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Income Tax Appellate Tribunal, “I” Bench, Mumbai
Before: Shri B.R. Baskaran (AM)& Shri Pawan Singh (JM)
O R D E R Per B.R. Baskaran (AM) :-
The appeal filed by the assessee is directed against the order dated 10- 10-2014 passed by Ld CIT(A)-14, Mumbai and it relates to the assessment year 2010-11. The assessee is aggrieved by the decision of Ld CIT(A) rendered on the following issues:- (a) Disallowance u/s 14A of the Act. (b) Disallowance of administration expenditure. (c) Disallowance out of interest expenditure. (d) Assessment of interest income under the head Income from other sources instead of business income.
The assessee company is engaged in the business of Toll Collections. It filed its return of income declaring a total income of Rs.72.74 lakhs. The AO completed the assessment determining total income at Rs.294.69 lakhs. In the appellate proceedings before the Ld CIT(A), the first appellate authority allowed the appeal in part and also enhanced the income by Rs.485.83 lakhs. Aggrieved by the order passed by Ld CIT(A), the assessee has filed this appeal.
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The first issue relates to the disallowance u/s 14A of the Act. The assessee has filed an additional ground contending that the value of strategic investments should be excluded for the purpose of computing average value of investments. However, the said additional ground is liable to be rejected in view of the decision rendered by Hon’ble Supreme Court in the case of Maxopp Investment Ltd (2018)(91 taxmann.com 154)(SC), wherein it has been held that the dominant purpose for which the investment into shares is made by an assessee may not be relevant.
4. The facts relating to the disallowance made u/s 14A of the Act is discussed in brief. During the year under consideration, the assessee earned exempt dividend income of Rs.144.55 lakhs. In the return of income, the assessee disallowed a sum of Rs.151.07 lakhs u/s 14A of the Act. The assessing officer took the view that the disallowance has to be computed under Rule 8D of the I T rules. Accordingly he computed the disallowance u/s 14A of the Act as per Rule 8D, which worked out to Rs.266.09 lakhs. The Ld CIT(A) also confirmed the same.
5. The Ld A.R submitted that the own funds available with the assessee forms major chunk of sources of investments. He submitted that the investments have been made mainly in the group companies with the dominant objective of holding it for having controlling interest and not for the purpose of earning dividend income. Hence they are strategic investments in furthering the business interests of the assessee and hence the interest expenditure is allowable u/s 36(1)(iii) of the Act. He submitted that the assessee has earned dividend income of Rs.144.55 lakhs only and hence the disallowance u/s 14A should not exceed the dividend income as held by Hon’ble Punjab & Haryana High Courts in the case of Empire Package P Ltd (ITA 415/2015 dated 12-01-2016)(P & H).
On the contrary, the Ld D.R submitted that the Ld CIT(A) has given a finding that the assessee has used loan funds also in making investments in 3 Ideal Toll & Infrastructure Private Limited the shares. Accordingly he submitted that the Ld CIT(A) was justified in confirming the disallowance made by the AO by applying the provisions of Rule 8D of I.T Rules.
We have heard rival contentions on this issue and perused the record. We have gone through the Investment Schedule given in the paper book and notice that the assessee has made investments mainly in its subsidiaries and associate concerns numbering eight companies. Besides the above, the assessee has made investments in units of Mutual Funds. There should not be any dispute that the investments are made in associate concerns and subsidiaries as a business policy and the same does not require much analysis and time. We also notice that the assessee has mainly increased its stake in the associate and subsidiary companies during the year under consideration, i.e., in the earlier also, the assessee has made investments in the very same companies. Under these set of facts, we are of the view that there is not much complication in computation of disallowance u/s 14A of the Act. We also notice that the AO did not find fault with the computation of disallowance made by the assessee and has simply stated that he was not satisfied with the computation of the assessee without pointing out the defects. Hence we are of the view that there is no necessity in applying the provisions of Rule 8D in the facts and circumstances of the present case.
