E-CITY INVESTMENTS & HOLDINGS CO. PVT. LTD.,MUMBAI vs. D.C.I.T. RG. 8(1) (OSD), MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 16/09/2011 of the ld. First Appellate Authority, Mumbai. The only ground raised in this appeal pertains to upholding

5 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 Rs.6,63,78,465/- u/s 36(1)(iii) of the Act on the ground that no business interest of the assessee has been served by granting interest free loans to its subsidiaries.

2.3. On appeal, before the ld. Commissioner of Income Tax (Appeals), the explanation of the assessee could not find favour and thus the stand taken in the assessment order was affirmed. The relevant finding contained in the impugned order is reproduced hereunder for ready reference:-

“ 2.1.1 In the case, during the course assessment proceedings, the Ld. AO asked the appellant to explain reasons for revising the return of income and why interest expenditure should not be disallowed u/s. 36(1) (ii). In reply, the appellant has revised the return of income to withdraw interest wrongly disallowed in the original return of income. The appellant further submitted that the share application money /loans to subsidiary out of commercial expediency. The subsidiary has used these funds for its business. Hence, it use of funds expediency. The subsidiary has used these funds for its business. Hence, is use of funds by the appellant for its own business and interest thereon is allowable. This was examined by the Hon'bIe Supreme Court in the case of S.A. Builders Ltd vs CIT- 288 ITR 1 and was first upheld by ITAT Mumbai in the case of Indian Hotels Ltd - 276 ITR and the ratio judgement in both cases is same. In both cases, it is held that as the company advances borrowed money to its subsidiary and same is used by the subsidiary for some business purpose the appellant will be entitled to deduction of interest on borrowed funds. The Ld. AO observed that the appellant is engaged in the business of investments. The borrowed funds have been used for the purpose of granting interest free loans and advance share

6 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 application money to various companies including subsidiary companies including subsidiary companies. Accordingly, the interest has been utilized not for the purpose of business of the appellant and total income of interest claimed is Rs.6,79,03,542/-. The Ld. AO placed reliance on the decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd Vs. CIT ( 2007) 288 ITR 1 (SC). The Ld. AO further held that as per appellant's own working in original return of income, it comes to Rs. 6,79,03,542/ - and while working out the above disallowance, the appellant company has disallowed total interest claimed in the P&L Account in computing of income and credited the interest received at Rs.15,25,077/- pertaining to the funds invested for earning interest income including interest on LT. refund. The appellant has taken borrowed funds @14.5% and given on interest to one party at 15% and second party at 12% and to 3rd party at 14.5%. From three parties and interest on income tax refunds, total interest received was Rs.15,25,077 1 -. The Ld. AO asked the appellant to demonstrate the utilization of funds taken on loan. Then the Ld. AO found that out of current years loan only Rs. 75.00 lakh on 08.06.2007 and Rs. 30.00 lakh on s13.06.2007 was utilized for investment towards earning interest income at 15% and 12% respectively. The Ld. AO further observed that the appellant has also given loan @ 14.5% to Shree Vijayraj on21.09.2007 and 24.09.2007 at Rs. 25,00,000/- & Rs.75,00,000/ - respectively and the rest of the funds of Rs.36.00 crore was given interest free to the subsidiaries and prior to giving of loan to above parties, it was also" given to subsidiaries only for their own use for share application money or for other purpose. The Ld. AO further held that similar is the position of last years interest bearing fund given to subsidiaries.

7 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 2.1.2. The Ld. AO further held that interest bearing funds were not given to subsidiaries, appellant company has earned interest @15% on all funds and in this way,5% interest has been earned. Appellant has borrowed funds@14.5% and in this way, there was occurred income to the company and there would have been profit to the company and not loss. The appellant further submitted that no business interest of the company has been served by granting interest free loans to subsidiaries. The Id. AO therefore disallowed appellant's claim of interest at Rs.6,79,03,542 - 15,25,077 = Rs.6,63,78,465/ - u/ s. 36(1)(iii) of the Act as was rightly done by the appellant in the original return of income filed by the appellant.

