ORDER
Keshaw Prasad, Accountant Member
1. Both the appeals have been directed by the assessee. While the appeal for assessment year 1996-97 has been directed against the order of the ld. CIT(A) dated 16.9.99. the appeal for assessment year 1997-98 has been directed against the order of the ld. CIT(A) dated 19.5 2000. As the issues in both the appeals are common, these are being disposed off by a consolidated order.
2. In the original grounds, the assessee has challenged the disallowance of salary paid to S/Shri Love Gary, Gunjan Garg and Vivek Garg by invoking the provisions of Section 40(b) of the Act. However, these grounds of appeals have not been pressed, hence, the same are dismissed.
3. The learned Counsel had also raised two additional grounds. In one additional ground, the assessee has challenged the levy of interest Under Section 234B and 234C of the Act on the ground that in the assessment order there was no direction to charge interest under the specific section. By another additional ground, the learned Counsel had challenged the levy of interest under the above sections on the ground that the interest should be calculated on the returned income and not assessed income. In support of the first additional ground, the learned Counsel has relied on the decisions reported in 247 ITR 210 (Patna). 259 ITR 671 (P&H), 80 ITD 39 (Bangalore), 85 ITD 95 (Third Member) 76 TTJ 427 (Hyderabad) and 259 ITR 449 (S.C).
4. Regarding the levy of interest on the returned income, the learned Counsel stated that even if the same is to be levied, the same should be levied on the assessed income as defined in Explanation to Section 234B of the Act, He also stated that the provisions relating to the assessed tax remained unchanged even after the amendment to Section 234B of the Act. On the other hand, the ld. DR objected to the admission of the additional grounds.
5. We have considered the rival submissions. As both the additional grounds relate to the very jurisdiction of levying interest, we admit these additional grounds and proceed to adjudicate the same.
6. Part F of Chapter XVII was brought on the statute by Direct Tax Laws (Amendment) Act. 1987. w.e.f. 1.4.89. This part deals with the interest chargeable in certain cases. Section 234A provides for the levy of interest where the assessees filed their return of income after the due date or no return of income was furnished. Section 234B provides for levy of interest for defaults in payment of advance tax. Section 234C provides for levy of interest for deferment of advance tax.
7. Whether in absence of specific order in the body of the assessment order, interest under the above sections could be charged or not is the common issue. There have been divergent views on this point. The Hon’ble Patna High Court in the cases of Uday Mistanna Bhandar and Complex and Smt Tej Kumari and Others had held that no interest under this Chapter could be levied unless there was specific direction to charge interest under a particular section in the assessment order itself. These decisions have also been approved by the Hon’ble Supreme Court in the case of Ranchi Club Ltd reported in 247 ITR 209 The Hon’ble Supreme Court in the case of Kalyan Kumar Ray reported in 191 ITR 634 has held that ITNS 150 was part of the assessment order But the court has not ruled that if in the ITNS 150 the interest has been charged it will amount to direction to charge interest. It is clear from the following paragraphs of the order of the Hon’ble Supreme Court:
“Assessment” is one integrated process involving not only the assessment of the total income but also the determination of the tax. The latter is as crucial as the former. The Income-tax Officer has to determine, by an order in writing, not only the total income but also the net sum which will be payable by the assessee for the assessment year in question and the demand notice has to be issued under section 156 of the Income-tax Act, 1961, in consequence of such an order. The statute does not, however, require that both the computations (i.e. of the total income as well as of the sum payable) should be done on the same sheet of paper, the sheet that is superscribed ‘assessment order’. It does not prescribe any form for the purpose. Once the assessment of the total income is complete with indications of the deductions, rebates, reliefs and adjustments available to the assessee, the calculation of the net tax payable is a process which is mostly arithmetical but generally time consuming. If therefore, the Income-tax Officer first draws up an order assessing the total income and, indicating the adjustments to be made, directs the office to compute the tax payable on that basis and then approves of it, either immediately or some time later, no fault can be found with the process, though it is only when both the computation sheets are signed or initialed by the Income-tax Officer that the process described in Section 143(3) will be complete,(emphasis supplied).
