TaxTMI 
TaxTMI 
2012 (9) TMI 754
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....asi and Bhubaneshwar. In the course of its scrutiny assessment proceedings for this year, the Assessing Officer, inter alia, noted that while the assessee has not charged any interest on its advance of Rs 3,55,25,833 to a subsidiary company by the name of HHI Resorts Pvt Ltd and advance of Rs 3,32,258 to a group company by the name of United Hotel and Property Pvt Ltd. , the assessee has paid interest on secured loans taken. When assessee was asked to explain the position, the assessee submitted that the advance was given to "the subsidiary in the ordinary course of business of the assessee, since such amount is being expended by such subsidiary for the purpose of hospitality business only, in which assessee deals in", the advance was in the ordinary course of business. It was also submitted that the assessee has sufficient interest free funds in form of share capital and reserves. Reliance was also placed on Hon'ble Supreme Court's judgment in the case of S A Builders Vs C IT (288 ITR 1) in support of the propositions that it is for the assessee to decide what is commercially expedient for him, and that the advances, given for business purposes by the assessee, are required to be ....
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....d, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) held that as there was no increase in share capital and reserves of the company, it cannot be said that the assessee had sufficient interest free funds generated during the year out of which interest free advances were given. Learned CIT(A) further observed that as against interest free funds of Rs 27.17 crores, the assessee has already invested Rs 48.03 crores in fixed assets, it could also but be said that the assessee had granted interest free loans out of the interest free funds available to the assessee. Learned CIT(A) further observed that in view of the above reasoning and as "direct nexus had been proved by the AO between borrowing of loans and making interest free advances", the disallowance of Rs 37,86,614 is to be confirmed. The appeal was, accordingly, rejected on this issue. 3. Not satisfied with the stand so taken by the CIT(A), the asses see carried the matter in further appeal before a division bench of this Tribunal, and this appeal resulted in a split verdict. 4. While learned Judicial Member was of the view that since assessee's own interest bearing funds were....
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....he extent of Rs 34,70,000" and that "under these circumstances, in my considered opinion, neither the profits of the assessee during the year, nor the surplus and reserves, will serve an y purpose to contend that the assessee is having own funds to give to the sister concern". As regards the learned Judicial Member's reliance on Hon'ble Supreme Court's judgment in the case of S A Builders (supra), learned Accountant Member was of the vie w that "learned counsel appearing for the assessee has not brought on record any material on record to (establish) the fact that the loan given by the assessee company to the subsidiary company is in the commercial expediency" and that " under the circumstances, it is not fair to follow the ratio laid down by simply accepting the submission of the assessee". He then referred to Hon'ble Supreme Court's observation, in the case of S A Builders itself, to the effect that "it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern; it all depends on the facts and circumstances of the case." Learned Accountant Member then observed that "in this case, the AO has brought on recor....
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....ree funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.'s case (supra) where a similar issue ha d arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such ....
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.... interest paid on borrowings, on account of grant of interest free advances to the subsidiary companies, on the facts of this case. In my considered view, the C IT(A) was indeed in error in holding that the assessee did not have sufficient own funds to advance the interest free advances to the sister concerns. 10. As regards the second limb of the point of difference between my distinguished colleagues i.e whet her or not "the CIT(A) is justified in confirming the action of the AO by stating that the funds used by the sister concerns are not for commercial expediency", I find that there are no findings by the CIT(A) about commercial expediency, or lack thereof, of advancing interest free advances to the sister concerns. The point of difference, therefore, proceeds on the fallacious assumption that the CIT(A) did adjudicate on this issue. Undoubtedly, this aspect of the matter is important for the reason that in case the fact of commercial expediency of advancing interest free advances to the subsidiary companies is established, even if one is to come to the conclusion that interest free advances to the subsidiary companies are out of the borrowed funds, interest on borrowed fund....
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....company of HHI Resorts Pvt Ltd, had a deep interest in the subsidiary and that the advances given to the subsidiary company were for the purposes of business. When an assessee gives an interest free advance to a one hundred percent owned subsidiary for its business purposes, it cannot but ordinarily be said to be commercially expedient. As noted by Their Lordships in S A Builder's case (supra), "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". Of course, there has to be some material to show that the funds advanced to the subsidiary company were used for some business purposes, but then the Assessing Officer did not probe this aspect of the matter but simply rejected the commercial expediency of the interest free advance on the ground that construction was not possible on the plot owned by the subsidiary company. The objection taken by the Assessing Officer was devoid of any legally sustainable merits, but....
