JCT Ltd. vs Commissioner of Income Tax

The appeal u/s 260A of the Act for the asst. yr. 1996-97 has been admitted by this Hon''ble Court on the following questions of law:

(i) Whether the Tribunal was justified in law in remanding the issue relating to disallowance of interest expenditure of Rs. 90,35,217 to the AO, particularly in view of the order dt. 20th Dec, 2000 passed by the CIT(A) and the order dt. 25th April, 2003 passed by the Tribunal both for the asst. yr. 1995-96?

(ii) Whether the Tribunal was justified in law in ignoring its findings for the asst. yr. 1995-96 that the advance to M/s Sonia International was made for purchase for capital goods out of the appellant''s own funds and not out of borrowed funds, and in remanding the matter for the asst. yr. 1996-97 to the AO for an enquiry about the source of funds for making the advance on the assumption that it was a loan?

(iii) Whether in view of the findings of the CIT(A) for the asst. yr. 1995-96 which were accepted by the Revenue, namely, that loans were given by the appellant out of its own funds and not out of borrowed funds and comparison between the borrowing rate and the lending rate was not called for and that in any event no disallowance of interest expenditure could be made because of any alleged difference between the borrowing rate and the lending rate, the Tribunal was justified in law in remanding the matter for the asst. yr. 1996-97 to the AO for an enquiry about the source of funds without considering and/or dealing with any of the contentions of the appellant or the said findings for the asst. yr. 1995-96?

(iv) Whether and in any event the order of remand by the Tribunal is contrary to the principles laid down by this Hon''ble Court in various judgments including in Woolcombers of India Ltd. Vs. Commissioner of Income Tax (Central), ?

It appears that the AO disallowed a sum of Rs. 90,35,217 out of the interest paid on borrowed fund. The said sum consisted of two items namely, Rs. 77,55,00,642 in relation to advance made to Sonia International and Rs. 12,79,00,575 on account of difference in the rate of interest between borrowing and lending by the appellant. The said sum of Rs. 12,79,00,575 was in fact treated as notional interest which the appellant should have earned on its interest-bearing loans. Since the said amount was not earned by the appellant, the said equivalent amount was disallowed for not earning the same in respect of the interest paid on borrowed fund.

It appears that interest was disallowed with reference to Sonia International on the assumption as has been stated before us by Mr. Bajoria on an erroneous assumption that the said sum had been given out of borrowed fund. The advance to the said concern as it is submitted was given in the earlier asst. yr. 1995-96 for purchasing capital goods. In spite of such payment the firm failed to supply those goods. The order was rescinded and/or cancelled by the parties and the payment which was made in advance was returned by the said Sonia International to the appellant in instalments. The issue relating to advance by the appellant to the said concern came up for the first time during the asst. yr. 1995-96. The interest was disallowed with reference to the said advance in the said year was subject-matter of appeal which was pending before the CIT(A). The said CIT(A) by his order held that no such disallowance could be made since the advance was for the purpose of procuring capital goods for the business and further the advance was made out of the internal accruals of the appellants. The Tribunal confirmed the said order so passed by the CIT(A).

Our attention was drawn to the statement of account of Sonia International for the asst. yr. 1996-97. It appears from the said accounts that during the year the balance was reduced to Rs. 97,89,008 from Rs. 5,10,51,00,444 and during the year there were several debit and credit entries made in the accounts in respect of the lease rent and other expenses. Therefore, it was contended before us that the said amount was not by way of any advance. The explanation has also been placed before us which was annexed to the paper book (in fact appearing at p. 73 of the paper book). Two other sums as it appears being Rs. 1,57,00,000 and Rs. 25,00,000 were paid on 22nd May, 1995 and 5th June, 1995 respectively. The said sums were paid out of the appellant''s own fund and which has been placed before us on the basis of the evidence annexed to the paper book and our attention was drawn to the said evidence by Mr. Bajoria. In spite of the fact that no borrowed fund has been used for making any advance the Sonia International as contended on behalf of the appellant most of the outstanding were brought forward from the earlier year, the AO contrary to the decision of the CIT(A) and the Tribunal for the preceding asst. yr. 1995-96 disallowed the said sum of Rs. 77,55,00,642 out of interest paid on borrowed fund. The CIT(A) as it is submitted followed the said order which was passed by him for the asst. yr. 1994-95 on the ground that the facts were similar to that year. It is further pointed out that with regard to the asst. yr. 1994-95 no advance was made to Sonia International. The first payment of advance was made for the previous year relevant to the asst. yr. 1995-96. It was further pointed out that the observations made by the AO that the Sonia International was connected with the Thapar Group also cannot be accepted. For the asst. yr. 1994-95 the advances involved were those to the subsidiaries and others. Therefore, the CIT(A) concluded that by not utilising such fund properly and resorting to borrowings the assessee had not followed the normal business norms and/or its memorandum cannot be accepted.

