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TMI Blog2016 (12) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee is engaged in the business of trading and assembling of Solar Equipments. In addition, the assessee engaged itself in Installation and Commissioning of Network Towers for Telecom Service Providers. During the year, the ld AO observed that the assessee purchased trading goods and raw materials for assembling the units worth Rs. 2,74,69,275/- from Environ Energy Corporation India Pvt Ltd , being holding company of the assessee. The ld AO observed that the assessee had made sale to SREI Equipment Finance Private Limited only on three days to the tune of Rs. 4,88,45,280/-. The ld AO mentioned that the assessee had paid interest of Rs. 5,34,24,658/- to the said customer of the assessee for the unsecured loan advanced to the extent of Rs. 250 crores on 31.3.2011. Solely on the basis of these facts, without relying upon any other material, the ld AO held the payments made to the holding company to be unreasonable and excess of its fair market value and added 2% of Rs. 2,74,69,275/- in the sum of Rs. 5,49,386/- u/s 40A(2) of the Act. Before the ld CIT(A), the assessee argued that merely because the sale of Rs. 4,88,45,280/- was made to a single party and is spread over 3 days only, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance/addition is devoid of any merit and liable to be set aside." 3.2. The ld AR drew the attention of the Bench to Pages 18 & 19 of the Paper Book containing the reply filed by the assessee before the ld AO vide letter dated 25.8.2014 received in tapal by the ld AO on the said date, that the details of purchases have been furnished to the ld AO in the course of earlier hearings and assessee purchased various parts and accessories and then assembled the same as per design and drawings and then sold the assembled goods and in such situation , it could be found that each supply was distinct and the same were not standard and uniform products. However, the details of sales and purchases in the format suggested by the ld AO were also filed to the extent possible. He also argued that it was specifically brought to the notice of the ld AO vide page 19 of the paper book that the assessee had neither taken any loan from SREI Equipment Finance Private Limited (SEFPL) nor paid any interest to them. In fact, it had taken loan only from SREI Infrastructure Finance Ltd which is a separate and distinct legal entity altogether and paid interest to them on the loan taken. He further argued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act are indeed applicable or not. For the sake of convenience, the provisions of section 40A(2) are reproduced hereunder:- Expenses or payments not deductible in certain circumstances (2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Hence it is very clear that the onus is on the ld AO to bring the fair market value of the goods purchased by bringing in comparable cases ; onus is on the ld AO to bring on record that the payment for purchases has resulted in some benefit derived by the other person to whom the payment has been made. Only in such cases, he could disallow to the extent that such payment is found to be excessive o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to arrange, manage and liason with engineers and to supervise and advise on the assembly of various parts and components and moreover, whenever the assessee needed particular expert, the responsibility of bringing an expert was given to her and for the said purposes retained here and she was discharging her responsibility nicely for which the assessee paid Rs. 3,00,000/- as salary for 3 months and later on due to her other engagement, was retained as retainer and paid professional fees of Rs. 9,00,000/- . It was argued that both salary and professional fees paid to her were not in excess of market rates considering her expertise and services given to the assessee and hence the provisions of section 40A(2) of the Act cannot be invoked. It was also stated that the total payments made to Mrs Chandana Poddar towards salary and professional fees was only Rs. 12 lakhs and not Rs. 13 lakhs as claimed by the ld AO. The ld AO observed that the assessee had failed to substantiate the reasonableness and logic for expending Rs. 13 lakhs towards Mrs Chandana Poddar and then claiming the same as business expenditure with reference to any cogent materials like educational qualification cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sible in law. Reliance was also placed on certain judgements in support of its propositions. The ld CIT(A) upheld the disallowance by observing as under :- "6.3. The A.O. has not taken any statement of Mrs Poddar to prove his case. Having regard to apparent lack of qualifications, skill and matching services on the part of Mrs Poddar I hold the A.O's action as reasonable and correct in law. The ground, therefore, not allowed." 