Mittal Castings Ltd. vs Deputy Commissioner Of Income Tax
1998 Latest Caselaw 586 Del

ORDER

B-11. JAIN, A.M.:

This appeal by the assessee arises from the order of the CIT(A), New Delhi for asst. yr. 1992-93. Following grounds have been raised:

" 1. That on the facts and circumstances of the case, and in law the CIT(A) New Delhi, briefly "the CIT(A)" erred in partially upholding disallowance of interest debited to P&L a/c. on account of non-charging of interest on the amount advanced.

" 1. That on the facts and circumstances of the case, and in law the CIT(A) New Delhi, briefly "the CIT(A)" erred in partially upholding disallowance of interest debited to P&L a/c. on account of non-charging of interest on the amount advanced.

2. That on facts and circumstances of the case and in law the CIT(A)-VH, New Delhi, erred in upholding the disallowance of power expenses of Rs. 96,78,827.

2. That on facts and circumstances of the case and in law the CIT(A)-VH, New Delhi, erred in upholding the disallowance of power expenses of Rs. 96,78,827.

3. That the orders passed by authorities below are bad in law and void ab initio. "

2. In the first ground briefly the facts are that the appellant company claimed deduction of interest amounting to Rs. 16,37,881. This payment was made to the financial institutions. The assessee sold its plant and machinery in the month of September, 1991, for Rs. 1,38,90,000. The advances made have jumped from Rs. 55,97,055 to Rs. 1,32,52,585. These advances were made to the shareholders and other concerns where such shareholders were having intergst. The AO disallowed the entire interest of Rs. 16,37,881 by holding that on his hand the assessee is paying interest on borrowings and on the other has advancing money to the parties having substantial interest in the business of the assessee without charging any interest from them. The learned CIT(A) treated the amount of interest that has been paid in proportion to interest-free advances made by the assessee as non-business expenses. Accordingly, he directed the AO to disallow the interest for the period for which the amount was actually advanced interest-free.

2. In the first ground briefly the facts are that the appellant company claimed deduction of interest amounting to Rs. 16,37,881. This payment was made to the financial institutions. The assessee sold its plant and machinery in the month of September, 1991, for Rs. 1,38,90,000. The advances made have jumped from Rs. 55,97,055 to Rs. 1,32,52,585. These advances were made to the shareholders and other concerns where such shareholders were having intergst. The AO disallowed the entire interest of Rs. 16,37,881 by holding that on his hand the assessee is paying interest on borrowings and on the other has advancing money to the parties having substantial interest in the business of the assessee without charging any interest from them. The learned CIT(A) treated the amount of interest that has been paid in proportion to interest-free advances made by the assessee as non-business expenses. Accordingly, he directed the AO to disallow the interest for the period for which the amount was actually advanced interest-free.

3. The learned authorised representative placed reliance on the written submissions made before the CIT(A), copy filed with the paper-book. Details of plant and machinery sold and interest payment have also been placed on record. It was contended that the Revenue has not established any nexus between the moneys borrowed and moneys advanced. Reliance was placed on the decisions of OT vs. Bombay Samachar Ltd. (1969) 74 IM 723 (Bom) according to which, the only conditions to be satisfied were firstly that money must have been borrowed by the assessee, secondly it must have been borrowed for the purpose of business and thirdly the assessee must have paid interest on the said amount and claimed it as a deduction. It was thus contended that no disallowance should have been made since the appellant has satisfied all the three conditions. He has further supported the contention from the view that was taken by the Hon'ble Madras High Court in the case of CIT vs. Coimbatore Salem Ttansport Co. (P) Ltd. (1966) 61 ITR 480 (Mad). Assessee's counsel also relied on the cases of CIT vs. GopalYlishan Murlidhar (1963) 47 ITR 469 (AP) and Regal Theatre vs. CIT (1997) 143 CTR (Del) 81

(1997) 225 ITR 205 (Del).

(1997) 225 ITR 205 (Del).