2.2 Appellant's Contentions and Submissions:

2.2.1 During the course of assessment proceedings, the Ld. AR of the appellant submitted that the assessee has advanced interest free loans and share application money to its subsidiaries during the year and earlier years. The appellant has deep interest in the business of subsidiaries and other associate concerns. The share application money/loans advanced to subsidiary out of commercial expediency. The subsidiary has used these funds for its business. Hence, it is use of funds by the appellant for its own business and interest thereon is allowable. The Ld. AR of the appellant further submitted that this proposition was examined by the Supreme Court in the case of S. A. Builders Ltd (288 ITR 1) and was first held by IT AT Mumbai in the case of Indian Hotels Ltd (276 ITR 104) and the ratio of judgment in both cases is same. In both cases it is held that as the holding company has deep interest in the business of its subsidiaries, hence if holding company advances borrowed money to its subsidiary and same is used

8 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 by the subsidiary for some business purpose the assessee will be entitled to deduction of interest on borrowed funds. The appellant further submitted that the details of Loans and Advances along with share holding of assessee company in these companies is as under:

Name of the Company Amount(Rs.) % age of holding 31.03.2008 Inter Corporate Deposit � Fun Multiplex (P) Ltd. 33,51,83,379 99.94% � Shree Vijayraj Entertainment & 1,07,53,801 Interest Charged Software (P.) Ltd. � Suncity Projects (P.) Ltd. 5,28,689 Interest Charged Share Application money Fun Multiplex (P.) Ltd. 18,77,00,000 99.94% E City Reality Holdings P. Ltd. 44,75,00,000 99.00% E city Exhibition Holding P. Ltd. 1,45,50,000 99.79% E City Films (India) Pvt. Ltd. 5,32,84,430 50.00% E City Publishing & Distributing (India) Pvt. 30,50,000 50.00% Ltd. 2.2.2. The appellant further submitted that the appellant has itself promoted and owned these companies and is a holding company or can be called a parent company and therefore it has deep interest in the business of its subsidiaries situated at different places all over India. Further, the assessee being a holding company has deep interest in the business of subsidiaries and these subsidiaries have used these loans/ advances for their own business and not for any non-business purpose and therefore has to be considered as use of funds for its own business out of commercial expediency and therefore even if the borrowed funds are utilized for such advances the assessee is entitled to deduction of interest. The Ld. AR of the appellant further submitted that where a loan is advanced to a subsidiary/sister concern it stands on a different footing than to its directors or their close relatives. In the case of a hundred percent, subsidiary of the company, the profit of the subsidiary belongs to the company and if a higher rate of interest is charged this would go to reduce the profits. If no interest is charged the same amount would be returned in the shape of profits. This aspect has to be kept in view while determining the question whether advancement of a loan is a 9 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 measure of business expediency. The distinction has to be kept in mind between a case where the loan is used for the purpose of the business and a case of the loan misutilised by giving it interest free or at a nominal interest to directors, their relatives. In the latter situation, interest can be disallowed, but not in the case where advances are made to a subsidiary company who used the same for purposes of business. The Ld. AR of the appellant further submitted that Hon'bIe Supreme Court in case of S.A. Builders Ltd vs. CIT 288 ITR 1/158 Tax man 74 it is held as under:

(a) The amount advanced to subsidiaries or sister concerns as a measure of commercial expediency even not from the point of view to earning profit, the interest is allowable u/ s 36 (1) (iii) of the Act.

(b) It is obvious that a holding company has a deep interest in its subsidiary and hence if the holding company advances borrowed money to subsidiary and the same is used by the subsidiary for some business purpose, the assessee would be entitled to deduction of interest on its borrowed funds even if used for advancing to subsidiaries without interest.

