TMI Blog2016 (3) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... The money was advanced by the assessee holding company to its subsidiaries for “business expediency”, which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee. - Decided in favour of assessee - ITA NO.8382/Mum/2011 - - - Dated:- 3-2-2016 - Shri Joginder Singh, Judicial Member, and Shri Ashwani Taneja, Accountant Member For The Assessee : Shri Vijay Mehta For The Revenue : Mr.J ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... munications Infrastructure Ltd. (270 taxman 219) (Bom.). The ld. counsel further explained that for A.Y. 2007-08 (page- 21 of the paper book), the assessee claimed interest, page 24 of the paper book, containing computation of income, wherein, no disallowance was made by the Assessing Officer. The crux of the argument is that if interest is allowed in earlier year, the same cannot be disallowed in later year unless and until the facts are different. For this proposition, reliance was placed upon following decision: i. CIT vs Sridev Enterprises (192 ITR 165)(Kar.) ii. ITO vs J.M.P. Enterprises (101 ITD 324, 336-337) (Asr) iii. Escorts Ltd. vs ACIT (104 ITD 427, 512-513)(Del.) iv. Malwa Cotton Spinning Mills vs ACIT (89 ITD 65, 94- 95)(Chd)(TM) v. CIT vs Industrial Cables (India) Ltd. 209 CTR (P H) 167 2.1. On the other hand, the ld. DR, Shri J. Sarvanan, defended the conclusion drawn in assessment order as well as impugned order by contending that commercial expediency was not proved by the assessee and further the assessee himself disallowed the interest in earlier assessment order, therefore, the ld. Commissioner of Income Tax (Appeals) is justified in disallow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for its business. Hence, is use of funds by the appellant for its own business and interest thereon is allowable. This was examined by the Hon'bIe Supreme Court in the case of S.A. Builders Ltd vs CIT- 288 ITR 1 and was first upheld by ITAT Mumbai in the case of Indian Hotels Ltd - 276 ITR and the ratio judgement in both cases is same. In both cases, it is held that as the company advances borrowed money to its subsidiary and same is used by the subsidiary for some business purpose the appellant will be entitled to deduction of interest on borrowed funds. The Ld. AO observed that the appellant is engaged in the business of investments. The borrowed funds have been used for the purpose of granting interest free loans and advance share application money to various companies including subsidiary companies including subsidiary companies. Accordingly, the interest has been utilized not for the purpose of business of the appellant and total income of interest claimed is ₹ 6,79,03,542/-. The Ld. AO placed reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd Vs. CIT ( 2007) 288 ITR 1 (SC). The Ld. AO further held that as per appellant's own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns and share application money to its subsidiaries during the year and earlier years. The appellant has deep interest in the business of subsidiaries and other associate concerns. The share application money/loans advanced to subsidiary out of commercial expediency. The subsidiary has used these funds for its business. Hence, it is use of funds by the appellant for its own business and interest thereon is allowable. The Ld. AR of the appellant further submitted that this proposition was examined by the Supreme Court in the case of S. A. Builders Ltd (288 ITR 1) and was first held by IT AT Mumbai in the case of Indian Hotels Ltd (276 ITR 104) and the ratio of judgment in both cases is same. In both cases it is held that as the holding company has deep interest in the business of its subsidiaries, hence if holding company advances borrowed money to its subsidiary and same is used by the subsidiary for some business purpose the assessee will be entitled to deduction of interest on borrowed funds. The appellant further submitted that the details of Loans and Advances along with share holding of assessee company in these companies is as under: Name of the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hether advancement of a loan is a measure of business expediency. The distinction has to be kept in mind between a case where the loan is used for the purpose of the business and a case of the loan misutilised by giving it interest free or at a nominal interest to directors, their relatives. In the latter situation, interest can be disallowed, but not in the case where advances are made to a subsidiary company who used the same for purposes of business. The Ld. AR of the appellant further submitted that Hon'bIe Supreme Court in case of S.A. Builders Ltd vs. CIT 288 ITR 1/158 Tax man 74 it is held as under: (a) The amount advanced to subsidiaries or sister concerns as a measure of commercial expediency even not from the point of view to earning profit, the interest is allowable u/ s 36 (1) (iii) of the Act. (b) It is obvious that a holding company has a deep interest in its subsidiary and hence if the holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purpose, the assessee would be entitled to deduction of interest on its borrowed funds even if used for advancing to subsidiaries without interest. 