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AMICUS AI
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • D.K Seth
  • Maharaj Sinha, JJ.
Acts
  • section 36(1)(iii).Scope of section 36(1)(iii):6. Section 36
  • provision of section 36(1)(iii) of the Income-tax Act
  • section 36(1)(iii) of the Income-tax Act, 1961.
  • sub-section (1). Clause (iii) of sub-section (1)
  • section 2(41) of the Income-tax Act, 1961.
  • section 36(1)(iii).
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Cites
Cited by
Citation Codes
Equivalent Citations
citation codes
Case Number
Judges
  • D.K Seth
  • Maharaj Sinha, JJ.
Acts
  • section 36(1)(iii).Scope of section 36(1)(iii):6. Section 36
  • provision of section 36(1)(iii) of the Income-tax Act
  • section 36(1)(iii) of the Income-tax Act, 1961.
  • sub-section (1). Clause (iii) of sub-section (1)
  • section 2(41) of the Income-tax Act, 1961.
  • section 36(1)(iii).
See more information ...
Smart Summary

Structured Summary of the Opinion (D.K. Seth, J.)

Factual and Procedural Background

The dispute concerns interest-free advances made by the assessee (a company) to M/s. Malabar Cashewnut and Allied Products (MCAP). On the date when the assessee's packing credit facility from Syndicate Bank was enhanced (from Rs. 25 lakhs to Rs. 175 lakhs), the assessee advanced Rs. 165 lakhs to MCAP by cheque. The Assessing Officer contended that MCAP was a firm of relatives of the assessee's directors and treated the advances as not made for business purposes; the Assessing Officer also observed that MCAP's accounts showed insolvency and that the advances were made without security or stipulation for interest, while the assessee paid interest to the bank on the packing credit.

The Commissioner (Appeals) and the Income-tax Appellate Tribunal (the Tribunal) reviewed these findings. Both the Commissioner (Appeals) and the Tribunal found that a substantial portion of the assessee's cashew-nut kernel exports for the relevant period was supplied by MCAP (figures cited include Rs. 91.45 lakhs out of total cashew-nut export of Rs. 120.75 lakhs for one period — about 70.45%), and for subsequent assessment years they found large proportions of supplies from MCAP (detailed in the opinion). The Tribunal concluded that the advances were in the regular course of business and amounted to advances for business purposes.

The present appeal challenges the Tribunal's conclusion that the interest-free advances were made for the purpose of business and therefore entitled to the benefit of section 36(1)(iii) of the Income-tax Act, 1961. The High Court was called upon to answer whether the Tribunal was justified in law in so holding, particularly given the asserted non-fulfillment of conditions under section 36(1)(iii).

Legal Issues Presented

  1. Whether, on the facts and circumstances, the Income-tax Appellate Tribunal was justified in law in holding that the interest-free advances were given for the purpose of business and thereby eligible under section 36(1)(iii) of the Income-tax Act, notwithstanding the contention that conditions of that provision were not fulfilled.
  2. Whether the recipient firm (MCAP) was a "firm of relatives" of the assessee's directors within the meaning of section 2(41) of the Income-tax Act, 1961, which would affect the characterization of the advances.
  3. Whether the funds advanced were actually amounts siphoned from capital borrowed (packing credit) or whether they were advanced out of the assessee's own/mixed account (raising presumption regarding source of payment).

Arguments of the Parties

Appellant's Arguments (as recorded in the opinion)

  • It was contended that the recipient firm was effectively a firm of relatives of the assessee's directors, which could affect the treatment of the advances.
  • The advance of Rs. 165 lakhs was made on the same date as the enhancement of the packing credit facility; the capital borrowed from Syndicate Bank was allegedly "siphoned" to MCAP as an interest-free advance.
  • MCAP's own accounts showed insolvency (debit balances in partners' capital: Rs. 142 lakhs as at December 31, 1982, and Rs. 119 lakhs as at December 31, 1983), and MCAP had not supplied the raw materials it claimed to have supplied; instead, MCAP returned the advance in two instalments (Rs. 123.8 lakhs on June 11, 1984, and Rs. 41.2 lakhs in September 1984).
  • The advances were made without security and without stipulation for payment of interest, whereas the assessee paid 12% interest on the packing credit — therefore, the advance was not for the purpose of business but for extraneous reasons and so did not meet the ingredients of section 36(1)(iii).
  • Reliance was placed on precedents (for example, Commissioner Of Income-Tax v. Orissa Cement Ltd. and Motor General Finance Ltd.) to argue that the assessee must place requisite materials to prove a bona fide loan to a sister-concern or related entity.

