PVP VENTURES LTD,CHENNAI vs. ITO, CROP WARD -5(2), CHENNAI

The brief facts of the case emanating from the records are that the assessee M/s.PVP Ventures Ltd. (formerly known as 'SSI Limited') is engaged in the business of software training, development, export etc. During the subject A.Y.2004-05, the assessee was engaged in imparting computer education and software development services under the name 'SSI Limited'. The Return of Income for the A.Y.2004-05 was filed on 01.11.2004, admitting loss of Rs.93,94,89,910/-. The Return of income was processed u/s.143(1) of the Act on 24.10.2005. The case was subsequently selected for scrutiny assessment u/s.143(3) of the Act.

The assessment was then completed u/s.143(3) of the Act through by an order dated 18.12.2006 wherein the AO had disallowed interest expenditure of Rs.8,84,11,739/- u/s.36(1)(iii) of the Act on the ground that interest bearing funds were diverted for non-business purpose.

Being aggrieved, an appeal was preferred before the Ld.CIT(A) who, vide Order dated 22.02.2013 had directed the AO to delete the said addition of Rs.8,84,11,739/-, holding that investment made to acquire controlling interest in the sister concern is a business expenditure allowable u/s.36(1)(iii) of the Act, following the order of Ld.CIT(A) in appellant’s own case for the preceding A.Y.2003-04. (Order is forming part of the Paperbook in Page Nos.15 to 24).

Aggrieved by the order of the ld.CIT(A), the Department preferred an appeal before the Tribunal in ITA No.1706/Chny/2013. The Tribunal, vide Order passed on 10.03.2020, following their Order passed on 21.11.2019 for the A.Y.2003-04 in ITA No.1705/Chny/2013, had remitted the file back to ld.CIT(A) for fresh adjudication whether the funds were advanced to sister concern out of business expediency or not. (Order is forming part of the Paperbook in Page Nos.25-30).

Thereafter, the Ld.CIT(A) vide Order dated 30.04.2025 passed u/s.250 r.w.s 254 of the Act had upheld the disallowance of the interest expenditure of Rs.8,84,11,739/- made u/s.36(1)(iii) of the Act, by holding that the assessee had not advanced funds to the sister concern out of business expediency due to its failure to explain along with supporting documentary evidences the nature of business expediency for advancing funds to the sister concerns. Further, the ld.CIT(A) had rejected the alternate plea of the assessee that the assessee company had sufficient own funds to source advances given to the subsidiary company by stating that the Tribunal had remanded back the matter to the file back to ld.CIT(A) for fresh adjudication only on the issue whether the funds were advanced to sister concern out of business expediency or not. Therefore, the issue to be decided in the set aside appeal proceedings is not whether the appellant company had sufficient own funds to source advances given to the subsidiary company.

Aggrieved by the above mentioned ld.CIT(A)’s Order, the assessee is in appeal before us.

The ld.AR for the assessee submitted that company had given Loans and Advances to subsidiary companies that stood at Rs.122,79,39,814/- as at 31.03.2004 that is evident from ‘Schedule 10 - Loans and Advances’ of the Audited Financial Statements for the year ended 31.03.2004 (Copy of the Audited Financial Statements of the Appellant for the year ended 31.03.2004 - Paperbook Page nos. 1-14). The line-item details of the same is as follows:

From the above, it is evident that apart from the first two line-items reflecting receivables from subsidiaries on sale of Land & Building / computer education business, the rest had all been made in the ordinary course of business of the assessee. The purpose behind the same can be nothing but business expediency, for, only the parent company (ie) the assessee in this case, shall take all the necessary steps for the welfare of the subsidiaries. The Hon'ble Bombay High Court in the case of Vaman Prestressing Co. (P.) Ltd. v.Additional Commissioner of Income-Tax [2023] 154 taxmann.com 325 (Bom) had observed in Para 17 of the Order that “17... Moreover there can be no other reason but commercial expediency for petitioner to give loans and advances and capital to ICON. 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 a prudent businessman should act. The authorities must not look at the matter from their own point of view but that of a prudent businessman.". [Case-law is enclosed herewith as Annexure 1].

The ld.AR submitted that the term ‘commercial expediency’ has a wide import, as held by the Hon'ble Supreme Court in the case of S.A.Builders Ltd. v.Commissioner of Income-Tax (Appeals), Chandigarh [2007] 158 Taxman 74 (SC) in Para 25 that “25. 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... 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" videCIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140, CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc.”

Reliance is placed on the said decision of the Hon’ble Apex Court in that the loans/advances made to subsidiaries prima-facie can stem out of no other factor other than ‘business/commercial expediency’ which had been widely accepted by various judicial forums time and again. Reliance is also placed on the following decisions: a) The Hon’ble Bombay High Court in the case of Commissioner of Income-tax, Panaji v. Phil Corpn. Ltd. [2011] 14 taxmann.com 58 (Bombay) where overdraft was not used for mere investment in shares of sister/subsidiary company to earn dividend but was used to have control over that company and further that where such an investment was integral part of business of assessee, it was held that the assessee was entitled to deduction of interest paid on overdraft u/s.36(1)(iii) of the Act.

