Calcutta High Court
Ltd vs C.I.T. - Iv Kolkata on 18 January, 2024
Author: Rajarshi Bharadwaj
Bench: Rajarshi Bharadwaj
A.F.R.
ORDER OD-10
IN THE HIGH COURT AT CALCUTTA
SPECIAL JURISDICTION (INCOME TAX)
ORIGINAL SIDE
ITA/187/2004
KANORIA CHEMICALS INDUSTRIES
LTD.
VS
C.I.T. - IV KOLKATA
BEFORE :
THE HON'BLE JUSTICE SURYA PRAKASH KESARWANI
HON'BLE JUSTICE RAJARSHI BHARADWAJ
Date: 18th January 2024.
Appearance :
Mr. J.P. Khaitan, Sr. Adv.
Mr. Sanjay Bhowmick, Adv.
Ms. Swapna Das, Adv.
Mr. Siddhartha Das, Adv.
....for appellant.
Ms. Smita Das De, Adv.
Mr. Prithu Dudhoria, Adv.
...for respondent.
1. The impugned common order dated 28th November, 2003 has been
passed by the Income Tax Appellate Tribunal (ITAT), 'E' Bench, Kolkata in
thirteen income tax appeals, out of which eight appeals were filed separately
by the assessee before the Tribunal relating to assessment years 1987-88,
1988-89, 1993-94, 1994-95, 1995-96, 1996-97, 1997-98 and 1998-99 and
five appeals were filed by the Deputy/Joint Commissioner of Income Tax,
Special Branch, 17, Kolkata separately for assessment years 1986-87, 1995-
96, 1996-97, 1997-98 and 1998-99. The Department's appeals for the
assessment years 1995-96 to 1998-99 were dismissed and the appeal for
assessment year 1986-87 was partly allowed. Appeals filed by the
assessee/appellant were partly allowed.
2. Aggrieved with the aforesaid common order of the Income Tax
Appellate Tribunal, the appellant/assessee filed the present appeal i.e., the
only appeal to challenge the common order of the ITAT relating to the
assessment years 1987-88, 1988-89, 1993-94, 1994-95, 1995-96, 1996-97,
1997-98 and 1998-99. It also challenged in the same appeal the order
relating to assessment year 1986-87 passed by the Tribunal partly allowing
the appeal of the revenue.
3. Learned counsel for the appellant now states that the appellants are
pressing this appeal only with respect to assessment years 1987-88,
1988-89, 1995-96 and 1996-97. He states that the appellants are not
pressing this appeal with respect to the impugned order of the ITAT relating to
rest of the assessment years.
4. This appeal was admitted by this Court by an order dated 11th
December, 2008 on certain substantial questions of law.
5. Mr. J.P. Khaitan, learned Senior Advocate states that the appellant is
pressing only substantial question of law No. (d) for the assessment order
1987-88, substantial questions of law (d) and (e) for the assessment year
1988-89, substantial questions of law (d), (f) and (g) for the assessment year
1995-96 and substantial question of law (b) for the assessment year 1996-97.
He further states that substantial questions of law No. (a) & (c) are not being
pressed.
6. Accordingly, on a statement made by the learned Counsel for the
appellant as afore-noted the appeal qua the substantial questions of law No.
(a) & (c) stand dismissed.
7. The rest of the substantial questions of law on which the appeal is now
being heard, are as under:-
(b) Whether on a true and proper interpretation of the scheme of
Government of Gujarat, the Tribunal was justified in law in holding
that the subsidy amounting to Rs.17,28,843/- and Rs.12,65,490/- for
the assessment years 1995-96 and 1996-97 respectively was liable
top tax as a revenue receipt and was not on capital account outside the
purview of taxation ?
(d) Whether the Tribunal was justified in law in upholding the
disallowance of the payments made by the appellant during the
previous years relevant to the assessment years 1987-88 and 1988-89
to Shriram Institute for Industrial Research and Tata Economic
Consultancy Services for Research in connection with Acetal Resins
and Hexamine, value added products which could be manufactured
from the appellant's existing product formaldehyde, as unrelated to the
appellant's existing business and its purported findings in that behalf
are arbitrary, unreasonable and perverse ?
(e) Whether the Tribunal was justified in law in upholding the addition of
Rs.2,82,573/- made in the assessment year 1988-89 on account of
notional interest on investment made with M/s. Kamarhatty Co. Ltd. ,
rejecting the change in the method of accounting bona fide made by the
appellant and followed regularly and consistently and its purported
findings in that behalf are arbitrary, unreasonable and perverse ?
(f) Whether the Tribunal was justified in law in upholding the
disallowance of the appellant's claim under sections 28 and/or 37(1)
for deduction of the business advance of Rs.74,59,661/- made to the
joint venture company M/s. Polypropylene India Ltd. written off in the
appellant's accounts for the assessment year 1995-96 and its
purported findings that the expenditure was capital in nature not
incidental to the running of the appellant's business and disallowing
the claim are arbitrary, unreasonable and perverse ?
(g) Whether the Tribunal was justified in law in upholding the
disallowance of a sum of Rs.13,42,739/- out of the interest
expenditure incurred by the appellant for the purposes of its business
during the previous year relevant to the assessment year 1995-96 and
its purported findings in that behalf and upholding taxation of the said
amount as deemed interest on the advance made to M/s.
Polypropylene India Ltd. in the earlier years out of the appellant's own
funds are arbitrary, unreasonable and perverse?"
8. Since this is a composite appeal filed for the several assessment years
involving some substantial questions of law including some common
questions, therefore, we proceed to decide the appeal assessment year-wise.
Assessment Year 1987-88
9. The substantial question of law being pressed for this assessment year
is the substantial question of law No.(d) which is reproduced below :
(d) Whether the Tribunal was justified in law in upholding the disallowance
of the payments made by the appellant during the previous years relevant
to the assessment years 1987-88 and 1988-89 to Shriram Institute for
Industrial Research and Tata Economic Consultancy Services for Research
in connection with Acetal Resins and Hexamine, value added products
which could be manufactured from the appellant's existing product
formaldehyde, as unrelated to the appellant's existing business and its
purported findings in that behalf are arbitrary, unreasonable and perverse
?
