TaxTMI 
TaxTMI 
2004 (6) TMI 589
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....er of the Tribunal in the assessee company's own case for the assessment year 1988-89 vide order dated 9-8-2000 wherein in paras 2 to 5, the disallowance of Rs. 50,000 stands deleted. The case of the assessee further stands supported by the following judgments:- 1. CIT v. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom.) 2. First, ITO v. French Dyes & Chemicals I. (P.) Ltd. [1984] 10 ITD 240 (Mum.) (SB) 3. CIT v. Indian Aluminium Cables Ltd. [1989] 183 ITR 611(Delhi). In view of the above, we decline to interfere and dismiss this ground. 4. Ground No. 2 reads as under:- "On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that the deduction for proportionate premium should be allowed on pro rata basis without appreciating the fact that the premium is to be paid on the redemption of debentures at the end of 7 years period and no such liability has crystallized during the previous year." 5. We find that this issue also stands covered in favour of the assessee-company by the above-mentioned order (Paras 13 to 17). The case of the assessee also stands fortified by the following cases:- ....
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.... learned CIT(Appeals) relied upon the decision of the Bombay High Court in the case of CIT v. Favre-Leuba & Co. Ltd. [1979] 120 ITR 898, and the decision of the Delhi High Court in the case of Addl. CIT v. Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 70. 9. Shri RIS Gill, the learned Departmental Representative strongly supported the order of the learned Assessing Officer. He submitted that the action of the Assessing Officer is justified as the income by way of interest on advances made to its subsidiaries and other customers by the assessee company cannot be treated as income from business. In support of this contention, he relied upon the judgment of the Bombay High Court in the case of Godavari Sugar Mills Ltd. v. CIT [1991] 191 ITR 359, Judgment of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 110 and in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1999] 227 ITR 172 . 10. Shri Dinesh Vyas, the learned Counsel for the Assessee submitted that in the course of assessee's business of hoteliers, the assessee company gave advances to its own group companies with which the assessee company had an ongoing business relationship, namely, in the ....
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....ness is derived from an "eligible business" and if the assessee has out of such income utilized any amount during the previous year for the purpose of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent. Of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with sub-section (5) of section 32AB." 13. It is clear from the above observations that deduction under section 32AB can be availed of in respect of profit of such eligible business as computed in the accounts of the assessee which are audited in accordance with sub-section (5) of section 32A. It has further been observed by the Hon'ble Supreme Court that:- "The dispute in the present case is in regard to the question whether the assessee's investment in the UTI is business, and if so, is it a business which qualifies to be an "eligible business" under section 32AB? In regard to the first aspect, we must note that the Tribunal as a question of fact based on material on record has come to the conclusion that the investment in the UTI by the assessee-company is in the course of its business and its business of m....
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....ppeals) erred in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company." 17. The facts of the case here are that the assessee had charged interest from its subsidiary companies at the rate of 6% which according to the Assessing Officer was much below normal rate of interest paid by the assessee and charged by other parties. It is also stated by the Assessing Officer that the assessee itself claimed huge deduction on account of interest payment. Hence, it was not justified for charging concessional rate of interest on advances to its subsidiaries. The Assessing Officer further held that as the advances to subsidiaries were not made for specific business purpose of the assessee, the money advanced to them could have been utilized to reduce assessee's own interest liability. In view of the above, the Assessing Officer disallowed the sum of Rs. 25,11,807 being the difference between the interest charged from subsidiary companies and the normal rate of interest. 18. On appeal, the learned CIT(Appeals) deleted the addition observing as under:- "Since the assessee-company is i....
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....of giving advance forms integral part of complete hotelier business which is the core, fundamental and only business of the assessee-company. In fact, from a business point of view, no concession was provided with regard to the advances made to the subsidiary companies which made investment in shares of other companies having business dealings with the assessee-company. This resulted ultimately in assessee being benefited to an immensely larger extent than the concession in the rate of interest. It is the prerogative of the businessman how to run the business and it is not open to the Revenue to prescribe what expenditure an assessee should incur and in what circumstances he should incur. Every businessman knows his interest best-CIT v. Dhanrajgiriji Raja Narasingirji [1973] 91 ITR 544 (SC). In the case of CIT v. Premier Auto Finance (P.) Ltd. [1981] 128 ITR 540 (Delhi), the assessee, which carried on the business of finance of vehicles had borrowed monies and claimed deduction of interest paid thereon in the computation of its profits. Out of the borrowed monies, the assessee had itself advanced a sum of Rs. 1,02,003 to another company 'D'. The Tribunal found that 'D' was a dealer....
