M/s Friends Real Estate Developers, Ghaziabad V. ACIT, Ghaziabad

ITA 5523/DEL/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 53332 (ITAT-DELHI)
• Duration Of Justice: 11 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-11-2011
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 21-09-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 07-12-2010
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Business expenditure; Source of fund; Proportionate interest; Commercial expediency
• Section: 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH B DELHI ] BEFORE SHRI RAJ PAL YADAV, JM AND SHRI K. D. RA NJAN, AM I. T. APPEAL NO. 5523 (DEL) OF 2010. ASSESSMENT YEAR : 200607. M/S. FRIENDS REAL ESTATE DEVELOPERS, ASSTT. COMMISSIONER OF INCOME-TAX, C/O. M/S. ATUL KUMAR GOEL & CO., C.AS.; VS. C I R C L E : 1, J 78, P A T E L N A G A R, G H A Z I A B A D. G H A Z I A B A D. P A N / G I R NO. AAB FF 1883 D. ( APPELLANT ) ( RESPONDENT ) ASSESSEE BY : SHRI K. SAMPATH, ADV.; DEPARTMENT BY : SHRI ROHIT GARG, SR. D. R.; O R D E R. PER K. D. RANJAN, AM : THIS APPEAL BY THE ASSESSEE FOR ASSESSMENT YEAR 20 06-07 ARISES OUT OF ORDER OF THE LD. CIT (APPEALS), GHAZIABAD. 2. THE GROUND OF APPEAL RAISED BY THE ASSESSEE IS A S FOLLOWS :- THAT ON THE FACTS AND IN THE CIRCUMSTANCES O F THE CASE AND IN LAW, THE AUTHORITIES ERRED IN HOLDING THAT INTEREST BEARING FUNDS HAVE BEEN UTILIZED FOR NON-BUSINESS PURPOSES AND THEREBY DISALLOWING RS.36 LACS OUT OF INTEREST PAID ACCOUNT. THE ACTION BEING MOST ARBITRARY, UNLAWFUL AND UNTENABLE MUST BE QUASHED WITH DIRECTION TO ALLOW NECESSARY RELIEF. 2 I. T. APPEAL NO. 5523 (DEL) OF 2010. 3. THE ONLY ISSUE FOR OUR CONSIDERATION RELATES TO CONFIRMING THE ADDITION OF RS.36 LAKHS ON ACCOUNT OF INTEREST PAID. THE FACTS OF THE CASE ST ATED IN BRIEF ARE THAT THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR WAS ENGAGED IN BUSINESS OF R EAL ESTATE DEVELOPMENT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO OBSERVED THAT THE ASS ESSEE HAD DEBITED INTEREST OF RS.1,41,21,664/- TO PROFIT AND LOSS ACCOUNT. THE A SSESSEE HAD INVESTED RS. 4,00,00,000/- IN PURCHASE OF SHARES OF SISTER COMPANY. THE FUNDS IN VESTED IN THE SHARES WERE OUT OF INTEREST BEARING FUNDS AVAILABLE WITH THE ASSESSEE. THE AO REQUIRED THE ASSESSEE TO EXPLAIN AS TO WHY THE PROPORTIONATE INTEREST ON AMOUNT OF RS. 4,00,00,000 /- SHOULD NOT BE DISALLOWED. IN RESPONSE TO THIS QUERY IT WAS SUBMITTED BY THE ASSESSEE THAT FO R THE PURPOSES OF ITS BUSINESS THE ASSESSEE HAD TO INVEST IN VARIOUS ASSETS INCLUDING LAND ETC. AND THE ASSESSEE HAD TO OBTAIN LOANS FROM VARIOUS PARTIES FOR SUCH PURPOSES. THE LOANS WERE OBTAINED FOR THE PURPOSES OF BUSINESS. THEREFORE, THE ENTIRE INTEREST WAS ALLOWABLE