ORDER
1. The Income Tax Appellate Tribunal, Allahabad, has referred the following two questions of law under Section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), for opinion to this Court:
Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in holding that the assessee's claim for deduction of interest on excess levy sugar price was allowable?
Whether, on the facts and in the circumstances of the case, the Tribunal was legally justified in upholding the Commissioner (Appeals)'s action in deleting the disallowance of interest of Rs. 3,60,000, when no interest was charged by the assessee-company on the advances given to its subsidiaries, namely, M/s. Dhampur Yeast Co., and M/s. U.P. Strawboards and Agro Products Ltd.?"
2. The reference relates to years 1983-84 to 1986-87.
3. Briefly stated the facts, giving rise to the present reference are as follows:
The facts, which are common to question No. I is concerned, that applies for all the assessment years and under reference is related to the rate of interest payable on the excess levy price sugar collected by the assessee. The claim of the assessee was that interest at 15 per cent was allowable while the department had not allowed any interest. The Commissioner (Appeals), however, allowed the interest at 12.5 percent against which allowance, the department carried the matter to the Tribunal and the assessee was aggrieved on the order of the Commissioner (Appeals) for restricting the deduction to 12.5 per cent. The Tribunal in paras 4, 5, 6 and 7 of the order had made the following observations:
4. We have given our very careful consideration to the rival submissions. The amendment to Section 3 of the Levy Sugar Price Equalisation Fund Act by the Levy Sugar Price Equalisation (Amendment) Fund Act, 1984 added the following provisions:
(a) the interest due on so much of any amount of any excess realisation made before the date of commencement of the Levy Sugar Price Equalisation Fund (Amendment) Act, 1984 as is not credited to the fund together with interest at the aforesaid rate of twelve and half per cent per annum before the expiry of sixty days from the date of such commencement; and
(b) the interest due on so much of the amount of any excess realisation made on or after the date of such commencement as is not credited to the fund together with interest at the aforesaid rate of twelve and a half per cent per annum within sixty days from the date on which such amount was realised shall be at the rate of fifteen per cent per annum from the date on which such amount was realised by the producer.'
5. The amendment to sub-Section (5) of Section 3 read as under:
'Credit to the fund within sixty days from the date of such final disposal such amount to the extent it represents any excess realisation together with interest due thereon at the rate of twelve and a half per cent per annum from the date on which such amount was realised by him Provided that:
(i) the interest due on so much of such amount as was realised before the date of commencement of the Levy Sugar Price Equalisation Fund (Amendment) Act, 1984 and is not credited to the fund together with interest at the aforesaid rate of twelve and half per cent per annum before the expiry of sixty days from the date of such commencement; and
(ii) the interest due on so much of such amount as is realised after such commencement and not credited to the fund together with interest at the aforesaid rate of twelve and half per cent per annum within sixty days from the date on which such amount was realised shall be at the rate of fifteen per cent per annum from the date on which such amount was realised by the producer.'
6. There is another addition to the Section 5A which reads as under:
(5-A) Notwithstanding anything contained in sub-Section (5), the interest payable on the amount of any excess realisation required to be credited to the fund under that sub-Section in respect of any period during which such amount was by reason of any order of any court held by the producer with any other person or with any Court, Government bank or other authority referred to in Clause (a) of that sub-Section shall be the interest which actually accrued on such amount in respect of such period.
7. The reading of the above amendment indicates that it recognises the two parameters (a) collections of excess price sugar prior to 23-8-1984 and (b) the collections on and after 23-8-1984. In both the parameters, the provision states that if the interest due on such realisation is not credited to the fund at the rate of 12.5 per cent before expiry of sixty days from 23-8-1984 and in respect of the second parameter within sixty days from the date of realisation, then only the rate of 15 per cent interest shall become operational. If the interest stands credited to the fund account at the rate of 12 per cent then the 15 per cent shall not be applicable. The reading of sub-Section (5A) as amended (teproduced above) goes to indicate that if the excess realisation is held by the producer as ordered by the Court, with any person, Court, Government or bank then the interest shall be limited to that amount actually accrued for such period. The reading of the order of the authorities below does not give any indication as to whether the interest on the excess sugar price realised had been credited to the fund account at the rate of 12.5 per cent. We may observe that if it had not so been credited to the fund account at the rate of 12.5 per cent then the interest on the excess sugar price realised shall become payable at the rate of 15 per cent. This would be the position if provisions of sub-Section (5A) are not applicable to the facts of the case. The reading of the order does not give an indication that the amount has been provided in the books and not credited to the fund account. The assessing officer, therefore, directed to examine this aspect as to whether the fund account has been credited with interest at the rate of 12.5 per cent for the period for collections earlier to the amendment and if it has been so credited then limit the deduction to 12.5 per cent and in the event of there being no credit to the fund account, then he shall allow reduction to the extent of 15 per cent. We may add that the Tribunal had been consistently allowing deduction of interest on the excess sugar price realised by the assessee. Following this order, we have come to the above conclusion."
