Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “A” BENCH: KOLKATA
Before: Shri J. Sudhakar Reddy & Shri S.S. Viswanethra Ravi
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. IN THE INCOME TAX APPELLATE TRIBUNAL “A” BENCH: KOLKATA Before: Shri J. Sudhakar Reddy, Accountant Member and Shri S.S. Viswanethra Ravi, Judicial Member I.T.A No.1037/Kol/2018 (Assessment Year: 2010-11)
DCIT, Cir-11(1), Kolkata Appellant Vs M/s Orbis Power Venture Pvt. Ltd. Respondent [PAN: AABCO1322P] For the Appellant : Shri A.K. Nayak, DR For the Respondent : Ms. Ruchira Lakhatia, ACA Date of hearing : 22.04.2019 Date of pronouncement : 10.07.2019 ORDER PER Shri S.S. Viswanethra Ravi, JM:
This appeal by the Revenue against the order dated 28.02.2018 passed by the Commissioner of Income Tax (Appeals)-10, Kolkata [‘CIT(A)’] for Assessment Year 2010-11.
Ground No.1 is raised questioning the action of CIT(A) in deleting the additions made by the Assessing Officer on account of payment of interest on borrowed funds in the facts and circumstances of the case.
Brief facts of the case are that the assessee is a company and claimed to have engaged in the business of generation, transmission, distribution and supply of electric energy. The assessee filed its return of income declaring a total loss of Rs.6,22,63,231/-. Notice u/s 143(2) of the Act was issued and the Assessing Officer restricted the loss to an extent of Rs.23,693/- (Rs.6,22,23,231/- - Rs.6,22,39,538/- ) vide his order dated 23.01.2013 by making disallowances on
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. account of payment of interest on loan and processing fee to obtain such loan to an extent of Rs.6,12,33,844/- and Rs.10,05,694/- respectively.
It is noted during the course of scrutiny proceedings that the Assessing Officer asked the assessee why the interest on secured or unsecured loan amounting to Rs.6,12,33,844/- and processing fee to an extent of Rs.10,05,694/- should not be disallowed as it was not related to business activity and are being in the capital in nature. In reply, it was stated that the assessee paid the said interest on borrowed loans to acquire or purchase of shares of DPSC Ltd vide its written submission dated 10.01.2013. The Assessing Officer found the written submissions are not acceptable and added above said amounts to the total income of the assessee for the reasons as under:
“1. It has been claimed that the assessee is engaged in the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes. But the final accounts submitted by the assessee reveals a picture which is quite contrary to the claim of the assessee. No income has been earned by the assessee in any manner out of the business activities described (generation, transmission, distribution and supply of electrical energy or power) and there is no fixed assets owned by the assessee as per the Audited Balance Sheet as at 31-3-10 filed in course of the hearing of the case. From these two documents it is amply clear that the business of the assessee has not started up to the year ending on 31-03-2010 2. The above observation is also supported by the written submission filed by the assessee on 10th January 2013 where in paragraph 4.'1 it is clearly written that "……During the relevant assessment year, for the purpose of engaging in the business of power, the assessee had acquired shares of DPSC Ltd, a public limited company, engaged in the similar business that of the assessee.” This means up to 31-3-2010, the assessee, on its own, was not carrying on any business and had not acquired any asset to carry out the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes Therefore, all the expenses debited in the profit and loss account, including the interest on loan and processing fee paid on such loan partake the character of an expense incurred in a period when the assess was not doing any business. 3. An agreement of share purchase dated 27-01-2010 has been filed in photocopy. On a close look on the papers it is seen that (a) it does not contain all the pages of the agreement, only first two pages on non judicial stamp paper of Rs.100/- and Rs.50/- had been provided along with page no. 16 of 49 of the Agreement; (b) the document is neither registered not notarized; (c) all the terms and conditions are not available from the pages provided and (d) the signature of the lender company, SREI infrastructure Finance Ltd, is not present on any of the pages of the agreement the assessee had chosen to submit in course of the assessment proceedings. Even if it is considered as a valid agreement, a loan seems to have been sanctioned on a security which was not there in the possession of the assessee on the date of signing the agreement because the loan agreement is dated 27-10-2010 and the share purchase agreement is dated
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. 28-10-2010. The demat account statement of the assessee has also not been furnished as a matter of proof in support of the share purchase transactions. 4. The assessee has quoted the provisions of section 36(1)(iii)of the Income Tax Act, 1961 to establish that the interest on loan is allowable as a revenue expenditure. For the sake of convenience, the provisions of the said section is reproduced as below:- “36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 – ( i ) and ( ii )****** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :- Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation – Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause.”
