SETO TECHNOLOG P. LTD, MUMBAI V. ITO 10(2)(2), MUMBAI

ITA 4195/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59745 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: G
• Next Hearing Date: 24-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 24-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A K NAYAK
• Assessee Lawyers: F V IRANI; D B SHAH
• Keywords: Capital asset; Earning of tax free income; Proportionate interest; Wholly owned subsidiary; Notional interest
• Section: 143(3)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI P.M. JAGTAP, A.M. AND SHRI V. DURGA RA O, J.M. ITA NO. 4195/MUM/2010 ASSESSMENT YEAR: 2007-08 SETO TEKNOLOG PVT. LTD., APPELLANT 101/406, HILL VIEW IND. ESTATE, OFF LBS MARG, GHATKOPAR (WEST), MUMBAI 400 086 (PAN - AABCS4066) VS. INCOME-TAX OFFICER-(10)(2)(2), RESPOND ENT MUMBAI. APPELLANT BY : MR. F.V. IRANI & D.B. SHAH RESPONDENT BY : MR. A.K. NAYAK DATE OF HEARING : 01/12/2011 DATE OF PRONOUNCEMENT : 31/01/2012 ORDER PER V. DURGA RAO, J.M.: THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAI NST THE ORDER OF CIT(A)-22, MUMBAI, PASSED ON 12/03/2010 FOR THE ASS ESSMENT YEAR 2007-08. 2. GROUND NO. 1 AND 2 READ AS UNDER:- 1. THE CIT(A) ERRED IN UPHOLDING THE DISALLOWANCE OF I NTEREST COST OF RS. 16,91,958/- ON THE ALLEGED GROUND THAT INTE REST COST WAS INCURRED FOR THE PURPOSE OF MAKING AN INVESTME NT IN THE SHARES OF SAMEERA ELECTRONICS PVT. LTD. (SAMEERA) AND NOT INCURRED FOR THE PURPOSE OF THE BUSINESS OF THE AP PELLANT, HEREAS THE INVESTMENT IN SAMEERA WAS INTEGRAL TO THE CORE BUSINESS OF ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 2 THE APPELLANT. THE CIT(A) HAS PASSED A CRYPTIC ORDE R WITHOUT DISCUSSING THE SUBMISSIONS OF THE APPELLANT. 2. THE CIT(A) ERRED IN UPHOLDING THE ACTION OF THE AO TO TREAT THE INTEREST FREE ADVANCE GIVEN TO VENDOR AS WELL AS AP PELLANT'S SUBSIDIARY I.E. SAMEERA AS A COMMERCIAL LOAN ON WHI CH NOTIONAL INTEREST IS TO BE DISALLOWED, SUMMARILY DISREGARDIN G THE FACTS AND SUBMISSIONS OF THE APPELLANT THAT THE AMOUNT WA S ADVANCED IN THE COURSE OF BUSINESS OF THE APPELLANT. 3. BRIEFLY THE FACTS RELATING TO RAISE THIS GROUND ARE THAT THE ASSESSEE IS STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING AND DEALING OF ALL TYPES OF ELECTRICAL AND ELECTRONICS AND COMPUTER HARDWARE AND SOFTWARE SYSTEMS. THE ASSESSEE HAD FIL ED ITS RETURN OF INCOME ON 21/10/2007 DECLARING TOTAL INCOME AT RS. 27,66,870/-, WHICH WAS PROCESSED U/S 143(1) AND THEREAFTER ASSES SMENT WAS COMPLETED US/ 143(3) OF THE ACT ASSESSING THE TOTAL INCOME AT RS. 53,02,570/-. DURING THE COURSE OF ASSESSMENT PROCEE DINGS THE AO OBSERVED THAT ASSESSEE HAD TAKEN LOAN FROM SIDBI FO R ACQUISITION OF SHARES OF M/S SAMEERA ELECTRONICS PVT. LTD. A 100% SUBSIDIARY OF THE ASSESSEE COMPANY FOR WHICH IT HAD PAID RS. 16,91,95 8/- AND CLAIMED THE SAME AS FINANCIAL EXPENSES. THE AO HAD NOTED T HAT THESE EXPENSES WERE NOT INCURRED FOR THE PURPOSE OF ASSES SEE'S EXISTING BUSINESS. THE AO FURTHER NOTED THAT THE ASSESSEE HA D CLASSIFIED THESE SHARES AS 'INVESTMENT' IN BALANCE SHEET, THEREFORE ITS CONTENTION THAT ACQUISITION OF SHARES FOR THE PURPOSE OF BUSINESS I S NOT CORRECT. THE AO ALSO DISTINGUISHED THE DECISIONS RELIED UPON BY THE ASSESSEE. THE AO FOUND THAT THE ASSESSEE WAS PAYING RENT FOR USE OF PREMISES OF SAMEERA ON COMMERCIAL TERMS AND, HENCE, ACQUISITION OF SHARES COULD NOT BE SAID FOR USING PREMISES OF SAMEERA ELECTRONI CS PVT. LTD. AND THE SAME SEPARATE ENTITY AND DOING SEPARATE BUSINES S. IN VIEW OF THESE FACTS, THE AO DISALLOWED THE TERM LOAN INTERE ST AMOUNTING TO ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 3 RS. 16,91,958/- AND ADDED THE SAME TO THE RETURNED INCOME OF THE ASSESSEE. 