COMMISSIONER OF INCOME TAX Vs. INDIA CARBON LIMITED

JUDGEMENT

(1.) THE present proceeding is initiated at the instance of the revenue on an application under section 256(2) of the Income Tax Act, 1961 (hereinafter referred to as 'the Act'), requiring the Tribunal to state the case and refer the two questions of law enumerated in their application under section 256(1) of the Act before the Tribunal, Gauhati Bench, which was finally turned down by the Tribunal. THE application relates to the assessment year 1985-86. THE original assessment order was passed by the assessing officer on 28-1-1988, and Rs. 15,24,434 was disallowed out of the total interest claimed by the assessee at Rs. 1,41,08,898. THE assessee went in appeal up to the Commissioner (Appeals), about the disallowance. THE Commissioner (Appeals) set aside the order of the assessment and directed the assessing officer to adjudicate the claim of interest for the revenue deduction in the light of the directions passed in its order. A fresh assessment was made thereafter by the assessing officer. THE assessee claimed for the revenue deduction on the interest before the assessing officer. THE assessee in the relevant accounting year advanced loans to two of its subsidiary companies, namely, to C & C Investment Ltd. and Him Containers Ltd. THE assessee claimed that the loans were advanced for the purpose of the business of the assessee-company and that the assessee had sufficient funds at its disposal in the form of capital, reserve, accumulated depreciation and profit of the year for the purpose of advancing loans to the subsidiary companies. THE assessee also claimed that the borrowings of the assessee-company decreased from Rs. 6,12,00,000 (approximately) in the preceding year to about Rs. 3,35,39,777 at the end of the assessment year in question. THE assessing officer, however, took the view that the loans advanced to the subsidiary companies by the assessee-company did not mean that the loans were for the purpose of the business of the holding company unless it was proved supporting evidence. It was also held that the subsidiary companies were separate entities under the Act. THErefore, when the loans were advance to the subsidiary companies, it could not be accepted to be for the purpose of the holding company. THE assessing officer also noted that the loans were directly advanced out of a cash credit account with the State Bank of India and out of a current account with the United Commercial Bank. THE source of money in the current account was deposit from the public on which interest was paid by the assessee-company. THE assessing officer, therefore, concluded that there was direct nexus between the borrowings on which interest had been paid and the loans advanced to the subsidiary companies on which no interest had been charged and, accordingly, turned down the plea of the assessee. THE assessee preferred appeal before the Commissioner (Appeals). It was, inter alia, contended before the Commissioner (Appeals) that the advances to the subsidiary companies were meant for the business of the assessee. THE Commissioner (Appeals) did not accept the contention of the assessee that the advances were made for the purpose of the business of the assessee. THE Commissioner (Appeals), however, held that sufficient funds were available for the purpose of the business of the subsidiary companies on various dates and no disallowance ought to have been made out of the interest paid to the bank. THE Commissioner (Appeals) did not accept the plea of the assessee in dealing with the view of the assessing officer about the nexus between the interest-bearing borrowed fund and non-interest bearing advances and that the money advanced came out of a cash credit account and current account. THE appellate authority pointed out that the assessing officer failed to take into account the share capital of the company, depreciation reserve, other reserves and profit generated during the previous year relevant to the assessment year in question prior to the allowance of depreciation. THE appellate authority took note of a number of judicial decisions cited and relied on by the assessee and, accordingly, held that the material facts did not lead to the inference that the borrowed interest bearing funds were utilised for interest-free advances and that the revenue failed to establish the nexus between the two and, accordingly, deleted Rs. 8,50,000. THE revenue preferred an appeal before the Tribunal, Gauhati Bench. THE revenue on appeal supported the assessment order passed by the assessing officer. THE revenue contended that the advances made by the assessee to the two subsidiary companies were not for business purposes and that was accepted both by the assessing officer as well as the Commissioner (Appeals). THE moneys advanced to the two subsidiary companies of the assessee-company were also through cash credit and current accounts. THE revenue pointed out that the moneys advanced to the two subsidiary companies of the assessee-company were through cash credit any current accounts and it is also contended on behalf of the revenue that there was no dispute that the assessee paid interest on cash credit account and the money available for the current account was from the public on which interest was paid by the assessee-company. Merely because the liabilities came down substantially in the year in question from that of the earlier year and that the various reserves, etc., had increased in the was did not ipso facto lead to the conclusion that the assessee did not explain that the assessee advanced interest-free loans to its subsidiary companies. THE assessee supported the view of the Commissioner (Appeals) and, accordingly, prayed for rejection of the appeal. THE Tribunal by its judgment and order dated 12-11-1996, in C.O. No. ................ (Gau.) of 1991 (sic) in I.T. Appeal No. 265 (Gau.) of 1991, dismissed the appeal of the revenue and upheld the order of the Commissioner (Appeals). In deciding the appeal, the Tribunal observed that the Commissioner (Appeals) after examining the claim of the assessee as to the availability of funds for advancing loans to the subsidiary companies of the assessee-company has found that the assessee had sufficient funds available and that the assessing officer failed to establish a nexus between the funds withdrawn from the cash credit and current account and the funds advanced as loans to the subsidiary companies. THE Tribunal held that the findings of the Commissioner (Appeals) were not controverted with evidence by the revenue. On the other hand, the Tribunal held that the assessee had at its disposal available funds and that the findings of the Commissioner (Appeals) were supported by the books of account of the assessee-company. In the circumstances, the Tribunal held that it cannot be said that interest-free loans advanced to the subsidiary companies were out of interest-bearing funds from the bank merely because the loans advanced passed through the cash credit and current account of the assessee-company. THE appellate authority also noted that there was no dispute as to the fact that the funds of the assessee-company were deposited with the bankers and the loans advanced to the subsidiary companies were also given by cheques. THE appellate authority, accordingly, upheld the order of the Commissioner (Appeals) to the effect that the interest-free loans advanced to the subsidiary companies were not from interest-bearing funds from the bankers but from their own funds that were available with the assessee.

(2.) THE revenue, accordingly, preferred an application before the Tribunal under section 256(1) of the Act requiring the Tribunal to refer to the High Court the following two questions of law:

(3.) DR. A.K. Saraf, the learned senior counsel appearing on behalf of the assessee, on the other hand, submitted that no question of law arose out of the order of the Tribunal and the Tribunal rightly dismissed the application under section 256(1). DR. Saraf, in support of his argument, relied upon the following decisions of the Supreme Court :