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Cit Kanpur v. New Kashmir Oriental Tpt. - INCOME TAX REFERENCE No. 212 of 1984 [2005] RD-AH 113 (7 January 2005)


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Court No. 37

I.T.R. No. 212 of 1984

CIT Vs.. M/s New Kashmir Oriental Transport Co. (P) Ltd.


I.T.R. No. 56 of 1986

CIT Vs.. M/s New Kashmir Oriental Transport Co. (P) Ltd.

Hon'ble R.K. Agrawal, J.

Hon'ble Prakash Krishna, J.

In both the income tax references i.e. I.T.R. No. 212 of 1984, which relates to the assessment year 1972-73, 1974-75 and I.T.R. No. 56 of 1986, which relates to the assessment year 1975-76, the Income Tax Appellate Tribunal Allahabad has referred the identical questions of law under Section 256 (1) of the Income Tax Act, 1961, hereinafter referred to as the Act, for opinion to this Court.

"Whether the Tribunal was correct in holding that while considering the allowability of interest on borrowed funds from the firm, the account relating to unrealized hiring charges due from the firm could not be taken into account?"

Briefly stated the facts giving rise to the present references are as follows :

The respondent/assessee is a private limited company carrying on the business of transporting of goods and its Head Office is at Kanpur. On 31st August, 1966, it purchased a running business of a firm styled as M/s New Kashmir & Oriental Forwarding Agency. Certain loans of the firm were also taken over by the respondent in the process. On 20th October, 1969, the respondent entered into an agreement with the firm for hiring of trucks. The agreement stipulated that for each truck the company would receive monthly hiring charges of Rs. 750/- per truck. The agreement came into existence long after the borrowing taken over by the company from the firm, whereas Clause 7 of the agreement has stipulated that no interest shall be payable on the hiring charges due from the firm and the company shall not adjust the amount due from the firm against the loan balance of the firm payable by the company. During the assessment years in question the respondent had paid interest to the firm on the loans. It may be mentioned here that three partners of the firm were also the contractors of the respondent company having more 50%  of the shareholding and had substantial interest in the respondent company. There have been a regular running account in which the borrowing made by the respondent company from the firm are recorded. It has been going up year after year and in the year in question also there were further borrowings and the interest was being paid by the respondent company to the firm. In the course of assessment proceedings the Income Tax Officer has disallowed the interest paid by the respondent company to the firm. However, in appeal the Commissioner of Income Tax (Appeals) had allowed the claim of interest, which order has been upheld by the Tribunal.

We have heard Sri Shambhu Chopra, learned Standing Counsel for the Revenue. No body has appeared on behalf of the respondent/assessee.

It may be mentioned here that the Tribunal by upholding the order of the Commissioner of Income Tax (Appeals) had relied upon its earlier order for the assessment year 1971-72. We are not aware as to what happened in the assessment year 1971-72, as despite sufficient time having been allowed no information had been furnished by the Revenue. In this view of the matter we proceeding to decide this reference on merits.

Learned Standing Counsel submitted that three partners of the firm were also contractors of the respondent company having substantial interest and of more than 50% of the shareholding, the respondent company ought to have adjusted the amount of interest from the outstanding hiring charges and having the agreement of hiring of trucks was a shame transaction, the Income Tax Officer was, therefore, justified in disallowing the amount of interest paid by the respondent company to their firm. Having given our anxious consideration to the aforesaid submissions made by the learned Standing Counsel, we find that the genuineness of the hiring agreement is not for consideration before this Court as no specific question in this behalf has been referred. We have proceed on the basis that the agreement of hiring is genuine. In terms of Clause 7 of the said agreement, the respondent company was not entitled to charge any amount of interest whatsoever on the outstanding amount of hiring charges, nor it was entitled to adjust the amount of interest from the hiring charges. It is not in dispute that the running business of the firm along with the outstanding loans have been taken over by the respondent company, as a result of which it became debtor to the firm. There was an agreed rate of interest on which the interest was payable by the respondent company to the firm as the interest was liable to be paid. The Tribunal has rightly allowed the claim of interest as a deduction without taking into consideration the adjustment of hiring charges.

In this view of the matter we answer the question referred to us in the affirmative i.e. in favour of the assessee and against the Revenue. There shall be no order as to costs.

Dt. 7.1.2005



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