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TMI Blog1998 (2) TMI 162X X X X Extracts X X X X X X X X Extracts X X X X ..... Uttar Pradesh (for short "PICUP") and utilised the same for the purpose of acquiring plant and machinery against hypothecation of company's movable properties and against an equitable mortgage of land at Sahibabad in U.P. 3. The assessee-company made payment of interest to bank, financial institutions and parties from whom inter-corporate loans were received as per details given below: Name of the party Asst. yr. 1989-90 . 1989-90 1990-91 Interest on term loan from PICUP 6,50,000 6,88,256 On cash credit account with State Bank ofPatiala 2,66,124 3,06,129 On inter-corporate loans from various companies 17,19,235 4,21,476 . 26,36,159 14,15,861 The AO was of the view that the loans taken from financial institutions, bank and other companies had been advanced to subsidiary company without charging interest and for the purpose which was not incidental to the carrying on of the assessee's legitimate business. Therefore, in the asst. yrs. 1988-89 and 1990-91 the AO disallowed the entire interest claimed at Rs. 26,36,159 and Rs. 14,15,861 respectively. In the asst. yr. 1991-92 he observed that the facts are identical to those in the preceding assessment years and furthe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary company DTL further increased the authorised capital to Rs. 3 crores and had obtained advances to the tune of Rs. 2,06,71,775 from the assessee-company, without making any allotment of any share whatsoever. On the other hand, DTL had invested an amount equal to the funds received by it from the assessee-company, namely, Allen-Bradlay Ltd. for the purchase of the shares and also had given loan of Rs. 45 lakhs to the said company during the asst. yr. 1989-90. The AO enquired about the source of investment made by the assessee and found that the assessee had taken large number of inter-corporate loans from various parties on which it had paid interest at the rate of 16.5 per cent per annum. These loans were advanced by the assessee-company to DTL without charging any interest and also without any allotment of shares. He further observed that the assessee's own balance sheet revealed that it had obtained loans of Rs. 61 lakhs from the various parties and financial institutions against hypothecation of immovable properties, stock of raw material and other assets in order to meet its own requirement. On the other hand, the assessee-company had returned losses for both the asst. y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestment made in DTL in each of the assessment years from 1987-88 to 1989-90 along with the source of investment and copy of the relevant bank statement and the balance sheet for the financial years 1985-86 to 1987-88 and 1988-89, which were sent to the AO for examination and report as to how much of the inter-corporate loans taken by the assessee were invested in DTL. The AO vide his report dt.11th Nov., 1993, stated that during the asst. yr. 1987-88, there was no nexus between the investment in DTL and the borrowed funds by the appellant company. It was further reported that in the asst. yr. 1988-89, a total investment of Rs. 24,40,000 was made in DTL out of which Rs. 19 lakhs were invested out of the assessee's own funds and Rs. 5,40,000 were invested out of loans taken from Charaiveti Estates which were, however, paid before 31st March, 1988, by taking fixed deposit from Anirudh Minerals. It was also mentioned that the assessee paid back the amount of Rs. 5,40,000 to Anirudh Minerals also on17th Aug.,1988and29th Aug., 1988. However, no interest as paid on these funds borrowed by the assessee because Anirudh Minerals withdrew fixed deposit prematured. Thus, on the basis of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loans and the investment made in the DTL. It was not open to suggest to the businessman how to run his business. It was further pointed out that the memorandum of articles of the assessee-company permits the company to invest funds in the subsidiaries for the purpose of carrying on its business. As such the investment made in the subsidiary company was by all means a part of business carried on by the assessee and the funds were used wholly and exclusively for the purpose of business. Therefore, the entire interest payment whether paid to the financial institutions or State Bank ofPatialaor on the inter-corporate loans for investment in DTL should be allowed as business expenditure. The CIT(A) rejected the assessee's contention for the following reasons : "2.7 I have considered the facts of the case and the arguments of the learned counsel. In my opinion, interest payment on inter-corporate loans which were invested in DTL for the alleged allotment of capital which were in turn invested by DTL in another concern cannot be allowed in view of the facts and circumstances with regard to this investment, discussed in para 2.3 above, which need not be repeated for the sake of brevity. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0-91: "4. Without prejudice to the above, alternatively it is contended that interest paid on borrowings even if utilised for investment in subsidiary company, should have been allowed under s. 57(iii) of the Act. 5. (a) It is contended that investment of Rs. 17,03,610 as share application money paid to Debikay System Ltd., written off in the books should have been allowed as business loss under s. 28 of the IT Act. (b) Alternatively it is contended that loss arising due to relinquishment of investment of Rs. 17,03,610 should have been allowed as long-term capital loss under the head capital gains". Therefore, these are dismissed as not pressed. 9. The learned assessee's counsel very vehemently argued that the disallowance of interest is not justified. In this connection our attention was invited to the remand report of the AO, wherein after perusal of the various bank accounts and relevant entries in the books with regard to investment made in DTL, it has observed that there was no diversion of funds from the cash credit account for making investment in DTL. He pointed out that the investment in DTL have gone out of bank accounts maintained by the company with Bank of India,C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest liability is incurred, it is allowed as per the decision of the Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 : (1978) 115 ITR 519 (SC). Reliance was also placed on the decision of the Supreme Court in the case of Liquidator of Mahamudabad Properties (P) Ltd. vs. CIT (1980) 16 CTR (SC) 192 : (1980) 124 ITR 31 (SC). It is further submitted that the company vide its memorandum and articles of association is permitted to make investment in the equity shares of any body incorporation. The investment in the other companies is a part of business carried on by the