9911796707
TMI Blog2016 (10) TMI 807X X X X Extracts X X X X X X X X Extracts X X X X ..... ation on record. 2. The Ld. AO has grossly erred in not allowing carry forward of capital loss of Rs. 3,47,00,000 on account of loss on sale of joint venture in the computation of the assessed income even when the same was allowed as long term capital loss in conformity with the directions of Ld. DRP. 3. Ld DRP grossly erred in directing inclusion of the income from letting out of building under the head "Income from House Property" as against "Income from Business" offered by the appellant. 4.The Ld. AO/Ld DRP erred in treating preference share issue expenses of 3,75,00,000 paid towards arranger's fee (brokerage) as a capital expenditure and disallowed the same. Without prejudice to the above the Ld. AO/Ld. DRP grossly erred in not allowing amortization of preference share issue expenses u/s. 35D of the Act by holding that appellant's rig is not an 'industrial undertaking' and further for the reason that refurbished rig was not put to use. 5.The Ld. AO/ Ld. DRP grossly erred in directing disallowance Rs. 1,44,50,789 u/s. 14A r.w.r. 8D. In doing so, a) he disallowed Rs. 1,34,18,595 u/r 8D(2) towards interest even when the appellant had total capital and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts of the case are that the assessee in its profit and loss account claimed an expenditure of Rs. 28,15,18,658/-, under the head management fee paid to its group concern India Offshore Inc. The assessee before the Department submitted that since there was a DTAA between India and U.S., the TDS deductible on the payments was at lower rates. However, the assessee before the Department furnished varying explanations that it has withheld the tax @ 15% on one occasion and later on claimed that it has withheld the tax @ 4.0478%. Further, when called for the details like the residency certificate of deductee, the assessee could not furnish the same. Hence, the AO opined that the amounts are not allowable in view of the provisions contained u/s.40(a)(i) r.w.s.195 of the Act. In addition, the assessee also failed to furnish the details of the nature of services rendered by India Offshore Inc., even after repeated requests. The assessee has only furnished the copy of the agreement between the assessee and India Offshore Inc. No other details like the copies of the invoices, nature of the services rendered have been furnished by the assessee till the date of preparing the draft order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red the assessee to furnish the nature of tile services rendered by India Offshore Inc., copies of the invoices, the details of the tax withheld, residency certificate, etc. From the date of enquiry u/s.131 till the date of draft assessment order on 31.03.2014, there were several reminders by the Assessing Officer to the assessee to furnish the details. However, the assessee failed to furnish any of the details called for by the Investigation Wing as well as the Assessing Officer. 5.3 Even before the DRP, the assessee failed to furnish any details I evidences regarding the nature of the services rendered by India Offshore Inc. Instead of furnishing the details called for by the Assessing Officer and proving the genuineness of the transactions, the assessee tried to explain that once the Assessing Officer disallows an amount u/s.40(a)(i) of the Act, it is not open to the Assessing Officer to disallow the same under an alternative plea. This contention of the assessee is not acceptable to DRP. An expenditure can be disallowed for more than one reason. It is not the intention of the legislature that if the expenditure which is disallowed under a particular provision should not be exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nc. vide agreement dated 15.12.1986, which was extended upto 15.12.2014. This agreement was subject to scrutiny before the authorities and the Tribunal in earlier years and there was no addition on this count. The payment has been made originally, vide agreement dated 15.12.1986 and it was further extended upto 15.12.2014. Therefore, there is no question of raising invoices for each assessment year and the payment is made in terms of approved agreement. Further, in our opinion, the genuineness agreement cannot be questioned by the assessing authorities when it is duly approved by the Central Govt., Ministry of Commerce & Industry, Department of Industrial Policy and Promotion and by the Reserve Bank of India as well. It is brought on record that Ministry of Commerce & Industry, Department of Industrial Policy and Promotion approved this payment vide their letter dated 25.4.2005. It is also brought on record that the payment made to Indian Offshore Inc was subjected to withholding taxes u/s.195 of the Act and TDS was duly deducted and deposited in the Govt. Bank as seen from Form 16A placed on paper book at page 204. When the Department has given "No Objection Certificate" for remit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that commercial transactions are in the domain of the businessman and Income-tax Department cannot intervene in realm of intricacies of commercial expediencies involved in these arrangements. 