Case Law Details

Case Name : S.P. Jaiswal Estates (P.) Ltd. Vs Assistant Commissioner of Income-tax (ITAT Kolkata)
Appeal Number : IT Appeal No. 488 & 525 (KOL.) Of 2011
Date of Judgement/Order : 31/05/2012
Related Assessment Year : 2006- 07
Courts : All ITAT (4213) ITAT Kolkata (264)

Interest not to be disallowed on interest free loan given to related companies if Assessee proves that same was from surplus interest free funds

IN THE ITAT KOLKATA BENCH ‘A’ (THIRD MEMBER)

S.P. Jaiswal Estates (P.) Ltd.

Versus

Assistant Commissioner of Income-tax

AND C.D. RAO, ACCOUNTANT MEMBER

IT APPEAL NOS. 488 & 525 (KOL.) OF 2011

[ASSESSMENT YEARS 2006-07 AND 2007-08]

MAY 31, 2012

ORDER

Mahavir Singh, Judicial Member  

Appeal No. 488/K/2011 filed by assessee is arising out of revision order of CIT (Central-1), Kolkata in M. No. CIT(C-1)/263/SP JAISWAL ESTATES P. LTD./Tech/10-11/Kol/11212-14 dated 01.03.2011. Assessment was framed by DCIT, C.C.-IV, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2006-07 vide dated 22.12.2008. Likewise, Appeal No.525/K/201 filed by assessee is arising out of order of CIT(A), Central-1, Kolkata in appeal No.131/CC-IV/CIT(A),C-1/09-10 dated 31.01.2011. Assessment was framed by ACIT, CC-IV, Kolkata u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as “the Act”) for Assessment Year 2007-08 vide dated 29.12.2009.

2. First we take up ITA No. 488/Kol/2011. This appeal of assessee is against the revision order passed by CIT u/s. 263 of the Act, revising the assessment framed u/s. 143(3) vide assessment order dated 22.12.2008. At the outset, Ld. Counsel for the assessee fairly stated that the AO while passing consequential order i.e. order u/s. 263 r.w.s. 143(3) of the Act dated 14.10.2011 has accepted the total income computed by AO u/s. 143(3)/251/154 dated 24.02.2010 at Rs. 1,35,63,565/- and also verified the foreign exchange reserve created and found the same in accordance with the provisions of section 80HHD of the Act, which has duly been utilized for the specific purpose as envisaged in sub-section (a) to (f) of section 80HHD(4) of the Act. According to Ld. Counsel, now this issue of section 263 of the Act i.e. the revision order is academic only and requires no adjudication. Ld. CIT, DR also fairly conceded the position. In view of the above, we dismiss the appeal of the assessee being infructuous as academic.

3. Now, we are taking ITA No. 525/Kol/2011. The first issue in this appeal of assessee is against the order of CIT(A) confirming the dis allowance of employees’ contribution to P.F u/s. 2(24)(x) r.w.s. 36(1)(va) of the Act. For this, assessee has raised following ground no. 1:

“1. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary addition of Rs. 1,10,224/-made in assessment u/s. 2(24)(x)/36(1)(va) of the Act on a/c of alleged belated deposit of Employees’ contribution to P.F. without considering the facts in the matter and such action of Ld. CIT(A) is bad in law and it may kindly be held accordingly.”

4. We have heard rival submissions and gone through facts and circumstances of the case. The Ld. Counsel for the assessee before us argued that these payments have been made within the due date of filing of return u/s. 139(1) of the Act, but these dates are not available in either of the orders of the authorities below. Hence, he stated that the matter can be remitted back to the file of Assessing Officer for verifying the dates whether the payment is made within the due date of filing of return of income u/s. 139(1) of the Act or not. We find that the issue is squarely covered in favour of assessee and against the revenue by the decision of Hon’ble jurisdictional High Court in the case of CIT v. Vijay Shree Ltd. vide ITAT No. 245 of 2011 in GA No. 2607 of 2011 dated 7th September, 2011, wherein it has been held as under:

“After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax v. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income-tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988.

Such being the position, the deletion of the amount paid by the Employees’ contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act.

We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal.”

In this view of the matter, we remit the matter back to Assessing Officer to verify dates whether payment is made within due dates of filing of return of income u/s. 139(1) of the Act or not. If payments are made within due date of filing of return of income u/s. 139(1) of the Act, then addition should be deleted in full. We order accordingly. This ground of appeal of the assessee is allowed for statistical purposes.

5. The next issue in this appeal of assessee is against the order of CIT(A) confirming dis allowance of prior period expenses on account of interest of Rs. 2,50,930/- and Rs. 2,59,408/- related to F.Y. 2004-05 and 2005-06. For this, assessee has raised following ground no. 2:

“2. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary dis allowance of Rs. 5,10,338/- made in the assessment on a/c of prior period expenses representing the interest expense of Rs. 2,50,930/- and Rs. 2,59,408/- for the F.Ys. 2004-05 & 2005-06 respectively without considering the facts that the said expenditure related to the electricity charge, allowable as a revenue expense and it may kindly be held accordingly.”

We have heard rival submissions and gone through facts and circumstances of the case. We find that the CIT(A) has confirmed the dis allowance by following finding in para 4.1 of his appellate order:

“4.1. I have carefully considered the submission of the Ld. A. R. There is no dispute that the only expenditure which is related to the accounting year under consideration has to be allowed against the declared receipts except the expenditure which was not crystallized in earlier accounting years. The expenditure in question pertains to F.Y 2003-04 & F.Y. 2004-05. The mistake if any was to be rectified within the time allowed in the Act. Further the assessee has failed to prove that the expenditure in question was crystallized only in the accounting year in question. Considering above the dis allowance of Rs. 5,10,339/-made by the A.O. is confirmed. Accordingly ground no. 3 is dismissed.”