4. The learned Departmental Representative contended that the advances have been made to the shareholders and to their associate and related persons. The interest has been disallowed out of the interest paid by the appellant on secured loans. There is a clear nexus as machinery against which such loans were raised has been sold and diverted towards making interest-free advances. Thus by making sale of plant and machinery, a business asset has got extinguished and thus there remains only the loans as simpliciter but not as business borrowings in that proportion. It has also been contended that the interest-free advances are more than the borrowings on which interest is being paid by the appellant. The action of the AO in disallowing the interest as a whole is justified and though the Department is not in cross-appeal, the disallowance to the extent CIT(A) has upheld is justified.

5. Rival submissions have been heard and case laws relied upon and material on record have carefully been considered. The perusal of the balance sheet at paper-book pp. 64 to 74 of the appellant for the relevant year shows that out of sundry creditors declared at Rs. 1,50,29,651, an amount of Rs. 1,19,71,019 is a provision for power and electricity and Rs. 17,62,400 is a provision of amount payable to Asstt. Assessment Collector. This leaves a balance of Rs. 12,96,232 only that could be said as available with the appellant as interest-free funds out of the total sundry creditors of Rs. 1,50,29,651. The balance amount of provisions has not yielded any cash and thus was not available for making any interest-free advances. Besides this the appellant's balance sheet shows capital and reserves also as referred by the CIT(A) at para 4(c) of her order as Rs. 37,01,210. Thus the total interest free funds which could be said as available with the appellant are Rs. 49,97,442 i.e., (Rs. 37,01,210+Rs. 12,96,232). The appellant has shown as brought forward losses of Rs. 75,37,041, out of which accumulated losses at the end of the relevant year are Rs. 57,37,374. Thus the interest-free funds of Rs. 49,97,442 get wiped out by virtue of business loss of Rs. 57,37,374, whereas the interest-free advances made by the appellant to the shareholders, their relatives and associate concern made during the relevant period are Rs. 1,04,80,210 besides brought forward advances also. Nothing thus can be said as having been advanced out of interest-free funds available with the appellant company. Secured loans outstanding as at the close of the relevant year show that Rs. 47,83,957 are payable on account of principal and interest for hypothecation of plant and machinery and stocks, etc. to New Bank of India and Rs. 13,91,500 payable for deferred payment guarantee loan under IDBI Scheme. There is a liability of New Bank of India for Rs. 47,83,957 and the appellant has got meagre stocks of Rs. 2,88,150 only. Furthermore out of the total plant and machinery of the cost of Rs. 1,20,79,248, the machinery of the cost of Rs. 89,20,800 have been sold and the left over machinery is of Rs. 31,58,448, the written down value of which is only Rs. 7,95,731. The power connection of the appellant was disconnected on 3rd Oct., 1990, as per suit filed before Hon'ble High Court of Delhi as per copy at paper-book pp. 24 to 139. The trading and P&L a/c. does not show any payment for wages or salary except a meagre amount of Rs. 5,140-Under these circumstances the appellant is not in a position to conduct the business of manufacturing. The AO has also mentioned that no production or manufacturing has been carried out by the appellant. The sales of Rs. 89,119 have been made out of the opening stocks of Rs. 3,78,085 available with the appellant. The P&L a/c. indicates profit on sale of assets at Rs. 1,16,42,518. As such on the facts and circumstances given above the appellant neither has current assets which have been hypothecated and against which loans have been raised nor it has sufficient plant and machinery to carry on any business. The appellant when asked, could not substantiate with cogent material that machinery sold was neither mortgaged nor hypothecated or was free from any loans. Even if it is agreed for argument sake that the machinery sold was not mortgaged, the loans outstanding against the stocks and plant and machinery remain only as loans and no longer business borrowJ'ngs and thus any interest paid on such loans is not an expenditure incurred for business purposes as no business.is continued by the appellant and substantial assets have also been sold, The nexus as pointed out by the learned authorised representative by relying on the various decisions are relevant only in cases where the business of assessee and loans taken also continue as business borrowing and moneys have been diverted out of such borrowings. The facts of the appellant's case are different.

