TaxTMI 
TaxTMI 
2012 (6) TMI 623
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.... Rs. 43,98,254/- and Rs. 5,37,356/- charged u/s.234B and u/s.234C respectively." 2. The assessee is in the manufacturing and trading of industrial chemicals. The assessee filed the return of income declaring total income at Rs. 7,00,68,875/- which was selected for scrutiny and assessment was completed u/s. 143(3). As noted in the assessment order, the assessee claimed the huge interest expenses to the tune of Rs. 4,72,07,891/-. The assessee has utilized the funds of Rs. 16,66,31,589/- by way of share application money for making the investment in shares. As noted by the A.O. the assessee made the other investments apart from the above utilisation of Rs. 5,71,000/--. The A.O. observed that the utilization of the funds by the assessee was not used for day-to-day trading in shares but the borrowed funds are utilized towards investment/strategic purpose. In further opinion of the A.O. the nature of the investment is capital as the assessee will have the enduring benefits and hence, interest expenditure partakes the character of the capital expenditure. The A.O., therefore, proceeded to make the disallowance of the interest on the following grounds:- (a) the claim is a non-b....
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....application money of Rs. 13.62 crores. It was further pleaded that the cash flow from partners last year was Rs. 86.13 lakhs whereas investment in share application is Rs. 13.62 crores. The assessee also pleaded that the working capital borrowed from the banks was not used for the investment purpose and hence the entire investment/advances is made from non-borrowing funds. The assessee also pleaded that it has capitalized interest of Rs. 1,54,34,285/- out of the interest charged to the profit and loss account of Rs. 4,72,07,891/-. But that was also not considered by the A.O. The assessee also pleaded that interest on powers credit amounting to Rs. 79,31,885/- was also included for computing the disallowance by the A.O. which resulted into excess disallowance. 5. The Ld. CIT (A) was not impressed with the plea of the assessee that investments in the share application money was out of the non-interest bearing funds, but, he accepted the plea of the assessee that as the assessee has capitalized Rs. 1,54,34,285/- out of the gross interest of Rs. 4,72,07,891/- debited to the P & L A/c and he, therefore, directed the A.O. to exclude Rs. 1,54,34,285/- which was the part of the interest....
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....r opinion, the disallowance made by the A.O. is not justified. Though the Ld. Counsel argued that at the first instance the investments are made out of the borrowed funds but we find that the required data is not placed before us. So far as reliance placed by the Ld. Counsel in the decision of Reliance Utilities and Power Ltd. (supra), in our opinion, in the said case, the assessee has demonstrated that the investment was made out of the surplus funds and hence, the Tribunal accepted the plea of the assessee on facts and the same was confirmed by Their Lordship. Hence, in our opinion, in the present case, the assessee has not demonstrated the facts and figures that the non-interest bearing funds are utilized. So far as alternate plea of the assessee is considered, that the investment in the share application money is made on the commercial expediency, in our opinion, merely claim is not sufficient but the assessee has to demonstrate with the facts and figures. We, therefore, consider it fit to restore the issue to the file of the A.O. for fresh adjudication with the direction that the A.O. should confine to the issue to the extent of Rs. 2.6 crores +Rs. 5,71,000/- whether the said ....
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....stment made during the year is out of own funds. The own funds of the assessee company as on 31-3-2006 is Rs. 36.88 crores and Rs. 48.57 crores as at 31-3-2007. The investments in shares aggregating to Rs. 16.77 crore as at 31-3-2007 is out of own fund and not borrowed funds. Also, since it is an investment in a wholly owned subsidiary overseas, the investment is not eligible to exempt income such as dividend on capital gains. In view of the facts explained above, there is no application of borrowed funds towards the above referred investments. 13. It appears that the Assessing Officer was not satisfied with this explanation, and he also asked the assessee to compute as to what would be quantum of disallowance in case a proportionate disallowance of interest, so far as investment in share application money aggregating to Rs. 16.77 crores, was to be made. In reply the assessee once again made out a case to the effect that the investments are out of its own funds, and also submitted that "the interest apportionment working is submitted at your request without prejudice to assessee's contention that no borrowing costs can be attributed to the investment funds in view of the ....
