9911796707
TMI Blog2012 (6) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s.234C respectively." 2. The assessee is in the manufacturing and trading of industrial chemicals. The assessee filed the return of income declaring total income at Rs. 7,00,68,875/- which was selected for scrutiny and assessment was completed u/s. 143(3). As noted in the assessment order, the assessee claimed the huge interest expenses to the tune of Rs. 4,72,07,891/-. The assessee has utilized the funds of Rs. 16,66,31,589/- by way of share application money for making the investment in shares. As noted by the A.O. the assessee made the other investments apart from the above utilisation of Rs. 5,71,000/--. The A.O. observed that the utilization of the funds by the assessee was not used for day-to-day trading in shares but the borrowed funds are utilized towards investment/strategic purpose. In further opinion of the A.O. the nature of the investment is capital as the assessee will have the enduring benefits and hence, interest expenditure partakes the character of the capital expenditure. The A.O., therefore, proceeded to make the disallowance of the interest on the following grounds:- (a) the claim is a non-business expenditure; (b) alternatively, it is a capital expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estment in share application is Rs. 13.62 crores. The assessee also pleaded that the working capital borrowed from the banks was not used for the investment purpose and hence the entire investment/advances is made from non-borrowing funds. The assessee also pleaded that it has capitalized interest of Rs. 1,54,34,285/- out of the interest charged to the profit and loss account of Rs. 4,72,07,891/-. But that was also not considered by the A.O. The assessee also pleaded that interest on powers credit amounting to Rs. 79,31,885/- was also included for computing the disallowance by the A.O. which resulted into excess disallowance. 5. The Ld. CIT (A) was not impressed with the plea of the assessee that investments in the share application money was out of the non-interest bearing funds, but, he accepted the plea of the assessee that as the assessee has capitalized Rs. 1,54,34,285/- out of the gross interest of Rs. 4,72,07,891/- debited to the P & L A/c and he, therefore, directed the A.O. to exclude Rs. 1,54,34,285/- which was the part of the interest capitalized by the assessee and then to work out the appropriate disallowance. Now, the assessee is in appeal before us to the extent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de out of the borrowed funds but we find that the required data is not placed before us. So far as reliance placed by the Ld. Counsel in the decision of Reliance Utilities and Power Ltd. (supra), in our opinion, in the said case, the assessee has demonstrated that the investment was made out of the surplus funds and hence, the Tribunal accepted the plea of the assessee on facts and the same was confirmed by Their Lordship. Hence, in our opinion, in the present case, the assessee has not demonstrated the facts and figures that the non-interest bearing funds are utilized. So far as alternate plea of the assessee is considered, that the investment in the share application money is made on the commercial expediency, in our opinion, merely claim is not sufficient but the assessee has to demonstrate with the facts and figures. We, therefore, consider it fit to restore the issue to the file of the A.O. for fresh adjudication with the direction that the A.O. should confine to the issue to the extent of Rs. 2.6 crores +Rs. 5,71,000/- whether the said investment is made out of the interest free funds, as claimed by the assessee. The A.O. is also directed to exclude any part of the above amou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The investments in shares aggregating to Rs. 16.77 crore as at 31-3-2007 is out of own fund and not borrowed funds. Also, since it is an investment in a wholly owned subsidiary overseas, the investment is not eligible to exempt income such as dividend on capital gains. In view of the facts explained above, there is no application of borrowed funds towards the above referred investments. 13. It appears that the Assessing Officer was not satisfied with this explanation, and he also asked the assessee to compute as to what would be quantum of disallowance in case a proportionate disallowance of interest, so far as investment in share application money aggregating to Rs. 16.77 crores, was to be made. In reply the assessee once again made out a case to the effect that the investments are out of its own funds, and also submitted that "the interest apportionment working is submitted at your request without prejudice to assessee's contention that no borrowing costs can be attributed to the investment funds in view of the fact that the same has been invested out of the assessee's own funds and that there is no nexus between the investments made and borrowed funds. The relevant ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erm loan cannot be said to have been applied for advancing share application money. * The term loan from State Bank of Patiala of Rs. 11.12 crores is towards the Jammu unit and term loan from Bank of India is for Chennai which is under construction and the entire interest has been capitalised. * The working capital loan funded as at 31-3-2006 is Rs. 12.73 crores which has increased to 13.02 corres as at 31-3-2007. The net current assets as at 31.3.2007 is Rs. 49.60 crores of which 13.02 crores is funded by borrowed funds. From the above facts it is evident that the assessee has not utilised borrowed funds for investment in the wholly owned subsidiary. (v) Without prejudice to the contention of the assessee that the entire investment made in wholly owned subsidiary is out of owned funds as is evident from above stated facts, even if it is to be constructed that the borrowed funds are utilised for investment, the apportionment of borrowed