JUDGMENT
1. Heard the learned counsel for the applicant Sri Pradeep Agarwal and Sri S.M.K. Chaudhary for the assessee.
1. Heard the learned counsel for the applicant Sri Pradeep Agarwal and Sri S.M.K. Chaudhary for the assessee.
2. These are two references under section 256(2) of the Income Tax Act challenging the assessment orders passed in income-tax appeal by the Income Tax Appellate Tribunal for the assessment year 1986-87 decided vide order dated 22-4-1998.
2. These are two references under section 256(2) of the Income Tax Act challenging the assessment orders passed in income-tax appeal by the Income Tax Appellate Tribunal for the assessment year 1986-87 decided vide order dated 22-4-1998.
3. The assessee is a registered firm. The two points, which became subject matter of consideration before the Commissioner, Income Tax (Appeals) as well as the Income Tax Appellate Tribunal are to the following effect: (i) whether the assessee was entitled to 100 per cent depreciation on shuttering material; and (ii) whether relief of Rs. 21,100 being the disallowance out of interest for not charging adequate interest from the sister concern i.e., M/s. Poonam Biscuits has rightly been given.
3. The assessee is a registered firm. The two points, which became subject matter of consideration before the Commissioner, Income Tax (Appeals) as well as the Income Tax Appellate Tribunal are to the following effect: (i) whether the assessee was entitled to 100 per cent depreciation on shuttering material; and (ii) whether relief of Rs. 21,100 being the disallowance out of interest for not charging adequate interest from the sister concern i.e., M/s. Poonam Biscuits has rightly been given.
4. In respect to the 100 per cent depreciation on shuttering material, the parties no more dispute that the matter is covered by the judgment in Harijan Evam Nirbal Varg Avas Nigam Ltd. v. CIT (1998) 229 ITR 776 (All) and, therefore, the said depreciation has rightly been given to the assessee.
4. In respect to the 100 per cent depreciation on shuttering material, the parties no more dispute that the matter is covered by the judgment in Harijan Evam Nirbal Varg Avas Nigam Ltd. v. CIT (1998) 229 ITR 776 (All) and, therefore, the said depreciation has rightly been given to the assessee.
5. We do not find any referable question so far the aforesaid point is concerned.
5. We do not find any referable question so far the aforesaid point is concerned.
6. In respect of claim of deletion in excess payment of interest of Rs. 21,000, the assessing officer found that the assessee was not entitled to such deletion and, therefore, it was added in income of the assessee.
6. In respect of claim of deletion in excess payment of interest of Rs. 21,000, the assessing officer found that the assessee was not entitled to such deletion and, therefore, it was added in income of the assessee.
7. The facts which gave rise to the aforesaid dispute are that the applicant-firm had given loan of Rs. 14 lakhs to its sister concern M/s. Poonam Biscuits. The interest charged from M/s. Poonam Biscuits was at the rate of 15 per cent as against the interest charged from the assessee by various Government departments and banks was at the rate of 16.5 per cent from whom advances and loan had been taken. The assessee was required to explain as to why lesser rate of interest has been charged when the firm was paying 16.5 per cent on the loans taken by it. The assessee-firm in response submitted that the loan which was given to M/s. Poonam Biscuits was not a loan out of any loan taken by the assessee from any party including the bank and the Government departments and that the firm was itself having sufficient capital so as to advance loan to the sister concern. It was the case of the assessee that its capital amounts to Rs. 54 74,892 and, therefore, the firm had enough funds to give loan to M/s. Poonam Biscuits without taking any loan from outside parties and it was free to charge any rate of interest that was agreed upon between the two.
7. The facts which gave rise to the aforesaid dispute are that the applicant-firm had given loan of Rs. 14 lakhs to its sister concern M/s. Poonam Biscuits. The interest charged from M/s. Poonam Biscuits was at the rate of 15 per cent as against the interest charged from the assessee by various Government departments and banks was at the rate of 16.5 per cent from whom advances and loan had been taken. The assessee was required to explain as to why lesser rate of interest has been charged when the firm was paying 16.5 per cent on the loans taken by it. The assessee-firm in response submitted that the loan which was given to M/s. Poonam Biscuits was not a loan out of any loan taken by the assessee from any party including the bank and the Government departments and that the firm was itself having sufficient capital so as to advance loan to the sister concern. It was the case of the assessee that its capital amounts to Rs. 54 74,892 and, therefore, the firm had enough funds to give loan to M/s. Poonam Biscuits without taking any loan from outside parties and it was free to charge any rate of interest that was agreed upon between the two.
