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Commissioner of Income Tax-i Vs. Abhishek Industries Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberI.T.A. No. 110 of 2005
Judge
Reported in(2006)205CTR(P& H)304; [2006]286ITR1(P& H)
ActsIncome Tax Act, 1961 - Sections 28, 36, 36(1), 41(1), 72, 143(3) and 256(1); Evidence Act - Sections 106; Punjab General Sales Tax (Deferment and Exemption) Rules, 1991 - Rule 4A
AppellantCommissioner of Income Tax-i
RespondentAbhishek Industries Ltd.
Appellant Advocate S.K. Garg Narwana, Adv.
Respondent Advocate Radhika Suri, Adv.
DispositionAppeal allowed
Cases ReferredBritish Rlys. Board v. Herrington
Excerpt:
- hindu law -- custom: [vijender jain, c.j., m.m. kumar, jasbir singh, rajive bhalla & rajesh bindal, jj] alienation of ancestral property - punjab and haryana - held, in respect of state of punjab by virtue of punjab amendment act, 1973 there is a complete bar to contest any alienation of ancestral or non-ancestral immovable property or appointment of an heir to such property on ground that such alienation or appointment was contrary to custom. in punjab the property in hands of a successor has to be treated as coparcenary property and its alienation has to be governed by hindu law except to the extent it is regulated by sections 6 and 30 of the hindu succession act. in haryana, property in hands of successor has to be treated as coparcenary property as well as ancestral property......rajesh bindal, j.1. the revenue has filed the present appeal against order dated 27.2.2004, passed by the income-tax appellate tribunal, chandigarh bench `a' (for short, `the tribunal') in i.t.a. no. 1017/chandi/97 for the assessment year 1993-94, raising the following substantial questions of law:(i) whether on the facts and circumstances of the case, the hon'ble income tax appellate tribunal was right in deleting the disallowance of rs. 16,48,024/- made on account of interest on interest free advances given to the sister concern for non-business purpose ?(ii) whether on the facts and circumstances of the case, the hon'ble income-tax appellate tribunal was right in law in deleting the addition on account of sales tax subsidy of rs. 4,56,948/- claimed by the assessee as capital receipt.....
Judgment:

Rajesh Bindal, J.

1. The Revenue has filed the present appeal against order dated 27.2.2004, passed by the Income-tax Appellate Tribunal, Chandigarh Bench `A' (for short, `the Tribunal') in I.T.A. No. 1017/CHANDI/97 for the assessment year 1993-94, raising the following substantial questions of law:

(i) Whether on the facts and circumstances of the case, the Hon'ble Income Tax Appellate Tribunal was right in deleting the disallowance of Rs. 16,48,024/- made on account of interest on interest free advances given to the sister concern for non-business purpose ?

(ii) Whether on the facts and circumstances of the case, the Hon'ble Income-tax Appellate Tribunal was right in law in deleting the addition on account of sales tax subsidy of Rs. 4,56,948/- claimed by the assessee as capital receipt instead of revenue receipt ?

2. The appeal is admitted for consideration of substantial questions of law, referred to above.

3. With the consent of learned Counsel for the parties, we have taken the appeal on Board and heard the same for final disposal.

4. More than two decades ago, a Constitution Bench of Hon'ble the Supreme Court in McDowell & Company Limited v. Commercial Tax Officer : [1985]154ITR148(SC) , while referring to earlier judgments and also laying path for departing from Westminster principle observed as under:

16. In Commr. of Income-tax, Gujarat v. A. Raman & Co. : [1968]67ITR11(SC) , J.C. Shah, J. speaking for himself and Sikri and Ramaswami, JJ. repeating almost verbatim the observations in Westminster 1936 AC 1 and Fishers Executors 1926 AC 395 observed:

Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues to arise to him. Effectiveness of the device depends not upon considerations of morality, but on the operation of the Incometax Act. Legislative injunction in taxing statutes may not, except on period (Pain ?) of penalty, be violated, but it may lawfully be circumvented. The same judge, speaking for himself, Ramaswami and Grover, JJ. in Commr. of Income-tax, Gujarat v. Kharwar : [1969]72ITR603(SC) expressly followed Westminster and observed (at p.815):

The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. If the parties have chosen to conceal by a device the legal relation, it is open to the taxing authorities to unravel the device and to determine the true character of relationship. But the legal effect of a transaction cannot be displaced by probing into the 'substance of the transaction.17. We think that time has come for us to depart from the Westminster principle as emphatically as the British Courts have done and to dissociate ourselves from the observations of Shah, J. and similar observations made elsewhere. The evil consequences of tax avoidance are manifold. First there is substantial loss of much needed public revenue, particularly in a welfare State like ours. Next there is the serious disturbance caused to the economy of the country by the piling up of mountains of black money, directly causing inflation. Then there is 'the large hidden loss' to the community (as pointed out by Master Sheatcroft in 18 Modern Law Review 209) by some of the best brains in the country being involved in the perpetual war waged between the tax-avoider and his expert team of advisers, lawyers and accountants on one side and the tax-gatherer and his perhaps not so skillful advisers on the other side. Then again there is the `sense of injustice and inequality which tax avoidance arouses in the breasts of those who are unwilling or unable to profit by it'. Last but not the least is the ethics (to be precise, the lack of it) of transferring the burden of tax liability to the shoulders of the guileless good citizens from those of the `artful dodgers'. It may, indeed, be difficult for lesser mortals to attain the state of mind of Mr. Justice Holmes, who said, 'Taxes are what we pay for civilized society. I like to pay taxes. With them I buy civilization.' But, surely, it is high time for the judiciary in India too to part its ways from the principle of Westminster and the alluring logic of tax avoidance, we now live in a welfare State whose financial needs, if backed by the law, have to be respected and met. We must recognise that there is behind taxation laws as much moral sanction as behind any other welfare legislation and it is a pretence to say that avoidance of taxation is not unethical and that it stands on no less moral plane than honest payment of taxation. In our view, the proper way to construe a taxing statute, while considering a device to avoid tax, is not to ask whether the provisions should be construed literally or liberally, nor whether the transaction is not unreal and not prohibited by the statute, but whether the transaction is a device to avoid tax, and whether the transaction is such that the judicial process may accord its approval to it. A hint of this approach is to be found in the judgment of Desai, J. in Wood Polymer Ltd. and Bengal Hotels Limited, (1977) 47 Comp Cas 597 (Guj) where the learned Judge refused to accord sanction to the amalgamation of companies as it would lead to avoidance of tax.