The assessee, Orbis Power Venture Private Limited was formed as a private limited company with its main object of business, inter alia, to generate, transmit, use, distribute and supply electrical energy or power in all forms and manner for public and private purposes. Now just by forming a company with the main objective of power generation does not signify that the business has actually been started when the final accounts do not reflect that any such business has been carried out by the assessee in the relevant previous year. By the same token, acquisition of controlling stake in a business by way of purchase of share, even with borrowed capital, does not mean that a business "asset" within the meaning of the proviso to section 36(1)(iii) has been acquired by the assessee for the purpose of carrying out its business. The shareholder of a company and the company itself are two different entities and the business carried on by the company does not indicate that the business is actually carried on by the shareholder. What has been acquired with the fund borrowed from SREI Infrastructure Finance Ltd. here is the shares of DPSC Ltd which is outside the purview of a business asset as clarified in Sec 36(1)(iii)of the l. T. Act, 1961. 6. So the basic criterion for allowing the interest on borrowed fund, which must be utilized for the purpose of business of the assessee, has not been satisfied and more so, in a situation where no business has been carried on by the assessee during the financial year ending on 31-3-2010 either on its own or with the shares acquired from DPSC Ltd. Hence, the interest on loan and the processing fee paid on loan is part of the cost of investment made in the shares of DPSC Ltd and should not be considered as an expenditure laid out either under section 36(1)(iii) or under section 37 of the Act. Hence, these two expenditures are disallowed in full as they are not related to acquisition of any asset acquired for extension of any existing business. 7. In course of the hearing of the case the assessee vide its written submissions dated 20.12.2012 [Para 1.0 submitted that M/s. Orbis Power Venture Pvt. Ltd. has been merged with India Power Corporation Ltd. by virtue of an order of the High Court at Calcutta as per C.P No.854 of 2010. This action of the assessee also establishes the fact beyond doubt that purchase of shares of DPSC Ltd with borrowed fund had not been done in order to carry out any business but it is purely an investment decision. This disentitles the assessee to claim any expenditure towards interest and processing fee paid for the loan taken for the purchase of shares. 8. The assessee has also furnished several case decisions in support of the claim of interest and processing fee as business expenditure, But the facts and circumstances of those cases are different from the instant case and hence, these are not applicable here. Under the circumstances, the claim of the assessee of interest amounting to Rs.6,12,33,844/- and processing fees of Rs.10,05,694/-are disallowed and the same
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. are added back to the total income. Penalty proceedings u/s. 271(1)(c) has been initiated separately.”
We observe from the aforesaid reasons for the denial of claim of deduction that assessee did not earn any income during the relevant year under consideration. No fixed assets were shown in the audited balance sheet. No business started as on 31.03.10 which is relevant year under consideration. It is also noted from the record that the assessee clearly stated that it had acquired shares of DPSC Ltd. which is a public limited company engaged in the similar business that of the assessee and the Assessing Officer observed that the an agreement of shares supporting the contention of the assessee in purchasing the shares does not contain all the pages of the agreement and nor it is registered or notarized. No signature of lender company i.e. SREI Infrastructure Ltd. Therefore according to Assessing Officer the contention of acquiring shares of a company in the similar business to stake control in such a business even with borrowed capital does not mean a business asset within the meaning of proviso to section 36(1)(iii) of the Act.
