TMI Blog2003 (12) TMI 274X X X X Extracts X X X X X X X X Extracts X X X X ..... nce had not been given the same would have been available for its business purposes and to that extent the borrowings as well as interest payable to bank would have been less. Following the decision in the case of CIT v. H.R. Sugar Factory (P.) Ltd. [1991] 187 ITR 363 (All.), Assessing Officer made a disallowance of Rs. 2,31,261 out of interest paid by working out the same on product method. Same submissions were reiterated before CIT (A) and reliance was placed on the decisions in the cases of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.) and D H Secheron Electrods (P.) Ltd. v. CIT [1983] 142 ITR 529 (MP). CIT (A) upheld the impugned disallowance observing thus: - "... I have considered the above facts and it is noted that as ascertained at the time of hearing and noted above" it is clear that interest free advances have been given by the assessee out of cash credit account with the bank which had debit balance on which the assessee is required to pay interest to the bank and after giving of advance, the said debit balance increased further on which the assessee was required to bear additional burden of interest. Therefore, there is clear nexus between interest bearing f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant year and not out of the overdraft account for the running of the business; and (b) British Paints (India) Ltd. v. CIT[1991] 190 ITR 196 (Cal) - In this case also, all receipts were deposited in overdraft account and all payments including taxes were made from that account. The High Court held that the Tribunal was not right in presuming that payments of the assessee-company's income-tax liability were made during the previous year out of its overdraft from the bank when all the company's sale proceeds and receipts during the year covering its profits far in excess of such tax liability were being deposited in that overdraft account and as such in holding that a proportionate part of the interest on the said overdraft was referable to the tax payments. Thus, it was submitted that the assessee was maintaining one CC account and all trading receipts were deposited in the said account. Funds, no doubt, were made to sister-concern also out of the said account but it did not mean that funds are advanced out of borrowed funds. Tax authorities have not appreciated the law properly. No disallowance is called for out of interest claimed under section 36(1)(iii). 3.2 Ld. DR, on the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that the assessee was maintaining CC account with Indian Bank and a sum of Rs. 25.50 lakhs was advanced on 26-10-199l, when there was debit balance in CC account. A sum of Rs. 2.50 lakhs was advanced on 14-11-1991, when there was credit balance in CC account. The claim of the assessee is that it was maintaining one CC account and whole of the funds which consisted of even profits from business by way of sale proceeds were being deposited in the said CC account. The assessee has generated cash profit from operation to the extent of Rs. 18.42 crore during the year, therefore, profits must have been deposited in the said CC account. Merely because there was debit/credit balance in CC account does not mean that funds to sister-concern were advanced out of interest bearing funds. For examining this plea of the assessee, it is necessary to look into the facts to decide whether cash generated from operation amounting to Rs. 18.42 crore was really available. If cash so generated was available, then it can very well be held that interest bearing funds were not diverted to the sister-concern. To appreciate this plea, we have examined the cash flow statement filed, which shows source an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing overdraft account and all profits being deposited in overdraft account, the assessee paid advance tax on 12-12-1969, i.e., just few days before the end of the accounting year ending on 31-12-1969. The assessee had earned a sum of Rs. 27 lacs, therefore, on facts of the case, there was a finding that the assessee's profits from business were sufficient to cover payments of advance tax made a few days before the year ended on 31-12-1969. This payment could not be regarded to be made out of overdraft account. The High Court rejected the contention of the revenue and held that interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should also have been allowed as an admissible deduction in the computation of the assessee's business income, as the profits were sufficient to meet the advance tax liability. Before us, the year ending was 31-3-1992, while funds amounting to Rs. 25.5 lakhs were advanced to sister-concern on 26-10-1991, i.e., much before year ended when the profits accrued. Secondly, the assessee has also applied funds in fixed assets, current assets and other investments which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in the cases of Malwa Chemtex Udyog Ltd. and also S.A. Builders Ltd. Following decisions also support the plea taken by the Revenue:- (i) Triveni Engg. Works Ltd.'S case; (ii) CIT v. Sujani Textiles (P.) Ltd. [1985] 151 ITR 653 (Mad.); (iii) Madhav Prasad Jatia s case, in which it was held that interest paid on borrowed amount from overdraft account utilized for making donations could not be held to be for the purpose of assessee's business purpose as it was not utilized for the purpose of assessee's business. Thus, having regard to the aforesaid facts and discussion, we are of the view that the tax authorities were justified in law and facts in disallowing interest on borrowed funds to the extent the money was advanced by the assessee to its sister-concern. We uphold the disallowance of Rs. 2,31,261 made under section 36(1)(ii). Thus, ground No.2 fails. 