funds to the investment has to be only in the proportion of the working capital funds borrowed to the total net current assets. The net current assets is 49.6 crores and the funded working capital loan is 13.02 crores. The ratio of borrowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowable interest. Therefore, the computation of disallowable interest is worked out in the manner provided u/s. 145(3) of I.T.Act as follows. As per following computation, the disallowable interest is worked out at Rs. 3,22,23,048 and this amount is accordingly disallowed. Penalty proceedings u/s.271(l) (c) of I.T.Act have been initiated separately as the assessee has furnished inaccurate particulars of income thereby concealing the particulars of income: Figures on 31-3-2007/for the year ending 31-3-2007 As on 31.3.2006 (II) Average (I) +(II) (a) share application money 166631589 139749624 153190606.50 (b) investment 571000 571000 571000 (c) Diversion of funds for non-business purposes (a+b) 153761606.50 (d) borrowed funds 282075161 168457084 225266122.50 (e) Int. expenses 47207891 (f) disallowable int. [(e)X(c)/(d) 32223048 *153761606.5047207891 = 32223048 / 225266122.50" 15. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without complete success. The CIT(A) upheld the disallowance in principle but reduced the quantum of disallowance. In his brief operative portion of the ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or evidence now was it made before the AO in any manner. I, therefore, direct the AO to rework the proportionate disallowance of interest after excluding the interest of Rs. 1,54,34,285 capitalised by the appellant. The appellant gets relief to this extent." 16. The assessee is not satisfied and is in further appeal before this Tribunal. 17. A plain look at the financial statements for the assessee (pages 1 to 28 of the paper-book) shows that as at the end of the relevant previous year, the assessee had own funds of Rs. 48,57,77,712, consisting of shares capital and free reserves, and own funds of the assessee as in the beginning of the year was Rs. 36,88,44,838. There is no dispute on this elementary factual position. In this backdrop, let us take a look at following observations made by Hon'ble jurisdictional High Court had to say in the case of Reliance Utilities & Power Limited (supra) : 10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the investments have been made out of these interest free funds. As a matter of fact, Hon'ble High Court has categorically observed that, "learned Tribunal was pleased to record a finding that the assessee had sufficient funds of its own for making the investment without using the interest bearing funds and accordingly upheld the order of CIT (Appeals)" Availability of interest free funds is one thing, and direct evidence of such interest free funds being invested in investments is quite another. A plain reading of Hon'ble High Court's judgment in the case of Reliance Utilities & Power Ltd. (supra) would show that Their Lordships were dealing with the former situation, and not the latter situation. In any case, Their Lordships did not leave it at that, and, relying upon Hon'ble Supreme Court's judgment in the case of East India Pharmaceutical Ltd v. CIT [1997] 224 ITR 627 /1 91 Taxman 185 and Hon'ble Calcutta High Court's judgment in the case of Woolcombers of India Ltd. v. CIT [1982] 134 ITR 219/[1981] 60 Taxman 188, Their Lordships proceeded to lay down a general proposition as to what inference should be taken about the source of funds when inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same by vague and generalized observations. I have also noted that investments are made in the share application money in a wholly owned subsidiary. Yet, the plea of commercial expediency of making this investment is rejected on the ground that "the assessee has to demonstrate (commercial expediency) with facts and figures", and the matter is remitted to the file of the Assessing Officer to consider the same on the basis of facts and figures in support of commercial expediency. I am unable to concur with this approach either. The reason is this. In the case of SA Builders Ltd. (supra), Hon'ble Supreme Court has held that even use of funds by subsidiary for its business purposes will be deemed to be for "the purposes of business" of the assessee, and deduction under section 36(l)(iii) will have to be allowed. Their Lordships, inter alia, observed that, "...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 subsidiaryfor some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... int of difference has been referred to me by the Hon'ble President u/s.255(4) of the I.T. Act, 1961 : "Whether, under the facts and circumstances of the case, the disallowance of Rs. 2,57,94,775, in respect of interest on borrowings claimed as deduction under section 36(1)(iii) of the Income-tax Act, 1961, should have been deleted, as held by the Accountant Member, or should have been partly deleted and partly remitted to the file of the Assessing Officer for fresh examination, as held by, and in terms of the direction set out, by the Judicial Member? " 2. The facts of the case have been elaborately set out by my ld. Brothers in their respective opinions. Still, it would be prudent to succinctly recapitulate the factual matrix of the case as follows. The assessee is engaged in the business of manufacturing of emulsion polymers, adhesive and textile chemicals. According to the AO, the assessee claimed deduction of interest amounting to Rs. 4,72,07,891/-. It was observed that the assessee had diverted funds totalling Rs. 16,66,31,589/- by way of share application money for making investment in shares of its overseas subsidiary company. Apart from that, the assessee had also ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appeal before the Tribunal. The ld. Judicial Member, who passed the leading order, held that the investment made by the assessee in the earlier years could not