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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 ..... r income tax - The assessee is engaged in the business of real estate - Same is the position with the sister concern, M/s. GSPL - There are common interests among the companies - the assessee advanced the interest free funds to the sister concern which is received from M/s. PPPL - Being so, the interest bearing funds were not at all diverted by the assessee to make investment in the sister concern – thus, no disallowance could be made on notional basis and it cannot be disallowed even if it has not resulted in any income to the assessee – Decided in favour of Assessee. - ITA No. 58/Hyd/2012 - - - Dated:- 22-1-2014 - Shri Chandra Poojari And Smt. Asha Vijayaraghavan,JJ. For the Appellant : Sri K. C. Devadas For the Respondent : Sri D. Sudhakara Rao ORDER Per Chandra Poojari, AM:- This appeal by the assessee is directed against the order of the CIT(A) I, Hyderabad dated 25th November, 2011 for the assessment year 2008 09. 2. The assessee raised the following grounds of appeal: 1. The order of the Commissioner of Income tax (Appeals) I is erroneous in law, against the weight of evidence and opposed to the facts and circumstances of the case of the appellant co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e earlier year. The AO observed that the assessee company had obtained fresh loans to the tune of Rs. 12,17,58,804. However, the entire borrowals were not utilized wholly and exclusively for the purpose of its own business. A part of the borrowed fund was diverted for acquiring equity shares of sister concerns of the assessee company. Referring to Schedule of Investments, the AO observed that the assessee had diverted its borrowals to the tune of Rs. 20,77,63,500 for acquiring the equity shares of a number of sister concerns. The names of the sister concerns and the amount invested has been given in page 3 of the assessment order. After analyzing the total investment, the AO came to the conclusion that the assessee company had utilized Rs. 11,24,75,000 from out of the borrowed fund towards investment in the equity shares of the sister concerns and subsidiary. He was, therefore, of the view that proportionate interest charged on the borrowals would not qualify for deduction u/s. 36(i)(iii) of the Act. The AO worked out the proportionate interest at Rs. 55,11,275 and disallowed the same while completing the assessment. Being aggrieved against the disallowance so made, the assessee pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... position of the company as a particular date, i.e. 31.3.2008 to substantiate his contention that unsecured loans obtained by the assessee company was utilized for investing in equity shares of sister concerns. The financial position of the company changes each day of the year in the light of transactions which are taken place throughout the year. A balance sheet is only a statement of the financial position of the company on a given date. The important aspect to be considered in this case is limited to whether the unsecured loans on which interest was paid were utilized for investing in the shares of group company by the assessee. 6. The AR further submitted that in the AY 2008 09, the company made investment of Rs. 15 crores in the share capital of another associate company M/s. Global Shelters Pvt. Ltd. (M/s. GSPL). It was also explained during the course of assessment proceeding that this was not a fresh investment made but only the amount given to the said company as loan during the previous assessment year 2007 08 which was initially transferred as share application and finally as investment in the company. Therefore, there was no interest bearing unsecured loan directly uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that no borrowed funds were used for the purpose of advancing money to M/s. GSPL and, on the other hand, the assessee used the funds received from M/s. PPPL to advance the same to M/s. GSPL. Further, he submitted that investment in sister concern cannot be said to be an investment in non business purposes. According to him, making investment in shares of the other companies is one o the objects of the assessee company and to achieve the object of the assessee company, the investment had been made in M/s. GSPL which was received from M/s. PPPL. Further he drew our attention to the cash flow statement and also to the Balance Sheet of the assessee company specifically to Schedule VI of the Balance Sheet, to suggest that the money advanced to M/s. GSPL from the unsecured loan received from the other sister concern. Further he relied on the judgement of Supreme Court in the case of SA Builders vs. CIT (288 ITR 1) wherein the Apex Court held as under: "To consider whether one should allow deduction under section 36(1)(ili) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he shares of its sister concerns as investment and the value of the same stood at the end of the current year at Rs. 20,77,63,500. During the year under consideration, the assessee's net investment in M/s. GSPL is Rs. 11.25 crores after sale of shares worth Rs. 3,75,00,000 of this company. Initially, the assessee had given a sum of Rs. 15 crores as loan to M/s. GSPL and subsequently the loan has been converted as investment in the form of shares. Out of the same, shares worth Rs. 3.75 crores were sold to M/s. Reliance Trading Enterprises on 31 3 2008. Therefore, the net investment in the above company for the year stands at Rs. 11.25 crores. These investments in various sister concerns have been made out of the unsecured loans obtained from various concerns by incurring interest expenditure of Rs. 2,28,60,868. At the same time, unsecured loans were given to various sister concerns and received interest of Rs. 1,35,74,201/ . This part of the unsecured loan and interest on the same has not been carried to the project cost by the assessee company on the ground that it has no bearing on the cost of the project. However, according to the assessee, the same constitutes its business as it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r concerns but also offered an unconditional guarantee for the loan of Rs. 6.75 crores obtained from HDFC Bank to one of its sister concern. But nothing has been established to prove that the business interest of the assessee is protected or enhanced by virtue of such guarantee offered to one of its sister concerns. Further, these companies do not have the potential of declaring any dividend to the assessee company in near future. Hence it is unbecoming on the part of any business man to invest in such concerns without any return on huge investments when the assessee is carrying on capital intensive projects on borrowed funds and incurring huge expenditure. Nothing wrong on the part of the assessee to obtain unsecured loans from related parties and given unsecured loans to sister concerns bearing interest on such loans. Such conduct of the assessee should be at arm's length level with no benefit or favour conferred on those sister entities. There is no necessity for the assessee to invest in the shares of other companies by diverting interest bearing loans received from its close related entities. Had these funds been not invested in the related concerns, these funds would have fet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement (placed at page No. 19 in the Paper Book) which is a follows: 15. Being so, as seen from the above, it cannot be said that the assessee used borrowed funds for non business purposes. The plea of the Department is that instead of making interest free investment in M/s. GSPL, the assessee should have used the same for the purpose of clearing loans and it could have very well saved the interest payment. When the assessee not used borrowed funds for the purpose of investment, the Department cannot say that interest free funds availed by the assessee should have been used for the purpose of clearing the existing loans. It is the prerogative of the assessee to take a business decision in what manner the assessee has to deploy its funds. The Revenue cannot decide what the assessee has to do and cannot compel the assessee to maximise the profit so as to pay higher income tax. The assessee is engaged in the business of real estate. Same is the position with the sister concern, M/s. GSPL. There are common interests among the companies. In view of the commercial expediency the assessee advanced the interest free funds to the sister concern which is received from M/s. PPPL. B ..... X X X X Extracts X X X X X X X X Extracts X X X X
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