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2016 (6) TMI 976 - ITAT MUMBAI

2016 (6) TMI 976 - ITAT MUMBAI - TMI - Disallowance of Interest Expenditure claimed under section 36(1)(iii) - CIT(A) deleted the disallowance - Held that:- No interference is called for in the impugned order of the learned CIT(A). We, therefore, sustain and confirm the decision of the learned CIT(A) in holding that since the amount advanced to VTL as share application money was done in the normal course of its business, for purposes of its business and was made on grounds of commercial expedien .....

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it is also allowable as a deduction from the assessee’s income. - Decided against revenue - ITA No. 5715/Mum/2013 - Dated:- 31-5-2016 - Shri Jason P. Boaz, Accountant Member And and Shri Sandeep Gosain, Judicial Member For the Appellant : Shri G.M. Doss For the Respondent : Shri Shailesh S. Shaw ORDER Per Jason P. Boaz, A.M. This appeal by the Revenue is directed against the order of the CIT(A)- 7, Mumbai dated 26.04.2013 for A.Y. 2008-09. 2. The facts of the case, briefly, are as under: - 2.1 T .....

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der dated 31.03.2011 wherein the income of the assessee was determined at ₹ 647,55,09,642/-. Subsequently, vide order under section 154 of the Act, the income of the assessee was revised to ₹ 588,02,16,620/-. 2.2 Subsequently, the AO, based on information received from the Investigation Wing of the Department relating to the 2G cases, initiated re- assessment proceedings under section 147 of the Act by recording reasons for action in this regard and issued notice under section 148 of .....

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der section 143(3) r.w.s. 147 dated 27.02.2013 for A.Y. 2008-09 the assessee preferred an appeal before the CIT(A)-7, Mumbai. The learned CIT(A) disposed off the assessee s appeal vide the impugned order dated 26.04.2013 allowing the assessee partial relief. In the impugned order the learned CIT(A) deleted the disallowance of interest under section 36(1)(iii) of the Act amounting to ₹ 12,87,36,636/- and Upfront fee of ₹ 1,25,000/-, but upheld the validity of the re-opening of the ass .....

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to subsidiary company as interest free deposits in guise of share application. 2. Whether on the facts and circumstances of the case and in law, the CIT(A) was justified in deleting the disallowance of ₹ 1,25,000/- being upfront fees paid to Central Bank of India without appreciating the fact that the fees were paid to obtain the loan not for its own business but was given to subsidiary company without any consideration. 3. The appellant prays that the order of the CIT(A) on the above grou .....

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ls that impugned order of the learned CIT(A) as being erroneous in deleting the disallowance of ₹ 12,87,36,636/-, out of interest expenditure claimed, under section 36(1)(iii) of the Act without appreciating that the interest bearing funds were given to subsidiary company as interest free deposits in the guise of share application money. It was further contended that the impugned order was erroneous in view of the deletion of the disallowance of ₹ 1,25,00,000/- being upfront fees pai .....

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al Bank of India for the reason that the interest bearing funds were diverted for non-business purpose. 5.2 Per contra, the learned A.R. for the assessee supported the finding of the learned CIT(A) on these issues, i.e. of deletion of the disallowance of interest of ₹ 12,87,36,636/- under section 36(1)(iii) of the Act paid on loan of ₹ 500 crores taken from Central Bank of India and the upfront fee of ₹ 1,25,00,000/- paid by the assessee to the Bank in this regard. The learned .....

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he valuation thereof was very high, the assessee felt it to be commercially expedient to do so. As investment in shares, securities, etc. is one of the business activities of the assessee there was commercial expediency in advancing the amount to VTL and therefore no disallowance of interest ought to have been made, since the advance was for the purposes of business. In support of the proposition that no disallowance of interest expenditure ought to be made under section 36(1)(iii) the learned D .....

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Ltd. (2012) 207 Taxman 219. It was prayed that Revenue s grounds be dismissed. 5.3.1 We have heard the rival contentions and perused and carefully considered the material on record, including the judicial pronouncements cited. The facts of the matter, as emanate from the record, are that in the course of assessment proceedings, the AO noticed that the assessee had taken a term loan of ₹ 500 crores from Central Bank of India which it advanced on 27.12.2007 to its subsidiary Datacom Solution .....

