M/s Plethico Pharmaceutical Ltd., Indore V. The Asstt. Commissioner Of Income Tax Circle- 5(1), Indore

ITA 498/IND/2010

• Counselvise Citation: 49822714 RSA 2010
• Duration Of Justice: 1 year(s) 3 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-11-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 01-11-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 19-07-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: KESHAV SAXENA
• Assessee Lawyers: P D NAGAR
• Keywords: Proportionate interest; Commercial expediency; Rule 8D
• Section: 14A; 36 (1) (iii); 250

Judgement Text

1 IN THE INCOME TAX APPELLATE TRIBUNAL INDORE BENCH, INDORE BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER AND SHRI R.C. SHARMA, ACCOUNTANT MEMBER ITA NO.498/IND/2010 A.Y. 2007-08 M/S PLETHICO PHARMACEUTICAL LTD. 37-A INDUSTRIAL ESTATE, POLOGROUND, INDORE PAN AABCP-306301 ... APPELLANT VS ACIT, CIRCLE, 5(1) INDORE ... RESPONDENT DEPARTMENT BY : SHRI KESHAV SAXENA CIT DR ASSESSEE BY : SHRI P.D.NAGAR, CA DATE OF HEARING : 01.11.2011 DATE OF PRONOUNCEMENT : 16.11.2011 O R D E R PER JOGINDER SINGH THIS IS AN APPEAL BY THE ASSESSEE AGAINST THE ORDE R OF THE LD CIT(A) DATED 07/05/2010 ON THE FOLLOWING GROUNDS:- 2 1 THE THE LEARNED COMMISSIONER OF INCOME TAX (APPEA LS) ERRED IN LAW IN CONFIRMING THE ALLOCATION OF VARIOUS EXPENDI TURE TO NET PROFIT EARNED BY SEZ UNIT & THEREBY REDUCING THE DEDUCTION CLAIMED U/S 10A OF THE ACT BY RS. 154 LACS. HE OUGHT TO HVE CON SIDERED THAT SUCH DISALLOWANCE WAS BASED ON PRESUMPTION WITHOUT CONSI DERING AND APPRECIATING FOLLOWING FACTS AND MATERIALS PLACED O N RECORDS:- (A) SEZ UNIT OWNED BY THE APPELLANT IS SITUATED AT KANDLA (GUJRAT) WHEREAS DTA UNITS ARE IN THE STATE OF MP HAVING IND EPENDENT ADMINISTRATION, MANAGEMENT & CONTROL. (B) SEPARATE SET OF BOOKS HAVE BEEN MAINTAINED BY A FORESAID UNITS AND PROFITABILITY OF EACH UNIT WAS VERIFIABLE INDEP ENDENTLY. (C) BOOKS OF ACCOUNTS OF DTA UNITS AS WELL OF THE S EZ UNIT AT KANDLA ALONG WITH DOCUMENTARY EVIDENCES WERE PRODUC ED BEFORE THE ASSESSING AUTHORITY TO SUBSTANTIATE THE PROFITABILI TY OF SUCH UNITS. (D) PRODUCTS MANUFACTURED IN SEZ UNIT AND IN DTA UN ITS ARE ABSOLUTELY DIFFERENT NOT ONLY BY TRADE-NAME BUT IN ITS USE PRODUCT MIX, CUSTOMERS ETC. (E) PRODUCTS MANUFACTURED IN SEZ UNIT ARE HERBAL PR ODUCTS HAVING MUCH BETTER RECOGNITION AND REALIZATION IN FOREIGN COUNTRIES & ITS MARKET WAS ALREADY SET SINCE MANY YEARS, WHEREAS PR ODUCTS MANUFACTURED IN DTA UNITS REQUIRED CONTINUOUS ADVER TISEMENT AND MARKETING EFFORTS IN INDIA, BEING MOST COMPETITIVE MARKET. (F) THOUGH EXPORTS WERE EFFECTED BY DTA UNIT ALSO B UT