M/S DIVAKAR SOLAR SYSTEM LTD.,KOLKATA vs. DCIT, CIR-10, KOLKATA, KOLKATA

1 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 IN THE INCOME TAX APPELLATE TRIBUNAL “D” BENCH: KOLKATA [Before Shri M. Balaganesh, AM & Shri S. S. Viswanethra Ravi, JM]

I.T.A No. 1301/Kol/2015 Assessment Year: 2012-13

M/s. Divakar Solar System Ltd. Vs. Deputy Commissioner of Income-tax, (PAN:AACCD8485F) Circle-10, Kolkata. (Appellant) (Respondent)

Date of hearing: 30.11.2016 Date of pronouncement: 16.12.2016

For the Appellant: Shri S. K. Tulsiyan, Advocate For the Respondent: Shri Sallong Yaden, Addl. CIT

ORDER Per Shri M. Balaganesh, AM: This appeal by assessee is arising out of order of CIT(A)-5, Kolkata vide appeal No. 08/CIT(A)-5/Cir.10/14-15 dated 30.07.2015. Assessment was framed by DCIT, Circle-10, Kolkata u/s. 143(3) of the Income tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2012-13 vide his order dated 01.09.2014.

3.1. The brief facts of this issue is that the assessee is engaged in the business of trading and assembling of Solar Equipments. In addition, the assessee engaged itself in Installation and Commissioning of Network Towers for Telecom Service Providers. During the year, the ld AO observed that the assessee purchased trading goods and raw materials for assembling the units worth Rs. 2,74,69,275/- from Environ Energy Corporation India Pvt Ltd , being holding company of the assessee. The ld AO observed that the assessee had

2 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 made sale to SREI Equipment Finance Private Limited only on three days to the tune of Rs. 4,88,45,280/-. The ld AO mentioned that the assessee had paid interest of Rs. 5,34,24,658/- to the said customer of the assessee for the unsecured loan advanced to the extent of Rs 250 crores on 31.3.2011. Solely on the basis of these facts, without relying upon any other material, the ld AO held the payments made to the holding company to be unreasonable and excess of its fair market value and added 2% of Rs. 2,74,69,275/- in the sum of Rs. 5,49,386/- u/s 40A(2) of the Act. Before the ld CIT(A), the assessee argued that merely because the sale of Rs. 4,88,45,280/- was made to a single party and is spread over 3 days only, it cannot be said that the purchase do not constitute a legitimate business need. It was also argued that moreover, the ld AO has the burden of proving that the conditions required for invoking the provisions of section 40A(2) exist in support of which, it placed reliance on various decisions. It was also argued that the ld AO has nowhere alleged that the assessee has paid to its Holding Company a sum over and above the fair market value of goods. He nowhere alleged that the payment for purchases incurred were in excess of their fair market value. The ld CIT(A) ignored all the submissions of the assessee and upheld the addition made by the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds:- “2a) That the Ld. C.I.T.(A) erred in having upheld the disallowance/addition of Rs.5,49,386/- made by the Ld. A.O. u/s. 40A(2) of the Act purely on estimate basis at 2% of the total amount of Rs.2,74,69,275/- incurred towards purchase of solar equipments from the holding company M/s. Energy Corporation India Pvt. Ltd. which was based on the relationship between the holding company and the subsidiary company and without bringing on record any material and/or comparable cases to arrive at the suspicion that the price was unreasonable or higher. (b) That the Ld. C.I.T.(A) ought to have appreciated that the price paid for equipments purchased from holding company in consideration of assured supply of material or uniform quality to meet the order obtained by the subsidiary company could not be termed unreasonable and hence part of the price could not be disallowed inasmuch as purchase made by the assessee would not be hit by the provisions of sec.40A(2) of the Act. (c) That the Ld. C.I.T.(A) further failed to take into cognizance that the assessee as well as the holding company are in the same tax bracket and paid the same rate of tax and it was not a case of tax evasion and that being so, he acted arbitrarily and against the established norms in having upheld the uncalled for addition of Rs.5,49,386/- u/s. 40A(2) of the Act. (d) That the Ld. C.I. T .(A) erred in not having considered that the genuineness of the transaction was not doubted by the Ld. A.O. and hence the mere fact that the payment was made to the holding company need not discredit the claim, which was otherwise reasonable and that being so, his action upholding the disallowance/addition is devoid of any merit and liable to be set aside.”

