Where the assessee had its own funds as well as borrowed funds and it advanced funds to its sister concerns for allegedly non-business purposes and the question arose whether the AO was justified in disallowing the interest on the borrowed funds on the ground that they had been used for non-business purposes, HELD:
Where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose. Accordingly, the disallowance of the interest on the borrowed funds is not justified.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
INCOME TAX APPEAL NO.1398 OF 2008
The Commissioner of Income vs. Reliance Utilities & Power Ltd.
Mr.Vimal Gupta, for the Appellant.
Mr. J.D. Mistry with Mr. Raj Darak & Mr. P.C. Tripathi, for the Respondent.
CORAM: F.I. REBELLO & R.S.MOHITE, JJ.
DATED: 9th January, 2009
JUDGMENT (PER F.I. REBELLO, J.):
. Admit on the following question:-
(A) Whether on the facts and in the circumstance of the case and in law the Hon’ble Tribunal was justified in holding that the Assessee Company had sufficient funds of its own for making the investments without using the interest bearing funds even though the Balance Sheet of the Assessee Company as at 31.03.1999 shows that the Assessee Company has no reserve or own funds for making the investments in the sister concern and therefore, borrowed funds have been utilized and interest on these borrowed funds are rightly disallowed by the Assessing Officer?
2. We may also mention that in Appeal Memo the Revenue had raised the following question:-
(B) Whether on the facts and in the circumstance of the case and in law the Hon’ble Tribunal was right in holding that advances to sister concerns were for business purposes even though the Assessee Company is not in the business of investments and there is nothing on record to suggest that the advances made to sister concerns were made for business purposes?
At the hearing of this Appeal in so far as Question (B) is concerned, considering the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-tax (Appeals) and Anr., (2007) 288 IR 1 (SC), the learned Counsel did not press that question and consequently we have not admitted the Appeal on the said Question.
3. The Assessing Officer had recorded a finding that the sum of Rs.213 crores were invested out of their own funds and Rs.147 crores were invested out of borrowed funds. Accordingly had disallowed interest amounting to Rs.4.40 crores calculated @ 12% per annum for three months from January, 2000 to March, 2000.
4. From the order of the Assessing Officer the assessee in respect of disallowance of interest amounting to Rs.4.40 crores preferred an Appeal to the C.I.T. (Appeals). It was the contention of the Assessee that the assessee had invested Rs.389.60 in Reliance Gas Limited and Rs.1.01 in Reliance Strategic Investments Limited. The Assessee themselves were in the business of generation of power. The Companies, in which the investments were made, were in the energy sector. Investments were made mainly during January, 2000 to March, 2000. It was the submission of the Assessee that they had earned regular business income from distribution of power and investments made were in the companies in energy sector and were with a view to build long term business prospects. Investments were in the regular course of business and accordingly no part of interest can be disallowed when the fund is utilized for the purpose of business. It was also pointed out that respondent had borrowed Rs.43.62 crores by way of issue of Debentures and the said amount was utilised as capital expenditure and inter corporate deposit. It was the submission that no part of the interest bearing fund have gone into investments in the two companies. In so far as funds are concerned it was pointed out that income from operation of the company was Rs.418.04 crore which was evenly distributed. Considering this, till December, 1999 the appellant had earned Rs.313.53 crore from its operation. It had raised capital of Rs.7.90 crores and had also received interest free deposit of Rs.10.03 crores. Also it had recovered Rs.39.04 from its debtors.
. It was also pointed out that considering the balance sheet for the year ending 31st January, 2000 the availability of interest free fund was as
Share capital 180.00
Reserves & Surplus 120.80
Depreciation reserves 95.39
Total interest free fund 398.19
It was, therefore, submitted that from the analysis of balance sheet as on 31st March, 2000 the respondent had enough interest free funds at its disposal for making investment.
. In the light of the above material the C.I.T. (Appeals) held that it agreed with the contention advanced by the Assessee that they had enough interest free fund at its disposal for investment and accordingly deleted the addition of Rs.4,40,00,000/- made by the Assessing Officer and directed him to allow the same under Section 36(1)(iii) of the Income Tax Act.
6. The Revenue being aggrieved by the order preferred an Appeal to the Tribunal. Before the Tribunal it was sought to be contended that the shareholders funds of Rs.172,10,88,000/- were utilised for the purchase of fixed assets shown in Schedule D in terms of the balance sheet as on 31st March, 1999. It was submitted that the assessee had no reserve or own funds for making the investments in the sister concern and, therefore, borrowed funds had been utilised and interest on these investments are for non-business purposes and hence rightly disallowed by the Assessing Officer.
. On the other hand on behalf of the Assessee the learned Counsel relied on the order of C.I.T. (Appeal) and submitted that the assessee had total interest free fund of Rs.398 crores.
. From the facts on record the learned Tribunal was pleased to record a finding that the assessee had sufficient funds of its own for making the investment without using the interest bearing funds and accordingly upheld the order of C.I.T. (Appeal). It is this order which is the subject matter of the present Appeal.
7. At the hearing of this Appeal on behalf of the Appellant learned Counsel submits that the order of the Tribunal is perverse in as much as the Tribunal ignored the fact that the respondent assessee had no interest free funds out its own. It is pointed out that in so far as the shareholders funds are concerned, in terms of the balance sheet as on 31st March, 1999 they were utilised for the purpose of purchase of fixed assets shown in Schedule D.
. On the other hand on behalf of the assessee the learned Counsel submits that the assessee company had generated sufficient interest free fund of its own which it utilized for its business, including investment in sister concerns and consequently no fault could be found with the order of the C.I.T. (Appeals) and/or the Tribunal. It was further submitted that once monies are available it is for the assessee to take a business decision for application of funds. The submission is that where there are both borrowed funds as also interest free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. Commissioner of Income-tax (Central), Calcutta, 134 ITR 219. It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. Commissioner of Income-Tax 224 ITR 627 (S.C.).
8. We have heard learned Counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs.172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned Counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also.
9. Apart from that we have noted earlier that both in the order of the C.I.T. (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs.398.19 crores including Rs.180 crores of share capital. In this context, in our opinion, the finding of fact recorded by C.I.T. (Appeals) and I.T.A.T. as to availability of interest free funds really cannot be faulted.
10. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber’s case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T.
11. Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed.
(R.S.MOHITE, J.) (F.I.REBELLO, J.)