TMI Blog2023 (3) TMI 1340X X X X Extracts X X X X X X X X Extracts X X X X ..... gly, this primary objection of ld. D.R. is dismissed. For this purpose, order of this coordinate bench of Tribunal in the case of Cawnpore Textiles Ltd [ 1990 (6) TMI 88 - ITAT ALLAHABAD-A] wherein the Tribunal has taken a similar view on this issue. Delay of 93 days in filing the appeal - reasonable cause in filing the appeal by delay of 93 days - There is a technical defect in the appeals since the appeals were not filed within the period of limitation. The assessee filed an affidavit stating that the appeals were not filed because of the improper service of notice by the Department. The Revenue has not filed any counter-affidavit to deny the allegation made by the assessee. Tribunal is bound to remove the injustice by condoning the delay on technicalities. If the delay is not condoned, it would amount to legalising an illegal order which would result in unjust enrichment on the part of the State by retaining the tax relatable thereto. Under the scheme of Constitution, the Government cannot retain even a single pie of the individual citizen as tax, when it is not authorised by an authority of law. Therefore, if we refuse to condone the delay, that would amount to legal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only to acquire but also to hold shares in any other company. This power to hold shares is enough to permit the company to acquire and hold controlling interest in any other company. In my opinion, as such an activity can itself constitute a business when the real intention of the company is not to earn profit but to acquire and exercise control of the group company. When it is said that the shares were acquired to have controlling interest, it does not necessarily mean that the acquiring company should have majority share holding in the other company. Many group concerns may be holding shares in the other company and all their holdings put together will enable the group as a whole to exercise control on the other company. We observe that it is for the assessee to decide as a businessman as to how much number of shares would be sufficient to control its stake and the motive of the company cannot be to earn profit if, it was to acquire controlling interest, which is the commercial expediency. Thus as given a finding that the business of the assessee is to invest in shares and that the borrowing was for the purpose of business, the entire interest has to be allowed under s. 36( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on fees as part of the costs. 2. At the outset the ld. D.R. objected that the addition in this case is Rs.1,06,13,329/- and as such this cannot be heard by SMC. In my opinion, this plea of the ld. D.R. is misplaced. At this point, it is appropriate to go through the provisions of section 255(3) of the Act which reads as under:- Section 255(3): The President or any other member of the Appellate Tribunal authorized in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotted to the Bench of which he is a member and which pertains to an assessee whose total income as computed by the [Assessing] Officer in the case does not exceed fifty lakh rupees. 2.1 A plain reading of above provisions of section 255(3) as extracted above in the case of a Single Member Bench of the Income Tax Appellate Tribunal can hear all those appeals where total income determined by AO does not exceed Rs.50 lakhs. The aforesaid phraseology does not suggest that the figure of Rs.50 lakhs mentioned in the section should be understood in the algebraical sense of either being a plus figure or minus figure. The clause total income . does not exceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.6 The ld. D.R. strongly opposed the admission of appeal before this Tribunal and relied on the order of the Tribunal in the case of Dr. Raveendra M. Madraki in ITA No.670/Bang/2019 dated 10.2.2022, wherein held as under: 6. We have heard both the parties and gone through the petition filed by the assessee, his affidavit and also the confirmation letter filed by Advocate, Mr. Prakash R. Badiger. The assessee explained the delay of 310 days on the reason that on the advise of his CA, he handed over the appeal papers to Prakash R. Badiger, Advocate, Dharwad who failed to take necessary steps to file appeal before this Tribunal and thereafter he engaged M/s. K.R. Prasad, Advocates, Bangalore to file appeal. The assessee also furnished a confirmation letter from Mr. Prakash R. Badiger, Advocate, Bangalore stating that due to eagerness or immaturity, he accepted the income tax brief, but not able to deliver and there was a delay from his end. 7. However, the assessee has not produced any evidence of his CA, Mr. Sharanagouda Patil who advised assessee to contact Mr. Badiger, Advocate. Further, there is no evidence to suggest about the date of handing over the documents to Adv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er receipt of the order of the CIT(Appeals), to whom the assessee wants to entrust the work of filing appeal before the Tribunal is his own concern and this explanation does not constitute sufficient ground to condone the delay. Therefore we find no merit in the application for condonation of delay. Accordingly, we are of the considered view that the assessee has failed to make out a sufficient and reasonable cause for condonation of delay and reject the petition for condonation of delay. Being so, we refrain from going into other grounds of appeal on merits. 2.7 The ld. D.R. also relied on the order of the Hon ble Supreme Court Civil Appeal No.7696/2022 dated 16.12.2021 wherein held as under: 7. Perused the records and considered the submissions of the learned counsel for the appellant/plaintiff. From perusal of the cause-title in the memorandum of appeal, it is clear that plaintiff is aged about 60 years, but in fact in the affidavit filed by the plaintiff nowhere mentioned the age of the plaintiff. Further, in support of his contention, the plaintiff has not produced any medical records. 8. Thus, there is inordinate delay on the part of the appellant in approachin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as acted with negligence, lack of bonaf ides or there is inaction then there cannot be any justified ground for condoning the delay even by imposing conditions. It is observed that, Each application for condonation of delay has to be decided within the framework laid down by this Court . It is further observed that, If Courts start condoning delay where no sufficient cause is made out by imposing conditions then that would amount to violation of statutory principles and showing utter disregard to the legislature. 