In view of the above observations, it is clear that the Assessing Officer has to pass the assessment order. He has to determine the total income on which tax is leviable. The job of making calculations can even be performed by the office. However, it is only when the order of assessment and the computation sheet are signed or initialed by the Income-tax Officer that the process of assessment is complete.”
8. This issue was again considered by the Hon’ble MP High Court in the case of Ayushajaya Construction Ltd. The appeal was preferred before the Hon’ble MP High Court, inter alia, on the following questions of law:
“Whether the Income Tax Appellate Tribunal was justified in holding that as there was no specific order for charging interest under Section 234B of the Act, the charging of interest Under Section 234B in the demand notice was illegal even though in the computation sheet (ITNS 150) which formed part of the assessment order, interest amounting to Rs. 23,47,990/- Under Section 234B has been charged”.
The Hon’ble MP High Court considered the above question in I.T.A. No. 67/2000. Vide its order dated 6.12.2000, the Hon’ble Court dismissed the appeal filed by the Revenue on the ground that no substantial question of law (SIC) consideration. The Department has challenged the order of the Hon’ble High Court before the. Hon’ble Supreme Court by way of SLP. The Hon’ble Supreme Court, decide its order dated 11.1.02 (SLP(C) No. 715 of 2002) has dismissed the SLP filed by the (SIC)evenue. Reference may be made to the reports appearing in 254 (SIC) 276 (statute).
9 The Hon’ble Punjab & Haryana High Court in the case of Vinod Khurana reported in 253 ITR 578 had occasion to consider similar issue. It held that even if the specific section was not mentioned in the assessment order but if the A.O. has directed to charge interest as per law, it was a direction to charge interest and the Department will be justified in levying the interest in such case. The assessee preferred SLP against this judgment which was also dismissed by the Hon’ble Supreme Court consisting of three judges. The SLP in the case of Vinod Khurana was dismissed by the Bench consisting of two judges. The Hon’ble Supreme Court also considered similar issue in the case of Anjum M.H Ghaswala and Others reported in 252 ITR 1. While referring to the powers of Settlement Commission, the Hon’ble Supreme Court has held that the Settlement Commission has no power to waive the charge of interest Under Section 234A, 234B and 234C of the Act as the same was mandatory. It could be said that if the levy of interest under the above sections was mandatory then whether the direction to charge interest was mentioned in the assessment order or not becomes irrelevant. This view is being canvassed by the Department.
10. It may be mentioned that the Hon’ble Delhi High Court in the case of Kishan Lal HUF reported in 258 ITR 359 and in the case of Insilco. Ltd reported in 261 ITR 220, the judgment of which were delivered much after the decision in the case of Anjum M.H Ghaswala and Others (supra) had taken a consistent view that unless there was direction to charge interest in the assessment order under the specific sections, the levy of interest was illegal. But in all these cases, unfortunately, there is no reference to the decision of the Hon’ble Supreme Court in the case of Anjum M.H Ghaswala and Others.
11. We have also perused the decision of the Hon’ble Supreme Court in the case of Kalyankumar Ray (supra). We find that the Hon’ble Supreme Court in the case of Kalyankumar Ray has considered the meaning of assessment order in different context. There is no dispute that ITNS 150 was part of the assessment order. The purpose of ITNS 150 is to apprise the assessees their liabilities under various sections of the Income-tax Act. It is just a calculation sheet and not a direction to charge interest. Looking to the contrary views on this issue, we feel that where there is no direction to charge interest at all in the assessment order, the levy of interest under the above sections would be illegal. But, where there is a direction to charge interest in the assessment order but the specific section has not been mentioned, the Department could be justified in charging interest under the applicable sections. While coming to this conclusion, we are also guided by the fact that the decision in the case in Insilco Ltd (supra) was challenged before the Hon’ble Supreme Court by way of SLP. Vide its order dated 2.5.2003 the Hon’ble Supreme Court has granted SLP filed by the Department. We are aware that the admission of SLP was not laving down a proposition of law. But as the SLP has been admitted after the decisions in the case of Ranchi Club Ltd (supra) and Anjum M.H Ghaswala (supra) were delivered, the admission of SLP by the Hon’ble Supreme Court could not be lost sight off Reference 264 ITR 199 (statute). We further feel that if in the assessment order there was no direction to charge interest but in the ITNS 150 and in demand notice, the amount of interest to be charged was mentioned, this will not amount to direction to charge interest and levy of interest in such cases will be invalid.