4. BEFORE THE CIT(A), THE ASSESSEE HAD FURNISHED WR ITTEN SUBMISSIONS WHEREIN IT HAD BEEN STATED THAT THE ASS ESSEE HAD RECEIVED LARGE NUMBER OF ORDERS DURING THE YEAR UND ER CONSIDERATION AND TO ACCOMPLISH SUCH LARGE ORDER BOOK POSITION, T HE ASSESSEE WAS URGENLTY IN NEED OF EXTRA MANUFACTURING/ASSEMBLING CAPACITY. THE ASSESSEE FURTHER SUBMITTED THAT IT HAD TO TAKE PREM ISES ON LEASE/TO PURCHASE PREMISES ON OWNERSHIP AND TO PURCHASE AND INSTALL PLANT AND MACHINERY AND TO BUILD A SUITABLE INFRASTRUCTUR E WHICH CAN BE USED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. T HE ASSESSEE ALSO SUBMITTED THAT ITS INTENTION FOR ACQUISITION OF 100 % SHAREHOLDING IN SAMEERA ELECTRONICS PVT. LTD., WAS ONLY FOR THE PUR POSE OF THE EFFECTIVE AND EFFICIENT UTILISATION OF PREMISES/INF RASTRUCTURE OF THE SAMEERA ELECTRONICS PVT. LTD. AND THEREBY INCREASE IN THE MANUFACTURING/ASSEMBLING CAPACITY OF THE ASSESSEE T O MEET THE SURGE IN THE ORDERS. THE ASSESSEE FURTHER SUBMITTED THAT IT HAD PARTLY FINANCED THE SAID ACQUISITION OF SHARES BY TAKING A TERM LOAN FROM SIDBI AND INCURRED AN INTEREST EXPENDITURE ON THE S AID LOAN AMOUNTING TO RS. 16,91,958/-. THE ASSESEE RELIED UP ON VARIOUS CASE LAWS, WHICH WERE MENTIONED BY THE CIT(A) IN HIS ORD ER AT PAGE 2. IN VIEW OF THE SAID SUBMISSIONS THE ASSESSEE PRAYED TH AT THE DISALLOWANCE MADE ON ACCOUNT OF COST OF INTEREST AM OUNTING TO RS. 16,91,958/-. MAY BE DELETED. THE LEARNED CIT(A) AFT ER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE, HELD AS UNDER:- 3.4 I HAVE GONE THROUGH THE ASSESSMENT ORDER, PERUS ED THE SUBMISSIONS MADE BY THE APPELLANT AND ALSO DISCUSSED THE CASE WITH THE AIR OF THE APPELLA NT. A.O. DURING THE ASSESSMENT PROCEEDINGS OBSERVED THAT ASSESSEE TOOK A LOAN FROM SIDBI FOR A CQUISITION OF SHARES OF M/S. SAMEERA ELECTRONICS PVT. LTD. AND PAID INTEREST OF RS.16,91 ,958!- AND CLAIMED THE SAME FINANCIAL EXPENSES. THE A.O. FURTHER OBSERVED THAT THE ASSESSEE ITSELF HAS CLASSIFIED THESE SHARES AS INVESTMENT IN BALANCE SHEET AND NOT UNDER THE HEAD FIXED ASSETS AND THEREFORE ITS ARGUMENT THAT INTEREST WAS ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 4 PAID ON BORROWED MONEY FOR PURCHASE OF SHARES AND F OR ACQUISITION OF CONTROLLING INTEREST IS BASELESS. THE A.O. FURTHER NOTED THAT THERE WAS NO INCREASE IN TURNOVER OF THE BUSINESS IN THE CURRENT YEAR AS COMPARED TO THE EARLIER YEAR. A.O. HELD THAT THE APPELLANT OUT OF THIS INVESTMENT CAN RECEIVE DIVIDEND WHICH IS EXEMPT INCOME AND HEN CE NO REVENUE WILL BE GENERATED OUT OF THIS INVESTMENT, A.O. FURTHER STATED THAT SINCE THE APPE LLANT IS PAYING SERVICE CHARGES TO SAMEERA FOR UTILIZING ITS PREMISES/INFRASTRUCTURE ,THE ACQUISIT ION OF SHARES CANNOT BE RELATED TO THE USE OF SAMEERAS ASSETS SINCE