AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2013 (3) TMI 534
X X X X Extracts X X X X
X X X X Extracts X X X X
....on which notional interest is to be disallowed, summarily disregarding the facts and submissions of the appellant that the amount was advanced in the course of business of the appellant. 3. Briefly the facts relating to raise this ground are that the assessee is stated to be engaged in the business of manufacturing and dealing of all types of electrical and electronics and computer hardware and software systems. The assessee had filed its return of income on 21/10/2007 declaring total income at Rs. 27,66,870/-, which was processed u/s 143(1) and thereafter assessment was completed us/ 143(3) of the Act assessing the total income at Rs. 53,02,570/-. During the course of assessment proceedings the AO observed that assessee had taken loan from SIDBI for acquisition of shares of M/s Sameera Electronics Pvt. Ltd. a 100% subsidiary of the assessee company for which it had paid Rs. 16,91,958/- and claimed the same as financial expenses. The AO had noted that these expenses were not incurred for the purpose of assessee's existing business. The AO further noted that the assessee had classified these shares as 'investment' in balance sheet, therefore its contention that acquisition of share....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er observed that the assessee itself has classified these shares as "investment" in balance sheet and not under the head 'Fixed assets' and therefore its argument that interest was paid on borrowed money for purchase of shares and for acquisition of controlling interest is baseless. The A.O. further noted that there was no increase in turnover of the business in the current year as compared to the earlier year. A.O. held that the appellant out of this investment can receive dividend which is exempt income and hence no revenue will be generated out of this investment, A.O. further stated that since the appellant is paying service charges to Sameera for utilizing its premises/infrastructure ,the acquisition of shares cannot be related to the use of Sameera's assets since it is not free of cost. Before me it was submitted that the shares were acquired only for the purpose of effective utilization of premises/infrastructure which was financed by the loan from SIDBI on which interest was paid. However, I do not agree with the contention of the appellant since the share transfer agreement dated 06.09.2006 clearly states that this agreement is being made with a view to make investments an....
X X X X Extracts X X X X
X X X X Extracts X X X X
....usive in determining the nature of income. It is further submitted that the AO has erroneously relied on the classification in the balance sheet and ignored the fact that the acquisition of shares for the purpose of business. The assessee had acquired the shares of Sameera Electronics Pvt. Ltd. which is subsidiary of assessee company and also a loss making company, no prudent businessman invests in loss making company. It is further submitted that the loan was taken for the purpose of business, for that he relied on the paper book at pages 58 & 59. It is submitted that the assessee had acquired the shares of Sameera only for immediate necessity of business and, therefore, the interest paid thereon either allowable u/s 36(1)(iii) or 37 of the Act. The learned counsel for the assessee relied upon the following decisions: 1. CIT Vs. Jardine Henderson Ltd., 210 ITR 981 (Cal.) 2. ATE Enterprises Ltd. Vs. JCIT, 102 ITD 112 (Bom.) 3. CIT Vs. Rajeev Lochan Kanoria, 208 ITR 616 (Cal.) 8. On the other hand, the learned DR submitted that the assessee had acquired the capital asset with an interest to earn dividend income and therefore, the interest paid thereon has to be capitalized. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e shares in Sameera to effective control in that company. It is a fact that the assessee has entered into a separate agreement with M/s Sameera Electronics Pvt. Ltd. for utilization of premises and rent was also paid. When the assessee has paid charges for using of the premises, it cannot be said that the shares acquired by the assessee is for the purpose of the business of the assessee and, therefore, allowable u/s 36(1)(iii) of the Act. Therefore, in our considered opinion, acquiring shares in Sameera Electronics Pvt. Ltd. by the assessee is not connected for the purpose of business. Therefore, the acquisition of shares in Sameera Electronics Pvt. Ltd. is not for the purpose of the business and the interest paid thereon is not allowable either in the section 36(1)(iii) or section 37 of the Act. In so far as the case laws relied upon by the learned counsel for the assessee is concerned, in the case of CIT Vs. Jardine Henderson Ltd., [1994] 210 ITR 981 the Court has held as under:- "It was categorical f inding of the Tribunal that the borrowal for the purchase of shares was for the managing agency business of the assessee and to retain its grip over the managing agency business. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is because of these facts, the Chairman of assessee company was on the Board of Trumac' as non-executive Chairman and could get sole selling agency for the distribution of the products manufactured by Trumac. Since it was main source of income, it was natural for a prudent man to safeguard its business interest. Therefore, if the assessee decided to increase its holding in Trumac' In our opinion, the assessee was guided by business consideration to safeguard its selling agency. If shares are purchased by outsiders then there is possibility that outsider may jeopardize th business interest of assessee company. Therfore, in our opinion, act of borrowing money for the acquisition of shares was closely connected with or incidental to the carrying on the business. Consequently, the conditions of allowing deduction u/s 36(1)( iii) stood satisf ied. 11. The assessee also relied on the CIT Vs. Rajeev Lochan Kanoria (supra) wherein the Court has held as under:- "Held, that directorship is nothing but a vocation. The assessee was admittedly a director of several controlled companies. The activity of controlling, managing, administering and f inancing companies is nothing but a busin....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... assssee that the own funds are used for the purpose of interestfree loans. For this, he relied on the decision of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities Power Ltd., 313 ITR 340 wherein it was held that if there are funds available both interest free and overdraft/loans taken, then a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds are sufficient to meet the investments. 18. On the other hand, the learned DR submitted that the issue may be remitted to the AO to examine whether the assessee is having sufficient interest free funds or not. 19. We have heard both the parties, perused the record and gone through the orders of the authorities below. The issue raised by the assessee, i.e. assessee having sufficient own funds, was neither examined by the AO nor by the CIT(A). Therefore, in the interest of justice, we set aside the order of the CIT(A) and restore the issue to the file of the AO with a direction to examine the issue and decide the same after considering the decision Hon'ble Bombay High court in the case of Reliance Utilities and Power (supr....