C.R. Auluck and Sons P. Ltd. vs Commissioner of Income Tax

Ajay Kumar Mittal, J.—This appeal has been preferred by the assessee u/s 260A of the income tax Act, 1961 (in short, "the Act")/against the order dated June 30, 2010, annexure A. 12, passed by the income tax Appellate Tribunal Chandigarh "B" Bench in I.T.A. No. 915/Chd/2008, for the assessment year 2005-06, claiming the following substantial question of law:

Whether, under the facts and in the circumstances of the case, u/s 36(1)(iii), the interest paid ''for the purpose of business'' has to be assigned restricted meaning such that overlooking inter connection, interlacing, interdependence and unity of the management and the financial affairs of the assessee?

Briefly, the relevant facts necessary for adjudication of the controversy involved, as available on record, may be noticed. The assessee is deriving income from the business of manufacturing of sewing machines and technical consultancy. It filed its income tax return declaring an income of Rs. 45,57,615 for the assessment year in question. The return was processed u/s 143(1)(a) of the Act. Later on, the case was selected under compulsory scrutiny. Notice under sections 143(2) and 142(1) of the Act was issued to the assessee on February 8, 2007. The directors of the assessee-company had the interest in accordance with the profit and loss sharing ratio, in the partnership firm, namely, M/s. Luxmi Engineering Works, Ludhiana, engaged in the business of manufacturing and sale of electric fans and major portion of the sales was being made to M/s. Usha International Ltd. Both the concerns had banking loan arrangements from the same bank, namely, Punjab National Bank whereby the guarantor to the loan of the firm had been rendered by the appellant and its another two companies, namely, J.C. Auluck Investment Pvt. Ltd. and A.C. Auluck Investment Pvt. Ltd. were only the investment companies and they did not have sufficient capacity to rescue the firm running into huge losses and bad financial position. After obtaining a mortgage loan of Rs. 100 lakhs from bank, an amount of Rs. 1,23,55,787 was advanced by the assessee to its sister concern, M/s. Luxmi Engineering Works, as interest-free loan in the last week of March, 2004. The Assessing Officer, vide order dated May 10, 2007, annexure A. 2, disallowed interest to the tune of Rs. 14,82,695 u/s 36(1)(iii) of the Act being the proportionate interest which worked on interest-free loan given by the assessee to its sister concern, M/s. Luxmi Engineering Works, out of borrowed funds. Aggrieved by the order dated May 10, 2007, the assessee filed an appeal before the Commissioner of income tax (Appeals) ("the CIT(A)"). Vide order dated August 29, 2008, annexure A. 5, the appeal was dismissed. Still not satisfied, the assessee filed an appeal before the Tribunal. Vide order dated June 30, 2010, annexure A. 12, the Tribunal dismissed the appeal. Hence, the present appeal by the assessee.

Learned counsel for the appellant submitted that the assessee had taken loan from the bank and advanced the same to its sister concern, M/s. Luxmi Engineering Works, Ludhiana. The shareholdings of the directors in the assessee-company and the partners in the sister concern were common. It was urged that the two concerns were family concerns having different lines of manufacturing under the brand name "Luxmi" and major portion of the sales were being made to M/s. Usha International Ltd. The said sister concern was engaged in the manufacturing of fans under the brand name "Luxmi" and 90 percent. of the sales were being made to it. Both the concerns had taken independent credit limits from Punjab National Bank and the assessee had stood guarantor to the credit limits advanced to its sister concern. However, M/s. Luxmi Engineering Works had gone into huge losses and the bank account was proposed to be declared non-performing asset (NPA) by the bank. It was in these circumstances that a loan of Rs. 100 lakhs was taken from the bank by the assessee and given to its sister concern, M/s. Luxmi Engineering Works. It was contended that in such circumstances, there was commercial expediency as laid down by the apex court in Commissioner of Income Tax, Kerala Vs. Malayalam Plantation Ltd., ) and S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, . It was argued that the findings recorded by the Assessing Officer and affirmed by the Commissioner of income tax (Appeals) and the Tribunal were against the record.

On the other hand, learned counsel for the Revenue supported the order passed by the Tribunal.

After hearing leaned counsel for the parties, we do not find any merit in the appeal.

The Assessing Officer, after appreciating the material, came to the conclusion that there was no commercial expediency in advancing the loan by the assessee to its sister concern, M/s. Luxmi Engineering Works. The relevant finding recorded by the Assessing Officer in that behalf is as under:

The assessee-company itself has a profitable return of income while the sister concern has filed a loss return for the assessment year 2004-05 and nil return for the assessment year 2005-06. This makes the intention more clear as funds are being transferred from a profit-making concern to a loss-making concern which allows the profits to be transferred thereby reducing the tax liability of the profit-making concern. This is made more clear from the table below:

Other guarantors

It is important to mention here that apart from M/s. C.R. Auluck and Sons Pvt. Ltd. two other companies are also guarantors in the loan taken by Luxmi Engineering Works from bank. These companies are J.C. Auluck Investment Pvt. Ltd. and A.C. Auluck Investment Pvt. Ltd. None of these two companies have given any interest-free advance to save their sister concern, i.e., M/s. Luxmi Engineering Works on the pretext as has been done by the assessee-company, i.e. M/s. C.R. Auluck and Sons Pvt. Ltd. The reason for this being that the two investment companies are not in much of profit these years and no reasonable profit can be transferred to the loss-making sister concern. If the business need was to extend interest-free advance to the sister concern, the other guarantors should have been equally eager to extend the same as has been done by the assessee-company but that has not been in the case. It''s only the profit-making concern, i.e., M/s. C.R. Auluck and Sons Pvt. Ltd. which has extended this advance rather than any other guarantor making the intention of reducing the profits very clear.