10. Undisputed facts of the present case are that the appellant/assessee is
engaged in manufacture of chemical salt, yarn and textile. It has four
manufacturing units. The assessee was manufacturing formaldehyde. The
assessee engaged two consultants, namely, Shriram Institute for Industrial
Research and M/s. Tata Economic Consultancy Services for Research to give
market survey report for manufacturing of 'Hexamine' and 'Acetal Resins'. It
was stated that 'Hexamine' is a value added product of formaldehyde which is
already being manufactured by the assessee. The assessee paid a sum of
Rs.2,51,000/- to M/s. Sriram Institute for Industrial Research and
Rs.57,500/- to Tata Economic Consultancy Services for the aforesaid
consultancy/research work. These two amounts were disallowed by the
assessing officer on the ground that it is not revenue in nature being not
connected with the business of the assessee. In appeal filed by the assessee
the CIT(A) upheld the assessment order. Aggrieved, the assessee filed appeal
before the Income Tax Appellate Tribunal, E-Bench, Kolkata which has been
dismissed by the impugned order dated 28.11.2003.
11. Section 37 of the Income Tax Act, 1961 (hereinafter referred to as the
Act) provides that any expenditure laid out or expanded wholly or exclusively
for the purpose of business or profession shall be allowed in computing
income chargeable under the head 'profits and gains of business or
profession' provided the expenditure so incurred is not an expenditure of
nature described in Sections 30 to 36 and is not in nature of capital
expenditure or personal expenses of the assessee. Thus, the necessary
requirement for deducting expenditure in computing the income chargeable
under the head 'profits and gains of business or profession' is that the
expenditure has been laid out or expanded wholly and exclusively for the
purposes of business or profession.
12. In the present set of facts, we find that the appellant/assessee has
engaged the aforesaid two consultants for the purposes of manufacture and
market assessment of 'Hexamine' and 'Acetal Resins'. The Tribunal has noted
the submission of the appellant in paragraph 23 of the order that the
'Hexamine' is a value added product of formaldehyde which is being
manufactured by the assessee company. Perusal of the two reports shows
that the research and development was in respect of the existing line of
business of the appellant company. The market survey was in connection
with the existing line of the assessee's business of manufacture of chemical
and expansion of existing business. Only in paragraph 25 of the impugned
order the Tribunal has recorded its finding on the issue in question, by merely
referring to certain judgments. The Tribunal has completely failed to record
any finding adverse to the assessee to reject the contention based on records
as noted in paragraph 23 of the order of the Tribunal. Even the Departmental
representative has not disputed before the Tribunal that 'Hexamine' is a value
added product of formaldehyde which is already manufactured by the
company. He merely submitted that the expenses were not related to the
existing business of the assessee company. The Departmental representative
of the respondent has not disputed before the Tribunal that formaldehyde is
being manufactured by the assessee company. That apart, in its wisdom the
assessee company has not taken further steps to go manufacture of
'Hexamine' and 'Acetal Resins'.
13. Thus, the necessary ingredients of Section 37 of the Act, 1961 that the
expenditure laid out or expended is wholly and exclusively for purposes of
business or profession of the assessee, stand satisfied. Therefore, the
expenditure incurred by the assessee was an allowable expenditure under
Section 37 of the Act, 1961.
14. For the reasons afore-stated, the substantial question of law (d) for the
assessment year 1987-88 is answered in favour of the assessee and against
the revenue. To this extent, the appeal deserves to be allowed.
Assessment Year 1988-89
15. In this assessment year, two substantial questions of law No.(d) and (e)
are involved. The substantial question of law (d) has already been answered
by us in favour of the assessee and against the revenue. Therefore, for this
assessment year, i.e. 1988-89, the substantial question of law (d) is also
answered in favour of the assessee and against the revenue. The appeal to
this extent deserves to be allowed.
16. So far as the substantial question of law No.(e) is concerned, the facts
in brief are that the assessee was the tenant of one M/s. Kamarhatty
Company Limited, Kolkata. Under some understanding, the assessee
company gave a short-term loan of Rs.24 lakh to the aforesaid landlord.
Subsequently, there arose some dispute between the assessee (tenant) and
the aforesaid landlord, which resulted in institution of certain cases in City
Civil Court and also in High Court. Since the assessee was not desirous of
indulging in continuous litigation, therefore, in its wisdom, it entered into
some arrangement with the landlord for return of the short-term loan of Rs.24
lakh given to the landlord. From the correspondences between the assessee
(tenant) and the aforesaid landlord dated 10.05.1988, 26.05.1988,
26.05.1988, 26.05.1988 which are appearing at pages 141-145 of the paper
book and also which were filed before the Income Tax Appellate Tribunal as
noted by the Tribunal in paragraph 45 of its impugned order, it is evident that
to recover the short-term loan of Rs.24 lakh and to end the dispute, the
tenant (assessee) and the landlord have mutually agreed on certain terms.
Under the mutual agreement, the assessee (tenant) has surrendered the
tenancy of the office space in question with effect from 01.02.1987 and agreed
to receive the principal amount of the short-term loan of Rs.24 lakh in full
and final settlement and to waive the entire unpaid interest on the aforesaid
short-term loan. The landlord agreed to return only the principal amount of
the short-term loan i.e. Rs.24 lakh and withdraw all cases filed against the
assessee company or its sister concerns in the High Court at Calcutta and in
City Civil Court at Calcutta or in any other court. The landlord also agreed
that he shall have no claim either against the assessee company or against its
sister concerns or against Sri S.S. Kanoria. Thus, as mutually agreed by the
parties, no interest was receivable by the assessee company from the landlord
in respect of the above-noted short-term loan for the assessment year 1988-
89. Under the circumstances, the assessee company has not shown accrued
interest of Rs.2,82,573/- in its books of account and instead in the schedule
to the accounts, a note was written that interest shall be accounted for on
receipt basis. The entry so made is supported by strong circumstances
inasmuch as it appears from the correspondences between the landlord and
the tenant as referred above that some negotiation was going on between
them which took a final shape on 26th May 1988 i.e. just after the close of the
financial year 1987-88 corresponding to assessment year 1988-89.
17. Despite having noted the aforesaid correspondences and the mutual
agreement between the landlord and the tenant (assessee), the Tribunal has
not taken pain even to record its finding. It simply noted the facts in
paragraph 44 and without disbelieving the aforesaid correspondences/mutual
agreement between the landlord and the tenant, it upheld the order of the CIT
(A). Under the circumstances, the appeal against the impugned order of the
Tribunal insofar as it upheld the addition of Rs.2,82,573/- on account of
accrued interest, deserves to be allowed and the substantial question of law
(e) deserves to be answered in favour of the assessee and against the revenue.
Assessment year 1996-97:
18. In this assessment year the only substantial question of law involved is
substantial question of law no. (b) which is reproduced below:
(b) Whether on a true and proper interpretation of the scheme
of Government of Gujarat, the Tribunal was justified in law in
holding that the subsidy amounting to Rs.17,28,843/- and
Rs.12,65,490/- for the assessment years 1995-96 and 1996-97
respectively was liable to tax as a revenue receipt and was not on
capital account outside the purview of taxation?
