M-S. MUNJAL SALES CORPORATION v. COMMISSIONER OF INCOME TAX, LUDHIANA AND ANR

Citation: [2008] 2 S.C.R. 1169

Court: Supreme Court of India

Bench: S.H. KAPADIA, B. SUDERSHAN REDDY

Case summary

M-S. MUNJAL SALES CORPORATION v. COMMISSIONER OF INCOME TAX, LUDHIANA AND ANR.pdf

Judgment text

[2008] 2 S. C. R. 1169 j- MIS. MUNJAL SALES CORPORATION v. COMMISSIONER OF INCOME TAX, LUDHIANA AND ANR. (Civil Appeal No. 1378 of 2008) FEBRUARY 19, 2008 [S. H. KAPADIA AND B. SUDERSHAN REDDY, JJ. ] y . , Income Tax Act, 1961: ss. 36(i)(iii) and 40(b)(iv) - Deduction of interest under s. 36(i)(iii) and applicability of s. 40(b)(iv) - Held: s. 40(b) is not a stand alone section - It operates as a limitation to deduction under ss. 30 to 38 - , Assessee including a firm is required to establish in the first instance, its right to claim deduction under one section between . ; ss. 30 to 38 and in case of firm if it claims special deduction it has also to prove that it is not disentitled to claim deduction by reason of applicability of s. 40(b)(iv) - Object of s. 40 is to , put limitation on amount of deduction which the assessee. is ' entitled to under ss. 30 to 38 - On facts, loans granted by assessee-firm in August 1991 which continued uptoA.

Y 1997- 98 - Said Joans were advanced for business purpose and interest paid thereon did not exceed 18112% p. a. -Assessee entitled to deductions unders. 36(i)(iii) r. w. s. 40(b)(iv) - Finance Act, 1992. In August/September 1991, appellant-assessee 'f granted interest free advances to its sister concerns which . were disallowed by the Department on the ground that "' the said advances were not given from the firm's Own Funds but from interest bearing loans taken by the assessee-firm from third parties. Accordingly, the assessee's claim for deduction under s. 36(1 )(iii) of Income 'G Tax Act, 1961 was disallowed by the Department for the -- ,.. AY 1992-93. However, by order dated ~. 1. 03, the Tribunal deleted the disallowance saying that the assessee had given such advance from its Own Funds. In the next AY 1993-94, the same situation took place. Once again by .... . order dated 1. 1. 03, the Tribunal deleted disallowance for ' AY 1993-94.

The Department accepted the orders passed by the Tribunal in favour of the assessee for both the AYs 1992-93 and 1993-94. The interest free advance given to the sister concern was repaid on year to year basis. The said advance/loan got finally repaid in AY 1997-98. During the AY 1994-95, no further advances were made by the "f ' assessee-firm in favour of its concerns. However, during / AY 1995-96, a small interest free loan of Rs. 5 lacs was advanced by the assessee-firm to its sister concern as during the year in question the assessee had profits of Rs. 1. 91 crores. For the AY 1994-95, Department disallowed the claim for deduction under s. 40(b)(iv) saying that in this case there was diversion of funds by raising of interest free loans. The AO did not accept the submission of the assessee that advances made by the assessee were out of income of the firm.

According to the AO, the said ~ interest free advances to sister concerns were out of monies borrowed by the firm from third parties on payment of interest, hence the assessee was not entitled to deduction under s. 40(b) of the 1961 Act. This view was confirmed by the Tribunal. For the AYs 1995-96 and 1996- J· 97, Tribunal held that during the said years, no interest free advances to sister concerns were made and, therefore, there was no nexus between "interest bearing E loans" taken and "interest free advances". However, the ,,.. . Tribunal found that there was no material to show that advances were made to sister concerns out of the fir. m's own income and, therefore, the assessee was not entitled to deduction under s. 40(b)(iv) of the 1961 Act. The question for consideration in these appeals is whether s.

40(b) of the 1961 Act is a stand-alone section -- - from consideration is that the loans which were given in August/ September 1991 to the sister concerns got wiped out only in AY 1997-98. As stated above, for AY 1992-93 and AY 1993-94, the • Tribunal held that the loans given to the sister concerns were out of the firm's Funds and that they were advanced for business purposes. Once it is found that the loans granted in August/ September 1991 continued upto AY 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12% per annum, the assessee was entitled to deductions under Section 36(1 )(iii) read with Section 40(b)(iv) of the 1961 Act. 17. One aspect needs to be mentioned during theAY 1995- 96, apart from the loan given in August/September 1991, the assessee advanced interest free loan to its sister concern amounting to Rs. 5 lacs.

According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee-firm out of its Own Funds and, therefore, it was not entitled to claim deduction under Section 36(1 )(iii). This finding is erroneous: The Opening Balance as on 1. 4. 94 was Rs. 1. 91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lacs. In our view, the profits earned by the assessee during the relevant year were sufficient t~ cover the impugned loan of Rs. 5 lacs. 18. Before concluding, we may mention that the importance of the judgment is the clarification which we were required to give in the context of deductions under Sections 30 to 38 to be read with the limitation prescribed under Section 40. Since there was some confusion with regard to the status of Section 40, particularly, after enactment of Finance Act 1992, we have explained the law in the context of deductions under ,.. Chapter IV-D of the 1961 Act.

We have accepted the submissions advanced by the learned Addi. Solicitor General in that regard. However, the assessee succeeds in this batch of civil appeals on the peculiar facts of this case. 19. Accordingly, the impugned judgments of the High Court are set aside and the civil appeals preferred by the assessee stand allowed with no order as to costs. D. G. Appeals allowed.