Case: The Commissioner of Income Tax Vs. Reliance Utilities &amp; Power Limited

of Rs.172,10,88,000/- were utilised for the purchase of fixed assets shown in Schedule D in terms of the balance sheet as on 31st March, 1999. It was submitted that the assessee had no reserve or own funds for making the investments in the sister concern and, therefore, borrowed funds had been utilised and interest on these investments are for non-business purposes and hence rightly disallowed by the Assessing Officer. On the other hand on behalf of the Assessee the learned Counsel relied on the order of C.I.T. (Appeal) and submitted that the assessee had total interest free fund of Rs.398 crores. From the facts on record the learned Tribunal was pleased to record a finding that the assessee had sufficient funds of its own for making the investment without using the interest bearing funds and accordingly upheld the order of C.I.T. (Appeal). It is this order which is the subject matter of the present Appeal.7. At the hearing of this Appeal on behalf of the Appellant learned Counsel submits that the order of the Tribunal is perverse in as much as the Tribunal ignored the fact that the respondent assessee had no interest free funds out its own. It is pointed out that in so far as the shareholders funds are concerned, in terms of the balance sheet as on 31st March, 1999 they were utilised for the purpose of purchase of fixed assets shown in Schedule D.On the other hand on behalf of the assessee the learned Counsel submits that the assessee company had generated sufficient interest free fund of its own which it utilized for its business, including investment in sister concerns and consequently no fault could be found with the order of the C.I.T. (Appeals) and/or the Tribunal. It was further submitted that once monies are available it is for the assessee to take a business decision for application of funds. The submission is that where there are both borrowed funds as also interest free funds, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. Commissioner of Income-tax (Central), Calcutta, 134 ITR 219 . It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. C.) Commissioner of Income-Tax 224 ITR 627 (S.C.). 8. We have heard learned Counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs.172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned Counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that we have noted earlier that both in the order of the C.I.T. (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee had interest free funds of its own which had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs.398.19 crores including Rs.180 crores of share capital. In this context, in our opinion, the finding of fact recorded by C.I.T. (Appeals) and I.T.A.T. as to availability of interest free funds really cannot be faulted. 9. If there be interest free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of he business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]7. At the hearing of this Appeal on behalf of the Appellant learned Counsel submits that the order of the Tribunal is perverse in as much as the Tribunal ignored the fact that the respondent assessee had nos out its own. It is pointed out that in so far as the shareholders funds are concerned, in terms of the balance sheet as on 31st March, 1999 they were utilised for the purpose of purchase of fixed assets shown in Schedule D.On the other hand on behalf of the assessee the learned Counsel submits that the assessee company had generated sufficientinterest free fundof its own which it utilized for its business, including investment in sister concerns and consequently no fault could be found with the order of the C.I.T. (Appeals) and/or the Tribunal. It was further submitted that once monies are available it is for the assessee to take a business decision for application of funds. The submission is that where there are both borrowed funds as alsos, discretion lies in the hands of the assessee for utilisation of those funds. Reliance for that purpose was placed on the judgment of the Calcutta High Court in the case of Woolcombers of India Ltd. vs. Commissioner of(Central), Calcutta, 134 ITR 219  . It was further submitted that the view taken by the Calcutta High Court had found approval by the Supreme Court in East India Pharmaceutical Works Ltd. vs. C.) Commissioner of224 ITR 627   (S.C.).We have heard learned Counsel for both the parties. In our opinion the very basis on which the Revenue had sought to contend or argue their case that the shareholders funds to the tune of over Rs.172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, we are not concerned with the balance sheet as of 31st March, 1999. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the learned Counsel has been unable to point out to us from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. To our mind the profit and loss account and the balance sheet would not show whether shareholders funds have been utilised for investments. The argument has to be rejected on this count also. Apart from that we have noted earlier that both in the order of the C.I.T. (Appeals) as also the Appellate Tribunal, a clear finding is recorded that the assessee hadfunds of its ownwhich had been generated in the course of the year commencing from 1st April, 1999. Apart from that in terms of the balance sheet there was a further availability of Rs.398.19 crores including Rs.180 crores of share capital. In this context, in our opinion, the finding of fact recorded by C.I.T. (Appeals) and I.T.A.T. as to availability ofs really cannot be faulted.If there bee funds availableto an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from thes available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (Supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen.Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers case (Supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of he business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if thereoth interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of theinterest free fundgenerated or available with the company, if thes were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T.