M/S. MUNJAL SALES CORPORATION versus COMMISSIONER OF INCOME TAX, LUDHIANA AND ANR.

Citation: [2008] 2 S.C.R. 1169 · Decided: 19-02-2008 · Supreme Court of India · Bench: S.H. KAPADIA · Disposal: Appeal(s) allowed

Judgment (excerpt)

[2008] 2 S.C.R. 1169 
j-
MIS. MUNJAL SALES CORPORATION 
A 
v. 
COMMISSIONER OF INCOME TAX, LUDHIANA AND ANR. 
(Civil Appeal No. 1378 of 2008) 
FEBRUARY 19, 2008 
B 
[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 c 
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 D 
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 
E 
interest paid thereon did not exceed 18112% p.a. -Assessee 
entitled to deductions under s. 36(i)(iii) r. w. s.40(b )(iv) - Finance 
Act, 1992. 
'f 
In August/September 1991, appellant-assessee 
granted interest free advances to its sister concerns which F 
. 
"' 
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 
1169 
H 
1170 
SUPREME COURT REPORTS 
[2008] 2 S.C.R. 
A 1993-94, the same situation took place. Once again by 
.... . 
order dated 1.1.03, the Tribunal deleted disallowance for 
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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 
B 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 
c 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 
D 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 
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interest free advances to sister concerns were out of 
monies borrowed by the firm from third parties on 
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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-
97, Tribunal held that during the said years, no interest 
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free advances to sister concerns were made and, 
therefore, there was no nexus between "interest bearing 
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F 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. 
G 
The question for consideration in these appeals is 
whether s.40(b) of the 1961 Act is a stand-alone section 
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or whether it operates as a limitation to the deduction 
under ss. 30 to 38 of the 1961 Act. 
H 
Allowing the appeals, the Court 
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M/S. MUNJAL SALES CORPN. v. COMMNR. OF 
1171 
INCOME TAX, LUDHIANA & ANR. 
-j. 
HELD: 1.1 Prior to FA 1992, payment of interest to A 
the partner was an item of Business Disallowance. 
However, after FA 1992, s.40(b) of the Income Tax Act, 1961 
puts limitations on the deductions under ss. 30 to 38 from 
which it follows that s.40 is not a stand-alone section. 5.40, 
before and after FA 1992, has remained the same in the 8 
sense that it begins with a non-obstante clause. It starts 
., 
with the words "Notwithstanding anything to the contrary 
in ss. 30 to 38" whic

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