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....though assessee was paying interest on secured 'loan taken. The reply submitted by the A/R is reproduced below: Your good self-had enquired us to the reason for not charging interest on the loan given to subsidiary companies amounting to Rs. 3,55,25,833/- & Rs. 3,32,258/- outstanding as on 31.03.2007. In this respect, this is to submit that such amount given to such subsidiary is in the ordinary course of the business of the assessee since such amount is being expended by such subsidiary for the purpose of hospitality business only in which the assessee deals in. Since the said sum is for the purpose of business hence the assessee had given such interest free to such subsidiary. Without prejudice, the assessee has substantial interest free find in the firm of share capital and reserve and commercial expediency of the sum so advanced can only be decided by the assessee. Indeed, Hon'ble Apex Court in the case of S. A. Builders Ltd. v. CIT(2007) 288 ITR I (SC) has already held that "it is only the assessee who can decide as to the affairs of the business and nobody else can sit in the chair of the assessee to decide the same ". Indeed Hon'ble Apex Court held so in the case of an as....
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....(A): "6.1. 1 have carefully considered the submission of the L.d A.r and the reason mentioned by the A.O for making disallowance,, The claim that interest- free funds available with assessee were more than that of interest free advances and that no part of borrowed capital was diverted towards interest-free advances was considered There has been no increase in the share capital and the reserve of the Company has also been advanced decreased. Hence it cannot be said that assessee had interest-free funds of its own which had been generated in course of year commencing from 1.4.2006. Accordingly the claim of the assessee that the loan has been advanced from the existing share capital, reserve & surplus amounted to Rs.5,56,43,400/- & Rs.21,61,28,161/- respectively totaling to Rs.27,17,71,561/- and hence the interest free advances of Rs.3,58,58,091/- to the sister concern is from interest free fund has no relevance. Moreover against the shareholders fund and reserve & surplus totaling to Rs.27,17,71,561/- the existing investment of the Company in fixed asset is Rs.48,03,46,443/-. Hence taking all the factors into connection and since direct nexus had been proved h the AO between the ....
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....nerated in course of year commencing from 1.4.2006. Accordingly the claim of the assessee that the loan has been advanced from the existing share capital, reserve & surplus amounted to Rs.5,56,43,400/- & Rs.21,61,28,161/- respectively totaling to Rs.27,17,71,561/- and hence the interest free advances of Rs.3,58,58,091/- to the sister concern is from interest free fund has no relevance" 18.5. However, in order to establish the availability of own funds of assessee to lend the same to the sister concern the relevant/correct basis is the scrutiny of the cash flow statement for the whole year. In this case assessee has himself has given the consolidated fund flow statement which were placed at page 45 of the paper book. The opening cash balance as on 1.4.2006 of Rs.2,23,01,497/- has been reduced to Rs.1,88,31,497/- as on 31.3.2007. The extract cash flow statement is as under :- "a) Cash Flow from Operating Activities : Rs.69,007,614/- b) Cash Flow from Investing Activities : Rs.10,017,237/- c) Cash Flow from Financing Activities : (-) Rs.82,494,851/- Net(Decrease)Increase in cash and Cash Equivalents (a+b+c) : (3,470,000) Cash and Cash Equival....
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....iary is in the commercial expediency. Under this circumstances it is not fair to follow the ratio laid down by simply accepting the submissions of assessee. Since in the case of S.A.Builders the Hon'ble Supreme Court has categorically mentioned that "It is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case." In this case apparently the AO brought on record that the subsidiary company who received interest free loan from assessee company has not used the said loan for business expediency and the ld. Counsel appearing on behalf of assessee has not brought any contrary material to the specific findings of the ld. AO. Therefore, in my considered opinion the ratio laid down by M/s. SA Builders is also not applicable to the present facts of the case. 19.2. However, on careful verification of the disallowance made by AO it is observed that AO has made the disallowance based on the closing balance of Rs.3,55,25,833/- which includes the opening balance of Rs.10,21,000/-. Therefore, in my considered opinion the disallowance to the extent of int....
