TMI Blog2016 (10) TMI 807X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Dalmia Cement (Bharat) Ltd. [2001 (9) TMI 48 - DELHI High Court] is applicable to the facts of the present case, wherein it was held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. 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. - ITA Nos. 585/Mds/2015 & 267/Mds/16, ITA Nos. 927/Mds/2015 & 668/Mds/2016 - - - Dated:- 14-9-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For The Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parent arithmetical errors in computing the average investments of the appellant u/r 8D(2)(ii) 8D(2)(iii) of Income Tax Rules, 1962. 6a) The Ld. AO grossly erred in disallowing the appellants claim of relief u/s 90 of Rs. 17,63,24,330. b) In doing so, Ld. AO grossly erred in ignoring the directions of Ld. DRP without verifying the facts on records. 7. The Ld. AO/Ld. DRP grossly erred in law and on facts, in disallowing interest expenditure of Rs. 57,46,43,700 debited to profit and loss account incurred by the appellant in the course of business. 2.1 The assessee has raised the additional grounds as follows : 9. We would like to submit that as per the ratio laid down by the Honourable Supreme Court of India in the case of National Thermal Power Co. Ltd v. CIT (1998) 229 ITR 383 (SC) the IT AT has jurisdiction to examine issues which though not arose before the first appellate authority but arose before IT A T for the first time. 10. The Assessing Officer has erred in law by making a reference to the learned TPO without meeting the preconditions for such reference under section 92CA of the Act. 11.The AO ought to have appreciated the fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... intended error. The assessee explained that the actual amount of tax withheld was ₹ 4,45,81,999/-, being @ 15% on ₹ 28,15,18,658/- and the above payment of management fee of ₹ 28,15,18,658/- will not be hit by the provisions of sec.40(a)(i) of the Act. 5. The DRP observed that submission of residency certificate of the non-residents is a mandatory requirement from 1.4.2013 only as submitted by the assessee and hence, not applicable to the current A.Y. 2010-11 under consideration. At the same time, the residency certificate can be called for by the AO in order to verify the residential status of a foreign company (or person), so that the correct rates of taxes can be determined in the cases of non-residents for the purpose of taxes can be determined in the cases of non-residents for the purpose of withholding tax u/s.195 of the Act. If the residency certificate is not available, it may not be possible for the AO to determine the residence of the non-resident and hence, the AO will not be in a position to apply the proper Double Taxation Avoidance Agreement. Since the assessee has filed a residency certificate on 31.3.2014, before the AO, no adverse inference can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the provisions of the Act , only the genuine expenses are to be allowed as a deduction. Even after proving the genuineness of the expenditure, if the expenditure is hit by other provisions like 40A(3) , 43B, 40(a)(i), etc., the disallowance can be made under the respective sections. Therefore, the DRP observed that the Assessing Officer has to examine the provisions of each section and the assessee's claim should fulfil the requirements provided under various sections. 5.4 The DRP observed that the assessee has not furnished any details like copies of invoices, nature of the services rendered by India Offshore Inc. etc. either before the AO or before the panel. Mere making of the payment through banking channel is not a conclusive proof for the incurrence of the expenses. It is the responsibility of the assessee to prove the genuineness of the payments and also the nexus between the business and the payments. If there is no direct nexus between the assessee s business and payments, the amounts paid should not be allowed as a deduction, even if the assessee conclusively proves the payments. In the present case, even the commercial expediency is not established by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment years 2005-06 to 2008- 09 which is kept on record at pages 1 to 146 of the paper book. Therefore, it is not possible to hold that the payment is not genuine. 6.1 Further, the Tribunal in the case of Cadbury India Ltd. V.ADCIT in ITA No.7408/Mum/2010 dated 13.11.2013 held in paragraph 39 that if the assessee has paid the payments in relation to royalty to its parent AE for use of technical know-how and trademark after getting due approval from RBI and SIA, the disallowance cannot be made. Further, if the amount paid by assessee was lesser than similar payments made by other group entities to parent AE, then, TPO should not make the TP adjustment in respect of the royalty payment to its parent AE. 6.2 It is pertinent to note that the Tribunal, Hyderabad Bench in the case of Air Liquid Engineering India P. Ltd. In ITA Nos.1040 1159/Hyd/2011 and 1408/Hyd/2010, vide order dated 13.2.2014 held that in transfer pricing proceedings TPO could not sit in judgment on business and commercial expediency of assessee company so as to conclude that payment of royalty made by assessee to its AE was unreasonable and thus ALP of said payment was to be taken as nil. 6.3 It is