AS BUSINESS EXPENDITU RE. HOWEVER, THE AO OBSERVED THAT THE ASSESSEES BUSINESS WAS PURCHASE/SALE OF LAND AND C ONSTRUCTION OF FLATS AND HOUSES. THE PURCHASE OF SHARES WAS NOT THE REGULAR BUSINESS ACTIVITY OF THE ASSESSEE. THEREFORE, THE FUNDS BORROWED FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE WHICH WERE DIVERTED FOR THE PURPOSE OF PURCHASING THE SHARES, THE INTEREST ON SUCH FUNDS WAS NOT ALLOWABL E AS BUSINESS EXPENDITURE. HE, THEREFORE, DISALLOWED INTEREST AT THE RATE OF 9 PER CENT AN AM OUNT OF RS. 4,00,00,000/- DIVERTED FOR THE PURCHASE OF SHARES OF THE GROUP CONCERN. 4. BEFORE THE LD. CIT (APPEALS) IT WAS SUBMITTED TH AT THE MAIN BUSINESS OF THE ASSESSEE WAS PURCHASE AND SALE OF FLATS. THE ASSESSEE INVESTED IN THE SHARE OF A COMPANY WITH A VIEW TO HAVING THE CONTROLLING INTEREST. THEREFORE, THE AC QUISITION OF SHARES WAS IN THE NATURE OF COMMERCIAL EXPEDIENCY. 5. THE LD. CIT (APPEALS) EXAMINED THE CONTENTION OF THE ASSESSEE. HE OBSERVED THAT THE ASSESSEE HAD MADE INVESTMENT OF RS. 4,00,00,000/- F OR PURCHASE OF MAJORITY SHARES I.E.4,00,000 SHARES OUT OF TOTAL 4,40,000 SHARES OF M/S. FRIENDS INFRA-STRUCTURE PVT. LTD. THE INVESTMENT COULD NOT BE SAID TO BE UTILIZATION FOR THE PURPOSE OF BU SINESS BECAUSE M/S. FRIENDS INFRA-STRUCTURE PVT. LTD. WAS SISTER-CONCERN OF THE ASSESSEE, THE ACTIVI TIES THEREOF WERE ALSO OF REAL ESTATE 3 I. T. APPEAL NO. 5523 (DEL) OF 2010. DEVELOPMENT. HE FURTHER NOTED THAT THE ASSESSEES BUSINESS WAS NOT OF ANY INVESTMENT COMPANY, THEREFORE, INVESTING IN ACQUISITION OF SHARES OF A SISTER CONCERN WOULD TANTAMOUNT TO USING THE BORROWINGS FOR NON-BUSINESS PURPOSE. IT WAS NOT TH E CASE OF THE ASSESSEE THAT THE ASSESSEES BUSINESS WAS PURCHASE OF SHARES AND ACQUISITION OF CONTROLLING INTEREST. THEREFORE, THE ARGUMENT OF THE ASSESSEE THAT THE BORROWINGS HAD BEEN USED F OR BUSINESS PURPOSES BECAUSE THE BUSINESS OF THE SISTER CONCERN, M/S. FRIENDS INFRA-STRUCTURE WA S ALSO GOING TO BE OF REAL ESTATE; WAS A LEGAL JUGGLERY AND, HE THEREFORE, REJECTED THE CONTENTION OF THE ASSESSEE. HE FURTHER NOTED THAT THE ASSESSEES CASE WAS AKIN TO THAT OF BORROWINGS DIVE RTED TO A SISTER CONCERN WITHOUT CHARGING ANY INTEREST. HE FURTHER OBSERVED THAT INTEREST ON BOR ROWED MONEY WAS ALLOWABLE AS DEDUCTION FROM BUSINESS ONLY IF IT SATISFIED THE CONDITION THAT IT WAS FOR THE PURPOSE OF THE BUSINESS OR PROFESSION. WHERE THE MONEY BORROWED WAS DIVERTED FOR GIVING IN TEREST FREE LOANS TO SISTER CONCERN, THE PROPORTIONATE INTEREST ATTRIBUTABLE TO SUCH LOANS C OULD BE LEGITIMATELY DISALLOWED BY THE ASSESSING OFFICER. IN THE CASE OF ASSESSEE DEALING IN SHARES WAS NOT THE BUSINESS OF ASSESSEE. THEREFORE, INTEREST ON BORROWED MONEY FOR ACQUIRING SHARES COU LD NOT BE