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TMI Blog2004 (6) TMI 589X X X X Extracts X X X X X X X X Extracts X X X X ..... essman how to run his business and it was not open to the revenue to prescribe what expenditure the assessee should incur and in what circumstances. Thus, confirmed the order of the learned CIT (Appeals) in his proposed order. The learned Judicial Member did not agree with the view taken by the learned Accountant Member. He took into account the decisions in the case of Shankar Theatres and Doctor Co.[ 1983 (1) TMI 50 - BOMBAY HIGH COURT] with relevant portions extracted in his proposed order. The learned Judicial Member observed that it was not disputed by the assessee that it had diverted borrowed funds to advance loans to its subsidiaries (wrongly stated as sister concern). There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and the CIT(A) was not right in deleting the disallowance..... With the above observations, the learned Judicial Member restored the order of the Assessing Officer in his proposed order. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in deleting the disallowance of Rs. 50,000 made under Rule 6B of I.T. Rules on the ground that expenditure on presentation articles which do not carry company logo was outside the scope of disallowance under Rule 6B. 3. After hearing both the parties, we hold that the issue stands covered in favour of the assessee by the Order of the Tribunal in the assessee company s own case for the assessment year 1988-89 vide order dated 9-8-2000 wherein in paras 2 to 5, the disallowance of Rs. 50,000 stands deleted. The case of the assessee further stands supported by the following judgments:- 1. CIT v. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom.) 2. First, ITO v. French Dyes Chemicals I. (P.) Ltd. [1984] 10 ITD 240 (Mum.) (SB) 3. CIT v. Indian Aluminium Cables Ltd. [1989] 183 ITR 611(Delhi). In view of the above, we decline to interfere and dismiss this ground. 4. Ground No. 2 reads as under:- On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that the deduction for proportionate premium should be allowed on pro rata basis without appreciating the fact that the premium is to be paid on the redemption of debentures at the end of 7 years p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c and, therefore, interest income earned on such advances has to be reckoned under the head Income from other sources . In support of this conclusion, the learned CIT(Appeals) relied upon the decision of the Bombay High Court in the case of CIT v. Favre-Leuba Co. Ltd. [1979] 120 ITR 898, and the decision of the Delhi High Court in the case of Addl. CIT v. Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70. 9. Shri RIS Gill, the learned Departmental Representative strongly supported the order of the learned Assessing Officer. He submitted that the action of the Assessing Officer is justified as the income by way of interest on advances made to its subsidiaries and other customers by the assessee company cannot be treated as income from business. In support of this contention, he relied upon the judgment of the Bombay High Court in the case of Godavari Sugar Mills Ltd. v. CIT [1991] 191 ITR 359, Judgment of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 110 and in Tuticorin Alkali Chemicals Fertilizers Ltd. v. CIT [1999] 227 ITR 172 . 10. Shri Dinesh Vyas, the learned Counsel for the Assessee submitted that in the course of assessee s business of hoteliers, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax under the head Profits and gains of business or profession and if the income from such business is derived from an eligible business and if the assessee has out of such income utilized any amount during the previous year for the purpose of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent. Of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with sub-section (5) of section 32AB. 13. It is clear from the above observations that deduction under section 32AB can be availed of in respect of profit of such eligible business as computed in the accounts of the assessee which are audited in accordance with sub-section (5) of section 32A. It has further been observed by the Hon ble Supreme Court that:- The dispute in the present case is in regard to the question whether the assessee s investment in the UTI is business, and if so, is it a business which qualifies to be an eligible business under section 32AB? In regard to the first aspect, we must note that the Tribunal as a question of fact based on material on record has come to the conclusion that the investment in the UTI by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned CIT(Appeals) erred in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company. 17. The facts of the case here are that the assessee had charged interest from its subsidiary companies at the rate of 6% which according to the Assessing Officer was much below normal rate of interest paid by the assessee and charged by other parties. It is also stated by the Assessing Officer that the assessee itself claimed huge deduction on account of interest payment. Hence, it was not justified for charging concessional rate of interest on advances to its subsidiaries. The Assessing Officer further held that as the advances to subsidiaries were not made for specific business purpose of the assessee, the money advanced to them could have been utilized to reduce assessee s own interest liability. In view of the above, the Assessing Officer disallowed the sum of Rs. 25,11,807 being the difference between the interest charged from subsidiary companies and the normal rate of interest. 