M/S BEEKONS INDUSTRIES LIMITED vs. COMMISSIONER OF INCOME TAX AND ANR

Facts

The assessee, M/s. Beekons Industries Limited, is appealing against an order of the Income Tax Appellate Tribunal (ITAT) for the assessment year 2006-07. The Assessing Officer (AO) disallowed Rs. 13,61,450, representing interest paid on loans, on the grounds that the assessee had advanced interest-free loans and advances totaling Rs. 3,11,22,866 to its directors, their relatives, and sister concerns. The CIT(A) deleted this addition. The revenue appealed to the ITAT, which held that interest attributable to Rs. 49,38,930 given as an interest-free loan to Shri A.S. Bhatia (maternal uncle of the Managing Director) was disallowable. However, the ITAT held that loans to the subsidiary, Punjab Biotechnology Plant Ltd., were for business expediency and not disallowable.

Held

The High Court allowed the appeals filed by the assessee-companies. The Court held that the issue concerning the loan given to Shri A.S. Bhatia has been considered by the Hon'ble Supreme Court in Hero Cycles' case, where a similar situation of advances to directors from sufficient own funds was examined. The Supreme Court, in Hero Cycles, overruled the judgment in Abhishek Industries, which was relied upon by the ITAT. The Court noted that the judgment in Hero Cycles' case has been followed by this Court in Principal Commission of Income Tax vs. Holy Faith International (P) Ltd. The Court observed that the impugned advance was made out of interest-free funds available with the assessee, and therefore, there was no justification for disallowing interest under Section 36(1)(iii) of the Act. The ITAT's order was set aside, and the order of the CIT(A) was restored. The Assessing Officer was directed to recompute the disallowance as per the judgments in Hero Cycles and Holy Faith International.

Key Issues

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in applying the ratio of this Hon'ble Court in the case of CIT Vs. Abhishek Industries Ltd. when no diversion of interest-bearing funds had been made to Shri A.S. Bhatia? Assessee's contention: The assessee argued that the Hon'ble Supreme Court in Hero Cycles (P) Ltd. Vs. Commissioner of Income Tax (Central), Ludhiana, examined similar advances to directors and held that if the company has sufficient own funds (reserves/surplus), the AO must establish a nexus between borrowing and advancing to prove non-business purposes. The Supreme Court allowed the appeal and overruled the judgment in Abhishek Industries Ltd. The assessee also contended that the issue regarding advances to the sister concern, Punjab Biotechnology Plant Ltd., was settled in Hero Cycles' case. Revenue's contention: The revenue's grounds before the ITAT were that the CIT(A) erred in deleting the addition of Rs. 13,61,450 for not charging interest on loans and advances to directors and subsidiaries, and that the CIT(A) failed to appreciate the facts.