Assessee has further submitted that no disallowance out of interest of Rs. 31,39,988/- paid to HSBC loan was called for. This is for the reason that loans were advanced to group companies which fell under the category of subsidiary companies under the same management and were engaged in similar business of entertainment / distribution of pay channels.
Advances were given to the said group companies as part of the corporate / business strategy of the assessee to expand the business operations. Assessee’s further submission is that lower authorities further failed to appreciate that since the loans and advances were advanced by the assessee to group companies engaged in the similar business out of commercial expediency, no part of interest expenditure was disallowable for advancing interest free loans. In our considered opinion, there is considerable cogency in the assessee’s submission as above. Hence, in our considered opinion, since the advances were given to the group companies and subsidiary companies out of commercial expediency, no disallowance of interest in this regard is called for.
INCOME TAX APPELLATE TRIBUNAL, DELHI
I.T.A. No. 2208/Del/2011 – A.Y.: 2001-02
Modi Entertainment Ltd. Vs. DCIT
ORDER
PER SHAMIM YAHYA: AM
This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 25.2.2011 pertaining to assessment year 2001-02.
2. The grounds raised read as under:-
“1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the disallowance of interest of Rs. 92,61,100/- made by the assessing officer holding the same to be expenditure incurred for non business purposes.
1.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in holding/alleging that the appellant withheld the relevant documents/material, like bank statements and failed to establish that the aforesaid interest expenditure on account of commercial expediency.
2. That without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that out of total interest of Rs.92,61,100, the following amounts could not be said to have been incurred for non-business purposes:
i) interest on late deposit of tax of Rs. 851/-.
ii) bank overdraft charges of Rs. 11,85,235/-.
iii)interest on delayed payments to NDSL Rs. 44,70,796/-
iv) interest on security deposits received from distributors, of Rs. 4,60,229/-.
2.1 That the Commissioner of Income Tax (Appeals) in holding that there was a direct nexus between the payment of interest to NDSL on account of delayed payment and provision of interest free advance to MEN Interactive Network Ltd.
3. That further without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that since the loan was procured from HSBC Bank on 25.01.2001, at best, proportionate interest relatable to Rs. 12,17,140/-, being the amount advanced during the period 25.01.2001 and 31.03.2001 to sister concerns, could have been disallowed, in case any disallowance was required to be made.
4. Without prejudice, that the Commissioner of Income Tax (Appeals) erred on facts and in law in not holding that interest income amounting to Rs. 55,36,506/-, earned by the appellant, during the relevant previous year, was required to be netted off against the above interest expenditure and only the balance amount was disallowable.
The appellant craves leave to add, to alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.”
3. In this case, the facts are that the original assessment in this case was completed u/s. 143(3) of the IT Act, 1961 wherein, apart from others, disallowance on account of payment of interest of Rs. 10832532/- was made. Being aggrieved by the order of the Id.AO, the assessee company challenged the same before Ld. CIT (A) which was dismissed by him. Thereafter, the matter was carried in further appeal by the assessee to the ITAT, Delhi. The Tribunal was of the view that the issues raised by the assessee company had not been properly appreciated by the lower authorities and therefore required fresh examination. Accordingly, the matter relating to disallowance of interest of Rs. 10832532/- was set aside by the Tribunal with the directions to examine the issue in the light of judgment of Hon’ble Delhi High Court in the cases of Orissa Cement Ltd and Elmer Havell Electrics & Others. In the light of aforesaid directions of the Hon’ble Tribunal, the impugned assessment order has been framed by the Ld. Assessing Officer.
3.1 A perusal of assessment order reveals that as against Rs. 10832532, the disallowance on account of payment of interest has been restricted to actual expenditure of Rs. 9261100 being payments made to HSBC, bank overdraft charges and payment to NDSL for delayed payment of purchase consideration. According to the Id. AO, in the course of assessment proceedings the assessee company failed to furnish details of amounts and dates on which interest free loans were given to the subsidiaries and the holding company and also the copy of bank statements and thus prevented him from finding out the immediate source of interest free advances given to related parties and the purpose for which funds were borrowed by the assessee. Accordingly, the subject disallowance was made by him.
