Commissioner of Income Tax vs M.M. Nagalinga Nadar Sons

C.N. Ramachandran Nair, J.—Heard standing counsel for the appellant and the counsel appearing for the respondent assessee.

Two issues are raised in the appeal filed by the Revenue. The first question pertains to the bogus purchases accounted by the assessee as excess driage for the copra purchased and crushed in the assessee''s mill. The entire copra was purchased by the assessee from its sister concern M/s Sree Rajvel and Company. The case raised by the Department against the sister concern is that they were not accounting the full purchases and sales of copra and driage was accounted to cover unaccounted transaction. The entire quantity purchased by the sister concern M/s Sree Rajvel and Company was transported to the assessee and the assessee accounted the difference of quantity also as purchases which were found to be bogus by the AO. The CIT(A) reversed the finding of the officer and the Tribunal confirmed it. In the appeal filed before us, the contention of the Revenue is that the transactions are between the sister concern M/s Sree Rajvel and Company and the assessee. In the appeal filed against the regular assessment in the hands of the sister concern M/s Sree Rajvel and Company, the Tribunal has set aside and remanded the assessment on this issue. However, in the case of assessee where the addition is only protective assessment, the Tribunal declined to remand the matter, but confirmed the order of the CIT(A) in deleting the condition (sic-addition). Both sides do not know the outcome of the remand proceedings in the case of sister concern.

We are of the view that the Tribunal should have remanded this case also for reconsideration because the assessment in the case of the assessee is protective assessment and the regular assessment in which same addition is sustained stands remanded to the AO. We, therefore, reverse the order of the Tribunal on this issue and remand the matter to the AO for reconsideration in the light of the findings in the case of the sister concern. Since the matter is remanded, the assessee is given freedom to raise all contentions on merits.

The next question raised pertains to the order of the Tribunal confirming the appellate order reversing the disallowance of proportionate interest on the sum advanced by the assessee to the partners as interest-free loans. The assessee had a FDR of Rs. 10 lakhs with the bank which matured on 30th Nov., 1990. The assessee, which substantially depends on borrowed funds for running the business instead of utilising the funds for business purposes, allowed the partners to take 5 lakhs rupees each before maturity of deposit and deposited the same in the personal accounts of the partners. The AO noticed that the proportionate interest paid by the assessee is to be disallowed because the assessee had allowed sizable amount to be siphoned off by the partners for their personal needs. The CIT(A) allowed the assessee''s claim by stating that the funds and advance to partners were not from borrowed capital and so much so, there is no nexus between the advance to partners and borrowals. The Tribunal confirmed this order and further held that the firm had surplus reserves at the end of the previous year and therefore disallowance of proportionate interest on interest-free advance to the partners is not called for. Counsel for the Revenue referred to the decision of this Court reported in Commissioner of Income Tax Vs. Baby, and in Commissioner of Income Tax-I Vs. Abhishek Industries Ltd., . Counsel for the assessee relied on the finding of the authorities below about the availability of the reserves and surplus in their favour and supported the order of the Tribunal. We feel the facts of the case are very similar to the facts based on which this Court decided the matter in the decision first above referred. The Tribunal has not gone into the question whether borrowals were justified when the assessee had funds with it. The assessee was well aware of the maturity of the deposit and they could have easily limited the borrowals in such a way so that interest for the deposit amount is avoided after its maturity. The assessee, which advanced its funds as interest-free loans to the partners, has no justification to claim interest on borrowals on so much amount. It cannot be denied by the assessee that the funds reaching its hands on maturity of deposits could not be utilised for its own business purposes. This could have reduced the interest burden. In this view of the matter, we feel, proportionate disallowance of interest on borrowals is perfectly justified. Following the above decision of this Court, we reverse the order of the Tribunal and the first appellate authority and restore the assessment on disallowance.

The appeal is disposed of as above.