TaxTMI 
TaxTMI 
2004 (7) TMI 293
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "1. That ld. CIT(A)(C) erred in law and on facts in sustaining the disallowance of Rs. 1,80,000 being rent paid for Employees Club maintained by the company. The same being unnecessary business expenditure may be directed to be allowed. 2. That ld. CIT(A)(C) erred in law and on facts in sustaining the disallowance of Rs. 14,416 being the amount of expenditure incurred on employees at Employees Club. The same being expenses incurred exclusively for staff welfare may be directed to be allowed." 3. Brief facts relating to ground No. 1 of the revenue's appeal, as gathered from the orders of the tax authorities, are that the assessee had advanced a sum of Rs. 2.76 crores as interest-free loan to its employees for purchasing shares of the company. The assessee-company had paid a sum of Rs. 659.79 lakhs as interest on loan and claimed it deductible under section 36(1)(iii). Before the Assessing Officer, the assessee submitted that the company was having Rs. 13,535.72 crore reserves along with capital and the amount advanced to its employees may be considered as given out of the said reserve. The company had not specifically borrowed for giving loan to its employees. The Assessin....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore than the shareholders' funds. The loan was advanced to the employees just for the purpose of purchasing shares/debentures by the company itself in the names of the employees because the company could not bought the shares in its own name. The shares/debentures were never-transferred/delivered to the employees and the interest and dividend also not paid to the employees. The CIT(A) simply followed the order of the Tribunal relating to assessment year 1992-93, without looking into the facts of the case specifically that part of loan must have been advanced during the year. Ld. DR reiterated that the Assessing Officer has rightly made the disallowance out of interest claimed under section 36(1)(iii). 3.3 Ld. AR, on the other hand, drew our attention to the balance sheet as on 31-3-1995 and submitted that the assessee is having reserve and surplus amounting to Rs. 13,535.72 lakhs, in addition to capital of Rs. 2,089.42 lakhs. The assessee was, thus, having interest-free funds and natural inference will be that these have been invested for the purpose of advancing loan to the employees. It was submitted that the case is duly covered by order for assessment year 1992-93, wherein t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eserve and surplus 13535.72 15625.14 5361.90 6028.50 -------- Loan funds Secured loans 9599.96 5167.40 Unsecured 9599.96 500.00 5667.40 loans -------- --------- Applica- 25225.10 11695.90 tion -------- --------- of funds Gross block Less 9677.31 5027.59 depreci- ation Net block 2328.4....
X X X X Extracts X X X X
X X X X Extracts X X X X
....bsp; 2956.09 current -------- assets Misc. 11880.47 6228.02 expendi- 107.86 ture (to the extent not written off or adjus- ted) -------- --------- Total: 25225.10 11695.90" ------------------------------------------------ However, the assessee has not filed any statement or copy of account in its books of account before us which may depict how much loan has been advanced during the year to the employees free of interest for purchase of shares/debentures. Although there ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sp; in lakhs ------------------------------------------ Increase in capital 1,422.72 Increase in reserve and surplus 8,173.92 Increase in secured loans 4,432.56 ---------- Total increase in funds 14,029.20 ------------------------------------------ We also note that these funds have been applied by the assessee in the following manner:- ------------------------------------------ Amount &nbs....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ing Officer observed that part of the borrowed funds were not utilized for the purposes of business but for the purpose of advancing interest-free loan to its employees for the purposes of shares/debentures of the company. We feel that the onus lies on the assessee to prove that it has not utilized the borrowed funds for the purposes of advancing interest-free loan to its employees. The assessee in this case has not discharged its onus, as no evidence has been filed which may prove that it has advanced money to its employees out of non-interest-bearing funds during the year. Ld. AR although argued that the assessee was having reserve and surplus much more than the amount advanced to the employees, therefore, a presumption may be drawn that non-interest-bearing loans have been used for the purpose of advancing loan to the employees of the assessee-company. From the application of funds, reproduced above, we feel that no such presumption can be drawn as other long-term investment made were more than increase in reserve and surplus. From the assessment order, we find that the Assessing Officer-has observed as under:- "... There is no denial of the fact that the interest-bearing fun....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ted 6-11-2002. 4.2 After carefully considering the rival submissions, we find that the Tribunal in para 6 of its order dated 6-11-2002 has held that the provisions of section 80-I(8) and 80-I(9) were not applicable to the facts of the present case. The order of the CIT(A) is in conformity with the orders of the Tribunal for the earlier three assessment years. Respectfully following the aforesaid orders of the Tribunal, we are of the opinion that the order of the CIT(A) does not merit any interference. The same is upheld and revenue's ground of appeal is dismissed. 5. Coming to the CO of the assessee, we find that the Assessing Officer disallowed the expenses incurred on the guest house maintained by the assessee. It seems that the assessee has not agitated the issue before the CIT(A). Before us, the assessee relied on the order of the Tribunal dated 6-11-2002 and submitted that since the rent was specifically allowable under section 30, therefore, the provisions of section 37(4) will apply and no disallowance can be made. Ld. DR, on the other hand, relied on the order of the Assessing Officer and also on the decision in the case of United Catalysts (India) Ltd. v. CIT [1998] ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aken by him on ground No. 1.1, therefore, propose to write a separate order. 