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2023 (3) TMI 1340
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....ited in P & L Account under the facts and in the circumstances of the appellant's case. 4. Without prejudice to the right to seek waiver with the Hon'ble CCIT/DG, the appellant denies itself liable to be charged to interest u/s. 234-B of the Act, which under the facts and in the circumstances of the appellant's case deserves to be cancelled. 5. For the above and other grounds that may be urged at the time of hearing of the appeal, your appellant humbly prays that the appeal may be allowed and Justice rendered and the appellant may be awarded costs in prosecuting the appeal and also order for the refund of the institution fees as part of the costs." 2. At the outset the ld. D.R. objected that the addition in this case is Rs.1,06,13,329/- and as such this cannot be heard by SMC. In my opinion, this plea of the ld. D.R. is misplaced. At this point, it is appropriate to go through the provisions of section 255(3) of the Act which reads as under:- "Section 255(3): The President or any other member of the Appellate Tribunal authorized in this behalf by the Central Government may, sitting singly, dispose of any case which has been allotte....
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.... reported in 34 ITD 495 of Allahabad bench, wherein the Tribunal has taken a similar view on this issue. 2.2 It is also pointed by ld. D.R. that there was a delay of 93 days in filing the appeal. 2.3 The ld. A.R. filed a condonation petition for delay as follows:- 2.4 Further, the ld. A.R. also filed supporting affidavit from V.S. Narayanan as follows:- 2.5 Thus, the contention of the ld. A.R. is that due to miscommunication between Shri Deepak Manoharlal Chhabria, Senior Managing Director of the assessee company and between V.S. Narayanan, Group Managing Director, it was resulted in delay of 93 days in filing appeal before this Tribunal. 2.6 The ld. D.R. strongly opposed the admission of appeal before this Tribunal and relied on the order of the Tribunal in the case of Dr. Raveendra M. Madraki in ITA No.670/Bang/2019 dated 10.2.2022, wherein held as under: "6. We have heard both the parties and gone through the petition filed by the assessee, his affidavit and also the confirmation letter filed by Advocate, Mr. Prakash R. Badiger. The assessee explained the delay of 310 days on the reason that on the advise of his CA, he handed over the appeal papers to Pra....
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.... long delay is that he did not know the correct legal position and he came to know about the same after the decision of the Allahabad High Court in the Commissioner of Sales Tax, U.P. Vs. Modi Food Products Ltd. Every individual is deemed to know the law of the land. He courts merely interpret the law and do not make law. Ignorance of law is not an excuse for not taking appropriate steps within limitation. Therefore the argument that the appellant did not know the true legal position is not one that can be accepted in law. ...." 8. Further, in the present case, there is no denial on the part of the assessee about the service of the order on the assessee and after receipt of the order of the CIT(Appeals), to whom the assessee wants to entrust the work of filing appeal before the Tribunal is his own concern and this explanation does not constitute sufficient ground to condone the delay. Therefore we find no merit in the application for condonation of delay. Accordingly, we are of the considered view that the assessee has failed to make out a sufficient and reasonable cause for condonation of delay and reject the petition for condonation of delay. Being so, we refrain from go....
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....9;ble Apex Court in the case of Majji Sannemma @ Sanyasirao vs. Reddy Sridevi & Ors., in Civil Appeal No.7696/2021 disposed of on 16.12.2021 relying on the judgment of the said Court in the case of Basavaraj and another vs. Special Land Acquisition Officer reported in (2013)14 SCC 81 has observed as under: "The expression "sufficient cause" cannot be liberally interpreted if negligence, inaction or lack of bona fides is attributed to the party." It is further observed that, "Even though limitation may harshly affect the rights of a party but it has to be applied with all its rigour when prescribed by statute." It is further observed that,- "In case a party has acted with negligence, lack of bonaf ides or there is inaction then there cannot be any justified ground for condoning the delay even by imposing conditions." It is observed that, "Each application for condonation of delay has to be decided within the framework laid down by this Court". It is further observed that, "If Courts start condoning delay where no sufficient cause is made out by imposing conditions then that would amount to violation of statutory principles and sh....
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.... this Tribunal. Now we have to see whether the assessee's failure to file appeal in time before this Tribunal is there sufficient cause for condoning the delay. Hon'ble Madras High Court consider an issue in the case of Srinivas Charitable Trust Vs. DCIT (280 ITR 357) (Mad) and held that mixing of papers with other papers are sufficient because for not filing appeal in time. The Madras High Court further observed that the expression "sufficient cause" should be interpreted to advance substantial justice. Therefore, advancement of substantial justice is the prime factor while considering the reason for condoning the delay. 3.1 There is a technical defect in the appeals since the appeals were not filed within the period of limitation. The assessee filed an affidavit stating that the appeals were not filed because of the improper service of notice by the Department. The Revenue has not filed any counter-affidavit to deny the allegation made by the assessee. While considering a delay in filing the appeal, the Apex Court in the case of Collector, Land Acquisition v. Mst. Katiji and Ors. (167 ITR 471) laid down six principles. For the purpose of convenience, the principles laid down b....
