Commissioner of Income Tax vs Kamal Industry (HUF)

Ajay Kumar Mittal, J.—This appeal has been filed by the revenue under Section 260A of the Income Tax Act, 1961 (in short "the Act") against the order dated 31.8.2006 passed by the Income Tax Appellate Tribunal, Delhi Bench "D", Delhi (hereinafter referred to as "the Tribunal") for the assessment year 2001-02, claiming the following substantial question of law:-

"Whether on the facts and in the circumstances of the case, the Hon''ble ITAT was right in law in deleting the disallowance of interest of Rs.3,13,677/- made u/s 36 (1)(iii) of the I.T. Act, 1961 on account of interest on borrowings to the extent those are diverted to relatives without interest?"

Briefly stated, the facts necessary for adjudication of the present appeal as narrated therein are that the assessee derived interest income and from sale and purchase of metals. The assessee filed its return for the assessment year 2001-02 on 30.10.2001 declaring an income of Rs. 3,78,270/- which was processed under Section 143(1) of the Act on 19.9.2002. During the course of assessment proceedings, the Assessing Officer found that the assessee had paid interest of Rs. 3,13,677/- on unsecured loans of Rs. 19,55,603/- and also given interest free loans to its relatives amounting to Rs. 1,11,85,750/-. Accordingly, vide order dated 27.2.2004 (Annexure A-1), the Assessing Officer computed the income of the assessee at Rs. 7,01,450/- by making an addition of Rs. 3,13,677/- under Section 36(1)(iii) of the Act on account of diversion of interest free loans for non-business purposes. Feeling aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) [for brevity "the CIT(A)"] who vide order dated 10.6.2004 (Annexure A-2) while confirming the addition of Rs. 3,13,677/- dismissed the appeal. Still dissatisfied, the assessee filed an appeal before the Tribunal. The Tribunal vide order dated 31.8.2006 (Annexure A-3) allowed the appeal and deleted the said addition by relying on its earlier order for the assessment year 1998-99. Hence, the present appeal by the revenue.

Learned counsel for the revenue submitted that the Tribunal while accepting the appeal of the assessee had relied upon its earlier decision in the case of assessee relating to the assessment year 1998- 99. Learned counsel referred to the assessment order wherein while disallowing interest on loans and advances, it was noticed as under:-

"(i) Interest on loans & advances:

From the perusal of Annexure ''C'' of the audit report submitted in Form 3CD, it is noticed that the assessee has shown loans & advances of Rs.19,55,603/- taken from the various persons and has debited interest on such loan & advances amounting to Rs.3,13,677/-. The assessee has further given interest free loans to the following close relatives:

The assessee has not shown interest income from the above loans. Whereas, the assessee had paid interest @ 12% to 18% on loans taken from the various persons. During the course of assessment proceedings, though order sheet entry dated 12.12.2003, the assessee was asked to submit details for utilization of unsecured loans for business purpose with supporting evidence. However, the assessee has failed to discharge its onus. The assessee was again asked vide order sheet entry dated 05.01.2004 to submit the complete details of loans & advances given to the above persons along with rate of interest charged. Vide reply dated 27.01.2004, the assessee has submitted the details of loans and advances. From the perusal of details furnished, it is noticed that no interest has been charged. Had the said money been not advanced to the above close relatives, it would have been available to the assessee for his business purposes and earning more profits. The interest relatable to the amount lent to the above relatives cannot be allowed as deduction u/s 36(1)(iii) of the Income Tax Act, 1961, because it cannot be said that the money to that extent was borrowed for the purposes of business. This view finds support from the decision of the Hon''ble Allahabad High Court in the case of Commissioner of Income Tax Vs. H.R. Sugar Factory Pvt. Ltd., , COMMISSIONER OF Income Tax Vs. SARAYA SUGAR MILLS (P.) LTD., . The Hon''ble Madras High Court in the case of K. Somasundaram and Bros vs. CIT 153 CTR 153 , has held that "when the assessee decided to lend a substantial part of those funds interest free to the sister concern of the assessee, it was clearly not a business purpose." Similar view has been expressed by the Hon''ble Madras High Court in the case of Commissioner of Income Tax Vs. Sujanni Textiles (P) Ltd., . Keeping in view, the above facts, the proportionate interest on above loans is therefore, liable to be disallowed on account of diversion of interest free loans for no business purposes to the assessee''s relative. I, therefore, disallow interest of Rs.3,13,677/- u/s 36(1) (iii) of the Income Tax Act, 1961."

It was submitted that the Tribunal while accepting the appeal had not discussed anything as to how the present case was similar with the case of the assessee for the assessment year 1998-99. It was urged that allowance or disallowance under Section 36(1)(iii) of the Act is dependent upon the facts of each case and the reliance of the Tribunal on its earlier order for the assessment year 1998-99 without referring to the similarity, the findings stand vitiated and the matter requires to be remanded for re-adjudication by the Tribunal after examining the factual matrix involved in the current assessment year.

Learned counsel for the assessee, on the other hand, besides supporting the order passed by the Tribunal submitted that similar deduction had also been allowed for the assessment years 2004- 05, 2005-06 and 2006-07.

After hearing learned counsel for the parties, we find force in the submissions made by learned counsel for the appellant.

A perusal of the order passed by the Tribunal shows that the Tribunal has decided the appeal in favour of the assessee only by relying upon its earlier order for the assessment year 1998-99. The factual matrix in the present case, as noticed hereinabove, is different. The Tribunal was required to discuss with regard to the details as have been noticed by the Assessing Officer while making the assessment. Moreover, the assessment orders for the years 2004-05, 2005-06 and 2006-07 do not specifically show that the issue with regard to Section 36 (1)(iii) of the Act was discussed in the said assessment orders as is discernible from the assessment order produced by the learned counsel for the assessee. However, it shall still be open for the assessee to urge this point before the Tribunal at the time of hearing of the appeal again.

In view of the above, the substantial question of law stands answered accordingly. The order passed by the Tribunal is set aside and the matter is remitted to the Tribunal to decide the same afresh in accordance with law after affording an opportunity of hearing to the parties.