9. The Hon'ble Apex Court has declined to condone the delay of 1011 days in preferring the second appeal. Further, the Hon'ble Apex Court in the case of Lingeswaran Etc. vs. Thirunagalingam in Special Leave to Appeal (C) Nos.2054- 2055/2022 disposed of on 25.02.2022, held that when it is found that the delay is not properly explained, the application to condone the delay is required to be dismissed. The Hon'ble Apex Court declined to condone the delay of 465 days. 10. Considering the law declared by the Hon'ble Apex Court in the above cases, the plaintiff has not made out sufficient cause to condone the delay of 1172 days in filing t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the period of limitation. The assessee filed an affidavit stating that the appeals were not filed because of the improper service of notice by the Department. The Revenue has not filed any counter-affidavit to deny the allegation made by the assessee. While considering a delay in filing the appeal, the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down six principles. For the purpose of convenience, the principles laid down by the Apex Court are reproduced hereunder: (1) Ordinarily, a litigant does not stand to benefit by lodging an appeal late. (2) Refusing to condone delay can result in a meritorious matter being thrown at the very threshold and cause of justice being defeated. As against this, when delay is condoned, the highest that can happen is that a cause would be decided on merits after hearing the parties. (3) 'Every day's delay must be explained' does not mean that a pedantic approach should be made. Why not every hour's delay, every second's delay? The doctrine must be applied in a rational, commonsense and pragmatic manner. (4) When substantial justice and technical consideration are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od of delay may not be relevant factor. In fact, the Madras High Court in the case of CIT vs. K.S.P. Shanmugavel Nadai and Ors. (153 ITR 596) considered the condonation of delay and held that there was sufficient and reasonable cause on the part of the assessee for not filing the appeal within the period of limitation. Accordingly, the Madras High Court condoned nearly 21 years of delay in filing the appeal. When compared to 21 years, 93 days cannot be considered to be inordinate or excessive. Furthermore, the Chennai Tribunal by majority opinion in the case of People Education and Economic Development Society (PEEDS) v. ITO (100 ITD 87) (Chennai) (TM) condoned more than six hundred days delay. It is pertinent to mention herein that the view taken by the present author in that case was overruled by the Third Member. 3.4 I also place reliance on the decision of this Tribunal in the case of Midas Polymer Compounds (P.) Ltd vs. Asstt. CIT in ITA No. 288/Coch/2017 dated 25/06/2018 wherein this Tribunal condoned the delay of 2819 days. Insofar as the reliance on the decision of the Tribunal in the case of Midas Polymer Compounds (P) Ltd. cited supra is concerned, I am of the view tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial justice which is of prime importance in the administration of justice, the expression sufficient cause should receive a liberal construction. In my opinion, this Judgment of the Madras High Court is also squarely applicable to the facts of this case. A similar view was taken by the Madras High Court in the case of Venkatadri Traders Ltd. v. CIT (2001) 168 CTR (Mad) 81 : (2001) 118 Taxman 622 (Mad). 3.6 The Mumbai Bench of this Tribunal in the case of Bajaj Hindusthan Ltd. v. Jt. CIT (AT) (277 ITR 1) has condoned the delay of 180 days when the appeal was filed after the pronouncement of the Judgment of the Apex Court. Furthermore, the Revenue has not filed any counter-affidavit opposing the application of the assessee for condonation of delay. The Apex Court in the case of Mrs. Sandhya Rani Sarkar vs. Smt. Sudha Rani Debi (AIR 1978 SC 537) held that non-filing of affidavit in opposition to an application for condonation of delay may be a sufficient cause for condonation of delay. In this case, the Revenue has not filed any counter affidavit opposing the application of the assessee, therefore, as held by the Apex Court, there is sufficient cause for condonation of delay. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rst ground for our consideration is with regard to the disallowance of Rs.99,02,829/-, which is claimed by assessee as an interest payment. The assessee in the year under consideration advanced a sum of Rs.41 crores towards purchase of shares. The AO questioned the sources of Rs.41 crores paid as advance towards purchase of shares. The assessee stated that assessee had taken loan from M/s. Millenia Realtors Pvt. Ltd., Ulsoor, Bengaluru. The assessee also stated that assessee has paid an interest of that inter-corporate loan at Rs.99,02,829/- which is charged to P L account. The said amount has been given towards purchase of shares and shares has not been allotted in the assessment year under consideration and it has been allotted in the next financial year 2018- 19 relevant to assessment year 2019-20. According to the AO, the shares has not been allotted in the assessment year under consideration and the amount paid as an advance to acquire shares to M/s. Akarshak Infrastructure Pvt. Ltd. (AIPL) for the period of preacquisition during the assessment year under consideration. As such, the said interest payment on the loan borrowed from M/s. Millenia Realtors Pvt. Ltd. cannot be allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... squarely applicable in the assessee's case. 5.1 The ld. A.R. submitted that the averments of the learned Assessing Officer in the order that the interest paid on loan to acquire shares of the promoters of M/s. Akarshak Infrastructure Private Limited is the pre-acquisition cost and should therefore be added to the cost of shares is incorrect for the following reasons: a. It is to be noted that as per the principles laid out in Indian Accounting Standard-23 (Accounting Standard - 16 (AS-16)) - Borrowing Cost , only the interest incurred on borrowings which are used for an asset that necessarily takes a substantial period of time to get ready for its, intended use or sale i.e., a qualifying asset is to be capitalized. In this