THE COMMISSIONER OF INCOME TAX vs. M/S PHIL CORPORATION LTD. AND ANR.

It is a common ground that the only question (a) has been decided against the respondent no.1- assessee by judgment dated 30.08.2010 in Tax Appeal No. 58 of 2002 by this Court and as far as question (c) is concerned, by consent the matter is remanded on this point to the Assessing Officer for verifying whether the amount of Rs.94,00,000/- can be claimed as bad debts after verifying whether the alleged bad debts fulfil the condition laid down under Section 36(1)(iii) read with Section 36(2) of the Income Tax Act.

The parties agreed that in question (c) above, “Section 36(1)(vii)” be read instead of “Section 36(1)(iii)”. Thus the only question that needs to be decided is whether the Income Tax Appellate Tribunal (ITAT) was right in deleting the addition of Rs.19,73,333/- being interest on the loan taken by the assessee for the investment of Rs.3,70,00,000/- in Phil Photo Ltd.

The assessee took a loan from the bank for a sum of Rs.3,70,00,000/-. This amount was invested by the assessee into the sister concern called Phil Photo Ltd., undisputedly, as an investment though no dividend has been received by the assessee. It was not disputed that the amount was paid to Phil Photo Ltd., as an integral part of the business. The assessee claimed a deduction under Section 36(1)(iii) of the Income Tax Act in respect of the interest payable by it to the bank. Section 36 reads as follows :

The Assessing Officer held that since the investment of Rs.3,70,00,000/- is out of borrowed funds for business, the proportionate interest is to be disallowed. The :6: Assessing Officer further observed that since the assessee is entitled to receive an amount of 20% from Phil Photo Ltd., on account of I.C.D., an amount of Rs.19,73,333/- is disallowed and is added to the gross total income. At this stage, it may be noted that the learned Counsel for the appellant is not in a position to point out any basis on which the Assessing Officer has treated the amount as I.C.D., and not an investment in the shares.

The Commissioner's order appears to have confirmed the demand in the tenor of reasoning that even after investing the amount by the assessee in the Phil Photo Corporation as an investment as debit balance assessment in the OD account of the assessee and when this money was diverted by debiting this account, it went to increase the debit balance on which the interest is charged by the bank which is included in the total amount of interest claimed.

The Commissioner's order further appears to have treated the amount as bad debts. Before us the learned Counsel for the appellant was not in a position to justify how this amount is treated as bad debts, particularly since the amount is shown by the assessee as an investment in its :7: account as contended by the learned Counsel for the respondents.

The Commissioner of Income Tax (Appeals ) thus confirmed the order of the Assessing Officer.

In appeal, however, the ITAT found that the assessee had invested the amount in question in subsidiary company - Phil Photo Ltd., for the acquisition of its shares i.e. to have a control over majority shares but not to earn dividend on interest. Before ITAT, it was not disputed that such an investment is an integral part of the business. In these circumstances, ITAT, therefore, came to the conclusion that the assessee is entitled to the amount as deduction under Section 36(1)(iii) of the Income Tax Act.

Ms. Dessai, learned Counsel for the appellant submitted that the amount made over by the assessee to Phil Photo Corporation must be treated as loan given to Phil Photo Corporation and since the amount was drawn directly from the overdraft account and paid to Phil Photo Corporation, it is attributed a pledging of debt on which the assessee would be entitled to earn interest since the assessee now seeks to claim

Mr. Sonak, learned Counsel for the respondent no.1 submitted that the Tribunal has rightly relied on the decision of Shree Digvijay Cement Co. Ltd. V/s CIT (1982)(138 ITR 45) of the Gujarat High Court. He further relied on CIT V/s Jardine Herderson Ltd., (1994) (210 ITR 981, 986) of Calcutta High Court, wherein it was held that the interest paid on borrowings utilized for the purchase of shares in order to retain managing agency by the assessee company was held allowable as business expenditure. We find that the reasoning of the ITAT that the overdraft was not operated only for investing in the shares of subsidiary company and the fact that it was also used for investment in the shares of the subsidiary company to have control over that company and, therefore, the element of interest paid on the overdraft was not susceptible of bifurcation and therefore, the respondent no.1 is entitled to the deduction under Section :9: 36(1)(iii) of the Income Tax Act is correct and deserves to be accepted.

In this result, we hold that ITAT was right in deleting the addition of Rs.19,73,333/- and thus the question is answered against the Revenue and in favour of the assessee.