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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI SANJAY GARG
सुनवाई की तायीख / Date of Hearing : 25.07.2016 घोषणा की तायीख /Date of Pronouncement : 28.09.2016 आदेश / O R D E R PER D. KARUNAKARA RAO, AM: There are two appeals under consideration and they are filed by the assessee for the AYs 2008-09 and 2009-2010. Since, the issues raised in both the appeals are identical, therefore, for the sake of convenience, they are clubbed, heard combinedly and disposed of in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order. (Assessment Year:2008-2009) 2. This appeal filed by the assessee against the order of the CIT (A)-14, Mumbai dated 26.11.2013 for the assessment year 2008-2009. In this appeal, assessee raised the following grounds which read as under:- “1. The Ld CIT (A) erred in law and facts in upholding disallowance of interest of Rs. 6,85,93,455/- u/s 36(1)(iii) of the Act with reference to advances given to subsidiary companies and companies in which the assessee has acquired controlling interest. The reasons given by her for doing so are wrong and contrary to the facts of the case and provisions of law.
2. (a) the Ld CIT (A) erred in law and facts in not adjudicating ground related to disallowance of interest of Rs 3,11,63,911/- u/s 14A of the Act. (b) The Ld CIT (A) erred in law and facts in directing the AO to disallow expenses u/s 14A of the Act to the extent of expenses claimed of Rs. 7,62,855/- without proving any nexus between expenses claimed and exempt income. The reasons given by her for doing so are wrong and contrary to the facts of the case and provisions of law.”
Briefly stated relevant facts of the case are that the assessee, being a company engaged in the business of „Finance & Investment in Shares and Securities‟, filed the return of income for the AY 2008-2009 declaring the total loss of Rs. 11,50,33,959/-. In the assessment, AO determined the total loss of Rs. 1,04,26,701/-. AO made a couple of disallowances viz (i) disallowance of Rs. 6,91,33,907/- u/s 36(1)(iii) of the Act and (ii) disallowance u/s 14A read with Rule 8D of Rs. 3,44,61,814/-. During the assessment, AO noticed that the assessee gave certain advances to Sirpur Gold Refinery Private Limited and Mumbai Football Club Pvt Ltd. The said advances were allegedly paid out of the borrowed capital without charging interest on the said advances. Otherwise, assessee made a claim of interest payment relatable to the borrowed funds to the extent of Rs. 6,91,33,907/- u/s 36(1)(iii) of the Act. In the assessment proceedings, assessee submitted that the said advances were given for the purpose of acquisition of assets / share application money. Regarding the advances paid to the Mumbai Football Club Pvt Ltd, assessee added back the interest expenditure relating to the share application money advance given to the said club. Therefore, there is no dispute on this transaction. The leaves us with the issues relating to the other advances paid to Essel Sports Private Limited (in short „Essel‟). Further, AO also made disallowance u/s 14A on considering the fact that the assessee earned income of Rs. 7.8 Crs (rounded off) which is exempt u/s 10(34) of the Act. The disallowance on this account works out to Rs. 3,44,61,814/-. Aggrieved, assessee carried the matter to the first appellate authority.
During the proceedings before the first appellate authority, assessee could not improve the case on account of disallowance with reference to the provisions of section 36(1)(iii) of the Act. Regarding the other issue relating to the disallowance u/s 14A read with Rule 8D of the IT Rules, 1962, the CIT (A) rejected the claim of the assessee by holding that the assessee has not incurred any administrative expenses to earn exempt income. For this, he relied on the various decisions. Regarding the argument relating to the disallowance when it exceeded the claim in the P & L Account, CIT (A) directed the AO to restrict the disallowance to the expenditure debited to the P & L Account. For this, he relied of the ITAT, Delhi in the case of Gillette India Pvt Ltd. Aggrieved with the above, assessee is in appeal before the Tribunal with the grounds referred above.
At the outset, Ld Counsel for the assessee submitted that Ground no.2(b) is not pressed. After hearing the ld DR, we dismissed the said ground as not pressed.
Regarding Ground no.2(a), Ld Counsel for the assessee submitted that the CIT (A) erred in law and facts in not adjudicating the issue attending to certain important arguments, relating to the disallowance of interest of Rs. 3,11,63,911/- u/s 14A of the Act. On this issue, ld Counsel for the assessee brought our attention to the discussion given in para 4 and its sub-paras of the CIT (A)‟s order and mentioned that there is no finding of the CIT (A) on the amount of 3,44,61,814/- disallowed by the Assessing Officer. Further, there is no discussion about the adjustment to be made to the average investment with respect to the reduction of strategic investment as well. Ld Counsel for the assessee fairly mentioned that this issue should be remanded to the file of CIT (A) for want of speaking order and proper adjudication of the issue considering all the aspects of Ground no.2(a).