The Ld A.R has also taken a plea that the disallowance u/s 14A should not exceed the value of investments. We notice that this contention of Ld A.R gets support from the following case laws also:-
(a) Joint Investments P Ltd (ITA 117/15 dated 25.12.15)(Delhi) (b) Shanghi Exports Intl. P Ltd (ITA No.3405/M/15 dated 10-07-17) (c) Pest Control India P Ltd Vs. DCIT (ITAT Mumbai dated 31.10.17) (d) M/s Sunrays Properties & Investments Vs. JCIT (ITA 353/Del/2014 dated 17-02-17) (e) Anjaneya Cold Storage Vs. ACIT (ITA No.6079/Del/2014 dated 25- 10-17).
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In the case of Anjaneya Cold Storage Vs. ACIT (supra), the Delhi bench of Tribunal considered an identical issue and has held as under:-
“9. Regarding the alternative ground No. 5 of the assessee, we agree with the contention that disallowance under section 14A of the Act cannot exceed the exempt income earned by the assessee during the year under consideration, in view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd [378 ITR 33(Del)], wherein it is held as under:
"15. Turning to the central question that arises for consideration, the Court finds that the complete answer is provided by the decision of this Court in CIT v. Holcim India (P) Ltd. (decision dated 5th September 2014 in ITA No. 486/2014). In that case a similar question arose, viz., whether the ITAT was justified in deleting the disallowance under Section 14A of the Act when no dividend income had been earned by the Assessee in the relevant AY? The Court referred to the decision of this Court in Maxopp Investment Ltd. (supra) and to the decision of the Special Bench of the ITAT in this very case i.e. Cheminvest Ltd. v. CIT(2009) 317 ITR 86. The Court also referred to three decisions of different High Courts which have decided the issue against Revenue. The first was the decision in Commissioner of Income Tax, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in which in turn referred toITA No. 6079/Del/2014 two earlier decisions of the same in CIT v. Hero Cycles Limited[2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd.[2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P) Ltd. [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question "corresponding expenditure could not be worked out for disallowance."
In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under:
"15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessment year. For example, long term capital gain on sale of shares is presently not taxable where security
5 Ideal Toll & Infrastructure Private Limited transaction tax has been paid, but a private sale of shares in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax."
On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made.
In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income.
In light of the clear exposition of the law in Holcim India (P) Ltd. (supra) and in view of the admitted factual position in this case that the Assessee has made strategic investment in shares of Max India Ltd.; that no exempted income was earned by the Assessee in the relevant AY and since the genuineness of the expenditure incurred by the Assessee is not in doubt, the question framed is required to be answered in favour of the Assessee and against the Revenue.
Since the Special Bench has relied upon the decision of the Supreme Court in Rajendra Prasad Moody (supra), it is considered necessary to discuss the true purport of the said decision. It is noticed to begin with that the issue before the Supreme Court in the said case was whether the expenditure under Section 57 (iii) of the Act could be allowed as a deduction against dividend income assessable under the head "income from other sources". Under Section 57 (iii) of the Act deduction is allowed in respect of any expenditure laid out or expended wholly or exclusively for the purpose of making or earning such income. The Supreme Court explained that the expression "incurred for making or earning such income‟, did not mean that any income should in fact have been 6 Ideal Toll & Infrastructure Private Limited
earned as a condition precedent for claiming the expenditure. The Court explained:
"What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. It is the purpose of the expenditure that is relevant in determining the applicability of s. 57(iii) and that purpose must be making or earning of income. s. 57(iii) does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction. It does not say that the expenditure shall be deductible only if any income is made or earned. There is in fact nothing in the language of s. 57(iii) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of s. 57(iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure."