BEING NEW PRODUCTS IN EXPORT MARKET REQUIRED PROMOTIONAL EXPE NSES, ADVERTISEMENT EXPENSES STC. AS AGAINST NEGLIGIBLE E XPENDITURE IN RELATION TO EXPORT OF HERBAL DRUGS MANUFACTURED IN SEZ UNIT. ALL THE EXPENSES RELATED TO EXPORT BY SEZ UNIT WERE PROPERL Y DEBITED IN THE BOOKS OF SEZ UNIT. (G) NATURE OF PRODUCTS MANUFACTURED IN SEZ UNIT DID NOT REQUIRE SKILLED WORKERS AND STAFF THOUGH SALES REALIZATION WAS HIGHER, WHEAREAS IN DTA UNIT OLD STAFF AND WORKERS CONTINUE D WHO ARE BEING PAID NOT ONLY HIGHER SALARY AND WAGES BUT ALSO ELIG IBLE FOR VARIOUS INCENTIVES SUCH AS BONUS, GRATUITY AND OTHER BENEFI TS BECAUSE OF THEIR LONG TENURE OF SERVICE PERIOD. (H) HIGHER GROSS PROFIT IN SEZ UNIT IN COMPARISON T O DTA UNITS ITSELF PROVES THE FACT OF HIGHER REALIZATION AGAINST LOWER COST OF PRODUCTION. (I) SEPARATE BOOKS OF ACCOUNTS OF ALL THE UNITS ARE BEING MAINTAINED SINCE BEGINNING AND IN EARLIER YEAR THEY HAVE BEEN ACCEPTED BY HIS PREDECESSORS WHILE COMPLETING ASSESSMENT U/S 143 (3 ) O THE ACT. CONFIRMATION OF ALLOCTION OF EXPENDITURE INCURRED BY DTA UNITS TO SEZ UNIT TO THE EXTEND OF RS. 1.54 CRORES WITHOU T APPRECIATING EXPLANATION AND SUBMISSION MADE JUSTIFYING THE EXPE NDITURE IN DTA UNIT AND LESSER EXPENDITURE IS SEZ UNIT. IS, VERY V ERY EXCESSIVE, UNJUSTIFIED AND BAD IN LAW AND DESERVES TO BE SET A SIDE. 2) THAT THE LEARNED COMMISSIONER OF INCOME TAX (APP EALS) ERRED IN LAW IN DISALLOWING A SUM OF RS. 45.60 LACS U/S 36(1 )(III) OF THE ACT OUT OF INTEREST PAID ON BORROWINGS ON THE GROUND THAT A SUM OF RS. 5.70 CRORES INVESTED IN ACQUISITION OF SHARES IN OVERSEA S SUBSIDIARY COMPANIES DURING A.Y 2006-07 ( IN DECEMBER 2005) OU T OF BORROWED 3 FUNDS WAS FOR NON-BUSINESS PURPOSES. HE OUGHT TO HA VE CONSIDERED THAT DURING THE YEAR UNDER APPEAL I.E. ASESSMENT YE AR 2007-2008, THE APPELLANT REPAID THE LOANS TO THE EXTENDS OF RS. 8. 59 CRORES I.E. MUCH MORE THAN RS. 5.70 CRORES BESIDES EQUITY CAPITAL RA ISED WITH PREMIUM TO THE EXTEND OF RS. 110 CRORES. THEREFORE, THE PRE SUMPTION THAT OLD BOWRROWINGS CONTINUED TO BE UTILIZED FOR NON-BUSINE SS PURPOSE DURING THIS YEAR ALSO IS UNCALLED FOR AND DISALLOWA NCES OF INTEREST AT RS. 45.60 LACS U/S 36(1)(III) OF THE ACT IS WHOLLY UNJUSTIFIED, IMPROPER AND BAD IN LAW. 03) THE APPELLANT FURTHER CRAVES LEAVE TO ADD, ALTE R AND/OR TO AMEND THE AFORESAID GROUNDS OF APPEAL AS WHEN NECESSARY . 2. AT THE TIME OF HEARING WE HAVE HEARD SHRI P.D. NAGAR, LD COUNSEL FOR THE ASSESSEE AND SHRI KESHAV SAXENA, LD CIT DR. MR. NAGAR DID PRESS GROUND NUMBER 1 ALONG WITH ITS SUB GROUND S THEREFORE, THE SAME ARE DISMISSED AS NOT PRESSED. 