TMI Blog2021 (9) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... traordinary receipts compared to the expenditure incurred by the assessee. Assessee has given interest free loans/advances from interest bearing account which was not a debit balance i.e. loan funds have been utilized for advancing to its subsidiary, fellow subsidiary ultimate holding co. and to others. Assessee was unable to establish the use of the funds for business purposes as per the decision relied on by the ld. AR of the assessee. He also unable to establish the commercial expediency as observed supra, in all the years the assessee has not received any dividend or interest income and has not produced any agreements between / amongst the companies to whom the loans and advances were made and what was the purpose for giving loans and advances. The assessee failed to produce documentary evidences, the end use of funds invested in subsidiary, fellow subsidiary, ultimate holding company and to others. We also do not find any weightage on the submission of the ld. AR of the assessee that assessee had sufficient own funds for giving loans and advances and invested in shares and further, could not produce the availability of own funds on the date investments in shares and givi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeals under consideration, are as under: 1. Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in holding that the financial charges be allowed as business expenditure even though there was no business expediency? 2. Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in deleting the addition when the Assessing Officer concluded in his assessment order that the money borrowed on which interest was paid was actually not for business purposes of the assessee? 3. Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in deleting the addition when there was absolutely no nexus between the expenditure claimed by assessee and the business of assessee? 4. Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in applying S.A. Builders case, where the facts are totally opposite and Assessing Officer clearly distinguished this case while disallowing the expenditure? 5. Any other ground that may be urged at the time of hearing. 4. Brief facts as taken in AY 2011-12 are that the assessee company is engaged in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way of dividend, capital gains, interest on deposits / ICDs etc 4.4. As could be seen from the balance sheet, the assessee made investments in equity shares at ₹ 189.28 crores and the loans advances was shown at ₹ 187.70 crores. Thus, it is clear that the funds borrowed from bank were utilized for the purpose of investment in equity shares and interest free loans and advances. As held in the case of CIT Vs Amritaben R.Shah (Bom) 238 ITR 777, the interest paid on borrowed capital for purchase of shares is not allowable. Thus, it is clear that the assessee invested the monies borrowed from banks to earn exempt income by investing in equity shares. However, the A.R submitted that the interest was earned on the deposits pledged for business purpose hence if the financial charges are disallowed the interest income earned on deposits may be set off given. Accordingly, the financial charges debited to P L a/c were not allowable and it was proposed to disallow the same from the loss returned. 5. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and contended inter-alia, that in the immediately preceding AY 2010-11, the CIT(A) allowed ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... utiny proceedings. After thoroughly considering the facts of the case and the business model of the assessee, allowed it as a deduction as claimed without making any disallowance. However in this AY.2012-13, the assessee earned 'Management consultancy fee' of ₹ 28 crore and interest income of ₹ 6.56 crore. Just as in the case of AY.2010-11, the assessee did not earn any 'Management fee' for the year under appeal i.e., A.Y.2011-12 also. The fact of accepting assessee's explanation for the A.Y.2012-13 and not accepting its explanation for AY 2010-11 and also for relevant AY 2011-12 clearly shows that the sole reason for non-acceptance seems to be nonearning of 'Management fee' for these assessment years. 5.4. As it can be seen from the facts for the year under appeal i.e., A.Y 2011-12, the assessee did not earn any management consultancy fees but earned interest income of ₹ 2.34 crore and admitted it as business income. According to the AD, the assessee has not shown any business income and that interest income of ₹ 2.34 crore was shown under 'other sources.' The AD was of the view that the borrowed funds are utilised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee's appeal for AY.2010-11 on the same issue and deleted the addition of interest expenditure of ₹ 15.33 crore brought to tax by the AO. After having gone through the same, I am in agreement with my predecessor's finding for the A.Y 2010-11 which is extracted as under. 5.3. It was held by the Supreme Court in the case of SA Builders (supra) that a loan extended without being under a legal obligation to do so cannot always be seen as a diversion of business funds or application of borrowed funds for non-business purposes. If such outflows can be explained in terms of commercial expediency, they have to be seen as admissible business expenditure. In addition to the decision of the Supreme Court in the case of Rajendra Prasad Moody (supra) that earning of income is not a precondition to decide the allowability of expenditure incurred U/S 57(iii) or 37(1), the above cited decision in the case of SA Builders settles the matter in assessee's favour. The assessee-company has explained these investments with reference to objectives of securing managing control and with reference to a business model of investing in SPVs. It is not the case of the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .com 154 {sq. In the said case at para 34 of the decision, the Supreme Court held that We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure . Therefore, it is submitted that disallowance is called for even in cases where investments are made to maintain dominant interest or for protection of interest. 