19. Brief facts having bearing on the afore-noted substantial question of
law are that the appellant/assessee has a manufacturing unit at Ankleshwar,
District- Bharuch (Gujarat). There was a scheme of the State Government for
attracting the industries in backward areas which provided for capital
subsidy. Allured with the scheme of the State Government for capital
subsidy, the appellant/assessee had set up a unit under diversification
programme. The assessee invested in fixed assets Rs.16.92 lakhs for
building, Rs.325.57 lakhs for plant and machinery, Rs.32.50 lakhs for
electrification and Rs.23.97 lakhs for erection; totalling to Rs.398.96 lakhs.
The State cash subsidy towards fixed assets was @ 15% under the 1986-91
scheme for diversification project subject to maximum amount of subsidy of
Rs.20 lakhs. The appellant/assessee undertook diversification project and
invested in fixed assets as aforesaid and applied for State cash subsidy under
the aforesaid scheme which was sanctioned by the State Level Committee by
letter dated 11.01.1994. Accordingly, the Joint Commissioner of Industries
directed the General Manager, District Industries Centre, Bharuch vide order
dated 28.03.1994 to disburse state cash subsidy of Rs.20 lakhs to the
appellant/assessee on eligible assets of Rs.398.96 lakhs.
20. Since industries setting up projects under the aforesaid state cash
subsidy scheme were facing lot of problems in disbursement of subsidy
amount, therefore, the State Government evolved a mechanism for payment of
cash subsidy by providing exemption from payment of sales tax to the tune of
Rs.30 lakhs in lieu of total payable state cash subsidy of Rs.20 lakhs.
Consequently, letter dated 12.09.1994 was written by the Dy. Industries
Commissioner and General Manager, District Industries Centre, Bharuch to
the appellant/assessee which is reproduced below:
"No.DIC/BH/SCA/124
District Industries Centre
Behind Falshrut Society
BHARACH - 392
Date : 12.09.1984
M/s. Kanoria Chemicals & Industries Limited,
Plot No.3507, G.I.D.C.
Ankleshwar
Sub :: Regarding benefit for additional sales-tax
in lieu of state cash assistance.
- --
Dear Sirs,
In reference to above we are to state that for attracting the
industries in backward areas benefits of subsidy and sales tax
are given from time to time under incentive schemes of State Govt.
As a result of this liberal policy and industrialisation in the State
liability of payable subsidy to the industries established in the
backward areas becomes higher much more than estimate. As
such, the industrialists have to wait some time for getting the
subsidy. Taking this situation into consideration State Govt.
has decided to put into implementation scheme of additional
sales tax as option of subsidy to avoid obstacle in the State's
industries development and the subsidy amount receivable to
industries from optional means to State Government.
Resolutions in this respect have also been circulated.
Under this optional scheme industries will be entitled for benefits
of additional sales tax % 15% of the receivable subsidy amount.
These additional benefits can be enjoyed by way of sales tax
exemption or delayed payment. Besides, one year benefit will be
given for enjoying these benefits. Due to this optional scheme
industries can create funds which will be helpful in executive
capital.
You have been sanctioned of subsidy of Rs.20,00,000/- by this
office which is to be paid. In view of the present situation,
there will be considerable delay in disbursement. As such,
above scheme is very attractive and thereby you will be easily
running your unit. You are requested to please fill the necessary
details in the application form enclosed with this letter. You are to
inform to contact this office if you require more information in this
regard. Immediate action will be initiated if the filled in application is
sent within seven days.
Yours faithfully,
Sd/-
Dy. Industries Commissioner
& General Manager,"
21. Thereafter, an eligibility certificate dated 05.10.1994 for incentive of
sales tax in lieu of payable state cash subsidy was issued by the Joint
Industries Commissioner (Incentive) to the appellant which is reproduced
below :
"IC/PRO-2/S.T./710/0166
Name & Address of Office:
Office of Industries Comm.
Udyog Bhavan, Block No.1/2,
Sector-11, GANDHINAGAR
Date: 05/10/1994
Eligibility Certificate for incentive of sales-tax in lieu of payable State
Cash Assistance : M/s. Kanoria Chemicals & Inds. Ltd. 3407, GIDC
Estate, Ankleshwar, Dist.- Bharuch
1. This is to certify that above referred unit is found eligible for
getting above mentioned benefits under resolution of Industry &
Mines Deptt. Govt. of Gujarat and amendments thereof Abiding
by the provisions of the resolutions these benefits are given,
a) Res Ref No. : INC 1093-1175-I dt. 19/07/94.
b) Res Ref No. : INC 1086-706( ) I dt. 05/05/86
Res Ref No. : INC 1086-706 (2) I dt. 06/05/86
OR
c) Res Ref No. : INC 1090-1023-(1)I dt. 16/10/90.
Res Ref No. : INC 1090-1023-(2)I dt. 16/10/90
d) Eligibility Cert Ref No.:
(1) IC-INC2-T 4-9. T - 86-91-1907 dt. 19/03/94.
(2) IC-INC2-S. T.-T -4-710-2195 dt. 31/03/94.
2. A unit of this eligible certificate to be received maximum limit of
sales-tax exemption of Rs.30 lacs , 20 lacs at the rate of 15%
in lieu of total payable state cash assistance of Rs.20
lacs.
3. As mentioned in para (1), the time limit of enjoying maximum
limit is 04/10/1994 to 31/12/2000 or till one year of the date of
getting these benefits under certificate, which res first till that
the certificate shall be effec-
4. eligible certificate shall comply to all the conditions of the
certificate now to be issued by Sales-tax Commissioner.
5. After issue of this eligibility certificate, unit will have no
claim of the subsidy which has been sanctioned vide
Sanction letter No.IC-SUB-SLC-Section-805-113
dt,11/01/94, resolution no.IC-1036-706-(1)I dt. 05/06/86.
6. This unit has Sales-tax registration no.42111635 dt. 08/10/82
under Gujarat Sales-tax Act 1969 and manufactures below
mentioned category/sort material for sale.
7. A unit availing benefit of delayed sales-tax payment, shall have
to pay the amount of delayed sales-tax in six equal monthly
instalments after two years of the date of maximum limit under
certificate or time period, whichever is enjoyed earlier.
