{"id":115371,"date":"2008-02-19T00:00:00","date_gmt":"2008-02-18T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/munjal-sales-corporation-vs-commissioner-of-income-on-19-february-2008"},"modified":"2015-11-05T23:11:44","modified_gmt":"2015-11-05T17:41:44","slug":"munjal-sales-corporation-vs-commissioner-of-income-on-19-february-2008","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/munjal-sales-corporation-vs-commissioner-of-income-on-19-february-2008","title":{"rendered":"Munjal Sales Corporation vs Commissioner Of Income … on 19 February, 2008"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Munjal Sales Corporation vs Commissioner Of Income … on 19 February, 2008<\/div>\n
Author: Kapadia<\/div>\n
Bench: S.H. Kapadia, B. Sudershan Reddy<\/div>\n
           CASE NO.:\nAppeal (civil)  1378 of 2008\n\nPETITIONER:\nMunjal Sales Corporation\n\nRESPONDENT:\nCommissioner of Income Tax,Ludhiana & Anr\n\nDATE OF JUDGMENT: 19\/02\/2008\n\nBENCH:\nS.H. Kapadia & B. Sudershan Reddy\n\nJUDGMENT:\n<\/pre>\n
J U D G M E N T
\n(Arising out of S.L.P. (C) No. 4317 OF 2007)
\nWITH
\nCIVIL APPEAL NO.1379 OF 2008 arising out of S.L.P. (C) No. 4392 OF 2007,
\nCIVIL APPEAL NO.1380 OF 2008 arising out of S.L.P. (C) No. 4395 OF 2007,
\nCIVIL APPEAL NO.1381 OF 2008 arising out of S.L.P. (C) No. 4397 OF 2007,
\nCIVIL APPEAL NO.1382 OF 2008 arising out of S.L.P. (C) No. 6442 OF 2007,<\/p>\n
KAPADIA, J.\n<\/p>\n
Leave granted.\n<\/p>\n
2.\tThis batch of civil appeals filed by the assessee is
\ndirected against judgments dated 12.10.06 and 16.10.06
\npassed by the Punjab and Haryana High Court whereby the
\nHigh Court has upheld the disallowance of interest claimed
\nunder Section 36(1)(iii) of the Income-tax Act, 1961 (“1961
\nAct”, for short), placing reliance on its judgment in the case of
\nCommissioner of Income-tax  v.  Abhishek Industries Ltd.<\/a>
\n (2006) 286 ITR 1 (P&H).\n<\/p>\n
3.\tIn this batch of civil appeals we are concerned with
\nAssessment Years 1993-94, 1994-95, 1995-96, 1996-97 and
\n1997-98.\n<\/p>\n
FACTS :\n<\/p>\n
4.\tIn August\/September 1991, appellant assessee granted
\ninterest free advances to its sister concerns which were
\ndisallowed by the Department on the ground that the said
\nadvances were not given from the firm’s Own Funds but from
\ninterest bearing loans taken by the assessee-firm from third
\nparties.  Accordingly, the assessee’s claim for deduction under
\nSection 36(1)(iii) was disallowed by the Department for the AY
\n1992-93.  However, vide order dated 3.1.03, the Tribunal
\ndeleted the disallowance saying that the assessee had given
\nsuch advance from its Own Funds.\n<\/p>\n
5.\tIn the next AY 1993-94, the same situation took place.
\nOnce again vide order dated 1.1.03, the Tribunal deleted
\ndisallowance for AY 1993-94.  It is important to note that the
\nDepartment accepted the orders passed by the Tribunal in
\nfavour of the assessee for both the AYs 1992-93 and 1993-94.