6.5 In view of the above discussion, we are of the opinion that the payment is made in accordance with agreement entered into by the parties, which is evident from the record and it was subjected to TDS, disallowance is not justified. Accordingly, we allow the ground raised by the assessee. 7. The next ground is with regard to in not allowing carry forward of capital loss of Rs. 3,47,00,000 on account of loss on sale of joint venture in the computation of the assessed income even when the same was allowed as long term capital loss in conformity with the directions of Ld. DRP. 8. The facts of the case are that the next objection of the assessee is regarding the proposed disallowance of loss on account of sale of business interest and addition on account of sale of business in joint venture. The objections has two parts : (i) disallowance of business loss on account of sale of business interest in JV with prize petroleum - Rs. 3,47,00,000/- and (ii) addition of amount of amount received over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e reduction (on account of revision of the sale agreement) of the very same sale consideration, the additional loss suffered by the assessee on account of the revision of the sale consideration also constitutes a capital loss. Therefore, it was observed by the DRP that the assessee is not justified in claiming Rs. 3.47 crores as a business expenditure in the current AY 2010-11, under consideration. The loss of Rs. 3.47 crores is a long term capital loss, as held by the CIT(A) in A.Y. 2008-09. Therefore, the Assessing Officer is directed to consider and allow the above loss of Rs. 3.47 as a long term capital loss. 9.3 As mentioned above, all the transactions and the assets and liabilities of the joint venture, to the extent of the assessee's interest of 50%, are being shown in the assessee's books of accounts. When, the assessee has sold its interest of 50% of the joint venture for Rs. 13 crores (or revised value of Rs. 9.50 crores), the business value of Rs. 13.64 crores has been reduced from the assessee's balance sheet in the A.Y. 2008-09. Hence, the question of offering the sale consideration separately once again in the return of income of A.Y. 2008-09 or 2010-11 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd it cannot take a different character to say it is a business loss in terms of sec.28(va) of the Act. Therefore, lower authorities are justified in treating it as a capital loss only. The judgment cited by the ld. AR has no application to the present case. Accordingly, this ground is dismissed. 11. The next ground is with regard to inclusion of the income from letting out of building under the head 'income from house property' as against 'income from business' offered by the assessee. 12. At the time of hearing, the ld. AR submitted that the assessee did not press this ground and the same is dismissed as not pressed. 13. The next ground is with regard to in treating preference share issue expenses of Rs. 3,75,00,000/- paid towards arranger's fee (brokerage) as a capital expenditure and disallowed the same. 14. The ld. AR submitted that the expenditure incurred for preference shares is treated as revenue expenditure. 15. The ld. DR relied on the order of the Tribunal in assessee's own case in ITA No.1159/Mds/2012 dated 31.12.2015, wherein the Tribunal placed reliance on the order of the Tribunal in assessee's own case for the A.Y. 2006-07 in ITA No.1382/Mds/2010 dated 15.7.20 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sment year 2007-08 and it is to be read as follows: "23. We have heard both the parties and perused the material on record. The issue came up before the Tribunal for assessment year 2007-08 in assessee's own case in I.T.A.No.90/Mds/2012, dated 26.6.2015 wherein the Tribunal has observed as under: 11. Bringing our attention to para 10.2 of the CIT(A)'s order, both the parties concurred on the fact that similar issue was adjudicated by the Tribunal in assessee's own case in I.T.A.No. 1382/Mds/2010 for assessment year 2006-07. We reproduce para 10.2 of the CIT(A)'s order as under: 10.2 I have carefully considered the facts of the case and the submission of the Id. AR. I have also gone through the decisions relied on by the AO and AR. Similar issue had come up for consideration in appellant's own case for A.Y. 2006-07. After considering the facts and rival submissions, it was held in ITA No.573/08**09/A.1I1 dated 23.06.2010 for A.Y. 2006- 07 that the expenditure on issue of shares is not deductible because it is directly related to the expansion of the capital base of the company. The disallowance of the AO was sustained. However, since the appellant is engage in the busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing through the said paragraph of the CIT(A)'s order and following the order of the Tribunal in assessee's own case (supra), we decide the issue in favour of the assessee. Accordingly, the ground raised by the Revenue is dismissed. 24. In view of the above, the ground raised by the Revenue is dismissed." 