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2016 (3) TMI 816 - ITAT MUMBAI

2016 (3) TMI 816 - ITAT MUMBAI - TMI - Disallowance of interest u/s.36(1)(iii) - advance made to the sister concerns - Held that:- There can be no presumption that the shareholders’ fund of a company is utilized for the purchase of fixed assets. If the assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest fee funds at the disposal of the assessee. The facts of the instant case abundantly show tha .....

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oginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 14/10/2011 of the ld. First Appellate Authority, Mumbai. The only ground agitated by Shri M. Subrmanian, ld. counsel for the assessee, is with respect to disallowance of ₹ 22,47,100/- made u/s 36(1)(iii) of the Income Tax Act, 1961 (hereinafter the Act). 2. During hearing, the crux of argument advanced by the ld. counsel for the assessee is that the impugned issue is covered by the decision of the Tribuna .....

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ld. Assessing Officer disallowed ₹ 22,47,100/- u/s 36(1)(iii) and assessed the income at ₹ 8,09,20,910/-. On appeal, before the ld. Commissioner of Income Tax (Appeals), the addition was affirmed, against which the assessee is in further appeal before this Tribunal. It is noted that for A.Y. 2006-07, which is the lead year, identical addition was made by the ld. Assessing Officer and finally, it travelled to the Tribunal, wherein, vide order dated 23/12/2011 (ITA No.3313/Mum/2010), t .....

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l Instrument & Systems Limited and ₹ 23,13,002 to M/s. Aplab Seba Electronics. Both these companies happened to be the group concerns. The Assessing Officer noted that the assessee had obtained certain loans on interest and the interest cost debited to the profit and loss account was ₹ 2.42 crore. Considering the fact that the loans of ₹ 44.71 lakh were advanced to the sister concerns without interest, the A.O. made proportionate disallowance of interest u/s.36(1)(iii) at t .....

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placed on record to indicate as to how such amount was utilized by the sister concerns. 7. The assessee in the case before the Hon ble Summit court in S.A.Builders Ltd. (supra) transferred substantial amount to its subsidiary company out of its cash credit account in which there was a huge debit balance. The AO held that the assessee had diverted its borrowed funds to a sister concern without charging any interest. Proportionate interest relating to the said amount, out of the total interest pa .....

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e purpose of business used in section 36(1)(iii) and held that the same should not be confused with the narrower expression for the purpose of earning income, profits or gains . In the light of such observation, the Hon ble Apex Court remitted the matter to the Tribunal for a fresh decision by considering deductibility or otherwise of interest after examining whether the funds advanced by the assessee holding company to its subsidiary company were used by the subsidiary company for some business .....

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obvious that when a holding company has advanced borrowed money to its subsidiary, which is used by the subsidiary for some business purpose, there cannot be denial of deduction on account of interest. 9. The Hon ble Supreme Court, in this case, after laying down the broad parameters helpful in taking decision about the deductibility or otherwise of interest in the hands of the holding company, being the purpose for which the funds were ultimately used by the subsidiary company, remitted the ma .....

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ucial criteria for deciding the second question is the commercial expediency, that is, the user of such funds by the subsidiary for business purpose . It is only when answer to both the questions is in affirmative that the holding company qualifies for deduction of interest paid. If answer to the first question is in positive, the stage of finding out the answer to the second question comes. Only when the answer to the first as well as the second questions is given in positive that the ratio of .....

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d then taking final decision. That is why it categorically observed : We wish to make it clear 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 respective case . Thereafter, it has been observed that : For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously, it cannot be .....

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of the subsidiary company. If the mere fact of advancing loan by holding company to subsidiary company had been sufficient enough for granting deduction of interest to the holding company, there was no need to restore the matter. The Hon ble Supreme Court, in such a situation, would have itself granted deduction of interest in the hands of holding company. 11. From the above judgment, it is manifest that the assessee has to prove the commercial expediency for advancing the loans to its subsidiar .....

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ny evidence either before the AO or the ld. CIT(A) to prove the commercial expediency by demonstrating as to how the funds received by the subsidiary from the assessee company were utilized. Position is same before the Tribunal as well since there is no documentary proof to establish the commercial expediency . The situation would have been different if the assessee had placed sufficient material in support of its claim of business purpose in advancing the amount to its sister concern by properl .....

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as been placed before us which shows that the amount of shareholders fund at ₹ 27,52,14,000 comprising of share capital of ₹ 5,00,00,000 and reserves and surplus of ₹ 22,52,14,000. As against this, the assessee has advanced only a sum of ₹ 44.71 lakh to its sister concerns without interest. 13. The Hon ble jurisdictional High Court in the case of CIT vs. Reliance Utilities & Power Ltd. [(2009) 313 ITR 340 (Bom)] considered almost similar facts. In that case the AO rec .....

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res and the assessee had also raised capital of ₹ 7.90 crores, apart from receiving interest free deposit of ₹ 10.03 crores. It was, therefore, submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee s submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that t .....

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interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon ble jurisdictional High Court, it was contended by the Department that the shareholders funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon ble High Court observed that : In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the s .....

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the Hon ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT [(1997) 224 ITR 627 (SC)] and also the judgment of the Hon ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT [(1981) 134 ITR 219 (Cal)] were considered. It was finally concluded that : 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 the investments would be out of interest free funds generat .....

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