21. There is merit in the contention of Mr. Vohra that the decision of the Supreme Court in Rajendra Prasad Moody (supra) was rendered in the context of allowability of deduction under Section 57(iii) of the Act, where the expression used is „for the purpose of making or earning such income‟. Section 14A of the Act on the other hand contains the expression „in relation to income which does not form part of the total income.‟ The decision in Rajendra Prasad Moody (supra) cannot be used in the reverse to contend that even if no income has been received, the expenditure incurred can be disallowed under Section 14A of the Act.
In the impugned order, the ITAT has referred to the decision in Maxopp Investment Ltd. (supra) and remanded the matter to the AO for reconsideration of the issue afresh. The issue in Maxopp Investment Ltd. (supra) was whether the expenditure (including interest on borrowed funds) in respect of investment in shares of operating companies for acquiring and retaining a controlling interest therein was disallowable under Section 14 A of the Act. In the said case admittedly there was dividend earned on such investment. In other words, it was not a case, as the present, where no exempt income was earned in the year in question. Consequently, the said decision was not relevant and did not apply in the context of the issue projected in the present case.
23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression „does not form part of the total income‟ in Section 14A of the envisages that there should be an actual receipt of income, which is not 7 Ideal Toll & Infrastructure Private Limited
includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.
10. In view of the binding precedent, respectfully following the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd (supra), we restrict the disallowance under section 14A of the Act to Rs.6,62,660/-.”
In the case of Sunrays Properties & Investments Ltd ( supra), the Delhi bench of Tribunal has considered an identical issue and has held as under:-
“6. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it appears that the disallowance made by the AO is more than the exempted income claimed by the assessee. On a similar issue the ITAT Delhi Bench 'D' in the aforesaid referred to case of M/s Global Capital Ltd., New Delhi Vs ACIT, Circle-12(1), New Delhi (supra) by following the earlier decision dated 29.04.2015 of the ITAT 'C' Bench, New Delhi in the case of Indus Valley Investment & Finance (P) Ltd. Vs DCIT in for the assessment year 2009-10, observed as under:
"3. We have heard the rival submissions and carefully perused the relevant material placed on record. At the very outset, learned counsel of the assessee submitted a copy of the order of the ITAT Delhi 'C' Bench in for assessment year 2009-10 dated 29.4.15 in the case of Indus Valley Investment & Finance (P) Ltd. vs DCIT and submitted that in the similar set of facts and circumstances, the Tribunal in the case of assessee's group company has directed that the disallowance u/s 14A should not exceed the exempt income and therefore, the disallowance was restricted to the exempt income. Learned counsel of the assessee has drawn our attention towards para 4 of the Tribunal order (supra).
Learned Departmental Representative strongly supported the orders of the authorities below, however, he fairly accepted that in the similar set of facts and circumstances, the amount of disallowance has been restricted to the exempt income.
Firstly, it would be appropriate to reproduce the relevant part of the order of the Tribunal (supra) which has been relied by the learned counsel of the assessee which reads as follows:-
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"4. We have heard the rival submissions and perused the relevant material on record. It is observed that the total exempt income earned by the assessee is to the tune of Rs.25.38 lac, against which an addition of Rs.1.05 crore has been made. The Hon'ble Delhi High Court in Joint Investment Pvt. Ltd. Vs. CIT, vide its judgment dated 25.2.2015, has held that the disallowance u/s 14A cannot exceed the amount of exempt income. The Hon'ble Delhi High Court in the case of CIT vs. Holcim India Pvt Ltd. (2014) 90 CCH 081-DEL-Hon'ble High Court, has held that there can be no disallowance u/s 14A in the absence of any exempt income. The rationale behind these judgments is that the amount of disallowance u/s 14A should not exceed the exempt income. Since the total exempt income in the instant case is Rs.25,38,020/-, we direct that the disallowance u/s 14A be restricted to Rs.18,01,968/- (Rs.25,38,020- Rs.7,36,052/-). The remaining amount of disallowance is directed to be deleted."