4. Upon assessee’s appeal Ld. Commissioner of Income Tax (Appeals) noted the submissions of the assessee, but did not find cogency in the same. Ld. Commissioner of Income Tax (Appeals) inter-alia observed in the present case that it was necessary to examine the claim of the assessee with reference to the bank statement and the fund flow statement. However, the Assessing Officer has recorded a categorical finding that the assessee company failed to produce before him the bank statement, copy of accounts of the subsidiaries and the holding company. Ld. Commissioner of Income Tax (Appeals) observed that it was only because of nonavailability of these relevant documents that the Assessing Officer had no option but to hold that the expenditure on account of interest was not incurred in connection with any business need/ expediency and the same was therefore not allowable to the assessee company. Ld. Commissioner of Income Tax (Appeals) further observed that in the course of appellate proceedings also, the assessee company has again expressed its inability to file the copy of bank statement maintained with HSBC bank and ICICI bank from where the funds had been made available to the group companies and investment had been made with Modi Media (P) ltd. and Cric Live Dot Com (I) (P) Ltd. Therefore, Ld. Commissioner of Income Tax (Appeals) held that in the absence of the relevant documents, he is unable to agree with the assessee company that the entire expenditure of Rs. 9261100/- was incurred in connection with business requirement and no part of it was relatable to the interest free funds made available to the sister concerns and investment made with Modi Media (P) Ltd. and Cric Live Dot Com (I) (P) Ltd. Ld. Commissioner of Income Tax (Appeals) further opined that assessee has failed to establish that the aforesaid interest expenditure was incurred on account of commercial expediency. Ld. Commissioner of Income Tax (Appeals) further held that assessee paid overdue interest to NDSL on account of purchase of decoder boxes out of interest free funds and simultaneously made interest bearing borrowings from HSBC Bank which were give as interest free advances to sister concern.
5. Against the above order the assessee is in appeal before us.
6. We have heard the rival contentions in light of the material produced and precedent relied upon.
6.1 Assessee submission in this regard are as under:-
“At the outset, it is respectfully submitted that in the cases of Orissa Cement Ltd. (supra) and Elmer Hovel Electrics & Ors: (supra), the Courts have stressed that the question of nexus between the borrowing and interest free advances to sister concerns is a question of fact and that the same must be established on the basis of evidences before an incometax authority disallows any interest paid by the assessee on its own borrowings. In the present case, no such nexus exists for the reasons elaborated as under. It is submitted that the aforesaid amount of Rs.92,6l,000 represented the total interest paid by the appellant during the previous year relevant to the assessment year 2001-02. The detailed break-up of the same is as under:
(i) Total interest paid on HSBC Loan Rs. 31,39,988
(ii) Interest on late deposit of tax Rs. 851
(iii) Bank Overdraft Charges Rs. 11,85,235
(iv) Interest to NDSL for delayed payment Rs. 44,70,796
(decoder boxes supplier)
(v) Interest on security deposit from Rs. 4,64,229
Distributors Total = Rs. 92,61,100
It is, at the outset, respectfully submitted that it is not at all the case of the lower authorities that various interest paid by the appellant (other than interest paid to HSBC Bank) was incurred for the purposes of the business. Even otherwise, there cannot be any dispute regarding allowability of interest paid (i) on bank overdraft, (ii) to supplier for delayed payment, and (iii) on security deposit from distributors. Therefore, out of total interest of Rs.92,61,100, interest expenditure of Rs.61,20,261 (other than interest paid to HSBC Bank and late deposit of tax) was clearly allowable as business deduction. The lower authorities failed to appreciate that disallowance, if any, could have been made only out of interest expenditure of Rs.31 ,39,988, being the interest paid on HSBC loan.
It is further submitted that no disallowance out of interest of Rs.31,39,988 paid on HSBC loan was called for, because of the following reasons:
A. Re: Disallowance of interest pertaining to loans advanced to group companies