ALLOWED AS BUSINESS DEDUCTION UNDER SECTION 36(1)(III) OF THE ACT. HE PLACED REL IANCE ON THE DECISION OF HONBLE RAJASTHAN HIGH COURT IN THE CASE OF INDIAN SHAVINGS PRODUCTS LTD. VS. CIT 265 ITR 250 (RAJ). A SIMILAR VIEW WAS TAKEN IN CALDERM PHARMEUTICALS LTD. VS. CI T 265 ITR 244 (CAL.). THE LD. CIT (APPEALS), THEREFORE, CONFIRMED THE DISALLOWANCE. THE LD. CIT (APPEALS) DISTINGUISHED THE DECISIONS RELIED UPON BY THE ASSESSEE IN THE CASES OF GAUTAM MOTORS 194 TAXMAN 21 (DEL.); CIT VS. RAJEEV LOCHAN KANODIA 208 ITR 616 (CAL.); C IT VS. JARDINE HENDERSON LTD. 210 ITR 981 (CAL). 6. BEFORE US THE LD. AR OF THE ASSESSEE SUBMITTED T HAT THE ASSESSEE SUBSCRIBED TO SHARE CAPITAL OF SISTER CONCERN IN ORDER TO ACQUIRE CONTR OLLING INTEREST IN THE COMPANY. THE BUSINESS OF SISTER CONCERN, NAMELY, M/S. FRIENDS INFRASTRUCTURE PVT. LTD. IS ALSO REAL ESTATE DEVELOPMENT. THEREFORE, BY ACQUISITION OF 4 LAKHS SHARES OUT OF TOTAL SHARES OF 4,40,000 OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD., THE ASSESSEE HAD ACQUIRE D 90% OF ITS SHARE HOLDING AND HAD CONSEQUENTLY ACQUIRED CONTROLLING INTEREST. THEREF ORE, THE INVESTMENT MADE IN SHARES OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD. WOULD BRING SUBSTA NTIAL BUSINESS TO THE ASSESSEE. HENCE, THE AMOUNT INVESTED IN SHARES HAS TO BE TREATED FOR THE PURPOSE OF COMMERCIAL EXPEDIENCY AND 4 I. T. APPEAL NO. 5523 (DEL) OF 2010. THEREFORE, THE ASSESSEE WILL BE ELIGIBLE FOR DEDUCT ION UNDER SECTION 36(1)(III) OF THE ACT.. HE PLACED RELIANCE ON THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS LTD. VS. CIT (APPEALS) & ANOTHER 288 ITR 1 (SC). HE ALSO PLA CED RELIANCE ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. RAJEEV L OCHAN KANODIA (SUPRA) WHICH ACCORDING TO THE LD. AR OF THE ASSESSEE IS A DIRECT DECISION ON THE ISSUE. HE ALSO PLACED RELIANCE ON THE DECISION OF HONBLE DELHI HIGH COURT IN THE CASE OF CIT VS. GAUTAM MOTORS (SUPRA) AND THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS. JARDIN HANDERSON LTD. (SUPRA) AND THE DECISIONS OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF KEJRIWAL ENTERPRISES & ANOTHER VS. CIT 260 ITR 341 (CAL); & CIT VS. BOMBAY SAMACHA R LTD. 74 ITR 723 FOR THE PROPOSITION THAT DEDUCTION UNDER SECTION 36(1)(III) MUST BE ALL OWED TO THE ASSESSEE AS THE AMOUNT HAS BEEN INCURRED FOR THE PURPOSES OF BUSINESS. 