TaxTMI 
TaxTMI 
2006 (8) TMI 123
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.... assessee as capital receipt instead of revenue receipt?" The appeal is admitted for consideration of the substantial questions of law, referred to above. With the consent of learned counsel for the parties, we have taken the appeal on board and heard the same for final disposal. More than two decades ago, a Constitution Bench of the hon'ble Supreme Court in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC); [1985] 59 STC 277; AIR 1986 SC 649, while referring to earlier judgments and also laying down the path for departing from the Westminster [1936] AC 1 (HL) principle observed as under: "16. In CIT v. A. Raman and Co. [1968] 67 ITR 11 (SC); [1968] 1 SCR 10; AIR 1968 SC 49, J.C.Shah, J. speaking for himself and Sikri and Ramaswami, JJ. repeating almost verbatim the observations in Westminster [1936] AC 1 (HL) and Fishers Executors [1926] AC 395 (HL) observed: 'Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the I....
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....State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less a moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd., In re and Bengal Hotels P. Limited, In re [1977] 47 Comp Cas 597 (Guj) where the learned judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax. 18. It is neither fair nor desirable to expect the Legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the court to tak....
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....Rs. 1,48,51,396 to the profit and loss account and the balance of Rs. 81,81,508 were charged to pre-operations which were capitalised. During the course of assessment proceedings, it was noticed that the assessee had advanced a large amount of money to its sister concern. On a query by the Assessing Officer to specify the nature of advances and also the rate of interest being charged thereon and the rate of interest being paid to the financial institutions on the loans raised by the assessee, it was submitted as under: "In respect of disallowance of interest on amounts given to M/s VAPPL and M/s. Trimurti Chemineers P. Ltd., it is submitted that the same were given out of company's own funds represented by share capital. No borrowed funds have been utilized in giving these interest free loans. Details of sources of funds given are enclosed herewith. There is no nexus between borrowing and loans given interest-free." The assessee in the present case is a public limited company. As is evident from the details, interest-free loan was advanced to the sister concern before the commencement of production and also after the commencement of production. The amount of interest arising ....
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...., the peak debit balance and closing balance in the cases of the sister concerns was Rs. 44,00,000 and Rs. 9,99,250; Rs. 95,00,000 and Rs. 93,79,845; Rs. 70,00,000 and Rs. 70,00,000; Rs. 31,00,000 and nil in the accounts of M/s. Varinder Agro, Chemicals Ltd., Trimurti Chemineers P. Ltd.; Varinder Agro Products P. Ltd. and Varinder Agro Chemicals Ltd. respectively. It is not in dispute that besides raising substantial amounts as term loan which, according to the assessee, is required to be repaid as per the fixed schedule agreed to at the time of disbursement of loan, there were substantial amounts of loan in the form of working capital which were not required to be returned after any specified period. Rather, the same is use of money in day-to-day working of the company and usually there remains a debit balance in the account of the company which bears interest only to the extent of the debit balance in the account. In such a situation, in case the assessee had not advanced loans to its sister concern on interest free basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan is concerned, but the ....
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....ur view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. The entire money in a business entity comes in a common kitty. The monies received as share capital, as term loans, as working capital loan, as sale proceeds etc., do not have any different colour. Whatever are the receipts in the business, they have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to a sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister conce....
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....ar proposition, the Madras High Court held as under: "The amount so lent, according to the assessee, came out of the contract earnings. The amount borrowed, according to the assessee was invested in the execution of the contracts. It is clear, therefore, that the assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract. The amount realised on the execution thus, included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial part of those funds interest-free to the relatives of the partners, it was clearly not a business purpose. The assessee clearly diverted the funds which had been borrowed, had been invested in the contract work, after the investment was recovered and was available either for the purposes of the business or by way of repayment of the loan. The assessee did neither, but chose to divert the money for non-business purposes. After such diversion, the interest paid on the capital borrowing to the extent of the amounts diverted can no longer be an item of expenditure which can be claimed for deduction as a....
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....ces are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and the sister concerns, and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made." We may notice that in CIT v. Motor General Finance Ltd. [2002] 254 ITR 449, the Delhi High Court held as under: "From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee. ....
