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2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT

2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT - [2016] 381 ITR 107 - Disallowance of interest paid to the bank - the appellant/assesse had advanced an interest free loan to its sister concern although the appellant had no business dealings with the sister concern - Whether while arising at the ‘chargeable income’ u/s 29 considering the provisions of Section 36(1)(iii), the disallowance of interest paid to banks is mandatory on the true and correct interpretation of the words ‘for the purpose o .....

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mercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits.

In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangibl .....

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a, JJ. For the Petitioner : Mr. Pankaj Jain, Senior Advocate with Mr. Divya Suri and Mr. Sachin Bhardwaj, Advocates For the Respondent : Mr. Rajesh Katoch, Advocate ORDER S. J. Vazifdar, Acting Chief Justice This is an appeal against the order of the Income Tax Appellate Tribunal dated 07.08.2012 in so far as it allowed the appeal filed by the revenue against the order of the Commissioner of Income Tax (Appeals) deleting an addition of ₹ 1,31,24,332/- made by the Assessing Officer on accou .....

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isallowance of interest paid to banks is mandatory on the true and correct interpretation of the words for the purpose of business? 3. Section 36(1)(iii) reads as under:- 36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- …… ………. ………. ……. (iii) the amount of the interest paid in respect .....

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ptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; 4. As noted in the assessment order, the Assessing Officer found from the sundry advances that the assessee had advanced an amount of ₹ 14,08,25,185/- as project advance to various parties, out of which an amount of ₹ 10,29,17,301/- was advanced to the appellant s sister concern .....

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advance of ₹ 10,29,17,301/- whereas the appellant had paid the interest amounting to ₹ 1,31,24,332/- on the loans taken from various banks. He observed that had the appellant not advanced the said sum to its sister concern without charging interest, it would have been left with sufficient funds to refund the bank loan and the appellant would not have had to pay interest to the bank. In arriving at this conclusion, the Assessing Officer relied upon the judgment of this Court in the ca .....

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ngs. The findings of the CIT (Appeals) are as follows. The appellant and its sister concern were in the hotel business and the advance was as a measure of commercial expediency and only for the purpose of the business of the sister concern. The funds advanced had been used for the purpose of the business of the sister concern. This plea had been raised by the appellant along with a copy of the balance sheet of the sister concern and the Assessing Officer had not commented adversely on the appell .....

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. This view as we will demonstrate is not sustainable. The CIT (Appeals), therefore, rightly came to the conclusion that the appellant advanced the amount to its sister concern on account of commercial expediency and that the sister concern used the same for the purpose of its business. It was also found that the advance of about ₹ 10.29 crores to the appellant s sister concern was covered by the capital and interest free reserve available with the appellant. Accordingly, supported by prec .....

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reme Court in the case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC), in right spirit. No where the assessee has established the measure of commercial expediency either before the AO or before the ld. CIT(A) and not even before us. There is nothing on record that the money so advanced by the assessee to the sister concern had been used as a measure of commercial expediency. In the facts and circumstances of the case, the ld. CIT(A) has wrongly interpreted and relied upon the decision of Hon ble S .....

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under which it purchased the shares of M/s Kolkatta Hotels Private Limited. Mr. Jain produced a share purchase agreement dated 08.07.2002 between the President of India, the appellant and Modern Publisher, who were referred to in the agreement as the purchaser and M/s Kolkatta Hotels Private Limited referred to in the agreement as the Company. The agreement stated that the government owned about 89.97% of the paid up equity share capital of M/s Kolkatta Hotels Private Limited, the Indian Hotels .....

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ment had agreed to sell the shares to the purchasers mentioned therein which included the appellant and that by a separate agreement the IHCL had also agreed to sell its 10% share holding to the said purchaser. Further, the purchasers had agreed to make an offer to the residual share holders to purchase their shares. The term business was defined in Article-1 to include the entire business of the said unit of ITDC including not merely the various assets but all liabilities and debts as well. Art .....

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en. b) Simultaneous with the actions envisaged at 3.3(a) above, the Purchaser shall pay the Consideration after due adjustment with the Earnest Amount in the following manner: (i) ₹ 9,33,42,000/- (Rupees Nine Crores Thirty Three Lakhs Forty Two Thousand Only) by way of demand draft drawn in favour of India Tourism Development Corporation Limited toward dues payable under the voluntary retirement scheme under implementation by ITDC to VRS Employees as defined in Article 6.10. (ii) ₹ 9 .....

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irports Authority of India towards outstanding dues in respect of lease of land/Airport Restaurant. The Government shall make best efforts to procure a No Dues Certificate from the relevant authorities as soon as practicable. (v) ₹ 5,64,73,145/- by way of Demand Draft or Bankers Cheque in favour of the Government towards share consideration for purchase Shares calculated on the basis of the Price Per Share as defined in this Agreement. Admittedly, the appellant ultimately acquired 88.75% o .....

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; 18 crores in the sister concern. The appellant and its sister concern are in the same business. For the point under consideration, it may not have made any difference even if they were not in the same business. However, the fact that they are in the same business is a further aspect in the appellant s favour. The parties admit that the appellant advanced the said sum of about ₹ 10.29 crores to the appellant s sister concern free of interest. The share purchase agreement and in particular .....

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he amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Ja .....

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stment and that the investment and advances were made for the purposes of business. From the order of the CIT (Appeals), it is evident that the department never contended that the amounts were not advanced for commercial expediency. Nor was it contended that the amounts advanced were used by the sister company for any purpose other than for the purpose of its business. Indeed, such a case was not even advanced before the Tribunal. 10. The CIT (Appeals) was, therefore, entirely justified in comin .....

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ts in this regard. The appellant expressly stated that the amounts had been utilized for commercial activity. This assertion was never denied. The appellant was not required to do anything further to establish its assertion that its sister company had utilized the amounts for the purposes of its business. The finding of the Tribunal is not based on any material. It is important to note that the Tribunal had not even suggested that such a case was put to the appellant or its authorized representa .....

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its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. (emphasis supplied) It is precisely this test that was applied by the CIT (Appeals). 13. The commercial expediency in advancing the amount is established beyond doubt. The appellant owns about 89% of the equity capital. A Division Be .....

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or gains . It has been held in S.A. Builders Ltd.'s case (supra) that when the assessee borrowed the fund from the bank and lent some of it to its sister concern as an interest free loan, then the real test to allow the interest as deduction under section 36(1)(iii) of the Act is whether this was done as a measure of commercial expediency. It has been held that in order to claim a deduction, it is enough to show that the money is expended, not on necessity and with a view to direct and immed .....

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#39;s case (supra), it was held that in order to decide whether it was for commercial expediency, the authorities and the courts should have examined the purpose for which the assessee advanced money to its sister concern and what the sister concern did with the money. It was further held that it is not relevant whether the assessee has utilized the borrowed amount in its own business or has advanced the same as interest free loan to its sister concern. What is relevant is whether the amount, so .....

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l to consider the matter in the light of the principles laid down by the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). 14. The appellant s case meets each of the tests stipulated by the Division Bench. In fact, it meets a higher test. When a holding company invests amounts for the purpose of the business of its subsidiary, it must of necessity be held to be an expense on account of commercial expediency. A financial benefit of any nature derive .....

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f utmost necessity for without it the subsidiary would have suffered grave financial prejudice. 15. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). 16. As we noted earlier, the funds/reserves of the appell .....

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