18. On appeal, the learned CIT(Appeals) deleted the addition observing as under: Since the assessee-company is in the bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elier business which is the core, fundamental and only business of the assessee-company. In fact, from a business point of view, no concession was provided with regard to the advances made to the subsidiary companies which made investment in shares of other companies having business dealings with the assessee-company. This resulted ultimately in assessee being benefited to an immensely larger extent than the concession in the rate of interest. It is the prerogative of the businessman how to run the business and it is not open to the Revenue to prescribe what expenditure an assessee should incur and in what circumstances he should incur. Every businessman knows his interest best CIT v. Dhanrajgiriji Raja Narasingirji [1973] 91 ITR 544 (SC). In the case of CIT v. Premier Auto Finance (P.) Ltd. [1981] 128 ITR 540 (Delhi), the assessee, which carried on the business of finance of vehicles had borrowed monies and claimed deduction of interest paid thereon in the computation of its profits. Out of the borrowed monies, the assessee had itself advanced a sum of Rs. 1,02,003 to another company D . The Tribunal found that D was a dealer in trucks which had an arrangement with a firm in Triva ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guishable from the facts of the case of the assessee. First of all, both the Judgments have taken note of the earlier Judgment in the case of Bombay Samachar Ltd. (supra) and have tried to distinguish the same, but none of the Judgments states that the law laid down in the case of Bombay Samachar Ltd. (supra), is no more good law. In the case of Shankar Theatres (supra) at page 146, the Hon ble High Court has observed as under : In the Bombay Samachar Ltd. s case, the admitted position was that the capital borrowed by the assessee from outsiders was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilized for the purposes of advancing loans to any component of the company. 25. Similarly, in Doctor Co. s case (supra), the Hon ble Bombay High Court, referred to the case of Bombay Samachar Ltd. (supra) and noted that the amounts advanced to the sister concerns on the assessee s own admission, were partly out of borrowed funds . But none of the two Judgments talk of or take into consideration the commercial expediency of the type which the assessee resorted to. It has not been disputed before us by the Revenue that the advances we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow that in its claim for deduction under section 80HHD, it had not included receipts from people visiting India from abroad on business trips. The Assessing Officer held that the assessee had not furnished the required details and he estimated 10% of the total receipts in foreign currency declared by the assessee as being from foreigners visiting India on business trips. 30. On appeal, the learned CIT (Appeals) held that as per clause (a) of sub-section (1) of section 80HHD, the words used are foreign tourists and it would not be correct to say that the word tourist can only imply to visitors from abroad who have come on pleasure trip. According to the learned CIT (Appeals), it has necessarily to include a visitor from abroad who has come on business trip and he accordingly directed the Assessing Officer to allow deduction under section 80HHD as claimed by the assessee. 31. Shri RIS Gill, the learned Departmental Representative supported the order of the learned Assessing Officer. 32. Shri Dinesh Vyas, the learned counsel for the Assessee submitted that deduction of 10% on total receipts in foreign exchange receipts with regard to the claim under section 80HHD is totally unjustifie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer disallowed this amount with the following observations : 19. Rate of Interest charges from subsidiary companies. Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concealed rate of interest on advances, to its subsidiaries. As the advance to subsidiaries are not made for any specific business purpose of the assessee, the money is advanced to them could have been utilized to reduce assessee s own interest liabilities. In view of this, the difference between interest charged from subsidiary and the normal rate of interest coming to Rs. 25,11,807 is disallowed. 3. In an appeal before CIT(A), it was pleaded that through resolution of Board of Directors, the interest was charged at the rate of 6% on loan/deposits given by assessee to Taj Investment and Finance Limited which is 100% subsidiary of the assessee-company. The subsidiary company made investment in the shares of group itself. The assessee-company earned dividend from its subsidiary company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e charged interest @ 15% instead of 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed. 4. The order of learned CIT(A) in this regard has been upheld by the learned Accountant Member on the basis of decision in the case of Bombay Samachar Ltd. (supra) and Premier Auto Finance (P.) Ltd. (supra). 5. During the course of hearing a reference was made to following two decisions of Hon ble Bombay High Court in the case of Shankar Theatres (supra) and Doctor and Co. (supra). 6. In both the above-mentioned decisions, the Hon ble High Court has considered the decision in the case of Bombay Samachar Ltd. (supra). In the case of Shankar Theatres (supra), the observations of Hon ble Bombay High Court regarding decision in the case of Bombay Samachar Ltd. (supra) are as follows : In the Bombay Samachar Ltd. s case, the admitted position was that the capital borrowed by the assessee from outsiders was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilised for the purposes of advancing loans to any component of the company. 