Decided on March 09,1991



- (1.) At the instance of the assessee, the following question has been referred by the Income-tax Appellate Tribunal, Cuttack Bench (in short the Tribunal) for adjudication under section 256(1) of the Income-tax Act, 1961 (in shortthe Act) : Whether, on the facts and in the circumstances of the case and on a correct interpretation of section 36(1)(iii) of the Income-tax Act, 1961, the assessee entitled to the deduction of interest of Rs. 1,97,616 while computing its income from business
(2.) The factual position as culled from the statement of case submitted by the Tribunal is as follows : The assessee is a limited company deriving income from business in the manufacture and sale of ferro-silicon. During the assessment year 1975-76, corresponding to the previous year ending on December 31, 1974, the assessee invested a sum of Rs. 14 lakhs in equity shares of a company styled Indian Metals and Carbide Ltd. (hereinafter referred to as the subsidiary company). Apart from the above investment, a sum of Rs. 38,41,372 was advanced as loan on interest the rate of which was to be determined later. The assessee received fixed deposits from the public to the tune of Rs. 36,38,050 on which it had to pay interest. Besides, it had also availed of bank loans for various banks for which it had to pay interest. By a resolution of the subsidiary companys board of management dated March 8, 1975, it was acknowledged that interest would be payable on the advances received form the assessee at a rate to be determined later. The average rate of interest paid by the assessee on its borrowings was 10 per cent. Considering the dates of investment and/or advances of the amounts to the subsidiary company, a sum of Rs. 1,97,616 was disallowed from the amount claimed as payment of interest by the Inspecting Assistant Commissioner of Income-tax (Assessment), Bhubaneswar (hereinafter referred to as the Assessing Officer). He concluded that the amount of interest attributed to borrowings applied towards investments in and advances made to the subsidiary company was not wholly and exclusively laid out and expended for the purpose of the business of the assessee. In appeal, the disallowance was deleted by the Commissioner of Income-tax (Appeals), Orissa, Cuttack, who held that there was nothing to show that the money advanced to the subsidiary company was out of the borrowed capital and not out of the own funds of the assessee. He noticed that, as against the investment and advances aggregating to Rs. 52 lakhs, the profit generated by the assessee was about Rs. 70 lakhs, the besides its other assets. It was observed that there was no evidence to show that the money lent to its subsidiary company represented loan capital or, for that matter, that it did not, and, in such circumstances, there being no conclusive evidence either way, the issue must be determined in favour of the subject. The Revenue preferred appeal before the Tribunal. On a consideration of the rival stands, the Tribunal was of the view that even if the assessee had its own assets, or generated huge profits during the relevant accounting year, it does not necessarily follow that only those assets or profits were utilised for the purpose of making investment or advances to its subsidiary company. Accounting to it, obviously, the profits generated during the year were not necessarily in cash and the assets already existing before the start of the accounting year would ordinarily be in some other form. It was noticed that the assessee had raised huge loans and accepted deposits on which it paid large amounts of interest and, therefore, it would follow that the money acquired by loans or deposits was utilised directly or indirectly for making investments and advances to the subsidiary company. Consequentially, the Revenues appeal was accepted and the order of disallowance passed by the Assessing Officer was restored. The assessee moved the Tribunal for making a reference to this court under section 256(1) of the Act. The Tribunal has referred the aforesaid question along with the statement of facts.
(3.) The main plank of the argument of learned counsel for the assessee is that the approach of the Commissioner of Income-tax (Appeals) was correct and the Tribunal has resorted to generalisations without considering the acceptability of the stand of the assessee. It was submitted that the very fact that the assessee made a profit of more than Rs. 70 lakhs and had other cash inflow for the depreciation of more than Rs. 50 lakhs and the electricity power charges of more than Rs. 39 lakhs, clearly established that the assessee had sufficient funds to make investments and advances out of its own funds and, therefore, the disallowance was improper and the Tribunal has acted on surmises by concluding that the assessees investment in and advances made to the subsidiary company were out of borrowed funds. Learned counsel for the Revenue, however, submits that the burden was on the assessee to establish the source of the money invested in or advanced to the subsidiary company. The Tribunal having inferred from the factual aspects that the borrowed funds carrying interest were utilised, the disallowance is proper. Section 36(1)(iii) of the Act provides that, in computing the income chargeable under the head Profits and gains of business or profession, a deduction shall be allowed of the amounts of interest paid in respect of capital borrowed for the purpose of business or profession. What is borrowed money has been construed by courts in England and by the Supreme Court in a number of cases. In Part of London Authority v. IRC, 1922 2 KB 599, Lord Sterndale M. R. observed that, in order that there be borrowed money, there must be a borrower and a lender. A similar view was expressed in CIT v. Bazpur Co-operative Sugar Factory Ltd., 1989 177 ITR 469. The essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had used his own money, or conversely, the loss he suffered because he had not that use. The general idea is that he is entitled to compensation for the deprivation (see Westminster Bank Ltd. v. Riches,1947 28 TC 159).;

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