Respondent's / Assessee's Arguments (as recorded in the opinion)

  • The assessee (through its counsel Dr. Pal as recorded) maintained that the advance was made for the purpose of obtaining supplies of raw materials (cashew-nut kernels) necessary for its export business, and that material on record showed MCAP supplied a substantial portion of the assessee's requirements (e.g., Rs. 91.45 lakhs of supplies representing about 70.45% of exports in a stated period).
  • The recorded facts showed that the advance was used to secure supplies over a period (a regular course of business), and therefore was made in the course of or incidental to the assessee's business.
  • As to the contention that the advance derived from bank borrowing, the assessee relied on accounting facts showing that sale proceeds were deposited in a mixed account (total sale proceeds for the year at Rs. 114.08 crores) and that there were sufficient funds in the mixed account, supporting the presumption that the advance was made from the assessee's own funds rather than capital borrowed from the bank.
  • The assessee relied on a body of case law (several Calcutta High Court authorities) for the proposition that payments made from a mixed or overdraft account may be presumed to be from own funds when facts indicate sufficient internal funds.

Table of Precedents Cited

Precedent Rule or Principle Cited For Application by the Court
Tetron Commercial Limited v. Commissioner of Income Tax, W.B.-IV, Calcutta [2003] 261 ITR 422 (Cal) To avail benefit under section 36(1)(iii) the assessee must show the borrowing was for the purpose of the assessee's business; utilization may be for capital or revenue; it suffices if it relates to any stage of the business activity. The court applied this ratio to assess whether the advance to MCAP was borrowed for the purpose of the assessee's business, noting that it is the nature of the expenditure that matters.
Consolidated Fibres and Chemicals Ltd. v. CIT [2005] 273 ITR 353 (Cal) Purpose of business satisfied if advance is made in the course of the assessee's business; taxability depends on point of accrual and not solely on destination or manner of utilization. The court used this principle to evaluate whether the advance was made in the course of business.
Commissioner Of Income-Tax v. Orissa Cement Ltd. [2002] 258 ITR 365 (Delhi) Relied upon by appellant; referenced as part of authorities stressing the assessee's burden to prove bona fides of loans to related or sister concerns. The court observed that, given the materials placed by the assessee showing substantial supplies from MCAP, this authority did not assist the appellant on the facts of the present case.
CIT v. Motor General Finance Ltd. [2002] 254 ITR 449 (Delhi) Holds it is for the assessee to prove that a bona fide loan has been granted to a sister-concern and to place requisite material on record. The court noted this principle but found the assessee had placed materials (supply figures) and therefore the precedent did not help the appellant here.
Commissioner Of Income-Tax v. H.R. Sugar Factory [1991] 187 ITR 363 (All) On facts, advances made to directors and shareholders at low interest were held not to be for the purpose of the assessee's business. The court observed this decision does not establish a general principle that helps the appellant given the differing facts of the present case.
CIT v. Gillanders Arbuthnot and Co. Ltd. [1982] 138 ITR 763 (Cal) and [1992] 195 ITR 331 (Cal) Money lent by a holding/management company to subsidiaries or related managed companies may be lent in the course of its business if financing or management of subsidiaries is incidental to its business. The court relied on these authorities (as advanced by Dr. Pal) to support the view that advances made to secure supplies and consistent business operations may be advances in the course of business.
Commissioner Of Income-Tax, Nagpur v. Gwalior Sugar Company Ltd. [1984] 150 ITR 320 (MP) A similar view that financing related companies can be incidental to the business and therefore advances may be in the course of business. Used to bolster the proposition that advances incidental to the business can qualify under section 36(1)(iii).
CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC) “For the purpose of the business” is wider than “for the purpose of earning profits”; it includes day-to-day running, rationalization, preservation of the business, protection of assets, statutory dues, and acts incidental to carrying on business. The court applied this broad meaning to conclude the advances could be for the purpose of business when used to secure supplies critical for export operations.
Woolcombers Of India Ltd. v. CIT (Central), Calcutta [1982] 134 ITR 219 (Cal); Commissioner Of Income-Tax v. Samuel Osborn (India) Ltd. [1982] 135 ITR 699 (Cal); Indian Explosives Ltd. v. CIT [1984] 147 ITR 392 (Cal); Alkali & Chemical Corporation of India Ltd. v. CIT [1986] 161 ITR 820 (Cal) These Calcutta High Court decisions support a presumption that payments made from a mixed or overdraft account where sale proceeds are deposited may be treated as payments from the assessee's own funds (even if the overdraft shows a debit balance), when facts indicate sufficient internal funds. The court relied on these authorities to support the Tribunal's presumption that the advance was made from the assessee's own/mixed account and not by siphoning off bank-borrowed capital.
East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 (SC) The Supreme Court considered the Calcutta High Court authorities on mixed accounts and made observations; it did not lay down a new principle and decided on another technical ground in that case. The High Court noted the Supreme Court's treatment of the Calcutta authorities but observed that the apex court did not lay down a general principle; the present court nonetheless relied on the Calcutta authorities as applied to the present facts.

