2005 (6) TMI 19 - HC - Income Tax

Interest-free loan for business purposes qualifies under section 36(1)(iii)

Commissioner of Income-Tax Versus Britannia Industries Limited.

Commissioner of Income-Tax Versus Britannia Industries Limited. - [2006] 280 ITR 525 Issues Involved:1. Whether the recipient of the interest-free loan is a firm of relatives.2. Whether the interest-free advances were given for the purpose of business entitling the assessee to the benefit of section 36(1)(iii) of the Income-tax Act, 1961.3. Whether the advances were made from the borrowed capital or the assessee's own funds.4. Assessment years 1986-87, 1987-88, 1988-89, and 1989-90.Issue-wise Detailed Analysis:1. Whether the recipient of the interest-free loan is a firm of relatives:The Assessing Officer initially found that the firm receiving the interest-free loan was constituted by relatives of the directors of the assessee. However, upon examining the definition of 'relative' under section 2(41) of the Income-tax Act, 1961, it was determined that the relations cited did not fall within this definition. Therefore, the claim that the firm was a firm of relatives could not be sustained.2. Whether the interest-free advances were given for the purpose of business entitling the assessee to the benefit of section 36(1)(iii):The eligibility for deduction under section 36(1)(iii) depends on three factors: the capital must be borrowed, it must be for the purpose of business, and interest must be payable on such capital. In this case, the interest payment and the capital borrowing were not in dispute. The contention was whether the borrowed capital was used for the business purpose of the assessee. The Commissioner (Appeals) and the Tribunal found that the advances to MCAP were indeed for business purposes, specifically for securing raw materials (cashew-nuts) which constituted a significant portion of the assessee's exports. This finding was based on concrete evidence and was not contradicted by any material presented by the Department.3. Whether the advances were made from the borrowed capital or the assessee's own funds:It was argued that the advance coincided with the enhancement of packing credit from Syndicate Bank. However, the Tribunal found that the assessee's total sales proceeds were deposited in a mixed account, from which the advance was made. Given the substantial funds in this account, it was presumed that the advance was made from the assessee's own funds, not the borrowed capital. This presumption was supported by several judicial precedents, including decisions in Woolcombers of India Ltd., Samuel Osborn (India) Ltd., Indian Explosives Ltd., and Alkali and Chemical Corporation of India Ltd.4. Assessment years 1986-87, 1987-88, 1988-89, and 1989-90:For these assessment years, the Tribunal found that MCAP supplied substantial materials to the assessee, indicating a regular business relationship. The advances were made in the regular course of business for commercial expedience. These findings were not proven to be perverse and thus the same principles applied as discussed for the earlier years.Conclusion:The judgment concluded that for each assessment year involved, the recipient of the interest-free loan was not a firm of relatives; the advances were made for business purposes within the meaning of section 36(1)(iii); there was a regular course of business between the assessee and the firm; the advances were made for commercial expedience and business purposes; the findings of the Tribunal were not perverse; and the advances were made from the mixed account, presumed to be from the assessee's own funds. Therefore, the assessee was entitled to the benefit of section 36(1)(iii).Order:The appeal was dismissed, and the question was answered in the affirmative for the respective assessment years involved. There was no order as to costs, and all parties were to act on a signed xerox copy of the dictated order on the usual undertaking.