Insofar as the second question is concerned, which is relevant for assessment year 1983-84, the assessing officer made the following observations in including the said amount of Rs. 3,60,000 as income of the assessee:
"2. Interest on advance to Dhampur Yeast Co. & Straw Board & Agro Products Ltd.
As discussed in earlier years an amount as per opening balance at Rs. 20,01,083 had remained advance to both these companies, and it was at Rs. 13,63,021 at the close of the accounting year. Since the major amount has remained at about 20 lakhs for major part of the year interest at the rate of 18 per cent was chargeable on the same. The claim of the assessee has been same as in earlier years that on account of huge losses in both the companies, no interest is being charged, cannot be accepted since the company is paying huge amount of interest on other amounts taken as loan by the company. Therefore, interest on this amount amounting to Rs. 3,60,000 is clearly disallowable and, accordingly, an addition of Rs. 3,60,000 is added in the total income on the basis of reasons given in the earlier years."
The Commissioner (Appeals) in this connection made the following observations:
"3. Ground No. 1(i)(b) is against the addition of Rs. 3,60,000 for interest on the amounts advanced to M/s. Dhampur Yeast Company Ltd. which is a subsidiary company of the appellant. This issue is covered by the Hon'ble ITAT's order dated 1-2-1985 in ITA Nos. 4437 and 4602/D/83 for the assessment year 1978-79, which has been followed in ITA No. 503/(Delhi)/84 for the assessment year 1980-81. Following the decision of the Income Tax Appellate Tribunal for the earlier years, the addition of Rs. 3,60,000 on account of interest from Dhampur Yeast Company is deleted."
The Tribunal followed the earlier orders on the issue. The observations made by the Tribunal in the order dated 1-2-1985 for assessment year 1975-76 in ITA No. 685/Delhi/79 is reproduced for the sake of facility:
"7 Ground No. 1(e) Income Tax Officer made addition of Rs. 3.60 lakhs as estimated interest at the rate of 15 per cent on estimated debit balance of Rs. 24 lakhs after noting that as per auditors report Rs. 25,82,607 were due from Dhampur Yeast Company Ltd. which was a subsidiary of the assessee-company and that the assessee-company had been charging interest from the said subsidiary in the earlier years but no interest had been charged in the year under consideration. Income Tax Officer observed that the assessee was paying heavy interest on loans obtained from business, etc., and, therefore, considering the opening debit balance in the said Yeast Company's account of Rs. 22,60,127. Income Tax Officer made the aforesaid addition on account of interest at Rs. 3.60 lakhs. Commissioner (Appeals) deleted the addition accepting the assessee's contention that the paid-up capital of the subsidiary was only of Rs. 1 lakh while the losses suffered by the said subsidiary were of Rs. 12.95 lakhs, therefore, there was very little possibility of every realising the principal amount from the subsidiary and, therefore, the company had rightly not charged any interest from the said subsidiary.
8. At the hearing before us revenue relied on Gappumal Kanhaiyalal (1979) 117 ITR 78 (All.), where interest was credited to assessee by debtor on last day of accounting year but the same was foregone at request of debtor and the relinquishment was not based on commercial expediency. High Court held that income has already accrued in the previous year in which it was credited.
9. Learned Counsel for the assessee referring to the facts mentioned above urged that company had foregone interest on the aforesaid debit balance considering the weak financial position of the subsidiary company and the decision taken was based on commercial expediency. Reliance was placed on CIT v. Motor Credit Company (P.) Ltd , where it was held that where principal monies advanced by assessee are not capable of realisation, no question of taxing interest arise and there is no hypothetical accrual of illusory interest. It is urged that similar view was taken in . It is further urged that there is no material on record that advances to the subsidiary company were made out of borrowed funds and revenue has not proved any nexus of the advances with the borrowings. Reliance is placed on CIT v. Bombay Samachar Ltd .
10. Considering the circumstances of the case, we fully accept the assessees contentions and confirm Commissioner (Appeals)s order."
4. We have heard Shri A.K. Mahajan, learned standing counsel for the revenue and Shri Rakesh Ranjan Agrawal appearing for the respondent assessee.
5. It is agreed between the learned Counsel for the parties that both the questions have to be answered in favour of the assessee and against the revenue in view of the decision of this Court in CIT v. Dhampur Sugar Mils Ltd. (No. 1) , wherein this Court has held that interest on excess levy sugar price is an allowable deduction and in ITR No. 65 of 1996 - CIT v. Dhampur Sugar Mills Ltd. decided on 8-4-2005, wherein this Court has held that the question of disallowance of interest does not arise in the case where the assessee-company had not charged interest on the advances given to its subsidiaries, namely, M/s. Dharnpur Yeast Company and M/s. U.P. Straw Boards & Agro Products Ltd.
6. Respectfully following the aforesaid two decisions, we answer the questions ref erred to us in the affirmative, that is, in favour of assessee and against the revenue.
However, there shall be no order as to costs.