IT IS NOT FREE OF COST. BEFO RE ME IT WAS SUBMITTED THAT THE SHARES WERE ACQUIRED ONLY FOR THE PURPOSE OF EFFECTIVE UTILIZAT ION OF PREMISES/INFRASTRUCTURE WHICH WAS FINANCED BY THE LOAN FROM SIDBI ON WHICH INTEREST W AS PAID. HOWEVER, I DO NOT AGREE WITH THE CONTENTION OF THE APPELLANT SINCE THE SHARE TRANSFE R AGREEMENT DATED 06.09.2006 CLEARLY STATES THAT THIS AGREEMENT IS BEING MADE WITH A VIEW TO MAKE IN VESTMENTS AND NOTHING ELSE. IN FACT, ON PAGE 3 OF THE AGREEMENT IT HAS BEEN MENTIONED THAT SAMEERA HAS AGREED TO ACCEPT THE APPELLANT AS A NEW SHAREHOLDER AND ALSO AGREED TO ACKNOWLEDGE AND REGI STER THE SAID TRANSFER OF SHARES IN FAVOUR OF BUYER AFTER PROPER EXECUTION OF THE AGREEMENT. FURT HER, NOWHERE IN THE AGREEMENT IT IS MENTIONED THAT THE PURPOSE IS TO MAKE INVESTMENT IN SIDBI WIT H THE INTENTION OF EXPANSION. THE APPELLANT RELIES UPON LOAN AGREEMENT WITH SIDBI AND DIRECTORS REPORT. HOWEVER, THE MOST VITAL DOCUMENT IS THE AGREEMENT TO PURCHASE THE SHARES WHICH HAS BEEN DISCUSSED. THUS, THERE IS NO PROOF REGARDING THE CLAIM OF THE APPELLANT THAT THE PURPOSE WAS FOR ACQUISITION OF SHARES TO EXPAND BUSINESS. THE APPELLANT HAS RELIED UPON SEVERAL CASE LAWS REFERRE D TO ABOVE, THE FACTS WHICH ARE DIFFERENT AS COMPARED TO THE ASSESSEES CASE. THE APPELLANT IN S UBMISSIONS HAS ADMITTED THAT THE TURNOVER OF THE COMPANY WENT DOWN FROM RS.41.87 MILLIONS IN A.Y . 2007-2008 TO RS.17.03 MILLIONS IN A.Y. 2008-2009 WHICH SUPPORTS A.OS VIEW. THE APPELLANT FURTHER SUBMITTED THAT INTEREST ON CAPITAL BORROWED WHICH IS USED FOR THE PURPOSE OF BUSINESS HAS TO BE ALLOWED. HOWEVER, IN THE CASE OF H.T.CONVILLE VS. CIT 4 ITR 137, IT WAS HELD THAT WH ERE BORROWED MONEY IS UTILIZED FOR EARNING THE NON ASSESSABLE INCOME, NO DEDUCTION SHALL BE ALLOWE D FOR INTEREST PAID ON SUCH BORROWINGS. RATIO OF THIS JUDGEMENT IS SQUARELY APPLICABLE SINCE THE DIVIDEND INCOME RECEIVABLE OUT OF THE INVESTMENT IN SHARES OF SAMEERA IS EXEMPT FROM TAX. 5. THE LEARNED CIT(A) CONFIRMED THE ORDER OF THE AO BY OBSERVING AS ABOVE. 6. STILL AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFOR E THE TRIBUNAL. 7. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE ASSESSEE HAD ACQUIRED THE SHARES IN SAMEERA FOR THE PURPOSE OF BUSINESS, FOR WHICH HE RELIED ON THE PAPER BOOK AT PAGES 31 & 32. THE ASSESSEE HAD SHOWN THE SHARES ACQUIRED FOR THE PURP OSE OF BUSINESS IN THE BOOKS OF ACCOUNT AS AN INVESTMENT WHICH IS A S PER COMPANIES ACT AND ALSO ACCORDING TO THE ACCOUNTING STANDARDS ISSUED BY THE ICAI. IT IS SUBMITTED THAT MERE CLASSIFICATION IN T HE BOOKS OF ACCOUNT DOES NOT TO BE A DETERMINATIVE FACTOR FOR THE TRUE CHARACTER OF THE TRANSACTION. FOR THE ABOVE PROPOSITION, THE LEARNED COUNSEL FOR THE ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 5 ASSESSEE RELIED UPON THE CIT VS. GOPAL PUROHIT WHER EIN THE BOMBAY HIGH COURT HAS HELD THAT ENTRIES IN BOOKS OF ACCOUN T ALONE ARE NOT CONCLUSIVE IN DETERMINING THE NATURE OF INCOME. IT IS FURTHER SUBMITTED THAT THE AO HAS ERRONEOUSLY RELIED ON THE CLASSIFICATION IN THE BALANCE SHEET AND IGNORED THE FACT THAT THE ACQ UISITION OF SHARES FOR THE PURPOSE OF BUSINESS. THE ASSESSEE HAD ACQUI RED THE SHARES OF SAMEERA ELECTRONICS PVT. LTD. WHICH IS SUBSIDIARY O F