M/S Punjab Stainless Steel Inds. vs Commissioner Of Income Tax-Vii & ...
2010 Latest Caselaw 2570 Del

                 THE HIGH COURT OF DELHI AT NEW DELHI


%                                 Judgment Reserved on: 04.05.2010
                                  Judgment Delivered on: 14.05.2010


+            ITA 47/2008


M/S PUNJAB STAINLESS STEEL INDS.                           ... Appellant


                                  - versus -


COMMISSIONER OF INCOME TAX-VII & ANR.                    .... Respondents


Advocates who appeared in this case:
For the Appellant   : Mr Satyen Sethi, Mr Johnson Bara & Mr A T Panda
For the Respondent  : Ms Prem Lata Bansal



CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE V.K. JAIN


     1.    Whether Reporters of local papers may be allowed to
           see the judgment? Yes
     2.    To be referred to the Reporter or not? Yes

     3.    Whether the judgment should be reported in Digest? Yes



V.K. JAIN, J.

1. This is an appeal against the order of the Income Tax

Appellate Tribunal dated 3.8.2007, whereby it dismissed the

appeal, being ITA No.5533/Del/2004, filed by the

appellant/assessee against the order passed by the

Commissioner of Income Tax(Appeals) dated 28.9.2004,

whereby he dismissed the appeal filed by the assessee in

respect of the Assessment Year 2001-2002.

2. During the year in question, the appellant/assessee

paid an amount of Rs.80,93,749/-towards net interest, which

included Rs.84,30,252/- paid to the banks on credit facilities

and foreign bills etc. and Rs.1,34,334/- paid to the partners of

the assessee firm. On going through the account of the

assessee in respect of M/s.Kesho Ram Industries, it transpired

that there was an opening debit balance of Rs.1,80,64,962/- in

that account, on 1st April, 2000. The debit balance in that

account, at the end of the financial year, stood at

Rs.1,75,49,633/-. It was noted by the Assessing Officer that

M/s.Kesho Ram Industries was a sister concern of the

assessee, in which two partners of the assessee firm, namely,

Shri Paramjit Singh and Shri Harvinder Singh, were also

partners, holding 50% shares in the profits of that firm. The

Assessing Officer held that there was a clear cut diversion of

the funds borrowed by the assessee, since the funds were

advanced to M/s.Kesho Ram Industries out of CC 40 account

of the assessee with Punjab & Sind Bank, in which the secured

loan stood at Rs.1.33 crores. He was of the view that interest

bearing funds had, thus, been diverted to the associate

concern. He rejected the contention that since the firm had

interest free funds in the current account of the partners

aggregating Rs.22.7 crores, besides Rs.4.60 crores in the

account of the father of a late partner Shri Trilochan Singh,

the interest free advance to M/s.Kesho Ram Industries were

made by the firm out of those interest free funds of Rs.27.32

crores. He, accordingly, disallowed the interest paid by the

assessee firm to the extent of Rs.30,92,266/-, taking the rate

of interest at 14.45% per annum, which was the rate at which

interest was being paid by the assessee firm to the bank in CC

40 account.

3. In the appeal filed by the assessee, the CIT(A) held

that interest free advances were given out of the cash from

account with the bank, which had debit balance, on which the

assessee firm was required to pay interest and, therefore, there

was a direct nexus between the interest bearing funds

borrowed by the assessee and interest free advances given by it

to its sister concern. He rejected the explanation that interest

free advances were made out of interest free funds available

with the assessee firm, as he found that the advances were

made out of the overdraft bank account maintained with

Punjab & Sind Bank. He, accordingly, upheld the disallowance

made by the Assessing Officer.

4. In the appeal before the Income Tax Appellate

Tribunal, it was submitted by the assessee that the debit

balance in the name of the sister concern was much smaller

compared to the interest free funds available with the assessee

and no disallowance of interest had been made in the earlier

year, in respect of debit balance in the account of M/s.Keshoo

Ram Industries.

5. In para 2.3.4 of its judgment, the Tribunal noted

that there was no dispute that interest free advance of Rs.1.75

crores had been given to the sister concern and that the

assessee had borrowings on which substantial interest had

been paid. The Tribunal was of the view that what is required

to be seen is whether there was any commercial expediency in

making the interest free advances. The Tribunal did not find

any commercial expediency in making interest free advances to

the sister concern. It was noted by the ITAT that no material

had been brought to its notice to show that the interest free

advances had been given for the purpose of business or that by

giving interest free advance, the business of the assessee would

be served better. The Tribunal rejected the argument of the

assessee that there was business connection because part of

the advances were on account of sale of import licences and

found that the assessee, instead of getting the money back on

account of sale of licences, had allowed the same to remain

with the sister concern to be used interest free and, therefore,

the nature of the amount was the same as interest free

advance. It was also found by the Tribunal that there was

direct nexus between interest bearing loans and the interest

free advances, since the advances had been made from the

cash credit account and this position had not been disputed

before it. The Tribunal was of the view that no case for

commercial expediency in making the interest free advances

was made out by the assessee.

