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2017 (11) TMI 1946 - AT - Income TaxRectification u/s 254 - Allowability of the interest on borrowed funds - investment in shares of subsidiary company - interest expenditure allowability u/s.36(1)(iii) - Tribunal considered the issue and gave findings 2016 (10) TMI 807 - ITAT HENNAI as restored the matter to the file of ld. Assessing Officer for fresh consideration with certain directions - Tribunal on earlier occasion in its order, has given direction to ld. Assessing Officer to allow the expenditure u/s.36(1)(iii) of the Act, if the investment was made in subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee - HELD THAT - Decision of the Tribunal is binding on the AO and he cannot pick up a words or sentences from the Order of Tribunal, de hors the context or questions under consideration and construe it to be complete law declared by the Tribunal. When once the Tribunal decides the issue in one way, only course available to the AO is to follow the Order of Tribunal in full spirits, and it is not permissible to the AO to take a different view, or to sit in judgment over the Order of Tribunal by interpreting the same in the manner he wanted. The Tribunal on earlier occasion in its order, has given direction to ld. Assessing Officer to allow the expenditure u/s.36(1)(iii) of the Act, if the investment was made in subsidiary company for the purpose of acquiring controlling interest and acquisition of such controlling interest was of the business of the assessee and if it resulted in promote the business of the assessee as well as helpful to the assessee for having management control over said such subsidiary company, then the duty of the AO is to grant deduction u/s.36(1)(iii) of the Act, if it is fulfilled the condition laid down by the Tribunal. If the money was borrowed for the purpose of purchase of shares of subsidiary company, which is for the purpose of acquiring or maintaining controlling interest and acquisition/maintaining of such controlling interest was of the business of the assessee and if it is resulted in promotion of the business of assessee company as well as helpful to the assessee for having management control over such subsidiary company, then such interest expenditure should be allowed u/s.36(1)(iii) of the Act. If AO fails to properly understand or appreciate the direction to the Tribunal, then the assessee is at liberty to explore and pursue the remedies available under law at elsewhere, as the AO is duty bound to pass the consequential order in conformity with the Order of Tribunal cited supra and he has no discretion or choice or to overlook the Order of Tribunal. In the present case, the assessee has not pointed out any mistake in the Order of Tribunal cited supra which warrants rectification in terms of Sec.254(2) of the Act. In absence of any specific mistake which warrants any rectification within the scope of provisions of the section 254(2) of the Act, in the Order of Tribunal cited supra, there is no reason to recall the earlier Order of Tribunal, or to delete any part therein. The decision of Tribunal has not to be scrutinized sentence by sentence to find out whether all facts have been set out in detail by the Tribunal or whether some incidental fact, which appears on the record, has not been noticed by the Tribunal in its order, if the order of the Tribunal shows that it has, in fact, done so, there is no reason to interfere with the decision of the Tribunal vide provision of the section 254(2) of the Act and we make it clear that the AO shall pass the order in conformity with the Order of Tribunal. With this observation, we dispose off the Miscellaneous Petitions filed by the assessee.
Issues Involved:
1. Rectification of the Tribunal's order for assessment years 2010-11 and 2011-12. 2. Allowability of interest on borrowed funds under Section 36(1)(iii) of the IT Act, 1961. 3. Commercial expediency of interest-free loans to a wholly-owned subsidiary. 4. Classification of interest expenditure as revenue or capital expenditure. 5. Binding nature of Tribunal's decisions on lower authorities. Issue-wise Detailed Analysis: 1. Rectification of the Tribunal's Order for Assessment Years 2010-11 and 2011-12: The assessee filed Miscellaneous Petitions seeking rectification of the Tribunal's common order for the assessment years 2010-11 and 2011-12. The Tribunal had previously set aside the issue to the Assessing Officer (AO) for fresh consideration. The assessee's representative argued that certain findings in para No. 31.8 of the Tribunal's order were unnecessary and could potentially confuse the AO. The Tribunal acknowledged the need for clarity and emphasized that the AO must follow the Tribunal's directions precisely. 2. Allowability of Interest on Borrowed Funds under Section 36(1)(iii) of the IT Act, 1961: The primary issue was the allowability of interest on borrowed funds. The Tribunal referred to Section 36(1)(iii) which allows deduction of interest on capital borrowed for business purposes. The Tribunal highlighted that the expression "for the purpose of business" is broader than "for the purpose of earning income, profits, or gains." The Tribunal noted that the lower authorities had approached the matter from an erroneous angle by not considering the commercial expediency of the interest-free loan given to the wholly-owned subsidiary. 3. Commercial Expediency of Interest-Free Loans to a Wholly-Owned Subsidiary: The Tribunal emphasized that the test for allowability of such interest expenditure is whether the loan was given as a measure of commercial expediency. The Tribunal cited several Supreme Court decisions, including Eastern Investments Ltd. vs. CIT and SA Builders Ltd. vs. CIT, which support the view that expenditure incurred voluntarily for commercial expediency is allowable. The Tribunal directed the AO to examine whether the interest-free loan to the subsidiary was given for commercial expediency. 4. Classification of Interest Expenditure as Revenue or Capital Expenditure: The Tribunal discussed the classification of interest expenditure and noted that if the interest is incurred for the purpose of acquiring shares of a subsidiary, it should be considered part of the cost of investment until the date of acquisition. However, interest paid after the acquisition should be treated as revenue expenditure. The Tribunal clarified that allowing interest as part of the cost of acquisition would result in double deduction, which is not permissible under the Act. 5. Binding Nature of Tribunal's Decisions on Lower Authorities: The Tribunal reiterated that its decisions are binding on the AO and that the AO cannot interpret or overlook the Tribunal's directions. The Tribunal stressed the importance of judicial discipline and the hierarchy of courts, stating that the AO must follow the Tribunal's order in its entirety. The Tribunal also pointed out that if the AO has any grievances, the proper course is to appeal to a higher forum, not to reinterpret the Tribunal's order. Conclusion: The Tribunal concluded that the AO must follow the directions given in the Tribunal's order for assessment years 2010-11 and 2011-12. The Tribunal emphasized that the AO should consider the commercial expediency of the interest expenditure and follow the principles laid down in the Tribunal's order. The Miscellaneous Petitions filed by the assessee were partly allowed, with the Tribunal clarifying that the AO must pass the order in conformity with the Tribunal's directions.
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