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....nbsp; 1551848 1551848 Nil 282075161 * The term loan from HSBC was the loan of IDBI for building and machinery of the factory at Silvassa which was taken prior to commencement of the factory at Silvassa in December 2001. Obviously the term loan cannot be said to have been applied for advancing share application money. * The term loan from State Bank of Patiala of Rs. 11.12 crores is towards the Jammu unit and term loan from Bank of India is for Chennai which is under construction and the entire interest has been capitalised. * The working capital loan funded as at 31-3-2006 is Rs. 12.73 crores which has increased to 13.02 corres as at 31-3-2007. The net current assets as at 31.3.2007 is Rs. 49.60 crores of which 13.02 crores is funded by borrowed funds. From the above facts it is evident that the assessee has not utilised borrowed funds for investment in the wholly owned subsidiary. (v) Without prejudice to the contention of the assessee that the entire investment made in wholly owned subsidiary is out of owned funds as is evident from above stated facts, even if it is to be constructed....
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....sted to furnish the computation of disallowable portion of interest without prejudice to their claim. However, the assessee vide letter dated 17-12-2009 did not furnish the complete computation. Therefore, I am satisfied within the meaning of section 145(3) of I.T. Act, that the accounts of the assessee are incorrect and incomplete in respect of computations of disallowable interest. Therefore, the computation of disallowable interest is worked out in the manner provided u/s. 145(3) of I.T.Act as follows. As per following computation, the disallowable interest is worked out at Rs. 3,22,23,048 and this amount is accordingly disallowed. Penalty proceedings u/s.271(l) (c) of I.T.Act have been initiated separately as the assessee has furnished inaccurate particulars of income thereby concealing the particulars of income: Figures on 31-3-2007/for the year ending 31-3-2007 As on 31.3.2006 (II) Average (I) +(II) (a) share application money 166631589 139749624 153190606.50 (b) investment 571000 571000 571000 (c) Diversion of funds for non-business purposes (a+b) 153761606.50 (d) borrowed funds 282075161 168457084....
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....ellant that the AO made excessive prorate disallowance to the extent of interest capitalised of Rs. l,54,34,285 out of gross interest of Rs. 4,72,07,891 debited to the P&L account. However, I find no substance in the claim of the appellant that the AO also considered interest of Rs. 79,31,885 claimed to be on buyers' credit a/c for the purpose of impugned disallowance. The appellant has not substantiated this with any material or evidence now was it made before the AO in any manner. I, therefore, direct the AO to rework the proportionate disallowance of interest after excluding the interest of Rs. 1,54,34,285 capitalised by the appellant. The appellant gets relief to this extent." 16. The assessee is not satisfied and is in further appeal before this Tribunal. 17. A plain look at the financial statements for the assessee (pages 1 to 28 of the paper-book) shows that as at the end of the relevant previous year, the assessee had own funds of Rs. 48,57,77,712, consisting of shares capital and free reserves, and own funds of the assessee as in the beginning of the year was Rs. 36,88,44,838. There is no dispute on this elementary factual position. In this backdrop, let us take ....
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.... is not to discharge the onus to demonstrate that the investments have been made from interest free funds. Undoubtedly, in the case of Reliance Utilities & Power Ltd. (supra), Their Lordships approved the findings of the CIT(A) and ITAT to the effect that it was a case in which sufficient interest free funds were generated during the year and that sufficient interest free funds were available to the assessee. However, there was no finding by anyone that the investments have been made out of these interest free funds. As a matter of fact, Hon'ble High Court has categorically observed that, "learned Tribunal was pleased to record a finding that the assessee had sufficient funds of its own for making the investment without using the interest bearing funds and accordingly upheld the order of CIT (Appeals)" Availability of interest free funds is one thing, and direct evidence of such interest free funds being invested in investments is quite another. A plain reading of Hon'ble High Court's judgment in the case of Reliance Utilities & Power Ltd. (supra) would show that Their Lordships were dealing with the former situation, and not the latter situation. In any case, Their Lor....
