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TMI Blog2016 (12) TMI 1079X X X X Extracts X X X X X X X X Extracts X X X X ..... nly to the extent of ₹ 12 lakhs to Mrs Chandana Poddar as against ₹ 13 lakhs disallowed by the revenue, which was not rectified even when specifically brought to their notice. We find that in the instant case, the assessee had duly provided the complete details of nature of services rendered by Mrs Chandana Poddar. If the revenue had got any apprehension regarding the same, nothing prevented them from questioning her by recording a statement by resorting to process of issuing summons procedure contemplated u/s 131 of the Act. In the absence of bringing any other evidence to the contrary, no disallowance could be made in the facts and circumstances of the case. AO had merely disallowed the entire expenditure as not meant for the purpose of business. If that be so, he ought not to have invoked the provisions of section 40A(2) of the Act. We also find that the ld AO had without prejudice had also tried to disallow the said expenditure u/s. 37 of the act as not meant for the purpose of business. We find that this action of the ld AO is purely without any basis and is merely based on surmise and conjecture. - Decided in favour of assessee Disallowance of interest paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , without relying upon any other material, the ld AO held the payments made to the holding company to be unreasonable and excess of its fair market value and added 2% of ₹ 2,74,69,275/- in the sum of ₹ 5,49,386/- u/s 40A(2) of the Act. Before the ld CIT(A), the assessee argued that merely because the sale of ₹ 4,88,45,280/- was made to a single party and is spread over 3 days only, it cannot be said that the purchase do not constitute a legitimate business need. It was also argued that moreover, the ld AO has the burden of proving that the conditions required for invoking the provisions of section 40A(2) exist in support of which, it placed reliance on various decisions. It was also argued that the ld AO has nowhere alleged that the assessee has paid to its Holding Company a sum over and above the fair market value of goods. He nowhere alleged that the payment for purchases incurred were in excess of their fair market value. The ld CIT(A) ignored all the submissions of the assessee and upheld the addition made by the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds:- 2a) That the Ld. C.I.T.(A) erred in having upheld the disallowa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble. He also argued that it was specifically brought to the notice of the ld AO vide page 19 of the paper book that the assessee had neither taken any loan from SREI Equipment Finance Private Limited (SEFPL) nor paid any interest to them. In fact, it had taken loan only from SREI Infrastructure Finance Ltd which is a separate and distinct legal entity altogether and paid interest to them on the loan taken. He further argued that the ld AO had not brought on record the fair market value of purchases made by the assessee in order to reach to a conclusion that in comparison to the said fair market value, the value of purchases reflected by the assessee were in excess of the same and hence in his opinion, the same is excessive or unreasonable within the meaning of section 40A(2) of the Act. He also argued that no expenditure was excessive or unreasonable having regard to the fair market value of the goods purchased for which payments were made considering the legitimate needs of the business and no extra benefit was derived by the holding company in such transactions and that the said transactions were made at Arm s Length Price. He also In support of this, he placed reliance on the fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unreasonable shall not be allowed as a deduction. Hence it is very clear that the onus is on the ld AO to bring the fair market value of the goods purchased by bringing in comparable cases ; onus is on the ld AO to bring on record that the payment for purchases has resulted in some benefit derived by the other person to whom the payment has been made. Only in such cases, he could disallow to the extent that such payment is found to be excessive or unreasonable in his opinion. In the instant case, the ld AO had not brought any comparable cases on record to disprove the purchases made from holding company by the assessee. We find that the reliance placed by the ld AR on the decision of the Hon ble Madhya Pradesh High Court in the case of CIT vs Udhoji Shrikrishnadas reported in 139 ITR 827 (MP) is directly on the point wherein it was held that :- In view of the finding of the Tribunal that there was no adequate material to hold that the purchase of the tobacco was not made at the market rate, it could not be said that the payment of price made by the assessee to the firm was either excessive or unreasonable. Therefore, the extra payment of ₹ 70,257 could not be added ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 40A(2) of the Act cannot be invoked. It was also stated that the total payments made to Mrs Chandana Poddar towards salary and professional fees was only ₹ 12 lakhs and not ₹ 13 lakhs as claimed by the ld AO. The ld AO observed that the assessee had failed to substantiate the reasonableness and logic for expending ₹ 13 lakhs towards Mrs Chandana Poddar and then claiming the same as business expenditure with reference to any cogent materials like educational qualification certificates, details of services provided by her to the assessee and how the same is commensurate with the prevailing market rate. He held that the payments made to Mrs Chandana Poddar were not made for the purpose of business and hence not allowable as deduction. 