have been taken into consideration for the purpose of making disallowance of interest in this year. He took note of the fresh investment of Rs. 2.68 crores made by the assessee in the financial year relevant to the assessment year under consideration which was invested by way of share application money. Further investment to the tune of Rs. 5.71 lakhs was also noted by the ld. Judicial Member as having been made in the current year. It was opined that if, at all, any disallowance of interest was to be made, that should be restricted to the funds utilized in the current assessment year, i.e., Rs. 2.68 crores + Rs. 5.71 lakhs. Eventually, the matter was restored by him to the AO for examining the facts as to whether such investment was made out of surplus funds. The alternative plea raised by the assessee on the strength of the judgment of the Hon'ble Supreme Court in S.A. Builders Ltd. ( supra) that investment in share application money was by way of commercial expediency and hence deduction should be allowed on that grou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Builders Ltd. (supra) in support of his contention. 5.2 In order to evaluate the rival contentions, which, in turn, are based on the case of S.A. Builders Ltd. (supra) , it becomes indispensable to find out the facts and the ratio of this judgment. The assessee in the case before the Hon'ble Summit court transferred substantial amount to its subsidiary company out of its cash credit account in which there was a huge debit balance. The AO held that the assessee had diverted its borrowed funds to a sister concern without charging any interest. Proportionate interest relating to the said amount, out of the total interest paid by that assessee to the Bank, was disallowed. The CIT(A) allowed partial relief but the Tribunal restored the action of the AO in sustaining complete disallowance of interest. The High Court dismissed the appeal filed by the assessee. When the matter came up before the Hon'ble Supreme Court, the assessee contended that interest was to be allowed in full as making of investment in subsidiary company is a business purpose. The Hon'ble Supreme Court appreciated the ambit of the expression "for the purpose of business" used in section 36(l)( iii) and he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... second questions is given in positive that the ratio of this judgment applies and the holding company becomes entitled to claim deduction of interest. 5.5 It is imperative to note that the Hon'ble Supreme Court, on noting that the funds were advanced as loan by the holding company to its subsidiary company, being the answer to the first question in positive, did not straightway proceed to allow deduction of interest. As the answer to the second question was not available from facts on record, it restored the matter to the tribunal for examining it and then taking final decision. That is why it categorically observed : "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". Thereafter, it has been observed that : "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". The gist of the judgment for allowing deduction on account of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee. The situation would have been different if the assessee had placed sufficient material in support of its claim of business purpose in advancing the amount to its sister concern by properly documenting its claim and the AO would have failed to controvert such material. 5.8 It has been noticed from the judgment in the case of S.A. Builders Ltd. (supra) that merely having interest in subsidiary company is not enough to earn deduction u/s. 36(l)(iii ) if the borrowed interest bearing funds are advanced by the holding company to its subsidiary. Apart from that, the assessee also needs to objectively show that the subsidiary company utilized such funds for its business purpose. In the absence of the assessee having led even an iota of evidence to prove that the subsidiary company utilized the funds received from the assessee company for its business purpose, in my considered opinion, the assessee failed to garner any support from the above referred Hon'ble Supreme Court judgment in its favour on the question of allowing deduction of interest on this count. I, therefore, agree with the ld. Judicial Member on this issue. II. SCOPE OF PROCEEDINGS U/S 255(4) 6.1 The ld. D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idiary company, there is no commercial expediency. Once this view is taken, the natural consequence would be that the judgment in the case of S.A. Builders Ltd. (supra) would have no application to the facts of the case and the deductibility of interest on this score would be ruled out. At this juncture it is relevant to note the mandate of section 255(4), which reads as under :- 255(4) "If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by the President of the Appellate Tribunal for hearing on such point or points by one or more of the other members of the Appellate Tribunal, and such point or points shall be decided according to the opinion of the majority of the members of the Appellate Tribunal who have heard the case, including those who first heard it." (Emphasis supplied) 6.4 A bare perusal of this provision indicates that on a difference of opinion between the members of a Division Bench on a point, they shall state the point of difference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiary company should be viewed as distinct from advancing loan to subsidiary company for the business purpose and hence deduction of interest on this count should be held as not maintainable. None of the ld. Members has held that the subscribing to the share capital of the subsidiary company per se can be held as non-business purpose. Whereas the ld. JM has restored the matter to the file of the AO with a direction to the assessee to demonstrate the commercial expediency, the ld. AM has held that the commercial expediency has been proved. Now accepting this contention of the ld. DR would amount to canvassing a third opinion, diverse from those expressed by the two members earlier. It is palpable that the formation of third view on the point of difference is inconceivable in the scheme of section 255(4) of the Act. As such, I refrain from considering this point of view put forth by the ld. DR before me for the first time. III : WHETHER INVESTMENT OUT OF INTEREST FREE FUNDS ? 