\nAt the same time, we need to emphasise, at this stage, that the
\ninterest free advance given to the sister concern was repaid on
\nyear to year basis.  The said advance\/loan got finally repaid in
\nAY 1997-98.\n<\/p>\n
6.\tDuring the AY 1994-95 no further advances were made
\nby the assessee-firm in favour of its concerns.  However,
\nduring AY 1995-96, a small interest free loan of Rs.5 lacs was
\nadvanced by the assessee-firm to its sister concern as during
\nthe year in question the assessee had profits of Rs.1.91 crores.\n<\/p>\n
7.\tAt this stage, it may be noted that before Finance Act
\n1992, payment of interest to the partner was an item of
\ndisallowance.  Therefore, it had to be added back to the
\nassessable income of the firm.  But, after 1.4.93, vide Finance
\nAct 1992, the said interest became an item of deduction,
\nprovided that the amount of deduction does not exceed
\n18\/12% interest per annum [See: Section 40(b)(iv) of the 1961
\nAct].  For the AY 1994-95, Department in this case, therefore,
\ndisallowed the claim for deduction under Section 40(b)(iv)
\nsaying that in this case there was diversion of funds by raising
\nof interest free loans.  The AO did not accept the submission of
\nthe assessee that advance(s) made by the assessee were out of
\nincome of the firm.  According to the AO, the said interest free
\nadvances to sister concerns were out of monies borrowed by
\nthe firm from third parties on payment of interest, hence the
\nassessee was not entitled to deduction under Section 40(b) of
\nthe 1961 Act.  This view was confirmed by the Tribunal.\n<\/p>\n
8.\tFor the AYs 1995-96 and 1996-97, Tribunal held that
\nduring the said years, no interest free advances to sister
\nconcerns were made and, therefore, there was no nexus
\nbetween “interest bearing loans” taken and “interest free
\nadvances”.  However, the Tribunal found that there was no
\nmaterial to show that advances were made to sister concerns
\nout of the firm’s own income and, therefore, the assessee was
\nnot entitled to deduction under Section 40(b)(iv) of the 1961
\nAct.\n<\/p>\n
9.\tThe basic question which arises for determination is :
\nwhether Section 40(b) of the 1961 Act is a stand-alone section
\nor whether it operates as a limitation to the deduction under
\nSections 30 to 38 of the 1961 Act?\n<\/p>\n
10.\tOn the above question of law, Mr. S. Ganesh, learned
\nsenior counsel appearing on behalf of assessee, contended
\nthat prior to 1.4.93, Section 40(b) referred to disallowances per
\nse but after the Finance Act 1992 the said Section 40(b)(iv)
\nallows deduction, subject to the above limit of 18\/12% per
\nannum.  According to learned counsel, Section 40(b)(iv) talks
\nabout statutory deduction and that the question of
\ndisallowance comes in only to the extent that payment of
\ninterest to the partner exceeds 12\/18% per annum.  In this
\ncase, according to learned counsel, all the conditions of
\nSections 40(b)(iv) have been satisfied and, therefore, the
\nassessee was entitled to the benefit of deduction thereunder.
\nIn this connection, it was further argued that deduction under
\nSection 40(b)(iv) is not for expenditure; that it was a statutory
\ndeduction and that the contribution by the partner to the firm
\ncannot be equated to a loan to the firm and that the former
\nfalls only under Section 40(b)(iv) and, therefore, the said
\nSection 40(b) was a stand-alone section having no connection
\nwith the provisions of Section 36(1)(iii) of the 1961 Act.
\nFurther, according to learned counsel, in this case Section
\n36(1)(iii) had no application as this was a case of payment of
\ninterest to the partner on his capital contribution which
\ncannot be equated to monies borrowed by the firm from third
\nparties, hence the present case fell only under Section 40(b)(iv)
\nand not under Section 36(1)(iii) of the 1961 Act.\n<\/p>\n
11.\tMr. Prag P. Tripathi, learned Addl. Solicitor General
\nappearing for the Department, submitted that object behind
\nenactment of Finance Act 1992 is not only to avoid double
\ntaxation but also to put the firm as an assessee on par with
\nother assessees.  In this connection, learned counsel
\nsubmitted that in view of the changed language of Section
\n40(b)(iv) of the 1961 Act, which is in the nature of a proviso, it
\ncan no longer be said that Sections 30 to 38 are not applicable
\nto the firm as an assessee and that it will apply to all other
\nassessees.  That, prior to 1.4.93, Section 40(b)(iv) disallowed
\ninterest paid to the partners but after 1.4.93 the firm has to
\nestablish its claim for deduction under Sections 30 to 38 and
\nthat it was not disentitled under Section 40(b) would apply.