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....retaining the tax relatable thereto. Under the scheme of Constitution, the Government cannot retain even a single pie of the individual citizen as tax, when it is not authorised by an authority of law. Therefore, if I refuse to condone the delay, that would amount to legalise an illegal and unconstitutional order passed by the lower authority. Therefore, in my opinion, by preferring the substantial justice, the delay of 93 days has to be condoned. 3.3 The next question may arise whether delay was excessive or inordinate. There is no question of any excessive or inordinate when the reason stated by the assessee was a reasonable cause for not filing the appeal. I have to see the cause for the delay. When there was a reasonable cause, the period of delay may not be relevant factor. In fact, the Madras High Court in the case of CIT vs. K.S.P. Shanmugavel Nadai and Ors. (153 ITR 596) considered the condonation of delay and held that there was sufficient and reasonable cause on the part of the assessee for not filing the appeal within the period of limitation. Accordingly, the Madras High Court condoned nearly 21 years of delay in filing the appeal. When compared to 21 years, 93 days ....
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....e Court should adopt a pragmatic approach and the Court should exercise their discretion on the facts of each case keeping in mind that in construing the expression "sufficient cause" the principle of advancing substantial justice is of prime importance and the expression "sufficient cause" should receive a liberal construction. Therefore, this Judgment of the Madras High Court (supra) clearly says that in order to advance substantial justice which is of prime importance, the expression "sufficient cause" should receive a liberal construction. In this case, the issue on merit regarding granting of deduction u/s. 80IB was covered in favour of the assessee by the Judgment of the Madras High Court. Therefore, for the purpose of advancing substantial justice which is of prime importance in the administration of justice, the expression "sufficient cause" should receive a liberal construction. In my opinion, this Judgment of the Madras High Court is also squarely applicable to the facts of this case. A similar view was taken by the Madras High Court in the case of Venkatadri Traders Ltd. v. CIT (2001) 168 CTR (Mad) 81 : (2001) 118 Taxman 622 (Mad). 3.6 The Mumbai Bench of this Tribuna....
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....fficer. Since the assessment order was passed ex parte u/s. 144 of the Act, the CIT(A), if required, may call for the remand report from the Assessing Officer and confront the same to the assessee before deciding the appeal. I also make it clear that if the ld. CIT(A) or the Assessing Officer relied on any statement of the third parties so as to frame the impugned assessments on an earlier occasion, the same is to be confronted to the assessee and if the assessee requires any cross examination of the parties concerned, the same is to be provided. 3.9 Being so, I am of the opinion that there is reasonable cause in filing the appeal before me by delay of 93 days and I condone the above delay and admit the appeal for adjudication. 4. The first ground for our consideration is with regard to the disallowance of Rs.99,02,829/-, which is claimed by assessee as an interest payment. The assessee in the year under consideration advanced a sum of Rs.41 crores towards purchase of shares. The AO questioned the sources of Rs.41 crores paid as advance towards purchase of shares. The assessee stated that assessee had taken loan from M/s. Millenia Realtors Pvt. Ltd., Ulsoor, Bengaluru. The as....
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....sessee that the amounts advanced for acquisition of shares was purely out of business expediency. Consequently, the ld. A.R. submitted that the case laws submitted by the assessee in its reply dated 21/02/2021 and those referred to in the Grounds of Appeal are clearly applicable in the assessee's case. The ld. A.R. submitted that the analogy adopted by the learned Assessing Officer in rejecting the assessee's contention by holding that the case laws cited by him are not applicable as the assessee had not yet become the holding company of M/s. Akarshak Infrastructure Private Limited in F.Y 2017-18 but became the holding company only in the F.Y 2018-19, is devoid of merit as the principles laid down in the decisions cited by the assessee are squarely applicable in the assessee's case. 5.1 The ld. A.R. submitted that the averments of the learned Assessing Officer in the order that the interest paid on loan to acquire shares of the promoters of M/s. Akarshak Infrastructure Private Limited is the pre-acquisition cost and should therefore be added to the cost of shares is incorrect for the following reasons: a. It is to be noted that as per the principles laid out in ....
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.... with Income Computation and Disclosure Standard-IX. d. It is to be noted that Central Board of Direct Taxes (CBDT) as notified Income Computation and Disclosure Standard to be adopted by the assesses vide Notification No. S.O. 892(E) dated 31/03/2015, to compute income chargeable under the head "Profits and (Jains of Business or Profession". Further vide Notification No. S.O. 3079(E) dated 31/09/2016 the CBDT has mandated that all assesses following mercantile system of accounting for the purpose of computation of income chargeable to Income Tax under the head Profits and Gains of Business or Profession have to be mandatorily followed, the ICDS already notified by exercising its power under section 145(2) of The Income Tax Act, 1961,In effect, in order to comply with the method of accounting mandated under section 145(2), the assessee has to follow the principles laid down in the 1GDS. 5.2 Further, the ld. A.R. submitted that in case of the assessee, as it is a company, it has to mandatorily follow Accounting Standard for preparations of its accounts under the Companies Act, 2013 and follow the ICDS for computation of its income and the same has been correctly followed....
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....id by the assessee, it would be necessary to determine the dominant purpose for which the expenditure was incurred, meaning thereby that if the expenditure incurred is not to earn the income, the expenditure would not be allowable. What section 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making of earning income. Section 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall deductible only if any income is made or earned. Where the borrowings are made for the purchase of shares, a question that would often arise is whether the interest paid should be allowed as deduction under section 36(1)(iii) or under section 57(iii). Income by way of dividends on shares, whether held on investment portfolio or as stock-in-trade, is pacifically assessable, under section 56(2)(i), as "Income from other sources". Although the shares are held on the investment portfolio as an integral part of the business, the interest on such borrowings is allowable under section 36(1)(iii). Thus, the qualifying factor to ascertain whether the borr....
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....ese facts, the AO invoked the provisions of proviso to section 36(i)(iii) which says that if the funds are borrowed for acquiring an asset for extension of existing business, then interest is not allowable till the date on which such asset was first put to use. The objection of the assessee is this that in the present case, the land was not acquired for extension of business but it was acquired for expansion of business and therefore, this proviso is not applicable. In this regard, para no. 18 of the Tribunal order rendered in the case of AT & T Global Network Services (India) Pvt. Ltd. Vs. DCIT (supra) is relevant and hence, the same is reproduced hereinbelow from page no. 690 of the paper book. "18. Undisputedly assessee is engaged in telecommunication business. It has commenced its business operation on April 07, 2007. The present situation deals with the case where in the assessee has purchased capital goods for its existing telecommunication business. The question that arises for IT(TP)A No.4ii/Bang/2Oi6 Maxim India Integrated Circuit Design Pvt. Ltd., Bangalore consideration here is that whether the proviso to Section 36(i)(iii) which disallows the interest paid on a....
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....der is applicable and hence, respectfully following this Tribunal order, we hold the interest disallowance made by the AO is not justified because the funds were borrowed for continuation / expansion of existing business and not for extension of existing business and therefore, the proviso to section 36(i)(iii) is not applicable in the present case because the amendment in this proviso was made by the Finance Act, 2015 w.e.f. 01.04.2016 as per which the words "for extension of were omitted and therefore in our considered opinion, up to Assessment Year 2015-16, the proviso is applicable only in those cases where borrowed funds was used for acquisition of asset for extension of existing business. In the present case, the Assessment Year involved is Assessment Year 2009-10 and therefore, in the facts of present case, in the present year, this proviso is not applicable and hence, we delete this disallowance by respectfully following this Tribunal order rendered in the case of AT &T Global Network Services (India) Pvt. Ltd. Vs. DCIT (supra). Accordingly, ground no. 4(b) is allowed." 14-3 Following the above said decision of the co-ordinate bench rendered in assessee's own c....
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.... the end of the second period of 90 days, Shaw Wallace issued a cheque which it could not honour. If these are not good enough reasons to consider a debt as irrecoverable, what else is required. It is further interesting to note that the interest of Rs. 21,05,278 accrued on this very ICD is also claimed as a bad debt and the AO has allowed the same. Therefore, considering the facts of the case, the claim of the assessee for deduction of Rs.1 crore is allowed." (iv) Decision of Hon'ble Supreme Court of India in the case of M/s. S.A. Builders Ltd. reported in 158 Taxman 74, wherein held as under: "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. 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 b....
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.... 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. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and 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'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. Thus, the ratio of Madhav Prasad Jantia'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 th....
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....ith the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having 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. 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.....
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....sman. [Para 13) In the instant case, it is manifest that the advance to subsidiary company became imperative as a expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it woik4jpr-dyide additional margin to subsidiary company to meet the working capital for meeting any cash loses. [Para 14] Insofar as the loans to Directors were concerned, it could not be disputed by the revenue that the assesses had a credit balance in the Bank account when the said advance of Rs. 3 lakhs was given. Remarkably as observed by the Commissioner (Appeals) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. [Para 16] On the basis of aforesaid discussion, the present appeal is allowed, thereby setting aside the order of the High Court and restoring that of the Tribunal. [Para 17]." (vi) The ld. A.R. relied on the judgement of Delhi High Court in the case of Tulip Star Hotels Ltd. Vs. CIT (16 taxmann.com 335) (Delhi). 6. On the other hand, the ld. D.R. submitted that during t....
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....bmitted that as regardsd reliance of the assessee on the decision in the case of B. Nanji & Co. (supra), it is observed that in the said case the High Court had decided the issue in the favour of the assessee on the basis of the then existing provisions of section 36(1)(iii) of the Act, which were relevant for AY 1996-97 and AY 1997-98. Since the said provisions have already been amended, this decision doesn't help. The reliance of the assessee on the decisions in the cases of ITW Signode India Ltd. (supra) and decision of Delhi Tribunal in the case of AT&T Global Network Servics (India) Pvt. Ltd. in ITA No.489/Del/2021 and SA No.75/Del/2021 dated 24.8.2021 is also misplaced as the facts involved are nowhere akin to the case of the assessee and no such ratio, as being argued by the assessee, was laid down in the said cases also. The reliance of the assessee on the decision in the case of Maxim India Integrated Circuit Design Pvt. Ltd. (supra) is also misplaced as the said decision doesn't support its arguments. The said decision is in relation to the AY 2011-12 and the Tribunal had decided the issue in the favour of the assessee on the basis of the then existing provisions of Secti....