7. ON THE OTHER HAND, LD. SR. DR SUBMITTED THAT THE ASSESSEE HAD ACQUIRED SHARES OF CLOSELY HELD COMPANY AT THE PREMIUM OF RS.90/- PER SHARE. THE BUSINESS OF THE COMPANY HAS NOT YET COMMENCED. THEREFORE, IT IS A VAGUE STATEMENT OF LD . COUNSEL FOR THE ASSESSEE THAT BY ACQUIRING 90% OF SHARES M/S. FRIENDS INFRASTRUCTURE PVT. LTD. , THE ASSESSEE IS GOING TO ACQUIRE SUBSTANTIAL BUSINESS OF REAL ESTATE DEVELOPMENT. SINCE THE BUS INESS OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD. HAS NOT YET COMMENCED, THERE IS NEITHER ANY JUSTIFI CATION FOR PAYMENT OF PREMIUM OF RS. 90/- PER NEITHER SHARE NOR ANY BENEFIT WOULD BE DERIVED BY T HE ASSESSEE BY HOLDING CONTROLLING INTERESTS. THEREFORE, THE FUNDS INVESTED IN SHARES COULD NOT B E TREATED FOR THE PURPOSES OF THE BUSINESS OF THE ASSESSEE. THE ASSESSEE HAD DIVERTED INTEREST BE ARING FUNDS FREE OF INTEREST IN ORDER TO SET UP BUSINESS OF THE SISTER CONCERN OF WHICH THE PARTNER S OF THE ASSESSEE FIRM ARE PROMOTERS. HENCE, THE PRINCIPLE OF COMMERCIAL EXPEDIENCY AS ENUNCIATE D BY HONBLE SUPREME COURT IN THE CASE OF SA BUILDERS (SUPRA) IS NOT SATISFIED. LD CIT (APPEA LS) IS, THEREFORE, JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) O F THE ACT. 8. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE MATERIAL AVAILABLE ON RECORD. UNDER SECTION 36(1)(III) THE AMOUNT OF INTEREST PAID IN R ESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF THE BUSINESS OR PROFESSION OF THE ASSESSEE SHALL BE ALL OWED AS DEDUCTION IN COMPUTING THE INCOME 5 I. T. APPEAL NO. 5523 (DEL) OF 2010. REFERRED TO IN SECTION 28 OF THE ACT. IN THE CASE BEFORE US THE ASSESSEE HAS ACQUIRED 4 LAKHS SHARES OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD., A SISTER CONCERN, WHICH HAS BEEN ESTABLISHED FOR DEVELOPMENT OF REAL ESTATE BUSINESS. THE CONTENTION OF THE ASSESSEE IS THAT ACQUISITION OF SHARES OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD. IS FOR THE PURPOSE OF ACQUIRING CONTROLLING INTEREST AND HENCE, ACQUISITION OF SHARES OF M/S. FRIENDS INFRAS TRUCTURE PVT. LTD. IS FOR THE PURPOSE OF COMMERCIAL EXPEDIENCY AS THE BUSINESS OF THE ASSESS EE AS WELL AS M/S. FRIENDS INFRASTRUCTURE PVT. LTD. BEING THE SAME, THE ASSESSEE IS GOING TO BE BE NEFITED IMMENSELY. IN ORDER TO DECIDE THIS ISSUE WE HAVE SEE AS TO WHAT WAS THE PERCENTAGE OF SHARES HELD BY THE PARTNERS OF THE ASSESSEE FIRM BEFORE ACQUISITION OF 4,00,000 SHARES OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD. M/S. FRIENDS INFRASTRUCTURE PVT. LTD. WAS INCORPORATED ON 1/06/2 004 VIDE CERTIFICATE OF INCORPORATION NUMBER U-45201/DL/2004-PTC-127070/2004-05 DATED 22/06/2004 AND THREE PERSONS NAMELY SHRI ATUL KUMAR GARG S/O SHRI D. C. GARG, SHRI RAKESH GARG S/O SHRI PRABHU SARAN GARG AND SHRI PAWAN KUMAR S/O SHRI SAT PAL JINDAL HELD 30,000 SHARES EQ UALLY I.E. 10,000 SHARES EACH. THE ASSESSEE FIRM AT THE RELEVANT TIME WAS ALSO CONSTITUTED BY T HESE THREE PERSONS. IT IS SETTLED LAW THAT A PARTNERSHIP FIRM IS NOT A LEGAL ENTITY BY ITSELF BUT ONLY A COMPENDIOUS WAY OF DESCRIBING THE PARTNERS CONSTITUTING THE FIRM. THEREFORE, FROM ITS INCEPTION THE PARTNERS