Kirloskar Electric Company Ltd., Bangalore V. ACIT,

ITA 169/BANG/2013

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9378 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 7 month(s) 14 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-09-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 18-08-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 07-02-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SANJAY KUMAR CITIII
• Assessee Lawyers: SHYAM RAMADHYANI
• Keywords: Proportionate interest; Cost of acquisition; Bad and doubtful debts; Commercial expediency; Revenue expenditure; Capital expenditure
• Section: 14A; 115JB; 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH C BEFORE SHRI A .K. GARODIA , ACCOUNTANT MEMBER AND SHRI VIJAY PAL RAO , JUDICIAL MEMBER I.T.A. NO. 169 /BANG/201 3 (ASSESSMENT YEAR : 20 09 - 10 ) M/S. KIRLOSKAR ELECTRTIC COMPANY LTD., P B NO.5555, MA LLESWARAM (WEST), BANGALORE - 560 055 PAN AABCK 2721K VS. ASST. COMMISSIONER OF INCOME TAX, RANGE 11, BANGALORE. APPELLANT RESPONDENT. I.T.A. NO. 238 /BANG/201 3 (ASSESSMENT YEAR : 20 09 - 10 ) DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BANGALORE. VS. M/S. KIRLOSKAR ELECTRTIC COMPANY LTD., BANGALORE - 560 055 APPELLANT RESPONDENT. ASSESSEE BY : SHRI SHYAM RAMADHYANI, C.A. REVENUE BY : SHRI SANJAY KUMAR, CIT - III (D.R) DATE OF H EARING : 18.08. 2016. DATE OF P RONOUNCEMENT : 21. 0 9. 201 6 . O R D E R PER SHRI VIJAY P AL RAO, J. M. : THESE CROSS APPEALS ARE DIRECTED AGAINST THE ORDER DT.21.11.2012 OF COMMISSIONER OF INCOME TAX (APPEALS) - I, BANGALORE FOR THE ASST . YEAR 2009 - 10. 2 ITA NO. 169 & 238 /BANG/ 201 3 2. FIRST WE TAKE UP THE APPEAL FILED BY THE DEPARTMENT RAISING THE FOLLOWING GROUNDS : 3 ITA NO. 169 & 238 /BANG/ 201 3 3. GROUND NO.1 IS GENERAL IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 4 ITA NO. 169 & 238 /BANG/ 201 3 4. GROUND NOS.2 TO 5 ARE REGARDING DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER SECTION 14A ON ACCOUNT OF INTEREST EXPENDITURE WHICH WAS DELETED BY THE CIT (APPEALS). THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED INTEREST EXPENDITUR E OFRS.22,52,66,000 WHEREAS THE ASSESSEE HAS MADE INVESTMENT OF RS.3,15,57,000 YIELDING TAX FREE INCOME. THE ASSESSING OFFICER HAS INVOKED THE PROVISIONS OF SECTION 14A OF THE INCOME TAX ACT, 1961 (IN SHORT 'THE ACT') R.W. RULE 8D OF INCOME TAX RULES AN D WORKED OUT THE PROPORTIONATE INTEREST EXPENDITURE OF RS.24,38,288 TOGETHER WITH A SUM OF RS.1,57,785 BEING 0.5% OF THE AVERAGE INVESTMENT UNDER RULE 8B(2)(III) OF THE I.T RULES. THUS THE ASSESSING OFFICER MADE A DISALLOWANCE OF RS.25,96,073 UNDER SECTI ON 14A OF THE ACT AS AGAINST THE DISALLOWANCE MADE BY THE ASSESSEE AT RS.4,276. THE ASSESSEE CHALLENGED THE ACTION OF THE A.O. BEFORE THE CIT(APPEALS). THE CIT (APPEALS) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST EXPEND ITURE ON THE GROUND THAT THE ASSESSEE HAS NOT USED ANY BORROWED FUND FOR THE PURPOSE OF INVESTMENT IN QUESTION. HOWEVER THE DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT ON ACCOUNT OF INDIRECT ADMINISTRATIVE EXPENSES WAS UPHELD BY THE CIT (APPEALS). 