2.2.3. The Ld. AR of the appellant further submitted that applying, the ratio of decision of Apex Court (Supra) to the facts of the appellant's case, no part of interest disallowed relates to interest free advances made to subsidiaries on account of commercial expediency and its deep business interest. Without prejudice to above, the appellant further submitted that submit that interest free funds / internal accruals have been used for the purpose of giving interest free loans / share application money during the earlier years, which has been accepted by the Ld. AO and there is no disallowance u/s 36(1)(iii) of the Act. The Ld. AO however ignored the asst. orders of earlier year. The appellant further submitted the details of interest free funds available with the assessee is as under:

10 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11

As on As on 31.03.2008 31.03.2007

Share Capital 81,40,12,000 81,40,12,000 Share Premium 15,27,60,000 15,27,60,000 Unsecured Loan - Interest Free 16,75,00,000 ________________ 113,42,72,000 96,67,72,000

Less: Debit balance in Profit & Loss 8,10,77,174 1,39,57,504 105,31,94,826 95,28,14,496

Less Investments 64,95,04,500 64,95,04,500 40,36,90,326 30,33,09,996 2.2.4. Without prejudice to the above, the Ld. AR of the appellant further submitted that no interest is disallowable u/s 36 (l)(iii), alternatively from the above chart it is very much clear that interest free funds available with the assessee at the end of the year was Rs.40.37 crores on which no disallowance can be made u/s 36 (1) (iii). The appellant further placed reliance on the decision of jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. (313 ITR 340) and held that proposition laid down by this decision is squarely applicable to the facts of the case of the assessee. The Ld. AO has disallowed entire interest cost of Rs. Rs. 6.64 crores (6.79 - 0.13) debited to profit & Loss Account. The Ld. AR of the appellant further submitted that the following the above decision of Reliance Utilities (supra) the Ld. AO at the most can disallow interest in proportion to interest free advances/ share application money given to subsidiaries/ associate concerns outstanding at the year end and interest free funds of Rs.40.37 Crores available to the assessee as explained above. The Ld. AR of the appellant further observed that Ld. AO has also observed that had the interest bearing funds were not given to subsidiaries, assessee

11 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 company could have earned interest @ 15% on all funds and by this way 0.5% of interest could have been earned i.e. 15 % charged by the assessee on one of the advances less 14.5 % charged on borrowed funds. It was held in various decisions that dept. cannot decide how business is required to be run by an assessee. Further, as per the decision of Apex Court (Supra) what is relevant is whether the amount- was advanced to subsidiaries as a measure of commercial expediency and not from the point of view for earning profit. The transactions with subsidiary companies are purely business transactions and out of commercial expediency hence interest on account of such advances if disallowed will be against the judgment of Hon. Supreme Court. The Ld. AR of the appellant further placed reliance on the following decisions:- i) Supreme Court in case of S.A. Builders Ltd vs CIT 288 ITR 1 (SC). ii) The ITAT judgment in the case of Indian Hotels is also very relevant. ITAT Mumbai in case of DCIT Vs. Indian Hotels Co. Ltd (276 ITR 104) ill) Reliance Utilities (313 ITR 340)

2.3 Decision 2.3.1 I have carefully considered the contention of the appellant company as well as carefully gone through the available documents on record. I find that the Ld. AO has made the disallowances of interest u/ s. 36(1)(iii) of the Act on the ground that it was for the non business purposes. The Ld. AR of the appellant contended before me that the loan were advanced to the subsidiary companies for the purposes of its business. Secondly, it was also contended that the appellant had got a surplus fund available to it amounting to Rs.43.36 Crores which are 12 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 sufficient to meet the advances made to subsidiary companies. I find that both the arguments of the ld. AR of the appellant deserve no merit. Firstly, that the appellant is a investment company and gives loan& advances and does not deal in treading of shares &securities. Therefore, the main business of the appellant company is to give loan etc. and earned income thereon while the subsidiary company of the appellant are involved in doing substantive business such as constructing multiplex and entertainment industries etc. Advancing loan to the company does not serve any business purpose of the appellant. It is also interesting to know that the appellant in its own working in the original return of income has made disallowance of Rs.6,79,79,03,542/ -. In computation of income the appellant had shown an income 'of Rs.15,25,077/- pertaining to the funds invested for earning interest income including interest on I.T. refunds.

