Bombay High Court

Asstt. Cit vs Mafatlal S. Bafna on 6 January, 2003

Equivalent citations: (2004) 90 TTJ Mumbai 1064

ORDER

G.C Gupta, J.M.:

These three appeals by the revenue for the assessment years 1991-92, 1992-93 and 1994-95 are directed against the order of Commissioner (Appeals). Since identical issue is involved in these appeals, these are being disposed of by this common order.

2. The only issue in these appeals is regarding addition on account of disallowance out of interest expenditure claimed by the assessee. The assessee is an individual. He has received loans from outside parties and has advanced loans to sister concerns mainly M/s. Parag Construction (P) Ltd. and M/s. Chetan Consultants (P) Ltd., wherein the assessee was managing director or director. The assessee has not charged interest from M/s. Chetan Consultants (P) Ltd. on an amount of Rs. 1.5 crores. Accordingly, the assessing officer disallowed the interest on the said amount. The assessee's advance balance as on 31-3-1990, was Rs. 3,45,16,906 with M/s. Chetan Consultants (P) Ltd. The figure of advance to M/s. Chetan Consultants (P) Ltd. of Rs. 1.5 crores as on 31-3-1991, has been shown by the assessee as lease deposit with M/s. Chetan Consultants (P) Ltd. The case of the assessee is that the amount of Rs, 1.5 crores during the relevant year ending on 31-3-1991, relates to lease deposit with M/s. Chetan Consultants (P) Ltd. as per agreement with them and, therefore, the advance is for business purpose on which no interest is chargeable.

3. Learned Departmental Representative has argued that there is no business purpose in the advance since no leasehold rights were ever acquired by the assessee for the property. He argued that the deposit was converted into lease deposit and in fact no agreement was ever entered into between the parties. He argued that the articles of agreement filed by the assessee at pp. 1 to 16 of the paper book before the Tribunal is only a "Draft" which is undated and no agreement thereafter was entered into between the parties. He argued that since no leasehold rights were acquired by the assessee, there was no need to make any payment for lease deposit and, therefore, no business purpose for the advance is established. He argued that in the preceding assessment year the assessee has charged interest on the amount of advance. He argued that the copy of so-called agreement for sale dated 18-12-1971, or the letter dated 26-4-1988, mentioned in the draft agreement was never produced before the assessing officer or learned Commissioner (Appeals), He argued that liability to pay the amount crystallized only on the execution of agreement and since no agreement was executed hence no money was payable. He has relied on the decisions in CIT v. V.I. Baby & Co. (2002) 254 ITR 248 (Ker) and Indian Metals & Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344 (Ori).

4. The learned counsel for the assessee has opposed these arguments. He argued that the property in the form of plot at Malad valuing Rs. 5.68 crores was duly shown in the balance sheet as on 31-3-1991, by M/s. Chetan Consultants (P) Ltd. He argued that the part of loan with M/s. Chetan Consultants (P) Ltd. was converted into advance for lease deposits with them. He argued that ultimately it did not mature and has to be cancelled, is not relevant for the issue before us. On merits of the case he argued that the assessee has sufficient non-interest-bearing funds to advance the said lease deposits of Rs. 1.5 crores to Chetan Consultants (P) Ltd. and accordingly the interest cannot be disallowed. He argued that if two funds are available, one interest-bearing and the other non-interest-bearing, it cannot be said that the advance has been made out of interest-bearing funds. He relied on decisions in CIT v. Bombay Samachar Ltd. (1969) 74 ITR 723 (Bom), CIT v. Gopikrishna Muralidhar (1963) 47 ITR 469 (AP) and CIT v. Hotel Savera (1998) 14B CTR (Mad) 585.

5. In the rejoinder, learned Departmental Representative argued that the funds have not been identified from where the lease deposit has been advanced. He argued that the onus is on the assessee to prove that the advance is for business purpose, which the assessee has failed to discharge.