ASSESSEE COMPANY AND ALSO A LOSS MAKING COMPANY, NO PRUDENT BUSINESSMAN INVESTS IN LOSS MAKING COMPANY. IT IS FURTHER SUBMI TTED THAT THE LOAN WAS TAKEN FOR THE PURPOSE OF BUSINESS, FOR THAT HE RELIED ON THE PAPER BOOK AT PAGES 58 & 59. IT IS SUBMITTED THAT THE AS SESSEE HAD ACQUIRED THE SHARES OF SAMEERA ONLY FOR IMMEDIATE N ECESSITY OF BUSINESS AND, THEREFORE, THE INTEREST PAID THEREON EITHER ALLOWABLE U/S 36(1)(III) OR 37 OF THE ACT. THE LEARNED COUNSEL FO R THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS: 1. CIT VS. JARDINE HENDERSON LTD., 210 ITR 981 (CAL.) 2. ATE ENTERPRISES LTD. VS. JCIT, 102 ITD 112 (BOM.) 3. CIT VS. RAJEEV LOCHAN KANORIA, 208 ITR 616 (CAL.) 8. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THAT THE ASSESSEE HAD ACQUIRED THE CAPITAL ASSET WITH AN INTEREST TO EARN DIVIDEND INCOME AND THEREFORE, THE INTEREST PAID THEREON HAS TO BE CAPITALIZED. THE DR FURTHER SUBMITTED THAT THE ASSESSEE HAD ENTE RED INTO A SEPARATE AGREEMENT WITH SAMEERA ELECTRONICS PVT. L TD. AND PAID RENT FOR THE PURPOSE OF UTILIZING THE PREMISES AND, THER EFORE, THE CONTENTION OF THE ASSESSEE IS THAT THE ASSESSEE HAD ACQUIRED THE SHARES IN SAMEERA FOR THE PURPOSE OF BUSINESS IS NO T CORRECT. ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 6 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSE D THE RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELO W AS WELL AS DECISIONS CITED. THE QUESTION FOR CONSIDERATION BEF ORE US IS WHETHER INTEREST PAID BY THE ASSESSEE ON THE BORROWINGS FOR ACQUISITION OF SHARES OF SAMEERA ELECTRONICS PVT. LTD. FOR THE PU RPOSE OF BUSINESS OR NOT ? THE CASE OF THE ASSESSEE IS THAT THE ASSES SEE IS IN THE BUSINESS OF MANUFACTURING AND DEALING OF ELECTRICAL , ELECTRONICS AND COMPUTER HARDWARE AND SOFTWARE. DURING THE YEAR UND ER CONSIDERATION, THE ASSESSEE HAD ACQUIRED SHARES OF M/S SAMEERA ELECTRONICS PVT. LTD., A 100% SUBSIDIARY OF THE ASS ESSEE COMPANY, FOR WHICH IT HAD PAID RS. 16,91,958/- TO THE SIDBI FROM WHOM THE ASSESSEE BORROWED THE MONEY AND TO THIS EFFECT THE ASSESSEE REFERRED PAGES 58 & 59 WHERE THE SCHEDULES OF THE PROJECT, F INANCE PLAN, AND AMORTIZATION SCHEDULE AND LETTER OF INTENT FROM SDB I FOR FINANCIAL ASSISTANCE. THE MAIN CONTENTION OF THE ASSESSEE IS THAT THE ABOVE STATED SHARES ACQUIRED BY THE ASSESSEE FOR THE EFFE CTIVE CONTROL IN THE SAMEERA ELECTRONICS AND THEREBY USING THE PREMISES OF THE SAMEERA FOR THE PURPOSE OF IMMEDIATE NECESSITY OF ASSESSEE S BUSINESS. THE ASSESSEE HAS EXPLAINED THE SAME BEFORE THE AO AND C IT(A) AND ULTIMATELY THEY HAVE REJECTED THE EXPLANATION OFFER ED BY THE ASSESSEE. TO THIS EFFECT, THE ASSESSEE REFERRED PAGES 31 & 32 OF THE PAPER BOOK TO ESTABLISH THAT THE SAID SUBMISSIONS MADE BEFORE THE REVENUE AUTHORITIES. THE ASSESSEE HAD ACQUIRED SHARES IN S AMEERA ELECTRONICS PVT. LTD., WHICH IS A LOSS MAKING COMPANY IS THE SI STER CONCERN OF THE ASSESSEE COMPANY IN WHICH THE ASSESSEE IS HAVING IN TEREST. THE ASSESSEE HAD ALSO GIVEN INTEREST FREE LOANS TO ITS SISTER CONCERN SAMEERA ELECTRONICS PVT. LTD. THE ASSESSEE IN ONE O F ITS SUBMISSIONS BEFORE US STATED THAT NOBODY IS INTERESTED IN ACQUI RING SHARES IN SAMEERA BECAUSE IT IS A LOSS MAKING COMPANY. WHEN T HE SAMEERA ELECTRONICS