SECTION 37(1) of the income tax Act. 1961- Business Expenditure

SECTION 37(1) OF THE INCOME TAX ACT, 1961
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessing Officer disallowed advances made by assessee in year in question to its sister concern in view that basic information was not provided so as to arrive at a conclusion of nexus between advances and assessee’s over-draft and, therefore, adverse inference had to be drawn to effect that assessee had utilized interest bearing loans to make advances to sister concern - Accordingly, Assessing Officer also disallowed interest liability - Prima facie, it appeared that for a certain number of days amount was paid from borrowed funds to sister concern - Whether Assessing Officer was required to examine as to what extent benefit of borrowed funds was granted by way of allowing advance to sister concern - Held, yes [matter remanded back to Assessing Officer]

Facts

The assessee had made certain advances in the year in question to its sister concern. The Assessing Officer was of the view that the basic information was not provided so as to arrive at a conclusion of the nexus between the advances and the assessee’s over-draft and, therefore, adverse inference had to be drawn to the effect that the assessee had utilized interest bearing loans to make the advances to the sister concern and ultimately disallowed interest liability. The Tribunal held that the case was covered by the decision of the Tribunal in the case of IT Appeal No. 804 (Delhi) of 1986 and the Supreme Court decision in the case of East India Pharmaceuticals Works Ltd. v. CIT [1997] 224 ITR 627/91 Taxman 185 and, accordingly, vacated the disallowance. On appeal, the High Court upheld the disallowance. On second appeal, the Supreme Court held that certain statements were produced before the authorities, notice of which had not been taken by the High Court and since the High Court had proceeded on an erroneous factual basis, the matter should be remanded back to the High Court to consider the material produced by the assessee. Accordingly, the impugned order of the High Court was set aside and the matter was remitted back to the High Court for fresh disposal.

Held

From the reading of the decision of the Tribunal, it appeared that the Tribunal had examined the decision at a macro level and not in the manner in which the Tribunal ought to have examined the matter in view of the evidence which was placed before it. It might be that the assessee might not have utilized the loan amount for the benefit of the sister concern or might have utilized the said amount. For that purpose, it was for the Tribunal to consider the same or the Tribunal ought to have given a direction to the Assessing Officer and thereafter examined the matter and recorded a finding in that behalf. [Para 6]

Prima facie, it appeared that for a certain number of days the amount was paid from the borrowed funds to the sister concern. However, that was required to be examined by the Assessing Officer as to what extent the benefit of borrowed funds was granted by way of allowing the advance to the sister concern. It was on that amount that the interest was to be calculated and disallowed. The Assessing Officer would have to calculate the exact tax for which the amount was utilised out of the borrowed funds. [Para 7]

Thus, the matter was remanded to the Assessing Officer for the aforesaid exercise and it was after that exercise, the Assessing Officer would make an appropriate order as to what extent the interest was to be disallowed. [Para 8]

Case Referred to

East India Pharmaceuticals Works Ltd. v. CIT [1997] 224 ITR 627/91 Taxman 185 (SC) [Para 4].

Sanjeev Khanna for the Appellant. O.S. Bajpai for the Respondent.

Judgment

B.C. Patel, CJ. - On remand made by the Supreme Court in Civil Appeal No. 1479/2004 in the case of M/s. Motor General Finance Ltd. v. Commissioner of Income-tax, Delhi Decided on 25-2-2004, this appeal is listed before us for hearing.

2. From the order of the Tribunal, it transpires that there was a specific ground with regard to the disallowance of Rs. 10 lakhs in respect of fresh advances made in the year in question to the sister concern by the appellant. In all, the loan granted to the sister concern extended to the tune of Rs. 47,67,740.

3. The Assessing Officer was of the view that the basic information was not provided so as to arrive at a conclusion of the nexus between the advances and the assessee’s over-draft and, therefore, adverse inference had to be drawn to the effect that the assessee had utilised interest bearing loans to make the advances to the sister concern and ultimately, considering this aspect, came to the conclusion that interest liability charged to the profit and loss account or to the like after taking a sum of Rs. 10 lakhs pertaining to this advance.

4. It appears that before the Income-tax Appellate Tribunal, some material was placed on record which has been examined and this is clear from a reading of paragraphs 7 and 8 of the order made by the Income-tax Appellate Tribunal. It was submitted before the Tribunal that in this way loan of Rs. 47,67,740 to the sister concern was entirely out of the profit of the year. No disallowance of interest was warranted. The Tribunal thereafter examined the matter and, after going through the relevant record, held that the issue is covered by the decision of the Tribunal in the case of ITA No. 804/Delhi/86, which vacated the addition after considering the case laws on the points and also in view of the Supreme Court decision in the case of East India Pharmaceuticals Works Ltd. v. CIT [1997] 224 ITR 6271 that vacated the disallowance, as submitted before the Assessing Officer. It is against this order that the appeal has been preferred before this Court.

5. In view of this, the court answered the question in negative, i.e., in favour of the revenue and against the assessee. It is against this order that the assessee preferred an appeal before the Supreme Court which was disposed of on 25-2-2004. The Supreme Court held as under :—

“We have seen from the file that, as contended by the learned counsel, certain statements were produced before the authorities, notice of which has not been taken by the High Court. The contents of these statements would have vital importance on the ultimate decision that the High Court may have to take. Therefore, we think it appropriate that since the High Court has proceeded on an erroneous factual basis, this matter should be remanded back to the High Court to consider the material produced by the appellant which is found at pages 70-74 of the appeal papers and decide the case on that basis.

In view of the above, we allow this appeal, set aside the impugned order of the High Court and remit the matter back to the High Court for fresh disposal.”

6. In view of the aforesaid order, we are hearing this appeal and we have to examine pages 70-74 of the appeal papers. Reading pages 70-74 and the decision of the Tribunal, particularly, paragraph 8 thereof, it appears that the Tribunal has examined the decision at a macro level and not in the manner in which the Tribunal ought to have examined the matter in view of the evidence which was placed before it. It may be that the assessee may not have utilised the loan amount for the benefit of the sister concern or may have utilised the said amount. For that purpose, it was for the Tribunal to consider the same or the Tribunal ought to have given a direction to the Assessing Officer and thereafter examined the matter and record a finding in this behalf.

7. Prima facie, it appears to us that, as indicated at page 72, for certain number of days the amount was paid from the borrowed funds to the sister concern. The amount was advanced to the sister concern. However, that is required to be examined by the Assessing Officer as to what extent the benefit of borrowed funds was granted by way of allowing the advance to the sister concern. It is on that amount that the interest is to be calculated and disallowed. The Assessing Officer will have to calculate the exact tax for which the amount was utilised out of the borrowed funds. We could have remanded the matter to the Tribunal for doing the exercise but in view of the fair statement made by the learned counsel that let it be remanded to the Assessing Officer so as to enable him to calculate the exact number of days for use of the borrowed funds, we remand it to the Assessing Officer. It goes without saying that pages 70-74 (File before the Supreme Court) will have to be examined by the Assessing Officer for arriving at a correct conclusion.

8. The matter is remanded to the Assessing Officer for the aforesaid exercise and it is after this exercise, the Assessing Officer will make an appropriate order as to what extent the interest is to be disallowed.

The appeal is disposed of.