16.1 In view of the above order of the Tribunal, the claim of the assessee u/s.35D of the Act to be allowed as this is not the first year of claim to hold that oil ring was never put to use so as to disallow the claim. This ground of the assessee is allowed and the expenditure to be considered u/s.35D of the Act. 17. The next ground is with regard to disallowance of Rs. 1,44,50,789/- u/s.14A of the Act. 18. The facts of the issue regarding the disallowance of expenses u/s.14A read with rule 8D are that the assessee company is found to have invested Rs. 25.63 crores as on 31.03.2010. The assessee also derived dividends income of Rs. 2,19,07,337/- and the same was claimed as exempt u/s.l0(34) of the Act. However the assessee has not segregated any expenditure attributable to such investments. Hence the Assessing Officer invoked the provisions of sec.14A of the Act read with rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally valid and is applicable from assessment year 2008-09 onwards. In this case, the High Court has clearly and categorically held that "the provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply with effect from Assessment Year 2008-09". 18.4 According to the DRP, the disallowance of expenses u/s.14A r.w. rule 8D is in relation to the earning of the exempt income and not in relation to the exempt income earned as such. The disallowance of expenses is always in relation to the efforts made for earning such exempt income and not proportionate to the exempt income earned. It is particularly so because, in some years the income so earned may be less or nil. Therefore, the disallowance to be computed should always be with reference to the investments made in such activity and the effort made therein, as held by Special of ITAT, Delhi in the case of Cheminvest Ltd. V. ITO(2009) (121 ITD 318)(Del)(SB). It was held that the amount of exempt income earned during the year is not relevant for the purpose of disallowance of expenses u/s.14A read with rule 8D. What is to be seen the amount of investments made and the efforts taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lities in making the investments in shares/funds. Hence, there was a satisfaction of the AO that there was some element of expenses incurred by the assessee in relation to the investments in shares and earning the exempt income, which needs to be quantified and disallowed u/s.14A of the Act. Accordingly, as provided u/s.14A of the Act the AO had rightly quantified the said expenses at Rs. 1,44,50,789/- by using the rule 8D, and disallowed u/s.14A of the Act. 18.8 Thus, the AO is satisfied that there was an element of expenses involved in making investments whose income is exempt from tax. The AO is duty bound to invoke the provisions of Rule-8D. Once the provisions of Rule-8D are invoked, the AO has no option but to arrive at the expenses @ 0.5% as per step-3 of the formula which is mandatory. In fact, the AO in his order has clearly stated these facts before invoking the provisions of section 14A r.w.r.8D. Hence the AO rightly invoked Rule 8D and arrived at the disallowance of expenses u/s.14A r.w.Rule 8D. 18.9 In view of the above, the DRP observed that the AO's action of determining the expenses attributable for earning exempt income at Rs. 1,44,50,789/-, u/s.14A r.w.r.8D, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for making any investments having tax free income. While holding so, the Commissioner of Income Tax (Appeals) held as under:- "5.2.1 Having held that provisions of rule 8D are applicable, let us now examine whether the amount has been correctly quantified. The AO had calculated the disallowance at Rs. Nil, Rs. 1,04,38,000/- and Rs. 26,87,000/- under (i), (ii) & (iii) of rule 80 (2)respectively. There is no dispute regarding the first component, because it is Nil. With regard to the second component being the expenditure by way of interest which is not directly attributable to any particular income or receipt, the AO has determined the amount at Rs. 1,04,38,000/. The AO has taken into account the entire interest expenditure of Rs. 5,79,46,000/- for computing the above disallowance. The Id.AR, in his submission, has given the break-Up of interest which includes (1) interest on bank loans: ı 67,92,000/- (2) interest on term loans Rs. 3,82,11,000/- and (3) interest on other accounts: Rs. 1,29,43,000/-. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... considered a situation when the loans were utilized for the purchase of machineries, interest arising out of such loans, whether such interest is to be excluded for the purpose of computing disallowance under Rule 8D(2)(ii), the Tribunal held that such interest has to be excluded. While holding so, it has held as under:- "11. There is no dispute about working of this method so far as rule 8D(2)(i) and (iii) is concerned. It is only with regard to the computation under rule 8D(2)(ii) that the Assessing Officer and the CIT(A) have different approaches. This provision admittedly deals with a situation in which " the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt" . Clearly, therefore, this sub clause seeks to allocate 'common interest expenses' to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is "expenditure by way of interest...........which is not directly attributable to any particular income or receipt" and the only categories of income and receipt, so far as scheme of rule 8 D is concerned, ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income are excluded, interest expenses directly relatable to taxable income, even if any, are not excluded. 