Having aggrieved by the order of Assessing Officer, the assessee filed an appeal before the CIT(A). We find that the same arguments which were advanced before the Assessing Officer were reiterated before the CIT(A). Further it is observed that the Memorandum of Association is appears to have been filed before the CIT(A). The assessee placed reliance in the judgment of (i) Hon’ble High Court of Calcutta in the case of CIT vs. Rajeeva Lochan Kanoria reported in 208 ITR 616 (Calcutta), (ii) ITO vs. M/s. First American Securities Pvt. Ltd. ITA No.4768/Del/2012 of Delhi ITAT and (iii) Tetron Commercial Ltd. vs. CIT of Hon’ble High Court of Calcutta reported in 261 ITR 422 (Calcutta). Having considered the submissions and the case laws, the CIT(A) is of the opinion that the
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. Memorandum of Association permits the assessee to acquire shares of other companies engaged in the similar line of business. DPSC Ltd. is a listed company engaged in generation, transmission and distribution of electricity whose activity is similar to the course of business of assessee. He found the facts and circumstances of the decision of Hon’ble High Court of Calcutta in the case of Rajeeva Lochan Kanoria (supra) is similar to the facts and circumstances of the case on hand and held making strategic investments is also a commercial transaction amounting to commencement of business and deleted the addition made by the Assessing Officer on account of interest expenses. The relevant portion of which is reproduced hereinbelow:
“1. I have carefully considered the written submission of the ld. ARs and the findings of the ld. A.O in his assessment order. This ground of appeal is directed against the disallowance made by the Ld. DCIT for the interest on loan availed from M/s Srei Infrastructure Finance Limited and India Power Corporation Limited from M/s SREI Infrastructure Finance Limited and India Power Corporation Limited utilized for purchase of shares of DPSC Ltd. amounting to Rs.6,12,33,844/-. The ld. DCIT (AO) has rejected the Appellant's contention on grounds that the interest cost was not incurred for the purpose of the business. 2. During the course of appellate proceedings, the Ld. ARs for the Appellant submitted that interest on borrowed funds utilized for acquisition of shares of companies in same line of business is allowable u/s 36(1)(iii). In this regard, the appellant relied on the decision of the Hon'ble Bombay High Court in CIT -vs.-Phil Corporation Ltd. (2011) 244 DTR 226 (Bom.). Reliance was also placed by the assessee on the decision of Hon'ble Calcutta High Court in CIT vs. Raieeva Lochan Kanoria [1994) 208 ITR 516(Cal) wherein the assessee has borrowed capital for the purpose of acquiring controlling stake in a company and claimed deduction in respect of interest paid on said borrowing and the said claim of the assessee u/s 36(1)(iii) of the Act by holding that the above transaction entered by the assessee is in the normal course of business and therefore the interest expenditure incurred in this regard should be allowed as deduction. 3. It was submitted by the appellant that investment has been made by way of acquisition of controlling stake in its subsidiary, M/s DPSC Limited for gaining control and advancement of its business. Hence, the business had duly commenced during the relevant previous year. Hon'ble Delhi ITAT in ITO -vs.- First American Securities Pvt. Ltd.(ITA 4768/Del/2012) under identical facts, held that by making strategic investments, the assessee has commenced its business. Reliance was placed on the decision of Hon'ble Jurisdictional High Court in Tetron Commercial Ltd. -vs.- CIT (2003) 261 ITR 422 (Cal) wherein it was held that "even a single transaction carried out is an adventure and a business". 4. I have considered the rival submissions. The appellant is engaged in the business of generation, transmission, distribution and supply of electrical energy. The memorandum of association of the appellant also permits the appellant to acquire shares of assessee's engaged in similar line of business, DPSC whose shares have been acquired is a listed company engaged in generation, transmission and distribution of electricity. Hence, the activity of purchase of shares is activity in the course of
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. business. Hence, I find strength and merit in the above arguments of the Appellant that interest on borrowed funds utilized for purchasing shares of Subsidiary Company is allowable as deduction, Further, the facts in the case of CIT vs. Raieeva Lochan Kanoria (1994) 208 ITR 615(Cal) is similar to the assessee. Making strategic investments is also a commercial transaction and amounts to commencement of business, Thus, as emanates from the ratio of the Jurisdictional Calcutta High Court as well as the other decisions relied upon by the Appellant. Accordingly, disallowance of interest expenses of Rs.6,12,33,844/- made by the Ld. DCIT is not sustainable, and is therefore deleted. The ground of appeal stands allowed accordingly.”
Having aggrieved by the order of CIT(A), the Revenue is before us challenging his action in allowing the claim of deduction u/s 36(1)(iii) of the Act without a proof regarding commercial expediency behind such loan.