6. In view of above, it is observed that in the similar set of facts and circumstances, the total exempt income earned by the present assessee is Rs.13,35,040 against which an addition of Rs.21,87,713 has been made by the Assessing Officer u/s 14A of the Act. As noted by the Coordinate Bench of this Tribunal that in the case of Joint Investment (P) Ltd. vs CIT (supra), the Hon'ble Delhi High Court has held that the disallowance u/s 14A of the Act should not exceed the exempt income. The Tribunal also noted that the Hon'ble Delhi high Court in the case of CIT vs Holcim India Pvt. Ltd. (supra) held that there can be no disallowance u/s 14A in the absence of any exempt income. Finally, the ratio laid down by the Jurisdictional High Court noted that the disallowance should not exceed the exempt income during the relevant financial period. In the present case, since the total exempt income of the assessee is Rs.13,35,040 and the assessee had suo moto offered disallowance of Rs.1,81,388 under Rule 8D(2)(iii) of the Income Tax Rules, 1962 being 0.5% of the average value of the investment in the shares of Apollo Tyres Ltd. on which such dividend income was earned. Hence, we direct the Assessing Officer that the disallowance u/s 14A be restricted to Rs.11,53,752 (Rs. 13,35,040- Rs.1,81,388) and the remaining amount of disallowance is directed to be deleted."
7. We, therefore, respectfully following the aforesaid referred to order dated 27.11.2015 in for the assessment year 2009-10 in the case of M/s Global Capital Ltd., New Delhi Vs ACIT, Circle- 12(1), New Delhi, direct the AO to make the disallowance to the extent of the income claimed by the assessee as exempt.”
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We notice that identical views have been expressed by Mumbai bench of Tribunal in the case of Pest Control India P Ltd (supra) and Sanghavi Exports International Ltd (supra). Consistent with the view taken in the above said cases, we set aside the order passed by Ld CIT(A) on this issue. Since the disallowance voluntarily made by the AO is slightly higher than the dividend income, we sustain disallowance u/s 14A of the Act to the extent worked out by the assessee. Accordingly the disallowance made by the AO is directed to be deleted.
The next issue relates to disallowance of administration expenses. The assessee had reported toll collection receipts in the immediately preceding year. However, during the year under consideration; it did not report any toll collection receipts. The AO noticed that the assessee has claimed administrative expenses, depreciation and other expenses. The assessee did not report any toll collection receipts, since the contract for toll collection has expired in the preceding year. Accordingly, the AO took the view that the assessee has stopped its business activities and accordingly took the view that various expenses claimed by the assessee is not allowable as deduction. Accordingly he disallowed entire administrative expenses, depreciation and other expenses claimed by the assessee.
Before Ld CIT(A), the assessee contended that it has not stopped the business activities and is looking for new contracts. It was submitted that it was only a temporary lull in the business. Accordingly it was submitted that the expenses claimed by the assessee is allowable. In this regard, the assessee placed reliance on the decision rendered by Hon’ble Madras High Court in the case of L.Ve.Vairavan Chettiar Vs. CIT (72 ITR 114); the decision rendered by Hon’ble Allahabad High Court in the case of Inderchand Hari Ram Vs. CIT (23 ITR 437).
The Ld CIT(A) agreed with the contentions of the assessee that the absence of toll collection receipts does not signify that the assessee has 10 Ideal Toll & Infrastructure Private Limited stopped its business operations. Having held so, the Ld CIT(A), however, allowed specific expenses listed out in paragraph 5.5 of his order aggregating to Rs.25,76,662/- only. The Ld CIT(A) held that the depreciation of Rs.4,91,679/- claimed on computers is allowable. The assessee had claimed a sum of Rs.50,73,800/- as legal and professional fee paid for arranging loans to a concern named M/s Altamont Capital Management Services. The Ld CIT(A) asked the assessee to justify this claim. The assessee explained that the assessee could obtain a loan of seventy crores of rupees through the mediation of M/s Altamont Capital management Services from M/s India Infoline and hence the above said amount of Rs.50,73,800/- was paid to the above said company. The Ld CIT(A) took the view that the assessee has failed to substantiate the nature of services provided by M/s Altamont Capital Management Services and accordingly held that the claim of Rs.50,73,800/- is not allowable as deduction. The assessee had claimed a sum of Rs.1,03,97,132/- as deduction as administrative and other expenses. However, the Ld CIT(A) has rendered his decision on an aggregate amount of Rs.81,42,141/- discussed above and did not discuss anything about remaining amount, meaning thereby, he has impliedly confirmed disallowance of remaining amount.