After hearing both the parties on this issue, we of the considered opinion that the issue involved in Ground no.2(a) is required to be remanded to the file of the CIT (A) for want of speaking order in accordance with the provisions of section 250(6) of the Act. We order accordingly and direct the CIT (A) to adjudicate this issue afresh after considering the relevant precedents. CIT (A) is also directed to consider the decision of the Tribunal in the assessee‟s own case for the AY 2007-2008 in dated 13.7.2016 where in an identical issue was remanded to the file of the AO with certain direction given in para 6 of the said Tribunal‟s order (supra). With identical directions, we remand this issue. Thus, this ground no.2(a) is allowed for statistical purposes.
Ground no.1 relates to the disallowance of claim of interest of Rs. 6,85,93,455/- u/s 36(1)(iii) of the Act. In this regard, it is the case of the assessee that this interest is relatable to the advances given to the subsidiary companies / other companies on which assessee has acquired interest. According to the assessee, such disallowance is uncalled for and contrary to the provisions of the Act. Although the facts available on the assessment order are scanty, during the first appellate proceedings, assessee submitted that Shirpur Gold Refinery Limited & Essel Sports Private Limited are the holding companies. As a result, assessee has “deep interest” in the business of its associate and subsidiary companies. The advances were given to them out of the “commercial expediency”. The advances given for share application money were used by the said company for their own business, which amounts to use of the funds for the business purpose of the assessee. The interest incurred by the assessee on these funds are allowable u/s 36(1)(iii) of the Act. For this, he relied on the proviso to said clause (iii) of section 36(1) of the Act. Further, he submitted that the assessee has interest free funds to the tune of Rs. 30.54 Crs (rounded off) as on 31.3.2008, whereas the interest free advances given to the above concerns is only Rs. 10.09 Crs. Assessee relied heavily on the judgment of the Hon‟ble Supreme Court in the case of S.A. Builders (288 ITR 1) (SC). However, CIT (A) distinguished the same and mentioned that the facts relating to the S.A. Builders (supra) are different and the said company advanced to the sister concern for making purchases of raw materials. Whereas, in the present case, the undisputed fact is that the said amounts are given as advance in the beginning and it was converted into share application money / equity. On finding that the assessee failed to establish the nexus between the advance towards share application money vis-a-vis the business purposes of the assessee, the CIT (A) held that the assessee‟s reliance on the said judgment in the case of S.A. Builders (supra) is misplaced and the said judgment is distinguishable on facts CIT (A) also gave a negative finding towards availability of own funds being source of such advances. Accordingly, CIT (A) confirmed the addition of Rs. 6,85,93,455/-. Aggrieved with the same, assessee is in appeal before the Tribunal by the above mentioned Ground no.1 of the appeal.
During the proceedings before us, on this issue of disallowance of claim of interest of Rs. 6,85,93,455/- u/s 36(1)(iii) of the Act, Ld Counsel for the assessee filed written submissions and the same are extracted as under:- “Disallowance u/s 36(1)(iii) amounting to Rs. 6,91,33,907/-. During the relevant financial year under consideration, the appellant had advanced the following sums with the intent to acquire controlling interest in the aforesaid companies: Party name Amount in Rs. Shirpur God Refinery Ltd 82,52,02,588/- Essel Sports Pvt Ltd 59,30,69,000/- Shirpur Gold Refinery Limited operates a green field precious metal refinery. The said advance is for the acquisition of controlling / promoter interest in the company. However, due to certain procedural requirements, the appellant has acquired equity shares to the extent of 48.91% only in the subsequent AY ie 2009-2010 and hence the share application money advanced in the relevant year under consideration was classified as „loans and advances‟.
