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

ITA 8382/MUM/2011

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 4050 (ITAT-MUMBAI)
• Duration Of Justice: 4 year(s) 1 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: E
• Next Hearing Date: 30-04-2014
• Assessment Year: 2008-2009
• Appeal Filed On: 09-12-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Business income; Business expenditure; Rule of consistency; Proportionate interest; Question of law; Commercial expediency; Onus to prove; Revised return
• Section: 143(3); 260A; 37(1); 37

Judgement Text

, , , IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES E, MUMBAI , , , BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER, AND SHRI ASHWANI TANEJA, ACCOUNTANT MEMBER ITA NO.8382/MUM/2011 ASSESSMENT YEAR: 2008-09 E-CITY INVESTMENTS & HOLDINGS COMPANY PRIVATE LIMITED, 844/4, SHAH INDUSTRIAL ESTATE, OFF. NEW LINK ROAD, OPP. LAXMI INDUSTRIAL ESTATE, ANDHERI (WEST), MUMBAI-400053 / VS. DCIT, RANGE-8(1)(OSD), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020 ( ! /ASSESSEE) ( ' / REVENUE) PAN. NO. AAACE8030F ! / ASSESSEE BY SHRI VIJAY MEHTA ' / REVENUE BY MR.J. SARAVANAN -DR # ' $ ! % / DATE OF HEARING : 23/12/2015 $ ! % / DATE OF ORDER: 03/02/2016 / O R D E R PER JOGINDER SINGH (JUDICIAL MEMBER) THE ASSESSEE IS AGGRIEVED BY THE IMPUGNED ORDER DA TED 16/09/2011 OF THE LD. FIRST APPELLATE AUTHORITY, MU MBAI. THE ONLY GROUND RAISED IN THIS APPEAL PERTAINS TO U PHOLDING E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 2 DISALLOWANCE OF INTEREST OF RS.6,63,78,465/-, U/S 3 6(1)(III) OF THE INCOME TAX ACT, 1961 (HEREINAFTER THE ACT) ON A CCOUNT OF FINANCE PROVIDED BY WAY OF SHARE APPLICATION/LOAN T O ITS SUBSIDIARIES/SISTER CONCERNS OUT OF COMMERCIAL EXPE DIENCY. 2. DURING HEARING, THE LD. COUNSEL FOR THE ASSESSE E, SHRI VIJAY MEHTA, EXPLAINED THAT THE ASSESSEE BORRO WED CERTAIN AMOUNTS OUT OF WHICH PART OF THE BORROWED A MOUNT WAS UTILIZED FOR GIVING LOANS IN THE FORM OF SHARE APPLICATION TO GROUP COMPANIES, WHERE THE ASSESSEE IS A HOLDING CO MPANY. THE CRUX OF ARGUMENT IS THAT THE AMOUNTS WERE ADVAN CED FOR COMMERCIAL EXPEDIENCY. OUR ATTENTION WAS INVITED TO PAGE 1 OF THE PAPER BOOK, CONTAINING THE STATUS OF FUNDS, BAL ANCE SHEET AND THE CAPITAL AVAILABLE WITH THE ASSESSEE. THE DI SALLOWANCE WAS ARGUED TO BE PRIMARILY ON THIS COUNT. IT WAS CO NTENDED THAT FOR ASSESSMENT YEAR 2007-08, WHILE FRAMING ASS ESSMENT U/S 143(3) OF THE ACT (PAGE 6 OF THE PAPER BOOK), N O DISALLOWANCE WAS MADE. ALL THE ENTITIES WERE EXPLAI NED TO BE INVOLVED IN IDENTICAL ACTIVITY AND THE ASSESSEE IS HOLDING COMPANY OF ALL THE ENTITIES. RELIANCE WAS PLACED UP ON THE DECISION IN S.A. BUILDERS CASE (288 ITR 1) (SC) BY