We heard the parties on this issue and perused the record. We notice that the Ld CIT(A) did not agree with the view taken by the AO that the assessee has stopped the business activities. The AO had disallowed entire expenses claimed by the assessee on the reasoning that the assessee has stopped the business. Since the contract for toll collection has come to an end in the immediately preceding year and since the assessee did not get new contracts during the year under consideration, it did not report any toll collection receipts. We agree with the view taken by Ld CIT(A) that these factual aspects do not mean that the assessee has permanently closed down the business. In fact, the assessee has clarified that it is taking all steps to obtain new contracts. Accordingly we agree with the view taken by Ld CIT(A) that the assessee should be considered as continuing its business activities.
11 Ideal Toll & Infrastructure Private Limited Having held so, we notice that the Ld CIT(A) has restricted the amount allowable as business expenditure. We find no reason for the same. We notice that the Ld CIT(A) has given some reasons for confirming disallowance of Rs.50,73,800/- paid as legal and professional fee. He has not given any other reason for confirming disallowance of remaining amount of expenses except the expenses aggregating to Rs.25,76,662/- listed out in paragraph 5.5 of his order. Since the Ld CIT(A) has held that the assessee should be considered as continuing its business activities, we do not find any reason for confirming disallowance of remaining amount of expenses.
16. With regard to the legal and professional fee of Rs.50,73,800/- paid to M/s Altamont Capital Management Services, the assessee has stated that it has utilized services of the above said concern for obtaining loan of Rs.70.00 crores from M/s India Infoline. From the Balance sheet of the assessee, we notice that the assessee has obtained loan of Rs.70.00 crores from M/s India Infoline during the year under consideration. Hence it was submitted that the legal and professional charges of Rs.50,73,800/- was given for arranging the above said loan. We notice that the Ld CIT(A) has confirmed the disallowance only on the reasoning that the nature of services provided by the above said concern was not specified. The Ld A.R submitted that the fee was paid to the above said concern for arranging the loan only, meaning thereby the nature of services provided by Altamont Capital Management Services was loan syndication work. We notice that the tax authorities have not brought on record any material to contradict the submissions so made by the assessee. Under these set of facts, we do not see any reason to disallow the claim of the assessee. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to allow the expenses claimed by the assessee in its profit and loss account.
17. The next issue relates to disallowance of interest expenditure. It is pertinent to note that the AO allowed entire interest expenses. However, the Ld CIT(A) has enhanced the assessment by disallowing interest expenditure.
12 Ideal Toll & Infrastructure Private Limited The background of the same is discussed in brief. The Ld CIT(A) noticed that the assessee has given interest free advances to the following concerns:- a) A.N. Enterprises Rs.33,57,43,425/- b) Dr. Rajendra Singh Rs. 1,00,00,000/- c) MEP Toll Road P Ltd Rs.46,03,86,800/- d) Evergreen financial Services Rs. 2,57,66,917/- The assessee submitted that it has given interest free advances on commercial considerations to Dr. Rajendra Singh, MEP toll Road P Ltd and Evergreen Financial services. It further submitted that the advance to A.N. Enterprises was given on 31.3.2010 only and further it was given out of own funds.
