SHOPPERS STOP LTD,MUMBAI vs. ACIT CEN CIR 29, MUMBAI

We have heard the ld. Authorized Representative (AR) of the assessee and ld. Departmental Representative (DR) for the Revenue and perused the material available on record. The Ld. AR of the assessee argued that assessee-company is engaged in the business of retail store through various outlets in various big cities in country. The Upasana Trading Ltd. (UTL) is 100% subsidiary of assessee and entirely dependent of assessee-company. Being 100% subsidiary of assessee, the assessee is committed to provide necessary financial support to UTL to enable it to operate and pay its debts, if required. The ld AR for assessee submitted during the assessment proceeding, the assessee vide its letter dated 19.12.2011 contended that amount of Rs. 3,97,65,845/- was advanced to UTL from its interest free funds available with assessee. The assessee further provided the Fund Flow Statement to AO. The AO disallowed the expenditure of Rs. 29,82,438/- holding that interest bearing fund have been diverted to its subsidiary and disallowed the interest on pro-rata basis u/s 36(1)(iii) of the Act. The ld. CIT(A) confirmed the disallowance holding that there was no commercial expediency and no month wise cash flow statement has been furnished. It was also argued that in The Ld. AR of the assessee to substantiate his submissions relied upon the decision of Hon’ble Apex Court in S.A. Builder Vs CIT in Civil Appeal no. 5811 of 2006 dated 14.12.2006 . On the other hand the ld. DR for the Revenue supported the order of authorities below. Ld. DR for the Revenue argued that money was paid on account of Sale-Tax Liability in the name of M/s K.R. Trends, a division of UTL. The amount was not shown as advance.

We have considered the rival contention of the parties and gone through the order of authorities below. The AO during the assessment proceeding, noticed that assessee has shown loans and advances to its subsidiary at Rs. 4,05,94,175/- out of which an amount of Rs. 3,97,65,845/- was due from UTL. The AO asked the assessee to explain why interest on pro-rata basis should not be disallowed, as the assessee claimed huge interest expenses while assessee has advanced interest free loan to its subsidiary. The assessee filed its reply dated 19.12.2011. The assessee contended that 3 & 1363/M/2013 Shoppers Stop Ltd. UTL is its 100% subsidiary and are dependent upon the assessee-company to provide necessary level of financial support to enable it to operate and pay its debts, if required. The assessee had sufficient interest free fund available for advancing amount of Rs. 4,97,65,000/- to its subsidiary Company . The reply of assessee was not accepted by AO. The AO concluded that reply and Fund Flow Statement given by assessee does not support the assessee- company’s contention. The AO further concluded that assessee could not make out ground for Commercial Expediency for advancing interest free loan and disallowed interest of pro-rata basis. The interest was worked out at 7.5% on the amount of Rs. 3,97,65,485/-. The interest was calculated at Rs. 29,82,438/-. On appeal before the ld. CIT(A), the similar contention were urged. In addition, it was submitted that advances given to UTL was not a loan or advance, but it was a trade advance and hence, there was a commercial expediency. The contention of the assessee was not accepted by ld. CIT(A). The ld. CIT (A) also concluded that in the balance-sheet, the amount has been shown as advance. The assessee cannot go against its own entry in the books of account; the amount provided by assessee to UTL was not a business transaction. Thus, there was no commercial expediency and confirmed the disallowance.

We have seen that the assessee owned sufficient interest free funds available with it as shown in the balance sheet of the assessee. We have also perused the copy of reply of the assessee dated 24th December 2012 filed before Commissioner (Appeals) during the appellate proceedings, wherein the assessee has specifically contended that UTL is 100% subsidiary of the assessee company which is engaged in the business of providing distribution and logistics support to the assessee. The assessee company advances certain funds to UTL in the ordinary course of business of providing services to assessee. The copy of financial statement of UTL for the year ending on 31 March 2004 was also furnished. We have also seen that in the financial statement of UTL, UTL mentioned that its operations are entirely dependent on its holding company i.e. Shoppers Stop Ltd (SSL). The SSL has committed to provide the necessary level of financial support to UTL to operate and pay its debts as and when it became due. The UTL further mentioned that SSL business plans envisage a significant increase in its operations. Accordingly, UTL prepared the statements assuming that the company will continue as a going concern and do not therefore 4 & 1363/M/2013 Shoppers Stop Ltd. include any adjustment relating to the recoverability and classification of asset amounts or the amounts and classification of liabilities that might result should the company be unable to continue as a going concern. We have also find on record the copy of assessment order of UTL passed under section 143(3) for assessment year 2004-05 dated 20th Nov 2006, for AY 2003-04 and AY 2002-03, wherein the nature of business of UTL is accepted by revenue as “Distribution and logistics function of M/s Shoppers Stop Ltd”. We have also seen that UTL in its Notes to the financial statements ending in March 2004 has also mentioned the liability of SSL. From the above factual position observed above we are of the view that there was business expediency for advancing interest free loan by the assessee to its subsidiary company. Thus, no disallowance was warranted against the assessee, when, the assessee was having sufficient interest free funds available with the assessee. With these observation we delete the disallowance of interest under section 36 (1)(iii) of the Act. In the result appeal of the assessee is allowed. ITA No. 1363/Mum/2013