CLAIMING THAT THE CASE OF THE ASSESSEE IS IDENTICAL TO THE D ECISION PRONOUNCE IN THE AFORESAID CASE. BY EXPLAINING THAT ULTIMATE UTILIZATION OF FUNDS HAS TO BE SEEN. THE LD. COUNS EL CONTENDED THAT THERE IS NO FINDING IN THE ASSESSMENT ORDER TO THE FACT THAT THE FUNDS WERE NOT USED OR THE MONEY WAS NOT A DVANCED FOR BUSINESS PURPOSES. OUR ATTENTION WAS INVITED T O PAGE-5 (PARA 2.2.2 OF THE IMPUGNED ORDER AND PAGE7 OF THE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 3 ASSESSMENT ORDER). RELIANCE WAS PLACED UPON THE DEC ISION IN S.P. JAISWAL ESTATES (P.) LTD. VS ACIT (140 ITD 19) (TM) (KOL.), HERO CYCLES P. LTD. VS CIT (379 ITR 347)(SC). IT W AS ALSO EXPLAINED THAT THE CASES RELIED UPON BY THE LD. COM MISSIONER OF INCOME TAX (APPEALS) ARE PRIOR TO THE DECISION A RRIVED AT IN THE CASE OF S.A. BUILDERS LTD. VS CIT (SUPRA). RELI ANCE WAS FURTHER PLACED IN CIT VS R.P.G. TRANSMISSION (266 C TR 533) (MAD.), WHEREIN, FACTS WERE CLAIMED TO BE IDENTICAL , BY FURTHER PLACING RELIANCE UPON THE DECISION IN CIT VS RELIAN CE COMMUNICATIONS INFRASTRUCTURE LTD. (270 TAXMAN 219) (BOM.). THE LD. COUNSEL FURTHER EXPLAINED THAT FOR A.Y. 200 7-08 (PAGE- 21 OF THE PAPER BOOK), THE ASSESSEE CLAIMED INTERES T, PAGE 24 OF THE PAPER BOOK, CONTAINING COMPUTATION OF INCOME , WHEREIN, NO DISALLOWANCE WAS MADE BY THE ASSESSING OFFICER. THE CRUX OF THE ARGUMENT IS THAT IF INTEREST IS ALLOWED IN E ARLIER YEAR, THE SAME CANNOT BE DISALLOWED IN LATER YEAR UNLESS AND UNTIL THE FACTS ARE DIFFERENT. FOR THIS PROPOSITION, RELIANCE WAS PLACED UPON FOLLOWING DECISION: I. CIT VS SRIDEV ENTERPRISES (192 ITR 165)(KAR.) II. ITO VS J.M.P. ENTERPRISES (101 ITD 324, 336-337) (A SR) 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 2.1. ON THE OTHER HAND, THE LD. DR, SHRI J. SARVAN AN, DEFENDED THE CONCLUSION DRAWN IN ASSESSMENT ORDER A S WELL AS E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 4 IMPUGNED ORDER BY CONTENDING THAT COMMERCIAL EXPEDI ENCY WAS NOT PROVED BY THE ASSESSEE AND FURTHER THE ASSE SSEE HIMSELF DISALLOWED THE INTEREST IN EARLIER ASSESSME NT ORDER, THEREFORE, THE LD. COMMISSIONER OF INCOME TAX (APPE ALS) IS JUSTIFIED IN DISALLOWING THE INTEREST. IN REPLY, TH E LD. COUNSEL FOR THE ASSESSEE EXPLAINED THAT THE ISSUE OF RS.6 CRORE S WAS RECTIFIED BY FILING REVISED RETURN BY THE ASSESSEE AND THE SAME WAS ACCEPTED BY THE ASSESSING OFFICER. THIS FACTUAL MATRIX WAS CONSENTED TO BE CORRECT BY THE LD. DR. 2.2. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE FACTS , IN BRIEF, ARE THAT THE ASSESSEE COMPANY WAS INCORPORATED WITH MAIN OBJECTS OF FINANCING AND PROMOTING GROUP COMPANIES, DECLARED LOSS OF RS.1,75,537/- IN ITS RETURN FILED ON 27/09/ 2008. THE LD. ASSESSING OFFICER DISALLOWED CLAIMED INTEREST O F RS.6,79,03,545/- U/S 36(1)(III) OF THE ACT. THE ASS ESSEE REVISED ITS RETURN ON 29/01/2010 DECLARING BUSINESS LOSS OF RS.6,65,54,000/- WITHDRAWING INTEREST WRONGLY DISAL LOWED U/S 36(1)(III) OF THE ACT, WHILE FILING THE ORIGINAL RE TURN AS SHARE APPLICATION MONEY/LOAN GIVEN TO SUBSIDIARY/ASSOCIAT ES CONCERNS, CLAIM TO BE OUT OF COMMERCIAL EXPEDIENCY. THE ASSESSEE ADVANCED INTEREST FREE LOANS AND SHARE APP LICATION MONEY TO ITS SUBSIDIARIES/SISTER CONCERN DURING EAR LIER YEARS. THE SUBSIDIARIES USED THESE FUNDS FOR THEIR BUSINES S PURPOSES, THEREFORE, THE INTEREST THEREON WAS CLAIM ED AS ALLOWABLE U/S 36(1)(III) OF THE ACT. THE LD. ASSES SING OFFICER COMPLETED THE ASSESSMENT U/S 143(3) OF THE ACT DISA LLOWING E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 5 RS.6,63,78,465/- U/S 36(1)(III) OF THE ACT ON THE G ROUND THAT NO BUSINESS INTEREST OF THE ASSESSEE HAS BEEN SERVE D BY GRANTING INTEREST FREE LOANS TO ITS SUBSIDIARIES. 2.3. ON APPEAL, BEFORE THE LD. COMMISSIONER OF INC OME TAX (APPEALS), THE EXPLANATION OF THE ASSESSEE COUL D NOT FIND FAVOUR AND THUS THE STAND TAKEN IN THE ASSESSMENT O RDER WAS AFFIRMED. THE RELEVANT FINDING CONTAINED IN THE IMP UGNED ORDER IS REPRODUCED HEREUNDER FOR READY REFERENCE:- 2.1.1 IN THE CASE, DURING THE COURSE ASSESSMENT PROC EEDINGS, THE LD. AO ASKED THE APPELLANT TO EXPLAIN REASONS FOR REVISIN G THE RETURN OF INCOME AND WHY INTEREST EXPENDITURE SHOULD NOT BE DI SALLOWED U/S. 36(1) (II). IN REPLY, THE APPELLANT HAS REVISED THE RETURN OF INCOME TO WITHDRAW INTEREST WRONGLY DISALLOWED IN THE ORIGINAL RET URN OF INCOME. THE APPELLANT FURTHER SUBMITTED THAT THE SHARE APPLIC ATION MONEY /LOANS TO SUBSIDIARY OUT OF COMMERCIAL EXPEDIENCY. TH E SUBSIDIARY HAS USED THESE FUNDS FOR ITS BUSINESS. HENCE, IT USE OF FUNDS EXPEDIENCY. THE SUBSIDIARY HAS USED THESE FUNDS FOR ITS BUSINESS. HEN CE, IS USE OF FUNDS BY THE APPELLANT FOR ITS OWN BUSINESS AND INTEREST TH EREON 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 B Y ITAT MUMBAI IN THE CASE OF INDIAN HOTELS LTD - 276 ITR AND THE RATI O JUDGEMENT IN BOTH CASES IS SAME. IN BOTH CASES, IT IS HELD THAT AS TH E COMPANY ADVANCES BORROWED MONEY TO ITS SUBSIDIARY AND SAME IS USED BY T HE SUBSIDIARY FOR SOME BUSINESS PURPOSE THE APPELLANT WILL BE ENTI TLED TO DEDUCTION OF INTEREST ON BORROWED FUNDS. THE LD. AO OBSERVED THAT T HE APPELLANT IS ENGAGED IN THE BUSINESS OF INVESTMENTS. THE BORROWED FUNDS HAVE BEEN USED FOR THE PURPOSE OF GRANTING INTEREST FREE LOANS AN D ADVANCE SHARE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 6 APPLICATION MONEY TO VARIOUS COMPANIES INCLUDING SUB SIDIARY 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 T HE 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 