TMI Blog2012 (5) TMI 622X X X X Extracts X X X X X X X X Extracts X X X X ..... ry company and sister concern - Held that:- The amount advanced by assessee-company to its subsidiaries is for advancement of its objects and falls under the commercial expediency thus we allow the claim of assessee Addition u/s 14A - Held that:- We direct the AO to restrict disallowance at 1% of expenses. This ground of appeal of assessee is partly allowed. - IT APPEAL NOS. 488 AND 525 (KOL.) OF 2011 - - - Dated:- 31-5-2012 - PRAMOD KUMAR, ACCOUNTANT MEMBER (AS A THIRD MEMBER), MAHAVIR SINGH, JUDICIAL MEMBER AND C.D. RAO, ACCOUNTANT MEMBER For the Petitioner : Siddarth Jhajharia For the Respondent : S.K. Roy ORDER Mahavir Singh, Judicial Member Appeal No. 488/K/2011 filed by assessee is arising out of revision order of CIT (Central-1), Kolkata in M. No. CIT(C-1)/263/SP JAISWAL ESTATES P. LTD./Tech/10-11/Kol/11212-14 dated 01.03.2011. Assessment was framed by DCIT, C.C.-IV, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for Assessment Year 2006-07 vide dated 22.12.2008. Likewise, Appeal No.525/K/201 filed by assessee is arising out of order of CIT(A), Central-1, Kolkata in appeal No.131/CC-IV/CIT(A),C-1/09- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e within the due date of filing of return of income u/s. 139(1) of the Act or not. We find that the issue is squarely covered in favour of assessee and against the revenue by the decision of Hon'ble jurisdictional High Court in the case of CIT v. Vijay Shree Ltd. vide ITAT No. 245 of 2011 in GA No. 2607 of 2011 dated 7th September, 2011, wherein it has been held as under: After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax v. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income-tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear. The assessee's counsel in all his fairness conceded this position and accordingly, we dismiss this issue of assessee's appeal. 6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of depreciation on hotel building claimed by assessee at 15% and allowed by Assessing Officer at 10%. For this, assessee has raised following ground no.3: For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of depreciation of ₹ 15,78,678/- on the Buildings in Kolkata and Varanashi units used as hotel by allowing the depreciation @ 10% only instead of @ 15% claimed by the assessee without considering the facts of the case and it may kindly be held accordingly. 7. We have heard rival contentions and gone through facts and circumstances of the case. We find that this issue is covered against the assessee even in earlier years and CIT(A) has decided on that basis only. The relevant findings of CIT(A) in para 7 are as under: Ground no. 6 taken by the appellant is against allowing depreciation on building used for hotel @ 10% instead of 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from subsidiary companies. Even otherwise it was argued that the assessee has substantial interest free funds in the form of share capital, reserves and surplus and profits of the year. For commercial expediency the assessee relied on the decision of Hon'ble Apex Court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1/ 158 Taxman 74. The AO noted from the Balance Sheet that interest free loan to the subsidiary company increased from ₹ 10.21 lac in the previous year to ₹ 3,55,25,833/- in the relevant year but there is no increase in the share capital and general reserves and surplus during the relevant period. According to AO, secured loan from banks increased from ₹ 13,31,88,370/- as on 31.03.2006 to ₹ 24,28,25,324/- as on 31.03.2007. Accordingly, AO has not accepted the contentions of the assessee and made disallowance of interest on interest free advances by estimating and by taking average rate of interest at ₹ 37,86,614/-. Aggrieved assessee preferred appeal before CIT(A), who exactly on identical facts confirmed the action of AO. Aggrieved, now assessee is in appeal before us. 10. We have heard rival contentions and gone through f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1961 Act to the facts of this case As stated above, in this batch of civil appeals we are concerned with the assessment years 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. At this stage, it may be mentioned that as far back as in August/September, 1991, the assessee herein had given interest-free advances to its sister concerns. These advances stood reduced over a period, till the assessment year 1997-98. Each year the balances stood reduced. Further, vide order dated January 3, 2003, the Tribunal held, for the assessment year 1992-93, that the assessee had given interest-free loans from its own funds and not from interest bearing loans taken by the firm from third parties and consequently the assessee was entitled to claim deduction under section 36(1)(iii). In other words, the Tribunal held that the loans were given for business purposes. Similarly, for the assessment year 1993-94, the Tribunal had taken the view that the said loans given to the firm's sister concerns were for business purposes. Accordingly, the Tribunal had deleted the disallowances during the assessment years 1992-93 and 1993-94. It is equally true that for the assessment year 1994-95 the Tribunal took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to subsidiaries, as noted the facts above. Once it is a fact that the amount advanced as interest free is out of assessee's own funds no disallowance of deduction claimed u/s. 36(1)(iii) can be made. 11. Another facet of arguments made by Ld. Counsel that there is business expediency and for this he argued that the assessee is engaged in the business of running and managing of hotels and such subsidiary companies were set up with an intention to acquire/manage new hotels, which will advance the cause or achieve object of assessee-company and as such the advances were given to such subsidiary companies, which were in course of business of the assessee company. Since such advances were in course of business even if the said advances were interest free, no notional interest can be attributed towards such interest free advance, reason being there is business expediency in advancing these interest free advances to its subsidiary. For this, the decision of Hon'ble Apex Court in the case of S. A. Builders Ltd. (supra) has described the purpose of business and commercial expediency by considering, whether one should allow deduction under section 36(1)(iii) of interest paid by as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. In the present case also the amount advanced by assessee-company to its subsidiaries is for advancement of its objects and falls under the commercial expediency as enumerated by Hon'ble Apex Court in the case of S. A. Builders Ltd. (Supra). Respectfully following both the decisions of Hon'ble Apex Court, cited supra, we allow the claim of assessee and reverse the orders of lower authorities. This issue of assessee's appeal is allowed. 12. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of interest expenses by invoking the provisions of section 14A of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant and germane material having a bearing on the facts and circumstances of the case We further find that the Tribunal, Kolkata Bench on the selfsame facts in the case of Sagrika Goods Services (P.) Ltd. v. ITO [I.T. Appeal No. 1278/Kol/2010, Assessment Year 2005-06, dated 24th September, 2010] has held as under: 5. Heard the rival submissions, perused the material available on record and the decisions relied on by the Ld. Authorised Representative of the assessee cited supra. We find that on the issue of disallowance u/s. 14A, this Bench of the Tribunal has been taking a consistent view that this disallowance should be restricted to 1% of dividend income. Following the same, in this appeal also we hold that the disallowance u/s 14A for earning exempt dividend income should be restricted to 1% of dividend income. The Assessing Officer is accordingly directed to do so and work out the quantum of disallowance. This ground of appeal of the assessee is allowed as directed above. In view of the above an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the loan given to subsidiary companies amounting to ₹ 3,55,25,833/- ₹ 3,32,258/-outstanding as on 31.03.2007. In this respect, this is to submit that such amount given to such subsidiary is in the ordinary course of the business of the assessee since such amount is being expended by such subsidiary for the purpose of hospitality business only in which the assessee deals in. Since the said sum is for the purpose of business hence the assessee had given such interest free to such subsidiary. Without prejudice, the assessee has substantial interest free fund in the form of share capital and reserve and commercial expediency of the sum so advanced can only be decided by the assessee. Indeed, Hon'ble Apex Court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR I (SC) has already held that it is only the assessee who can decide as to the affairs of the business and nobody else can sit in the chair of the assessee to decide the same. Indeed Hon'ble Apex Court held so in the case of an assessee advancing interest free sum to others sister concern. Hence it will be appreciated by your honour that since such sum was given for the purpose of business of the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The claim that interest-free funds available with assessee were more than that of interest-free advances and that no part of borrowed capital was diverted towards interest-free advances was considered. There has been no increase in the share capital and the reserve of the Company has also been advanced decreased. Hence it cannot be said that assessee had interest-free funds of its own which had been generated in course of year commencing from 1.4.2006. Accordingly the claim of the assessee that the loan has been advanced from the existing share capital, reserve surplus amounted to ₹ 5,56,43,400/- ₹ 21,61,28,161/- respectively totalling to ₹ 27,17,71,561/-and hence the interest-free advances of ₹ 3,58,58,091/- to the sister concern is from interest-free fund has no relevance. Moreover against the shareholders fund and reserve surplus totalling to ₹ 27,17,71,561/- the existing investment of the Company in fixed asset is ₹ 48,03,46,443/-. Hence taking all the factors into connection and since direct nexus had been proved by the AO between the borrowals of loan and making free of interest advances, the disallowance of ₹ 37,86,614/- made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee that the loan has been advanced from the existing share capital, reserve surplus amounted to ₹ 5,56,43,400/- ₹ 21,61,28,161/-respectively totalling to ₹ 27,17,71,561/- and hence the interest-free advances of ₹ 3,58,58,091/- to the sister concern is from interest-free fund has no relevance 18.5 However, in order to establish the availability of own funds of assessee to lend the same to the sister concern the relevant/correct basis is the scrutiny of the cash flow statement for the whole year. In this case assessee has himself has given the consolidated fund flow statement which were placed at page 45 of the paper book. The opening cash balance as on 1.4.2006 of ₹ 2,23,01,497/- has been reduced to ₹ 1,88,31,497/- as on 31.3.2007. The extract cash flow statement is as under :- (a) Cash Flow from Operating Activities : ₹ 69,007,614/- (b) Cash Flow from Investing Activities : ₹ 10,017,237/- (c) Cash Flow from Financing Activities : (-) ₹ 82,494,851/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ionship in the assessee's case. In this case business expediency has not been established by the assessee company. 