(A. B. PANCHAL)
JT. INDUSTRTIES COMMISSIONER (INCENTIVE)
Cc to.: Kanoria Chemicals , Ankleshwar
CC TO : Sales-tax Commissioner, Ahmedabad
Asstt. Sales-tax Commissioner, DV-6,
Behind Byuilding of Chamber of Commerce,
` 2nd Floor, Makaipul, Nanpura, Surat
General Manager, DIC, Bharuch
Since the unit has got additional sales-tax incentive against
state cash assistance, now subsidy not to be paid to the unit
against said disbursement letter. For putting necessary note
in the concerned records.
Disbursement Table No. 8 ...for information and action."
22. The state cash subsidy sanctioned in favour of the appellant/assessee
and communicated to it by the Joint Commissioner of Industries (Incentive)
by letter dated 28.03.1994 is also reproduced below for ready reference:
"To
The General Manager,
District Industries Centre,
Bharuch,
Sub : Disbursement of State Cash Subsidy @ 15 % under 1986 -
91 Scheme for Diversification project.
You are hereby authorised to make disbursement of State Cash
Subsidy amounting to Rs.20,00,000/- (Rupees Twenty lach only) ) to
M/s. Kanoria Chemicals of Industries, 3407, GIDC, Ankleshwar, dist.
Bharuch As per the following details.
1 (A) No. & date of SLC Meeting No. 152 Dt. 23-12-93
where sanction is accorded
for following fixed capital
investment
(a) Land Rs. -
(b) Building Rs. 16.92 lacs
(c) Plant & Machinery Rs. 325.57 "
(d) Electrification Rs. 32.50 "
(e) Erection charges Rs. 23.97 "
(f) Rs.
Total Rs. 398.96 lacs
(B) Total amount of subsidy Rs. 20/- lacs (Max.)
sanctioned
2 Eligible fixed assets
considered for
disbursement of subsidy
(a) Land -
(b) Building 16.92 Lacs
(c) Plant & Machinery 325.57 "
(d) Electrification 32.50 "
(e) Erection charges 23.97 "
(f)
Total Rs. 398.96 "
3 (A) Amount of subsidy
disbursed previously
1. Order No. Rs. Nil
2. Order No. Rs. Nil
Total Rs. Nil
(B) Amount of subsidy to be 20/- lacs
disbursed under this
order
(C) Total amount of subsidy
disbursed including this
order
(A.B. Panchal)
Jt. Commissioner of Industries (Incentive)
Copy to :
(1) M/s. Kanoria Chemicals of India ltd.
3407, GIDC Ankleshwar, Dist. Bharuch
(2) Sales Tax File."
23. From the facts as briefly noted above, it is evident that the 1986-91
scheme for new/expansion/diversification project brought by the
Government of Gujarat provided for state cash subsidy on eligible fixed
assets. Pursuant to the scheme, the appellant/assessee undertook a
diversification project and applied for state cash subsidy. Cash subsidy of
Rs.20 lakhs was sanctioned to the appellant/assessee and an order dated
28.03.1994 was issued by the Joint Commissioner of Industries (Incentive) to
the appellant/assessee communicating that state cash subsidy of Rs.20 lakhs
shall be disbursed to it on eligible fixed assets of Rs.398.96 lakhs.
24. Subsequently, the State Government in its wisdom took a decision to
change the mechanism for payment of aforesaid subsidy and, accordingly,
communicated to the appellant/assessee by the afore-quoted letter dated
12.09.1994 followed by eligibility certificate dated 05.10.1994, both of which
have been reproduced above. In the aforesaid two letters dated 12.09.1994
and 05.10.1994, it was specifically mentioned that for attracting the
industries in backward areas benefits of subsidy and sales tax are given from
time to time under incentive scheme of the state Government and since
liability of payable subsidy to the industries established in the backward
areas becomes higher much more than estimate due to which the
industrialists have to wait some time for getting the subsidy. Taking this
situation into consideration, the State Government has decided to put into
implementation a scheme of additional sales tax as option of subsidy to avoid
obstacle in the development of industries in the State and payment of subsidy
amount receivable by industries from optional means of the State
Government. Thus, the Government of Gujarat has evolved a mechanism by
way of optional scheme for the payment of subsidy amount so that industries
can create funds in their capital and thereby the considerable delay in
disbursement of the subsidy may be avoided so that industrial units may run
easily.
25. Thus, the very purpose and object of the State scheme "1986-91
Scheme for New/Expansion/Diversification Project" was to attract
industrialists in backward areas and to achieve that object state cash subsidy
on eligible fixed assets subject to maximum of Rs.20 lakhs was provided.
However, the assessing officer while passing the assessment order has treated
the aforesaid capital subsidy to be revenue receipt and, accordingly, added
the subsidy so received in income in the hands of the appellant/assessee.
The Tribunal has also upheld the aforesaid subsidy to be a revenue receipt in
the hands of the assessee which caused the appellant/assessee to come up in
appeal before this Court under Section 260A of the Income Tax Act, 1961.
Thus, the sole question is as to whether the subsidy in question is a capital
receipt or revenue receipt?
26. To determine whether the subsidy received by an assessee is a capital
or a revenue receipt, the test is the character of the receipt in the hands of the
assessee has to be determined first with respect to the purpose for which the
subsidy was given. In other words, in such cases one has to apply the
purpose test. The point of time at which the subsidy is paid is not relevant.
The form of subsidy and the source is also immaterial. If the object of a
subsidy scheme is to enable the assessee to run the business more profitably,
then the receipt shall be of revenue in nature. But if the object of the
assistance under the subsidy scheme was to enable the assessee to set
up a new unit or to expand the existing unit, then the receipt of the
subsidy would be of capital nature. Therefore, it is the object for which the
subsidy/assistance is given which determines the nature of the incentive
subsidy. The form or mechanism through which the subsidy is given are not
relevant. In the present set of facts, as already discussed above, the subsidy
in question was sanctioned and given by the Government of Gujarat to the
appellant/assessee for setting up industries in a backward area. The main
object of subsidy scheme was attracting the industrialists in backward areas.
The subsidy was payable to a maximum of Rs.20 lakhs on eligible fixed
assets. Therefore, all these facts leave no manner of doubt that the object of
the assistance under the subsidy scheme was to enable the
appellant/assessee to diversify its unit and the subsidy was payable on
eligible fixed assets only. Thus, the subsidy so received by the
appellant/assessee is clearly a capital receipt.