regard the definition of Qualifying Assets in Ind AS-23 (AS-16) Borrowing Cost is defined as A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale . From a perusal of the aforesaid definition of Qualifying Asset , the investment in shares of subsidiaries cannot be termed as a qualifying asset as they do not fall within the definition of the term qualifying asset as above, and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounting mandated under section 145(2), the assessee has to follow the principles laid down in the 1GDS. 5.2 Further, the ld. A.R. submitted that in case of the assessee, as it is a company, it has to mandatorily follow Accounting Standard for preparations of its accounts under the Companies Act, 2013 and follow the ICDS for computation of its income and the same has been correctly followed by the assessee by claiming the interest on loan for acquisition of shares as a period cost for preparation of its financial statement under the Companies Act, 2013 and for claiming the same as deductible expense for computation of income under Profits and Gains of Business or Profession as per the Income Computation and Disclosure Standards. 5.3 The ld. A.R. submitted to consider these written submissions along with the Grounds of Appeal and the Statement of Facts. 5.4 The ld. A.R. for the assessee relied on the following judgements: (i) Decision of Hon ble High Court of Gujarat in the case of B. Nanji and Co. reported in 425 ITR 286, wherein held as under:- Sub-section (i)(iii) of section 36 of the Income-tax Act, 1961, has three words or phrases that are important for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of dividends on shares, whether held on investment portfolio or as stock-in-trade, is pacifically assessable, under section 56(2)(i), as Income from other sources . Although the shares are held on the investment portfolio as an integral part of the business, the interest on such borrowings is allowable under section 36(1)(iii). Thus, the qualifying factor to ascertain whether the borrowings for purchasing shares is an integral part of the business of the assessee. The interest can be allowed under section 36(1)(iii) only if assessee proves that it was paid in respect of capital borrowed for the purpose of business.. The assessee was in the business of real estate. With the intention to expand the business of real estate, it created a housing arm. The purpose of creating such a housing finance company within the group was to make funds readily available when required. With this object the assessee and B, its associate, borrowed funds and subscribed the share capital of I. The interest paid on the borrowed capital by the assessee came to be disallowed by the Assessing Officer. The Commissioner (Appeals) took the view that the interest could not be allowed to the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... April 07, 2007. The present situation deals with the case where in the assessee has purchased capital goods for its existing telecommunication business. The question that arises for IT(TP)A No.4ii/Bang/2Oi6 Maxim India Integrated Circuit Design Pvt. Ltd., Bangalore consideration here is that whether the proviso to Section 36(i)(iii) which disallows the interest paid on acquisition of an asset for extension of existing business is applicable to the present case or not. In the present case, whether the assets were acquired for extension of business or not. The word -extension has not been defined in the Income-tax Act, 1961 and one has to resort to the popular meaning of the term. The dictionary meaning of the word extend is a part that is added to something to enlarge or prolong it, addition, add-on, adjunct, addendum, augmentation, supplement, appendage, appendix; annexe, supplementary etc. The assessee submitted that the assets have been acquired only in connection with its existing telecommunication business, In our view, there is a very thin line of demarcation between the term expansion and extension, which can be differentiated basis the facts and evidences brought on record. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent year, this proviso is not applicable and hence, we delete this disallowance by respectfully following this Tribunal order rendered in the case of AT T Global Network Services (India) Pvt. Ltd. Vs. DCIT (supra). Accordingly, ground no. 4(b) is allowed. 14-3 Following the above said decision of the co-ordinate bench rendered in assessee's own case on an identical issue, we direct the AO to delete this disallowance. (iii) Decision of Hyderabad Bench of Tribunal in the case of M/s. ITW Signode India Ltd. reported in 110 TTJ 170, wherein held as under: 12. We have duly considered the rival contentions and the material on record. The facts are not in dispute. Recently, Supreme Court had the occasion to explain the meaning of the expression 'commercial expediency . It was explained that it is a term of wide import and includes such expenditure for which there may not be any legal obligation but is incurred for the purpose of the business. It referred to its earlier judgment in the case of Madhav Prasad Jatia V: CIT (1979) 10 CTR (SC) 375 : (1979) 118 ITR 200 (SC) where the borrowed amount was donated to a college with a view to commemorate the memory of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch of the High Court as well as the authorities below on the aforesaid question was not correct. 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. In Madhav Prasad Jantia vs. Commissioner of Income Tax U.P. 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. 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 the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expedienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such a case could not be allowed, as it could not be said that it was for commercial expediency. Thus, the ratio of Madhav Prasad Jantia'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. 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. 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 vide CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140, CIT vs. Birla Cotton Spinning Weaving Mills Ltd (1971) 82 ITR 166 etc. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 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 subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. (v) Decision of Hon ble Supreme Court of India in the case of M/s. Hero Cycles Pvt. Ltd. reported in 379 ITR 347, wherei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and restoring that of the Tribunal. [Para 17]. (vi) The ld. A.R. relied on the judgement of Delhi High Court in the case of Tulip Star Hotels Ltd. Vs. CIT (16 taxmann.com 335) (Delhi). 