KIRLOSKAR ELECTRIC COMPANY LTD.,,BANGALORE vs. ACIT,

Ground No.1 is general in nature and does not require any specific adjudication.

Officer under Section 14A on account of interest expenditure which was deleted by the CIT (Appeals). The Assessing Officer noted that the assessee has claimed interest expenditure ofRs.22,52,66,000 whereas the assessee has made investment of Rs.3,15,57,000 yielding tax free income. The Assessing Officer has invoked the provisions of section 14A of the Income Tax Act, 1961 (in short 'the Act') r.w. Rule 8D of Income Tax Rules and worked out the proportionate interest expenditure of Rs.24,38,288 together with a sum of Rs.1,57,785 being 0.5% of the average investment under Rule 8B(2)(iii) of the I.T Rules. Thus the Assessing Officer made a disallowance of Rs.25,96,073 under Section 14A of the Act as against the disallowance made by the assessee at Rs.4,276. The assessee challenged the action of the A.O. before the CIT(Appeals). The CIT (Appeals) deleted the disallowance made by the Assessing Officer on account of interest expenditure on the ground that the assessee has not used any borrowed fund for the purpose of investment in question. However the disallowance made under Section 14A of the Act on account of indirect administrative expenses was upheld by the CIT (Appeals).

Before us, the ld. DR has submitted that when the assessee has borrowed fund and further the Assessing Officer found that the assessee is having section 14A are applicable in respect of the interest expenditure. The Assessing Officer has made disallowance in proportion to the total assets and average investment to the interest expenditure. Thus the Assessing Officer was justified in making the disallowance on account of interest expenditure.

On the other hand, the ld. AR has submitted that the assessee has not used any borrowed fund for the purpose of investment in question. He has further contended that this company has bank and cash balance of Rs.48.42 Crores as on 31.3.2009 after making all the inter corporate investments and loans referred by the Assessing Officer. He has further contended that the net of loans against the fixed deposits gives a clear fund of Rs.40 Crores. The current ratio and debt equity ratio are within the banking norms. Thus merely because the assessee company is having loans cannot be a ground for making disallowance of interest on account of investment in question. He has supported the order of the CIT (Appeals).

We have considered the rival submissions as well as the relevant material on record. The Assessing Officer noted that the assessee made various investments as under :

On appeal, the CIT (Appeals) deleted the disallowance made by the Assessing Officer by accepting the claim that the payment was made for availing the service of the said company.

Before us, the ld. DR has submitted that there is no agreement between the parties for payment of syndicate fees. The assessee has not produced any material to show that the financial facility service was rendered by the said company to the assessee. Therefore the claim is not allowable as not laid out absent since entire loan amount has been taken from only one bank.

On the other hand, the ld. AR has submitted that the payment was made for arranging the loan from syndicate of banks. He has referred to the sanction letter of the bank and submitted that the assessee has availed the working capital facility from the Axis Bank apart from the other loans taken in the earlier years and therefore the payment of 0.4% as syndicate fees was made for arranging the loan of Rs.125 Crores from Axis Bank Ltd. The ld. AR has referred the details of the secured loan as well as working capital term loan and submitted that this is not the only loan taken by the assessee but in addition to the existing loan, the assessee took fresh loan from Axis Bank Ltd. Therefore, the payment was made for securing the loan from the bank.

We have considered the rival submissions as well as the relevant material on record. There is no dispute that the assessee has taken loan in the past as well as during the year under consideration. However the payment in to a third party for alleged service of arrangement of the loan. It is pertinent to note that neither any agreement nor any documentary evidence was produced by the assessee to show that the an intermediatary service was availed by the assessee for obtaining the loan in question. Further no such fact was brought on record to suggest that any such service was actually rendered except letter from the said company charging the fees from the assessee. Therefore in the absence of any material in support of the claim, we set aside the order of the CIT (Appeals) for this issue and restore the order of the Assessing Officer as there is no nexus between the payment and the loan taken by the assessee from bank.

Ground Nos.10 to 13 are regarding disallowance of interest on account of interest free advances to the sister concerns.

From the details in the statement of account as well as cash flow statement, the Assessing Officer noted that the assessee had given interest free advance aggregating to Rs.14,86,39,400 to various sister concerns. The Assessing Officer further found that the assessee had negative cash flow of Rs.9,81,29,000 as on 31.3.2008 and Rs.3,36,56,000 as on 31.3.2009. Thus the Assessing Officer was of the view that the assessee had debt repayment Rs.131.31 Crores. The Assessing Officer accordingly disallowed a sum of Rs.2,22,95,910 being 15% of the interest free advances given to the sister concerns. The assessee challenged the action of the A.O. before the CIT(Appeals). The CIT (Appeals) deleted the disallowance on the ground that these advances were made in the normal course of business and therefore no amount of interest is disallowable even if the borrowed funds are utilized.

Before us, the ld. DR has submitted that the Assessing Officer brought out this fact that the assessee is having negative cash flow and there is no commercial expediency in advancing loan to the subsidiaries. The assessee company did not have sufficient reserves of its own. Therefore the ratio of the decision in the case of S.A. Builders Ltd. V CIT(Appeals) & Anr. 288 ITR 1 (SC) is not applicable to the present case as the assessee failed to substantial the commercial expediency during the assessment proceedings.