27. The view being taken by us is also supported by the law laid down by
the Hon'ble Supreme in the case of Commissioner of Income Tax v. Ponny
Sugar & Chemicals Limited reported in (2008) 306 ITR 392 (SC). The relevant
portion of the judgement in the case of Ponny Sugar & Chemicals
Limited(supra) is reproduced below :-
"In our view, the controversy in hand can be resolved if we apply
the test laid down in the judgment of this Court in the case of Sahney
Steel and Press Works Ltd. In that case, on behalf of the assessee, it
was contended that the subsidy given was up to 10 per cent of the
capital investment calculated on the basis of the quantum of
investment in capital and, therefore, receipt of such subsidy
was on capital account and not on revenue account. It was also
urged in that case that subsidy granted on the basis of refund of
sales tax on raw materials, machinery and finished goods was also
of capital nature as the object of granting refund of sales tax was that
the assessee could set up new business or expand his existing
business. The contention of the assessee in that case was dismissed
by the Tribunal and, therefore, the assessee had come to this Court
by way of a special leave petition. It was held by this court on the
facts of that case and on the basis of the analysis of the scheme
therein that the subsidy given was on revenue account because it
was given by way of assistance in carrying on of trade or business.
On the facts of that case, it was held that the subsidy given was to
meet recurring expenses. It was not for acquiring the capital asset. It
was not to meet part of the cost. It was not granted for production of
or bringing into existence any new asset. The subsidies in that case
were granted year after year only after setting up of the new industry
and only after commencement of production and, therefore, such a
subsidy would only be treated as assistance given for the purpose of
carrying on business of the assessee. Consequently, the contentions
raised on behalf of assessee on the facts of that case stood rejected
and it was held that the subsidy received by Sahney Steel could not
be regarded as anything but a revenue receipt. Accordingly, the
matter was decided against the assessee. The importance of the
judgment of this Court in Sahney Steel case lies in the fact that it has
discussed and analysed the entire case law and it has laid down the
basic test to be applied in judging the character of a subsidy. That
test is that the character of the receipt in the hands of the
assessee has to be determined with respect to the purpose for
which the subsidy is given. In other words, in such cases one
has to apply the purpose test. The point of time at which the
subsidy is paid is not relevant. The source is immaterial. The
form of subsidy is immaterial. The main eligibility condition in the
schemw with which we are concerned in this case is that the
incentive must be utilised for repayment of loans taken by the
assessee to set up new units or for substantial expansion of existing
units. On this aspect there is no dispute. If the object of the
subsidy scheme was to enable the assessee to run the business
more profitably, then the receipt is on revenue account. On the
other hand, if the object of the assistance under the subsidy
scheme was to enable the assessee to set up a new unit, or to
expand the existing unit, then the receipt of the subsidy was
on capital account. Therefore, it is the object for which the
subsidy/assistance is given which determines the nature of the
incentive subsidy. The form or the mechanism through which
the subsidy is given are irrelevant."
28. Subsequent decision of the Government of Gujarat providing for an
optional mechanism for payment of subsidy by way of sales tax exemption in
lieu of the State Capital Subsidy, shall not change the very nature of the
subsidy. The subsidy sanctioned to the appellant/assessee by the
Government of Gujarat under the scheme as aforesaid, was a capital subsidy
and shall continue to be capital subsidy despite the change in mechanism for
its payment by the State Government to an industrialist/appellant-assessee.
29. For all the reasons afore-stated, we find that the Income Tax Appellate
Tribunal has committed a manifest error of law to hold the subsidy in
question to be revenue in nature. Consequently, the substantial question of
law no.(b) as reproduced above is answered in favour of the appellant
assessee and against the revenue. To this extent the impugned order of the
income Tax Appellate Tribunal is liable to be set aside and the addition of the
subsidy made by the assessing officer in the income of the appellant-assessee
is deleted.
Assessment Year 1995-96
30. In this assessment year, three substantial questions of law nos. (b), (f)
and (g) are involved, which are reproduced below:-
"(b) Whether on a true and proper interpretation of the scheme of
Government of Gujarat, the Tribunal was justified in law in holding
that the subsidy amounting to Rs.17,28,843/- and Rs.12,65,490/- for
the assessment years 1995-96 and 1996-97 respectively was liable
to tax as a revenue receipt and was not on capital account outside the
purview of taxation?"
"(f) Whether the Tribunal was justified in law in upholding the
disallowance of the appellant's claim under sections 28 and/or 37(1)
for deduction of the business advance of Rs.74,59,661/- made to the
Joint Venture company M/s. Polypropylene India Ltd. written off in
the appellant's accounts for the assessment year 1995-96 and its
purported findings that the expenditure was capital in nature not
incidental to the running of the appellant's business and disallowing
the claim are arbitrary, unreasonable and perverse?"
"(g) Whether the Tribunal was justified in law in upholding the
disallowance of a sum of Rs.13,42,739/- out of the interest
expenditure incurred by the appellant for the purposes of its business
during the previous year relevant to the assessment year 1995-96
and its purported findings in that behalf and upholding taxation of the
said amount as deemed interest on the advance made to M/s.
Polypropylene India Ltd. in the earlier years out of the appellant's
own funds are arbitrary, unreasonable and perverse?"
31. The substantial question of law No.(b) on identical set of facts in the
case of the assessee itself has already been answered above by us while
dealing with the said question in respect of assessment year 1996-97.
Accordingly, the substantial question of law no.(b) is answered in favour of the
assessee and against the revenue and to that extent the impugned order of
the Tribunal is liable to be set aside and the addition made in this regard by
the assessing officer in the hands of the assessee is deleted.
32. So far as question No.(f), as reproduced above, is concerned, we find
that the Tribunal has dealt with this issue in paragraphs 46 to 51 of the
impugned order, which are reproduced below:-
"46. In ground no.2 the assessee has challenged the
disallowance of bad debts amounting to Rs.74,59,661 in respect of
the amount advanced to Polypropylene India Ltd.
47. According to the AO this advance does not come within the
ambit of sec. 36(1)(vii) of the Act. The assessee was engaged in the
manufacture and sale of chemicals and textiles. Lending of money
was not the main activity of the assessee and hence the advance not
being a trade debt was disallowed. The CIT (A) agreed with the
finding of the AO and confirmed the disallowance.
48. The Ld. authorized representative Sri R. Salarpuria,
appearing on behalf of the assessee, submitted that the assessee-
company had entered into a joint venture business along with PICU
for setting up a joint venture company known as Polypropylene India
Ltd. The investment in this joint venture of business was made by the
assessee from time to time in earlier years the project ultimately could
not be implemented and the entire amount became bad and was
written off. Since this advance/investment made in the joint venture
was a business venture, the amount written off was allowable as a
business deduction either u/s 28 or u/s 37(1) of the Act. The ld
authorized representative relied on the orders of Hon'ble Calcutta
High Court reported in 221 ITR 420 as well as 203 ITR 415 in support
of his submissions.
