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2016 (8) TMI 739 - GUJARAT HIGH COURT

2016 (8) TMI 739 - GUJARAT HIGH COURT - TMI - Deduction of interest expenses - admissibility under section 36(1)(iii) - Held that:- Merely because ultimately such shares could not be acquired for the reasons stated hereinabove, would not detract from the fact that the amount had been borrowed for the purpose of business. When funds are invested for business purposes, there can be no guarantee that the purpose would be achieved. What has to be looked into is whether the funds were expended as a m .....

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g been borrowed for the purposes of its business, the requirements of section 36(1)(iii) of the Act stand satisfied and the assessee was entitled to deduction 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 .....

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ch 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 contrary to the view adopted by this court in the case of Additional Commissioner of Income tax v. Laxmi Agents (1975 (12) TMI 7 - GUJARAT .....

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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. - 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. - 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 .....

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37(1) (iii) is applicable to the facts of the present case, the issue regarding application of section 57(iii) of the Act is left unanswered. The impugned order passed by the Tribunal is accordingly quashed and set aside and the order passed by the Commissioner (Appeals) is hereby restored. - TAX APPEAL NO.474 of 2006, TAX APPEAL NO.475 of 2006, TAX APPEAL NO.476 of 2006 - Dated:- 5-4-2016 - Harsha Devani And G. R. Udhwani, JJ. For the Appellant : Mr SN Divatia, Advocate For the Opponent : Mr KM .....

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y 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 app .....

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d the facts and contentions are also common, the same were taken up for hearing together and are decided by this common judgment. For the sake of convenience, reference is made to the facts as appearing in Tax Appeal No.474/2006. 4. The assessment years are 1996-97, 1997-98 and 1998-99 respectively. The appellant - assessee is a private limited company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of manufacturing and trading in industrial gases. For .....

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which included deposits of ₹ 50,54,117/- given. From the grouping, it was found that the assessee had given ₹ 42,90,000/- to Akshar Private Limited. The assessee was asked to give the details and the purpose of such advance and the immediate source thereof. In response thereto, the assessee submitted that the sum of ₹ 39,90,000/- was paid to Akshar Private Limited, the associate concern, by taking a loan from the Baroda Peoples Co-operative Bank Limited, Baroda as advance for t .....

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sed the account copies and noted that the amount of ₹ 39,90,000/- was directly paid by the Baroda Peoples Co-operative Bank Limited, Baroda to Akshar Private Limited on behalf of the assessee. He further noted that the assessee has applied for 4,29,000 shares of Akshar Private Limited, a sister concern, 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 n .....

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se 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 .....

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n relation to assessment year 1997-98 and 1998-99. Revenue carried the matter in appeal before the Tribunal, which reversed the order of the Commissioner (Appeals) and restored the order passed by the Assessing Officer. Being aggrieved, the assessee has preferred the present appeals. 5. Mr. S.N. Divatia, learned advocate for the appellant, assailed the impugned order by submitting that the Tribunal had erred in concluding that the interest would not be an allowable deduction in view of the fact .....

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loan, it is an amount paid by way of commercial expediency. Referring to the Balance Sheet and Profit and Loss Account of the appellant which were produced before the Tribunal, it was submitted that there is no dispute that the amount was in the nature of share application money. It was submitted that allotment of shares is not a condition precedent for applicability of section 36(1)(iii) of the Act. Referring to the findings recorded by the Assessing Officer, it was pointed out that it is evide .....

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osition 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 .....

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assessee. The court found that the findings of the Commissioner (Appeals) and the Tribunal were consistent with the judgment of the Supreme Court in the case of S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals), (2007) 288 ITR 1. The court held that where the assessee, as held in the said case, has significant interest in the business of the subsidiary and utilises even borrowed money for furthering its business connection, there was no reason or justification to make a disallowance in .....

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ection 36(1)(iii) of the Act. 5.2 The decision of the Supreme Court in the case of Hero Cycles (P.) Ltd. v. Commissioner of Income-tax (Central), Ludhiana, 281 CTR 481 <=> (2015) 379 ITR 347, was cited wherein the court placed reliance upon its earlier decision in the case of S.A. Builders Limited v. Commissioner of Income-tax (Appeals), (supra) for the proposition that once it is established that there is nexus between the expenditure and the purpose of the business (which need not necess .....

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orities must not look at the matter from their own point of view but that of a prudent businessman. Reference was made to the decision of the Delhi High Court in the case of Commissioner of Income Tax v. Modi Entertainment Ltd., (2014) 89 CCH 14 DelHC, wherein the court placed reliance upon the decision of the Supreme Court in the case of S.A. Builders v. CIT as well as the decisions of the Delhi High Court in the case of CIT v. Dalmia Cement (P) Ltd. and CIT v. Bharti Televentures Ltd. (supra), .....

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usiness 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 busin .....