Supporting the ground raised by the Revenue, the ld. DR, Sri A.K. Nayak submits that the assessee is not at all engaged in the business of power generation. Loans availed but utilized in acquiring shares of other companies and there was no business by the assessee in the relevant year under consideration. Interest paid on such loans cannot be allowed as a deduction as there was no business by the assessee. He referred to Para No.4 of impugned order and argued that the CIT(A) erred in holding the activity of purchase of shares is an activity in the course of business which is contrary to the evidence as main objective of assessee’s business is power generation. He argued that the acquisition of controlled stake in a business by way of purchase of shares even with borrowed capital does not mean that the business ‘asset’ within the meaning of proviso to section 37(1)(iii) of the Act.
Further shareholders of a company and the company itself are two different entities. The business carried on by the company does not indicate the business is actually carried on by the shareholders. Shares purchased by the assessee with the borrowed fund from SREI Infrastructure Finance Ltd. is outside the purview of a business asset as clarified in section 36(1)(iii) of the Act. Further, Sri A.K. Nayak
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. submits that the basic criterion for allowing interest on borrowed fund which must be utilized for the purpose of business which has not been satisfied by the assessee. There was no business carried on by the assessee during the year under consideration either on its own or with the shares acquired from DPSC Ltd. He submits the payment of interest on borrowed loan and the processing fee paid on such borrowed loan is part of the cost of investment made in the shares of DPSC Ltd. and should not be considered as an expenditure either u/s 36(1)(iii) or section 37 of the Act and vehemently argued that the assessee is not entitled to claim allowance as it is not related to acquisition of any asset.
Further, he submits that the action of any merging itself with India Power Corporation Ltd. by virtue of an order of Hon’ble High Court of Calcutta clearly establishes beyond doubt the purchase of shares of DPSC Ltd. with borrowed fund and not being in order to carry out any business as it is purely an investment decision, which clearly disentitles the assessee to claim any expenditure towards interest and processing fee paid for the loan taken for the purpose of shares. He prayed to set aside the order of CIT(A) and restore the order of Assessing Officer.
The ld. DR referred to the decision of Hon’ble High Court of Bombay in the case of CIT vs. Phil Corpn. Ltd. reported in [2011]14 taxmann.com 58 (Bombay) and by referring to Para No.9 it was argued that the Phil Corporation Ltd. invested in its subsidiary company i.e. Phil Photo Ltd. for the acquisition of its shares to have a control over majority shares but not to earn dividend on interest. In the present case, he submitted that the DPSC Ltd. is not a subsidiary of assessee and acquiring of shares of DPSC Ltd. is not an integral part of the business as that of Phil Corporation Ltd.(supra). He submits that the facts and circumstances in Phil Corporation
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. Ltd.(supra) are entirely different from the facts on hands and argued that the CIT(A) erred in following decision of Phil Corporation Ltd. of Hon’ble High Court of Bombay(supra).
Coming to Rajeeva Lochan Kanoria (supra) of Hon’ble High Court of Calcutta, it was submitted by the Sri A.K. Nayak, ld. DR that the Department of Revenue has not challenged the findings of Tribunal that the assessee’s business activity consists of acquiring share for managing, controlling and rehabilitating different companies. There was no object of controlling stake in the case of Rajeeva Lochan Kanoria and argued that the CIT(A) erred in allowing the deduction to the assessee by wrong conclusion in applying the ratio laid down by the Hon’ble High Court of Calcutta in the case of Rajeeva Lochan Kanoria (supra). The ratio laid down by the Hon’ble High Court is not applicable to the case on hand.
Referring to Tetron Commercial Ltd. (supra) and M/s. First American Securities Pvt. Ltd. (supra), the ld. DR submitted that the assessee claimed the deduction u/s 36(1)(iii) of the Act in the present case and in the above decisions no claim was made u/s 36(1)(iii) of the Act. He submits the facts in the aforementioned cases are not identical and finding therein not applicable in the present case.
