G. Santhanam, Accountant Member - (1.) THIS is an appeal by the assessee. The appellant is a company in which public are substantially interested. The previous year of the appellant ended on 31-3-1992 relevant to the assessment year 1992-93. The assessment was completed under the provisions of Section 143(3) of the Income-tax Act. In arriving at the business income, the appellant had debited a sum of Rs. 1,59,75,409 as interest paid (which included a sum of Rs. 1,20,20,766 being interest paid to the holding company). The Assessing Officer noticed from the accounts that a sum of Rs. 1,99,78,000 was due from M/s. Unitel Communications Limited, a joing sector project promoted by U.B. Group companies, of which the appellant is one such company. But no interest was charged by the appellant on such advance. It was explained before the Assessing Officer that the financial position of Unitel Communication's Limited was in a precarious condition and as the assessee is one of the major shareholders, at the request of the borrower and on ground of commercial expediency interest was not charged on the advances made to the other party, namely, Unitel Communications Ltd. The learned Assessing Officer was of the view that the appellant-company was paying interest to the holding company on the amounts borrowed from it and as it did not choose to charge interest on the advances made by it to Unitel Communications Ltd., there was diversion of borrowed funds for non-business purposes and in this view of the matter he estimated the interest on such advances at 21% to make a disallowance of Rs. 41,95,3 80, from out of the interest charges claimed as deduction by the assessee-company.
(2.) For similar reasons the Assessing Officer disallowed interest on estimate basis at 21 per cent per annum in a sum of Rs. 40,07,010 in the case of advances made to Sapthagiri Traders (P.) Ltd. The assessee appealed. The learned CIT (Appeals) held that the appellant-company had borrowed money at interest but had made advances to the two companies without charging interest. Though the balance-sheet of the holding company was not before him, still he ventured an inference that the holding company must be setting off the interest cost of its borrowings against the interest income received from the assessee-com-pany and thus must have paid lesser amount of tax by not charging interest on its advances. Thus the transactions of lending and borrowing with interest and without interest are of a colourable nature at the cost of the revenue. He further held that merely because the assessee-company had the object of promoting or aiding promotion of companies, it did not follow that it could lend its interest-bearing funds free of interest to other companies. Any company purporting to invest funds in deposits or loans would look for the return of its investment as a prudent business proposition and this element was totally absent in the case of the assessee. Further he held that though the Orissa Government (not the UB group of companies as stated by the Assessing Officer) is the major shareholder in the joint sector project, yet it is all well-known that except on rare occasions participating Government did not interfere in the working of the companies and hence the decision not to charge interest cannot be justified on ground of commercial expediency. In the case of Sapthagiri Traders (P.) Ltd., there was equally no countervailing circumstances to make the advances free of interest. In addition, the CIT (Appeals) on a scrutiny of the balance-sheet of the assessee-company held that the assessee did not have any non-interest bearing funds from out of which the advances could have been made. For all these reasons, he upheld the order of the Assessing Officer. The assessee is in second appeal.
(3.) SHRI K.R. Ramamani, the learned Advocate for the assessee submitted that it is not in dispute that the assessee did not charge interest on the advances made by it to the two companies in question. It is also not in dispute that the appellant-company was paying interest on the funds borrowed by it. The disallowance has been made on a very narrow view of the whole issue for the simple reason that interest bearing funds were advanced to the two companies without charging interest on the advances made by it. Narrow view because it has been conveniently forgotten that the assessee is an investment company with the object of dealing in shares, stocks, debentures and making advances and also promoting companies in India, subsidise, organise, assist or aid in forming, promoting, subsidising, organising or aiding companies, syndicates, etc. One of the objects of the company is to subsidise or aid other companies. When the object itself is such a one, it is immaterial whether the company used its interest free funds or interest bearing funds for making interest-free advances. Prudent business considerations cannot be tested on short-term policies or short-term norms. Unitel Communications Ltd. is a joint sector-project with Orissa Government having 26.5 per cent shares in the company. Unit Trust of India is having 12.79 per cent. U.B. Group of companies to which the assessee belongs is having 24.93 per cent. 36.23 per cent is held by the public. The company was facing financial difficulties and had to go before BIFR. The BIFR in case No. 106/92 had in its hearing held on 21-12-1994 confirmed its prima facie opinion of winding up of the company and directed Canara Bank to say whether they are agreeable for disposal of the assets of the company under Section 20(4) of the Sick Industrial Companies (Special Provisions) Act, 1985. In its order dated 5-6-1994, the BIFR appointed Canara Bank to dispose of the assets of the company and gave guidelines for the same. Thus it is not in doubt that Unitel Communications Ltd. was found to be fit for being wound up by competent authorities. There cannot be overnight sickness of an industrial undertaking unlike in the case of human beings. The signs of sickness were evident over the years and it is in consideration of these facts that the assessee did not charge any interest. Charging of interest to a company tending to become sick would only result in unnecessarily inflating the profits of the assessee-company without any chance of recovery of such interest at a future date. At the same time, as a shareholder the assessee was interested in reviving the company or to ward off the sickness, and it was in this view the moneys were advanced but without interest. The assessee's very object is to promote and aid companies and in the circumstances of the case besides commercial expediency and business prudence, the action of the assessee could be justified in terms of its very object for which the company was formed. Therefore, the question of diversion of funds for non-business purposes cannot be raised in the case of advances made to Unitel Communications Limited. He relied on the following decisions : (1) CIT v. Pudukottai Co. (P.) Ltd. [1972] 84 ITR 788 (Mad.) (2) CIT v. Premier Auto Finance (P.) Ltd. [1981] 128 ITR 540 (Delhi) (3) Patnaik & Co. Ltd. v. CIT[1986] 161 ITR 365 (SC) (4) Indian Commerce & Industries Co. (P.) Ltd. v. CIT[1995] 213 ITR 533 (Mad.) (5) N. Sundareswaran v. CIT[1969] 72 ITR 219 (Ker.) (6) Durametallic (India) Ltd. v. IAC[1991] 38 ITD 211 (Mad.).;