At the outset, Ld. Counsel for the assessee fairly conceded that this expenditure is related to the receipts for accounting year 2003-04 and 2004-05 and not to the relevant assessment year 2007-08. Hence, he stated that these are not allowable in this year. The assessee’s counsel in all his fairness conceded this position and accordingly, we dismiss this issue of assessee’s appeal.

6. The next issue in this appeal of assessee is against the order of CIT(A) confirming the dis allowance of depreciation on hotel building claimed by assessee at 15% and allowed by Assessing Officer at 10%. For this, assessee has raised following ground no.3:

“For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the dis allowance of depreciation of Rs. 15,78,678/- on the Buildings in Kolkata and Varanashi units used as hotel by allowing the depreciation @ 10% only instead of @ 15% claimed by the assessee without considering the facts of the case and it may kindly be held accordingly.”

7. We have heard rival contentions and gone through facts and circumstances of the case. We find that this issue is covered against the assessee even in earlier years and CIT(A) has decided on that basis only. The relevant findings of CIT(A) in para 7 are as under:

“Ground no. 6 taken by the appellant is against allowing depreciation on building used for hotel @ 10% instead of 15% claimed by the During the course of appeal it was submitted that the issue has been decided against the assessee in earlier years. Considering above and the fact that the it is a settled issue that depreciation for hotel building will be allowable only @ 10%. Accordingly ground no. 6 taken by the appellant is dismissed.”

We find no infirmity in the order of CIT(A) and even in earlier years the assessee’s claim has been allowed @ 10% as per depreciation rules. Accordingly, this issue of assessee’s appeal is dismissed.

8. The next issue in this appeal of assessee is against the order of CIT(A) confirming the estimated proportionate dis allowance of interest at Rs. 37,86,614/- paid on borrowed funds having advanced interest free to its subsidiary company and sister concern. For this, assessee raised following ground no. 4:

“For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the estimated proportionate dis allowance of interest of Rs. 37,86,614/- paid on borrowed funds on the alleged ground of having advanced interest free loans to its subsidiary company and another sister concern out of borrowed funds without establishing any direct nexus between the borrowed funds and the interest free loans advanced out of it and also without considering the facts on record that the said interest free loans were advanced out of assessee’s own capital and reserves and hence it may kindly be held accordingly.”

9. The brief facts leading to the above issue are that during financial year 2006-07 relevant to assessment year 2007-08, year under consideration, the assessee advanced interest free loan amounting to Rs. 3,55,25,833/- to its subsidiary company HHI Resorts Pvt. Ltd. and further Rs. 3,32,258/- to group company United Hotels & Property Pvt. Ltd. The AO during the course of assessment proceedings required the assessee to explain why no interest has been charged on loan advanced to group companies whereas it was paying interest on secured loans. The assessee replied that such amount was given to subsidiaries in the ordinary course of business of the company, since such amount is being expended by these subsidiaries for the purpose of business i.e. hospitality business or for construction of hotels. Hence, the assessee has not charged any interest for such advance from subsidiary companies. Even otherwise it was argued that the assessee has substantial interest free funds in the form of share capital, reserves and surplus and profits of the year. For commercial expediency the assessee relied on the decision of Hon’ble Apex Court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR 1. The AO noted from the Balance Sheet that interest free loan to the subsidiary company increased from Rs. 10.21 lac in the previous year to Rs. 3,55,25,833/- in the relevant year but there is no increase in the share capital and general reserves and surplus during the relevant period. According to AO, secured loan from banks increased from Rs. 13,31,88,370/- as on 31.03.2006 to Rs. 24,28,25,324/- as on 31.03.2007. Accordingly, AO has not accepted the contentions of the assessee and made dis allowance of interest on interest free advances by estimating and by taking average rate of interest at Rs. 37,86,614/-. Aggrieved assessee preferred appeal before CIT(A), who exactly on identical facts confirmed the action of AO. Aggrieved, now assessee is in appeal before us.

10. We have heard rival contentions and gone through facts and circumstances of the case. The Ld. Counsel for the assessee Shri Siddharth Salarpuria, first of all took us to the accounts of the company from where he stated that the share capital of the company as on 31.03.2007 was at Rs. 5,56,43,400/- and reserve and surplus at Rs. 21,61,28,161/- and this year’s profit i.e. net profit as per P&L Account before making provisions for taxation is Rs. 3,50,51,698/- and if we reduce prior period adjustment of Rs. 5,10,339/-, the resultant net profit will be Rs. 3,45,41,359/-. Even otherwise the non cash expenditure i.e. depreciation the assessee has available cash of Rs. 1,86,44,232/- thereby net profit in the shape of cash available with the assessee during the year is Rs. 5,31,85,591/-, which is more than the amount advanced by the assessee to its subsidiaries. Ld. Counsel stated that once own funds are available and assessee has advanced out of the same as interest free, no dis allowance on account of interest be made. He also stated that even otherwise the assessee company has undergone demerger of its Goa unit with HHI Resorts Pvt. Ltd., a hundred per cent subsidiary, by virtue of scheme approved by Hon’ble Calcutta High Court dated 16.03.2007, at a consideration of 2225800 equity shares of Rs. 10/- each fully paid at a premium of Rs. 50/- per share in HHI Resorts Pvt. Ltd. The above scheme consists of transfer of whole of properties of Goa unit of S. P. Jaiswal Pvt. Ltd. as a going concern as on 31.03.2006 and the asset owned by S. P. Jaiswal Pvt. Ltd. at Goa was a hotel plot and this advance was made to its sister concern for the purpose of carrying out construction of hotel for the purpose hospitality business, which in turn, will help the assessee- company in its business. We find from the accounts of the company, as contended and produced before us in assessee’s paper book, that there are assessee’s own funds available in the shape of share capital, reserve and surplus and profits of the relevant year, which are more than the amount advanced to its subsidiary as interest free. In that eventuality no dis allowance can be made and for this, we are relying on the decision of Hon’ble Apex court in the Case of Munjal Sales Corpn. v. CIT [2008] 298 ITR 298, wherein Hon’ble Apex Court has considered the issue as under:

