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TMI Blog2014 (1) TMI 1225X X X X Extracts X X X X X X X X Extracts X X X X ..... ught not to have directed the assessing officer to enhance the disallowance of interest by further amount of Rs. 37,75,392/ thereby determining the disallowance of interest expenditure of the appellant at an amount of Rs. 92,96,667/ . 4. The Commissioner of Income Tax (Appeals) is not justified in concluding that the appellant's case was not that the investment in the shares In the subsidiary companies was out of the appellant's internal accruals available for investment, while it is not so as borne out from the records of the appellant. 5. The Commissioner of Income Tax (Appeals) ought to have appreciated that the investment in subsidiary was in the course of appellant's business activity and arising out of the objects enunciated in the memorandum of association. 6. The appellant denies its liability to be assessed to the levy of interest u/s. 234B in an amount of Rs. 3,19,397/ . 3. Brief facts of the case are that a search and seizure operation u/s. 132 of the Income tax Act, 1961 was conducted in the business premises of the assessee. Consequently, notice u/s. 153A was issued. In response to the same, the assessee filed the return of income admitting total income of Rs. 22,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business only. In the instant case, there is no business interest of the assessee is established to incur such a huge amount of interest without any yield on such investment. Alternatively, even if it is assumed that these investments are part of the business, still the same cannot be allowed as revenue expenditure and the entire interest along with incidental expenses are to be capitalized. However, there no such case has been established by the assessee. Therefore, the entire interest payment of Rs. 92,86,667 (which represents net of interest receipts and interest payments i.e. 2,28,60,868 1,35,74,201) is required to be disallowed. However, the AO has disallowed only a sum of Rs. 55,11,275. Therefore, the balance of Rs. 37,75,392/ is also to be disallowed as not incurred for the purpose of business. Accordingly, the CIT(A) directed the AO to enhance the disallowance by Rs. 37,75,392 to the disallowance already made of Rs. 55,11,275 and compute the total income. Against this, the assessee is in appeal before us. 5. The learned AR submitted that no incriminating material was seized from the company and the additions made in the assessment order have arisen on account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i) The company had earned interest from M/s. PPPL of Rs. 10,27,974 during the FY relevant to AY 2007 08. Thus, in effect, there was no interest payment. (iii) On 1 4 2007, the company transferred an amount of Rs. 15 crore given as loan to M/s. GSPL as share application money made in M/s. GSPL and on 20 3 2008 the shares were allotted to the company . Subsequently, an amount of Rs. 3,75,00,000 out of the investment made of M/s. GSPL was sold on 31 3 2008 to M/s. Reliance Trading Enterprises. Therefore, the company's investment made in the shares of M/s. GSPL as on 31 3 2008 was Rs. 11.25 crore only. (iv) In the AY 2008 09, the company had not paid interest to M/s. PPPL 7. The disallowance of interest will arise only in case it can be ascertained that the unsecured loan on which interest has been paid were utilized for investment in shares. The AO has ignored the facts and records produced but on his own calculation as mentioned in the order, disallowed interest aggregating to Rs. 55,11,275. The case of the assessee company is squarely covered by the ratio of the decision of the Hon'ble Supreme Court in S.A. Builders vs CIT, 288 ITR 1 wherein it was clearly held that if the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself the Revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits." 9. The AR relied on the CIT v. Walchand and Co. (R) Ltd. (1967) 65 ITR 381 (SC), for the proposition that when the expenditure is wholly incurred for the purpose of business of the assessee, there was no reason to disallow any portion of the interest expenditure on imaginary reasons. The AR also relied on the decision of Tribunal in the case of SSPDL Ltd. vs. DCIT (24 ITR (Trib) 290) wherein held that unless and until borrowed funds are used as investment in sister concern, disallowance of interest is not possible. 10. On the other hand, the learned DR submitted that the assessee has claimed interest of Rs. 61,11,478/ on account of secured loans obtained from banks and financial institutions towards project cost incurred during the year under considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g loans to such companies. Many of such concerns are recently floated companies with no business at all. It is not known how such companies can benefit and help the business of the assessee company. 12. The DR submitted that any act of having controlling interest in other companies cannot constitute business of the assessee by any stretch of imagination. In this case, the assessee failed to establish the interwoven connection and the benefits accrued to the assessee by virtue of such interest in those companies. On the other hand, it is established that the assessee is trying to help those companies financially to establish themselves by foregoing the profits generated year after year. As a consequence of the claim of interest on such unsecured loans which have not been utilized for any business, the assessee is reducing its net profit and avoiding taxes duly payable on those profits. If such loans are taken for the purpose of the assessee, the interest on such unsecured loans would have found place in the cost of the project as has been done in respect of the interest on secured loan of Rs. 61,11,478. The conduct of the assessee explains that the business of unsecured loans for i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is not the case of the assessee that the investment in the shares of the sister concerns is out of its own idle funds. On the other hand, the funds have been diverted to invest in shares out of borrowed funds, whereas the assessee company is not an investment company to deal with shares in such a manner. Assessee also cannot take the plea that it had invested out of accumulated profits and reserves, since the accumulated profits have been generated after a prolonged act of business, taking risks and utilizing borrowed funds etc. Hence, these reserves and profits have cost attached to them. Therefore, the same cannot be termed as idle funds. They are meant for utilization for business interest only. They cannot be utilized to the whims and fancies of the management by benefitting their own concerns at the cost of the assessee company which had accumulated profits over the years after conducting the task of business despite various hurdles came in the way. These reserves are to be classified as business funds and are to be utilised for the purpose of the business of the assessee only. 14. We have heard both parties and perused the material on record. The CIT(A) disallowed the net ..... X X X X Extracts X X X X X X X X Extracts X X X X
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