18. It is neither fair not desirable to expect the legislature to intervene and take care of every device and scheme to avoid taxation. It is up to the Court to take stock to determine the nature of the new and sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the existing legislation with the aid of `emerging' techniques of interpretation was done in Ramsay 1982 AC 300, Burma Oil 1982 STC 30 and Dawson 1984 1 All 530, to expose the devices for what they really are and to refuse to give judicial benediction.

5. Briefly, the facts, as are available on records, are that the respondent assessee filed its return of income for the assessment year in question on 31.12.1993, showing its income as 'nil'. Subsequently, revised return was filed on 12.8.1994 declaring the loss at Rs. 4,53,07,410/-. The assessment was completed under Section 143(3) of the Income-tax Act, 1961 (for short, `the Act') and vide order dated 29.3.1996 assessing the loss at Rs. 96,81,213/-, inter alia, making additions on account of disallowance of interest under Section 36(1)(iii) of the Act for interest free advances made by the assessee to its sister concerns for nonbusiness purposes and treating the receipt of sales tax subsidy by the assessee as revenue receipt as against capital receipt treated by the assessee.

6. Not being satisfied with the order of assessment, the assessee preferred appeal before the Commissioner of Income-tax (Appeals) [for short, `the CIT (A)'] who, vide its order dated 27.8.1997, accepted the appeal of the assessee on both the counts, i.e., disallowance of interest under Section 36(1)(iii) on account of interest free advances given to sister concerns for non-business purposes and also by treating the sales tax subsidy received by the assessee, after the unit came into production, as capital receipt. Aggrieved against the order of CIT(A), the Revenue went in appeal before the Tribunal, which was dismissed by it vide order dated 27.2.2004. It is against this order of the Tribunal, the Revenue is in appeal before this Court.

Question No. (i)

7. As far as this question is concerned, the facts, as appear from the record, are that as on 31.3.1993, secured loans standing against the assessee were to the tune of Rs. 25,40,04,090/- and the interest liability, which arose during the year thereon, was Rs. 2,26,64,944/-, out of which the assessee had debited a sum of Rs. 1,48,51,396/- to the profit and loss account and the balance of Rs. 81,81,508/- were charged to pre-operations which were capitalised. During the course of assessment proceedings, it was noticed that the assessee had advanced large amount of money to its sister concern. On a query by the Assessing Officer to specify the nature of advances and also the rate of interest being charged thereon and the rate of interest being paid to the financial institutions on the loans raised by the assessee, it was submitted as under:

In respect of disallowance of interest on amounts given to M/s VAPPL and M/s Trimurti Chemineers Pvt. Ltd., it is submitted that the same were given out of company's own funds represented by share capital. No borrowed funds have been utilized in giving this interest free loans. Details of sources of funds given are enclosed herewith. There is no nexus between borrowing and loans given interest free.

8. The assessee in the present case is a public limited company. As is evident from the details, interest free loan was advanced to the sister concern before the commencement of production and also after the commencement of production. The amount of interest arising thereon was reduced from the value of the assets and was added to the income respectively by holding that raising of loan by the assessee to the extent, the same has been advanced interest free to sister concern, was not allowable under Section 36(1)(iii) of the Act.

9. Learned Counsel for the Revenue submitted that the Tribunal has gone wrong in deciding the issue against the Revenue. Once the assessee was unable to establish on record that the amount of loans raised by the assessee was not used for business purpose there is no valid reason to permit deduction of interest to that extent from the income of the assessee. In response to the contentions of counsel for the Revenue, counsel for the assessee submitted that the loans advanced to the sister concerns were not out of borrowed funds but company's own funds. To substantiate her argument, learned Counsel for the assessee referred to Commissioner of Income-tax v. Orissa Cement Ltd. : [2001]252ITR878(Delhi) ; Commissioner of Income-tax v. Tin Box Co. : [2003]260ITR637(Delhi) and Commissioner of Income-tax v. Radico Khaitan Ltd. : [2005]274ITR354(All) and submitted that the Revenue has failed to establish any nexus of loans raised by the assessee with interest free loans given by the assessee to its sister concerns.

10. It was first year of the operation of industrial unit of the assessee. The capital is introduced in any company at the initial stage with an object to set up the industry and to use the same for creating fixed assets like land, building, plant and machinery. The loans are raised only to supplement the capital to the extent it is short for the purpose of implementation of the project. The contention of learned Counsel for the assessee in the present case is that the loans, which have been advanced by the assessee either during the course of implementation of the project, i.e., before the production started or after the commencement of production, was out of the company's own funds represented by share capital. The share capital is meant to be used for productive use in the business. If the share capital, according to the assessee, was surplus and it could part with the same to sister concern for non-business purpose without any interest, there was no need to raise the loans to that extent and the amount of such share capital should have been utilised for the project itself.

11. As is evident from Annexure `A' attached with the order of assessment, the peak debit balance and closing balance in the cases of sister concerns was Rs. 44,00,000/- and Rs. 9,99,250/-; Rs. 95,00,000/- and Rs. 93,79,845/-; Rs. 70,00,000/- and Rs. 70,00,000/-; Rs. 31,00,000/- and nil in the accounts of M/s Varinder Agro Chemicals Ltd., Trimurti Chemineers Pvt. Ltd; Varinder Agro Products Pvt. Ltd. and Varinder Agro Chemicals Ltd. respectively. It is not in dispute that besides raising substantial amount of term loan which, according to the assessee, is required to be repaid as per the fixed schedule agreed to at the time of disbursement of loan, there were substantial amount of loan in the form of working capital which was not required to be returned after any specified period. Rather, the same is use of money in day-to-day working of the company and usually there remains a debit balance in the account of the company which bear interest only to the extent of debit balance in the account. In such a situation, in case the assessee had not advanced loans to its sister concern on interest free basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan is concerned, but the interest being paid by the assessee on the working capital could have certainly been saved to that extent. It can very well be held that borrowing of the funds by the company to that extent was not for the purpose of business and there is nothing on record to suggest that amounts were advanced to sister concern to advance some business object. Rather, the same is in the nature of funds being provided to sister concern which are closely held to carry on business and earn income thereon without incurring any cost of fund or without even investing anything. If the assessee had to transfer the money in the form of interest free loan from one company to another close company, the same could very well be in the manner by introducing less capital in one company and by investing the balance amount in the other company as capital because according to the assessee, it had share capital funds of its own which could be given to other sister concern.