Application of the 1961 Act to the facts of this case

As stated above, in this batch of civil appeals we are concerned with the assessment years 1993-94, 1994-95, 1995-96, 1996-97 and 1997-98. At this stage, it may be mentioned that as far back as in August/September, 1991, the assessee herein had given interest-free advances to its sister concerns. These advances stood reduced over a period, till the assessment year 1997-98. Each year the balances stood reduced. Further, vide order dated January 3, 2003, the Tribunal held, for the assessment year 1992-93, that the assessee had given interest-free loans from its own funds and not from interest bearing loans taken by the firm from third parties and consequently the assessee was entitled to claim deduction under section 36(1)(iii). In other words, the Tribunal held that the loans were given for business purposes. Similarly, for the assessment year 1993-94, the Tribunal had taken the view that the said loans given to the firm’s sister concerns were for business purposes. Accordingly, the Tribunal had deleted the dis allowances during the assessment years 1992-93 and 1993-94. It is equally true that for the assessment year 1994-95 the Tribunal took a contrary view in view of the change in law brought about by the Finance Act, 1992. Prior to April 1, 1993, payment of interest to the partner had to be added back to the asses sable income of the firm whereas after the Finance Act, 1992, such payment became an item of deduction for computing the asses sable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for the assessment years 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been left out from consideration is that the loans which were given in August/September, 1991 to the sister concerns got wiped out only in the assessment year 1997-98. As stated above, for the assessment year 1992-93 and the assessment year 1993-94, the Tribunal held that the loans given to the sister concerns were out of the firm’s funds and that they were advanced for business purposes. Once it is found that the loans granted in August/September, 1991 continued up to the assessment year 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12 per cent per annum, the assessee was entitled to deductions under section 36(1)(iii) read with section 40(b)(iv) of the 1961 Act.

One aspect needs to be mentioned during the assessment year 1995-96, apart from the loan given in August/September, 1991, the assessee advanced interest-free loan to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee- firm out of its own funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The opening balance as on April 1, 1994, was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs.”

We find from the above judgment of Hon’ble Apex Court and the facts of the present case before us that the assessee has advanced loans to its subsidiary during the year out of its own funds i.e. the share capital, reserve and surplus and profits of the year, which are more than the amount of advance to subsidiaries, as noted the facts above. Once it is a fact that the amount advanced as interest free is out of assessee’s own funds no dis allowance of deduction claimed u/s. 36(1)(iii) can be made.

11. Another facet of arguments made by Ld. Counsel that there is business expediency and for this he argued that the assessee is engaged in the business of running and managing of hotels and such subsidiary companies were set up with an intention to acquire/manage new hotels, which will advance the cause or achieve object of assessee- company and as such the advances were given to such subsidiary companies, which were in course of business of the assessee company. Since such advances were in course of business even if the said advances were interest free, no notional interest can be attributed towards such interest free advance, reason being there is business expediency in advancing these interest free advances to its subsidiary. For this, the decision of Hon’ble Apex Court in the case of S. A. Builders Ltd. (supra) has described the purpose of business and commercial expediency by considering, whether one should allow deduction under section 36(1)(iii) of interest paid by assessee on amounts borrowed by it for advancing to a sister concern, the authorities should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business 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. Hon’ble Apex Court held as under:

“We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) 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 his 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 viewpoint 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. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”

In the present case also the amount advanced by assessee- company to its subsidiaries is for advancement of its objects and falls under the commercial expediency as enumerated by Hon’ble Apex Court in the case of S. A. Builders Ltd. (Supra). Respectfully following both the decisions of Hon’ble Apex Court, cited supra, we allow the claim of assessee and reverse the orders of lower authorities. This issue of assessee’s appeal is allowed.

12. The next issue in this appeal of assessee is against the order of CIT(A) confirming the dis allowance of interest expenses by invoking the provisions of section 14A of the Act r.w.r 8D(2)(ii) of the I. T. Rules, 1962 claimed against exempt income. For this, assessee raised following ground no. 5:

“For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the ad hoc dis allowance of an amount of interest of Rs. 15,68,741/- u/s. 14A of the Act read with Rule 8D(2)(ii) of the I. T. Rules allegedly attributing the said expense as related to the earning of the exempt dividend income of Rs. 4,25,785/- and without establishing any direct nexus or relationship of such expenditure with dividend earned and as such action of Ld. CIT(A) in confirming action of A.O. is bad in law and it may kindly be held accordingly.”