PVT. LTD. IS LOSS MAKING COMPANY WHERE ASSESSEE IS ALSO ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 7 HAVING INTEREST, WE ARE UNABLE TO UNDERSTAND THAT W HAT IS THE NECESSITY OF ACQUIRING THE SHARES IN SAMEERA TO EFF ECTIVE CONTROL IN THAT COMPANY. IT IS A FACT THAT THE ASSESSEE HAS EN TERED INTO A SEPARATE AGREEMENT WITH M/S SAMEERA ELECTRONICS PVT . LTD. FOR UTILIZATION OF PREMISES AND RENT WAS ALSO PAID. WHE N THE ASSESSEE HAS PAID CHARGES FOR USING OF THE PREMISES, IT CANNOT B E SAID THAT THE SHARES ACQUIRED BY THE ASSESSEE IS FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND, THEREFORE, ALLOWABLE U/S 36(1)(II I) OF THE ACT. THEREFORE, IN OUR CONSIDERED OPINION, ACQUIRING SHA RES IN SAMEERA ELECTRONICS PVT. LTD. BY THE ASSESSEE IS NOT CONNEC TED FOR THE PURPOSE OF BUSINESS. THEREFORE, THE ACQUISITION OF SHARES I N SAMEERA ELECTRONICS PVT. LTD. IS NOT FOR THE PURPOSE OF TH E BUSINESS AND THE INTEREST PAID THEREON IS NOT ALLOWABLE EITHER IN TH E SECTION 36(1)(III) OR SECTION 37 OF THE ACT. IN SO FAR AS THE CASE LAWS R ELIED UPON BY THE LEARNED COUNSEL FOR THE ASSESSEE IS CONCERNED, IN T HE CASE OF CIT VS. JARDINE HENDERSON LTD., [1994] 210 ITR 981 THE COU RT HAS HELD AS UNDER:- IT WAS CATEGORICAL FINDING OF THE TRIBUNAL THAT THE BORROWAL FOR THE PURCHASE OF SHARES WAS FOR THE MANAGING AGENCY BUSINESS OF THE ASSESSEE AND TO RETAIN ITS GRIP OVER THE MANAGI NG AGENCY BUSINESS. THE TRIBUNAL ALSO FOUND THAT THE INVESTME NT IN SHARES WAS PRINCIPALLY AND PRIMARILY WITH A VIEW TO OBTAIN THE MANAGING AGENCY COMMISSION RATHER THAN DIVIDEND INCOME. THE SAID FACTS WAS ALSO EVIDENT FROM THE COMPARATIVELY SMALL AMOUN T OF DIVIDEND WHICH THE ASSESSEE RECEIVED COMPARED TO TH E LARGE AMOUNT OF MANAGING AGENCY COMMISSION RECEIVED DURIN G THE VARIOUS PREVIOUS YEARS. THEREFORE, THE ENTIRE AMOUN T OF INTEREST PAID WAS DEDUCTIBLE IN COMPUTING THE PROFITS AND GA INS OF THE ASESSEES BUSINESS. 10. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO RELIE D UPON THE DECISION OF ITAT, MUMBAI BENCH H, MUMBAI, IN THE CASE OF ATE ENTERPRISES LTD. VS. JCIT ORDER DATED 11/11/2005 WH EREIN THE TRIBUNAL HAS HELD AS UNDER:- ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 8 11. RIVAL SUBMISSIONS OF THE PARTIES HAVE BEEN CONS IDERED CAREFULLY. THE QUESTION FOR CONSIDERATION I WHETHER INTEREST PAID BY THE ASSESSEE ON THE BORROWINGS FOR ACQUISITION O F SHARES OF TRUMAC CAN BE ALLOWED AS DEDUCTION U/S 36(1)(III) C ONSIDERING THE FACTS OF THE CASE AND CASE LAW AVAILABLE ON THIS PO INT. THERE IS NO DISPUTE BETWEEN THE PARTIES THAT DEDUCTION IS ALLOW ABLE IF MONEY IS BORROWED FOR THE PURPOSE OF BUSINESS. THE EXPRES SION FOR THE PURPOSE OF BUSINESS IS MUCH WIDER THAN THE EXPRESSI ON FOR THE PURPOSE OF EARNING PROFITS AS HELD BY HONBLE SUPR EME COURT IN THE CASE OF INDIA CEMENTS LTD., 60 ITR 52. THUS, FO R THE PURPOSE OF ALLOWING DEDUCTION U/S 36(1)(III) IT WOULD BE IR RELEVANT TO CONSIDER WHETHER BORROWED MONEY WAS UTILIZED FOR ME ETING DAY TO DAY EXPENSES OR FOR ACQUIRING CAPITAL ASSETS TO BE USED IN BUSINESS. THEREFORE, INTEREST FOR BORROWING WOULD B E ALLOWED EVEN IF BORROWED FUND IS UTILIZED FOR ACQUIRING PLA NT AND MACHINERY OR LAND AND BUILDING FOR USE IN BUSINESS. REFERENCE CAN BE MADE TO JURISDICTIONAL HIGH COURT JUDGMENT I N THE CASE OF CALICO DYEING & PRINTING WORKS VS. CIT, 34 ITR 265. 