18. The Ld CIT(A) took the view that the assessee has availed various loans and the same was brought into common bank account, i.e., in common hotchpotch. With regard to the claim of commercial considerations, the assessee had placed reliance on the decision rendered by Hon’ble Supreme Court in the case of S.A. Builders (288 ITR 1) in order to contend that the amount advanced to sister concerns on commercial expediency will not debar from allowing interest expenditure claim. However the Ld CIT(A) observed that the assessee could not place its reliance on the decision rendered by Hon’ble Supreme Court in the case of M/s S.A Builders (supra), as it was rendered on the facts prevailing in that case and further the said decision has been referred to a larger bench in the case of M/s Tulip Star Hotel. Accordingly the Ld CIT(A) took the view interest expenditure incurred by the assessee should be disallowed. The Ld CIT(A) computed the interest amount that should have been charged by the assessee by adopting a rate of 12% p.a. and accordingly computed a sum of Rs.701.49 lakhs as the amount that should have been charged. Since the assessee has claimed a sum of Rs.485.83 lakhs only as interest expenditure, the Ld CIT(A) restricted the disallowance to Rs.485.83 lakhs.
19. The assessee is contesting the disallowance made in respect of advances given to A.N. Enterprises, Dr. Rajendra Singh and MEP toll Road P Ltd. We heard the parties on this issue and perused the record. We notice that the Ld
13 Ideal Toll & Infrastructure Private Limited CIT(A) has computed interest on the loan of Rs.3357.43 lakhs given to M/s A.N. Enterprises for full year by applying the interest rate of 12%. Before Ld CIT(A), the assessee has submitted that the above said loan was given to M/s A.N. Enterprises on 31.3.2010, i.e., on the last day of the previous year. The Ld A.R took us to page 76 of the paper book, wherein a copy of ledger account of M/s A.N. Enterprises is placed, which substantiate his claim. Since the advance to M/s A.N. Enterprises was given on the last day of the financial year, even without considering the claim that the same has been given on commercial consideration, we are of the view that the Ld CIT(A) was not justified in disallowing interest expenditure in respect of loan amount of Rs.3357.43 lakhs given to M/s A.N. Enterprises as on the last day of the financial year. Accordingly we set aside the order passed by Ld CIT(A) relating to interest disallowance made on the loan given to M.s A.N. Enterprises.
20. The next item is the loan of Rs.100/- lakhs given to Dr. Rajendra Singh and we notice that the ld CIT(A) has computed interest for whole of the year. The ledger account of Dr. Rajendra Singh is placed at page 77 of the paper book. A perusal of the same would show that the loan of Rs.100 lakhs was given on 27.10.2009. Hence it shall be proper to compute interest disallowance for five months only. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to compute interest disallowance for five months only. The order passed by Ld CIT(A) on this loan amount stands modified accordingly.
The next item pertains to loan given to M/s MEP Toll Road P Ltd. The assessee submitted that the above said company is its subsidiary engaged in the same line of business. It was also submitted that as per the Memorandum of Association, the assessee is entitled to float subsidiary companies in furtherance of its objectives. It was also submitted that the assessee is maintaining a running account with its subsidiary. Accordingly it was submitted that the advance given to the above said subsidiary company was on commercial expediency and hence there is no requirement of disallowing
14 Ideal Toll & Infrastructure Private Limited interest expenditure. The Ld CIT(A) was not convinced with the explanations given by the assessee. As stated earlier, the Ld CIT(A) took the view that the Hon’ble Supreme Court has rendered its decision in the case of S.A Builders on the basis of facts prevailing in that case.
22. We notice that the Ld CIT(A) has examined the ledger account of M/s MEP Toll Road P Ltd and accepted the fact that the assessee is maintaining running account with its subsidiary. Hence for the purpose of computing interest disallowance, the Ld CIT(A) adopted peak balance of Rs.2366.92 lakhs. However a perusal of the Ledger account would show that the above said peak balance was available on 25.03.2010, i.e., in fag end of the year. Hence there is basic flaw in the amount of interest disallowance computed by Ld CIT(A).