14. The question then arises whether we can tinker with the formula prescribed under rule 8D(2)(ii) of the Income Tax Rules, or construe it any other manner other than what is supported by plain words of the rule 8 D (2)(ii). 15. We find that notwithstanding the rigid words of Rule 8D(2)(ii), the stand taken by the revenue authorities about its application, as was before Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg Co Ltd Vs DCIT (328 ITR 81) when constitutional validity of rule 8 D was in challenge,is that " It is only the interest on borrowed funds that would be apportioned and the amount of expenditure by way of interest that will be taken (as 'A' in the formula) will exclude any expenditure by way of interest which is directly attributable to any particular income or receipt (for example-any aspect of the assessee's business such as plant/machinery etc.)". Therefore, it is not only the interest directly attributable to tax exempt income, i.e. under rule 6D(2)(i), but also interest directly relatable to taxable income, which is to be excluded ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s business such as plant/machinery etc.)". Accordingly, even by revenue's own admission, interest expenses directly attributable to tax exempt income as also directly attributable to taxable income, are required to be excluded from computation of common interest expenses to be allocated under rule 8D(2)(ii). 17. To the above extent, therefore, we have to proceed on the basis that rigour of rule 8 D (2)(ii) is relaxed in actual implementation, and revenue authorities, having taken that stand when constitutional validity of rule 8 D was in challenge before Hon'ble High Court, cannot now decline the same. Ideally, it is for the Central Board of Direct Taxes to make the position clear one way or the other either by initiating suitable amendment to rule 8D(2)(ii) or by adopting an interpretation as per plain words of the said rule, but even on the face of things as they are at present , in our humble understanding, revenue authorities cannot take one stand when demonstrating lack of 'perversity, caprice or irrationality' in rule 8D before Hon'ble High Court, and take another stand when it comes to actual implementation of the rule in real life situations. Therefore, even as we are ali ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncy in view of the judgment of Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1. It is not the case of the Revenue that the sister concern or any of the Directors has misused the funds invested by the assessee. When the sister concern uses the funds only for business purpose, there was commercial expediency for making investment. Therefore, this Tribunal is of the considered opinion that there cannot be any disallowance under Section 14A of the Act read with Rule 8D of the Income-tax Rules, 1962. 13. In view of the above, this Tribunal is unable to uphold the orders of the lower authorities. Accordingly, the orders of the lower authorities are set aside. The entire addition made by the Assessing Officer is deleted." 21.3 Further, we also make it clear that the own funds which is in the form of share capital and reserves and surplus, which was available to the assessee to make investments which is yielding exempted income have no cost and therefore, it is to be given due weightage while applying the formula of Rule 8D. This view of ours is fortified by the order of the co-ordinate Bench in the case of Beach Miners Co. Pvt Ltd. Vs. ACIT in ITA No.2110/Mds./14 dated 06.08. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... return of income filed by the assessee in India and whatever taxes have been paid by the branches in the other contracting states i.e the source country, credit of such taxes shall be given. Thereafter, the Tribunal in this case remitted the issue to the file of the Assessing Officer to decide afresh in the light of the above order of the Tribunal in the case of Bank of Baroda in I.T.A.No.2927/Mum/2011 dated 25.7.2014. Later assessee filed MA in MA Nos. 95 & 96/Mds/2016 stating that the direction given by the Tribunal is not appropriate. Since the assessee has no income from any branches in Singapore, that decision cannot be applied to the assessee's case. The Tribunal while adjudicating the said MA vide order dated 29.7.2016 held as follows : "We have heard the rival submissions and perused the material on record. In our opinion, the interpretation of the order of the Tribunal by the ld. AR is misconceived. The Tribunal was of the opinion that if the income from foreign country is offered to tax by the assessee by whatever means, the assessee has to get tax credit to the extent the tax was paid in foreign country. In other words, once the income is included either in the Profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ] 305 ITR 434 (MAD). 