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.... (supra) and (ii ) Doctor & Co.'s case (supra), we find that the facts in these cases are distinguishable from the facts of the case of the assessee. First of all, both the Judgments have taken note of the earlier Judgment in the case of Bombay Samachar Ltd. (supra) and have tried to distinguish the same, but none of the Judgments states that the law laid down in the case of Bombay Samachar Ltd. (supra), is no more good law. In the case of Shankar Theatres (supra) at page 146, the Hon'ble High Court has observed as under :- "In the Bombay Samachar Ltd.'s case, the admitted position was that the capital borrowed by the assessee from outsiders was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilized for the purposes of advancing loans to any component of the company." 25. Similarly, in Doctor & Co.'s case (supra), the Hon'ble Bombay High Court, referred to the case of Bombay Samachar Ltd. (supra) and noted that "the amounts advanced to the sister concerns on the assessee's own admission, were partly out of borrowed funds". But none of the two Judgments talk of or take into consideration the commercial expediency ....
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.... that deduction under section 80HHD was allowable in respect of income from services provided to foreign tourists only. He, therefore, asked the assessee vide letter dated 12-9-1990 to show that in its claim for deduction under section 80HHD, it had not included receipts from people visiting India from abroad on business trips. The Assessing Officer held that the assessee had not furnished the required details and he estimated 10% of the total receipts in foreign currency declared by the assessee as being from foreigners visiting India on business trips. 30. On appeal, the learned CIT (Appeals) held that as per clause (a) of sub-section (1) of section 80HHD, the words used are "foreign tourists" and it would not be correct to say that the word "tourist" can only imply to visitors from abroad who have come on pleasure trip. According to the learned CIT (Appeals), it has necessarily to include a visitor from abroad who has come on business trip and he accordingly directed the Assessing Officer to allow deduction under section 80HHD as claimed by the assessee. 31. Shri RIS Gill, the learned Departmental Representative supported the order of the learned Assessing Officer. 32. ....
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....um of Rs. 25,11,807 made on account of differences between interest charged from subsidiary and normal rate of interest. This ground has been dealt by the learned Accountant Member in his order in paragraphs 14 to 23. The Assessing Officer disallowed this amount with the following observations : "19. Rate of Interest charges from subsidiary companies.-Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concealed rate of interest on advances, to its subsidiaries. As the advance to subsidiaries are not made for any specific business purpose of the assessee, the money is advanced to them could have been utilized to reduce assessee's own interest liabilities. In view of this, the difference between interest charged from subsidiary and the normal rate of interest coming to Rs. 25,11,807 is disallowed." 3. In an appeal before CIT(A), it was pleaded that through resolution of Board of Directors, the interest was charged at the rate of 6% on loan/....
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....ecific business purpose of the assessee does not appear to be justified. In view of the ratio of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd., the Assessing Officer's action of holding that the appellant-company ought to have charged interest @ 15% instead of 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed." 4. The order of learned CIT(A) in this regard has been upheld by the learned Accountant Member on the basis of decision in the case of Bombay Samachar Ltd. (supra) and Premier Auto Finance (P.) Ltd. (supra). 5. During the course of hearing a reference was made to following two decisions of Hon'ble Bombay High Court in the case of Shankar Theatres (supra) and Doctor and Co. (supra). 6. In both the above-mentioned decisions, the Hon'ble High Court has considered the decision in the case of Bombay Samachar Ltd. (supra). In the case of Shankar Theatres (supra), the observations of Hon'ble Bombay High Court regarding decision in the case of Bombay Samachar Ltd. (supra) are as follows : "In the Bombay Samachar Ltd.'s case, the admitted posi....
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....tion in disallowing the interest payment. In the said case the assessee was able to establish business purpose, inasmuch as, the assessee was advancing money to another company for the purposes of taking delivery of vehicles. After taking the delivery of vehicles, the assessee was receiving back the money from another company. Thus, the facts of the decision in the case of Premier Auto Finance (P.) Ltd. (supra) cannot be said to be on all fours to the facts of present case. In the present case no such nexus has been shown. In the present case, the assessee has made simple arguments that by way of advancing monies to its subsidiary company, the assessee was able to earn huge operating fees. There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and CIT(A) was not right in deleting the disallowance following the decision in the cases of Bombay Samachar Limited (supra) and Premier Auto Finance P. Ltd. (supra). In my ....
