SUPREME COURT OF
Munjal Sales Corpn.
v.
Commissioner
of Income-tax,
S.H. Kapadia and B. Sudershan Reddy, JJ.
Civil
Appeal Nos. 1378 to 1382 of 2008
Arising
out of S.L.P. (C) Nos. 4317, 4392, 4395, 4397 and 6442 of 2007
February
19, 2008
Section 36(1)(iii), read with section 40(b),
of the Income-tax Act, 1961 -Interest on borrowed capital - Assessment years
1993-94 to 1997-98 - Whether section 40 is not a stand alone section; it is
corollary to sections 30 to 38 and its object is to put limitation on amount of
deduction which assessee is entitled to under sections 30 to 38 - Held, yes -
Whether after enactment of Finance Act, 1992, every assessee including a firm
has to establish, in first instance, its right to claim deduction under one of
sections between sections 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 section 40(b) - Held, yes - Whether, therefore,
in case of a firm to claim deduction in respect of interest paid on capital
borrowed from third parties (apparently partners), firm is required to
establish, in first instance, that it is entitled to claim deduction under
section 36(1)(iii), and secondly that it is not disentitled to claim such
deduction on account of applicability of section 40(b)(iv) - Held, yes
Section 36(1)(iii),
read with section 40(b), of the Income-tax Act, 1961 - Interest on borrowed
capital - Assessment years 1993-94 to 1997-98 - Assessee’s
claim for deduction under section 36(1)(iii) was disallowed on ground that it
had given interest-free advances to its sister concerns from interest-bearing
loans taken from third parties - On appeal, Tribunal deleted disallowance for
assessment years 1992-93 and 1993-94, holding that assessee had given such
advance from its own funds, but upheld disallowances for assessment years
1994-95 to 1996-97 - Whether once it was found that interest-free loans granted
in August/September 1991 continued up to assessment year 1997-98; that said
loans were advanced for business purpose; and that interest paid to third parties
(partners) did not exceed 18/12 per cent per annum, assessee was entitled to
deduction under section 36(1)(iii), read with section 40(b)(iv) - Held, yes
Facts
In August/September 1999,
the assessee-firm 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 assessee’s own fund, but from the
interest-bearing loans taken by the assessee from third parties. Accordingly,
the assessee’s claim for deduction under section 36(1)(iii) was disallowed. The Tribunal deleted the
disallowance for the assessment years 1992-93 and 1993-94, holding that
interest-free advances were given out of assessee’s
own funds, but it upheld the disallowance for the assessment years 1994-95 to
1996-97. The High Court affirmed the order of the Tribunal.
On appeal to the Supreme
Court, the assessee contended that section 40(b) is a stand-alone
section having no connection with the provisions of section 36(1)(iii);
and that section 36(1)(iii) had no application in the instant case, as
it was a case of payment of interest to the partner on his capital contribution
which could not be equated to monies borrowed by the firm from third parties
and, hence, the instant case fell only under section 40(b)(iv)
and not under section 36(1)(iii).
Held
Prior to the Finance
Act, 1992, payment of interest to the partner was an item of business
disallowance. However, after the Finance Act, 1992, the said section 40(b) puts limitations on the deductions under
sections 30 to 38 from which it follows that section 40 is not a stand-alone
section. Section 40, before and after the Finance Act, 1992, has remained the
same in the sense that it begins with a non obstante
clause. It starts with the words ‘Notwithstanding anything to the contrary in
sections 30 to 38’ which shows that even if an expenditure or allowance comes
within the purview of sections 30 to 38, the assessee could lose the benefit of
deduction if the case falls under section 40. In other words, every assessee,
including a firm, has to establish, in the first instance, its right to claim
deduction under one of the sections between sections 30 to 38 and in the case
of the firm, if it claims special deduction, it has also to prove that it is
not disentitled to claim deduction by reason of applicability of section 40(b)(iv). Therefore, in the instant case, the
assessee was required to establish in the first instance that it was entitled
to claim deduction under section 36(1)(iii), and that it was not disentitled
to claim such deduction on account of applicability of section 40(b)(iv).
