TaxTMI 
TaxTMI 
2025 (2) TMI 1577
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....Act, without considering the facts of the case that the assessee had availed huge loan of Rs 68.62 crore and, out of this invested an amount of Rs. 60.25 in subsidiary companies and claimed an interest expenditure of 8.95 crores on this loan amount for AY: 2018-19. 3. The Id.CIT(A) disregarded the findings of the AO, that the assessee could not produce the supporting details to prove the commercial expediency. Just because the investments were made in the subsidiary companies, it cannot be construed that the same were in made due to business expediency. 4. The ld. CIT(A) failed to appreciate that the assessee could not prove how interest free loans given to subsidiaries advanced the cause of its own business. For these grounds and any other ground including amendment of grounds that may be raised during the course of the appeal proceedings, the order of learned CIT(Appeals) may be set aside and that of the Assessing Officer be restored''. 4. Brief facts are as under: The assessee company is engaged in the business of renting of its infrastructure buildings and industrial parks to various third parties and receiving rental income. For the AY 2018-19,....
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....nts can only yield dividends to the holding company. 5.6.1 Now, the moot point for consideration is whether interest on borrowed funds utilized for investing in subsidiaries is allowable as business expenditure? Though there cannot be any direct reply to this issue since various words in the very question convey different meanings and the same have to be viewed depending on the facts of each case. Coming to the facts of the present case, the undisputed fact is that the subsidiaries of the appellant company were also engaged in similar line of business as of the appellant. Therefore, whether pursuing business interest through subsidiaries can be termed as business of the appellant company? While referring to such question and elaborating the term 'for the purpose of business' the Hon'ble Supreme Court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC) observed that the expression 'for the purpose of business' is wider in scope than the expression for the purpose of earning income, profits and gains. Therefore, the remarks of the AO that the investments had not brought in any income to the assessee and that the subsidiaries should have avai....
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.... line of business as of the appellant. Therefore, in view of the above decision, the test of allowability of interest is that the investment should be for the purpose of business. Accordingly, the inferences drawn by the AO in disallowing the proportionate interest on investments made out of borrowed funds are not well founded. 5.6.4 Further, the jurisdictional High Court in the case of CIT V. RPG Transmissions Ltd., (359 ITR 673) (2013) (Mad) referring to similar set of facts where assessee-company invested borrowed funds in shares of sister company having similar business, held that interest paid on borrowed capital was to be allowed. The operative portion of the said judgment is as under: "In the instant case, the Tribunal found that there is proximate nexus between the business of the assessee-company and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, there is expectancy of substantial gains which fact has returns are far below the quantum of interest paid on the borrowed funds and, there....
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....he equity capital in the subsidiaries. It was also contended that this expansion of business is within the ambit of objects of company as laid in their memorandum and articles of association. The relevant portion of the appellant's submission is reproduced as under: "5. As seen from the Schedule no 12 of the audited Financial statement for the Impugned year, Copy enclosed in paper book Page no 27, the appellant company has total Investment of Rs 123.40 crores in the Equity and Preference capital in six subsidiaries and step down subsidiaries and one Associate concern as a part of its business Planning. Out of the said total investment Rs 120.35 crore was invested on or before AY 2010-11 and Rs 3.05 crores spread over the years AY 2015-16 to AY 2017-18. Thus these investments had been carried over many years, the majority of which even more than eight years ago. A chart detailing the same is enclosed in paper book Pg No 34. The amount of investment is Rs 123.40 crore is also the opening balance for the impugned Assessment year. There is no increase in the Investments during the year. This investment has been ill conceived and noted by the Ld AO as Advance/Loan ....
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....refore the AO cannot sit in judgement over the business model. The Ld AO assumed that the Loan borrowed had been diverted to subsidiary and sister concern as loans or advances. Had the appellant company advanced the capital borrowed by way of Interest Free loan to its sister concern or subsidiary who are not in need and in similar line of business, may be, there can be a case to say there is no business exigency exists. This again is subject to the facts surrounding the ratio of the law held by the Hon'ble Apex Court in the case of SA Builders 288 ITR 1(SC). However in the appellant's case it is not a Loan nor advance and the investment in share capital is for the purpose of business need and expediency for the advancement of the objects of business to capture the fast growing market. Without prejudice even assuming that the investments are with a view to earn dividends, the capital invested and the return their from would be assessed under Income from Other Sources. In such an event the Interest on borrowed funds used for the investment in shares would be allowable under the head Income from Other Sources. Without prejudice, the appellant further submits that on facts surr....
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....investment in AY 2015-16 (Rs 1.81 crores) and 2016-17 (Rs 1.60 crore) which are detailed in the chart enclosed in paper book page no 34. 11. The appellant company submits that in the assessments for earlier years with similar and existing facts had been completed u/s 143(3), 153A and also u/s 147 where no such disallowance was made by the then AO, even after making due enquiries on the loans and investments. 12. Further, the conclusion of the Ld AO in his order in page 8 and 9 are ill conceived and erroneous for the reasons: i. The observation that huge Investment in sister concern without charge of Interest is highly ill conceived as the invested amount is in the share capital on which the income can be only through Dividend and not Interest. There can be no payment of Interest on share capital nor repayment as in the case of loans for the share capital invested creates further Business opportunities. ii Year after year business Exigency can emerge if new loans are given to its sister concern or subsidiary companies based on the requirements. The chart enclosed in the paper book page no 35 indicates that the appellant company is not obtaining lo....
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.... in its decision dated 5th November, 2015 that "commercial expediency is the prerogative of the businessman and that the Revenue cannot justifiably claim to put itself in the armchair of the businessman and dictate as to what is "commercial expediency". The Supreme Court has also observed that the Revenue cannot put itself in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure, having regard to the facts and circumstances of the case. It further held that no businessman can be compelled to maximize his profit and that 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 point o view but that of a prudent businessman. This decision of the Supreme Court should go a long way in asserting the rights of the businessmen with regard to what is meant by "commercial expediency" as the Revenue does not seem to have understood the market conditions in which businesses are carried on. No doubt, the Income-tax Department (Revenue) is not precluded from assuming powers against those who try to circumvent law through una....