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2016 (6) TMI 385 - GUJARAT HIGH COURT

2016 (6) TMI 385 - GUJARAT HIGH COURT - TMI - Disallowance on total investment made in shares of subsidiary company - whether the investment made for the purchase of shares of subsidiary company was not a legitimate business activity of the appellant - Held that:- The Tribunal's finding that the investment made by the assessee company for purchase of shares in the subsidiary company was not a legitimate business activity, was in fact, an expansion beyond what the Assessing Officer had himself en .....

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were framed by order dated 19.10.2015 : (1) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in reversing the order of the Commissioner of Income Tax (Appeals) deleting disallowance made by the Assessing Officer on total investment made in shares of subsidiary company ? (2) Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in law and on facts in holding that the invest .....

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he assessee had purchased shares worth ₹ 7.86 crores (rounded off) of a subsidiary company one Dinesh Remedies Ltd. The Assessing Officer in this connection conveyed to the assessee as under : It is noted that the assessee has not charged any interest on the above said investment in shares. Vide order sheet entry dated 9.12.2009 it was requested to show cause as to why interest should not be charged on the said investment. 3. The assessee responded by stating that the investment in Dinesh .....

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the earlier years. Such interest was also allowable under 36(1)(iii) of the Income Tax Act. Entire funds of such borrowings has been used for the purpose of business only. 4. The Assessing Officer however, was not convinced. He disallowed a sum of ₹ 66.97 lacs (rounded off) calculated on the hypothecal borrowings of the assessee at the rate of interest of 9.5%. In the process, he observed as under: 4.3 The contention put forth by the assessee is not acceptable. The assessee has made the in .....

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t with the sole intention of earning exempted income, Hence it is proved beyond doubt that there is no business expediency in making investment in the equity shares of Dinesh Remedies Ltd. 4.4 It is the contention of the assessee that the assessee has huge reserve and surplus and out of this assessee has made investment in its subsidiary company, then what was the need of the assessee to take term loan for capital expenditure and pay interest on the same. The assessee should have been utilised t .....

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. Investment in subsidiary company having entirely separate business gives no yield to the assessee company. Here at the one hand, the assessee is paying huge interest on its borrowings and on the other hand, huge amount has been invested in equity shares of subsidiary company. Such borrowing to the extent of investment can not possibly be held for the business of the assessee. It is for supplementing the cash diverted without deriving any benefit out of it. Therefore, the assessee is not entitl .....

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pany. The disallowance comes to ₹ 66,97,495. Penalty proceedings u/s.271(1)(c) of the Income Tax Act, 1961 are separately initiated. 5. The assessee carried the matter in appeal. CIT(Appeals) allowed the appeal making the following observations : 7.1 Before me the appellant has objected for this disallowance. It has been stated that out of ₹ 7,86,99,950/investment in subsidiary company as amount of ₹ 2,90,99,950/was made in earlier years for which no interest was disallowed in .....

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d from customers for late payment amounting to ₹ 16.36,032/After giving careful consideration to the facts of the case and the submissions made I find that the Assessing Officer was not justified in making the disallowance. The investment made for purchase of shares of subsidiary company can be considered legitimate business activity. Considering the fact that a substantial amount was invested in earlier years wherein no such disallowance was made, the action of the Assessing Officer in ma .....

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activity of the assessee. According to us, the assessee is not in the business of finance, but a manufacturer of suitings. The Ld CIT(A) has erred in holding that no disallowance was made in the past, therefore, the Assessing Officer was not justified for the impugned disallowance in the year under consideration. Each year is an independent year. Facts of this year are to be seen independently and not to be governed by the decision taken in the past. The Assessing Officer had noted that the asse .....

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r for the assessee submitted that the assessee had sizeable interest free funds for investment which were utilised for investment in the subsidiary company. The Assessing Officer as well as the Tribunal committed a serious error in disallowing the same. Certain borrowings were made during earlier assessment years. Such funds were invested for business purpose. Deduction of interest under section 36(1)(iii) of the Act was allowed. He relied on the following decisions of this Court : 1) Commission .....

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oner of Incometax (Appeals) and another reported in (2007) 288 ITR 1 (SC) would not apply. 9. Facts emerging from the record are quite clear. The assessee had purchased shares of a subsidiary company by investing sum of ₹ 7.86 crores. In view of the Assessing Officer, there had to be disallowance of interest matching to such sum since interest bearing funds were diverted for such purpose. Firstly, we are unable to see the rationale behind such approach. As noted, foundational query of the .....

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made by the assessee to the subsidiary, the question of charging interest on the investment made, would not arise. The Assessing Officer in our opinion therefore, clearly misdirected himself by examining the question of charging interest on investment by the assessee company in the subsidiary company. Entire issue could be looked from a different angle had the premise of Assessing Officer been that in disguise of investment, what the assessee had done was to advance the sum to sister concern wi .....

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ly because the assessee company had interest bearing funds for its capital investment, claiming deduction under section 36(1)(iii) of the Act would not automatically imply that any diversion of funds without interest to a subsidiary would automatically give rise to disallowance. So much has been discussed by the Supreme Court in case of S.A. Builders Ltd.(supra). The assessee had demonstrated before the Assessing Officer that it had sizeable net profit and availability of interest free funds for .....

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as under : 4. Learned counsel Ms. Mauna Bhatt has fervently urged that the Tribunal had held the funds to be mixed funds and therefore, disallowances had been rightly made by the Assessing Officer, which were not to be disturbed. The Tribunals holding that Rule 8D could not have been invoked is contrary to its own finding, and therefore, deletion needs to be quashed. Reliance is placed on the decision of Delhi High Court in case of Maxopp Investment Limited v. Commissioner of Income Tax, reporte .....

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