TaxTMI 
TaxTMI 
TaxTMI 
2016 (7) TMI 1716
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....ncome Tax Appellate Tribunal was right in law in holding that the interest expenditure amounting to Rs. 1,74,01,007/- incurred by the appellant on the funds borrowed for the purpose of business of making share application is not business expenditure and therefore not eligible for deduction? (ii) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in not appreciating that borrowings have ultimately been used for the purpose of business and therefore interest upon the same has to be allowed as business expenditure u/s. 36(1)(iii) of the Act? (iii) Whether in the facts and circumstances of the case the Income Tax Appellate Tribunal was right in law in disallowing interest expenditure u/s. 57(iii) of the Act?" 2.1 Similarly, in Tax Appeal Nos. 876, 2272 to 2274 of 2009 and 1486, 1488, 1489 and 1590 of 2010, all the substantial questions are same except the variation in the amount of interest expenditure in question no.(i) in each of said appeals. So far as Tax Appeal No. 1485 of 2010 is concerned, over and above aforesaid questions, following additional question is posed for our consideration. "(ii) Whether, in the f....
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....owed by taking loan from Baroad Peoples' Co-op. Bank for which the assessee has deposited a sum of Rs. 12,40,000/- as margin money with the bank for this purpose which was taken from Ashokjyot Oxygen Pvt. Ltd. another concern of the assessee. In the case before us there is a clearcut finding given by the AO that the funds had been rotated from GACL to SFC, from SFC to the assessee and again went back to GACL. No material or evidence was brought before us by the learned AR which may prove that the finding given by the AO is not correct. This finding, in our opinion, remains uncontroverted and due to this finding the facts involved in this case are also similar to the facts in the case of DCIT v Pramukh Oxygen Ltd. in which this Tribunal has vide order 31-10-2005 restored the order of the AO disallowing the interest by observing as under:- "4. We have heard the parties and considered their rival submissions. When the assessee had applied for allotment of shares on 8-5-1995 and paid the full value of the shares and when the project for which the share capital was being raised could not be completed because of recession in the market and other unfavourable market conditions....
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....ing the decision of the coordinate bench of this Tribunal, we set aside the order of the CIT (A) and restore the order of the AO disallowing the claim of interest. Thus, Ground No. 1 stands allowed." 4. He contended that the aforesaid decision in the case of DCTI v. Pramukh Oxygen Ltd. has been reversed by a judgment of this Court rendered in Tax Appeal No. 474 of 2006 and allied matters, wherein it is observed as under:- "11. In the backdrop of the aforesaid facts, it would be germane to refer to the question as to whether the provisions of section 36(1)(iii) of the Act would be applicable to the facts of the present case and whether the assessee is entitled to the deduction of interest on borrowed funds which have been advanced for the purpose of acquisition of shares in the sister concern. 12. A perusal of the orders passed by the authorities below clearly shows that it is the consistent case of the assessee that the advance obtained from the Baroda Peoples Co-operative Bank Limited was for the purpose of acquiring the shares of Akshar Private Limited, an associate concern, to gain the controlling interest in the said company with a view to expand its business o....
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....n of the Supreme Court in the case of Deputy Commissioner of Income tax, Ahmedabad v. Core Health Care Ltd., (2008) 2 SCC 465, wherein the court held that interest on monies borrowed for the purpose of business is a necessary item of expenditure in a business. For allowance of a claim for deduction of interest under the said section, all that is necessary is that firstly, the money i.e. capital, must have been borrowed by the assessee; secondly, it must have been borrowed for the purpose of business; and thirdly, the assessee must have paid interest on the borrowed amount. All that is germane is: whether the borrowing was, or was not, for the purpose of business. It was held that the expression for the purpose of business occurring in section 36(1)(iii) indicates that once the test of for the purpose of business is satisfied in respect of borrowed capital, the assessee would be entitled to deduction under section 36(1)(iii) of the 1961 Act. 14. Examining the facts of the present case in the light of the principles propounded in the above decisions, the facts as emerging from the record reveal that the assessee had borrowed capital for the purpose of acquiring shares of Akshar P.....
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.... to deduction of the interest paid on such borrowed funds notwithstanding the fact that ultimately, the purpose for which the capital was borrowed was not served and the shares were not actually allotted to the assessee. 15. The findings recorded by the Assessing Officer that the amount was paid under the guise of share application money to the sister concern, stand dislodged by the facts which emerge from the record, inasmuch as, the amount was directly paid by the concerned bank to the sister concern and in fact, share applications had been made for 4,29,000 shares which was reflected in the records of the assessee as well as the sister concern. 16. As regards the contention of the learned advocate for the revenue that the borrowed funds were advanced towards share application money which shares would have ultimately yielded dividend which would be exempted income and hence, in the light of the decision of the Kerala High Court in the case of Leena Ramachandran (supra), the expenditure incurred by the assessee towards purchase of shares would not be an admissible expenditure is concerned, in the opinion of this court, the view adopted in the above decision is contrary to th....