2.2.3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - 0.13) debited to profit Loss Account. The Ld. AR of the appellant further submitted that the following the above decision of Reliance Utilities (supra) the Ld. AO at the most can disallow interest in proportion to interest free advances/ share application money given to subsidiaries/ associate concerns outstanding at the year end and interest free funds of ₹ 40.37 Crores available to the assessee as explained above. The Ld. AR of the appellant further observed that Ld. AO has also observed that had the interest bearing funds were not given to subsidiaries, assessee company could have earned interest @ 15% on all funds and by this way 0.5% of interest could have been earned i.e. 15 % charged by the assessee on one of the advances less 14.5 % charged on borrowed funds. It was held in various decisions that dept. cannot decide how business is required to be run by an assessee. Further, as per the decision of Apex Court (Supra) what is relevant is whether the amountwas advanced to subsidiaries as a measure of commercial expediency and not from the point of view for earning profit. The transactions with subsidiary companies are purely business transactions and out of commercia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st on such advancing of loan need to be disallowed. In the case of Marolia Sons vs. CIT(1981) 129 ITR 475 (ALL), the Hon'ble Allahabad High Court relying heavily on the decisions of Milapchand R. Shah vs. CIT (1965) 58 ITR 525 (Mad) and Roopchand Chabildass Sons vs. CIT (1967) 63 ITR 166 (Mad) has held that if the capital borrowed is not utilised for the purposes of the business, the assessee will not be entitled to deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partners for their personal use or utilisation, the firm would not be entitled to claim deduction on the amount diverted for utilization for other purposes or by other persons. It appears to be settled that an assessee-firm cannot be entitled to claim deduction under cl. (iii) of sub-so (1) of s. 36 on the amount which is not used for the purposes of business but is given to the partners for their personal use. Therefore, it follows from the decision of this case that assesseefirm cannot claim deduction of interest under s. 36(1)(iii) on the amount borrowed which is not used for the purpose of the business but is given to the partners for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Tribunal was not right in deleting the disallowance of interest attributable to borrowers diverted to I Ltd. through A Ltd. 2.3.4. In the case of CIT V Is. Motor General Finance Ltd (2002) 173 CTR (Del) 123 wherein the Hon'ble Delhi High Court has held that the assessee is a financing company. Whether it borrows a huge sum of money, cash balance in its own account may show a huge account and the same may not be determinative of the question as to whether the said amount was earned by way of profit or not. Normally a financing company would not grant any interest free loan. The assessee despite several opportunities granted, did not produce the relevant documents. An adverse inference, therefore, should have been drawn against the assessee. There cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to in this regard was on the assessee. It was to be proved that a bona fide loan had been granted in favour of a sister concern. It was, therefore, its duty t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted to sister concerns. The view taken by the AAC in this regard was correct. The Tribunal was not justified in deleting the disallowance of interest maintained by the AAC. 2.3.6. In the case of Elmer Havell Electrics Ors. V / s. CIT (2005) 277 ITR 549 (Del), while following the decision of CIT vs. Tin Box Co. (2003) 182 CTR (Del), the Hon'ble Delhi High Court has held that the assessee had placed on record the fund-flow statement for the year 1995-96 which itself shows that the concern had taken unsecured loans, which was considered as one of the main sources of funds and still had opted to give loan to the extent of ₹ 34,42,850 to its sister-concern. Whether there existed any commercial expediency for the assessee to transfer the said amount to one of its sister-concerns or not, is primarily a question of fact. The contention that the funds were advanced from self-generated funds of the assessee and that there was a need for that purpose, is again a question of fact. It is a settled principle of law that the Tribunal is the final fact-finding authority and the Courts while exercising the appellate jurisdiction under s. 260A would not normally interfere with suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer the money in the form of interest-free loan from one company to another close company, the same could very well be in the manner by introducing less capital in one company and by investing the balance amount in the other company as capital because according to the assessee, it had share capital funds of its own which could be given to other sisterconcern. It is not, at all, possible to accept such a plea raised by the assessee. 2.3.8. The Hon'ble High Court further held that as far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concern on interest-free basis is concerned, the stand of. the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sisterconcerns without interest is on the Revenue is not correct. Sec.36(1 )(iii) provides for deduction of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the AO that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of use of borrowed funds for the purpose of business to claim deduction under s. 36(1)(iii). If the plea of the assessee is accepted that the interest-free advances made to the sisterconcerns for non- business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister-concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. 