In the case of CTT vs. Doctor & Co. (1989) 80 CTR (Bom) 179: (1989) 180 ITR 627 (Bom), before the Hon'ble Bombay High Court, where no part of the amounts standing to the credit of various sundry creditors represented the value of the goods purchased and to whom no interest was paid by its sister concern, it was held that payment of interest on borrowed funds was not allowable. in the case of appellant before us nexus as pointed out and satisfying of conditions as laid down in s. 36 by relying on the decisions of CTT vs. Bombay Samachar Ltd. (supra) and Regal Theatre vs. CIT, (supra) could be relevant only when the business is continued and loans taken continue as business borrowings and moneys have been diverted out of such borrowings. On facts the decision of the Hon'ble Madras High Court in the case of CTT vs. Coimbatore Salem Transport (P) Ltd. (supra) is also distinguishable with the case of the appellant. The appellant's borrowings in the year under appeal are only as a loan simpliciter and no business is continuing and also the appellant has sold its assets and current assets substantially. The appellant also does not have any interest-free capital and creditors to cover the interest-free advances made to the shareholders and to their relatives and their interested companies. The borrowing of the appellant do not remain for the business purposes. Any interest paid on such borrowings shall not be deductible as business expenditure. We, therefore, uphold the order of the CIT(A) in treating the amount of interest that has been paid in proportion to the interest-free advances made by the assessee as non-business expenditure and disallowing the same for the period for which the amount was actually advanced interestfree.

6. Next ground of appeal relates to the disallowance of power expenses for Rs. 96,78,827, for which a provision has been made for additional liability. This liability is being contested though no payment has been made by the appellant. The AO treated this liability as a contingent I-lability. Since there has been no manufacturing during the year the AO as per para 3 of his order treated the power and fuel expenses as disallowable. The learned C11IT(A) confirmed the disallowance by holding that amount will become allowable as and when the final decision is given and the assessee makes the payment. The appellant has disputed the said disallowance-

7. The learned authorised representative has contended that the appellant has maintained its accounts on mercantile basis and the provision has been made on the basis of the bills received from DESU which pertains to the period under appeal- These bills are for minimum charges. The assessee could not undertake any production because its power connection was disconnected. Despite disconnection bills were being issued by DESU. The short point to be decided is whether such minimum charges are to be allowed or not in such circumstances. It has been contended that the liability is not ascertained is not correct. Bills are there and have duly been entered in the accounts. The dispute cannot postpone the claim of the appellant. Fixed charges have to be paid. It is a standard contract. The liability is neither purely statutory nor purely contractual. The agreement with the electricity company cannot be cancelled. A copy of agreement has also been placed on record at paper-book pp. 43 to 52 and its clauses at paras 13 and 16(b) are relevant for the liability claimed by the' appellant.

The learned authorised representative placed reliance on the following decisions:

(i) Sarvarya Textiles Mills Ltd. vs. Dy. CIT (1995) 53 7TJ (Hyd) 457: (1995) 54 ITD 612 (Hyd);

(i) Sarvarya Textiles Mills Ltd. vs. Dy. CIT (1995) 53 7TJ (Hyd) 457: (1995) 54 ITD 612 (Hyd);

(ii) Bihar State Electricity Board vs. Green Ruhber Industries & Ors. AIR 1990 SC 699;

(ii) Bihar State Electricity Board vs. Green Ruhber Industries & Ors. AIR 1990 SC 699;

(iii) Cap Steel Ltd. vs. Karnataka State Electhcity Board & Ors. AIR 1991 Kar 220: and

(iii) Cap Steel Ltd. vs. Karnataka State Electhcity Board & Ors. AIR 1991 Kar 220: and

(iv) CIT vs. Sun Engg. Works (1992) 107 CTR (SQ) 209: (1992) 198 ITR 297 (SQ).

It was also contended that the liability to pay minimum charges even if treated as a statutory liability shall not be of the nature of statutory dues as referred to in cl. (a) of s. 43B. Written submissions made before the CIT(A) have also been filed along with the paper-book for claiming the deduction.