26. The DRP observed that the above interest payment of Rs. 57,46,43,000/- pertain to the purchase of equity of the assessee's subsidiary company M/s. Aban Holdings Pte. Ltd., Singapore. As per the IT Act, only the expenses, which are incurred or laid out wholly, solely and exclusively for the purpose of business, are to be allowed while computing the income taxable under the head 'income from business or profession'. The assessee's business is offshore drilling activities. Therefore only the expenses incurred in relation to the offshore drilling are to be allowed as business expenses. The loans advanced (or the investments) to the subsidiary company will not form part of the business of offshore drilling, even if the subsidiary is engaged in the same line of business. If the assessee claims that the investments itself is a separate business activity, then the resulting gains from such investments should be assessable under the head income from business, and the investments should be included in the stock- in-trade in the balance sheet. However, perusal of the assessee accounts shows that the gains (or the losses) from the investments are offered t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the expenses are incurred / claimed, is capable of generating income. iii) Whether income so generated (or likely to be generated) is assessable to tax. iv) If assessable to tax, whether assessable under the head 'income from business / profession' and v) In whose hands the said income is assessable. Further, if a particular income is assessable under any other head, other than the head "income from business or profession", the expenses allowable are specifically provided in the respective heads of income. Expenses, other than specified under the respective heads of income, cannot be allowed. 26.4 Under this background, the DRP observed that the subsidiary company (M/s. Aban Holdings Pte Ltd, Singapore), in which the assessee invested, is an independent company with separate legal status and also assessable to Income Tax in its own status. Further, M/s. Aban Holdings Pte Ltd., Singapore, being a foreign company is not assessable tax in India, but under the laws in Singapore. In other words, the income earned by the said subsidiary is assessable in the hands of the said subsidiary company only (that too in Singapore) and not in the hands of the instant assessee. 26. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt in capital gains in the hands of the assessee and assessable under the head capital gains. The capital gains on sale of shares are either exempt or taxable at lower rates. Further, in both of these situations, i.e. dividends or capital gains, no other expenses (especially, the present claim of expenses) are allowable. Therefore, the DRP observed that the present claim of interest expenses by the assessee is not allowable in the hands of the assessee, in any manner. 26.8 According to the DRP, in order to make the expenses eligible to be claimed as expenditure under the head 'income from business', under sections 28 to 37 of the I.T. Act, the expenditure must have been incurred wholly, solely and exclusively for the purpose of the business. The business here means the business whose profits are assessable to tax under the head 'income from business', that too, in the hands of the assessee only. If these two ingredients are missing, the expenditure cannot be considered as incurred. In the instant case, as the assessee under the head 'income from business' either in the current year or in the subsequent years. Therefore, the above expenses cannot be treated as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessing Officer. On further appeals by the assessee, the Tribunal vide order dated 7.7.2014 in ITA No. 1035/Mds/2013 held that the expenses incurred by M/s. IFMR Trust are not allowable as they are not incurred for the business. The Tribunal further held that IFMR Trust was acting like a provider and facilitator for its subsidiaries and such creation and facilitation of assets from the subsidiaries cannot be held as a business in the hands of the M/s. IFMR Trust. Hence, the Bench dismissed appeals. The relevant portion of the order of the Tribunal in ITA No.1035/Mds/2013 dated 07.07.2014 is as under: "22. We heard both sides in detail. It is admitted that the assessee is a private trust formed with the object of carrying on certain specific targets. The activities of the assessee trust is to identify the sectors, where small entities can be set up especially stressing on the requirement of rural population. The assessee is selling up such micro units in different sectors and handing over to the entrepreneur's to carry on such units in a viable manner. The main object of the assessee trust is the ultimate financial inclusion of all individuals and entities working in differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rred in relation to the establishing the subsidiary company and/or making the subsidiary company operational/viable, the interest expenses under consideration are attributable to the concerned subsidiary company only and not in relation to the earning of any income in the hands of the instant assessee company. In other words, there is no link or nexus between the assessee's incurrence of the expenses and the receipts accounted in the profit and loss account, during the year under consideration. Hence, it is held that the above interest expenses incurred are not in relation to earning of the income which is assessable under the head 'income from business' in the hands of the assessee for the F.Y. 2009-10 under consideration. Therefore, the present interest expenses are not allowable in the hands of the assessee. The interest expenses debited in the profit and loss account and claimed in the return of income, to the tune of Rs. 57,46,43,700/- claimed by the assessee are not