2.3.9. . The Hon'ble High Court in the above referred case while relying on the several decisions as quoted by the Ld. AR of the appellant held that Sec. 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aised by the assessee before the ld. First Appellate Authority. Now, we are expected to deal with the objections raised by the ld. Assessing Officer and dealt with by the ld. First Appellate Authority. Another point which is to be adjudicated by us is whether there was any commercial expediency in advancing the loans to the sisterconcerns/ group companies, where the assessee is a holding company. The assessee utilized the funds available with it for giving loans/share application to its subsidiaries/group companies, where the assessee is a holding company. It is also noted that all these group companies are also doing identical activities. Before us, the stand of the assessee is that commercial expediency was very much there in advancing such loans. For this proposition, we are expected to analyze the utilization of such loans. We note that there is no finding in the assessment order that such loans were not used for business purposes, whereas, for A.Y. 2007-08, while framing the assessment u/s 143(3) of the Act, no disallowance was made by the Department against identical claim of the assessee. No new facts have been brought on record for the present assessment year by the Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been analyzed by Hon ble Apex Court in the case of S.A. Builders Ltd vs CIT (288 ITR 1)(SC). The relevant portion of the same is extracted hereunder for ready reference:- 23. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is for the purpose of business . It has been consistently held in the decisions relating to section 37 that the expression for the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 24. Thus in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton' s case [1925] 10 TC 155 (HL) has been approved by this court in several decisions, e.g., Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 32. 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 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. 33. Learned counsel for the Revenue relied on a Bombay High Court deci sion in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 37. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 38. We also make it clear that we are not setting aside the order of the Tribunal or other Income-tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds. If the aforesaid decision from Hon ble Apex Court is analyzed it clearly says that in order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961,one has to enquire whether the loan was given by the assessee as a measure of commercial expediency . The expression commercial expediency is one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister-concern was for the purposes of Commercial Expediency , thus, we find merit in the contention of the ld. counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. 2.6. Now, we shall analyze section 36(1)(iii), which deals in interest on borrowed capital. By the Finance Act, 2003, a new provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred. What is allowable as deduction u/s 36(1)(iii) is any sum paid by way of interest in the commercial sense. There cannot be strait jacket formula as was held in CIT vs Hindustan Condutors Pvt. Ltd. (1999) 240 ITR 762, 768-69, 770 (Bom.) and CIT vs Sarswati Chemical and allied Industries Pvt. ltd. (2001) 249 ITR 235, 238 (Del.). For allowance of claim for deduction of interest, under these provision, all that is necessary is that, firstly, the money, that is capital, must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on the (so-called borrowed) amount. Our proposition get support from the following decisions:- i. Madhav Prasad Jatia vs CIT (1979) 118 ITR 200 (SC) ii. Addl. CIT vs Laxmi Agents Pvt. ltd. (1980) 125 ITR 227 (Guj.) iii. Marolia Sons vs CIT (129 ITR 475)(All.) iv. Regal Theater vs CIT (225 ITR 205)(Del.) v. CIT vs Bombay Samachar Ltd. (74 ITR 723)(Bom.), vi. Ramkishan Oil Mills vs CIT (56 ITR 186)(MP) vii. Calico Dyeing and Printing Works vs CIT (34 ITR 265)(Bom.) 2.8. For making a disallowance u/s 36(1)(iii) of the Act essentially, there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowance under the section interest must be paid in respect of the capital borrowed. Where the money borrowed have been utilized for business purposes and also earning income under the residuary head income from other sources the interest paid on money so borrowed should be bifurcated proportionately between the business income and income from other sources (H.K. Investment Pvt. ltd. vs CIT 211 ITR 511, 514 (Guj.). However, in the present case, the facts are entirely different as the assessee advanced the funds to its subsidiaries for business exigencies , wherein, the assessee is a holding company, thus, it is not a colorable device. 2.11 In the case of CIT vs Reliance Communication Infrastructure Ltd. (2012) 207 taxman 219 (Bom.), the Hon ble jurisdictional High Court vide order dated 28/03/2012, considering the decision in S.A. Builders Ltd. vs CIT (2007) 288 ITR 1(SC) held that if there is a business purpose, while advancing money to its sister concern, the disallowance of interest cannot be sustained, supports the case of the assessee. The Hon ble High Court further held that there would not be any difference in the legal position whether the investment is made ..... X X X X Extracts X X X X X X X X Extracts X X X X
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