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....ld that the assessee-company was not entitled to the allowance of interest. In S.A. Builders Ltd. v. CIT [2004] 269 ITR 535, this court dismissed an appeal by the assessee, wherein the Tribunal had disallowed interest under section 36(1)(iii) of the Act on interest free advances made by the assessee to the sister concerns as the assessee could not show any material to the effect that it had derived any business benefit by advancing free interest amounts to the sister concerns. In Veecumsees v. CIT [1996] 220 ITR 185 (SC); [1996] 9 SCC 25, hon'ble the Supreme Court held that deduction for payment of interest on the loans raised for building a cinema theatre, which w as ultimately closed, was allowable deduction as the assessee was engaged in a composite business of jewellery and cinema. The facts of the case are distinguishable from the facts of the case in hand. In CIT v. Saraya Sugar Mills P. Ltd. [1993] 201 ITR 181, the Allahabad High Court held that where part of the overdraft was diverted to directors and concerns in which they were substantially interested, interest on such amount to that extent was held disallowable. A similar views were expressed by the Bombay High ....
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.... of the Act is purely a question of law as it is an inference to be drawn from the facts. In CIT v. Tin Box Co., [2003] 260 ITR 637, the Delhi High Court decided a similar issue against the Revenue keeping in view the fact therein that even the interest free unsecured loan raised by the assessee far exceeded the amount advanced to the sister concern. It was a case in its own facts. In CIT v. Orissa Cement Ltd. [2001] 252 ITR 878, the Delhi High Court 35 declined to answer the reference for the reason that in the opinion of the court, no question of law arose and the findings recorded by the Tribunal were findings of fact. In CIT v. Radico Khaitan Ltd. [2005] 274 ITR 354 the Allahabad High Court, while rejecting the plea of the Revenue and relying upon the findings recorded by the Tribunal to the effect that there were sufficient funds available with the assessee-company in the form of capital share, share application money, reserve and surplus other than the borrowed money for diverting a sum of Rs. 17.19 lakhs, held that it cannot be said that the amount of loan advanced to the sister concern was out of the borrowed funds and the order of the Tribunal allowing deduction o....
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....pplementing 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. Question No. (ii) As far as this question is concerned, learned counsel for the Revenue, referring to the provisions of rule 4-A of the Punjab General Sales Tax (Deferment and Exemption) Rules, 1991 (for short, "the 1991 Rules") submitted that admittedly the sales tax subsidy was available to the assessee after it came into production and therefore applying the ratio of the law laid down by the hon'ble the Supreme Court in Sahney Steel and Press Works Ltd. v. CIT [1997] 228 ITR 253, the same had to be treated as revenue receipt and cannot possibly be termed as capital receipt. It was further submitted that the Tribunal in the present case, while dealing with the issue, has passed a totally non-speaking order merely referring to various orders passed by it in different cases and blindly following the same without even referring to the details either in the case in hand or in the cases referred to. While dismissing the appeal....
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....otal sales tax exemption shall not exceed 300 per cent, of their fixed capital investment. (ii) group of industries which are set up in 'B' category area on or after the first day of October, 1992 shall be exempt from the payment of sales tax for a period of seven years commencing from the date of production for the first time in the State of Punjab, subject to the condition that the total sales tax exemption shall not exceed 150 per cent. of their fixed capital investment." A bare perusal of the abovereferred rule shows that the benefit under the 1991 Rules accrues for a period of 10 years from the date of production and the quantum is fixed at 300 per cent, of the fixed capital investment as far as group of industries set up in "A" category, whereas for the industries set up in "B" category area, the over-all quantum of exemption is limited to 150 per cent, of the fixed capital investment to be availed of within 7 years. This exemption was to commence from October 1, 1992. Besides this, there is no other document or material on which reliance is placed by the assessee to substantiate its contention that the sales tax subsidy of the kind in consideration should be treated....
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.... the year 1971-72 Rs. 390.79 (iii) Refund of sales tax paid on sale of finished goods during the year 1971-72 Rs.8,423.98 The Income-tax Officer, while making the assessment for the year 1974-75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the Commissioner of Income-tax (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs. 14,665.70, refunded to the assessee in terms of the said Government order 'did not represent refund of sales tax' but was a development subsidy in the nature of a capital receipt. The Tribunal also held that the said amount cannot be deemed to be the income of the assessee under section 41(1) either. Thereupon the Revenue asked for and obtained the reference of the following question (CIT v. Sahney Steel and Press Works Ltd.): 'Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was not liable to be included in the total income asses....
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....on, are operational subsidies and not capital subsidies. The relevant part is extracted below: "By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies." It is further reiterated at page 266 of the Reports that the subsidies under consideration were revenue in character and will have to be taxed accordingly. A similar findings recorded by the Calcutta High Court in Kesoram Industries and Cotton Mills Ltd. v. CIT [1991] 191 ITR 518 were referred to with approval, whereas the view taken by the Madhya Pradesh High Court in CIT v. Dusad Industries [1986] 162 ITR 784, where it was held that the object of such scheme was not to supplement the profits of the industry, hence capital in nature, was held to be erroneous. Ultimatel....