OF THE ASSESSEE FIRM WERE HOLDING ALL THE SHARES AND THE FIRM THROUGH IT S PARTNERS WAS EXERCISING 100% CONTROL OVER THE MANAGEMENT OF M/S. FRIENDS REAL ESTATE DEVELOPE RS P. LTD. ON 22/11/2004, 4 LAKHS SHARES WERE ALLOTTED TO ASSESSEE FIRM THROUGH SHRI RAKESH GARG, ATUL KUMAR GARG AND SHRI PAWAN KUMAR, THE PARTNERS OF M/S. FRIENDS REAL ESTATE DEV ELOPERS. HENCE NO CHANGE IN THE CONTROL OF MANAGEMENT OCCURRED DUE TO ALLOTMENT OF SHARES ON T HE DATE WHEN 4,00,000 SHARES WERE ALLOTTED TO THE ASSESSEE FIRM. 9. WITH EFFECT FROM 1/02/2005 SHRI ATUL GARG HAD RE TIRED FROM THE PARTNERSHIP FIRM AND BECAME DIRECTOR OF M/S. FRIENDS REAL ESTATE DEVELOP ERS P. LTD. EVEN AFTER THE CHANGE OF CONSTITUTION WITH EFFECT FROM 1/02/2005 SHRI PAWAN KUMAR HELD 33.33 PER CENT SHARES AND SHRI RAKESH GARG HAD 66.67 PER CENT SHARES IN THE PROFIT AND LOSS OF THE PARTNERSHIP FIRM. THEREFORE, IN A CASE WHERE NO SHARES WERE ALLOTTED ON 22.11.20 04 TO THE FIRM THROUGH ITS PARTNERS, M/S. FRIENDS REAL ESTATE DEVELOPERS, THE ASSESSEE FIRM W AS EXERCISING CONTROLLING POWERS AS 2/3 RD OF THE SHARES I.E. 20,000 SHARES OUT OF 30,000 SHARES WERE HELD BY SHRI RAKESH GARG AND BY SHRI 6 I. T. APPEAL NO. 5523 (DEL) OF 2010. PAWAN KUMAR. THEREFORE, AS ON THE DATE OF ALLOTMEN T OF SHARES TO THE PARTNERS ON PREMIUM OF RS.90/-, ALL THE THREE PARTNERS WERE HAVING CONTROL LING INTEREST IN M/S. FRIENDS INFRASTRUCTURE PVT. LTD. AS ON 22.11.2004 M/S. FRIENDS INFRASTRUCTURE PVT. LTD. WAS NOT DOING ANY BUSINESS AND THUS HAD NO GOODWILL OR NAME IN THE MARKET. HENCE I TS SHARES COULD NOT FETCH ANY PREMIUM IF THE SHARE WERE TO BE OFFERED TO PUBLIC. THUS FROM THESE FACTS IT IS EVIDENT THAT THE ASSESSEE FIRM DIVERTED BORROWED FUNDS OF RS. 4,00,00,000/- NOT F OR ACQUIRING THE CONTROLLING INTEREST, BUT FOR INFUSING MONEY IN THE COMPANY. 10. IT IS SETTLED LAW THAT THE COMMERCIAL EXPEDIEN CY WOULD INCLUDE SUCH PURPOSE AS IS EXPECTED BY THE ASSESSEE TO ADVANCE ITS BUSINESS IN TEREST AND MAY INCLUDE MEASURERS TAKEN FOR PRESERVATION, PROTECTION OR ADVANCEMENT OF ITS BUSI NESS INTEREST. THE BUSINESS INTEREST OF THE ASSESSEE HAS TO BE DISTINGUISHED FROM THE PERSONAL INTEREST OF ITS DIRECTORS OR PARTNERS, AS THE CASE MAY BE. IN OTHER WORDS, THERE HAS TO BE A NEXUS BE TWEEN THE ADVANCING OF FUNDS AND THE BUSINESS INTEREST OF THE ASSESSEE FIRM. THE APPROPRIATE TES T IN SUCH A CASE WOULD BE AS TO WHETHER A REASONABLE PERSON STEPPING INTO THE SHOES OF THE DI RECTORS / PARTNERS OF THE ASSESSEE FIRM AND WORKING SOLELY IN THE INTEREST OF THE ASSESSEE FIRM / COMPANY, WOULD HAVE SUCH INTEREST-FREE ADVANCE, WHEN THE ASSESSEE FIRM / COMPANY ITSELF IS BORROWING FUNDS FOR RUNNING ITS BUSINESS. IT MAY NOT BE RELEVANT AS TO WHETHER THE ADVANCES HAVE BEEN EXTENDED OUT OF BORROWED FUNDS OR OUT OF MIX FUNDS WHICH INCLUDED BORROWED FUNDS. THE TE ST IS TO BE APPLIED IN SUCH CASES IS NOT THE SOURCE OF FUNDS, BUT THE PURPOSE FOR WHICH ADVANCES WERE EXTENDED. IN VIEW THE LEGAL POSITION AND FACTS OF THE CASE IT HAS TO BE HELD THAT INVEST MENT IN SHARES AT PREMIUM OF RS 90/- WAS NOT FOR COMMERCIAL EXPEDIENCY. 