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.... the above discussions, and in the light of law laid down by Hon'ble jurisdictional High Court, inference is to be drawn that investments are made out of interest free funds. In any case, assessee has given detailed explanations as to how investments are made out of interest free funds, and the Assessing Officer, or the Departmental Representative, could not point out any fallacies or errors in the computations so furnished, and have rejected the same by vague and generalized observations. I have also noted that investments are made in the share application money in a wholly owned subsidiary. Yet, the plea of commercial expediency of making this investment is rejected on the ground that "the assessee has to demonstrate (commercial expediency) with facts and figures", and the matter is remitted to the file of the Assessing Officer to consider the same on the basis of facts and figures in support of commercial expediency. I am unable to concur with this approach either. The reason is this. In the case of SA Builders Ltd. (supra), Hon'ble Supreme Court has held that even use of funds by subsidiary for its business purposes will be deemed to be for "the purposes of business" of....
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....4,28,273, in respect of interest on borrowings claimed as deduction under section 36(l)(iii ) of the Income-tax Act, 1961, should have been deleted, as held by the Accountant Member, or should have been partly deleted and partly remitted to the file of the Assessing Officer for fresh examination, as held by, and in terms of the directions set out by the Judicial Member? THIRD MEMBER ORDER R. S. Syal (Accountant Member) (As a Third Member) The following revised point of difference has been referred to me by the Hon'ble President u/s.255(4) of the I.T. Act, 1961 : "Whether, under the facts and circumstances of the case, the disallowance of Rs. 2,57,94,775, in respect of interest on borrowings claimed as deduction under section 36(1)(iii) of the Income-tax Act, 1961, should have been deleted, as held by the Accountant Member, or should have been partly deleted and partly remitted to the file of the Assessing Officer for fresh examination, as held by, and in terms of the direction set out, by the Judicial Member? " 2. The facts of the case have been elaborately set out by my ld. Brothers in their respective opinions. Still, it would be prudent to succinctly rec....
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....m, therefore, desisting from repeating the same. The ld. CIT(A), on consideration of the entire factual spectrum, came to hold that the AO made excessive pro rata disallowance to the extent of interest capitalized by the assessee itself amounting to Rs. 1,54,34,285/-. Allowing partial relief, he directed the AO to recompute the proportionate disallowable interest after excluding the interest of Rs. 1.54 crores capitalized by the assessee. 3. Not satisfied, the assessee preferred appeal before the Tribunal. The ld. Judicial Member, who passed the leading order, held that the investment made by the assessee in the earlier years could not have been taken into consideration for the purpose of making disallowance of interest in this year. He took note of the fresh investment of Rs. 2.68 crores made by the assessee in the financial year relevant to the assessment year under consideration which was invested by way of share application money. Further investment to the tune of Rs. 5.71 lakhs was also noted by the ld. Judicial Member as having been made in the current year. It was opined that if, at all, any disallowance of interest was to be made, that should be restricted to the funds u....
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....pra) has been heavily banked upon on behalf of the assessee for arguing that the business purpose or commercial expediency was proved by the very fact of the assessee investing in the share capital of its wholly owned subsidiary company. On the contrary, the ld. DR stated that mere making of investment by way of contributing to the share application of the company without anything further, did not prove the commercial expediency. He also placed reliance on the judgment in the case of S.A. Builders Ltd. (supra) in support of his contention. 5.2 In order to evaluate the rival contentions, which, in turn, are based on the case of S.A. Builders Ltd. (supra) , it becomes indispensable to find out the facts and the ratio of this judgment. The assessee in the case before the Hon'ble Summit court transferred substantial amount to its subsidiary company out of its cash credit account in which there was a huge debit balance. The AO held that the assessee had diverted its borrowed funds to a sister concern without charging any interest. Proportionate interest relating to the said amount, out of the total interest paid by that assessee to the Bank, was disallowed. The CIT(A) allowed par....