INC OME, IT COMES TO RS. 6,79,03,542/ - AND WHILE WORKING OUT THE ABOVE D ISALLOWANCE, THE APPELLANT COMPANY HAS DISALLOWED TOTAL INTEREST CLAI MED IN THE P&L ACCOUNT IN COMPUTING OF INCOME AND CREDITED THE INTE REST RECEIVED AT RS.15,25,077/- PERTAINING TO THE FUNDS INVESTED FOR E ARNING INTEREST INCOME INCLUDING INTEREST ON LT. REFUND. THE APPELLAN T HAS TAKEN BORROWED FUNDS @14.5% AND GIVEN ON INTEREST TO ONE PART Y AT 15% AND SECOND PARTY AT 12% AND TO 3RD PARTY AT 14.5%. FROM THRE E 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 A ND RS. 30.00 LAKH ON S13.06.2007 WAS UTILIZED FOR INVESTMENT TOWARDS EA RNING INTEREST INCOME AT 15% AND 12% RESPECTIVELY. THE LD. AO FURTHE R OBSERVED THAT THE APPELLANT HAS ALSO GIVEN LOAN @ 14.5% TO SHREE V IJAYRAJ 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 C RORE 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. A O FURTHER HELD THAT SIMILAR IS THE POSITION OF LAST YEARS INTEREST BE ARING FUND GIVEN TO SUBSIDIARIES. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 7 2.1.2. THE LD. AO FURTHER HELD THAT INTEREST BEARING FU NDS WERE NOT GIVEN TO SUBSIDIARIES, APPELLANT COMPANY HAS EARNED I NTEREST @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 OCCURRE D INCOME TO THE COMPANY AND THERE WOULD HAVE BEEN PROFIT TO THE C OMPANY AND NOT LOSS. THE APPELLANT FURTHER SUBMITTED THAT NO BUSINE SS INTEREST OF THE COMPANY HAS BEEN SERVED BY GRANTING INTEREST FREE LOANS TO SUBSIDIARIES. THE ID. AO THEREFORE DISALLOWED APPELLAN T'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 T HE 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 B USINESS OF SUBSIDIARIES AND OTHER ASSOCIATE CONCERNS. THE SHARE AP PLICATION 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 INTE REST THEREON IS ALLOWABLE. THE LD. AR OF THE APPELLANT FURTHER SUBMIT TED THAT THIS PROPOSITION WAS EXAMINED BY THE SUPREME COURT IN THE C ASE 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, HE NCE IF HOLDING COMPANY ADVANCES BORROWED MONEY TO ITS SUBSIDIARY AND SAME IS USED E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 8 BY THE SUBSIDIARY FOR SOME BUSINESS PURPOSE THE ASSE SSEE WILL BE ENTITLED TO DEDUCTION OF INTEREST ON BORROWED FUNDS. T HE APPELLANT FURTHER SUBMITTED THAT THE DETAILS OF LOANS AND ADVAN CES ALONG WITH SHARE HOLDING OF ASSESSEE COMPANY IN THESE COMPANIES IS AS UNDER: NAME OF THE COMPANY AMOUNT(RS.) 31.03.2008 % AGE OF HOLDING INTER CORPORATE DEPOSIT FUN MULTIPLEX (P) LTD. SHREE VIJAYRAJ ENTERTAINMENT & SOFTWARE (P.) LTD. SUNCITY PROJECTS (P.) LTD. 33,51,83,379 1,07,53,801 5,28,689 99.94% INTEREST CHARGED INTEREST CHARGED SHARE APPLICATION MONEY FUN MULTIPLEX (P.) LTD. E CITY REALITY HOLDINGS P. LTD. E CITY