6. On the other hand, the ld. D.R. submitted that during the year under consideration the assessee had advanced money to the promoters of AIPL for the purchase of their shareholding in the said company. The shares were allocated in the next financial year and as such during the year under consideration the assessee was not the owner of the shares in AIPL. As such AIPL was not its subsidiary at all during the year under consideration, as being claimed by the assessee. So this cannot be said that the assessee was making investment in its wholly owned subsidiary. 6.1 The ld. D.R. further submitted that as regards decision rendered in the cases of Tulip Star Hotels (supra), it is noted that the issue involved was the disallowance of the interest by the AO by holding that borrowed funds were used for the investment in wholly owned subsidiary. The High Court, on the facts of the said case, held that the funds were used for the purpose of the business of the said assessee as the assessee wanted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (supra) is also misplaced as the said decision doesn t support its arguments. The said decision is in relation to the AY 2011-12 and the Tribunal had decided the issue in the favour of the assessee on the basis of the then existing provisions of Section 36(1)(iii) of the Act, which were relevant for AY 2011-12. The proviso to Section 36(l)(iii) of the Act has already been amended by the Finance Act, 2015 w.e.f. 01.04.2016. Vide the said amendment the words 'for extension of existing business or profession' were omitted. As such w.e.f. AY 2016-17 the proviso became applicable irrespective of the fact whether the capital was borrowed for expansion of the business or extension of the business. So the distinction, which the assessee has tried to bring, is no longer relevant. In fact, this aspect has duly been discussed by the ITAT in para 14 of its order in the case of Maxim India Integrated Circuit Design Pvt. Ltd. (supra) and as per the ratio of the same, up to AY 2015-16 if the capital was borrowed for extension of business, only then the proviso would become applicable and the interest on borrowed capital would not be allowed for such period but w.e.f. AY 2016-17 the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for assessee submitted that the sundry creditors as on 31.03.2006 was at Rs.34,70,32,605/-. Out of this, an amount of Rs.24,52,61,029/- due from M/s. S.P. Apparels Limited which is a closely held company and according to the ld. Authorised Representative for assessee capital of the assessee as on 31.03.2006 was around Rs.39,73,08,548/-. In addition to this, the assessee borrowed interest free loans from his family members. As such, the amount advanced to M/s. S.P. Apparels Limited is out of interest free own funds and interest bearing funds was not at all used for the purpose of loan to M/s. S.P. Apparels Limited. Further he relied on the judgment of the Supreme Court in the case of S.A. Builders Ltd vs. CIT (A) and another 288 ITR 1(SC) wherein held that In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern(eg., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... If the share capital, according to the assessee, was surplus and it could part with the same to its sister concern for non-business purpose without any interest, there was no need to raise the loans to that extent and the amount of such share capital should have been utilized for the project itself. In case the assessee has not advanced loans to its sister concern on interest fee basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan was concerned, the interest being paid by the assessee on the working capital could have certainly been saved to that extent. The borrowing of the funds by the company to that extent was not for the purpose of business and there was nothing on record to suggest that amounts were advanced to the sister concerns to advance some business object. Accordingly, the assessee was not entitled to claim deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest. 10. We have heard both the parties and perused the material on record. In the present case, admittedly the assessee has advanced a sum of Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is clear, therefore, that the assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract. The amount realised on the execution thus, included the amount which the assessee had borrowed and invested. When the assessee decided to lend a substantial part of those funds interest-free to the relatives of the partners, it was clearly not a business purpose. The assessee clearly diverted the funds which had been borrowed, had been invested in the contract work, after the investment was recovered and was available either for the purposes of the business or by way of repayment of the loan. The assessee did neither, but chose to divert the money for non-business purposes. After such diversion, the interest paid on the capital borrowing to the extent of the amounts diverted can no longer be an item of expenditure which can be claimed for deduction as an item of business expenditure. If the amounts diverted was subsequently brought back into the business and utilised in the business, the assessee could thereafter claim the interest paid as a deduction. But so long as the diversion cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrowings will not be for business purposes, but for supplementing the cash diverted by the assessee without any benefit to it. Therefore, so long as the assessee is not the beneficiary of the investments made by the partners, their relatives and the sister concerns, and so long as the advances are interest free, the Assessing Officer is perfectly justified in disallowing the interest in proportion to the advances made. 14.4 We may notice that in the case of CIT v. Motor General Finance Ltd. 254 ITR 449, Delhi High Court held as under (page 460): From the conspectus of the decisions as noticed hereinbefore, there cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee. It was to be proved that a bona fide loan had been granted in fav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee-company was not entitled to the allowance of interest. 