1983 (4) TMI 105 - AT - Income Tax

Tribunal partially allows appeals, directs re-examination of interest, upholds disallowance related to advances.

The Tribunal partly allowed the appeals, directing a re-examination of the overdraft account interest and restoration of the ground concerning the levy of ... Disallowance of interest under s.36(1)(iii) on borrowings not used for business - application of borrowed funds test - restriction of disallowance to the period of actual overdraft/borrowing - deduction under s.80J - appealability of levy of interest under s.215Disallowance of interest under s.36(1)(iii) on borrowings not used for business - application of borrowed funds test - Whether interest on borrowings was disallowable because the borrowed funds were advanced to an associate concern and not utilised for the assessee's business - HELD THAT: - The Tribunal upheld the finding of the authorities below that the sums drawn on overdraft were routed directly to M.P. Spinning & Weaving Mills P. Ltd. and were therefore borrowed for the purpose of advancing to that concern rather than for the assessee's own business. The assessee's contention that the associate was promoted to secure raw material supplies did not alter the character of the transactions; the decision in CIT v. United Breweries (Mysore High Court) was treated as directly applicable. The Bombay High Court authority relied on by the assessee was held distinguishable on its facts because, there, funds were originally received for the assessee's business and only subsequently diverted. The Tribunal found no reason to interfere with the conclusion that the borrowings, insofar as they financed advances to the associate, were not for the purpose of the assessee's business and that the corresponding interest was therefore not deductible. [Paras 5]Disallowance upheld insofar as the borrowings were used to advance funds to the associate concern and thus were not for the purposes of the assessee's business.Restriction of disallowance to the period of actual overdraft/borrowing - disallowance of interest under s.36(1)(iii) on borrowings not used for business - Whether the disallowance should be restricted to interest relating to the period during which the overdraft remained outstanding - HELD THAT: - The Tribunal observed that s.36(1)(iii) requires enquiry into (i) whether money was borrowed for business purposes, (ii) whether interest was payable thereon, and (iii) whether it was actually paid. If the overdraft was recouped by the assessee's own receipts so that there ceased to be borrowing or liability to pay interest, no disallowance could be made for such period. Accordingly, the ITO was directed to re-examine the assessee's overdraft account and compute the actual interest attributable to the advances to the associate for the period the overdraft remained outstanding; any disallowance was to be limited to that interest and the balance disallowance vacated. [Paras 6]Matter remitted for verification and recomputation; disallowance restricted to actual interest attributable to the period the overdraft remained outstanding, balance vacated.Deduction under s.80J - Whether the assessee's claim for deduction under s.80J was correctly worked out by the ITO and sustained by the CIT(A) - HELD THAT: - The Tribunal found the CIT(A)'s approach to the computation to be in conformity with the law and the amendment effected by the Finance (No. 2) Act, 1980. The CIT(A) had computed the relief with reference to net assets (gross assets employed less debts and borrowings as at the beginning of the computation period) as required under the statute and applicable decisions, and there was no reason shown to interfere with that conclusion. [Paras 7]Order of the CIT(A) on s.80J deduction upheld.Appealability of levy of interest under s.215 - Whether the assessee could agitate, before the CIT(A), the levy of interest under s.215 impugned as being wrongly imposed on an asserted nil advance-tax position - HELD THAT: - The Tribunal held that where the assessee denies liability to the levy of interest under s.215, the question can be agitated before the CIT(A). Relying on the reasoning of the Bombay High Court in the cited authority, the Tribunal concluded that the assessee's challenge to the levy was entertainable and therefore restored the ground to the file of the CIT(A) for consideration on merits. [Paras 8]Ground restored to CIT(A) for fresh adjudication on merits regarding liability to interest under s.215.Final Conclusion: Appeal partly allowed: the disallowance of interest on borrowings used to advance funds to an associate was upheld, but the quantum was remitted for recomputation and restricted to interest for the period the overdraft remained outstanding; the CIT(A)'s decision on s.80J deduction is sustained; the challenge to interest under s.215 is restored to the CIT(A) for fresh adjudication. Issues Involved:1. Disallowance of interest related to advances given to M.P. Spinning & Weaving Mills P. Ltd.2. Deduction under Section 80J of the IT Act.3. Levy of interest under Section 215 of the IT Act.Issue 1: Disallowance of Interest Related to Advances Given to M.P. Spinning & Weaving Mills P. Ltd.The assessee appealed against the disallowance of Rs. 58,663 for the assessment year 1977-78 and Rs. 28,055 for the assessment year 1978-79. The ITO found that the assessee had paid interest amounting to Rs. 5,59,897 on borrowed funds, part of which were advanced to M.P. Spinning & Weaving Mills P. Ltd. without charging interest. The ITO estimated the interest at 15.5% and added it back to the income, treating the advances as not utilized for business purposes. The CIT(A) upheld this disallowance, referencing the Mysore High Court decision in CIT vs. United Breweries (1973) 89 ITR 17 (Mys), which held that interest on advances to a subsidiary concern free of interest could not be for the business purposes unless the businesses were one and the same.The Tribunal considered the arguments and found that the advances were made from the overdraft account directly to M.P. Spinning & Weaving Mills P. Ltd., indicating the funds were not required for the assessee's business. The Tribunal upheld the CIT(A)'s decision but directed the ITO to re-examine the overdraft account and restrict the disallowance to the actual interest for the period the account remained overdrawn.Issue 2: Deduction Under Section 80J of the IT ActThe assessee claimed relief under Section 80J based on Calcutta High Court decisions in Century Enka Ltd. vs. ITO (1977) 107 ITR 123 (Cal) and 1977 CTR (Cal) 433: (1977) 107 ITR 909 (Cal). However, the ITO calculated the relief based on net assets (gross assets less debts and borrowings) as on the first day of the computation period, which the CIT(A) upheld in light of the amendment to Section 80J by the Finance (No. 2) Act of 1980. The Tribunal found the CIT(A)'s order in conformity with the law and saw no reason to interfere.Issue 3: Levy of Interest Under Section 215 of the IT ActThe ITO raised a demand for advance tax under Section 210, which the assessee contested by filing a 'Nil' estimate, denying liability for advance tax and consequent interest under Section 215. The ITO overruled the objection and levied interest, which the CIT(A) declined to entertain, stating no appeal was provided against the levy of interest under Section 215. The Tribunal, referencing CIT vs. Daimler Benz, A.G. 1977 CTR (Bom) 568 (FB): (1977) 108 ITR 961 (Bom) (FB), held that the assessee could agitate the issue before the CIT(A) and restored the ground for re-examination on merits.Conclusion:The appeals were partly allowed, with specific directions for re-examination of the overdraft account interest and restoration of the ground concerning the levy of interest under Section 215 for re-examination on merits by the CIT(A).