to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 50 crores. In the return of income filed, the assessee has claimed a loss of ₹ 3.47 crores on account of sale of the joint venture. However, the assessee has not furnished the details of the working of the loss of ₹ 3.47 crores. Hence, the AO proposed to disallow the loss claimed of ₹ 3.47 crores. In addition, the AO also proposed to bring the entire sale consideration of ₹ 9.50 crores to tax as long term capital gains. Against this, the assessee carried the matter before the DRP. 9. The DRP observed that the assessee entered into a joint venture business with M/s. Prize Petroleum Ltd. with 50:50 ratio. The assessee has been including the assets and liabilities of the joint venture, to the extent of 50%, in its balance sheet and the business transactions in the profit and loss account. The assessee sold its 50% interest in the joint venture to M/s. Valdel Oil Gas P. Ltd. for a consideration of ₹ 13 cores in the F.Y. 2007-08. The total business value value [assets-liabilities] of its 50% interest in the joint venture, at the time of sale in 2007-08 was ₹ 13,64,91,065/-. Hence the assessee, in the return of income for the A.Y.2008-09 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 13 crores. Therefore, the issue of capital gains, if any, is to be examined in the assessment of A.Y. 2008-09. In fact, there was a capital loss of ₹ 64.91 lakhs, which was also allowed by the CIT(A) in A.Y. 2008-09. Therefore, no separate capital gains are assessable on the same transaction in the subsequent years. The present issue is only reduction in the sale consideration of the transaction which has already happened in F.Y. 2007-08. Hence, no action is required in the current A.Y. 2010-11. Therefore, the DRP observed that the AO is not justified in bringing the revised sale consideration of ₹ 9.50 crores to tax as long term capital gains is not justified and deleted. Now the assessee is in appeal before us with regard to the findings of the DRP that loss of ₹ 3.47 crores is a long term capital loss, as held by the CIT(Appeals) in A.Y. 2008-09 and allow the above loss as a long term capital loss only. 10. We have heard both the sides and perused the material on record. The contention of the ld.AR is that the above impugned amount was receivable from Valdel Oil Gas Pvt. Ltd. Out of the total consideration of ₹ 13 crores and this is a busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lied on the order of the Tribunal in assessee s own case for the A.Y. 2007-08 in ITA No 90/Mds/2012 dated 26.6.2016, wherein the Tribunal allowed the claim of the assessee u/s.35D of the Act on the same issue. 16. We have heard both the parties and perused the material on record. The ld. AR relied on the judgment of Rajasthan High Court in the case of Secure Meters Ltd. reported in 175 Taxman 567, for the proposition that it should be considered as expenditure u/s.35D of the Act. The ld. AR submitted that the expenditure was incurred on non-convertible redeemable preference shares. It can be characterized in the nature of debt. As per RBI guidelines, non-convertible redeemable and partly convertible redeemable preference shares are debt instruments and wholly convertible preference shares are part of equity. According to him, in the present case, there is a contract with the subscriber to the preference shares for repayment of capital after a particular period of redemption. Whereas in the case of equity, there is no commitment on the part of the company in making the repayment. The expenditure is incurred towards increased debt funding for the benefit of the company and not tow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces, hydrocarbon exploration and production, it was held that these activities would fall within the ambit of mining under clause (aa) (iv) of sub-section (7) of section 72A of the Act which defines industrial undertaking . Having decided that the appellant qualifies as an industrial undertaking, it was further examine as to whether it satisfies the conditions laid down in section 350 of the Act. Since the appellant had only purchased the oil rig but had not put it to use during the year and had classified it as capital work-in-progress in its book, the extension of the industrial undertaking was held to be in-complete. Accordingly, the contention of the Id. AR that extension of the industrial undertaking was completed on purchase of the oil rig was not accepted and the ground was dismissed ln assessment year 2006-07. On further appeal, the Hon'ble ITAT has confirmed the finding of the CIT(A) for A.Y.2006-07 in ITA No.1382/Mds/10 dated 15.07.2011. It held as under: . In view of the above decision of the Hon'ble ITAT, it is clear that the assessee was not eligible for deduction u/s 35D for A.Y 2006-07. However, the appellant has completed the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 1,44,50,789/- and proposed to disallow the same. 18.1 Before the DRP, the assessee company submitted that the investments in the acquisition of shares were from its own interest-free funds. The assessee also stated that it had not incurred any expenses in relation to investments made in shares. The assessee further claimed that since there were no dividends income received during the year no expenses u/s.14A can be disallowed. Hence, the assessee stated that the