11. THE DECISIONS RELIED UPON BY THE ASSESSEE ARE NOT APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. IN THE CASE OF GAUTAM MOTORS (SUPRA) THE ASSE SSEE ADVANCED MONEY TO THE RELATIVES OF THE PARTNERS. SPECIFIC FINDING OF FACT, WHICH HAS BEEN ARRIVED AT WAS THAT THE LOANS AND MONEYS WHICH ASSESSEE HAD TAKEN FROM THE BANK WERE IN FACT UTILIZED BY THE ASSESSEE FOR THEIR OWN PURPOSES. NO DOUBT THE ASSESSEE HAD CERTAIN SURPLU S FUNDS WHICH WERE OTHERWISE ADVANCED BY THE ASSESSEE TO CERTAIN OTHER PERSONS ON INTEREST-F REE BASIS. MERELY BECAUSE THE ASSESSEE HAD ITS 7 I. T. APPEAL NO. 5523 (DEL) OF 2010. OWN AMPLE RESOURCES AT ITS DISPOSAL CAN NOT NEGATE THE DEDUCTION IN RESPECT OF INTEREST PAID ON BORROWED FUNDS AS THE SURPLUS FUNDS WERE GIVEN FOR INTEREST-FREE LOANS TO RELATIVES OF PARTNERS. IN THE INSTANT CASE THE ASSESSEE HAD NO SURPLUS FUNDS AND THE BORROWED FUNDS HAVE BEEN GIVEN TO THE PARTNERS OF THE FIRM FOR THE PURPOSE OF ACQUISITION OF SHARES OF M/S. FRIENDS INFRASTRUCTURE PVT. LTD., WHICH HAD BEEN HELD TO BE FOR NON-COMMERCIAL EXPEDIENCY. THERE IS NO FURTHERANCE OF BUSINESS INTEREST OF THE ASSESSEE BY ACQUIRING MORE SHARES THOUGH THE PARTNERS WHO HAD CONTROLLING INTEREST FROM THE VERY BEGINNING IN THE SAID COMPANY. HENCE, THE DECISION IS NOT APPLICABLE. 12. AS REGARDS THE DECISION IN THE CASE OF RAJEEV L OCHAN KANODIA (SUPRA) THE ONE OF THE DIRECTOR WAS IN THE BUSINESS OF ACQUIRING CONTROLLI NG INTEREST IN VARIOUS COMPANIES. THE BORROWINGS UTILIZED FOR THE PURPOSE OF ACQUIRING CO NTROLLING INTEREST WAS HELD TO BE ALLOWABLE. IN THE CASE OF ASSESSEE, THE ASSESSEE IS NOT IN THE BU SINESS OF CONTROLLING INTEREST. THE PARTNERS OF TH E FIRM WERE ALREADY HAVING CONTROLLING INTEREST FROM THE INCEPTION OF THE COMPANY. THEREFORE, THE DECISION OF RAJEEV LOCHAN KANODIA (SUPRA) IS NOT AP PLICABLE TO THE FACTS OF THE ASSESSEES CASE. 13. IN THE CASE OF CIT VS. JARDINE HENDERSON LTD. ( SUPRA) THE ASSESSEES PRINCIPAL BUSINESS WAS MANAGING AGENCY. IT BORROWED MONEY FROM TIME T O TIME FROM THE BANK. THE INCOME TAX OFFICER HELD THAT THE ENTIRE AMOUNT OF INTEREST PAI D TO BANK COULD NOT BE DEDUCTED FROM THE BUSINESS INCOME AND THAT A PORTION OF INTEREST RELA TABLE TO THAT PORTION OF BORROWED AMOUNT WHICH WAS UTILIZED FOR INVESTMENTS IN SHARES HAD TO BE DI SALLOWED AS DEDUCTION FROM THE BUSINESS INCOME AND COULD BE ALLOWED ONLY AS A DEDUCTION FRO