ORDER
M.V.R. Prasad, AM
1. This appeal was decided vide Tribunal’s order dated 20-4-1994. However, it was recalled vide order dated 28-9-1994 in M.A. No. 314/Bom./94 read with corrigendum dated 20-5-1996.
2. The order of the Tribunal was recalled on the short question whether the assessee is entitled to deduction of Rs. 19,17,643 being the amount disallowed by the Assessing Officer out of the interest payments made by the assessee. The ground raised on this issue in the appeal memo reads as follows :-
“The assessee submits that the learned CIT(A) erred in confirming the disallowance of Rs. 19,17,643 made by the Income-tax Officer as excess payment of interest. The assessee submits that when the amount advanced to Dharmayug Investment Limited, the wholly-owned subsidiary of the Company, was admittedly not out of borrowings but out of the profits of the Company, the learned CIT(A) erred in confirming the addition on notional basis that the assessee could have saved interest expenditure had it utilised its funds to reduce Bank Overdraft instead of loaning to Dharmayug Investment Limited. There is a mistake in working.”
3. The Assessing Officer made the allowance of Rs. 19,17,643 with the following remarks :-
“Disallowance of excess payment of interest. – During the year, it is observed that the assessee gave interest-free loans as detailed below to Dharmayug Investments Ltd. :
Date Amount
Rs.
27-10-1983 50,00,000
11-11-1983 50,00,000
1-12-1983 5,00,000
9-12-1983 4,00,000
19-12-1983 50,00,000
23-12-1983 7,00,000
2-1-1984 20,00,000
27-4-1984 10,00,000
------------
Total 1,96,00,000
------------
It is contended that Dharmayug Investments Ltd. is a wholly subsidiary company and the loan given is not from borrowings but from the profits of the company and, therefore, there is no loss to the revenue.
I have carefully considered the contentions of the assessee.
During the year, the assessee has shown the figures of interest receipt and interest payment as follows :
Rs.
(1) Interest receipts 19,04,700
(2) Interest payments - Rs.
(i) On overdrafts 62,46,165
(ii) On FDs 40,01,612
(iii) On term loan 40,83,710
----------
1,43,31,487
------------
Excess interest paid 1,24,26,787
-------------
Even believing the assessee’s statement, that the loans given have no linking with the borrowings, then also by diverting the funds by way of interest-free loan, the assessee has paid excess interest to that extent. On perusal of interest receipt account, it is found that the assessee has charged interest between 14.75% to 21% from the persons to whom loans bearing interest, have been given. Interest payment is also in the same range. I, therefore, work out the interest @ 15% on loans given to Dharmayug Investments Ltd., which comes to Rs. 19,17,643. The assessee could have saved interest to that extent, had the funds been not diverted by giving interest-free loans. I, therefore, reduce the excess interest payments to the extent of Rs. 19,17,643. For the sake of convenience, the said figure will be shown separately in the computation of income.”
4. The CIT(Appeals) dealt with this issue in para 17 of his order and he confirmed the disallowance with the following remarks :-
“Further the appellant’s submissions that the funds advanced to the subsidiary company did not come out of the borrowed funds is also not the whole truth. As mentioned above whereas the appellant company made arrangements so that all receipts were made over to the particular bank, i.e., United Bank of India from where the funds were advanced to the subsidiary company, the appellant-company in all other banks drew overdraft facilities and sustained heavy liabilities towards payment of interest, i.e., to the extent of Rs. 1.43 crores. Under these circumstances, disallowance of Rs. 19,17,643 made by the Assessing Officer will have to be sustained. The same is, therefore, confirmed.”