\nAccording to learned counsel, Section 40 is in nature of a
\nproviso to Sections 30 to 38 and, therefore, even if the
\nassessee establishes its claim for deduction under Section
\n36(1)(iii), it has still to prove that it is not disentitled under
\nSection 40(b)(iv).  Therefore, according to learned counsel,
\nafter Finance Act 1992 the assessee has to establish
\ndeductions under Sections 30 to 38 and it has also to prove
\nthat it is not disentitled under Section 40 of the 1961 Act, like
\nany other assessee.\n<\/p>\n
12.\tWe quote hereinbelow Sections 36(1)(iii), 40(b) as it
\nexisted before 1.4.93 and 40(b)(iv) after Finance Act 1992
\nw.e.f. 1.4.93 which read as follow:\n<\/p>\n
“OTHER DEDUCTIONS\n<\/p>\n
36.(1) The deductions provided for in the following
\nclauses shall be allowed in respect of the matters
\ndealt with therein, in computing the income referred
\nto in Section 28-\n<\/p>\n
(iii) the amount of the interest paid in respect of
\ncapital borrowed for the purposes of the business or
\nprofession.\n<\/p>\n
Explanation : Recurring subscriptions paid
\nperiodically by share-holders, or subscribers in
\nMutual Benefit Societies which fulfill such
\nconditions as may be prescribed, shall be deemed to
\nbe capital borrowed within the meaning of this
\nclause;\n<\/p>\n
AMOUNTS NOT DEDUCTIBLE<\/p>\n
40. Notwithstanding anything to the contrary in
\nSections 30 to 38, the following amounts shall not
\nbe deducted in computing the income chargeable
\nunder the head “Profits and gains of business or
\nprofession”, –\n<\/p>\n
(b) in the case of any firm, any payment of interest,
\nsalary, bonus, commission or remuneration made
\nby the firm to any partner of the firm.\n<\/p>\n
Explanation 1 : Where interest is paid by a firm to
\nany partner of the firm who has also paid interest to
\nthe firm, the amount of interest to be disallowed
\nunder this clause shall be limited to the amount by
\nwhich the payment of interest by the firm to the
\npartner exceeds the payment of interest by the
\npartner to the firm.\n<\/p>\n
Explanation 2 : Where an individual is a partner in a
\nfirm on behalf, or for the benefit, of any other
\nperson (such partner and the other person being
\nhereinafter referred to as “partner in a
\nrepresentative capacity” and “person so
\nrepresented” respectively,)-\n<\/p>\n
(i) interest paid by the firm to such individual
\nor by such individual to the firm otherwise
\nthan as partner in a representative capacity,
\nshall not be taken into account for the
\npurposes of this clause;\n<\/p>\n
(ii) interest paid by the firm to such individual
\nor by such individual to the firm as partner in
\na representative capacity and interest paid by
\nthe firm to the person so represented or by the
\nperson so represented to the firm, shall be
\ntaken into account for the purposes of this
\nclause.\n<\/p>\n
Explanation 3 : Where an individual is a
\npartner in a firm otherwise than as partner in
\na representative capacity, interest paid by the
\nfirm to such individual shall not be taken into
\naccount for the purposes of this clause, if such
\ninterest is received by him on behalf, or for the
\nbenefit, of any other person;”\n<\/p>\n
Section 40(b)(iv) after Finance Act 1992 w.e.f.1.4.93:
\n\t“AMOUNTS NOT DEDUCTIBLE<\/p>\n
40. Notwithstanding anything to the contrary in
\nSections 30 to 38, the following amounts shall not
\nbe deducted in computing the income chargeable
\nunder the head “Profits and gains of business or
\nprofession”, –\n<\/p>\n
(b) in the case of any firm assessable as such, –\n<\/p>\n
(iv) any payment of interest to any partner which is
\nauthorized by, and is in accordance with, the terms
\nof the partnership deed and relates to any period
\nfalling after the date of such partnership deed
\ninsofar as such amount exceeds the amount
\ncalculated at the rate of eighteen per cent simple
\ninterest per annum;”\n<\/p>\n
ISSUE\n<\/p>\n
13.\tWhether the claim for special deduction made by the
\nassessee exclusively came only under Section 40(b)(iv) and
\nthat it never came under Section 36(1)(iii) of the 1961 Act as
\nargued on behalf of the assessee?\n<\/p>\n
Legal Position Explained\n<\/p>\n
14.\tBefore enactment of FA 1992, broadly speaking, payment
\nof interest by the firm to any partner of the firm constituted
\nBusiness Disallowance per se.  After FA 1992, Section 40(b)(iv)
\nof the 1961 Act places limitations on the deductions under
\nSections 30 to 38.  Prior to FA 1992, payment of interest to the
\npartner was an item of Business Disallowance.  However, after
\nFA 1992 the said Section 40(b) puts limitations on the
\ndeductions under Sections 30 to 38 from which it follows that
\nSection 40 is not a stand-alone section.  Section 40, before
\nand after FA 1992, has remained the same in the sense that it