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under section 36(1)(iii) of the Act and that the Tribunal was not justified in deleting the same. 6. Opposing the appeals, Mr. K.M. Parikh, learned senior standing counsel for the respondent, invited the attention of the court to the findings recorded by the Assessing Officer to submit that the Assessing Officer has come to the conclusion that the assessee had borrowed interest bearing funds and transferred the same to its sister concern in the guise of share application money and that ultimate .....

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assessee s money did not arise. The Tribunal was of the view that this may amount to utilisation of the assessee s money by the sister concern received in the garb of application money, and that even if it is considered to be application money, the interest would not be an allowable deduction to the assessee because the share had never come on the surface. It was pointed out that the Tribunal had clearly distinguished between the decision of the Calcutta High Court in the case of Rajeeva Lochan .....

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n section 28 of the Act of the amount of interest paid in respect of capital borrowed for the 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 t .....

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ares 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 total interest paid in the accounting year alone was as much as ₹ 17,44,310/- whereas the assessee has received dividend income of ₹ 3,00,000/- and no other benefit was derived by the company for .....

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constitute total income in the hands of the assessee. The court, accordingly, held that the disallowance was rightly made by the Assessing Officer. It was submitted that in the facts of the present case also, even if it is accepted that the assessee had paid the borrowed funds towards share application money, ultimately, the shares would yield dividend which would be exempt from income and hence, the above decision would be squarely applicable to the facts of the present case and the dividend in .....

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uld not be applicable to the facts of the present case, inasmuch as, what has been held in that decision is that if the interest-free loan is given to the sister concern as a measure of commercial expediency, it should be allowed. It was argued that in the facts of the present case, the amount advanced to the sister concern was a mere advance and was not as a measure of a commercial expediency and hence, the said decision would not be applicable to the facts of the present case. It was, accordin .....

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y 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 a .....

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es of the said concern on 8.5.1995 and paid full face value of the shares. The shares were not allotted as it is claimed that the said concern wanted to expand its business by setting up a project at Daman, but the same could not be done because of recession in the share market and other unfavourable market conditions. The mere fact that the shares were not allotted would not change the character of money given. There is nothing on record to doubt that the appellant did not apply for the shares .....

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n the case of Rajiv Lochan Kanoria 213 ITR 616 that interest on borrowed capital utilized to purchase shares of different companies in order to acquire controlling interest is an allowable expenditure under section 36(1)(iii) of the Act. On similar issue the Gujarat High Court in the case of Laxmi Agents Pvt. Ltd. 125 ITR 227 has held that the interest paid by the assessee company on the amounts borrowed for purchase of shares of its managed company was allowable deduction under section 36(1)(ii .....

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n view of the above discussion, the interest on borrowed money for this purpose is held to be allowable under section 36(1)(iii) of the Act. The disallowances made in this regard in both the years are, therefore, deleted. 9. The Tribunal, in the impugned order, has recorded 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 i .....

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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 concern wanted to expand its .....

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shares were ultimately allotted to the assessee, the interest would not be an allowable deduction to the assessee. Both, the Assessing Officer as well as the Tribunal, have also observed that the amount has been advanced by the assessee in the garb of share application money. Insofar as the finding that the funds had been advanced under the garb of share application money is concerned, the same does not appear to be borne out from the record, inasmuch as, in fact, the assessee had borrowed such .....

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to refer to the question as to whether the provisions of section 36(1)(iii) of the Act would be applicable to the facts of the present case and whether the assessee is entitled to the deduction of interest on borrowed funds which have been advanced for the purpose of acquisition of shares in the sister concern. 12. A perusal of the orders passed by the authorities below clearly shows that it is the consistent case of the assessee that the advance obtained from the Baroda Peoples Co-operative Ban .....

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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 .....

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urpose of business includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. The court held that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expedie .....

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ing regard to the circumstances of the case. 13. Reference may also be made to the decision of the Supreme Court in the case of Deputy Commissioner of Income tax, Ahmedabad v. Core Health Care Ltd., (2008) 2 SCC 465, wherein the court held that interest on monies borrowed for the purpose of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that - firstly, the money i.e. capital, must have .....

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tion under section 36(1)(iii) of the 1961 Act. 14. Examining the facts of the present case in the light of the principles propounded in the above decisions, the facts as emerging from the record reveal that the assessee had borrowed capital for the purpose of acquiring shares of Akshar P. Ltd., a sister concern, as it intended to acquire the controlling interest in the said company to expand its business operation through such investments. Such amount was directly paid by the Baroda Peoples Co. .....

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ee. 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 .....

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to is whether the funds were expended as a measure of commercial expediency, which includes such expenditure which a prudent businessman incurs for the purposes of business. Once it is established that there was a nexus between the expenditure and the purpose of the business, the revenue cannot justifiably claim to put itself in the armchair of the businessman and assume the role to decide the reasonableness of such expenditure. In the facts and circumstances narrated hereinabove, the court is o .....

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e 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. 16. As regards the contention of the learned advocate for the revenue that the borrowed funds were advanced towards share application money which shares wo .....

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