2.3.2. I find that the position of law has been elaborated by the various courts wherein it has been held that if the assessee borrowed funds and then divert the same to its sister concern for non business purpose or for the purpose of carrying on their business purpose, the same cannot be said to be given for the purposes of assessee's own business and the proportionate interest on such advancing of loan need to be disallowed. In the case of Marolia & Sons vs. CIT(1981) 129 ITR 475 (ALL), the Hon'ble Allahabad High Court relying heavily on the decisions of Milapchand R. Shah vs. CIT (1965) 58 ITR 525 (Mad) and Roopchand Chabildass & Sons vs. CIT (1967) 63 ITR 166 (Mad) has held that if the capital borrowed is not utilised for the purposes of the business, the assessee will not be entitled to deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partners for their personal use or utilisation, the firm

13 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 would not be entitled to claim deduction on the amount diverted for utilization for other purposes or by other persons. It appears to be settled that an assessee-firm cannot be entitled to claim deduction under cl. (iii) of sub-so (1) of s. 36 on the amount which is not used for the purposes of business but is given to the partners for their personal use. Therefore, it follows from the decision of this case that assessee- firm cannot claim deduction of interest under s. 36(1)(iii) on the amount borrowed which is not used for the purpose of the business but is given to the partners for their personal use.

2.3.3. Similarly in the case of CIT v / s. Indian Express Newspapers (Madurai) P. LTD.(1999) 238 ITR 70 (Mad), the Hon'ble High Court has held that the fact that the money was not paid directly, but was shown as having been invested in the subsidiary company is not decisive of the true character of the transaction. The mere fact that A Ltd. is a distinct legal entity does not by itself establish that the purported investment was a genuine investment, which company had' made for securing benefits to itself by way 'of trading or carrying on business through that subsidiary. Sum of Rs. 10 lakhs was paid to the Bombay company on the same day on which it was paid to A Ltd. Though A Ltd. is purported to charge interest in the first year, subsequently, no interest at all was charged to the Bombay company on that sum. It is not the assessee's case that money was returned to A Ltd. subsequently with interest or that the assessee received dividends from out of the investments made by it in A Ltd. It is well settled that the corporate veil of a company can be lifted for the purpose of ascertaining the real character of a transaction, if that transaction was a fraudulent one or was intended to evade payment of tax. While legitimate tax avoidance is always permissible, the devices adopted to evade payment of tax,

14 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 however, are not permissible, though the dividing line is not always easy to draw, but such line does exist. The true character of the transaction here clearly was one of an advance by the assessee to the Bombay company for whose benefit that sum was obviously intended and had only been channelled through the A Ltd. The Tribunal has failed to notice the facts which had been set out in the draft assessment order and has also erred in adopting the wrong approach for the purpose of deciding as to whether the amount disallowed was a sum which could properly fall within the ambit of s. 36(1)(iii). The amount disallowed was the amount paid on amounts borrowed, but, not used for the purpose of business or profession of the assessee. Rs. 10 lakhs 'invested' in A Ltd. being in substance and reality an amount advanced to the Bombay company for use of financing the construction undertaken by it cannot be said to be an amount which formed part of the capital borrowed for the purpose of the assessee's business. The Tribunal was not right in deleting the disallowance of interest attributable to borrowers diverted to I Ltd. through A Ltd. 2.3.4. In the case of CIT V Is. Motor General Finance Ltd (2002) 173 CTR (Del) 123 wherein the Hon'ble Delhi High Court has held that the assessee is a financing company. Whether it borrows a huge sum of money, cash balance in its own account may show a huge account and the same may not be determinative of the question as to whether the said amount was earned by way of profit or not. Normally a financing company would not grant any interest free loan. The assessee despite several opportunities granted, did not produce the relevant documents. An adverse inference, therefore, should have been drawn against the assessee. There cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a sister concern and 15 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 the fund available at the relevant time in assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to in this regard was on the assessee. It was to be proved that a bona fide loan had been granted in favour of a sister concern. It was, therefore, its duty to place requisite materials on record. Keeping in view the fact that the assessee had not produced materials, despite opportunities having been granted to it, by the AO, the purported finding of fact arrived at by the Tribunal must be held to be perverse. In other years also the assessee having despite opportunities being given did not produce documents, the fact that neither in the previous years nor in the later years such transactions had been questioned by itself would not deter the Court from examining the said question. As the assessee could not produce any document in this regard, an adverse inference in terms of s. 114 of the Evidence Act should be drawn to the effect that had those documents been produced, the same would have gone against the interest of the assessee, the questions of law involved in the instant case should be answered in negative.

