APLAB LTD,THANE vs. ACIT RG 1, THANE

During hearing, the crux of argument advanced by the ld. counsel for the assessee is that the impugned issue is covered by the decision of the Tribunal in the case of assessee itself for assessment year 2007-08 (ITA No.6931/Mum/2010) and another decision of the Tribunal for A.Y. 2006-07 (ITA No.3313/Mum/2010). This factual matrix was consented to be correct by the ld. DR, Shri Aarsi Prasad.

2.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company is in the business of manufacturing, assembling and trading in power equipments, electronic equipments, etc. The ld. Assessing Officer disallowed Rs.22,47,100/- u/s 36(1)(iii) and assessed the income at Rs.8,09,20,910/-. On appeal, before the ld. Commissioner of Income Tax (Appeals), the addition was affirmed, against which the assessee is in further appeal before this Tribunal. It is noted that for A.Y. 2006-07, which is the lead year, identical addition was made by the ld. Assessing Officer and finally, it travelled to the Tribunal, wherein, vide order dated 23/12/2011 (ITA No.3313/Mum/2010), the issue was decided in favour of the assessee. The relevant portion of the same is reproduced hereunder for ready reference:-

We have heard the rival submissions and perused the relevant material on record. The learned A.R. has heavily relied on the judgment of the Hon’ble Supreme Court in the case of S.A.Builders Ltd.Vs. CIT(A) & Anr. [(2007) 288 ITR 1 (SC)] to buttress his submission that the interest be allowed as deduction as the advance was given to its subsidiary companies. However no material was placed on record to indicate as to how such amount was utilized by the sister concerns.

The assessee in the case before the Hon’ble Summit court in S.A.Builders Ltd. (supra) transferred substantial amount to its subsidiary company out of its cash credit account in which there was a huge debit balance. The AO held that the assessee had diverted its borrowed funds to a sister concern without charging any interest. Proportionate interest relating to the said amount, out of the total interest paid by that assessee to the Bank, was disallowed. The CIT(A) allowed partial relief but the Tribunal restored the action of the AO in sustaining complete disallowance of interest. The High Court dismissed the appeal filed by the assessee. When the matter came up before the Hon’ble Supreme Court, the assessee contended that interest was to be allowed in full as making of investment in subsidiary company is a business purpose. The Hon’ble Supreme Court appreciated the ambit of the expression “for the purpose of business” used in section 36(1)(iii) and held that the same should not be confused with the narrower expression “for the purpose of earning income, profits or gains”. In the light of such observation, the Hon’ble Apex Court remitted the matter to the Tribunal for a fresh decision by considering deductibility or otherwise of interest after examining whether the funds advanced by the assessee holding company to its subsidiary company were used by the subsidiary company for some business purpose or not.

From the above judgment, it can be noticed that the ratio decidendi of the judgment is that interest on borrowed loans advanced to a sister concern without interest is allowable as deduction, if there is a commercial expediency in advancing such loan. To decide the commercial expediency in the hands of holding company, it is vital to examine the purpose for which the assessee advanced the money to the sister concern and what the sister concern did with this money. Thus, it is obvious that when a holding company has advanced borrowed money to its subsidiary, which is used by the subsidiary for some business purpose, there cannot be denial of deduction on account of interest.

The Hon’ble Supreme Court, in this case, after laying down the broad parameters helpful in taking decision about the deductibility or otherwise of interest in the hands of the holding company, being the purpose for which the funds were ultimately used by the subsidiary company, remitted the matter to the file of the Tribunal and not granted deduction at its own. It is not crux of the judgment that in each and every case of the holding company advancing loan to the sister concern, entitles it to deduction of interest paid on the funds borrowed and in turn advanced to its subsidiary company. In other words, there are two questions which require answers. First is the advancing of loan to the subsidiary company and second is the utilization of such funds by the subsidiary company. The crucial criteria for deciding the second question is the commercial expediency, that is, “the user of such funds by the subsidiary for business purpose”. It is only when answer to both the questions is in affirmative that the holding company qualifies for deduction of interest paid. If answer to the first question is in positive, the stage of finding out the answer to the second question comes. Only when the answer to the first as well as the second questions is given in positive that the ratio of this judgment applies and the holding company becomes entitled to claim deduction of interest.