4. Ground No.3 is against upholding the disallowance under section 43B. Assessing Officer observed that the assessee had made certain payments under ESI and PF to the Government account beyond the due dates specified in these Acts. Therefore, such payments amounting to Rs. 65,859 were disallowed. Details are given in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the payment has not been made as per provisions of clause (b) of section 43B, even disallowance of Rs. 63,117 is hereby upheld. Thus, total disallowance of Rs. 68,859 stands confirmed." 4.1 After hearing the rival submissions, we find that second proviso to section 43B lays down that no deduction in respect of PF etc. shall be allowed, unless it has actually been paid before the due date as defined in the Explanation below clause (va) of section 36(1). The said Explanation defines due date to mean the date by which the assessee is required as an employer to credit an employee's contribution to the employee's account in the relevant fund under any Act, order of notification issued there under or under any standing order, award, contract of service or otherwise. We find that under Circular E-ll /128, dated 24-10-1973, the Central Board of Trustees of the Provident Fund has allowed grace period of five days for payment of PF contribution, administrative charges etc. and have laid down that no damages will be levied in this regard. Thus, in our view, due date will be taken 15 days + 5 days grace period = 20 days for payment of PF. From the details, extracted above, we find that exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 45-47 of the paper book. Identity of Indian Airlines cannot be doubted and genuineness of expenses also cannot be doubted. Therefore, we are of the opinion that the case is duly covered by the exception to rule 6DD(j), as payment has been made by the employees at the time of purchase of air tickets which they could not get if payment were not made in cash. Genuine transactions are outside the scope of section 40A(3). Accordingly, on facts of the case, we delete the disallowance of Rs. 11,184. 6. The only other ground reads as under: "That ld. CIT(A) has erroneously upheld the view of the Assessing Officer that CST and ST collected on behalf of the State are a part of total turnover for the purpose of 'calculating relief under section 80HHC." In this connection, CIT(A)'s order for assessment year 1991-92 which is followed for assessment year 1993-94 read as under: "Ground No.8 Deduction under section 80HHC. As per this ground of appeal, it is claimed that the Assessing Officer has erred in reducing the claim of the assessee under section 80HHC from Rs. 2,04,67,812 to Rs. 1,92,13,344. 2. As per written submissions filed, it is stated that the Assessing Officer has reduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to inclusion of misc. receipt in total turnover. Therefore, not accepting the assessee's contention, action of Assessing Officer in this respect is hereby upheld. 6. With regard to inclusion of misc. receipt in the total turnover, the assessee has not pressed the issue and, therefore, action of Assessing Officer in this respect is hereby upheld. - 7. With regard to treating of insurance claim of Rs. 17,09,176 as not part of profits of business, Assessing Officer has observed that the insurance claim receipt do not have an element of turnover and as a result the said receipts are not treated as part of turnover but it has been held that the same are required to be excluded from the business profit of the assessee to the extent of 90 per cent. 8. As per written submissions, it has been claimed that relevant provisions of section 80HHC, wherein it has been stated that 90 per cent of brokerage, commission, interest, rent, etc. have to be excluded from profits of business, since insurance claim do not come under this category, the exclusion of insurance claim receipt is outside the scope of section 80HHC. 9. It appears that this issue has not been analysed by taking into accoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... benefit and whole purposes of section 80HHC would be defeated. It was contended that now Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. [2002] 245 ITR 769 has decided the issue in favour of the assessee. No contrary view of any other High Court was shown to us. Besides, the issue bas been fully thrashed by the Tribunal in favour of the assessee as per the following decisions: 1: Avon Cycles v. ACIT 59 TTJ 75 (Chd.); 2. Freeman Measures (P.) Ltd. v. ACIT in ITA. Nos.237 etc./92 for assessment year 1988-89 etc.; 3. Chloride India Ltd. v. Dy. CIT [1995] 53 ITD 180 (Cal.); 4. Shri Dinesh Mills Ltd. v. Asstt. CIT [1999] 105 Taxman 238 (Mag.)