2.3.5. In the case of CIT V / s. Doctor & Co. (1989) 180 ITR 627 (Born), the Hon'ble Bombay High Court has held that the assessee had borrowed money from different persons in the earlier years on interest and that a part of the money so borrowed was advanced to its sister concerns free of interest. The interest to the extent it was payable on the moneys borrowed and diverted to sister concerns free of interest was disallowed in those years. However, during the relevant year, the assessee had charged interest on the debit balances to its sister concerns at the rate of 4 per cent per annum. The AAC accepted that the assessee could have advanced interest-free loans to its sister

16 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 concerns out of its capital. However, the assessee's claim that amounts standing to the credit of the various sundry creditors representing the value of the goods purchased to whom no interest was paid, were also available for the purpose of advancing money to the sister 'concerns was rightly rejected by AAC for the reason that the assessee must have likewise sold goods on credit free of interest. Besides this, the amounts advanced to its sister concerns, on the assessee's own admission, were at least partly out of borrowed funds. Accordingly, he computed the amount available to the assessee out of its capital on an average basis and the loans advanced to the sister concerns on interest at the rate of 4 per cent. On such computation, he reduced the disallowance of interest on borrowings to the extent it was diverted to sister concerns. The view taken by the AAC in this regard was correct. The Tribunal was not justified in deleting the disallowance of interest maintained by the AAC.

2.3.6. In the case of Elmer Havell Electrics & Ors. V / s. CIT (2005) 277 ITR 549 (Del), while following the decision of CIT vs. Tin Box Co. (2003) 182 CTR (Del), the Hon'ble Delhi High Court has held that the assessee had placed on record the fund-flow statement for the year 1995-96 which itself shows that the concern had taken unsecured loans, which was considered as one of the main sources of funds and still had opted to give loan to the extent of Rs. 34,42,850 to its sister-concern. Whether there existed any commercial expediency for the assessee to transfer the said amount to one of its sister-concerns or not, is primarily a question of fact. The contention that the funds were advanced from self-generated funds of the assessee and that there was a need for that purpose, is again a question of fact. It is a settled principle of law that the Tribunal is the final fact-finding authority and 17 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 the Courts while exercising the appellate jurisdiction under s. 260A would not normally interfere with such findings. The bare reading of all the questions raised by assessee itself shows that they are purely questions of fact, much less a pure question of law. Besides the fact that no question of law, much less a substantial question of law, arises in the present case, the other predominant factors which would require dismissal of the appeal is that, from the records nexus can be traced between the borrowed funds and the interest-free advances made by the assessee and its sister-concern. Secondly, it has been clearly established on record that the assessee itself had taken loans with interest and had advanced funds by diversion or otherwise to its sister- concern free of interest. In these circumstances, the order of the Tribunal calls for no interference and in any case no substantial question of law arises for consideration in the appeal. The appeal is accordingly dismissed 2.3.7. In the case of CIT V Is. Abhishek Industries Ltd, (2006) 286 ITR 1 (P&H), the Punjab & Haryana High Court has held that besides raising substantial amount of term loan which, according to the assessee, is required to be repaid as per the fixed schedule agreed to at the time of disbursement of loan, there was substantial amount of loan in the form of working capital which was not required to be returned after any specified period. Rather, the same is use of money in day-to- day working of the company and usually there remains a debit balance in the account of the company which bears interest only to the extent of debit balance in the account. In such a situation, in case the assessee had not advanced loans to its sister-concern on interest-free basis, even if the alleged surplus amount could not be repaid to the financial institution before the scheduled date as far as the term loan is 18 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 concerned, but the interest being paid by the assessee on . the working capital could have certainly been saved to that extent. It can very well be held that borrowing of the funds by the company to that extent was not for the purpose of business and there is nothing on record to suggest that amounts were advanced to sister-concern to advance some business object. Rather, the same is in the nature of funds being provided to sister-concern which are closely-held to carry on business and earn income there on without incurring any cost of fund or without even investing anything. If the assessee had to transfer the money in the form of interest-free loan from one company to another close company, the same could very well be in the manner by introducing less capital in one company and by investing the balance amount in the other company as capital because according to the assessee, it had share capital funds of its own which could be given to other sister- concern. It is not, at all, possible to accept such a plea raised by the assessee.