Assessing Officer is not justified in proposing to disallow the expenses u/s.14A of the Act r.w.r.8D. 18.2 The DRP observed that the total investments in shares/funds during the financial year 2009-10 was ₹ 25.63 crores (closing balance as on 31.03.2010) as could be seen from the investments of the balance sheet of the financial year. 18.3 The assessee is not maintaining any separate books of accounts for the investments in shares. Nor there was a separate establishment to look after the investments in shares/funds. The assessee may be having substantial interest free own funds (in the form of capital/reserves and surpluses etc]. But this does not mean that the investments are made only from these own in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce is to be worked out proportionate to the investments made and the expenses (either direct or indirect) involved in the process, even if there are no such exempt income earned during the year. 18.5. It is seen from the P L account that the assessee has several activities including investments in shares. For the purpose of making these investments etc. the same management, manpower, machinery and infrastructural facilities of the assessee are being used. Hence, there is an element of expenditure involved in the process. This expenditure may not be direct. Thus, there is an expenditure involved in making these investments. Therefore, there is al need to identify and apportion a reasonable amount of expenses as attributable for earning the exempted income. this purpose reliance placed on the following decisions by the DRP: Dy. CIT v. SREI International Finance Ltd. (2006) 10 SOT 722 (Delhil- Trib). In light of clear provisions of section 14A, even in case it is not possible to identify expenses incurred in earning income which does not form part of total income, disallowance has to be made on some basis. Morezban Bharucha v. Asstt. CIT (2007) 12 SOT 133(Mum-Trib) : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oposal for disallowance of expenses, by the AO, u/s.14A r.w.r.8D, is justified and confirmed. 19. Consequently, AO passed the order against which the assessee is in appeal before us. 20. We have heard both the parties and perused the material available on record. The ld. AR placed before us about netting of interest paid with interest received. In our opinion, application of Rule 8D of the I.T. Rules does not allow for netting of any interest income with interest expenditure. If netting of interest income is allowed, it would be equivalent to adding something which is not there in the Rule book, accordingly impermissible. Thus, we uphold the AO s application of Rule 8D(2)(ii) read with sec.14A on gross interest, through AO did not consider interest receipts as income from other sources ; the treatment of interest by AO would not change the nature of transaction or character of receipts. Accordingly, we reverse the finding of the CIT(Appeals), on this issue. 20.1 However, the AO has to consider the availability of share capital, reserves and surplus while invoking the provisions of sec.14A read with Rule 8D of the Income-tax Rules, as this is the non-interest bearing own f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If loans have been sanct i oned for spec i fic projects/expans i on and have been ut i lized towards the same , then o b viously they could not have been uti l ized for making any investments having tax - free i ncomes . From the copy of the sanct i on letters from State Bank of Bikaner Jaipur i t can be seen tha t the loan was granted with a specific r equ i remen t t ha t the loan shal l be uti l ize d for purchase of impor t ed m a chinery whi l e in the case of loan fr o m Fe d era l B ank , i t i s se e n t hat t he loan was to be u t i li zed fo r expansion of p r o j ec t s. S an c t ion o f b oth these loans prohib i t u t i l izat i on of funds for purposes other than for the u tilizat i on f or which t hey are s a nctioned . From the ledger ex t ract for the year ended 3 1. 03 . 2008 for both loan accou n ts, it i s seen that no amount has been ut i lized f or inves t ment in subsid i aries wh i c h earns tax-free income . T he loan amounts were ful l y d i sbu r s ed a n d u t il iz ed in t h e yea r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, are mutually exclusive categories of tax exempt income and receipt and taxable income and receipt . No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14 A leave any ambiguity about it. 12. Ironically, however, the definition of variable A embedded in formula under rule 8D(2)(ii) is clearly incongruous inasmuch while it specifically excludes interest expenditure directly related to ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 from the definition of variable A in formula as per rule 6D(2)(ii), and rightly so, because it is only then that common interest expenses, which are to be allocated as indirectly relatable to taxable income and tax exempt income, can be computed. This is clear from the following observations made by Their Lordships of Hon ble Bombay High Court in the case of Godrej Boyce (supra): 60. In the affidavit-in-r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laxed 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 alive to the fact that the stand of the learned Departmental Representative is in accordance with the strict wording of rule 8D(2)(ii), we have to hold that, for the reasons set out above, this rigid stand cannot be applied in practice. 