3 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 3.2. The ld AR drew the attention of the Bench to Pages 18 & 19 of the Paper Book containing the reply filed by the assessee before the ld AO vide letter dated 25.8.2014 received in tapal by the ld AO on the said date, that the details of purchases have been furnished to the ld AO in the course of earlier hearings and assessee purchased various parts and accessories and then assembled the same as per design and drawings and then sold the assembled goods and in such situation , it could be found that each supply was distinct and the same were not standard and uniform products. However, the details of sales and purchases in the format suggested by the ld AO were also filed to the extent possible. He also argued that it was specifically brought to the notice of the ld AO vide page 19 of the paper book that the assessee had neither taken any loan from SREI Equipment Finance Private Limited (SEFPL) nor paid any interest to them. In fact, it had taken loan only from SREI Infrastructure Finance Ltd which is a separate and distinct legal entity altogether and paid interest to them on the loan taken. He further argued that the ld AO had not brought on record the fair market value of purchases made by the assessee in order to reach to a conclusion that in comparison to the said fair market value, the value of purchases reflected by the assessee were in excess of the same and hence in his opinion, the same is excessive or unreasonable within the meaning of section 40A(2) of the Act. He also argued that no expenditure was excessive or unreasonable having regard to the fair market value of the goods purchased for which payments were made considering the legitimate needs of the business and no extra benefit was derived by the holding company in such transactions and that the said transactions were made at Arm’s Length Price. He also In support of this, he placed reliance on the following decisions :-

(a) Decision of Bangalore Tribunal in the case of S.K.Engineering vs JCIT reported in 286 ITR (AT) 210 (b) Decision of Bangalore Tribunal in the case of BPL Refrigeration Ltd vs ACIT reported in 272 ITR (AT) 47 (c) Decision of Hon’ble Madhyapradesh High Court in the case of ICT vs Udhoji Shrikrishnadas reported in 139 ITR 827 (MP) (d) Decision of Hon’ble Delhi High Court in the case of CIT vs Denso Haryana Pvt Ltd reported in 328 ITR 14 (Del)

3.3. In response to this, the ld DR merely argued that the details called for by the ld AO in tabular form were not fully complied with by the assessee and hence the disallowance had been rightly made by the ld AO.

4 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13

3.4. We have heard the rival submissions and perused the materials available on record. The facts and submissions stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that the assessee had purchases of goods from its holding company to the tune of Rs. 2,74,69,275/-. It is not in dispute that the holding company is also engaged in the similar line of business in which assessee is engaged and hence competent to supply goods to the assessee. We find that the ld AO had not brought any comparable cases on record to prove that the assessee’s purchase price is in excess of the fair market value and by that process some benefit had accrued to the other person. We find that the provisions of section 40A(2) are very clear in this regard and the onus is on the ld AO to bring on record whether in the facts and circumstances of the case, the provisions of section 40A(2) of the Act are indeed applicable or not. For the sake of convenience, the provisions of section 40A(2) are reproduced hereunder:-

Expenses or payments not deductible in certain circumstances

(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction

Hence it is very clear that the onus is on the ld AO to bring the fair market value of the goods purchased by bringing in comparable cases ; onus is on the ld AO to bring on record that the payment for purchases has resulted in some benefit derived by the other person to whom the payment has been made. Only in such cases, he could disallow to the extent that such payment is found to be excessive or unreasonable in his opinion. In the instant case, the ld AO had not brought any comparable cases on record to disprove the purchases made from holding company by the assessee. We find that the reliance placed by the ld AR on the decision of the Hon’ble Madhya Pradesh High Court in the case of CIT vs Udhoji Shrikrishnadas reported in 139 ITR 827 (MP) is directly on the point wherein it was held that :- “In view of the finding of the Tribunal that there was no adequate material to hold that the purchase of the tobacco was not made at the market rate, it could not be said that the payment of price made by the assessee to the firm was either excessive or unreasonable. Therefore, the

5 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 extra payment of Rs. 70,257 could not be added to the income of the assessee under section 40A(2).”

We also find that the decision of Hon’ble Delhi High Court in the case of CIT vs Denso Haryana Pvt Ltd reported in 328 ITR 14 (Del) also supports the case of the assessee wherein it was held that the Assessing Officer was required to compare the price which prevailed in the local market in the same year. It was a pure finding of fact recorded by the two appellate authorities and, therefore, no question of law arises.

In view of the aforesaid facts and findings and in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we direct the ld AO to delete the disallowance made in the sum of Rs. 5,49,386/- u/s 40A(2) of the Act. Accordingly, the Grounds 2(a) to 2(d) raised by the assessee are allowed.