5. BEFORE US, THE LD. DR HAS SUBMITTED THAT WHEN THE ASSESSEE HAS BORROWED FUND AND FURTHER THE ASSESSING OFFICER FOUND THAT THE ASSESSEE IS HAVING 5 ITA NO. 169 & 238 /BANG/ 201 3 NEGATIVE CASH FLOW DURING THE YEAR UNDER CONSIDERATION THEN THE PROVISIONS OF SECTION 14A ARE APPLICABLE I N RESPECT OF THE INTEREST EXPENDITURE . T HE ASSESSING OFFICER HAS MADE DISALLOWANCE IN PROPORTION TO THE TOTAL ASSETS AND AVERAGE INVESTMENT TO THE INTEREST EXPENDITURE. THUS THE ASSESSING OFFICER WAS JUSTIFIED IN MAKING THE DISALLOWANCE ON ACCO UNT OF INT EREST EXPENDITURE. 6. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT THE ASSESSEE HAS NOT USED ANY BORROWED FUND FOR THE PURPOSE OF INVESTMENT IN QUESTION . HE HAS FURTHER CONTENDED THAT THIS COMPANY HAS BANK AND CASH BALANCE OF RS.48.42 CRORES AS ON 31.3.2009 AFTER MAKING ALL THE INTER CORPORATE INVESTMENTS AND LOANS REFERRED BY THE ASSESSING OFFICER. HE HAS FURTHER CONTENDED THAT THE NET OF LOANS AGAINST THE FIXED DEPOSITS GIVES A CLEAR FUND OF RS.40 CRORES. THE CURRENT RATIO AND DEBT EQUITY R ATIO ARE WITHIN THE BANKING NORMS. THUS MERELY BECAUSE THE ASSESSEE COMPANY IS HAVING LOANS CANNOT BE A GROUND FOR MAKING DISALLOWANCE OF INTEREST ON ACCOUNT OF INVESTMENT IN QUESTION. HE HAS SUPPORTED THE ORDER OF THE CIT (APPEALS). 7. WE HAVE CONS IDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE MADE VARIOUS INVESTMENTS AS UNDER : 6 ITA NO. 169 & 238 /BANG/ 201 3 THE ASSESSING OFFICER WORKED OUT DISALLOWANCE UNDER RULE 8D REGARDING INTEREST EXPENDITURE AT RS.2 4,38,288 AND INDIRECT ADMINISTRATIVE EXPENDITURE BEING 0.5% OF THE AVERAGE INVESTMENT AT RS.1,57,785. ON APPEAL, THE CIT (APPEALS) DELETED INTEREST DISALLOWANCE ON THE GROUND FOR THE LOAN TAKEN BY THE ASSESSEE WAS USED FOR THE PURPOSE OF BUSINESS AND THER EFORE IT COULD NOT BE USED FOR INVESTMENT. THUS NEITHER THE ASSESSING OFFICER NOR THE CIT (APPEALS) HAS EXAMINED THE AVAILABILITY OF NON - INTEREST BEARING FUND FOR INVESTMENT. EVEN THE AUTHORITIES BELOW HAVE NOT EXAMINED THE YEAR OF INVESTMENT. THEREFORE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR PROPER VERIFICATION AND EXAMINATION OF THE RELEVANT FACTS AND THE AVAILABILITY OF ASSESSEE'S OWN FUND FOR INVESTMENT AS WELL AS THE YEAR OF INV ESTMENT. THE ASSESSING OFFICER THEREAFTER DECIDE THE ISSUE AFTER GIVING AN OPPORTUNITY OF HEARING TO THE ASSESSEE. 