Commissioner of Income Tax vs Accelerated Freeze Drying Co. Ltd.

C.N. Ramachandran Nair, J.—The appeal is filed by the Department against the order of the Tribunal canceling the enhanced disallowance of interest paid on borrowed funds diverted by the assessee to sister concern made by the Commissioner of Income Tax (Appeals) in the appeal filed by the assessee after notice to them. The assessment involved is for the year 1997-98.

We have heard standing Counsel appearing for the appellant and advocate Sri P. Balakrishnan, appearing for the respondent.

The assessee is a limited company engaged in export of marine products. On verifying the accounts, the Assessing Officer found that the assessee had advanced an interest free loan of Rs. 4,03,75,000 to another limited company by name M/s. Amalgam Investments P. Ltd. which is styled as a sister concern of the assessee. The Assessing Officer found that advances were made out of borrowed funds on which the assessee had paid an interest of Rs. 64,72,004. It was found that the term loan outstanding in the end of the previous years was Rs. 17.74 lakhs. u/s 36(1)(iii) of the Income Tax Act, 1961 (for short "the IT Act"), the assessee is entitled to deduction of interest paid on borrowed funds if such funds were borrowed for business purposes. If the assessee is able to divert borrowed funds to other companies, whether it be sister concerns or not, obviously, the purpose of borrowal was not for its own business purposes, but for helping another company for that company''s business purposes. The Assessing Officer, by following the judgment of the various High Courts in Commissioner of Income Tax Vs. H.R. Sugar Factory, held that diversion of borrowed fund on which interest is paid by the assessee to sister concern without collecting interest calls for proportionate disallowance. He had worked out the interest attributable to funds diverted to another company without collection of interest at Rs. 14,76,510 and disallowed the same.

When the assessee challenged the same before the Commissioner of Income Tax (Appeals), he, in principle, completely agreed with the findings of the Assessing Officer and following the decision of this Court in Commissioner of Income Tax Vs. Baby, reworked the interest to be disallowed on proportionate basis after notice to the assessee and enhanced the disallowance. It is pertinent to note from the order of the Commissioner of Income Tax (Appeals) that the assessee did not have any case that advancing of interest free loan to another company which is a sister concern is in the interest of commercial expediency. On the other hand, the assessee''s case was that it had available funds like, surplus for giving interest free loans to another company. However, when the matter went to the Tribunal in second appeal, the assessee changed the stand of availability of surplus funds for giving interest free advances, but took a stand that on an earlier occasion, the Tribunal allowed the assessee''s case on the same issue relying on the decision of the Supreme Court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, . In similar case, we have found that the decision of the Supreme Court could be applied only if commercial expediency is established with facts. Unless the interest free loan goes to advance business interest of the assessee, there cannot be any commercial expediency. For e.g., if a company or a firm supplying raw material for manufacture of products of the assessee goes into financial crisis and if assistance, rendered by the assessee, would retain their business which in turn helps the assessee to carry on business more successfully, certainly commercial expediency can be canvassed. However, prima facie in this case, from the name of the company to which assessee advanced interest free loans, it appears to be an investment company probably engaged in finance and we do not know what is the commercial expediency that the petitioner can canvass for advancing interest free loans to that concern As already stated, the assessee has shifted the stand canvassed before the first appellate authority in second appeal before the Tribunal, and the Tribunal, without considering the facts by relying on their earlier order, allowed the claim. The Department has stated that the other year''s case relied on by the Tribunal pertains to loans advanced to other companies and not to the investment company and the facts are different. We do not think, the Department is barred from filing appeal against one year''s assessment merely because for another year, they have not contested the matter. The Tribunal''s order is not a precedent to be followed by the Department in every year''s assessment. Since the Department has filed appeal in this case, it was the duty of the Tribunal to decide the case with reference to the facts and not by just following the earlier year''s order. Strangely, the Tribunal has not bothered to consider the various High Court judgments particularly that of this Court, based on which the Commissioner of Income Tax (Appeals) decided the matter, As already found by us, the decision of the Supreme Court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, could be applied only if, on facts, the assessee establishes commercial expediency in advancing interest free loans which the assessee has not ventured to raise or prove before the two lower authorities. We therefore hold that the Tribunal''s order is unsustainable and we therefore set aside the order and remand the case back to them to decide the case on the merits.

The Income Tax appeal is disposed of as above.