Be that as it may, it is the contention of the assessee that M/s MEP Toll Road P Ltd is a subsidiary of assessee. This fact can be verified from the Investment portfolio of the assessee. In the Investment schedule attached to the Balance sheet, M/s MEP Toll Road P Ltd is shown as Subsidiary company. Further the above said subsidiary company is also engaged in the same line of business. Hence if the subsidiary company has utilized funds given by the assessee for its business purposes, the same shall pass the test of commercial expediency mentioned in the order passed by Hon’ble Supreme Court in the case of S.A. Builders (supra). In the case of S.A. Builders (supra), the Hon’ble Supreme Court has observed that its decision should not be followed blindly, i.e, if the directors of the subsidiary company has used the funds received from the parent company for personal purposes, then it cannot be held that the funds were given on commercial expediency.
In the instant case, it is an admitted position that the assessee is maintaining running account with its subsidiary. A perusal of the ledger account would show that there is flow of funds between assessee and subsidiary company. The lowest outstanding balance was Rs.29.89 lakhs and the highest was Rs.2406.92 lakhs. It is also an admitted position that the 15 Ideal Toll & Infrastructure Private Limited subsidiary company is also engaged in the same line of business. The assessee has promoted the subsidiary company only in furtherance of its objectives listed out in the Memorandum of Association. There is no finding that the funds given to subsidiary company were not used for the purpose of business. Under these set of facts, in our view, there is no reason to suspect existence of commercial expediency in giving/receiving funds to/from the subsidiary company. Accordingly, in our view, the ratio laid down by Hon’ble Supreme Court in the case of S.A Builders (supra) shall apply to the facts of the present case. In this view of the matter, we are of the view that there is no justification in disallowing interest expenditure in respect of amounts advanced to M/s MEP Toll Road P Ltd. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the disallowance pertaining to M/s MEP Toll Road P Ltd.
The last relates to the assessment of interest income under the head income from other sources rejecting the claim of the assessee to assess the same as income from business. In the Profit and Loss account, the assessee declared “Other income” as detailed below:-
Dividend from Companies 1,44,55,298 Interest on bank FDR 5,17,446 Interest on loan to associate concerns 4,93,92,236 Interest on security deposits 15,33,284 ------------------- 6,58,98,264 ============ The assessee claimed exemption for Dividend income and accordingly offered remaining amount of Rs.5,14,42,966/- as income under the head “Income from Business”. The Assessing officer assessed the same as income under the head Income from other sources, but the AO did not give any reasoning for the same.
The Ld CIT(A) held that the above cited interest income is assessable as income under the head Income from other sources. The assessee submitted that it is investing its surplus funds in banks, shares, securities as per the 16 Ideal Toll & Infrastructure Private Limited incidental objects of Memorandum of Association and is also promoting subsidiary companies having similar objects and invested funds therein also as per the objects of the assessee company. The Ld CIT(A) took support of various decisions rendered by Hon’ble Supreme Court, Bombay High Court etc., to hold that the interest income earned by the assessee is assessable as income from other sources. Some of the decisions relied upon by Ld CIT(A) are:- (a) Swani Spice Mills P Ltd (322 ITR 288)(Bom) (b) Tuticorin Alkali Chemical & Fertilisers (227 ITR 172)(SC) (c) Pandian Chemicals (262 ITR 278)(SC) (d) Liberty India (317 ITR 218)(SC) (e) Totgars Co-operative Sale society (322 ITR 283)(SC) (f) Gopinathan (248 ITR 449)(SC)
We heard the parties on this issue and perused the record. We notice that the various decisions relied upon by the Ld CIT(A) relate to the interest income earned on investment of “surplus funds”. The decision rendered in the case of Pandian Chemicals (supra) and Liberty India (supra) relate to the issue whether the interest income and other receipts can be considered as “derived from industrial undertaking” or not?, i.e., the question before the Hon’ble Supreme Court was not whether the interest income is business income or not, but whether it is derived from industrial undertaking or not?
