DEVELOPMENT INVESTORS LTD. VS COMMISSIONER OF INCOME-TAX., 1998 PTD-GAUHATI-HIGH-COURT-INDIA 3375 (1996)

Income-tax---

----Income---Interest---Loan advanced by company from own funds to subsidiary---Subsidiary under financial strain---Interest on loan reduced from 18 per cent. to 12 per cent.---Difference cannot be treated as income of company and taxed.

The assessee-company gave a loan to its subsidiary company from out of its own funds charging interest at 18 per cent. At that time, the subsidiary had been incurring losses from time to time and the total loss amounted to Rs.8,36,496 up to the calendar year 1982. Thereafter, by a board resolution, the assessee-company reduced the rate of interest from 18 per cent. to 12 per cent. with effect from January 1, 1983. On the ground, that there was no justification for lowering the rate of interest from 18 per cent. to 12 per cent. the Assessing Officer added back sums for the assessment years, 1984-85 and 1985-86, representing the difference in the interest. The Tribunal confirmed this, holding that the reduction resulted in loss of revenue to the State. On a reference:

Held, that a loan can be given by a person or a company to any other person for various reasons. It also depends on the person giving the loan to settle the rate of interest or to give the loan without any interest at all. When the loan was advanced by the assessee-company, the condition of the subsidiary was bad and it had been facing serious financial constraints. After a period of time it showed signs of improvement and gradually it improved. Considering this, the assessee 'company which was the parent company thought it fit to give some more relief by reducing the rate of interest. The approach of the assessee-company was not contrary to any provisions of law. The observation of the Tribunal that if the rate of interest so reduced was allowed, the Revenue would suffer loss was not relevant in the present case. Accordingly, the addition of tax to the extent of the reduced interest was unjustified.

A.R. Banerjee and Ms. B. Choudhury for the Assessee.

U. Bhuyan for the Commissioner.

JUDGMENT

D.N. BARUAH, J.---As per direction given by this Court in Civil Rules Nos. l1(M) of 1992, and 12(M) of 1992, the following question has been referred by the Income-tax Appellate Tribunal under section 256(2) of the Income Tax Act, 1961 (for short "the Act"), for opinion of this Court:

"Whether, on the facts and in the circumstances of the case, the Tribunal was right in holding that there was no justification on the part of the assessee-company to reduce the rate of interest from 18 per cent per annum to 12 per cent per annum, when such reduction was made from the point of view of a prudent businessman?"

The assessee is a public limited company carrying on consultancy business. The case relates to the assessment years 1984-85 and 1985-86. The assessee-company gave an unsecured loan amounting to Rs.12,08,000 to Kontest Chemicals Ltd. which is also a public company. Interest charged on the loan was 18 per cent. At that time the said Kontest Chemicals Ltd. had been incurring loss from time to time and the total loss amounted to Rs.8,36,496 up to the calendar year, 1982. Thereafter, the assessee-company reduced the rate of interest from 18 per cent to 12 per cent per annum. The interest was reduced from 18 per cent. to 12 per cent. by a board resolution effective from January 1, 1983. It may also be mentioned here that the parent company, i.e., the assessee-company, contributed to the share capital and also had given the loan to the subsidiary company, i.e., Kontest Chemicals Ltd., out of its own funds. Even after reduction of the interest rate by the parent company to 12 per cent., the loss incurred by the subsidiary company during the assessment year 1984-85 was Rs.3,28,935. In the course of assessment, the Assessing Officer compared the sale and expenditure of Kontest Chemicals Ltd. in respect of the previous assessment year and the assessment year in question and found that there was no justification for lowering the rate of interest from 18 per cent to 12 per cent and, accordingly, he added back Rs.1,42,662 and Rs.1,61,489 for the assessment years 1984-85 and 1985-86, respectively, being the difference of interest charged at the rate of 12 per cent against 18 per cent as charged in the earlier years. Being aggrieved by the said order of the Assessing Officer, the assessee-company preferred an appeal before the Commissioner of Income ?tax (Appeals). The Commissioner of Income-tax (Appeals), after considering the facts of the case, observed that looking to the accumulated losses of the company, it was prudent exercise on the part of the assessee-company to reduce the rate of interest. He also held that the funds, which had been advanced to the subsidiary company, were out of funds available with the assessee-company and not out of borrowed funds and, therefore, interest at the rate of 12 per cent. was reasonable. Accordingly, the Commissioner of Income-tax (Appeals) deleted the additions of Rs.1,42,662 and Rs.1,61, 489 made in the assessment years 1984-85 and 1985-86, respectively. The Revenue being aggrieved by the order passed by the Commissioner of Income-tax (Appeals) preferred appeal before the Income-tax Appellate Tribunal. The Tribunal, after considering the facts of the case, held that such reduction of rate of interest 18 per cent to 12 per cent resulted in loss revenue as the amount reduced was eligible to tax. The Tribunal further held that the amounts eligible to tax minimised due to reduction of interest rate were quite substantial in both the assessment years. The Tribunal, therefore, reversed the order passed by the Commissioner of Income-tax (Appeals) and added the aforesaid amounts. The assessee being aggrieved, requested the Tribunal to refer the above question for the opinion of this Court under section 256(1) of the Act which, however, was rejected. Situated, thus, the assessee approached this Court by filing applications (Civil Rules Nos. l1(M) of 1992 and 12(M) of 1992). This Court by order, dated February 4, 1994, passed in the aforesaid civil rule directed the Tribunal to refer the question for opinion of this Court. Hence, the present reference.