7 ITA NO. 169 & 238 /BANG/ 201 3 8. GROUND NOS.6 TO 9 ARE REGARDING DISALLOWANCE OF PAYMENT MADE TO M/S. SHASHANKA FINANCIAL SERVICES PVT. LTD. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS CLAIMED A SYNDICATE FEES OF RS.56,18,000 PAID TO M/S. SHASHANKA FINANCIAL SERVICES PVT. LTD. ON QUERY FROM THE ASSESSING OFFICER THE ASSESSEE REPLIED THAT THE SAID COMPANY HAS CHARGED A SYNDICATE FEES OF 0.4% FOR ARRANGING R S.125 CRORES LOAN FACILITY FROM AXIS BANK LTD. THE ASSESSING OFFICER DISALLOWED THE CLAIM OF THE ASSESSEE BY RECORDING THE FACT THAT THE LOAN WAS TAKEN ONLY FROM ONE BANK I.E. AXIS BANK LTD. WHEREAS THE FEES IS PAID AS SYNDICATE FEES. FURTHER THE ASSESSI NG OFFICER OBSERVED THAT THE ASSESSEE FAILED TO ESTABLISH THAT THE SAID COMPANY HAS RENDERED ANY SERVICE FOR OBTAINING THE LOAN FROM THE BANK. ACCORDINGLY, THE ASSESSING OFFICER MADE THE ADDITION IN QUESTION. 9. ON APPEAL, THE CIT (APPEALS) DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER BY ACCEPTING THE CLAIM THAT THE PAYMENT WAS MADE FOR AVAILING THE SERVICE OF THE SAID COMPANY. 10. BEFORE US, THE LD. DR HAS SUBMITTED THAT THERE IS NO AGREEMENT BETWEEN THE PARTIES FOR PAYMENT OF SYND ICATE FEES. THE ASSESSEE HAS NOT PRODUCED ANY MATERIAL TO SHOW THAT THE FINANCIAL FACILITY SERVICE WAS RENDERED BY THE SAID COMPANY TO THE ASSESSEE. THEREFORE THE CLAIM IS NOT ALLOWABLE AS NOT LAID OUT 8 ITA NO. 169 & 238 /BANG/ 201 3 FOR THE PURPOSE OF THE ASSESSEE S BUSINESS. THE EL EMENT OF SYNDICATE FEES IS ABSENT SINCE ENTIRE LOAN AMOUNT HAS BEEN TAKEN FROM ONLY ONE BANK. MOREOVER THE ASSESSEE HAS FAIRLY LARGE FINANCIAL DIVISION WITH SR. EXECUTIVE WORKING THERE AND THEREFORE IN THE ABSENCE OF ANY RECORD THIS PAYMENT IS NOT ALLOWA BLE. ALTERNATIVELY THIS IS A CAPITAL EXPENDITURE RELATING TO THE CAPITAL ADVANCE FOR THE ASSESSEE COMPANY. 11. ON THE OTHER HAND, THE LD. AR HAS SUBMITTED THAT THE PAYMENT WAS MADE FOR ARRANGING THE LOAN FROM SYNDICATE OF BANKS . HE HAS REFERRED T O THE SANCTION LETTER OF THE BANK AND SUBMITTED THAT THE ASSESSEE HAS AVAILED THE WORKING CAPITAL FACILITY FRO M THE AXIS B ANK APART FROM THE OTHER LOANS TAKEN IN THE EARLIER YEARS AND THEREFORE THE PAYMENT OF 0.4% AS SYNDICATE FEES WAS MADE FOR ARRANGING T HE LOAN OF RS.125 CRORES FROM AXIS BANK LTD. THE LD. AR HAS REFERRED THE DETAILS OF THE SECURED LOAN AS WELL AS WORKING CAPITAL TERM LOAN AND SUBMITTED THAT THIS IS NOT THE ONLY LOAN TAKEN BY THE ASSESSEE BUT IN ADDITION TO THE EXISTING LOAN , T HE ASSESSE E TOOK FRESH LO AN FROM AXIS BANK LTD. T HEREFORE , THE PAYMENT WAS MADE FOR SECURING THE LOAN FROM THE BANK. 12. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS TAKEN LOA N IN THE PAST AS WELL AS DURING THE YEAR UNDER CONSIDERATION. HOWEVER THE PAYMENT IN 9 ITA NO. 169 & 238 /BANG/ 201 3 QUESTION IS NOT TO THE BANK OR AS PER THE INSTRUCTIONS OF THE BANK BUT IT WAS PAID TO A THIRD PARTY FOR ALLEGED SERVICE OF ARRANGEMENT OF THE LOAN. IT IS PERTINENT TO NO TE THAT NEITHER ANY AGREEMENT NOR ANY DOCUMENTARY EVIDENCE WAS PRODUCED BY THE ASSESSEE TO SHOW THAT THE AN INTERMEDIATARY SERVICE WAS AVAIL ED BY THE ASSESSEE FOR OBTAINING THE LOAN IN QUESTION. FURTHER NO SUCH FACT WAS BROUGHT ON RECORD TO SUGGEST THAT A NY SUCH SERVICE WAS ACTUALLY RENDERED EXCEPT LETTER FROM THE SAID COMPANY CHARGING THE FEES FROM THE ASSESSEE. THEREFORE IN THE ABSENCE OF ANY MATERIAL IN SUPPORT OF THE CLAIM, WE SET ASIDE THE ORDER OF THE CIT (APPEALS) FOR THIS ISSUE AND RESTORE THE ORD ER OF THE ASSESSING OFFICER AS THERE IS NO NEXUS BETWEEN THE PAYMENT AND THE LOAN TAKEN BY THE ASSESSEE FROM BANK. 13. GROUND NOS.10 TO 13 ARE REGARDING DISALLOWANCE OF INTEREST ON ACCOUNT OF INTEREST FREE ADVANCES TO THE SISTER CONCERNS. 14. FR OM THE DETAILS IN THE STATEMENT OF ACCOUNT AS WELL AS CASH FLOW STATEMENT, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAD GIVEN INTEREST FREE ADVANCE AGGREGATING TO RS.14,86,39,400 TO VARIOUS SISTER CONCERNS. THE ASSESSING OFFICER FURTHER FOUND THAT T HE ASSESSEE HAD NEGATIVE CASH FLOW OF RS.9,81,29,000 AS ON 31.3.2008 AND RS.3,36,56,000 AS ON 31.3.2009. THUS THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAD DEBT REPAYMENT 10 ITA NO. 169 & 238 /BANG/ 201 3 LIABILITY DURING THE YEAR OF RS.35.92 CRORES AGAINST THE TOTAL BORROW ING OF RS.131.31 CRORES. THE ASSESSING OFFICER ACCORDINGLY DISALLOWED A SUM OF RS.2,22,95,910 BEING 15% OF THE INTEREST FREE ADVANCES GIVEN TO THE SISTER CONCERNS. THE ASSESSEE CHALLENGED THE ACTION OF THE A.O. BEFORE THE CIT(APPEALS). THE CIT (APPEALS) DELETED THE DISALLOWANCE ON THE GROUND THAT THESE ADVANCES WERE MADE IN THE NORMAL COURSE OF BUSINESS AND THEREFORE NO AMOUNT OF INTEREST IS DISALLOWABLE EVEN IF THE BORROWED FUNDS ARE UTILIZED. 15. BEFORE US, THE LD. DR HAS SUBMITTED THAT THE ASSESS ING OFFICER BROUGHT OUT THIS FACT THAT THE ASSESSEE IS HAVING NEGATIVE CASH FLOW AND THERE IS NO COMMERCIAL EXPEDIENCY IN ADVANCING LOAN TO THE SUBSIDIARIES. THE ASSESSEE COMPANY DID NOT HAVE SUFFICIENT RESERVES OF ITS OWN. THEREFORE THE RATIO OF THE DE CISION IN THE CASE OF S.A. BUILDERS LTD. V CIT(APPEALS) & ANR. 288 ITR 1 (SC) IS NOT APPLICABLE TO THE PRESENT CASE AS THE ASSESSEE FAILED TO SUBSTANTIAL THE COMMERCIAL EXPEDIENCY DURING THE ASSESSMENT PROCEEDINGS. 16. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT A MAJOR PART OF THIS AMOUNT WAS ADVANCED IN THE PRIOR YEARS AND NOT DURING THE YEAR UNDER CONSIDERATION. THIS AMOUNT HAS ALREADY BEEN PROVIDED IN THE FINANCIAL STATEMENT AS DOUBT FUL OF RECOVERY AND HAS BEEN ADDED BACK I N THE COMPUTATION OF INCOME. HE HAS FURTHER CONTENDED THAT THE ASSESSEE - COMPANY 11 ITA NO. 169 & 238 /BANG/ 201 3 HAS CASH AND BANK BALANCE OF RS.48.42 CRORES AS ON 31.3.2009 AFTER MAKING ALL INTER CORPORATE INVESTMENT AND LOANS REFERRED TO BY THE ASSESSEE. THE NET AMOUNT AFTER CONSIDERI NG THE LOAN AGAINST THE BANK DEPOSITS COMES TO RS.40.33 CRORES. THEREFORE THE ASSESSEE WAS HAVING CURRENT RATIO AND DEBT EQUITY RATIO WHICH ARE WITHIN THE BANKING NORMS. THE LEARNED AUTHORISED REPRESENTATIVE HAS SUBMITTED THAT MERELY BECAUSE THE ASSESSEE IS HAVING LOANS WOULD NOT LEAD TO THE CONCLUSION THAT THE ADVANCE GIVEN TO THE SIST ER CONCERN WHICH IS NOT FROM ASSESSEE'S OWN FUND WHEN THE ASSESSEE IS GENERATING GOOD AMOUNT OF FUNDS FROM THE OPERATIONS WHICH ARE SUFFICIENT TO COVER THE ADVANCES GIVEN T O THE SISTER CONCERNS. 17. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THERE IS NO QUARREL ON THE POINT THAT NO DISALLOWANCE CAN BE MADE ON ACCOUNT OF INTEREST FOR ADVANCING THE INTEREST FREE FUND TO THE SUBS IDIARIES IF THE ASSESSEE IS HAVING ITS OWN SUFFICIENT FUNDS OR THERE EXISTS A COMMERCIAL EXPEDIENCY IN ADVANCING THE MONEY. AS REGARDS THE AVAILABILITY OF FUNDS NONE OF THE AUTHORITIES BELOW HAVE EXAMINED THIS FACT. THE ASSESSING OFFICER HAS DISALLOWED T HE INTEREST BY CONSIDERING THE CASH FLOW BEING NEGATIVE. THE CIT (APPEALS) HAS NOT GONE INTO THE ISSUE OF AVAILABILITY OF OWN FUND AND DELETED THE ADDITION ON THE GROUND THAT IT WAS GIVEN IN THE NORMAL COURSE OF BUSINESS AND 12 ITA NO. 169 & 238 /BANG/ 201 3 FOR COMMERCIAL EXPEDIENCY. W E FIND THAT THE AVAILABILITY OF OWN FUND HAS TO BE ASCERTAINED AFTER CONSIDERING THE OTHER INVESTMENT INCLUDING THE INVESTMENT IN THE SHARES YIELDING TAX FREE INCOME AS WELL AS INVESTMENT IN THE SUBSIDIARY COMPANY. THE ISSUE OF AVAILABILITY OF FUNDS FOR T HE PURPOSE OF DISALLOWANCE UNDER SECTION 14A HAS BEEN SET ASIDE TO THE RECORD OF ASSESSING OFFICER FOR PROPER VERIFICATION. THEREFORE THE AVAILABILITY OF FUND FOR ADVANCING THE MONEY TO THE SISTER CONCERN IS DIRECTLY CONNECTED WITH THE FINDING ON THE ISS UE OF AVAILABILITY OF OWN FUND AND CONSEQUENTIAL DISALLOWANCE UNDER SECTION 14A OF THE ACT. 18. AS REGARDS THE COMMERCIAL EXPEDIENCY THE ASSESSEE HAS NOT PRODUCED ANY MATERIAL TO SHOW THAT THE ASSESSEE IS HAVING REGULAR BUSINESS WITH THESE SUBSIDIARIE S. THE CIT (APPEALS) HAS ACCEPTED THE CONTENTION OF COMMERCIAL EXPEDIENCY WITHOUT CONSIDERING THE INCIDENT OF BUSINESS TRANSACTIONS BETWEEN THE ASSESSEE AND THE SUBSIDIARY. THEREFORE IN THE FACTS AND CIRCUMSTANCES OF THE CASE, THIS ISSUE REQUIRES PROPER VERIFICATION AND EXAMINATION. ACCORDINGLY, WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR PROPER VERIFICATION AND READJUDICATION. 