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TMI Blog2004 (7) TMI 293X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 Assessing Officer disallowed the proportionate interest b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 the Tribunal deleted the disallowance made under similar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 2328.42 2012.60 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sc. 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 is an observation of the Assessing Officer in the order that interest-free loan amounting to Rs. 2.76 crores have been given to the employ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs ------------------------------------------ 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 unsecur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-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] 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 [ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance 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 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 fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... akhs 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvance 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 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal 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 Rs. In lakhs Share 208 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; 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) -------- ------------------------------------------- As is evident from the above statement, the assessee had surplus funds/own capital available which has been worked out after setting off the amount utilized for fixed assets, work-in-progress, business creditors, etc. Therefore, it cann ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onsidered 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 own case for the assessment year 1992-93 and followed in assessment years 1993-94 and 1994-95. Therefore, such a view is bound to be followed unless such a view is established to be perverse or arbitrary. Reference to the decision of the Hon'ble jurisdictional High Court of Punjab & Haryana in the case of Dal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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, 1993-94 and 1994-95, upheld the order of the Commissioner of Income-tax (Appeals) in deleting the disallowance. 4. The Third Member vide order dated 22-4-2004 agreed with the view of the Judicial Member and thus, by majority view, the decision of the Commissioner of Income-tax (Appeals) in deleting the disallowance of Rs. 49,68,000 out of interest payments is upheld. Since there is already an agreement between the Members of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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