6. In S.A.Builders Ltd. v. Commissioner of Income-

Tax(Appeals) & Another: (2007) 288 ITR 1 (SC), it was found

by the Assessing Officer that the assessee had transferred a

sum of Rs.82 lakhs to its subsidiary company and there was a

huge debit balance in the account of the subsidiary company.

He, therefore, held that since the assessee had diverted the

borrowed funds to its sister concern without charging any

interest, proportionate interest relating to the said amount

deserved to be disallowed. In the appeal filed by the assessee,

Commissioner of Income Tax(Appeals) was of the view that only

a sum of Rs.18 lakhs advanced to the subsidiary company had

a clear nexus with the borrowed funds, since the borrowed

amount had been paid out of receipts from other parties, to

whom no interest had been paid. The Tribunal, however, held

that the entire amount of Rs.82 lakhs had been advanced by

the assessee realizing overdraft account and, therefore, upheld

the disallowance made by the Assessing Officer. The appeal

filed by the assessee having been dismissed by the High Court,

he approached the Supreme Court, obtaining Special Leave.

The Supreme Court was of the view that the approach of the

High Court, the Tribunal as well as the Income Tax Authorities

was erroneous, since the test in such a case was whether the

advances were made as a measure of commercial expediency.

The Supreme Court was of the view that the High Court as well

as the other authorities should have enquired as to whether

the interest free loan to the sister company was given as a

measure of commercial expediency. It was observed by the

Supreme Court that the expression 'commercial expediency'

includes such expenditure as a prudent businessman incurs

for the purpose of business, though it may not have been

incurred under any legal obligation. Interpreting its earlier

decision in the case of Madhav Prasad Jatia v. CIT : (1979)

118 ITR 200 (SC), the Court was of the view that the ratio of its

decision in that case was that the borrowed funds, advanced to

a third party, should be for commercial expediency if it is

sought to be allowed under Section 36(1)(iii) of the Income Tax

Act. The Court agreed with the view taken by this Court in CIT

v. Dalmia Cement (B.) Limited : (2002) 254 ITR 377, holding

that once it is established that there was nexus between the

expenditure and the purpose of business, the Revenue cannot

justifiably claim to put itself in the arm-chair of the

businessman or in the position of a Board of Directors and

assume the role to decide how much is reasonable

expenditure, having regard to the circumstances of the case. It

was observed that the income tax authorities must put

themselves in the shoes of the assessee and see how a prudent

businessman would act. The matter was to be seen from the

point of view of commercial expediency and not from the point

of view whether the amount was advanced for earning profit.

7. A perusal of the assessment order would show that

the assessee did not claim before him, that the advances to

M/s.Kesho Ram Industries were actuated by way of

commercial expediency. The contention before the Assessing

Officer was that the interest free advances to M/s.Kesho Ram

Industries were made out of interest free funds available with

the assessee firm. No case of commercial expediency was set

up before him. From a perusal of the order passed by the

CIT(A), we find that the plea of commercial expediency was not

set up before him as well. The assessee firm did not claim

before him that the advances to M/s.Kesho Ram Industries

were in the business interest of the assessee firm and were a

measure of commercial expediency. The plea of commercial

expediency in advancing the loan was set up for the first time

before the Income Tax Appellate Tribunal. The assessee,

however, failed to make out a case of commercial expediency

before the Tribunal. During the course of arguments before us

the assessee did not try to make out a case of commercial

expediency in extending interest free advances to M/s.Kesho

Ram Industries. The assessee did not tell the Tribunal as to

what business interest of the assessee firm was sought to be

achieved by making interest free advances to M/s.Kesho Ram

Industries and in what manner that interest was served. The

assessee was required not only to claim commercial expediency

but also to establish it from the material available to the

Assessing Officer. It has not even made such an attempt.

8. In Elmer Havell Electrics & Others v.

Commissioner of Income Tax & Another : (2005) 277 ITR

549, the assessee had borrowed funds while giving interest

free loan to its sister concern. The Tribunal held that there

was no commercial expediency in extending the interest free

loan to the sister concern. It was held by this Court that

whether there existed any commercial expediency for the

assessee to transfer amount in question to one of its sister

concerns and whether the funds were advanced from self-

generated funds of the assessee and there was a need for that

purpose, were questions of fact and the Tribunal was the final

fact finding authority in this regard.

