TaxTMI 
TaxTMI 
2021 (9) TMI 1162
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.... letter from the Office of the Pr. CIT - 2, Hyderabad was caused the impugned delay in filing of the instant appeals. Case law Collector Land Acquisition vs Mst. Katiji & Ors, 1987 AIR 1353 (SC) and University of Delhi Vs. Union of India, Civil Appeal No. 9488 & 9489/2019 dated 17 December, 2019, hold that such a delay; supported by cogent reasons, deserves to be condoned so as to make way for the cause of substantial justice. We accordingly hold that Revenue's impugned delay in filing these appeals is neither intentional nor deliberate but due to the circumstances beyond its control. The same stands condoned. Cases are now taken up for adjudication on merits. 3. As the grounds are common in all these appeals, but the financial results are different in all the above assessment years . For the sake and brevity of the case, we refer to the facts in ITA No. 1120/Hyd/2017 for AY 2011-12 and the decision taken in the said appeal shall apply mutatis-mutandis to other appeals as well. The grounds raised by the revenue in this appeal, which are common in all the appeals under consideration, are as under: "1. "Whether, on the facts and circumstances of the case and in law, the C....
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....ment Rs. 65,70,252 (iv) Liabilities no longer required Written back Rs. 1,046 Rs. 3,01,43,648 4.3 Against which, the assessee claimed huge financial charges amounting to Rs. 21,88,63,069. It is evident that interest bearing funds borrowed by the assessee were not utilized for the said purpose and earned other income as shown in P&L a/c. In this regard, the authorized representative of assessee asked to furnish the details regarding the loans obtained from the banks that are used for the purpose of business entity and income derived from such business. In this regard, the A.R submitted a letter dt. 11.11.2013 wherein a note on business activity was given. On verification, it was noticed that the main intention of the assessee that not only earns income for services rendered but also earns income by way of dividend, capital gains, interest on deposits / ICDs etc 4.4. As could be seen from the balance sheet, the assessee made investments in equity shares at Rs. 189.28 crores and the loans advances was shown at Rs. 187.70 crores. Thus, it is clear that the funds borrowed from bank were utilized for the purpose of investment in equity shares and interest free....
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....re (AY 2008-09) to Rs. 49.35 crore (AY.201516), which were admitted as business income. However, the assessee did not earn any 'Management consultancy fees' for the A.Y.2010-11 and AY 2011-12 out of the above 8 years. The non-earning of this income prompted the AO to disallow interest expenditure of Rs. 15.33 crore for A.Y.2010-11 on the ground that this interest expenditure was not incurred for the assessee's business purpose and that no business income was earned during the year. The assessee appealed before the CIT(A) who has allowed assessee's plea for that AY 2010-11 after elaborate discussion on the issue involved. 5.3. It could be further seen that the AO proposed to disallow interest expenditure of Rs. 50.94 crore for the A.Y.2012-13 during the course of scrutiny proceedings. After thoroughly considering the facts of the case and the business model of the assessee, allowed it as a deduction as claimed without making any disallowance. However in this AY.2012-13, the assessee earned 'Management consultancy fee' of Rs. 28 crore and interest income of Rs. 6.56 crore. Just as in the case of AY.2010-11, the assessee did not earn any 'Managemen....
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.... result in some income. It is held in the case of Rajendra Prasad Moodys case (supra), that earning of income is not a precondition to decide the allowability of expenditure incurred either u/s 57(iii) or u/s 37(1) of the Act. Therefore, I am of the considered view that not earning income from managerial services for a particular year such as this, cannot render the related expenditure disallowable u/s 37(1) of the Act. 5.5. It is clear from the above that the ratio laid down by the Hon'ble Apex court in SA Builder's case (supra) clearly applies to the facts of the assessee's case, in which case, there is no case for any disallowance of interest expenditure. 5.6. Further, it is relevant to mention here that my predecessor allowed the assessee's appeal for AY.2010-11 on the same issue and deleted the addition of interest expenditure of Rs. 15.33 crore brought to tax by the AO. After having gone through the same, I am in agreement with my predecessor's finding for the A.Y 2010-11 which is extracted as under. "5.3. It was held by the Supreme Court in the case of SA Builders (supra) that a loan extended without being under a legal obligati....