2. It is humbly submitted that the appellant obtained working capital loan of about ₹ 100.9 Cr from Bank of India, Mumbai and short term loan of about ₹ 76.67 Cr from India Infoline Investment Services Ltd. The appellant also availed unsecured loans to the extent of about ₹ 7.29 Cr from Bank of India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the appellant-company was formed with the objective of developing/supporting the development of power projects throughout India. The appellant-company provides Management Consultancy and undertakes a variety of development activities including undertaking necessary feasibility studies, fuel assessment, tie-up and monitoring, logistic support and various services required by the power plants and in turn enjoys development fees in line with actual power generation supported and achieved. A lead lag could exist between incurrence of expenditure, providing the necessary service and revenue realisation against such services. Also, exploiting the business opportunity provided by the government policy of encouraging the Special Purpose Vehicle (SPV) route particularly in the power sector, the appellant-company invests in the SPVs which construct and operate infrastructure facilities that support power generation. 8.1 The Ld. AR submitted that the appellant-company apart from investing in equity, also advances loans/ICDs to meet the particular financial requirements of SPVs. In order to meet the financial requirements of SPVs, the appellant-company raises funds through iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Apex Court in the case of SA Builders (2007) 288 ITR 1(SC) where it was held that for the allowability of interest, what is relevant is whether the interest-free loan given to the sister concern is on account of commercial expediency. The AR of the appellant contended that in view of the rule laid down by the Apex Court, the expenditure incurred by the appellant deserves to be treated as expenditure laid out wholly and exclusively for the purpose of business u/s 37(1). 8.4 The Ld.AR submitted that for AY 2012-13, similar interest expenditure to the tune of ₹ 50.94 crores was claimed as a debit in the Profit and Loss account which was accepted by the Assessing Officer and he did not resort to disallowance of interest in the assessment order u/s 143(3) dt.27-3-2015. 9. In the re-joinder, the ld. DR submitted that the case law relied by the AR is not applicable to the case of the assessee because the facts are different in those case laws. He therefore, contended that the disallowances deleted by the CIT(A) without examining the cases in depth with case law relied by the AR of the assessee with the present facts in the impugned assessment years is unjustified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and control equipment, transmission lines, accumulators, fittings and apparatus in the capacity of principals, constructors or otherwise. 3, To establish captive power plants on stand alone or co-operative basis for an individual identity or a group of industrial and other consumers and supply power to the participants in the co-operative effort either directly or though the transmlssion1ines of Electricity Boards or any other authorities by entering iota appropriate arrangements. 4. To purchase. lease acquire, sublease. act as agents, sell, license any mine. mining . rights. mines and lands in India or elsewhere believed to contain coal and lignite and to prospect. explore, excavate, open and work mines, drill and sink shafts or wells in connection with carrying on the business of the company. 10.1 In all these years under consideration, there is only one issue involved regarding disallowance of interest. The AO observed that the assessee has utilized the borrowed funds other than the purpose for which it was taken. Considering the arguments from both the sides, we observe from the financial statements of the assessee that it has given loans and advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellate Tribunal (hereinafter referred to as the 'Tribunal'). The Tribunal by its order dated 20-6-2002 allowed the appeal of the revenue, and held that the entire amount of ₹ 82 lakhs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the Assessing Officer was justified. Accordingly, the appeal filed by the revenue was allowed and the appeal filed by the assessee was dismissed. 7. Against the order of the Tribunal, the assessee filed appeals in the High Court which were dismissed by the impugned judgment. 8. In the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of ₹ 82 lakhs advanced in the assessment year 1990-91, a further sum of ₹ 37,85,000 had been advanced to M/s. SAB Credits Ltd. which also had a clear nexus with the amounts borrowed by the assessee on payment of interest. Accordingly, the Assessing Officer disallowed proportionate interest relatable to these amounts amounting to ₹ 20,08,836. 