12. Keeping in view the judicial pronouncements on the subject and our finding mentioned above, we have examined the facts of the case. We find that in the assessment order for the assessment year 1996-97, the A.O. has mentioned the specific section under which the interest was being charged. In the assessment order for assessment year 1997-98, the A.O. has directed to charge interest as per law. Keeping in view our finding mentioned earlier, we hold that the Department was justified in levying the interest under the above sections in both the assessment years.
13. The second controversy was relating to levy of interest Under Section 234B. This section had two limbs – (1) Upto which date the interest should be charged; and 2) on what tax the interest should be calculated. When this Section was brought on the statute on 1.4.89, the original provisions relating to both the issues read as under:
“Subject to the other provisions of this section, where, in any financial year, an assesses who is liable to pay advance tax under Section 208 has failed to pay such tax or, where the advance tax paid by such assessee under the provisions of Section 210 is less than ninety percent of the assessed tax, the assessee shall he liable to pay simple interest at the rate of two percent for every month or part of a month comprised in the period from the first day of April next following such financial year to the date of determination of total income under Sub-section (1) of Section 143 or regular assessment on an amount equal to the assessed tax or as the case may be on the amount by which the advance tax paid as aforesaid falls short of the assessed tax.
Explanation I: In this Section, assessed tax means:
(a) For the purposes of computing the interest payable under Section 140A the tax on the total income as declared in the return referred to in that section.
(b) In any other case, the tax on the total income determined under Sub-section (1) of Section 143 or on regular assessment,
as reduced by the amount of tax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total Income”.
14. There was a lot of controversy about the above provisions. The controversy was as to where an assessment has been passed Under Section 143(3) whether the interest Under Section 234B could be charged upto the date of order under Section 143(3) or upto the date of determination of total income under sub Section(1) of Section 143 of the Act. This became very relevant because in most of the cases the assessment Under Section 143(3) were made much after the determination of income Under Section. sub Section(1) of Section 143.
15. Most of the Courts took the view that it was chargeable upto the date of determination of income under Sub-section (1) of Section 143. There was controversy even to the meaning of the words “assessed tax”. Whether the assessed tax meant the tax calculated on the income determined under sub Section (1) of Section 143 or where the regular assessment was made the tax on such assessed income. Both the issues were considered by different Courts.
16. The Bangalore Bench of the Tribunal in the case of M.G. Kalyan reported in 80 ITD 39 considered this issue. In Paragraph 9 of its order, the Tribunal observed and held as under:
“9. We have considered the rival submissions very carefully. We have also gone through the judgment of the Supreme Court in the case of Modi Industries Ltd. (supra). No doubt, the above decision related to ‘interest under Section 214. As per the Supreme Court: “The period, therefore, for which the interest has to be paid remains the same i.e the first day of the relevant assessment year to the date of the regular assessment (first assessment)”. The above judgment related to payment of interest to the assessee under Section 214. But, in our opinion, regarding the date upto which interest is payable to the assessee or is chargeable from the assessee, there should be no different yardsticks. The period should be from the first day of the relevant assessment year to the date of regular assessment/first assessment. In this case, the date of first assessment is the dates on which intimation under Section 143(1)(a) has been sent to the assessees. Therefore, we hold that interest under Section 234B has to be reckoned upto 20.1.1992 in the case of M.G. Kalyan and upto 22.11.1991 in the case of S.G. Kalyan. We, accordingly, direct the Assessing Officer to charge interest upto the above dates in the case of the two assessees herein. To this extend, the contention of the assessee is accepted.”
