Per Shri K. T. Thakore, Accountant Member - 1 to 5. [These paras are not reproduced here as they involve minor issues.]
6. The next contention raised in these appeals relates disallowance of interest on bank overdraft as indicated below :
Assessment year 1973-74
Assessment year 1974-75
Assessment year 1975-76
For the assessment year 1973-74, the ITO disallowed a sum of Rs. 3 lakhs out of claim for deduction of interest of Rs. 3,32,612 by way of overdraft interest on bank loans. For the assessment year 1974-75, the ITO disallowed a sum of Rs. 2,74,215 while in the assessment year 1975-76 he disallowed a sum of Rs. 1,52,543 out of interest paid on bank loans. The ITO found that the assessee had advanced a sum of Rs. 24 lakhs to one Induri Farms Ltd., a subsidiary of the assessee, free of interest. He also found certain advances made to staff members free of interest. We are not concerned with the second advances made by the assessee in the present appeals. The assessees contention in regard to the loan to Induri Farms Ltd. Was that cows milk and eggs were in short supply in the market and, therefore, in order to ensure adequate supply, the assessee had given interest-free loan to the said party. It was intended that the advance so made was in the curse of assessees business and, therefore, the question of disallowance of interest on bank overdraft did not arise. The Commissioner (Appeals), however, relying on the decision in the case of CIT v. United Breweries : 89ITR17(KAR) held that the loan advanced to Induri Farms without interest could not be said to been the assessees business interest and, therefore, disallowance of interest as is attributable to the loan advanced to the Induri Farms should be disallowed. In view of the matter, therefore, he upheld the disallowance as addicted above.
7. Before us the learned representative of the assessee contended that Induri Farms used to supply raw materials like cows milk and eggs to the assessee. Though it was true that the said company was a wholly-owned subsidiary of the assessee-company, the advance made to Induri Farms was in the cores of the assessees business, then the question whether interest was charged thereon or not is clearly immaterial. He referred to the decisions reported at T. J. Lalvani v. CIT : 78ITR176(Bom) , CIT v. Rohtas Industries Ltd. : 120ITR110(Cal) CIT v. Mysore Sugar Co. Ltd. : 46ITR649(SC) , CIT v. Bombay Samachar Ltd. : 74ITR723(Bom) , CIT v. Pudukottai Co. (P.) Ltd. : 84ITR788(Mad) and CIT v. Carew & Co. (P.) Ltd. : 120ITR540(SC) . It was also submitted that no specific amounts out of the borrowings made by the assessee were advanced to the said company. Therefore, it could not be said (assuming for the sake of argument, that the loan was not for the purpose of business) that there was diversion of any specific loan borrowed by the assessee for non-business purposes, if any. The learned departmental representative, on the other hand, relying on the orders of the authorities below and in particular the decision in the case of United Breweries (supra), contended that the disallowance was justified.
8. In order to appreciate the controvert, we may refer to certain decisions as are relevant to determine the controversy at issue :
1. In P. J. Lalvani (supra), it was, inter alia, held that financing of imports on licences belonging to a third party which handled the imports on their arrival in India was said to be incidental to the business carried on by the assessee.
2. In Pudukottai Co. (supra), the interest paid on amount borrowed for the purpose of business, which was higher than interest received on the amounts lent to the persons who were intimately connected with it, was wholly allowed as deduction.
3. In Mysore Sugar (supra), the advances made against the next year in supply of sugarcane, profits which were not found to be recoverable, were allowed as a revenue loss (sic).
4. In Bombay Samachar, it was, inter alia, held as follows :
'The only conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital under section 10(2) (iii) are : firstly, that money must have been borrowed by the assessee : secondly, it must have been borrowed for the purpose of business, and : thirdly, the assessee must have paid interest on the said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing the assessee had sufficient amount of its own, the deduction could not be allowed.
The fact that the assessee had ample resources at its disposal and need not have borrowed, is not a relevant matter for consideration.' (p. 723)
5. In Rohtas Industries (supra), it was held that the advances made by the assessee for the purpose of securing raw materials, could be said to be wholly and exclusively for the purpose of the assessees business. Non-realisation of such advances was allowable as bad debt.