2. The ground relates to deletion of Rs. 49,68,000 out of deduction of interest claimed by the assessee. The disallowance has been made on account of the fact that the assessee advanced a sum of Rs. 2.76 crores to its employees free of interest as loan for purchasing share of the assessee-company. The Assessing Officer made disallowance in question holding that the amount was not advanced for business of assessee-company and that borrowed funds were not utilized for purposes of business. He, accordingly, disallowed a portion of the interest calculating the same at 18 per cent of Rs. 2.76 crores. 3. On appeal, the learned CIT (Appeals) held that similar disallowances were made in assessment year 1992-93 but on appeal, the ITAT, Chandigarh Bench deleted the disallowance. Similar order was passed by the ITAT in the assessment year 1993-94. Respectfully following the aforesaid order, the disallowance of interest in question was deleted. 4. Before us during the course of hearing of appeal, the learned counsel for the assessee had placed on record copy of order of ITAT in the case of the assessee for as....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ered the submissions of both the sides. The assessee-company has advanced interest-free loans only to its employees and not to any of its directors. Such an advance is neither in violation of the Companies Act nor of the guidelines issued by the Ministry of Finance. In fact, the law encourages- such advances to be made to the employees. In the first instance, the revenue authorities have not been able to establish a direct nexus between the amounts borrowed by the assessee-company on which interest was paid by it and the amounts advanced by the assessee-company to its employees free of interest. The assessee-company had reserves and surplus to the extent of Rs. 14.77 crores from which the amounts could be said to have been advanced interest-free to the employees. Assuming though not admitting that the advances had been made from out of funds on which assessee paid interest, then also such an advance was for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. If the assessee had not advance interest-free loans to the employee....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... February, 1992 relevant to assessment year 1992-93. Therefore, there is no change in the facts. Moreover, while deleting the disallowance of interest, the Tribunal also observed that even if it is assumed that assessee had advanced the loans to employees out of funds on which assessee paid interest, then also such advances were for business purposes of the assessee as the entire amount came back to the assessee within three days. Thus, in the light of these facts, we are of the considered opinion that the facts of the case for the assessment year under reference are similar to the facts of the case for the assessment years 1992-93 and 1993-94 and, therefore, the ratio of the aforesaid decision for the above-mentioned assessment years would equally apply to the facts of the present case. Respect fully, following the orders of the Tribunal for the assessment years 1992-93 and 1993-94, we set aside the order of the CIT(A) and delete the impugned disallowance. This ground of appeal of the assessee is allowed. 7. Unfortunately, I am party to above order dated 6-11-2002. Besides I do not see any good ground to deviate from consistent view taken by the Tribunal on identical facts of t....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... No. 1. 11. On other points I agree with the decision of the learned Accountant Member. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT, 1961 The Members of the Bench have differed in their opinion while considering and deciding the captioned appeal on the following point which is being referred to the President, Income-tax Appellate Tribunal under section 255(4) of the Income-tax Act, 1961: "Whether, on the facts and in the circumstances of the case, CIT (Appeals) was right in deleting interest of Rs. 49,68,000 attributable to interest-free advances given to its workers for purchase of shares of the assessee-company?" THIRD MEMBER ORDER Per Shri M.A. Bakshi, Vice President. - The appeal of the revenue and the cross- objection of the assessee for the assessment year 1995-96 were heard by the Division Bench of this Tribunal. As a result of difference of opinion between the Members of the Bench, I have been nominated as Third Member for a decision in regard to the following point of difference:- "Whether, on the facts and in the circumstances of the case, CIT (Appeals) was right in deleting interest of Rs. 49,68,000 attributable to interest-free advances given to it....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usiness to purchase its own shares in its own name or in the names of its employees and, therefore, funds amounting to Rs. 2.76 crores were not utilized for purposes of business. The proportionate interest worked out at Rs. 14.68 lakhs computed at the rate of 18 per cent from the date of advance till the end of previous year was disallowed out of the claim of interest made under section 36(1)(iii). 3. On appeal, the CIT(A) deleted the addition on the basis of the decision of the Tribunal in ITA No. 128/Chd./1996 for the assessment year 1992-93 and ITA No. 129/Chd./1996 for the assessment year 1993-94, where on similar facts, the disallowance made by the Assessing Officer was deleted. 4. The revenue appealed to the Tribunal against the decision of the CIT(A). The ld. Accountant Member proposed an order partly allowing the appeal of the revenue. The disallowance of interest, as per the proposed order by the ld. Accountant Member, has been restricted to the loan of Rs. 1.22 crores being the amount advanced to the employees in the year under appeal. The disallowance with reference to the advances made in the preceding years has, however, been held to be not justified. 5. The l....