TMI Blog2002 (8) TMI 75X X X X Extracts X X X X X X X X Extracts X X X X ..... lic 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. - - - - - Dated:- 6-8-2002 - Judge(s) : S. B. SINHA., A. K. SIKRI. JUDGMENT The judgment of the court was delivered by: S.B. SINHA C.J.-At the instance of the Revenue, the following questions have been referred to this court for its opinion by the Income-tax Appellate Tribunal, Delhi Bench "C", New Delhi (hereinafter referred to as "the Tribunal"), in terms of section 256(l) of the Income-tax Act, 1961 (in short, "the said Act"): "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?" Re: Question No. 1: Facts: The assessee is a public limited company. It filed a return of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the aforesaid discussion, entire disputed disallowance of Rs. 3,67,619 is deleted. In this view of the matter, the contention regarding interest calculation in respect of loan given to the subsidiary company being wrong as raised by ground No. 9(b) requires no consideration." The Tribunal while upholding the findings recorded by the Commissioner of Income-tax (Appeals) observed: "The next ground pertains to allowance of interest paid on borrowings. The interest amount is equal to the assumed interest on loans/advances to subsidiary of the assessee-company by name of Utkal Investment Ltd. and to Lions Club, Rajgangpur, Lanjiberna Quarry Employees Consumers Co-operative Stores Ltd., and to its employees. This matter is also covered by the order of the Tribunal for the assessment year 1976-77, a copy of which is on page 402 onwards of the paper book. In para. 29 of this order, the disallowance of interest has been deleted on the ground that it had not been proved that the advances were out of borrowed funds on which interest had been paid by the assessee-company. In fact before interest can be disallowed in the hands of the assessee, it is necessary for the Revenue to establish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company is served by such lendings to its directors/shareholders. It cannot be said that it is expedient in the interest of business or is laid out for the purpose of the business of the assessee ... May be that the company borrows large amounts for the purpose of its business every year, but that does not explain the huge advances to the directors/shareholders. Had this money been not advanced to the directors, it would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow from the banks. We are, therefore, of the opinion that the Income-tax Officer was right in disallowing the difference of interest under section 36(1)(iii) of the Income-tax Act and that the Tribunal's approach is not only superficial but too naive." In Indian Metals and Ferro Alloys Ltd. v. CIT [1992] 193 ITR 344, the Orissa High Court held: "....it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch borrowing was not an admissible deduction under section 36(1)(iii)." In Roopchand Chabildass and Sons' case [1967] 63 ITR 166, whereupon also the Income-tax Officer has placed reliance, the Madras High Court held: ". . . as the amount borrowed was not utilised for purposes of business of the assessee, the interest paid on it was not allowable under section 10(2)(iii) either in the assessment of the firm or of the partners in their individual capacity." In this view of the matter, the first question must be answered in the negative, i.e., in favour of the Revenue and against the assessee. Re: Question No. 2 Facts: The assessee claimed a deduction of Rs. 2,97,000 on account of commission paid to three parties for organising/supervising sales of its product, i.e., cement Rs. Cement Distributors Ltd. 1,35,000 Ganesh Trading Corporation 90,000 Vishnu Agencies 72,000 -------- Total 2,97,000 -------- The Income-tax Officer disallowed the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the other two parties did not violate or run counter to the said Government decision. After all the actual running of the business has to be done by the businessman himself and in the case of the appellant company it had to make some sort of temporary marketing arrangements in order to exercise control over the stockists in the matter it was done when it had no marketing Organisation of its own to take over such functions with immediate effect. In other words, the payments in question were fully justified on the grounds of actual needs of the company's business and practical considerations. Moreover by many appellate orders for the earlier years, assessment years 1974-75 to 1976-77, the disallowances of commission paid to Cement Distributors Ltd. were deleted. The amounts of commission paid in those years were quite substantial so that I find there is merit in the learned representative's contention that the new arrangement with effect from April 1, 1976, was as a matter of fact very economical to the appellant-company. In other words, there is and can be no question of the payments to the outside agencies as claimed being regarded as excessive or unreasonable. Lastly, the Incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exactly the position of the buyer in respect of the cement and the supplier or the manufacturer is the real boss in the system. The list furnished of the job done by the market supervisors in para. 15 is really more in the nature of a cosmetic than in the nature of actual services required and rendered though the correspondence on record shows that some services were rendered. We are satisfied that the payment made to Cement Distributors Ltd., which is a sister-concern of the assessee at Rs. 15,000 per month and Vishnu Agencies P. Ltd. at Rs. 8,000 per month was ad hoc and not commensurate with the services rendered by them. It is clear that the assessee-company has tried to frustrate the Government policy and circumvented it by paying huge amounts under different names. It is immaterial that the payments to the Cement Distributors were allowed in earlier years by the Tribunal. The sole selling agencies were abolished as a matter of public policy, for cement, obviously for the reasons discussed that no services of sole selling agents were required for a scarce and controlled commodity. Looking to the facts stated above, we hold that the payment made to the three market supervisors ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