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....zation of such funds by the subsidiary company. The crucial criteria for deciding the second question is the commercial expediency, that is, "the user of such funds by the subsidiary for business purpose". It is only when answer to both the questions is in affirmative that the holding company qualifies for deduction of interest paid. If answer to the first question is in positive, the stage of finding out the answer to the second question comes. Only when the answer to the first as well as the second questions is given in positive that the ratio of this judgment applies and the holding company becomes entitled to claim deduction of interest. 5.5 It is imperative to note that the Hon'ble Supreme Court, on noting that the funds were advanced as loan by the holding company to its subsidiary company, being the answer to the first question in positive, did not straightway proceed to allow deduction of interest. As the answer to the second question was not available from facts on record, it restored the matter to the tribunal for examining it and then taking final decision. That is why it categorically observed : "We wish to make it clear that it is not our opinion that in every c....
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....by demonstrating as to how the funds received by the subsidiary from the assessee company were utilized. Position is same before the Tribunal as well since there is no documentary proof to establish the "commercial expediency". On a specific query, it was fairly admitted by the ld. AR that at no stage either the balance-sheet or fund flow statement or bank account of the subsidiary company was submitted before any authority to exhibit the utilization of funds received by the subsidiary company from the assessee. The situation would have been different if the assessee had placed sufficient material in support of its claim of business purpose in advancing the amount to its sister concern by properly documenting its claim and the AO would have failed to controvert such material. 5.8 It has been noticed from the judgment in the case of S.A. Builders Ltd. (supra) that merely having interest in subsidiary company is not enough to earn deduction u/s. 36(l)(iii ) if the borrowed interest bearing funds are advanced by the holding company to its subsidiary. Apart from that, the assessee also needs to objectively show that the subsidiary company utilized such funds for its business purpose....
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....s why there is no finding of the Bench on this aspect of the matter. The contention of the ld. DR, would require appraisal as to whether there is any difference in advancing loan on one hand and subscribing to the capital of the subsidiary company on the other, insofar as the question of granting deduction to the holding company on account of interest u/s 36(l)(iii) is concerned. Further if such contention is found to be acceptable on merits, it would mean that by investing in the share application of the subsidiary company, there is no commercial expediency. Once this view is taken, the natural consequence would be that the judgment in the case of S.A. Builders Ltd. (supra) would have no application to the facts of the case and the deductibility of interest on this score would be ruled out. At this juncture it is relevant to note the mandate of section 255(4), which reads as under :- 255(4) "If the members of a Bench differ in opinion on any point, the point shall be decided according to the opinion of the majority, if there is a majority, but if the members are equally divided, they shall state the point or points on which they differ, and the case shall be referred by t....
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....ection 255(4). Evidently, the Act does not contemplate such a situation. As formation of majority for resolving the difference between the members who heard the appeal first, is a pre-requisite condition of section 255(4), it is not possible for the third member to form a third opinion or in other words, go beyond the views expressed by the members of the bench who first heard the appeal. 6.5 I advert to the contention now raised by the ld. DR urging that the act of the assessee subscribing to share capital of the subsidiary company should be viewed as distinct from advancing loan to subsidiary company for the business purpose and hence deduction of interest on this count should be held as not maintainable. None of the ld. Members has held that the subscribing to the share capital of the subsidiary company per se can be held as non-business purpose. Whereas the ld. JM has restored the matter to the file of the AO with a direction to the assessee to demonstrate the commercial expediency, the ld. AM has held that the commercial expediency has been proved. Now accepting this contention of the ld. DR would amount to canvassing a third opinion, diverse from those expressed by the two....
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.... was made to the tune of Rs. 2.40 crores. It was argued on behalf of the assessee that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs. 418.04 crores and the assessee had also raised capital of Rs. 7.90 crores, apart from receiving interest free deposit of Rs. 10.03 crores. It was, therefore, submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee's submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders' funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, r....
