TMI Blog2006 (8) TMI 123X X X X Extracts X X X X X X X X Extracts X X X X ..... ribunal was right in deleting the disallowance of Rs. 16,48,024 made on account of interest on interest free advances given to the sister concern for non-business purpose? (ii) Whether on the facts and circumstances of the case, the hon'ble Income-tax Appellate Tribunal was right in law in deleting the addition on account of sales tax subsidy of Rs. 4,56,948 claimed by the 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance. We now live in a welfare 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 Polym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l before this court. Question No. (i) As far as this question is concerned, the facts, as appear from the record, are that as on March 31, 1993, secured loans standing against the assessee were to the tune of Rs. 25,40,04,090 and the interest liability, which arose during the year thereon, was Rs. 2,26,64,944, out of which the assessee had debited a sum of 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 gi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the share capital, according to the assessee, was surplus and it could part with the same to sister concern for non-business purpose without any interest, there was no need to raise loans to that extent and the amount of such share capital should have been utilised for the project itself. As is evident from annexure attached with the order of assessment, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our 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 bear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. In K. Somasundaram and Brothers v. CIT [1999] 238 ITR 939, while dealing with a similar 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... investment or the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profit. The actual financial liquidity position on the relevant date has to be established by the assessee." Yet again in CIT v. H.R. Sugar Factory P. Ltd. [1991] 190 ITR 643 (All), B.P. Jeevan Reddy C.J. (as his Lordship then was) relying upon his earlier decision in H.R. Sugar Factory P. Ltd.'s case [1991] 187 ITR 363 (All), held 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee." In Regal Theatre v. CIT [1997] 225 ITR 205, the Delhi High Court held that consideration of the issue regarding allowability of deduction under section 36(1)(iii) 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p of industries which are set up in 'A' category area on or after the first day of October, 1992 and the goods produced by them shall be exempt from the payment of sales tax for a period of ten 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting year, the assessee obtained refund of the following three items totalling Rs. 14,665.70 in terms of Government Order Ms. No. 455. The three items are: (i) Refund of sales tax on purchase of machines during 1971-72 Rs.5,839.93 (ii) Refund of sales tax on purchases of raw materials during 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. Sahne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 262-263 of the Reports, a clear finding has been recorded that by no stretch of imagination, subsidy by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to the setting up of the industry. The payments, which are made for a specified period after the commencement of production, 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 Mill ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tantiate its plea that the subsidy of the kind under consideration was to enable it to acquire new plant and machinery or as an aid to set up the industry. Rather, it is quite evident that subsidy in the present case is in the form of an operational subsidy provided by the State after the industry had been set up and commenced 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] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bsidy is not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running of the sugar factories in the initial years. ... the payments of subsidy were made not for the purchase of capital items, and it was not tied 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on a consideration of the policy therein that the same was to promote construction of buildings in small towns where incentive was given in the form of grant in aid for setting up and establishment of cinema house, which was relatable to the construction of cinema house. Similar is the position with regard 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we do not deem it appropriate to restrain from discharging our judicial function in hearing and deciding the appeal on merits. As far as the issue as to whether the circular prescribing limits for filing appeals before the courts or the Tribunals is concerned, different courts have taken different views 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 Tribun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent case are capital and not revenue in nature. Similar was the manner in which the issue regarding interest free advance to sister concern was dealt with. The Tribunal was required to examine the material on record before rendering a decision on any issue raised by the parties. It is evident that 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper. 12. The following words of Lord Denning in the matter of applying precedents have become locus classicus: 'Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cardozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive ... Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it'." The same view was reiterated in State of Haryana v. AGM Management Services Ltd. [2006] 5 SCC 520. We are hopeful that the Tribunal will be careful in future in deciding the lis between the parties which is in conf ..... X X X X Extracts X X X X X X X X Extracts X X X X
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