12. IN VIEW OF THE ABOVE LEGAL BACKGROUND, THE QUES TION WHICH SURVIVES FOR OUR CONSIDERATION IS WHETHER ON FACTS IT CAN BE SAID THAT MONEY WAS BORROWED FOR THE PURPOSE OF BUSINESS . ADMITTEDLY TRUMAC WAS A JOINT VENTURE OF ASSESSEE AND MAFTLAL GROUP OF COMPANIES. IN ITS REPLY TO SHOW CAUSE NOTICE, THE A SSESSEE HAD STATED THAT PROMOTERS OF THE ASSESSEE COMPANY AS WE LL AS OF MAFTLAL GROUP HAD GOOD BUSINESS RELATIONSHIPS HAVIN G CLOSE ASSOCIATION WITH INDIAN TEXTILE INDUSTRY. THIS FACT HAS NOT BEEN DISPUTED BY THE REVENUE AT ANY STAGE. IT IS BECAUSE OF THESE FACTS, THE CHAIRMAN OF ASSESSEE COMPANY WAS ON THE BOARD OF TRUMAC AS NON-EXECUTIVE CHAIRMAN AND COULD GET SOL E SELLING AGENCY FOR THE DISTRIBUTION OF THE PRODUCTS MANUFAC TURED BY TRUMAC. SINCE IT WAS MAIN SOURCE OF INCOME, IT WAS NATURAL FOR A PRUDENT MAN TO SAFEGUARD ITS BUSINESS INTEREST. THE REFORE, IF THE ASSESSEE DECIDED TO INCREASE ITS HOLDING IN TRUMAC IN OUR OPINION, THE ASSESSEE WAS GUIDED BY BUSINESS CONSID ERATION TO SAFEGUARD ITS SELLING AGENCY. IF SHARES ARE PURCHAS ED BY OUTSIDERS THEN THERE IS POSSIBILITY THAT OUTSIDER M AY JEOPARDIZE TH BUSINESS INTEREST OF ASSESSEE COMPANY. THERFORE, IN OUR OPINION, ACT OF BORROWING MONEY FOR THE ACQUISITION OF SHARE S WAS CLOSELY CONNECTED WITH OR INCIDENTAL TO THE CARRYING ON THE BUSINESS. CONSEQUENTLY, THE CONDITIONS OF ALLOWING DEDUCTION U/S 36(1)(III) STOOD SATISFIED. ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 9 11. THE ASSESSEE ALSO RELIED ON THE CIT VS. RAJEEV LOCHAN KANORIA (SUPRA) WHEREIN THE COURT HAS HELD AS UNDER:- HELD, THAT DIRECTORSHIP IS NOTHING BUT A VOCATION. THE ASSESSEE WAS ADMITTEDLY A DIRECTOR OF SEVERAL CONTROLLED COM PANIES. THE ACTIVITY OF CONTROLLING, MANAGING, ADMINISTERING AN D FINANCING COMPANIES IS NOTHING BUT A BUSINESS/PROFESSIONAL/VO CATIONAL ACTIVITY. A BUSINESSMAN, LIKE THE ASSESSEE IN THIS CASE, DID NOT PURCHASE SHARES OF DIFFERENT COMPANIES FOR ACQUIRIN G CONTROLLING INTEREST THEREIN ONLY FOR EARNING DIVIDENDS. ACQUIR ING CONTROLLING INTEREST IN COMPANIES AND MANAGING, ADMINISTERING, FINANCING AND REHABILITATING COMPANIES UNDER CONTROL WERE FOR BUSINESS AND/OR PROFESSIONAL PURPOSE. INTEREST ON CAPITAL BO RROWED FOR INVESTMENT IN SHARES WAS DEDUCTIABLE. 12. THE ABOVE THREE CASE LAWS RELIED UPON BY THE LE ARNED COUNSEL FOR THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE CASE UNDER CONSIDERATION FOR THE REASON THAT IN THE PRESENT CA SE, ONE OF THE MATERIAL DISTINGUISHABLE FACT IS THAT THE ASSESSEE ENTERED INTO A SEPARATE AGREEMENT WITH THE SAMEERA ELECTRONICS PVT . LTD. AND PAID SERVICE CHARGES FOR THE UTILIZATION OF THE PREMISES OF SAMEERA, THEREFORE, THE ABOVE CASE LAWS ARE NOT APPLICABLE T O THE CASE OF THE ASSESSEE. 13. IN VIEW OF THE ABOVE, THIS GROUND OF APPEAL RAI SED BY THE ASSESSEE IS DISMISSED. 