We have heard Mr. A.R. Banerjee, learned 'counsel appearing on behalf of the assessee, and Mr. U. Bhuyan, learned counsel appearing on behalf of the Revenue.

Mr. Banerjee submits that the assessee gave the loan with interest at the rate of 18 per cent. when Kontest Chemicals Ltd. was almost at the dying stage. Thereafter, the said company started improving its financial condition. Moreover, as it was a subsidiary company, the assessee-company had all the interest to see that the said company would not die. Therefore, endeavour was made to bring its life back and in that endeavour the assessee-coxnpan5 being successful in improving the condition of its subsidiary company, decided to give a fillip to it by reducing the rate of interest. Mr. Banerjee also submits that the loan was advanced from the assessee's own money and not borrowed from any financial institution by paying a higher rate of interest. Therefore, there was no reason for the Assessing Officer or, for that matter the Tribunal to disbelieve this aspect.

?Mr. Bhuyan on the other hand supports the finding of the Tribunal. Mr. Bhuyan submits that the Assessing Officer had rightly added the tax because if the lowering, of interest was allowed, the Revenue would suffer.

On the rival contention of the parties it is to be seen whether the reduction in the rate of interest is permissible. A loan can, be given by a person or a company to any other person for various reasons. It also depends on the person giving the loan to settle the rate of interest or to give the loan without any interest at all. Mr. Bhuyan has not been able to show us any law relating to charging of interest while granting loan. Normally, the rate of interest on a secured loan is less than that on an unsecured loan. The? increased rate of interest on an unsecured loan is to cover the risk in advancing the loan. If the person receiving the, loan is really facing financial stringency. Then the risk factor would be more and in that case normally the rate of interest would also be more. In the present case when the loan was advanced, the condition of the said subsidiary company was bad and it had been facing serious financial constraints. After a period of time it showed signs of improvement and gradually it improved. Considering this the assessee-company which was the parent company thought it fit to give some more relief by reducing the rate of interest. We do not think that the approach of the assessee-Company was contrary to any provisions of law. The observation of the Tribunal that if the rate of the interest so reduced was allowed the Revenue would suffer loss, in our opinion, has no relevance in the present case. Accordingly, we hold that the addition of tax to the extent of the reduced interest was unjustified.

??????????? In view of the above, we answer the question in the negative, in favour of the assessee and against the Revenue. A copy of this judgment under the signature of the Registrar and the seal of the High Court shall be transmitted to the Income-tax Appellate Tribunal, Guwahati.

M. B. A. / 1619/FC???????????????????????????????????????????????????????????????????????????? Order accordingly.