THE COMMISSIONER OF INCOME TAX vs. SIDDHESHWAR SAHAKARI SAKHAR KARKHANA LTD

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TA/55/2010HC BombayHCBM03018542201005 September 2014Author: HON'BLE SHRI JUSTICE A.V. NIRGUDE,HON'BLE SHRI JUSTICE A. I. S. CHEEMA10 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the question of law raised in the appeal had already been decided by this Court in the case of Commissioner of Income Tax vs. Samarth Sahakari Sakhar Karkhana Ltd. (2007) 294 ITR 540 (Bom). In that judgment, the Court had held that advances given to H&T contractors, even if at a lower rate of interest or without charging interest, were for business purposes and not a diversion of borrowed funds for non-business purposes. The Court found the Revenue's approach to the binding judgment objectionable and dismissed the appeal. The Court noted that the Revenue's ground for appeal, stating the High Court's decision was not acceptable and that an SLP was proposed, was an adamant attitude. The Court emphasized that a judgment of the High Court, as long as it stands, cannot be disregarded or ignored and must be obeyed. The Revenue cannot escape its binding effect by stating the decision was not acceptable or by proposing to file an SLP. The Court found no substantial question of law involved.

What were the facts?

The assessee, Siddheshwar Sahakari Sakhar Karkhana Ltd., a sugar factory, gave advances to Harvesting and Transporting Contractors (H&T Contractors) without charging interest. The assessee was paying significant interest on its own loans. The Assessing Officer disallowed Rs. 41,30,672 on account of notional interest, treating it as diversion of borrowed funds for non-business purposes. The assessee argued the advances were for business purposes. The Commissioner (Appeals) deleted the addition, relying on previous decisions. The Income Tax Appellate Tribunal also dismissed the Revenue's appeal, following its earlier decision in ACIT vs. Tuljabhavani SSK Ltd. The Revenue filed the present appeal before the High Court against the Tribunal's order.

What were the issues?

1. Whether, on the facts and in the circumstances of the case, the Tribunal was correct in holding that the advances to Harvesting & Transport contractors are in the nature of business advances? (Question of law) 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in allowing interest on borrowed funds, which have been utilized towards interest-free advances for non-business purpose? (Question of law) Assessee's contentions (as inferred from the lower authorities' decisions and the Tribunal's reliance on precedents): The advances to H&T Contractors were made for wholly and exclusively business purposes. The assessee relied on CIT vs. Samarth Sahakari Sakhar Karkhana Ltd., 294 ITR 540. The Tribunal relied on its decision in ACIT vs. Tuljabhavani SSK Ltd. which held that advances to H&T contractors are for business purposes to ensure fresh cane of desired quantity and quality, thereby increasing sugar yield. Revenue's contentions: The advances were not in the normal course of business, were made without specific contractual obligations, and were out of borrowed funds on which higher interest was paid, thus constituting diversion of borrowed funds for non-business purposes. The Revenue acknowledged the High Court's decision in CIT vs. Samarth Sahakari Sakhar Karkhana Ltd. but stated it was not acceptable and proposed filing an SLP, seeking to keep the issue alive.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 260A

AI-generated summary — verify with the full judgment below

IN  THE HIGH COURT OF JUDICATURE AT BOMBAY BENCH AT AURANGABAD TAX APPEAL NO.55 OF 2010 The Commissioner of Income Tax, Aayakar Bhavan, Near Holy Cross School, Cantonment, Aurangabad. ...APPELLANT VERSUS Siddheshwar Sahakari Sakhar Karkhana Ltd., Maniknagar, Tq­Sillod, Dist­Aurangabad. ...RESPONDENT ... Shri Alok Sharma, Standing Counsel for Appellant. Respondent though served ­ absent. ... CORAM:  A.V. NIRGUDE AND                       A.I.S. CHEEMA, JJ. DATE : 5TH SEPTEMBER, 2014

JUDGMENT [PER A.I.S. CHEEMA, J.] :

1.

This Appeal is filed by the Commissioner of   Income   Tax,   Aurangabad   against   order   of   the Income   Tax   Appellate   Tribunal,   Pune   in   I.T.A. No.1298/PN/2009   dated   30th   November   2009,   vide which order the Appellate Tribunal confirmed the order dated 10th August, 2009 of the Commissioner of   Income   Tax   (Appeals),   Aurangabad   in ABD/CIT(A)/195/2008­09. 2. The Appeal filed before the Commissioner of   Income   Tax   (Appeals)   was   against   the   orders dated   24th   December   2008   passed   by   Assistant Commissioner of Income Tax, Circle­1, Aurangabad, under Section 143(3) of the Income Tax Act, 1961, relating to the assessment year 2006­2007. 3. The   facts   of   the   case   show   that   the Assessee,   Siddheshwar   Sahakari   Sakhar   Karkhana Ltd.,   a   sugar   factory   had   given   advances   to Harvesting   and   Transporting   Contractors   (H   &   T Contractors).   Interest   was   not   charged   on   the advances,   whereas   the   Karkhana   was   paying   heavy interest to the other Banks/Institutes from whom the   loan/advances   had   been   taken.   The   Assessing Officer