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....shows that the interest on capital borrowed for acquisition of an asset cannot be allowed prior to its usage. In the case under consideration the asset is the share. Alternatively, this can also be said that the acquisition of the share would have given the assessee a complete control over the underlying assets of AIPL. So unless those assets were put to use, the interest could not have been allowed as revenue expenditure. In the case under consideration the allotment of share was not there in the year under consideration and as such the action of the AO in disallowing the interest on capital borrowed for giving advance for acquisition of shares cannot be faulted with. 6.5 The ld. D.R. relied on the following judgements:- (i) Decision of Chennai bench of Tribunal in the case of R. Sundararajan in ITA No.1666/Mds/2013 dated 25.6.2015, wherein held as under: "8. Regarding disallowance of interest the ld. Authorised Representative for assessee submitted that the sundry creditors as on 31.03.2006 was at Rs.34,70,32,605/-. Out of this, an amount of Rs.24,52,61,029/- due from M/s. S.P. Apparels Limited which is a closely held company and according to the ld. Authoris....
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....f directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be completed to maximize his profits." 9. On the contrary, the ld. Departmental Representative submitted that the assessee advanced an amount of Rs.24,52,61,029/- to M/s. S.P. Apparels Limited without any interest. Further, there was investment of Rs.12 crores in shares and the loan and investment are made without bringing any business advantage to the assessee. Further, he submitted that the assessee at the same time, paid interest of Rs.56,61,461/- and the Assessing Officer is justified in disallowing the interest of Rs.26,52,500/- out of the interest expenditure incurred by the assessee of Rs.56,61,461/-. He relied on the judgment of Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. 286 ITR 1, wherein held that the share capital is meant to be used for productive use in the business. If the share capital, according to the assessee, was surplus and it could part with the same to its sister concern for non-business purpose without any interest, there was no need to raise the loans to that extent and the....
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....ee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that inspite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. In our view, even the plea of nexus of loans raised by the assessee with the funds advanced to the sister concerns on interest free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted. 11. The Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds etc. do not have any different colour. Whatever are the receipts in the business, th....
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.... the time of disbursement of funds. This would depend on facts of each case. 13. Section 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim no or little interest from its subsidiaries. 14. In the case of K. Somasundaram and Brothers v. Commissioner of Income-Tax 238 ITR 939, while dealing with a similar proposition, Madras High Court held as under (page 944): The amount so lent, according to the assessee, came out of the contract earnings. The amount borrowed, according to the assessee was invested in the execution of the contracts. It is clear, therefore, that the assessee had invested the borrowed funds in the execution of the contracts, had recouped the money so invested presumably with profits as well on executing the contract....
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.... ''We are inclined to accept the argument raised by counsel for the Revenue, because the advances to the partners, their relatives and the sister concerns are not for business purposes and the assessee has not derived any benefit out of the same. Admittedly, no interest was charged on these advances. The Tribunal appears to have placed reliance on the fact that the partners and their relatives have utilised the amounts for business purposes, such as construction of a shop building etc. So long as the assessee- firm is not the beneficiary of such investments, the nature of investment or the utilisation of such advances has no relevance. So far as the assessee is concerned, it is only an interest free advance. The claim of the assessee's counsel that cash balances were available with the firm for advances to the partners, their relatives and the sister concerns does not advance the assessee's case. If cash balances are available, the borrowing itself is not for the purpose of the business. An assessee with liquidity cannot claim that it can give interest free advances to the partners and others and then borrow funds from the bank on interest for business purposes. Such borrow....
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....it may not have been necessary to borrow from the banks. We are, therefore, of the opinion that the Income-tax Officer was right in disallowing the difference of interest under Section 36(1)(iii) of the Income-tax Act and that the Tribunal's approach is not only superficial but too naïve". 14.6 In the case of Indian Metals and Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344, the Orissa High Court held as under (page 349): ''... it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee. 14.7 Yet again in CIT v. H.R. Sugar Factory Pvt. Ltd. 190 ITR 643 (All.), B.P. Jeevan Reddy C.J. (as his Lordship then was) relying upon his earlier decision in H.R. Sugar Factory Pvt. Ltd.'s case that the assessee-company was not entitled to the allowance of interest. 14.8 In Veecumsees v. CIT, 220 ITR 185 (SC) ; The Hon'ble the Supre....
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....bunal, with reference to the factual aspects, came to hold that the money utilised was from the borrowed funds. This essentially is an inference from factual aspects. Illustratively, it may be pointed out that, in a hypothetical case, an assessee can earn profits only after the date of investment and advance. It cannot be said that because, in the concerned assessment year, the profit was more than the investment and advance, those came only out of the profit. The actual financial liquidity position on the relevant date has to be established by the assessee". 14.13 In Regal Theatre v. Commissioner of Income Tax, 225 ITR 205, the Delhi High Court held that consideration of the issue regarding allowability of deduction under Section 36(1)(iii) of the Act is purely a question of law as it is an inference to be drawn from the facts. 15. In our opinion, if the amount is advanced from a mixed account or share capital or sale proceeds or profits etc., the same would be termed as diversion of borrowed capital and that the revenue need not require to establish nexus of the funds advanced to the sister concerns with the borrowed funds. Once it is borne out from the record t....
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....s fruitfully utilised instead of keeping it idle the income thus generated will be of revenue nature and not accretion of capital. Whether the company raised the capital by issue of shares or debentures or by borrowing will not make any difference to this principle. If borrowed capital is used for the purpose of earning income that income will have to be taxed in accordance with law. Income is something which flows from the property. Something received in place of the property will be capital receipt. The amount of interest received by the company flows from its investments and is its income and is clearly taxable even though the interest amount is earned by utilising borrowed capital. It is true that the company will have to pay interest on the money borrowed by it. But that cannot be a ground for exemption of interest earned by the company by utilising the borrowed funds as its income. The interest earned by the assessee is clearly its income and unless it can be shown that any provision like s. 10 has exempted it from tax, it will be taxable. The question of adjustment of interest payable by the company against the interest earned by it will depend upon the provisions o....
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.... whichever way he likes. He may or may not discharge his liability to pay interest with this income. Merely because it was utilised to repay the interest on the loan taken by the assessee, it did not cease to be his income. The interest earned by the assessee could have been used for many other purposes. If the assessee purchased a house or distributed dividend or paid salary of its employees with the money received as interest, will the interest amount be treated as not his income? This is not a case of diversion of income by overriding title. The assessee was entirely at liberty to deal with the interest amount as he liked. The application of the income for payment of interest could not affect its taxability in any way.-CIT vs. Seshasayee Paper & Boards Ltd. (1987) 61 CTR (Mad) 117 : (1985) 156 1TR 542 (Mad) : TC 41 R. 544 and Kedar Narain Sinoh vs. CIT (1938) 6 ITR 157 (All) : TC 32R.258 approved; CIT vs. NaQdriuna Steels Ltd. (1988) 71 CTR (AP) 118 : (1988) 171 ITR 663 (AP) : TC 41R.551, CIT vs. Electrochem Orissa Ltd. (1995) 123 CTR (On) 162 : (1995) 211 ITR 552 (Ori) and CIT vs. Maharashtra Electrosmelt ,v Ltg\. (1995) 124 CTR (Bom) 117 : (1995) 214 ITR 489 (Bom) : TC 41R.557....
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....were not making profits and the assessee before us was making profits, hence, funds were transferred for reducing the tax liability of the profit making concern. Applying the ratio laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Abhishek Industries [286 ITR 1 (P&H)], the Assessing Officer disallowed a sum of Rs. 14,82,695/- being 12% interest on the said advances. The Assessing Officer also held that the ratio of commercial expediency quoted by the Hon'ble Supreme Court in M/s S.A. Builders [288 ITR 1 (SC)] was not applicable in view of no business expediency. Another plea of the assessee that both the assessee and its sister concern were supplying their goods to one concern was held by the Assessing Officer not to be a case of business expediency in relation to the assessee. The CIT(A) upheld the order of Assessing Officer on all counts and also agreed with the Assessing Officer that the commercial expediency for the purpose of examining and applicability of the ratio laid down in M/s S.A. Builders Ltd (Supra) had to be seen with reference to the loan given and not to the loan receiver. The CIT(A) thus held that in view of the ratio laid down in CIT Vs. Abh....
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....supra), the Hon'ble Supreme court has recognized that in order to establish nexus between the expenditures and the purposes of business, the business of sister concern need not necessarily be the business of the assessee itself. 5. We have heard the rival contentions and perused the records. The issue arises in the present appeal with regard to the allowability of deduction u/s 36(1)(iii) of the Act. The assessee during the year under consideration had raised loan of Rs. 100 lacs from its banks, which was advanced interest free to the sister concern of the assessee M/s Luxmi Engineering Works. The loan was borrowed from the bank at interest cost of 12% and the same was advanced interest free to the sister concern. The plea of the assessee for making the said advance to its sister concern is that the same has been advanced for commercial expediency. The assessee and the sister concern had individually overdrawn credit limits from banks. The assessee had stood guarantee to the credit facilities availed by the sister concern. Because of non payment, the said overdraft account available by the sister concern was in danger of being declared as NPA by the bank. In order to e....
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....ny other circumstances (which need not be enumerated here). However, where it is obvious that 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." 9. Coming to the facts of the present case before us, we find that the share holding of the directors in the assessee company and the partners in the sister concern M/s Luxmi Engineering Works are common. The two concerns are family concerns having different lines of manufacturing. The assessee is manufacturing sewing machines under the brand name of 'Luxmi' and as per the assessee major portion of the sales are being made to M/s Usha International Ltd. The sister concern is engaged in the manufacturing of fans under the brand name 'Luxmi' and 90% of the sales are being made to M/s Usha International Ltd. Both the concerns had taken independent credits limits from Punjab National Bank and the assessee had stood guarantor to the credit limits advanced to the sister concern. However, M/s Luxmi Engineering works had gone into huge losses and the bank accoun....
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....sment Year 2001-02 wherein while allowing the claim of deduction u/s 37(1) of the Act, the expression 'for the purpose of business' has been considered in the light of the ratio laid down in various judgments by the Hon'ble Apex Court. A reference has been made to the ratio laid down by Apex Court in CIT Vs. Chandu Lal Keshav Lal & Company [38 ITR 601], which reads as under:- "11.3 In fact, a gainful reference can be made to the judgement of the Hon'ble Apex Court in the case of CIT v. Chandulal Keshavala and Co. reported in 38 ITR 601. In the said case, assessee was a managing agent of a company and commission of Rs 309114/- accrued to it. The financial position of the managed company was not goods and as such it gave up full amount of claim of commission and agreed to take only Rs 100000/- only. The AO taxed the entire amount of Rs 309114/- as income of the assessee. The ITAT held that the amount of Rs 209114/- given up was for the purposes of business and hence allowable as business expenditure. It held that the assessee's business prosperity is linked up with managed company, if the managed company grew assessee's commission would also grow and conseque....
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....the services of existing and future members of their staff and of increasing the efficiency of the staff; and after referring to the contention of the Crown that the sum of pound 31,784 was not money wholly and exclusively laid out for the purposes of the trade under the rule above referred to, they found that the deduction was admissible--thus in effect, although not in terms, negativing the Crown's contention. I thing that there was ample material to, support the findings of the Commissioners. and accordingly that this prohibition does not apply." (Underlined for emphasis by us)" 12. Applying the test of commercial expediency propounded by the Apex Court in S.A. Builders Ltd (Supra), the Tribunal in Hero Cylces Ltd Vs. ACIT held as under:- "............In fact, learned counsel for the assessee had relied upon the judgement of the Hon'ble Apex Court in the case of S.A. Builders Ltd. (supra) for the necessarily be the business of the assessee itself. In the said judgement, the Hon'ble Apex Court has noted that where it is obvious that a holding company has a deep interest in a subsidiary and if the holding company advanced borrowed money to a subsidiar....
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....rticles of Association of the assessee company, the main business of the assessee company is to deal and investment in shares. As per the balance sheet of the assessee company available at page Nos.1 to 11 of the paper book, it is seen that the assets of the company includes investments of Rs.192 crores and deposit with a company M/s Mysore Amalgamated Coffee Estates Ltd. Rs.17.95 crores and Yes bank Rs.49 lakhs and there is no inventory or stock in trade. As per P&L account available at page 12 of the paper book, the assessee is showing income of Rs.3,44,869/-on account of interest on FDs and the activity in respect of purchase of shares of various companies is not shown as purchase and closing stock in trade. Specific query was raised by the Bench and in reply it was submitted by the ld AR of the assessee that there is no stock in trade and in my considered opinion, in the facts of the present case, it cannot be said that the assessee is doing any business activity and any income is to be taxed under the head 'income from business'. Therefore, no deduction is allowable u/s 36(1)(iii) in respect of interest paid by the assessee and claimed as allowable expenditure because as per t....
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.... or constructions and any property for the purpose of letting out the same to visitors or guests or to customers or persons doing business with the Company whether in single rooms, suits, cottages or in any other form or manner, and to establish and provide for all kinds of comforts and facilities for the customers. 4 To carry on the business of builders, contractors, operators, developers of land and building and maintaining and providing various infrastructural facilities in or to various sectors by setting up hotels, motels, restaurants, food courts, shops & business establishments, shopping malls, commercial complexes, holiday resorts, clubs, pubs, bars, eating joints, cafes, tavern, beer-houses, refreshments, tea rooms, milk and snack bars, baths, boutiques, swimming pools, boat clubs, dressing rooms, laundries, reading rooms, libraries, play grounds, places and equipments of all kinds and description including altering, improving, enlarging, developing, decorating, furnishing and maintaining of structures, buildings, sites, for and in connection with the industry of hospitality, boarding, lodging, entertainment, amusement, recreation, sports, and/or pleasure, cottage....
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.... conveniences of all kinds and by consolidating or connecting or sub dividing properties and by leasing renting out and disposing of the same. 5. To collaborate with foreign firms for acquiring or offering technical know-how, or to employ foreign technicians or experts or advisers on a contract basis or otherwise and to loan on suitable terms in Company's technicians, experts and others to other parties in or outside India for pursing the main objects and to send out to foreign countries the Company's own technicians, plants, machinery tools, etc., for pursuing the main objects in foreign countries on a joint venture basis or otherwise and to send out Company's men to foreign countries for further training. 6. To administer/manage land, building, bungalows and other properties, colony or colonies whether belonging to the Company or not and to collect rents and income and to supply to tenants, occupiers and others refreshments attendants, messengers, lights and to provide waiting-rooms, reading rooms, meeting rooms, lavatories, laundries and all conveniences, stables and other advantages. 7. To acquire and take over any business or undertaking ....
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....d Semi-Government Undertakings, Local Authorities and for other public and private bodies. 14. To apply or join in applying to any Parliament, Government, Local Improvement Trust or other authority or body Municipal, Local or otherwise in Dominion of India, Native States, colonies or foreign countries for and to obtain or in any way assist in obtaining any Act of Parliament, Laws, decrees, concessions, orders, rights or privileges or advantages that may seem conducive to the objects of this or any other company or for enabling this or any other company's constitution to oppose any proceeding or applications which may seem calculated directly or indirectly or prejudice the interests of this or any other company to be legalized, registered or incorporated if necessary in accordance with the laws of any country, state or place in which it may propose to carry on operation to establish and maintain any agencies of the Company and to open and keep a colonial or a foreign register of this or any other company in any Foreign country, Native States, colony or dependency and to allocate any number of these or any other shares in this or any other company to such register or reg....
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....pany, both present and including its uncalled capital and also by a similar mortgage, charge, pledge, hypothecation or lien to secure and guarantee the performance by the Company or any other person or company of any obligation undertaken by the Company or any other person or company as the case may be, and on such other terms and conditions like rate of interest repayment schedule, creation of trust, powers of trustees and lenders, convertibility clause, nomination of Directors etc. as the Directors may deem fit so, however, that the Company shall not do any Banking Business as defined in the Banking Regulation Act, 1949. 23. Subject to the provisions of the Companies Act, 1956, to lend and advance money or give credit with or without security, to such persons, companies, corporation or firms and on such terms as may seem expedient and in particular, to customers and others having dealing with the Company and to release or discharge any debt or obligation owing to the Company, guarantee the performance of any contract or obligation of any company, firm or person and to guarantee the payment and repayment of the capital and principal interest or premium payable on any stoc....
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....ill, property-rights, assets or liabilities of any Company or persons carrying on or about to carry on any business which the Company is authorized to carry on. 31. To incur debts and obligations for the conduct of any business of the Company and to purchase or hire goods or materials or machinery on credit or otherwise for any business or purposes of this Company. 32. To amalgamate or enter into partnership or into any arrangement for sharing profits, union of interests, cooperation, joint ventures, reciprocal concession, limiting competition or otherwise, with any person, firm or Company carrying on or engaged in or about to carry on or be engaged in, any business or transaction which this Company is authorised to carry on or and to lend money to guarantee the contracts or otherwise assist or subsidise any such person, firm or company and to take or otherwise acquire, share and securities of any such Company, and to sell, hold, reissue with or without guarantee or otherwise deal with the same and to give to any persons, firm or company special rights and privileges in connection with control over this Company, and in particular the right to nominate one or more ....
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....interest as may seem expedient for the fulfillment of objects. 39. To establish or promote or concur in establishing or promoting any company or firm for the purposes of acquiring all or any of the property-rights, and liabilities of the Company and to place or guarantee the placing of underwrite, subscribe for or otherwise acquire all or any part of the shares, debentures or other securities or any such other company. 40. To employ agents or experts to investigate and examine and conditions, prospects, value, character and circumstances of any business concerns and undertakings and generally of any assets, properties or rights or business or industry or profession. 41. To procure the recognition of the Company in or under the law or regulations of any place outside India and to do all acts necessary for carrying on, in any foreign country, any business or profession of the Company. 42. To create any depreciation fund, reserve fund, sinking fund, insurance fund, provident fund or any other special fund whether for depreciation or for repairing, replacing, improving, extending or maintaining any of the property of the Company or for any other purp....
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....Company subject to the provisions of the Companies Act, 1956 in the event of the winding up of the Company. 50. To act as selling agents, sale organizers as well as consultants, agents and advisers in all the respective branches and in such capacity to give advices and information and render advices in person, a firm, company or body corporate or authority or Government. 51. To investigate on behalf of any company, corporation, body corporate, industries, firm, association or any person and to collect information and data and submit reports, feasibility or new projects and/or improvements to and/or expansion of existing projects and to diagnose operational difficulties and weakness and suggest remedial measures to improve and moderate existing units. 52. To prepare and submit overall and detailed plans for civil, industrial execution to any company, corporation and body corporate, industries, firm, association or any person with regard to New Projects and/or Improvements and/or expansion of the existing projects. 53. To invest in and acquire and hold and otherwise deal in shares, stocks, debentures, debenture stock, bonds, obligations and securit....
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....or firm for the purposes of acquiring all or any of the property-rights, and liabilities of the Company and to place or guarantee the placing of underwrite, subscribe for or otherwise acquire all or any part of the shares, debentures or other securities or any such other company. ...................... 51. To investigate on behalf of any company, corporation, body corporate, industries, firm, association or any person and to collect information and data and submit reports, feasibility or new projects and/or improvements to and/or expansion of existing projects and to diagnose operational difficulties and weakness and suggest remedial measures to improve and moderate existing units. ................... 53. To invest in and acquire and hold and otherwise deal in shares, stocks, debentures, debenture stock, bonds, obligations and securities issued or guaranteed by any company constituted or carrying on business in India or elsewhere and debentures, debenture stock, bonds, obligations and securities issued or guaranteed by any government, state, dominion, sovereign, ruler, commissioner, public body or authority supreme, municipal, local or otherwise ....
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....ak Infrastructure Pvt. Ltd. Thus, loan was borrowed for the purpose of investments and loan has been shown in the balance sheet as on 31.03.2018 under head "Current liabilities - Financial Liabilities - Other current financial liabilities" as on 31.3.2018. The investment activity is one of the business of the assessee and this loan continues to be for business purposes. The activity of investment of the assessee cannot be said that it is not the business activity of the assessee company. In other words, when the assessee has borrowed the funds for the purpose of making investment in shares and that investment is one of the business activity of the assessee company amount borrowed for such investment is for the purpose of business and the interest incurred on such borrowals to be wholly and exclusively for the purpose of business and it has been fulfilled the condition laid down in section 36(1)(iii) of the Act, which reads as under:- "36(1)(iii): The amount of interest paid in respect of capital borrowed for the purpose of business or profession: [Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset [**....