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....ny into the shares of other public companies. Your assessee company operates several hotels belonging to other companies as a hotel operator and earns substantial fees therefrom. Out of the annual net profit before tax of Rs. 1087.4 lakhs, Rs. 656.44 represents receipts by way of operating fees from various hotels operated by the Indian Hotels Co. Limited which are treated as part of the famous Taj Chain. It is purely with a view to ensure continuity in the operating agreements which is immense business value to the assessee-company, that the assessee-company has via its wholly owned subsidiary invested Rs. 264.06 lakhs in the shares of various concerns, only a small fraction of which may represent investments in shares of the companies not operated by the assessee-company, yet having sufficiently intimate nexus of business interest. It is for this reason that the assessee-company has advanced monies to Taj Investments and Finance Co. Limited whose balance sheet appears at page 52 of the full printed Accounts. A reference to this will reveal that the investment block of Rs. 264 lakhs matches, in value, the aggregate of issued capital and unsecure....
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....essee-company in the course of its business of hoteliering. We, therefore, submit that no addition can be made to the returned income of the assessee for the difference between the normal rate of interest and the rate of interest actually charged by the assessee- company to its wholly owned subsidiary. Finally, it is submitted that as assessee cannot be said to make profit from itself and a wholly owned subsidiary is virtually itself and, therefore, the Indian Hotels Co. Limited cannot be said to make profit from itself i.e. Taj Investments and Finance Co. Limited." 5. The Assessing Officer did not find force in the above contentions and made an addition of Rs. 25,11,807 with the following observations : "19. Rate of interest charges from Subsidiary Companies :- Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concessional rate of interest on advances to its subsidiaries. As the advances to subsidiaries are no....
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.... be justified. In view of the ratio of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd. the Assessing Officer's action of holding that the appellant-company ought to have charged interest @ 15% instead of 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed." 8. The revenue being aggrieved brought the issue in appeal before the Tribunal. After hearing both the parties, the learned Accountant Member, as per his proposed order, upheld the view taken by the learned CIT (Appeals) in the impugned order. He held that act of giving advances forms integral part of hoteliers' business. In that light, no concession was provided with regard to advances made to the subsidiary company, which made investment in shares of other public limited companies having business dealing with the assessee-company. This way the assessee was benefited to a large extent and was compensated for the concession in the rate of interest allowed. The learned Accountant Member further observed that it was the prerogative of the businessman how to run his business and it was not open to the revenue ....
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....d and the CIT(A) was not right in deleting the disallowance....." With the above observations, the learned Judicial Member restored the order of the Assessing Officer in his proposed order. 10. On account of above difference, the matter has been referred to me under section 255(4) of the Income-tax Act, 1961. I have heard Shri Boota Singh, the learned Departmental Representative for the revenue and Shri Dinesh Vyas, Senior Advocate on behalf of the assessee. I have also perused the proposed orders of the learned Members and other materials on record, to which my attention was drawn. Shri Boota Singh strongly relied upon the proposed order of the learned Judicial Member. He submitted that the assessee diverted borrowed funds on which it had to pay interest at the rate of 15%. No borrowed fund was diverted in the case of Bombay Samachar (supra) and, therefore, the said decision has no application. In fact, he submitted, the matter in issue is fully covered against the assessee as per the decisions of the Hon'ble Bombay High Court in the case of Doctor & Co. (supra) and Shankar Theatres (supra) and the decision of the Delhi High Court in the case of Premier Auto Finance (P.) Ltd. (....
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....ital which is lent to the subsidiary company is not allowable." He next relied upon the decision of the Kerala High Court in the case of CIT v. V.I. Baby & Co. [2002] 254 ITR 248, wherein disallowance of interest on borrowed funds was upheld on account of diversion of funds for non-business purposes. Lastly, he relied upon the decision of the Allahabad High Court in the case of CIT v. H.R. Sugar Factory (P.) Ltd. [1991] 187 ITR 363 to support the proposed order of the learned Judicial Member. 11. Shri Dinesh Vyas, Senior Advocate appearing for the assessee, opposed the above submissions. He referred to the letter dated 3-2-1992 filed before the Assessing Officer, wherein the circumstances under which the amount was advanced to the subsidiary company were explained. Shri Dinesh Vyas submitted that none of the facts stated by the assessee in the said letter were challenged by the Assessing Officer. Therefore, the observations made by the learned Judicial Member to the effect that borrowed funds were utilized to advance loans to the subsidiary company and that there was no nexus between these loans and business of the assessee were factually incorrect. Out of the net profit of R....