2.3.8. The Hon'ble High Court further held that as far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concern on interest-free basis is concerned, the stand of. the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister- concerns without interest is on the Revenue is not correct. Sec.36(1 )(iii) provides for deduction of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the AO that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain

19 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 funds to sister-concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister-concerns for non- business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. Even the plea of nexus of loans raised by the assessee with the funds advanced to the sister-concerns on interest- free basis, may be it is pleaded to be out of sale proceeds or share capital or different account cannot be accepted, Entire money in a business entity comes in a common kitty. The monies received as share capital, as term loan, as working capital loan, as sale proceeds, etc. do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources have no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister-concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest- bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister-concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister-concern would be enjoying the benefits thereof. It cannot possibly be held that the funds

20 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 to the extent diverted to sister-concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. The theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes cannot be accepted. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under s. 36(1)(iii). If the plea of the assessee is accepted that the interest-free advances made to the sister- concerns for non- business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister-concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds.

2.3.9. . The Hon'ble High Court in the above referred case while relying on the several decisions as quoted by the Ld. AR of the appellant held that Sec. 106 of the Indian Evidence Act or the principles analogous thereto places the burden in respect thereof upon the assessee, as the facts are within its special knowledge. However, a presumption may be raised in a given case as to why an assessee who for the purpose of running its business is required to borrow money from banks and other financial institutions would be giving loan to its subsidiary companies and that too when it pays a heavy interest to its lenders, it would claim

21 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 no or little interest from its subsidiaries. If the amount is advanced from a mixed account or share capital or sale proceeds or profits, etc., the same would not be termed as diversion of borrowed capital or that the Revenue had not been able to establish nexus of the funds advanced to the sister-concerns with the borrowed funds. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister-concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under s. 36(1)(iii) of the Act. Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee will not be entitled to claim deduction of the interest on the borrowings to the extent those are diverted to sister-concerns or other persons without interest 2.3.10. Therefore, the inference that can be drawn from ration of the above case is that once assessee has borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts have been advanced to sister- concerns without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed; onus is on the assessee to prove the nexus between the borrowed funds and the funds advanced to others without interest. In view of the foregoing, the additions made by the Ld. AO is accordingly upheld and this ground of appeal is accordingly dismissed.”

22 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 2.4. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that identical submissions were raised by the assessee before the ld. First Appellate Authority. Now, we are expected to deal with the objections raised by the ld. Assessing Officer and dealt with by the ld. First Appellate Authority. Another point which is to be adjudicated by us is whether there was any “commercial expediency” in advancing the loans to the sister- concerns/group companies, where the assessee is a holding company. The assessee utilized the funds available with it for giving loans/share application to its subsidiaries/group companies, where the assessee is a holding company. It is also noted that all these group companies are also doing identical activities.