12. It is not, at all, possible to accept such a plea raised by the assessee. As far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister concern on interest free basis is concerned, in our view, the stand of the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest is on the Revenue is not correct. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that inspite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for nonbusiness purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed.

13. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. This would depend on facts of each case. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries.

14. In K. Somasundaram and Brothers v. Commissioner of Income-Tax : [1999]238ITR939(Mad) , while dealing with a similar proposition, Madras High Court held as under:

The amount so lent, according to the assessee, came out of the contract earnings. The amount borrowed, according to the assessee was invested in the execution of the contracts. It is clear, therefore, that the assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract. The amount realised on the execution thus, included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial part of those funds interest-free to the relatives of the partners, it was clearly not a business purpose. The assessee clearly diverted the funds which had been borrowed, had been invested in the contract work, after the investment was recovered and was available either for the purposes of the business or by way of repayment of the loan. The assessee did neither, but chose to divert the money for non-business purposes. After such diversion, the interest paid on the capital borrowing to the extent of the amounts diverted can no longer be an item of expenditure which can be claimed for deduction as an item of business expenditure. If the amounts diverted was subsequently brought back into the business and utilised in the business, the assessee could thereafter claim the interest paid as a deduction. But so long as the diversion continues the assessee would be disentitled.

15. In Commissioner of Income-Tax v. M.S. Venkateswaran : [1996]222ITR163(Mad) , Madras High Court accepting the plea of the Revenue held as under:

The facts on record would clearly go to show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, it cannot be said that there can be a presumption that a part of the capital would have been diverted for non-business purposes not from the borrowed capital but from the capital contributed by the assessee. In the absence of such an element in the facts arising in the present case, we are unable to subscribe to the view of the Tribunal that the assessee is entitled to deduction under Section 36(1)(iii) with regard to the interest paid on borrowed capital, which was utilised by the assessee's father for non-business purposes.

16. In Commissioner of Income-tax v. P. Ganu Rao and Sons : [1990]185ITR324(Mad) , interest on borrowed capital to the extent the same was utilised for non- business purposes was disallowed under Section 36(1)(viii) of the Act.

17. In Commissioner of Income-Tax v. V.I. Baby and Co. : [2002]254ITR248(Ker) , Kerala High Court, while reversing the order of the Tribunal, held as under:

We are inclined to accept the argument raised by counsel for the Revenue, because the advances to the partners, their relatives and the sister concerns are not for business purposes and the assessee has not derived any benefit out of the same. Admittedly, no interest was charged on these advances. The Tribunal appears to have placed reliance on the fact that the partners and their relatives have utilised the amounts for business purposes, such as construction of a shop building etc. So long as the assessee- firm is not the beneficiary of such investments, the nature of investment or the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and the sister concerns, and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made.

18. We may notice that in CIT v. Motor General Finance Ltd. (2002) 254 ITR 449, Delhi High Court held as under:

From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee. It was to be proved that a bona fide loan had been granted in favour of a sister concern. It was, therefore, its duty to place requisite materials on record.

19. This aspect of the matter has also been considered in CIT v. H.R. Sugar Factory Pvt. Ltd. : [1991]187ITR363(All) , wherein the Allahabad High Court held:

The court cannot shut its eyes to realities. What has actually happened is visible to the naked eye. The assessee, a private limited company closely held by three family groups, is made to lend huge amounts (up to 23 lakhs of rupees as per the compromise arrived at between the assessee and the directors/ shareholders in the civil suits referred to above) at a very low rate of interest and the entire difference of interest is being charged to the assessee. The assessee is not a finance company. It is engaged in the manufacture of sugar. No business purpose of the assessee-company is served by such lendings to its directors/ shareholders. It cannot be said that it is expedient in the interest of business or is laid out for the purpose of the business of the assessee.... May be that the company borrows large amounts for the purpose of its business every year, but that does not explain the huge advances to the directors/shareholders. Had this money been not advanced to the directors, it would have been available to the assessee for its business purposes and to that extent it may not have been necessary to borrow from the banks. We are, therefore, of the opinion that the Income-tax Officer wasright in disallowing the difference of interest under Section 36(1)(iii) of the Income-tax Act and that the Tribunal's approach is not only superficial but too nave.

20. In Indian Metals and Ferro Alloys Ltd. v. CIT : [1992]193ITR344(Orissa) , the Orissa High Court held (page 349):. it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee.

21. Yet again in CIT v. H.R. Sugar Factory Pvt. Ltd. (1991) 190 ITR 643 , B.P. Jeevan Reddy C.J. (as his Lordship then was) relying upon his earlier decision in H.R. Sugar Factory Pvt. Ltd.'s case : [1991]187ITR363(All) held that the assessee-company was not entitled to the allowance of interest.

22. In S.A. Builders Ltd. v. Commissioner of Income-Tax and Anr. , this Court dismissed an appeal by the assessee, wherein the Tribunal had disallowed interest under Section 36(1)(iii) of the Act on interest free advances made by the assessee to sister concerns as the assessee could not show any material to the effect that it had derived any business benefit by advancing free interest amounts to the sister concerns.

23. In Veecumsees v. CIT : [1996]220ITR185(SC) , Hon'ble the Supreme Court held that deduction for payment of interest on the loans raised for building a cinema theatre, which was ultimately closed, was allowable deduction as the assessee was engaged in a composite business of jewellery and cinema. The facts of the case are distinguishable with the facts of the case in hand.

24. In Commissioner of Income-Tax v. Saraya Sugar Mills (P) Ltd. : [1993]201ITR181(All) , Allahabad High Court held that where part of the overdraft diverted to Directors and concerns in which they were substantially interested, interest in such amount to that extent was held disallowable. Similar views were expressed by Bombay High Court in Phaltan Sugar Works Ltd. v. Commissioner of Wealth Tax, : [1994]208ITR989(Bom) and Phaltan Sugar Works Ltd. v. Commissioner of Income-Tax : [1995]215ITR582(Bom) .

