TaxTMI 
TaxTMI 
2016 (6) TMI 385
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....year 2007-2008, the assessee had filed its return of income on 29.10.2007 disclosing total income of Rs. 13.02 crores(rounded off). Return was taken in scrutiny by the Assessing Officer. During the scrutiny assessment, the Assessing Officer noticed that the assessee had purchased shares worth Rs. 7.86 crores (rounded off) of a subsidiary company one Dinesh Remedies Ltd. The Assessing Officer in this connection conveyed to the assessee as under : "It is noted that the assessee has not charged any interest on the above said investment in shares. Vide order sheet entry dated 9.12.2009 it was requested to show cause as to why interest should not be charged on the said investment." 3. The assessee responded by stating that the investment in Dinesh Remedies Ltd., of Rs. 4.96 crores has been made out of the internal accruals of the company during the current financial year. No loan has been taken for making such investment. The investment was made with intention to earn income. Mere fact that no income was earned during the year would not mean that no benefit would accrue to the assessee in future also. The investment was made for business purpose. Interest of 1.91 crores (rounded off....
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....d for the business of the assessee. It is for supplementing the cash diverted without deriving any benefit out of it. Therefore, the assessee is not entitled to claim interest on the borrowings to the extent those are invested in the equity shares of the subsidiary concern. Therefore, the interest to the extent of investment in subsidiary company is disallowed at the rate on which the assessee is paying interest on its interest bearing funds and added back to the total income of the assessee. The assessee is paying interest at the rate of 9.5% on its borrowing. Therefore, interest at the rate of 9.5% is charged on investment made in subsidiary company. The disallowance comes to Rs. 66,97,495. Penalty proceedings u/s.271(1)(c) of the Income Tax Act, 1961 are separately initiated." 5. The assessee carried the matter in appeal. CIT(Appeals) allowed the appeal making the following observations : "7.1 Before me the appellant has objected for this disallowance. It has been stated that out of Rs. 7,86,99,950/investment in subsidiary company as amount of Rs. 2,90,99,950/was made in earlier years for which no interest was disallowed in those years. It was further stated that an investme....
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....." 7. Before us learned counsel Shri Soparkar for the assessee submitted that the assessee had sizeable interest free funds for investment which were utilised for investment in the subsidiary company. The Assessing Officer as well as the Tribunal committed a serious error in disallowing the same. Certain borrowings were made during earlier assessment years. Such funds were invested for business purpose. Deduction of interest under section 36(1)(iii) of the Act was allowed. He relied on the following decisions of this Court : 1) Commissioner of Income taxII v. Hitachi Home and Life Solutions (I) Ltd reported in (2014) 41 taxmann.com 540 (Gujarat). 2) Commissioner of Incometax v. Raghuvir Synthetics ltd reported in (2013) 354 ITR 222 (Guj). 8. On the other hand, learned counsel Shri Parikh supported the view of the Tribunal contending that the assessee failed to demonstrate that interest free funds were available for diversion to sister concern. The principle laid down by the Supreme court in case of S.A. Builders Ltd. v. Commissioner of Incometax (Appeals) and another reported in (2007) 288 ITR 1 (SC) would not apply. 9. Facts emerging from the record are quite clear. The ....
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....f Raghuvir Synthetics ltd (supra), Division Bench of this Court following the decision of Supreme Court in case of S.A. Builders Ltd.(supra), upheld the view of the Tribunal rejecting the appeal of the Revenue on the ground that substantial interest free funds were available, the Commissioner and the Tribunal also considered the question of business expediency. In case of Hitachi Home and Life Solutions (I) Ltd (supra), the Court held and observed as under : "4. Learned counsel Ms. Mauna Bhatt has fervently urged that the Tribunal had held the funds to be mixed funds and therefore, disallowances had been rightly made by the Assessing Officer, which were not to be disturbed. The Tribunals holding that Rule 8D could not have been invoked is contrary to its own finding, and therefore, deletion needs to be quashed. Reliance is placed on the decision of Delhi High Court in case of Maxopp Investment Limited v. Commissioner of Income Tax, reported in [2012] 347 ITR 272 [Delhi], wherein, introduction of Rule 8D is held prospective in nature. However, it has been held therein that the Assessing Officer if is not satisfied with the correctness of the claim of the assessee in respect of the....