3. THE ONLY GROUND REMAINS FOR OUR CONSIDERATION I S REGARDING DISALLOWING A SUM OF RS. 45.60 LACKS OUT OF INTERES T PAID ON BORROWING U/S 36 (1) (III) OF THE ACT ON THE GROUND THAT A SUM OF RS. 5.70 CRORES INVESTED IN ACQUISITION OF SHARES IN OVERSEAS SUBSIDIARY COM PANIES DURING ASSESSMENT YEAR 2006-2007 ( IN DECEMBER 2005) OUT O F BORROWED FUNDS AS THE SAME WAS UTILISED FOR NON-BUSINESS PURPOSES . THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT THE APP ELLANT INVESTED IN SHARES OF OVERSEAS COMPANIES WHICH WERE CARRYING ON SIMILAR BUSINESS ACTIVITIES WITH THE OBJECT TO EXPAND THE BUSINESS A BROAD BY FURTHER 4 SUBMITTING THAT THE ASSESSEE ACQUIRED CONTROLLING R IGHT IN SUCH COMPANIES FROM ASSESSMENT YEAR 2005-2006 TO 2007-20 08 . MR NAGAR FURTHER CONTENDED THAT THE ASSESSING OFFICER DISALL OWED AN AMOUNT OF RS. 228.83 LACS U/S 14 OF THE ACT AS PER RULE 8D OF THE INCOME TAX RULES AND THE HE HAS NOT INVOKED THE PROVISIONS OF SECTION 36 (1) (III) OF THE ACT. IT IS AN ACCEPTABLE POSITION THAT THE ASSESSEE COMPANY WAS HAVING ITS OWN CAPITAL AND RESERVES FOR SUCH INVESTMENT BESIDES IN TERNAL APPROVAL AND SUCH INVESTMENTS WERE MADE FOR COMMERCIAL EXPEDIENC Y ONLY. A STRONG PLEA WAS RAISED THAT THE LD CIT (A) WRONGLY CONSIDE RED THAT BORROWED FUNDS OF RS. 5.07 CRORES WERE UTILIZED FOR ACQUISIT ION OF SHARES AND CONSEQUENT DISALLOWANCE OF INTEREST @ OF 8% THEREON . A PLEA WAS RAISED THAT SUFFICIENT NON- INTEREST BEARING FUNDS WERE AV AILABLE WITH THE ASSESSEE FOR MAKING SUCH INVESTMENT AND THERE WAS N O EVIDENCE WITH THE DEPARTMENT TO SHOW THAT INTEREST BEARING FUNDS WER E UTILIZED FOR INVESTMENT IN SHARES OF SUBSIDIARY COMPANIES. THE LD COUNSEL RELIED UPON FOLLOWING JUDICIAL PRONOUNCEMENT:- A. S.A BUILDERS LTD. VS. CIT (A) (2007) 288 ITR 1 (SC) B. CIT V/S BHARTI TELEVENTURE LTD (2011) 331 ITR 502 ( DELHI) C. CIT VS. MARK AUTO INDUSTRIES LTD. (2011) 57 DTR 113 (P&H) 5 D. ASSTT. CIT VS. BAGREE FINCOM P. LTD (2010) 14 ITJ 2 34 ( INDORE BENCH) E. ACIT VS. DHARAM DEVELOPERS & FINEST LTD. (2007) 8 I TJ 488 ( INDORE BENCH) F. DY. CIT VS. PRAKASH SOYA LTD. (2007) 9 ITJ 724 ( IN DORE BENCH) G. ITO VS. TARUN MOTORS & TRACTORS P.LTD (2007) 8 ITJ 518 ( INDORE BENCH) H. CIT VS. BHARTI TELEVENTURE LTD. ( 2011) 331 ITR 502 (DELHI) 3.1 ALTERNATIVELY IT WAS CONTENDED THAT EVEN WITHO UT ADMITTING IF IT IS PRESUMED THAT THE BARROWED FUNDS WERE UTILISED FOR INVESTMENT IN SHARES OF OVERSEAS COMPANIES SUCH INVESTMENT WAS FO R EARNING DIVIDEND INCOME ( TAXABLE) THERFROM INTEREST DISALLOWED BY C IT (A) U/S 36 (1) (III) SHOULD BE TREATED AS LOSS UNDER THE HEAD INCOME FRO M OTHER SOURCES AND SET OFF TO BE ALLOWED FROM INCOME FROM BUSINESS