4.1. The brief facts of this issue is that the assessee availed the services of Mrs Chandana Poddar, relative of the director, in return of which the assessee paid her a salary of Rs. 3,00,000/- and Rs. 9,00,000/- as professional fees. The assessee replied before the ld AO vide letter dated 25.8.2014 that Mrs Chandana Poddar was looking after and liasoning with various engineers and she has vast knowledge with solar line of business and she has influence and connections with the various engineers and therefore, she was retained by assessee to arrange, manage and liason with engineers and to supervise and advise on the assembly of various parts and components and moreover, whenever the assessee needed particular expert, the responsibility of bringing an expert was given to her and for the said purposes retained here and she was discharging her responsibility nicely for which the assessee paid Rs 3,00,000/- as salary for 3 months and later on due to her other engagement, was retained as retainer and paid professional fees of Rs. 9,00,000/- . It was argued that both salary and professional fees paid to her were not in excess of market rates considering her expertise and services given to the assessee and hence the provisions of section 40A(2) of the Act cannot be invoked. It was also stated that the total payments made to Mrs

6 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 Chandana Poddar towards salary and professional fees was only Rs 12 lakhs and not Rs 13 lakhs as claimed by the ld AO. The ld AO observed that the assessee had failed to substantiate the reasonableness and logic for expending Rs. 13 lakhs towards Mrs Chandana Poddar and then claiming the same as business expenditure with reference to any cogent materials like educational qualification certificates, details of services provided by her to the assessee and how the same is commensurate with the prevailing market rate. He held that the payments made to Mrs Chandana Poddar were not made for the purpose of business and hence not allowable as deduction.

4.2. Before the ld CIT(A), it was argued that the total professional fees paid was only Rs 9 lakhs as against Rs 10 lakhs taken by the ld AO, in support of which the ledger account of the same was furnished and was pleaded that in any case, a sum of Rs. 1 lakh is to be deleted forthwith. It was pleaded that Mrs Chandana Poddar , being wife of director, was involved in business for the past several years and accordingly had exposure in the assessee’s line of business . It was stated that educational qualification was not the sole determinative factor of payment of salary / professional charges but the ability, experience and amount of time and effort put in by a person are more determinative of such payment. It was also pleaded that the onus of proof u/s 40A(2) of the Act is on the ld AO , who is required to prove that the sums paid to the relative was in excess of fair market value which was not done by the ld AO by bringing any material on record. With regard to the nature of services rendered by Mrs Chandana Poddar , apart from what has been stated before the ld AO, the assessee replied that the engineers would inform and educate her on the various alternatives available to the company for installation, operation and maintenance of towers. She in turn, would weigh the various alternatives and advise the engineers on cost efficiency matters, co-ordination with engineers is important to ensure cost efficient installation of towers and also to maximize the satisfaction of the service providers. The assessee further stated that Mrs Chandana Poddar was hired to provide a link between the telecom service providers and the engineers, who was to convey the requirements of the service providers to the engineers who would then develop towers based on their needs and specifications. It was further stated that both the salary and professional fees were made by cheque and were duly subjected to deduction of tax at source and was offered to tax in her hands. Hence the disallowance of the said expenditure in the hands of the assessee company would amount to

7 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 double taxation of the same amount which is not permissible in law. Reliance was also placed on certain judgements in support of its propositions. The ld CIT(A) upheld the disallowance by observing as under :- “6.3. The A.O. has not taken any statement of Mrs Poddar to prove his case. Having regard to apparent lack of qualifications, skill and matching services on the part of Mrs Poddar I hold the A.O’s action as reasonable and correct in law. The ground, therefore, not allowed.”