8. On the other hand, the learned Departmental Representative has contended that the appellant has not. carried out any manufacturing activity in the relevant year, There is no power connection with the appellant. The liability thus cannot be said to be relating to the previous year. The appellant has not demonstrated as to what is the actual liability at the time when it has been claimed. The appellant has moved to the Court for quantification of the liability. Furthermore the appellant has not brought any material to show that it has continued the business and in the relevant year it was temporarily suspended or closed. The assets have been sold and it is not possible to carry the business with the left over plant and machinery. There is no staff also nor the power connection has been revived till date. The contingent liability does not constitute expenditure. Reliance has been placed on the following decisions:

(i) Shree Sajjan Mills Ltd. vs, CTT (1985) 49 CTR (SQ) 193 : (1995) 156 ITR 585 (SC);

(ii) Indian Molasses Co. (P) Ltd. vs. CTT (1959) 37 ITR 66 (SQ);

(ii) Indian Molasses Co. (P) Ltd. vs. CTT (1959) 37 ITR 66 (SQ);

(iii) Ra]asthan Mines & Minerals Ltd. vs. CIT (1994) 208 1TR 1010 (Raj); and

(iii) Ra]asthan Mines & Minerals Ltd. vs. CIT (1994) 208 1TR 1010 (Raj); and

(iv) CIT vs. Hindustan Housing & Land De-velopment (1986) 58 CTR (SQ) 179 (1985) 161 rM 524 (SQ).

It has also been contended that cl. 13 of the agreement with DESU speaks of defective meter, whereas in the case of the appellant, it is a tampered meter and its seals are broken. It is a case of theft of electricity and, therefore, the connection has been discontinued on 3rd Oct., 1990. The minimum charges become payable when supply is interrUPLICk-A' but not when it has been disconnected. The details of bills also sbow tha they are all identical and no electricity has been used by the appellant. Entnes La the books of account have been made only on the last date just to cla4m th6 liability for reducing the income on sale of assets. There is no consideraticn for making such a payment. The statute also does not recognise the concept of semi-statutory and semicontractual liability. The law has not given opton for giving a deduction for the third type of liability which has a dual nature. Since the learned authorised representative has admitted that the liability is neither a statutory nor contractual, then it is not at all a liability which could be allowed as deductible from the income. The cases relied by the learned authorised representative are all distinguishable on facts and circumstances of this case. It has further been contended that the appellant has violated the contract and found indulging in fraudulent abstraction of energy. It will be against the public policy to allow the benefit of deduction.

9. The learned authorised representative in rejoinder contended that the doctrine of public policy is to be viewed by its spirit and not by analogy. Merely because DESU has raised the bills, the liability has accrued and the appellant is maintaining its accounts or) mercantile basis. The liability thus has to be allowed. Dispute is no ground for denying the deduction of a liability. The penalty is not punitive in nature as the bills say excluding load violation charges. The learned Departmental Representative has not commented upon the decision of Sarvarya Textiles Mfl1s Ltd. (supra). If this decision is not to be followed then the matter may be referred to a larger Bench. Since the case of the appellant is for a payment of minimum guarantee charges and the deduction may be allowed.

10. Rival submissions have been heard, case law relied upon by the parties and material on record have also carefully been considered. From record we find that the appellant was sanctioned a load of 2,012 K.W. for running an induction furnace by categorising as a large industrial power consumer. Joint inspection with the officials of CBI was conducted by the team of DESU employees on 22nd July, 1988. The connected load was found to be 3,520 K.W. besides other anomalies. According to DESU the appellant was found indulging in fraudulent abstraction of energy which constituted an offence under ss. 39 & 44 of the Indian Electricity Act, 1910. A letter, dt. 12/14th Sept., 1990, written by the legal cell of DESU and placed at paper-book pp. 205 to 209 contains the brief facts of the case. In this letter grounds for raising of bill for the period from 16th Oct., 1987, to 22nd July, 1988, and a notice for disconnection of supply has also been given. These grounds read as under:

"A. That as stated above, a joint inspection by the officials of DESU was held on 22nd July, 1988, during which the following anomalies were discovered:

(1) That against the sanctioned loan of 2,012 K.W. (2000 I.P.) + 5 K.W. (C.P.) + 7 K.W. (L.P.) the connected load on the site was found to be 3,520 K.W.

(ii) The inspection of the seals fixed on the metering cubicle revealed that both the plastic and lead seals on the front plate of the metering cubicle were found fictitious. The PT connection of primary, PT brushing were found tempered as they were taped with a fresh yellow cover(with PVC tape of Bhor-make on red and blue phase whereas on yellow phase, the PVC tape was of different quality and an old one. Further, the roof of the switching room instead of being concrete as per requirement, was found to be temporary with asbestos sheets first placed as a cover (without even hooks fixed thereon). A secret entry through this temporary roof was also noticed which was apparently an access point to temper with the metering apparatu3 to pilfer energy by the consumer i.e. yourself.