FOR WHICH RELIANCE WAS PLACED IN CIT VS. RAJENDRA PRASAD MODI ( 1978) 115 ITR 519 (SC) 4. ON THE OTHER HAND THE LD CIT DR SHRI KESHAV SAX ENA STRONGLY DEFENDED THE IMPUGNED ORDER BY SUBMITTING THAT THE INVESTMENT IN OVERSEAS COMPANIES WAS MADE BY THE ASSESSEE FOR ACQ UIRING CONTROLLING BUSINESS RIGHTS THEREFORE, SUCH INVESTMENT CANNOT B E SAID FOR BUSINESS EXPEDIENCY. IT WAS SUBMITTED THAT NEW/FRESH UNSECUR ED LOANS OF RS. 25 CRORES WERE TAKEN AND WERE INVESTED IN SHARES THERE FORE, THE ASSESSEE HAS TO PROVE NEXUS. IT WAS FURTHER CONTENDED THAT T HE ASSESSEE HAS TO EXPLAIN THAT THE LOANS WERE USED FOR BUSINESS PURPO SES FOR WHICH RELIANCE 6 WAS PLACE UPON THE DECISION IN CIT VS. MARUDHAR CHE MICALS AND PHARMACEUTICALS PVT. LTD. (2009) 319 ITR 75, PANJA B STAINLESS STEEL INDUSTRIES VS. CIT ( 2010) 324 ITR 396 (DELHI), IN NUTSHELL IT WAS SUBMITTED THAT NO EVIDENCE REGARDING PURPOSE OF LOA N WAS PRODUCED BY THE ASSESSEE. THE LD CIT DR FURTHER RELIED UPON THE DECISION IN CIT VS. INDIAN EXPRESS NEWS PAPERS ( MADURAI) P. LTD. 238 I TR 70 (MADRAS,) KALINDI INVESTMENT PVT.LTD. VS. CIT 260 ITR 261,(GU JRAT) INDIAN SHAVINGS PRODUCT LTS. CIT 265 ITR 250 (RAJ), S.A. BUILDERS LTD. VS. CIT 288 ITR 1 (SC), AND 258 ITR 365 (DELHI). 5. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL AVAILABLE ON RECORD. THE FACTS IN BRIEF ARE THAT T HE ASSESSEE IS A PHARMA BUSINESS COMPANY AND IS IN THE BUSINESS OF SALES OF PHARMA PRODUCTS IN DOMESTIC AND FOREIGN MARKET WHICH MADE SALES OF MA DE INVESTMENT IN SHARES OF OVERSEAS COMPANIES HAVING SIMILAR BUSINES S ACTIVITIES, WITH AN OBJECT TO EXPAND THE BUSINESS ABROAD AND ACQUIRE CO NTROLLING RIGHTS OF SUCH COMPANIES FROM THE ASSESSMENT YEAR 2005-06 TO 2007-08. AN AMOUNT OF RS.228.83 LACS WAS DISALLOWED U/S 14A OF THE ACT AND AS PER RULE 8D OF THE INCOME TAX RULES. A DISALLOWANCE OF RS. 45.60 LACS U/S 7 36(1)(VIII) OF THE ACT WAS MADE BY LEARNED COMMISSI ONER OF INCOME TAX (APPEALS). HOWEVER, THE STAND OF THE ASSESSEE IS THAT THE ASSESSEE COMPANY WAS HAVING ITS OWN CAPITAL AND RESERVES FOR MAKING SUCH INVESTMENT BESIDES INTERNAL ACCRUALS AND SUCH INVES TMENTS WERE MADE FOR COMMERCIAL EXPEDIENCY ONLY. THE LEARNED COMMIS SIONER OF INCOME TAX (APPEALS) CONSIDERED THAT BORROWED FUNDS OF RS. 5.70 CRORES WERE UTILISED FOR ACQUISITION OF SHARES AND HE DISALLOWE D INTEREST AT THE RATE OF 8% THEREON. THE CRUX OF ARGUMENTS ON BEHALF OF THE ASSESSEE IS THAT IS THAT SUFFICIENT NON-INTEREST BEARING FUNDS WERE AVA ILABLE WITH THE ASSESSEE FOR MAKING SUCH INVESTMENT IN SHARES OF OV ERSEAS COMPANIES AND THERE WAS NO EVIDENCE WITH THE DEPARTMENT TO SH OW THAT THE INTEREST