Joint Commissioner of Income Tax vs Beekay Engineering Corporation

Dhirendra Mishra, J.—The appellant/Revenue''s appeal u/s 260A of the Income Tax Act, 1961 (for brevity "the Act") against the order of the Income Tax Appellate Tribunal, Nagpur (for brevity "the Tribunal") has been admitted by this Court on the following substantial question of law:

Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was justified in deleting the addition of Rs. 15,44,750 being disallowance out of interest equivalent to the amount of interest receivable by the respondent on interest free loan in view of Section 36(1)(iii) of the Income Tax Act?

Briefly stated the facts of the case, as projected in the impugned order, are that the assessee is engaged in manufacturing of different types of equipment and spare parts mainly for steel and power sector, railways and cement plants and execution of turnkey projects. The assessee filed its return of income for the assessment year under consideration declaring a total income of Rs. 2,64,42,974. The Assessing Officer (AO) on examination of the account books of the assessee noticed that the assessee made an advance of Rs. 50 lakhs to Air Construction Consultant Pvt. Ltd., Calcutta and during the year, the debit balance was transferred to the account of Smt. Shashi Gupta and Master Nitin Gupta at Rs. 25 lakhs each. The explanation of the assessee before the Assessing Officer was that Shri Vijay Kumar is a partner in the assessee-firm in his capacity as karta of Vijay Kumar (HUF). There was credit balance of Rs. 1,80,25,443 for which no interest is being paid and since the above two persons were members of the Hindu undivided family, the firm had given interest free advances to them because of substantial credit balance in the account of the Hindu undivided family. The Assessing Officer rejected the explanation and calculated the interest at the market rate at 18 per cent. at Rs. 15,44,754 disallowed the interest equal to this amount out of the interest claimed by the assessee.

The appeal preferred by the assessee was further dismissed by the Commissioner of Income Tax (Appeals) by confirming the order of disallowance by the Assessing Officer, however, the Tribunal by the impugned order allowed the appeal of the assessee with a finding that nothing has been brought on record to establish that the assessee advanced interest free loan out of the borrowed funds to the wife and son of the partner and no nexus has been established between the borrowed fund and interest free loan made to the members of the Hindu undivided family. No evidence has been brought on record to prove that the amounts borrowed by the assessee were not utilized by the assessee for its own business but were diverted as advance to members of the Hindu undivided family free of interest. On the contrary, the assessee explained that there is credit balance of Rs. 1,80,25,443 in the account of the Hindu undivided family with the firm for which no interest is being paid and since the above two persons are members of the Hindu undivided family, the firm has given interest free advance to them because of substantial credit balance in the account of the firm and accordingly, disallowance of Rs. 15,44,750 has been deleted.

Shri Rajeev Shrivastava, learned Counsel for the appellant/Revenue vehemently argued that the Assessing Officer on the basis of accounts submitted by the assessee found that the assessee has suffered a huge interest burden of Rs. 42,45,766 (actual interest burden as per the account furnished by the assessee is to the tune of Rs. 2,00,31,206) during the year under consideration as against Rs. 1,65,84,102 of the preceding assessment year and accordingly, it has been held that advances to the members of the Hindu undivided family were for non-business purposes. It was held that where the amounts were borrowed in interest and interest free loans were given to the subsidiary company, such interest would be allowable only if proved that the business of the subsidiary is the assessee''s business. The finding of the Tribunal that no evidence has been adduced to establish that the amounts borrowed by the assessee were not utilized by the assessee for its own purpose but were diverted as advances to the members of the Hindu undivided family free of interest is erroneous. The finding that there is sufficient fund of the partner in the opening balance and sufficient profit has been earned during the year also is not supported from the heads "Source of funds, application of funds and partner''s capital account" in the balance-sheet. In view of the above fact, the Assessing Officer has rightly held that the amount borrowed by the assessee-firm on interest has been advanced to the members of the Hindu undivided family on interest free loan and making addition of Rs. 15,44,750 equivalent to the amount of interest payable by the assessee on interest free loan is just and proper.

