TMI Blog2004 (7) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... aining 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 Assessing Officer disallowed the proportionate interest being paid on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees 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 the Tribunal deleted the disallowance made under similar circumsta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9677.31 5027.59 depreci- ation Net block 2328.42 2012.60 ------- -------- Capital 7348.89 3014.99 work in 594.22 7943.11 613.42 3628.41 progress ------- Invest- 5401.52 1731.61 ments -------- -------- 13344.63 5360.02 Current assets Loans and advances Inven- 6953.01 3380.95 tories Sundry debtors 4781.62 3608.11 Cash and bank balances 637.77 397.28 Loans and advances 2926.62 1797.77 -------- --------- 15299.02 9184.11 -------- Less: Current liabili- ties provi- sions Liabili- 3147.93 2756.10 ties Provi- 270.62 199.99 sion -------- -------- Net 3418.55 2956.09 current -------- assets Misc. 11880.47 6228.02 expendi- 107.86 ture (to the extent not written off or adjus- ted) -------- --------- Total: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the year from the following sources:- ------------------------------------------ Amount 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 in lakhs ------------------------------------------ Reduction in unsecured loans 500.00 Addition in fixed assets 4,314.70 Increase in long-term investment 3,669.91 Net increase in current assets 5,544.59 --------- Total funds applied 14,029.20 ------------------------------------------ From the above, it is clear that to the extent there is increase in reserve and surplus the assessee has invested in the fixed asset as well as in the long-term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 funds have been put to use for non-business purposes." This observation of the Assessing Officer has not been challenged by the assessee either before the CIT(A) or even before us. The assessee has also not produced any evidence before us to discharge its onus that non-interest-bearing funds have been utilized for the purpose of advancing interest free loan to its employees. Under these facts and circumstances of the case, we feel that the assessee is not entitled for deduction of interest on borrowed capital to the extent it has been-used for the purpose of advancing loan to its employees for subscribing to the shares/debentures of the assessee-company. We, therefore, set aside the order of the CIT(A) to that extent and direct the Assessing Officer to disallow interest on a sum of Rs. 1.22 crores inferred to have been advanced to the employees during the year at the rate of 18 per cent, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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] 229 ITR 233 (Ker.). 5. I We have carefully considered the rival submissions. We find that the issue is duly covered by the decision in the case of Eicher Tractors Ltd. v. Dy. CIT [2003] 84 ITD 49 (Delhi), in which the Special Bench while considering deduction of the rent paid for the guest house whether disallowable under section 37(4) held as under:- "Section 30 refers to rent paid by any tenant in respect of the premises used for the purposes of business or profession. Similar is the case in respect of section 32 which makes a reference to depreciation in respect of any building, machinery, plant or furniture owned by the assessee. These sections are wide enough to cover any types of premises whereas it is not so in the case of section 37(4) and (5) which is very specific and pertains to a guest house alone. On a comparison of the two provisions, viz., section 37(4) read with section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment 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 assessment year 1994-95 wherein order of Tribunal for assessment year 1992-93 was applied. The learned D.R. did not oppose above submission nor advanced any other argument before the Bench. 5. I find from records that while deleting the addition in assessment year 1994-95 in ITA No. 1314/Chd./1996 as per its order dated 6 November. 2002, the Tribunal observed as under: "12. We have heard both the parties at some length and carefully considered their rival submissions. We have also examined the facts, evidence and material on record and referred to the above-mentioned two orders of ITAT, Chandigarh Bench for the assessment years 1992-93 and 1993-94. From the facts discussed above, it is obvious that interest-free loans of Rs. 131.18 lakhs were given to the employees in February, 1992 relevant to assessment year 1992-93. Similar disallowance of interest of Rs. 2.80 lakhs was made for the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 employees which was for business purposes of the assessee. In out-opinion, if the assessee spent any money for the welfare of the employees, then such expenditure is to be allowed rather than disallowed. The Income-tax Act also takes due recognition of such a principle. Section 37(2A) for instance provides for disallowance of entertainment expenditure. The Explanation to the said section enlarges the scope of 'entertainment expenditure' but provides that expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of work was not to be included in entertainment expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the case. We were not even asked to take a different view. The learned Accountant Member while not following the decision cited before us has merely observed that each assessment year is an independent assessment year and finding in one assessment year is to be followed when facts are the same. The Bench in the earlier year had clearly recorded that advance to the employees of the company was for business purposes and had allowed the deduction. In the assessment year under consideration, there are no different circumstances nor it is possible to hold that advances made are not for purposes of business. Therefore, in line with the earlier view taken by the Tribunal, I hold that deletion of interest by the learned CIT (Appeals) is quite in order and is required to be upheld. 8. It is accepted by one and all that principle of consistency is applicable and the view once taken cannot be reopened unless it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h, 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 its workers for purchase of shares of the assessee-company?" 