Vildirect: IncomeTax-caselaws-1979-VIL-06-ITAT-IND

1979-VIL-06-ITAT-IND

Equivalent Citation: [1980] 9 TTJ 348 (ITAT [Indore])

Income Tax Appellate Tribunal INDORE

ITA. No. 651 & 652/JP/78-79

Date: 15.11.1979

THE CURIOUS HOUSE (P) LIMITED

INCOME TAX OFFICER

BENCH

D. D. VYAS (J.M.) and P. L. KANOJIA (A.M.)

JUDGMENT

P.L. Kanojia, A.M.-By this consolidated order, we propose to dispose of the two appeals bearing number 664 and 665/JP/78-79, filed by the assessee and the other two appeals, bearing numbers 651 and 652/JP/78-79, filed by the Department, as they involve common contentions.

2. In the two appeals filed by the assessee the common contention pressed by the learned Counsel is that the AAC was not justified in upholding the addition of additional interest amounting to Rs. 8,483 during the Asst. yr. 1976-77 and Rs. 3,883 during the Asst. yr. 1977-78.

3. The facts of the case are that the assessee company advanced certain loans to three of its Directors, namely S/Shri Vardichand, Onkarlal and Narayanlal and charged interest on these advances @12 per cent per annum. The ITO found that the assessee company had obtained loans mainly from an allied concern M/S Parihar & Company, in which the aforesaid Directors were partners @ 15 per cent. The ITO was of the view that by charging a lesser rate of interest from the Directors, the assessee company has given a concessional treatment to them and, hence, the difference of 3 per cent was liable to be taxed as the income of the assessee.

4. Before the AAC, the assessee's submission was that the company had already charged interest @ 12 per cent in respect of debit balance of the Directors and, hence, the ITO was not justified in making this addition on the ground that the interest should be charged at 15 per cent and not 12 per cent. In this connection, the learned counsel of the assessee relied on the decisions reported in 1977, Taxation 49(6) page 57 and 67 ITR 11. The AAC did not accept the above contentions. According to him, the assessee company itself was paying interest @ 15 per cent to the firm M/s Parihar &Co., in which the Directors of the company were partners, and hence, there was no justification for charging a lesser rate of interest in respect of the debit balances of the Directors. He, therefore, upheld the disallowance of interest @ 3 per cent during the Asst. yrs. 1976-77, and 1977-78. Aggrieved, the assessee has come up in the present appeals.

5. Before us the learned counsel of the assessee submitted that the borrowing made by the assessee from M/s Parihar & Co. @ 15 per cent and the moneys advanced to the Directors @12 per cent were two independent transactions and there was no evidence on record to show that the borrowed funds were advanced to the Directors at a lesser rate of interest. It was further pointed out that the rate of interest charged from the Directors, namely, 12 per cent was quite reasonable and no adverse inference should have been drawn in this respect. In pressing home his point of view, reliance was placed on the decision of the Madras High Court in 84 ITR 788.

6. The learned representative of the Department on the other hand, submitted that M/s Parihar & Co., is a firm in which the three Directors, were partners, that there was no contract between the parties for charging a lesser rate of interest, and in these circumstances, the value of benefit or amenity provided by the Company to Directors was clearly chargeable to tax as perquisite. In this connection, reliance was placed on the decisions of this Madras High Court reported in 1977 ILR 460 and 113 ITR 378. The learned counsel for the assessee, in reply was submitted that the above two decisions, cited by the learned representative of the Department are distinguishable, as in these cases no interest at all was charged on the advances made to the Directors, whereas in the present case the assessee has, in fact, charged interest @ 12 per cent.

7. We have carefully considered the rival contentions and, in our opinion, the assessee deserves to succeed. As correctly contended by the learned counsel for the assessee there is no evidence to show that the amounts borrowed from M/s Parihar & Co., @ 15 per cent were diverted as loans to the Directors from whom interest has been charged @ only 12 per cent. In our opinion the two transactions namely, borrowings from M/s Parihar & Co., and lending of moneys to the Directors are two independent transactions & in these circumstances, it cannot be said that any concessional treatment was given by the assessee company to its Directors, by charging a lesser rate of interest. The ratio of the decisions of the Madras High Court cited by the learned representative of the Department is also not applicable to the facts of the case, since in those two cases no interest at all was charged by the company, while in the present case the assessee has, in fact charged interest @12 per cent from the Directors and keeping into account the fact that even the IT Department is Charging interest on delayed payments @ 12 per cent this rate of interest, in our opinion, is quite reasonable. In this connection, we may also refer to the decisions of the Madras High Court in the case of CIT Madras, vs. Pudukottai Company Pl. Ltd.(1). The facts of this case are identical to the facts of the present case. We are, therefore, of the opinion that no disallowance out of the interest, paid by the assessee company is called for and, accordingly we delete the impugned additions of interest amounting to Rs. 2583 during the Asst. yr. 1976-77 and Rs. 3,883 during the Asst. yr. 1977-78.

8. In the two Departmental appeals relating to the Asst. yrs. 1976-77 and 1977-78, the first common contention is that the AAC was not justified in directing the ITO to allow depreciation on vehicles which were not registered in the name of the assessee company, but were registered in the names of the Directors. The other ground taken by the Department is that the AAC should not have deleted the disallowance of interest claimed by the assessee company which pertained to the amounts which were advanced by the company to its Directors for the purchase of the vehicles.