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nsidering the finding of the AO and the submissions of the assessee (reproduced at para 6.3 of the impugned order), went on to hold that the amount of ₹ 500 crores advanced to VTL as share application money by the assessee was for the purpose of the assessee s business and therefore the disallowance of ₹ 12,87,36,616/- out of interest expenditure claimed by the assessee under section 36(1)(iii) of the Act was unwarranted in the facts of the case and deleted the same. In that view of .....

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9;s A/R submission. It is the submitted by the appellant that the share application money advanced was during the course of its regular business activities. The appellant had not charged any interest on these advances as there was no such contract. Hence, any interest paid on borrowings for the purpose of business activity is allowable u/s.36(1)(iii) of the Act. According to the provisions of Section 36(1 )(iii) of the Act, an assessee is entitled to deduction of interest payment in respect of c .....

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share application money was advanced to Data Corn. On going through the submissions of the AR, the following points emerge: i) VIL had an aggregate shareholding of 64% in Data Corn. VIL had given the advance by way of share application money with a view to acquire further share capital of the said subsidiary. Thus, the amount advanced to subsidiaries was for business purposes as the same are linked with the business of subsidiary in which the appellant has deep interest. Indeed, the valuation o .....

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ncy. The above transaction was approved and authorized by the Board of Directors in the normal course of business activities. Hence, the said advance towards share application money given to Data Corn is for the purpose of business and any interest paid on the funds utilized for the purpose of such business activity is allowable expenditure u/s 36(1)(iii) of the Income Tax Act, 1961. (iii) Further, the appellant company is also engaged in the business of investment in shares, securities, propert .....

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ision of Videocon International Ltd. which amalgamated with the appellant company VIL, for AY 2003-04 in ITA No. 4784/Mum/2008 wherein similar issue of disallowance of interest on share application money advanced was involved. The Hon'ble Mumbai ITAT in that case upheld the deletion of the disallowance of interest on share application money advanced on the reasoning that "the utilization of the fluids has been found to be in accordance with the objects clause in the Memorandum of Associ .....

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n the company for the purpose of normal business activities. Thus, it cannot be contended that the share application money made is not for business purposes. This view is supported by the decision of the Calcutta High Court in the case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 (CAL) and the decision of the Bombay High Court in the case of CIT v. Srishti Securities (P.) Ltd. [20101 321 ITR 498 (BOM). (v) On perusal of the above main object clause A5 it is clear that one of the main obje .....

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t company to make investments in shares/securities in such companies and/or to enter into joint venture/partnership with such companies carrying on the abovementioned activities. Data Com is in the business of telecommunication. The appellant company has made the investment in Data Com to carry on the business of telecommunication and has thus promoted Data Com which is also in the business of telecommunication. To make investments in shares/securities in the companies and/or to enter into joint .....

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e Bombay High Court in the case of CIT v. Reliance Communication Infrastructure Ltd. 207 Taxman 219 (Bom.), Calcutta High Court in the case of CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 (CAL) and the decision of the Karnataka High Court in the case of CIT v. Anand Technology Resource Park (P.) Ltd. 202 Taxman 654 (KAR). (vi) The share application being advanced by the appellant company for the purpose of business and commercial expediency, the interest expenditure on loan taken for the sai .....

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ving held that the share application money advanced to Data Com was for the purpose of business of the appellant company, the "Upfront Fee" paid to Central Bank of India on the loan taken from it is also allowable as deduction from income of the appellant. Thus, this ground of appeal is decided in favour of the appellant. 5.3.3 According to the assessee the amount of ₹ 500 crores advanced as share application money by the assessee to VTL was made in the course of the regular busi .....

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in further share capital would be for business purposes of the assessee (which included investment in shares, securities, etc.) as well as of that the subsidiary, advanced in the normal course of its business activities and as a measure of commercial expediency. In these circumstances, since the assessee s objectives of business as per the Memorandum of Association include telecommunication business, investment in shares, securities, etc., interest expenditure incurred on loan taken to invest i .....

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