14.8 In Veecumsees v. CIT, 220 ITR 185 (SC) ; The Hon'ble the Supreme Court held that deduction for payment of interest on the loans raised for building a cinema theatre, which was ultimately closed, was allowable deduction as the assessee was engaged in a composite business of jewellery and cinema. The facts of the case are distinguishable with the facts of the case in hand. 14.9 In the case Commissioner of Income-Tax v. Saraya Sugar Mills (P) Ltd. , 201 ITR 181, the Allahabad High Court held that where part of the overdraft diverted to Directors and concerns in which they were substantially interested, interest in such amount to that extent was held disallowable. Similar views were expressed by Bombay High Court in Phaltan Sugar Works Ltd. v. Commissioner of Wealth Tax, and Phaltan Sugar Works Ltd. v. Commissioner of Income-Tax 215 ITR 582 (Bom). 14.10 In the case of Elmer Havell Electrics and Ors. v. Commissioner of Income-Tax and Anr. 277 ITR 549, the Delhi High Court, while rejecting the appeal of the assessee on the issue of disallowance of interest on interest free advances made to sister con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister concerns or other persons without interest. (ii) Decision of Hon ble Supreme Court of India in the case of Tuticorin Alkali Chemicals and Fertilizers Ltd. reported in 141 CTR 387 (SC), wherein held as under: The basic proposition that has to be borne in mind in this case is that it is possible for a company to have six different sources of income, each one of which will be chargeable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest payable by the company against the interest earned by it will depend upon the provisions of the Act. The expenditure would have been deductible as incurred for the purpose of business if the assessee's business had commenced. But that is not the case here. The assessee may be entitled to capitalise the interest payable by it. But what the assessee cannot claim is adjustment of this expenditure against interest assessable under s. 56. Sec. 57 sets out in its cls. (i) to (iii) the expenditures which are allowable as deduction from income assessable under s. 56. It is not the case of the assessee that the interest payable by it on term loans are allowable as deduction under s. 57. In the facts of this case the company cannot claim any relief either under s. 70 or s. 71, since its business had not started and there could not be any computation of business' income or loss incurred by the assessee in the relevant accounting year. In such a situation the expenditure incurred by the assessee for the purpose of setting up its business cannot be allowed as deduct/on, nor can it be adjusted against any other income under any other head. No adjustment can be allowed except i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aharashtra Electrosmelt ,v Ltg\. (1995) 124 CTR (Bom) 117 : (1995) 214 ITR 489 (Bom) : TC 41R.557 / disapproved; CIT vs. Shaw Wallace Co. (1932) 59 IA 206~(PC) and Pondicherry -Railway Company Ltd. vs. CIT AIR 1931 PC 165 relied on. (Paras 10 12) (iii) Decision of the Chandigarh Tribunal in the case of M/s. C.R. Auluck Sons Pvt. Ltd. in ITA No.915/Chd/2008 dated 30.6.2010, wherein held as under: 3. The only issue in the present appeal is against the disallowance of interest u/s 36(1)(iii) of the Act amounting to Rs. 14,82,695/- . The brief facts of the case are that on the perusal of the balance sheet, the Assessing Officer noted the assessee had made advances to its sister concern and others totaling Rs. 2,31,23,236/- . The learned AR for the assessee was asked to furnish the details of loans and advances made and whether any of the same had been given interest free to the sister concerns for non business purposes. In reply, the assessee furnished the details of loans and advances given. A sum of Rs. 1,23,65,787/- was given to M/s Luxmi Engg. Works, a sister concern of the assessee. As the assessee had paid interest at the rate of 12% on its borrowings, it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n receiver. The CIT(A) thus held that in view of the ratio laid down in CIT Vs. Abhishek Industries Ltd (Supra), the disallowance of interest u/s 36(1)(iii) of the Act is upheld. The assessee is in appeal against the aforesaid order of CIT(A). 4. The learned AR for the assessee pointed out that the advances to the sister concern were made on account of commercial expediency. It was pointed out that assessee was supplying sewing machines to M/s Usha International and the sister concern was supplying fans to the said concerns. The assessee in order to save its reputation and goodwill in the market had advanced Rs. 1 Cr interest free to its sister concern. It was further pointed by the learned AR that both the concerns had raised bank loans and the assessee was a guarantor of loan advanced to M/s Luxmi. In case, the assessee was declared NPA, the creditability of the assessee also gets affected. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court S.A. Builder Ltd Vs. CIT (Supra) for the proposition that no disallowance is warranted u/s 36(1) (iii) of the Act where the amounts are advanced, interest free to the sister concern for commercial expediency. Fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er concern was in danger of being declared as NPA by the bank. In order to ensure the firm not being declared as NPA, the assessee before us had made the said advances to its sister concern. The second plea of the assessee was that both the concerns were supplying its products to M/s Usha International and hence the business expediency. 6 The allowability of interest on borrowed capital wherein interest bearing funds have been advanced interest free to the sister concern was deliberated upon by the Hon'ble Supreme Court in S.A. Builders Vs. CIT (Supra). The ratio laid down by the Hon'ble Supreme Court is as under:- In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g. a subsidiary of the assessee) should be allowed as a deduction under section 36 (1)(iii) of the Income Tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. 