DCIT, CIRCLE- 21(1), NEW DELHI vs. RELIGARE ENTERPRISES LTD.,, NEW DELHI

Per Dr. B. R. R. Kumar, Accountant Member:

“1. That on facts and circumstances of the case, the Ld. CIT(A) has erred in allowing the appeal of the assessee ignoring the fact that the assessee company failed to prove that interest bearing funds were granted as loan to subsidiaries/group companies and not its own funds/funds generated with zero interest liability.

2. That on facts and circumstances of the case, the Ld. CIT(A) has erred in holding that there was a direct correlation between the interest bearing funds

2 Religare Enterprises Ltd. and grant of interest bearing ICDS to subsidiaries/Group Companies.”

The assessee company is a Non-Banking Finance Company with Reserve bank of India and was engaged in the business of providing financial advisory services and support services to its subsidiaries and Religare Group Companies. The company incurred expenses of Rs.976,30,09,360/- out of which an amount of Rs.946,22,50,000/- has been disallowed u/s 37(1) and Rs.24,52,39,611/- u/s 14A of the Income Tax Act, 1961. Thus, the entire expenses of the company was disallowed either u/s 37(1) or 14A. Further, the AO held that an amount of Rs.760,92,407/- was not disallowed.

In its return of income appellant suo-moto made disallowance of Rs. 24,52,39,611/- under section 14A of the Act read with Rule 8D of Income Tax Rules, 1962 (“Rules ), computation of which is as under:

Particulars Amount (Rs.) i) The amount of expenditure directly relating to income NIL which does not form part of the total income ii) Interest cost not directly attributable to any income 19,76,29,621 or receipt iii) An amount to equal to 0.5 percent of the average 4,76,09,990 value of investment, income from which does not form part of the total income, as appearing in the balance sheet of the assesse as on the first day and last day of the previous year Total Disallowance 24,53,29,611 ....The assessing officer has disallowed interest on Compulsorily Convertible Debentures (CCDs) of Rs.7,60,92,407/-. The appellant also submitted a detailed breakup of the interest costs incurred by it in the instant AY and suo-moto disallowance u/s 14A of the Act r.w. Rule 8D as under:

S.No. Particulars Amount (Rs.) Amount Amount Amount not considered while disallowed considered while computing under section computing the disallowance 37 of the Act disallowance under section under section 14A 14A of the Act 1. Interest paid on ICDs 80,13,168 2. Interest on CCDs 16,51,45,127 7,60,92,407 3. LC Charges 7,60,92,407 4. Interest on NCDs 1,44,50,900 5. NCD amortization 7,36,795 charges Total 19,76,09,195 7,13,96,784 7,60,92,407

4 Religare Enterprises Ltd. Appellant has further submitted that interest paid on loans taken for specific purposes cannot be considered for calculating disallowance under section 14A of the Act read with Rule 8D of Rules. It has submitted that during this AY it had allotted Unsecured Compulsorily Convertible Debentures (CCDs) of Rs. 404.83 Cr. with International Finance Corporation (IFC) on November 7, 2012. The said CCDs were issued at a coupon rate of 15% for the period November 7, 2012 to May 6, 2014. The same has been duly certified by the appellant’s statutory auditors M/s Price Waterhouse and Coopers under Note 5.2 of the audited financial statements for the period ended March 31, 2013. Out of Rs. 404.83 crores, Rs. 264.4 crores was utilised towards capitalisation of subsidiaries. It was further submitted that corresponding interest cost of Rs. 16,51,45,146/- has been duly disallowed in entirety u/s 14A of the act read with Rule 8D(2)(ii).

Balance CCD proceeds aggregating to Rs. 139.82 Cr. was utilised as under:

(i) ICDs of Rs. 123.65 crores to subsidiary and group companies @ interest rate of 14% on which interest income of Rs. 7,90,16,370/- was earned by the appellant and duly offered to tax a business income in its return of income expense of Rs.6,92,18,710/- was not disallowed u/s 14A of the Act.

(ii) Purchase of 150 12.5% convertible debenture of Religare Finvest Limited (“RFL”) in the secondary market on December 7, 2012 aggregating to Rs. 16.17 crores).

5 Religare Enterprises Ltd. It was further submitted that as the appellant on sale of the said NCDs earned interest aggregating to Rs. 57,28,081/- and profit on sale of NCDs of Rs. 81,53,633/- which has been duly offered to tax as business income in its return of income filed for the subject AY the corresponding CCF interest cost of Rs. 68,73,697/- was not disallowed u/s 14A of the Act. During the subject AY, the appellant has incurred interest costs aggregating to Rs. 34,51,18,811/- which has been recorded under Schedule 24-‘Finance Costs’ of its audited financial statements for the period ended March 31, 2013. As discussed above, the Appellant out of the aforesaid interest expense incurred by it has in entirety disallowed the following interest expense aggregating to Rs. 26,90,05,979/- in its return of income either under section 14A of the Act read with Rule 8D(2)(ii) of Rules or under section 37 of the Act: a. Interest on ICDs of Rs.1,80,13,168/- b. LC charges of Rs.7,06,59,998/-; c. NCD amortization charges of Rs.7,36,795/-; d. Interest paid on CCDs of Rs.16,51,45,127/-; e. Interest paid on NCDs of Rs.1,44,50,900/- Total Rs.26.90,05.988/- and has claimed the balance CCD interest expense aggregating to Rs. 7,60,92,407/- as a deductible expense under section 37(1) of the Act. The appellant during this AY has generated cash flow aggregating to Rs. 7.95 crores from business operations. Appellant has submitted that since it did have adequate own funds for infusing additional share capital in its subsidiaries or granting them short term loans for meeting their

6 Religare Enterprises Ltd. working capital requirements, it raised funds for the same by allotting CCDs aggregating to Rs. 404.83 crores to International Finance Corporation (IFC) on November 7, 2012 at an IRR of 15 percent for the period November 7, 2012 to May 6, 2014 and allotting NCDs aggregating to Rs. 845 crores to various mutual fund houses on March 28, 2013 at a coupon rate of 14 percent. Ld. AR of appellant further submitted that being a prudent businessman, it would not raise funds from an international organisation like IFC which is funded by the World Bank nor would it place NCDs with reputed mutual fund houses unless and until its own funds were not adequate to meet its business requirements viz. infusion of additional share capital in its subsidiaries and grant of inter-corporate deposits to its subsidiaries for enabling them to meet their working capital requirements. Perusal of submissions reveals that there exists one to one correlation between the funds aggregating to Rs. 404.83 crores received on allotment of CCDs to IFC and part utilisation of the same towards grant of interest bearing ICDs to subsidiaries and purchase of NCDs from the secondary market.

4.3 Appellant has relied on a number of judgements of the Apex Court as well as various High Courts which hold that the expenditure must be incidental to the business and must be necessitated or justified by commercial expediency. The expenditure must be directly and intimately connected with business laid out by the assessee in his capacity as a trader. To be a permissible deduction, there must be a direct and intimate connection between the expenditure and the business. Ordinarily it is for the assessee to decide whether a certain expenditure should be incurred during the course of his

7 Religare Enterprises Ltd. business and if such expenditure has been incurred for promoting the assessee’s business and earning profits, the assessee can claim a deduction of the expense under section 37(1) of the Act. Respectfully following the ratio of decision of the Apex Court in the case of CIT vs. Delhi Safe Deposit Co. Ltd. (supra), I hold that the interest expense of Rs. 7,60,92,407/- has been incurred by appellant in respect of earning taxable income.”