4.3. Aggrieved, the assessee is in appeal before us on the following grounds :- “3a) That the Ld. A.O. disallowed sums of Rs.3,00,000/- and Rs. 10,00,000/-, aggregating to Rs.13,00,000/- on account of salary and professional fees respectively paid to Mrs. Chandana Poddar, one of the relatives of the director, u/s. 40A(2) of the Act and the Ld. C.I.T.(A) upheld the same without considering the objection made in the written submission that actually the professional fees paid to her amounted to Rs.9,00,000/- and hence the excess addition of Rs.1,00,000/- was uncalled for and needs to be deleted at the outset. (b) That the Ld. C.I.T.(A) failed to appreciate that onus of proof u/s. 40A(2) of the Act is on the A.O. who is required to prove by bringing on record cogent material that the sums paid to the relative was in excess of fair market value and that not being done, the disallowance/addition of Rs.12,00,000/- upheld by him on that score was capricious, unjustified and bad in law. (c) That the Ld. C.I.T.(A) fell in error in having upheld the disallowance of Rs.l2,00,000/- made on the specious ground that the payments were made without any proven service with reference to professional qualification and experience in spite of the fact that Mrs. Poddar was involved in the assessee's business for the past several years, she had exposure in the assessee's line of business and further educational qualification is not the sole determinative factor rather the ability, experience and efforts put in by a person are more determinative for such payment. (d) That the Ld. C.I.T.(A) further erred in having endorsed the view of the Ld. A.O. that the payment made to Mrs. Poddar was not for business purposes and hence not allowable u/s. 37 of the Act without considering the fact that the payments were made as a matter of commercial expediency and the matter should be judged from the view point of a prudent businessman and not from the A.O’s own view point and moreover the genuineness of the payment was not doubted. (e) That further the Ld. C.I.T.(A) fell in error while upholding the disallowance of Rs.12,00,000/- in not having considered the admitted position in law that to remove the doubt about payment, the payee should be summoned to ascertain the services rendered by him/her, whereas he himself has recorded his finding at para 6.3 of the order to the effect that "the A.O. has not taken any statement of Mrs. Poddar to prove his case.". (f) That without any prejudice to the above, The Ld. C.I.T.(A) failed to consider that the payment to Mrs. Poddar was made by cheque, TDS effected therefrom, receipt was offered to tax in the hands of the payee and hence the disallowance made in the hands of the assessee has lead to double taxation of the same amount, which is not permissible in law.”

4.4. The ld AR reiterated the arguments made before the lower authorities. He argued that if the ld AO had any doubt with regard to the capacity of Mrs Chandana Poddar to render the requisite services as stated supra justifying the salary and professional fees payment to

8 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 her, he could have issued summons u/s 131 of the Act to her and recorded statement from her, which was admittedly not done by the ld AO. He placed reliance on the following decisions :- (a) Decision of Hon’ble Allahabad High Court in the case of Abbas Wazir (P) Ltd vs CIT reported in 265 ITR 77 (All)

(b) Decision of Hon’ble Madras High Court in the case of CIT vs Nagesh Cine Enterprises reported in 232 ITR 750 (Mad)

He further argued that the revenue had made this addition purely based on surmise and conjecture. The law is very well settled as on date that no additions could be made on surmise and conjecture. Reliance in this regard was placed on the following decisions :-

(a) Decision of Hon’ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd vs CIT reported in 26 ITR 775 (SC)

(b) Decision of Hon’ble Supreme Court in the case of Lalchand Bhagat Ambica Ram vs CIT reported in 37 ITR 288 (SC)

4.5. In response to this, the ld DR argued that the work that is expected of Mrs Chandana Poddar is purely technical in nature which could not be rendered without possessing the requisite technical qualifications. Hence, in the absence of filing details of educational qualification of Mrs Chandana Poddar , the payments made to her would not be allowable as business expenditure.

4.6. We have heard the rival submissions and perused the materials available on record. We find that the assessee had taken adequate precaution in providing the nature of services rendered by Mrs Chandana Poddar for and on behalf of the company in detail. None of these services purported to be rendered by Mrs Chandana Poddar were disputed by the revenue before us except merely harping only on the technical educational qualification as a pre-requisite for rendering the said services. We find that business expediency in the subject mentioned transaction is proved by engaging a liason officer who is a trusted person of the management more especially in view of the fact that the stakes involved in the telecom project would be very huge, which requires co-ordination with various engineers and advising on cost efficient measures. For rendering these services at least, no technical

9 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 qualification is required as the same could be done by experience. Often it could be noticed that the business acumen is developed by a person not by educational qualification but by his / her sheer native intelligence and presence of mind which does not come from education alone. We also find that the assessee had made total payments only to the extent of Rs 12 lakhs to Mrs Chandana Poddar as against Rs 13 lakhs disallowed by the revenue, which was not rectified even when specifically brought to their notice. We find that in the instant case, the assessee had duly provided the complete details of nature of services rendered by Mrs Chandana Poddar. If the revenue had got any apprehension regarding the same, nothing prevented them from questioning her by recording a statement by resorting to process of issuing summons procedure contemplated u/s 131 of the Act. In the absence of bringing any other evidence to the contrary, no disallowance could be made in the facts and circumstances of the case.