19. GROUND NO.14 IS REGARDING DISALLOWANCE OF INTEREST ON ACCOUNT OF INVESTMENT MADE IN THE SHARE S OF KIRSON S BV, A SUBSIDIARY COMPANY 13 ITA NO. 169 & 238 /BANG/ 201 3 INCORPORATED IN NETHERLAND. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS INVESTED AN AMOUNT OFRS.54,53,39,000 IN THE SHARES OF THE SUBSIDIARY COMPANY. THE ASSESSING OFFICER FOUND THAT THIS INVESTMENT WAS MADE F ROM BORROWED CAPITAL AND THEREFORE THE INTEREST ON THE BORROWED CAPITAL NEEDS TO BE CAPITALISED ALONG WITH THE ASSETS ACQUIRED. THE ASSESSING OFFICER HAS RELIED UPON THE DECISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MYTHRI PAI 1 52 ITR 2 47 AS WELL AS IN THE CASE OF CIT VS. UNITED BREWERIES LTD. 321 ITR 546. ACCORDINGLY, THE ASSESSING OFFICER HAS DISALLOWED THE INTEREST OF RS.9,68,00,850. ON APPEAL, THE CIT (APPEALS) HAS OBSERVED THAT THE TOTAL OUT FLOW FOR PURPOSE OF FIXED ASS ETS AND INVESTMENT DURING THE YEAR WAS RS.85.99 CRORES WHEREAS INCREASE IN BORROWED FUND S RS.15.49 CRORES. THEREFORE THE PERCENTAGE OF BORROWED FUND TO TOTAL FUND UTILIZED DURING THE YEAR WHICH WORKED OUT BY THE CIT (APPEALS) AT 18.01%. ACCORDINGLY, THE ASSESSING OFFICER WAS DIRECTED TO RESTRICT THE DISALLOWANCE BY CONSIDERING THE INVESTMENT FROM BORROWED FUND AT RS.11.63 CRORES INSTEAD OF RS.54.53 CRORES. 20. BEFORE US, THE LD DR HAS SUBMITTED THAT THE ASSESSING OFFICER ON ANALYSIS OF THE CASH FLO W STATEMENT FOUND THAT THE ASSESSEE HAD A NEGATIVE C ASH FLOW OF 9.81 CRORES DURING THE ASSESSMENT YEAR 2008 - 09 AND FURTHER NEGATIVE CASH FLOW OF RS.3.36 CRORES DURING THE ASSESSMENT YEAR 2009 - 10. THEREFORE ENTIRE 14 ITA NO. 169 & 238 /BANG/ 201 3 INVESTMENT IN THE SHARE CAPITAL OF THE SU BSIDIARY HAS COME FROM THE BORROWED FUND MADE YEAR ON YEAR. HE HAS FURTHER SUBMITTED THAT THE INTEREST ON BORROWED CAPITAL USED FOR INVESTMENT IN THE SHARE CAPITAL OF THE SUBSIDIARY HAS TO BE CAPITALIZED ALONG WITH THE CAPITAL OF ASSETS ACQUIRED AS HELD B Y THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MYTHRI PAI (SUPRA) AS WELL AS CIT VS. UNITED BREWERIES LTD. 321 ITR 546 (KAR) . 21. ON THE OTHER HAND, THE LD. AR OF THE ASSESSEE HAS SUBMITTED THAT THE ASSESSEE HAS NOT BORROWED ANY LOANS S PECIFICALLY FOR THE PURPOSE OF ACQUISITION OF SUBSIDIARY. FURTHER WHEN BOTH THE INTEREST FREE AND INTEREST BEARING FUNDS ARE AVAILABLE WITH THE ASSESSEE THEN THE PRESUMPTION CAN BE RAISED THAT THE INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUND GENERATE D OR AVAILABLE WITH THE ASSESSEE IF SUCH FUNDS ARE SUFFICIENT TO MEET THE INVESTMENT. IN SUPPORT OF HIS CONTENTION, HE HAS RELIED UPON THE DECISION OF THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILIT IES & POWER LTD. 313 ITR 340 (BOM) . ALTERNATIVELY, THE LD. AR HAS SUBMITTED THAT THE DISALLOWANCE IF ANY HAS TO BE CALCULATED ONLY FROM THE DATE OF INVESTMENT MADE AND NOT FOR THE WHOLE YEAR. HE HAS REFERRED TO THE DETAILS OF THE REMITTANCES OF THE AMOUNT TO THE SUBSIDIARY AND SUBMITTED T HAT ONLY FROM THE DATE OF REMITTANCES UP TO 31.3.2009 THE DISALLOWANCE OF INTEREST HAS TO BE CALCULATED. 