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2015 (6) TMI 797 - ITAT MUMBAI

2015 (6) TMI 797 - ITAT MUMBAI - TMI - Disallowance of interest under section 36(1)(iii) - CIT(A) deleted the addition - Held that:- Where the assessee had established availability of funds of its own and also where the investment was made in 100% subsidiary of the assessee, which in turn was engaged in the same line of business and had utilised the funds for its business, the existence of commercial expediency stands proved. In case the connection between the lender and the borrower is of comme .....

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allowed the remuneration on the ground that much less remuneration was paid in the case of sister concern. Although, this could be a starting point to suspect that excessive remuneration was paid but for effecting an addition the suspicion has to be grounded on fair market value of services rendered. The A.O. however, did not carry out such exercise. On the other hand the appellant has explained that the appellant is a 35 year old company whereas the subsidiary is only in business for last 4 yea .....

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does not seem to be excessive and thus the disallowance of ₹ 22,80,000/- is directed to deleted. - Decided in favour of assessee. - ITA No. 7758/Mum/2010, ITA No. 1364/Mum/2011, ITA No. 5088/Mum/2012 - Dated:- 10-6-2015 - R. C. Sharma, AM And Sushma Chowla, JM,JJ. For the Appellant : Shri Neil Philip For the Respondent : Shri B P Agarwal ORDER Per Sushma Chowla, JM. Out of this bunch of three appeals filed by Revenue the appeal in ITA No. 7758/Mum/2010 is filed against the order of CIT(A) .....

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TA No. 7758/Mum/2010 & ITA No. 1364/Mum/ 2011, has raised the following grounds of appeal: - "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of ₹ 18,50,000/- being interest disallowed u/s. 36(1)(iii) of the I.T. Act, 1961, overlooking the failure of the assessee to substantiate that the amounts borrowed were for the purpose of the assessee's business. 2. On the facts and in the circumstances of the case and in law .....

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Act. The facts and issue in the present appeals are similar, however, reference is being made to the facts in ITA No. 7758/Mum/2010 to adjudicate the issue. 5. Briefly in the facts of the case, assessee is engaged in the business of manufacturing of Pneumatic Tools. During the course of assessment proceedings the AO noticed that assessee had made investment of ₹ 110 lakhs in the shares of its subsidiary company, i.e. Edicon Pneumatic Tools Co. Pvt. Ltd., which included advance against shar .....

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o interest free loans & advances and investment made for non business purposes should not be disallowed under section 36(1)(iii) of the Act. In reply assessee stated that the said investment was made in 100% subsidiary company by way of share capital of ₹ 1 lakh and share application money of ₹ 109 lakhs and advance of ₹ 75 lakhs. The said investment was claimed to have been made out of Capital & Reserves and surplus of the company and it was claimed that no disallowanc .....

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e said to have been borrowed for the purpose of assessee's own business. Further, the claim of the assessee that investment was made for the purpose of business was also not accepted, since the subsidiary company was an altogether different entity. The AO thus held that disallowance of ₹ 18,50,000/- was warranted under section 36(1)(iii) of the Act. 6. The CIT(A) noted that the loans and advances have been advanced to 100% subsidiary of the assessee, which was also carrying on the same .....

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iness purposes, the CIT(A) held that no disallowance is warranted under section 36(1)(iii) of the Act. 7. Revenue is in appeal against the said order of the CIT(A). The learned D.R. for the Revenue pointed out that where the assessee had borrowed funds on interest and investment was made in tax free funds, though with the subsidiary, in the absence of any trade between the two and in the absence of any commercial expediency, there was no merit in the plea of the assessee. 8. On the other hand, t .....

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ho was in the same line of business with same Directors. The next plea raised by him was that the income earned by the subsidiary goes to the holding company, hence the said investment was made for business purposes. Reliance in this regard was placed upon the ratio laid down by the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). 9. We have heard the rival submissions and perused the record. The issue arising in the present appeal is in relation to computation .....

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iary company was the same as that carried on by the assessee. The claim of assessee before the AO was that the said investment was made for business purposes, hence no disallowance of interest was warranted under section 36(1)(iii) of the Act. The first advance was made by assessee to its subsidiary company vis-a-vis investment in the shares of the said subsidiary company in A.Y. 2005-06. It was claimed by the assessee that the said investment was out of its share capital. However, the AO dismis .....

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ce no part of interest was disallowable under section 36(1)(iii) of the Act. The addition made by the AO was ₹ 2,21,731/- and because the small tax effect no appeal was filed before the Revenue against the said order. 10. In the instant year, assessee had further advanced ₹ 75 lakhs to its subsidiary company. A perusal of the Balance Sheet filed for A.Y. 2006-07 at pages 1 to 5 of the paper book reflects that though the capital of the assessee company remained at ₹ 20 lakhs but .....

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d the funds for its business, the existence of commercial expediency stands proved. In case the connection between the lender and the borrower is of commercial expediency, then in view of the ratio laid down by the Hon'ble Supreme Court in SA Builders Ltd. (supra), no disallowance is warranted under section 36(1)(iii) of the Act. In view thereof we hold that there is no justification for disallowing interest under section 36(1)(iii) of the Act and uphold the order of the CIT(A). We dismiss t .....

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penditure of ₹ 13,90,000/-, on the ground that for A.Y. 2005-06, 2006-07 and 2007-08, the department has accepted the CIT(A)'s decision. The disallowance made by the Assessing Officer as interest expenses was on account of interest free advances, which were not used for the purpose of assessee's business. Further, the CIT(A)'s order for A.Y. 2005-06 was not challenged due to low tax effect and appeals on the same issue have been preferred against CIT(A)'s order for A.Y. 200 .....

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same line of business and assessee's failure to justify the heavy expenses claimed by it as against the expenses claimed by its sister concern which enjoys benefit u/s. 10B. 13. The issue in ground No. 1 raised by Revenue is identical to the ground No. 1 raised in A.Y. 2006-07 and A.Y. 2007-08, which we have adjudicated in the paras hereinabove. Following the same parity of reasoning, we uphold the order of the CIT(A) in deleting the disallowance under section 36(1)(iii) of the Act. Accordi .....

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s sister concern, where the company was in the same line of business and having common Directors. As per the AO it was evident that similar nature of services were rendered by the Directors in both the companies. The only difference between the companies was that assessee company was 36 years old whereas the subsidiary was only 5 years old and in view thereof AO allowed only a remuneration of ₹ 3,50,000/- and the balance remuneration of ₹ 22,80,000/- was disallowed. 15. The CIT(A), o .....

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