4.3. Aggrieved, the assessee is in appeal before us on the following grounds :- "3a) That the Ld. A.O. disallowed sums of Rs. 3,00,000/- and Rs. 10,00,000/-, aggregating to Rs. 13,00,000/- on account of salary and professional fees respectively paid to Mrs. Chandana Poddar, one of the relatives of the director, u/s. 40A(2) of the Act and the Ld. C.I.T.(A) upheld the same without considering the objection made in the written submission that actually the professional fees paid to her amounted to Rs. 9,00,000/- and hence the excess addition of Rs. 1,00,000/- was uncalled for and needs to be deleted at the outset. (b) That the Ld. C.I.T.(A) failed to appreciate that onus of proof u/s. 40A(2) of the Act is on the A.O. who is required to prove by bringing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act to her and recorded statement from her, which was admittedly not done by the ld AO. He placed reliance on the following decisions :- (a) Decision of Hon'ble Allahabad High Court in the case of Abbas Wazir (P) Ltd vs CIT reported in 265 ITR 77 (All) (b) Decision of Hon'ble Madras High Court in the case of CIT vs Nagesh Cine Enterprises reported in 232 ITR 750 (Mad) He further argued that the revenue had made this addition purely based on surmise and conjecture. The law is very well settled as on date that no additions could be made on surmise and conjecture. Reliance in this regard was placed on the following decisions :- (a) Decision of Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd vs CIT reported in 26 ITR 775 (SC) (b) Decision of Hon'ble Supreme Court in the case of Lalchand Bhagat Ambica Ram vs CIT reported in 37 ITR 288 (SC) 4.5. In response to this, the ld DR argued that the work that is expected of Mrs Chandana Poddar is purely technical in nature which could not be rendered without possessing the requisite technical qualifications. Hence, in the absence of filing details of educational qualification of Mrs Chandana Poddar , the payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s found to be excessive or unreasonable. In the instant case, nothing has been brought on record to that effect and the ld AO had merely disallowed the entire expenditure as not meant for the purpose of business. If that be so, he ought not to have invoked the provisions of section 40A(2) of the Act. We also find that the ld AO had without prejudice had also tried to disallow the said expenditure u/s. 37 of the act as not meant for the purpose of business. We find that this action of the ld AO is purely without any basis and is merely based on surmise and conjecture. It is very well settled that no addition / disallowance could be made based on surmise and conjecture as per the decisions rightly relied upon by the ld AR. The principles enunciated in those decisions are not reiterated herein for the sake of brevity. We find that the ld AO had not made out a case for making disallowance under the provisions of the Act. The test of commercial expediency has to be looked into from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decisions of the Hon'ble Supreme Court in the case of CIT vs Dhanraj Girji Raja Narasin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Nagesh) as the secretary and paid her a salary of Rs. 1,520/- per month. According to the department, the agreement was only a device to divert the income of Mr Nagesh so as to avoid higher tax liability. But this was not established by the department. On the given facts, the Hon'ble Court observed as below:- "The assessee produced the agreement dated April 20, 1971 , before the Income-Tax Officer, and no further evidence was produced to establish that the secretary rendered any service to mr Nagesh. The Tribunal pointed out that if there is a doubt in the mind of the Department with regard to the services rendered by the secretary to Mr Nagesh, the Department could have summoned the secretary, to ascertain the fact whether any service was rendered by her. The fact remains that the agreement dated April 20, 1971, and the letter dated January 20, 1976, were not doubted by the Department. When the secretary was appointed in pursuance of the agreement and when there is evidence on record to show that services were rendered by Mrs Regina Nagesh to Mr Nagesh, there cannot be any impediment for the allowance of the salary payment made by the firm to the secretary." We find that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owability of interest payment on borrowed funds by proving as to how the borrowed funds were utilized by the assessee for the purpose of its business. The assessee also brought to the notice of the ld AO that loan was borrowed from SREI Infrastructure Finance Ltd and not from SREI Equipment Finance Pvt Ltd as wrongly stated by the ld AO in the show cause notice and accordingly it was stated that no interest was paid to the party mentioned by the ld AO. The ld AO observed in this regard that from the details submitted by the assessee clearly revealed that the assessee had not utilized any amount of loan out of said pre-existed