Court's Reasoning and Analysis

The court's analysis proceeded in structured steps:

  1. Two-aspect framing: The court treated the dispute as having two central aspects — (a) whether MCAP was a firm of relatives of the assessee's directors and (b) whether the interest-free advances were made for the purpose of the assessee's business so as to attract deduction under section 36(1)(iii). The court observed that if MCAP were not a firm of relatives, the question would be simpler.
  2. Definition of "relative" (section 2(41)): The Assessing Officer's finding that the firm was constituted by relatives was examined against the statutory definition in section 2(41). The court found that the relationships asserted did not fall within that definition, concluding that the firm could not "by any stretch of imagination" be said to be a firm of relatives of any of the directors.
  3. Scope of section 36(1)(iii): The court identified three ingredients to claim deduction under section 36(1)(iii): (i) the borrowing is capital borrowed; (ii) such capital was borrowed for the purpose of business; and (iii) interest is payable on such capital. In the present case, interest paid and character as capital were not disputed; the contested ingredient was whether the borrowing was for the purpose of business.
  4. Application of precedent on "purpose of business": The court relied on Tetron and Consolidated Fibres authorities to explain that the requirement is that the borrowing must be for the purpose of the assessee's business; actual utilization can be for capital or revenue and may relate to any stage of the business—even an isolated adventure—so the decisive inquiry is the nature and purpose of the borrowing at the relevant point.
  5. Concurrent findings of fact on supplies from MCAP: The Commissioner (Appeals) and the Tribunal had found on the available materials that MCAP supplied a substantial portion of the assessee's cashew-kernel exports (for example, Rs. 91.45 lakhs out of Rs. 120.75 lakhs in one period, approximately 70.45%). The court treated these as concurrent findings of fact and observed that the Department had not produced material to contradict those findings nor had it filed cross-objections/appeals against those findings before the Tribunal. Absent any material to show perversity, the court would not interfere with concurrent factual findings.
  6. Conclusion as to purpose: Given that a large portion of raw materials was supplied by MCAP and the finding that advances were made to secure such supplies, the court held that the advances were made for the purpose of the business and not for extraneous considerations.
  7. Mixed account and presumption as to source of payment: The court examined the contention that the advances were funded by newly-borrowed packing credit. It accepted the Tribunal's and Commissioner (Appeals)' finding that sale proceeds were deposited in a mixed account (total sale proceeds of Rs. 114.08 crores for the relevant year) and that there were sufficient funds in that mixed account to justify the advance. Relying on a line of Calcutta High Court authorities (and noting the Supreme Court's consideration of them in East India Pharmaceutical), the court endorsed the presumption that payments made from the mixed account, where sufficient funds existed, can be presumed to be from the assessee's own funds rather than by siphoning bank-borrowed capital.
  8. Subsequent assessment years: For later years (1986-87 to 1989-90) the Tribunal had specific quantitative findings showing that MCAP supplied the bulk of the assessee's exports in those years (figures provided for each year). The Tribunal concluded there was a regular course of business between the parties and that advances were made in the regular course of business for commercial expedience. The court found no perversity in those findings.
  9. Overall synthesis: Combining (a) the statutory meaning of "relative" (section 2(41)) which negated the "firm of relatives" contention, (b) the concurrent factual findings showing substantial supplies by MCAP, (c) the legal principle that advances made in the course or incidental to business satisfy section 36(1)(iii), and (d) the presumption in favor of internal/mixed account funds where supported by facts, the court concluded the Tribunal and Commissioner (Appeals) were correct in holding that the advances qualified for the benefit of section 36(1)(iii).

