TaxTMI 
TaxTMI 
2016 (8) TMI 739
X X X X Extracts X X X X
X X X X Extracts X X X X
....not admissible either u/s. 36(1)(iii) of 57(iii) of the Income-tax Act, 1961 merely because shares were never allotted to the appellant in response to the share application? [B] Whether on the facts and in the circumstances of the case, Income-tax Appellate Tribunal was right in law in confirming the disallowance of interest of Rs. 2,93,665/-?" It may be noted that the amounts mentioned in the above questions are in relation to Tax Appeal No.474/2006. In Tax Appeal No.475/2006, the amount is Rs. 4,91,955/- and in Tax Appeal No.476/2006, the amount is Rs. 5,17,730/-. 3. Since all these appeals arise out of a common order passed by the Tribunal and the facts and contentions are also common, the same were taken up for hearing together and are decided by this common judgment. For the sake of convenience, reference is made to the facts as appearing in Tax Appeal No.474/2006. 4. The assessment years are 1996-97, 1997-98 and 1998-99 respectively. The appellant - assessee is a private limited company incorporated under the provisions of the Companies Act, 1956 and is engaged in the business of manufacturing and trading in industrial gases. For assessment year 1996-97, the assessee fi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....the view that this was a case of the assessee borrowing interest bearing funds and transferring the same to its sister concern in the guise of share application money. He, accordingly, held that the interest expenses claimed in the profit and loss account are certainly not for business purpose and, therefore, cannot be allowed as deduction in computing income for income-tax purposes. The Assessing Officer noted that the assessee had paid Rs. 2,93,665/- as interest on the loan taken from the Baroda Peoples' Co-operative Bank Limited and had submitted bank certificate in this regard. Since the Assessing Officer had for assessment year 1997-98 disallowed such interest on loan, he placed reliance upon the said order and also disallowed the interest for the year under consideration. Being aggrieved, the assessee carried the matter in appeal before the Commissioner of Income Tax (Appeals), Baroda who by an order dated 27th September, 2002 allowed the appeal by placing reliance upon the earlier order passed by him in relation to assessment year 1997-98 and 1998-99. Revenue carried the matter in appeal before the Tribunal, which reversed the order of the Commissioner (Appeals) and restored....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... utilised for business purpose, the interest will have to be allowed as deduction. Reliance was placed upon the decision of the Bombay High Court in the case of Commissioner of Income-tax v. Reliance Communications Infrastructure Ltd., (2012) 21 taxmann.com 118 (Bom.), wherein the Tribunal had held that the investments were made in the wholly owned subsidiary and money advanced to RIL was for furthering the business of the assessee. The court found that the findings of the Commissioner (Appeals) and the Tribunal were consistent with the judgment of the Supreme Court in the case of S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals), (2007) 288 ITR 1. The court held that where the assessee, as held in the said case, has significant interest in the business of the subsidiary and utilises even borrowed money for furthering its business connection, there was no reason or justification to make a disallowance in respect of the deduction which is otherwise available under section 36(1)(iii) of the Act. Reliance was placed upon the decision of the Bombay High Court in the case of Commissioner of Income Tax v. Srishti Securities (P) Ltd., (2010) 321 ITR 498, wherein the court placed ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Ltd., (1980) 125 ITR 227, for the proposition that once it is established that capital was borrowed for the purpose of business, it is immaterial how that borrowed capital was applied because all that clause (iii) of section 36(1) requires is that borrowings, on which interest is paid, should be for the purpose of business. The court agreed with view adopted by the Tribunal that though the income from dividend has to be assessed under a separate head, payment of interest by the assessee on amounts borrowed for the purpose of investments must be allowed as business expenditure, and not as an expenditure incurred for earning dividends. It was, accordingly, urged that the Commissioner (Appeals) had rightly held that the amount advanced to the sister concern for the purpose of share application money was allowable under section 36(1)(iii) of the Act and that the Tribunal was not justified in deleting the same. 6. Opposing the appeals, Mr. K.M. Parikh, learned senior standing counsel for the respondent, invited the attention of the court to the findings recorded by the Assessing Officer to submit that the Assessing Officer has come to the conclusion that the assessee had borrowed inte....