COMMISSIONER OF INCOME TAX Vs. LALSONS ENTERPRISES

JUDGEMENT

(1.) The Revenue is aggrieved by the order dated 27.03.2003 passed by the Income Tax Appellate Tribunal in ITA 2144/Del/2002 relating to the assessment year 1998-99. The Revenue proposed the following four questions which, according to it, are substantial questions of law and require determination of this Court:

(2.) Question "B" was common to several other appeals. The said question was ultimately decided by virtue of a common judgment passed by a Division Bench of this Court in ITA 166/2000 titled "CIT v. Shri Ram Honda Power Equipments" on 12.01.2007. The said decision has since been reported in , 289 ITR 475 (Del). Consequently, this Court noted in its order dated 04.04.2007 that question "B" as proposed by the Revenue had already been answered and the matter was, thereafter, listed for admission with regard to questions "A", "C and "D". The matter has been taken up from time to time. We have now heard counsel for the parties on the proposed questions A, C and D.

(3.) Proposed question "C pertains to the issue of interest of Rs. 18,53,916/-, which was paid by the assessee to the bank and had been disallowed by the Commissioner of Income Tax in proceedings under Section 263 of the Income Tax Act, 1961 (hereinafter referred to as "the said Act") on the ground that the assessee had diverted these borrowed funds to Damas Jewels and Lal Jewels. The plea of the assessee was that while it is true that the assessee had borrowed funds from the bank and had paid interest on the said funds, no loans were extended to M/s Damas Jewels and that there were only mutual advances made by the assessee as well as Damas Jewels in the normal course of business for the purposes of business. Therefore, there was no question of disallowance of the interest paid to the bank in respect of the funds borrowed by the assessee. Insofar as Lal Jewels is concerned, the learned Counsel for the assessee pointed out that there may have been mutual loan transactions but, the interest payable by the assessee was much greater than the interest due from Lal Jewels and, therefore, there could be no disallowance on this count. The learned Counsel for the assessee respondent drew our attention to paragraphs 5, 7 and 8 of the impugned order to indicate the stand taken by the respondent assessee before the Tribunal. It was pointed out that the assessee had a business relationship with Damas Jewels inasmuch as the assessee purchased pure gold from the said concern and also got jewellery fabricated from Damas Jewels against payment for making charges. The learned Counsel drew our attention to the fact that a copy of the ledger accounts of Damas Jewels as appearing in the books of the assessee was placed before the Tribunal in the paper book at pages 142-156, which would go to indicate that the amounts advanced from time to time were in the course of business and that there was no practice between Damas Jewels and the assessee for paying/charging interest on the inter-party outstanding balances. With regard to the transactions with Lal Jewels, it was submitted that the assessee had been advancing funds and/or receiving funds from the said Lal Jewels intermittently during the year in question and on which no interest was charged by either party. He submitted that the non-charging of interest was on account of commercial expediency. It was submitted that the interest, if payable, to Lal Jewels would be Rs. 4,59,502/- as against the interest receivable from Lal Jewels to the tune of Rs. 64,150/-. Since the interest payable would be much higher than the interest receivable, there was no question of making any disallowance on the interest paid by the assessee on the funds received from the bank.