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2010 (5) TMI 901 - ITAT AHMEDABAD

2010 (5) TMI 901 - ITAT AHMEDABAD - TMI - ITA No.2960/Ahd/2004, ITA No. 653/Ahd/2007, ITA No. 163/Ahd/2007 and ITA No.2407/Ahd/2005 - Dated:- 7-5-2010 - SHRI G. D. AGARWAL, VP AND BHAVNESH SAINI, JM. Department by : Shri Amarjit Singh, DR ORDER PER BHAVNESH SAINI: This order shall dispose of all the above appeals filed by the Revenue and the assessee on identical issues. 2. We have heard the learned DR and perused the findings of the authorities below and considered the material available on rec .....

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of companies, mainly group companies totaling to ₹ 2,86,41,100/- as per balance sheet as on 31st March, 2001. The AO also observed that share capital and reserve and surplus stood at ₹ 6,59,21,888/-. The AO has also mentioned that after excluding investments in shares the assessee was required a sum of ₹ 7,91,26,253/- as against net worth held as on 31st March, 2001 totaling to ₹ 6,59,21,888/-. The AO accordingly worked out funds required for business and ₹ 2.00 Cr .....

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efore, interest paid on it are allowable as business expenditure. The assessee relied upon the decision of the Hon'ble Supreme Court in the case of Madhavprasad Jatia Vs CIT 118 ITR 200 (SC). It was also submitted that investments in shares were made by the assessee company long back and not in the assessment year under appeal. It was further stated that this fact is also evident from the assessment order wherein in Para 3.1, the AO has mentioned investments which stood on 31st March, 2000. .....

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reference to interest free loan given is confined to the interest free loan given during the relevant accounting year itself and disallowance cannot be extended to interest free loans given in the earlier year when no disallowance was made in that regard". It was further submitted that the assessee being a company is legally entitled to invest in shares of companies and there was no prohibition to invest in shares. The investments in shares were made in the best interest of the company and .....

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assessee drew attention of learned CIT(A) to the net worth i.e. share capital and free reserves which were held by the assessee company as on 31st March, 2001. It was submitted that the assessee company had net worth of ₹ 6.59 Crores and, therefore, investments stood at ₹ 2.86 Crores can easily be said to have been made out of own capital. The assessee relied upon the decision of the Hon'ble Madras High Court in the case of CIT Vs Hotel Savera 148 CTR 585 (Mad) wherein it was he .....

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hat any borrowed funds were utilized either for giving interest free loans or for non-business purpose, therefore, no interest can be disallowed. The assessee relied upon several decisions of the Tribunal in support of the contention. The assessee also relied upon the decision of the Hon'ble Gujarat High Court in the case of Shree Digvijay Cement Company Ltd. Vs CIT 138 ITR 45 (Guj) wherein it was held that "the assessee company has made investments in shares partly out of borrowed fund .....

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ing investments in shares the director or his relatives have not been benefited in any manner. It was submitted that the decisions cited by the AO are not applicable to the facts of the case. The assessee filed chart of several years ended on 31st March, 1995 to 31st March, 2001 to show that own funds of the assessee were more than the investments made in the shares. The table is reproduced at page 8 of the order of the learned CIT(A). It was accordingly submitted that since investments in share .....

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te that the assessee was authorized under the Companies Act by its Memorandum to invest in shares of companies. There is also no material on record to show that investments were not for business purpose. The learned CIT(A) also found that investments as on 31st March, 2000 and 31st March, 2001 were same at ₹ 2.86 Crores which shows that no investment was made by the assessee during the assessment year under consideration. The decision in the case of Sridev Enterprise (supra), therefore, cl .....

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ld that "borrowed capital advanced to subsidiary companies interest not allowable." He has also relied upon the order of the Bombay Bench of ITAT in the case of Sanghvi Swiss Refills (P) Ltd. Vs ITO 85 ITD 59 (Bom) in which it was held that "the deduction cannot be allowed when the amount was diverted to sister concerns and assessee did not produce any evidence to show that it had sufficient funds/non-interest bearing funds". The learned DR submitted that investments have bee .....

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ot claim that, it can give interest free advances to the parties and others than the borrowed funds such borrowing would not be for the purpose of business but for supplementing the cash diverted by the assessee without any benefit to the assessee. Under the circumstances, nexus theory does not hold good. Disallowance of interest was upheld being interest free advances to the partners and persons related and sister concerns. 7. The assessee in the written statement reiterated the same submission .....

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assessment order that investments as on 31st March, 2000 and 31st March, 2001 were same at ₹ 2.86 Crores which shows that no investment has been made by the assessee during the assessment year under consideration. The decision of the Hon'ble Karnataka High Court in the case of Sridev Enterprise (supra) would, therefore, squarely apply to the case of the assessee. The AO has also not brought any facts on record if there was any nexus between the borrowed money and the investments made f .....