4.6.1. Moreover, we find that the disallowance has been made by the ld AO by invoking the provisions of section 40A(2) of the Act. We have already held in the previous ground that for the purpose of invoking the provisions of section 40A(2) of the Act, the onus is on the ld AO to bring on record the comparable cases to prove that the payments made by the assessee is in excess of fair market value and hence the same in his opinion is found to be excessive or unreasonable. In the instant case, nothing has been brought on record to that effect and the ld AO had merely disallowed the entire expenditure as not meant for the purpose of business. If that be so, he ought not to have invoked the provisions of section 40A(2) of the Act. We also find that the ld AO had without prejudice had also tried to disallow the said expenditure u/s. 37 of the act as not meant for the purpose of business. We find that this action of the ld AO is purely without any basis and is merely based on surmise and conjecture. It is very well settled that no addition / disallowance could be made based on surmise and conjecture as per the decisions rightly relied upon by the ld AR. The principles enunciated in those decisions are not reiterated herein for the sake of brevity. We find that the ld AO had not made out a case for making disallowance under the provisions of the Act. The test of commercial expediency has to be looked into from the point of view of businessman and not from the point of view of the revenue. Reliance in this regard is placed on the decisions of the Hon’ble Supreme Court in the case of CIT vs Dhanraj Girji Raja Narasingherji (1973) 91 ITR 544 (SC) and CIT vs Walchand and Co. (1967) 65 ITR

10 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 381 (SC). We hold that just because the payment is made to relative of the director , the principles of the said judgement on business expediency does not get disturbed and it practically makes no difference whether the expenditure is incurred towards relatives or non –relatives as long as the expenditure per se is incurred wholly and exclusively for the purpose of business.

4.6.2. With regard to another argument advanced by the ld AR that the subject mentioned payments towards salary and professional services had been duly subjected to deduction of tax at source and have been duly offered to tax in the personal returns of Mrs Chandana Poddar and hence any disallowance made in the hands of the assessee company (payer) would result in double addition. We respectfully beg to differ from this argument of the ld AR in as much as if this argument is to be accepted, then the very purpose of provisions of section 40A(2) of the Act would get defeated. With regard to allowability of expenses u/s 37 of the Act, the primary onus is on the assessee to prove that the said expenditure has been wholly and exclusively incurred for the purpose of its business and in such a scenario, it really does not matter, whether the recipient had paid taxes on the same. If double taxation is to be suffered in such a case, by a disallowance in the hands of the payer, then it is only the case where the assessee had not conclusively proved the incurrence of the expenditure to be wholly and exclusively for the purpose of business. It is well settled that the provisions of the Act are to be interpreted in a manner that makes conducive to its applicability and not to frustrate the same. Hence this argument of the assessee is dismissed.

4.6.3. We find that the decision relied upon by the ld AR on the decision of Hon’ble Madras High Court in the case of CIT vs Nagesh Cine Enterprises reported in 232 ITR 750 (Mad) wherein the facts and findings given thereon were as under:- The assessee is a partnership firm. The assessee entered into an agreement with Mr Nagesh dated 20.4.1971. According to the said agreement, the firm was to provide a secretary to Mr Nagesh. The firm is doing business in film production, distribution and exploitation of talents of cine stars. Accordingly, the firm appointed Mrs. Regina Nagesh (wife of Mr Nagesh) as the secretary and paid her a salary of Rs. 1,520/- per month. According to the department, the agreement was only a device to divert the income of Mr Nagesh so as to avoid higher tax liability. But this was not

11 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 established by the department. On the given facts, the Hon’ble Court observed as below:- “The assessee produced the agreement dated April 20, 1971 , before the Income-Tax Officer, and no further evidence was produced to establish that the secretary rendered any service to mr Nagesh. The Tribunal pointed out that if there is a doubt in the mind of the Department with regard to the services rendered by the secretary to Mr Nagesh, the Department could have summoned the secretary, to ascertain the fact whether any service was rendered by her. The fact remains that the agreement dated April 20, 1971, and the letter dated January 20, 1976, were not doubted by the Department. When the secretary was appointed in pursuance of the agreement and when there is evidence on record to show that services were rendered by Mrs Regina Nagesh to Mr Nagesh, there cannot be any impediment for the allowance of the salary payment made by the firm to the secretary.”

We find that the facts of the instant case also fall on the same footing as the facts before the Hon’ble Madras High Court stated supra.