M THE DIVIDEND INCOME AND INTEREST ON SECURITIES AND THIS WAS CONFIRMED BY THE APPELLATE ASSISTANT COMMISSIONER. THE TRIBUNAL FOUND THAT THE ASSESSEE WAS NOT A DEALER IN SHARES. ITS BUSINESS WAS THAT OF MANAGING AGENCY. THE SHARES HELD BY THE ASSESSEE WERE WITH A VIEW TO RET AIN THE MANAGING AGENCY. THE TRIBUNAL HELD THAT NO PART OF INTEREST COULD BE DISALLOWED. ON A REFERENCE, IT WAS HELD THAT IT WAS THE CATEGORICAL FINDING OF THE TRIBUNAL THAT THE BORROW INGS FOR THE PURCHASE OF SHARES WAS FOR THE MANAGING AGENCY BUSINESS OF THE ASSESSEE AND TO RET AIN IT BRICK OVER THE MANAGING AGENCY BUSINESS. THE TRIBUNAL ALSO FOUND THAT THE INVESTM ENT IN SHARES WAS PRINCIPALLY AND PRIMARILY 8 I. T. APPEAL NO. 5523 (DEL) OF 2010. WITH A VIEW TO OBTAIN THE MANAGING AGENCY COMMISSIO N RATHER THAN THE DIVIDEND INCOME. THE SAID FACT WAS ALSO EVIDENT FROM THE COMPARATIVELY S MALL AMOUNT OF DIVIDEND, WHICH THE ASSESSEE RECEIVED COMPARED TO LARGE AMOUNT OF THE MANAGING A GENCY COMMISSION RECEIVED DURING THE VARIOUS PREVIOUS YEARS. THEREFORE, THE ENTIRE AMOU NT OF AMOUNT PAID WAS DEDUCTIBLE IN COMPUTING THE PROFIT AND GAINS OF ASSESSEES BUSINE SS. THIS DECISION IN THE CASE OF CIT VS. JARDINE HENDERSON LTD. (SUPRA) IS NOT APPLICABLE ON THE GROUND THAT THE PARTNERS OF THE ASSESSEE FIRM WERE ALREADY HAVING CONTROLLING INTEREST. THE ASSESSEE IS CLOSELY HELD COMPANY BY THE SAME SET OF PERSONS. THEREFORE, THIS DECISION IS OF NO HELP TO THE ASSESSEE. 14. IN THE CASE OF KEJRIWAL ENTERPRISES & ANOTHER ( SUPRA) THE ASSESSEE FIRM ENTERED INTO A JOINT VENTURE COLLABORATION AGREEMENT WITH A COMPAN Y OF THE USSR AT THE TIME JUST BEFORE THE DISINTEGRATION OF THE UNITED SOVIET RUSSIA. THE AG REEMENT WAS IN WRITING AND THE BASIC TERMS OF THE AGREEMENT WERE THAT THE COMPANY WOULD BE FLOATE D BY THE TWO PARTIES, AND SHARE CAPITAL WOULD BE CONTRIBUTED BY THE ASSESSEE TO THE EXTENT OF 60 PER CENT AND BY THE RUSSIAN COMPANY TO THE EXTENT OF 40 PER CENT. THE RUSSIAN COLLABORATO R WAS UNABLE TO CONTRIBUTE THE SHARE CAPITAL OF THE JOINT VENTURE COMPANY TO THE EXTENT AGREED. TH E CORRESPONDING 60 PER CENT OF THIS WAS MATCHED BY THE ASSESSEE COMPANY. ONLY A PART OF AP PLICATION MONEY FORWARDED BY THE ASSESSEE BECAME ACTUALLY CONVERTED INTO SHARE CAPITAL. THE JOINT VENTURE COMPANY DID GOOD BUSINESS THEREAFTER AND THE ASSESSEE EVEN GOT ITS OWN PRODUC T EXPORTED THROUGH IT AT MUCH PROFIT. THE RUSSIAN PARTY REQUESTED FOR RETURN OF ITS UNCONVERT ED MONEY, BUT IT WAS ASKED FOR IN DRIBLETS. THE RECORD SHOWED THAT AS AND WHEN THE MONEY WENT BACK FROM UNCONVERTED MONEY TO RUSSIA [I.E. PART OF 40 PER CENT] THE ASSESSEE FIRM ALSO TOOK BA CK THE CORRESPONDING 60 PER CENT FROM ITS CONTRIBUTORY SHARE APPLICATION MONEY. IN THESE CIR