assessee-company. Therefore, the amount was utilised for acquiring the shares in the subsidiary company is also used fully and exclusively for the purpose of business. Mere fact that the amount had been paid as application money and the assessee-company has not been allotted any share, does not change the nature and character of the payment made when the amount remains to be invested of the assessee-company in the subsidiary company. Therefore, the interest payable on loans and deposits received to the extent the same has been utilised for investment in subsidiary company is allowable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve very vehemently argued that the interest liability relating to investment in the subsidiary company cannot be allowed because no shares were ever allotted. Rather it has adopted a colourable device to divert the funds of the assessee-company to the subsidiary company who in turn purchased shares of Allen Bradley Ltd. The decision of the Hon'ble Supreme Court in the case of Rajendra Prasad Moody is not applicable because in that case shares were allotted whereas in the present case no shares were ever allotted. It is pointed out that under the Company law the shares money has to be kept separately in the bank account but there is no material on record to show that the money was kept in the bank account. It is a case of diversion of funds for non-business purposes. It is pointed out that the investment in share money went on increasing and so the authorised capital of the subsidiary company. Money was consistently diverted by the assessee to the subsidiary company in the name of allotment of shares. Therefore, it is a perfect planning of the assessee-company to reduce the tax liability. Reliance was placed on the following decisions: (1) Highways Construction Co. (P) Ltd. vs. CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est paid. So far as this huge amount of interest is concerned, we find that the legal position as laid down by the Hon'ble Supreme Court and various High Courts does not warrant disallowance on this ground. Before we discuss the legal position, it would be pertinent to mention here that the AO submitted his remand report to the CIT(A) on 11th Nov., 1993, in which he has clearly mentioned that there was no investment of borrowed funds in DTL till asst. yr. 1988-89 and he further observed as under: "A perusal of the various bank accounts and relevant entries in the books with regard to the investment made in DTL did show that there are no diversion of fund from the cash credit account for making investment in DTL. The investment in DTL have gone out of bank accounts maintained by the company. with Bank ofIndiaCalcuttaand Bank ofIndia,Delhi. As such no direct nexus between the payment of interest to State Bank of Patiala Hauzkhas branch and investment in DTL could be established." 13. Therefore, from the perusal of the bank account and relevant entries in the books with regard to investment it is clear that there was no direct nexus between payment of interest to State Bank ofPatial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut charging any interest thereon while it was paying interest on the amounts borrowed by it, and that to the extent to which it would have been in a position to collect interest on the outstandings due to it from others, it could not be permitted to claim as an allowance interest paid by it is not correct." Therefore, as per the legal principle laid down by the Hon'ble Supreme Court and the Bombay High Court, it is clear that the consideration which weighed with the CIT(A) for disallowing the interest in respect of PICUP and State Bank ofPatiala, was not a valid consideration in the eye of law. So far as the decision of the Hon'ble Allahabad High Court in the case of H.R. Sugar Factory (P) Ltd. relied on by the CIT(A) is concerned, the facts of that case are distinguishable. In that case the assessee borrowed money from bank but advanced loan to its director on concessional rate lower than what it was paying to the bank. In that circumstance, the Hon'ble Allahabad High Court took the view that the assessee was not a financial company. Rather it was engaged in the manufacture of sugar and no business purpose was served by advancing the loan on concessional rate to its director. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... njustified. We, therefore, direct the AO to allow the same accordingly. 15. As regards the disallowance of interest relating to inter-corporate loans invested in DTL, we find that the AO has reported that the assessee invested Rs. 1,24,20,000 in DTL which came out of inter-corporate loans. The assessee-company invested the same for the purchase of shares of DTL which was never allotted to the assessee-company. Rather DTL invested the money in another concern for purchase of shares of Allen-Bradley Ltd. Therefore, it is clear that the money was borrowed for non-business purposes. The shares were never allotted to the assessee-company. So we agree with the view taken by the CIT(A) on this issue entirely. 16. The case of the assessee is that whereas the assessee-company borrowed money for the purpose of making investment in purchase of shares and paid interest thereon, it is allowable as per the decision of the Hon'ble Supreme Court in the case of Rajendra Prasad Moody. So far as this contention of the learned assessee's counsel is concerned, the case of the assessee-company is distinguishable from the case of Rajendra Prasad Moody. In that case the assessee-company borrowed money f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat till 3rd Sept., 1990, the amount outstanding against the sister concern was Rs. 2,06,55,000 on 4th Sept., 1990 itself. The assessee further advanced a sum of Rs. 50 lakhs. And it is only on31st March, 1991, that the account has been finally settled. Therefore, in view of the assessment framed for the asst. yr. 1990-91 which has been substantially upheld by the CIT(A) and the facts being identical to last year, the assessee's entire interest claimed at Rs. 4,34,028 is disallowed." So far as it pertains to interest payment to State financial institutions, the State Bank ofPatialaand PICUP is concerned, our finding given on this issue in the preceding paragraph is applicable in this year also. It will be pertinent to mention here that the AO fell into error when he mentioned that the facts of this year are identical to the facts of the earlier assessment year. In this year the assessee has recovered the amount of Rs. 2,06,85,000 due from DTL on 4th Sept., 1990, and thereafter the company gave short-term loan of Rs. 50,00,000 (Rs. 50 lakhs) for seven months from September to 31st March, 1991 which is clear from the details given at p. 6 of the Statement of the case. This loan was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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