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Tax v. Leena Ramachandran and Homfit, (2011) 339 ITR 296, wherein the Tribunal had held that the assessee was entitled to deduction of substantial amount paid towards interest on borrowed funds utilised for acquisition of shares in a company of which the assessee acquired controlling interest upto 90% in the course of ten years. The court noted that the interest paid by the assessee during the previous year for the funds borrowed for acquisition of shares in the company was at the rate of 24% per annum and the total interest paid in the accounting year alone was as much as Rs. 17,44,310/- whereas the assessee has received dividend income of Rs. 3,00,000/- and no other benefit was derived by the company for the business carried on by it. The court observed that the disallowance prohibited under section 14A is expenditure incurred for earning any income which does not constitute total income of the assessee. In other words, any expenditure incurred for earning any income which is not chargeable to tax is not an allowable expenditure. Dividend income is exempt under section 10(33) of the Act and so much so, dividend earned by the assessee on the shares acquired by her with her borrowe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ereinabove. At this juncture, it may be germane to refer to the findings recorded by the Commissioner (Appeals) while allowing the appeal for assessment year 1997-98 which are as follows:- "2.2 I have considered the facts of the case and submissions of the appellant's counsel. It is seen that there is no dispute on the point that the money advanced by the appellant to the said concern was out of loan from a bank on which the interest was paid. It is noted to be considered whether the advance of money was in the form of interest free loan. In this regard, it is seen that the appellant has applied for 4,29,000 shares of the said concern on 8.5.1995 and paid full face value of the shares. The shares were not allotted as it is claimed that the said concern wanted to expand its business by setting up a project at Daman, but the same could not be done because of recession in the share market and other unfavourable market conditions. The mere fact that the shares were not allotted would not change the character of money given. There is nothing on record to doubt that the appellant did not apply for the shares of the said concern and in absence of any material to show otherwise it would ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....issioner (Appeals) and the Tribunal, it appears that it is an admitted position that the appellant had advanced borrowed funds to the sister concern towards allotment of shares of the sister concern. The purpose behind this investment in acquiring shares was the expansion of the business of the assessee by acquiring controlling interest in the sister concern. The assessee had applied for 4,29,000 shares of the sister concern on 8th May, 1995 and paid full face value of the shares. The sister concern wanted to expand its business of setting up a project at Daman but the same could not be done because of the recession in the market and other unfavourable market conditions, and hence, the shares were not allotted to the assessee. In the aforesaid background, despite the fact that the assessee had applied for shares and had paid the amount for allotment of shares from the borrowed funds, such shares were not allotted and the amount was returned to the assessee. The Tribunal has held that in view of the fact that no shares were ultimately allotted to the assessee, the interest would not be an allowable deduction to the assessee. Both, the Assessing Officer as well as the Tribunal, have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... was whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. The court was of the view that the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It was noted that it has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. The court held that the expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. The court agreed with the view taken by the Delhi High Court in the case of CIT v. Dalmia Cement (B) Ltd., (2002) 254 ITR 377 (Del.), that once it is established that there was nexus between the expenditure and the purpose of the business (which need not be the bu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f business and had paid interest on the borrowed amount. As held by the Supreme Court in the above referred decisions all that is germane is whether the borrowing was or was not for the purpose of business. On the facts as emerging from the record, having regard to the intention of the assessee of acquisition of shares of the associate concern for the purpose of gaining controlling interest therein to expand its own business, it cannot be said that the amount advanced was not for the purpose of its business. Merely because ultimately such shares could not be acquired for the reasons stated hereinabove, would not detract from the fact that the amount had been borrowed for the purpose of business. When funds are invested for business purposes, there can be no guarantee that the purpose would be achieved. What has to be looked into is whether the funds were expended as a measure of commercial expediency, which includes such expenditure which a prudent businessman incurs for the purposes of business. Once it is established that there was a nexus between the expenditure and the purpose of the business, the revenue cannot justifiably claim to put itself in the armchair of the businessman....