In reply, the ld. AR argued that the expenditure u/s 36(1)(iii) incurred for the purpose acquiring stake in similar business of other companies is required to be allowed as deduction. The ld. AR referred to Page No.6 of CIT(A) and submitted that the Hon’ble High Court of Calcutta agreed with the scheme of amalgamation vide its letter dated 10.01.2013 wherein it is clearly mentioned that the assessee through its subsidiaries is primarily engaged in the business of generation, transmission, distribution and supply of electrical energy or power in all forms and manner for public and private purpose and
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. ancillary thereto and submitted that the assessee is entitled to get deduction u/s 36(1)(iii) of the Act. Further placed reliance in the case of Baba Satyanarayan Himghar P. Ltd. of ‘SMC’ Bench of Calcutta, ITAT and submitted that the ‘SMC’ Bench held that the interest paid on loan availed to acquire the shares to gain controlling interest of a competitor company to be an allowable deduction u/s 36(1)(iii) of the Act. Further preferred to the order of Kolkata Tribunal in the case of Divakar Solar System Ltd. vs. DCIT reported in [2017] 88 taxmann.com 770 (Kolkata –Trib.) and submitted that the Coordinate Bench of Kolkata held that the interest paid on borrowed capital which were invested in shares for strategic business purposes is a commercial expediency would be an allowable deduction and supported the order of CIT(A).
In counter reply the ld. DR argued that the acquiring control is not the object of assessee and assessee is not entitled to claim deduction u/s 36(1)(iii) of the Act.
Heard both parties and perused the material available on record. The contention of the ld. DR before us is that the assessee carried no business in the year under consideration. The assessee has an object of acquiring shares of other companies to stake control. The case laws as relied on by the CIT(A) are distinguishable and no application of the ratio laid down in the said decisions. We find that the CIT(A) in his impugned order at Page No.6 discussed the objects of assessee. On perusal of the relevant portion which has been reproduced by the CIT(A) at Para 1.1 in Page No.6, is clearly mentioned that the Memorandum of Association authorized the assessee to purchase or otherwise acquire and undertake whole or any part of, or any interest in, the business, goodwill, property, contracts, agreements, rights, privileges, effects and liabilities of any other company to advance its interest as may be deemed advisable.
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. So, therefore it is clear that the assessee has a right to acquire shares of other companies which are in similar business to stake control in the said company is permissible under Memorandum of Association. Considering the same, the CIT(A) held the purchase of shares of DPSC Ltd. by availing loan from SREI Infrastructure Ltd. is incurred for the purpose of business to arrive such conclusion. The CIT(A) placed reliance in the case of Phil Corporation Ltd. (supra), Rajeeva Lochan Kanoria (supra), First American Securities Pvt. Ltd. (supra) and Tetron Commercial Ltd. According to CIT(A) the facts and circumstances in the case of Rajeeva Lochan Kanoria (supra) of Hon’ble High Court of Calcutta are similar to the facts and circumstances of the assessee. We find that the Hon’ble High Court of Calcutta was pleased to hold making strategic investments is also a commercial transaction which amounts to commencement of business. Therefore it is clear from the observation of the Hon’ble High Court of Calcutta when the shares of other companies purchased to stake control which is in similar business amounts to a commencement of business, therefore the contention of ld. DR that the assessee has no object in the Memorandum of Association to purchase shares of other companies to stake control and by mere purchasing shares does not amount to commencement of business are not acceptable.
For better understanding, the substantial question of law raised by the appellant-Revenue before the Hon’ble High Court of Calcutta relevant to the issue on hand in the case of Rajeeva Lochan Kanoria (supra) is reproduced hereinbelow:
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that interest payment could not be disallowed for investment in shares as per provisions of Section 36(1)(iii) of the Income-tax Act, 1961, when such shares were not used as stock-in-trade but were acquired simply for the purpose of acquiring controlling interest in the companies concerned ? 2. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that investment in shares was the admitted business for the
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies and had not earned any income (except director's fees) by such vocation ?"
