The Commissioner of Income Tax vs Century Flour Mills Ltd.

P.P.S. Janarthana Raja, J.—The revenue has come on appeal as against the order of the Income Tax Appellate Tribunal, Madras ''B''

Bench, dated 24.06.2004 made in ITA Nos. 79 and 80/Mds/1998.dated 06.04.2004 for the assessment years 1991-1992 and 1992-1993

respectively, raising the following substantial question of law.

Whether in the facts and circumstances of the case, the Tribunal was right in holding that the interest paid on the loan availed from bank can be

allowed as a deduction, when said loan was advanced to the Managing Director without charging any interest?

The Assessee is a company in which public are not substantially involved. The Assessee is engaged in the business of manufacturing and sale of

maida, sooji and wheat items. The relevant assessment years are 1991-1992 and 1992-1993 and the corresponding assessment years ended on

31.03.1991 and 31.03.1992 respectively. For the assessment year 1991-1992, the Assessee filed a return admitting the loss of Rs. 27,29,851/-.

The assessing officer processed the same u/s 143(1)(a) of the Income Tax Act. Later, it was found in the course of the assessment proceedings

that the Assessee had entered into an agreement for the purchase of the land owned jointly by P. Govindasamy, Managing Director of the

Assessee Company and also N. Chockalingam. The agreement was entered on 26.10.1983 and a sum of Rs. 20,00,000/-was given by the

Assessee company as advance to the Managing Director during the previous year relevant to the assessment year 1984-1985. One of the Clauses

of the agreement stated that if the Assessee company is unable to supply the goods contemplated under the agreement on or before 30.04.1984,

they should refund the amount taken as advance and also pay a consolidated damage of Rs. 5,00,000/-. The said agreement was renewed year

after year. It is also pertinent to note that no sale had taken place and the vendor also refunded the entire amount of Rs. 30,00,000/-on

05.09.1992. During the assessment year, it was found that the borrowed funds of the Assessee on which interest paid, was claimed as a

deduction. Therefore, the assessing officer was of the view that the Assessee has not proved that the amount given as advance was out of its own

surplus funds. Therefore, the assessing officer disallowed the interest to the extent of 18% on the advance of Rs. 20,00,000/-and the same worked

out to Rs. 3,60,000/-.

For the assessment year 1992-1993, the return was filed on 28.12.1992 claiming net loss of Rs. 13,30,487/-. The return was processed u/s

143(1)(a) and the assessing officer also made certain prima facie adjustments and determined the tax to the extent of Rs. 5,18,492/-. Later, the

assessment was taken for scrutiny and competed the assessment u/s 143(3) and determined the total income at Rs. 18,35,727/-. While computing

the assessment, he disallowed the interest payment of Rs. 4,24,800/-on the ground that the Assessee has diverted the borrowed funds. Aggrieved

by that orders disallowing the interest, the Assessee filed appeals to the Commissioner of the Income Act (Appeals). The Commissioner of

Appeals confirmed the assessment order and dismissed the appeals. Aggrieved by that, the Assessee filed the appeals to the Income Tax

Appellate Tribunal. The Tribunal held that the revenue has not established the nexus between the borrowed funds and advanced money with the

Managing Director. Therefore, the Tribunal set aside the order of the lower authorities and allowed the appeals. Aggrieved by that, the revenue

filed the present appeals raising the above questions of law.

Learned Counsel appearing for the revenue vehemently contended that the order passed by the Tribunal is illegal, wrong, without basis and

justification. He further contended that the Assessee Company has not proved that the amount given as advance to the Managing Director was out

of its own surplus funds. He further submitted that the Assessee has been paying interest on bank loan and at the same time lent the money without

charging any interest and relied on the decision of the Kerala High Court reported in Commissioner of Income Tax Vs. Baby, and the decision of

the Punjab and Haryana High Court reported in Commissioner of Income Tax-I Vs. Abhishek Industries Ltd., . Therefore, the order passed by

the Income Tax Appellate Tribunal is not in accordance with law and the same has to be set aside.

In spite of notice having been served on the Assessee, there is no representation on behalf of the Assessee and his name has also appeared in

the cause list.