13. We have heard rival contentions and gone through facts and circumstances of the case. We find that Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) has already held that applicability of Rule 8D of the Rules is prospective and not retrospective i.e. applicable w.e.f. assessment year 2008-09, wherein Hon’ble High Court has also directed to recompute dis allowance in case there is a nexus for expenses with exempt income by laying down the principle as under:

“(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09;

(vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; (vii) The proceedings for the assessment year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under Section 14A. The Assessing Officer can adopt reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer shall provide a reasonable opportunity to the assessee of producing its accounts and relevant and germane material having a bearing on the facts and circumstances of the case”

We further find that the Tribunal, Kolkata Bench on the selfsame facts in the case of Sagrika Goods & Services (P.) Ltd. v. ITO [I.T. Appeal No. 1278/Kol/2010, Assessment Year 2005-06, dated 24th September, 2010] has held as under:

“5. Heard the rival submissions, perused the material available on record and the decisions relied on by the Ld. Authorized Representative of the assessee cited supra. We find that on the issue of dis allowance u/s. 14A, this Bench of the Tribunal has been taking a consistent view that this dis allowance should be restricted to 1% of dividend income. Following the same, in this appeal also we hold that the dis allowance u/s 14A for earning exempt dividend income should be restricted to 1% of dividend income. The Assessing Officer is accordingly directed to do so and work out the quantum of dis allowance. This ground of appeal of the assessee is allowed as directed above.”

In view of the above and respectfully following the aforesaid decision of jurisdiction Tribunal (cited supra), we, direct the AO to restrict dis allowance at 1% of expenses. This ground of appeal of assessee is partly allowed.

14. In the result, appeals of assessee being ITA No. 488/K/2011 is dismissed and ITA No. 525/K/2011 is partly allowed.

C.D. Rao, Accountant Member – I have carefully gone through the draft order authored by my learned colleague and have also had the opportunity of discussing the matter with him in detail. Much as I persuade myself to agree with the findings and conclusion arrived at by my learned colleague at para No. 10 and 11 of the proposed order which relates to ground no.4 raised by assessee in ITA No. 525/Kol/2011. I am unable to concur with him and my learned colleague is also not inclined to yield to my suggestions. Accordingly, to come out of the cul de sac and with the leave and consent of my Brother colleague, I proceed to write this separate and dissenting order.

16. The ground raised by assessee at ground no.4 is as under :-

“4. For that in view of the facts and circumstances of the case the ld. CIT(A) was wholly wrong and unjustified in confirming the estimated proportionate dis allowance of interest of Rs. 37,86,614/- paid on borrowed funds on the alleged ground of having advanced interest-free loans to its subsidiary company and another sister concern out of borrowed funds without establishing any direct nexus between the borrowed funds and the interest-free loans advanced out of it and also without considering the facts on record that the said interest-free loans were advanced out of assessee’s own capital and reserves and hence it may kindly be held accordingly.”

17. The relevant facts as mentioned by the ld. Assessing Officer as well as the ld. CIT(A ) are as under :-

“Observations of the ld. AO :During the Financial Year 2006-07 the Assessee company has given interest free loan amounting to Rs. 3,55,25,833/- to subsidiary company M/s HHI Resorts Pvt. Ltd and Rs. 3,32,258/-to one of the group company M/s United Hotel & Property Pvt. Ltd.. A/R was asked to explain the reason for not charging interest on loan advanced though assessee was paying interest on secured loan taken. The reply submitted by the A/R is reproduced below:

Your good self had inquired us to the reason for not charging interest on the loan given to subsidiary companies amounting to Rs. 3,55,25,833/- & Rs. 3,32,258/-outstanding as on 31.03.2007. In this respect, this is to submit that such amount given to such subsidiary is in the ordinary course of the business of the assessee since such amount is being expended by such subsidiary for the purpose of hospitality business only in which the assessee deals in. Since the said sum is for the purpose of business hence the assessee had given such interest free to such subsidiary. Without prejudice, the assessee has substantial interest free fund in the form of share capital and reserve and commercial expediency of the sum so advanced can only be decided by the assessee. Indeed, Hon’ble Apex Court in the case of S. A. Builders Ltd. v. CIT [2007] 288 ITR I (SC) has already held that “it is only the assessee who can decide as to the affairs of the business and nobody else can sit in the chair of the assessee to decide the same. “Indeed Hon’ble Apex Court held so in the case of an assessee advancing interest free sum to others sister concern. Hence it will be appreciated by your honour that since such sum was given for the purpose of business of the assessee, the assessee did not charge any interest on the same considering the commercial expediency of the sum so advanced.

The assessee has advanced loan amounting to Rs. 3,55,25,833/- to M./s. HHI Resorts Pvt. Ltd. a subsidiary of the assessee. The subsidiary company was demerged from the assessee company on 16.03.2007. The subsidiary company has no business activity except a land at Goa on which no construction is allowable due to certain laws of Government. This land was originally with the assessee- company and was transferred to the subsidiary company under the demerger scheme. Construction on the above mentioned land was not allowable even when the land with the assessee- company. In his explanation A/R could not explain the business expediency in granting the interest free loan to the subsidiary company.

It is apparent from Balance Sheet that interest free loan to the subsidiary company was increased from Rs. 10,21.000/- in the previous year to Rs. 3,55,25,833/- in the current year However, there is no increase in the share capital and general reserve of the assessee company during that period. Rather secure loan from banks was increased from Rs. 13,31,88,370/- as on 31.03.2006 to Rs. 24,28,25,324/- as on 31.03.2007. Hence, A/R argument that assessee has substantial interest free fund in the form of share capital and reserve is not true.

Further, A/R has quoted the decision of Supreme Court in the case M/s. S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC). Supreme Court has made clear in its decision that it is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case. Supreme Court has decided in the quoted case by relying on the decision of Delhi High Court in CIT v. Dalmia Cement (P.) Ltd. 254 ITR 377. But the facts of Dalmia Cement case are not identical with that of the assessee. In that case loan was advanced to a company which was rendering services also to the loan creditors where as there is no such relationship in the assessee’s case. In this case business expediency has not been established by the assessee company.”