9. On appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer that the sum of ₹ 37,85,000 advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and had deposited these in the account out of which advances were subsequently made to the sister concern. These deposits/payments/advances of ₹ 82 lakhs as and when received and made by the appellant to its sister concern, namely, SAB Credits Ltd. in the assessment year 1990-91 are reproduced hereunder in a tabular form : Date Ch. No. Amount Name of Bank Course of funds 16-9-1989 683366 24.00 lakhs State Bank of Patiala, CC Account Amount received from R.C.I., Hyderabad, a client 25-9-1989 684404 18.00 lakhs -do- From cash credit account (Debit balance account) 27-12-1989 676546 20.00 lakhs -do- From Indian Acrylics Ltd., a client 12-1-1990 476582 20.00 lakhs -do- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich it took. 18. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest, on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 19. In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which states that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. 20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression for the purpose of business occurring under the provision is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sumption of the Tribunal is that the advances were made out of own funds because assessee had a huge profit. However, we notice that the interest-free advances made every year is ₹ 2 crores when the assessee had substantial borrowings. The argument of the assessee is logically unacceptable because if assessee had huge profits and own funds, we do not know why the assessee should depend on borrowed funds. In any case if at a given point of time assessee has own funds and they have advanced it as interest-free loans to sister concerns for meeting their business needs in which assessee also has an interest, then such advances should not lead to disallowance of interest paid on subsequent borrowings. In other words, unless the assesses establishes with cash flow statements about availability of its own funds at the time of making the interest-free advances, the finding of the Tribunal cannot stand. Besides this, going by the decision of the Supreme Court, unless the assessee establishes the benefit it derives from each sister concern to which loans were advanced and the financial plight of such business concerns deserving interest-free advances, we do not know how the test of bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee has not led any evidence to show the commercial expediency to advance funds to the sister concerns. In addition to this, the assessee failed to file the cash flow statement to show that own funds were advanced to the sister concerns. Hence, the issue was decided against the assessee by the lower authorities. Though the assessee made an oral plea that the money had been advanced to the sister concerns on account of commercial expediency, the assessee failed to place any evidence to suggest whether funds advanced by the assessee to the sister concerns was in the nature of interest free own funds or the funds were advanced on account of commercial expediency. The interest paid by the assessee on such account cannot be allowed. The only plea of the assessee is that the assessee had mortgaged its property to avail bank loans for the sister concerns and if the sister concerns failed in their business, it will effect the profitability of the assessee. However, the assessee has not produced an iota of evidence to prove that it has mortgaged its property, and on its classification of funds as NPA, it would affect the assessee's profitability. Being so, we are not in a posi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... balance sheet as well as no rental expenses debited into the P L Account to establish that wherefrom the assessee is operating its business operations and no fixed assets are appearing in the balance sheet for the AY 2013-14 2014-15. All these factors cannot be brushed aside. We further observe that the assessee has shown capital work in progress(including capital advances) of ₹ 25,11,50,000/- and ₹ 25,50,00,000/- in AY 2010-11 2011-12 respectively, but, subsequently, no fixed assets were materialized, which is clear from the following financial statements: Description 31st March 2011 31st March 2010 Sources of funds Shareholder s funds Share capital Share application money Reserves and surplus Loan funds: Secured loans Deferred tax liability 516,689,940 2,843,521,450 1,087,802,986 1,248,326,593 35,012 500,000,000 535,920 979,318,376 1,84,661,310 26,763 5,659,375,981 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... - Audit fees - Certification fees Miscellaneous expenses 655,250 41,407 235,805 1,082 2,816 498,142,461 8,273 13,760 1,341,400 8,371 18,014 254,447 642 987 37,314,898 6,030 13,790 60,957 500,442,254 37,678,136 Finance Charges: Interest on fixed loans Interest others Bank/other finance charges 140,840,722 77,032,165 990,182 134,337,075 18,993,764 3,713,487 218,863,069 157,044,326 Description 31st March 2014 31st March 2013 1. Equity and Liabilities (1) Shareholder s funds (a) share capital (b) Reserves and surplus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Interest income Net gain on sale/restatement of investments Liabilities/provision no longer required written back 3,342,009 - 11,820 10,683,454 751,597 156,537 3,353,829 11,591,588 ,Employee benefits expense: Salaries and wages Staff welfare 1,511,517 41,768 1,581,126 62,938 1,553,285 1,644,064 Other expenses: Rates and taxes Consultancy and other professional charges Auditor remuneration as auditor Other services Travel and conveyance Miscellaneous expenses 1,946,545 536,376 7,500 15,927 5,363 61,344 1,962,602 1,184,790 8,427 19,303 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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