4.6.4. We also find that the decision relied upon by the ld AR on the decision of the Hon’ble Allahabad High Court in the case of Abbas Wazir (P) Ltd vs CIT reported in 265 ITR 77 (All) wherein it was held that :- “Whenever a claim is made by the assessee before the Income-Tax Officer for allowing an expenditure as a legitimate business expenditure, the approach of the Income-Tax Officer (or other income-tax authority) has to be that he has to look at the matter from the view point of a prudent businessman, and not from his own view point , and then ascertain whether the said expenditure has been incurred for the purpose of commercial expediency. When a company pays a higher salary to the directors or the managers or other officers or employees as a matter of commercial expediency, it is not for the Income – Tax Officer to say that in his opinion the said salary should not have been paid. A company may decide to pay a higher remuneration to its directors, officers or employees so as to encourage them to work hard, expand the business or for a host of other commercial considerations and the matter has to be looked at from the view point of the company.”

We find that the facts of the instant case also fall on the same footing as the facts before the Hon’ble Allahabad High Court stated supra.

4.6.5 In view of the aforesaid facts and findings and in the facts and circumstances of the case and respectfully following the judicial precedents relied upon hereinabove, we direct the ld AO to delete the disallowance made in the sum of Rs. 13,00,000/- u/s 40A(2) / 37 of the Act. Accordingly, the Grounds 3(a) to 3(f) raised by the assessee are allowed.

12 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 5. The last issue to be decided in this appeal is as to whether the ld CIT(A) is justified in upholding the disallowance of interest paid on borrowed funds on a proportionate basis in the sum of Rs. 5,34,24,658/- in the facts and circumstances of the case.

5.1. The brief facts of this issue is that the assessee borrowed interest bearing loan of Rs. 250 crores on 31.3.2011 from SREI Infrastructure Finance Ltd which was repaid during the year under appeal. The assessee paid interest on such outstanding loan to the tune of Rs. 5,34,24,658/-. The assessee was asked to show cause to justify the allowability of interest payment on borrowed funds by proving as to how the borrowed funds were utilized by the assessee for the purpose of its business. The assessee also brought to the notice of the ld AO that loan was borrowed from SREI Infrastructure Finance Ltd and not from SREI Equipment Finance Pvt Ltd as wrongly stated by the ld AO in the show cause notice and accordingly it was stated that no interest was paid to the party mentioned by the ld AO. The ld AO observed in this regard that from the details submitted by the assessee clearly revealed that the assessee had not utilized any amount of loan out of said pre-existed loan of Rs 250 crores (before 1.4.2011) and refunded the entire principal amount on 14.6.2011 and then the interest of RS. 5,34,24,658/- has been paid on 24.8.2011 for the period 1.4.2011 to 14.6.2011. He observed that during the period 1.4.2011 to 13.6.2011, the assessee had purchased solar equipments of Rs. 3,77,35,150/- and sold said equipments at RS. 4,88,45,280/- and there was no opening stock and closing stock was valued at cost price at Rs. 16,47,300/- as on 31.3.2012. Accordingly he concluded that no loan amount could have been utilized for opening stock of traded items and hence proceeded to disallow the entire interest paid of Rs. 5,34,24,658/-.

5.2. Before the ld CIT(A), the assessee replied that the loan amount of Rs. 250 crores borrowed from SREI Infrastructure Finance Ltd on 31.3.2011. The entire loan received was forwarded to M/s Confident Solar P Ltd, which is a subsidiary company of the assessee company, keeping in view the strategic business purposes to strengthen and promote its existing business. The assessee stated that this lending to subsidiary company was made as a measure of commercial expediency and accordingly placed reliance on the decision of the Hon’ble Supreme Court in the case of S.A.Builders Ltd vs CIT reported in 288 ITR 1 (SC). Accordingly, it was pleaded that the interest paid on borrowed funds is allowable as

13 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 deduction u/s 36(1)(iii) of the Act. It was also stated that M/s Confident Solar Pvt Ltd in turn had used the sums for its business purposes by investing the same in their inventories by way of investment in shares of Viom Networks Ltd which is also engaged in the business of deployment and commissioning of telecommunication towers across India to telecom service providers. The assessee is engaged in installation, operation and maintenance of network towers. Thus with a view to expand its business and acquire a controlling interest in Viom Networks, investment therein was made through its sister concern namely Confident Solar Pvt Ltd. Accordingly it was pleaded that by placing reliance on the principles enunciated in the Hon’ble Supreme Court’s decision in S.A.Builders Ltd case supra , the interest expenses incurred by the assessee should be allowed as deduction. Apart from this, the assessee also placed reliance on the decisions of the Hon’ble Madras High Court in the case of CIT vs RPG Transmissions Ltd reported in 359 ITR 673 (Mad) ; CIT vs Spencers and Co. Ltd (No. 3) reported in 359 ITR 644 (Mad) and CIT vs Spencers and Co. Ltd (No. 2) reported in 359 ITR 630 (Mad). The assessee also drew the attention of Clause 17 of the Memorandum of Association of the subsidiary company M/s Confident Solar Pvt Ltd which is reproduced below:- “17. To establish, or concur in establishing or promoting any company or companies for the purpose of acquiring all or any of the undertakings, business, rights, liberties and properties of the company or for any other purpose which may seem directly or indirectly calculated to benefit the company and to place or guarantee the placing of, underwrite, subscribe for or otherwise acquire all or any part of the shares, debentures, or other securities of any such other company or companies and to subsidise or otherwise assist any such company or companies either out of its own funds or out of funds that it might borrow by issue of debentures or from bankers or otherwise.”

