DCIT, CHENNAI vs. PVP VENTURES LTD., CHENNAI

आदेश / O R D E R

PER INTURI RAMA RAO, ACCOUNTANT MEMBER

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‘’1. The order of the learned CIT(A) is contrary to facts and circumstances of the case.

2. The Ld. CIT(A) erred in deleting the interest disallowance on account of purchase of shares of Aptech Ltd..

2.1. The Ld CIT(A) ought to have appreciated that the assessee borrowed loan from the bank to purchase shares of Aptech Ltd with the sole intention to acquire controlling interest, who was a competitor of the assessee company. This act of the assessee cannot be termed as an expense incurred wholly and exclusively for the purpose of earning income from its business. It is only trying to weed out the competition in an unhealthy manner.

2.2. It is submitted that by doing so, the assessee certainly derives a substantial interest in the affairs of the company M/s Aptech Ltd., which ought to have been considered by the Ld CIT(A).

2.3. Further, the Ld CIT(A) ought to have noted that the assessee enjoyed the benefit of voting power / substantial interest in the company, the shares of which were purchased out of the loan amount. This is also squarely covered by the provisions of section 28(iv) of the Act.

2.4. The Ld CIT(A) ought to have considered the decision of the Hon’ble Madras High Court in the case of M/s Sujani Textiles (P) Ltd (151 ITR 653) wherein it was held that the investment in shares cannot be considered as an investment for the purpose of business and that applicability of section 36(1) (iii) stands excluded in such circumstances ‘ 3. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Ld CIT(A) may be set aside and that of the Assessing Officer restored’’.

The brief facts of the case are as under: 3.

The Respondent – assessee namely ‘’M/s.PVP Ventures Ltd’’ is a company incorporated under the provisions of the Companies Act,

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1956. It is engaged in the business of software training, development, export etc., The return of income for the assessment year 2004-2005 was filed on 1.11.2004 admitting loss of Rs.93,94,89,910/-. Against the said return of income, the assessment was completed by the Assistant Commissioner of Income Tax, Company Circle-V (2), Chennai passed u/s.143(3) of the Act on 18.12.2006 at total loss of Rs.36,92,22,032/-.

While doing so, the Assessing Officer 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.

During the course of assessment proceedings, the Assessing 4.

Officer observed that the Respondent- assessee had advanced the following amount to sister subsidiary companies.

AGS Holdings P. Ltd ( L & B A/c) 86,551.10 Aptech Limited (sale of business) 14,03,07,812.10 SSI Education –Aptech A/c 51,37,374.23 SSI Europe 12,79,35,646.84 SSI Europe (2001-02) 78,54,334.47 SSIT Singapore 4,76,95,777.12 SSIT Singapore 42,98,995.96 SSIT NA Inc 2,28,773.77 Clientsoft Income USA 16,21,37,413.67 SSI T NA 64,57,92,354.88

Total 1,22,79,39,814.14 Therefore the Assessing Officer was of the view that interest bearing funds were diverted and accordingly disallowed interest expenditure.

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Being aggrieved, an appeal was preferred before the 5. ld.CIT(A) who vide impugned order deleted the addition holding that amount invested in the form of equity shares to acquire controlling interest in the sister concern is a business expenditure, following the order of ld. CIT(A) in assessee’s own case for the assessment year 2003-2004, accordingly directed the Assessing Officer to delete the addition.

Being aggrieved, the Revenue is in appeal before us in the 6. present appeal. It is contended that interest bearing funds were being diverted to sister concern, therefore, the interest cannot be allowed as expenditure u/s.36(1) (iii) of the Act. It is further contended that acquiring controlling interest in subsidiary company does not amount to business activity and therefore interest can be disallowed u/s.36(1)(iii) of the Act placing reliance on the decision of Jurisdictional High Court in the case of Sujani Textiles (P) Ltd (supra).

On the other hand, the ld. Authorised Representative 7. submitted that no disallowance of interest is warranted, as the amounts were invested in the form of share capital for acquiring controlling interest in subsidiary company placing reliance on the decisions of Hon’ble Bombay High Court in the case of CIT vs. Reliance Communications Infrastructure Ltd (2012) 21 Taxman 118 and CIT vs.Panaji vs. Phil Corpn Ltd, (2011) 14 Taxman. com 58.

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We heard the rival submissions and perused the material on 8. record. The only issue involved in the present appeal relates to whether or not the Assessing Officer is justified in making disallowance u/s.36(1) (iii) of the Act on the ground that borrowed funds were utilized for non business purpose. The issue in the present appeal was decided in assessee’s own case in for assessment year 2003-2004, dated 21.11.2019, wherein it was held as follows:-

‘’8. We heard the rival submissions and perused the material on record. The only issue involved in the present appeal relates to whether or not the Assessing Officer is justified in making disallowance u/s.36(1) (iii) of the Act on the ground that borrowed funds were utilized for non business purpose. Admittedly, amounts were advanced to the sister concern for the purpose of acquiring shares in Aptech Ltd and purchase of assets. The amounts were advanced in the form of loan to the sister concern. Therefore, the contention that the amount were advanced for the purpose of acquiring controlling interest cannot be accepted. It is the sister concern of the company which acquired the controlling interest of Aptech Ltd. If the loans are advanced to sister concern out of business expediency, it can be allowed as deduction. Business expediency is a question of fact which requires to be substantiated with evidence. The ld. Commissioner of Income Tax (Appeals) without discussing any factual situation merely jumped to conclusion that it is a business expenditure. Reliance placed by the Authorised Representative on the decision of Bombay High Court in the case of Reliance Communications Infrastructure Ltd (supra) cannot be applied to the facts of the present case, as the ratio laid down by the Hon’ble Bombay High Court in the above case is that in case of the mixed funds, borrowed funds and own funds, where the own funds are more than the investment, the presumption is to be drawn that own funds were utilized for the purpose of making investments. In the present case, it is not the contention of the assessee that own funds are utilized for the purpose of making investment. In the circumstances, we are of the considered opinion that the matter should go back to the file of the ld. Commissioner of Income Tax

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(Appeals) to decide the allowability of the interest as business expenditure keeping in view the factual facts of the case’’.

Since in the earlier assessment year 2003-2004, the matter 9. was remitted back to the file of the CIT(A) for the reasons stated herein, this matter is remanded back to the file of the ld. CIT(A) for fresh adjudication whether the funds were advanced to sister concern out of business expediency or not. Needless to say ld. CIT(A) should afford due opportunity of hearing to the assessee in accordance with law. Hence, the appeal filed by the Revenue is partly allowed for statistical purposes.

In the result, the appeal filed by the Revenue is partly 10. allowed for statistical purpose.

Order pronounced on 10th day of March, 2020, at Chennai.