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....rest incurred by the assessee on the funds borrowed for share application money is not allowable as a deduction. He reiterated that the decision, which has been relied upon by the Tribunal, has been reversed by this Court in the Tax Appeal, as aforesaid. 6. Mr. Sudhir Mehta, learned counsel for the respondent has supported the impugned order and submitted that in view of the following decisions, impugned order is not required to be interfered with. 6.1 In the case of Commissioner of Income-tax, Ahmedabad v. Cornerstone Exports (P.) Ltd. reported in [2016] 67 taxmann.com 345 (Gujarat), it is observed as under:- "13. The facts in this case are some what peculiar. As recorded by the Assessing Officer and which facts are not disturbed by the Tribunal, the assessee, during year under consideration, borrowed Rs. 25.30 crores from various group companies at a higher interest rate, in most cases @ 21%. Amount of Rs. 16.88 crores out of such funds was advanced to the various companies, mostly @ 14% interest. In many cases funds borrowed on the same day were used for making advances. Out of advances of Rs. 16.88 crores Rs. 15.08 crores was made to various companies ha....
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....st liability discharged by the assessee company in borrowing such funds was not shown to be in any manner actuated by business expediency. The Assessing Officer was perfectly justified in disallowing such component of interest." 6.2 In Jayesh Raichand Shah v. Assistant v. Commissioner of Income-tax reported in [2014] 360 ITR 387 (Gujarat), it is observed as under:- "3.00. Having heard Mr. Hemani, learned advocate appearing on behalf of the appellant assessee. With respect to the impugned judgement and order passed by the ITAT remanding the matter to the Assessing Officer on the issue of rejection of books of accounts under section 145(3) of the ITAT and consequently addition of Rs. 1,07,39,574/- by way of estimation of gross profit is concerned, as the matter is remanded to the Assessing Officer and sufficient opportunity will be given to the assessee to make submissions and submit explanation, we do not think it proper to interfere with the impugned order of remand by the ITAT with respect to the aforesaid issue. However, suffice it to say that despite the sufficient opportunity given to the assessee to explain the discrepancies in the books of accounts as well as stock, ....
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....the instant case it is seen that the assessee has made gift of Rs. 20,00,000/- to each to Shri Bhavik J. Shah, Shri Tejas Shah and Shri Jignesh Shah on 19/06/07, 19/06/07 and 16/06/07 respectively and almost the same amount is received as loan from these persons just after 3 days that is on 22/06/07. This action of the assessee clearly transpires that business exigency was over looked and unreasonable interest was paid to the above persons. Therefore, the interest paid to the above persons on the amount gifted is not allowable as per 40(A)(2)(b) of the IT Act. Accordingly I calculate the excessive payment of interest on the amount gifted as under : Name of the Person Amount of Gift Gift made on Period upto March 2008 Interest @ 16% Bhavik J. Shah Rs. 20,00,00 0 19/06/07 285 days Rs. 2,49,863 Tejas R. Shah Rs. 20,00,00 0 19/06/07 285 days Rs. 2,49,863 Jignesh Shah Rs. 20,00,00 0 16/06/07 285 days Rs. 2,47,239 Total Rs. 7,46,965 The same came to be deleted by CIT (A) and in appeal ITAT reversed the order of CIT (A) and confirmed the addition made by the Assessing Officer. While restoring order passed by Assessing Officer, ITAT in ....
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....nterest from taxable income. They do not establish any genuine borrowing. It is quite well settled that illegal or colourable devices have to be ignored. The CIT (A) ought to have ignored them and decided the issue in accordance with the provisions of sec. 36(1)(iii) which was relevant for deciding the issue under appeal. Ground 2 is allowed. 5. We are in complete agreement with the reasoning given by the ITAT. The submissions on behalf of the assessee that out of the aforesaid three persons, two persons namely, Mr. Tejas Shah and Mr. Jignesh Shah cannot be said to be related to the assessee within the meaning of section 40(A)(2)(b) of the Act is concerned, it is required to be noted that as such the aforesaid persons are found to be nephews of the assessee and the finding that money was first diverted by the assessee from his business as a gift to the aforesaid three persons and thereafter the same money was given to the assessee at the rate of 16% per annum and on which the assessee claimed benefit under section 40(A)(2)(b) of the Act and the entire series of transactions were illusory, colourable and not genuinely for the purpose of the business. It is rightly held that there....
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....tive must always be borne in mind, for, what is relevant is the manifest and immediate purpose and not the motive or personal considerations weighing in the mind of the assessee for incurring the expenditure. 11. Now, if we turn to the facts of this case, what is required to be noted is that the shares of SGML were held by the assessee along with two other groups of shareholders, viz., Kasturbhai group and Patel group. The assessee held 11,264 shares, Kasturbhai group held 24,975 shares and the Patel group held 12,737 shares. The assessee was also the managing agent of SGML. It was agreed amongst the shareholders that the assessee should purchase all the shares in order to improve the business of SGML by holding 100% shares of SGML, which would have enabled it to implement the expansion projects. Thus, the shares which were purchased by the assessee were not for the purpose of earning income, though that can be regarded as the ultimate motive. The shares were purchased by the assessee with a clear purpose or object of getting 100% control over SOML. If the purpose was to earn income only, or even if that was the dominant purpose, it would not have sold the shares again to KPPL a....