Asstt. C.I.T. vs Mihir Metals Pvt. Ltd.

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K.S. Jhaveri, J.—By way of this appeal, the appellant-revenue has challenged the order dated 16.06.2000 passed by the Income Tax Appellate Tribunal, Rajkot Bench [for short "the ITAT"] in ITA No. 188/Rjt/98, whereby the appeal filed by the assessee was partly allowed by the ITAT.

The facts of this case are that the respondent-assessee had filed its return for the Assessment Year 1994-95 on 22.12.1994 and declared total loss of Rs. 1,40,070/-. The same is processed under Section 143(1)(a) of the Income Tax Act and the Assessing Officer passed his order 27.03.1997. Against the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals), Rajkot. The CIT(A) vide order dated 31.03.1998 partly allowed the appeal filed by the assessee. Being aggrieved by the said order, the assessee again filed an appeal before the ITAT. The Tribunal vide impugned order dated 16.06.2000 partly allowed the appeal. Hence, this appeal is filed at the instance of the revenue.

While admitting this appeal on 13.11.2000, the Court had formulated the following substantial questions of law:-

"Whether, the Appellate Tribunal is right in law and on facts in deleting the addition of Rs. 9,82,129/- under Section 36(1)(iii) being the amount of interest paid by the assessee on the borrowing which amounts the assessee lent to another party with whom the assessee had business dealings?"

Learned counsel for the appellant-revenue has contended that both the authorities namely the Commissioner of Income Tax as well as the ITAT have committed an error in deciding the matter. He submitted that the Tribunal has not properly appreciated the materials available on record. He, therefore, urged that the present appeal deserves to be allowed.

On the other hand, learned advocate for the respondent-assessee has supported the impugned order of the Tribunal and submitted that the Tribunal after considering all the materials on record has passed the impugned order and therefore, there is no germane reason to interfere with the impugned judgment and order of the Tribunal.

5.1. In support of his contention, he relied upon the decision of the Apex Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, .

We have heard learned advocates appearing for both the parties and perused the material on record. We have also perused the impugned order passed by the Tribunal. While deciding the appeal, the Tribunal in paragraph Nos. 11, 12, 14 and 14 has observed as under:-

"11. We have heard both the parties. It is pointed out by the ld. Counsel that the borrowed funds were utilized for business activities. For purchasing goods from various authorities as well as advancing for conducting procurement services rendered to GMMSS Ltd. resulted to earn net service charges of Rs. 4,04 Lakhs as well as sales to said company worth Rs. 157 Lakhs, where the assessee company earned gross profit of Rs. 17.99 Lakhs. There was expected business commitment agreed by GMMSS Ltd., which would have resulted in additional revenue of profit and on sale for about 1,000 M. tons of N.F. Metals, p.m. in coming days. Thus, this was an act on the part of the assessee company for a set of systematic and regular business activity and therefore the said advances to GMMSS Ltd. was not for any personal relation but for the purpose of the business of assessee.

For a claim of deduction of interest u/s. 36(1)(iii) all that is necessary is that the money i.e. capital must have been borrowed by the assessee. Secondly, it should have been borrowed for the purpose of business. Profession of vocation of the assessee and thirdly the assessee should have paid the amount as an allowance under that clause. This clause makes more distinction between the capital borrowed in order to acquire a revenue assets. It does not say that borrowing of capital should have been necessarily for the purpose of business. So as to hold that the deduction cannot be allowed. If the assessee had sufficient money at the time of borrowing the interest paid is also not subject to test of reasonableness when the AO finds that the borrowing not illusive and colourable and that the capital was borrowed by the assessee for the purpose of business and the amount of interest was paid, then the claim for deduction has to be allowed.

In the present case, the assessee is having business dealing with GMMSS Ltd. as we have discussed above. The assessee could sell its goods to the extent of Rs. 157 lakhs during the year to GMSS Ltd. The assessee company also earned Rs. 4.04 Lakhs GMMSS Ltd. From the facts mentioned above, the assessee company could also earn 45% gross profit out of the sale made to GMMSS Ltd. Therefore, it cannot be said that the interest free advances were made without business consideration. It is a fact that the funds have been borrowed by the assessee company. The only point for consideration of the A.O. is that whether the funds borrowed have been utilized for the purpose of business of the assessee or not. He has also to find out whether the transactions are genuine or not. Further, he has also to find out whether the funds have been advanced with the intention of evasion of tax. In the present case, it has been established that the transactions are genuine and they are also not entered into with any malafide intention to deprive the Department from lawful revenue, which is otherwise payable by the assessee. The dominant intention of these transactions was for ultimate benefit of the assessee and, thus, the same was entered into with business considerations.

In this case, (i) the assessee borrowed the funds,(ii) such funds have been borrowed for the purpose of business (iii) the assessee has also paid interest on such funds, (iv) the case of the assessee is also not covered under the provisions of Section 40A(2). Therefore, in our considered opinion, the interest is allowable under the provisions of Section 36(1)(iii) of the Act. The addition of Rs. 9,82,129/- is therefore, deleted and the findings of the Ld. CIT(A) are reversed."

In view of the aforesaid discussion and in view of the principle laid down by the Apex Court in the case of S.A. Builders Ltd. (supra), we are of the considered opinion that the view taken by the Tribunal is just and proper. We do not find any reason to disturb the findings recorded by the Tribunal. Apart from that, learned advocate for the appellant is not in a position to show how the findings of the Tribunal are bad in law and on facts. Therefore, the present appeal deserves to be dismissed.

For the foregoing reasons, the present appeal is hereby dismissed. Accordingly, the question posed in this appeal is answered in favour of the assessee and against the revenue.