TMI Blog1977 (7) TMI 78X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest paid and the interest charged had to be disallowed. The opening balance in respect of the subsidiary company in the year was of Rs. 5,85,293 and the closing balance was of Rs. 5,30,128. The assessee was paying interest to bank at 10 per cent and other at 13 per cent. Taking the average debit balance in the account of M/s. Atlas Pharma Ltd. At Rs. 5,00,000 and the rate of interest at 11 per cent, the interest which had been less charged was calculated at Rs. 30,366. This was disallowed by the ITO in 1970-71. The said addition was upheld by the AAC. In 1972-73, the interest similarly disallowed was of Rs. 26,390. This addition was also upheld by the AAC. In 1972-73, there was also a payment of Rs. 40,000 to the wife of a Financial Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly an extension of the assessee company s business. It was further stated that the borrowing was for the assessee company s business and it was utilised also for business or extended business and that the subsidiary company which had a capital of Rs.10,000 only could not be killed by charging a high rate of interest on the amounts advanced to it. It was further stated that the Mysore High Court had considered in the case of CIT,Mysorevs. United Breweries that in deciding whether a subsidiary company was an agent of the parent company the true test was whether there was in addition to capitalist control, functional control by the parent company over its subsidiary. If the parent company did exercise functional control over its subsidiary, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to it was blocked in outstandings recoverable by the subsidiary company. It was further submitted that it was difficult to imagine a company having a share capital of Rs.10,000 only and functioning without loans and that even if loans were provided by the parent company, it was only for the purpose of providing it with a working capital as and when required by it. 6. The other point made by the learned counsel for the assessee was that there was no nexus between the borrowings effected by the assessee company and the amounts advanced by it to its subsidiary company. In this connection it was stated that the current liabilities and provisions as on31st March, 1970were of Rs. 15,09,498 while the amount advanced to the subsidiary company was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m Rs.3.48 lakhs as on 31st March, 1966 to Rs.3.70 lakhs as on 31st March, 1967. The learned counsel for the assessee thus submitted that the ITO had not referred to the existence of any nexus between the borrowings and the lending by the assessee company and that the Income-Tax Officer had made the addition only because there was change in the rates of interest on borrowing from outsider and on lending by the assessee company to the subsidiary company. 7. The learned Departmental Representative, on the other hand, stated that it was not necessary to have only the capitalistic control but that it was also necessary to have the functional control. The learned counsel for the assessee stated in reply that the entire functioning control was w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troverted showed to the contrary. On these facts, we consider that the additions made of Rs.30,366 in 1970-71 and of Rs.26,390 in 1972-73 call for being deleted and we order accordingly. 9. The other point raised in 1970-71 concerns the action taken by the ITO under s. 147(b) in this regard. There was an audit objection and the notice was issued by the ITO in pursuance thereof taking the audit object as information . The assessee s objection was that it could not constitute information in view of the judicial pronouncements of the Delhi High Court in this case this point had to be respectfully following the same, decided against the assessee. 10. In 1972-73. the next objection pressed before us pertains to the disallowance of Rs.40,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ew of the long and meritorious services rendered by Mr. R.K. Batra to the Company, which had helped in bringing back its operations on a profitable basis, it was resolved that an Ex gratia payment of Rs. 40,000 be made to Mrs. Usha Batra or her nominee and in the manner to be decided by the Chairman in consultation with the consultant". The learned counsel for the assessee stated that the payment to the widow of the deceased Shri R.K. Batra was made in view of the long and meritorious services rendered by the Financial Advisor to the assessee company. The learned counsel for the assessee further stated that the reference to the word "Ex gratia" appearing in the resolution was only to distinguish the payment made in this regard from paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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