It was argued that the sister concern was empowered to extend financial assistance to companies out of borrowed funds for the purpose of acquiring the business / undertaking / properties of the assisted company. In pursuance of the aforesaid object, the assessee invested the borrowed funds in shares of Viom Networks Ltd. Accordingly, it was submitted that shares in Viom Networks Ltd were acquired in ordinary course of business and accordingly the same was correctly disclosed as stock in trade in the Balance sheet of the said company. It was further argued that it is now well settled that managing the business of companies by acquiring controlling interest therein constitutes business activity. Thus, the investment made by M/s Confident Solar Pvt Ltd in Viom Networks Ltd with a view to acquire a controlling interest therein constitutes business and accordingly the same

14 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 can be held to be a profession within the meaning of section 2(36) of the Act. Reliance in this regard was placed on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) . In the light of all these submissions together with the various case laws relied upon, the assessee pleaded that the interest paid to the tune of Rs. 5,34,24,658/- is squarely allowable as deduction. The ld CIT(A) however did not appreciate these contentions and upheld the action of the ld AO. Aggrieved, the assessee is in appeal before us on the following grounds :- “(4a) That the Ld. C.I.T.(A) erred in upholding the disallowance/addition of Rs.5,34,24,658/- being the interest paid on a pre-existing loan of Rs.250 crores on the purported ground that the loan was not utilized for the purpose of assessee's business and hence not allowable u/s. 36(1)(iii) of the Act. (b) That the Ld. C.I.T.(A) misguided himself in having alleged that there was hardly any details of the possible utilization of the loan of Rs.250 crores in spite of the fact that the impugned loan was forwarded as a loan to the sister concern M/s. Confident Solar Pvt. Ltd., which in turn invested in the shares of M/s. Viom Networks Ltd. engaged in the same line of business, to acquire controlling interest in that company and hence utilization of the borrowed fund was for business purposes. (c) That the action of the Ld. C.I.T.(A) in having denied interest expenditure as allowable business expenditure u/s. 36(1)(iii) is against the guidelines specified by the Hon'ble Apex Court in the case of S.A. Builders Ltd. (288 ITR 01) that the borrowed amount was not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant and what is relevant is what the sister concern did with that money and in the instant case, the money was invested to acquire controlling interest of M/s. Viom Networks Ltd. (d) That without any prejudice to the above, both the Ld. revenue authorities erred in not even considering that if acquiring of the controlling interest. by the sister concern by utilizing the loan forwarded by the assessee-company is not held to be for business purposes, then interest expenditure is otherwise allowable as business expenditure u/s. 37(1) of the Act, because the borrowed funds were used by the sister concern for the purpose of their business.”

5.3. The ld AR argued by reiterating the arguments made before the lower authorities and placed a written submission in this regard. The ld AR also drew the attention of the Bench to operative portion of various decisions relied upon by him. In response to this, the ld DR vehemently relied on the orders of the lower authorities.

5.4. We have heard the rival submissions and perused the materials available on record. We find that the assessee borrowed interest bearing loan of Rs. 250 crores from SREI Infrastructure Finance Ltd and advanced the same to M/s Confident Solar Pvt Ltd, a subsidiary of assessee company. According to the Balance Sheet of the subsidiary company for financial year 2011-12, the said interest free loan fund received from the assessee

