Facts of the Case

  • The Revenue preferred a series of appeals (ITA Nos. 1062/2009, 1772/2010, 1826/2010, 1827/2010, 90/2010, 1165/2010, 1166/2010, 1167/2010, 1169/2010 & 1172/2010) against the assessee spanning multiple assessment years.
  • The Assessing Officer (AO) observed that the assessee—who was engaged in the business of finance rather than manufacturing—had extended interest-free advances to its sister concern.
  • The AO formed the view that these interest-free advances were funneled out of the assessee's overdraft account.
  • Consequently, the AO disallowed the interest paid by the assessee on its overdraft facilities to the extent of the advances given to the sister concern, adding this amount back to the assessee's taxable income.
  • On appeal, the CIT (Appeals) deleted the substantial part of these additions, leaving a nominal amount of ₹30,000.
  • Upon further appeal, the Income Tax Appellate Tribunal (ITAT) completely deleted the additions, allowing the assessee’s cross-objections and dismissing the Revenue’s appeals. The Revenue subsequently appealed to the Delhi High Court.

Issues Involved

  • Whether the ITAT was legally correct in deleting the disallowance of interest paid on an overdraft account when interest-free advances were simultaneously made to a sister concern.
  • Whether the onus of proof lies strictly on the assessee to establish that advances given to sister concerns came exclusively from its own interest-free funds and not from interest-bearing overdraft accounts, especially when conflicting judgments between High Courts exist.
  • Whether the jurisdictional High Court precedent overrides a contrary view taken by a non-jurisdictional High Court.

Petitioner’s (Revenue's) Arguments

  • The Revenue heavily relied upon the judgment of the Hon'ble Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. (286 ITR 1).
  • Based on this precedent, the Revenue contended that the onus of proof rests entirely on the assessee to prove that the advances given to its sister concern emerged out of its own capital/interest-free funds, rather than being diverted from an interest-bearing overdraft account.
  • The petitioner argued that because the finance was accommodated through an overdraft account, the proportional interest expense should be disallowed under Section 36(1)(iii).

Respondent’s (Assessee's) Arguments

  • The Respondent defended the order of the ITAT, arguing that the factual matrix was properly appreciated and governed by binding local precedents.
  • It was submitted that the jurisdictional High Court (Delhi High Court) had consistently maintained a contrary, pro-assessee view in similar matters, which takes legal precedence over the Abhishek Industries decision of the Punjab and Haryana High Court.

Court Order / Findings

  • The Delhi High Court noted that the Punjab and Haryana High Court in CIT vs. Abhishek Industries Ltd. had explicitly disagreed with the established position of the Delhi High Court.
  • The High Court affirmed that the ITAT was entirely correct in following the judgments of its own jurisdictional High Court rather than a non-jurisdictional one.
  • The Court highlighted that its earlier decisions in CIT vs. Tinbox (260 ITR 637) and CIT vs. Orissa Cement Ltd. (252 ITR 878) directly governed the issue and were legally binding on the present Bench.
  • The Bench also noted that this legal position was recently reiterated by the same Bench in CIT vs. Bharti Televenture Ltd. (331 ITR 502).
  • Concluding that no substantial question of law arose from the ITAT's order, the Delhi High Court dismissed all the appeals filed by the Revenue.

Important Clarification

  • Jurisdictional Precedent Overrules External Precedent: The ruling reaffirms a foundational principle of judicial discipline: an ITAT bench and a High Court bench are bound by the precedents of their own jurisdictional High Court over a contrary view taken by another state's High Court (even if specifically cited and explicitly divergent, as Abhishek Industries was).
  • Interest Disallowance Mitigation: Where the jurisdictional High Court has taken a view favoring the assessee concerning interest-free advances out of mixed/overdraft funds, that position remains binding until modified by a larger bench or the Supreme Court.

Section Involved

  • Section 36(1)(iii) of the Income Tax Act, 1961 – Interest paid in respect of capital borrowed for the purposes of the business or profession.

Link to download the order - https://delhihighcourt.nic.in/app/case_number_pdf/2011:DHC:14580-DB/AKS19072011ITA18272010_150651.pdf 

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