It is important to note that section 36(1) refers to other deductions, whereas
section 40 comes under the heading ‘Amounts not deductible’. Therefore,
sections 30 to 38 are other deductions, whereas section 40 is a limitation on
those deductions. Therefore, even if an assessee is entitled to deduction under
section 36(1)(iii), the assessee-firm will not
be entitled to claim deduction for interest payment exceeding 18/12 per cent per
se. This is because section 40(b)(iv)
puts a limitation on the amount of deduction under section 36(1)(iii). [
It was vehemently urged
on behalf of the assessee that the partner’s capital is not a loan or borrowing
in the hands of a firm. According to the assessee, section 40(b)(iv)
applies to partner’s capital, whereas section 36(1)(iii) applies to
loan/borrowing. Conceptually, the position may be correct, but in the instant
case, the scheme of Chapter IV-D was in question. After the enactment of the
Finance Act, 1992, section 40(b)(iv) was
brought to the statute book not only to avoid double taxation, but also to
bring on par different assessees in the matter of
assessment. Therefore, the assessee-firm, in the instant case, was required to
prove that it was entitled to claim deduction for payment of interest on
capital borrowed under section 36(1)(iii), and that it was not
disentitled under section 40(b)(iv). There was one more way of
answering the above contention. Section 36(1)(iii)
and section 40(b)(iv) both deal with payment of interest by the
firm for which deduction can be claimed. Therefore, keeping in mind the scheme
of Chapter IV-D, every assessee, who claims deduction under sections 30 to 38,
is also required to establish that it is not disentitled under section 40. The
object of section 40 is to put limitation on the amount of deduction which the
assessee is entitled to under sections 30 to 38. Section 40 is a corollary to
sections 30 to 38 and, therefore, section 40 is not a stand-alone section. [
In the instant case,
the Tribunal, for the assessment year 1992-93, held that loans were given for
business purposes. Similarly, for the assessment year 1993-94, the Tribunal had
taken the view that the said loans given to the firm’s sister concerns were for
business purposes. Accordingly, the Tribunal had deleted the disallowances
during the assessment years 1992-93 and 1993-94. However, for the assessment
year 1994-95, the Tribunal took a contrary view in view of change in law
brought about by the Finance Act, 1992. Prior to 1-4-1993, payment of interest
to the partner had to be added back to the assessable income of the firm
whereas after the Finance Act, 1992, such payment became an item of deduction
for computing the assessable income of the firm and it became part of the
business income of the partner. In view of this change of law, the Tribunal
disallowed payment of interest in the instant case for the assessment years
1994-95 to 1997-98. However, the point, which had been left out from
consideration, was that the loans, which were given in August/September 1991 to
the sister concerns, got wiped out only in the assessment year 1997-98. Once it
was found that the loans granted in August/September 1991 continued up to the
assessment year 1997-98; that the said loans were advanced for business
purposes and that the interest paid thereon did not exceed 18/12 per cent per
annum, the assessee was entitled to deduction under section 36(1)(iii), read with section 40(b)(iv).
[
Further, during the
assessment year 1995-96, apart from the loan given in August/September 1991,
the assessee advanced interest-free loan to its sister concerns amounting to Rs. 5 lakhs. According to the Tribunal,
there was nothing on record to show that the loans were given to the sister
concerns by the assessee-firm out of its own funds and, therefore, it was not
entitled to claim deduction under section 36(1)(iii). That finding was erroneous. The
opening balance as on 1-4-1994 was Rs. 1.91 crores, whereas the loan given to the sister concerns was a
small amount of Rs. 5 lakhs.
Thus, the profits earned by the assessee during the relevant year were
sufficient to cover the impugned loan of Rs. 5 lakhs. [
Accordingly, the
impugned judgment of the High Court was to be set aside. The appeal was
allowed. [
Case
review
CIT v. Abhishek
Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj.
& Har.) [
Case
referred to
CIT v. Abhishek
Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj.
& Har.) [
S. Ganesh,
Satyen Sethi and Rameshwar
Prasad Goyal for the Appellant. Parag
P. Tripathi, Vikram Gulati, Ms. Arti Gupta and B.V.
Balaram Das for the
Respondent.
nn