It is imperative to note that the Hon’ble Supreme Court, on noting that the funds were advanced as loan by the holding company to its subsidiary company, being the answer to the first question in positive, did not straightway proceed to allow deduction of interest. As the answer to the second question was not available from facts on record, it restored the matter to the tribunal for examining it and then taking final decision. That is why it categorically observed : “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”. Thereafter, it has been observed that : “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”. The gist of the judgment for allowing deduction on account of interest in the hands of holding company is the user of funds by the subsidiary “for some business purpose”. Unless “business purpose” is proved, the deduction cannot be allowed. That appears to be the sole reason for the Hon’ble Supreme Court to remit the matter to the file of the Tribunal for considering the commercial expediency or business purpose in the hands of the subsidiary company. If the mere fact of advancing loan by holding company to subsidiary company had been sufficient enough for granting deduction of interest to the holding company, there was no need to restore the matter. The Hon’ble Supreme Court, in such a situation, would have itself granted deduction of interest in the hands of holding company.

From the above judgment, it is manifest that the assessee has to prove the commercial expediency for advancing the loans to its subsidiary company. The onus is on the assessee to prove the business usefulness. It is the primary duty of the assessee, on inquiry by the AO, to lead evidence demonstrating the user of funds by the subsidiary for business purpose. Only when such initial burden is discharged, that it becomes incumbent upon the AO to accept or reject such evidence with cogent reasons. Principal duty is always of the assessee. Adverting to the facts of the instant case, it is observed that the assessee failed to produce any evidence either before the AO or the ld. CIT(A) to prove the commercial expediency by demonstrating as to how the funds received by the subsidiary from the assessee company were utilized. Position is same before the Tribunal as well since there is no documentary proof to establish the “commercial expediency”. The situation would have been different if the assessee had placed sufficient material in support of its claim of business purpose in advancing the amount to its sister concern by properly documenting its claim and the AO would have failed to controvert such material. As the assessee failed to substantiate its claim in this regard by any material or evidence, we are of the considered view that the assessee does not deserve to succeed on this issue.

Now we will come to the second contention raised by the learned A.R. to the effect that the assessee had sufficient own funds for the purpose of making advance to the sister concerns. The assessee’s balance sheet as on 31.3.2006 has been placed before us which shows that the amount of shareholders fund at Rs.27,52,14,000 comprising of share capital of Rs.5,00,00,000 and reserves and surplus of Rs 22,52,14,000. As against this, the assessee has advanced only a sum of Rs 44.71 lakh to its sister concerns without interest.

The Hon’ble jurisdictional High Court in the case of CIT vs. Reliance Utilities & Power Ltd. [(2009) 313 ITR 340 (Bom)] considered almost similar facts. In that case the AO recorded a finding that a sum of Rs.213 crores was invested by the assessee out of their own funds and Rs.1.74 crores out of borrowed funds. Accordingly, disallowance of interest was made to the tune of Rs.2.40 crores. It was argued on behalf of the assessee that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crores and the assessee had also raised capital of Rs.7.90 crores, apart from receiving interest free deposit of Rs.10.03 crores. It was, therefore, submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got convinced with the assessee’s submissions and deleted the addition. Before the Tribunal, it was contended on behalf of the Revenue that the shareholders’ funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for. The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its owns for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon’ble jurisdictional High Court, it was contended by the Department that the shareholders’ funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon’ble High Court observed that : “In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders’ fund to the tune of over Rs.172 crores was utilized for the purpose of fixed assets in terms of the balance-sheet as on March 31, 1999, is fallacious.” In upholding the order of the Tribunal, the Hon’ble High Court held that : “If there be interest free funds available to an assessee sufficient to meet its investment and at the same time the assessee had raised a loan, it can be presumed that the investments were from the interest free funds available”. Thereafter, the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT [(1997) 224 ITR 627 (SC)] and also the judgment of the Hon’ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT [(1981) 134 ITR 219 (Cal)] were considered. It was finally concluded that : “The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment”. Consequently the interest was held to be deductible in full.

From the above judgment, it is manifest that there can be no presumption that the shareholders’ fund of a company is utilized for the purchase of fixed assets. If the assessee has interest free funds as well as interest bearing funds at its disposal, then the presumption would be that investments were made from interest fee funds at the disposal of the assessee. The facts of the instant case abundantly show that the shareholders fund is much more than the amount advanced by the assessee without any interest to its sister concerns. Respectfully following the precedent, we hold that the ld. CIT(A) was not justified in sustaining addition under the present circumstances. We, therefore, order for the deletion of addition. Ground no.5 is allowed.”