17. The Hyderabad Bench of the Tribunal also took the same view in the case of Ashok Brothers reported in 76 TTJ 427.
18. The Hon’ble Patna High Court in the case of Smt Tej Kumari & Others reported in 247 ITR 210 by way of full bench decision observed as under:
“Sections 234A and 234B lay down the provision with regard to interest chargeable in certain cases. Section 234 A provides that if the return of income for any assessment year is either not furnished or furnished after the due date, the assessee shall be liable to pay simple interest at the rate of 11/2 percent for every month or part of a month comprised in the period. It further provides that where the return is furnished after the due date or where no return has been furnished, ending on the date of completion of the assessment under Section 144, the assessee shall be liable to pay simple interest on the amount of tax on the total income as determined under Sub-section (1) of Section 143 or on regular assessment as reduced by the advance tax, if any, paid or deducted or collected at source. Similarly, Section 234B lays down the provision for payment of interest for default in payment of advance tax”.
From the reading of these provisions alongwith the Explanation it is clear that tax on the total income as determined under Sub-section (1) of Section 143 or on regular assessment shall be deemed to be tax on the total income as declared in the return for the purpose of computing the interest payable under Section 140A of the Act. It is also clear that the additional liability to pay interest arises only on account of delayed filing of return or non-filing of return and also on account of delayed payment or non-payment of advance tax.”
19. The Hon’ble Patna High Court in the case of Sushila Devi Jain reported in 259 ITR 671 also held the same by observing as under:
“The other issue raised before the Tribunal was in regard to the levy of interest under Section 234B of the Act. The Commissioner of Income-tax (Appeals) directed the Assessing Officer to charge interest under Section 234B of the Act upto the date of determination of income under Section 143(1)(a) of the Act. It is settled law that interest is levied under Section 234B on the basis of returned income and not on the basis of the assessed income. The Tribunal was right in setting aside the finding of the Commissioner of Income-tax (Appeals) in this regard and remanding the case back to the assessing authority for this purpose. The order of remand does not give rise to any substantial question of law and the Assessing Officer will decide the issue in accordance with law.”
20. Due to divergent views on this issue, the amendments were brought to Section 234B of the Act by Finance Act, 1995 with retrospective effect from 1.4.89. As per this amendment, in Section 234B the words “or regular assessment on an amount” were deleted and its place the words “and where regular assessment is made, to the date of such regular assessment on an amount” were inserted. The effect of such amendment was that in case the regular assessment was made, the interest Under Section 234B would be leviable upto the date of such regular assessment. Thus, after the amendment, the legal position has crystallized to the effect that in case a regular assessment has been made, the interest Under Section 234B has to be levied upto the date of regular assessment and not upto the date of determination of total income Under Section. Sub-section (1) of Section 143.
21. As regards the second controversy, the Explanation I to Section 234B which consisted of Clause (a) and (b) mentioned earlier, was also amended. The amendment was brought by Finance Act. 2001 with retrospective effect from 1.4.89. The amended Explanation-1 now reads as under:
“In this Section, “assessed tax” means the lax on the total income determined under Sub-section (1) of Section 143 or on regular assessment as reduced by the amount of lax deducted or collected at source in accordance with the provisions of Chapter XVII on any income which is subject to such deduction or collection and which is taken into account in computing such total income ”
22. From the perusal of above amendments, it is clear that as regards the period upto which the interest Under Section 234B was to be charged as per the amended provisions, if the regular assessment has been made then the interest is to be charged upto that date. As regards the definition of the words “assessed tax” it almost remained the same which was prior to the amendment. Prior to the amendment, as per Explanation I to Section 234B, “assessed tax” meant the tax on the total income determined under Sub-section (1) of Section 143 or on regular assessment. As per the amended Explanation I to Section 234B, the assessed tax means the tax on the total income determined under Sub-section (1) of Section 143 or regular assessment. Thus, while amending the Section 234B as well as Explanation I. the Legislature in its own wisdom provided that where a regular assessment is made, the interest was leviable upto that date. But it did not bring any similar amendment of words “assessed tax”. It did not provide for levy of interest on the tax determined under Sub-section (1) of Section 143 or where a regular assessment is made the tax on the income determined on regular assessment. In view of these facts, we find force in the argument of the learned Counsel that the interest Under Section 234B cannot be levied on the basis of tax determined on regular assessment. But at the same time, we do not agree with the arguments of the learned Counsel that the interest should be calculated on the basis of tax on the returned income. Actually, in the unamended Explanation and even in the amended Explanation, there is no mention of the tax on the returned income. It has only provided that the assessed tax means the tax on the income determined under Sub-section (1) of Section 143 or regular assessment. Thus the option was given to the assessee to calculate tax on the assessed income which was advantageous to it. We. therefore, direct the A.O. to recalculate interest Under Section 234A & B of the Act on the tax on the income determined under Sub-section (1) of Section 143 of the Act.
