2002 (8) TMI 75 - HC - Income Tax

1. Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the assessee was entitled to the deletion of addition of Rs. 3, 67, 619 out of its interest claim? - 2. Whether on the facts and in the circumstances of the case the Tribunal was right in allowing the deduction of Rs. 1, 48, 500 to the assessee in respect of payments made to field organisers after the abolition of the sole selling agency? - Tribunal in our opinion having regard to the aforementioned finding committed a serious error in directing payment to the extent of 50 per cent. of the claim. Once it is held that the arrangement entered into by the assessee with the firms in question was entered into with a view to defeating the policy decision of the Government of India as regards abolition of the sole selling agency in our considered view no amount whatsoever could have been allowed. If the arrangements entered into by the assessee with the alleged market supervisors were violative of the statutory provisions and against public policy the same cannot be encouraged for any purpose whatsoever far less for evasion of tax. both questions must be answered in the negative i.e. in favour of the Revenue and against the assessee.

Summary

Issues Involved:
1. Deletion of addition of Rs. 3,67,619 out of the interest claim.
2. Deduction of Rs. 1,48,500 in respect of payments made to field organizers after the abolition of the sole selling agency.

Issue-wise Detailed Analysis:

Re: Question No. 1: Deletion of Addition of Rs. 3,67,619 out of Interest Claim

Facts:
The assessee, a public limited company, declared a total taxable income of Rs. 3,53,28,960 for the assessment year 1977-78, claiming various deductions under Chapter VI-A. The Income-tax Officer (ITO) disallowed the interest expenditure claim on loans raised, asserting that the assessee made interest-free advances to Utkal Investment Ltd., Lions Club, Rajgangpur, Lanjiberna Quarry Employees Consumers Co-operative Stores Ltd., and employees amounting to Rs. 3,35,111, Rs. 7,699, Rs. 4,839, and Rs. 20,000, respectively.

Findings:
The ITO, relying on various case laws, found it illogical for the assessee to raise heavy interest-bearing loans while giving interest-free loans to various entities. The Income-tax Appellate Commissioner (IAC) deleted some disallowances and confirmed others. The ITO determined the total income of the assessee at Rs. 3,82,42,720, disallowing Rs. 3,67,619 out of the interest claim.

The Commissioner of Income-tax (Appeals) deleted the entire disputed disallowance, stating that the advances were not proved to be out of borrowed funds. The Tribunal upheld this finding, noting that the Revenue needed to establish that the interest-bearing loans were diverted for interest-free loans, which was not proven.

Legal Precedents:
The court referred to several cases, including CIT v. Motor General Finance Ltd. and CIT v. H. R. Sugar Factory Pvt. Ltd., emphasizing that the nexus between the borrowed funds and the advances must be established. The onus was on the assessee to prove the bona fide nature of the loans to its sister concerns.

Conclusion:
The court concluded that the Revenue's inability to prove the nexus between the borrowed funds and the interest-free advances meant the disallowance could not be sustained. The first question was answered in the negative, in favor of the Revenue and against the assessee.

Re: Question No. 2: Deduction of Rs. 1,48,500 for Payments to Field Organizers

Facts:
The assessee claimed a deduction of Rs. 2,97,000 for commissions paid to three parties for organizing/supervising sales of cement. The ITO disallowed this expenditure, arguing that the payments were made in violation of the Government policy abolishing the sole selling agency system in the cement industry.

Findings:
The Commissioner of Income-tax (Appeals) deleted the disallowance, holding that the payments were justified for the business's actual needs and practical considerations. The Tribunal, however, observed that the payments were made to circumvent the Government policy and allowed only 50% of the claimed amount, disallowing Rs. 1,48,500.

Legal Precedents:
The court noted that the Tribunal should have considered whether the arrangement was permissible under the Cement Control Order made by the Central Government under section 3 of the Essential Commodities Act, 1955. The Tribunal's decision to allow 50% of the claim was seen as an error, given that the arrangement aimed to defeat the Government's policy decision.

Conclusion:
The court held that if the arrangements were violative of statutory provisions and against public policy, no amount should be allowed. Thus, the second question was also answered in the negative, in favor of the Revenue and against the assessee.

Final Disposition:
The reference was answered and disposed of without any order as to costs.