S. A. Builders Ltd. .. Petitioner vs Commissioner Of Income Tax (Appeals) ...

Since the leading case is that of S.A. Builders [SLP(C) 21707- 21710/2004], we shall be taking note of the facts of this case.

During the course of the proceeding for the relevant assessment year(s), the Assessing Officer under the Income Tax Act observed that the assessee had transferred a huge amount of Rs. 82 lakhs to its subsidiary company M/s. SAB Credits Limited out of the cash credit account of the assessee in which there was a huge debit balance. He, therefore, held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed. Accordingly, he disallowed a sum of Rs. 5, 66, 729/- .

The assessee preferred an appeal to the Commissioner of Income Tax (Appeals) Chandigarh [for short hereinafter referred to as the CIT(A)], who vide his order dated 15.4.1993 partially accepted the claim of the assessee. According to the CIT (A), out of the total amount of Rs. 82 lacs advanced by the assessee in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs. 18 lacs had a clear nexus with the borrowed funds, as the balance amount had been paid out of the receipts from other parties to whom no interest had been paid. Accordingly, the CIT(A) directed the Assessing Officer to calculate disallowance of interest only relating to the sum of Rs. 18 lacs, and the disallowance was reduced accordingly.

Both the assessee as well as the Revenue filed appeals before the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal'). The Tribunal by its order dated 20.6.2002 allowed the appeal of the Revenue, and held that the entire amount of Rs. 82 lacs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the Assessing Officer was justified. Accordingly, the appeal filed by the Revenue was allowed and the appeal field by the assessee was dismissed.

On appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer that the sum of Rs. 37,85,000/- advanced during assessment year 1990-91, was relatable to the borrowed funds. However, in view of the findings of her predecessor in assessment year 1990-91, that out of Rs. 82 lacs advanced during that year, advance of Rs. 64 lacs had no nexus with the borrowed funds, she reduced the disallowance from Rs. 20,08,836 to Rs. 10,03,538/- vide her order dated 28.7.1994. The assessee was granted further relief of Rs. 1,48,464/- by the CIT(A) vide order dated 6.9.1995 under Section 154 of the Act. On the cross-appeals filed by the assessee as well as the Revenue, the Tribunal following its order for assessment year 1990-91, upheld the disallowance as made by the Assessing Officer. Accordingly, the appeal of the revenue on this issue was allowed and that of the assessee dismissed.

The High Court held that since it stands established that the amount of Rs. 82 lacs and Rs. 37.85 lacs had been advanced by the assessee to its sister concern from out of the overdraft account with the bank in which there was already a debit balance, the order of the Tribunal does not suffer from any factual or legal infirmity. Accordingly, the High Court dismissed the appeal.

In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above.

We also make it clear that we are not setting aside the order of the Tribunal or other Income Tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds.