TaxTMI 
TaxTMI 
2024 (7) TMI 1723
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..... Facts of the case: 3. A search and seizure operations U/s. 132 of the Act was conducted in the group cases of Lalithaa Jewellery Mart Pvt ltd (LJMPL) on 04.03.2021 and the residential premises of Moolchand Kiran Kumar was also covered. The assessee is a proprietor of AK Exports and promoter of Lalithaa Jewellery Mart Pvt ltd (LJMPL) group. The assessee filed the return of Income for the A. Y 2020-21 declaring total Income of Rs. 37,910/-. The assessee filed return Income for the A Y 2021-22 declaring total Income of Rs. 1,87,79,210/-. The AO concluded the assessment as under: AY Order Particulars Addition/ disallowance 2020-21 u/s. 153A /143(3) Addition on account of bad debt written of Rs. 71,14,31,320/- Disallowance u/s. 36(1)(iii) Rs. 12,38,52,364/- 2021-22 u/s. 143(3) Disallowance us. 36(1)(iii) Rs. 15,37,46,880/- Aggrieved by the action of the AO, the assessee preferred an appeal before the Ld. CIT(A). 4. The ld. CIT(A), adjudicated both the appeals on merit and dismissed the assessee's appeal with respect to addition on account of bad debts written off to the tune of Rs. 71.14 crores for the A Y 2020-21 (which has no....
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....nufacture of body of motor vehicle M. Kiran Kumar, Ponnusamy Rajeswaran 13 Shree Ayyappa Jewellery Pvt Ltd Company Wholesale dealer n bullion, diamond and gold ornament Sundaresan Vasan Ramesh, Ravindra Kumar Bothra The flagship company of the group is M/s. Lalitha Jewellery Mart P Ltd (M/s. LIMPL) which runs 32 large format showrooms across south India. Sl. No Investment (FY 2019-20) AY 2020-21 Amount in Rs. 1 Max Life Insurance 1,200,000 2 SBI Life Insurance 11,090,963 3 Star Union 1,974,481 4 Shares Division 3,240,699 5 Global Capital 1,239,727 6 Magnum Trust 6,000,000 7 Raj TV 556,148,491 8 Shares in Akshitha Castle Pvt Ltd 99,990 9 Shares in Asita Jewellery Exporters Pvt Ltd 3,315,849 10 Shares in BB Jeweller Exporters Pvt Ltd 41,000 11 Shares in Bhakthi Castle Pvt Ltd 99,990 12 Shares in Bhavya Homes P Ltd 99,990 13 Shares in Dilip Chhabria Design Pvt Ltd 292,227,711 14 Shares in KrishKiran Mega Mall Pvt Ltd 346,130 15 Shares in Lalitha Jewellery Mart Pvt Ltd 1,281,975,000 16 Shares in Shree Ayyappa Jeweller....
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....he interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation.- Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; As per See 36(1(ii), deduction shall be allowed for the amount o interest paid in respect of capital borrowed for the purposes of business or protection. The Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. Commissioner of Income Tax (CASE NO. Appeal (civil) 5811 of 2006} dt:14 December, 2005 has settled the issue of disallowance of interest paid us 36(1)(iii) based on commercial expediency for the purpose of business. The relevant paras are reproduced as under: It has been repeatedly held by this Court that the expression "or the purpose of business" is wider in scope than the expressi....
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....e businessmen 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 pent but that of & 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, It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize these 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 s....
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....llowed as expenditure. 9.3.3.6 The assessee has stated that he is having sufficient own fund to meet out the investment which resulted into generation of exempt income; however, the segregation of borrowed fund and the appellant own funds are not possible due to holding of long period and therefore, the best option if deemed fit for disallowance of expenses is to invoke the provision of section 14A rather than invoking of provision of section 36(1)(iii) of the Act. The argument of the assessee is unacceptable. The investments are not only in share capital, but in debt capital (loans) also. The major investment in the shares of LJMPL has already been excluded on the basis of commercial expediency. As far as other investments are concerned, there also, the assessee claims business expediency. Therefore, section 36(1)(iii) comes into play more here and gains more primacy here to see whether there is business expediency in such investments. In view of the above reasons, section 14A gains no merit in this case and hence, this contention is rejected. 9.3.3.7 On the investments other than M/s LJMPL, the assessee has not established any commercial expediency, Assessee has....
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....eferring to the financials statements of the assessee submitted that, the assessee has acquired shares in the private limited company to have control over the business i.e. commercial expediency and shown that the such investment has been made strategically over the number of years from 1999 to 2021. The assessee has acquired about 1,17,12,806 shares in the Company LJMPL, amounting to Rs. 128.19 Crores. 7. The Ld. counsel took us through the provisions of U/s.36(1)(iii) along with the Explanation of three important words/ phrases that are core to understanding of sub-section (iii) i.e. (i)Interest, (ii) borrowed and (iii) for the purpose of business or profession, which provides for claiming the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession and stated that, the AO has not understood the concept of business/commercial expediency in terms of investment made in shares to have a controlling stake and the relevant investments are 'business investment' and 'not Non- business investment'. 8. The ld. Counsel reiterated that these investments have been made in various group concerns. The Ld. Counsel relied on t....
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....at 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 free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 32. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a m....
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....me 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. (ii) B Nanji & co., Vs. DCIT [2020] 194 DTR 390 - (Guj) "37 The appellant assessee had borrowed the capital to purchase the shares of the IHFC Ltd so as to have effective control of the IHFC Ltd in order to expand its real estate business. Thus, the investment in share was nothing but the expansion of business of the assessee. Therefore, all the conditions necessary for deduction under Section 36(1) (iii) were prima facie satisfied by the appellant assessee. The CIT(A) was, therefore, not justified to allow deduction under Section 57(iii) of the Act as the appellant assessee did not borrow the capital for earning dividend or for making profit and gains. The dominant purpose of the appellant assessee to borrow the capital was to acquire the shares to have effective control over the IHFC Ltd so as to expand the business of the assessee. In that view of the matter, the CIT(A) was not justified in granting deduction of interest paid by the assessee under Section 57(iii) of the Act. But the assessee is entitled to....
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....ourt of Madras in the said case is not applicable to facts of this case, because in the said case the question of law answered by the Hon'ble Madras High Court is on the issue on re-opening of assessment u/s. 147 of the Act, but not on the issue of disallowance on interest u/s. 36(1)(iii) of the Act, for interest free advances to group companies for non-business purpose. Therefore, we are of the considered view that the case laws relied upon by the Ld. CIT(A) has no application to the facts of the present case." (iv) Gujarat Nippon enterprises Pvt Ltd Vs. ITO -ITA No. 410/AHD/2017 dated 01/02/2022 - Ahmedabad Tribunal "10. We have heard the rival contention of both the parties and perused the materials available on record. Admittedly, the borrowed fund has been invested by the assessee by acquiring the shares of 5 different companies which are capable of generating only dividend income which is exempt from the tax. 10.1 The question that requires to be adjudicated whether the investment was made by the assessee to have controlling interest in the companies. In this regard ITA no.410/AHD/2017 A.Y. 2005-06 we find that the assessee during the assessment proce....
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....rily 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 his profits." 10.4 We also note that the SLP filed against the above observation of Hon'ble Bombay High court has been dismissed by the Hon'ble Supreme Court in case of PCIT v/s E-City Investment and Holdings Company (P.) Ltd. reported in 117 taxmann.com 124 ITA no. 410/AHD/2017 A.Y. 2005-06. 10.5 We also draw support and guidance from the judgment of the Hon'ble Bombay High Court in the case of CIT vs. Phil Corpn. Ltd. reported in 14 taxmann.com 58 has held as under: "The reasoning of the Tribunal that the overdraft was not operated only for investing in the shares of subsidiary company and the fact that it was also used for investment in the shares of the sister/subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and,....