From the above anomalies found on the site by the DESU joint inspection team along with officials or CAI, DESU has very strong reasons to believe that you have been indulging in the fraudulent abstractions of energy which constituted an offence under ss. 39 and 44 of Indian Electricity Act, 1910.

B. That as per precedent followed by DESU which now has the legal sanction it is clear that your factory had been working for 24 hours per day for 25 days in a month and you had consumed at least 60 per cent of the energy of Ille connected load. The local number of units worked out on this basis comes to 82,29,143 units.

C. That as per the tariff schedule, the aforesaid units per month were to be billed as per LIP tariff. These details have already been furnished to you in the bill, dt. 119th Oct., 1988, which was served on you. However, find enclosed a photocopy for ready refererce and the contents of this bill may be read as part of these grounds.

D. On the basis of the aforesaid working hours per day, working days per month and 60 per cent of the connected load, the aforesaid supplementary bill has been raised for the period 16th Oct., 1987, to 22nd July, 1988, for a sum of Rs. 1,06,64,383.60 P after making due adjustments of the payments already received from you during the said period."

Consequently, DESU had disconnected the power supply on 3rd Oct., 1990 and this fact has been mentioned by the appellant in suit No. 63-A/92 filed in the High Court of Delhi and a copy of which has also been filed before us. In this suit the appellant has also disputed the charges of minimum guarantee bill and the appellant is denying the liability to pay the bills. The claim of the appellant is that as there was no power supply in the factory he was entitled to full rebate on the minimum guarantee charges. For this rebate he has quoted clause No. 15(b) of the agreement with DESU. Accordingly in this suit the appellant has submitted that a difference and dispute had arisen between the parties and reference had been demanded to be made to the arbitrator to determine and adjudicate various issues including the following:

"Whether the plaintiff is liable to pay the bills for the month of April, to October, 1991 when admittedly there was no power supply in the factory of the plaintiff in view of cls. 5 and 15B of the Agreement."

Since the appellant himself is denying the liability, there remains no case for allowing deduction to the appellant.

11. We also find that the appellant has made the entries of the whole amount of Rs. 96,70,827 only on 31st March 4, 1992, by debiting it to power expenses account and showing the liability ati-;sundry creditor in the balance sheet which is placed at paper-book p. 68. In fact this liability cannot be treated as a creditor of the appellant company as no electricity has been consumed by the appellant nor any purchase has been made by it so as to make it fall within the ambit of a creditor.

12. The learned authorized representative has relied on the decision of the Tribunal in the case of Sarvarya Textiles Ltd. vs. Dy. CrT (supra). We have gone through this judgment and find that the facts of the appellant's case are different. In the case of Sarvarya Textiles Ltd. (supra), the dispute related to the incremental charges and business was continued by that assessee. Besides this the assessee in that case had paid the liability in the imm ediately following year. Whereas in the appellant's case neither the business.is continued as has been held by us while deciding the first ground of appeal of this order, nor the appellant has paid the liability for the last about six years and the charges are also not incremental. The appellant has not consumed any electricity also whereas in the case law relied by the appellant the electricity was consumed and payment related to consideration for consumption. The learned authorised representative has been pressing that the liability of the appellant is neither statutory nor contractual but it is a serni- statutory and semi- contractual liability, whereas the basic issue of the Revenue is that the appellant has no liability at all.