4.2. Before the ld CIT(A), it was argued that the total professional fees paid was only ₹ 9 lakhs as against ₹ 10 lakhs taken by the ld AO, in support of which the ledger account of the same was furnished and was pleaded that in any case, a sum of ₹ 1 lakh is to be deleted forthwith. It was pleaded that Mrs Chandana Poddar , being wife of director, was involved in business for the past several years and acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al fees respectively paid to Mrs. Chandana Poddar, one of the relatives of the director, u/s. 40A(2) of the Act and the Ld. C.I.T.(A) upheld the same without considering the objection made in the written submission that actually the professional fees paid to her amounted to ₹ 9,00,000/- and hence the excess addition of ₹ 1,00,000/- was uncalled for and needs to be deleted at the outset. (b) That the Ld. C.I.T.(A) failed to appreciate that onus of proof u/s. 40A(2) of the Act is on the A.O. who is required to prove by bringing on record cogent material that the sums paid to the relative was in excess of fair market value and that not being done, the disallowance/addition of ₹ 12,00,000/- upheld by him on that score was capricious, unjustified and bad in law. (c) That the Ld. C.I.T.(A) fell in error in having upheld the disallowance of Rs.l2,00,000/- made on the specious ground that the payments were made without any proven service with reference to professional qualification and experience in spite of the fact that Mrs. Poddar was involved in the assessee's business for the past several years, she had exposure in the assessee's line of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he following decisions :- (a) Decision of Hon ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd vs CIT reported in 26 ITR 775 (SC) (b) Decision of Hon ble Supreme Court in the case of Lalchand Bhagat Ambica Ram vs CIT reported in 37 ITR 288 (SC) 4.5. In response to this, the ld DR argued that the work that is expected of Mrs Chandana Poddar is purely technical in nature which could not be rendered without possessing the requisite technical qualifications. Hence, in the absence of filing details of educational qualification of Mrs Chandana Poddar , the payments made to her would not be allowable as business expenditure. 4.6. We have heard the rival submissions and perused the materials available on record. We find that the assessee had taken adequate precaution in providing the nature of services rendered by Mrs Chandana Poddar for and on behalf of the company in detail. None of these services purported to be rendered by Mrs Chandana Poddar were disputed by the revenue before us except merely harping only on the technical educational qualification as a pre-requisite for rendering the said services. We find that business expediency in the subject mentione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat no addition / disallowance could be made based on surmise and conjecture as per the decisions rightly relied upon by the ld AR. The principles enunciated in those decisions are not reiterated herein for the sake of brevity. We find that the ld AO had not made out a case for making disallowance under the provisions of the Act. The test of commercial expediency has to be looked into from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decisions of the Hon ble Supreme Court in the case of CIT vs Dhanraj Girji Raja Narasingherji (1973) 91 ITR 544 (SC) and CIT vs Walchand and Co. (1967) 65 ITR 381 (SC). We hold that just because the payment is made to relative of the director , the principles of the said judgement on business expediency does not get disturbed and it practically makes no difference whether the expenditure is incurred towards relatives or non relatives as long as the expenditure per se is incurred wholly and exclusively for the purpose of business. 4.6.2. With regard to another argument advanced by the ld AR that the subject mentioned payments towards salary and professional services had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt with regard to the services rendered by the secretary to Mr Nagesh, the Department could have summoned the secretary, to ascertain the fact whether any service was rendered by her. The fact remains that the agreement dated April 20, 1971, and the letter dated January 20, 1976, were not doubted by the Department. When the secretary was appointed in pursuance of the agreement and when there is evidence on record to show that services were rendered by Mrs Regina Nagesh to Mr Nagesh, there cannot be any impediment for the allowance of the salary payment made by the firm to the secretary. We find that the facts of the instant case also fall on the same footing as the facts before the Hon ble Madras High Court stated supra. 