5. During the course of the first hearing before the Tribunal, it was conceded that the advances to M/s. Dharmayug Investments Ltd., which is a 100% subsidiary of the appellant-company, were not trade advances. However, it was contended that the advances were made out of a separate bank account with United Bank of India into which collections by way of advertisement receipts and circulation receipts were deposited and so, the assessee had always a credit balance in his bank account even after advancing the amount in question of Rs. 1,96,00,000 to the subsidiary company and, that the other borrowals on which substantial interest payments made were effected for the purposes of the business of the assessee and as these borrowals were not diverted to the subsidiary company or any other sister concern, the interest paid on these borrowals has to be allowed as a deduction in terms of the provisions of section 36(1)(iii) of the Income-tax Act. In other words, as the advances to the subsidiary company were made out of the gross revenues of the assessee company, no interest could be disallowed as attributable to the diversion of borrowed funds to a subsidiary or a sister concern for non-business purposes. The Tribunal disposed of this argument with the following observations :-
“The next point to be considered is whether having regard to the fact that the amounts were advanced from an account which had throughout a credit balance, would support the claim of the assessee or not. We may in this connection recall that the claim of the assessee before the revenue authorities had been that the amounts were advanced out of the assessee’s revenue from advertisement and the like. It has to be remembered in this connection that maintenance of credit balance in the United Bank of India from which amounts had been advanced to the subsidiary company was a clear improvisation by the assessee to reduce its tax liability. The over-drafts from the banks, the fixed deposits and the term loans were all used for the purpose of business. The loan liability including the over-drafts due to the banks had been a colossal amount. The account with the United Bank of India where the assessee banked all its revenues was with a view to make it appear that advances free of interest were out of the income earned by it. Such an action by the assessee cannot be countenanced. Where an assessee borrows funds for the purpose of its business, by using its revenues for advancing interest-free loans to a subsidiary company and when such advance is not in the course of business carried on by it, the assessee cannot be heard to say that the advances made to the sister concerned were out of its own revenues and not out of its borrowed funds. If such a view is accepted, it would open the flood gates of tax evasion. Any conscious device adopted by an assessee with a view to depriving the states of its revenues cannot be approved even though on the face of it the device has some legitimacy. We, having regard to the totality of the facts of the case, hold that the disallowance of part of the interest-free advances made by the assessee to the subsidiary company, has been rightly done by the revenue.”
6. As already mentioned, the order of the Tribunal was recalled and while doing so, the Tribunal observed as follows :-
“The Tribunal after observing that the over-drafts from banks, the fixed deposits and term loans were all used for the purpose of business held that since the assessee had made interest-free loans from its revenue, interest attributable to such advances had to be disallowed. The claim of the assessee before the Tribunal in the miscellaneous application was that such a finding of the Tribunal was not consistent with its earlier findings that borrowings had been used for the purpose of business. It was also claimed in the miscellaneous petition that it was argued before the Tribunal, inter alia, relying on the Bombay High Court decision in the case of Bombay Samachar (74 ITR 723) that once there was a finding that the borrowings were utilised for the purpose of business, there could not be any notional disallowance. This was lost sight off by the Tribunal while upholding the order of the CIT(A). After hearing the parties to the dispute we find that there is a mistake apparent in the order of the Tribunal. The Tribunal has given a clear out finding that the borrowings of the assessee were utilised for the purpose of business carried on by the assessee. Thereafter the Tribunal disgressed a little and held that since there were huge interest-free advances, the revenue was justified in disallowing interest on notional basis. There seems to be some apparent contradiction in the order passed by the Tribunal and this gives rise to a mistake. We, in the circumstances, recall the order of the Tribunal for the limited purpose of adjudicating whether the notional interest disallowed by the revenue was justified or not.”
7. In the course of the present hearing, the learned counsel for the assessee has again reiterated the contentions made out on the earlier rounds. It is pleaded that first, as the borrowed funds were utilised for business purposes, interest payments on the borrowed funds should be allowed under the provisions of section 36(1)(iii) without any deduction for diversion of funds for non-business purposes. Secondly, it is pleaded that the advances to the subsidiary were made out of a separate bank account in which gross revenues were deposited and as such, it always had a credit balance and so, it has to be held that the borrowed funds were not utilised for the purposes of making the advances in question. Thirdly, it is made out that the Assessing Officer had made the disallowance of Rs. 19,17,643 on the ground that if the advances to the subsidiary had not been made, the borrowed funds would have been less to that extent and as such, some interest payments would have been saved. It is argued that such a reasoning is totally untenable and the disallowance by virtue of such a reasoning is beyond the permissible legal limits.
