TaxTMI 
TaxTMI 
2021 (9) TMI 1162
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....yderabad 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 CIT(A) is correct in holding that the financial charges....
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....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 loans and advances. As held in the case of CIT Vs Amritaben R.Shah (Bom) 238 ITR 777, the interest paid on ....
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....arn 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 'Management fee' for the year under appeal i.e., A.Y.2011-12 also. The fact of accepting assessee's explanation for the A.Y.2012....
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....o 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 obligation to do so cannot always be seen as a diversion of business funds or application of borrowed funds for non-business purposes. If such outflows can be exp....
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....n 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 remains that such dividend income is non-taxable. In this scenario, if expenditure is incurred on earning the dividend income, that much of the expenditure which is attribu....
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....s 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 supported and achieved. A lead lag could exist between incurrence of expenditure, providing the necessary service and revenue realisation against such services. Also, exploiting the business ....
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....der 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). 8.4 The Ld.AR submitted that for AY 2012-13, similar interest expenditure to the tune of Rs. 50.94 crores was claimed as a debit in the Profit and Loss account which was accepted by the Assessing Of....
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....ransmit, 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 arrangements. 4. To purchase. lease acquire, sublease. act as agents, sell, license any mine. mining *. rights. mines and lands in India or elsewhere believed to contain coal and lignite and to prospect. explore, excavate, open....
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....nly 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 Tribunal, the assessee filed appeals in the High Court which were dismissed by the impugned judgment. 8. In the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of Rs. 82 lakhs advanced in the assessment year 1990-91, a furt....
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....ubmitted 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 684404 18.00 lakhs -do- From cash credit account (Debit balance account) 27-12-1989 676546 20.00 lakhs -do- From Indian Acrylics Ltd., a client 12-1-1990 476582 20.00 lakhs -do- -do- Rs. 82.00 lakhs 14. Learned counsel for the appellant submitted that a perusal o....
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....ourt 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 well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions rela....
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....ed, 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 Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest fr....
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....f 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 obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. It is clear from the above judgement that the interest free loans/advances was given to its sister concern only out of debit balance from over draft account as per para no. 12. Furt....
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.... 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 and the financial plight of such business concerns deserving interest-free advances, we do not know how the test of business expediency is satisfied. The Tribunal has just accepted the argument of the assessee that the sister concerns were in financial difficulties and the cheques issued by them could be honoured only with the interest-free advances made by the assessee. We have to necessarily accept the argument of the Standing Counsel that the Tribunal has decided the case without verifying facts available....
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....he 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, and on its classification of funds as NPA, it would affect the assessee's profitability. Being so, we are not in a position to uphold the argument of the Ld. AR on this issue. Further, the judgment of the Supreme Court relied on by the Ld. AR in the case of Munjal Sales Corpn. (supra) cannot be applied to the facts of the assessee's case. In that case, the issue was with regard to allowability of interest u/s. 36(1 ) (iii) subject to provisions of section 40(b )(iv) of the I. 1. Act. Hence, this ground of app....
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....d 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: Gross Block Less: Depreciation Net Block Capital work in progress (including capital advances) 855,337 183,440 671,897 255,000,000 855,337 102,579 752,758 251,150,000 255,671,897 251,902,758 Investments 1,892,896,949 2,562,552,301 Current Assets, loans and advances: Cash and bank balances Other current assets Loans and advances Less: Current liabilities and provisions Current Liabilities Net current assets Profit & loss account 1,229,581,791 25,568,330 1,877,003,467 475,008,273 2,657,145,315 8....
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....on-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) Current assets (a) Trade receivables (b)Cash and bank Balances (c) Short term loans and advances (d) Other current assets 2,49,313,793 5,928,388 616,178,852 278,758 871,699,791 1,389,828, 9,133,781 793,493,886 684,345 804,701,840 Total 20,124,624,788 19,790,158,950 Revenue from operations 31st March 2014 31st March 2013 Management consultancy fees 479,688,466 386,056,025 479,688,466 386,056,025 Other Income: Interest income Net gain on sale/restatement of investments Liabilities/provision no longer required written back 3,342,009 - 11,820 10,683,454 751,597 156,537 3,353,829 11,591,588 ,Employee benefits expense: Salaries and wages Staff welfare 1,511,517 41,768 1,581,126 62,938 1,553,285 1,644,064 Other expenses: Rates and taxes Consultancy and other professional char....