Observations of the ld. CIT(A):

“6.1.1 have carefully considered the submission of the Ld. AR and the reason mentioned by the A.O for making dis allowance, The claim that interest-free funds available with assessee were more than that of interest-free advances and that no part of borrowed capital was diverted towards interest-free advances was considered. There has been no increase in the share capital and the reserve of the Company has also been advanced decreased. Hence it cannot be said that assessee had interest-free funds of its own which had been generated in course of year commencing from 1.4.2006. Accordingly the claim of the assessee that the loan has been advanced from the existing share capital, reserve & surplus amounted to Rs. 5,56,43,400/- & Rs. 21,61,28,161/- respectively totaling to Rs. 27,17,71,561/-and hence the interest-free advances of Rs. 3,58,58,091/- to the sister concern is from interest-free fund has no relevance. Moreover against the shareholders fund and reserve & surplus totaling to Rs. 27,17,71,561/- the existing investment of the Company in fixed asset is Rs. 48,03,46,443/-. Hence taking all the factors into connection and since direct nexus had been proved by the AO between the borrowals of loan and making free of interest advances, the dis allowance of Rs. 37,86,614/- made by the AO is confirmed. Accordingly ground no.5 is dismissed.”

18. In the proposed order the ld. JM has considered the availability of own funds of assessee in the shape of share capital, reserves and surplus and profit of the relevant year which are more than the amount advanced to its subsidiary as interest-free and by applying the ratio laid down by Hon’ble Apex Court in the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298 he is of the view that no dis allowance of deduction claimed u/s 36(1)(iii) of the IT Act can be made in para no.10.

18.1 In para no. 11 the ld. JM by applying the ratio laid down by Hon’ble Supreme Court in the case of S.A. Builders Ltd. (supra) I was of the view that in the present case the amount advanced by assessee- company to its sister concern is for advancement of its objects and falls under commercial expediency as enumerated by Hon’ble Supreme Court in the case of SA Builders Ltd. (supra).

18.2 However, in my view both the propositions laid down by the Hon’ble Apex Court in the cases on which the ld. JM placed reliance are not applicable to the facts of assessee’s case. First in respect of the sufficiency of own funds the submissions made by the ld. Counsel which were taken into consideration by the ld. JM is misconceived. Since Assessing Officer as well as CIT(A) has categorically mentioned giving the finding.

18.3 The relevant findings of Assessing Officer are as under :-

Findings of Assessing Officer :-

“It is apparent from Balance Sheet that interest-free loan to the subsidiary company was increased from Rs. 10,21.000/- in the previous year to Rs. 3,55,25,833/- in the current year. However, there is no increase in the share capital and general reserve of the assessee- company during that period. Rather secure loan from banks was increased from Rs. 13,31,88,370/- as on 31.03.2006 to Rs. 24,28,25,324/- as on 31.03.2007. Hence, A/R argument that assessee has substantial interest free fund in the form of share capital and reserve is not true.”

18.4 The above view of the AO has further strengthened in the findings of the ld. CIT(A). In view of the specific findings of the ld.CIT(A) which are as under :-

“Hence it cannot be said that assessee had interest-free funds of its own which had been generated in course of year commencing from 1.4.2006. Accordingly the claim of the assessee that the loan has been advanced from the existing share capital, reserve & surplus amounted to Rs. 5,56,43,400/- & Rs. 21,61,28,161/-respectively totaling to Rs. 27,17,71,561/- and hence the interest-free advances of Rs. 3,58,58,091/- to the sister concern is from interest-free fund has no relevance”

18.5 However, in order to establish the availability of own funds of assessee to lend the same to the sister concern the relevant/correct basis is the scrutiny of the cash flow statement for the whole year. In this case assessee has himself has given the consolidated fund flow statement which were placed at page 45 of the paper book. The opening cash balance as on 1.4.2006 of Rs. 2,23,01,497/- has been reduced to Rs. 1,88,31,497/- as on 31.3.2007. The extract cash flow statement is as under :-

“(a) Cash Flow from Operating Activities

:

Rs. 69,007,614/-

(b) Cash Flow from Investing Activities

:

Rs. 10,017,237/-

(c) Cash Flow from Financing Activities

:

(-) Rs. 82,494,851/-

Net(Decrease)Increase in cash and
Cash Equivalents (a+b+c)

:

(3,470,000)

Cash and Cash Equivalent as at (Opening Balance)

:

22,301,497

Cash and Cash Equivalent as at (Closing Balance)

:

18,831,497″

18.6 From the above analysis it is clearly evident that the cash flow generated by assessee on account of operating activities as well as investing activities has been set off against the cash flow from financing activities and resultantly there is a decrease of opening cash balance to the extent of Rs. 34,70,000/-. Under these circumstances in my considered opinion neither the profits of assessee during the year nor the surplus and reserves will not serve the purpose to contend that assessee is having own funds to give to its sister concern.

18.7 Keeping in view of my above findings I am of the view that the facts of the present case are quite contrary to the facts of Munjal Sales Corporation (supra). Therefore in my opinion the ratio laid down by Hon’ble Apex Court in the case of Munjal Sales Corpn. (supra) is not applicable to the present facts of the case.