Before us, the stand of the assessee is that commercial expediency was very much there in advancing such loans. For this proposition, we are expected to analyze the utilization of such loans. We note that there is no finding in the assessment order that such loans were not used for business purposes, whereas, for A.Y. 2007-08, while framing the assessment u/s 143(3) of the Act, no disallowance was made by the Department against identical claim of the assessee. No new facts have been brought on record for the present assessment year by the Revenue establishing their stand. Thus, on the 23 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 principle of consistency the assessee is having a good case. Our view is fortified by the following decisions:- i. Parshuram Pottery Works Ltd. vs ITO 106 ITR 1 (SC) ii. Security Printers 264 ITR 276(Del.) iii. CIT vs Neo Polypack Pvt. Ltd. 245 ITR 492 (Del.) iv. CWT vs Allied Finance Pvt. Ltd. 289 ITR 318 (Del.) v. Berger Paints India Ltd. vs CIT 266 ITR 99 (SC) vi. DCIT vs United Vanaspati (275 ITR 124) (AT)(Chandigarh ITAT) vii. Union of India vs Kumudini N. Dalal 249 ITR 219 (SC) viii. Union of India vs Satish Pannalal Shah 249 ITR 221 ix. B.F.Varghese vs State of Kerala 72 ITR 726 (Ker.) x. CIT vs Narendra Doshi 254 ITR 606 (SC) xi. CIT vs Shivsagar Estate 257 ITR 59 (SC) xii. Pradip Ramanlal Seth vs UOI 204 ITR 866 (Guj.) xiii. Radhaswamy Satsang vs CIT 193 ITR 321 (SC) xiv. Agarwal warehousing & Leasing Ltd. 257 ITR 235 (MP)

The sum and substance of the aforesaid judicial pronouncements is that on the basis of principle of judicial discipline, consistency has to be followed and once in a particular year, if any view is taken, in the absence of any contrary material, no contrary view is to be taken as finality to the litigation is also a principle which has to be followed. Before us, no contrary facts or any adverse material was brought on record by the Revenue, therefore, on the issue of consistency, we find merit in the contention of the assessee.

24 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11

In the following cases, wherein, interest on loan was not disallowed in earlier years and the loan balance was brought forward from earlier year, it was held that no disallowance for interest on such loan could be made for the subsequent assessment years:- i. CIT vs Sridev Enterprises (192 ITR 165)(Kar.) ii. ITO vs J.M.P. Enterprises (101 ITD 324, 336-337) (Asr) iii. Escorts Ltd. vs ACIT (104 ITD 427, 512-513)(Del.) iv. Malwa Cotton Spinning Mills vs ACIT (89 ITD 65, 94- 95)(Chd)(TM) v. CIT vs Industrial Cables (India) Ltd. 209 CTR (P & H) 167 vi. Sushee Hi Tech Construction Pvt. Ltd. vs DCIT (2013) 33 taxman.com 236 (Hyd. Trib.). The ratio laid down in above cases squarely fortifies the case of the assessee, thus, on this count, we find merit in the submissions of the ld. counsel for the assessee.

2.5. Now, we shall analyze whether there is commercial expediency. The word “Commercial Expediency” has been analyzed by Hon’ble Apex Court in the case of S.A. Builders Ltd vs CIT (288 ITR 1)(SC). The relevant portion of the same is extracted hereunder for ready reference:-

“ 23. 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 the decisions relating to section 37 that the expression " for the purpose of business" includes expenditure

25 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.

26 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11

27 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11

28 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 If the aforesaid decision from Hon’ble Apex Court is analyzed it clearly says that in order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961,one has to enquire whether the loan was given by the assessee as a measure of “commercial expediency”. The expression “commercial expediency” is one 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 business expenditure if it was incurred on grounds of commercial expediency.

Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is “for the purpose of the business”. “For the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. While coming to this conclusion, the Hon’ble Apex Court also analyzed various decisions such as ATHERTON (H. M. INSPECTOR OF TAXES) v. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155 (HL),EASTERN INVESTMENTS LTD. v. CIT [1951] 20 ITR 1 (SC); [1951] 21 Comp Cas 194 (SC) and CIT v. CHANDULAL KESHAVLAL AND CO. [1960] 38 ITR 601 (SC) followed. The 29 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 expression “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits”.

CIT v. MALAYALAM PLANTATIONS LTD. [1964] 53 ITR 140 (SC) and CIT v. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [1971] 82 ITR 166 (SC) followed.

