THE PR COMMISSIONER OF INCOME TAX CENTRAL LUDHIANA vs. M/S HOLY FAITH INTERNATIONAL PVT LTD

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ITA/87/2017HC Punjab & HaryanaPHHC01117829201724 July 2017Author: MR. JUSTICE SURINDER GUPTA,MR. JUSTICE ARUN MONGA6 pages
AI SummaryDismissed

What did the High Court hold?

The High Court held that the Tribunal's decision to delete the addition of ` 3,71,68,025/- on account of disallowance of interest expenditure was not illegal, perverse, or based on a misreading of evidence. The Tribunal had relied on the High Court's judgment in Bright Enterprises Private Limited (2016) 381 ITR 107, which held that commercial expediency in advancing loans does not solely depend on direct transactions between group companies, and that a group company can advance amounts to another if it benefits the former, even if the benefit is not tangible. The Tribunal also noted that the Supreme Court in Hero Cycles Vs. CIT (2015) 379 ITR 347 (SC) had overruled the 'Abhishek Industries' judgment, which was relied upon by the lower authorities. The Tribunal concluded that since the advance was made out of interest-free funds, there was no justification for disallowing interest under Section 36(1)(iii). The High Court found no substantial question of law arising from the Tribunal's order.

What were the facts?

The assessee, M/s Holy Faith International Pvt. Ltd., engaged in publishing children's books and printing, made investments of ` 149,36,11,300/- as 'Share Application Money' in related concerns, notably M/s MBD Printographics Private Limited. The Assessing Officer (AO) observed that the share capital of M/s MBD Printographics Private Limited was fully subscribed, questioning the acceptance of further funds as 'Share Application Money' and deeming it a colorable transaction of interest-free loans. The AO disallowed ` 3,71,68,025/- of bank interest expenditure, as the assessee failed to prove interest-bearing funds were used exclusively for business purposes. The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed this disallowance, noting the assessee's failure to demonstrate any business purpose for the investments in sister concerns. The Income Tax Appellate Tribunal (Tribunal) allowed the assessee's appeal, deleting the addition.

What were the issues?

1. Whether on the facts and in the circumstances of the case, the Tribunal erred in deleting the addition of ` 3,71,68,025/- on account of disallowance of interest expenditure, ignoring the finding that the assessee had not shown that investments in sister concerns served any business purpose? (Section 36(1)(iii) of the Income Tax Act, 1961). 2. Whether on the facts and in the circumstances of the case, the Tribunal erred in deleting the addition of ` 3,71,68,025/- on account of disallowance of interest expenditure without appreciating that funds raised on interest for working capital were to cover the shortfall caused by interest-free investments in sister concerns which did not serve any business purpose? (Section 36(1)(iii) of the Income Tax Act, 1961). 3. Whether the Tribunal erred in law by ignoring that the investment made as 'Share Application Money' in sister concerns, whose share capital was almost fully subscribed, was a colorable transaction of interest-free loans/advances, not permissible in law? (Impliedly related to Section 36(1)(iii) and general principles of tax law). Assessee's contentions (as inferred from Tribunal's reasoning): The impugned advance was made out of interest-free funds available with the assessee, thus no disallowance of interest under Section 36(1)(iii) was warranted. Decisions relied upon by the lower authorities, such as 'Abhishek Industries' and 'Bright Enterprises Private Limited', have been overruled by higher courts. Revenue's contentions: The Tribunal erred in deleting the addition as the assessee had not demonstrated any business purpose for the investments in sister concerns, and these investments were colorable transactions of interest-free loans.

Which sections of the Income-tax Act were involved?

Section 260A,Section 36(1)(iii)

AI-generated summary — verify with the full judgment below

ITA No. 87 of 2017 (O&M) 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH

ITA No. 87 of 2017 (O&M)

Date of decision: 24.07.2017

The Pr. Commissioner of Income Tax (Central), Ludhiana

……Appellant

Vs. M/s Holy Faith International Pvt. Ltd., MBD House, Railway Road, Jalandhar

…..Respondent CORAM: HON’BLE MR. JUSTICE AJAY KUMAR MITTAL

HON’BLE MR. JUSTICE AMIT RAWAL

Present: Mr. Rajesh Katoch, Senior Standing Counsel for the appellant-

revenue.

Ajay Kumar Mittal,J.

1.

The appellant-revenue has filed the instant appeal under Section 260A of the Income Tax Act, 1961 (in short, “the Act”) against the order dated 13.6.2016, Annexure A.III, passed by the Income Tax Appellate Tribunal, Amritsar Bench, Amritsar (in short, “the Tribunal”) in ITA No. 32(Asr)/2015, for the assessment year 2012-13 claiming following substantial questions of law:- (i) “Whether on the facts and in the circumstances of the case, the Hon’ble Income Tax Appellate Tribunal, Amritsar Bench, Amritsar has erred in deleting the addition of ` 3,71,68,025/- made by the Assessing Officer, on account of disallowance of interest expenditure, ignoring the specific finding of the CIT(A) that the assessee had not even attempted to show that the investments in sister concerns served any business purpose ? Gurbax Singh 2017.08.02 17:31

ITA No. 87 of 2017 (O&M) 2 (ii) Whether on the facts and in the circumstances of the case, the Hon’ble Income Tax Appellate Tribunal, Amritsar Bench, Amritsar has erred in deleting the addition of ` 3,71,68,025/- made by the Assessing Officer, on account of disallowance of interest expenditure without appreciating the finding of the CIT(A) that funds raised on interest for working capital requirements had to be raised to make up for the shortfall caused by interest free investments in sister concerns which did not serve any business purpose for the assessee company? (iii) Whether the Hon’ble ITAT, while allowing relief to the assessee, has erred in law in ignoring an important issue that the investment made by the assessee in the shape of ‘Share Application Money’ in those sister concerns, the share capital of which was almost fully subscribed was a colorable transaction of interest free loans/advances to its sister concerns and such colorable transactions are not permissible in the eyes of law?