7. Similarly, in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ney from another company. Thus, the facts of the decision in the case of Premier Auto Finance (P.) Ltd. (supra) cannot be said to be on all fours to the facts of present case. In the present case no such nexus has been shown. In the present case, the assessee has made simple arguments that by way of advancing monies to its subsidiary company, the assessee was able to earn huge operating fees. There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and CIT(A) was not right in deleting the disallowance following the decision in the cases of Bombay Samachar Limited (supra) and Premier Auto Finance P. Ltd. (supra). In my view, the order of Assessing Officer in this regard has to be upheld. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Per Chhibber, A.M. 1. As there is a difference of opinion between the Account Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... treated as part of the famous Taj Chain. It is purely with a view to ensure continuity in the operating agreements which is immense business value to the assessee-company, that the assessee-company has via its wholly owned subsidiary invested Rs. 264.06 lakhs in the shares of various concerns, only a small fraction of which may represent investments in shares of the companies not operated by the assessee-company, yet having sufficiently intimate nexus of business interest. It is for this reason that the assessee-company has advanced monies to Taj Investments and Finance Co. Limited whose balance sheet appears at page 52 of the full printed Accounts. A reference to this will reveal that the investment block of Rs. 264 lakhs matches, in value, the aggregate of issued capital and unsecured loans. It is, therefore, purely out of commercial expediency and motivation that advances have been given by the assessee-company to its subsidiary at the concessional rate of interest. Your kind attention is invited to the decision of the Bombay Bench A of the Hon ble ITAT in the case of Cadbury Fry (India) Limited v. ITO 2 ITD 435 wherein the assessee-company had made interest-free advances to its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... therefore, the Indian Hotels Co. Limited cannot be said to make profit from itself i.e. Taj Investments and Finance Co. Limited. 5. The Assessing Officer did not find force in the above contentions and made an addition of Rs. 25,11,807 with the following observations : 19. Rate of interest charges from Subsidiary Companies :- Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concessional rate of interest on advances to its subsidiaries. As the advances to subsidiaries are not made for any specific business purpose of the assessee, the money is advanced to them could have been utilized to reduce assessee s own interest liabilities. In view of this, the difference between interest charged from subsidiary and the normal rate of interest coming to Rs. 25,11,807 is disallowed. 6. The assessee impugned above disallowance in appeal before the CIT (Appeals) and contended that disallowance was unjustified having regard to the submissions made before the Ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Accountant Member, as per his proposed order, upheld the view taken by the learned CIT (Appeals) in the impugned order. He held that act of giving advances forms integral part of hoteliers business. In that light, no concession was provided with regard to advances made to the subsidiary company, which made investment in shares of other public limited companies having business dealing with the assessee-company. This way the assessee was benefited to a large extent and was compensated for the concession in the rate of interest allowed. The learned Accountant Member further observed that it was the prerogative of the businessman how to run his business and it was not open to the revenue to prescribe what expenditure the assessee should incur and in what circumstances. The learned Accountant Member for the above view relied upon and followed the decision of the Hon ble Delhi High Court in the case of Premier Auto Finance (P.) Ltd. (supra) and the decision of Bombay Samachar Ltd s. case (supra). As regards the case of Shankar Theatres (supra) and Doctor Co. ( supra), the decisions cited by the revenue during the course of hearing of the appeal, the learned Accountant Member held the v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d Members and other materials on record, to which my attention was drawn. Shri Boota Singh strongly relied upon the proposed order of the learned Judicial Member. He submitted that the assessee diverted borrowed funds on which it had to pay interest at the rate of 15%. No borrowed fund was diverted in the case of Bombay Samachar (supra) and, therefore, the said decision has no application. In fact, he submitted, the matter in issue is fully covered against the assessee as per the decisions of the Hon ble Bombay High Court in the case of Doctor Co. (supra) and Shankar Theatres (supra) and the decision of the Delhi High Court in the case of Premier Auto Finance (P.) Ltd. (supra) is distinguishable on facts. The learned Departmental Representative read out all the decisions referred to in the proposed orders of the learned Members. Shri Boota Singh further argued that no case of commercial expediency was proved by the assessee with reference to any material on record. The assessee justified the deduction claimed under section 37(1) of the Act by showing that loan was given as a matter of commercial expediency, but, in fact, the provisions of section 36(1)(iii) of the Act were applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the assessee, opposed the above submissions. He referred to the letter dated 3-2-1992 filed before the Assessing Officer, wherein the circumstances under which the amount was advanced to the subsidiary company were explained. Shri Dinesh Vyas submitted that none of the facts stated by the assessee in the said letter were challenged by the Assessing Officer. Therefore, the observations made by the learned