25. In Elmer Havell Electrics and Ors. v. Commissioner of Income-Tax and Anr. : [2005]277ITR549(Delhi) , Delhi High Court, while rejecting the appeal of the assessee on the issue of disallowance of interest on interest free advances made to sister concern, observed that the assessee itself had taken loan with interest and had advanced funds by diversion or otherwise to its sister concern free of interest. Taking this and other findings by the Tribunal into consideration, the appeal was dismissed.

26. In Commissioner of Income Tax v. Sujanni Textiles (P) Ltd. : [1997]225ITR560(Mad) , Madras High Court disallowed the interest on the borrowed capital to the extent the same was advanced to the Directors without interest.

27. In Indian Metals & Ferro Alloys Ltd. v. Commissioner of Income Tax : [1992]193ITR344(Orissa) , Orissa High Court held as under:

The determinative question in a case of this nature is the source from which the assessee makes investments or advances. Where an assessee seeks to deduct certain items from his business profits, the onus of proving the same falls on him. The burden of proving a claim to an allowance or deduction is on an assessee. If the assessee makes a claim to deduction in terms of Section 36 for the purpose of computation of income referred to in Section 28, he has to place materials in support of his claim of entitlement to the deduction. Therefore, the assessee was required to show that the amounts invested in or advanced to the subsidiary company came out of the assessee's own funds. The Tribunal, with reference to the factual aspects, came to hold that the money utilised was from the borrowed funds. This essentially is an inference from factual aspects. Illustratively, it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investmentand advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee.

28. In Regal Theatre v. Commissioner of Income Tax : [1997]225ITR205(Delhi) , Delhi High Court held that consideration of the issue regarding allowability of deduction under Section 36(1)(iii) of the Act is purely a question of law as it is an inference to be drawn from the facts.

29. In Commissioner of Income Tax v. Tin Box Co. (supra), Delhi High Court decided a similar issue against the Revenue keeping in view the fact therein that even the interest free unsecured loan raised by the assessee far exceeded the amount advanced to the sister concern. It was a case in its own facts.

30. In Commissioner of Income-Tax v. Orissa Cement Ltd. (supra), Delhi High Court declined to answer the reference for the reason that in the opinion of the Court, no question of law arose and the findings recorded by the Tribunal were findings of fact.

31. In Commissioner of Income-Tax v. Radico Khaitan Ltd., (supra) Allahabad High Court, while rejecting the plea of the revenue and relying upon the findings recorded by the Tribunal to the effect that there were sufficient funds available with the assessee-company in the form of capital share, share application money, reserve and surplus other than the borrowed money for diverting a sum of Rs. 17.19 lacs, held that it cannot be said that the amount of loan advanced to the sister concern was out of the borrowed funds and the order of the Tribunal allowing deduction of interest was upheld. The same view was followed by Allahabad High Court in Commissioner of Income-Tax v. Prem Heavy Engineering Works (P) Ltd. (2006) 150 TAXMAN 90.

32. In Commissioner of Income Tax v. Britannia Industries Ltd. : [2006]280ITR525(Cal) , Calcutta High Court, while upholding the concurrent finding of fact recorded by the Commissioner of Income-tax (Appeals) and the Tribunal that interest free advance in that case was for the purpose of business and not for any extraneous consideration or otherwise, observed that advance was given from the mixed account where the entire sale proceeds were deposited and there were sufficient funds for making the advance - payment was thus made out of the assessee's own funds and borrowed capital was not siphoned out. Accordingly, the order of the Tribunal allowing the deduction was upheld.

33. Relying upon the principle of nexus between borrowings and withdrawal made by the partner of the assessee-firm, in R.D. Joshi and Co. v. Commissioner of Income-Tax : [2001]251ITR332(MP) , Madhya Pradesh High Court held that deduction was allowable.

34. Respectfully disagreeing with the views expressed by Delhi High Court in Commissioner of Income Tax v. Tin Box Co. (supra) and Commissioner of Income Tax v. Orissa Cement Ltd. (supra); Allahabad High Court in Commissioner of Income-Tax v. Radico Khaitan Ltd. (supra) and Commissioner of Income-Tax v. Prem Heavy Engineering Works (P) Ltd. (supra); Calcutta High Court in Commissioner of Income Tax v. Britannia Industries Ltd. (supra) and Madhya Pradesh High Court in R.D. Joshi and Co. v. Commissioner of Income-tax (supra), we do not subscribe to the observation in the judgments to the effect that if the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would not be termed as diversion of borrowed capital or that the revenue had not been able to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest.

Question No. (ii)

35. As far as this question is concerned, learned Counsel for the Revenue, referring to the provisions of Rule 4-A of the Punjab General Sales Tax (Deferment and Exemption) Rules, 1991 (for short, `the 1991 Rules') submitted that admittedly the sales tax subsidy was available to the assessee after it came into production and therefore, applying the ratio of law laid down by Hon'ble the Supreme Court in Sahney Steel and Press Works Ltd. and Ors. v. Commissioner of Income-tax : 1997ECR787(SC) , the same had to be treated as revenue receipt and cannot possibly be termed as capital receipt. It was further submitted that the Tribunal in the present case, while dealing with the issue, has passed a totally nonspeaking order merely referring to various orders passed by it in different cases and blindly following the same without even referring to the details either in the case in hand or in the cases referred to. While dismissing the appeal of the revenue, the Tribunal did not even refer to cases decided by Hon'ble the Supreme Court or various other High Courts on the issue.

36. On the other hand, learned Counsel for the assessee also referred to and relied upon the judgment of Hon'ble the Supreme Court in Sahney Steel's case (supra). She submitted that the kind of subsidy received by the assessee in the present case, which has co-relation with the fixed capital investment, should be treated as capital receipt only.

37. We have considered the submissions made by learned Counsel for the parties. It is evident from paragraph 5 of the order of assessment that initially while filing the return of income, the assessee treated the sales tax subsidy as a revenue receipt. Even though revised return was filed by the assessee on 12.8.1994 still no claim was made for treating the sales tax subsidy as capital receipt as against revenue receipt, admittedly treated by the assessee in the return of income as revenue receipt. However, it was only at the time of framing of assessment that the assessee changed its stand, where vide letter dated 29.2.1996 a plea was sought to be raised that sales tax subsidy was inadvertently treated as a revenue receipt. Whether a plea in this manner, which runs contrary to the stand taken in the return filed by the assessee, could be taken without even filing the revised return within the time permitted, is a debatable issue. However, since the same is not under consideration before us in the present appeal, we are not opining thereon.