8. The assessing authority did not feel satisfied with the answer given by the assessee and held that the excess amount of interest should be treated as income of the assessee and, therefore, directed the same to be added in its income.
8. The assessing authority did not feel satisfied with the answer given by the assessee and held that the excess amount of interest should be treated as income of the assessee and, therefore, directed the same to be added in its income.
9. Placing reliance upon the case of CIT v. H.R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All) the argument of the revenue has been rein forced by Sri Pradeep Agarwal that the Commissioner of Income Tax as well as the Income Tax Appellate Tribunal committed gross illegality in allowing the deletion of the aforesaid amount.
9. Placing reliance upon the case of CIT v. H.R. Sugar Factory (P) Ltd. (1991) 187 ITR 363 (All) the argument of the revenue has been rein forced by Sri Pradeep Agarwal that the Commissioner of Income Tax as well as the Income Tax Appellate Tribunal committed gross illegality in allowing the deletion of the aforesaid amount.
10. In the case of H.R. Sugar Factory (P) Ltd. (supra), the assessee, a private limited company, was carrying on the business of manufacture of sugar, in which the directors /shareholders were substantially interested. For the purposes of business, the assessee raised loan from banks on the security of its assets. It was also having cash credit account with banks. The assessee had been advancing loans to its directors and since there was practically no repayment, the loan amounts went on mounting. The assessee was charging interest at the rate of 5 per cent per annum on the loans advanced to the directors, whereas it was paying interest at the rate of 8 per cent per annum on the moneys borrowed by it from banks.
10. In the case of H.R. Sugar Factory (P) Ltd. (supra), the assessee, a private limited company, was carrying on the business of manufacture of sugar, in which the directors /shareholders were substantially interested. For the purposes of business, the assessee raised loan from banks on the security of its assets. It was also having cash credit account with banks. The assessee had been advancing loans to its directors and since there was practically no repayment, the loan amounts went on mounting. The assessee was charging interest at the rate of 5 per cent per annum on the loans advanced to the directors, whereas it was paying interest at the rate of 8 per cent per annum on the moneys borrowed by it from banks.
11. The question arose that whether the advancement of loans to the Directors at the lower rate than the rate at which the loan was taken by the assessee can be treated as income of the assessee or not.
11. The question arose that whether the advancement of loans to the Directors at the lower rate than the rate at which the loan was taken by the assessee can be treated as income of the assessee or not.
12. The High Court answered the said reference by holding that the assessee was not a finance company. It was engaged in manufacture of sugar. No business purpose was served by the advances to its directors. The amount of interest payable in each year on account of the loans to the directors was very large and this fact could not be glossed over by saving that the amount was not substantial in each of the relevant years. The company might have borrowed large amounts for the purpose of its business every year, but that did not explain the huge advances to the directors /shareholders. Had this money been not advanced to the directors it would have been available to the assessee for its business purpose and to that extent it might not have been necessary to borrow from the bank. Therefore, the Income Tax Officer was right in disallowing the difference between interest paid to the banks and interest recovered from the directors under section 36(1)(iii) of the Income Tax Act, 1961.
12. The High Court answered the said reference by holding that the assessee was not a finance company. It was engaged in manufacture of sugar. No business purpose was served by the advances to its directors. The amount of interest payable in each year on account of the loans to the directors was very large and this fact could not be glossed over by saving that the amount was not substantial in each of the relevant years. The company might have borrowed large amounts for the purpose of its business every year, but that did not explain the huge advances to the directors /shareholders. Had this money been not advanced to the directors it would have been available to the assessee for its business purpose and to that extent it might not have been necessary to borrow from the bank. Therefore, the Income Tax Officer was right in disallowing the difference between interest paid to the banks and interest recovered from the directors under section 36(1)(iii) of the Income Tax Act, 1961.
13. In the present case, it is the specific case of the assessee that the firm was having sufficient capital amount so as to advance loan from its own funds. It is also the case of the assessee that the amount which has been advanced to M/s. Poonam Biscuits, the sister concern, has not been advanced from the amount of loan taken by the assessee from the bank or any other Government department.
13. In the present case, it is the specific case of the assessee that the firm was having sufficient capital amount so as to advance loan from its own funds. It is also the case of the assessee that the amount which has been advanced to M/s. Poonam Biscuits, the sister concern, has not been advanced from the amount of loan taken by the assessee from the bank or any other Government department.