Holding and Implications

Holding:

The court's core ruling can be summarized as: The appeal is dismissed; the Tribunal and Commissioner (Appeals) were correct in holding that the interest-free advances to MCAP were made for the purpose of the assessee's business and thus eligible under section 36(1)(iii) for the assessment years concerned.

Implications / Consequences:

  • Direct effect on the parties: The appeal by the Department fails; the assessments (for the years under dispute) remain in favor of the assessee to the extent that the advances qualify under section 36(1)(iii) as held by the Tribunal and Commissioner (Appeals).
  • Presumption as to source of funds: The court upheld the Tribunal's presumption that the advances were made from the assessee's mixed/own funds (on the facts that sale proceeds were deposited in a mixed account and sufficient funds existed), and not by siphoning newly-borrowed bank capital.
  • Procedural notes from the order: The Department was directed to check that separate court fee had been paid for each assessment year; there was no order as to costs; parties may act on a signed xerox copy of the dictated order on the usual undertaking.
  • Broader precedent: The opinion does not purport to lay down a novel principle of law; it primarily applies established authorities to the facts. The court did not indicate that it was creating new precedent beyond affirming the application of existing principles to the facts before it.

Disposition / Order

The court answered the question posed in the affirmative for the respective assessment years involved and dismissed the appeal. There will be no order as to costs. The Department should verify that separate court fees were paid for each assessment year.

Note: This summary is strictly based on the content of the provided opinion and does not add or infer information beyond that opinion.

Show full summary ...

    Commissioner Of Income-Tax v. Britannia Industries Ltd.

    D.K Seth, J.:— In this case, the question that is to be answered is:

    “Whether, on the facts and circumstances of the case, the Income-tax Appellate Tribunal was justified in law in holding that the interest-free advances were given for the purpose of business ignoring the fact that the condition as laid down under the provision of section 36(1)(iii) of the Income-tax Act were not fulfilled?”

    2. In the facts and circumstances of the case, this question has two aspects. One is related to the transaction between the assessee and the firm alleged to be a firm of relatives, which might have some impact on the transaction. In case we find that it is not a firm of relatives, the answer would be simple and would not assume a different complexion, as it would have if the firm is found to be a firm of relatives. The other question requires to be examined in this context is that whether this interest-free advances were given for the purpose of business entitling the assessee to the benefit of section 36(1)(iii) of the Income-tax Act, 1961. We may now examine these questions as hereafter.

    Whether the recipient of interest-free loan is a firm of relatives:

    3. The Assessing Officer had found that the firm to which interest-free loan was advanced was constituted by the relatives of the directors of the asses-see. But the relatives as has been explained or spelt out by the Assessing Officer shows that this relations did not come within the definition of relatives as defined in section 2(41) of the Income-tax Act, 1961. Therefore, the first point that has been urged by Mr. Banerjee, that the firm with which the assessee was dealing was a firm of the relatives, cannot be sustained.

    4. Inasmuch as section 2(41) defines “relative” in relation to an individual to mean the husband, wife, brother or sister or any lineal ascendant or descendant of that individual. In this case the relation was sought to be related between the individual office-bearers of the assessee and the firm. Having regard to this definition as mentioned above, the firm can by no stretch of imagination be said to be a firm of relatives of any of the directors of the assessee.