19.1 In my considered opinion on this issue the ld. Counsel appearing on behalf of assessee has not brought any material on record to the fact that the loan given by assessee company to the subsidiary is in the commercial expediency. Under this circumstances it is not fair to follow the ratio laid down by simply accepting the submissions of assessee. Since in the case of S.A. Builders the Hon'ble Supreme Court has categorically mentioned that It is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case. In this case apparently the AO brought on record that the subsidiary company who received interest free loan from assessee company has not used the said loan for business expediency and the ld. Counsel appearing on behalf of assessee has not brought any contrary material to the specific findings of the ld. AO. Therefore, in my considered opinion the ratio laid down by M/s. SA Builders is also not applicable to the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e ordinary course of business. It was also submitted that the assessee has sufficient interest-free funds in form of share capital and reserves. Reliance was also placed on Hon'ble Supreme Court's judgment in the case of S A Builders Ltd. (supra) in support of the propositions that it is for the assessee to decide what is commercially expedient for him, and that the advances, given for business purposes by the assessee, are required to be treated as having been given on the grounds of commercial expediency. None of these submissions, however, impressed the Assessing Officer. He noted that the subsidiary company, i.e. HHI Resorts Pvt Ltd, was demerged from the assessee-company on 16th March, 2007, and that the said company did not have any commercial activity at present. The Assessing Officer further noted that the assessee-company owns a piece of land at Goa but, on account of certain legal restrictions, no construction is permissible on this piece of land. He thus questioned commercial expediency of granting interest free loan to the subsidiary company, when no construction is permissible on the land owned by that subsidiary company. As regards the availability of sufficie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in view of the above reasoning and as direct nexus had been proved by the AO between borrowing of loans and making interest free advances , the disallowance of ₹ 37,86,614 is to be confirmed. The appeal was, accordingly, rejected on this issue. 3. Not satisfied with the stand so taken by the CIT(A), the assessee carried the matter in further appeal before a division bench of this Tribunal, and this appeal resulted in a split verdict. 4. While learned Judicial Member was of the view that since assessee's own interest bearing funds were far in excess of the interest free advances given to the subsidiaries, deduction claimed under section 36(1)(iii) in respect of interest on its borrowings could not be declined. In coming to this conclusion, learned Judicial Member referred to and relied upon Hon'ble Supreme Court's judgment in the case of Munjal Sales Corpn. (supra). He further held that as the assessee was engaged in the hotel business and the subsidiaries were also set up to acquire, set up or manage the hotels, which will advance the cause or achieve objects of the assessee-company, the advances given to the subsidiary companies are required to be tre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company to the subsidiary company is in the commercial expediency and that under the circumstances, it is not fair to follow the ratio laid down by simply accepting the submission of the assessee . He then referred to Hon'ble Supreme Court's observation, in the case of S A Builders Ltd. (supra) itself, to the effect that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern; it all depends on the facts and circumstances of the case. Learned Accountant Member then observed that in this case, the AO has brought on record that the subsidiary company, who received interest-free loan from the assessee-company, has not used the said loan for business expediency, and learned counsel appearing for the assessee has not brought any contrary material to the specific findings of the learned AO . He was thus of the considered opinion that the ratio laid down by S A Builders is also not applicable to the facts of the case . He thus upheld the disallowance in principle, though he modified the quantum of disallowance but then that aspect of the quantification of disallowance is not really relevant for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO by stating that the funds used by the sister concerns are not for commercial expediency , I find that there are no findings by the CIT(A) about commercial expediency, or lack thereof, of advancing interest free advances to the sister concerns. The point of difference, therefore, proceeds on the fallacious assumption that the CIT(A) did adjudicate on this issue. Undoubtedly, this aspect of the matter is important for the reason that in case the fact of commercial expediency of advancing interest free advances to the subsidiary companies is established, even if one is to come to the conclusion that interest free advances to the subsidiary companies are out of the borrowed funds, interest on borrowed funds is to be allowed in full nevertheless. It is so held by Hon'ble Supreme Court in the case of SA Builders Ltd. (supra). That was a case in which borrowed funds were not used by the assessee in its business but diverted the same to the sister concern by giving interest free advances. On these facts, Their Lordships observed that It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans . Of course, there has to be some material to show that the funds advanced to the subsidiary company were used for some business purposes, but then the Assessing Officer did not probe this aspect of the matter but simply rejected the commercial expediency of the interest free advance on the ground that construction was not possible on the plot owned by the subsidiary company. The objection taken by the Assessing Officer was devoid of any legally sustainable merits, but then the CIT(A) did not even deal with this issue at all. When there are no findings by the CIT(A) on this aspect, the point of difference, to this extent, cannot be adjudicated upon. In any event, having held that the assessee did have sufficient interest bearing funds to advance interest free advances to sister concerns, this aspect of the matter is somewhat academic. 11. The matter will now go back to the division bench to decide the appeal in accordance w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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