13. The apex Court in a recent judgment in the case of Hyderabad Vanaspati Ltd. vs. Andhra Pradesh State Electricity Board & Ors JT 1998 (3) SC 84 has held in para 20 of the judgment that the terms and conditions of supply are applicable to all consumers availing supply of electricity board. Agreements in writing with each consumer will not make terms contractual. The Board in performance of a statutory duty supplied energy on certain specific terms and conditions framed in exercise of a statutory power. Accordingly, it was held that the terms and conditions are statutory in character. But the facts in that case were that th(, officers of the Board inspected the factory premises and noticed pilferage oi energy. The power supply was immediately disconnected and a provisional assessment of the loss on account of pilferage was made at Rs. 61,28,535. After enquiry the final assessment was made fixing the loss at Rs. 55,72,511. The appellant filed suit that it was not liable to pay any amount as penal damages, Whereas in the present case before us neither the electricity was disconnected inu-nediately nor final assessment has yet been made. The matter here relates to the minimum guarantee charges which are for the period after the disconnection of the meter but not for the loss on account of pilferage. 14. All other case law relied upon or referred have also been considered. In the case of Bihar State Electricity Board vs. Green Rubber Industries & Ors. the assessee has himself applied to the State Electricity Board for disconnection of power under the minimum guarantee period and accordingly he was held to be liable for payment of minimum guaranteed charges. Moreover, that case did not pertain to allowability of expenses under the 1T Act.

In Cal) Steel Ltd. vs. Karnataka State Electricity Board & Ors. (supra) the demand of minimum guaranteed power charges was made from the beginning of grant of the power connection but the assessee could not consume power from beginning due to his own reasons and for no fault of electricity board. Ultimately he was granted partial exemption from payment of such charges.

In Asstt CIT vs. Rathi Afloys & Steels Ltd. the assessee has been actually consurning power regularly and the demand raised by electricity board was for revision of power tariff only and the dispute was under the provisions of s. 43B of the Art. Similarly In Andhura Ferro iUoys (P) Ltd. vs. Dy. CIT the assessee has been actually consuming power regularly and was placed has been actually consuming power regularly and was placed by electricity board as a consumer of category-1 but later on he was demanded charges of category-III. Moreover the issue before, Tribunal was in respect of disallowance under s. 43B of the IT Act.

15. In the absence of any decision brought to our notice, by the learned outbor4sed representative we agree with the proposition of the learned Departiric,ntal Representative that the Indian Statute does not recognise a liability which is neither statutorv nor contractual. In the case of the appellant there is no hability at all or it is disputed. The appeflant has hin)self contested that there was no power supply and +therefore he was entitled to full rebate. Thus even if bills ha7q(--? been raised by DESU for minimum guarantee charges, the appellant was claiming full rebate and have disputed that there is no liability. The Hon'ble Apex Court in the case of Maddir Venkataran, an & Co, (P) Ltd. vs. CIT (1998) 144 CTR (SQ) 214 : (1998) 229 1TP ',,34 (SQ) has held that it will be against public policy to allow the benefit of deduction under one statute of any expenditure incurred in violation of the provisions of another statute or any penalty imposed under another statute. The appellant has violated the provisions of Electricity (Supply) Act, 1948 and has been found indulging in fraudulent abstraction of electricity. This is the reason for wItch I-As electric supply has been disconnected and has not been restored till date. Thus, in view of this decision of the apex Court also, the appellant's clairyn for deduction is not allowable.

16. In view of flie foregoing facts arid findings, we are of the opinion that the amount of Rs. 96,78,827 pertaining to minimum guarantee charges after the date of disconnection of electricity is not a business expenditure as the appellant is not continuing any business and substantial assets have also been sold and no efforts have been made for restoration of the electric connection and, therefore, it is not an expenditure incurred wholly and exclusively for the purposes of the business. The liability, if any, has cropped up out of the action of the appellant against a public policy being a case of theft and not because of

consumption of power for business purposes. Furthermore the appellant has himself contested tlfiat the -liability is neither statutory nor contractual but semi-statutory anc I i semi- contractual, which in our view is not allowable under the facts and circumstan(,es of the case. Despite appellant's arguing that the agreement vvith DESU is In the standard form, it had not given up his claim for full rebate of the amount for which bills have been raised. Thus, the appellant himself is dispur,fig the liability and so far the dispute has not been resolved.

The liability thus continues to remain disputed and hence it cannot be allowed as deduction either on accrual basis or on payment basis since no payment has also been made by the appellant. We accordingly uphold the decision taken by the CIT(A) and dismiss the ground taken by the appellant.

17. Last ground of appeal being general and no arguments have been advanced by the appellant. Accordingly the same is dismissed.

In the result, the appeal of assessee is dismissed.