    Submission on behalf of the appellant:

    5. The next point that has been urged by Mr. Banerjee is that the assessee had a packing credit sanctioned by Syndicate Bank, Nariman Point, Bombay, to the extent of Rs. 25 lakhs. This was enhanced to Rs. 175 lakhs. On the very date of enhancement of the packing credit, a sum of Rs. 165 lakhs was advanced to M/s. Malabar Cashewnut and Allied Products (MCAP) through a cheque drawn on Syndicate Bank, Nariman Point. Therefore, according to Mr. Banerjee, the capital borrowed from the Syndicate Bank was siphoned to MCAP as interest-free advance. He has pointed out from the assessment order that though it was pointed out by the assessee that the advance was made to MCAP for supplying raw materials, namely, cashew-nut to the assessee, but in fact it had not supplied any raw material. On the other hand, it had returned the amount in two instalments, namely, Rs. 123.8 lakhs on June 11, 1984, and the balance of Rs. 41.2 lakhs in September, 1984. At the same time, he pointed out to the findings of the Assessing Officer that the annual accounts of MCAP for the year ended December 31, 1982, revealed that the firm MCAP was insolvent and had a debit balance in the partners' capital for a sum of Rs. 142 lakhs and on December 31, 1983, the debit balance of Rs. 119 lakhs. He further pointed out that the advance was made to MCAP without any security and without any stipulation for payment of interest. Whereas the assessee had paid 12 per cent, interest on the packing credit to Syndicate Bank. On this ground Mr. Banerjee wanted to emphasize that this advance was not made for business purpose but for some extraneous reasons and, therefore, it could not satisfy the ingredients of section 36(1)(iii).

    Scope of section 36(1)(iii):

    6. Section 36 provides for deductions as enumerated in sub-section (1). Clause (iii) of sub-section (1) permits deduction of the amount of interest paid by an assessee in respect of capital borrowed for the purposes of the business or profession. Therefore, we need to examine whether the interest payable on the capital borrowed as mentioned above would be eligible for deduction under section 36(1)(iii). The eligibility depends on three factors, viz., one is that the borrowing is a capital borrowed and the second that such capital was borrowed for the purpose of business and the third that interest is payable on such capital borrowed. These three ingredients are to be satisfied in order to claim deduction under section 36(1)(iii).

    7. In this case that the interest is paid on the borrowing is not in dispute. That the borrowing was a capital is also not in dispute. What is disputed in this case is that this borrowed capital was not utilized for the purpose of the assessee's business. Learned counsel for the Department, Mr. Shibdas Banerjee, senior counsel, pointed out that this borrowing was siphoned off to the firm MCAP. Therefore, it is not a capital borrowed for the purpose of the business. According to him, it was borrowed for the purpose of helping the firm. It was not utilized for the purpose of the business.

    8. We do not find that the question is so simple as has been sought to be presented by Mr. Banerjee in order to ascertain the characteristics of the borrowing in relation to the business of the assessee as appears from the facts disclosed in the present case. Admittedly, the borrowing was made for the purpose of extending the packing credit. The amount of packing credit is definitely a capital borrowed. But the question is as to whether this capital was utilized for the purpose of the business or not. For this purpose, we may examine the scope of section 36(1)(iii).

    9. We had occasion to deal with this question in Tetron Commercial Limited v. Commissioner Of Income Tax, W.B-Iv, Calcutta, [2003]261 ITR 422 (Cal); [2003] 4 AIC 696 (Cal) (DB). In the said decision, it was held that in order to avail of the benefit under section 36(1)(iii), the assessee has to show that it was borrowed for the purpose of business of the assessee. It is immaterial whether it is utilized for capital expenditure or revenue expenditure. It is permissible if it relates to any stage of the business activity, even if it is an isolated adventure. It is the nature of the expenditure that requires determination. Applying the above ratio, we may examine the facts and circumstances of the case whether the assessee could claim the benefit of deduction under section 36(1)(iii) as hereafter. A similar question in relation to deduction under section 36(1)(iii) came up in Consolidated Fibres and Chemicals Ltd. v. CIT, [2005]273 ITR 353 (Cal); [2005] 26 AIC 364 (Cal) (DB). In the said decision, it was held that the purpose of the business would be satisfied if the advancement of the money is made in the course of the assessee's business. It is to be examined in the facts discussed whether this advance made to the firm MCAP by the assessee was made in the course of the business or not. The taxability of the income is not dependent upon its destination or manner of its utilization. It has to be seen at the point of accrual. It is not necessary that there should be a direct connection, but still then it has to be seen whether the amount was borrowed for the purpose of business.