7.1 From the facts recorded above, it is observed that out of the balance amount totalling Rs. 16.66 crores as at the end of the year in the name of the subsidiary company, the AO held that interest on the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders' funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its owns for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon'ble jurisdictional High Court, it was contended by the Department that the shareholders' funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon'ble High Court observed that : "In our opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the assessee in the current year. Accordingly, I am left with examining whether Rs. 2.68 crores invested by the assessee in its subsidiary company was out of interest free funds or interest bearing funds. According to the judgment in Reliance Utilities & Power Ltd. (supra), what is relevant is to consider the shareholders' funds vis-a-vis the amount of investment for non-business purpose. If the shareholders' funds and/or other interest free advances are more than the investment, then it has to be presumed that the investments came out of interest free funds available with the assessee. The balance-sheet of the assessee company is available at page 6 of the paper book, from where it can be seen that the shareholders' fund comprising of share capital, reserve and surplus is Rs. 48.57 crores. As against that, the total investment made by the assessee with its subsidiary company in the shape of share application money is Rs. 16.66 crores, which includes the fresh investments made during the year at Rs. 2.68 crores. Even if other interest free advances available at the assessee's disposal are ignored and the position is considered as on the date of balance-sheet, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ow. Without wandering here and there, such formula is readily available in the form of the following two judgments. 7.7 In the case of Woolcombers of India Ltd. (supra) the question was whether the Tribunal was correct in holding that a part of the interest paid by the assessee on bank overdraft account as relatable to payment of advance-tax was not an admissible deduction. In that case, the assessee had an overdraft account with the bank. The assessee paid advance-tax which increased the overdraft balance. The ITO held that the payment of advance-tax could not be treated as business expenditure and he, therefore, disallowed the proportionate interest. The Tribunal sustained the addition. When the matter came up before the Hon'ble High Court, it was observed that though the assessee had taken money from overdraft account for payment of tax, but it had sufficient profits which were also banked. It was observed that such funds would easily meet the advance-tax liability. Finally, it was held that the addition sustained on account of proportionate interest was not justified as the payment of advance-tax was not relatable to the overdraft as the assessee had, in fact, drawn moneys ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able during the year are much more than the amount invested by the assessee in share capital of its subsidiary company during the year. 7.10 I will examine this issue from a third angle as well. The assessee paid total interest of Rs. 4.72 crores. This interest was paid in respect of three broad categories of loans which have been tabulated by the ld. Accountant Member in para 13.4 of his opinion. The first category indicates the term loans taken by the assessee from the Honkong & Shanghai Banking Corporation, Bank of India and State Bank of India. Term Loans are extended for the purpose of acquisition of fixed assets viz., land, building, plant and machinery for setting up of new industrial units or expansion/modernization of existing units. To put it simply, if a borrower wants to install machinery worth Rs. 100/-, he will approach a bank for loan. The bank will provide term loan of, say, Rs. 75/- with a margin of Rs. 25/- to be contributed by the borrower. The term loan cannot be utilized for any other purpose. In the present case, the assessee utilized the term loan for building & machinery of the factory at Silvassa and also for Jammu & Chennai units under construction. Obvio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as deduction as per ld. Accountant Member or should be partly allowed and partly restored to the file of AO for fresh examination as per ld. Judicial Member. If the assessee succeeds in proving the business purpose i.e. stage (a) above, then no disallowance of interest can be made notwithstanding the fact that funds utilized were interest free or interest bearing. Section 36(l)(iii) categorically provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession is deductible. I am not concerned with the prescription of the proviso to sec. 36(l)(iii). So long as the interest bearing funds are used for the business purpose, whether for investment in fixed or circulating capital, the amount of interest shall be allowed as deduction. If answer to stage (a) turns out to be in negative, only then the question of examining the stage (b) arises as to whether investment for non-business purpose was made out of interest free funds. If such investment for non-business purposes is out of interest free funds, then there cannot be disallowance of interest and vice versa. The second stage arises for consideration on the assessee's failure to ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
