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TMI Blog2021 (9) TMI 1162X X X X Extracts X X X X X X X X Extracts X X X X ..... cular financial requirements of SPVs. Further, he was also unable to controvert the regarding revenue receipts, which are extraordinary receipts compared to the expenditure incurred by the assessee. Assessee has given interest free loans/advances from interest bearing account which was not a debit balance i.e. loan funds have been utilized for advancing to its subsidiary, fellow subsidiary ultimate holding co. and to others. Assessee was unable to establish the use of the funds for business purposes as per the decision relied on by the ld. AR of the assessee. He also unable to establish the commercial expediency as observed supra, in all the years the assessee has not received any dividend or interest income and has not produced any agreements between / amongst the companies to whom the loans and advances were made and what was the purpose for giving loans and advances. The assessee failed to produce documentary evidences, the end use of funds invested in subsidiary, fellow subsidiary, ultimate holding company and to others. We also do not find any weightage on the submission of the ld. AR of the assessee that assessee had sufficient own funds for giving loans and advances and inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als under consideration, are as under: "1. "Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in holding that the financial charges be allowed as business expenditure even though there was no business expediency?" 2. "Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in deleting the addition when the Assessing Officer concluded in his assessment order that the money borrowed on which interest was paid was actually not for business purposes of the assessee? 3. "Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in deleting the addition when there was absolutely no nexus between the expenditure claimed by assessee and the business of assessee?" 4. "Whether, on the facts and circumstances of the case and in law, the CIT(A) is correct in applying S.A. Builders case, where the facts are totally opposite and Assessing Officer clearly distinguished this case while disallowing the expenditure?" 5. Any other ground that may be urged at the time of hearing." 4. Brief facts as taken in AY 2011-12 are that the assessee company is engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .70 crores. Thus, it is clear that the funds borrowed from bank were utilized for the purpose of investment in equity shares and interest free loans and advances. As held in the case of CIT Vs Amritaben R.Shah (Bom) 238 ITR 777, the interest paid on borrowed capital for purchase of shares is not allowable. Thus, it is clear that the assessee invested the monies borrowed from banks to earn exempt income by investing in equity shares. However, the A.R submitted that the interest was earned on the deposits pledged for business purpose hence if the financial charges are disallowed the interest income earned on deposits may be set off given. Accordingly, the financial charges debited to P&L a/c were not allowable and it was proposed to disallow the same from the loss returned. 5. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and contended inter-alia, that in the immediately preceding AY 2010-11, the CIT(A) allowed assessee's claim and in AY 2012-13, the AO also allowed the assesse's claim. Complete submissions of the Assessee, were extracted by the CIT(A) at pages 4 to 11. 6. After considering the submissions of the assessee, the CIT(A) deleted the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancy fee' of ₹ 28 crore and interest income of ₹ 6.56 crore. Just as in the case of AY.2010-11, the assessee did not earn any 'Management fee' for the year under appeal i.e., A.Y.2011-12 also. The fact of accepting assessee's explanation for the A.Y.2012-13 and not accepting its explanation for AY 2010-11 and also for relevant AY 2011-12 clearly shows that the sole reason for non-acceptance seems to be nonearning of 'Management fee' for these assessment years. 5.4. As it can be seen from the facts for the year under appeal i.e., A.Y 2011-12, the assessee did not earn any management consultancy fees but earned interest income of ₹ 2.34 crore and admitted it as business income. According to the AD, the assessee has not shown any business income and that interest income of ₹ 2.34 crore was shown under 'other sources.' The AD was of the view that the borrowed funds are utilised for purchase of shares and not for the purpose of business and applying the case of Amritaben's case (supra), observed that interest paid on 'borrowed capital' for purchase of shares is not allowable and therefore disallowed the entire interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is extracted as under. "5.3. It was held by the Supreme Court in the case of SA Builders (supra) that a loan extended without being under a legal obligation to do so cannot always be seen as a diversion of business funds or application of borrowed funds for non-business purposes. If such outflows can be explained in terms of commercial expediency, they have to be seen as admissible business expenditure. In addition to the decision of the Supreme Court in the case of Rajendra Prasad Moody (supra) that earning of income is not a precondition to decide the allowability of expenditure incurred U/S 57(iii) or 37(1), the above cited decision in the case of SA Builders settles the matter in assessee's favour. The assessee-company has explained these investments with reference to objectives of securing managing control and with reference to a business model of investing in SPVs. It is not the case of the Assessing Officer that these loans were extended to the Directors for their individual assets or any such comparable deployment. In fact it is seen from Schedule-6 to the Balance Sheet as at 31.3.2010 that the new/incremental investments for the year are in the equity/preference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income has to be disallowed and cannot be treated as business expenditure". Therefore, it is submitted that disallowance is called for even in cases where investments are made to maintain dominant interest or for protection of interest. 