    Whether the advance was made for business purpose within the meaning of section 36(1)(iii):

    10. On this point, the findings of the learned Commissioner (Appeals) and the learned Tribunal are otherwise. The Commissioner (Appeals) found that the finding by the Assessing Officer was totally incorrect (paper book p. 55). Dr. Pal pointed out from para. 6 of the decision by the Commissioner (Appeals) that out of the interest-free advance of Rs. 165 lakhs, MCAP supplied cashew-nut kernels to the assessee-company between the period December, 1983, and June, 1984 amounting to Rs. 91.45 lakhs out of the total cashew-nut export of the assessee of Rs. 120.75 lakhs for the period ended June 30, 1984, which accounted for 70.45 per cent, of the total cashew-nut kernels exported by the assessee in that year. At para. 9 (paper book page 57) the Commissioner (Appeals) found that the Assessing Officer had misstated the facts in his order. This finding was affirmed by the learned Tribunal at para. 7 of its order where it had found that out of the total export of the cashew-nut kernels of Rs. 129 lakhs in the assessment year 1985-86, an extent of Rs. 91 lakhs was supplied by MCAP to whom advance was made by the assessee. Thus, the finding, which is a finding of fact, becomes a concurrent finding of fact concluded by the Commissioner (Appeals) and the learned Tribunal.

    11. Mr. Banerjee attempts to point out that this concurrent finding is based on no materials and as such is perverse. But Mr. Banerjee has not been able to show from the record that there is any material to contradict the finding of the Commissioner (Appeals) and those of the learned Tribunal. The Department has also not filed any cross-objection nor appeal against this particular finding before the learned Tribunal. On the other hand, Dr. Pal points out that no such ground has since been taken even in this appeal. Admittedly, the order of the Assessing Officer merges in those of the Commissioner (Appeals) and those of the learned Tribunal and it is the decision of the last court that becomes the ultimate finding of facts and in this case the findings being a concurrent finding of fact, we do not think, in the absence of any material to hold the finding as perverse, that this court can interfere with such findings.

    12. As soon as it appears that the advance was made for obtaining supply of raw materials and out of which certain portion of raw materials representing almost 70 per cent, of the total advance is made, in that event, it cannot but be held that the advance was made for the purpose of the business and the advance cannot be said to have been made for any other consideration extraneous or otherwise.

    13. Mr. Banerjee had relied on the decision in Commissioner Of Income-Tax v. Orissa Cement Ltd., [2002]258 ITR 365 (Delhi) to support his contention. In the said decision, reliance was placed on CIT v. Motor General Finance Ltd., [2002]254 ITR 449 (Delhi), where it was held that it was for the assessee to prove that the bona fide loan has been granted in favour of a sister-concern and it is the assessee's duty to place the requisite material on record. In the present case, both the learned Commissioner (Appeals) and the learned Tribunal had found on the basis of the materials placed by the assessee that 70 per cent, of the total export was met by the supply of cashew-nuts by MCAP. Therefore, this decision does not help Mr. Banerjee, having regard to the facts and circumstances of the case. Mr. Banerjee also relied upon Commissioner Of Income-Tax v. H.R Sugar Factory., [1991]187 ITR 363 (All). There it was found that the sugar factory had advanced various sums to its directors and shareholders at a very low interest without being financing company but engaged in the manufacture of sugar and on facts it was held that these advances were made not for the purpose of the business of the assessee. Thus, this decision has not laid down any principle, which can support Mr. Banerjee in his contention.

