2006 (7) TMI 515 - AT - Income Tax

Assessee's Interest Deduction Dismissed; Professional Fees Disallowed as Capital Expenditure

Sushmita Holdings Ltd. Versus Joint Commissioner of Income-tax, Special Range 32, Mumbai

Sushmita Holdings Ltd. Versus Joint Commissioner of Income-tax, Special Range 32, Mumbai - [2007] 14 SOT 425 (MUM.) Issues Involved:1. Disallowance of interest expenditure of Rs. 1,23,85,617 out of the total claim of Rs. 2,01,64,247.2. Disallowance of professional fees amounting to Rs. 75,00,000.Detailed Analysis:1. Disallowance of Interest Expenditure:The assessee-company, engaged in the business of investments, claimed a deduction for interest expenditure amounting to Rs. 2,01,64,247 under section 36(1)(iii) of the Income-tax Act. The Assessing Officer (AO) disallowed Rs. 1,23,85,617 of this amount, allowing only Rs. 77,78,630 under section 57(iii). The AO found that the assessee had received an advance of Rs. 34.90 crore from Mafatlal Industries Ltd. (MIL) towards subscription of shares, which was not allotted but retained, incurring interest. The assessee used Rs. 15.60 crore to invest in Gujarat Gas Carbon Company Ltd. and Rs. 19.35 crore was given as an interest-free advance to Vibhadeep Investments & Trading Ltd. (Vibhadeep). The AO disallowed the interest related to the interest-free advance given to Vibhadeep, citing no business necessity and the lack of an agreement for the loan.The CIT(A) upheld the AO's decision, stating that the advance subscription was diverted to Vibhadeep to claim interest deduction, which was a colorable device to reduce tax liability. The CIT(A) referenced the case of K. Somasundaram & Bros. v. CIT, where interest on diverted funds not used for business purposes was disallowed. The Tribunal agreed with the CIT(A), noting that the borrowed funds were not used for the assessee's business but diverted to a sister concern without any business benefit. The Tribunal concluded that the interest expenditure was not allowable under section 36(1)(iii).However, the Tribunal directed the CIT(A) to reconsider the assessee's claim under section 57(iii) for the proportionate interest related to the actual utilization of the borrowed funds for purchasing shares, provided the transaction was not a colorable device.2. Disallowance of Professional Fees:The assessee claimed a deduction of Rs. 75,00,000 paid to Mafatlal Industries Ltd. (MIL) for restructuring expenses incurred by McKinsey & Co. The AO disallowed this amount, stating it was capital expenditure and had no nexus with the assessee's business, which primarily earned interest and dividend income. The CIT(A) upheld the AO's decision, adding that the assessee had not incurred the expenditure directly and there was no legal liability to share the expenses.The Tribunal confirmed the CIT(A)'s findings, noting the lack of evidence showing the assessee's agreement to share the expenses or any benefit derived from the restructuring plan. The Tribunal emphasized that the assessee failed to establish the expenditure was incurred wholly and exclusively for its business purposes under section 37.Conclusion:- The Tribunal dismissed the assessee's claim for deduction under section 36(1)(iii) but restored the claim under section 57(iii) to the CIT(A) for reconsideration.- The Tribunal upheld the disallowance of professional fees, confirming the CIT(A)'s decision.