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.... Legal and professional charges 7,105 Printing and stationery 23 Rates and taxes 116 Miscellaneous expenses 159 Total 14,454 7.6 These expenses are also allowable only in case of business income and which has not been disallowed by the AO. In fact, the AO treated the income as business income. Though the shares have not been shown as stock-in-trade in the balance sheet, the method of valuation has been shown to be Fair Market Value which can be seen from notes to financial statements, which are as follows: 3.2 Financial Instruments i. Recognition and initial measurement Trade receivables and debt securities issued are initially recognized when they are originated. All other financial assets and financial liabilities are initially recognized when the Company becomes a party to the contractual provisions of the instrument. A financial assets or financial liability is initially measured at fair value plus, for an item not at fair value through profit and loss (FVTPL), transaction costs that are directly attributable to its acquisition or issue. ii. Classification and subsequent measurement Financial assets ....
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....usiness is managed and information is provided to the management. The information considered includes: - The stated policies and objectives for the portfolio ad the operation of those policies in practice. These include whether management's strategy focuses n earning contractual interest income, maintaining a particular interest rate profile, matching the duration of the financial asset to the duration of any related liabilities or expected cash outflows or realizing cash flows through the sale of the assets; - How the performance of the portfolio is evaluated and reported to the Company's management. - The risk that effects the performance of the business model (and the financial asset held within that business model) and how those risks are managed; - How managers of the business are compensated - e.g. whether compensation is based on the fair value of the assets managed or the contractual cash flows collected; and - The frequency, volume and timing of sales of the financial assets in prior periods, the reasons for such sales and expectations about about future sales activity. Transfers of financial assets to third parties in ....
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....e holding and subsidiary are in same line of business. That being so, it is to be held that nexus between expenditure and purpose of business. It has been repeatedly held by various Courts in the expression used in section 36(1) (iii) "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". 7.9 For this proposition reliance is placed on the Judgment of the Hon'ble Supreme Court in the case of CIT vs Malayalam Plantations Ltd 53 IT 140 and CIT Vs Birla Cotton Spinning and Weaving Mills Ltd 82 IT 166. It therefore follows that even in the event of no profit/revenue immediately emanating from investment, such investment is dictated by commercial expediency; no business man can be compelled to maximize profits. 7.10 The Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd Vs CIT (Central) in Civil Appeal No 514/2008 has held that when the assessee has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business no disallowance can be made under section 36(1) (iii). In the said case the Hon'ble Supreme Court upheld the finding of the lower authorities that when the i....
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....xpression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The Calcutta High Court in the case of CIT vs. Kanoria Investments (P) Ltd. (1999) 151 CTR (Cal) 160 : (1998) 232 ITR 7 (Cal) observed that once the capital has been borrowed for the purpose of business, it is immaterial as to how the borrowed money was applied, the interest payment would be deductible under s. 36(l)(iii) of the Act. The Supreme Court in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) drew a distinction between the expressions "for the purpose of business" and "for the purpose of earning profits". The former is wider in scope than the latter to the extent that it may take in not only the day-to-day running of a business but also the rationalization of its administration and modernization of its machinery; it may include measures for the preservation of the business and for the protection of its assets and property from expropriation, coercive process or assertion of hostile title; it may also comprehend payment of statutory dues and taxes imposed as a precondition to commence ....
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....hat since I have given a finding that the business of the assessee is to invest in shares and that the borrowing was for the purpose of business, the entire interest has to be allowed under s. 36(l)(iii) of the Act. 7.13 In view of this, I allow this ground of appeal of the assessee. 8. Next ground for my consideration is with regard to disallowance of Rs.7,10,500/- being the expense incurred on legal and professional charges debited to P&L account. This expenditure disallowed on the reason that it was incurred for purchase of shares of AIPL and it was the observation of the lower authorities that "acquisition of shares of AIPL is the result in capital gain. The cost of acquisition of such a capital asset would include the expenditure incurred for acquiring it. The legal and professional charges paid by the assessee thus go to increase the cost of acquisition of capital asset acquired and hence, it cannot be allowed." 8.1 I have heard both the parties on this issue. While adjudicating the earlier ground for making investment in shares is for business activity of the assessee company and it was carried in terms of the object clause mentioned in the Memorandum of Articles of....
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.... income tax matters earlier. 6. TAR 8. CHITRA BANGALORE METROPOLITAN AREA Reg . No. 10153 GOVT. FINDIA OF For RMZ Hotels Private Limited Ahhabria Senior managDirector That, Sri V S Narayanan, who was handling all the income tax related matters had actually desired that we should henceforth start handling the income tax matters of our company and owing to the confusion misconception in communication between us, the appeal could not be filed within the due date as we were under the impression that he would have attended to the matter and he was under the impression that we would have attended to the filing of the appeal. 7. That, recently, when we were going through our income tax files during the tax audit of the group companies, we approached Sri V S Narayanan to get a copy of the appeal filed for our records and it is only then that it was discovered that no appeal was filed against the aforesaid appellate order and thereupon, we took immediate steps to file the present appeal before the Hon'ble ITAT. 8. That, there was a delay of 93 days in filing the appeal before the Hon'ble Income-tax Appellate T....