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....efore us, the ld. DR relied on the order of the Assessing Officer and filed written submissions in support of revenue's case, which are as under: "1. As admitted in the return of income, the appellant is into manufacturing industry (Power & Energy) (Code 0114) and is not an investment company. The issue in appeal is on disallowance of interest on borrowed funds utilized for investment in subsidiaries to the tune of about Rs. 15 Cr (including a minor portion of interest paid on pledged FDs). It is submitted that the claim of the appellant that the investments are part of its business to protect its interests is not maintainable in light of the decision of the Hon'ble Supreme Court in the case of Max opp Investment Ltd [2018] 91 taxmann.com 154 {sq. In the said case at para 34 of the decision, the Supreme Court held that "We are of the opinion that the dominant purpose for which the investment into shares is made by an assessee may not be relevant. No doubt, the assessee like Maxopp Investment Limited may have made the investment in order to gain control of the investee company. However, that does not appear to be a relevant factor in determining the issue at hand. Fact ....
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....und utilized for its sister concern and others . He further submitted that the assessee has no any Fixed Assets in the assessment year 2013-14 & 2014-15 but how the assessee can earn crores of Income from consultancy services from its subsidiary and others , the Salary payment is also less than Rs. 16.00 Lakhs. What types are consultancy services was rendered by the assessee, it is also a matter of question. He contended that the assessee also could not justify the commercial expediency as argued by the AR and it has just invested the borrowed funds for non-business purposes. 8. The ld. AR, on the other hand, relied on the order of CIT(A) and reiterated the submissions made before the CIT(A). Further, he submitted that the appellant-company was formed with the objective of developing/supporting the development of power projects throughout India. The appellant-company provides Management Consultancy and undertakes a variety of development activities including undertaking necessary feasibility studies, fuel assessment, tie-up and monitoring, logistic support and various services required by the power plants and in turn enjoys development fees in line with actual power generation s....
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....ng of income from managerial services should not render the related expenditure disallowable u/s 37(1). 8.3 It was submitted that the interest income earned has been claimed by the appellant under the head 'Profit and gains of business or profession', keeping in view, the business model of the appellant-company i.e., apart from investing in equity, the appellant also advances loans/ICDs to meet the particular financial needs of the SPVs as the business interests of the SPVs is eminently the business interest of the appellant. While dealing with the issue of allowability of interest on borrowed funds which were advanced to sister concerns free of interest, the Ld.AR relied on the decision of Hon'ble Apex Court in the case of SA Builders (2007) 288 ITR 1(SC) where it was held that for the allowability of interest, what is relevant is whether the interest-free loan given to the sister concern is on account of commercial expediency. The AR of the appellant contended that in view of the rule laid down by the Apex Court, the expenditure incurred by the appellant deserves to be treated as expenditure laid out wholly and exclusively for the purpose of business u/s 37(1). ....
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....mers of electricity including for captive consumption for any industrial projects, joint venture companies or otherwise and generally to develop, generate accumulate power at any other place or places and Lo transmit, distribute, sell and supply such power. 2. To construct, establish, operate, manage power station, boiler houses, steam turbine. switch yard, sub-station. transmission lines, accumulators, workshops, and all such works necessary for generating, accumulating. distribut"II'9. and supply of electricity. To construct. lay down. establish, fix, erect equipment and maintain power generating machinery, and all other type of plant and machinery, electric equipment and cables, computer and control equipment, transmission lines, accumulators, fittings and apparatus in the capacity of principals, constructors or otherwise. 3, To establish captive power plants on stand alone or co-operative basis for an individual identity or a group of industrial and other consumers and supply power to the participants in the co-operative effort either directly or though the transmlssion1ines of Electricity Boards or any other authorities by entering iota appropriate arrang....
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.... the CIT(A)], who vide his order dated 15-4-1993 partially accepted the claim of the assessee. According to the CIT(A), out of the total amount of Rs. 82 lakhs advanced by the assessee in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs. 18 lakhs had a clear nexus with the borrowed funds, as the balance amount had been paid out of the receipts from other parties to whom no interest had been paid. Accordingly, the CIT(A) directed the Assessing Officer to calculate disallowance of interest only relating to the sum of Rs. 18 lakhs, and the disallowance was reduced accordingly. 6. Both the assessee as well as the revenue filed appeals before the Income-tax Appellate Tribunal (hereinafter referred to as the 'Tribunal'). The Tribunal by its order dated 20-6-2002 allowed the appeal of the revenue, and held that the entire amount of Rs. 82 lakhs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the Assessing Officer was justified. Accordingly, the appeal filed by the revenue was allowed and the appeal filed by the assessee was dismissed. 7. Against the order of the ....