9. In the light of the above judicial pronouncements, the first point which we have to consider is, whether the interest-free advances as made by the assessee could be said to be in course of the assessees business. The undisputed facts are that the assessee had been procuring substantial portion of its raw materials, namely, milk and eggs, from Induri Farms. In fact for the assessment years under appeal, 100 per cent of its requirement in regard to milk was met by the said company, while 71 per cent of its requirement in regard to eggs was met by the said company in the assessment year 1974-75 and 72.36 per cent for the assessment year 1975-76. Therefore, the act advancing interest-free loan for regular supply of raw materials which form substantial part of the assessees requirement could be said to have been made in the course of the assessees business. Now, once it is established on facts that the advance was made in course of assessees business, it is not obligatory on the part of the assessee to recovery interest in such advance in the light of the decision of the Bombay High Court in Bombay Samachars case (supra). That apart, as rightly pointed at by Shri Dastur, no specific advance was made out of borrowed funds to the said company. If the assessee, as a prudent businessman, though fit not to charge interest on advances which were admittedly made in the course of the assessees business and in particular to secure regular supply of his raw material, then it is not open to the revenue authorities to dispute such as act which is otherwise not found to be mala fide or for some mala fide purpose. In the present case both the ITO and the Commissioner (Appeals), have proceeded to disallow a portion of the interest on the loans borrowed by the assessee. The loans were, admittedly, borrowed for the purpose of business and in the instant case, the loans were also utilised in course of the assessees business. In such a case, therefore, the disallowance of a portion of the interest as the lower authorities did, could to be said to be justified in law, or on facts. The disallowance, therefore, stands deleted.
10. [This para is not reproduced here as it involves a minor issue.]
11. The next contention is in regard to claim for treating depreciation as an expenditure for allowance of weighted deduction under section 35C of the Income-tax Act. The controversy relates to the assessment years 1974-75 and 1975-76. While determining the agricultural development allowance as provided for under section 35C, the ITO reduced the total expenditure as claimed by the assessee by a sum of Rs. 33,327 for the assessment year 1974-75 and Rs. 23,852 for the assessment year 1975-76 on the ground that the said item related to claim for depreciation which is not an item of expenditure but an allowance and as such not eligible to relief under section 35C. This conclusion of the ITO for both the years was upheld by the Commissioner (Appeals). Hence, these appeals. The Provisions of section 35C as are relevant for our purpose provide that where a company is engaged in manufacture or processing of any article or thing which is made from or uses, in such manufacture or processing as raw material, any product of agriculture, animals husbandry, dairy or poultry framing, and has incurred after 29-2-1968, whether directly or through an association or a body which has been approved for the purpose of this section by the prescribed authority, any expenditure in the provision of any goods, services or facilities specified in clause (b) to a person who is a cultivator, etc., the company shall, subject to the provisions of this section, be allowed a dedication of a sum equal to one and one-fifth times the amount of such expenditure incurred during the previous year. The controversy at issue is whether the depreciation as climbed by the assessee for both the years could be treated as the amount of such expenditure incurred by the assessee during the previous year. Now the expression expenditure which is not defend in the Act was judicially interpreted in the case of Indian Molasses Co. (P.) Ltd v. CIT : 37ITR66(SC) . In that case, it is observed as follows :
'Spending in the sense of paying out or away of money is the primary meaning of expenditure. `Expenditure is what is paid out or away and is something which is gone irretrievably. Expenditure, which is deductible for income-tax purposes, is one which is towards a liability actually existing at the time, but the putting aside of money which may became expenditure on the happening of an even is not expenditure.' (p. 66)
The above provisions of section 35C, in our opinion, in the light of the meaning of the expression expenditure postulate a sum which is spent out irretrievably and does not take within its scope allowance like depreciation which has a different character than an expenditure as is ordinarily understood. The depreciation is an allowance which is allowed to be charged against the profits for purpose of determining the taxable income but it cannot be quoted with a sum spent out, but it represents wear and tear of the machinery which is chargeable on revenue account against the taxable profits as indicated above. The depreciation is a notional allowance which is allowable subject to fulfillment of certain conditions and which could be withdrawn and could again from part of profits in certain contingency like a sale of the asset at a price higher than the written down value. Therefore, as compared to the item of expenditure which goes out of the coffers of an assessee, the depreciation is a notional allowance in respect of which the charge of profit is withheld but the said charge would be revived in case of sale and the same would go to swell the profits in the year in which the asset is sold. Therefore, if the essential distinction between an expenditure and depreciation allowance is kept in mind, then the inevitable conclusion is that item of depreciation is not an expenditure incurred, which would qualify for weighted dedication under section 35C.
An alternative submission was raised by Shri Dastur, that the cost of asset could also be allowed as an expenditure in determining the weighted deduction. We are unable to accept this contention also, because no such claim was made before the authorities below and the scope of section 35C does not contemplate deduction n capital account, as the claim for deduction pertains t expenditure on goods, services and facilities which would cover the expenditure on revenue account.
12. [This para is not reproduced here as it involves a minor issue.]
13. In the result, the appeals are partly allowed.