TaxTMI 
TaxTMI 
2008 (6) TMI 542
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....acts and circumstances of the case the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition amounting to Rs. 61,42,500 being addition on account of advance given to Vignette Investment P. Ltd. On the facts and circumstances of the case the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition of Rs. 23,12,674 on account of advance to concerns under the same management. On the facts and circumstances of the case the learned Commissioner of Income-tax (Appeals) has erred in giving relief to the assessee of Rs. 70,000 on account of sales promotion expenses. I. T. A. No. 1526/Del/03 (assessment year : 1997-98) On the facts and circumstances of the case the learned Commissioner of Income-tax (Appeals) has erred in deleting the addition amounting to Rs. 86,83,318 and restricting the same to Rs. 24,874 being interest paid by the company on borrowed funds diverted for non-business purposes. I. T. A. No. 2706/Del/02 (assessment year 1998-99) '(1) The learned Commissioner of Income-tax (Appeals) in the facts and circumstances has erred in deleting the addition of Rs.12,50,000 made by the Assessing Officer on account of interest....
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....cements, which were relied upon by the assessee, as statutory provisions of section 145 are of overriding nature. It was also found by the Assessing Officer that the assessee had recovered the principal amount in August, 1999, therefore, there was every possibility of recovery of interest and the company, to whom the assessee had provided ICD, was a well-known company. An appeal was filed before the Commissioner of Income-tax (Appeals) before whom certain additional evidence was filed showing the circumstances under which the assessee did not consider the said amount of Rs. 12.50 lakhs as interest accrued to it. Certain documents were filed to show that the recovery of the principal amount given by the assessee to Alliance Capital and Management Services Ltd. (ACMS) had become doubtful and it was claimed that no interest had accrued to the assessee. Reference was also made to certain judicial pronouncements of the hon'ble apex court. It was also pointed out that the assessee had received a sum of Rs. 2 crores from ACMS and ACMS was demanding interest thereon and that was the other reason for not considering the said amount of Rs. 12.5 lakhs as income. An application under rule 46A ....
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....e clear whether any request was made by the assessee for admission of additional evidence and the learned Commissioner of Income-tax (Appeals) also has not recorded the reasons for admitting such additional evidence as per the requirement of rule 46A(2). Thus, he pleaded that at best the matter may be restored back to the file of the Commissioner of Income-tax (Appeals) directing him to adopt the procedure laid down in rule 46A(2) and then to pass order on the issue as per law. 5. On the other hand, the learned authorised representative referring to the application submitted to the Commissioner of Income-tax (Appeals) for admission of the additional evidence and also the remand report submitted by the Assessing Officer, pleaded that the assessee had complied with the requirements of rule 46A and it was not in the hands of the assessee to ask the Commissioner of Income-tax (Appeals) to follow the procedure laid down in rule 46A. However, he pleaded that while deciding the issue, the learned Commissioner of Income-tax (Appeals) has observed the formalities as he had referred the additional material/ evidence to the file of the Assessing Officer and thus, the Assessing Officer was pr....
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....own secured loans amounting to Rs. 8.13 crores and unsecured loans of Rs. 4.90 crores on which the assessee had claimed interest of Rs. 94,17,265. The Assessing Officer proposed disallowance of such interest on the ground that interest bearing funds were diverted by the assessee to make interest free advances. In reply, it was submitted that these advances were made out of non-interest bearing funds and for providing housing accommodation for use of managers and officers of the company. The Assessing Officer found such explanation of the assessee incorrect as according to him the assessee did not explain why funds were given to other concerns for procuring accommodation for the managers and officers of the company. The Assessing Officer also observed that the assessee did not establish that these advances are for the purpose of business of the assessee and in this manner the Assessing Officer observed that disallowance of interest calculated at the rate of 18 per cent. on the above mentioned interest free advances of Rs. 27.65 crores comes to Rs. 4.97 crores. However, he restricted the disallowance to a sum of Rs. 94,74,265 which was claimed by the assessee on account of secured lo....
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....g Officer in the assessment year 1996-97, therefore, no disallowance could be made on account of interest free advances made to these two concerns. The learned Commissioner of Income-tax (Appeals) further observed that the Assessing Officer has not brought any material on record to prove the nexus between the interest bearing loans and the non-interest bearing funds which would strengthen the conclusion of the Assessing Officer that interest bearing funds were utilised for advancing interest free loans for non business purposes. He observed that right from the beginning it has been the contention of the assessee that the money has been advanced out of its surplus funds and not out of interest bearing funds. The learned Commissioner of Income-tax (Appeals) observed that the assessee is maintaining a combined overdraft account through which all the deposits and payments are being made. He also observed that there is no doubt that overdraft bears interest whenever there is a debit balance till the same is nullified by the other deposits and since the advances are made from such overdraft account, the contention of the assessee cannot be accepted that the advances were made from surplu....
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....on in the judgments to the effect that if the amount is advanced from a mixed account or share capital or sale proceeds or profits, etc., the same would not be termed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister-concern with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest." 13. The learned Departmental representative also referred to the decision of the hon'ble Delhi High Co....
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....d by the Commissioner of Income-tax (Appeals) that the balance in the overdraft is negated by the other receipts credited in the overdraft account. He contended that once the assessee had advanced interest bearing funds that will retain its character of utilisation of interest bearing funds for the non-business purposes till the same are received back by the assessee. 18. On the other hand, the learned authorised representative pleaded that the decision in the case of CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1 was considered by their Lordships of the hon'ble Supreme Court in the case of Munjal Sales Corporation v. CIT [2008] 298 ITR 298 and their Lordships in that case held that in view of sufficient non-interest bearing funds available with the assessee, no disallowance could be made on account of funds diverted to sister concern. He has placed before us copy of the said decision of the hon'ble Supreme Court to show that in that case it has been observed by their Lordships that the assessee had its own funds of Rs. 1.91 crores and in view of that fact it was observed that the amount of Rs. 5 lakhs advanced by the assessee to its sister concern could not be said to have been....