19. As regarding the second observations of the ld. JM regarding the commercial expediency it is observed from the specific observations of the ld. AO which were confirmed by the ld. CIT(A) that Assessing Officer has categorically distinguished the applicability of the Supreme Court in the case of S.A. Builders (supra). The relevant portion of the observations are as under:

“A/R has quoted the decision of Supreme Court in the case M/s. S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC). Supreme Court has made clear in its decision that it is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case. Supreme Court has decided in the quoted case by relying on the decision of Delhi High Court in CIT v. Dalmia Cement (P) Ltd. 254 ITR 377. But the facts of Dalmia Cement case are not identical with that of the assessee. In that case loan was advanced to a company which was rendering services also to the loan creditors where as there is no such relationship in the assessee’s case. In this case business expediency has not been established by the assessee company.”

19.1 In my considered opinion on this issue the ld. Counsel appearing on behalf of assessee has not brought any material on record to the fact that the loan given by assessee company to the subsidiary is in the commercial expediency. Under this circumstances it is not fair to follow the ratio laid down by simply accepting the submissions of assessee. Since in the case of S.A. Builders the Hon’ble Supreme Court has categorically mentioned that

“It is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case.”

In this case apparently the AO brought on record that the subsidiary company who received interest free loan from assessee company has not used the said loan for business expediency and the ld. Counsel appearing on behalf of assessee has not brought any contrary material to the specific findings of the ld. AO. Therefore, in my considered opinion the ratio laid down by M/s. SA Builders is also not applicable to the present facts of the case.

19.2 However, on careful verification of the dis allowance made by AO it is observed that AO has made the disallowance based on the closing balance of Rs. 3,55,25,833/-which includes the opening balance of Rs. 10,21,000/-. Therefore, in my considered opinion the dis allowance to the extent of interest pertaining to the loan granted by the assessee company during the previous year relevant to assessment year to the sister concern i.e. Rs. 3,45,04,833/- (Rs. 3,55,25,833/- Rs. 10,21,000/-) is sufficient. Therefore I direct the AO to re-compute the dis allowance accordingly.

20. In the result ground no.4 raised by assessee is allowed in part.

21. As regarding the others grounds I concur with the observations and decision of the ld. JM.

THIRD MEMBER ORDER

Pramod Kumar, Accountant Member (As a Third Member) – On a difference of opinion between the Members constituting the Division Bench when these appeals originally came up for hearing, following point of difference has been referred to me by Hon’ble President under section 255(4) of the Income-tax Act, 1961:

Whether, in the given facts and circumstances of the case, the learned CIT(A) is justified in confirming the dis allowance of interest on borrowed funds on the ground that the assessee’s own funds are not sufficient to advance the same to the sister concerns and further whether the CIT(A) is justified in confirming the action of the AO by stating that the funds used by the sister concerns are not for commercial expediency ?

2. The assessee before me is a hotelier, and it owns and manages some hotels in Kolkata, Varanasi and Bhubaneshwar. In the course of its scrutiny assessment proceedings for this year, the Assessing Officer, inter alia, noted that while the assessee has not charged any interest on its advance of Rs 3,55,25,833 to a subsidiary company by the name of HHI Resorts Pvt Ltd and advance of Rs 3,32,258 to a group company by the name of United Hotel and Property Pvt Ltd., the assessee has paid interest on secured loans taken. When assessee was asked to explain the position, the assessee submitted that the advance was given to “the subsidiary in the ordinary course of business of the assessee, since such amount is being expended by such subsidiary for the purpose of hospitality business only, in which assessee deals in”, the advance was in the ordinary course of business. It was also submitted that the assessee has sufficient interest-free funds in form of share capital and reserves. Reliance was also placed on Hon’ble Supreme Court’s judgment in the case of S A Builders Ltd. (supra) in support of the propositions that it is for the assessee to decide what is commercially expedient for him, and that the advances, given for business purposes by the assessee, are required to be treated as having been given on the grounds of commercial expediency. None of these submissions, however, impressed the Assessing Officer. He noted that the subsidiary company, i.e. HHI Resorts Pvt Ltd, was demerged from the assessee- company on 16th March, 2007, and that the said company did not have any commercial activity at present. The Assessing Officer further noted that the assessee- company owns a piece of land at Goa but, on account of certain legal restrictions, no construction is permissible on this piece of land. He thus questioned commercial expediency of granting interest free loan to the subsidiary company, when no construction is permissible on the land owned by that subsidiary company. As regards the availability of sufficient interest free funds, the Assessing Officer rejected the said claim on the short ground that while there was an increase in interest free loans to subsidiaries in the current year, there was no such corresponding increase of share capital and reserves and that the increase in the source of funds in the current year was in secured loans from banks which stood at Rs 24,28,25,324 at the end of the year as against Rs. 13,31,88,370 at the beginning of the year. As regards assessee’s reliance on Hon’ble Supreme Court’s judgment in the case of S A Builders Ltd. (supra), the Assessing Officer observed that Hon’ble Supreme Court itself “has made it clear, in its decision, that it is not their opinion that in each and every case interest on borrowed funds has to be allowed, if the assessee advances to its sister concerns”. He was of the view that such a decision must depend on the facts of the each case. He further observed that Hon’ble Supreme Court’s decision was based on Hon’ble Delhi High Court in the case of CIT v. Dalmia Cements (P.) Ltd [2002] 254 ITR 377 but then “the facts of Dalmia Cements’ case are not identical with the facts of the assessee’s case” as “in that case, loan was advanced to a company which was rendering services also to the loan creditors whereas there is no such relationship in assessee’s case”. With these observations, the Assessing Officer disallowed interest paid by the assessee on its borrowings in proportion of total advances to the subsidiary and group companies. The average interest rate was worked out at Rs 10.56% and interest on entire interest-free fund of Rs 3,58,58,091 was computed at Rs 37,86,614. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) held that as there was no increase in share capital and reserves of the company, it cannot be said that the assessee had sufficient interest-free funds generated during the year out of which interest-free advances were given. Learned CIT(A) further observed that as against interest free funds of Rs 27.17 crores, the assessee has already invested Rs 48.03 crores in fixed assets, it could also but be said that the assessee had granted interest free loans out of the interest free funds available to the assessee. Learned CIT(A) further observed that in view of the above reasoning and as “direct nexus had been proved by the AO between borrowing of loans and making interest free advances”, the dis allowance of Rs. 37,86,614 is to be confirmed. The appeal was, accordingly, rejected on this issue.