    14. On the other hand, Dr. Pal relied on the decision in CIT v. Gillanders Arbuthnot and Co. Ltd., [1982]138 ITR 763 (Cal). There it was held that the assessee was engaged in the business as a holding company of financing its subsidiaries and, therefore, the money lent to such subsidiaries was held to be lent and advanced in the course of its business. In the present case, MCAP might be a partnership firm constituted of some near relations outside the purview of the definition of relatives under section 2(41), yet the advance was made for the purpose of its business for exporting cashew kernels in order to secure consistent supply of quality cashew-nuts for export business of the assessee, a fact similar to the facts considered in the said case.

    15. Dr. Pal then relied on CIT v. Gillanders Arbuthnot and Co. Ltd., [1992]195 ITR 331 (Cal). There also the assessee-company had financed one Bur-low and Co. which in turn had financed various other companies managed by Gillanders Arbuthnot and Co. and after Burlow and Co. was taken over by Gillanders Arbuthnot and Co., the balance-sheet of Burlow and Co., the advances given by Gillanders Arbuthnot and Co. and also the loan given to the different subsidiary companies by Burlow and Co. was wiped off. In such circumstances, it was held that the finance was really made by Gillanders Arbuthnot and Co. and that such financing to the managed company was incidental to the business of managing agency. Dr. Pal then relied on the decision in Commissioner Of Income-Tax, Nagpur v. Gwalior Sugar Company Limited., [1984]150 ITR 320 (MP) which had also taken the similar view.

    16. On the facts, if it appears that the advances were made in the course of the business or are incidental to the business, in that event, the same satisfies the ingredients of section 36(1)(iii). In this case, this interest-free loan or advance was given to the MCAP in the course of or incidental to the business of the assessee. The phrase “purpose of business” was explained in the case of CIT v. Malayalam Plantations Ltd., [1964]53 ITR 140 (SC). There it was held that the expression “for the purpose of the business” is wider in scope than the expression “for the purpose of earning profits”. Its range is wide; it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence or for the carrying on of a business; it may comprehend many other acts incidental to the carrying on of the business. However wide the meaning of the expression may be, its limits are implicit in it. The purpose shall be for the purpose of the business, that is to say, the expenditure incurred shall be for the carrying on of the business and the assessee shall incur it in his capacity as a person carrying on the business. If this test is applied in the present case, in that event, we cannot but, in the absence of any material to the contrary, hold that this amount was spent for the purpose of the business.

    Mixed account: Own fund: Presumption:

    17. However, this question would be redundant if, as contended by Dr. Pal, it is held that it was not the sum, which, borrowed as capital, was advanced as interest-free loan to MCAP. Inasmuch as Mr. Banerjee had relied on the making of the advance on the same date on which the packing credit was enhanced from Rs. 0.25 crores to Rs. 1.75 crores by the bank; but from the accounts, it appears, as was found by the learned Tribunal, that the total sale proceeds of the relevant financial year was Rs. 114.08 crores and that the entire sale proceeds used to be deposited in the mixed account and the advance was also granted from the mixed account. Therefore, there were sufficient funds for making advance of Rs. 1.65 crores out of total transaction of Rs. 114.08 crores. If there is surplus and the advance is made out of the mixed fund, in that event, it cannot be said that the amount borrowed as capital from the bank was advanced, in order to deny the benefit of section 36(1)(iii) in the present case. If it is established that the payment was made from the mixed account and the assessee had sufficient funds then it is to be presumed that the payment was made out of the assessee's own fund and that the borrowed capital was not siphoned out.