4.6.4. We also find that the decision relied upon by the ld AR on the decision of the Hon ble Allahabad High Court in the case of Abbas Wazir (P) Ltd vs CIT reported in 265 ITR 77 (All) wherein it was held that :- Whenever a claim is made by the assessee before the Income-Tax Officer for allowing an expenditure as a legitimate business expenditure, the approach of the Income-Tax Officer (or other income-tax authority) has to be that he has to lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led that the assessee had not utilized any amount of loan out of said pre-existed loan of ₹ 250 crores (before 1.4.2011) and refunded the entire principal amount on 14.6.2011 and then the interest of ₹ 5,34,24,658/- has been paid on 24.8.2011 for the period 1.4.2011 to 14.6.2011. He observed that during the period 1.4.2011 to 13.6.2011, the assessee had purchased solar equipments of ₹ 3,77,35,150/- and sold said equipments at ₹ 4,88,45,280/- and there was no opening stock and closing stock was valued at cost price at ₹ 16,47,300/- as on 31.3.2012. Accordingly he concluded that no loan amount could have been utilized for opening stock of traded items and hence proceeded to disallow the entire interest paid of ₹ 5,34,24,658/-. 5.2. Before the ld CIT(A), the assessee replied that the loan amount of ₹ 250 crores borrowed from SREI Infrastructure Finance Ltd on 31.3.2011. The entire loan received was forwarded to M/s Confident Solar P Ltd, which is a subsidiary company of the assessee company, keeping in view the strategic business purposes to strengthen and promote its existing business. The assessee stated that this lending to subsidiary co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance to companies out of borrowed funds for the purpose of acquiring the business / undertaking / properties of the assisted company. In pursuance of the aforesaid object, the assessee invested the borrowed funds in shares of Viom Networks Ltd. Accordingly, it was submitted that shares in Viom Networks Ltd were acquired in ordinary course of business and accordingly the same was correctly disclosed as stock in trade in the Balance sheet of the said company. It was further argued that it is now well settled that managing the business of companies by acquiring controlling interest therein constitutes business activity. Thus, the investment made by M/s Confident Solar Pvt Ltd in Viom Networks Ltd with a view to acquire a controlling interest therein constitutes business and accordingly the same can be held to be a profession within the meaning of section 2(36) of the Act. Reliance in this regard was placed on the decision of the Hon ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) . In the light of all these submissions together with the various case laws relied upon, the assessee pleaded that the interest paid to the tune of ₹ 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the orders of the lower authorities. 5.4. We have heard the rival submissions and perused the materials available on record. We find that the assessee borrowed interest bearing loan of ₹ 250 crores from SREI Infrastructure Finance Ltd and advanced the same to M/s Confident Solar Pvt Ltd, a subsidiary of assessee company. According to the Balance Sheet of the subsidiary company for financial year 2011-12, the said interest free loan fund received from the assessee company was shown as inventories, which constituted shares in Viom Networks Ltd, which is engaged in the similar line of business. Thus with a view to expand its business and acquire a controlling interest in Viom Networks Ltd, the assessee made investment under capital account through its subsidiary company, M/s Confident Solar Pvt Ltd. We find that the revenue had alleged that the assessee company had no business worth mentioning and hence no business was served by advancing interest free loan to its subsidiary company. Hence on the above facts, a question may arise whether such utilization of the loan can be held to be on account of commercial expediency. The answer to this question would resolve the dispute b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould have been allowed. 25. 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. 26. No doubt as held in Madhav Prasad Jatia s case (supra), 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 Jatia s case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee s deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia s case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 2 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 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 its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r concern in the shares of Viom Networks P Ltd. Therefore, the shares in Viom Networks P Ltd were acquired in ordinary course of business and accordingly we find that the same was correctly disclosed as stock in trade in the balance sheet. The assessee s reliance in this regard on the decision of the Hon ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) is well founded. We find that the ld AR also placed reliance on the recent decision of co-ordinate bench of Delhi Tribunal in the case of ITO vs First American Securities Pvt Ltd in ITA No. 4768/Del/2012 dated 11.1.2016 . We find that this tribunal after referring to several judicial pronouncements on the issue concluded as under :- We also find that it is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investments in the business entities and accordingly, it has made strategic investment of ₹ 57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. And also, this is acknowledged by the AO himself in the assessment order wherein he has ..... X X X X Extracts X X X X X X X X Extracts X X X X
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