JUDGMENT
T.D. Sugla J.
1. The only question referred to this court in this case at the instance of the Department is :
“Whether, on the facts and in the circumstances of the case, any part of the interest paid by the assessee during the accounting period relevant to the assessment year 1971-72 merited disallowance ?”
2. The assessee is a firm and the assessment year involved is 1971-72. It is common ground that the assessee had borrowed moneys from different persons in the previous years relevant to the assessment years 1967-68 and 1968-69 on interest and that a part of the money so borrowed was advanced to its sister concerns free of interest. The sister concerns are All Steel and Asian Industries, in which the partners of the assessee-firm are also partners. It is also common ground that the interest to the extent it was payable on the moneys borrowed and diverted to sister concerns free of interest was disallowed in those years.
3. For the year under reference, the assessee stated that it had not advanced any moneys to its sister concerns. On the contrary, substantial amounts were recovered from them. It was pointed out that unsecured loans and advances in the beginning of the year were Rs. 3,39,885 but at the close of the year they came down to Rs. 2,74,597. As regards debits, the opening debit balance in the case of All Steel was Rs. 3,43,141 whereas at the end of the year it had come down to Rs. 2,35,677. In the case of Asian Industries, the opening debit balance was Rs. 1,16,716 which, at the end of the year, came down to Rs. 60,995. It was further pointed our that during the previous year, the assessee had charged interest on the debit balances to its sister concerns at the rate of 4 per cent. per annum. The submission was not accepted by the Income-tax Officer except to the extent that interest claimed by the assessee was disallowed by reducing the rate of interest from 15 per cent to 11 per cent. representing the difference in the rate of interest paid and the rate of interest charged on the debit balances in the name of its sister concerns.
4. Besides reiterating its submissions before the Income-tax Officer, it was urged before the Appellate Assistant Commissioner that the assessee had the benefit of not only interest-free capital but also of amounts standing to the credit of various sundry creditors to whom no interest was paid and that if those two amounts were taken into account, the total of amounts advanced to the sister concerns would be found covered. The Appellate Assistant Commissioner accepted that the assessee could have advanced interest-free loans to its sister concerns out of its capital. However, the amounts standing to the credit of the various sundry creditors representing the value of the goods purchased would not be available for the purpose of advancing money to the sister concerns as the assessee must have likewise sold goods on credit free of interest. Accordingly, he computed the amount available to the assessee out of its capital on an average basis and the loans advanced to the sister concerns on interest at the rate of 4 per cent. The computation is given in paragraph 11 of his order, On such computation, he reduced the disallowance of interest to Rs. 18,722 from Rs. 27,771 made by the Income-tax Officer.
5. The Tribunal accepted the assessee’s entire claim. According to the Tribunal, the fact that the assessee had not advanced any fresh loans to its sister concerns but rather recovered a substantial part of it during the year and that interest was charged on such amounts at the rate of 4 per cent. made a material change in the situation particularly as the moneys borrowed by the assessee from outsiders were for the purpose of business. In view of the position, the Tribunal further held that this court’s judgment in CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 was not applicable and disallowance of interest was not justified.
6. Dr. Balasubramanian submits that there is no finding in the earlier years’ orders that the assessee had borrowed moneys from outsiders for the purpose of its business and only subsequently the moneys were advanced to sister concerns or that the advances were made out of the assessee’s own capital. We have gone through the Tribunal’s order for the assessment years 1967-68 and 1968-69. The assessee’s submission that the loans taken by the assessee were substantially for the purpose of its own business and that only a small part of the borrowings was diverted to its sister concerns has been noted in paragraph 9 of its order. Vide paragraph 11 of the order, it found that this court’s decision in Bombay Samachar Ltd. [1969] 74 ITR 723 was not applicable as, in that case, there was a finding that the assessee had not advanced any loans to such parties out of its borrowed funds. In this case, on the assessee’s own admission, at least a part of borrowings was diverted to its sister concerns. The material difference in the situation, therefore, was only as regards (i) while no interest was charged in the earlier years, interest was charged at the rate of 4 per cent during the year under reference; and (ii) the plea that the assessee could have advanced moneys to its sister concerns out of its capital was not advanced. As regards the amounts standing to the credit of various sundry creditors representing the value of the goods purchased to whom no interest was paid, we are in agreement with the Tribunal that no part of these amounts could by available to the assessee for the purpose of advancing loans to its sister concerns for more than one reason. In the first place, just as there were sundry creditors representing the value of the goods purchased to whom no interest was paid, there would be sundry debtors from whom no interest was received. Secondly, the amounts advanced to its sister concerns, on the assessee’s own admission, were at least partly out of borrowed funds. In the above view of the matter, the Tribunal was, in our judgment, not justified in deleting the disallowance of interest maintained by the Appellate Assistant Commissioner. The view taken by the Appellate Assistant Commissioner in this regard was correct.
7. Accordingly, the question of law is answered in the affirmative, and in favour of the Revenue and against the assessee.
8. No order as to costs.