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....uring the year with its wholly owned subsidiary company. The other sum of Rs. 5.71 lakhs is the amount of investment in Govt. securities/trade investments brought forward from the earlier year. From the balance-sheet of the assessee company, copy placed at page 15 of the paper book, it is palpable that the balance standing as at the end of the year on 31-3-2007 at Rs. 5.71 lakhs is equal to the same amount as standing in the immediately preceding year as on 31-3-2006. Thus, it is clear that a sum of Rs. 5.71 lakhs was not invested by the assessee in the current year. Accordingly, I am left with examining whether Rs. 2.68 crores invested by the assessee in its subsidiary company was out of interest free funds or interest bearing funds. According to the judgment in Reliance Utilities & Power Ltd. (supra), what is relevant is to consider the shareholders' funds vis-a-vis the amount of investment for non-business purpose. If the shareholders' funds and/or other interest free advances are more than the investment, then it has to be presumed that the investments came out of interest free funds available with the assessee. The balance-sheet of the assessee company is available at ....
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....non-business purpose from this overdraft account, it would increase the overdraft balance. Thus, the deposits and withdrawals both for business and non-business purposes are merged in a common bank account. In such a situation, it gets very difficult to correlate one item of withdrawal with the other item of deposit as the balance in the overdraft account keeps on fluctuating with each deposit and withdrawal. It is in such a situation that there arises a need for devising a formula for linking a particular outgo with a particular inflow. Without wandering here and there, such formula is readily available in the form of the following two judgments. 7.7 In the case of Woolcombers of India Ltd. (supra) the question was whether the Tribunal was correct in holding that a part of the interest paid by the assessee on bank overdraft account as relatable to payment of advance-tax was not an admissible deduction. In that case, the assessee had an overdraft account with the bank. The assessee paid advance-tax which increased the overdraft balance. The ITO held that the payment of advance-tax could not be treated as business expenditure and he, therefore, disallowed the proportionate intere....
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....r, as emanating from the same statement, is Rs. 24.44 crores. If I further consider the proceeds from issue of equity shares during the year at Rs. 4.60 crores, it can be easily noticed that the sum of Rs. 2.68 crores is far less than the amount of cash profits, leave aside the proceeds from issue of equity shares. In the light of the above judgments in Woolcombers of India Ltd. (supra) and East India Pharmaceuticals Works Ltd (supra), it can be held without any hesitation that no part of interest can be disallowed as the cash profits available during the year are much more than the amount invested by the assessee in share capital of its subsidiary company during the year. 7.10 I will examine this issue from a third angle as well. The assessee paid total interest of Rs. 4.72 crores. This interest was paid in respect of three broad categories of loans which have been tabulated by the ld. Accountant Member in para 13.4 of his opinion. The first category indicates the term loans taken by the assessee from the Honkong & Shanghai Banking Corporation, Bank of India and State Bank of India. Term Loans are extended for the purpose of acquisition of fixed assets viz., land, building, pla....
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....est bearing funds were utilized by the assessee for the purpose of subscribing to the share capital of its subsidiary company. On this aspect, I agree with the learned Accountant Member. 8. It has been noticed above that both the ld. Members differed on one conclusion having two different limbs viz., (a) whether business purpose was proved in terms of S.A. Builders Ltd. (supra) and; (b) whether investment was out of interest free funds. Both these limbs are in support of only one ground as to whether interest of Rs. 2.57 crores should be allowed as deduction as per ld. Accountant Member or should be partly allowed and partly restored to the file of AO for fresh examination as per ld. Judicial Member. If the assessee succeeds in proving the business purpose i.e. stage (a) above, then no disallowance of interest can be made notwithstanding the fact that funds utilized were interest free or interest bearing. Section 36(l)(iii) categorically provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession is deductible. I am not concerned with the prescription of the proviso to sec. 36(l)(iii). So long as the interest bearing funds a....