allowable. Therefore, the action of the AO in proposing in the draft assessment order to disallow the interest expenses of Rs. 57,46,43,700/- was confirmed by the DRP. Consequently, the AO passed the final ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business expediency. The interest on such loan to be allowed as business expenditure when the assessee prove that the amount given was for business expediency. (iii) In the case of CIT v. Bharti Televentures Ltd. (11 Taxmann 356)(Delhi), the Delhi High Court held that the AO should not disallow the interest expenditure without considering whether interest bearing funds were routed to subsidiary. Further, if the assessee clearly proves that the assessee has given advances and investments made in AE is out of the interest free funds the interest expenditure claimed by the assessee should not be disallowed. (iv) The Delhi High Court in the case of CIT v. Dalmia Cement (P) Ltd.(121 Taxman 706), held that if all requisite conditions for allowance of interest are fulfilled, it is not open to revenue to make a part disallowance, unless there is a positive finding recorded that a part of amount borrowed is not used for purpose of business scope for allowing a deduction under section 36(1)(iii) is much wider than one available under section 57(iii) (v) The Bombay High Court in the case of CIT v. Reliance Communication Infrastructure Ltd. (21 Taxmann 232), held that when assessee proves t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 ITR 450), has held that the AO has disallowed @ 18% interest on borrowed capital stating that investment was not relating to the business. But the Tribunal stated that assessee would get orders from the company for existence and investment made is of commercial interest therefore deleted the addition. The High Court also contended the same as the Tribunal. (xii) The Tribunal, Chennai Bench in the case of Apollo Hospitals Enterprises Ltd. In ITA No.605/Mds/2012 has held that the AO disallowed a part of interest expenditure stating the assessee has provided interest free funds to its sister concern out of the borrowed capital. But the CIT(A) and the Tribunal has deleted the disallowance stating that the borrowed funds were utilized for specific projects and funds to sister concern were given from own funds. (xiii) The Supreme Court in the case of CIT v. Rajendra Prasad Moody (115 ITR 519) held that it is not necessary that any income should in fact have been earned as a result of expenditure. Therefore, interest paid on money borrowed for investment in shares, which had not yielded any dividend, was admissible u/s.57(iii). (xiv) The Bombay High Court in the case of CIT v. Modi ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order to indirectly facilitate the carrying on the business. The above test has been approved by the Supreme Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC), CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), SA Builders Ltd. v. CIT (supra) etc. 29.5 In our opinion, the lower authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the lower authorities should have enquired as to whether the interest-free loan was given to the sister company which is a wholly owned subsidiary of the assessee as a measure of commercial expediency, and if it was, it should have been allowed. 29.6 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 expediency. 29.7 Thus, the ratio of Madhav Prasad Jatia's case (118 ITR 200) (SC) is that the borrowed fund advanced to a third party should be for commercial e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t from the income offered by the assessee in its return of income. In such circumstances, it is not possible to us to confirm the disallowance of interest of Rs. 57,46,43,700/- u/s.36(1)(iii) of the Act. 30.1 The ld. DR relied on the judgment of the Madras High Court in the case of Trishul Investments Ltd. 305 ITR 434, wherein it was held that the interest on capital borrowed for investment in shares to be added to the cost of acquisition of shares. As the assessee has undertaken the activity of investment in shares, the shares are 'capital assets'. 31. We find that the reliance placed on by the ld. DR on the judgment of Madras High Court in the case of Trishul Investments (supra) is misplaced. The main contention of the ld. DR is that the interest expenditure on borrowings used for investment in wholly owned subsidiary cannot be allowed as deduction u/s.36(1)(iii) of the Act instead it should be added to the cost of investment, in view of the above judgment of the Madras High Court. In our opinion, when activity is undertaken as an investment activity and interest incurred upto the acquisition of the shares of subsidiary company could be considered as part of investment. Once it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund is provided under section 36(1)(iii) the Act, where the business assets are acquired out of borrowed funds. At this stage, it may be pertinent to note that depreciation is also allowable as deduction under section 32 in respect of business assets on the cost of acquisition. In determining the cost of acquisition, the interest component after bringing the asset into existence is not taken into consideration as Explanation 8 to section 43 of the Act. If the interest is to be added to cost of acquisition, then the assessee would be entitled to double deduction once under section 36(1)(iii) and the other under section 32 of Act, which is not permissible in view of the decision of the Supreme Court in the case of Escorts Ltd. v. UOI[1993] 199 ITR 43. 