2.

A few facts necessary for adjudication of the controversy involved, as narrated in appeal, may be noticed. The assessee-company is engaged in the business activity of publication of children books and as printers at its plants situated at Sahibabad in Uttar Pradesh and Jalandhar. During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had an amount of ` 149,36,11,300/- standing as investments as ‘Share Application Money’ in various related concerns but the assessee company had not received any interest or return on account of such investments. Major investment was in the shape of Share Application Money with M/s MBD Printographics Private Limited. From the perusal of balance sheet of M/s MBD Printographics Private Limited, the Assessing Officer noticed that share capital of the said

ITA No. 87 of 2017 (O&M) 3 company had already been fully subscribed and there was no reason to accept the funds from the assessee as ‘Share Application Money’. It was concluded that the investment was colorable transaction of loan/advance without any interest to its sister concern in the shape of ‘Share Application Money’. Similar was the position with other investments. The assessee had claimed expenditure on account of Bank interest. Since the assessee had not been able to prove with evidence that interest bearing funds were used exclusively for business purposes, the expenditure of ` 3,71,68,025/- of bank interest on CC limit, was disallowed and added to the income of the assessee, vide order dated 31.01.2014, Annexure A.

1.

Aggrieved by the order, the assessee filed appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. Vide order dated 12.11.2014, Annexure A-II, the CIT(A) confirmed the disallowance of interest expenditure made by the Assessing Officer. It was observed that the assessee had not even attempted to show that the investments in sister concerns served any business purpose. The entire emphasis of the assessee was to support the claim that the impugned investments had been made from self owned funds and not from interest bearing funds. The investments had been made from a separate current account in which the deposits represented accruals from the business of the assessee company i.e. sales. With these observations, the disallowance of interest expenditure made by the Assessing Officer was confirmed by the CIT(A). Aggrieved by the order, the assessee filed appeal before the Tribunal. Vide order dated 13.06.2016, Annexure A.III, the Tribunal allowed the appeal of the assessee deleting the addition on account of disallowance of interest expenditure. It was held that the impugned advance had been made out of interest free funds available with the assessee and there was no question for disallowance of interest under ITA No. 87 of 2017 (O&M) 4 Section 36(1)(iii) of the Act. Thus, the disallowance of interest under Section 36(1)(iii) pertaining to the sister concerns upheld by the CIT(A) was not held to be justified. Hence the instant appeal by the appellant- revenue.

3.

We have heard learned counsel for the appellant-revenue. 4. relevant findings recorded by the Tribunal in this regard read as under:- “We have heard the rival contentions and have perused the material available on record. It is seen that the reliance placed by the Ld. CIT(A) on the judgment of ‘Bright Enterprises Private Limited’ of the ITAT, Amritsar Bench, is not proper, since that judgment has been reversed by the Hon’ble Jurisdictional High Court vide order dated 26.07.2015, reported in 381 ITR 107 (copy placed at APB 100 to 106), holding as under:-

ITA No. 87 of 2017 (O&M) 5

“17. The Assessing Officer’s view that the advance was not for business purposes as the appellant had no business dealing with the sister company is erroneous. Commercial expediency in advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company if, for instance, as a result thereof the former benefits. In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long, as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient.”

7.

Further, the judgment in the case of ‘Abhishek Industries’ (supra) relied upon by both the Authorities below has also been overruled by the Hon’ble Supreme Court in the case of ‘Hero Cycles Vs. CIT’, 379 ITR 347 (SC) (copy placed at APB 112 to 116), in favour of the assessee by holding as follows:

“xxxxxxxxxxx.

Assessee had a credit balance in the bank account when the said advance of ` 34 lakhs was given. Company had reserve/surplus to the tune of ` 15 crores and, therefore, the assessee company could in any case, utilize those funds for giving advance to its directors.”

8.

Further, the reliance on the following judgments also support the case of the assessee overruling the judgment of ‘Abhishek Industries’, wherein it has been held that the disallowance under Section 36(1)(iii) is uncalled for: (i) ‘CIT-1, Ludhiana Vs. Rakesh Gupta, ITA No.37-2014, dated 2.07.2015. ITA No. 87 of 2017 (O&M) 6 (ii) ‘ACIT Vs. Omax Bikes Limited’ ITA No.1085/Chd/2013 dated 06.08.2015. 9. We are of the view that the ld. Counsel for the assessee is correct in contending that since the decisions in the case of ‘Abhishek Industries Limited’ (supra) and ‘Bright Enterprises Private Limited (supra) followed by the Authorities below while making and confirming addition have been overruled by the Hon’ble Courts, the addition does not survive.

10.

In view of the above discussion, we hold that the impugned advance has been made out of interest free funds available with the assessee and there was no question of whatsoever for disallowing interest under Section 36(1)(iii) of the Act. Accordingly, we hold that the disallowance of interest under Section 36(1)(iii) pertaining to the sister concerns upheld by the ld. CIT(A) is not justified, hence, the same is deleted. Thus, the appeal of the assessee is allowed.”

5.

Learned counsel for the appellant-revenue has not been able to show that the findings recorded by the Tribunal are illegal or perverse or based on misreading of evidence on record warranting interference by this Court. Thus, no substantial question of law arises. Consequently, the appeal stands dismissed.

(Ajay Kumar Mittal)

Judge

July 24, 2017

(Amit Rawal)

‘gs’

Judge Whether speaking/reasoned

Yes Whether reportable

Yes

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