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....ced commercial production. The subsidy is not in the form of a financial assistance granted to the assessee for setting up of the industry. The endeavour of the State was to provide the newly set up industries a helping hand for a specified period to enable them to be viable and competitive vis-a-vis the industries which were already set up and were in production since long. The assessee has failed to establish on record that the kind of subsidy involved in the present case was in the form of a subsidy to enable it to carry out capital investment. In the absence thereof, it cannot possibly be presumed by the authorities that such a subsidy would be in the nature of capital subsidy. The onus to provide the same strongly lay on the assessee, which it had failed to discharge. Following Sahney Steel's case [1997] 228 ITR 253 in CIT v. Rajaram Maize Products [2001] 251 ITR 427, the hon'ble Supreme Court held that power subsidy received by the new industry based on consumption per unit is a kind of revenue receipt as the benefit accrues after the commencement of the business. We deem it appropriate here to refer to the judgments of various High Courts dealing with the same/similar ....
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....up with the purchase of machinery or for future expansion of the industry. In other words, it was given without any prior condition attached to it and it is open to the petitioner to utilise the same for any of its purposes including its business purposes. The fact that the payments made might have been utilised for the purchase of capital equipments is not relevant as there is no embargo imposed on the sugar factory not to utilise the subsidy received for business purposes. The subsidy, in other words, is granted to tide over the teething troubles that the sugar factory may face soon after the commencement of production and it is not for the setting up of the factory. I also hold that the fact that the sugar factory is eligible to get the subsidy for a period of five years from the date of the commencement of production clearly indicates that the payment of subsidy is linked to the production of sugar in the factory. It is further strengthened by the fact that the measure of payment of subsidy is also closely interlinked with the purchase of sugarcane by the sugar factory which shows that the subsidy was granted for the continuous running of its business and it is not granted for ....
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....to the judgment of the Calcutta High Court in CIT v. Balarampur Chini Mills Ltd. [1999] 238 ITR 445, where also, on a consideration of the policy, it was held that the incentive received by the assessee therein was specifically for repayment of loan taken for expansion of plant and machinery-a capital asset. The additional free sale sugar quota as an incentive was available to the assessee therein only in case the assessee repaid the term loans taken from the Central financial institutions out of the realisation of sale of additional free sale quota sugar. Accordingly, realisation through additional free sale sugar quota under the incentive scheme was held to be a capital receipt. This judgment is also on the facts of its own case interpreting the policy in question, whereas in the present case, there is no such terms of the incentive scheme on record produced by the assessee which could establish that the sales tax subsidy of the kind in question was in any way having a relation with the setting up of the industry. Accordingly, the appeal of the Revenue is accepted and the substantial question, referred to above, is answered in favour of the Revenue and against the assessee, ho....
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....s as to whether in case an appeal is filed, which involves tax effect less than the amount prescribed in the circular for filing the appeal, still the court/Tribunal is bound to reject the same as such or to dispose of it on merits. In CIT v. Cameo Colour Co. [2002] 254 ITR 565 the Bombay High Court refused to entertain an appeal which was filed having tax effect less than what was prescribed in the instructions for filing appeal in the High Court. The same view was reiterated by the court in CIT v. Pithwa Engineering Works [2005] 276 ITR 519 (Bom). Taking a contrary view, this court in Rani Paliwal v. CIT [2004] 268 ITR 220, wherein an appeal filed by the assessee, raising the issue as to whether the Tribunal erred in law in not dismissing the appeal of the Revenue keeping in view the Board's circular dated March 27, 2000, prescribing limits for filing appeals before the Tribunal, was dismissed holding that the Tribunal is not bound by any such instructions and once the appeal is filed, the Tribunal was bound to decide the same on the merits. A similar view has been expressed by the Rajasthan High Court in CIT v. Rajasthan Patrika Ltd. [2002] 258 ITR 300, wherein it was h....
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....hat there is no application of judicial mind by the Tribunal in this case. The Tribunal being the last fact finding authority, a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue. Every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court. Not taking note of the facts of the case, nor the legal position and not even referring to the facts of the case involved in those decisions on which reliance is placed for deciding the appeal amounts to non-exercise of the appellate powers by the Tribunal, which cannot be appreciated at all. In Union of India v. Major Bahadur Singh [2006] 1 SCC 368, at pages 373-374, the hon'ble Supreme Court, while dealing with a similar situation and referring to the principles in the matter of applying pre....