There should not be any dispute that the interest income earned on investment of surplus funds shall not take the character of business income and hence the same is required to be assessed under the head income from other sources. In the case of Karnal Co-operative Sugar Mills Ltd (243 ITR 2) and Bokaro Steels Ltd (236 ITR 315), it was held that the interest income earned in connection with the setting up of capital asset or purchase of machinery, the same shall constitute capital receipt and should be reduced from the cost of capital asset. In the case of Karnal Co-operative Sugar Mills Ltd, the assessee therein opened Letter of Credit for purchase of machinery and for that purpose it made deposits on which interest income was earned. The Hon’ble Supreme Court held that the said interest income is directly
17 Ideal Toll & Infrastructure Private Limited linked with the purchase of Plant and machinery and accordingly the same is required to be deducted from the value of Plant and machinery.
By following the decision rendered in the case of Karnal Co-operative Sugar Mills Ltd (supra) and Bokaro Steels Ltd (supra), the Hon’ble Delhi High Court held in the case of CIT Vs. Koshika Telecom Ltd (2006)(287 ITR 479) that the interest on margin money given for obtaining bank guarantees for the purpose of business is inextricably linked to the business and hence such interest income is assessable under the head business. Identical view was expressed by Hon’ble Delhi High Court in the case of CIT Vs. Jaypee Dsc Ventures Ltd (ITA 357/2010 dated 16-12-2010). Hence if any money is deposited into the bank, which is not surplus money, but out of business necessities, then such interest income acquire the character of business receipts.
We shall now analyse the facts in the present case. The assessee has shown interest on Bank deposits of Rs.5,17,446/- and interest on security deposits of Rs.15,33,284/-. The record does not show the purpose for which these deposits were made. Without knowing the facts relating to these deposits, it may not be possible to render decision. Accordingly we set aside the order passed by Ld CIT(A) on the above said two receipts and restore the same to the file of the assessing officer for examining them afresh. If the assessee has deposited its surplus money, then the relevant income should be assessed under the head Income from Other Sources. If the deposits have been made out of business necessities, then the relevant income should be assessed as business income. The AO is directed to examine the issue accordingly.
Now we shall examine the remaining amount of Rs.4,93,92,236/- received from associate concerns. There is no dispute with regard to the fact that the assessee is holding company of many subsidiaries floated by it. The assessee made investments in those subsidiary companies and has also advanced loans
18 Ideal Toll & Infrastructure Private Limited to the subsidiaries and associate concerns. It is submitted that the investments in those concerns have been made as per the objectives of the assessee company. A perusal of the Balance sheet would show that the assessee has borrowed funds to the tune of Rs.14126/- lakhs and raised funds by way of share application money of Rs.240/- lakhs and profit during the year was Rs.38.68 lakhs. The increase in investments was Rs.12,020/- lakhs and the increase in Loans and Advances was Rs.1239/- lakhs. It has also made major investments in acquisition of premises to the tune of Rs.1130/- lakhs. These figures show that the assessee has used its borrowed funds as well as share application money for making investments in premises, subsidiary companies and for giving loans and advances. These figures also bring out an important point that the loans and advances have not been given out of surplus funds, but out of borrowed funds/own funds.
We have also noticed that the assessee has promoted subsidiary companies and in order to promote the business activities of subsidiaries and associate concerns, the assessee has started the activities of giving loans and advances to them. According to the assessee, the same was done in accordance with the object clauses of memorandum of association. Under these set of facts, we are of the view that the loans and advances given to the associate concerns and subsidiaries should be considered as part of business activities of the assessee. Consequently, there is merit in the contentions of the assessee that the interest income earned by the assessee from those loans and advances shall constitute business receipts of the assessee. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to assess interest income from loans and advances as business income of the assessee.
19 Ideal Toll & Infrastructure Private Limited
In the result, the appeal of the assessee is treated as allowed.
Order has been pronounced in the Court on 25.05.2018.