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TMI Blog2016 (3) TMI 450X X X X Extracts X X X X X X X X Extracts X X X X ..... ess exigencies”, wherein, the assessee is a holding company, thus, it is not a colorable device. The money was advanced by the assessee holding company to its subsidiaries for “business expediency”, which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee. - Decided in favour of assessee X X X X Extracts X X X X X X X X Extracts X X X X ..... on in CIT vs Reliance Communications Infrastructure Ltd. (270 taxman 219) (Bom.). The ld. counsel further explained that for A.Y. 2007-08 (page- 21 of the paper book), the assessee claimed interest, page 24 of the paper book, containing computation of income, wherein, no disallowance was made by the Assessing Officer. The crux of the argument is that if interest is allowed in earlier year, the same cannot be disallowed in later year unless and until the facts are different. For this proposition, reliance was placed upon following decision: i. CIT vs Sridev Enterprises (192 ITR 165)(Kar.) ii. ITO vs J.M.P. Enterprises (101 ITD 324, 336-337) (Asr) iii. Escorts Ltd. vs ACIT (104 ITD 427, 512-513)(Del.) iv. Malwa Cotton Spinning Mills vs ACIT (89 ITD 65, 94- 95)(Chd)(TM) v. CIT vs Industrial Cables (India) Ltd. 209 CTR (P & H) 167 2.1. On the other hand, the ld. DR, Shri J. Sarvanan, defended the conclusion drawn in assessment order as well as impugned order by contending that commercial expediency was not proved by the assessee and further the assessee himself disallowed the interest in earlier assessment order, therefore, the ld. Commissioner of Income Tax (Appeals) is jus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d these funds for its business. Hence, is use of funds by the appellant for its own business and interest thereon is allowable. This was examined by the Hon'bIe Supreme Court in the case of S.A. Builders Ltd vs CIT- 288 ITR 1 and was first upheld by ITAT Mumbai in the case of Indian Hotels Ltd - 276 ITR and the ratio judgement in both cases is same. In both cases, it is held that as the company advances borrowed money to its subsidiary and same is used by the subsidiary for some business purpose the appellant will be entitled to deduction of interest on borrowed funds. The Ld. AO observed that the appellant is engaged in the business of investments. The borrowed funds have been used for the purpose of granting interest free loans and advance share application money to various companies including subsidiary companies including subsidiary companies. Accordingly, the interest has been utilized not for the purpose of business of the appellant and total income of interest claimed is ₹ 6,79,03,542/-. The Ld. AO placed reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd Vs. CIT ( 2007) 288 ITR 1 (SC). The Ld. AO further held that as per appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free loans and share application money to its subsidiaries during the year and earlier years. The appellant has deep interest in the business of subsidiaries and other associate concerns. The share application money/loans advanced to subsidiary out of commercial expediency. The subsidiary has used these funds for its business. Hence, it is use of funds by the appellant for its own business and interest thereon is allowable. The Ld. AR of the appellant further submitted that this proposition was examined by the Supreme Court in the case of S. A. Builders Ltd (288 ITR 1) and was first held by IT AT Mumbai in the case of Indian Hotels Ltd (276 ITR 104) and the ratio of judgment in both cases is same. In both cases it is held that as the holding company has deep interest in the business of its subsidiaries, hence if holding company advances borrowed money to its subsidiary and same is used by the subsidiary for some business purpose the assessee will be entitled to deduction of interest on borrowed funds. The appellant further submitted that the details of Loans and Advances along with share holding of assessee company in these companies is as under: Name of the Company Amount(Rs.) 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it is held as under: (a) The amount advanced to subsidiaries or sister concerns as a measure of commercial expediency even not from the point of view to earning profit, the interest is allowable u/ s 36 (1) (iii) of the Act. (b) It is obvious that a holding company has a deep interest in its subsidiary and hence if the holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purpose, the assessee would be entitled to deduction of interest on its borrowed funds even if used for advancing to subsidiaries without interest. 2.2.3. The Ld. AR of the appellant further submitted that applying, the ratio of decision of Apex Court (Supra) to the facts of the appellant's case, no part of interest disallowed relates to interest free advances made to subsidiaries on account of commercial expediency and its deep business interest. Without prejudice to above, the appellant further submitted that submit that interest free funds / internal accruals have been used for the purpose of giving interest free loans / share application money during the earlier years, which has been accepted by the Ld. AO and there is no disallowance u/s 36 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies are purely business transactions and out of commercial expediency hence interest on account of such advances if disallowed will be against the judgment of Hon. Supreme Court. The Ld. AR of the appellant further placed reliance on the following decisions:- i) Supreme Court in case of S.A. Builders Ltd vs CIT 288 ITR 1 (SC). ii) The ITAT judgment in the case of Indian Hotels is also very relevant. ITAT Mumbai