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TMI Blog1995 (11) TMI 117X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and is also a shareholder of the assessee-company. Examination of the printed copy of the balance sheet shows that the assessee has made investment in two of its subsidiary companies to the extent shown as below: 1. Virarch Holding Pvt. Ltd. Rs. 20,00,800 2. Vikrant Holding Pvt. Ltd. Rs. 20,00,800 . Rs. 40,01,600 The investment made by the assessee-company in the above-mentioned two subsidiaries is in respect of the purchase of shares as indicated below: Investment in Virarch Holding Co. . 8 equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 . Rs. 20,00,800 Investment in Vikrant Holding P. Ltd. equity shares of Rs. 100 each Rs. 800 20,000 4% redeemable non-cumulative preference shares of Rs. 100 each fully paid-up Rs. 20,00,000 Rs.20,00,800 On going through the balance sheet of the above-mentioned two subsidiaries, it has been seen that each of the said two subsidiaries has advanced an amount of Rs. 20,00,000 to A.P. Industries Investment P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. The assessee is aggrieved by the confirmation of disallowance to the extent of Rs. 81,906 and the Revenue is aggrieved by the relief granted by the CIT(A) by restricting it to Rs. 81,906 out of the total disallowance of Rs. 7,20,000. 7. The learned counsel for the assessee submitted that the AO has grossly erred in disallowing Rs. 7,20,000 by presuming that the funds borrowed from the bank have been diverted for investment in the two subsidiary companies for acquiring preference shares of those companies. The amount invested in the two subsidiary companies for purchase of preference shares directly came from the loan of Rs. 40 lakhs received from A.P. Industries Investment Pvt. Ltd. To corroborate the contention, he invited our attention towards the copy of bank statement, the extracts of which has been reproduced at page 5 of the order of the CIT(A). The said entries in the bank statement reveals that there is a credit entry of Rs. 40 lakhs on 28th April, 1984, and on the same date there are two debit entries of Rs. 20 lakhs each. This shows that there was a direct nexus between the said sum of Rs. 40 lakhs borrowed from M/s A.P. Industries Investment Co. Ltd. with the inves ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o APL and M/s APL then had given a loan of Rs. 40 lakhs is a scheme which was designed with the sole motive of avoidance of tax liability. The principles of law laid down by the Hon'ble Supreme Court in the case of McDowell are clearly applicable. The CIT(A) ought to have confirmed the entire disallowance of Rs. 7,20,000 made by the AO out of interest expenditure. He submitted that the assessee made investments of Rs. 20 lakhs each in the two subsidiary companies for acquiring redeemable non-cumulative preference shares which did not produce any income to the assessee in the years under consideration. Those two subsidiary companies in turn have given loan of Rs. 20 lakhs each to M/s APL on interest at the rate of 3%. The income of Rs. 60,000 generated by these two companies was washed away by way of salaries including salary of Rs. 48,000 debited in the accounts of these two subsidiary companies as payable to its Managing Director, Director who are relatives of the Directors and the assessee-company. The same amount which belongs to the assessee was routed through these two subsidiaries and M/s APL and the amount came back to the assessee in the form of a borrowing from M/s APL on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate of 4% per annum. 9.2. The Dy. CIT(A) submitted a report to the CIT(A) vide letter dt. 5th Dec., 1990, during the course of hearing of the appeal for asst. yr. 1986-87. It has been admitted by the AO before the CIT(A) that with regard to the quantum of interest, the AO has calculated the same at the rate of 18% on Rs. 40 lakhs which does not appear to be correct. He, therefore, submitted before the CIT(A) that at the most interest disallowable will come to Rs. 81,096. 9.3. In view of the aforesaid facts and in view of the concession made by the AO, before the CIT(A) the ground raised by the Revenue in its appeal has no merit and, therefore, the same deserves to be rejected. 10. Coming to the ground raised by the assessee in its appeal in relation to this point, we find that the transaction made by the assessee-company by way of investment in the two subsidiary companies for acquiring redeemable preference shares of Rs. 20 lakhs each is an independent transaction. The loan transaction made between the two subsidiary companies with M/s APL by which both those companies advanced loan of Rs. 20 lakhs each on interest is a separate and independent transaction. The genu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the two subsidiary companies did not produce any income is also of no consequence or that by itself cannot justify disallowance of interest on funds borrowed from APL for investment made in the two subsidiary companies. Such a principle of law has been laid down by the Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Mody. The Hon'ble Supreme Court in the aforesaid judgment has clearly held that where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies, interests on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(iii) of IT Act, 1961, in computing its total income under the head income from other sources. The same principle would apply even if the investment is regarded as a business investment and the income therefrom is held to be assessable as income from business. After considering the submissions made by the learned representative of the parties and after going through the various judgments relied upon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... passed by him observed that the assessee has been paying bonus at the rate of 20% right from asst. yr. 1980-81. Most of the assessments have been made under s. 143(1) but some assessments have been made under s. 143(3) as in asst. yrs. 1981-82 and 1984-85 wherein such bonus has been allowed by the Department. The CIT(A) further observed that the bonus which is not covered by the Bonus Act may not be admissible under the first proviso to s. 36(1)(ii) but the same can still be allowed under the second proviso provided the bonus payment is reasonable with reference to the pay of employees and the conditions of the service, the profit of the business and the general practice in similar business or profession. The CIT(A) also placed reliance on judgment of Kerala High Court in the case of CIT vs. P. Ali Kunju M.A. Nazir Cashew Industries (1987) 62 CTR (Ker) 206 : (1987) 166 ITR 611 (Ker). In view of the aforesaid discussions and the judgment, the CIT(A) directed the AO to allow the claim of bonus after ensuring that the three conditions laid down by the Hon'ble Kerala High Court are satisfied in the case of the appellant. 14.2. We do not find any infirmity in such a view taken by ..... X X X X Extracts X X X X X X X X Extracts X X X X
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