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.... Rs. 8,08,000.00 Rs. 34,08,000.00 Thus loans were advanced to make the subsidiary company earn profit so as to give reasonable return to the assessee, besides earning operational fees which was the main income of the assessee. Shri Dinesh Vyas also relied upon the following decisions :- 1. Cadbury Fry (India) Ltd.'s case (supra) 2. Tata Chemicals Ltd. v. Dy. CIT 72 ITD 1 (Mum.) 3. Bombay Samachar Ltd.'s case (supra) 4. CIT v. Pudukottai Co. (P.) Ltd. [1972] 84 ITR 788 (Mad.) 5. Dhanrajgiriji Raja Narasingiriji's case (supra) 6. Favre-Leuba & Co. Ltd.'s case (supra) 7. Snam Progetti S.P.A.'s case (supra) 8. D & H Secheron Electrodes (P.) Ltd. v. CIT [1983] 142 ITR 528 (MP) 9. Shankar Theatres' case (supra) 10. Doctor & Co.'s case (supra) 11. CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 616(Cal.) 12. CIT v. Jardine Henderson Ltd. [1994] 210 ITR 9813 (Cal.) 13. CIT v. Tata Chemicals Ltd. [2002] 256 ITR 395 (Bom.) 14. Kejriwal Enterprises v. CIT [2003] 260 ITR 341 (Cal.). He in particular referred to the decision of the Tribu....
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.... of the High Courts it was not possible to view the investments in the tax-free bonds as representing a utilization of the borrowed capital for non-business purposes. Therefore, the disallowance of Rs. 20.35 crores was deleted. The interest claimed could not be allocated in the manner done by the Assessing Officer. The amount had to be considered and allowed under the head 'Business'." 13. Shri Dinesh Vyas further pointed out that the aforesaid decision was approved by the Bombay High Court in Tata Chemicals Ltd.'s case (supra). Further the Special Leave Petition filed by the Revenue against the decision of the Bombay High Court was not admitted by the Supreme Court as per their order dated 28th March, 2004, a cutting from Economic Times of aforesaid date was filed before me in proof of this claim. 14. I have carefully considered the rival submissions of the parties in the light of material available on record. The short question involved here is whether the assessee, on the facts and circumstances of the case, was justified in charging interest at 6% or a higher rate of interest should have been charged to give extra income of Rs. 25,11,807, the amount added in the income of....
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....advanced to directors, it would have been available to the assessee for its business purposes and to that extent it might not have been necessary to borrow from the banks. The aforesaid decisions, as noted earlier, was rendered on the peculiar circumstances where there was extraordinary abuse of borrowed funds by the directors of the company for their personal and non-business purposes. No business purpose of the company was served in that case. I find no similarity of facts to apply the above decision to the case in hand. 16. The Revenue as well as the learned Judicial Member placed further reliance on the decisions of the Hon'ble Bombay High Court in the case of Shankar Theatres (supra ) and also in the case of Doctor & Co. (supra). In the aforesaid decisions borrowed funds were diverted and advanced to partners of the firm and to sister concern. The interest paid was disallowed as not having been utilized for purpose of business by the assessee. In both the cases no question was raised and no claim was made that advances were made for purposes of business and, therefore, the question involved in the present case was not at all considered in those cases. The cited cases are....
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....ncern or by a company to its directors or their close relatives. In the case of 100% subsidiary of the company, the profit of the subsidiary belongs to the company and if a higher rate of interest is charged, this would go down to reduce the profit. If no interest is charged the same amount would be returned in the shape of profit. This aspect has to be kept in view while determining the question whether advancement of loan is a measure of business expediency. I further find force in the submission of the assessee's learned counsel that the distinction has to be kept in mind, of a case, where loan is used for purpose of business, and of case of loan misutilized by giving it interest-free or at a nominal interest to its directors, their relations and other sister concerns. In the latter situation, interest can be disallowed, but not in the case where advances are made to a subsidiary company for purposes of business. 18. In the present case, the assessee has elaborately explained that on account of restrictions on investment in its hands to buy shares of other public limited companies from whom the assessee was receiving operation fees, the subsidiary company was used to buy abov....