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....s. 7.68 crores which is much less than the increase in secured loans. 20. Referring to such factual aspect, the learned authorised representative pleaded that no disallowance could be made in the light of the following judicial pronouncements : A. CIT v. Britannia Industries Ltd. [2006] 280 ITR 525 (Cal) to contend that where the assessee has advanced any amount out of mixed account in which entire sale proceeds were being deposited, it has to be presumed that payment was made out of the assessee's own fund and, deduction under section 36(1)(iii) in respect of interest on borrowed funds could not be denied. He contended that in the present case the assessee had been depositing all sale proceeds to its overdraft account, therefore, the assessee cannot be denied benefit of deduction under section 36(1)(iii). He contended that the hon'ble Calcutta High Court has further observed that the decision of the Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 has been approved by the hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC). B. He further relied on the decision of the hon'ble Delhi High ....
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....t withdrawal was out of income generated during year under consideration and not out of borrowed funds-Held, yes-Whether therefore, order of Commissioner of Income-tax (Appeals) was to be upheld Held, yes. (g) United Agencies 37 TTJ 374 (Ahd) paper book pages 188 to 199 deduction under section 36(1)(iii)-Interest on borrowings-Interest paid on cash credit account with bank-Disallowed by Income-tax Officer on the ground that the assessee had given interest-free advances to its sister concern out of funds lying in cash credit account-Not justified on the facts of the case-Total cheques drawn on the cash credit account with the bank were of Rs. 53,61,519 so much so out of which the cheques issued to sister concern during the currency of the year, were only for Rs. 1,24,500Further, the various business receipts received during the year were also credited or deposited in the aforesaid bank account-Therefore, it cannot be said that there was a direct nexus between the loan borrowed from the bank and the interest-free amounts advanced to sister-concern. (h) Malwa Cotton Spinning Mills [2004] 89 ITD 65 (Chd.) (TM) Section 36(1)(iii) of the Income-tax Act, 1961-Interest on borrowed capi....
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....xpenditure. (1) Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal). (2) British Paints (India) Ltd. v. CIT [1991] 190 ITR 196 (Cal). (3) Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 (Cal). Payments out of overdraft account. Payments can be considered as out of profits. Disallowance of interest on overdraft not justified. 22. The learned authorised representative also contended that it is for businessmen to decide in which manner the business is to be carried on. He in this regard refers to the decision of the apex court in the case of Aluminium Corporation of India Ltd. v. CIT [1972] 86 ITR 11 and the decision of the hon'ble Delhi High Court in the case of CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377. He contended that relying on these decisions the Delhi Tribunal vide its order dated March 17, 2006 in I. T. A. No. 1526/D/01 in the case of Warm Champignons and Agro Products Ltd. v. Joint CIT (a copy was filed before us). In the said case the Tribunal has held that in case where the assessee had non-interest bearing surplus funds that cannot be the reason to stop the assessee from borrowing interest bearing funds for the purpose of business. 23. Thus, the l....
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....dictional High Court in the aforementioned two cases (page 19 of 286 ITR) : "Respectfully disagreeing with the views expressed by the Delhi High Court in CIT v. Tin Box Co. [2003] 260 ITR 637 and Orissa Cement Ltd.'s case [2001] 252 ITR 878 (Delhi) ; the Allahabad High Court in Radico Khaitan Ltd. [2005] 274 ITR 354 and Prem Heavy Engineering Works P. Ltd. [2006] 285 ITR 554 (All) ; the Calcutta High Court in Britannia Industries Ltd. [2006] 280 ITR 525 and Madhya Pradesh High Court in R. D. Joshi and Co. [2001] 251 ITR 332, we do not subscribe to the observation in the judgments to the effect that if the amount is advanced from a mixed account or share capital or sale proceeds or profits, etc., the same would not be termed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the exte....
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....9. Now coming to the contention of the learned Departmental representative that as the interest free advances have been made from interest bearing overdraft account, therefore, the character of money advanced by the assessee as interest free fund will not alter until the same is received back. This contention of the learned Departmental representative has to be examined in the light of various judicial pronouncements relied upon by the parties before us. It has been the contention of the assessee that it is maintaining a mixed overdraft bank account where all other deposits like sale proceeds, sundry creditors, etc., are being deposited. This contention of the assessee has not been shown to be incorrect or wrong. It was argued by the learned authorised representative that if such mixed bank account is maintained, the assessee has sufficient interest free funds for covering interest free advances then claim of interest cannot be disallowed. On the facts of the present case we find that such contention of the assessee is acceptable in view of the following decisions relied upon before us : (i) Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219 (Cal) ; [1981] 23 CTR 204 ; (ii) CI....
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....onsidered by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 at page 631 with the observation at page 632 that there was considerable force in the argument advanced by learned counsel for the appellant. However, the apex court did not lay down any principle and had decided the case on some other technical ground. Be that as it may, having regard to the principles enunciated in these decisions and having regard to the facts and circumstances of this case and the concurrent findings of the Commissioner (Appeals) and the learned Tribunal, it appears that there were sufficient fund and that the advance was made from mixed account and as such in this case the learned Tribunal and the Commissioner (Appeals) both were right in presuming that the advance was made out of the assessee's own funds." (emphasis ours) 30. Now looking at the facts of the present case in the light of the above principle of law, we find that it is not disputed that the overdraft funds were used for a very limited period as the interest for utilisation of overdraft funds has been computed by the Commissioner of Income-tax (Appeals) at a sum of Rs. 1,43,320 as against huge disal....