38. As far as the amount of sales tax subsidy is concerned, the claim of the assessee is that such receipts were in the form of sales tax exemption granted by the State of Punjab under the 1991 Rules, as amended vide notification dated 29.9.1992. The relevant rule, as is sought to be relied upon by learned Counsel for the assessee , is extracted below:

4-A (1) Notwithstanding anything contained in any other provision of these rules, and subject to the provisions of Sub-rule (i) Group of Industries which are set up in `A' category area on or after the first day of October, 1992 and the goods produced by them shall be exempt from the payment of sales tax for a period of ten years commencing from the date of production for the first time in the State of Punjab, subject to the condition that the total sales tax exemption shall not exceed 300 per cent of their fixed capital investment.

(ii) Group of Industries which are set up in `B' category area on or after the first day of October, 1992 shall be exempt from the payment of sales tax for a period of seven years commencing from the date of production for the first time in the State of Punjab subject to the condition that the total sales tax exemption shall not exceed 150% of their fixed capital investment.

39. A bare perusal of the above referred rule show that benefit under the 1991 Rules accrues for a period of 10 years from the date of production and the quantum is fixed at 300 per cent of the fixed capital investment as far as group of industries set up in `A' category, whereas for the industries set up in `B' category area, the over-all quantum of exemption is limited to 150 per cent of the fixed capital investment to be availed within 7 years. This exemption was to commence from 1.10.1992.

40. Besides this, there is no other document or material on which reliance is placed by the assessee to substantiate its contention that the sales tax subsidy of the kind in consideration should be treated as capital receipt and not revenue receipt. The assessee has not referred to any other document or policy of the State Government to show that the kind of subsidy under consideration was given to the assessee for creation of capital assets as an aid to setting up of the unit. First of all, we deem it appropriate to refer to the relevant portions of the judgment of Hon'ble the Supreme Court in Sahney Steel's case (supra), on which strong reliance has been placed by both the parties. The incentive, relevant for consideration of the point in issue in the present case, which was available to the assessee in Sahney Steel's case (supra), as noticed at page 256 of the Reports, is as under:

(a) Refund of sales tax on raw materials, machinery and finished goods, levied by the State Government subject to a maximum of 10 per cent. of the equity capital paid-up in the case of public limited companies and the actual capital in the case of others:

41. The contention raised by counsel for the assessee; the question of law referred to the High Court and the ultimate finding by Hon'ble the Supreme Court on the issue, are as under:

(At pages 258-259 of the Reports)

It was further contended by Mr. Ganesh that grant of subsidy was on the basis of refund of sales tax on raw materials, machinery and finished goods already paid for by the assessee. These subsidies would be enjoyed by the assessee for a period of five years and were of a capital nature. The object of granting refund of sales tax was that the assessee could set up new business or expand substantially his existing business.

Before we examine these provisions advanced by Mr. Ganesh, we will examine the facts of the case a little more. The assesseecompany, Sahney Steel and Press Works Ltd., set up a factory at Patancheru in Medak District, which went into production in the year 1973. The assessee maintains its accounts according to the calendar year. It was, therefore, entitled to the benefits of the said Government order in the calendar year 1973, which means the assessment year 1974-75. In the said accounting year, the assessee obtained refund of the following three items totalling Rs. 14,665.70 in terms of Government Order Ms. No. 455. The three items are:

Rs.(i) Refund of sales tax on purchase of machinesduring 1971-72 5,839.93(ii) Refund of sales tax on purchase of raw materialsduring the year 1971-72 390.79(iii) Refund of sales tax paid on sale of finished goodsduring the year 1971-72 8,423.98The Income-tax Officer, while making the assessment for the year 1974-75, included the said amount in the assessable income of the assessee which was confirmed on appeal by the Commissioner of Income-tax (Appeals). On further appeal, however, the Tribunal upheld the assessee's contention and held that the amount of Rs. 14,665.70, refunded to the assessee in terms of the said Government Order 'did not represent refund of sales tax' but was a development subsidy in the nature of a capital receipt. The Tribunal also held that the said amount cannot be deemed to be the income of the assessee under Section 41(1) either. Thereupon the Revenue asked for and obtained the reference of the following question : [1985]152ITR39(AP) :

Whether, on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal was justified in holding that the amount of Rs. 14,665 received by the assessee from the Government of Andhra Pradesh in the relevant accounting period was not liable to be included in the total income assessable for the assessment year 1974-75?The contention of Mr. Ganesh that the subsidies were of capital nature and were given for the purpose of stimulating the setting up and expansion of industries in the State cannot be upheld, because of the subsidy scheme itself. No financial assistance was granted to the assessee for setting up of the industry. It is only when the assessee had set up its industry and commenced production that various incentives were given for the limited period of five years. It appears that the endeavour of the State was to provide the newly set up industries a helping hand for five years to enable them to be viable and competitive. Sales tax refund and the relief on account of water rate, land revenue as well as electricity charges were all intended to enable the assessee to run the business more profitably.

42. During the course of reference and discussion on various judgments, cited by counsel for the assessee in Sahney Steel's case (supra), it was observed as under:

(At page 261 of the Reports)

In the case before us, payments were made only after the industries have been set up. Payments are not being made for the purpose of setting up of the industries. But the package of incentives were given to the industries to run more profitably for a period of five years from the date of the commencement of production. In other words, a helping hand was being provided to the industries during the early days to enable them to come to a competitive level with other established industries....

(At page 261 of the Reports)

In the case before us, the payments were made to assist the new industries at the commencement of business to carry on their business. The payments were nothing but supplementary trade receipts. It is true that the assessee could not use this money for distribution as dividend to its shareholders. But the assessee was free to use the money in its business entirely as it liked and was not obliged to spend the money for a particular purpose like extension of docks as in the Seaham Harbour Dock Co.'s case [1931] 16 TC 333 .

