TMI Blog2016 (8) TMI 739X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the interest paid on such borrowed funds notwithstanding the fact that ultimately, the purpose for which the capital was borrowed was not served and the shares were not actually allotted to the assessee. The findings recorded by the Assessing Officer that the amount was paid under the guise of share application money to the sister concern, stand dislodged by the facts which emerge from the record, inasmuch as, the amount was directly paid by the concerned bank to the sister concern and in fact, share applications had been made for 4,29,000 shares which was reflected in the records of the assessee as well as the sister concern. As regards the contention of the learned advocate for the revenue that the borrowed funds were advanced towards share application money which shares would have ultimately yielded dividend which would be exempted income and hence, in the light of the decision of the Kerala High Court in the case of Leena Ramachandran (2010 (6) TMI 612 - Kerala High Court ), the expenditure incurred by the assessee towards purchase of shares would not be an admissible expenditure is concerned, in the opinion of this court, the view adopted in the above decision is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st the common order dated 31st October, 2005 passed by the Income Tax Appellate Tribunal, Ahmedabad Bench B (hereinafter referred to as the Tribunal ) in ITA No.3939/Ahd/2002, 1935 and 1936/Ahd/2001 whereby the Tribunal has partly allowed the appeals preferred by the respondent revenue. 2. By an order dated 18th September, 2006, these appeals had been admitted on the following substantial questions of law: [A] Whether on the facts and in the circumstances of the case, Income-tax Appellate Tribunal was right in law in holding that the deduction of interest expense of ₹ 2,93,665/- was not admissible either u/s. 36(1)(iii) of 57(iii) of the Income-tax Act, 1961 merely because shares were never allotted to the appellant in response to the share application? [B] Whether on the facts and in the circumstances of the case, Income-tax Appellate Tribunal was right in law in confirming the disallowance of interest of ₹ 2,93,665/-? It may be noted that the amounts mentioned in the above questions are in relation to Tax Appeal No.474/2006. In Tax Appeal No.475/2006, the amount is ₹ 4,91,955/- and in Tax Appeal No.476/2006, the amount is ₹ 5,17,730/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n, on 8th May, 1995 and paid the full face value out of loans obtained directly from the Bank and transferred the existing debit balance to the advance account. The Assessing Officer further noted that the application money was kept lying with Akshar Private Limited till assessment year 1998-99, when it was returned without allotment of shares. The assessee company bore interest expenses on loan taken from Baroda Peoples Cooperative Bank Limited and the money was kept lying with Akshar Private Limited without any returns or possibility of any returns (income) as no terms of application money were fixed, as accepted. The Assessing Officer was accordingly of the view that this was a case of the assessee borrowing interest bearing funds and transferring the same to its sister concern in the guise of share application money. He, accordingly, held that the interest expenses claimed in the profit and loss account are certainly not for business purpose and, therefore, cannot be allowed as deduction in computing income for income-tax purposes. The Assessing Officer noted that the assessee had paid ₹ 2,93,665/- as interest on the loan taken from the Baroda Peoples Co-operative Bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of Commissioner of Income-Tax v. Rajeeva Lochan Kanoria, (1994) 208 ITR 616, for the proposition that the only enquiry which is required to be made under section 36(1)(iii) of the Act is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee s business or profession. When there is no dispute that the capital was borrowed and interest was paid on the borrowed capital, it has to be established that the amount was borrowed for the purpose of business or profession. The amount may be utilised for the purpose of acquisition of stock-in-trade or for the purpose of acquisition of capital assets. So long as the money is utilised for business purpose, the interest will have to be allowed as deduction. Reliance was placed upon the decision of the Bombay High Court in the case of Commissioner of Income-tax v. Reliance Communications Infrastructure Ltd., (2012) 21 taxmann.com 118 (Bom.), wherein the Tribunal had held that the investments were made in the wholly owned subsidiary and money advanced to RIL was for furthering the business of the assessee. The court found that the findings of the Commissioner (Appeals) and the Tribunal were con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d upheld the decision of the Tribunal wherein it had found that the advancing of interestfree monies to the subsidiary companies was driven by business considerations since the subsidiaries were also engaged in the same business in which the assessee was engaged. Thus, it would be in the interest of business of assessee and certainly would be commercially expedient for the assessee to advance interest- free monies to the subsidiaries as part of the corporate business strategy to advance its business operations through its subsidiaries. 5.3 Reliance was also placed upon the decision of this court in the case of Additional Commissioner of Income- Tax v. Laxmi Agents P. Ltd., (1980) 125 ITR 227, for the proposition that once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that clause (iii) of section 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business. The court agreed with view adopted by the Tribunal that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business or profession. It was submitted that, therefore, the capital should have been borrowed for the purpose of business or profession of the assessee whereas in the facts of the present case, the capital borrowed had been given to the sister concern under the guise of share application money whereas in fact, no shares had been issued and ultimately the capital borrowed had been returned to the assessee without payment of interest thereon. Clearly, therefore, the conditions of section 36(1)(iii) are not satisfied. In support of his submissions, the learned counsel placed reliance upon the decision of the Kerala High Court in the case of Commissioner of Income Tax v. Leena Ramachandran and