As against share application money advanced to Essel Sport Pvt Ltd of Rs. 59,30,69,000/- the appellant was allotted 2,09,93,990/- equity shares in the relevant year under consideration and balance sum of Rs. 28,05,07,340/- continued to appear under Loans & Advances (Details of the above are at page 61 of the paper book). In the subsequent assessment year ie AY 2009-2010, the appellant was further allotted 2,20,06,000 equity shares against the balance share application money. Effectively, the appellant has acquired controlling interest to the extent of 71.67%. As can be seen, the aforesaid advances were made to acquire promoter / controlling interest and to facilitate the appellant‟s business interest. It may be pertinent to note that strategic advances to acquire controlling / promoter interest stands on a different footing than regular advances. In the case of a strategic advances to acquire controlling interest, the appellant gains from appreciation of equity share value of the investee company. If interest is charged, this would go to reduce the profits and reduce equity share value. If no interest is charged the same amount would be returned in the shape of profits / higher equity share value. This aspect has to be kept in view while determining the question whether advancement of a loan is a measure of business expediency. The Hon‟ble Apex Court in the case of S.A. Builders Ltd vs. CIT (288 ITR 1) has laid down that the expression „for the purpose of business‟ is of wide import and includes within its ambit advances given to sister-concern out of commercial expediency. In the appellant‟s case too, the advances have been given out of commercial expediency as demonstrated above. The Department has relied on the decision of Supreme Court in the case of Tulip Star Hotels Ltd (21 taxmann.com 97 dated 30.4.2012) to contend that the SA Builders case no longer holds the field. The contention or the Department is erroneous since the Supreme Court in Tulip Star‟s case has not overruled the said decision in SA Builder‟s case and only observed that the said decision in SA Builders‟ case requires reconsideration. In view of the aforesaid decision of SA Builders case continues to hold the field if and till it is overruled. In fact, the Apex Court itself in the case of Hero Cycles (P.) Ltd, dated 5.11.2015 reported in 379 ITR 347 has reiterated the observations of the SA Builders‟ case to hold that no disallowance u/s 36(1)(iii) in respect of interest free advances given to subsidiaries out of business expediency can be made. It reiterated that the revenue cannot justifiably claim to put itself in the arm- chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. Attention is also invited to the case of EIH Associated hotels vs. DCIT (126 TTJ 246) wherein the Kolkata Tribunal held that where the advances in the form of share application money to its subsidiary to facilitate its own financial interest, disallowance u/s 36(1)(iii) is not warranted. In this context, the Tribunal held as under:- We note that the advances given by the assessee company from time to time were against the issue of share capital. It has been placed on record that the assessee was actually allotted shares in a subsequent year out of the advances paid. Hence, it is not the case that the funding was for a temporary adjustment and hence should not be equated with a normal loan. If that be so, there should not be any question of interest payable on a permanent fund introduced by the assessee company forming part of the capital of the sister concern.”
On the other hand, Ld DR for the Revenue vehemently argued stating that the said judgment of the Hon‟ble Supreme Court in the case of S.A. Builders (supra) is not valid law considering the judgment of the Apex Court in the case of Tulip Star Hotels Ltd (21 Taxmann.com 97) dated 30.4.2012. Reacting to the ITAT, Kolkata Bench order in the case of EIH Associated Hotels vs. DCIT (126 TTJ 246), ld Counsel for the assessee submitted that the said order did not consider the said Supreme Court judgment in the case of Tulip Star Hotels Ltd (supra).
Before us, assessee claims that it has sufficient interest free funds to explain the SAM given to its concerns namely Shirpur Gold Refinery Limited (SGFL) & Essel Sports Private Limited (ESPL). Assessee wants the grant of benefits of the jurisdictional HC judgment in the case of Reliance Utilities considering the existence of own funds. Further, assessee claims that it has met the conditions relating to 'commercial expediency' and 'deep interest' as enunciated in the judgment in the case of SA Builders. But the AO refutes the same. Assessee claims that the advances / loans with ESPL and SGFL constitute commercial expediency. Further, it is the claim of the assessee that the said judgment still holds the ground despite the judgment in case of Tulip Star Hotels Pvt Ltd (supra). As per the assessee, on similar facts, the claim was already allowed in favour of the assessee by the Kolkata Bench of the Tribunal in case of EIH Associated hotels (supra). In this case, we find that there is a finding of fact that the assessee invested in SAM of its sister concern for earning of dividend, which compensates the interest earnings. Whereas, in the present case, there is no such clarity.
Per contra, the case of the Revenue ie AO / CIT(A) is that the assessee failed to demonstrate that the said advance / investment in SAM constitutes business purposes of the assessee or out of commercial expediency or the assessee-holing company has deep interest in the said sister concern. As per the Ld DR, assessee failed to discharge the onus in demonstrating that the said investment constitutes strategic investment.
Decision of Tribunal 13. We have heard both the parties and perused the orders of the Revenue Authorities as well as the relevant material placed before us. Undisputed facts are that the assessee has given the advances to the SGPL & ESPL and they are appropriated towards the „share application money‟ (SAM). The same were subsequently converted into equity partly and eventually fully by the sister concern. The facts in the case of SA Builders (supra) obviously different as the advances in that case are clearly trading account ie purchase of raw material. It is also relevant that the ratio of the said Supreme Court judgment is found requiring reconsideration as held by the same court in the case of Tulip Star Hotels Ltd (supra). Further, the order of the Tribunal in the case of EIH Associate Hotels (supra) is on the facts of subscribing directly towards the SAM and not towards advances, which are subsequently taken a shape of SAM and then to equity. The question that arises relates whether the advance given to the said concerns constitutes interest yielding advances or not loan till they are converted to SAM / equity?
