ORDER SHEET IN HIGH COURT AT CALCUTTA Special Jurisdiction [Income Tax] ORIGINAL SIDE ITA No. 105 of 2004 C. E. S. C. LTD. Versus COMMISSIONER OF I.TAX, KOLKATA - II, BEFORE: Hon'ble JUSTICE GIRISH CHANDRA GUPTA Hon'ble JUSTICE SHIB SADHAN SADHU Date : 26th November, 2014. For Appellant : Mr. J. P. Khaitan, Senior Advocate with Ms. Nilanjana Banerjee (Pal), Advocate For Revenue : Md. Nizamuddin, Advocate Court : following question of law was framed by this Court while admitting appeal against judgement and order dated 29th October, 2003 passed by learned Income Tax Appellate Tribunal: Whether having regard to settled legal proposition and having regard to fact that profits of entire business and sale proceeds were all deposited in mixed overdraft account, finding of Tribunal that 2 sum by which shares were purchased or investments were made, came out of overdraft and not out of profits deposited with mixed overdraft account is unreasonable and perverse and without any material or evidence whatsoever. following facts are not in dispute: sum of Rs.99,99,800/- was invested by assessee in share capital of M/s. CESCON LTD. 100% subsidiary company in month of July, 1991 corresponding to financial year 1991-92 and assessment year 1992-93. assessing officer held that borrowed funds were utilized for purpose of aforesaid investment and therefore, interest at rate of 18% amounting to sum of Rs.17,99,964/- was disallowed. In appeal preferred by assessee, CIT(A) held that assessee had substantial reserves and has earned profits during year under appeal. In view of same, action of Assessing Officer in adding back said sum of Rs.17,99,964/- on ground that investment was made from borrowed funds, cannot be sustained. CIT(A) also recorded in its judgment that company earned profit, after taxation and appropriation to contingency reserves, sum of Rs.12,94,47,384/-. In appeal preferred by Revenue, learned Tribunal reversed order of CIT(A) on ground that assessee failed to furnish any evidence or material to show that assessee s own money accumulated out of profits has utilized in making investment in shares of its subsidiary company. 3 No cash flow statement at relevant point of time has also been furnished by assessee. Taking into account totality of facts and circumstances as discussed above and in light of our observation and discussion made hereinbefore we are of considered view that assessee has failed to establish or prove that investment made in shares of M/s. Cescon Ltd. by assessee has been made out of profits generated by assessee-company. Further, we are of considered opinion that assessee in present case can be said to have invested interest bearing funds in shares of M/s. Cescon Ltd. which investment is not in any way for purpose of assessee s business. Mr. Khaitan, learned Senior Advocate, appearing for appellant- assessee, has drawn our attention to Division Bench judgment of this Court in case of Woolcombers of India Ltd. vs. Commissioner of Income-Tax (Central) Calcutta, reported in 134 ITR 219. question, which cropped up for decision in that case, was whether expenditure disallowed by assessing officer/ITO was sustainable in law. ITO disallowed expenditure in following facts and circumstances: assessee had overdraft account with bank. On 12th December, 1969, i.e., few days before end of assessee s accounting year on 31st December, 1969, account showed debit balance of Rs.1,39,412. assessee paid advance tax of Rs.18,05,000 on 15th December, 1969, which increased overdraft to Rs.14,63,593 by 31st December, 1969. ITO holding that payment of advance tax could not 4 be treated as business expense disallowed proportionate interest amounting to Rs.6,769 payable by assessee to bank. Division Bench, after considering large number of authorities, came to following conclusion: And having regard to facts, in our opinion, it appears from facts that profits were sufficient to meet advance tax liability. profits were deposited with overdraft account. It should be presumed that in its essence and true character taxes were paid out of profits of year and not out of overdraft account for running of business. Mr. Khaitan submitted that point raised in this appeal is covered by aforesaid judgment of this Court. Mr. Nizamuddin, learned advocate appearing for Revenue, however, contended that question essentially is question of fact. He drew our attention to judgment of Tribunal which reads as follows: As assessee has failed to furnish relevant informations, though assessee was specifically asked to furnish same, it is, therefore, reasonable and justified to draw adverse inference against assessee. Mr. Nizamuddin contended that because of failure of assessee to produce relevant evidence, Tribunal has drawn adverse inference. He added that judgment of Division Bench, relied upon by Mr. Khaitan, is essentially on basis of facts and circumstances of that case which has nothing to do with problem which has arisen in case before us. 5 We are unable to accept this submission. Tribunal has laid stress upon fact that loan fund by way of secured loan as well as unsecured loan has increased from Rs.468,34,39,396/- to Rs.509,07,68,172/-. On perusal of audited accounts of assessee, we find that in overdraft account from bank assessee had balance of Rs.43,85,52,956/- payable as at end of 31.3.1992 as against Rs.23,28,16,552/- as at end of immediate preceding assessment year i.e. 31.3.1991. It is, therefore, clear that overdraft account has also increased from Rs.23,28,16,552/- to Rs.43,85,52,956/-. profit earned by assessee or any other funds accumulated by assessee during year under consideration has not been utilised in reducing loan amount particularly bank overdraft account from which assessee had made investment against shares of M/s. Cescon Ltd. or in making investment in shares of M/s. Cescon Ltd. Tribunal, however, missed fact that in case assessee had put in amount of income earned during year, which in this case was Rs.12 crores approximately, in separate account which assessee was entitled to do, debit balance as at last day of accounting year would have been further increased by Rs.12 crores. fact that liability on account of secured loan and unsecured loan increased is not ipso facto evidence of fact that company is running through unhealthy financial position. When profit making company has increased its liability on account of secured or unsecured loan, that may be pointer to show that company has increased its capital asset. In this case, there can be no denial that company earned Rs.12 crores which was offered for taxation. It cannot in circumstances be said by looking at secured or unsecured loan account or by constant increase thereof that borrowed funds were 6 utilized for purpose of investment in question which was evidently for sum of less than Rs.1 crore. That can possibly be said if it is loss making company. Therefore, it has to be held that investment was made from out of profits of year and not from out of overdraft account. There is, as such, no question of making any disallowance on account of any interest. We make it clear that in case where profit of entire business including sale proceeds were deposited in mixed overdraft accounts and in case investment is less than amount of profit earned or which could reasonably be deemed to have been earned, regard being had to date of expenditure, it has to be presumed that investment was from out of profits. For aforesaid reasons, question raised is answered in affirmative. appeal is allowed accordingly. (GIRISH CHANDRA GUPTA, J.) (SHIB SADHAN SADHU, J.) sm C. E. S. C. Ltd. v. Commissioner of I.Tax, Kolkata - II