31.6 Similarly, when the shares are purchased by way of investment, and the dividend is received in respect of such shares, the interest paid on borrowed funds has been held to be allowable as deduction against dividend income. The Supreme Court has gone a step further in the case of CIT vs. Rajendra Prasad Moody [1978] 115 ITR 519, wherein it has been held that deduction on account of interest paid on borrowed funds is allowable as d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment, it cannot be said that expenditure incurred after the asset brought into existence, i.e., after the acquisition of the asset would form part of the actual cost. The Supreme Court laid down the proposition that interest paid on monies borrowed for acquisition of capital asset and to meet expenses connected with its installation etc. and capitalized, has to be added to the cost of asset for the purpose of deprecation. 31.8 Thus in our opinion if the money was borrowed for purchase of shares of subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of thebusiness of the assessee and it resulted in promote the business of the assessee as well as helpful to the assessee for having management control oversaid such subsidiary company, then the interest expenditure should be allowed u/s.36(1)(iii) of the Act. Further if the Assessing Officer found that investment in shares of subsidiary company not for maintaining controlling interest, then the Assessing Officer should see that there cannot be any disallowance in respect of investment of assessee's own fund. This is so because the borrowed funds and own funds are admi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orporate guarantee as service charges / commission and determined the ALP accordingly. 33.3 Further, the DRP observed that the issue of determining the ALP on corporate guarantee has already been examined by the Tribunal, Chennai Bench in the case of Redington India Ltd. v. JCIT (ITA No.513/Mds/2014). The Tribunal has held that since there is no cost involved in extending the corporate guarantee, it will not constitute "an international transaction". The relevant portion of the order of the ITAT of Redington India Ltd. v. JCIT (ITA No.513/Mds/2014 dated 07.07.2014) are as under: 94. The ITAT, Delhi Bench, in the case of Bharti Airtel Ltd. vs. Addl. CIT, 43 Taxmann.com 150, has held that providing of corporate guarantee does not involve any cost to the assessee and, therefore, it is not "an international transaction", even under the definition of the said term as amended by the Finance Act 2012. This is because, the guarantee provided by an assessee does not have any bearing on profits, income, loss or assets of the assessee. 95. In view of the nature of corporate and bank guarantees given by the assessee company and in the light of the above order of the ITAT, Delhi Bench, we ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income. The assessee in P&L account debited an amount of Rs. 55,55,03,695/- by way of loss from 'cancellation of forward contracts. The Assessing Officer opined that the cancellation of forward contracts are speculative transactions u/s. 43(5) of the Act and the result losses are speculative losses. Hence he disallowed the same and added to the total income. 36.1 Before the DRP, the assessee company submitted that the 'forward contracts' are entered into by the assessee to reduce the incidence of unforeseen losses and depreciation of rupee value thereby protecting the interests of business. The 'forward contract' transactions were entered with banks to reduce its risk on losses fluctuations in the foreign currency rates. Hence it will amount to a business transaction and not a speculative transaction for the purpose of sec.43(5) of the Act. For this purpose the assessee also relied on several case laws. 37. The DRP observed that in view of the above discussions and judicial pronouncements it is clear that foreign currency is neither a share/stock nor a commodity for the purpose of sec.43(5) of the Act. Therefore, the transactions of 'foreign exchange contracts' canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive transaction mentioned in sec.43(5) of the Act, the transaction is not of that nature as there has been actual delivery of the scrips of share. As per the definition of sec.43(5), trading of shares which is done by taking delivery does not come under the purview of the said section. Similarly, as per clause (d) of sec.43(5), derivative transaction in shares is also not speculation transaction as defined in the said section. Therefore, both profit/loss from all the share delivery transactions and derivative transactions are having the same meaning, so far as sec.43(5) of the Act is concerned. Again, in view of the fact that both delivery transactions and derivative transactions are non-speculative as far as sec.43(5) is concerned, it follows that both will have the same treatment as far as application of Explanation to sec.73 is concerned. Therefore, aggregation of the share trading profit and loss from derivative