EXHIBITION HOLDING P. LTD. E CITY FILMS (INDIA) PVT. LTD. E CITY PUBLISHING & DISTRIBUTING (INDIA) PVT. LTD. 18,77,00,000 44,75,00,000 1,45,50,000 5,32,84,430 30,50,000 99.94% 99.00% 99.79% 50.00% 50.00% 2.2.2. THE APPELLANT FURTHER SUBMITTED THAT THE APPEL LANT HAS ITSELF PROMOTED AND OWNED THESE COMPANIES AND IS A HOLDING COMPANY OR CAN BE CALLED A PARENT COMPANY AND THEREFORE IT HAS D EEP INTEREST IN THE BUSINESS OF ITS SUBSIDIARIES SITUATED AT DIFFEREN T PLACES ALL OVER INDIA. FURTHER, THE ASSESSEE BEING A HOLDING COMPANY HAS DEEP INTEREST IN THE BUSINESS OF SUBSIDIARIES AND THESE SU BSIDIARIES HAVE USED THESE LOANS/ ADVANCES FOR THEIR OWN BUSINESS AND NOT FOR ANY NON-BUSINESS PURPOSE AND THEREFORE HAS TO BE CONSIDERE D AS USE OF FUNDS FOR ITS OWN BUSINESS OUT OF COMMERCIAL EXPEDIEN CY AND THEREFORE EVEN IF THE BORROWED FUNDS ARE UTILIZED FOR SUC H ADVANCES THE ASSESSEE IS ENTITLED TO DEDUCTION OF INTEREST. T HE LD. AR OF THE APPELLANT FURTHER SUBMITTED THAT WHERE A LOAN IS ADVAN CED TO A SUBSIDIARY/SISTER CONCERN IT STANDS ON A DIFFERENT FOOT ING THAN TO ITS DIRECTORS OR THEIR CLOSE RELATIVES. IN THE CASE OF A HUN DRED PERCENT, SUBSIDIARY OF THE COMPANY, THE PROFIT OF THE SUBSIDIA RY BELONGS TO THE COMPANY AND IF A HIGHER RATE OF INTEREST IS CHARGED THI S 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 T O BE KEPT IN VIEW WHILE DETERMINING THE QUESTION WHETHER ADVANCEMENT OF A LOAN IS A E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 9 MEASURE OF BUSINESS EXPEDIENCY. THE DISTINCTION HAS TO BE KEPT IN MIND BETWEEN A CASE WHERE THE LOAN IS USED FOR THE PU RPOSE OF THE BUSINESS AND A CASE OF THE LOAN MISUTILISED BY GIVI NG IT INTEREST FREE OR AT A NOMINAL INTEREST TO DIRECTORS, THEIR RELATIVES. IN THE LATTER SITUATION, INTEREST CAN BE DISALLOWED, BUT NOT IN TH E CASE WHERE ADVANCES ARE MADE TO A SUBSIDIARY COMPANY WHO USED TH E SAME FOR PURPOSES OF BUSINESS. THE LD. AR OF THE APPELLANT F URTHER SUBMITTED THAT HON'BIE SUPREME COURT IN CASE OF S.A. BUILDERS LT D VS. CIT 288 ITR 1/158 TAX MAN 74 IT IS HELD AS UNDER: (A) THE AMOUNT ADVANCED TO SUBSIDIARIES OR SISTER CONC ERNS AS A MEASURE OF COMMERCIAL EXPEDIENCY EVEN NOT FROM THE POI NT 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 SUBS IDIARY FOR SOME BUSINESS PURPOSE, THE ASSESSEE WOULD BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED FUNDS EVEN IF USED FOR ADVAN CING 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 O F THE APPELLANT'S CASE, NO PART OF INTEREST DISALLOWED RELATES TO INTERES T FREE ADVANCES MADE TO SUBSIDIARIES ON ACCOUNT OF COMMERCIAL EXPEDIE NCY AND ITS DEEP BUSINESS INTEREST. WITHOUT PREJUDICE TO ABOVE, T HE APPELLANT FURTHER SUBMITTED THAT SUBMIT THAT INTEREST FREE FUNDS / INTERNAL