annum, as was being paid by the assessee to financial institutions, amounting to Rs. 1,54,50,000/-.
Aggrieved against the order of assessment the assessee preferred appeal before the Commissioner of Income Tax (Appeals) [for short `CIT(A)']. The CIT(A) vide its order dated Dec,17,2003, following the order passed by the Tribunal in the case of M/s Industrial Cable, deleted the addition on the ground that the Assessing Officer had failed to prove the nexus between borrowed funds and interest free funds advanced to sister concern for non-business purposes.
Aggrieved against the order passed by the CIT(A), the revenue went in appeal before the Tribunal who vide its order dated Aug 9, 2005 dismissed the appeal of the revenue by relying upon an earlier order passed by the Tribunal in the case of assessee and ignorning the order passed by this court in M/s S.A. Builders Ltd. v. CIT(A) & Another (2003) 260 ITR 535, which was subsequent to the order of the Tribunal being relied upon.
While dismissing the appeal, by totally ignoring the judgment of this court in M/s S.A. Builders case (Supra) and discussing that even though the judgment of Allahabad High Court in CIT vs H.R.Sugar Factory Pvt. Ltd.
187 ITR 363, was also in favour of the revenue, as there was a contrary view also in the case of British Paints (India ) Ltd. Vs. Commissioner of Income-Tax (1991) 190 ITR 196 (Cal), the tribunal held that since there was divergence of opinion on the issue by two different High courts one in favour of assessee has to be adopted. Once the judgment of jurisdiction High Court was available in the case of M/s S.A. Builders case (supra), where the disallowance of interest on interest free advance to sister concern for non business purposes was upheld by this court in an appeal of the assessee, still the tribunal referred to and relied upon earlier orders of the tribunal and judgment of other courts.
Recently, we have considered an identical issue in M/s Abhishek Industries case (Supra), wherein it was categorically held that once it is established that the assessee had raised certain loans for his business purposes, on which interest liability is being incurred and on the other hand the funds were advanced to sister concern for non business purposes on interest free basis, then the interest payable by the assessee to the financial institutions to that extent cannot be held to be use of funds for business purposes and no deduction accordingly can be permitted under section 36(1)(iii) of the Act. In that judgment it is inter-alia held that the theory of nexus has no relevance for consideration of point in issue as different sources of receipts in a business concern do not have different colours.
For the detailed reasons recorded in judgment of this court in M/s Abhishek Industries case (Supra), the appeal of the revenue is accepted and the order passed by the Tribunal is set aside. The substantial question of law is answered in favour of the revenue and against the assessee.
18.8.2006 (Jasbir Singh)
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