9. Thus, the question whether the advances to

M/s.Kesho Ram Industries were extended for commercial

expediency or not was a question of fact and the Tribunal,

which is the final fact finding authority, has returned a finding

against the assessee in this regard. The finding recorded by

the Tribunal has not been shown to be perverse and, therefore,

cannot be interfered with in exercise of jurisdiction under

Section 260A of Income Tax Act.

10. During the course of arguments before us, referring

to the leadger account of M/s.Kesho Ram Industries, it was

submitted by the learned counsel for the appellant/assessee

that an amount of Rs.1,35,90,103/- out of the opening debit

balance of Rs.1,80,64,962.35 in the account represented the

amount payable by M/s.Kesho Ram Industries to the assessee

firm towards premium on transfer of DEPB licences and during

the course of the relevant year M/s.Kesho Ram Industries

made a payment of Rs.6,05,930/- towards part repayment of

that amount. We find from a perusal of this account that

during this year five payments - two of Rs.10 lakhs each, one

of Rs.20 lakhs, one of Rs.16 lakhs and one of Rs.5.5 lakhs -

were made by the assessee to M/s.Kesho Ram Industries

directly from CC 40 account which, admittedly, was the

interest bearing account in which interest was paid by the

assessee firm to Punjab & Sind Bank. We also find that two

payments of Rs.10 lakhs each were made by M/s.Kesho Ram

Industries to the assessee firm in CC 40 account. Therefore, it

cannot be said that no advances to M/s.Kesho Ram Industries

were extended by the assessee firm from CC 40 account,

during the year in question. It appears that there was a

purchase of sheets amounting to Rs.40,50,900/- from

M/s.Kesho Ram Industries on 7th February, 2001. It was

contended by the learned counsel for the appellant/assessee

that this payment should be adjusted against the advances

made from CC 40 account during this year. We are unable to

accept the contention. There was already a debit balance of

Rs.1,80,64,962.35 in the account as on 1st April, 2000.

Therefore, this amount payable by the assessee to M/s.Kesho

Ram Industries has to be adjusted against debit balance

payable by M/s.Kesho Ram Industries prior to the advances

extended during this year and not against the cash advances

extended during the course of the year. Moreover, there is no

finding recorded by the Assessing Officer, CIT(A) or by the ITAT

that the opening balance of Rs.1,80,64,962.35 on 1 st April,

2000 represented the premium payable by M/s.Kesho Ram

Industries to the assessee firm, on transfer of DEPB licences.

In fact, a perusal of the assessment order would show that the

assessee itself submitted before him that interest free advances

to M/s.Kesho Ram Industries amounted to Rs.1.81 crores at

the beginning of the year and Rs.1.75 crores at the closing of

the year. The plea taken by the assessee firm before the

Assessing Officer was that these advances were made from the

interest free funds available with the firm. It was also

submitted before CIT(A) that the debit balance in the account

of M/s.Kesho Ram Industries was not only on account of

advances made to them but also included debits on account of

sale of DEPB licences aggregating to Rs.1.36 crores. A perusal

of the order of CIT(A) would show that the case set up by the

assessee before him was that it had interest free deposit

amounting to Rs.27.47 crores in the account of partners and

ex partners, interest free advances to the sister concern of the

appellant amounted only to Rs.1.75 crores and the advances

were made to the sister concern out of the mixed funds which

comprised appellant's own funds, retained profits and other

interest free funds available with it. It, thus, appears to us

that the appellant did not dispute, before CIT(A) that the

amount which it did not realize from M/s.Kesho Ram

Industries, to which DEPB licences were transferred by it,

were allowed to be retained as advances to M/s.Kesho Ram

Industries from the assessee firm. As noted earlier, even before

the ITAT, the assessee did not dispute that it had given interest

free advances of Rs.1.75 crores to its sister concern. The

Tribunal was of the view that since the assessee, instead of

getting money back on account of sale of licences, allowed the

same to remain with the sister concern, to be used as interest

free, the nature of amount was of interest free advances. We

see no reason to take a contrary view.

11. In view of the provisions contained in Section

36(1)(iii) of Income Tax Act, the interest paid by the assessee

in respect of capital borrowed for the purpose of business or

profession is to be allowed as a deduction. Hence, the question

to be considered in a case such as the one before us is as to

whether the interest free advance was made by the assessee for

commercial expediency or not. If the advances were not made

by the assessee for a business purpose of the assessee firm,

interest paid by the assessee on that part of the borrowed

capital which is commensurate with the amount of the interest

free advances extended by it cannot be said to have been paid

for the purpose of its business.