2. Parties have been heard and record perused. Brief facts relating to issue are that the assessee had offered certain percentage of shares to its employees as per the guidelines regarding Employees Stock Option Scheme issued on 1-8-1985. As per the said Scheme, the companies while proposing further issue of capital are required to reserve 5 per cent of the further issue for their employees/workers on an equitable basis. The shares so allotted are subject to the condition that these will not be transferred/sold/hypothecated for a period of three years from the date of allotment. In order to enable the employees to purchase the shares reserved for the employees, the assessee advanced a sum of Rs. 2.76 crores as interest-free loans to the employees. Whereas, the assessee advanced loans to the employees, the money has returned to the company by way o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ld. President disagreed with the proposed order of the ld. Accountant Member in regard to the issue relating to partial disallowance of interest. The ld. President has referred to the order of the Tribunal for the assessment year 1994-95 where similar disallowance has been deleted in ITA No. 1314/Chd./1996 vide order dated 6-11-2002 rendered by following its own order for assessment years 1992-93 and 1993-94. The ld. President has also pointed out that there are no distinguishable facts in the year under appeal from the facts of the case for the assessment years 1992-93, 1993-94 and 1994-95. In the dissenting order, the ld. President has pointed out that in the assessment year 1992-93, the Tribunal has observed, "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 purposes of business of the assessee as the entire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rowed 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 advancing interest-free loans to them for the purpose of enabling them to purchase the shares. The ld. Counsel contended that firstly, the assessee had its own capital and reserves out of which the money could be said to have been advanced to the employees and, therefore, no disallowance is warranted on account of interest paid on borrowed money utilized for purposes of business. The ld. Counsel for the assessee has filed a statement to explain the surplus available with the company during the previous year, which ended on 31-3-1995. With reference to the above statement, the ld. Counsel contended that the borrowed funds have not been utilized for giving interest-free advances to the employees. 8. In the alternative, it was contended that providing of interest-free advances to the employees was for purposes of business. Firstly, it was compulsory for the assessee to reserve 5 per cent of additional share capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses (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 these guidelines, the companies while proposing a further issue of capital are required to reserve 5 per cent of the further- issue for their employees/workers on an equitable basis. The shares so allotted are subject to the condition that these shares shall not be transferred/sold/hypothecated for a period of 3 years from the date of allotment. It has been decided that in cases where the employees are granted loans by their companies for the purpose of buying shares under the Stock Option Scheme, these shares may be allowed to be hypothecated against such loans, to the companies themselves. The prior approval of the Controller of Capital Issues should be obtained for such arrangements." In the light of the above guidelines, the company had no option but to reserve 5 per cent of the further issue of share capital for employees/ workers. It is also not disputed that in the previous year, relevant to the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat 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 employees which was for business purposes of the assessee. In our opinion, if the assessee spent any money for the welfare of the employees, then such expenditure is to be allowed rather than disallowed. The Income-tax Act also takes due recognition of such a principle. Section 37(2A) for instance provides for disallowance of entertainment expenditure. The Explanation to the said section enlarges the scope of 'entertainment expenditure' but provides that expenditure on food or beverages provided by an assessee to his employees in office, factory or other place of work was not to be included in entertainment expenditure. The case law cited by Shri Gogna also supports the view that where welfare of the employee is concerned, the legislation has to be interpreted in such a way that the purpose of legislation is advanced rather than defeated. Moreover, the amounts advanced remained with the employees only for a couple of days ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ---------------------------------------- Year ended on 31.3.1995 Rs. In lakhs Share 2089.42 capital Reserves 13535.72 Surplus -------- 15625.14 Less: Fixed Assets (Net block + Capital work in progress) Less: Term Loans PSIDC 475.00 IFCI 177.63 PNB 2000.00 2652.63 5290.48 ------- ------- --------- 10334.66 Less: Investments 5401.52 --------- Net owned funds available with Co. for working Capital A 4933.14 --------- 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) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egislation, Courts should adopt a beneficent rule of construction. In the present case, the assessee has provided 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the appeal of the revenue is liable to be dismissed. 14. The matter may be placed before the regular Bench for passing consequential order in accordance with the majority view. ORDER Per Shri M.A. Bakshi, Vice-President. - In this case, the appeal of the revenue for the assessment year 1995-96 was heard by the Division Bench of the Tribunal. As a result of difference amongst the Members in regard to the following ground of appeal, the issue was referred to the Third Member:- "1. The learned Commissioner of Income-tax (Appeals) has erred both in law and on facts of the case in deleting the disallowance of Rs. 49,68,000 out of interest payments attributable to interest-free advances of Rs. 2.76 crores made to its workers for the purchase of shares of the assessee-company." 2. The learned Accountant Member of the Division Bench had restored the disallowance of interest of Rs. 49,68,000 out of interest payments attributable to interest-free advances of Rs. 2.76 crores made to its workers for the purchase of shares of the assessee-company. 3. The learned Judicial Member following the earlier orders of the Tribunal in assessee's own case for assessment years 1992-93, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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