Profit making concern

The contentions of the counsel for the assessee are not acceptable in the light of above discussion from which it is clear that no commercial expediency whatsoever was involved in the advancing of interest-free loan to the sister concern. It was simply advanced to reduce the profitability of the concern. The decision of the High Court of Punjab and Haryana in the case of Commissioner of Income Tax-I Vs. Abhishek Industries Ltd., is more applicable in this case. The issue before the learned High Court Bench was whether once it is borne out from record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and, on the other hand, certain amounts had been advanced to the sister concerns or others without carrying any interest and without any business purposes, interest to extend that advance had been made without carrying any interest is to be disallowed u/s 36(1)(iii). The learned court decided that the interest has to be disallowed u/s 36(1)(iii) in case advances have of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business could not be subscribed to. Rather there should be nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii). That being the position, there was no escape from the finding that the interest being paid by the assessee to the extent the amounts were diverted to the sister concern on interest-free basis were to be disallowed.

The assessee had taken a loan of Rs. 100 lakhs from the bank at the rate of 12 percent. and advanced the same to its sister concern, M/s. Luxmi Engineering Works. The finding of the Assessing Officer that the advancing of loan was not for commercial expediency and it was a device to divert the income by transferring the funds by way of interest-free loan to its sister concern was upheld on appeal by the Commissioner of income tax (Appeals) with the following observations:

I have carefully considered the contention of the learned counsel for the appellant and perused the relevant record. In the written submissions reproduced above the learned counsel has taken up the same arguments as taken before the Assessing Officer. However, as already discussed the Assessing Officer has duly discussed in detail in the assessment order as to how these arguments do not help the case of the appellant. With regard to the reliance placed on the decision of the hon''ble Supreme Court in the case of S.A. Builders (supra), as elaborated and discussed by the Assessing Officer in the assessment order, no business expediency in respect of the appellant having been proved, the ratio of this decision would not help the case of the appellant. Saving the account of M/s. Luxmi Engineering Works from being declared NPA and the buyer of the appellant and that concern being the same M/s. Usha International as rightly held by the Assessing Officer, cannot be said to be the business expediency in relation to the appellant. For another argument of the appellant that it was one of the guarantors of M/s. Luxmi Engg. Works and that therefore, it had advanced this amount to the sister concern, again as elaborately brought out in the assessment order, the appellant was not the only guarantor and there were two other guarantors being the group concerns, M/s. J.C. Auluck Pvt. Ltd. and A.C. Auluck Investments Pvt. Ltd. Admittedly, the loan has been advanced by the appellant which was a profit-making concern and not by the other two guarantors who did not have substantial income. From this, I am inclined to agree with the Assessing Officer that the amount was advanced to reduce the profitability of the appellant concern only. Also I agree with the Assessing Officer that the ''commercial expediency'' for the purposes of examining the applicability of the ratio of the decision of S.A. Builders Ltd. (supra), has to be seen with the reference to the loan giver and not the loan receiver. As already discussed, no such business expediency is revealed as far as the case of the appellant is concerned.

7.1 In view of the above discussed facts and the legal position, I agree with the Assessing Officer that the ratio of the decision of the hon''ble jurisdictional High Court, i.e., the hon''ble Punjab and Haryana High Court in the case of CIT v. Abhishek Industries Ltd. (supra), is very much applicable in the case of the appellant. Admittedly, the appellant has borrowed funds on which interest had been paid and, on the other hand, amounts having been advanced to the sister concern of the appellant without any interest and further there is no business expediency involved in relation to the appellant. The disallowance made by the Assessing Officer of interest of Rs. 14,82,695 u/s 36(1)(iii) is, therefore, upheld.

The Tribunal, while dismissing the appeal of the assessee, had also concluded that there was no commercial expediency and the interest-free borrowed funds had been advanced for non-business purposes and had accordingly disallowed interest amounting to Rs. 14,82,695 being interest attributable to the interest-free advances made by the assessee to its sister concern out of interest-bearing borrowed funds.

The findings of the Assessing Officer, the Commissioner of income tax (Appeals) and the Tribunal are based on appreciation of material on record in which no perversity could be pointed out by the learned counsel for the assessee. The only endeavour of the learned counsel for the assessee was to reappreciate the evidence and record different finding which does not fall within the scope and domain of section 260A of the Act.

Referring to the judgments relied upon by learned counsel for the assessee in Malayalam Plantation Ltd. and S.A. Builders Ltd.''s cases (supra), the legal proposition enunciated therein is well recognised but in view of the finding concurrently recorded by the Assessing Officer, the Commissioner of income tax (Appeals) and the Tribunal that commercial expediency was not involved in the transaction, the same do not help the assessee. In view of the above, there is no illegality or perversity in the impugned order dated June 30, 2010, passed by the Tribunal. The substantial question of law is answered against the assessee and in favour of the Revenue. Consequently, finding no merit in the appeal, the same is dismissed.