49. Ld. Departmental representative, on the other hand,
supported the findings of the authorities below and submitted that
there was no relation between the normal businesses activities of the
assessee and the advance made to Polypropylene India Ltd. Such
being the case, by no stretch of imagination, the debt of Rs. 7459,661
could not be considered as a revenue expenditure in the hands of the
assessee.
50. We have considered the rival submissions and gone through
the necessary material in this regard. Ld. authorized representative
relied on the order of the Hon'ble Calcutta High Court in the case
reported in 221 ITR 420. The case decided by the Hon'ble Calcutta
High Court related to the expenditure incurred for obtaining feasibility
report for manufacture of raw materials. The project did not
materialize and, therefore, the expenditure would be considered to be
allowable. In the present case, the facts are totally different and the
entire new project was to be undertaken in the form of doing business
with M/s. Polypropylene India Ltd. and the project did not take off at
all. In view of this fact this partakes the nature and character of
capital expenditure which cannot be allowed either u/s 28 or u/s
37(1). We find that the reference by ld authorized representative to
the decision of the Hon'ble Calcutta High Court in the case reported in
203 ITR 415 is mis-quoted 203 ITR 415 is decided by the Hon'ble
Rajasthan High Court and this case has no applicable in the presence
case. Therefore, the reliance upon this case is totally misplaced.
51. In view of the finding as above, we do not find any merit in
the submission of the assessee that the bad debt amounting to Rs.
74, 59,661 could have been claimed by the assessee as business
expenditure during this year. This ground taken by the assessee is,
therefore, dismissed."
33. Learned counsel for the appellant assessee submits that the appellant
assessee entered into a joint venture business with Pradeshiya Industrial and
Investment Corporation of Uttar Pradesh (PICUP) which is an instrumentality
of the State of Uttar Pradesh, to set up a project to manufacture
polypropylene. The project could not proceed for reason that much larger
projects were being established by others and in that situation, the project
sought to be implemented under the joint venture appeared to be quite
unviable. Therefore, the joint venture formed by PICUP and the appellant
assessee decided in their wisdom to give up the joint venture project. In the
process of attempt to establish the aforesaid joint venture project, the
appellant assessee advanced to the joint venture company namely
Polypropylene (India) Limited a sum of Rs.74,59,661/- which became
unrecoverable as the aforesaid joint venture went into liquidation and
ultimately it was liquidated by Allahabad High Court by order dated
23.03.1996 in Winding-up Petition No.3 of 1995.
34. Learned counsel for the appellant assessee, therefore, submits that
since the aforesaid amount clearly became bad debt, therefore, the assessee
has not committed any error to write it off, but the assessing officer and the
Tribunal have committed manifest error of law to disallow it and to add it in
the income of the assessee.
35. Smita Das De, learned senior standing counsel for the respondent, has
drawn our attention to paragraphs 10 to 10.6 of the assessment order and
internal page 5 of the order passed by the Commissioner of Income Tax
(Appeals). She submits that the appellant assessee has advanced a sum of
Rs.74,59,661/- to the joint venture company for setting up a new project and
therefore the purpose for which the money was advanced was itself capital in
nature. Therefore, by no imagination, the amount in question would fall
within the meaning of the words 'bad debt' as used in Section 36(1)(vii) of the
Income Tax Act, 1961. She submits that the amount in question is neither
bad debt falling under the aforesaid Section 36(1)(vii) nor it is an allowable
expenditure under Section 37 of the Act. Therefore, the assessing officer, the
Commissioner of Income Tax (Appeals) and the Tribunal have not committed
any manifest error of law to disallow it and to add it in the income in the
hands of the appellant assessee.
36. We have carefully considered the submissions of the learned Counsel
appearing for the parties and perused the record of the appeal.
37. We find that undisputedly, the appellant/assessee and Pradeshiya
Industrial and Investment Corporation of Uttar Pradesh (PICUP) have formed
a joint venture company named M/s. Polypropylene India Limited. To this joint
venture company, the appellant/assessee advanced a sum of Rs.74,59,661/-.
The joint venture project could not come up and ultimately the aforesaid joint
venture company itself was liquidated by order dated 26.3.1996 in winding up
company petition no. 3 of 1995 passed by the Allahabad High Court, which is
reproduced below:
"The petitioner's company was incorporated on 23rd December,
1986 under the Companies Act, 1956 as company Limited by Shares
having its registered office at Lucknow, Uttar Pradesh. This company
was promoted by Kanoria chemicals and industries Limited and the
Pradeshiya Industrial and Investment Corporation of Uttar Pradesh
Limited (FICUF). Both the promoters of the Company were size of the
view that in the existing economic circumstances, the project is no
more viable, therefore, they decided to drop the same. A special
resolution was passed by the petitioner's company in accordance
with Section 189 of the Companies Act, 1956, at an extra ordinary
general meeting held on 28th February, 1995 unanimously resolving
that the company be wound up by the court. A copy of said resolution
has been filed as Annexure "B" to this petition. The aforesaid
resolution is said to have been passed for the reason that the
company has failed to commence any business activities since its
incorporation that the company is no longer economically or
financially viable due to various factors. Pursuant to the company of
the said resolution, the company petition for winding up the
petitioner's company voluntarily has been failed.
This petition was admitted on 24th March, 1995 and notices were
issued in accordance with Rules 96 and 99 of Companies (Court)
Rules 1050. The notices were duly published in the Daily News
Papers. Pioneer and Swatantra Bharat on 5th April, 1995. The copies
of the said advertisement have been placed on record. The notices
were also published in the State of U.P. Gazettee dated 15th April,
1995.
Hence has put in appearance to this case nor any objection has
been filed pursuant to the publication of the notices.
I have heard learned counsel for the petitioners and am satisfied
that all the requisite stops as required under relevant rules for
winding up of two company voluntarily have been taken and there is
no objection to the same. The company has not carried out any
business as also no creditor has raised any claim against the
petitioner's company. The company petition is accordingly allowed."
38. The question that arises for our consideration is as to whether the
aforesaid sum of Rs.74,59,661/- is 'bad debt' within the meaning of Section
36(1)(vii) or it is an allowable expenditure under Section 28 or Section 37 of
the Income Tax Act, 1961. According to the appellant/assessee, the aforesaid
amount is an expenditure allowable under Section 28 and Section 37
whereas, according to the learned counsel for the respondent/department the
aforesaid amount is not allowable as expenditure and it is not even bad debt
under Section 36(1)(vii) of the Act of 1961.
39. In other words, the question is of whether the unrecovered advance of
Rs. 74,59,661/- is allowable expenditure under Section 28 or Section 37 of
the Act of 1961?