Heard the learned Counsel appearing for the revenue and perused the documents available on record. The Assessee Company entered into an

agreement for purchase of land owned jointly by P. Govindasamy, Managing Director of the Assessee company and N. Chockalingam as per the

agreement of sale dated 26.10.1983. As per the agreement, a sum of Rs. 20,00,000/-was given as advance to the Managing Director during the

previous year relevant to the assessment year 1984-1985. Also, one of the Clauses in the agreement contemplated that if the vendors are unable to

comply with the sale as per the agreement entered on 30.04.1984, they would refund the amount taken as advance and also pay the consolidated

damage of Rs. 5,00,000/-. The said agreement was also renewed year after year. Due to some unavoidable reasons, the sale was not effected and

the revenue has not disallowed any interest in earlier assessment years i.e., 1984-1985 to 1990-1991. It is also pertinent to note that the Managing

Director refunded the entire advance amount of Rs. 30,00,000/-to the Assessee company on 05.09.1992 since the sale has not been effected. So

in view of the refund of the amount, it is clear that the company paid the amount only for purchase of land owned jointly by the Govindasamy,

Managing Director and Chockalingam. It is only an advance and it is not a loan as alleged by the assessing officer. Only for purchase of the

property, the amount was given to the land owner, who is the Managing Director and another person by name one Chockalingam. It is not a loan

simplicitor. It is only the sale consideration paid as advance. It is also seen from the order of the Tribunal that a paper book was filed by the

Assessee before the Tribunal giving the details regarding advance amount and also the details of secured loan from 1983 to 1992 and even for the

assessment year 1987-1988 to 1990-1991, there is no disallowance of interest by the revenue. After considering the materials available on record,

the Tribunal in paragraph 5 held as follows:

We have heard the submissions of both the parties and gone through the case law cited by the Assessee''s counsel. It is seen that the Assessing

Officer has made the additions without going into the facts of the case. He has never tried to connect or prove the nexus with the borrowed funds

and the advanced funds. In earlier years in Assessee''s own case no disallowance was made. This isa good basis for not making the disallowance

for these years also. The principle of opportunity cost as enumerated by the C.I.T.(Appeals) has not relevance when there is no nexus between the

borrowed funds and advanced funds. Following the case law cited by the Assessee''s counsel cited supra and going through the facts of the case,

we allow the claim of the Assessee and accordingly, set aside the orders of the authorities below.

From a reading of the above, the Tribunal has given a categorical finding that there is no nexus established by the assessing officer between the

borrowed fund and the advanced amount. Therefore, the assessing officer has failed to establish that the borrowed amount was given as a loan to

the Managing Director. It is also pertinent to note that the borrowed fund was not diverted for non-business purposes. In the present case, the

amount is given only for the purchase of the land and it is for benefit of the business and it cannot be held that it is for the non-business purposes.

The revenue has not disallowed any interest for the period from 1984-1985 to 1990-1991. Only during these two years, the revenue disallowed

the interest. Considering the above factors, the Tribunal has correctly come to the conclusion that the disallowance made by the assessing officer is

not in accordance with law and rightly set aside the order of the lower authority.

In the decision of Kerala High court in Commissioner of Income Tax v.V.I. Baby and Co., cited supra, the Assessee borrowed fund from the

bank and transferred sizeable amounts to the personal accounts of its partners and advanced amounts to the relatives of the partners and sister

concerns and had not charged interest and hence, the assessing officer disallowed the proportionate interest payment in respect of the amounts so

advanced by the Assessee in computing its profits. Further, it is clear from that case that the Assessee had not derived any benefit out of the

advances to the partners, their relatives and the sister concerns and the Assessee was not the beneficiary of the investments made by the partners

and their relatives. Therefore, the Kerala High Court rightly held that since the Assessee was not the beneficiary of the investments made by the

partners and their relatives and the advance money was interest free, the assessing officer was justified in disallowing the interest. In the present

case, the facts are factually different and distinguished from the Kerala High Court judgment. Therefore, the judgment relied on by the revenue

does not help the case of the revenue.

In the decision of Punjab and Haryana High Court in Commissioner of Income Tax V. Abishek Industries Limited cited supra, it has been held

that the borrowed fund was used for non business purposes. Therefore, the Punjab and Huryana High Court held that the investment was made as

advance for non-business purposes and hence, the said judgment is also not helpful and support the case of the revenue.

The Supreme Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, , has considered

the question of payment of interest on the borrowed. In that case, the borrowed money was lent to the sister concern without charging interest and

it was held that the revenue must look into the transaction whether the transfer of funds to the sister concern was from the point of view of

commercial expediency and whether the amount was advanced for earning profits. Considering the principles in the above judgment, it is clear that

in the present case, the amount was given to the raa Managing Director and other persons only for the purchase of the land and also for business

purposes and there is no transaction of loan involved in this case. In these circumstances, I do not find any error or illegality in the order of the

Tribunal so as to warrant interference. It is a question of fact. It is not a perverse order. The order passed by the Tribunal is based on valid

materials and evidence. Accordingly, the question raised is answered in favour of the Assessee and against the revenue. The appeal is devoid of

merits and the same is dismissed.