14. In the case of CIT v. Tin Box Co. (2003) 260 ITR 637, almost a similar question arose for consideration before the Delhi High Court, wherein the court found that the department had not been able to controvert or disprove the fact that the assessee had substantial capital and interest-free funds available with it, not only in the preceding years but also in the years under consideration, which far exceeded the interest-free advances to the sister concern.
14. In the case of CIT v. Tin Box Co. (2003) 260 ITR 637, almost a similar question arose for consideration before the Delhi High Court, wherein the court found that the department had not been able to controvert or disprove the fact that the assessee had substantial capital and interest-free funds available with it, not only in the preceding years but also in the years under consideration, which far exceeded the interest-free advances to the sister concern.
15. The court also took into consideration the decision in the case of CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del).
15. The court also took into consideration the decision in the case of CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del).
16. The next case which has been relied upon by the learned counsel for the assessee is CIT v. India Carbon Ltd. (2001) 247 ITR 510 (Guj), wherein the Tribunal found that there was no nexus between the advance made to the borrower by the assessee and the deposit made by the assessee in the form of security deposit, when such advance was made from the current account of the assessee.
16. The next case which has been relied upon by the learned counsel for the assessee is CIT v. India Carbon Ltd. (2001) 247 ITR 510 (Guj), wherein the Tribunal found that there was no nexus between the advance made to the borrower by the assessee and the deposit made by the assessee in the form of security deposit, when such advance was made from the current account of the assessee.
17. The court found that the findings of the Tribunal were pure findings of fact and, therefore, no question of law arises.
17. The court found that the findings of the Tribunal were pure findings of fact and, therefore, no question of law arises.
18. Similar view, was expressed by the Madras High Court in the case CIT v. Hotel Savera (1999) 239 ITR 795. In this case the court held that even after debiting the drawings and the loss in the business, there were sufficient funds with the firm to cover the entire advance to the hotel. In this case the Tribunal by applying the principles laid down by the Andhra Pradesh High Court in the case of CIT v. Gopikrishna Muralidhar (1963) 47 ITR 469, held that where the money borrowed had been mixed up with their own funds and that it was impossible to come to the conclusion that from which fund the amounts were advanced to the hotel free of interest and the presumption as enunciated by the Andhra Pradesh High Court would in the aforesaid case would apply, the Tribunal, therefore, held that the working done by the Appellate Assistant Commissioner in disallowing a portion of the interest was not based on any principle and the estimate based by the Appellate Assistant Commissioner was found to be incorrect.
18. Similar view, was expressed by the Madras High Court in the case CIT v. Hotel Savera (1999) 239 ITR 795. In this case the court held that even after debiting the drawings and the loss in the business, there were sufficient funds with the firm to cover the entire advance to the hotel. In this case the Tribunal by applying the principles laid down by the Andhra Pradesh High Court in the case of CIT v. Gopikrishna Muralidhar (1963) 47 ITR 469, held that where the money borrowed had been mixed up with their own funds and that it was impossible to come to the conclusion that from which fund the amounts were advanced to the hotel free of interest and the presumption as enunciated by the Andhra Pradesh High Court would in the aforesaid case would apply, the Tribunal, therefore, held that the working done by the Appellate Assistant Commissioner in disallowing a portion of the interest was not based on any principle and the estimate based by the Appellate Assistant Commissioner was found to be incorrect.
19. In the case in hand, the Commissioner of Income Tax has recorded a specific finding about the sufficiency of the capital amount being available with the firm and its partners and has also taken note of the fact that the amount of loan which has been advanced to the sister concern M/s. Poonam Biscuits, was not advanced from the amount of loan taken from the bank and other Government departments. That being so, the view taken by the Commissioner of Income tax as well as the Tribunal does not make out any referable question, so as to be answered by this Court.
19. In the case in hand, the Commissioner of Income Tax has recorded a specific finding about the sufficiency of the capital amount being available with the firm and its partners and has also taken note of the fact that the amount of loan which has been advanced to the sister concern M/s. Poonam Biscuits, was not advanced from the amount of loan taken from the bank and other Government departments. That being so, the view taken by the Commissioner of Income tax as well as the Tribunal does not make out any referable question, so as to be answered by this Court.
20. Both the reference applications are rejected.
20. Both the reference applications are rejected.