40. It is relevant to note that before the assessing officer the
appellant/assessee has claimed that the aforesaid sum of Rs.74,59,661/- has
been written off as bad debt but the said claim was not allowed by the
assessing officer. The findings recorded by the assessing officer in this regard
are reproduced below :
"10. Bad Debt
In course of assessment proceedings, the A/R. of the assessee
furnished details of Bad Debt written off during the year. The details
includes the name of M/s. Polyprolene India Ltd. against which a sum
of Rs.74,59,661/- was shown. Query was raised regarding the
nature of such debt. In reply to the same, the A/R. of the assessee
stated that the said amount was advanced to M/s. Polyprolene India
Ltd. (which is a sister concern) for putting up a project for the
manufacturing of polyprolene jointly with M/s. Pradeshiya Industrial
& Investment Corporation of U.P. Ltd. This amount represents
expenses and advances made to the company for the said project.
The polyprolene project could not be pursued due to various reasons
and ultimately the project was not successful. M/s. Polyprolene India
Ltd. have filed application for winding up of the company and there
was no asset of the company for disbursement. Under this
circumstances assessee i.e., lender company had to write off the
amount paid to them.
10.1 But this advance does not come within the ambit of section
36(1)(vii). The main business of the assessee concern is to
manufacture and sale of chemicals items and textile. The relevant
provision of this section 36(1)(vii) reads as under :-
"Subject to the provisions of sub-section (2), the amount of any bad
debt or part thereof which is written off as irrecoverable in the
accounts of the assessee for the previous year;"
10.2 The main components of this section is 'Bad Debt' which was
written off during the previous year. But a loan given to a sister
concern cannot be covered under this Section. Lending money is not
the main activities of the company. It was not a trade-debt arises out
of business activities. Therefore, the claim is not allowable.
10.3 The similar principle was laid down in the judgment of
Curties -vs- Old Field & Co. (JG) 1925 - 9 TC 319.
"When the rules speaks of a bad debt, it mans a debt which is a
debt and should have come into balance-sheet as a trading debt in
this trade that is in question and that it is bad. It does not really
mean bad debt, when it was a good debt would not have into swell
into the Profits." Rowlatt J.
10.4 According to Justice Rowlatt only trade debt which have
come to swell the profits can be treated as debt for this purpose. In
instant case, the same is an advance made to a company which is
otherwise a sister concern, and same was not made in course of their
business activities. On the other hand, lending money is not a
principal business activities of the company. Therefore, the claim is
disallowed.
10.5 The Supreme Court has also expressed the similar view in
the case of Thomas & Co. Ltd. (AV) -vs- C.I.T. (48 ITR 67).
10.6 Since the company has taken loan from various sources
during the previous year relevant to the assessment year on which
total interest of Rs.12,81,33,000/- was debited in the Profit & Loss
Account, interest @18% is disallowed on the loan amount of
Rs.74,59,661/- written off during the year which comes to
Rs.13,42,739/-."
41. In appeal before the Commissioner of Income Tax [A] the
appellant/assessee attempted to shift the stand by pleading in ground no.7 of
the Memorandum of Appeal that in the event the aforesaid amount is not
allowable as bad debt then it may be allowed as business expenditure. The
learned CIT[A] dealt with ground no.7 of the Memorandum of Appeal and held
as under :
"As regards ground no.7, the appellant company claimed
Rs.74,59,661/- as bad debt which the A.O. has not accepted. In fact,
the amount does not represent either a bad debt or business
expenditure as the said amount had been paid to a subsidiary of the
appellant company to enter into a joint venture agreement with Govt.
of U.P. for manufacturing of polypropylene and hence the said amount
neither represented bad debt arising on account of sales or business
expenditure on account of advances made towards purchases of raw
materials".
42. In appeal before the Income Tax Appellate Tribunal the
appellant/assessee again took the stand that the aforesaid sum of
Rs.74,59,661/- is bad debt and, therefore, the assessee has not committed
any error to write it off. At the same time, he claimed that the aforesaid sum
is allowable as expenditure either under section 28 or under section 37[1] of
the Act, 1961. The stand so taken so rejected by the Tribunal, holding that
the aforesaid amount of Rs.74,59,661/- could neither be claimed by the
assessee as bad debt nor as business expenditure.
43. Learned counsel for the appellant/assessee has relied upon a
judgment of Bombay High Court in Mahindra and Mahindra Ltd. vs.
Commissioner of Income Tax [2023] 456 ITR 723 [Bom] and two judgments of
this Court in Commissioner of Income Tax, Kolkata-III vs. ITC Ltd. [2016] 237
Taxman 533 [Cal.] and Binani Cement Ltd. vs. Commissioner of Income Tax &
Anr. [2016 ] 380 ITR 116 [Cal]. Learned counsel for the respondent has relied
upon a judgment in Principal Commissioner of Income Tax 6 v. Khyati
Realtors Pvt. Ltd. (2022) 447 ITR 167 (SC).
44. On facts of the present case we find that the appellant/assessee is a
company engaged in manufacture of certain chemicals such as caustic soda,
bleaching powder, benzene, hexa chloride etc. having its unit at Renukoot
[Uttar Pradesh] and Ankleshwar in Gujarat and its textile division also in
Gujarat. The appellant/assessee and the PICUP formed a joint venture
company, namely, Polypropylene India Ltd. This joint venture project could
not come up since both the aforesaid promoters of the joint venture company
found that the project is no more viable and, accordingly, the project was
stopped and a special resolution was adopted by the joint venture company in
an extra-ordinary general meeting dated 28.2.1995, that the joint venture
company be wound up by the court. The joint venture company could not
commence any business activity since its incorporation. Under the
circumstances, the Winding-up Company Petition No.3 of 1995 was allowed
by the Allahabad High Court by an order dated 26.3.1996 and the joint
venture company was wound up. It was found by the Allahabad High Court
that no one has raised any claim against the joint venture company.
45. According to the appellant/assessee, it advanced a sum of
Rs.74,59,661/- to the aforesaid joint venture company which became
unrecoverable as the joint venture company was wound-up. Therefore, the
appellant/assessee has written off this amount standing in the books of
accounts and, accordingly, claimed it as bad debt in the assessment
proceedings before the assessing officer which was not allowed. Subsequently,
the appellant/assessee claimed it as a business expenditure and before the
CIT[A] and the ITAT, which was rejected.
46. Learned counsel for the appellant/assessee himself has stated
before us that the aforesaid sum of Rs.74,59,661/- is not bad debt. Thus, the
appellant/assessee has left its claim that the aforesaid amount is a bad debt.
Therefore, we hold that the aforesaid sum of Rs.74,59,661/- is not bad debt
allowable under section 36 of the Income Tax Act, 1961 as per own claim of
the appellant/assessee.
