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Income Tax Appellate Tribunal, DELHI BENCH ‘A’ NEW DLEHI
Before: SHRI PRADIP KUMAR KEDIA & SHRI N.K. CHOUDHRY
This appeal has been preferred by the Assessee against the order dated 27.10.2017, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)-11, New Delhi (in short ‘ld. Commissioner’) u/s. 250(6) of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2004-05.
The Assessee, being a non-banking financial company (NBFC), is engaged in the business of investment/financing activities and filed its return of income on dated 26.10.2004 by disclosing total loss of Rs.1,52,59,830/- for the relevant year under consideration. The return filed by the Assessee was revised on 22.03.2006 by disclosing total loss of Rs.1,20,69,530/-. The case of the Assessee was selected for scrutiny and in the assessment proceedings, the Assessing Officer noticed that the Assessee had claimed interest of Rs.1,32,44,471/- in its P & L account, on which the Assessee was asked to justify the said claim and finally, the Assessing Officer disallowed the said amount of interest mainly on the reason that the Assessee has used the loan amount to make investment in shares and securities from which earning dividend income or capital gains.
2.1 The Assessee being aggrieved, preferred first appeal before the ld. Commissioner, who vide order impugned, affirmed the addition under challenge by concluding as under:
“4.2 I have perused the facts of the case and the submission made by the AR. It .is noted from the bank statement furnished by the AR that the appellant had taken loan of Rs. 15-crores from M/s GE Capital Services India on 12.12.2001 and this amount was invested in Zero Coupon Fully Convertible Non- Marketable Transferable Bonds of Rs. 100 each to APJ Financial Services Private Limited (Rs. 11 crores) and Provestment Securities Private Limited (Rs. 4 crores) on 13.12.2001. It is contended that the said investment was not made in tax free securities and it was utilized for the purposes of the business. A perusal of the financial statements of the appellant shows that the appellant had shown these investments in securities as ‘investment' in the balance sheet and not as stock in trade. Even if the terminology used by the appellant is ignored, it is seen that any profit or loss on sale of such securities reflected as investment, is shown by the appellant as income under the head Capital Gains. This fact has been confirmed by the AR vide his submission made on 26.10.2017. The AR was asked as to why the interest paid on loan taken for making investment from which the income/loss is treated by the appellant under the head Capital gains, should be allowed as an expense from business income. This is contended by the AR that these investments are made for the purposes of business. It is further submitted by the AR that the said loan was taken in the FY 2001-02 and the interest on this loan has already been allowed by the AO in the assessment years 2002-03 & 2003- 04. From these facts and after perusal of the documents furnished by the AR, it is observed that the appellant has utilized the borrowed funds for earning income which is shown as income from sale of capital assets under the head Capital Gains and therefore, it is obvious that the appellant is treating these investments as capital assets and not as business assets. Accordingly, it is found that the borrowed funds have not been utilized for the purposes of the business. Even if the business of the appellant is of making investments, only such investments can be treated as business assets from which the appellant shows the sale proceeds as business income. In view of this, there is no reason that the interest paid in respect of funds borrowed for making investments which are treated as non- business assets, should be allowed as a business expense u/s 36(1) (iii) or 37(1) of the Act. 4.2.1 It is further contended by the AR that such interest has been allowed by the AO in the earlier two years. In this respect, it is to be observed that the Page 3 of 13 principle of res judicata is not applicable to IT Authorities. Reference is made to the decision in the case of A Shah and Co. Vs C.I.T, 30 ITR 618 (Bom) in which the court has held that though as a general rule, the principle of res judicata is not applicable to IT Authorities, this rule is subject to limitations, for there should be finality and certainty in all litigations including litigation arising out of the Income-tax Act and an earlier decision on the same question cannot be reopened if that decision is not arbitrary or perverse, if it had been arrived at after due inquiry, if no fresh facts are placed before the Tribunal giving the later decision, and if the Tribunal giving the earlier decision has taken into consideration all material evidence. Reference is also made to the decision of the Apex Court in the case of Parashuram Pottery Works Ltd. v. Income Tax Officer, [1977] 106 ITR 1 (SC)in which it was held: "We are aware of the fact that strictly speaking res judicata does not apply to income-tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year hut where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to .allow the position to be changed in a subsequent year. "On these reasonings in the absence of any material change justifying the Revenue to take a different view of the matter - and if there was no change it was in support of the assessee - we do not think the question should have been reopened and contrary to what had been decided by the Commissioner of Income Tax in the earlier proceedings, a different and contradictory stand should have been taken."