transactions should be done before the Explanation to sec.73 is applied. The above view has been taken by Special Bench of this Tribunal, Mumbai Bench, in the case of CIT v. Concord Commercial Pvt. Ltd. (2005) 95 ITD 117 (Mum)(SB). In this case, the Special Bench held t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o dealing in shares only for the purpose of settling the transaction otherwise than by actual delivery. The question arise whether the losses arising out of the dealings and transaction in which the assessee did not ultimately take delivery of the shares or give delivery of the shares could be set off against the income arising out of the dealings and transactions in actual buying and selling of shares. An answer to this question is to be found in the explanation appended to Section 73 which reads as follows: 'Explanation: where any part of the business of a company other than a company whose gross total income consists mainly of income which is chargeable under the heads "interest on securities", or a company the principal business of which is the bu9siness of banking or the granting of loans and advances) consists in the purchase and sale of shares of other companies, such company shall, for the purposes of this section, be deemed to be carrying on a speculation business to the extent to which the business consists of the purchase. In order to resolve the issue before us, the section has to be read in the manner as follows: "Explanation : Where any part of the business of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed the claim made by the assessee, that the assessee was of the opinion that transactions entered into by it were not speculative transactions. ITAT found that the amount involved in the forward contract (FC) was more than 100% of the turnover of the assessee, that FC were not relatable to specific bills, that the assessee had not related any single bill to any of the contract and had not provided any purchase order during the assessment or appellate proceedings. ITAT found that in the case under consideration assessee was not dealing in Foreign Exchange, therefore transactions entered into by it in Foreign Exchange cannot be held to be hedging transactions. As the assessee was dealing in diamonds and FC entered into only for diamonds would have been covered by the proviso (a) to the section 43(5)of the Act. As held by the Hon'ble High Court of Calcutta in the matter of Gourepore Co. Ltd ,onus was on the assessee to prove that the transactions in question were not of a speculative nature. ITAT was of the opinion that it had failed to discharge the onus cast upon him by the statute. It was also not able to contradict the finding of fact that booking and cancellation of FC of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proposition that if the assessee failed to take delivery within the period indicated in contract and the assessee had given instructions to bank for cancellation of contract on payment of agreed charges to the bank these transactions cannot be considered as speculative transaction. However, there is no finding in this judgment towards this effect and the reliance placed by the assessee is misplaced. More so, this issue was considered by the Mumbai Tribunal while delivering the decision in the case of Araska Diamond P. Ltd, 152 ITD 203, and after following the judgments of Calcutta High Court in the case of Bengal & Assam Co. Ltd vs CIT 227 CTR 399, and Bombay High Court judgment in the case of CIT vs Badridas Gauridu P. Ltd 261 ITR 256, the Tribunal came to the conclusion that the transactions, which were prematurely cancelled, cannot be considered as business transaction and it is to be considered as speculative transaction." 12. In view of the above order of the Tribunal, we remit this issue back to the file of the Assessing Officer. The Assessing Officer shall reconsider the issue afresh in the light of the above order of this Tribunal after giving adequate opportunity to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t ground is with regard to disallowance of management fees paid to India Offshore Inc., USA of Rs. 28,44,58,896/-. 41. This issue is covered by the order of the Tribunal in ITA No.585/Mds/2015 in earlier para. Following the same, this issue is allowed. 42. The next ground is with regard to upholding adjustment of Rs. 1,95,81,130/- towards charges on corporate guarantee issued on behalf of AEs which is not correct and not justified. 43. This issue is also covered in favour of the assessee by our order in earlier para. Accordingly, this ground is allowed. 44. The next ground is with regard to disallowing Rs. 10,42,456/- u/s.14A r.w. Ruld 8D without appreciating the fact that the assessee has capital and reserves of Rs. 2,357 crores as against the investment of Rs. 25.63 crores. 45. This issue is disposed of as discussed in earlier para for the assessment year 2010-2011. We remit this issue to the file of the Assessing Officer on similar line. 46. The next ground is with regard to disallowance of tax credit u/s.90 of the Act. 47. This issue is disposed of as discussed in earlier para for the assessment year 2010-2011. We remit this issue to the file of the Assessing Officer on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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