ITA No. 136 of 2007 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 136 of 2007 Date of Decision: 20.5.2011 Commissioner of Income Tax, Faridabad ....Appellant. Versus M/s Steriplate Pvt. Ltd. ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL, ACTING CHIEF JUSTICE. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Ms. Urvashi Dhugga, Senior Standing Counsel, for the appellant. Mr. Rupesh Jain, Advocate for the respondent. AJAY KUMAR MITTAL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order dated 9.6.2006 passed by the Income Tax Appellate Tribunal, Delhi Bench 'D”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 5548/Del/2003, relating to the assessment year 1997-98. 2. The appeal was admitted by this Court vide order dated 5.11.2007 for determination of the following substantial question of law:- “On the facts and circumstances of the case, whether the Hon'ble ITAT was right in upholding the order of learned CIT(A) deleting the disallowance of interest ITA No. 136 of 2007 -2- made by the Assessing Officer on account of the assessee using interest bearing funds for advancing interest free loans to sister concerns, in the light of the judgment dated 4.8.2006 of Hon'ble Punjab and Haryana High Court in CIT Vs. Abhishek Industries?” 3. Briefly stated, the facts necessary for adjudication as narrated in the appeal are that the assessee filed its return for the assessment year 1997-98 declaring an income of Rs.14,18,080/-. Assessment was completed on 21.3.2000 at an income of Rs.60,23,120/- by disallowing interest to the extent of Rs.45,92,000/- @ 14% of the amount of Rs.3,28,00,000/- advanced to subsidiary companies. The assessment order was set aside by the Commissioner of Income Tax (Appeals) [in short the CIT(A)”] directing the Assessing Officer to form a fresh assessment as per law allowing the opportunity of hearing to the assessee and also investigating the issue whether there was any nexus between the different transacting sister companies as decided by the Hon'ble Apex Court in Mcdowell and Company v. Commissioner of Income Tax, [1985] 154 ITR 148. Thereafter, the Assessing Officer again passed an assessment order on 26.3.2002 at a total income of Rs.60,23,320/- including the addition of Rs.45,92,000/- on account of interest disallowed on diverted funds. On appeal by the assessee, the CIT(A) vide order dated 22.10.2003 deleted the said addition made on account of aforesaid disallowance. Feeling aggrieved, the department took the matter in appeal before the Tribunal. The Tribunal vide order dated 9.6.2006 upheld the order of the CIT(A) and dismissed the appeal. Hence, the present appeal by the revenue. ITA No. 136 of 2007 -3- 4. We have heard learned counsel for the parties. 5. The issue for consideration in this appeal is whether the assessee had diverted the interest bearing funds to its sister/subsidiary concerns and, therefore, the interest on such interest free loans advanced by the assessee to the sister/subsidiary concerns could be added in the hands of the assessee. 6. Learned counsel for the revenue placed reliance upon the judgment of this Court in Commissioner of Income Tax v. Abhishek Industries, [2006] 286 ITR 1 and that of the Hon'ble Supreme Court in Mcdowell and Company's case (supra) in support of her submission. 7. Learned counsel for the assessee on the other hand supported the order passed by the CIT(A) and affirmed by the Tribunal. He submitted that a finding of fact has been recorded by the aforesaid authorities concurrently that there was no nexus between the borrowing of the amount and advancing of interest free loan to the sister/ subsidiary concerns. 8. We have given our thoughtful consideration to the respective submissions of learned counsel for the parties and do not find any substance in the submission of learned counsel for the revenue. 9. The Tribunal while affirming the finding of the CIT(A) had arrived at a conclusion that the assessee had advanced loan to its subsidiary companies, namely, M/s Falshajam Investments and Finance Co. Pvt. Ltd. of Rs.1.30 crores and M/s Expo Leasing Private Limited of Rs.1.98 crores on 1.2.1995 out of the sale proceeds of Rs.7.30 crores which was received by it from M/s Kelvinator India Ltd. on 30.1.1995. ITA No. 136 of 2007 -4- The Tribunal had also recorded that the interest free advances were given by the assessee on 1.2.1995 out of the aforesaid amount whereas the borrowings were made by the assessee amounting to Rs.9 crores in November, 1996. It was also observed that the assessee had paid tax on interest income of Rs.64.40 lacs which was earned by it on deposits with intercorporate bodies. On the basis of the aforesaid findings, it was concluded by the Tribunal that there was no nexus between the borrowings made by the assessee with the advances of interest free loans to the sister/subsidiary concerns. The findings recorded by the Tribunal in paras 4 and 5 of its order read thus:- “4. We have perused the orders of AO and learned CIT(A). We have also perused the paper book filed by assessee. We find that interest free advances of Rs.3.28 crores were given to subsidiary companies, namely, M/s Falshajam Investments and Finance Co. Pvt. Ltd.-Rs.1.30 crores and M/s Expo Leasing Private Ltd.-Rs.1.98 crores on 1.2.95 out of the proceeds of the sales of the undertaking amounting to Rs.7.30 crores received from Kelvinator of India Ltd. on 30.01.1995. Interest free advances were given much before the company borrowed Rs.9 crores from Desai in November, 1996. There is no nexus between the interest free advances given on 1.2.1995 and the borrowing of Rs.9 crores in November, 1996. 5. We have also perused the remand report ITA No. 136 of 2007 -5- furnished by the AO wherein it is clearly reported that the borrowed funds have not been diverted for non business purpose but were invested in inter corporate bodies with various companies and on which interest income of Rs.64.40 lacs has been earned. The interest free advance were given in earlier year out of the sale proceeds of its manufacturing division. In view of the above finding, we hold that since the interest has been paid on the amounts borrowed for the purpose of business and which has been utilized for the purpose of business, no disallowance is called for. There is no provision under the Act to charge notional income to tax. Under the ambit of Act if interest paid by the company is not wholly and exclusively for the purpose of business, the same can be disallowed. However, in the present case, it is seen that the amount borrowed has been utilized for the purpose of advancing the same at a higher rate of interest and the interest income from such advances are also taxed. Since there is no nexus between the borrower of sum and advancing on interest free basis and since there is specific finding that amount borrowed has been utilized for further advancing in the course of business, no part of interest is disallowable. We accordingly do not find any merit in this appeal.” ITA No. 136 of 2007 -6- 10. No perversity or illegality could be pointed in the aforesaid findings recorded by the Tribunal which may warrant interference by this Court. Referring to the judgments in Abhishek Industries and Mcdowell and Company's cases (supra), relied upon by the learned counsel for the revenue, suffice to say that in view of the findings recorded by the CIT(A) and affirmed by the Tribunal, the same do not advance the case of the revenue. 11. Accordingly, the substantial question of law is answered against the revenue and in favour of the assessee. The appeal stands dismissed. (AJAY KUMAR MITTAL) JUDGE May 20, 2011 (ADARSH KUMAR GOEL) gbs ACTING CHIEF JUSTICE