14. IN SO FAR AS GROUND NO. 4 IS CONCERNED, THE AO OBSERVED THAT THE ASSESSEE HAD PAID RS. 2,56,684/- AS CONSULTANCY CHA RGES AND RS. 8,15,000/- AS LOAN SYNDICATION CHARGES IN CONNECTIO N WITH THE ACQUISITION OF SHARES OF SAMEERA ELECTRONICS PVT. L TD. FOR THE PURPOSE ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 10 OF THE BUSINESS OF THE ASSESSEE. SINCE THE SAID EXP ENDITURE WAS NOT IN CONNECTION WITH THE BUSINESS OF THE ASSESSEE, THE A O DISALLOWED THE SAID AMOUNTS. ON APPEAL, THE CIT(A) CONFIRMED THE A CTION OF THE AO. 15. SINCE, THIS ISSUE IS INTER-CONNECTED WITH GROUN D NO. 1, THE CONCLUSIONS DRAWN IN GROUND NO. 1 ARE APPLICABLE TO THIS GROUND ALSO AND, THEREFORE, IN VIEW OF THE DISCUSSION IN GROUND NO.1, THIS GROUND IS ALSO DISMISSED. 16. AS REGARDS GROUND NO. 2, DURING THE COURSE OF A SSESSMENT PROCEEDINGS, THE AO HAD OBSERVED THAT THE ASSESSEE HAD ADVANCED RS. 15,60,865/- AS INTEREST-FREE LOAN TO M/S SAMEERA EL ECTRONICS PVT. LTD. THE ASSESSEE HAS PAID INTEREST ON BORROWED FUNDS FR OM THE DIRECTORS AS WELL AS OTHER LOANS BORROWED. ACCORDINGLY, THE A O DISALLOWED PROPORTIONATE INTEREST OF RS. 1,40,477/-. ON APPEA L, THE CIT(A) CONFIRMED THE ACTION OF THE AO. AGGRIEVED THE ASSES SEE CARRIED THE MATTER IN APPEAL BEFORE US.. 17. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE ASSESSEE IS HAVING OWN FUNDS AND ALSO BORROWED FUND S. ONCE OWN FUNDS ARE AVAILABLE WITH THE ASSESSEE, THE PRESUMPT ION IS IN FAVOUR OF THE ASSSSEE THAT THE OWN FUNDS ARE USED FOR THE PUR POSE OF INTEREST- FREE LOANS. FOR THIS, HE RELIED ON THE DECISION OF HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. RELIANCE UTILITIES POW ER LTD., 313 ITR 340 WHEREIN IT WAS HELD THAT IF THERE ARE FUNDS AVAILAB LE BOTH INTEREST FREE AND OVERDRAFT/LOANS TAKEN, THEN A PRESUMPTION WOULD ARISE THAT INVESTMENT WOULD BE OUT OF THE INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY IF THE INTEREST FREE FUN DS ARE SUFFICIENT TO MEET THE INVESTMENTS. ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 11 18. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THA T THE ISSUE MAY BE REMITTED TO THE AO TO EXAMINE WHETHER THE AS SESSEE IS HAVING SUFFICIENT INTEREST FREE FUNDS OR NOT. 19. WE HAVE HEARD BOTH THE PARTIES, PERUSED THE REC ORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. THE IS SUE RAISED BY THE ASSESSEE, I.E. ASSESSEE HAVING SUFFICIENT OWN FUNDS , WAS NEITHER EXAMINED BY THE AO NOR BY THE CIT(A). THEREFORE, IN THE INTEREST OF JUSTICE, WE SET ASIDE THE ORDER OF THE CIT(A) AND R ESTORE THE ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO EXAMINE THE ISSUE AND DECIDE THE SAME AFTER CONSIDERING THE DECISION HONBLE BOMBAY HIGH COURT IN THE CASE OF RELIANCE UTILITIES AND POWER (SUPRA) AFTER PROVIDING REASONABLE OPPORTUNITY OF HEARING TO THE ASSESSEE. 20. GROUND NO. 3 IS RELATING TO DISALLOWANCE U/S 40 (A)(IA) OF THE ACT. 21. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, TH E AO OBSERVED THAT ASSESSEE HAD PAID TESTING CHARGES AMOUNTING TO RS. 3,22,128/- TO ELECTRONIC REGIONAL TESTING LABORATORY AND RS. 5 6,120/- TO ELECTRONIC CORPORATION OF INDIA. THE AO NOTICED THA T NO TAX HAS BEEN DEDUCTED ON THESE PAYMENTS. THE AO NOTED THAT AS PE R SECTION 196, TAX NEED NOT BE DEDUCTED ONLY IF THE INCOME OF THE STATUTORY CORPORATION ARE EXEMPT. THE AO FURTHER NOTED THAT A S PER THE COPY OF RECEIPT ISSUED BY ELECTRONIC REGIONAL TESTING LABOR ATORY AND ELECTRONIC CORPORATION OF INDIA, THEY ARE LIABLE OF SERVICE TA X, WHICH CLEARLY SHOWS THEIR INCOME IS NOT EXEMPT FOR TAXATION. IN