On perusal of the above substantial question of law, we note that the Department of Revenue raised above two substantial questions of law against the order of the Tribunal. In a nutshell, the substantial question of law raised before the Hon’ble High Court of Calcutta was that whether the Tribunal was justified in holding the investment in shares was the admitted business for the assessee when the activity in such investment was only to purchase shares for acquisition of controlling interest of companies. The Hon’ble High Court of Calcutta agreed with the view taken by the Tribunal and affirmed the above substantial question of law in favour of the assessee in the said case by holding acquiring control interest in company and managing, administration, financing rehabilitating companies under control are for business and/or professional purposes. Therefore it is clear from the observation of Hon’ble High Court of Calcutta, the shares acquired for controlling interest is for business. In the present case, we find that the assessee acquired shares of DPSC Ltd which is in the similar business to control stake is a commencement of business. Therefore in our opinion, the ratio laid down by the Hon’ble High Court of Calcutta in the case of Rajeeva Lochan Kanoria (supra) is applicable to the facts on hand and the assessee is entitled to claim deduction of interest paid on borrowed funds.
The ld. AR referred to orders of the ‘SMC’ Bench in the case of Baba Satyanarayan Himghar P. Ltd. in ITA No.2027/Kol/2017 and Coordinate Bench in the case of Divakar Solar System Ltd. vs. DCIT reported in [2017] 88 taxmann.com 770 (Kolkata –Trib.). We find in the case of Baba Satyanarayan Himghar P. Ltd. (supra), the ‘SMC’
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. Bench by placing reliance in the case of CIT vs. Tulip Star Hotels Ltd. Hon’ble High Court of Delhi reported in [2011] 338 ITR 482 (Delhi) held that the payment of interest on a borrowed loan utilized for acquiring shares to gain control interest in a competitor company is an allowable deduction u/s 36(1)(iii) of the Act. The relevant portion of which is reproduced hereinbelow:
The Hon’ble Delhi High Court in the case of CIT vs. Tulip Star Hotels Ltd. [2011] 338 ITR 482 (Delhi), has held as follows:- “….the assessee was in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management it had invested in a wholly owned subsidiary company. The expenditure incurred was expenditure incurred for business purposes and was thus allowable under section 36 of the Income-Tax Act, 1961.” 5.1. Similar is the decision of the jurisdiction High Court in the case of Caldern Pharmaceuticals Ltd. vs. CIT [2004] 265 ITR 243. 6. Respectfully following the propositions laid down in these case-law and applying the same to the facts of the case, and as the assessee has acquired these shares to gain controlling interest in a competitor company. I am of the considered opinion that the disallowance made is bad in law. Accordingly I delete the disallowance made by the Assessing Officer as affirmed by the ld. CIT(A) and direct the Assessing Officer to allow the claim of the assessee u/s 36(1)(iii) of the Act.
Further in the case of Divakar Solar System Ltd. (supra) the Coordinate Bench of Calcutta Tribunal held that the interest paid on borrowed capital needs to be allowed as deduction u/s 36(1)(iii) of the Act as it is a commercial expediency with a view to expand business and acquiring, controlling interest in subsidiary companies. The relevant portions of which are reproduced hereinbelow:
“5.4.1. We find that the Hon'ble Madras High Court in the case of CIT vs RPG Transmissions Ltd reported in 359 TIR 673 (Mad) had observed that the Commissioner (Appeals) and the Tribunal found that the investments made in shares by the assessee by utilizing borrowed capital were for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1)(iii). The revenue did not adduce any evidence to show that the borrowed capital was utilized by the assessee for non-business purposes. 5.4.2. We also find from Clause 17 of Memorandum of Association of M/s Confident Solar Pvt. Ltd as reproduced supra that it was empowered to extend financial assistance to companies out of borrowed funds for the purpose of acquiring the business / undertaking properties of the assisted company. In pursuance of the aforesaid object, the assessee company invested the borrowed funds through its sister concern in the shares of Viom Networks P Ltd. Therefore, the shares in Viom Networks P Ltd were acquired in ordinary course of business and accordingly we find that the same was correctly disclosed as stock in trade in the balance sheet. The assessee's reliance in this regard on the decision of the Hon'ble Calcutta High Court in the case of
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) is well founded. We find that the ld AR also placed reliance on the recent decision of co-ordinate bench of Delhi Tribunal in the case of ITO vs First American Securities Pvt. Ltd in ITA No.4768/Del/2012 dated 11.1.2016. We find that this tribunal after referring to several judicial pronouncements on the issue concluded as under:- "We also find that it is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investments in the business entities and accordingly, it has made strategic investment of Rs. 57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. And also, this is acknowledged by the AO himself in the assessment order wherein he has stated that assessee has "parked its investible funds in the equity shares of a closely associated concern". Hence, we find that there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. 8.1. Our above view is also fortified by the decision of CIT vs Phil Corpn Ltd in (2011) 14 taxmann.com 58 (Bom) ....." 5.4.3. We also find that the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd vs CIT(Appeals) (supra) had been subsequently approved by another decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd vs CIT reported in (2015) 379 ITR 347. 5.4.4. We find that the test of commercial expediency is proved in the instant case beyond doubt and hence the interest paid on borrowed capital is to be allowed. We find that all the aforesaid judgements relied upon hereinabove apply to the facts of the instant case and hence we hold that the interest paid on borrowed funds in the sum of Rs. 5,34,24,658/- would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the Grounds 4(a) to 4(d) raised by the assessee are allowed.
