9911796707
TMI Blog1995 (11) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd., which is a company under the same management and is also a shareholder of the assessee-company. Examination of the printed copy of the balance sheet shows that the assessee has made investment in two of its subsidiary companies to the extent shown as below: 1. Virarch Holding Pvt. Ltd. Rs. 20,00,800 2. Vikrant Holding Pvt. Ltd. Rs. 20,00,800 . Rs. 40,01,600 The investment made by the assessee-company in the above-mentioned two subsidiaries is in respect of the purchase of shares as indicated below: Investment in Virarch Holding Co. . 8 equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 . Rs. 20,00,800 Investment in Vikrant Holding P. Ltd. equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 Rs.20,00,800 On going through the balance sheet of the above-mentioned two subsidiaries, it has been seen that each of the said two subsidiaries has advanced an amount of Rs. 20,00,000 to A.P. Industries Investment Pvt. Ltd. who is one of the shareholders of the assessee-company and comes under the sa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 906 and the Revenue is aggrieved by the relief granted by the CIT(A) by restricting it to Rs. 81,906 out of the total disallowance of Rs. 7,20,000. 7. The learned counsel for the assessee submitted that the AO has grossly erred in disallowing Rs. 7,20,000 by presuming that the funds borrowed from the bank have been diverted for investment in the two subsidiary companies for acquiring preference shares of those companies. The amount invested in the two subsidiary companies for purchase of preference shares directly came from the loan of Rs. 40 lakhs received from A.P. Industries Investment Pvt. Ltd. To corroborate the contention, he invited our attention towards the copy of bank statement, the extracts of which has been reproduced at page 5 of the order of the CIT(A). The said entries in the bank statement reveals that there is a credit entry of Rs. 40 lakhs on 28th April, 1984, and on the same date there are two debit entries of Rs. 20 lakhs each. This shows that there was a direct nexus between the said sum of Rs. 40 lakhs borrowed from M/s A.P. Industries Investment Co. Ltd. with the investment made by the assessee-company for purchase of redeemable non-cumulative preference sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sole motive of avoidance of tax liability. The principles of law laid down by the Hon'ble Supreme Court in the case of McDowell are clearly applicable. The CIT(A) ought to have confirmed the entire disallowance of Rs. 7,20,000 made by the AO out of interest expenditure. He submitted that the assessee made investments of Rs. 20 lakhs each in the two subsidiary companies for acquiring redeemable non-cumulative preference shares which did not produce any income to the assessee in the years under consideration. Those two subsidiary companies in turn have given loan of Rs. 20 lakhs each to M/s APL on interest at the rate of 3%. The income of Rs. 60,000 generated by these two companies was washed away by way of salaries including salary of Rs. 48,000 debited in the accounts of these two subsidiary companies as payable to its Managing Director, Director who are relatives of the Directors and the assessee-company. The same amount which belongs to the assessee was routed through these two subsidiaries and M/s APL and the amount came back to the assessee in the form of a borrowing from M/s APL on which interest was paid at the rate of 4%. Such interest is apparently not allowable expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % on Rs. 40 lakhs which does not appear to be correct. He, therefore, submitted before the CIT(A) that at the most interest disallowable will come to Rs. 81,096. 9.3. In view of the aforesaid facts and in view of the concession made by the AO, before the CIT(A) the ground raised by the Revenue in its appeal has no merit and, therefore, the same deserves to be rejected. 10. Coming to the ground raised by the assessee in its appeal in relation to this point, we find that the transaction made by the assessee-company by way of investment in the two subsidiary companies for acquiring redeemable preference shares of Rs. 20 lakhs each is an independent transaction. The loan transaction made between the two subsidiary companies with M/s APL by which both those companies advanced loan of Rs. 20 lakhs each on interest is a separate and independent transaction. The genuineness of that transaction by which the two subsidiary companies derived interest from M/s APL at the rate of 3% per annum has been accepted as a genuine transaction and such income by way of interest from M/s APL after deducting the expenses has been accepted in their respective assessments. It is true that their assessme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a Prasad Mody. The Hon'ble Supreme Court in the aforesaid judgment has clearly held that where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies, interests on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(iii) of IT Act, 1961, in computing its total income under the head income from other sources. The same principle would apply even if the investment is regarded as a business investment and the income therefrom is held to be assessable as income from business. After considering the submissions made by the learned representative of the parties and after going through the various judgments relied upon by the learned counsel for the assessee, we are of the considered opinion that the assessee is also entitled to grant of deduction of Rs. 81,096 being the amount of interest payable to M/s APL. 10.1. In view of the aforesaid discussion, we are of the considered opinion that the entire disallowance of Rs. 7,20,000 made by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rved that the bonus which is not covered by the Bonus Act may not be admissible under the first proviso to s. 36(1)(ii) but the same can still be allowed under the second proviso provided the bonus payment is reasonable with reference to the pay of employees and the conditions of the service, the profit of the business and the general practice in similar business or profession. The CIT(A) also placed reliance on judgment of Kerala High Court in the case of CIT vs. P. Ali Kunju M.A. Nazir Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker). In view of the aforesaid discussions and the judgment, the CIT(A) directed the AO to allow the claim of bonus after ensuring that the three conditions laid down by the Hon'ble Kerala High Court are satisfied in the case of the appellant. 14.2. We do not find any infirmity in such a view taken by the learned CIT(A). The order passed by him is perfectly valid and is justified. He has merely restored back the issue to the AO and directed him to allow the deduction only if the three conditions laid down in the second proviso to s. 36(1)(ii) are fulfilled in the case of the assessee. Such a view taken by the CIT(A) is perfectly va ..... X X X X Extracts X X X X X X X X Extracts X X X X
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