COMMISSIONER OF INCOME TAX vs. M/S HERO CYCLES LTD

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ITA/119/2004HC Punjab & HaryanaPHHC01051239200430 January 20153 pages
AI SummaryAllowed

What did the High Court hold?

The High Court addressed two substantial questions of law. For the first question, regarding the deletion of the addition on account of closing stock, the Court held that it was answered in favour of the Revenue and against the assessee, based on the reasoning in a separate, related appeal (ITA No.68 of 2001). For the second question, concerning the deletion of the addition for interest-free loans advanced to associated concerns, the High Court found that the Tribunal had set aside the disallowance made by the Assessing Officer. The Commissioner of Income Tax (Appeals) had previously remitted the matter to the Assessing Officer to examine the nexus between borrowed funds and the diversion thereof as interest-free loans. The High Court, applying the principles laid down in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and its own decision in Commissioner of Income Tax Vs. M/s Southern Bottlers Pvt. Ltd., set aside the order of the Tribunal. It restored the order of the CIT(A) and directed the Assessing Officer to reconsider the disallowance after examining the nexus between borrowed funds and the interest-free loans. Both substantial questions of law were answered in favour of the appellant-Revenue.

What were the facts?

The Revenue, Commissioner of Income Tax (Central), Ludhiana, filed an appeal against an order of the Income Tax Appellate Tribunal (ITAT) dated 02.12.2003, concerning assessment year 1994-95. The appeal raised two substantial questions of law. The first question concerned the deletion of an addition of Rs.10,02,350/- on account of closing stock of stores, spares, tools, etc. The second question pertained to the deletion of an addition of Rs.1,13,35,469/- made on account of interest-free loans advanced to associated concerns, while the assessee company was paying significant interest on its borrowings. The High Court had previously answered the first question in favour of the Revenue in a separate, related appeal.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.10,02,350/- on account of closing stock of stores, spares, tools etc.? (Question of law) 2. Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.1,13,35,469/- made on account of advances of interest-free loans to associated concerns, whereas the assessee company was paying huge interest on the borrowed funds? (Question of mixed law and fact, turning on Section 36(1)(iii) of the Income Tax Act, 1961) Assessee's contentions: Not recorded in the judgment. Revenue's contentions: The Revenue argued that the Tribunal erred in deleting the addition related to closing stock. For the second issue, the Revenue contended that the Tribunal was wrong in deleting the addition for interest-free loans advanced to associated concerns, especially when the assessee was incurring substantial interest expenses on its own borrowings. The Revenue relied on the judgment of the Hon'ble Supreme Court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals) (2007) 288 ITR 1 and a decision of this Court in ITA No.225 of 2004 titled ‘Commissioner of Income Tax Vs. M/s Southern Bottlers Pvt. Ltd.’ decided on 07.05.2013.

Which sections of the Income-tax Act were involved?

Section 36(1)(iii),Section 260A

AI-generated summary — verify with the full judgment below

IN THE HIGH COURT OF PUNJAB AND HARYANA AT

CHANDIGARH Date of Decision: 30.01.2015 I.T.A.No.119 of 2004 Commissioner of Income Tax (Central), Ludhiana ...Appellant Versus M/s Hero Cycles Ltd., Ludhiana

...Respondent CORAM: HON'BLE MR. JUSTICE HEMANT GUPTA

HON'BLE MR. JUSTICE HARI PAL VERMA 1. Whether Reporters of local papers may be allowed to see the judgment?

2.

To be referred to the Reporters or not?

3.

Whether the judgment should be reported in the Digest? Present : Ms. Savita Saxena, Advocate, for the appellant.

Mr. Aalok Mittal, Advocate, for the respondent.

HEMANT GUPTA, J. (ORAL)

The Revenue is in appeal under Section 260 A of the Income Tax Act, 1961 (for short ‘the Act’) aggrieved against the order passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (for short ‘the Tribunal’) on 02.12.2003 relating to the assessment year 1994-95. The Revenue - appellant has raised the following substantial questions of law: (i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.10,02,350/- on account of closing stock of stores, spares, tools etc.? (ii) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting the addition of Rs.1,13,35,469/- made on account of advances of interest free loans to the associated concerns whereas the assessee company was paying huge interest on the borrowed?

VIMAL KUMAR 2015.02.02 16:20 I attest to the accuracy and integrity of this document Chandigarh

ITA No.119 of 2004

The first substantial question of law has been answered in favour of the Revenue and against the assessee vide separate order of today rendered in I.T.A.No.68 of 2001 titled ‘Commissioner of Income Tax (Central), Ludhiana Vs. M/s Highway Cycle Industries Ltd.’ The said question is, thus, answered in favour of the revenue for the same reasons as are recorded therein.

Now coming to the second substantial question of law, the Tribunal disallowed the interest amounting to Rs.1,13,35,469/- on the amount of interest free loan advanced to M/s Gujarat Cycles Ltd. and M/s Majestic Auto Ltd. Such deduction was set aside by the Commissioner of Income Tax (Appeals) vide order dated 29.12.1997 remitting the matter back to the Assessing Officer and to make any disallowance if there is nexus between the borrowed funds and the diversion thereof in the form of interest free loans. The relevant finding recorded by the Commissioner of Income Tax (Appeals) reads as under: “Reverting to the issue, I hold that a re-consideration by the A.O. is required. As mentioned above, a disallowance under Section 36(1)(iii) could be made only if there is a nexus between the interest bearing loans and the diversion thereof for non-business purposes. Unless a nexus is proved, no disallowance would be called for. To re-examine the case from this angle, the issue is restored to the file of the A.O. The A.O. is directed to have a look into the case again and make any disallowance if there is nexus between the borrowed funds and the diversion thereof in the form of interest free loans. Unless any nexus is proved, no disallowance would be called for.”

The Revenue went in further appeal before the Tribunal. The Tribunal followed the earlier decision and set aside the disallowance made by the Assessing Officer. It may be noticed that the assessee was not in appeal against the order remitting the matter to the Assessing Officer, but still the Tribunal has set aside the disallowance altogether. VIMAL KUMAR 2015.02.02 16:20 I attest to the accuracy and integrity of this document Chandigarh

ITA No.119 of 2004

We find that the issue to find out the nexus between the borrowed funds and the diversion thereof in the form of interest free loans requires to be examined in the light of the judgment of the Hon’ble Supreme Court in S.A.Builders Ltd. Vs. Commissioner of Income Tax (Appeals) (2007) 288 ITR 1 followed by this Court in ITA No.225 of 2004 titled ‘Commissioner of Income Tax Vs. M/s Southern Bottlers Pvt. Ltd.’ decided on 07.05.2013.

Thus, the order of the Tribunal setting aside the disallowance is set aside and that of the Commissioner of Income Tax (Appeals) is restored. The Assessing Officer is directed to consider the disallowance in terms of the order of the CIT (Appeals), after examining the nexus between the borrowed funds and the diversion thereof in the form of interest free loans.

Consequently, while answering both the substantial questions of law in favour of the appellant – Revenue, the present appeal is allowed.

(HEMANT GUPTA)

JUDGE

30.01.2015

(HARI PAL VERMA)

Vimal

JUDGE VIMAL KUMAR 2015.02.02 16:20 I attest to the accuracy and integrity of this document Chandigarh

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