ACCRUALS HAVE BEEN USED FOR THE PURPOSE OF GIVING INT EREST 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 INTERE ST FREE FUNDS AVAILABLE WITH THE ASSESSEE IS AS UNDER: E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 10 AS ON AS ON 31.03.2008 31.03.200 7 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 CLEA R 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 C RORES (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 U TILITIES (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 IN TEREST FREE FUNDS OF RS.40.37 CRORES AVAILABLE TO THE ASSESSEE AS EXPLA INED ABOVE. THE LD. AR OF THE APPELLANT FURTHER OBSERVED THAT LD. AO HAS A LSO OBSERVED THAT HAD THE INTEREST BEARING FUNDS WERE NOT GIVEN TO SUBSI DIARIES, ASSESSEE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 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. C ANNOT DECIDE HOW BUSINESS IS REQUIRED TO BE RUN BY AN ASSESSEE. FURTHER, AS PER THE DECISION OF APEX COURT (SUPRA) WHAT IS RELEVANT IS WHE THER THE AMOUNT- WAS ADVANCED TO SUBSIDIARIES AS A MEASURE OF COMMERCIA L EXPEDIENCY AND NOT FROM THE POINT OF VIEW FOR EARNING PROFIT. THE TRANSACTIONS WITH SUBSIDIARY COMPANIES ARE PURELY BUSINESS TRANSACTIONS A ND OUT OF COMMERCIAL EXPEDIENCY HENCE INTEREST ON ACCOUNT OF SU CH ADVANCES IF DISALLOWED WILL BE AGAINST THE JUDGMENT OF HON. SUP REME COURT. THE LD. AR OF THE APPELLANT FURTHER PLACED RELIANCE ON THE FOL LOWING DECISIONS:- I) SUPREME COURT IN CASE OF S.A. BUILDERS LTD VS CIT 2 88 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. L TD (276 ITR 104) ILL) RELIANCE UTILITIES (313 ITR 340) 2.3 DECISION 2.3.1 I HAVE CAREFULLY CONSIDERED THE CONTENTION OF T HE APPELLANT COMPANY AS WELL AS CAREFULLY GONE THROUGH THE AVAILA BLE DOCUMENTS ON RECORD. I FIND THAT THE LD. AO HAS MADE THE DISALLOWA NCES OF INTEREST U/ S. 36(1)(III) OF THE ACT ON THE GROUND THAT IT WAS F OR THE NON BUSINESS PURPOSES. THE LD. AR OF THE APPELLANT CONTENDED BEF ORE 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 E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 12 SUFFICIENT TO MEET THE ADVANCES MADE TO SUBSIDIARY C OMPANIES. I FIND THAT BOTH THE ARGUMENTS OF THE LD. AR OF THE APPELLA NT DESERVE NO MERIT. FIRSTLY, THAT THE APPELLANT IS A INVESTMENT CO MPANY AND GIVES LOAN& ADVANCES AND DOES NOT DEAL IN TREADING OF SHARE S &SECURITIES. THEREFORE, THE MAIN BUSINESS OF THE APPELLANT COMPANY IS TO GIVE LOAN ETC. AND EARNED INCOME THEREON WHILE THE SUBSIDIARY C OMPANY OF THE APPELLANT ARE INVOLVED IN DOING SUBSTANTIVE BUSINESS SUCH AS CONSTRUCTING MULTIPLEX AND ENTERTAINMENT INDUSTRIES ET C. ADVANCING LOAN TO THE COMPANY DOES NOT SERVE ANY BUSINESS PURP OSE OF THE APPELLANT. IT IS ALSO INTERESTING TO KNOW