3. Not satisfied with the stand so taken by the CIT(A), the assessee carried the matter in further appeal before a division bench of this Tribunal, and this appeal resulted in a split verdict.

4. While learned Judicial Member was of the view that since assessee’s own interest bearing funds were far in excess of the interest free advances given to the subsidiaries, deduction claimed under section 36(1)(iii) in respect of interest on its borrowings could not be declined. In coming to this conclusion, learned Judicial Member referred to and relied upon Hon’ble Supreme Court’s judgment in the case of Munjal Sales Corpn. (supra). He further held that as the assessee was engaged in the hotel business and the subsidiaries were also set up to acquire, set up or manage the hotels, which will advance the cause or achieve objects of the assessee- company, the advances given to the subsidiary companies are required to be treated as having been given in the course of business of the company. Learned Judicial Member took note of the proposition, as laid down by Hon’ble Supreme Court in the case of S A Builders Ltd. (supra), that what is relevant is that the amount was advanced as a measure of commercial expediency and not from the point of view of earning profits. It was further explained that once it is established that there was nexus between the expenditure and purpose of the business, it is not for the revenue authorities to decide as to what quantum of expenditure will constitute reasonable expenditure having regard to the facts of the case. With this reasoning, and relying upon the judgments of Hon’ble Supreme Court in the cases of Munjal Sales Corpn. (supra) and S A Builders Ltd. (supra), and extensively reproducing from the same, learned Judicial Member deleted the dis allowance.

5. Learned Accountant Member, however, disagreed with the findings and conclusions in the draft order. He was of the view that learned Judicial Member was in error in applying the ratio of Hon’ble Supreme Court’s judgment in the case of Munjal Sales Corpn. (supra) on the facts of this case, and that learned Accountant Member’s finding, to the effect that the availability of interest-free funds by way of share capital, reserves and surplus and current profits is more than interest-free advance to sister concern, is ‘misconceived’. He referred to the cash flow statement filed by the assessee and noted that “it is clearly evident that the cash flow generated by assessee on account of operating activities as well as investing activities has been set off against the cash flow from financing activities and resultantly there is a decrease of opening cash balance to the extent of Rs 34,70,000” and that “under these circumstances, in my considered opinion, neither the profits of the assessee during the year, nor the surplus and reserves, will serve any purpose to contend that the assessee is having own funds to give to the sister concern”. As regards the learned Judicial Member’s reliance on Hon’ble Supreme Court’s judgment in the case of S A Builders Ltd. (supra), learned Accountant Member was of the view that “learned counsel appearing for the assessee has not brought on record any material on record to (establish) the fact that the loan given by the assessee-company to the subsidiary company is in the commercial expediency” and that ” under the circumstances, it is not fair to follow the ratio laid down by simply accepting the submission of the assessee”. He then referred to Hon’ble Supreme Court’s observation, in the case of S A Builders Ltd. (supra) itself, to the effect 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 case.”

Learned Accountant Member then observed that “in this case, the AO has brought on record that the subsidiary company, who received interest-free loan from the assessee-company, has not used the said loan for business expediency, and learned counsel appearing for the assessee has not brought any contrary material to the specific findings of the learned AO”. He was thus of the “considered opinion that the ratio laid down by S A Builders is also not applicable to the facts of the case”. He thus upheld the disallowance in principle, though he modified the quantum of disallowance but then that aspect of the quantification of disallowance is not really relevant for our purposes and we need not go into the same. Suffice to note that the disallowance was confirmed in principle by the learned Accountant Member, as against deletion of disallowance proposed by the learned Judicial Member in the lead order. It is in this backdrop that the matter has been referred to me, for expressing my view as a Third Member, so as to come out, what the learned Accountant Member terms as, cul-de-sac.

6. I have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position.

7. The first limb of the point of difference between my distinguished colleagues is whether or not “CIT(A) is justified in confirming the disallowance of interest on borrowed funds on the ground that the assessee’s own funds are not sufficient to advance the same to the sister concerns”. As far as this issue is concerned, for the reasons I will now set out, I am of the view that the CIT(A) was indeed in error in holding that the interest free funds available to the assessee were not sufficient to advance interest free advances to the sister concerns.

8. In my considered view, the impugned disallowance is unsustainable in law for the short reason that the interest free funds available with the assessee are far more than the interest free advances to the subsidiary companies, and that, in such a situation, as held by Hon’ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340, the presumption has to be that the interest free advances are given out of the interest free funds available to the assessee. In support of this approach, I rely upon Hon’ble Bombay High Court’s observations, in the case of Reliance Utilities & Power Ltd. (supra), as follows:

If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.’s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd.’s case (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.’s case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.