13. In view of the decision of the Calcutta Bench of this Tribunal cited above, we uphold the order of the Commissioner of Income Tax (Appeals) in excluding the interest on ban ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 06.08.15 wherein held that: 6.1. Ground No.3 Disallowance of expenditure by invoking the provisions of section 14A of the Act for ( 3,11,34,630/- since the assessee had made investments of ( 71,55,33,570/- for earning exempt income. At the outset, we find that there is no merit for the Revenue to make addition of ( 3,11,34,630/- invoking the provisions of section 14A of the Act because th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Loss Account or in the return of income, the corresponding tax credit on the same income has to be given. Accordingly, we are of the opinion that there is no need of apprehension for the assessee that the Assessing Officer will misinterpret the order of the Tribunal. Therefore, we do not find any merit in the argument of the ld. AR. Accordingly, the miscellaneous ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to tax under the head 'capital gains' and the investments are separately reflected as investments and not under stock-in-trade category, in the balance sheet. Therefore, the investments in the subsidiary company cannot be considered as a regular 'business activity'. 26.1 The DRP, further observe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 26.5 It is also observed by the DRP that there should be principle of matching between the expenditure incurred and income earned/accrued. Any expenditure, whose corresponding income, if not liable to tax in the year or in the hands of the assessee, such expenses, even if forms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, 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 business expenses in the hands of the assessee. 26.9 The assessee further claimed before the DRP that the investments in the subsidiary company were [or the furtherance of its business activities. The assessee also relied on certain case laws, wherein it was held tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 different rural sectors. The assessee trust proclaims as one of its objects to provide accessibility of modem markets for artisan and craftsmen. It also declares as its objects the availability of finance and facilities for different sectors to attain sustainab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany 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 ₹ 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 ₹ 57,46,43,700/- was confirmed by the DRP. Consequently, the AO passed the final assessment order. Against this, the assessee is in appeal before us. 27. The ld. AR submitted that the assessment company has invested share capital in its wholly owned subsidiary, M/s. Aban Holding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 that the advances and investment to AE are for the purpose of business expediency, no disallowance of interest to be made. (vi) In the case of CIT v. Tonneco RC Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (P) Ltd. (79 Taxmann 428) held that interest paid by an assessee on borrowings for purchasing shares from which assessee expected to receive/earn divide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 expediency if it is sought to be allowed under s. 36(1)(iii) of the Act. 29.8 In the present case, the lower authorities have not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rm the disallowance of interest of ₹ 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 is acquired, then it will be a revenue expenditure. In the present case, it is an admitted fact that the wholly owned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 deduction in computing the income under the head Income from other sources , even where the dividend is not r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 admittedly mixed up in such cases, the disallowance of interest has to be made on proportionate basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 hold that the TP addition made against corporate and bank guarantees ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount of ₹ 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 cannot be viewed as speculative transactions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 that : Before conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 foreign exchange were not in respect of specified export or import. Besides, finding of fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icated 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 assessee. 38.1 Later, the assessee filed MA in MA Nos.95 96/Mds/16 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement fees paid to India Offshore Inc., USA of ₹ 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 ₹ 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 ₹ 10,42,456/- u/s.14A r.w. Ruld 8D without appreciating the fact that the assessee has capital and reserves of ₹ 2,357 crores as against the investment of ₹ 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 similar line. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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