COMMISSIONER OF INCOME TAX, LD vs. HERO CYCLES PVT.LTD.

ITR/162/1999HC Punjab & HaryanaPHHC01038601199906 December 2006Author: MR. JUSTICE ADARSH KUMAR GOEL,MR. JUSTICE RAJESH BINDAL5 pages
AI SummaryAllowed

What were the facts?

The Commissioner of Income Tax (Central) Ludhiana (Revenue) has filed an Income Tax Reference (ITR) No. 162 of 1999 before the High Court of Punjab and Haryana at Chandigarh. The reference arises from an order dated May 12, 1998, passed by the Income Tax Appellate Tribunal (ITAT), Chandigarh Bench, in ITA No. 1056/Chandi/1992, pertaining to assessment year 1988-89. The Assessing Officer (AO) had disallowed interest of Rs. 16,02,423/-. The AO observed that the assessee, Hero Cycles (P) Limited, Ludhiana, had made advances to parties closely connected with it or its directors, while paying 18% interest to the bank and charging only 10% or no interest from these parties. The CIT(A) restricted the disallowance, and the ITAT upheld the CIT(A)'s view, except for a specific amount of Rs. 36,587/- which was restored to the AO for verification.

What did the High Court hold?

The High Court held that the question referred is answered in favour of the revenue and against the assessee. The Court referred to its earlier decision in Commissioner of Income Tax-I, Ludhiana v. M/s Abhishek Industries Limited, Ludhiana, ITA No. 110 of 2005, decided on August 4, 2006. In that judgment, it was held that interest on loans raised to the extent the amount is advanced to sister concerns for non-business purposes cannot be allowed as a deduction. The Court emphasized that the onus is on the assessee to satisfy the Assessing Officer that borrowed funds were used for business purposes. If interest-free advances are made to sister concerns, there is a heavy onus on the assessee to justify this. The Court rejected the plea of a direct nexus between borrowings and diversion of funds for non-business purposes, stating that the entire money in a business entity comes into a common kitty and lacks separate identification. The Court concluded that interest paid on borrowings to the extent amounts are diverted to sister concerns on an interest-free basis are to be disallowed. The plea of advances being made from own funds like capital was also rejected as a potential camouflage. The Court noted that the present case involved disallowing only the difference between interest payable to the bank and interest charged from sister concerns, and the plea of funds having been advanced from accounts containing credit balances or business receipts had already been rejected in the Abhishek Industries' case.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the ITAT was right in law in deleting the disallowance of interest of Rs. 16,02,423/- on the ground that there is no nexus between the borrowings and interest-free advance made to certain parties? Assessee's Contentions: The assessee argued that the CIT(A) had given specific findings after examining each loan and that the case law relied upon by the Revenue was not helpful as it was based on findings of fact. The assessee contended that the disallowance should not exceed Rs. 14,414/- in the case of M/s. Majestic Auto Limited. The assessee also implicitly argued that the advances were made from accounts with credit balances or business receipts. Revenue's Contentions: The Revenue contended that the interest paid to the bank was not for the purpose of business, given the interest-free advances made to related parties. The Revenue relied on the order of the AO and argued that the CIT(A)'s findings were not properly substantiated. The Revenue also argued that the onus is on the assessee to prove the nexus of borrowed funds with business purposes, especially when interest-free advances are made to sister concerns.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii)

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
ITR No.162 of 1999 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITR No.162 of 1999 Date of decision:6.12.1999 The Commissioner of Income Tax (Central) Ludhiana ....Petitioner versus Hero Cycles (P) limited, Ludhiana. ....Respondent CORAM: HON'BLE MR. JUSTICE ADARSH KUMAR GOEL HON'BLE MR. JUSTICE RAJESH BINDAL Present: Mr. SK Garg Narwana, Advocate, for the revenue. Mr. Akshay Bhan, Advocate, for the assessee.

JUDGMENT: Following question of law has been referred for the opinion of this Court by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short, 'the Tribunal'), arising out of its order dated 12.5.1998 in ITA No.1056/Chandi/1992, for the assessment year 1988-89:- “Whether on the facts and in the circumstances of the case, the ITAT was right in law in deleting disallowance of interest of Rs.16,02,423/- on the ground that there is no nexus between the borrowings and interest-free advance made to certain parties?”

The Assessing Officer disallowed claim for interest of the assessee and made an addition to the income shown by the assessee. It was observed that advances were made by the assessee to persons closely co

The order continues below.

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