BEARING FUNDS WERE UTILISED OF SUBSIDIARY COMPANIES. THE CRUX OF ARGUMENTS ON BEHALF OF THE REVENUE IS THAT IS THAT THE INVESTMENT IN SHARES OF SUCH COMPANIES WAS FROM SECURED AND UNSEC URED LOANS, THEREFORE, THE PROPORTIONATE INTEREST HAS TO BE DIS ALLOWED BECAUSE INVESTMENT IN CONTROLLING SAKES OF SUCH COMPANIES I S NOT THE OBJECT OF THE ASSESSEE COMPANY, THEREFORE, THE INTEREST EXPEN SES ON SUCH LOANS WILL NOT BE ALLOWABLE U/S 36(1)(III) OF THE ACT. B EFORE COMING TO ANY 8 CONCLUSION, WE ARE SUMMARISING THE STATEMENT SHOWIN G INVESTMENT MADE BY THE ASSESSEE FOR ACQUIRING SHARES OF OVERSE AS COMPANIES IN THE FOLLOWING TABLE :- A.Y 2005-06 A.Y 2006-07 A.Y 2007-08 NAME OF THE COMPANY COUNTRY NATURE OF BUSINESS AMOUNT REMITTED IN USD % OF ACQUISITIO N AMOUNT REMITTED IN USD % OF ACQUI SITION AMOUNT REMITTED IN USD % OF ACQUISIT ION TOTAL SHARE HOLDING TOO REZLOV KAZAKHST AN MARKETING & DISTRIBUTION OF PHARMACEUTIC ALS PRODUCTS 4950000.00 51% 4000000.00 24% 0.00 0 75% ICS AREZLOV MO SRL MOLDOVA MARKETING & DISTRIBUTION OF PHARMACEUTIC ALS PRODUCTS 3750000.00 51% 1500000.00 12% 1500000.00 12% 75% REZLOV LTD. KYRGHYZS TAN MARKETING & DISTRIBUTION OF PHARMACEUTIC ALS PRODUCTS 2750000.00 51% 2000000.00 24% 0.00 0 75% CJSC REZLOV RUSSIA MARKETING & DISTRIBUTIO N OF PHARMACEU TICALS PRODUCTS 4950000.00 51% 0.00 0 0.00 0 51% SC REZLOV LTD. UKRAINE MARKETING & DISTRIBUTIO N OF PHARMACEU TICALS PRODUCTS 3960000.00 51% 0.00 0 0.00 0 51% REZLOV LLS AZERBEIJA N MARKETING & DISTRIBUTIO N OF PHARMACEU TICALS PRODUCTS 2050000.00 51% 0.00 0 0.00 0 51% PLETHICO AFRICA LTD KENYA MARKETING & DISTRIBUTIO N OF PHARMACEU TICALS PRODUCTS 0.00 395000.00 22.57% 200000.00 11.43% 34% TOTAL 22410000.00 7895000.00 1700000.00 INVESTMENT IN INDIAN RS. 1024081734.00 348949538.00 75755001.00 9 INVEST MADE IN M/S REZLOV LTD., LTD. KYRGHYZSTA N IN A.Y 06-07 DATE OF REMITTANCE AMOUNT IN US$ 09.12.2005 100000 12.12.2005 175000 15.12.2005 160000 21.12.2005 150000 02.01.2006 100000 17.01.2006 150000 TOTAL 165000 1000000 INVESTMENT MADE IN M/S PLETHICO AFRICA LTD., KE NYA IN A.Y 06-07 01.12.2005 50000 15.12.2005 50000 27.12.2005 50000 12.01.2006 100000 TOTAL 250000 IF THE AFORESAID TABLE IS ANALYSED, IT IS PROVED BE YOND DOUBT THAT SUFFICIENT NON-INTEREST BEARING FUNDS WERE AVAILABL E WITH THE ASSESSEE FOR MAKING SUCH INVESTMENT AND ON THE OTHER HAND, THE L EARNED ASSESSING OFFICER HAS NOT SPECIFICALLY PIN-POINTED THAT INTER EST BEARING FUNDS WERE INVESTED IN SHARES OF SUCH SUBSIDIARY COMPANIES AND THE INVESTMENT WAS MADE FOR COMMERCIAL EXPEDIENCY OTHERWISE NO PRUDENT BUSINESSMAN WILL MAKE SUCH A HUGE INVESTMENT. AT THE SAME TIME THE A SSESSEE COMPANY WAS HAVING OWN CAPITAL AND RESERVES FOR MAKING SUCH INVESTMENT. SINCE THE INVESTMENT WAS MADE FOR BUSINESS EXPEDIENCY, TH ERE IS NO JUSTIFICATION IN DISALLOWING THE CLAIM OF INTEREST. THE RATIO LAID DOWN IN CIT 10 VS. MURUDHAR CHEMICALS & PHARMACEUTICALS PVT. LTD.; 319 ITR 75 (P&H) FURTHER SUPPORTS THE CASE OF THE ASSESSEE. 