disallowed

and brought

to tax Rs.41,30,672/­   on   account   of   notional   interest incurred   on   advances   made   to   the   H   &   T Contractors. The submission of the Assessee that the   Karkhana   was   not   charging   interest   on   the advances   to   H   &   T   Contractors   because,   if   they charge   interest   on   the   advances   to   H   &   T Contractors, the contractors would not turn up to render   proper   services   in   future,   was   not accepted.   The   Assessing   Officer   held   that   the interest @ 12% as per prevailing rate of interest dated 20th August, 2007 in ITA No.805/PN/2005 in the case of ACIT Circle­3, Nanded vs. Shankar SSK Ltd.,   Nanded   A.Y.1993­94. Commissioner   of   Income Tax

(Appeals)

deleted

the addition

of Rs.41,30,672/­ made by the Assessing Officer. 5. 1745/PN/2004   dated   30th   May,   2007. The   Tribunal reproduced following paragraphs from that order of 30th May, 2007: " It is well known that the Cane Harvesting &   Transport   is   carried   out   by   the   sugar factories to schedule fresh cane of desired quantity   and   quality.   This   increases   the yield of sugar from sugarcane. The advances are made by the sugar factory to the Cane Harvesting and Transport Contractors in the course   of   carrying   on   their   business activities   of   purchasing   fresh   cane   of desired   quality   and   quantity.   Therefore, whatever advances made by the assessee to harvesting and transport contractors can be said   to  have   been   made   only  for   business purposes. The disallowance   of interest on the   amount   of   advances   to   the   harvesting and   transport   contractors   is,   thus,   not called   for.   Therefore,   this   ground   is decided against the revenue." . Following the earlier decision the appeal was dismissed.

6.

Against   the   above   concurrent   Judgments, present   Appeal   has   been   tendered   under   Section 260A of the Income Tax Act, 1961. In the Appeal questions of law proposed by Revenue are:

"(1)   Whether   on   the   facts   and   in   the circumstances   of   the   case,   the   Tribunal was  correct in holding that the advances to Harvesting   &   Transport   contractors are in the nature of business advances? (2)   Whether   on   the   facts   and   in   the circumstances   of   the   case,   the   Tribunal was  justified   in   allowing   interest   on borrowed funds,   which   have   been   utilized towards  interest   free   advances   for   non business purpose ? 7. was :

"A)   Whether   on   the   facts   and   in   the circumstances of the case, the Tribunal was justified in holding that the advances paid to the harvesting transport contractors was in the nature of business interest of the respondent and not a diversion of borrowed funds   for   non   business   purposes,   even though   such   advance   was   not   made   in   the normal   course   of   business   and   was   made without

any specific

contractual obligations and such payments were made out of the borrowings on which the respondent was paying higher interest to the financial institutions?"

8.

This Court found in that matter, that the assessee had given advances to H and T contractors at lower rate of interest and that the same could not be ground to hold that the borrowed funds had been   diverted   for   non   business   purposes.   The substantial question of law framed, was answered in favour of the assessee for the reasons recorded in the Judgment. In that matter, the advance given was on less rate of interest. The difference in present matter is that here the advance has been given   without   charging   interest   on   the   advances given to H & T contractors. This however, is not material as the important question is whether the advance paid to H & T contractors is in the nature Judgment of this Court. In the ground of Appeal too, it is mentioned as under: "With due respect, the said decision of the Hon'ble   Bombay   High   Court   was   not acceptable   and   proposal   for   filing   SLP before   the   Hon'ble   Supreme   Court   on   the above said issue has already been submitted to   the   Board.   In   this   connection,   it   is also   submitted   that   the   department   is agitating the aforesaid issue in number of other Sugar Factory cases also. Hence, to maintain   the   consistency   and   to   keep   the above issue alive, filing of further appeal to   High   Court   u/s.   260A   is   considered necessary in the present case on account of interest on advances to H & T contractors."

9.

We   find   the   above   ground   to   be   adamant attitude. The Judgment of this Court, as long it stands, cannot be disregarded or ignored and has to be obeyed. If the Revenue did not file SLP to the Hon'ble Supreme Court or take up the matter in Review, etc. and did not get the Judgment dated 17th   September   2007   set   aside   till   now,   the Revenue   cannot   ignore   binding   effect   of   the Judgment of this Court. Revenue cannot escape by saying that the decision of the High Court was not acceptable and could not ignore the same on the ground that there is a proposal to file SLP.

10.

We   find   the   approach   of   the   Revenue   to the binding Judgment of this Court objectionable. We   refrain   from   passing   adverse   orders   on   this occasion, with the expectation that in future such litigations would be avoided by Revenue and will not add to unnecessary burden of Judiciary.

11.

There is no substantial question of law involved.

12.

The Appeal is dismissed.

[A.I.S. CHEEMA, J.]             [A.V. NIRGUDE, J.] asb/SEP14

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