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the employees/workers on equitable basis. As a matter of policy of the company, all the employees were given the option of purchasing snares for the purpose of which temporary loans were advanced to them. According to the ld. Counsel, the advancing of loans to the employees was in accordance with the policy of the company to keep them in good humour and faithful to the company. The money has remained out of the company only for a period of three days and has been returned to the company for being utilized for purposes of business. It was further contended that in 1992-93, at the time of enhancement of share capital, the assessee had reserved 5 per cent for the employees and offered interest-free advances enabling them to purchase the shares. The Tribunal had upheld the decision of the CIT(A) in deleting the addition made on account of interest disallowed by the Assessing Officer out of the interest paid on borrowed funds. In assessment years 1993-94 and 1994-95 also, the disallowance stands deleted and in the year under appeal, there is no difference in facts. The assessee has followed the established practice of reserving 5 per cent of additional shares for the employees and ad....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee-company to provide interest-free advance to the employees for the purpose of acquisition of shares of the company was purely for business considerations or for extraneous considerations. If the decision of the company to allow interest-free advance to the employees for the aforementioned purpose is found to be purely for business consideration, in that case the controversy as to whether the borrowed money has been utilized for the said purpose or the assessee-company has utilized its surplus funds for the said purpose, would be irrelevant. It is not disputed that as per the guidelines issued by the Ministry of Finance, Department of Economic Affairs, the assessee was required to reserve 5 per cent of the further issue capital to be raised for the employees/workers on equitable basis. The Press release issued by the Ministry of Finance, Department of Economic Affairs on 11-2-1987, reported in [1987] 61 Company Cases (Statute) 163, is reproduced here-under for the sake of reference:- "Loans by Companies to Employees to buy Shares - Clarification dated 11-2-1987: Attention is invited to the guidelines, regarding Employees' Stock Option Scheme issued on 1-8-1985. According to ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....orities have not been able to establish a direct nexus between the amounts borrowed by the assessee-company on which interest was paid by it and the amounts advanced by the assessee-company on which interest was paid by it and the amounts advanced by the assessee-company to its employees free of interest. The assessee-company had reserves and surplus to the extent of Rs. 14.77 crores from which the amounts could be said to have been advanced interest-free to the employees. Assuming though not admitting that the advances had been made from out of funds on which assessee paid interest, then also such an advance was for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. If the assessee had not advanced interest-free loans to the employees, then it is quite likely that some of the employees may not have applied for the shares of the assessee-company and those shares would have remained unsubscribed. By advancing interest-free loans to the employees, the assessee created a happy and harmonious relationship between it and the emp....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... had been given by the assessee for business purposes of the assessee because the same amount was to come back within three days which it actually did and the assessee was to achieve the objective of keeping its employees in a happy frame of mind. The Tribunal further observed that the assessee had not advanced interest-free loans to the employees, then it was quite likely that some of the employees may not have applied for the shares of the assessee-company and those shares would have remained unsubscribed. In my view, it would be reasonable to test the facts of the case on the basis of above principles laid down by the Bench. 11. For the year under appeal, as per the details available, the assessee had surplus of Rs. 21.48 crores as per the statement at page 1 of the paper book reproduced hereunder:- "NAHAR INTERNATIONAL LIMITED CALCULATION OF SURPLUS AVAILABLE WITH THE COMPANY DURING THE YEAR 1994-95 ------------------------------------------- Year ended on 31.3.1995 &....
X X X X Extracts X X X X
X X X X Extracts X X X X
....p; --------- Current Assets -------------- Inventory 6953.01 Sundry 4781.62 11734.63 Debtors Less: Creditors 3147.93 -------- B Net Current 8586.70 Assets C Margin Money 2146.68 Required -------- D Balance of funds available with Co. after margin money (A-C) 2786.46 E Cash & Bank 637.77 Balance -------- F Net Surplus 2148.69" (D-E) &n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....vided benefit to its employees. In deciding the issue whether the action of the company for the benefit of the employees was for business considerations or not, the principle of beneficial rule of construction should be preferred than the interpretation which goes against the welfare of the employees. In my considered view, the action of the company in providing interest-free loans to the employees for acquisition of shares of assessee-company for meeting the guidelines issued by the Ministry of Finance, Department of Economic Affairs was a prudent decision backed by business considerations. Any expenditure laid out or incurred by the assessee for purposes of business is allowable as a deduction in computing the profits and gains of the business. Therefore, assuming for arguments sake that assessee has utilized the borrowed money for providing the same to the employees for the purpose of acquisition of shares, since the amounts have been utilized purely for business considerations, no disallowance is warranted. As pointed out earlier, the view that money has been advanced to the employees purely for business considerations is supported by the view taken by this Bench in assessee's ....