THAT THE A PPELLANT IN ITS OWN WORKING IN THE ORIGINAL RETURN OF INCOME HAS MADE DISAL LOWANCE 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 ELA BORATED 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 PURPOS E, THE SAME CANNOT BE SAID TO BE GIVEN FOR THE PURPOSES OF ASSES SEE'S OWN BUSINESS AND THE PROPORTIONATE INTEREST ON SUCH ADVANCING OF LO AN NEED TO BE DISALLOWED. IN THE CASE OF MAROLIA & SONS VS. CIT(1 981) 129 ITR 475 (ALL), THE HON'BLE ALLAHABAD HIGH COURT RELYING HEAVI LY ON THE DECISIONS OF MILAPCHAND R. SHAH VS. CIT (1965) 58 ITR 525 (MA D) AND ROOPCHAND CHABILDASS & SONS VS. CIT (1967) 63 ITR 166 (MAD) H AS HELD THAT IF THE CAPITAL BORROWED IS NOT UTILISED FOR THE PURPOSES OF T HE BUSINESS, THE ASSESSEE WILL NOT BE ENTITLED TO DEDUCTION UNDER THI S CLAUSE. IN CASE, AFTER HAVING BORROWED THE CAPITAL FOR BUSINESS PURPOSES , THE FIRM GIVES THE SAME TO ITS PARTNERS FOR THEIR PERSONAL USE OR UTILIS ATION, THE FIRM E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 13 WOULD NOT BE ENTITLED TO CLAIM DEDUCTION ON THE AMO UNT DIVERTED FOR UTILIZATION FOR OTHER PURPOSES OR BY OTHER PERSONS. IT A PPEARS 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 EX PRESS NEWSPAPERS (MADURAI) P. LTD.(1999) 238 ITR 70 (MAD), THE HON'BL E HIGH COURT HAS HELD THAT THE FACT THAT THE MONEY WAS NOT PAID DIREC TLY, 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 F OR SECURING BENEFITS TO ITSELF BY WAY 'OF TRADING OR CARRYING ON B USINESS 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. THOU GH A LTD. IS PURPORTED TO CHARGE INTEREST IN THE FIRST YEAR, SUBSEQU ENTLY, 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. SUB SEQUENTLY WITH INTEREST OR THAT THE ASSESSEE RECEIVED DIVIDENDS FROM O UT 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 ASCERTA INING THE REAL CHARACTER OF A TRANSACTION, IF THAT TRANSACTION WAS A F RAUDULENT ONE OR WAS INTENDED TO EVADE PAYMENT OF TAX. WHILE LEGITIM ATE TAX AVOIDANCE IS ALWAYS PERMISSIBLE, THE DEVICES ADOPTED TO EVADE PAYMENT OF TAX, E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 14 HOWEVER, ARE NOT PERMISSIBLE, THOUGH THE DIVIDING LIN E IS NOT ALWAYS EASY TO DRAW, BUT SUCH LINE DOES EXIST. THE TRUE CHAR ACTER OF THE TRANSACTION HERE CLEARLY WAS ONE OF AN ADVANCE BY THE ASSESSEE TO THE BOMBAY COMPANY FOR WHOSE BENEFIT THAT SUM WAS OBVIOU SLY INTENDED AND HAD ONLY BEEN CHANNELLED THROUGH THE A LTD. THE TRIBUNAL HAS FAILED TO NOTICE THE FACTS WHICH HAD BEEN SET OUT I N THE DRAFT ASSESSMENT ORDER AND HAS ALSO ERRED IN ADOPTING THE WRON G 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 BO RROWED, BUT, NOT USED FOR THE PURPOSE OF BUSINESS OR PROFESSION OF THE ASSESSEE. RS. 10 LAKHS 'INVESTED' IN A LTD. BEING IN SUBSTANCE AN D REALITY AN AMOUNT ADVANCED TO THE BOMBAY COMPANY FOR USE OF FINANCING THE CONSTRUCTION UNDERTAKEN BY IT CANNOT BE SAID TO BE AN AMOUNT WHIC H FORMED PART OF THE CAPITAL BORROWED FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. THE TRIBUNAL WAS NOT RIGHT IN DELETING THE DISALLOWANCE O F INTEREST ATTRIBUTABLE TO BORROWERS DIVERTED TO I LTD. THROUGH A L TD. 