43. At pages 262-263 of the Reports, clear finding has been recorded that by no stretch of imagination, subsidy by way of refund of sales tax or relief of electricity charges or water charges can be treated as an aid to the setting up of the industry. The payments, which are made for a specified period after the commencement of production, are operational subsidies and not capital subsidies. The relevant part is extracted below:

By no stretch of imagination can the subsidies whether by way of refund of sales tax or relief of electricity charges or water charges be treated as an aid to the setting up of the industry of the assessee. As we have seen earlier, the payments were to be made only if and when the assessee commenced its production. The said payments were made for a period of five years calculated from the date of commencement of production in the assessee's factory. The subsidies are operational subsidies and not capital subsidies.

44. It is further reiterated at page 266 of the Reports that subsidies under consideration were revenue in character and will have to be taxed accordingly. Similar findings recorded by Calcutta High Court in Kesoram Industries and Cotton Mills Ltd. v. CIT : [1991]191ITR518(Cal) were referred with approval, whereas the view taken by Madhya Pradesh High Court in CIT v. Dusad Industries : [1986]162ITR784(MP) , where it was held that the object of such scheme was not to supplement the profits of the industry, hence capital in nature, was held to be erroneous. Ultimately, rejecting the appeal of the assessee, Hon'ble the Supreme Court held that the subsidy received by the assessee in Sahney Steel's case (supra) was revenue and not capital in nature.

45. As against the categoric findings recorded by Hon'ble the Supreme Court by referring to various judgments and also referring to details of the scheme, learned Counsel for the assessee sought to refer and rely upon the following passage at page 273 of the Reports:

For example, if the scheme was that the assessee will be given refund of sales tax on purchase of machinery as well as on raw materials to enable the assessee to acquire new plant and machinery for further expansion of its manufacturing capacity in a backward area, the entire subsidy must be held to be a capital receipt in the hands of the assessee. It will not be open to the Revenue to contend that the refund of sales tax paid on raw materials or finished products must be treated as revenue receipt in the hands of the assessee. In both the cases, the Government is paying out of public funds to the assessee for a definite purpose. If the purpose is to help the assessee to set up its business or complete a project as in Seaham Harbour Dock Co.'s case [1931] 16 TC 333, the monies must be treated as having been received for a capital purpose. But if monies are given to the assessee for assisting him in carrying out the business operation and the money is given only after and conditional upon commencement of production, such subsidies must be treated as assistance for the purpose of the trade.

46. There is no quarrel even with the example, referred to as above, as the observations recorded therein are borne out from the discussions in the body of the judgment. In the present case, all what is claimed and is put on record by the assessee is that sales tax subsidy is being received by it from the State. It is not disputed that the same is being received on recurring basis after the unit came into production. There is no document or material placed on record by the assessee to substantiate its plea that the subsidy of the kind under consideration was to enable it to acquire new plant and machinery or as an aid to set up the industry. Rather, it is quite evident that subsidy in the present case is in the form of an operational subsidy provided by the State after the industry had been set up and commenced commercial production. The subsidy is not in the form of a financial assistance granted to the assessee for setting up of the industry. The endeavour of the State was to provide the newly set up industries a helping hand for a specified period to enable them to be viable and competitive vis-a-vis the industries which were already set up and were in production since long. The assessee has failed to establish on record that kind of subsidy involved in the present case was in the form of a subsidy to enable it to carry out capital investment. In the absence thereof, it cannot possibly be presumed by the authorities that such a subsidy would be in the nature of capital subsidy. The onus to provide the same strongly laid on the assessee, which it had failed to discharge.

47. Following Sahney Steel's case (supra) in Commissioner of Incometax v. Rajaram Maize Products : [2001]251ITR427(SC) , Hon'ble the Supreme Court held that power subsidy received by the new industry based on consumption per unit is a kind of revenue receipt as the benefit accrues after commencement of business.

48. We deem it appropriate here to refer to judgments of various High Courts dealing with same/similar issue, which are as under:

49. In Commissioner of Income-tax v. Chhindwara Fuels : [2000]245ITR9(Cal) , Calcutta High Court held that subsidy received in the form of sales tax refund after commencement of production in the industry cannot be treated as capital receipt and was not exempt from tax.

50. In Jagapathy Art Pictures v. Commissioner of Income-Tax : [1999]240ITR625(Mad) , Madras High Court held that cash subsidy paid by the government to the producer of a film after certification by Central Board of Film Censors was not an amount paid to assist the assessee therein to make the film, the same having not been paid during the course of production and was not meant to assist the producer in financing the movie which was filmed in the State. The payment being in the kind of a supplementary trade receipt was held to be revenue in nature.

51. In Sree Ayyanar Spinning and Weaving Mills Ltd. v. Commissioner of Income-Tax : [1999]240ITR106(Mad) , Madras High Court held that the subsidy received by the assessee was not received as some ex-gratia payment but was received exclusively for carrying on the business after the commencement of the business by the assessee and was held to be a kind of revenue receipt. In Tamil Nadu Sugar Corporation Ltd. v. Commissioner of Income-Tax and Anr. : [2001]251ITR843(Mad) , Madras High Court held that purchase tax subsidy received from the State Government for a period of 5 years from the date of commencement of production was in the nature of revenue receipt as the object thereof was to tide over the difficulties that might be experienced by sugar factories after commencement of production and not for setting up of factories. It was observed there as under:

In other words, the subsidy was given by way of giving assistance to the sugar factories on the commencement of production and it is not given for the setting up of the factories, and the subsidy is given only to tide over the difficulties that may be experienced by the management in the actual running of the sugar factories. Though the amount of subsidy is equivalent to the quantum of purchase tax, the object behind the grant of the subsidy is not to set up a new sugar factory, but to run the factory efficiently. In other words, the subsidy is given so that the management may not be in trouble in running of the sugar factories in the initial years.

The payments of subsidy were made not for the purchase of capital items, and it was not tied up with the purchase of machinery or for future expansion of the industry. In other words, it was given without any prior condition attached to it and it is open to the petitioner to utilise the same for any of its purposes including its business purposes. The fact that the payments made might have been utilised for the purchase of capital equipments is not relevant as there is no embargo imposed on the sugar factory not to utilise the subsidy received for business purposes. The subsidy, in other words, is granted to tide over the teething troubles that the sugar factory may face soon after the commencement of production and it is not for the setting up of the factory. I also hold that the fact that the sugar factory is eligible to get the subsidy for a period of five years from the date of the commencement of production clearly indicates that the payment of subsidy is linked to the production of sugar in the factory. It is further strengthened by the fact that the measure of payment of subsidy is also closely interlinked with the purchase of sugarcane by the sugar factory which shows that the subsidy was granted for the continuous running of its business and it is not granted for the setting up of the sugar factory.

