TMI Blog1990 (7) TMI 72X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany entitled to allowance of Rs. 1,39,330 by way of interest in the assessment year 1965-66 ? " In Income-tax Reference No. 912 of 1978 too, only the following question is referred : " Whether, on the facts and in the circumstances of the case, the assessee-company was entitled to allowance of interest of Rs. 1,85,858 and Rs. 2,14,522 for the assessment years 1967-68 and 1968-69 ?" It may be stated that the judgments of the Tribunal in all the three matters are different. Though in Income-tax Reference No. 895 of 1978, two questions are referred, no arguments have been advanced with respect to the second question. The answer to question No. (ii), therefore, shall be in the affirmative, that is, in favour of the assessee and against the Revenue. The discussion in this judgment shall be confined only to question No. (i), which is common to all the three cases except for the fact that the amounts vary from year to year. The broad facts as they appear from the orders of the Tribunal are as follows : The assessee, H. R. Sugar Factory (P.) Ltd., Bareilly, is a private limited company, in which the directors/shareholders are substantially interested. Three persons, Murli Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are substantially interested. The assessee is engaged in the manufacture of sugar dispute had arisen among the directors with respect to the amount of advances made to each of them as a result of which the assessee issued notices to all the directors/borrowers to deposit back the loans drawn by them. The said notices were questioned in writ petitions filed in this court which were dismissed, whereafter civil suits were filed. As a result of compromise in the civil suits, the rate of interest chargeable to the directors was reduced from 5% to 2.5% with effect from "the previous year" relevant to the assessment year 1963-64. The compromise decree in the civil suits embodies the minutes of the extraordinary general meeting of the shareholders of the company held on April 6, 1961. According to this resolution, the total amount of loans outstanding against the directors as on August 21, 1960 was Rs. 14,09,624. This amount was made repayable up to March 31, 2000 A. D. Moreover, it was resolved that some of the directors shall be entitled to draw further advances from the assessee-company. In short, Murli Manohar Sahu (holding 50% shares) was permitted to draw loans up to eleven and a ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the Department filed appeals before the Income-tax Appellate Tribunal in respect of the aforesaid assessment years. So far as the remaining assessment years concerned herein are concerned, the Appellate Assistant Commissioner agreed with the Income-tax Officer and the appeals were preferred by the assessee before the Tribunal. The Tribunal, in its separate judgments in these three matters, agreed with the assessee and allowed the appeals filed by it. The appeal preferred by the Department was dismissed. The reasoning of the Tribunal is to the following effect: The assessee has been raising loans from banks on the security of its debentures and loan bonds ; it was also having a cash credit account with the banks against the pledge of its finished products and stores. Interest is payable by it on each of these types of borrowings at the rate of 8% per annum. Indisputably, these amounts were borrowed for the purpose of the business of the assessee. It is not the Revenue's case that the amounts borrowed were not utilised for the purposes of the business of the assessee but for advancing the same to the directors for some unproductive purpose unrelated to the business of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies. Actually, the assessee is made to pay a large amount of interest on the amounts borrowed by its directors ; in short, the burden of interest has been shifted from the directors to the assessee as part of a deliberate plan to take unfair advantage of their control over the assessee-company. On the other hand, Sri S. N. Verma, learned senior advocate appearing for the assessee, submitted that the court should not look to the previous borrowings, but must confine its attention to what happened during the previous year relating to each assessment year under consideration. If this approach is adopted, learned counsel says, the amount advanced during each of the previous years relating to the assessment years (concerned herein) is not large. F or example, during the previous year relevant to the assessment year 1963-64, it would be less than fifty thousand rupees. In the next year, it would be nothing. Even in the subsequent years, the advances to the directors would not be substantial, compared to the total borrowings of the assessee-company during each year for the purposes of its business. There is no connection or nexus between the borrowings of the assessee and the amounts adva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... glossed over by saying that the amount is not-substantial in each of the years. It must be remembered that, in pursuance of the compromise referred to above, the limit of amounts to be lent to the directors/shareholders was substantially raised while, at the same time, drastically reducing the rate of interest to be charged to them. It is clear that the directors/shareholders are taking unfair advantage of their control over the assessee and that they are exploiting it for their private ends. We are not saying that it is a device ; we need not go that far. What has happened in this case is self-evident, viz., the assessee is made to pay huge amounts by way of interest on account of heavy amounts advanced to its directors, bearing no relation whatsoever with the business purpose of the assessee. A look at the figures mentioned in the questions referred clearly shows that huge amounts are being paid by the assessee on account of interest. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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