1. These are appeals filed by the Revenue under Section 260A of the Income Tax Act raising various questions of law arising from orders of the Income Tax Appellate Tribunal pertaining to respondent’s assessments for the assessment years 1994-95 to 1996-97 and 1998-99. We have heard Senior counsel Sri.P.K.R.Menon appearing for the Revenue and Senior Adv. Sri.C.V.Rajan appearing along with Adv. Sri.Saji Varghese for the respondent-assessee.
2. The common question raised for all the years is whether the Income Tax Appellate Tribunal was justified in cancelling disallowance of interest on borrowed funds diverted by the assessee for running a school owned by a trust under the control of the Managing Director of the assessee. Huge amounts ranging between one to two crores rupees was given every year to M/s.Choice Foundation for acquisition of land and building for the Choice School which is said to be a business enterprise under the control of the Managing Director of the assessee-company. The Assessing Officer noticed that assessee-company had no surplus and the amounts transferred to M/s. Choice Foundation was from out of borrowed funds and since the funds diverted were not used for business purpose of the assessee, interest paid on borrowed funds so diverted was disallowed. Assessee, however, challenged the disallowance of interest on the ground that the assessee was engaged in real estate business and school facility in the area near to the flats constructed by the assessee would attract customers which will promote the business of the assessee. It is this argument which found acceptance with the first appellate authority as well as with the Tribunal for upholding assessee’s contentions and to allow the claim. However, before us Revenue contended that there is no correlation between establishment of school and the promotion of assessee’s business in real estate. Senior counsel also contended that assessee was mainly engaged in processing and export of marine products and real estate business itself was not returning any sizeable income to the assessee and the assessee eventually closed down the real estate business. Counsel appearing for the respondent-assessee supported the findings of the lower authorities. He also relied on the decision of the Supreme Court in S.A.BUILDERS LTD. Vs. COMMISSIONER OF INCOME TAX reported in 288 ITR 1. Senior counsel appearing for the Revenue on the other hand relied on Division Bench judgment of this court in COMMISSIONER OF INCOME TAX Vs. MANGALAM PUBLICATIONS INDIA(P) LTD. Reported in (2010) 190 TAXMAN 38 wherein this court held that proportionate interest on borrowed founds diverted for other purposes attract disallowance.
3. After hearing both sides and after going through the findings of the Tribunal, we are unable to sustain the order of the Tribunal because there is nothing to indicate that the construction of school by a trust at a huge cost any way benefited the assessee’s business in marine exports or even in real estate business. Of course it is very common that big developers engaged in real estate business construct township with school, hospital, shopping complex and other facilities attracting customers for purchase of flats, villas and business premises. However, there is nothing to indicate that the assessee even owned or possessed any sizeable real estate property in or near the school which was constructed by the trust with the managing director of the assessee as the promoter of the school. It is also the finding that the assessee was not engaged in major real estate business. It is also to be noted from the records that the assessee slowly gave up real estate business and, therefore, assessee shifted the stand that the school construction was for the benefit of the children of the assessee’s employees. Here again, we do not find any priority for admission or incentives for the children of employees of the assessee in the school set up by the assessee. In fact, it is the case of the assessee that the school itself is an independent business concern of the managing director and it is completely distinct and separate from the assessee’s activities and as such, we do not find any material to hold that the establishment of the school at huge cost in any way advances the business interest of the assessee. So much so, the commercial expediency pleaded by the respondent does not stand proved. Section 36(1)(iii) of the Income Tax Act provides for allowing interest on funds borrowed for business purposes. Unless it is established that the funds were atleast indirectly used for business purpose or for promotion of business, assessee is not entitled to deduction of interest on funds diverted for personal benefits by the managing director for himself or along with others. We, therefore, allow the appeal on this issue by reversing the findings of the Tribunal and that of the first appellate authority.