9. The facts of the case are that during the accounting period relevant for the Asst. yr. 1975-76, the assessee company advanced a sum of Rs. 72,964 to its Directors for the purchase of three cars and a Scooter. These vehicles were purchased on 26th Jan., 1974, and 22nd April, 1974. The Directors purchased the above vehicles and got them registered in their names, but these vehicles were used by the assessee company for the purposes of its business. The running expenses in respect of those vehicles were also debited to the books of accounts, of the company, the price of the vehicles was also shown as an asset in the Balance Sheet of the company and depreciation was claimed in respect of these vehicles by the assessee company. The ITO Firstly disallowed the assessee's claim in depreciation on these vehicles on the ground that the company was not its owner, Secondly the ITO disallowed proportionate interest amounting to Rs. 11,310 during the Asst. yr. 1976-77 and Rs. 3,216 during the Asst. yr. 1977-78 on the ground that to the extent of the advances made to the Directors for the purchase of the vehicles the assessee company diverted its borrowed funds for non-business purposes and hence, the claim of interest on the above borrowings was inadmissible.

10. The assessee went in appeal and the AAC accepted the assessee's contentions on both the points. As a matter of fact, both the above points were decided in favour of the assessee by the AAC in the assessment for the year 1975-76 vide his order dated 3rd April, 1978 and the department did not file any second appeal in respect of the above year. The Department is aggrieved by the findings of the AAC on the above two points, relating to Asst. yrs. 1976-77 and 1977-78 and has come up in the present appeals.

11. Before us the learned counsel for the assessee has submitted that although the company advanced certain loans to the Directors but these vehicles represented the assets of the company, as reflected in its balance sheet. Further it was pointed out that these vehicles were used for the purpose of the company's business, the running expenses of the same were as also allowed to the extent of the 3/4th. in the hands of the company by the ITO and even profit Under s. 41(2) was assessed in the hands of the company in respect of these vehicles in the subsequent years. In this connection, our attention was drawn to certain decisions of the ITAT, Gauhati Amritsar and Bangalore Benches, to the effect that mere registration of the vehicles in the name of someone-else would not disentitle the assessee to the claim of depreciation, if in, fact, funds were advanced for the purchase of the vehicles by the company, the vehicles were actually used for the purposes of the business, they formed part of the assets of the company and were reflected in its balance-sheet and the running expenses were actually met by the company. The learned counsel has also submitted that there was a specific resolution of the Board of Directors of the Company dated 3rd June, 1975 authorising the company to purchase the vehicles in the names of the Directors. It was also submitted that during the Asst. yr. 1975-76, the Department has accepted the findings of the AAC that the ownership of these vehicles vested with the company and, hence the claim of depreciation was allowed for that year. It was pleaded that for the two years under dispute, there are no new facts and, hence, following the decisions of the AAC for the Asst. yr. 1975-76, the Department should not have agitated this point against a similar finding of the AAC for these two years.

12. As regards the disallowance of interest on the advances made to the Directors for the purchase of the vehicles, it was submitted that it was not a case where the funds of the company were diverted for non-business purpose, but it was a case where the company purchased certain vehicles out of its borrowed funds for the purposes of its business and, in these circumstances, the AAC was quite justified in deleting the disallowance of interest made by the ITO for these two years.

13. The learned representative of the Department on the other hand, has opposed the above contentions and submitted that since the vehicles, in question, were not registered in the name of the company. The assessee was not entitled to claim depreciation on the same. Further, it was pleaded that the funds of the company to the extent of Rs. 72,965 were diverted to its directors for the purchase of vehicles and hence, to this extent, proportionate interest was not an admissible deduction and, hence, the AAC should not have deleted the disallowance of interest made by the ITO.

14. We have carefully considered the rival contentions and, in our opinion, the AAC on both the points agitated by the Department in these two appeals, does not call for any interference. The facts of the case clearly establish that it was the assessee company which was the owner of the said vehicles, the purchase price of the same was financed by it and these vehicles, were used for the purpose of the assessee's business. We have gone through the balance-sheet of the company for the Asst. yr. 1975-76 and find that a sum of Rs. 72,964 being the cost of the various vehicles has been included on the asset side of the balance sheet. The running expenses of these vehicles have been debited in the books of accounts of the assessee company, and therefore in fact, 3/4th. of such expenses has been allowed, as deduction by the Department in all the years. All these facts clearly go to show that it is the assessee company who is virtually the owner of these vehicles and not the Directors in whose names they were registered. In this connection we have also gone through the decision of the ITAT Gauhati Bench in the case of ITO vs. Modi Agency (ITA No. 198/Sao/1977-78) decided on 28th June, 1979, and the decision of the ITAT, Bangalore Bench in the case of M/s Associated Auditors, Chittor vs. The ITO, A-Ward. Chittor(2), copies of which were furnished by the assessee in its paper book. The above two decisions support the view taken by the AAC that mere registration of the vehicles in the name of some body else does not disentitle the assessee to the claim of depreciation, particularly when the funds for the purchase of the said vehicles were advanced by the assessee, these vehicles formed part of the assets of the assessee and reflected in the balance-sheet, the vehicles were actually used for the purposes of the assessee's business and the running expenses were also being incurred and claimed as deduction by the assessee. We are, therefore, of the opinion that the AAC was quite justified in taking the view that the assessee is entitled to the claim of depreciation in respect of these vehicles.

15. As regards the disallowance of interest on the amount of advances made to the assessee Directors for the purchase of the vehicles, we accept the finding of the AAC that the said advances were made by the assessee company for the purposes of its business, namely, for the purchase of the vehicles, which were used by the assessee company for its business. We, therefore, uphold the decision of the AAC on this point, also, whereby he has deleted the disallow ance of interest made by the ITO for the Asst. yrs. 1976-77 and 1977-78.

16. In the result, the two appeals, filed by the assessee, are allowed, while the other two appeals, filed by the Department, are dismissed.

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