15 ITA NO. 169 & 238 /BANG/ 201 3 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AS WELL AS THE RELEVANT MATERIAL ON RECORD. THE CIT (APPEALS) HAS RESTRICTED THE DISALLOWANCE BY RECAL CULATING THE BORROWED FUND TO BE UTILIZED FOR INVESTMENT IN SUBSIDIARY . THEREFORE, BOTH REVENUE AS WELL AS THE ASSESSEE ARE AGGRIEVED BY THE IMPUGNED O RDER AND GROUNDS RAISED ON THIS ISSUE. T HERE IS NO DISPUTE THAT THE AMOUNT OF RS.64,53,39,000 IN QUESTI ON WAS GIVEN TO THE SUBSIDIARY FOR PURCHASE OF SHARES. THE ASSESSING OFFICER HAS DISALLOWED INTEREST EXPENDITURE ON THIS AMOUNT @ 15% BEING THE INTEREST LIABILITY ON THE BORROWED FUND BY TREATING THE SAME AS CAPITAL IN NATURE AND COST OF ACQUISITION OF AS SET. THE ASSESSING OFFICER HAS RELIED UPON THE DE CISION OF HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. MYTHRI PAI (SUPRA) AS WELL AS CIT VS. UNITED BREWERIES LTD. (SUPRA). THE ASSESSEE HAS NOT DISPUTED THE FACTS RECORDED BY THE ASSESSING OFF ICER THAT THE AMOUNT IN QUESTION WAS ONLY FOR ACQUISITION OF SHARES AND THEREFORE THE INTEREST ON AMOUNT GIVEN TOWARDS THE ISSUE OF SHARES IN FUTURE PER SE IS A CAPITAL EXPENDITURE TILL THE SHARES ARE ACQUIRED. THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. UNITED BREWERIES LTD. (SUPRA) WHILE DEALING WITH AN IDENTICAL ISSUE IN PARAS 57 TO 60 AS UNDER : 57. AS THE PHRASE AND WORD OF TECHNICAL AND LEGAL CONTENT AND MEANING AND AN AMOUNT WHICH IS SAID TO BE SIMPLY ADVANCED FOR HELPING A BUS INESS ASSOCIATE DEFINITELY CANNOT CONSTITUTE A DEBT WHEN THE ASSESSEE HAD NOT PLACED ANY MATERIAL TO INDICATE THAT THE 16 ITA NO. 169 & 238 /BANG/ 201 3 BUSINESS ASSOCIATE OR ANY ASSOCIATE OF THE SUBSIDIARY OF THE ASSESSEE HAD A LEGAL OBLIGATION FOR REPAYMENT OF THE AMOUNT. 58. EVEN HERE, THE AMOUNT ADVANCED ARE MORE TOWARDS THE ISSUE OF SHARES IN FUTURE IF A COMPANY IS TO BE BROUGHT INTO EXISTENCE AND IN THE HOPE OF GETTING SHARES ALLOTTED IN THE COMPANY. 59. AN EXPENDITURE INCURRED FOR SECURING SHARES PER SE IS A CAPITAL EXPENDITURE AND NEVER 'REVENUE EXPENDITURE AND THEREFORE THE AMOUNT NEVER QUALIFIES FOR DEDUCTION EITHER UNDER S. 36 OR S. 37 OF THE ACT. 60. AN EXPENDITURE IN THE NATURE OF CAPITAL EXPENDITURE STRAIGHTAWAY GOES OUT OF THE PURVIEW OF S. 37 OF THE ACT UNLESS THE AMOUNT FULLY QUALIFIES IN TERMS OF THE OTHER STATUTORY PROVISIONS AND IN THE INSTANT CASE, IN TERMS OF S. 36(1)(VII) OF THE ACT, THERE IS NO QUESTION OF WRITTEN OF IRRECOVERABLE DEBTS WHICH CLAIM INEVITABLY FAILS AND THE MATTER DOES NOT WARRANT INTERFERENCE EV EN FOR A REMAND FOR