6. We have considered the rival sabmissions carefully. We find that the assessee could not prove that the lease deposit with M/s. Chetan Consultants (P) Ltd. of Rs. 1.5 crores is for business purpose. The articles of agreement and the final agreement were never entered into between the assessee and M/s. Chetah Consultants (P) Ltd. The assessee could not file the copy of the socalled consent decree or the agreement of sale dated 18-12-1971, or the letter of intent dated 26-4-1988, before the assessing officer or the learned Commissioner (Appeals) or even before us. Since no agreement was executed, it cannot be said that the liability to pay lease deposit had crystallized in the case of the assessee. Ultimately, the agreement did not mature, which is said to have been cancelled by the assessee. In these facts we hold that the assessee could not bring any material on record to prove that the amount of Rs. 1.5 crores advanced to M/s. Chetan Consultants (P) Ltd. was for any business purpose and accordingly it cannot be said that the advance of Rs. 1.5 crores to M/s. Chetan Consultants (P) Ltd. was for business purpose or was on lease deposit with them.

7, However, from the copy of the balance sheet of the assessee as on 31-3-1990 and 31-3-1991; we find that the assessee's balance as on 31-3-1990, with M/s. Chetan Consultants (P) Ltd. is Rs. 3,-45,16,906 and the total of non-interest bearing funds as on 31-3-1990 are Rs. 2,02,47,968 (capital Rs. 1,03,41,568 plus non-interest -bearing loan Rs. 99,06,400), and thus the difference of Rs. 1,42,68,938 is obviously out of interest-bearing loans of Rs. 1,44,15,435 as per schedule-A of the balance sheet as on 31-3-1990. The argument of the learned counsel that the advance of Rs. 1.5 crores given without interest is covered with the non-interest-bearing funds available as on 31-3-1991, has no force since the amount of Rs. 1.5 crores was advanced to M/s. Chetan Consultants (P) Ltd. in the preceding year ending 31-3-1990, and we have to determine the amount of interest-bearing loans advanced to M/s Chetan Consultants (P) Ltd. with reference to the balance sheet of the preceding year ending 31-3-1990, only and to disallow interest ratable thereto. In view of our finding that the amount of Rs. 1.5 crores advanced to M/s. Chetan Consultants (P) Ltd. is for non-business purposes, corresponding interest thereof has to be disallowed. Since this amount of Rs. 1. 5 crores was advanced to M/s. Chetan Consultants (P) Ltd., in the year ending 31-3-1990, and out of this amount the sum of Rs. 1,42,68,938 represents out of interest-bearing loans as detailed above, the disallowance of interest has to be restricted to the interest ratable to the amount of Rs. 1,42,68,938 and interest on the balance amount being out of non-interest bearing funds has to be ignored. During the relevant year ending on 31-3-1991, the interest disallowable has to be determined by finding out of the amount of loans of Rs. 1,44,15,435 as per schedule-A of balance sheet as on 31-3-1990, which is interest-bearing loan continuing as interest-bearing loan with the assessee in the year ending 31-3-1991. The argument of the learned counsel for the assessee that the advance of Rs. 1.5 crores is covered by the interest-free funds available with the assessee as on 31-3-1991, is not sustainable since the advance of amount to M/s. Chetan Consultants (P) Ltd. was made in the year ending 31-3-1990, and a clear nexus between the amount advanced as interest-free to M/s. Chetan Consultnats (P) Ltd. and the interest-bearing loans as on 31-3-1990, to the extent of Rs. 1,42,68,938 is established in this case. Accordingly, we direct the assessing officer to disallow the interest pertaining to amounts of interest-bearing loans of Rs. 1,42,68,938 which may be continuing from 31-3-1990, to the accounting period relevant to assessment years in appeal before us. We order accordingly and set aside the issue to the file of the assessing officer to restrict the disallowance as per our directions above which shall be applicable to all the three years in appeal before us after providing reasonable opportunity of hearing to the assessee.

8. In the result, the appeals of the revenue are allowed for statistical purpose.