Thus, to summarize the issue, it is noticed that it is well settled that the principle of res judicata, which applies to decision of Civil Courts, has no application to decisions of IT Authorities and it is for this reason that an assessment for a particular year is final and conclusive between the parties only in relation to that year. Decisions given in assessment for an earlier year are not binding either on the Assessee or the Department in a subsequent year. But this rule is subject to limitations. The first limitation is that there should be finality and certainty in all litigations including those arising out of income tax proceedings and an earlier decision on the same question cannot be changed in the absence of following circumstances: (i) The previous decision is not arrived at after due enquiry, (ii) The previous decision is arbitrary; or (iii) If fresh facts having a bearing on the earlier decision, come tolight. The other limitation is that the effect of revising a decision in a subsequent year should not lead to injustice and the court must always be anxious to avoid injustice to the Assessee. In this case, interest has not been allowed to the appellant in earlier years as the AO failed to appreciate the fact that the appellant has utilized the borrowed funds for making investment in non- business assets. In view of this, the decision taken by the AO in earlier years cannot dictate the findings in the year under consideration. 4.3 In view of the above facts and the legal position, I am of the opinion thatthe AO has rightly disallowed the interest paid on borrowed funds which have been utilized for making investment in securities with the objective of earning tax free income in the form of dividends and income under the head of Income from Capital Gains on sale of these investments. Page 5 of 13
Accordingly, the addition made by the A.O. is confirmed and the ground of appeal is dismissed.”
3. The Assessee, being aggrieved against the confirmation of addition, challenged the impugned order and is in appeal before us.
4. Heard the parties and perused the material available on record. The issue in the instant case relates to the disallowance of interest of Rs. 1,32,44,471/- claimed by the Assessee on the loan amount taken for making investment in shares and securities. The said amount of interest was disallowed by the Assessing Officer and affirmed by the Ld. Commissioner more or less on the reason that the loan money was utilized to make investment in shares, from which the Assessee earned dividend income or capital gains.
4.1 The Assessee has claimed that the loan was taken in F.Y. 2001-02 and the same has been used for making investments and the interest on the loan has already been allowed by the Assessing Officer in the two preceding assessment years 2002-03 and 2003-04 and therefore, by principle of res judicata, the Assessee is entitled to get the same benefit as already given in the previous assessment years.
5.1 Further, the Assessee has also claimed that the said investment was not made in tax free securities and in fact, the same was utilized for the purposes of business.
5.2 The Assessee before us also relied upon the judgment passed by jurisdictional High court in the case of EicherGoodearth Ltd. vs. CIT (2015) 60 taxmann.com 268(Delhi) wherein the Hon’ble Court has dealt with the identical issue and held as under :
Learned counsel for the Revenue urged that even though the ITAT precluded consideration of the expenditure under Section 36 (1) (iii) on the ground that shares were not held as stock-in-trade and such approach cannot be sustainable in law, nevertheless, the assessee's claim did not receive proper scrutiny by the lower authorities. Learned counsel highlighted that the CIT (A) as well as the ITAT went by whether the gross expenditure was net expenditure had to be taken into consideration while making deductions under Section 80M. It was submitted that in these circumstances, it would not be proper for this Court to render Aiings that the investments in this case made from the borrowings were in fact on account of strategic compulsions and not merely to derive income by way of dividends.
The judgments in CocanadaRadhaswami Bank {supra) and United Commercial Bank {supra) and the subsequent judgments in Western States Trading (P) Ltd. v. CIT [1971] 80 ITR 21 (SCI and Brooke Bond & Co. Ltd. v. CIT [1986] 162 ITR 373/28 Taxman 426E (SC! are authorities that the heads of income enumerated in the Income Tax Act in Section 14 do not denote their essential characteristics. In other words that a business or an individual receives some amount which may be assessed as income of a particular kind would not be conclusively determinative of that character. In the facts of the present case, that principle, in Page 7 of 13 the opinion of the Court, would squarely apply. If indeed the assessee had invested and subscribed to the rights issue in order to retain the control it originally did in Eicher Tractors Ltd, it can still be said that the expenditure was towards promotion of business and, therefore, properly entitled to be treated as such under Section 36 (1) (iii). At the same time, we are also of the opinion that there has been inadequate consideration and discussion on this aspect before the lower authorities, particularly the AO and the CIT (A). As has been pointed out on behalf of the Revenue, at that stage, the parties were more concerned with whether net or gross expenditure had to be deducted under Section 80M. At the same time, the assessee, we notice did put his contention both to the CIT (A) and ITAT.