in case of DCIT Vs. Indian Hotels Co. Ltd (276 ITR 104) ill) Reliance Utilities (313 ITR 340) 2.3 Decision 2.3.1 I have carefully considered the contention of the appellant company as well as carefully gone through the available documents on record. I find that the Ld. AO has made the disallowances of interest u/ s. 36(1)(iii) of the Act on the ground that it was for the non business purposes. The Ld. AR of the appellant contended before me that the loan were advanced to the subsidiary companies for the purposes of its business. Secondly, it was also contended that the appellant had got a surplus fund available to it amounting to ₹ 43.36 Crores which are sufficient to meet the advances made to subsidiary companies. I find that both the arguments of the l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss but is given to the partners for their personal use. 2.3.3. Similarly in the case of CIT v / s. Indian Express Newspapers (Madurai) P. LTD.(1999) 238 ITR 70 (Mad), the Hon'ble High Court has held that the fact that the money was not paid directly, but was shown as having been invested in the subsidiary company is not decisive of the true character of the transaction. The mere fact that A Ltd. is a distinct legal entity does not by itself establish that the purported investment was a genuine investment, which company had' made for securing benefits to itself by way 'of trading or carrying on business through that subsidiary. Sum of ₹ 10 lakhs was paid to the Bombay company on the same day on which it was paid to A Ltd. Though A Ltd. is purported to charge interest in the first year, subsequently, no interest at all was charged to the Bombay company on that sum. It is not the assessee's case that money was returned to A Ltd. subsequently with interest or that the assessee received dividends from out of the investments made by it in A Ltd. It is well settled that the corporate veil of a company can be lifted for the purpose of ascertaining the real characte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was, therefore, its duty to place requisite materials on record. Keeping in view the fact that the assessee had not produced materials, despite opportunities having been granted to it, by the AO, the purported finding of fact arrived at by the Tribunal must be held to be perverse. In other years also the assessee having despite opportunities being given did not produce documents, the fact that neither in the previous years nor in the later years such transactions had been questioned by itself would not deter the Court from examining the said question. As the assessee could not produce any document in this regard, an adverse inference in terms of s. 114 of the Evidence Act should be drawn to the effect that had those documents been produced, the same would have gone against the interest of the assessee, the questions of law involved in the instant case should be answered in negative. 2.3.5. In the case of CIT V / s. Doctor & Co. (1989) 180 ITR 627 (Born), the Hon'ble Bombay High Court has held that the assessee had borrowed money from different persons in the earlier years on interest and that a part of the money so borrowed was advanced to its sister concerns free of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally interfere with such findings. The bare reading of all the questions raised by assessee itself shows that they are purely questions of fact, much less a pure question of law. Besides the fact that no question of law, much less a substantial question of law, arises in the present case, the other predominant factors which would require dismissal of the appeal is that, from the records nexus can be traced between the borrowed funds and the interest-free advances made by the assessee and its sister-concern. Secondly, it has been clearly established on record that the assessee itself had taken loans with interest and had advanced funds by diversion or otherwise to its sisterconcern free of interest. In these circumstances, the order of the Tribunal calls for no interference and in any case no substantial question of law arises for consideration in the appeal. The appeal is accordingly dismissed 2.3.7. In the case of CIT V Is. Abhishek Industries Ltd, (2006) 286 ITR 1 (P&H), the Punjab & Haryana High Court has held that besides raising substantial amount of term loan which, according to the assessee, is required to be repaid as per the fixed schedule agreed to at the time of disbu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister-concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister-concerns for nonbusiness purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. Even the plea of nexus of loans raised by the assessee with the funds advanced to the sister-concerns on interestfree basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted, Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. If the amount is advanced from a mixed account or share capital or sale proceeds or profits, etc., the same would not be termed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister-concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister-concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under s. 