[Emphasis supplied]

9. I have also noted that in the current year itself, the assessee has earned a profit of Rs. 3,50,51,698, and when amounts of Rs. 5,10,399 towards prior period expenses as also of Rs. 1,86,44,232 towards non cash expenses in the nature of depreciation is added thereto, the total cash profits aggregate to Rs. 5,31,85,591. This amount is far more than the total advances of Rs. 3,55,25,833. On this factual matrix, and applying the presumption as laid down by Hon’ble Bombay High Court, one has to proceed on the basis that the entire interest free advances were given out of the interest bearing funds available to the assessee. Undoubtedly, this judgment is from a non-jurisdictional High Court, but, as is the settled legal position as analysed in Asstt. CIT v. Aurangabad Holiday Resorts (P.) Ltd. [2009] 118 ITD 1 (Pune), in the absence of anything to the contrary by Hon’ble jurisdictional High Court, a judgment of even non jurisdictional High Court constitutes binding precedent for this Tribunal. Hon’ble jurisdictional High Court has, in the case of J K Industries Ltd. v. CIT [1999] 238 ITR 820 (Cal.), has also adopted the same approach inasmuch as Their Lordships were in seisin of a situation in which the interest-free advance granted by the assessee to the subsidiary company was less than cash profit generated by the assessee, and, on these facts, Their Lordships held that “it should be presumed that the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount paid to the subsidiaries”. Viewed thus, on the facts of this case, no part of the borrowed funds can be said to have been diverted as non-interest bearing advances to the subsidiary companies. For this short reason alone, there is no room for any disallowance of interest paid on borrowings, on account of grant of interest free advances to the subsidiary companies, on the facts of this case. In my considered view, the CIT(A) was indeed in error in holding that the assessee did not have sufficient own funds to advance the interest free advances to the sister concerns.

10. As regards the second limb of the point of difference between my distinguished colleagues i.e whether or not “the CIT(A) is justified in confirming the action of the AO by stating that the funds used by the sister concerns are not for commercial expediency”, I find that there are no findings by the CIT(A) about commercial expediency, or lack thereof, of advancing interest free advances to the sister concerns. The point of difference, therefore, proceeds on the fallacious assumption that the CIT(A) did adjudicate on this issue. Undoubtedly, this aspect of the matter is important for the reason that in case the fact of commercial expediency of advancing interest free advances to the subsidiary companies is established, even if one is to come to the conclusion that interest free advances to the subsidiary companies are out of the borrowed funds, interest on borrowed funds is to be allowed in full nevertheless. It is so held by Hon’ble Supreme Court in the case of SA Builders Ltd. (supra). That was a case in which borrowed funds were not used by the assessee in its business but diverted the same to the sister concern by giving interest free advances. On these facts, Their Lordships observed that “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”. Elaborating upon the connotations of ‘commercial expediency’, Their Lordships observed that “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”. The Assessing Officer decided this issue against the assessee mainly on the ground that the subsidiary in question was holding a plot of land at Goa but then since no construction on this plot was possible, and this plot of land could not be used for the business purposes, any advances given to the said subsidiary could not said to be commercially expedient. The CIT(A) did not even deal with assessee’s contentions regarding interest free advances having been made out of commercial expediency has simply brushed them aside. The approach adopted by the Assessing Officer, however, overlooks the factual aspect that the restrictions on constructions were placed by the directions of Goa Coastal Zone Management Authority which were under legal challenge by the assessee, and thus these restrictions had not achieved finality. When this fact was pointed out to the learned Departmental Representative, all he had to say was that at the relevant point of time construction was not possible and, therefore, the subsidiary company could not be said to be in the hotel related business. In my understanding, it is wholly irrelevant whether or not the assessee was actually in the hotel business or not. What is material is that the assessee, being one hundred per cent holding company of HHI Resorts Pvt Ltd, had a deep interest in the subsidiary and that the advances given to the subsidiary company were for the purposes of business. When an assessee gives an interest free advance to a one hundred per cent owned subsidiary for its business purposes, it cannot but ordinarily be said to be commercially expedient. As noted by Their Lordships in S A Builder Ltd.’s case (supra), “where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans”. Of course, there has to be some material to show that the funds advanced to the subsidiary company were used for some business purposes, but then the Assessing Officer did not probe this aspect of the matter but simply rejected the commercial expediency of the interest free advance on the ground that construction was not possible on the plot owned by the subsidiary company. The objection taken by the Assessing Officer was devoid of any legally sustainable merits, but then the CIT(A) did not even deal with this issue at all. When there are no findings by the CIT(A) on this aspect, the point of difference, to this extent, cannot be adjudicated upon. In any event, having held that the assessee did have sufficient interest bearing funds to advance interest free advances to sister concerns, this aspect of the matter is somewhat academic.

11. The matter will now go back to the division bench to decide the appeal in accordance with the majority view.

Mahavir Singh, Judicial Member – Since there was a difference of opinion between the ld. Members constituting the Division Bench of ITAT, Kolkata with regard to the following question, the matter was referred to Third Member under section. 255(4) of the I.T. Act, 1961 for his opinion :-

“Whether in the given facts and circumstances of the case, the learned CIT(A.) is justified in confirming the disallowance of interest on borrowed funds on the ground that the assessee’s own funds are not sufficient to advance the same to the sister concerns and further whether the CIT(A.) is justified in confirming the action of the AO by stating that the funds used by the sister concerns are not for commercial expediency”?

2. Hon’ble President, ITAT nominated Shri Pramod Kumar, Hon’ble Accountant Member as Third Member. The Third Member vide his order dated 31.05.2012 has allowed the claim of assessee. Therefore, in accordance with the majority view, the appeal being ITA No. 488/Kol./2011 is dismissed and ITA No. 525/Kol./2011 is partly allowed.

More Under Income Tax

Posted Under

Category : Income Tax (24908)
Type : Judiciary (9823)
Tags : ITAT Judgments (4392) section 14a (225)

Leave a Reply

Your email address will not be published. Required fields are marked *