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Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: SHRI B.R.BASKARAN (AM) & SHRI RAM LAL NEGI (JM)
This appeal has been preferred by the assessee against order dated 25/11/2014 passed by the Ld. CIT(Appeals)-16 Mumbai for the Asst. Year 2008-09, whereby the Ld. CIT(A) dismissed the appeal filed by the assessee and confirmed the penalty of Rs. 2,25,60,040/- u/s 271(1)(c) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee company filed its return of income for the relevant assessment year declaring the loss of Rs. 1,75,537/- under the regular provisions of the Act and loss of Rs. 6,71,20,385/- u/s 115JB of the Act. The return was processed u/s 143(1) of the Act and assessment order was accordingly passed u/s 143(3)(ii) of the Act after making inter-alia addition of Rs. 6,63,78,465/- on account of disallowance of interest u/s 36(1)(iii) of the Act.
Feeling aggrieved by the assessment order the assessee carried the matter before the Ld. CIT(A) in first appeal. The Ld. CIT(A) after hearing the assessee confirmed the aforesaid addition. Accordingly, the A.O initiated proceedings u/s 271(1)(c) of the Act and levied penalty of Rs. 2,25,60,040/- holding that the assessee has furnished inaccurate particulars of income and has committed a clear default within the meaning of section 271(1)(c) read with explanation (1) to section 271(1)(c) of the Act, thereby suppressing its real income by Rs. 6,63,78,465/-. In appeal the Ld. CIT(A) confirmed the penalty order. The assessee has challenged the impugned order by raising the following grounds of appeal:-
“1. The Ld. CIT(A) erred in law and facts in upholding levy of penalty of Rs. 2,25,62,040/- u/s 271(1)(c) of the Act in respect of disallowance of interest of Rs. 6,63,78,465/- u/s 36(1)(iii) of the Act. The reasons given by him for doing so are wrong, contrary to the facts of the case and against the provisions of law.
2. The Ld. CIT(A) erred in law and facts in upholding levy of penalty u/s 271(1)(c) solely on the basis of disallowance of interest by the A.O and sustained by the Ld. CIT(A) in quantum appeal without discharging the onus and providing concealment of income or furnishing of inaccurate particulars of income.
3. The Ld. CIT(A) erred in law and facts in upholding levy of penalty u/s 271(1)(c) of the Act in respect of disallowance of interest of Rs. 6,63,78,465/- u/s 36(1)(iii) of the Act which is neither concealment of income or furnishing of inaccurate particulars of income.
The above grounds/sub-grounds are without prejudice to each other.”
4. At the very outset the Ld. Counsel for the assessee submitted that the addition in question has been deleted by the ITAT, Mumbai in Quantum appeal for Asst. Year 2008-09 vide order dated 03/02/2016. Since the addition has been deleted the penalty order confirmed by the CIT(A) does not survive.
The Ld. DR did not dispute the fact that the ITAT has deleted the addition in quantum appeal.
We have heard the rival submissions and perused the material placed on record, including the order passed by the co-ordinate Bench in quantum appeal. We notice that the disallowance of interest of Rs. 6,63,78,465/- made u/s 36(1)(iii) of the Act on account of finance provided by way of share application/loan to its subsidiaries/sister concerns out of commercial expediency has been deleted by the co-ordinate Bench vide order dated 03/02/2016 holding as under:-
“2.8. For making a disallowance u/s 36(1)(iii) of the Act essentially, there has to be a finding that the borrowed money were utilized for non-business purposes. As was held in CIT vs Hotel Savera 148 CTR (Mad.) 585 ; 239 ITR 795 (Mad.). In this context, the fact that the assessee had ample funds or resources at his disposal and need not have borrowed funds is not a relevant matter for consideration. All that is germane is whether the borrowing was, or was not, for the purposes of business. In City Motor Service Ltd. vs CIT (1966) 61 ITR 426 (Mad. ) The assessee used the borrowed capital for giving loans on interest to others in normal course of his business. Subsequently, it waved interest in respect of certain such loans. It was held that the subsequent waver did not alter the nature of loans. The ratio laid down in Gleneburn Estate Ltd. vs State of Tamilnadu 240 ITR 719 (Mad.) supports the case of the assessee.
2.9. The expression for the purposes of business” occurring in section 36(1)(iii) and also in section 37(1) is wider in scope then the expression “for the purposes of making or earning…… income” occurring in section 57(iii). Thus, the scope for allowing a deduction u/s 36(1)(iii) is much wider. We are aware that where the borrowed money are not use for “purposes of business” but are utilized for meeting personal obligation of the assessee himself (Madhav Prasad Jatia vs CIT) 118 ITR 200 (SC), or for paying tax liability (Kishanchand Chelaram vs CIT) 114 ITR 654 (Bom.), or are given over to partners for their personal use, the claim of the interest is not allowable. But for such disallowance, a finding of fact, based on relevant material, is necessary as was held in CIT vs R.K. Metal Works 112 ITR 445 (Punjab).
In Veecumsess vs CIT (1996) 220 ITR 185, 190 (SC), their lordship of the Apex Court have taken a view that when the assessee carries on more than one business and one business is transferred or closed and if loan was taken earlier for the business, which subsequently closed, but if the management is common, the interest paid on that loan cannot be denied, though one of the lines of the business or any branch of the business is closed for which the loan had been taken.
2.10 It is true that no allowance no sham or colorable transaction is permissible. If the object of the borrowing is illusory or colorable and not genuinely for the business purposes, then the provision has no application. To be admissible as an allowance under the section interest must be paid in respect of the capital borrowed. Where the money borrowed have been utilized for “business purposes” and also earning income under the residuary head “income from other sources” the interest paid on money so borrowed should be bifurcated proportionately between the “business income” and “income from other sources” (H.K. Investment Pvt. ltd. vs CIT 211 ITR 511, 514 (Guj.). However, in the present case, the facts are entirely different as the assessee advanced the funds to its subsidiaries for “business exigencies”, wherein, the assessee is a holding company, thus, it is not a colorable device.
2.11 In the case of CIT vs Reliance Communication Infrastructure Ltd. (2012) 207 taxman 219 (Bom.), the Hon’ble jurisdictional High Court vide order dated 28/03/2012, considering the decision in S.A. Builders Ltd. vs CIT (2007) 288 ITR 1(SC) held that if there is a business purpose, while advancing money to its sister concern, the disallowance of interest cannot be sustained, supports the case of the assessee. The Hon’ble High Court further held that there would not be any difference in the legal position whether the investment is made in the subsidiary company in the form of loan, advances or share application money. If the amount has been invested for the purposes of business of the assessee, then no disallowance can be made in the hands of the assessee. The Hon’ble Apex Court in Hero Cycles Pvt. Ltd. vs CIT (2015) 379 ITR 347 (SC) vide latest order dated 05/11/2015 on the issue of interest on borrowed capital, wherein, advances were made to subsidiaries, pursuant to undertaking given to financial institutions by assessee to provide addition margin to subsidiary to meet working capital for meeting cash losses, it was held that the advances were out of business expediency, therefore, interest paid on borrowing not to be disallowed u/s 36(1)(iii) of the Act. It is noteworthy that while coming to this conclusion, the Hon’ble Apex Court applied the decision already taken in S.A. Builders Ltd. vs CIT (supra) and also considered in Madhav Prasad case (1979) 118 ITR 200 (SC), CIT vs Malayalam Plantation Ltd. (1964) 53 ITR 140 (SC), CIT vs Birla Cotton Spinning and Weaving Mills Ltd. (1971) 82 ITR 166 (SC) and CIT vs Dalmia Cements (B.) Ltd. (2002) 254 ITR 377 (Del.), CIT vs Abhishek Industries Ltd. (2006) 286 ITR 1 (P & H). Identical ratio was laid down in S.P. Jaiswal Estates (P.) Ltd. vs ACIT (2013) 140 ITD 19 (Kolkata)(TM); 29 taxman.com 221 (Kolkata)(Trib.)(TM).
2.12 To sum up the matter, in the light of the aforesaid judicial pronouncement and the factual matrix available on record, we find that the money was advanced by the assessee holding company to its subsidiaries for “business expediency”, which has to be judged by the business man itself. The facts brought before us are that the assessee has pleaded before the lower authorities that the amount invested has been used by the subsidiaries for the purpose of business. The assessee has significant interest in the business of subsidiaries, as these subsidiaries are in same business as that of assessee. It is further noted that major portion of the amounts were invested in the earlier years. No disallowance has been made in assessment year 2007-08 or earlier. Thus, keeping in view, the legal position as discussed above and facts of this case, it can be said that amount invested in the subsidiaries company was arising out of commercial expediency and was thus for the purpose of business of the assessee. Therefore, we reverse the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee.”
Since, the addition on the basis of which the penalty was levied has been deleted by the co-ordinate Bench of the Tribunal, the impugned order confirming the penalty levied by the AO does not survive. We, therefore, set aside the impugned order and delete the penalty of Rs. 2,25,62,040/- levied u/s 271(1)(c) of the Act.