CUMSTANCES, A QUESTION AROSE IN THE ASSESSEES TAX RETURNS AS TO WHETHER SINCE THE FUNDS THE ASSES SEE HAD BORROWED FOR THE PURPOSE OF ADVANCING TO THE JOINT VENTURE WHICH WERE ATTRACTING INTEREST , THE ASSESSEE WAS ENTITLED TO CLAIM A DEDUCTION OF INTEREST PAID BY IT, ON SUCH BORROWINGS, AS DEDU CTION OF A REVENUE NATURE IN REGARD TO ITS RETURNS OF TAXABLE PROFITS. THE TRIBUNAL CAME TO THE CONCL USION THAT NOTHING HAD BEEN BROUGHT ON RECORD TO SHOW AS TO WHY THE ASSESSEE FIRM SHOULD HAVE KEP T ITS MONEY BLOCKED WITH THE JOINT VENTURE COMPANY WITHOUT CHARGING ANY INTEREST. SINCE THE P ARTNERS OF THE ASSESSEE FIRM WERE INTERESTED IN THE JOINT VENTURE COMPANY, INTEREST ON BORROWED CAP ITAL WAS DISALLOWED TO THE EXTENT IT LAID IN 9 I. T. APPEAL NO. 5523 (DEL) OF 2010. THAT COMPANY WITHOUT EARNING ANY INTEREST THERE. O N FURTHER APPEAL TO HONBLE HIGH COURT IT WAS HELD THAT THERE WERE NUMEROUS PAPERS BEFORE THE TRI BUNAL. IT WAS THE DUTY OF THE TRIBUNAL TO CONSIDER THE CASE OF THE ASSESSEE BEING COMPELLED T O KEEP ITS APPLICATION MONEY BLOCKED, BECAUSE ITS ASSOCIATE WAS BEING SO COMPELLED TO KEEP ITS MO NEY BLOCKED WITHOUT CONVERSION INTO SHARE CAPITAL BECAUSE OF THE STATES INTERNAL PROBLEMS. T HE BORROWINGS KEPT AS APPLICATION MONEY IN THE JOINT VENTURE COMPANY WAS FOR USE OF MONEY FOR ASSE SSEES BUSINESS AND THUS THE ONLY CONCLUSION OF LAW WOULD BE THAT INTEREST THEREON WAS DEDUCTIBL E AS REVENUE EXPENSES BY THE ASSESSEE. THE RATIO OF THIS DECISION IS NOT APPLICABLE TO THE FAC TS OF THE ASSESSEES CASE AS THERE WAS NO COMPULSION ON THE PART OF THE ASSESSEE FIRM TO KEEP BORROWED MONEY AS SHARE APPLICATION. THEREFORE, THE FACTS OF THE CASE ARE DISTINGUISHABL E. 15. IN VIEW OF THE ABOVE DISCUSSION IT IS HELD THA T THE INTEREST-BEARING BORROWED FUNDS WERE DIVERTED BY THE FIRM TO THE COMPANY IN ORDER T O INFUSE CAPITAL. THE FUNDS HAVE NOT BEEN USED FOR THE PURPOSE OF THE BUSINESS. SINCE THE IS SUE OF COMMERCIAL EXPEDIENCY HAVE NOT BEEN PROVED, IN OUR CONSIDERED OPINION, DISALLOWANCE OF INTEREST UNDER SECTION 36(1)(III) HAD BEEN RIGHTLY DONE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LD. CIT (APPEALS). ACCORDINGLY, WE DO NOT FIND ANY INFIRMITY IN THE ORDER PASSED BY TH E LD. CIT (APPEALS) CONFIRMING THE ORDER OF THE ASSESSING OFFICER. 16. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE IS DISMISSED. THE ORDER PRONOUNCED IN THE OPEN COURT ON : 30 TH NOVEMBER, 2011. SD/- SD/- [ RAJPAL YADAV ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 30 TH NOVEMBER, 2011. *MEHTA * 10 I. T. APPEAL NO. 5523 (DEL) OF 2010. COPY OF THE ORDER FORWARDED TO : - 1. APPELLANT. 2. RESPONDENT. 3. CIT, 4. CIT (APPEALS), 5. DR, ITAT, NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR, ITAT.