Homfit, (2011) 339 ITR 296, wherein the Tribunal had held that the assessee was entitled to deduction of substantial amount paid towards interest on borrowed funds utilised for acquisition of shares in a company of which the assessee acquired controlling interest upto 90% in the course of ten years. The court noted that the interest paid by the assessee during the previous year for the funds borrowed for acquisition of shares in the company was at the rate of 24% per annum and the to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsel for the appellant submitted that the decision of the Kerala High Court in the case of Commissioner of Income Tax v. Leena Ramachandran (supra) is distinguishable on facts, inasmuch as, at the relevant time, section 14A was not on the statute book and hence, the said decision would not have any applicability in the facts of the present case. It was pointed out that in that decision the court has distinguished the decision of the Calcutta High Court in the case of Rajeeva Lochan Kanoria (supra) on the ground that it pertains to the period prior to the introduction of section 14A and has no application. 8. The findings recorded by the Assessing Officer have already been reproduced hereinabove. At this juncture, it may be germane to refer to the findings recorded by the Commissioner (Appeals) while allowing the appeal for assessment year 1997-98 which are as follows:- 2.2 I have considered the facts of the case and submissions of the appellant s counsel. It is seen that there is no dispute on the point that the money advanced by the appellant to the said concern was out of loan from a bank on which the interest was paid. It is noted to be considered whether the advance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that when the assessee had applied for allotment of shares on 8th May, 1995 and paid the full value of the shares and when the project for which the share capital was being raised could not be completed because of recession in the market and other unfavourable market conditions, the question of retaining the assessee s money did not arise. This may amount to utilisation of the assessee s money by them received in the garb of application money. Be that as it may, even if it is considered to be an application money, the interest would not be an allowable deduction to the assessee because the share have never come on the surface. 10. Thus, on a conjoint reading of the orders passed by the Commissioner (Appeals) and the Tribunal, it appears that it is an admitted position that the appellant had advanced borrowed funds to the sister concern towards allotment of shares of the sister concern. The purpose behind this investment in acquiring shares was the expansion of the business of the assessee by acquiring controlling interest in the sister concern. The assessee had applied for 4,29,000 shares of the sister concern on 8th May, 1995 and paid full face value of the shares. The sister ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is the case of the appellant that the borrowed funds having been utilised as a measure of commercial expediency, the assessee is entitled to deduction of the interest under section 36(1)(iii) of the Act. In this regard, reference may be made to the decision of the Supreme Court in the case of S.A. Builders Limited (supra) wherein the court was dealing with the question as regards the allowability of interest on borrowed funds. The court took note of the fact that the borrowed amount in question was not utilised by the assessee for its own business, but had been advanced as interest-free loan to its sister concern. However, it was of the opinion that, that fact was not really relevant. What was relevant was whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. The court was of the view that 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 was noted that it has been consistently held in decisions relating to section 37 that the expression for the purpose of business includes expenditure voluntarily incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was directly paid by the Baroda Peoples Co. Op. Bank Ltd., Baroda to the sister concern. The share application money was kept lying with Akshar P. Ltd. and was returned without allotment of shares as due to the recession in the market and other unfavourable market conditions, the sister concern could not expand its business of setting up a project at Daman. Thus, the purpose behind borrowing the capital was for acquiring shares for the purpose of gaining a controlling interest in the sister concern and expanding the business of the assessee. Evidently therefore, the basic requirement of section 36(1)(iii) of the Act stands satisfied, inasmuch as, the assessee has borrowed capital for the purpose of business and had paid interest on the borrowed amount. As held by the Supreme Court in the above referred decisions all that is germane is whether the borrowing was or was not for the purpose of business. On the facts as emerging from the record, having regard to the intention of the assessee of acquisition of shares of the associate concern for the purpose of gaining controlling interest therein to expand its own business, it cannot be said that the amount advanced was not for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bunal that though the income from the dividend has to be assessed under a separate head, payment of interest by the assessee and amounts borrowed for the purpose of earning interest must be allowed as business expenditure and not expenditure incurred for earning dividend. The court has also held that if it is once established that capital was borrowed for the purpose of business, it is immaterial how the borrowed capital was applied because all that clause (iii) of section 36(1) of the Act requires is that borrowings on which interest is paid should be for the purpose of business. 17. In the light of the above discussion, it is not necessary to refer to and deal with the other decisions on which reliance had been placed by the learned advocate for the appellant. 18. For the foregoing reasons, the appeals succeed and are accordingly allowed. The questions are answered in the negative namely, in favour of the assessee and against the revenue. The Income Tax Appellate Tribunal was not right in law in holding that deduction of interest expenses was not admissible under section 36(1)(iii) of the Income Tax Act, 1961 merely because shares were never allotted to the appellant in res ..... X X X X Extracts X X X X X X X X Extracts X X X X
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