52. In Commissioner of Income-tax v. Neo Sack Ltd. (2005) 148 Taxman 603, Madhya Pradesh High Court held that power subsidy received by the assessee for consumption of power is revenue receipt in the hands of the assessee.

53. In Commissioner of Income-Tax v. Steel Authority of India Ltd. : [2002]257ITR241(Delhi) , Delhi High Court held that grant received from the Government not for bringing into existence any new asset but for functioning of the company was revenue in nature.

54. In Commissioner of Income-Tax v. Ponni Sugars and Chemicals Ltd. (2003) 260 ITR 605, Madras High Court held as under:

The question referred also refers to the purchase tax benefit enjoyed by the assessee. So far as this concession extended by the State Government is concerned, it was in no way linked to the expenditure incurred in setting up the industry. The very terms of the concession would show that it was a concession given to meet the cost of running the business after it had gone into the production. No obligation was cast on the assessee to apply the subsidy equivalent to the quantum of the purchase tax for the period for which it was given for any particular purpose. That amount was available to the assessee for being applied in such manner as it desired, without having to account for the same to the State Government.

55. In Commissioner of Income-Tax v. Premier Proteins Ltd. : [2005]277ITR406(MP) , Madhya Pradesh High Court held that power subsidy received after the unit started functioning was revenue in nature.

56. In Saroja Mills Limited v. Commissioner of Income-Tax : [1996]220ITR626(Mad) , Madras High Court held that the subsidy received by the assessee in respect of revenue expenditure incurred in modernisation of its plant in its industrial unit, established in a backward area from SIPCOT, was revenue receipt. In this case, an earlier judgment of Hon'ble the Supreme Court in V.S.S.V. Meenakshi Achi v. CIT : [1966]60ITR253(SC) was relied upon.

57. Counsel for the respondent-assessee has relied upon a judgment of Allahabad High Court in Kalpana Palace v. Commissioner of Income-Tax : [2005]275ITR365(All) . The same is clearly distinguishable as it was found on a consideration of the policy therein that the same was to promote construction of buildings in small towns where incentive was given in the form of grant in aid for setting up and establishment of cinema house, which was relatable to the construction of cinema house. Similar is the position with regard to the judgment of Calcutta High Court in Commissioner of Income-Tax v. Balarampur Chini Mills Ltd. : [1999]238ITR445(Cal) , where also, on a consideration of the policy, it was held that the incentive received by the assessee therein was specifically for repayment of loan taken for expansion of plant and machinery - a capital asset. The additional free sale sugar quota as an incentive was available to the assessee therein only in case the assessee repaid the term loans taken from the Central financial institutions out of the realisation of sale of additional free sale quota sugar. Accordingly, realisation through additional free sale sugar quota under the incentive scheme was held to be capital receipt. This judgment is also on the facts of its own case interpreting the policy in question, whereas in the present case, there is no such terms of the incentive scheme on record produced by the assessee which could establish that the sales tax subsidy of the kind in question was in any way having a relation with the setting up of the industry.

58. Accordingly, the appeal of the Revenue is accepted and the substantial question, referred to above, is answered in favour of the Revenue and against the assessee, holding that the Tribunal was not right in deleting the additions on account of sales tax subsidy claimed by the assessee as capital receipt.

59. Maintainability of Appeal Counsel for the assessee has further referred to and relied upon Sedco Forex International Drill Inc and Ors. v. Commissioner of Income-tax and Anr. : [2005]279ITR310(SC) ; Deputy Commissioner of Income-Tax v. Rural Electrical Co-operative Society Ltd. : [2005]279ITR319(MP) ; Jaswant Singh Bambha v. Central Board of Direct Taxes and Ors. ; B.S. Bajaj and sons v. Commissioner of Income-Tax ; K.P. Varghese v. Income-Tax Officer, Ernakulam and Anr. : [1981]131ITR597(SC) ; Navnit Lal C. Javeri v. K.K. Sen, Appellate Assistant Commissioner of Income-tax, Bombay 1995 46 ITR 198; Kylasa Sarabhaiah v. Commissioner of Income-Tax, Hyderabad : [1965]56ITR219(SC) ; Ellerman Lines Ltd. v. Commissioner of Income-Tax, West Bengal, I : [1971]82ITR913(SC) Smt. Bhagirathi Devi Kumar Rani Saheba of Vizianagaram v. Agricultural Income-Tax Revision Board, U.P. : [1971]82ITR921(All) ; and Commissioner of Income-Tax v. Milk Food Ltd. : [2006]280ITR331(Delhi) (Delhi) to submit that tax effect in the present case being `nil' as even if the deductions of the kind in question, i.e., receipt of sales tax subsidy and disallowance of interest under Section 36(1)(iii) of the Act are disallowed, still there would be loss and no tax becomes payable to the revenue. As per the circular of the Board, issued from time to time, limit has been prescribed for filing appeal before this Court and there being no tax effect in the present case, the appeal should not be entertained. The argument though seems to be attractive at first blush but deserves to be rejected. It cannot be disputed that in terms of Section 72 of the Act, any business loss incurred by the assessee is permitted to be carried forward further for a specific period to be set off against future profits. If excess loss is permitted to be carried forward to subsequent year, that would certainly have direct effect on the taxability resulting in loss of revenue. Disputed amount in the present case is to the tune of Rs. 21,04,972/-. Even otherwise, the issues involved in the present appeal are arising regularly in a number of cases and in subsequent years of the assessee as well. Accordingly, we do not deem it appropriate to restrain from discharging our judicial function in hearing and deciding the appeal on merits. As far as the issue as to whether the circular prescribing limits for filing appeals before the Courts or the Tribunals is concerned, different Courts have taken different views as to whether in case an appeal is filed, which involves tax effect less than the amount prescribed in the circular for filing the appeal, still the Court/ Tribunal is bound to reject the same as such or to dispose of it on merits.