8. After giving our anxious consideration to the issue involved, we find that the original order of the Tribunal was on the right lines and we have to sustain the disallowance of Rs. 19,17,643. A look at the printed balance-sheet would show that the assessee had considerable borrowed funds. The sources of funds as on 31-7-1984. i.e., the last day of the accounting year relevant for the present assessment year were as follows :-
Shareholders' Funds Rs. 12,96,86,257
Loan Funds Rs. 9,40,83,985
Deferred Payment Liabilities Rs. 1,28,19,157
-----------------
Total Rs. 23,65,89,399
-----------------
The fixed assets are shown at Rs. 14,18,52,416 as against the corresponding figure of Rs. 8,77,69,646 as on 30-4-1983 which is the last day of the earlier accounting year. So, it means that there is an increase of more than Rs. 5 crores in the fixed assets during the year of account. It may also be observed that the entire loan to the subsidiary company of Rs. 1,96,00,000 was advanced only during the year, as is evident from Schedule ‘L’ of the printed accounts (page 25). As the book profit before taxation is only of the order of Rs. 3,20,80,499, it is evident that the profit of the assessee is not available for meeting both the loan advanced to the subsidiary company and acquisition of the fixed asset. So, we have to reject the contention that the advance to the subsidiary company was made entirely from collection of advertisement revenue and circulation revenue. Technically, the assessee appears to be correct, but not really so. Gross revenues are not the same thing as profit and profit may not be available when the advances in question are made. The assessee bases its case only on the expedient of opening a separate bank account in which gross revenues were credited and the advances were made out of that account. We are of the view that liability of taxation does not depend on such, what we may call, sleight of hand, exhibited in opening a separate bank account for the purpose. The assessee admitted that the advance to the subsidiary company was not a trade advance and as a matter of fact, it did not have sufficient profits or own funds to make the advance. So, obviously, the advance is made only out of the borrowed funds and as such we are of the view that the assessee is squarely hit by the decision of the Hon’ble Bombay High Court in the case of Kishinchand Chellaram v. CIT [1978] 114 ITR 654. The relevant head note of this decision reads as follows :-
“Held, (1) that, so far as the Bombay High Court is concerned, it is quite clear that, under section 10(2)(iii), interest paid on borrowed capital will be allowed as a deduction only if the capital was borrowed and used for the purposes of business and that if it is used for a purpose other than that of business, then interest to the extent to which the capital was so used, will not be allowed as a permissible deduction under section 10(2)(iii) : Calico Dyeing and Printing Works v. CIT [1958] 34 ITR 265 (Bom.) and CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.) followed.”
In this context, reliance can also be made to the decision of the jurisdictional High Court in the case of CIT v. Doctor & Co. [1989] 180 ITR 627 (Bom.). The relevant portion of the head note of this decision reads as follows :-
“Held, that no part of the amounts standing to the credit of various sundry creditors representing the value of the goods purchased to whom no interest was paid, were available to the assessee for the purpose of advancing loans to its sister concerns for the reasons (1) that just as there were sundry creditors to whom no interest was paid, there would be sundry debtors from whom no interest was received and (2), that the amounts advanced to the sister concerned, on the assessee’s own admission, were partly out of borrowed funds. Therefore, the Tribunal was not justified in deleting the disallowance of interest maintained by the Appellate Assistant Commissioner.”
9. Of course, there is no admission on the part of the assessee that the advances in question to the sister concerns were made out of borrowed funds. To our minds, it makes no difference that there is no such admission so long as, it is evident from the printed accounts that there were no own funds or other non-interest-bearing funds available for diversion to sister concerns.
10. We are aware of the decision of the Hon’ble Calcutta High Court in the case of Reckitt & Colman of India Ltd. v. CIT [1982] 135 ITR 698/10 Taxman 189, which apparently favours the case of the assessee. However, in this case, there was an over-draft account with a bank into which the receipts of the business were deposited and the case proceeded on the basis that the department could not co-relate the loan taken with the interest-free advances made. In the present case, as made out by the assessee, the borrowed funds were not mixed up with the revenues. In such a situation, to our mind, there is no question of segregating the borrowed funds from own funds and then linking the borrowed funds to the interest-free advances. Such an exercise is not called for at all as the funds are not mixed up. However, that does not mean, as we have noted, that the assessee can escape by the simple expedient of opening a separate bank account. If such an argument is allowed to pass muster, as noted by the Tribunal in the original order, it would open the flood gates of evasion. In this context, we can do no better than to recall the following head note in the decision of the Apex Court in the case of McDowell & Co. Ltd. v. CIT [1985] 154 ITR 148/22 Taxman 11 :
“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. It is neither fair nor 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 to expose the devices for what really are and to refuse to give judicial benediction.”
11. In the course of hearing, we asked the learned counsel for the assessee whether he would like to file, what is normally in accounting terms called, a funds flow statement to indicate the source and utilisation of the funds and to clinch the issue whether the advance to the subsidiary company was made entirely out of own funds. But, the learned counsel observed that such a statement would not be relevant. In the circumstances, on a perusal of the printed accounts we have to infer that the assessee did not have own funds or other non-interest-bearing funds to make the interest-free advance in question to the subsidiary company which is admittedly a non-trade advance or an advance for purposes other than those related to the business of the assessee. In the circumstances, we are of the view that the simple expedient of opening a separate bank account and routing the advances through such a separate account will not save the assessee from the ratio of the decisions of the jurisdictional High Court cited supra. We are also of the view that the assessee is squarely hit by the decision of the Apex Court cited supra. In the circumstances, we reject the ground taken by the assessee in respect of the allowance of Rs. 19,47,643.
12. In the result, the appeal is dismissed.