(Ahd.); 5. DCIT v. Stone India Ltd. 69 ITJ 569 (Cal.); 6. Wolkem India Ltd. [2000] 108 Taxman 157 (Mag.) (JP). Ld. DR relied upon the order of CIT(A) 37. On carefully consideration of the rival submissions, we find that all the Benches of the Tribunal have decided the issue in favour of the assessee. Even the decision of Bombay High Court in the case of Sudarshan Chemical Industries Ltd. supports the claim of the assessee. Respectfully following the aforesaid decisions, we direct that ST and CST be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Industries and Oswal Foods Ltd. It was submitted that advances were made to these two concerns during the year and ld. AR did not dispute that funds were not advanced out of borrowed funds. Therefore, he relied on her arguments advanced for assessment year 1992-93 in respect of funds advanced to Oswal Palms Ltd. She submitted that the assessee has not discharged its onus that funds were advanced for business purposes. In respect of the order relied upon by ld. AR, she submitted that ratio in that case will apply only in case when no disallowance is made by Assessing Officer in earlier year and money has been advanced in earlier year. 8.2 We have considered the rival submissions and gone through the order dated 14-1-2003 and find that under para 2.1 of the order, the Tribunal has held that in earlier year when money was advanced and no disallowance was made by Assessing Officer in respect of interest on borrowed capital but in subsequent year Assessing Officer disallowed interest on borrowed capital, no disallowance can be made in subsequent year. The Tribunal ultimately held that when no finding has been recorded by the Assessing Officer that the money advanced was for non-bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber. I agree with him except on ground No.2 for assessment years 1992-93 and 1993-94 relating to disallowance of interest of Rs. 2,31,261 and Rs. 7,40,950 respectively under section 36(1)(iii) of the Income-tax Act. I write my separate order on these disallowances made out of interest claimed on the ground that borrowed funds were utilised for giving interest free loans to sister-concern/concerns. 2. I would like to take up the case for assessment year 1993-94 first. The ld. CIT(A) while upholding the disallowance has solely relied on his order for the assessment year 1992-93 dated 29-2-1996. The aforesaid order is also under review in these appeals. Before the Bench, the ld. representative of the assessee submitted that no fresh advances were made in the period relevant to assessment year 1993-94 and, therefore, no disallowance could be made in assessment year 1993-94. He placed reliance on decision of this Bench in the case of Punjab Woolcombers Ltd. for the assessment year 1993-94 wherein this very Bench had observed as under: "2. In respect of ground No.2 which relates to upholding the disallowance of interest paid during the year, the Assessing Officer noted that there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to order of CIT(A) as also to the proposed order of my ld. Brother to emphasis that disallowance for the assessment year 1993-94 is wholly based on orders for assessment year 1992-93. I have, therefore, deemed it appropriate to take up assessment year 1992-93 in detail and apply above findings in assessment year 1993-94 without detailed discussion of the latter year. 4. The controversy in assessment year 1992-93 revolves round the finding of the Revenue authorities that part of the borrowed interest bearing funds were diverted to give interest free loan to sister concern M/s. Oswal Palms Ltd. and thus not utilised for purposes of business. Accordingly proportionate interest claimed was disallowed which has been worked out at Rs. 2,31,261. In this connection, reference has been made to the cash credit account maintained by the assessee with Indian Bank, Ludhiana, wherefrom the assessee withdrew and advanced Rs. 25.50 lacs on 26-10-1991 and Rs. 2.50 lakhs on 14-11-1991 to its sister concern M/s. Oswal Palms Ltd. The assessee while opposing the disallowance had pleaded that it had utilised its own and non-borrowed funds. Even before the ld. CIT(A), as per written submissions (cop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med to be made out of profits of Rs. 18.42 crores. The assessee has filed photocopy of above account relating to all credits and debits made in the account in the relevant period. A summary of bank account from 1-10-1991 to 30-11-1991 when advance was made has also been filed. In support of above contention that amount withdrawn for advancing to sister-concern was made out of assessee's profit, the assessee has relied on the decision of the Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. which was subsequently applied by the same High Court in the case of British Paints (India) Ltd. 7. On consideration of rival submissions and material available on record, I am of the view that diversion of borrowed funds for advancing loan to sister-concern has not been established in this case and, therefore, disallowance made is not justified. The assessee can rely upon and derive full support from the decision of the Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. 8. On perusal of statement of mixed account, it is evidence that as on 14-11-1991, when advance of Rs. 2.5 lakhs was made, there was credit balance in CC account of the assessee, which sto ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f which the bank remitted the advance tax, the tax was paid out of the earning of the profits and not out of the overdraft account taken for other business purposes. Held, (i) (ii) That, on the facts of the case, the profits were sufficient to meet the advance tax liability. The entire profits were deposited in the overdraft account. It should be presumed that in its essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business. Therefore, the interest amounting to Rs. 6,769 paid by the assessee on the bank overdraft account which was disallowed as being relatable to payment of advance tax should have been allowed as an admissible deduction in the computation of the assessee's business income." 