60. In Commissioner of Income-Tax v. Camco Colour Co. : [2002]254ITR565(Bom) , Bombay High Court refused to entertain an appeal which was filed having tax effect less than what was prescribed in the instructions for filing appeal in the High Court. Same view was reiterated by the Court in Commissioner of Income-Tax v. Pithwa Engineering Works : [2005]276ITR519(Bom) . Taking a contrary view, this Court in Rani Paliwal v. Commissioner of Income-Tax , wherein an appeal filed by the assessee, raising the issue as to whether the Tribunal erred in law in not dismissing the appeal of the Revenue keeping in view the Board's circular dated 27.2.2000 prescribing limits for filing appeals before the Tribunal, was dismissed holding that the Tribunal is not bound by any such instructions and once the appeal is filed, the Tribunal was bound to decide the same on merits.

61. Similar view has been expressed by Rajasthan High Court in Commissioner of Income-Tax v. Rajasthan Patrika Ltd. , wherein it was held that the circular providing for quantum of tax which is fixed for filing appeals before various forums are administrative in nature. If the department prefers to file an appeal or make a reference to the Court, the same should not be dismissed by relying upon such administrative instructions. Accordingly, the appeal filed by the revenue was heard and decided on merits.

62. In Commissioner of Income-Tax v. Blaze Advertising (Delhi) Pvt. Ltd. (2002) 255 ITR 460, Delhi High Court held that the circular issued by the Board does not, in any way, prohibits or curtails the power of the Tribunal for making reference and in any case, the statutory right of the Tribunal to refer a case to the High Court for its opinion under Section 256(1) of the Act cannot be taken away by the Board by issuing a circular or otherwise.

63. In Commissioner of Income-Tax v. Hero Cycles Pvt. Ltd. and Ors. : [1997]228ITR463(SC) , Hon'ble the Supreme Court held that the circular issued by the Central Board of Direct Taxes (for short, `the Board') can bind the Income-tax Officer, but will not bind the appellate authority or the Tribunal or the Court or even the assessee.

64. Accordingly, it is held that there is no merit in the plea of the assessee to the effect that the present appeal filed by the Revenue should be dismissed. Rather, we hold that the circular issued by the Board fixing the quantum of tax for filing appeals before various forums are not binding on the Tribunal or the Courts and once the matter is before the Court or the Tribunal, the same has to be decided on its own merits.

65. Before parting with the judgment, we are constrained to observe the manner in which the Tribunal has dealt with the issue. The Tribunal has not even referred to any of the judgments of either Hon'ble the Supreme Court or various High Courts on the issue, but has merely given the citations or appeal numbers of various Benches of the Tribunal. As far as issue of subsidy is concerned, it has not even referred to the provisions of various schemes or the provisions in the case in hand, which could justify its finding to hold that kind of subsidies in the present case are capital and not revenue in nature. Similar was the manner in which the issue regarding interest free advance to sister concern was dealt with. The Tribunal was required to examine the material on record before rendering decision on any issue raised by the parties. It is evident that there is no application of judicial mind by the Tribunal in this case. The Tribunal being the last fact finding authority, a higher responsibility is cast by the Legislature on it to decide the cases by recording complete facts and assigning cogent reasons. It is the duty of the Tribunal to decide the cases on the basis of the law laid down by the Supreme Court/ High Court and not what the Tribunal decides on the particular issue. Every effort must be made by the Tribunal to decide the issue by taking help from the decisions of the Supreme Court and if there is no direct authority of the Supreme Court on the point then of the jurisdictional High Court and lastly of any other High Court. Not taking note of the facts of the case, nor the legal position and not even referring to the facts of the case involved in those decisions on which reliance is placed for deciding the appeal amounts to non-exercise of the appellate powers by the Tribunal, which cannot be appreciated at all.

66. In Union of India v. Major Bahadur Singh : (2006)1SCC368 , at pages 373-374, Hon'ble the supreme Court, while dealing with a similar situation and referring to the principles in the matter of applying precedent, held as under:

9. The Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of the courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of the courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for judges to embark into lengthy discussions but the discussion is meant to explain and not to define. Judges interpret statutes; they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes. In London Graving Dock Co. Ltd. v. Horton (1951) 2 All ER 1, Lord MacDermott observed: (All ER p. 14 C-D)

The matter cannot, of course, be settled merely by treating the ipsissima verba of Willes, J., as though they were part of an Act of Parliament and applying the rules of interpretation appropriate thereto. This is not to detract from the great weight to be given to the language actually used by that most distinguished Judge....10. In Home Office v. Dorset Yacht Co. (1970) 2 All 294, Lord Reid said: (All ER p.297 g-h) `Lord Atkin's speech... is not to be treated as if it were a statutory definition. It will require qualification in new circumstances.' Megarry, J. in Shephered Homes Ltd. v. Sandham (No. 2) (1971) 2 All ER 1267 observed: (All ER p.1274 d-e) 'One must not, of course, construe even a reserved judgment of even Russell, L.J. As if it were an Act of Parliament'; and, in British Rlys. Board v. Herrington (1972) 1 All ER 749 , Lord Morris said: (All ER p.761 c)

There is always peril in treating the words of a speech or a judgment as though they were words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case.11. Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases. Disposal of cases by blindly placing reliance on a decision is not proper.

12. The following words of Lord Denning in the matter of applying precedents have become locus classicus:

Each case depends on its own facts and a close similarity between one case and another is not enough because even a single significant detail may alter the entire aspect. In deciding such cases, one should avoid the temptation to decide cases (as said by Cordozo) by matching the colour of one case against the colour of another. To decide, therefore, on which side of the line a case falls, the broad resemblance to another case is not at all decisive.

xx xx xx

Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches else you will find yourself lost in thickets and branches. My plea is to keep the path to justice clear of obstructions which could impede it.

67. The same view was reiterated in State of Haryana v. AGM Management Services Ltd. : (2006)5SCC520 .

68. We are hopeful that the Tribunal will be careful in future in deciding the lis between the parties which is in conformity with the principles laid down therefor. Accordingly, the appeal of the Revenue is accepted, the order of the Tribunal is set aside and it is held that:

(1) the assessee will not be entitled to claim deduction of the interest on the borrwings to the extent those are diverted to sister concerns or other persons without interest; and

(2) the kind of sales tax subsidy received by the assessee in the present case is held to be revenue receipt and not capital in nature.


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