Mr. Bajoria also pointed out that other part of disallowance of Rs. 12,70,575 was made on the advance on several concerns at the average rate of 17.5 per cent whereas the average borrowing rate of the appellant was 17.75 per cent and hence 25 per cent was disallowed from which extra interest could have been earned. In the immediate preceding asst. yr. 1995-96 the AO had made similar disallowance on account of the slight difference in the rate at which the amounts were borrowed and were lent. On appeal against such order CIT(A) deleted such addition.

Against the said order of CIT(A) deleting disallowance of interest for such notional interest the Department did not prefer any appeal before the Tribunal and accepted the same. The CIT(A) in spite of the aforesaid fact in the appeals for the asst. yr. 1996-97 involved herein upheld such disallowance by merely observing that the same reasons as for disallowance of interest of Rs. 77,55,642 relating to Sonia International were applicable.

Being aggrieved the appellant filed an appeal before the Tribunal and Mr. Bajoria further pointed out that the Tribunal did not at all consider the submissions of the appellant with regard to disallowance in respect of Rs. 12,79,575 and further with regard to disallowance of interest of Rs. 77,55,642 with reference to the advance given to Sonia International. The Tribunal also did not follow its own order for the asst. yr. 1995-96 and remanded the issue to the AO, although the order of the AO has become final by reason of the Tribunal''s order for the earlier asst. yr. 1995-96 when such advance was given.

It is submitted that the Tribunal was wrong in remanding the said matter to reopen the issue which has already been decided by the Tribunal and according to him the AO cannot overrule the order so passed by the learned Tribunal can actually go to the details or to the root of the matter in question. Therefore, he submitted that the issue cannot be reopened once which has already been settled by the Tribunal and concluded by the order passed for the asst. yr. 1995-96. He further submitted that miscellaneous application was filed pointing out those anomalies in the order so passed by the learned Tribunal and prayed for review of the said order. But the learned Tribunal was pleased to dismiss the said miscellaneous application since it held that it has no jurisdiction for power to review the order in question. Hence, it is submitted that the order of the Tribunal is perverse and is liable to be set aside.

Mr. Bajoria further pointed out that there was no ground or justification whatsoever for remanding the matter. The Tribunal has no jurisdiction or power to remand the matter unless facts and circumstances justify the same. The only two issues involved were (a) advance given to Sonia International in the earlier asst. yr. 1995-96 which was substantially reduced during the assessment year under appeal and (b) difference in the rate of interest in respect of funds borrowed and lent by the appellant.

In respect of advance to Sonia International made in the earlier assessment year the findings of the Tribunal in its order for such year were final and binding. No disallowance of any interest was made in the earlier year in which advance was given by the Tribunal on the ground that it was for purchase of machinery and from the appellant''s own funds in the assessment year under appeal. The advance was substantially reduced. Accordingly, the question of remand for verifying source of advance made in the earlier year which was not within the scope of the appeal for this assessment year did not arise. It is also submitted that the second issue regarding the difference in rate of interest was not even dealt with by the Tribunal in its order. It even failed to consider that in the earlier asst. yr. 1995-96 the decision of CIT(A) deleting the addition on this ground was accepted by the Department. Accordingly, it is submitted by Mr. Bajoria that the order of the Tribunal is perverse and is liable to be set aside.

We have also heard Mr. Nijamuddin. It is submitted by him that since the Tribunal has not even gone into the merits which has been sought to be raised by way of a review petition before the Tribunal and which is really touching the root of the question which has been posed in this appeal, this matter has to be remanded back before the Tribunal so that the Tribunal can decide the question afresh after taking into account the facts which have been placed before this Court and on the basis of the evidence annexed to the paper book.

After hearing the learned Counsel for the parties and after analysing the facts of the case, it would be proper for us to remand the matter before the learned Tribunal after setting aside the order and the Tribunal is directed to hear out the matter afresh.

In view of this order it is not necessary for us to answer the question which has been posed before us since the matter has already been remanded back before the Tribunal.