2. It is humbly submitted that the appellant obtained working capital loan of about ₹ 100.9 Cr from Bank of India, Mumbai and short term loan of about ₹ 76.67 Cr from India Infoline Investment Services Ltd. The appellant also availed unsecured loans to the extent of about ₹ 7.29 Cr from Bank of India and UCO Bank. The said loans were not utilized for making investments and advances to Group Concerns. In F.Y: 2009-10, the investments were to the tune of ₹ 256. 25 Cr as compared to ₹ 128.59 Cr in F.Y: 2008-09. The funds for making the investments were clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y studies, fuel assessment, tie-up and monitoring, logistic support and various services required by the power plants and in turn enjoys development fees in line with actual power generation supported and achieved. A lead lag could exist between incurrence of expenditure, providing the necessary service and revenue realisation against such services. Also, exploiting the business opportunity provided by the government policy of encouraging the Special Purpose Vehicle (SPV) route particularly in the power sector, the appellant-company invests in the SPVs which construct and operate infrastructure facilities that support power generation. 8.1 The Ld. AR submitted that the appellant-company apart from investing in equity, also advances loans/ICDs to meet the particular financial requirements of SPVs. In order to meet the financial requirements of SPVs, the appellant-company raises funds through issue of equity/preference shares and also through loans from banks/financial institutions as well as unsecured loans from sister concerns. The banks after considering the business model and the financial viability of the company, advances the required funds.' The appellant company not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le laid down by the Apex Court, the expenditure incurred by the appellant deserves to be treated as expenditure laid out wholly and exclusively for the purpose of business u/s 37(1). 8.4 The Ld.AR submitted that for AY 2012-13, similar interest expenditure to the tune of ₹ 50.94 crores was claimed as a debit in the Profit and Loss account which was accepted by the Assessing Officer and he did not resort to disallowance of interest in the assessment order u/s 143(3) dt.27-3-2015. 9. In the re-joinder, the ld. DR submitted that the case law relied by the AR is not applicable to the case of the assessee because the facts are different in those case laws. He therefore, contended that the disallowances deleted by the CIT(A) without examining the cases in depth with case law relied by the AR of the assessee with the present facts in the impugned assessment years is unjustified and he requested that matter may be sent back to AO for further depth examination. 10. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The facts of the case and submissions of the appellant have been carefully considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rticipants in the co-operative effort either directly or though the transmlssion1ines of Electricity Boards or any other authorities by entering iota appropriate arrangements. 4. To purchase. lease acquire, sublease. act as agents, sell, license any mine. mining •. rights. mines and lands in India or elsewhere believed to contain coal and lignite and to prospect. explore, excavate, open and work mines, drill and sink shafts or wells in connection with carrying on the business of the company." 10.1 In all these years under consideration, there is only one issue involved regarding disallowance of interest. The AO observed that the assessee has utilized the borrowed funds other than the purpose for which it was taken. Considering the arguments from both the sides, we observe from the financial statements of the assessee that it has given loans and advances and invested in shares of the related parties and to others from its own funds as well as from the borrowed funds. From the entire arguments of the ld. AR of the assessee, we find that it was unable to quantify the amount of borrowed funds which have been utilized for other than the business purposes of the assessee. Further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer was justified. Accordingly, the appeal filed by the revenue was allowed and the appeal filed by the assessee was dismissed. 7. Against the order of the Tribunal, the assessee filed appeals in the High Court which were dismissed by the impugned judgment. 8. In the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of ₹ 82 lakhs advanced in the assessment year 1990-91, a further sum of ₹ 37,85,000 had been advanced to M/s. SAB Credits Ltd. which also had a clear nexus with the amounts borrowed by the assessee on payment of interest. Accordingly, the Assessing Officer disallowed proportionate interest relatable to these amounts amounting to ₹ 20,08,836. 9. On appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer that the sum of ₹ 37,85,000 advanced during assessment year 1990-91, was relatable to the borrowed funds. However, in view of the findings of her predecessor in assessment year 1990-91, that out of ₹ 82 lakhs advanced during that year, advance of ₹ 64 lakhs had no nexus with the borrowed funds, she reduced the disallowance from ₹ 20,08,836 to ₹ 10,03,538 vide he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urse of funds 16-9-1989 683366 24.00 lakhs State Bank of Patiala, CC Account Amount received from R.C.I., Hyderabad, a client 25-9-1989 684404 18.00 lakhs -do- From cash credit account (Debit balance account) 27-12-1989 676546 20.00 lakhs -do- From Indian Acrylics Ltd., a client 12-1-1990 476582 20.00 lakhs -do- -do- ₹ 82.00 lakhs 14. Learned counsel for the appellant submitted that a perusal of the above tabular statement makes it apparent that such payments as claimed were in fact received and deposited. Thus, there is no direct nexus between the amount borrowed by the appellant-assessee from the bank and the loans advanced by the appellant-assessee to its sister concern, as no amount was so advanced by raising an interest bearing loan. 15. Learned counsel submitted that the High Court has erred in not considering the categorical finding of the CIT(A) in this regard. He further stated that the CIT(A) in its order dated 15-4-1993 had given a clear finding of fact that except a sum of ₹ 18 lacs there was no clear nexus between the amount received on interest and the interest free advance made to M/s. SAB Credits Limited. He further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing profits" videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 32. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. It is clear from the above judgement that the interest free loans/advances was given to its sister concern only out of debit balance from over draft account as per para no. 12. Further, we find that in the said judgement at para No. 13, the entire interest free loan was not given from the interest bearing account. Whereas, in the case on hand, the assessee has given interest free loans/advances from interest bearing account which was not a debit balance i.e. loan funds have been utilized for advancing to its subsidiary, fellow subsidiary ultimate holding co. and to others. Therefore, facts of the case of the said judgement do not apply to the facts of the case under consideration. In regard to commercial expediency, we find that as per para 35 of the said judgment, the assessee should have deep intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the benefit it derives from each sister concern to which loans were advanced and the financial plight of such business concerns deserving interest-free advances, we do not know how the test of business expediency is satisfied. The Tribunal has just accepted the argument of the assessee that the sister concerns were in financial difficulties and the cheques issued by them could be honoured only with the interest-free advances made by the assessee. We have to necessarily accept the argument of the Standing Counsel that the Tribunal has decided the case without verifying facts available on record and by assuming arguments as true facts. The settled law is that interest on borrowed funds can be allowed under section 36(1) (iii) of the Income-tax Act only if it is for business purposes. Admittedly the funds borrowed were not used directly for the business of the assessee and the only question is whether interest-free advances made to sister concerns is also a business purpose. The Supreme Court has held that if loan is justified by applying the principle of commercial expediency, then claim can be allowed. We are of the view that it is for the assessee to establish the interest it has i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roduced an iota of evidence to prove that it has mortgaged its property, and on its classification of funds as NPA, it would affect the assessee's profitability. Being so, we are not in a position to uphold the argument of the Ld. AR on this issue. Further, the judgment of the Supreme Court relied on by the Ld. AR in the case of Munjal Sales Corpn. (supra) cannot be applied to the facts of the assessee's case. In that case, the issue was with regard to allowability of interest u/s. 36(1 ) (iii) subject to provisions of section 40(b )(iv) of the I. 1. Act. Hence, this ground of appeal of the assessee is rejected." 10.2 We observe from the financial statements that the assessee company itself is a subsidiary company and it has given advances to its subsidiaries, fellow subsidiaries, ultimate holding company and to others and invested in shares also. The AR of the assessee was unable to establish the use of the funds for business purposes as per the decision relied on by the ld. AR of the assessee. He also unable to establish the commercial expediency as observed supra, in all the years the assessee has not received any dividend or interest income and has not produced any agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Net Block Capital work in progress (including capital advances) 855,337 183,440 671,897 255,000,000 855,337 102,579 752,758 251,150,000 255,671,897 251,902,758 Investments 1,892,896,949 2,562,552,301 Current Assets, loans and advances: Cash and bank balances Other current assets Loans and advances Less: Current liabilities and provisions Current Liabilities Net current assets Profit & loss account 1,229,581,791 25,568,330 1,877,003,467 475,008,273 2,657,145,315 890,661,820 69,099,181 2,134,638 700,200,296 458,757,840 312,676,275 201,411,035 5,696,375,981 3,328,542,369 Schedules to the profit & loss account Description 31st March 2011 31st March 2010 Other income: Interest on deposits (gross) (Tax deducted at source ₹ 277,714; March 2010 - ₹ 600,180) Dividend received Profit on sale of investments Liabilities no longer required written back 23,459,730 112,620 6,570,252 1,046 3,526,633 196,722 5,587,615 1,937,703 30,143,648 11,248,673 Administration and other expenses: Rates and taxes Repairs and maintenance - others Consultancy and other professional charges Communication expenses Travelling and conve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices Travel and conveyance Miscellaneous expenses 1,946,545 536,376 7,500 15,927 5,363 61,344 1,962,602 1,184,790 8,427 19,303 15,783 93,411 2,573,055 3,284,316 Finance Costs: Interest expense on fixed period loans On others Other borrowing costs 1,351,317,135 172,102,214 4,673,608 938,331,124 213,133,590 2,762,377 1,528,092,957 1,154,227,091 10.4 In view of the above observations, the disallowance of interest made by the AO is justified and accordingly, we set aside the order of the CIT(A) and restore the order of AO in all the appeals under consideration. Thus, the grounds raised by the revenue in all the appeals, on this issue are allowed. 11. In the result, all the appeals of revenue are allowed. A copy of this common order be placed in the respective files. 12. We lastly acknowledge that although the instant appeals are being decided after a period of 90 days from the date of hearing as per Rule 34(5) of the IT(AT) Rules 1963, the same however, does not apply in the covid lockdown situation as per hon'ble apex court's recent directions dated 27-04-2021 in M.A.No.665/2021 in SM(W)C No.3/2020 'In Re Cognizance for extension of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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