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ar ended on 31ast March, 1995 to 31st March, 2001 and has specifically pleaded that the assessee had sufficient funds as against the investments in shares. In the assessment year under appeal the assessee has proved that it had net worth of ₹ 6.59 Crores and that investment stood at ₹ 2.86 Crores. It would prove that the above stated investments in shares have been made out of own funds of the assessee. The AO has thus not established that any borrowed funds were utilized either for .....

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that "In order to decide whether interest on funds borrowed by the assessee to give an interest loan to a sister concern (e. g. a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business-man incurs for the purpos .....

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third party also benefits thereby". While holding so, the Hon'ble Supreme Court overruled the decision of the Hon'ble Bombay High Court in the case of Phaltan Sugar Works Ltd. Vs CIT 208 ITR 989 (Bom) as is relied upon by the learned DR. The Hon'ble Allahabad High Court in the case of CIT Vs Dhampur Sugar Mills Ltd. (No.2) 274 ITR 370 (All) held that "the assessee had not advanced the money out of the borrowings, hence interest could not be added". The Hon'ble Alla .....

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to full allowance of the amount of interest paid by it on borrowed capital". The Hon'ble Madhya Pradesh High Court in the case of R. D. Joshi and Co. Vs CIT 251 ITR 332 (MP) held as under: "The assessee was a partnership firm assessed in the status of a registered firm. For the assessment year 1978-79, 1979-80 1880-81 and 1981-82, the assessee claimed deduction of interest on borrowings. The Income-tax Officer held that the borrowings, to the extent of the over drawings and conseq .....

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ioner of Income-tax (Appeals) was incorrect and erroneous and confirmed the order of the Assessing Officer. On a reference: Held, that when the Tribunal was to dislodge the order passed by the appellate authority it was obligatory on the part of the Tribunal to demonstrate as to how the findings recorded by the appellate authority were not consistent with t4he facts and the provisions of law. It was obligatory on the part of the Tribunal to demonstrate as to how the Department proved a nexus bet .....

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aw in disallowing the interest on the entire debit balances, including the opening balances of the partners". ITAT Chandigarh Bench "A" (Third Member) in the case of Malwa Cotton Spinning Mills Vs ACIT 89 ITD 65 (Chd) (TM) held as under: "Section 36(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1992- 93 and 1993-94 - Whether where assessee's own capital and current year's profits are substantially more than interest-free advances g .....

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ra) held that "Interest on investments in share capital of subsidiary companies could not be disallowed where no fresh investment had been made during the year". Considering the facts noted above, it is clear that no investment has been made in the assessment year under appeal. The AO has also not brought any evidence on record if there was any nexus between the borrowed funds and the investments made for non-business purpose. Accordingly, we do not find any error in the order of the l .....

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unds diverted for non-business purpose. It was submitted that the assessee company is engaged in processing of clothes of its own and also on job work basis. The assessee company has borrowed funds from banks and other parties in order to meet its working capital and other business requirements. The interest paid on such borrowed funds is deductible u/s 36(1) (iii) of the IT Act. It was submitted that the assessee has interest free funds comprising of share capital, reserves and surplus worked o .....

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ssessee's investment in shares of these companies has come down to ₹ 2.36 Crores during this year as against the investments in the financial year ended as on 31st March, 2000 and 31st March, 2001. It was submitted that disallowance cannot be made during this year for investments made in earlier years. The investment in earlier years was made in the business interest of the company and as per Memorandum of Association the assessee is authorized to make such investments. It was contende .....

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e additions of similar nature in the assessment year 2001-02. 12. The learned CIT(A) on consideration of the submissions noted that the share capital, reserves and surplus of the assessee amounted to ₹ 6.57 Crores; whereas investment in the fixed and current business assets as on that date worked out to ₹ 9.64 Crores. It, therefore, cannot be said that the investment of ₹ 2.36 Cores in the shares of other group companies as on 31st March, 2002 had come out of the interest free .....

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rned CIT(A) for assessment year 2001-02. The learned CIT(A) accordingly confirmed the disallowance of the interest but directed to apply rate of 9% on the borrowed funds held up in the shares of other group companies and directed to disallow ₹ 21,25,450/-. It is stated by the learned DR that the facts are same as considered in assessment year 2001-02. The learned DR again reiterated that the findings of the learned CIT(A) in assessment year 2001-02 are not correct. Therefore, learned CIT(A .....

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g Vs CIT 100 CTR 267 (SC) the consistency has to be maintained without making further addition on the same issue. 13. On consideration of the rival submissions we are of the view that the learned CIT(A) was not justified in making proportionate disallowance of the interest. It is admitted fact that no investment has been made in the shares of group companies in the assessment year under appeal. The AO has also not brought any evidence on record if there was any nexus between the borrowed funds a .....

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true that the principles of res judicata do not apply, the rule of consistency would apply". Since it is admitted fact that facts are same as considered in earlier year, therefore, following the same reason for decision in ITA No.2960/Ahd/2004, we set aside the orders of the authorities below and delete the entire addition. 14. As a result, the appeal of the assessee is allowed. ITA No.163/Ahd/2007: (By assessee) ITA No.653/Ahd/2007: (By Revenue) 15. Both the cross appeals are directed aga .....

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