23. The additional ground raised by the assessee is allowed to the extent mentioned above.
24. In the assessment year 1997-98, the assessee has also challenged the disallowance of interest. The A.O. observed that though the assessee had made purchases worth Rs. 7.74 lakhs from M/s Shadi Ram & Sons(Agency), a sister concern, the payments have been made to the extent of Rs. 12.07 lakhs. The A.O., therefore, observed that the interest free advances to the extent of Rs. 4.34 lakhs has been made to the sister concern. Similarly, the interest free advance to the extent of Rs. 28,109/- has been made to another sister concern M/s Shadi Ram Enterprises. The A.O. was of the opinion that these interest free advances have been made to the sister concerns out of interest baring funds obtained by the assessee on which interest was being paid. The A.O. held that as the amount to the extent of Rs-. 4,33,582/- + Rs. 28,109/- has not been utilized in the business carried on by the assessee, the interest attributable to such amount was not allowable deduction. He calculated such disallowance at Rs. 83,104/-which was more or less upheld by the ld. CIT(A). The addition sustained by the ld. CIT(A) has been challenged before us.
25. It is argued by the learned Counsel that the disallowance of interest could be made only if the Revenue is able to prove that the interest bearing funds have been diverted for non-business purposes. In the instant case, the Revenue has failed to do so. The reliance was placed on the decision of Lucknow Bench of the Tribunal in the case of Meenakshi Synthetics Pvt. Ltd. reported in 84 ITD 563. Further reliance was placed on the decision reported in 60 TTJ 1 (Delhi), 60 TTJ 125 (Ahmedabad), 76 TTJ 427 (Ahmedabad). 108 Taxman – mag 219 (Chandigarh) and other cases. The learned Counsel further argued that in the year under consideration, the interest to the bank has been paid at Rs. 67,177/- only whereas the A.O. has made the disallowance of much larger amount. The A.O. was therefore, not justified in disallowing the interest. On the other hand, the ld. DR relied on the decision reported in 187 ITR 363 (Alld), 190 ITR 643(Alld) and 254 ITR 248 (Kerala).
26. We have considered the rival submissions. It is settled law that the deduction of interest can be allowed only if the interest bearing funds have been utilized in the business carried on by the assessee. To the extent the borrowed funds have not been utilized in the business, the proportionate interest has to be disallowed. But it is also settled law that the onus was on the Revenue to prove that the interest bearing funds have been diverted to the sister concerns without charging the interest. The Lucknow Bench of the Tribunal in the case of Meenakshi Synthetics Pvt Ltd reported in 84 ITD 563 has held that non-charging of interest on loans given by an assessee cannot by itself be a sufficient ground for disallowing interest paid by the assessee on loans taken by it in absence of any nexus between the borrowed capital and interest free advances. The Ahmedabad Bench of the Tribunal in the case of Shree Krishna Salt Industries reported in 60 TTJ 125 had held that as no material was brought on record to establish that interest bearing funds were diverted for giving interest free loans, the disallowance of interest paid on loans and deposits was not justified. The Hyderabad Bench of the Tribunal in the case of Ashok Brothers reported in 76 TTJ 427 had held that no part of interest paid by the assessee on its overdraft account could be disallowed on the ground that the assessee has made interest fee advances to its sister concern by issuing cheques from its cash credit account when it has sufficient interest free funds available to match the interest free advances. Keeping in view these decisions, we hold that the ld. CIT(A) was not justified in sustaining the disallowance of interest made by the A.O. The disallowance sustained by the ld. CIT(A) is, therefore, deleted.
27. In the result, the appeals for both the years are partly allowed.