7. Their lordships further held that for allowing the deduction u/s 36(1)(iii) of the Act of interest paid on amounts borrowed for advancing loans to a sister concern, the authorities should examine the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g works had gone into huge losses and the bank account was proposed to be declared NPA by the bank. The fear of the assessee was that the amount could have been recovered from its being the guarantor which in turn would have affected its working and in turn its goodwill and reputation in business. In order to safeguard its business interest, the assessee claims to have raised a loan of Rs. 100 lacs from bank and advanced the same to its sister concern 10. The basis for allowing an expenditure in the hands of the assessee is an expenditure incurred for the purpose of business. Applying the ratio of commercial expediency propounded by the Hon'ble Supreme Court in S.A. Builders Vs. CIT (Supra), we find that the intention of the assessee in advancing the said loan interest free to its sister concern is not for the purpose of business. The two concerns were carrying on independent lines of manufacturing and the products manufactured were different by each of the concern. The end products were being supplied to one concern i.e M/s Usha International Ltd. The plea of the assessee in this regard is that the products were being supplied under the same brand name Luxmi by the two ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9;s commission would also grow and consequently the amount given up was a justified expenditure. The Hon'ble High Court and Supreme Court upheld the Findings of the ITAT. The Hon'ble Apex Court while approving the order of ITAT made the under mentioned observations:- Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of ordinary commercial trading. if the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Limited v. Bruce). Another testis whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Inv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would be entitled to deduction of interest on its borrowed loans. On the basis of the aforesaid, it is argued by the learned counsel that in this case, subsidy has been provided to MAL to recoup its losses and even if it is said that the subsidy is not for assessee's own business purpose, but it can be said to be for the purposes of MAL s business purposes and thus, the said expenditure would be allowable for deduction u/s 37(1) of the Act because the assessee has deep interest in MAL. We have carefully considered this plea and in our opinion, the case of the assessee has to fail. We are unable to appreciate and nor is there any evidence or pleading set up as to how the money provided to MAL as subsidy has been used by it for its business purposes. As noted earlier, in terms of the judgement of the Hon'ble Apex Court in the case of Chandu Lal Keshav Lal Co. (supra) where the expenditure is incurred for only fostering the business of another concern or the payment is wholly gratuitous or is for some oblique purpose outside the course of business, such expenditure is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause as per the sec. 36(1)(iii), interest is allowable if it is incurred in respect of capital borrowed for the purpose of business. Since there is no business activity, no deduction is allowable u/s 36 (1)(iii). Hence, I reject these grounds. 7. I have duly considered the rival contentions and perused the materials on record. First of all, I consider Memorandum of Articles of Association of the company so as to decide the issue of foundation on which the company has been formed and its object clauses. This Memorandum of Association is a Constitution, on, its incorporation, the company can pursue only the main objects which are listed therein and it can also undertake all ancilliary and incidental objects in pursuance of the main objects of the assessee company. If any of the other objects are to be pursued which are in clause 3(b) of the object clause same could be pursued with the company with the appropriate resolutions of the competent body. In general, what is not expressly prohibited is said to be permitted. However, under the Company Act objects which are not expressly permitted are prohibited. In the present case, the company was borne with the main object, inter-alia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orts, time share resort holiday rooms, tourist bungalows, dance halls, drama stages, apartment houses, gardens and orchards and to provide transport/pick up vans or other modes of transportation, conveniences or facilities for the comfort and hospitality of residents, either by way of purchase, lease, rent or by any other means in India or abroad. 7.1 As per clause 3(b), the assessee is permitted to carry on following objects also: 3 (b) MATTERS WHICH ARE NECESSARY FOR FURTHERANCE OF THE OBJECTS SPECIFIED IN CLAUSE 3(a) ARE:- 1. To act as contractors, sub-contractors, builders and property developers, architects or engineers, decorators, designers, planners, advisers for all types of construction and works of all description including electric works, highways, tunnels, pipelines, building roads, drainage and sewage work. 2. To purchase for investments, resale land and building and other property of any tenure and any interest therein and to create, sell and deal in freehold and leasehold land and to make advances and upon security of land, house or other property or any interest therein and generally to deal in or sell, lease, exchange or otherwise with land an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng which the Company may desire to acquire or become interested in and the whole or any of the assets and liabilities of such business or undertaking and to carry on the same or to dispose or remove or put an end thereto or otherwise deal with the same as may seem expedient. 8. To apply for, tender, purchase or otherwise acquire any contracts decrees or any concessions for or in relation to the construction, execution, carrying out equipments, improvements, management, administration or control of public and civil works and conveniences and undertake, execute, carry out, dispose of or otherwise turn into account the same. To sublet all or any contracts from time to time and upon such terms and conditions as may be thought expedient. 09 To enter into any arrangements with any Government or authorities, municipal, local or otherwise or any person, institution or company in India or abroad that may seem conducive to the objects of the Company or any of them and to obtain from such Government Authority, person, institution or company, rights, all sorts of assistance, privileges, charters, contracts, licenses and concessions which the Company may think it desirable to carry ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mit their uses to such persons, firms, companies or corporations which adhere to such terms and conditions as laid down by the Company by making such rules and regulations as are necessary from time to time in that regard. 