There is no dispute on facts. In our opinion, explanation given by the assessee before Revenue and the Tribunal appears very generic in nature. Its arguments revolving around Commercial Expediency (CE), Strategic Investment (SI), Deep Interest (DI) etc are unsupported by any documentary evidence. We find that in case of SA Builders, CE was demonstrated as to the assessee may suffer if the advance for raw materials was not given. Assessee failed to provide the deep interest in the recipient company. Therefore, in our view, there is no doubt in our minds about assessee's failure to demonstrate the aspects of CE/DI. In our view, there is need for the assessee to provide specific explanation and not the generic ones. In the case of S.A. Builders (supra), the advances are meant for purchase of raw material. This established the commercial connection to assessee. The same is not established in the instant case. As such, the CIT (A) has not considered various other arguments while confirming the additions. Assessee could not demonstrate the specific evidence or convincing explanation even before us in the Tribunal as to what is the commercial expediency in investing in the SAM of the ESPL / advances / SGPL. What is the gain to assessee in present or future if it invests in SAM of ESPL / SGFL and what is commercial loss if it doesn't. Mere existence of any kind of nexus is not the requirement of law. Commercial Expediency denotes the commercial scope only. Considering the Apex Court‟s judgment of S.A. Builders, we have no doubt in our minds that one should be clear about the commercial loss and certainly not the strategic investment. Assessee needs to bring that clarity on these issues to the records. The onus is on the assessee to demonstrate that the investment in SAM is not out of borrowed funds and alternatively, there exists the interest free funds. Further, assessee is under that obligation since the claim of deduction u/s 36(1) of the Act is made by it. The commercial expediency / deep interest has to be understood in the language of commerce of the assessee. Regarding the concept of deep interest also, assessee needs to demonstrate the specifics of such deep interest with the sister concern. It is also relevant to mention that the said concerns (ESPL / SGFL) are not its concerns at the time of advancing. They became its concerns only after advances were converted into equity and not at the time of advancing funds. More facts are required to be bring out on the records on this aspect too. Thus, relevant facts are not on records. Therefore, we are of the view that the issue raised in the ground 1 should be remanded to file of AO for want of speaking order on the issues discussed. Further, we find there is need for clarifying the computation of proportionate interest based on net interest or gross interests and as to why the netting of interest as claimed by the assessee is allowable or otherwise. Assessee needs to file relevant details before the AO. Assessee has not earned any interest or dividend during the year and however, the assessee debited the entire interest expenditure to its P and L account. Accordingly, we order and the AO is to grant proper opportunity to the assessee before passing his order.
Regarding second issue relating to disallowance u/s 14A of the Act r.w. Rule 8D of IT Rules, we find that the assessee desires the matter should be set aside as the Revenue authorities did not adjudicate various arguments such as why no reduction is given when there are obvious arguments relating to strategic investment. Assessee is entitled to relief in view of the ratio in the case of Garware Wall Ropes Ltd vs. Addl. CIT in dated 15.1.2014. The disallowance u/s 14A of the Act should not exceed the total expenditure claimed in the P and L account. In any case, the Tribunal has already set aside the similar issue in the AY 2007-08 to the file of the AO as stated by the Ld AR. Considering the above, we remand this issue to the file of the AO for fresh adjudication after affording a reasonable opportunity of being heard to the assessee.
In the result, appeal of the assessee is partly allowed for statistical purposes. (Assessment Year: 2009-2010) 17. This appeal filed by the assessee on 30.1.2014 is against the order of the CIT (A)-14, Mumbai dated 26.11.2013 for the assessment year 2009-2010. In this appeal, assessee raised the following grounds which read as under:- “1. The Ld CIT (A) erred in law and facts in upholding disallowance of interest of Rs. 4,91,37,180/- u/s 36(1)(iii) of the Act with reference to advances given to subsidiary companies and companies in which the assessee has acquired controlling interest. The reasons given by her for doing so are wrong and contrary to the facts of the case and provisions of law.
2. (a) the Ld CIT (A) erred in law and facts in not adjudicating ground related to disallowance of interest u/s 14A of the Act with reference to investment made in subsidiaries. The reasons given by her for doing so are wrong and contrary to the facts of the case and provisions of law. (b) The Ld CIT (A) ought to have allowed netting of interest income against interest expenses for working out disallowance u/s 14A of the Act. The reasons given by her for doing so are wrong and contrary to the facts of the case and provisions of law.”