6. THE LEARNED REPRESENTATIVES RELIED UPON CE RTAIN JUDICIAL PRONOUNCEMENTS. THE WHOLE THRUST OF THE RATIO LAID DOWN IN CASES RELIED UPON BY THE LEARNED CIT DR IS THAT SUCH INVESTMENT IN SHARES WAS NOT FOR THE PURPOSES OF BUSINESS EXPEDIENCY, THEREFORE, THE INTEREST PAID COULD NOT BE ALLOWED U/S 36(1)(III) OF THE ACT. ON THE O THER HAND, THE CASES RELIED UPON BY THE ASSESSEE LAYS THRUST UPON BUSINE SS EXPEDIENCY. IF THE FACTS OF THE PRESENT APPEAL ARE KEPT IN JUXTAPOSITI ON WITH THE ASSERTION MADE BY THE LEARNED RESPECTIVE COUNSELS, WE ARE OF THE VIEW THAT THE EXPRESSION COMMERCIAL EXPEDIENCY IS ONE OF WIDE I MPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESS MAN INCURS F OR THE PURPOSES OF BUSINESS. IN ORDER TO ALLOW THE CLAIM OF DEDUCTION U/S 36(1)(III) OF THE ACT REGARDING INTEREST PAID BY THE ASSESSEE ON AMOUNTS BORROWED BY IT FOR ADVANCING TO A SISTER CONCERN WE ARE SUPPOSED TO EX AMINE THE PURPOSE AND INTENT FOR WHICH THE ASSESSEE ADVANCED THE MONE Y. IF IT IS FOUND THAT THE AMOUNT WAS INVESTED/ADVANCED AS A MEASURE OF CO MMERCIAL EXPEDIENCY THEN IT HAS TO BE ALLOWED. ONCE IT IS ES TABLISHED THAT THERE 11 WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE O F BUSINESS THE REVENUE CANNOT JUSTIFIABLE CLAIM TO PUT ITSELF IN T HE ARM CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF BOARD OF DIRECTOR S AND FURTHER TO ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EX PENDITURE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMISE HIS PROFIT S. THE ASSESSEE STRONGLY DRAWS SUPPORT FROM THE DECISION FROM THE H ON'BLE DELHI HIGH COURT IN THE CASE OF CIT V. BHARTI TELEVENTURE LIM ITED; 331 ITR 502 WHEREIN VARIOUS CASES INCLUDING S.A. BUILDERS LIMIT ED; 288 ITR 1 (SC), CIT VS. DALMIA CEMENT; 254 ITR 377 (DEL), FALTON SUGAR WORKS LTD. VS. CIT; 215 ITR 582 (BOM), ETC. WERE CONSIDERED. THE HON'B LE COURT HELD AS UNDER :- HELD, DISMISSING THE APPEAL, THAT THE ORDERS OF TH E COMMISSIONER (APPEALS) AND THE TRIBUNAL SHOWED THAT THE ASSESSEE WAS MAINTAINING A BANK ACCOUNT WITH MIXED COMMON FUNDS IN WHICH ALL DEPOSITS AND WITHDRAWALS WERE MADE. THERE WAS NO SPECIFIC INSTANCE NOTED BY THE A SSESSING OFFICER OF DIRECT NEXUS BETWEEN THE BORROWED FUNDS AND THE ADVANCES MADE TO THE SUBSIDIARIES. THE ASSESSING OF FICER HAD