RECORDING A FINDING ON NON - EXISTENT MATERIAL AND THEREFORE WE REJECT THIS CLAIM AND ANSWER THE QUESTIONS REGARDING WRITTEN OFF BAD DEBTS I.E., SUBSTANTIAL QUESTION NOS. 1 TO 7 REFERRED TO (SUPRA) CORRESPONDING TO PARAS 29 TO 35 IN THE M EMORANDUM OF APPEAL IN IT APPEAL NO. 492 OF 2001 IN FAVOUR OF THE REVENUE AND AGAINST THE ASSESSEE. THIS PROPOSITION HAS BEEN FOLLOWED BY THE CIT (APPEALS) THOUGH THE DISALLOWANCE HAS BEEN RESTRICTED ON L Y BY REWORKING OF THE UTILIZATION OF BORROWED FUND FOR THE PURPOSE OF ACQUIRING THE SHARES IN THE SUBSIDIARY. SINCE WE HAVE ALREADY SET ASIDE THE OTHER ISSUES REGARDING THE AVAILABILITY OF THE ASSESSEE'S OWN FUND AND UTILIZATION OF THE BORROWED FUND FOR INVESTMENT IN THE SHARES YIELDING TAX FREE INCOME A S WELL AS INTEREST FREE ADVANCE GIVEN TO THE SISTER CONCERN THEREFORE THIS ISSUE REGARDING THE UTILIZATION OF THE BORROWED FUND BY THE ASSESSEE FOR THE PURPOSE OF ACQUISITION OF THE SHARE CAPITAL IN THE SUBSIDIARY HAS TO BE CONSIDERED ALONG WITH THE OTHER ISSUES ON THE SAME POINT. HENCE WE SET ASIDE THIS ISSUE TO THE RECORD OF THE ASSESSING OFFICER FOR LIMITED 17 ITA NO. 169 & 238 /BANG/ 201 3 PURPOSE OF WORKING OUT THE QUANTUM OF BORROWED FUND USED FOR THE PURPOSE OF ACQUISITION OF THE SHARE CAPITAL IN THE SUBSIDIARY. 23. THE ASSE SSEE HAS RAISED THE FOLLOWING GROUNDS IN ITS APPEAL : 24. GROUND NOS.1 AND 2 ARE COMMON TO THE GROUND NO.14 OF THE REVENUE S APPEAL AND ACCORDINGLY STANDS DISPOSED OF BEING SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER IN THE SAME TERMS. 25. GROUND NO.3 IS REGARDING THE ADJUSTMENT MADE WHILE COMPUTING THE BOOK PROFIT UNDER SECTION 115JB OF THE ACT IN RESPECT OF THE AMOUNTS OF DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 26. WE HAVE HEARD THE LEARNED AUTHORISED REPRESENTATIVE AS WEL L AS LEARNED DEPARTMENTAL REPRESENTATIVE AND CONSIDERED THE RELEVANT MATERIAL ON RECORD. 18 ITA NO. 169 & 238 /BANG/ 201 3 THIS ISSUE IS DIRECTLY CONNECTED WITH THE ISSUE OF DISALLOWANCE OF EXPENDITURE UNDER SECTION 14A OF THE ACT. SINCE WE HAVE SET ASIDE THE ISSUE OF DISALLOWANCE UNDER S ECTION 14A OF THE ACT TO THE RECORD OF THE ASSESSING OFFICER THEREFORE THIS ISSUE IS ALSO SET ASIDE TO THE RECORD OF THE ASSESSING OFFICER TO RECONSIDER THE ISSUE OF ADJUSTMENT OF AMOUNT DISALLOWED UNDER SECTION 14A AS WELL AS BY CONSIDERING THE OBJECTIONS OF THE ASSESSEE AND LEGAL PRECEDENT ON THIS POINT. 27. IN THE RESULT, THE REVENUE S APPEAL IS PARTLY ALLOWED AND THE ASSESSEE'S APPEAL IS ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 21 ST SEPT., 201 6 . SD/ - (A .K. GARODIA ) ACCOUNTANT MEMBER SD/ - (VIJAY PAL RAO) JUDICIAL MEMBER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, ITAT, BANGALORE. 6. GUARD FILE. BY ORDER ASST. RE GISTRAR, ITAT, BANGALORE