The Hon’ble Apex Court further observed as under:-

“To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. xxxxxxxxxxxxxxxx While coming to the aforesaid conclusion, the Hon’ble Apex Court duly considered the decisions in CIT v. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 (Delhi) approved. PHALTAN SUGAR WORKS LTD. v. CWT [1994] 208 ITR 989 (Bom) and overruled the decision in PHALTAN SUGAR WORKS LTD. v. CIT [1995] 215 ITR 582 (Bom).

If the aforesaid ratio laid down by Hon’ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for 30 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 business purposes and secondly, we note that advancing loan to the sister-concern was for the purposes of “Commercial Expediency”, thus, we find merit in the contention of the ld. counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and 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 his profits.”

2.6. Now, we shall analyze section 36(1)(iii), which deals in interest on borrowed capital. By the Finance Act, 2003, a new proviso was inserted w.e.f. 01/04/2004 to section 36(1)(iii) to secure and provide that no such deduction shall be allowed in respect of any amount of interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of accounts or not) and such amount of interest is for the period beginning from the date on which the capital was borrowed for acquisition of the assessee till the date on which such asset was first put to use. The Departmental Circular

31 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 No.7 of 2003 dated 05/09/2003 also elucidate date on this point. We note that section 36(1)(iii) is a code by itself. It makes no distinction between money borrowed to acquire a capital asset or a revenue asset. All that the section requires is that the assessee must borrowed capital and the purpose of borrowing must be for business which is carried on by the assessee in the year of account. Unlike section 37, which expressly excludes an expense of a capital nature, section 36(1)(iii) emphasizes the user of capital and not the user of the asset, which comes into existence as a result of borrowed capital. An assessee is entitled to claim interest paid on borrowed capital provided it is used for “business purposes” irrespective of what may be the result of using the capital which the assessee has borrowed. In relation to section 36(1)(iii) actual cost of an asset has not relevancy. Our view find supports from the decisions DCIT vs Core Health Care Ltd. (2008) 298 ITR 194, 199 (SC) and ratio laid down in Gujarat State Fertilizer & Chemicals Ltd. vs ACIT (2009) 313 ITR 244, 246 (Del.).

2.7. We shall analyze the meaning of interest. The essence of interest is that it is payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had used his money, or conversely, the loss is suffered because he had not that use. The general idea is that he is entitle to compensation for the deprivation (Westminister Bank Ltd. vs Riches, (1947) 28 TC 159, 189(HL). It may be 32 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 noted that the definition of “interest” in section 2(28A) means “interest payable in any manner in respect of any monies borrowed or debt incurred…..” . In the context and collocation of section 36(1)(iii) interest is restricted to that own money borrowed and not on debt incurred. What is allowable as deduction u/s 36(1)(iii) is any sum paid by way of interest in the commercial sense. There cannot be strait jacket formula as was held in CIT vs Hindustan Condutors Pvt. Ltd. (1999) 240 ITR 762, 768-69, 770 (Bom.) and CIT vs Sarswati Chemical and allied Industries Pvt. ltd. (2001) 249 ITR 235, 238 (Del.). For allowance of claim for deduction of interest, under these provision, all that is necessary is that, firstly, the money, that is capital, must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on the (so-called borrowed) amount. Our proposition get support from the following decisions:- i. Madhav Prasad Jatia vs CIT (1979) 118 ITR 200 (SC) ii. Addl. CIT vs Laxmi Agents Pvt. ltd. (1980) 125 ITR 227 (Guj.) iii. Marolia & Sons vs CIT (129 ITR 475)(All.) iv. Regal Theater vs CIT (225 ITR 205)(Del.) v. CIT vs Bombay Samachar Ltd. (74 ITR 723)(Bom.), vi. Ramkishan Oil Mills vs CIT (56 ITR 186)(MP)

33 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 vii. Calico Dyeing and Printing Works vs CIT (34 ITR 265)(Bom.) 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

34 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 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

35 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 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

36 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 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

37 E-City Investment & Holdings Company Pvt. Ltd. ITA No.8382/Mum/11 the decision of the ld. Commissioner of Income Tax (Appeals) and allow the appeal of the assessee.

Finally, the appeal of the assessee is allowed.

This Order was pronounced in the open court on 03/02/2016