\nbegins with a non-obstante clause.  It starts with the words
\n“Notwithstanding anything to the contrary in Sections 30 to
\n38” which shows that even if an expenditure or allowance
\ncomes within the purview of Sections 30 to 38 of the 1961, the
\nassessee could lose the benefit of deduction if the case falls
\nunder Section 40.  In other words, every assessee including a
\nfirm has to establish, in the first instance, its right to claim
\ndeduction under one of the sections between Sections 30 to 38
\nand in the case of the firm if it claims special deduction it has
\nalso to prove that it is not disentitled to claim deduction by
\nreason of applicability of Section 40(b)(iv).  Therefore, in the
\npresent case, the assessee was required to establish in the
\nfirst instance that it was entitled to claim deduction under
\nSection 36(1)(iii) and that it was not disentitled to claim such
\ndeduction on account of applicability of Section 40(b)(iv).  It is
\nimportant to note that Section 36(1) refers to Other
\nDeductions whereas Section 40 comes under the heading
\nAmounts not Deductible.  Therefore, Sections 30 to 38 are
\nOther Deductions whereas Section 40 is a limitation on that
\ndeduction.  It is important to note that Section 28 to 43C
\nessentially deal with Business Income.  Sections 30 to 38 deal
\nwith Deductions.  Sections 40A and 43B deal with Business
\nDisallowances.  Keeping in mind the said scheme the position
\nis that Sections 30 to 38 are deductions which are limited by
\nSection 40.  Therefore, even if an assessee is entitled to
\ndeduction under Section 36(1)(iii), the assessee(firm) will not
\nbe entitled to claim deduction for interest payment exceeding
\n18\/12% per se.  This is because Section 40(b)(iv) puts a
\nlimitation on the amount of deduction under Section 36(1)(iii).\n<\/p>\n
15.\tIt is vehemently urged on behalf of the assessee that
\npartner’s capital is not a loan or borrowing in the hand of a
\nfirm.  According to the assessee, Section 40(b)(iv) applies to
\npartner’s capital whereas Section 36(1)(iii) applies to
\nloan\/borrowing.  Conceptually, the position may be correct
\nbut we are concerned with the scheme of Chapter IV-D.  After
\nthe enactment of FA 1992, Section 40(b)(iv) was brought to the
\nstatute book not only to avoid double taxation but also to
\nbring on par different assesses in the matter of assessment.
\nTherefore, the assessee-firm, in the present case, was required
\nto prove that it was entitled to claim deduction for payment of
\ninterest on capital borrowed under Section 36(1)(iii) and that it
\nwas not disentitled under Section 40(b)(iv).  There is one more
\nway of answering the above contention.  Section 36(1)(iii) and
\nSection 40(b)(iv) both deal with payment of interest by the firm
\nfor which deduction could be claimed, therefore, keeping in
\nmind the scheme of Chapter IV-D every assessee who claims
\ndeduction under Sections 30 to 38 is also requires to establish
\nthat it is not disentitled under Section 40.  It is in this respect
\nthat we have stated that the object of Section 40 is to put
\nlimitation on the amount of deduction which the assessee is
\nentitled to under Sections 30 to 38.  In our view, Section 40 is
\na corollary to Sections 30 to 38 and, therefore, Section 40 is
\nnot a stand-alone section.\n<\/p>\n
Application of the 1961 Act to the facts of this case\n<\/p>\n
16.\tAs stated above, in this batch of civil appeals we are
\nconcerned with the Assessment Years 1993-94, 1994-95,
\n1995-96, 1996-97 and 1997-98.  At this stage, it may be
\nmentioned that as far back as in August\/September 1991
\nassessee herein had given interest free advances to its sister
\nconcerns.  These advances stood reduced over a period, till AY
\n1997-98.  Each year the balances stood reduced.  Further,
\nvide Order dt.3.1.03 the Tribunal held, for AY 1992-93, that
\nthe assessee had given interest free loans from its Own Funds
\nand not from interest bearing loans taken by the firm from
\nthird parties and consequently the assessee was entitled to
\nclaim deduction under 36(1)(iii).  In other words, the Tribunal
\nheld that loans were given for business purposes.  Similarly,
\nfor AY 1993-94, the Tribunal had taken the view that the said
\nloans given to the firm’s sister concerns were for business
\npurposes.  Accordingly, the Tribunal had deleted the
\ndisallowances during the AYs 1992-93 and 1993-94.  It is
\nequally true that for the AY 1994-95 the Tribunal took a
\ncontrary view in view of change in law brought about by
\nFinance Act 1992.  Prior to 1.4.93 payment of interest to the
\npartner had to be added back to the assessable income of the
\nfirm whereas after Finance Act 1992 such payment became an
\nitem of deduction for computing the assessable income of the
\nfirm and it became part of the business income of the partner.