16. To pay out of the funds of the Company all expenses of and incidental to the formation, registration, advertisements and establishment of this Company and the issue and subscription of the share or loan capital including brokerage and/ or commission for obtaining applications for all placing or guaranteeing the placing of shares or any debentures and other securities of this Company and also all expenses attending the issue of any circular of notice and the printing, stamping, circulating of proxies and forms to be filled up by the members of the Company. 17. To effect all such insurances in relation to the carrying on of the Company's business and any risks incidental thereto as may seem expedient and if thought fit, to join or become a member of any mutual Insurance company or to carry a part or the whole of such Insurance risk in connection with the Company's business. 18. To improve, manage, develop, grant-rights, or privileges in r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m or person, including (without prejudice to the said generality) bank overdrafts, bills of exchange and promissory notes and generally to give guarantee and indemnities so, however, that the Company shall not do any Banking Business as defined in the Banking Regulation Act, 1949. 24. To vest any movable or immovable property, rights or interest acquired by, received or belonging to the Company in person or persons or company on behalf of or for the benefit of the Company and with or without any declared trust in favour of the Company. 25. To apply for, purchase or otherwise acquire and protect and renew any patent, patents, rights, inventions, trade-marks designs, licences, concessions, and the like, conferring any exclusive or non-exclusive or limited rights to their use or any secret or other information as to any inventions which may seem capable of being used directly or indirectly for any of the purposes of the Company and to use, exercise, develop or grant licences in respect of or otherwise turn to account the property, rights/information so acquired and to expend money in experimenting upon, testing or improving any patents, inventions or rights. 26. To insu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... another the Employees and Directors of the Company or any parties for services rendered for acquisition of fixed and current assets or loans or rights or conduct of the business or activities or any other valuable consideration, by cash payment or by allotment of the shares, debentures or other securities of the Company credited as paid-up in full or in part or in kind or otherwise. 34. To make pecuniary grants by way of donations, bonus, subscription, allowance, provident fund, gratuity, guarantee or otherwise to or for the benefit of persons, who are or have been employed by the Company or otherwise and widows, orphans, and dependents of any such persons, and to or in aid of Association or Funds for the benefit of any of these objects and to hospital and for other charitable or benevolent object or public institution. 35. To employ or otherwise appoint technical experts, engineers, mechanics, foremen, skilled and unskilled labour for the business of the Company. 36. To provide for the welfare of shareholders, Directors, Employees and Ex-directors and ex-employees of the Company and the wives, widows and families of the dependents by building of houses, dwellings or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, think fit, any moneys received by way of premium on shares or debentures issued at a premium by the Company and any money, received in respect of forfeited shares and moneys arising from the sale by the Company of forfeited shares. 44. To refer or agree to refer any claims, demands, disputes, or any other question by or against the Company or in which the Company is interested or concerned and whether between the Company and the member and members or his or their representatives or between the Company and third party to arbitration in India or at any place outside India and to observe and perform and to do all acts, deeds, matters and things to carry out or enforce the awards. 45.To institute, conduct, defend or compound any legal proceedings, by or against the Company or its officers or otherwise concerning the affairs of the Company, and pay, satisfy or compromise any claim made against the Company or any of its officers notwithstanding that the claim may not be valid at law. 46. To act as trustees, executors, administrators, attorneys, nominees and agents and to undertake and execute trusts of all kinds and (subject to compliance with any statutory conditions) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ruler, commissioner, public body or authority supreme, municipal, local or otherwise whether in India or elsewhere. 54.To carry on the business of merchants, traders, commission agents, buying and selling agents, brokers, adatias, buyers, sellers, importers, exporters, dealers, collectors, or in any other capacity in India or elsewhere and to import, export, buy, sell, barter, exchange, pledge, mortgage, advance upon or otherwise trade and deal in goods produce, articles and merchandise of any kind whatsoever. 55. To carry on the business as manufacturers, dealers, stockiest, importers and exporters of buckets, bathtubs, tanks, trunks, metal furniture, sales, chimneys, pipes, utensils and pressed parts. 56. To promote and for and to be interested in and take old of and dispose off shares in other companies for all or any of the objects mentioned in this Memorandum and to subsidise or otherwise assist any such Company and to deal in stocks, shares, debentures and securities of every kind, lands, buildings, houses, flats, bungalows, shops, etc. 57. To carry on the business of buying, selling, leasing, hiring, hire-purchase and hire-purchase financing of all types ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of every kind, lands, buildings, houses, flats, bungalows, shops, etc. 7.3 These incidental objects mentioned in the Memorandum of Association of assessee company permits the assessee company to invest in the shares of any company and to hold a deal in any shares of any other company and to cause the sale or any of them to be vested in or held by a nominee or nominees for and on behalf of the company and upon distribution of assets or division of profits, to distribute in such shares, etc. Thus, it is evident from the Memorandum of Association that a company is permitted to carry on the business of investment by holding shares also to deal in shares. With the above background let me consider the grounds of appeal before me. In the present case, pursuant to the object as mentioned above, the assessee has advanced a sum of Rs.41 crores towards purchase of shares of M/s. Akarshaka Infrastructure Pvt. Ltd. To invest this amount of Rs.41 crores, the assessee availed loan from M/s. Millenia Realtors Pvt. Ltd., Ulsoor, Bangalore. The assessee paid an interest of Rs.99,02,829/-. The shares have not been allotted to the assessee in this assessment year under consideration. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause 7.4 Further, business of investing in shares can assume various forms. It is not that only when there is a frantic buying and selling activity, it would be considered to be a business in shares. Besides buying and selling, one may invest for not too a long-term but wait for some appreciation in the price and then off load the shares to make profit out of it. The Law Lexicon by P. Ramanatha Aiyar (2nd Edn.) says that the word investment is not a word of art but has to be interpreted in a popular sense. It is not capable of legal definition but a word of current vernacular. The words invest and investment are to be taken in the business sense of laying out of money for interest or profit. Thus, there can be a case where the company may not enter into a frantic trading activity, but hold on to the shares and yet it can be said that it is carrying on the business of investment. In fact, if one carefully reads cl. 21 of the incidental objects of the company, it permits not only to purchase and sell the shares but also to hold t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s classified as measured at. - Amortised cost - Fiar value through other comprehensive income (FVTOCI) debt investment; - Fair value through other comprehensive income (FVTOCI) equity investment; or - Fair value through profit loss (FVTPL) Financial assets are not reclassified subsequent to their initial recognition, except if and in the period the company changes its business model for managing financial assets. A financial asset is measured at amortised cost if it meets both the following conditions and is not designated as at FVTPI. - The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and - The contractual terms of the financial asset give rise on specific dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument is measured at FVOCI if it meets both of the following conditions and is not designated as at FVTPL; - The asset is held in a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and - The contractual terms of the financial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recognition of the assets. Financial assets that are held for trading or are managed and whose performance is evaluated on fair value basis are measured at FVTPL. 7.7 It is quite trite that the entries in the books or classification of a particular item in the annual accounts do not determine the character of the income or asset. One has to consider the basic intention and conduct of the assessee. The intention to carry on the business of investment in shares is evident from the objects in the memorandum of association. The conduct is also evident that it acquired the shares not only as per the mandate in the memorandum of association but also with a view to acquire controlling interest in associate concerns. None of these facts has been disputed or refuted by the Department. Further, it is admitted fact that on the date of acquisition of shares M/s. Akarshak Infrastructure Pvt. Ltd. became only subsidiary of RMZ Hotels Pvt. Ltd. and this subsidiary company M/s. Akarshak Infrastructure Pvt. Ltd. is having primary objection in clause 3(a) of the Object clause as follows: To carry on the business of designing, planning, managing, developing and construction of apartmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee should be allowed as business expenditure. It has been observed by the Hon'ble Supreme Court that it was for the AO to establish nexus between the borrowing and advancing to prove that expenditure was for non-business purpose which Assessing Officer failed to do. The Hon'ble Supreme Court has also cited from the judgment of the Delhi High Court in CIT Vs Dalmia Cement Ltd 254 ITR 377 and agreed with the view that once it is established there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself) the test of commercial expediency is satisfied. 7.11. In the present case there is specific provision in the memorandum that the assessee is permitted to acquire controlling interest as mentioned earlier, cl. 21 in the incidental objects clearly permits the assessee not only to acquire but also to hold shares in any other company. This power to hold shares is enough to permit the company to acquire and hold controlling interest in any other company. In my opinion, as such an activity can itself constitute a business when the real intention of the company is not to earn profit but to acquire and exercise control of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the case of ACIT Vs. M/s. Rideema Toll Pvt. Ltd. in ITA No.521/Mum/2021 dated 9.2.2022 on similar circumstances by answering the question that whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was right in deleting the addition made u/s 36(1)(iii) without appreciating the fact that the investments made in the shares of M/s. Baramati Tollways Pvt. Ltd. is out of borrowed funds and the assessee has failed to prove commercial expediency has held as under: We have noted that the investments are made by the assessee company in the ordinary course of its business. There is no dispute about the fact that the said investments have been made in equity shares of another company in materially similar line of activity. If is only elementary that as long as the funds borrowed the assessee are used for the purposes of business, the interest thereon will constitute an admissible deduction u/s. 36(l)(iii) of the Act. An investment in equity of another company is materially different in nature and character from an interest free advance or loan to another company. The question of diversion of funds for non-business purposes would only come into play in th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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