On the other hand, the ld. AR of the assessee has submitted that a major part of this amount was advanced in the prior years and not during the year under consideration. This amount has already been provided in the financial statement as doubtful of recovery and has been added back in the computation of income. He has further contended that the assessee-company inter corporate investment and loans referred to by the assessee. The net amount after considering the loan against the bank deposits comes to Rs.40.33 Crores. Therefore the assessee was having current ratio and debt equity ratio which are within the banking norms. The learned Authorised Representative has submitted that merely because the assessee is having loans would not lead to the conclusion that the advance given to the sister concern which is not from assessee's own fund when the assessee is generating good amount of funds from the operations which are sufficient to cover the advances given to the sister concerns.

We have considered the rival submissions as well as the relevant material on record. There is no quarrel on the point that no disallowance can be made on account of interest for advancing the interest free fund to the subsidiaries if the assessee is having its own sufficient funds or there exists a commercial expediency in advancing the money. As regards the availability of funds none of the authorities below have examined this fact. The Assessing Officer has disallowed the interest by considering the cash flow being negative. The CIT (Appeals) has not gone into the issue of availability of own fund and deleted the addition on the ground that it was given in the normal course of business and ascertained after considering the other investment including the investment in the shares yielding tax free income as well as investment in the subsidiary company. The issue of availability of funds for the purpose of disallowance under Section 14A has been set aside to the record of Assessing Officer for proper verification. Therefore the availability of fund for advancing the money to the sister concern is directly connected with the finding on the issue of availability of own fund and consequential disallowance under Section 14A of the Act.

As regards the commercial expediency the assessee has not produced any material to show that the assessee is having regular business with these subsidiaries. The CIT (Appeals) has accepted the contention of commercial expediency without considering the incident of business transactions between the assessee and the subsidiary. Therefore in the facts and circumstances of the case, this issue requires proper verification and examination. Accordingly, we set aside this issue to the record of the Assessing Officer for proper verification and readjudication.

Ground No.14 is regarding disallowance of interest on account of investment made in the shares of Kirsons BV, a subsidiary company invested an amount ofRs.54,53,39,000 in the shares of the subsidiary company.

Before us, the ld DR has submitted that the Assessing Officer on analysis of the cash flow statement found that the assessee had a negative cash flow of 9.81 Crores during the assessment year 2008-09 and further negative cash flow of Rs.3.36 Crores during the assessment year 2009-10. Therefore entire fund made year on year. He has further submitted that the interest on borrowed capital used for investment in the share capital of the subsidiary has to be capitalized along with the capital of assets acquired as held by the Hon'ble jurisdictional High Court in the case of CIT Vs. Mythri Pai (supra) as well as CIT Vs. United Breweries Ltd. 321 ITR 546 (Kar).

On the other hand, the ld. AR of the assessee has submitted that the assessee has not borrowed any loans specifically for the purpose of acquisition of subsidiary. Further when both the interest free and interest bearing funds are available with the assessee then the presumption can be raised that the investment would be out of the interest free fund generated or available with the assessee if such funds are sufficient to meet the investment. In support of his contention, he has relied upon the decision of the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340 (Bom).

Even here, the amount advanced are more towards the issue of shares in future if a company is to be brought into existence and in the hope of getting shares allotted in the company.

An expenditure incurred for securing shares per se is a ‘capital expenditure’ and never 'revenue expenditure’ and therefore the amount never qualifies for deduction either under s. 36 or s. 37 of the Act.

An expenditure in the nature of ‘capital expenditure’ straightaway goes out of the purview of s. 37 of the Act unless the amount fully qualifies in terms of the other statutory provisions and in the instant case, in terms of s. 36(1)(vii) of the Act, there is no question of ‘written of irrecoverable debts’ which claim inevitably fails and the matter does not warrant interference even for a remand for recording a finding on non-existent material and therefore we reject this claim and answer the questions regarding written off bad debts i.e., substantial question Nos. 1 to 7 referred to (supra) corresponding to paras 29 to 35 in the memorandum of appeal in IT Appeal No. 492 of 2001 in favour of the Revenue and against the assessee.”

The assessee has raised the following grounds in its appeal :

Ground Nos.1 and 2 are common to the Ground No.14 of the revenue’s appeal and accordingly stands disposed of being set aside to the record of the Assessing Officer in the same terms.

Ground No.3 is regarding the adjustment made while computing the book profit under Section 115JB of the Act in respect of the amounts of disallowance made under Section 14A of the Act.

We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. under Section 14A of the Act. Since we have set aside the issue of disallowance under Section 14A of the Act to the record of the Assessing Officer therefore this issue is also set aside to the record of the Assessing Officer to reconsider the issue of adjustment of amount disallowed under Section 14A as well as by considering the objections of the assessee and legal precedent on this point.

In the result, the revenue’s appeal is partly allowed and the assessee's appeal is allowed for statistical purpose.