    18. Dr. Pal relied on other decisions in Woolcombers Of India Ltd. v. Commissioner Of Income-Tax (Central), Calcutta., [1982]134 ITR 219 (Cal) at page 227; Commissioner Of Income-Tax v. Samuel Osborn (India) Ltd., [1982]135 ITR 699 (Cal); Indian Explosives Ltd. v. CIT, [1984]147 ITR 392 (Cal) and Alkali and Chemical Corporation of India Ltd. v. CIT, [1986]161 ITR 820 (Cal) at page 823. In Alkali and Chemical Corporation of India Ltd., [1986]161 ITR 820, this court had considered the decisions in Woolcombers of India Ltd., [1982]134 ITR 219 (Cal); Reckitt and Colman of India Ltd. v. CIT, [1982]135 ITR 698 (Cal) and Indian Explosives Ltd. v. CIT, [1984]147 ITR 392 (Cal). Following the earlier three decisions in Woolcombers of India Ltd., [1982]134 ITR 219 (Cal); Reckitt and Colman of India Ltd., [1982]135 ITR 698 (Cal) and Indian Explosives Ltd., [1984]147 ITR 392 (Cal), this court had held, having regard to the facts and circumstances of the case in Alkali and Chemical Corporation of India Ltd., [1986]161 ITR 820 (Cal) that the entire profits of the assessee during the relevant accounting year were deposited in the overdraft account from which all expenses of the assessee including all account of payments of income-tax were incurred and, therefore, the amount cannot be said to have been spent from the overdraft account. Even if the overdraft account had a debit balance, the same would not make any difference in the presumption. Relying on the earlier three decisions, it was held that there would be a presumption that this amount was paid out of the own fund of the assessee. All these four decisions of the Calcutta High Court were considered by the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT, [1997]224 ITR 627 at page 631 with the observation at p. 632 that there was considerable force in the argument advanced by learned counsel for the appellant. However, the apex court did not lay down any principle and had decided the case on some other technical ground.

    19. Be that as it may, having regard to the principles enunciated in these decisions and having regard to the facts and circumstances of this case and the concurrent findings of the Commissioner (Appeals) and the learned Tribunal, it appears that there were sufficient funds and that the advance was made from mixed account and as such in this case the learned Tribunal and the Commissioner (Appeals) both were right in presuming that the advance was made out of the assessee's own funds.

    Assessment years 1986-87,1987-88,1988-89 and 1989-90:

    20. In respect of the assessment years 1986-87, 1987-88, 1988-89 and 1989-90, the learned Tribunal had found that MCAP to whom the asses-see had made advances had supplied Rs. 19.90 crores of materials out of total export of cashew-nut of Rs. 22.61 crores, Rs. 11.52 crores out of Rs. 13.22 crores, Rs. 16.75 crores out of Rs. 20.86 crores, Rs. 17.95 crores out of Rs. 42.39 crores, respectively. Thus, on the facts, it had found that there was regular course of business between the assessee and the MCAP and the advances were made to MCAP in the regular course of business. In other words, such advances were made in the course of business for commercial expedience for the purpose of business. These findings have not been proved to be perverse.

    21. Therefore, the same principle as enunciated above would apply in respect of these relevant assessment years involved in the respective orders of the learned Tribunal.

    Conclusion:

    22. From the above discussion, we find in relation to each assessment years involved in this appeal that the recipient of interest-free loan was not a firm of relatives; the advance was made for the purpose of business within the meaning of section 36(1)(iii); that there was regular course of business between the assessee and the firm; and that the advances were made to MCAP in the regular course of business; such advances were made in the course of business for commercial expedience and for the purpose of business; the findings arrived at by the learned Tribunal were not perverse; the entire expenditure was made from the mixed account; therefore, there would be a presumption that the amount was made out of the own fund of the assessee and not from the borrowed capital; that there were sufficient funds and that the advances were made from the mixed account. Therefore, the Commissioner (Appeals) and the learned Tribunal both were right in presuming that the advance was made out from the assessee's own fund eligible for the benefit of section 36(1)(iii).

    Order:

    23. As such we find no merit in this appeal. We answer the question in the affirmative in respect of the respective assessment years involved in this appeal.

    24. In the result, the appeal fails and is accordingly hereby dismissed.

    25. It is pointed out that separate court fee has been paid for each of the assessment years, which the Department shall check.

    26. There will, however, be no order as to costs. All parties are to act on a signed xerox copy of this dictated order on the usual undertaking.

    Maharaj Sinha, J.:— I agree.

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    Commissioner Of Income-Tax v. Britannia Industries Ltd.
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