TaxTMI 
TaxTMI 
2015 (10) TMI 22
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....3 and 2003-04 respectively. 2. The Assessee is engaged in the business of providing cellular services in the Delhi Region. The Assessee actually commenced its business from June, 2002. During the AY 2002-03 the Assessee availed of financing facilities from the HSBC Bank, Barakhamba Branch, New Delhi. HSBC's sanction letter dated 2nd August 2001, a copy of which has been placed on record, offered the Assessee a combined credit limit of Rs. 340 crores. The fixed rate of interest was 11.5% for the first year but the letter mentioned that this was "an indicative rate and will be firmed up closer to date of drawdown." The interest was payable quarterly. The terms and conditions set out in the Appendix to the said sanction letter stated inter alia that the Assessee could advance the funds availed by it to any other concern, other than in the usual course of business, after receiving the bank's prior approval. 3. By a Board Resolution dated 5th November 2001, it was resolved that the Assessee would make available to its holding company Sterling Cellular Limited (SCL) a sum of Rs. 100 crores on terms and conditions to be decided by the Director of the Assessee. The Assessee h....
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.... these funds of Rs. 25 crores" had been given to SCL. The AO referred to the decision in Tuticorin Alkali (supra) and held that the interest paid to the bank would have been treated as business expenses but since the business was yet to commence they would form part of the pre-operative expenses to be capitalised. The interest earned from advancing of the loan to SCL would be taxed separately as income from other sources. The AO accordingly made an addition of Rs. 78,86,987/- to the income of the Assessee for AY 2002-03. 7. The Assessee took the matter in Appeal to the Commissioner of Income Tax ['CIT (A)']. The CIT (A) by separate orders dated 13th October 2010 for AY 2003-04 and 15th July 2011 for the AY 2002-03 concurred with the corresponding orders of the AO. The CIT (A) held that "there is no nexus between the expenditure incurred and the income sought to be earned in the instant case." Observing that the interest expense related to the pre-operative period and the giving of loan to SCL was not the business activity of the Assessee, the CIT (A) held that SCL on its own could have approached the bank for loan. 8. The ITAT passed the impugned common order in the t....
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....ve debentures of the face value of Rs. 50 lakhs carrying interest @ 5% per annum issued by the company which were redeemable at the option of the registered holder at any time. The company sought to adjust the 5% interest paid to Mr. Scott against its income under Section 12 (2) of the 1922 Act by treating it as "expenditure incurred solely for the purpose of making or earning such income, profits or gains". 12. After the company lost both before the ITAT and the High Court, it appealed to the Supreme Court. The Supreme Court in Eastern Investments Limited (supra) inter alia held that it was not necessary, for the purposes of Section 12 (2) of the 1922 Act, to show that the expenditure was a profitable one or that in fact any profit was earned. It was enough to show that "the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business." It was further held that the mere fact that the conversion had the effect of diminishing the taxable income of the company was not a proper consideration particularly when the tr....
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....e expenditure "should fructify into any benefit by way of return in the shape of income." The Supreme Court answered the question urged in the affirmative, i.e., in favour of the Assessee and against the Revenue. 16. In S.A. Builders Limited v. Commissioner of Income Tax (Appeals) Chandigarh (2007) 1 SCC 781, the Assessee company had advanced loans to its subsidiary without charging any interest. The loans were transferred out of the cash-credit account of the Assessee in which there was a debit balance. The AO disallowed the proportionate interest earned on the said loan out of the total interest paid to the bank by the Assessee. The disallowance for both the AYs, although partially modified by the CIT (A), was upheld by the ITAT which observed that there was no material on record to show that the Assessee had derived any business advantage by advancing the interest-free amounts to its subsidiary. The High Court upheld the order of the ITAT. 17. Reversing the aforementioned orders and remitting the matter to the ITAT for a fresh decision, the Supreme Court in S.A. Builders Limited (supra) explained that expression 'commercial expediency' was of wide import and includ....
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....eposits with the various banks and financial institutions. The company then sought to set off the expenditure incurred on repayment of the interest on the loans against the interest earned on the short term deposits. It was held that while the company may be entitled to capitalise the interest paid by it during the pre-operative phase, it could not claim the adjustment of the said expenditure against the income assessable as 'income from other sources'. Importantly, it was noted that the company had "chosen not to keep its surplus capital idle, but has decided to invest it fruitfully" and that "the fruits of such investment will clearly be of revenue nature." It was held that the expenditure incurred by the company for the purpose of setting up its business in the pre-operative phase cannot be allowed as deduction, nor can it be adjusted against any other income under any other head. 20. The legal position as regards deduction under Section 57 (iii) of the Act of expenditure laid out or expended wholly or exclusively for the purpose of making or earning 'income from other sources' may be summarised as under: (i) For the purpose of the deduction in terms of Sec....