47. We find that the aforesaid sum of Rs.74,59,661/- neither satisfies
the conditions of section 36[1][vii] read with sub-section [2] of section 36 of
the Income Tax Act, 1961, nor it is a business expenditure. Even no material
could be brought on record by the appellant/assessee either before the
assessing officer or before the CIT or ITAT that the aforesaid sum of
Rs.74,59,661/- was incurred on account of any commercial expediency. The
appellant/assessee being a promoter of the aforesaid joint venture company
had invested or advanced the aforesaid sum of Rs.74,59,661/- which became
unrecoverable due to winding up of the joint venture company, is a capital
loss to the appellant/assessee.
48. Learned counsel for the appellant/assessee has relied upon a
judgment in the case of Mahindra and Mahindra Ltd. [supra] of Bombay High
Court. The facts of that case were that Mahindra and Mahindra Ltd. incurred
certain expenses towards the salaries of staffs and officers, statutory charges,
security arrangements, rents etc. during the period of suspension of operation
and till winding-up order was passed against the jointly promoted company
namely, MMC and the expenses were incurred and certain other payments
were made by Mahindra & Mahindra Ltd. due to commercial expediency to
preserve and protect the value of goodwill attached to it. In the present set of
facts nothing could be brought on record by the appellant/assessee at any
stage of the proceedings that the aforesaid sum of Rs.74,59,661/- is an
amount which was incurred by it due to commercial expediency to preserve
and protect the value of goodwill attached to it, if any. Even the
appellant/assessee has not produced any agreement for advancing
Rs.74,59,661/- to the joint venture company or the nature, object and
purpose of the aforesaid alleged advance amount. Therefore, the
appellant/assessee has completely failed to lead any evidence to establish
either that the aforesaid amount was advanced due to commercial expediency
or that it was spent for the purpose and in connection with any business of
the appellant/assessee. Therefore, the aforesaid sum of Rs.74,59,661/-is
neither allowable as an expenditure under section 28 or section 37 nor it is
allowable as bad debt under section 36 of the Act of 1961. Therefore, the case
of Mahindra and Mahinidra [supra] does not have even persuasive value in
the matter of the appellant/assessee.
49. The next judgments in the case of ITC Ltd. [supra] and in the case of
Binani Cement Ltd. [supra] relied upon by the learned counsel for the
appellant/assessee are also clearly distinguishable on facts of the present
case and therefore, both the judgments are of no help to the
appellant/assessee.
50. In the case of Commissioner of Income Tax, Bombay Vs. M/s.
Abdullabhai Abdulkadar AIR 1961 SC 701 [Para 9], Hon'ble Supreme Court
while interpreting the provision of bad debt under section 10[2][xi] of the
Income Tax Act, 1922 held that "in every case the test is, was the debt due
as an incident to the business; if it is not of that character it will be a
capital loss" In the present set of facts we find that the aforesaid sum of
Rs.74,59,661/- so advanced to the joint venture company as per their own
case set up by the appellant/assessee, the advance given to the joint venture
company cannot be said to be an instance of the business of the
appellant/assessee. Therefore, the investment so made by the
appellant/assessee in the aforesaid joint venture company or the advance
given became a capital loss when the joint venture company was liquidated.
Therefore, the amount in question being a capital loss is neither a deductible
expenditure under section 37 nor it is a bad debt under section 36 [1][vii] of
the Act of 1961.
51. For all the reasons afore-stated the substantial question of law no.(f) is
answered in favour of the revenue and against the assessee. Consequently,
the appeal of the appellant on substantial question of law No.(f) deserves to be
dismissed.
Substantial question of law no.(g)
52. In so far as substantial question of law no. (g) is concerned, we find
that the assessing officer has computed deemed interest at the rate of 18% on
the aforesaid advance amount of Rs.74,59,661/- which comes to
Rs.13,14,739/- and added it in the income of the assessee on the ground that
during the previous year relevant to the assessment year in question the
assessee company has taken loan on interest from various sources on which
total interest of Rs. 12,81,33,000/- was debited in the profit and loss account.
Accordingly, he has disallowed the interest to the tune of Rs.13,42,739/-. The
CIT(A) affirmed the order of the assessing officer. The ITAT dealt with this
issue in paragraph 52 to 54 of the impugned order. The ITAT has not
disbelieved the contention of the assessee based on figures disclosed in the
balance sheet that the assessee had its own fund over Rs.158 crores; whereas
the investment made in M/s. Polypropylene India Ltd. (the joint venture
company) was only Rs.74.60 lakhs. However, the Tribunal rejected the
contention of the appellant assessee on the ground that if the assessee had
sufficient funds of its own available at the time of making the advance to M/s.
Polypropylene India Ltd., possibly the company was not required to take loan
from various organisations and pay interest on that.
53. We find that the finding recorded by the Tribunal is completely
erroneous inasmuch as on one hand the Tribunal has accepted that the
assessee was having its own funds over Rs.158 crores and yet affirmed the
disallowance Rs.13,42,739/- on the presumption that if own funds were
available, then possibly the assessee company was not required to take loan
from various organisations. In our view, the finding recorded by the Tribunal
is not based on any material. Taking of loan by the assessee is based on its
own business requirement. The fact remains undisputed that a sum of over
Rs.158 crores was available in its own hands which was a running capital.
Therefore, the contention of the assessee that it advanced Rs.74,59,661/- to
M/s. Polypropylene India Ltd. from its own fun/capital, cannot be rejected.
Under the circumstances, disallowance of Rs.13,42,739/- out of interest is
not based on any evidence, instead it is based totally on surmise and
presumption. That apart, we have held the aforesaid unrecovered advance is
the capital loss of the assessee. Under the circumstances, the substantial
question of law no. (g) is answered in favour of the assessee and against the
revenue. To this extent, the appeal of the assessee/appellant deserves to be
allowed.
54. For all the reasons afore-stated, the substantial question of law nos.
(a) and (c) are not answered as those have not been pressed before us, the
substantial question of law nos. (b), (d), (e) and (g) are answered in favour of
the assessee and against the revenue and to that extent the impugned order
of the Income Tax Appellate Tribunal is hereby set aside. The substantial
question of law no. (f) is answered in favour of the revenue and against the
assessee and to that extent the impugned order of the Tribunal is upheld.
55. Thus, the appeal (ITA/187/2004) is partly allowed to the extent
indicated above.
(SURYA PRAKASH KESARWANI, J.)
(RAJARSHI BHARADWAJ, J.)
GH/S.Kumar/S.Das/As/S.Bag/SK
A.F.R.