10. The facts in the present case are parallel to the facts involved in the case of Woolcombers of India Ltd. In fact, these are better. In the reported case, there was debit balance as on December 12,1969 of Rs. 1,39,412 in the overdraft account with the bank when the assessee further withdrew Rs. 18,05,000 for payment of tax and this increased the debit balance of overdraft to Rs. 14,63,593 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It should be presumed that in its essence and true character the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business." 12. In the present case like the case of British Paints (India) Ltd. the Revenue authorities have merely looked at the entries of withdrawal of Rs. 25.50 lakhs made on 26-10-1991 from the cash credit account with the bank without taking into account the fact that profit to the extent of Rs. 18.42 crores was also deposited in mixed bank account and presumption was that Rs. 28 lakhs were paid out of profit and not out of overdraft. "The profits were embedded in combined financial transactions" recorded in the mixed account. The above principle was required to be applied while considering combined effect of all the financial transactions routed through the CC account. 13. It is well settled that profit of a business does not accrue from day to day and till accounts are made up. But it does not follow that profits are not earned from day to day and these are earned only at the end of accounting year or when accounts are made up. Even in the case of British Paints India Ltd. the profits had not accrue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made from a mixed account. The entire profits are required to be considered to decide the question. 16. Even if above proposition is not accepted, the summary of bank account with the Indian Bank reveals that from 1-10-1991 to 16-10-1991, the assessee had deposited more than 4 crores out of business receipts and thus Rs. 25.50 lakhs advanced to sister-concern must be taken to be out of business receipts and not out of the borrowed funds. 17. Thus looked from any angle, I see no justification to uphold the disallowance of Rs. 2,31,261 out of interest claimed by the assessee. The disallowance made be deleted in assessment year 1992-93. 18. I follow and apply above reasoning in assessment year 1993-94 to delete the disallowance of Rs. 7,40,950. ORDER UNDER SECTION 255(4) OF INCOME-TAX ACT On a difference of opinion between the Members who heard these appeals, the following question is referred to the Hon'ble President for nominating Third Member to obtain a majority view: - "Whether, on the facts and in the circumstances of the case, disallowance of interest of Rs. 2,31,261 and Rs. 7,40,940 respectively in assessment years 1992-93 and 1993-94 is liable to be deleted in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the years under consideration. 5. The assessee filed appeals against both the orders passed by the CIT(A) challenging the confirmation of the aforesaid disallowances made out of interest expenditure along with other grounds. 6. Shri P.K. Bansal, Hon'ble Accountant Member in the proposed order has confirmed the said disallowances of Rs. 2,31,261 in assessment year 1992-93 and Rs. 7,40,950 in the assessment year 1993-94. Shri Virnal Gandhi, the then Hon'ble Vice-President (now Hon'ble President) has passed a separate dissenting order directing the Assessing Officer to delete the disallowances made out of interest expenditure in both the years under consideration. 7. The ld. Counsel for the assessee, reiterated the arguments as were earlier made before the Tribunal and placed reliance on judgments of Hon'ble Calcutta High Court in Woolcombers of India Ltd.'s case, Reckitt Colman of India Ltd. v. CIT [1982] 135 ITR 698, Indian Explosives Ltd. v. CIT[1984] 147 ITR 392 and British Paints (India) Ltd's case. He also placed reliance on the judgment of the Hon'ble Supreme Court reported in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 and submitted that the view ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anipur Vanaspati Allied Industries Limited (MVAIL) and Rs. 15.00 lakhs to Oswal Foods Limited (OFL) in terms of the conditions stipulated by Industrial Finance Corporation of India (IFCI) etc. These are subordinated loans and shall be repaid with the approval of IFCI. Terms of these loans have not been approved by IFCI, as such no provision for interest on these loans has been made." The ld. counsel for the assessee contended that the Assessing Officer has himself specifically mentioned at page 4 of the assessment order that there were old balances of Rs.9.50 lakhs and Rs.1O 1akhs in the accounts of these two concerns respectively. He once again confirmed that no fresh loans were advanced to these two parties in the year under consideration. It was also pointed out that the loans of Rs.28.24 1akhs given to M/s. Oswal Palms Ltd. in assessment year 1992-93 was received back by DD dated 30th June, 1992 and the balance was squared to nil amount. 11. The ld. representatives of both the sides reiterated their respective arguments as were earlier made before the Tribunal during the course of hearing of these appeals. 12. The assessee in assessment year 1992-93 submitted a cash f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.97 (e) Advance to sister-concerns 0.28 ------ 44.87 The interest bearing loans are only of Rs. 20.21 crores plus 0.18 crore i.e. Rs. 20.39 crores. As against this, the investment made for business purposes is Rs. 44.87 crores minus Rs. 0.28 crore being advance to sister concern i.e. Rs. 44.59 crores. Thus the assessee has made investment for business purposes to the tune of Rs. 44.59 crores during the year as against fresh borrowing aggregating to Rs. 20.39 crores made in the year under consideration. The cash profit of Rs. 10.5 crores for the first 7 months, as observed by the ld. Accountant Member, was substantially more than the amount of Rs. 28.24 lakhs advanced by the assessee to M/s. Oswal Palms Ltd. on different dates during the year under consideration. 