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TMI Blog2015 (6) TMI 797X X X X Extracts X X X X X X X X Extracts X X X X ..... this could be a starting point to suspect that excessive remuneration was paid but for effecting an addition the suspicion has to be grounded on fair market value of services rendered. The A.O. however, did not carry out such exercise. On the other hand the appellant has explained that the appellant is a 35 year old company whereas the subsidiary is only in business for last 4 years. It has also been mentioned that the subsidiary is export oriented unit which is mainly automated and located in single building with less overheads. The A.O. has not indicated as to how the turnover could be a sound basis for comparison of remuneration. Even if it is so, there could be a case for examining the lesser remuneration paid in the case of subsidiary company. The remuneration of around ₹ 25 lakhs paid to three directors who were promoters of the company in 35 year old company does not seem to be excessive and thus the disallowance of ₹ 22,80,000/- is directed to deleted. - Decided in favour of assessee. - ITA No. 7758/Mum/2010, ITA No. 1364/Mum/2011, ITA No. 5088/Mum/2012 - - - Dated:- 10-6-2015 - R. C. Sharma, AM And Sushma Chowla, JM,JJ. For the Appellant : Shri Neil Phi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee had made interest free advances to its subsidiary company of ₹ 185 lakhs for non business purposes although assessee had paid interest of ₹ 19,43,204/- and finance charges to secured/unsecured loans of ₹ 6,82,252/-. Assessee was asked to explain as to why proportionate interest relating to interest free loans advances and investment made for non business purposes should not be disallowed under section 36(1)(iii) of the Act. In reply assessee stated that the said investment was made in 100% subsidiary company by way of share capital of ₹ 1 lakh and share application money of ₹ 109 lakhs and advance of ₹ 75 lakhs. The said investment was claimed to have been made out of Capital Reserves and surplus of the company and it was claimed that no disallowance under section 36(1)(iii) of the Act was warranted. The AO noted that the share capital of assessee was ₹ 20 lakhs, which was with the company for the past several years and the same had already been utilised in application of funds in the earlier years. The AO also noted that in A.Y. 2005-06 similar disallowance was made in the hands of the assessee. The AO further held that where the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court in the case of S.A. Builders Ltd. vs. CIT 288 ITR 1 (SC). 9. We have heard the rival submissions and perused the record. The issue arising in the present appeal is in relation to computation of disallowance, if any, under the provisions of section 36(1)(iii) of the Act. The assessee had made certain advances to its 100% subsidiary. During the year under consideration assessee had advanced loan of ₹ 75 lakhs to Edicon Pneumatic Tools Co. Pvt. Ltd. In the earlier year assessee had made investment of ₹ 110 lakhs in the shares of its subsidiary company. The Directors of the assessee firm were also Directors of the subsidiary company and the business carried on by the subsidiary company was the same as that carried on by the assessee. The claim of assessee before the AO was that the said investment was made for business purposes, hence no disallowance of interest was warranted under section 36(1)(iii) of the Act. The first advance was made by assessee to its subsidiary company vis-a-vis investment in the shares of the said subsidiary company in A.Y. 2005-06. It was claimed by the assessee that the said investment was out of its share capital. However, the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition of interest expenditure of ₹ 13,90,000/-, on the ground that for A.Y. 2005-06, 2006-07 and 2007-08, the department has accepted the CIT(A)'s decision. The disallowance made by the Assessing Officer as interest expenses was on account of interest free advances, which were not used for the purpose of assessee's business. Further, the CIT(A)'s order for A.Y. 2005-06 was not challenged due to low tax effect and appeals on the same issue have been preferred against CIT(A)'s order for A.Y. 2006-07 2007-08. 2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in allowing the excess remuneration of ₹ 22,80,000/- paid to directors in assessee company viz-a-viz sister company which was disallowed by the Assessing Officer without appreciating the fact that services rendered by the directors were similar in nature. Further the expenditure was considered excessive on the basis of comparisons of two companies having same management and same line of business and assessee's failure to justify the heavy expenses claimed by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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