Commissioner of Income Tax-II vs Rockman Cycle Industries Ltd.

Satish Kumar Mittal, J.—This order shall dispose of three Income Tax Appeals bearing ITA Nos. 571, 572 and 573 of 2007. The revenue has filed these appeals u/s 260A of the Income Tax Act (hereinafter referred to as ''the Act'') against the order dated 16-4-2007 passed by the Income Tax Appellate Tribunal, Chandigarh Bench ''A'' (hereinafter referred to as ''the Tribunal'') in ITA Nos. 196 to 198/Chd./2006 in case of the assessee for the assessment years 1996-97,1998-99 and 1999-2000, raising the following substantial questions of law for consideration of this Court:

Whether on the facts and in the circumstances of the case, Tribunal was right in law in deleting the disallowance of interest of Rs. 9,00,000 on the ground that there is no direct nexus between the borrowings and interest-free advances made to sister concern?

2 Whether on the facts and in the circumstances of the case, the ITAT was right in sustaining the deletion though interest-free loan was for non-business purpose?

After notice of motion, we have heard the learned counsel for the parties and gone through the impugned order passed by the Tribunal. In this case, the Tribunal has recorded a finding of fact to the effect that the interest-free loan given to M/s. Gujarat Cycles Limited was for a business consideration. In view of the said finding of fact, the Tribunal while distinguishing the judgment of this Court in CIT v. Abhishek Industries Ltd. [2006] 286 ITR : 156 Taxman 257, has dismissed the appeal of the revenue while coming to the conclusion that the order of the Commissioner of Income Tax (Appeals) was correct.

Counsel for the revenue again while relying upon the judgment of this Court in Abhishek Industries Ltd.''s case (supra), has submitted that from the order of the Tribunal, the aforesaid two substantial questions of law arise for consideration of this Court.

On the other hand, counsel for the assessee while referring to the decision of the Supreme Court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, and Munjal Sales Corporation Vs. Commissioner of Income Tax, Ludhiana and Another, , submitted that once a finding of fact has been recorded by the Tribunal to the effect that the interest-free loan given to the sister concern was for a business consideration, then in that situation merely on the basis of the observations made in Abhishek Industries Ltd.''s case (supra), the order of the Tribunal in deleting the disallowance of interest on the ground that there is no nexus between the borrowings and interest-free advances made to sister concern, cannot be quashed.

After hearing the counsel for the parties, we do not find any substance in the arguments raised by the counsel for the revenue. As per Section 36(1)(iii) of the Act, the amount of interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as a deduction in computing the income u/s 28 of the Act. Once a finding of fact has been recorded that the interest paid in respect of the advances was for business consideration, then the deduction has to be allowed to the assessee while computing the income. Merely because the interest-free loan has been advanced to the sister concerns, no such inference can be drawn that the said advances were not for any business connection or purpose.

The Supreme Court in S.A. Builders Ltd.''s case (supra) has held that when the assessee borrowed the fund from the bank and lent some of it to its sister concerns as an interest-free loan, then the real test to allow the interest as deduction u/s 36(1)(iii) of the Act is whether this was done for commercial expediency or not. Similar view has been taken by the Supreme Court in Munjal Sales Corporation''s case (supra).

In view of the above facts, we are of the opinion that no substantial question of law arises for consideration out of the order of the Tribunal. Hence, all the three appeals are dismissed.