SHAHIBAG ENTREPRENEURS Vs. INCOME TAX OFFICER
LAWS(IT)-1994-2-14
INCOME TAX APPELLATE TRIBUNAL
Decided on February 21,1994

Appellant
VERSUS
Respondents

JUDGEMENT

Abdul Razack, Judicial Member - (1.) THESE are three appeals filed by the assessee relating to assessment years 1979-80, 1980-81 & 1981-82. In all these appeals, the controversy is regarding disallowance/addition of proportionate interest for each of the assessment year in respect of interest-free loans given by the assessee to its subsidiary companies & others. The proportionate disallowance is Rs. 41,722 for assessment year 1979-80, Rs. 4,89,857 for assessment year 1980-81 & Rs. 13,71,080 for assessment year 1981-82.
(2.) The Assessing Officer disallowed/added Rs. 41,722 for assessment year 1979-80, Rs. 4,89,857 for assessment year 1980-81 and Rs. 13,71,080 for assessment year 1981-82 as according to him, the assessee did not charge or take any interest from its subsidiary companies and various other parties to whom it advanced substantial loans/ advances; whereas the assessee made a claim as and by way of deduction in each of the years under appeal in respect of interest paid on the loans/ borrowings taken by it for business purposes for each of the years under appeal. The argument of the assessee before the lower authorities was that it had taken loans from various parties and institutions for the purpose of its business and the amounts were advanced to various parties including its subsidiary companies for commercial expediency. Any charge of interest from its subsidiary companies would not have resulted any gain to the revenue. Since the loans were borrowed for the purpose of business, the entire interest claimed was to be allowed in full and no proportionate disallowance was required to be made, was the argument of the assessee-company before the Assessing Officer. The Assessing Officer was not satisfied with the explanation so given and added for each of the year under appeal the amounts mentioned above. The assessee-company was unsuccessful before the first appellate authority who agreed with the Assessing Officer in making proportionate disallowance/addition towards interest claimed. These second appeals before this Tribunal assail the finding and conclusion of the first appellate authority. Commencing the argument, the assessee's counsel Shri K.C. Patel reiterated the submissions made before the Assessing Officer as well as before the first appellate authority and further contended before us that in accordance with the provisions of Section 36(1)(iii), the amounts borrowed by the assessee-company were for the purpose of business and the interest paid in respect of those borrowings were allowable in computing the taxable income of the assessee-company. The Assessing Officer has not shown any nexus or close relation between the loans obtained and loans advanced free of interest to its subsidiary companies and others. Arguing further the assessee's counsel submitted that the Assessing Officer has not established that the assessee-company did receive interest from its subsidiary companies and others in respect of loans advanced and did not offer the same for the purpose of taxation under the provisions of the Income-tax Act. It is not the case of the Assessing Officer that the loans were advanced by the assessee-company out of borrowings and, therefore, proportionate disallowance could not be made in respect of interest payments. In the absence of any such finding based on evidence, the proportionate disallowance for each of the years under appeal by the Assessing Officer was wholly unjustified and the first appellate authority failed to judiciously consider and appreciate all these facts and, therefore, fell in error in dismissing the assessee's appeals. The assessee's counsel Shri K.C. Patel further repelled the observations made by the Assessing Officer for making proportionate disallowance with reference to various documents, which are in the assessee's paper-book filed for each of the three years under the consideration. 3.1 The Departmental Representative, on the other hand, countering the arguments of the assessee's counsel submitted that when the assessee-company has given interest-free loans to its subsidiary companies and others and has paid substantial amount by way of interest in respect of its borrowings and claimed the same as deduction, the Assessing Officer was fully justified in disallowing proportionate interest in respect of interest-free loans so given and no fault can be found either with the Assessing Officer or with the first appellate authority. In order to support the case of the Revenue, the D.R. took us through the observations made by the Assessing Officer in his orders for each of the assessment years. According to the D.R., the assessee's case is very weak and the appeals are liable to be dismissed upholding the impugned order of the first appellate authority.
(3.) WE have heard rival contentions of both the parties at great length. In our view, the assessee deserves to succeed as we find much force in the arguments of the assessee's counsel. WE are not convinced with the elaborate reasons given by the Assessing Officer in his orders for all the three years under appeal for making proportionate disallowance of interest claimed by the assessee-company. According to the provisions of Section 36(1)(iii) of the Act, an assessee is entitled to deduction of interest payment in respect of capital/amount borrowed for the purpose of business. On going through the orders passed by the Assessing Officer for all the three years, we do not find that the Assessing Officer noticed that the loans obtained by the assessee-company from various parties for which interest was paid were not utilised for the purpose of business. It is an admitted fact that the assessee-company was to receive huge and substantial amounts from its subsidiary companies as well as from others in each of the three years and did not charge any interest from these parties for the loans and advances given by it. However, the Assessing Officer has not established by cogent evidence that the borrowed funds were utilised, diverted or given away to its subsidiary companies and other parties. There is no nexus established by the Assessing Officer between the loans obtained and loans given to its subsidiary companies and others. This vital fact has been ignored and lost sight of by the first appellate authority in deciding the controversy before him. The main thrust of the Assessing Officer is that since the assessee-company had taken substantial loans and paid interest thereon and claimed the same as and byway of deduction from its taxable profits, it did not charge or account for any interest on the amounts receivable from its subsidiary companies and others. In our view, this stand of the Assessing Officer is not proper in law. There may be variety of reasons why an assessee does not charge or take any interest from loanee parties; while at the same time, it pays interest on borrowings which are for business purposes. For the simple reason that the assessee has failed to charge interest on its receivables and dues there should be proportionate disallowance in respect of interest paid by the assessee on its borrowings which as stated by us above were for the purpose of business. In the absence of any such finding or evidence, the disallowance of proportionate interest by the Assessing Officer cannot be upheld.;


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