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TMI Blog2006 (2) TMI 494X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee furnished the details, that has duly been taken into consideration by the Assessing Officer as well as by the ld. CIT(A) at page Nos. 36 and 10 by the ld. Assessing Officer and CIT(A) respectively in their orders. The ld. Assessing Officer found that unsecured loan of the assessee had also increased from Rs. 8,48,25,000 to Rs. 19,63,70,000. On the basis of details submitted by the assessee ld. Assessing Officer formed an opinion that borrowed fund on interest have not been utilized by the assessee for its business purposes, rather, it has diverted the interest bearing funds to the subsidiary company i.e., M/s. SSL. On such prima facie belief ld. Assessing Officer issued a show-cause notice to the assessee inviting its explanation as to why the interest attributable to the borrowed capital diverted to subsidiary company, amounting to Rs. 3,25,25,750 be not disallowed. 6. In response to the notice of Assessing Officer the assessee-company contended that M/s. SSL was engaged in the manufacturing of Shock Absorber. Due to heavy financial burden and weak management its net wealth has gradually been eroded and, therefore, the reference to the BIFR (a Government Body empowered to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cturing Shock Absorber for the last three decades. M/s. SSL was also manufacturing Shock Absorber and, therefore, with a view to eliminate competition it was incumbent upon the assessee to take over this company. Since the merger has to be carried under the surveillance of various Government Agencies as well as the Courts. Prior to finalization of all the things it was necessary to take approval from the Hon'ble Bombay High Court as well as Hon'ble Delhi High Court, where certain litigations were pending. Apart from this the merger has to be carried out in consonance with the scheme formulated by the BIFR. Hence, it was intermediatory time phase which demonstrate that M/s. SSL and assessee were separate legal entities, otherwise for all practical purposes after making investment in share as well as advancement of interest-free fund assesee took over the business of the subsi-diary concern and, therefore, the utilization of funds should be construed for the purpose of the business in the case of assessee. 10. Ld. first appellate authority has gone through all the contentions of the assessee and rejected them in a detailed order supported by reasons lucidly and carefully. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ara 2 page No. 2 of BIFR order. (b)GIL to arrive at a suitable settlement with the existing manpower. (c)GIL to Buyback entire production of SSL. v.Scheme approved by BIFR : GIL was directed by BIFR to increase the financial commitment to Rs. 35.12 crores and was also directed not to charge any interest on the unsecured loans given to SSL, till the net worth of the company becomes positive. The revised offer of GIL after excluding interest on Unsecured Loans, had a much higher Net Present Value as compared to other bidder and was therefore accepted and sealed by the BIFR. 3. Accordingly, during the financial year ended 31-3-1997, GIL invested Rs. 10 crores in the Equity of SSL and provided Interest-Free Loan of Rs. 16.56 crores as per the BIFR directions. The funds advanced to SSL by GIL were drawn from Cash Credit A/c. of GIL, investment of Rs. 10 crores in quity resulted in 94.84% holding of GIL in SSL by way of which SSL became subsidiary of GIL. GIL had owned funds of Rs. 8,502 lakhs (Share Capital Rs. 711 lakhs and Reserves Rs. 7,791 lakhs) as at the year end. 4. Since the line of business of GIL and SSL were same i.e., manufacture and trading of Shock Absorbers, the ult ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds represent own funds and non-interest bearing loans and hence interest allocable to Unsecured Loans granted to SSL works out Rs. 200.78 lakhs. (Refer working placed in the Paper Book Vol. II page 4)." In support of his contention he relied upon the following judgments: 1.Dy. CIT v. Indian Hotels Co. Ltd. [2005] 92 ITD 97 (Mum.)(TM) 2.Kejriwal Enterprises v. CIT [2003] 260 ITR 341 (Cal.) 3.CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (All.) 4.CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616 (Cal.) 5.Patnaik & Co. Ltd. v. CIT [1986] 161 ITR 365 (SC) 6.Cadbury Fry (India) Ltd. v. ITO [1982] 2 ITD 435 (Bom.) 7.CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom.) 8.Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj.) 9.CIT v. Hotel Savera [1999] 239 ITR 795 (Mad.) 10.Maruti Udyog Ltd. v. Dy. CIT [2005] 92 ITD 119 (Delhi) Ld. counsel for the assessee further took us through the order of the BIFR available at page 6 of the paper book and particularly apprised us with the observation available at pages 7, 11 and 12 of the paper book. 12. On the other hand, ld. D.R. put reliance on the order of the CIT(A) and contended that ld. CIT(A) has examined the issue with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he deduction if any admissible or taxing any income if any resulted in that period. From the record it is seen that ultimate merger of M/s. SSL with the assessee has taken place with effect from 30-3-2002. Thus by the end of March 1997 M/s. SSL was an independent legal entity in itself. The arguments of the assessee that as per the order of BIFR it was not supposed to charge interest on the loan till the net worth of M/s. SSL become positive. We are of the view that this is not the direction of the BIFR, but rather it was an observation made on the basis of the consent given by the assessee and such consent is in consonance with the conduct of the assessee in making interest-free advances to the subsidiary concern. At the time of arguments it was emphasized by the ld. counsel for the assessee that the expression "for the purpose of business" should be construed in wider scope and it should not be considered in the line of expression "for the purpose of earning profit". We agree with the submission of the ld. counsel for the assessee that expression "for the purpose of business" is wider in scope, a deduction is admissible to an assessee even if no profit is earned by him but he dem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian Company took its money back in driblets. Accordingly assessee also took the corresponding 60 per cent from its contributed application money. According to the revenue the unutilized portion of the borrowed capital though invested in the joint venture was not for the purpose of the business, the Hon'ble High Court held that because of certain circumstances the total contribution could not be converted into the share capital, otherwise purpose of business cannot be denied. As far as this decision is concerned it is on the facts of that particular case the distinguishing feature is that assessee could not indicate that money was utilized for the purpose of the business. 16. In Bombay Samachar Ltd.'s case (supra) deduction of the interest was not granted to the assessee on the ground that assessee had sufficient funds of its own which were not recovered and had the assessee collected its funds then it would have not suffered the burden of interest expenses. The Hon'ble High Court has held that for granting the deduction of interest this cannot be a condition if the assessee has established that borrowed funds were utilized for the business then it would be entitled for the deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X
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