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....e to its sister concern from out of the overdraft account with the bank in which there was already a debit balance, the order of the Tribunal does not suffer from any factual or legal infirmity. Accordingly, the High Court dismissed the appeal. 13. Learned counsel for the appellant-assessee submitted that the High Court has erred in failing to consider the fact that the appellant had made the advances to its sister concern by withdrawals from its bank accounts in which there was sufficient credit balance as the appellant had received payments from its clients. It is an admitted fact that the appellant had received these payments from its clients and had deposited these in the account out of which advances were subsequently made to the sister concern. These deposits/payments/advances of Rs. 82 lakhs as and when received and made by the appellant to its sister concern, namely, SAB Credits Ltd. in the assessment year 1990-91 are reproduced hereunder in a tabular form : Date Ch. No. Amount Name of Bank Course of funds 16-9-1989 683366 24.00 lakhs State Bank of Patiala, CC Account Amount received from R.C.I., Hyderabad, a client 25-9-1989 684....
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....t of Rs. 82 lakhs to its sister concern. It referred to several decisions in support of the view which it took. 18. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest, on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 19. In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. 20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as we....
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....d not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad Jatia's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. & Wvg. Mills....
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.... regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is o....
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....88 ITR 1) we notice that the Tribunal has just accepted arguments without referring to the facts. In the first place, the assumption of the Tribunal is that the advances were made out of own funds because assessee had a huge profit. However, we notice that the interest-free advances made every year is Rs. 2 crores when the assessee had substantial borrowings. The argument of the assessee is logically unacceptable because if assessee had huge profits and own funds, we do not know why the assessee should depend on borrowed funds. In any case if at a given point of time assessee has own funds and they have advanced it as interest-free loans to sister concerns for meeting their business needs in which assessee also has an interest, then such advances should not lead to disallowance of interest paid on subsequent borrowings. In other words, unless the assesses establishes with cash flow statements about availability of its own funds at the time of making the interest-free advances, the finding of the Tribunal cannot stand. Besides this, going by the decision of the Supreme Court, unless the assessee establishes the benefit it derives from each sister concern to which loans were advanced....
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....fficient opportunity to the assessee." 6.1 In the course of passing consequential order by the lower authorities, the assessee has not led any evidence to show the commercial expediency to advance funds to the sister concerns. In addition to this, the assessee failed to file the cash flow statement to show that own funds were advanced to the sister concerns. Hence, the issue was decided against the assessee by the lower authorities. Though the assessee made an oral plea that the money had been advanced to the sister concerns on account of commercial expediency, the assessee failed to place any evidence to suggest whether funds advanced by the assessee to the sister concerns was in the nature of interest free own funds or the funds were advanced on account of commercial expediency. The interest paid by the assessee on such account cannot be allowed. The only plea of the assessee is that the assessee had mortgaged its property to avail bank loans for the sister concerns and if the sister concerns failed in their business, it will effect the profitability of the assessee. However, the assessee has not produced an iota of evidence to prove that it has mortgaged its property, a....
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....res like professional service expenditures and/or salary paid is very low and there is no any building appearing in the balance sheet as well as no rental expenses debited into the P&L Account to establish that wherefrom the assessee is operating its business operations and no fixed assets are appearing in the balance sheet for the AY 2013-14 & 2014-15. All these factors cannot be brushed aside. We further observe that the assessee has shown capital work in progress(including capital advances) of Rs. 25,11,50,000/- and Rs. 25,50,00,000/- in AY 2010-11 & 2011-12 respectively, but, subsequently, no fixed assets were materialized, which is clear from the following financial statements: Description 31st March 2011 31st March 2010 Sources of funds Shareholder's funds Share capital Share application money Reserves and surplus Loan funds: Secured loans Deferred tax liability 516,689,940 2,843,521,450 1,087,802,986 1,248,326,593 35,012 500,000,000 535,920 979,318,376 1,84,661,310 26,763 5,659,375,981 3,328,542,369 Application of funds: Fixed Assets: ....
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....Shareholder's funds (a) share capital (b) Reserves and surplus 1,187,812,750 2,586,377,446 3,774,190,196 1,187,812,750 3,635,554,448 4,823,367,198 (2) Non-current Liabilities (a) Long term borrowings (b) Deferred tax liabilities (c) Long term provisions (d) Other long term liabilities 7,167,477,124 43,215 142,026 1,202,640,490 8,370,302,855 7,871,645,828 43,215 153,981 2,582,640,490 10,454,483,514 (3) Current liabilities (a)Short-term borrowings (b) Trade payables (c)Other current liabilities (d) Short-term provisions 1,256,270,000 1,405,711 6,722,455,286 740 7,980,131,737 2,489,482,575 1,058,283 2,021,766,775 605 4,512,308,238 Total 20,124,624,788 19,790,158,950 II Assets (1) Non-current assets (a) Non-current Investments (b) Long term loans and advances 16,311,646,713 2,941,278,284 19,252,924,997 12,445,153,781 6,540,303,329 18,985,457,110 (2) Curren....