V IEW OF THESE FACTS, THE AO DISALLOWED THE AMOUNTS PAID TO THE TUNE OF R S. 3,78,248/- U/S 40(A)(IA) AND ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. ON APPEAL, BEFORE THE CIT(A), THE ASSESSEE HAS FURNISH ED WRITTEN SUBMISSION WHEREIN IT HAD BEEN STATED THAT THE ASSE SSEE PAID TESTING ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 12 CHARGES TO ELECTRONIC REGIONAL TESTING LABORATORY A ND ECIL AGGREGATING TO RS. 3,78,428/-. IT WAS FURTHER STATE D THAT IT HAD NOT DEDUCTED TAX AT SOURCES AT ERTL AND ECIL ARE GOVERN MENT AGENCY AND HENCE THE SAME IS COVERED BY THE PROVISIONS OF SECT ION 196 OF THE ACT AND DISALLOWANCE OF RS. 3,78,248/- U/S 40(A)(IA) OF THE ACT IS NOT JUSTIFIED AND SAME MAY BE DELETED. THE CIT(A) REJEC TED THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT SINC E THE AO HAD MENTIONED WITH PROOF THAT ERTL AND ECIL ARE LIABLE FOR SERVICE TAX AND HENCE THEIR INCOME CANNOT BE EXEMPT FROM TAX. H E, THEREFORE, UPHELD THE ADDITION. AGGRIEVED, THE ASSESSEE IS IN APPEAL BEFORE US. 22. BEFORE US, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE AO HAD DISALLOWED TESTING CHARGES PAID TO ERTL AND ECIL U/S 40(A)(IA) IGNORING THE FACT THAT PAYMENTS MADE TO S TATUTORY CORPORATION ARE NOT SUBJECT TO DEDUCTION OF TAX AT SOURCE U/S 196 OF THE ACT. THE LEARNED COUNSEL FOR THE ASSESSEE INVIT ED OUR ATTENTION TO SAMPLE INVOICES, WHICH HAVE BEEN PLACED AT 131 & 13 2 OF ASSESEES PAPER BOOK TO ESTABLISH THAT ERTL AND ECIL ARE GOVT . OF INDIA ENTERPRISES. 23. ON THE OTHER HAND, THE LEARNED DR BESIDES RELY ING ON THE ORDERS OF THE AUTHORITIES BELOW, SUBMITTED THAT SIN CE ERTL AND ECIL ARE LIABLE TO PAY SERVICE TAX, THE AO DISALLOWED TH E TESTING CHARGES PAID BY THE ASSESSEE FOR NON DEDUCTION TDS. 24. WE HAVE HEARD THE RIVAL SUBMISSIONS, PERUSED TH E RECORD AND GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. T HE ISSUE INVOLVED IN THIS GROUND IS WHETHER THE TDS HAS TO BE DEDUCTE D ON PAYMENT MADE TO THE A CORPORATION ESTABLISHED BY OR UNDER A CENTRAL ACT, WHICH IS UNDER ANY LAW FOR TIME BEING IN FORCE EXEM PT FROM INCOME- ITA NO. 4195/MUM/10 M/S SETO TEKNOLOG P. LTD . 13 TAX ON ITS INCOME. IN THE PRESENT CASE THE ASSESSEE MADE PAYMENTS TO ECIL. AS PER SECTION 196 A STATUTORY CORPORATION, W HICH IS ESTABLISHED UNDER LAW IS EXEMPT FROM THE TDS. IN THE PRESENT CA SE, THE AO DISALLOWED THE PAYMENTS MADE BY THE ASSESSEE TO ECI L, ERTL TOWARDS TESTING CHARGES ON THE GROUND THAT ECIL AND ERTL PA Y THE SERVICE TAX. IN THIS CASE, IN OUR OPINION, WHETHER THE ASSE SSEE HAS TO DEDUCT THE TAX IN VIEW OF SECTION 196 OR NOT HAS TO BE EXA MINED. THEREFORE, NEITHER THE AO NOR CIT(A) EXAMINED THE ISSUE IN PRO PER PERSPECTIVE. THUS, WE RESTORE ISSUE TO THE AO WITH A DIRECTION TO DECIDE THE ISSUE AFRESH IN THE LIGHT OF SECTION 196 OF THE ACT. 25. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON THIS 31 ST DAY OF JANUARY, 2012. SD/- SD/- (P.M. JAGTAP ) (V. DURGA RA O) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED: 31 ST JANUARY, 2012. KV COPY TO:- 1) THE APPELLANT. 2) THE RESPONDENT. 3) THE CIT (A) CONCERNED. 4) THE CIT CONCERNED. 5) THE DEPARTMENTAL REPRESENTATIVE, G BENCH, I.T .A.T., MUMBAI. BY ORDER //TRUE COPY// ASST. REGISTRAR, I.T.A.T., MUMBAI.