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue establishing their stand. Thus, on the principle of consistency the assessee is having a good case. Our view is fortified by the following decisions:- i. Parshuram Pottery Works Ltd. vs ITO 106 ITR 1 (SC) ii. Security Printers 264 ITR 276(Del.) iii. CIT vs Neo Polypack Pvt. Ltd. 245 ITR 492 (Del.) iv. CWT vs Allied Finance Pvt. Ltd. 289 ITR 318 (Del.) v. Berger Paints India Ltd. vs CIT 266 ITR 99 (SC) vi. DCIT vs United Vanaspati (275 ITR 124) (AT)(Chandigarh ITAT) vii. Union of India vs Kumudini N. Dalal 249 ITR 219 (SC) viii. Union of India vs Satish Pannalal Shah 249 ITR 221 ix. B.F.Varghese vs State of Kerala 72 ITR 726 (Ker.) x. CIT vs Narendra Doshi 254 ITR 606 (SC) xi. CIT vs Shivsagar Estate 257 ITR 59 (SC) xii. Pradip Ramanlal Seth vs UOI 204 ITR 866 (Guj.) xiii. Radhaswamy Satsang vs CIT 193 ITR 321 (SC) xiv. Agarwal warehousing & Leasing Ltd. 257 ITR 235 (MP) The sum and substance of the aforesaid judicial pronouncements is that on the basis of principle of judicial discipline, consistency has to be followed and once in a particular year, if any view is taken, in the absence of any contrary material, no contrary view is to be take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v. Chandulal Keshavlal and Co. [1960] 38 ITR 601, etc. 25. In our opinion, the High Court as well as the Tribunal and other Income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 26. The expression " commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad' s case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. [1994] 208 ITR 989 (Bom) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 34. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 582 also does not appear to be correct. 35. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the 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 armchair 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 profit. The Income-tax authorities must put ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ludes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of the business". "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. While coming to this conclusion, the Hon'ble Apex Court also analyzed various decisions such as ATHERTON (H. M. INSPECTOR OF TAXES) v. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155 (HL),EASTERN INVESTMENTS LTD. v. CIT [1951] 20 ITR 1 (SC); [1951] 21 Comp Cas 194 (SC) and CIT v. CHANDULAL KESHAVLAL AND CO. [1960] 38 ITR 601 (SC) followed. The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". CIT v. MALAYALAM PLANTATIONS LTD. [1964] 53 ITR 140 (SC) and CIT v. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [1971] 82 ITR 166 (SC) follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 36(1)(iii) to secure and provide that no such deduction shall be allowed in respect of any amount of interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of accounts or not) and such amount of interest is for the period beginning from the date on which the capital was borrowed for acquisition of the assessee till the date on which such asset was first put to use. The Departmental Circular No.7 of 2003 dated 05/09/2003 also elucidate date on this point. We note that section 36(1)(iii) is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrowed capital and the purpose of borrowing must be for business which is carried on by the assessee in the year of account. Unlike section 37, which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes the user of capital and not the user of the asset, which comes into existence as a result of borrowed capital. An assessee is entitled to claim interest paid on borrowed capital provided it is used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were utilized for non-business purposes. As was held in CIT vs Hotel Savera 148 CTR (Mad.) 585 ; 239 ITR 795 (Mad.). In this context, the fact that the assessee had ample funds or resources at his disposal and need not have borrowed funds is not a relevant matter for consideration. All that is germane is whether the borrowing was, or was not, for the purposes of business. In City Motor Service Ltd. vs CIT (1966) 61 ITR 426 (Mad. ) The assessee used the borrowed capital for giving loans on interest to others in normal course of his business. Subsequently, it waved interest in respect of certain such loans. It was held that the subsequent waver did not alter the nature of loans. The ratio laid down in Gleneburn Estate Ltd. vs State of Tamilnadu 240 ITR 719 (Mad.) supports the case of the assessee. 2.9. The expression for the purposes of business" occurring in section 36(1)(iii) and also in section 37(1) is wider in scope then the expression "for the purposes of making or earning…… income" occurring in section 57(iii). Thus, the scope for allowing a deduction u/s 36(1)(iii) is much wider. We are aware that where the borrowed money are not use for "purposes of business" ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of loan, advances or share application money. If the amount has been invested for the purposes of business of the assessee, then no disallowance can be made in the hands of the assessee. The Hon'ble Apex Court in Hero Cycles Pvt. Ltd. vs CIT (2015) 379 ITR 347 (SC) vide latest order dated 05/11/2015 on the issue of interest on borrowed capital, wherein, advances were made to subsidiaries, pursuant to undertaking given to financial institutions by assessee to provide addition margin to subsidiary to meet working capital for meeting cash losses, it was held that the advances were out of business expediency, therefore, interest paid on borrowing not to be disallowed u/s 36(1)(iii) of the Act. It is noteworthy that while coming to this conclusion, the Hon'ble Apex Court applied the decision already taken in S.A. Builders Ltd. vs CIT (supra) and also considered in Madhav Prasad case (1979) 118 ITR 200 (SC), CIT vs Malayalam Plantation Ltd. (1964) 53 ITR 140 (SC), CIT vs Birla Cotton Spinning and Weaving Mills Ltd. (1971) 82 ITR 166 (SC) and CIT vs Dalmia Cements (B.) Ltd. (2002) 254 ITR 377 (Del.), CIT vs Abhishek Industries Ltd. (2006) 286 ITR 1 (P & H). Identical ratio was laid down i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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