TaxTMI 
TaxTMI 
2021 (7) TMI 439
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....adjudication and the decision rendered thereon would apply with equal force for Asst Year 2014-15 also except with variance in figures. 2. The only effective issue to be decided in this appeal of the assessee is as to whether the ld CITA was justified in upholding the interest disallowance made u/s 36(1)(iii) of the Act in the facts and circumstances of the case. The interconnected issue involved therein is as to whether the ld CITA was justified in treating the interest income from debentures to be taxed under the head "income from other sources‟ as against "income from business‟ offered by the assessee in the facts and circumstances of the case. 3. The brief facts of this issue are that the assessee is a private limited company carrying on business of dealing in garments. The assessee company had filed its return of income for the Asst Year 2013-14 on 30.9.2013 declaring total loss of Rs. 6,81,41,247/-. The ld AO observed that assessee had taken loan of Rs. 33 crores from M/s Indiabulls Financial Services Ltd (IBFSL in short) and paid interest thereon in the sum of Rs. 4,68,55,519/-. The ld AO also observed that assessee company had invested in debentures of KA ....
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.... that the ld CITA had deleted this disallowance made towards net interest u/s 36(1)(iii) of the Act for the Asst Year 2012-13 vide his order in Appeal No. CIT(A)-20/DCIT-12(1)(2)/IT-83/2015-16 dated 29.6.2017 and that the revenue had not preferred further appeal before this Tribunal against the said order. Hence the fact of borrowings and its utilization was accepted by the revenue as meant for business purposes. 5.1. The ld AR further argued that majority of shareholders of assessee company and KA Hospitality Pvt Ltd are common and assessee company itself is holding 8.55% of shares in KA Hospitality Pvt Ltd. Hence he argued that the assessee had only invested in convertible debentures of its sister concern. It was also argued that the assessee company is authorised to diversify its business and to carry on another business of Hospitality as per its objects clause in Memorandum of Association. He further argued that this investment decision was further approved by the Board of Directors of the assessee company. He placed reliance on the decision of Hon‟ble Andhra Pradesh High Court in the case of CIT vs Peninsular Investment Ltd reported in 29 taxmann.com 422 (AP). The ld ....
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....the plea of the assessee has not been accepted by the revenue in Asst Year 2012-13. Moreover, the assessee has conveniently chosen to invest in debentures of its sister concern i.e M/s KA Hospitality Pvt Ltd by using the borrowed funds, which had yielded only 3% return in the form of interest on debentures, whereas the interest paid on its borrowings were several times more than the interest received. Hence this is a scheme adopted by the assessee to divert its borrowed funds to its sister concern and also enjoy the benefit of paying lesser taxes in its hands. 6. We have heard the rival submissions and perused the materials available on record. We find that there is absolutely no dispute that the borrowed funds of Rs. 33 crores from IBFSL had been utilized in investment in convertible debentures of M/s KA Hospitality Pvt Ltd (sister concern) of the assessee company. At the outset, we find that the borrowings were made in Asst Year 2012-13 and utilization of the same by way of making investment in convertible debentures of M/s KA Hospitality Pvt Ltd was also made in Asst Year 2012-13. The assessee had paid interest of Rs. 17,04,247/- for the period 19.3.12 to 31.3.12 relevant ....
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.... making investment in convertible debentures in sister concern. Despite knowing the fact that M/s KA Hospitality Pvt Ltd was incurring huge losses continuously, the assessee company chose to sell only 50% of its debentures in Asst Year 2018-19 thereby continuing to have the financial strain in its books. It is a fact on record, that despite the fact that M/s KA Hospitality Pvt Ltd had indeed opened various retail outlets having international brands in various Tier I cities upto 2017, it was still incurring only losses and assessee company was not able to get any benefit or return other than meagre return of interest on debentures at the rate of 3%. It is also fact on record that the assessee is dealing in garments and that the Hospitality industry is totally new stream of activity to the assessee. That "s why it is dependent on its sister concern. In the instant case, since its sister concern was already in the said industry with well established international brands thereon, the assessee has chosen to make investment in debentures in its sister concern by using borrowed funds. Then what is the benefit that is derived by the assessee by making this investment (other than meagre deb....
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....orted in 108 taxmann.com 449 (Bom) in support of its contentions. On perusal of the said decision, we find that in that case , that assessee was engaged in the business of development of real estate as well as financing. Hence amount advanced in the sum of Rs. 10 crores to Bhansali Developers for booking commercial space in an upcoming construction project, which eventually failed to materialize and subsequently the monies became irrecoverable, which was sought to be written off by that assessee. In that factual matrix of the case, the said write off of the sums were allowed as business loss by the Hon‟ble Jurisdictional High Court. In the instant case, the assessee company is engaged in the business of garments and had made investment in convertible debentures in its sister concern engaged in hospitality industry. Moreover, there is no question of claiming of any write off as business loss in the instant case before us. It is nobody‟s case that the investment in convertible debentures made by the assessee company in M/s KA Hospitality Pvt Ltd had become bad which requires to be written off and consequentially allowable as business loss. Hence the reliance placed on thi....