The ld.AR further reiterated that the loans taken by the assessee from Union Bank of India and Vysya Bank Ltd. during the relevant previous year, giving rise to the interest expenditure to the tune of Rs.8,19,38,239/-, was utilized for funding the investment in M/s.Aptech Limited to acquire the controlling interest therein through its subsidiary and also to purchase the Fixed Assets. M/s.Aptech Limited was a competitor of the assessee and the decision to acquire controlling interest therein through its subsidiary was purely a business decision, which in turn, facilitated the assessee to sell its education division business to them. In fact, the assessee had offered a sum of Rs.9,52,48,844/- to tax in the subject A.Y.2004-05 under the head 'Miscellaneous income' pertaining to profit arising from such sale of business. Hence, the ld.AR submitted that interest bearing funds were never utilized to

Without prejudice to the above, the ld.AR submitted her alternative plea as follows:

It is pertinent to note that, as is evident from the Audited Financial Statements for the relevant F.Y.2003-04 (forming part of Paperbook in Page Nos. 1-14), the assessee had sufficient own funds to source such loans/advances given to subsidiary companies of Rs.122,79,39,814/- (as reflected under Schedule No. 10 of the Balance Sheet ‘Loans and Advances’) as given under: Description Schedule No. Amount in Rs. Share Capital 1 113,46,78,600 Reserves and surplus: 2 General Reserve 17,83,55,125 Balance in P & L A/c. 136,44,25,911 Total 167,74,59,835

From the above, it is evident that the assessee’s shareholders’ funds and reserves aggregated to Rs.167,74,59,835/- whereas the Loans and advances to subsidiaries aggregated to Rs.122,79,39,814/-, whereby the interest-free funds available with the assessee were substantially in excess of the advances made to subsidiary concerns.

The ld.AR placed reliance in this regard on the decision of Hon’ble Bombay High Court vide [2022] 117 taxmann.com 625 (Bombay) that was upheld by Hon’ble Supreme Court of India in the case of Shapoorji Pallonji and Co. Ltd v.PCIT [2022] 141 taxmann.com 509 (SC) wherein it was held that where assessee had not utilized interest bearing borrowed funds for making interest- free advances as assessee had its own interest-free fund far in excess of interest-free advance, interest on borrowed capital could not be disallowed. The Hon’ble Bombay High Court therein had perused the decision of that Court

Further, reliance is placed by the ld.AR on the decision of Hon’ble Bombay High Court in the case of Principal Commissioner of Income-tax, Panaji v. V.S.Dempo Holding (P.) Ltd. [2021] 130 taxmann.com 456 (Bombay) wherein it was held that where assessee holding company advanced interest-free loans to its subsidiary purely out of commercial expediency and there was no findings of fact that such loans advanced by assessee were utilized for personal benefits of directors of subsidiary and, further, assessee had sufficient interest-free funds to cover such loans given to its subsidiary, no interest expenditure was to be disallowed u/s.36(1)(iii) of the Act. (case-law enclosed as Annexure 4).

Hence, the ld.AR submitted that the alternate plea of assessee’s own funds being sufficient to cover the Loans & advances given to its subsidiaries, the interest disallowance being unwarranted thereunder be deleted be considered.

In view of the above arguments, she submitted that where the loans/advances made to subsidiary companies were out of business expediency and were sourced from own funds, it is prayed that the disallowance of Rs.8,84,11,739/- made u/s.36(1)(iii) of the Act be deleted.

Per contra, the ld.DR for the revenue relied on the orders of the authorities and prayed for confirming the order of the ld.CIT(A) by dismissing the appeal of the assessee.

The ld.CIT(A), while deciding the matter pursuant to the directions of this Tribunal, has primarily examined the aspect of commercial expediency and ultimately upheld the disallowance. However, the alternate contention of the assessee that the advances made to subsidiary concerns were sourced out of its own interest-free funds was rejected on the ground that the scope of remand was confined only to examining the issue of commercial expediency. In our considered view, such an approach is not legally tenable. Once the issue relating to disallowance u/s.36(1)(iii) of the Act was restored for fresh adjudication, any contention arising from the facts already available on record and having a direct bearing on the allowability of interest expenditure ought to have been examined. The powers of the appellate authorities are intended to determine the correct tax liability and cannot be curtailed by refusing to consider a substantive legal plea which goes to the root of the addition.

Upon perusal of the audited financial statements placed before us, we find that as on 31.03.2004 the assessee had substantial interest-free funds in the form of share capital and reserves. The share capital stood at Rs.113,46,78,600/- and the reserves & surplus aggregated to Rs.154,27,81,036/-, resulting in total shareholders’ funds stood at Rs.167,74,59,835/-. On the other hand, the aggregate loans and advances reflected in Sch.-10 of the balance sheet amounted to Rs.122,79,39,814/-. Thus, the own funds available with the assessee were substantially higher than the advances made to its subsidiary concerns.

We also find merit in the submission of the ld.AR that a portion of the amounts reflected in Sch.-10 represents business receivables arising on account of sale of land and building and transfer of the computer education business, while the remaining advances were made to subsidiary concerns in the course of carrying on the business activities of the group. Significantly, there is no finding by the Revenue that any part of the advances was utilized for the personal benefit of directors or for any purpose unconnected with the business interests of the assessee.

Therefore, even assuming for the sake of argument that the Revenue's objections regarding commercial expediency are to be accepted, the disallowance u/s.36(1)(iii) of the Act cannot survive independently in view of the

In view of the foregoing discussion and respectfully following the ratio laid down by the Hon'ble Bombay High Court in Reliance Utilities & Power Ltd., as affirmed and followed in subsequent decisions, we hold that the advances made by the assessee are to be presumed to have been sourced out of its own interest-free funds. Consequently, the disallowance of Rs.8,84,11,739/- made u/s.36(1)(iii) of the Act is unsustainable in law and deserves to be deleted. Accordingly, we direct the AO to delete the impugned disallowance. The grounds raised by the assessee are allowed.

In the result the appeal of the assessee is allowed. Order pronounced in the open court on 02nd July, 2026 at Chennai.