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....e of employees' contribution to P.F u/s. 2(24)(x) r.w.s. 36(1)(va) of the Act. For this, assessee has raised following ground no.1: "1.For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary addition of Rs.1,10,224/- made in assessment u/s. 2(24)(x)/36(1)(va) of the Act on a/c of alleged belated deposit of Employees' contribution to P.F. without considering the facts in the matter and such action of Ld. CIT(A) is bad in law and it may kindly be held accordingly." 4. We have heard rival submissions and gone through facts and circumstances of the case. The Ld. Counsel for the assessee before us argued that these payments have been made within the due date of filing of return u/s. 139(1) of the Act, but these dates are not available in either of the orders of the authorities below. Hence, he stated that the matter can be remitted back to the file of Assessing Officer for verifying the dates whether the payment is made within the due date of filing of return of income u/s. 139(1) of the Act or not. We find that the issue is squarely covered in favour of assessee and against the revenue by the decision....
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....late order: "4.1. I have carefully considered the submission of the Ld. A. R. There is no dispute that the only expenditure which is related to the accounting year under consideration has to be allowed against the declared receipts except the expenditure which was not crystallized in earlier accounting years. The expenditure in question pertains to F.Y 2003-04 & F.Y. 2004-05. The mistake if any was to be rectified within the time allowed in the Act. Further the assesee has failed to prove that the expenditure in question was crystalizd only in the accounting year in question. Considering above the disallowance of Rs.5,10,339/- made by the A.O. is confirmed. Accordingly ground no. 3 is dismissed." At the outset, Ld. Counsel for the assessee fairly conceded that this expenditure is related to the receipts for accounting year 2003-04 and 2004-05 and not to the relevant assessment year 2007-08. Hence, he stated that these are not allowable in this year. The assessee's counsel in all his fairness conceded this position and accordingly, we dismiss this issue of assessee's appeal. 6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowa....
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....ence it may kindly be held accordingly." 9. The brief facts leading to the above issue are that during financial year 2006-07 relevant to assessment year 2007-08, year under consideration, the assessee advanced interest free loan amounting to Rs.3,55,25,833/- to its subsidiary company HHI Resorts Pvt. Ltd. and further Rs.3,32,258/- to group company United Hotels & Property Pvt. Ltd. The AO during the course of assessment proceedings required the assessee to explain why no interest has been charged on loan advanced to group companies whereas it was paying interest on secured loans. The assessee replied that such amount was given to subsidiaries in the ordinary course of business of the company, since such amount is being expended by these subsidiaries for the purpose of business i.e. hospitality business or for construction of hotels. Hence, the assessee has not charged any interest for such advance from subsidiary companies. Even otherwise it was argued that the assessee has substantial interest free funds in the form of share capital, reserves and surplus and profits of the year. For commercial expediency the assessee relied on the decision of Hon'ble Apex Court in the case of ....
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.... a hotel plot and this advance was made to its sister concern for the purpose of carrying out construction of hotel for the purpose hospitality business, which in turn, will help the assessee company in its business. We find from the accounts of the company, as contended and produced before us in assessee's paper book, that there are assessee's own funds available in the shape of share capital, reserve and surplus and profits of the relevant year, which are more than the amount advanced to its subsidiary as interest free. In that eventuality no disallowance can be made and for this, we are relying on the decision of Hon'ble Apex court in the case of Munjal Sales Corporation Vs. CIT (2008) 298 ITR 298 (SC), wherein Hon'ble Apex Court has considered the issue as under: Application of the 1961 Act to the facts of this case As stated above, in this batch of civil appeals we are concerned with the assessment years 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. At this stage, it may be mentioned that as far back as in August/September, 1991, the assessee herein had given interest-free advances to its sister concerns. These advances stood reduced over a period, till the assessment ....
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....at the loans were given to the sister concern by the assessee-firm out of its own funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The opening balance as on April 1, 1994, was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs." We find from the above judgment of Hon'ble Apex Court and the facts of the present case before us that the assessee has advanced loans to its subsidiary during the year out of its own funds i.e. the share capital, reserve and surplus and profits of the year, which are more than the amount of advance to subsidiaries, as noted the facts above. Once it is a fact that the amount advanced as interest free is out of assessee's own funds no disallowance of deduction claimed u/s. 36(1)(iii) can be made. 11. Another facet of arguments made by Ld. Counsel that there is business expediency and for this he argued that the assessee is engaged in the business of running and managing of hotels and such subsidiary companies were s....
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....of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a pru- dent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (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 ....
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.... 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; (vii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant and germane material having a bearing on the facts and circumstances of the case" We further find that the Tribunal, Kolkata Bench on the self same facts in the case of Sagrika Goods & Serv....