12. The commercial expediency, in our view, would

include such purpose as is expected by the assessee to

advance its business interest and may include measures taken

for preservation, protection or advancement of its business

interests. The business interest of the assessee has to be

distinguished from the personal interest of its directors or

partners, as the case may be. In other words, there has to be

a nexus between the advancing of funds and business interest

of the assessee firm. The appropriate test in such a case would

be as to whether a reasonable person stepping into the shoes

of the directors/partners of the assessee firm and working

solely in the interest of the assessee firm/company, would have

extended such interest free advances. Some business objective

should be sought to have been achieved by extending such

interest free advance when the assessee firm/company itself is

borrowing funds for running its business. It may not be

relevant as to whether the advances have been extended out of

the borrowed funds or out of mixed funds which included

borrowed funds. The test to be appelied in such cases is not

the source of the funds but the purpose for which the advances

were extended.

13. The learned counsel for the appellant has referred to

the decision of the Supreme Court in Munjal Sales

Corporation v. Commissioner of Income Tax & Another :

(2008) 298 ITR 298 (SC). In that case it was held by the

Tribunal that the assessee had given interest free loan in the

assessment year 1992-93, out of its own funds and not from

interest bearing loan taken by the firm from the third party

and, consequently, the assessee was entitled to claim

deduction under Section 36(i)(iii) of the Act. It was observed

by the Supreme Court that the Tribunal had held that the

loans were given for business purposes. It was further

observed that similarly for the assessment year 1993-94, the

Tribunal had taken the view that the loans given to the sister

concern of the assessee were for business purposes. The loans

given by the assessee in August/September, 1991 to its sister

concern were wiped out in the assessment year 1997-98. The

Court was of the view that once the Tribunal had found that

the loans were advanced for business purposes and the

interest paid by the assessee did not exceed 18% per annum,

the assessee was entitled to deduction under Section 36(1)(iii)

read with Section 40(b)(iv) of the Act. As regards a small

interest free loan of Rs.5 lakhs extended by the assessee

during the assessment year 1995-96, the Court was of the view

that since the opening balance as on 1st April, 1994 was

Rs.1.91 crores whereas loan given to the sister concern was a

small amount of Rs.5 lakhs, profits earned by the assessee

during the relevant year were sufficient to cover the loan of

Rs.5 lakhs. The assessee before the Supreme Court succeeded

on the peculiar facts of the case before the Court. However, in

the present case, there is absolutely no finding recorded by the

Tribunal that the interest free advances were made by the

assessee to M/s.Kesho Ram Industries for its business

purposes. There is no such finding by the Tribunal even with

respect to the advances extended in the previous years. It is

not the case of the appellant before us that it had so much

surplus cash available with it at the time of extending these

advances that the same could have been extended by it out of

those surplus funds available to it. In fact, the payments made

to M/s.Kesho Ram Industries from CC 40 account indicate to

the contrary and show that advances made during the

financial year relevant to the assessment year 2001-02, were

extended out of borrowed funds and not out of any credit

balance available with the assessee firm at that time.

Therefore, this judgment is of no help to the appellant.

14. The learned counsel for the appellant has also

referred to Commissioner of Income Tax & Another v. Tin

Box Co : (2003) 260 ITR 637 (Del). We find that in the case of

Tin Box Company(supra) the capital of the firm and interest

free unsecured loans available with the appellant far exceeded

the amount advanced to the sister concern in all the years

under appeal. The question as to whether the loans to the

sister concern were extended for commercial expediency or not

was neither raised nor examined in that case. Considering the

decision of Supreme Court in S.A.Builders(Supra), what is

relevant in such a case is as to whether the loan was extended

for any commercial expediency or not and, therefore, it would

be immaterial whether the assessee firm had interest free

funds available to it or not.

15. The learned counsel for the appellant has also lastly

referred to Commissioner of Income Tax v. Sridev

Enterprises : (1991) 192 ITR 165 (Kar). In the case before the

Karnataka High Court, it was found that in past years the

assessee's claims for deduction were allowed in respect of the

sums advanced during those years and a departure from that

finding in respect of the amount advanced during the previous

year would result in a contradictory finding and it would not be

equitable to permit the Revenue to take a different stand in

respect of the amounts which were subject matter of the

previous year. We find that no such argument was advanced

by the appellant before the Income Tax Appellate Tribunal.

We, therefore, do not deem it appropriate to allow the

argument to be raised in an appeal under Section 260A of

Income Tax Act, particularly when the advances made by the

assessee firm do not stand the test of commercial expediency

laid down by the Supreme Court in the case of S.A.

Builders(supra).

16. For the reasons given in the preceding paragraphs,

no substantial question of law arises for our consideration.

The appeal is accordingly dismissed.

(V.K. JAIN) JUDGE

(BADAR DURREZ AHMED) JUDGE MAY 14, 2010 RS/