15 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 company was shown as inventories, which constituted shares in Viom Networks Ltd, which is engaged in the similar line of business. Thus with a view to expand its business and acquire a controlling interest in Viom Networks Ltd, the assessee made investment under capital account through its subsidiary company, M/s Confident Solar Pvt Ltd. We find that the revenue had alleged that the assessee company had no business worth mentioning and hence no business was served by advancing interest free loan to its subsidiary company. Hence on the above facts, a question may arise whether such utilization of the loan can be held to be on account of commercial expediency. The answer to this question would resolve the dispute before us. We find that the Hon’ble Apex Court in the case of S.A.Builders Ltd vs CIT reported in 288 ITR 1 (SC) had addressed this aspect wherein it was held as under :- 20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to section 37 of the Act will also be applicable to section 36(1)(iii) because in section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton v. British Insulated & Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton’s case, (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal & Co. [1960] 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other income-tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency. 26. No doubt as held in Madhav Prasad Jatia’s case (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad Jatia’s case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee’s deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in

16 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jatia’s case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 32. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 1 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd.’s case (supra) that the interest, was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 33. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT [1995] 215 ITR 5851 also does not appear to be correct. 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 2 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), 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. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious

17 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 36. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 37. We also make it clear that we are not setting aside the order of the Tribunal or other income-tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds.

5.4.1. We find that the Hon’ble Madras High Court in the case of CIT vs RPG Transmissions Ltd reported in 359 TIR 673 (Mad) had observed that the Commissioner (Appeals) and the Tribunal found that the investments made in shares by the assessee by utilizing borrowed capital were for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under section 36(1)(iii). The revenue did not adduce any evidence to show that the borrowed capital was utilized by the assessee for non-business purposes.

5.4.2. We also find from Clause 17 of Memorandum of Association of M/s Confident Solar Pvt Ltd as reproduced supra that it was empowered to extend financial assistance to companies out of borrowed funds for the purpose of acquiring the business / undertaking properties of the assisted company. In pursuance of the aforesaid object, the assessee company invested the borrowed funds through its sister concern in the shares of Viom Networks P Ltd. Therefore, the shares in Viom Networks P Ltd were acquired in ordinary course of business and accordingly we find that the same was correctly disclosed as stock in trade in the balance sheet. The assessee’s reliance in this regard on the decision of the Hon’ble Calcutta High Court in the case of CIT vs Rajeeva Lochan Kanoria reported in 208 ITR 616 (Cal) is well founded. We find that the ld AR also placed reliance on the recent decision of co-ordinate bench of Delhi Tribunal in the case of ITO vs First American Securities Pvt Ltd in ITA No. 4768/Del/2012 dated 11.1.2016 . We find that this tribunal after referring to several judicial pronouncements on the issue concluded as under :-

“We also find that it is very specifically mentioned in the objects of the MOU that assessee company is to make strategic investments in the business entities and accordingly, it has made strategic investment of Rs. 57,80,03,400/- in Bharti AXA Insurance Co. Ltd. Therefore, we find that the interest expenditure incurred by the assessee is for business purposes. And also, this is acknowledged by the AO himself in the assessment order wherein he has stated that

18 ITA No.1301/Kol/2015 Divakar Solar System Ltd., AY 2012-13 assessee has “parked its investible funds in the equity shares of a closely associated concern”. Hence, we find that there was no basis for treating the interest expenditure claimed by the assessee as capital expenditure. 8.1. Our above view is also fortified by the decision of Commissioner of Income Tax, Panaji Gao vs Phil Corpn Ltd in (2011) 14 taxmann.com 58 (Bom) ………”

5.4.3. We also find that the decision of the Hon’ble Supreme Court in the case of S.A.Builders Ltd vs CIT reported supra had been subsequently approved by another decision of the Hon’ble Supreme Court in the case of Hero Cycles P Ltd vs CIT reported in (2015) 379 ITR 347 (SC) .

5.4.4. We find that the test of commercial expediency is proved in the instant case beyond doubt and hence the interest paid on borrowed capital is to be allowed. We find that all the aforesaid judgements relied upon hereinabove apply to the facts of the instant case and hence we hold that the interest paid on borrowed funds in the sum of Rs. 5,34,24,658/- would be squarely allowable as deduction u/s 36(1)(iii) of the Act. Accordingly, the Grounds 4(a) to 4(d) raised by the assessee are allowed.

Order pronounced in the open court on 16.12.2016 Sd/- Sd/- (S. S. Viswanethra Ravi) (M. Balaganesh) Judicial Member Accountant Member Dated : 16th December, 2016

Jd.(Sr.P.S.) Copy of the order forwarded to: APPELLANT – Shri Bharat Jain, C/o, Barik & Associates, 12, 1. Chowringhee Square , Kolkata-700 001. Respondent –ITO, Ward-8(1), Kolkata. 2 The CIT(A), Kolkata 3. 4. CIT , Kolkata 5. DR, Kolkata Benches, Kolkata /True Copy, By order,

Asstt. Registrar.