This Court, therefore, is of the opinion that the law as declared by the Supreme Court in such cases is that if the expenditure is incurred for the purpose of promotion of business- more specifically as in the facts of this case to retain control or as part of a strategic investment of the assessee/company, such expenses - by way of interest outgo would have to be treated under Section 36(1) (iii) and not under Section 57. The matter is, therefore, remitted to the AO for full appraisal of the fact situation and findings in the light of our conclusions. If, as a result of the A.O’s determination, it is found that such expenditure is incurred, the net expenditure is obviously to be taken into consideration under Section 80M of the Act in the facts of the present case.
The appeal is partly allowed to the above extent.”
5.3 The Hon’ble Tribunal at Mumbai in the case of ACIT vs. M/s. Tata Sons Ltd. (ITA No. 4041/mum/2007 decided on 05.05.2021) also dealt with the identical issue and held as under:
“10.5 Proceeding further, going by the factual matrix as enumerated in the preceding paragraphs, it is undisputed fact that the assessee was principal holding company for its various group entities. The object of investment in group concerns was to secure controlling interest. Under an agreement, the assessee received subscriptions from the group entities in lieu of Brand promotion / enhancement of goodwill of the group as a whole. Such subscriptions monies termed as ‘brand promotion subscriptions’ aggregated to Rs.62.64 Crores which were offered as well as accepted as ‘Business Income’. The Ld. AO, in our considered opinion, failed to appreciate the fact that making of investments could, by itself, constitute business activity. In fact, Ld. AO after appreciating the object clause as well as report of Board of directors came to a conclusion that the main object of the assessee was to make investment so as to gain controlling interest. The assessee was in the business of making investments. For the said purposes, it obtained loans and paid interest thereon. Nevertheless, the purpose of loan was in furtherance of assessee’s business activities and to fulfill its main objects. The dominant object of investment was to exercise business control by way of acquiring shareholding and not to earn the dividend. The assessee’s activity of holding such investment, in our opinion, constitute business activity and therefore, the interest would be fully deductible u/s 36(1 )(iii) notwithstanding the fact that the assessee earned various streams of income out of these investments, one of which was assessable under the head ‘Income from other sources’. Similar is the view of coordinate bench in assessee’s own case for AY 2009-10 as extracted by us in preceding para 10.1. Further, it is trite law that the earning of the income was not a pre-requisite to grant deductionof expenditure. Therefore, we donot concur with the approach ofLd.CIT(A) in invoking the provisions of Sec.14A of the Act. Consequently, the interest expenditure of Rs.246.88 Crores would be fully deductible u/s 36(1 )(iii) of the Act. The various case laws as enumerated in para 10.3 & relied upon by Ld. AR supports our conclusion. Accordingly, Ld. AO is directed to rework allowable deduction u/s 80M. Ground No.4 of assessee’s appeal stand allowed to that extent.”
From the judgement referred above it is clear that the interest on borrowed capital utilized for making investments would be eligible for deduction u/s. 36(1)(iii) of the Act because there is no bar for allowability of interest u/s. 36(1)(iii) of the Act for utilizing the borrowed funds for making investments specifically meant for the purposes of business of the Assessee.
6.1 Coming to the instant case, it is not in dispute here that the Assessee is a NBFC company and engaged into the business of investment in shares, debentures, bonds and financing etc. as ordinary activities. During the year under consideration, the Assessee utilized the loan amount for making investment in shares in ordinary course and eventually earned dividend or capital gains. It is also not the case of the Revenue department that the Assessee had no commercial expediency for making the investments while using the borrowed funds. Having regards to the nature of activities the Assessee is engaged in, there is no justification for disallowance of interest u/s. 36(1)(iii) of the Act.
6.2 On the aforesaid consideration and analyzations, the Assessee is entitled to get the deduction of the interest claimed and consequently, the addition under challenge is deleted.
In the result, the appeal filed by the Assessee stands allowed.