On perusal of the findings of the Coordinate Bench in the case of Divakar Solar System Ltd., we find that the Coordinate Bench considered the decision of Hon’ble High Court of Calcutta in the case of Rajeeva Lochan Kanoria (supra), First American Securities Pvt. Ltd. (supra) and Phil Corporation Ltd. (supra). Therefore considering the decisions of ‘SMC’ Bench and Coordinate Bench as discussed above we find no infirmity in the order of CIT(A) and it is justified. Thus Ground No.1 raised by the Revenue is dismissed.
Ground No.2 is relating to deletion of processing fee paid on availing loan in the facts and circumstances of the case.
Heard both parties and persued the material on record. We find that the CIT(A) discussed regarding the allowance of processing fee as deduction in the impugned order at Para No.10 and held that the said payment of processing fee is an incidental expenses on obtaining
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd. borrowed fund which is a revenue expenditure allowable u/s 37(1) of the Act. The relevant para of which is reproduced hereinbelow:
“10. FINDINGS & DECISION: 1. I have carefully considered the written submission of the ld. AR and the findings of the ld. DCIT in his assessment order. This ground of appeal is directed against the disallowance made by the ld. DCIT for the processing fees incurred on loan availed from SREI Infrastructure Finance Limited. 2. The ld. AR has submitted that the processing fees is a revenue expenditure allowable as deduction u/s 37(1) of the Act. Further, since it is incurred for the purpose of business, it is allowable. Reliance in this regard was placed on the decision of India Cements Ltd. vs. CIT (1996) 60 ITR 52(SC). 3. Since the loan has been utilized for purchase of shares of subsidiary company engaged in the similar line of business, incidental expenses on the loan is revenue expenditure allowable as deduction u/s 37(1). Further, no separate discussion is required to be made on this issue, since the interest expenses on the said loan has already been considered as an allowable deduction as discussed in Ground No.2. The ld. A.O is directed to delete the disallowance of Rs.10,05,694/-. Accordingly, the ground of appeal is allowed.
In the aforementioned paragraphs, we have taken a view that the payment of interest on borrowed fund is allowable as deduction u/s 36(1)(iii) of the Act and the CIT(A) has rightly held, the payment of processing fee to obtain such loan is an incidental expenses, since we have allowed the payment of interest as an allowable deduction, the processing fee paid on the said loan is also an allowable expenditure u/s 37(1) of the Act. Therefore we find no infirmity in the order of CIT(A) and it is justified. Thus Ground No.2 raised by the Revenue is dismissed.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the open court on 10.07.2019.
Sd/- Sd/- [J. Sudhakar Reddy] [S.S. Viswanethra Ravi] Accountant Member Judicial Member Dated : 10.07.2019 Place : Kolkata RS, Sr.PS
I.T.A No.1037/Kol/2018 M/s Orbis Power Venture Pvt. Ltd.
Copy of the order forwarded to: 1. Appellant – DCIT, Cir-11(1), Kolkata 2 Respondent– M/s Orbis Power Venture Pvt. Ltd., ‘Mirania Gardens’, 10B, Topsia Road (East), Kolkata – 700046. 3. The CIT(A), Kolkata 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata
By order, //True Copy// Assistant Registrar, ITAT, Kolkata