Judicial Member to the effect that borrowed funds were utilized to advance loans to the subsidiary company and that there was no nexus between these loans and business of the assessee were factually incorrect. Out of the net profit of Rs. 1087.4 lakhs, Rs. 657.44 lakhs represented receipts by way of operating fees. It was clearly stated in the said letter that the assessee-company made advances to the subsidiary company to ensure continuity in the operating agreements and to derive benefit from such agreements. Thus concessional rate of interest was allowed only as a measure of commercial expediency, which was to serve the business purposes of the assessee. The facts stated in the said letter were not challenged by the Assessing Officer and were supported by the entries made in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Snam Progetti S.P.A. s case (supra) 8. D H Secheron Electrodes (P.) Ltd. v. CIT [1983] 142 ITR 528 (MP) 9. Shankar Theatres case (supra) 10. Doctor Co. s case (supra) 11. CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616(Cal.) 12. CIT v. Jardine Henderson Ltd. [1994] 210 ITR 9813 (Cal.) 13. CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom.) 14. Kejriwal Enterprises v. CIT [2003] 260 ITR 341 (Cal.). He in particular referred to the decision of the Tribunal in the case of Tata Chemicals Ltd. (supra), wherein it was observed as under : The investments had been made in the course of the business. The fact that they were tax-free bonds did not mean that the interest attributable to the capital borrowed for purchasing them had to be disallowed. In the course of the business, a company may have to park the funds in investments as a matter of prudence. It is essentially a business decision. So long as the investment in the tax-free bonds has been made in the course of the business, the interest is allowable notwithstanding that the income from the bonds is not taxable. The assessee highlighted certain salient points. Firstly, it had been stated that the investment was made out of own fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me in proof of this claim. 14. I have carefully considered the rival submissions of the parties in the light of material available on record. The short question involved here is whether the assessee, on the facts and circumstances of the case, was justified in charging interest at 6% or a higher rate of interest should have been charged to give extra income of Rs. 25,11,807, the amount added in the income of the assessee. When asked by the Assessing Officer to justify the rate of interest charged, the assessee made a detailed submission as per letter dated 3-2-1992. The assessee further placed on record copy of balance-sheet of the subsidiary company to contend that charging of interest at 6% was fully justified and was an act of business prudence carried on account of business expediency. The detailed submissions of the assessee has been reproduced in the earlier part of this order. 15. The Assessing Officer in a short order, which has also been reproduced, disallowed Rs. 25,11,807 by observing that the assessee himself was paying and charging interest from other parties at much higher rates. Therefore, there was no justification to charge interest at concessional rate on advances ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted and advanced to partners of the firm and to sister concern. The interest paid was disallowed as not having been utilized for purpose of business by the assessee. In both the cases no question was raised and no claim was made that advances were made for purposes of business and, therefore, the question involved in the present case was not at all considered in those cases. The cited cases are, therefore, distinguishable and are not applicable to the case in hand. It is wrong to hold that the assessee here has not established that advances were made for purposes of business. In fact, facts stated by the assessee were not challenged by the Assessing Officer. The only question raised being that interest at a rate higher than 6% should have been charged, legal justification of the above stand is under dispute. 17. In my view the decisions of the ITAT Mumbai Bench in the case of Cadbury Fry India Ltd. (supra) and also in the case of Tata Chemicals Ltd. (supra) are relevant and applicable, as facts in the above cases are quite close to the facts involved in the case in hand. In the case of Cadbury Fry India Ltd. (supra), the facts noted are as under: The assessee-company had made inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but not in the case where advances are made to a subsidiary company for purposes of business. 18. In the present case, the assessee has elaborately explained that on account of restrictions on investment in its hands to buy shares of other public limited companies from whom the assessee was receiving operation fees, the subsidiary company was used to buy above shares and for that purpose loan was advanced to the subsidiary. It was a measure of business prudency. The loan advanced helped the assessee to earn substantial amount of operating fees. In fact, it was more than 60% of total receipts. This was besides dividend to be received from the subsidiary. Having regard to all the circumstances and benefits to the parties, it was agreed that interest on advance be charged @ 6% per annum. This advance was made wholly and exclusively for the purpose of business and to earn income. I find lot of force in the above submissions. In fact the revenue authorities did not challenge above facts/background which clearly showed that advance was made for purpose of business. It was a measure of business prudency. 19. The other argument accepted by the learned Accountant Member and advanced before ..... X X X X Extracts X X X X X X X X Extracts X X X X
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