loan of Rs. 250 crores (before 1.4.2011) and refunded the entire principal amount on 14.6.2011 and then the interest of Rs. 5,34,24,658/- has been paid on 24.8.2011 for the period 1.4.2011 to 14.6.2011. He observed that during the period 1.4.2011 to 13.6.2011, the assessee had purchased solar equipments of Rs. 3,77,35,150/- and sold said equipments at Rs. 4,88,45,280/- and there was no opening stock and closing stock was valued at cost price at Rs. 16,47,300/- as on 31.3.2012. Accordingly he concluded that no loan amount could have been utilized for opening st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... em directly or indirectly calculated to benefit the company and to place or guarantee the placing of, underwrite, subscribe for or otherwise acquire all or any part of the shares, debentures, or other securities of any such other company or companies and to subsidise or otherwise assist any such company or companies either out of its own funds or out of funds that it might borrow by issue of debentures or from bankers or otherwise." It was argued that the sister concern was empowered to extend financial assistance to companies out of borrowed funds for the purpose of acquiring the business / undertaking / properties of the assisted company. In pursuance of the aforesaid object, the assessee invested the borrowed funds in shares of Viom Networks Ltd. Accordingly, it was submitted that shares in Viom Networks Ltd were acquired in ordinary course of business and accordingly the same was correctly disclosed as stock in trade in the Balance sheet of the said company. It was further argued that it is now well settled that managing the business of companies by acquiring controlling interest therein constitutes business activity. Thus, the investment made by M/s Confident Solar Pvt Ltd i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... then interest expenditure is otherwise allowable as business expenditure u/s. 37(1) of the Act, because the borrowed funds were used by the sister concern for the purpose of their business." 5.3. The ld AR argued by reiterating the arguments made before the lower authorities and placed a written submission in this regard. The ld AR also drew the attention of the Bench to operative portion of various decisions relied upon by him. In response to this, the ld DR vehemently relied on the orders of the lower authorities. 5.4. We have heard the rival submissions and perused the materials available on record. We find that the assessee borrowed interest bearing loan of Rs. 250 crores from SREI Infrastructure Finance Ltd and advanced the same to M/s Confident Solar Pvt Ltd, a subsidiary of assessee company. According to the Balance Sheet of the subsidiary company for financial year 2011-12, the said interest free loan fund received from the assessee company was shown as inventories, which constituted shares in Viom Networks Ltd, which is engaged in the similar line of business. Thus with a view to expand its business and acquire a controlling interest in Viom Networks Ltd, the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1960] 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. 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. 26. No doubt as held in Madhav Prasad Jatia's case (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ugar Works Ltd.'s case (supra) that the interest, was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 33. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 5851 also does not appear to be correct. 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 2 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 arm-chair 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. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-business purposes. 5.4.2. We also find from Clause 17 of Memorandum of Association of M/s Confident Solar Pvt Ltd as reproduced supra that it was empowered to extend financial assistance to companies out of borrowed funds for the purpose of acquiring the business / undertaking properties of the assisted company. In pursuance of the aforesaid object, the assessee company invested the borrowed funds through its sister concern in the shares of Viom Networks P Ltd. Therefore, the shares in Viom Networks P Ltd were acquired in ordinary course of business and accordingly we find that the same was correctly disclosed as stock in trade in the balance sheet. The assessee's reliance in this regard on the decision of the Hon'ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) is well founded. We find that the ld AR also placed reliance on the recent decision of co-ordinate bench of Delhi Tribunal in the case of ITO vs First American Securities Pvt Ltd in ITA No. 4768/Del/2012 dated 11.1.2016 . We find that this tribunal after referring to several judicial pronouncements on the issue concluded as under :- "We also find that it is very speci ..... X X X X Extracts X X X X X X X X Extracts X X X X
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