13. It may also be pertinent to observe that assessee's own share capital and reserves surplus as on 31st March, 1992 were Rs. 4445.62 lakhs as against Rs. 3691.63 lakhs as at the end of the preceding year. Thus there was an increase in the shareholders' funds represented by reserves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vance tax liability and profits were deposited into the overdraft account of the assessee, then it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for running the business. The Hon'ble Supreme Court, however, further observed that to raise the presumption in that particular case, there were sufficient materials and the assessee had urged the contention before the High Court. The Hon'ble Supreme Court in the aforesaid case confirmed the disallowance of interest of Rs. 28,488 on money borrowed for payment of income-tax and held that it was not an expenditure laid out wholly and exclusively for purposes of business as contemplated under section 37(1) of the Act. However, the Hon'ble Supreme Court further observed that there was considerable force in the appellant's contention, the question whether a presumption could be drawn that the taxes were paid out of the profits of the relevant year and not out of the overdraft account for running of the business, would essentially depend upon the fact whether the entire profits had been pumped into the overdraft account, whether such profits were more than the tax amount paid for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee earned profit of more than Rs. 70 lakhs during the year, which was much more than the investment in advances. It was observed by the Hon'ble High Court that the substance of this argument could have been countenanced had the assessee placed material to show that it had generated surplus, in excess of investment in advances, prior to such investment and advance. No material was placed in this regard by the assessee. It was, therefore, held that the Tribunal was justified in holding that the assessee was not entitled to deduction of interest in respect of advances made to the subsidiary company. However, in the present case, it is an undisputed fact that the assessee had only one bank account which was the CC account with the same bank. The entire cash profits earned during the year were also deposited in the same bank account. The total cash profit during the year was Rs. 18.42 crores. The proportionate amount for 7 months computed by the ld. Accountant Member up to the date of first advance has been estimated at Rs. 10.5 crores. It has not been disputed by the departmental authorities nor by the ld. D.R. that the entire cash profits were pumped into the same bank account. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of advancing the loan has been worked out at Rs. 10.5 crores. Any of these figures is substantially more than the amount of interest free advance of Rs. 28.24 lakhs given by the assessee to its sister-concern. This judgment also, therefore, does not in any manner supports the department's contention. 18. I have given very thoughtful consideration to the entire relevant material and the orders proposed by the ld. Accountant Member and the ld. Vice-President. In my view, the ld. Vice-President has given convincing reasons to hold that there was no justification to uphold the disallowance of Rs. 2,31,261 out of interest claimed by the assessee for the assessment year 1992-93. In concur with his view. 19. In assessment year 1993-94, the ld. Counsel appearing for the assessee placed reliance on the decision of the same Bench of the ITAT in the case of Punjab Woolcombers Ltd. for the assessment year 1993-94. The ld. Vice-President has reproduced the extract from the said decision in para 2 of his proposed order. It has been held in the aforesaid case that where no disallowance out of interest expenditure had been made in earlier years, no disallowance out of interest expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven in assessment year 1992-93. I have already held that disallowance made out of interest expenditure in assessment year 1992-93 in relation to advance given to the aforesaid sister-concern has rightly been deleted by the ld. Vice-President. 24. The aforesaid facts clearly establish the fact that the assessee's own capital, current year's profits were substantially more than the advances given to these three sister-concerns which proves the absence of any nexus between the funds borrowed on interest and interest free advances given to these three parties. The same Bench of the Tribunal in the case of Punjab Woolcombers Ltd. have held that disallowance out of interest expenditure cannot be sustained in relation of interest free advances given in earlier years in cases where no such disallowance out of interest expenditure was made in those earlier years. 25. On careful consideration of the entire relevant facts, I am of the considered opinion that the ld. Vice-President has rightly directed the Assessing Officer to delete the disallowance of Rs. 7,40,950 in the assessment year 1993-94 also. 26. In view of the facts and discussions, I agree with the view taken by the ld. Vice ..... 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