\nIn view of this change of law, the Tribunal disallowed payment
\nof the interest in the present case for AYs 1994-95, 1995-96,
\n1996-97 and 1997-98.  However, the point which has been left
\nout from consideration is that the loans which were given in
\nAugust\/September 1991 to the sister concerns got wiped out
\nonly in AY 1997-98.  As stated above, for AY 1992-93 and AY
\n1993-94, the Tribunal held that the loans given to the sister
\nconcerns were out of the firm’s Funds and that they were
\nadvanced for business purposes.  Once it is found that the
\nloans granted in August\/September 1991 continued upto AY
\n1997-98 and that the said loans were advanced for business
\npurposes and that interest paid thereon did not exceed
\n18\/12% per annum, the assessee was entitled to deductions
\nunder Section 36(1)(iii) read with Section 40(b)(iv) of the 1961
\nAct.\n<\/p>\n
17.\tOne aspect needs to be mentioned during the AY 1995-
\n96, apart from the loan given in August\/September 1991, the
\nassessee advanced interest free loan to its sister concern
\namounting to Rs.5 lacs.  According to the Tribunal, there was
\nnothing on record to show that the loans were given to the
\nsister concern by the assessee-firm out of its Own Funds and,
\ntherefore, it was not entitled to claim deduction under Section
\n36(1)(iii).  This finding is erroneous.  The Opening Balance as
\non 1.4.94 was Rs.1.91 crores whereas the loan given to the
\nsister concern was a small amount of Rs.5 lacs.  In our view,
\nthe profits earned by the assessee during the relevant year
\nwere sufficient to cover the impugned loan of Rs.5 lacs.\n<\/p>\n
18.\tBefore concluding, we may mention that the importance
\nof the judgment is the clarification which we were required to
\ngive in the context of deductions under Sections 30 to 38 to be
\nread with the limitation prescribed under Section 40.  Since
\nthere was some confusion with regard to the status of Section
\n40, particularly, after enactment of Finance Act 1992, we have
\nexplained the law in the context of deductions under Chapter
\nIV-D of the 1961 Act.  We have accepted the submissions
\nadvanced by the learned Addl. Solicitor General in that regard.
\nHowever, the assessee succeeds in this batch of civil appeals
\non the peculiar facts of this case.\n<\/p>\n
19.\tAccordingly, the impugned judgments of the High Court
\nare set aside and the civil appeals preferred by the assessee
\nstand allowed with no order as to costs.<\/p>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Munjal Sales Corporation vs Commissioner Of Income … on 19 February, 2008 Author: Kapadia Bench: S.H. Kapadia, B. Sudershan Reddy CASE NO.: Appeal (civil) 1378 of 2008 PETITIONER: Munjal Sales Corporation RESPONDENT: Commissioner of Income Tax,Ludhiana & Anr DATE OF JUDGMENT: 19\/02\/2008 BENCH: S.H. Kapadia & B. Sudershan Reddy JUDGMENT: J […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-115371","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nMunjal Sales Corporation vs Commissioner Of Income ... on 19 February, 2008 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/munjal-sales-corporation-vs-commissioner-of-income-on-19-february-2008\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Munjal Sales Corporation vs Commissioner Of Income ... on 19 February, 2008 - 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