MADE GENERAL OBSERVATIONS WITHOUT POINTING OUT ANY SPECIFIC INSTANCE WHERE AN INTEREST BEARFING BORROWING WAS A DVANCED TO THE SUBSIDIARIES OR ESTABLISHING THAT THE BORROW INGS MADE BY THE ASSESSEE WERE NOT FOR BUSINESS PURPOSES. BO TH APPELLATE AUTHORITIES WERE OF THE VIEW THAT THE ASS ESSEE HAD EXPLAINED THE SOURCES OF THE ADVANCES AND INVESTMEN TS MADE TO THE SUBSIDIARIES, WHICH COULD NOT BE LINKED TO T HE BORROWED FUNDS AND THAT THE ADVANCES WERE MADE OUT OF THE AS SESSEES 12 OWN CAPITAL. AT THE RELEVANT TIME THE ASSESSEE WAS FOUND TO HAVE ADEQUATE NON-INTEREST BEARING FUNDS BY WAY OF SHARE CAPITAL AND RESERVES. EVEN OTHERWISE, THE ADVANCES WERE FOUND TO BE MADE TO THE SUBSIDIARIES FOR BUSINESS CONSIDERATIONS I.E. OUT OF COMMERCIAL EXPEDIENCY OF THE ASSESSEE. THAT BEING THE FACTUAL POSITION REFLECTED FROM THE RECORD OF THE ASSESSEE, THE ONUS THAT LAY ON IT STO OD DISCHARGED. THERE WAS NO GROUND TO INTERFERE WITH THOSE FINDINGS. 7. SO FAR AS APPLICATION OF SECTION 36(1)(III) IS C ONCERNED, BORROWED FUNDS ADVANCED TO THIRD PARTY SHOULD BE FOR COMMERC IAL EXPEDIENCY. IT IS NOT IN EVERY CASE THAT INTEREST ON BORROWED LOANS H AS TO BE ALLOWED IF THE ASSESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL D EPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. IF THE BORRO WED FUNDS ARE ADVANCED FOR THE PERSONAL BENEFIT OF ITS DIRECTORS, ADMITTEDLY IT CANNOT BE SAID THAT SUCH MONEY WAS ADVANCED AS A MEASURE O F COMMERCIAL EXPEDIENCY. MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY CIRCUMSTANCES BUT THE BUSINESS EXPEDIENCY HAS TO BE PROVED. WHERE HOLDING COMPANY HAS A DEEP IN ITS SUBSIDIARY AND THE HOLDING COMPANY ADVANCED BORROWE D MONEY TO A SUBSIDIARY AND THE SAME IS USED BY A SUBSIDIARY FOR BUSINESS PURPOSES, THE HOLDING COMPANY WOULD ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. THE NEXUS HAS TO B E EXAMINED BY THE 13 ASSESSING OFFICER. IN THE PRESENT APPEAL THERE ARE SUFFICIENT FUNDS OTHER THAN BORROWED MONEY AVAILABLE WITH THE ASSESSEE, TH EREFORE, IT CANNOT BE SAID THAT ONLY THE BORROWED MONEY WAS DIVERTED/I NVESTED IN SHARES FOR ACQUIRING CONTROLLING RIGHTS OF SUCH SUBSIDIARY . THE HUGE INVESTMENT WAS MADE BY THE ASSESSEE FOR COMMERCIAL EXPEDIENCY THEREFORE, THERE IS NO JUSTIFICATION IN MAKING DISALLOWANCE OF INTEREST , CONSEQUENTLY, THIS GROUND OF THE ASSESSEE IS ALLOWED. FINALLY, THE APPEAL OF THE ASSESSEE IS PARTLY ALLO WED. ORDER WAS PRONOUNCED IN THE OPEN COURT ON 16 N OVEMBER, 2011. (R.C. SHARMA) (JOGINDER SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER DATED - 16 NOVEMBER, 2011 COPY TO APPELLANT, RESPONDENT, CIT, CIT(A), DR, GUA RD FILE