Reliance is placed in the matter of Tirupati Trading Co. Vs. Commissioner of Income Tax,

On the other hand, Shri Moolchand Jain, learned Counsel appearing on behalf of the respondent/assessee would argue that from a perusal of the balance-sheet for the relevant assessment year filed as annexure R/11, it would be evident that there is sufficient fund of the partner in the opening balance and sufficient profit has been earned during the year, out of which the said amount has been given and it is not the case of diversion of borrowed funds. The Tribunal on due examination of the balance-sheet of the assessee and after considering the material available on record has categorically recorded a finding of fact that no evidence has been brought on record to prove that the amount borrowed by the assessee for its own business but were diverted as advances to the members of the Hindu undivided family free of interest and there is credit balance of Rs. 1,80,25,443 in the account of the Hindu undivided family of the assessee with the firm for which no interest is being paid. The finding of the Tribunal being based on the relevant evidence available on record, no question of law much less any substantial question of law arises from the orders of the Tribunal.

Reliance is placed in the matter of Munjal Sales Corporation Vs. Commissioner of Income Tax, Ludhiana and Another, .

We have heard learned Counsel for the parties. We have carefully examined the balance-sheet filed by the assessee as document of annexure R/11.

The finding of the Tribunal that there is credit balance of Rs. 1,80,25,443 in the account of the Hindu undivided family with the firm for which no interest is being paid is borne out as on March 31,1997, is established from the document of annexure R/13 being the partner''s capital amount schedule to the balance-sheet.

In the matter of Tirupati Trading Co. Vs. Commissioner of Income Tax, the question before the Calcutta High Court was whether the Tribunal was justified in disallowing interest of Rs. 1,01,250, as during the scrutiny, the Income Tax Officer found that the assessee has claimed interest on borrowed cash amount of Rs. 8,60,000 and on the same date that has been advanced to M/s. Puspak Commercial Co. Ltd. free of interest. The assessee''s case before the Tribunal was that it was not interest free loan to M/s. Puspak Commercial Co. but it was an advance against a flat booked by the asses-see in a building, however, when the building did not come up, the asses-see withdrew the amount. Rejecting the explanation, it was held that the loan so advanced only to accommodate the party as the assessee and the party had intimate connections and it was not for the purposes of business of the assessee. The Tribunal, considering that no evidence except oral claim that the flat was booked for the purpose of the assessee-firm, affirmed the order of the Income Tax Officer and the Commissioner of Income Tax (Appeals) and dismissed the appeal of the assessee.

In the matter of Munjal Sales Corporation Vs. Commissioner of Income Tax, Ludhiana and Another, , the assessee advanced interest free loan to its sister concern amounting to Rs. 5 lakhs. The Tribunal, considering the noting on record to show that loans were given to the sister concern by the assessee-firm out of its own fund, held that the assessee was not entitled to claim deduction u/s 36(1)(iii) of the Act, however, the Supreme Court, considering the fact that Rs. 1.91 crores was available in the opening balance as on April 18, 1994 whereas loan given to the sister concern was small amount of Rs. 5 lakhs, held that the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs.

In the matter of Commissioner of Income Tax Vs. Hotel Savera, , the High Court of Madras held that in the absence of any material or evidence to indicate that the firm had advanced moneys out of borrowed funds, the presumption would arise that money was advanced out of its own funds. The finding of the Tribunal that no disallowance is called for is a finding of fact and the same is sustainable in law and the finding of the Appellate Assistant Commissioner that the advance would have come proportionately out of own funds as well as borrowed funds is not based on any principle of law. It was concluded that no part of interest on borrowings could be disallowed on the ground that part of the money borrowed was advanced to a third party free of interest when there was sufficient credit balance in the partners'' accounts and there was no evidence that the amounts were advanced out of the borrowed amounts.

In the case in hand also, it is evident from the balance-sheet of the assessee-firm that there was sufficient fund in the account of the assessee-Hindu undivided family as found by the Tribunal. Even the profit of Rs. 46,81,943 accrued to the firm in the relevant financial year. In these circumstances, the findings of fact recorded by the Tribunal that no evidence is available on record to show that the borrowed funds were not utilized by the assessee for its own business but were diverted as advance to the members of the Hindu undivided family free of interest and, therefore, no justification in making disallowance of Rs. 15,44,750 out of interest paid on borrowed funds are findings of fact and the same do not call for interference.

On the basis of the aforesaid discussion, we are of the opinion that no substantial question of law arises for adjudication of this appeal. The appeal is accordingly dismissed.