4. The next question raised which is common for the assessment years 1994-95 and 1995-96 is the deduction claimed by the assessee under Section 801 of the Act for the investment in fish processing unit. The claim was rejected by the Assessing Officer on the ground that assessee was not engaged in manufacture or production of any article in the factory and all what the assessee was engaged was processing of fish which did not come within “manufacture or production of any article or thing” entitling assessee for deduction under Section 801 of the Income Tax Act. Counsel for the Revenue relied on decisions of the Supreme Court in STERLING FOODS Vs. THE STATE OF KARNATAKA reported in 63 STC 239 and in COMMISSIONER OF INCOME TAX Vs. RELISH FOODS reported in 237 ITR 59 and contended that processing of prawns does not amount to manufacture or production of goods eligible for deduction under Section 801 of the Act. Learned counsel appearing for the respondent-assessee on the other hand explained the process adopted and contended that the processing involved in assessee’s factory is different form cleaning, deveining and freezing referred to in the above two decisions and submitted that the product generated in the processing in assessee’s factory is a manufactured product. Prima facie the issue is covered against the assessee by the above two decisions because the item processed and exported is nothing but fish in frozen condition. Therefore, the only question to be considered is whether the peculiar processing adopted by the assessee amounts to manufacture or production of a thing which alone will qualify for deduction under Section 801. Counsel for the assessee explained that assessee is engaged partly in cooking and blanching of the product as well as glazing and freezing the item in the fish processing plant. However, there is not dispute that the item exported is not cooked food but fish in raw form and the part cooking itself is for blanching it for appearance. The product is called IQF (Individually Quick Frozen). Counsel for the assessee contended that contrary to the normal processing of sea food which is block freezing, assessee is engaged in individual freezing after cooking and chemical treatment. We do not find any distinction in the process involved because preservation of fish is achieved through freezing and it makes no difference whether it is block freezing or individual freezing. Even though counsel for the assessee has also relied on Full Bench decision of this court in COMMISSIONER OF INCOME TAX Vs. BHARAT SEA FOODS reported in 237 ITR 46, we do not think the said decision can any longer apply after the three Bench decision of Supreme Court in COMMISISONER OF INCOME TAX Vs. RELISH FOODS (237 ITR 59) wherein it is held that processing of shrimps and prawns does not involve manufacture or production of article entitling deduction under Section 801 of the Income Tax Act. We, therefore, allow the appeals on this issue by reversing the orders of the Tribunal and that of the first appellate authority and restore the disallowance made in assessment.
5. The additional issue raised in I.T.A. 1401/2009 for the assessment year 1994-95 pertains to disallowance of interest on funds diverted for acquiring industry with factory by the assessee. While Senior counsel appearing for the Revenue contended that the acquisition of another industrial undertaking does not directly promote the business of the assessee, counsel for the assessee referred to the findings of the lower authorities that the acquisition of the industry with the funds advanced by the assessee helped the assessee to make available the factory facility of that industry for processing sea food for export. The clear finding of the lower authorities including the Tribunal is that processing facility was inadequate for the assessee and by availing the factory facility of the asset acquired, the assessee could expand his business. We are of the view that the test of commercial expediency referred to in the decision of Supreme Court in S.A. BUILDERS’ case referred to above squarely applies to assessee’s case. We, therefore, reject the appeal on this issue by confirming the order of the Tribunal in favour of the assessee.
6. The next issue pertains to disallowance of interest on borrowed funds utilized by the assessee for purchase of landed property in Munnar. The Assessing officer disallowed the claim because assessee during the relevant precious year was not involved in real estate business. Counsel for the assessee, however, submitted that the assessee was engaged in real estate business and so much so, land acquired in Munnar was for business purpose. We find force in this contention because though assessee in the course of time gave up the business in real estate, during the previous year relevant for the assessment year 1994-95 the assessee was engaged in real estate business and in this connection acquisition of property at Munnar which is a prime location for tourism business cannot be said to be other than for business purpose, though the assessee later did not go ahead with the development or construction work. Since the asset was acquired for the company and with the motive to develop it and do business in real estate, no disallowance is called for. We, therefore, reject this ground raised by the Revenue and confirm the order of the Tribunal.
7. The last question raised pertains to disallowance of interest on borrowed funds diverted for acquisition of foreign car for the managing director. While the case of the Revenue is that the car was purchased for personal use by the managing director and the car also remained registered in the name of the managing director, counsel for the assessee contended that the assessee was engaged in export of marine products and assessee necessarily had to engage in and provide facility to foreign buyers reaching India. The assessee’s case is that the car was used for transporting foreign buyers and so much so, the acquisition of car should be treated as for business purpose. However, it is specifically admitted by the assessee that the car was purchased and registered in the name of the managing director and only in the subsequent year it was transferred in the name of the company. We are of the view that so long as car was owned and used by the managing director for his personal purpose, it cannot be said to be for use by foreign visitors reaching India for business transaction of the assessee. So much, so the nexus between the acquisition of the car in the personal name of the Managing Director and it’s use for business purpose is not established. Of course from the following year when the car was transferred to the name of the assessee and used by it for business purposes, the company is entitled to eligible deductions. However, for the assessment year 1994-95 disallowance was rightly made for the interest free funds given by the assessee to the Managing Director for acquisition of car from out of interest bearing borrowed funds. We, therefore, allow the appeal on this issue by reversing the orders of the Tribunal and that of the first appellate authority and restore the disallowance of interest on the amount of Rs.26,55,000/- advanced by the assessee-company to the Managing Director from out of borrowed funds for purchase of foreign car.
In view of the findings above, I.T.A. Nos.1438, 1214 and 1096 are allowed reversing the orders of the Tribunal and that of the first appellate authority and by restoring the assessments. I.T.A. No.1401/2009 is allowed in part as indicated above.