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 H ELD THAT THE ASSESSEE IS A FINANCING COMPANY. WHETHER IT BORROWS A HUGE SUM OF MONEY, CASH BALANCE IN ITS OWN ACCOUNT MAY SHOW A H UGE 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. NORMALL Y A FINANCING COMPANY WOULD NOT GRANT ANY INTEREST FREE LOAN. THE A SSESSEE DESPITE SEVERAL OPPORTUNITIES GRANTED, DID NOT PRODUCE THE RELEV ANT DOCUMENTS. AN ADVERSE INFERENCE, THEREFORE, SHOULD HAVE BEEN DRAWN AGAINST THE ASSESSEE. THERE CANNOT BE ANY DOUBT WHATSOEVER THAT T HE NEXUS BETWEEN THE AMOUNT PAID BY WAY OF ADVANCE TO A SIST ER CONCERN AND E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 15 THE FUND AVAILABLE AT THE RELEVANT TIME IN ASSESSEE' S HANDS MUST BE FOUND OUT FROM THE ADVANCES TAKEN BY THE ASSESSEE. T HE ONUS TO PROVE THAT IT IS ENTITLED TO IN THIS REGARD WAS ON THE ASSE SSEE. IT WAS TO BE PROVED THAT A BONA FIDE LOAN HAD BEEN GRANTED IN FAVO UR OF A SISTER CONCERN. IT WAS, THEREFORE, ITS DUTY TO PLACE REQUISITE MATERIALS ON RECORD. KEEPING IN VIEW THE FACT THAT THE ASSESSEE HA D NOT PRODUCED MATERIALS, DESPITE OPPORTUNITIES HAVING BEEN GRANTED T O IT, BY THE AO, THE PURPORTED FINDING OF FACT ARRIVED AT BY THE TRIBUNA L MUST BE HELD TO BE PERVERSE. IN OTHER YEARS ALSO THE ASSESSEE HAVING DE SPITE OPPORTUNITIES BEING GIVEN DID NOT PRODUCE DOCUMENTS, THE FACT THAT NEITHER IN THE PREVIOUS YEARS NOR IN THE LATER YEARS SUC H TRANSACTIONS HAD BEEN QUESTIONED BY ITSELF WOULD NOT DETER THE CO URT FROM EXAMINING THE SAID QUESTION. AS THE ASSESSEE COULD NOT PRODUCE ANY DOCUMENT IN THIS REGARD, AN ADVERSE INFERENCE IN TERMS O F 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 INST ANT 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 ASSE SSEE 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 I T WAS PAYABLE ON THE MONEYS BORROWED AND DIVERTED TO SISTER CONCERNS FREE OF INTEREST WAS DISALLOWED IN THOSE YEARS. HOWEVER, DURING THE REL EVANT YEAR, THE ASSESSEE HAD CHARGED INTEREST ON THE DEBIT BALANCES T O ITS SISTER CONCERNS AT THE RATE OF 4 PER CENT PER ANNUM. THE AAC A CCEPTED THAT THE ASSESSEE COULD HAVE ADVANCED INTEREST-FREE LOANS TO ITS SISTER E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 16 CONCERNS OUT OF ITS CAPITAL. HOWEVER, THE ASSESSEE'S CLAIM THAT AMOUNTS STANDING TO THE CREDIT OF THE VARIOUS SUNDRY CREDITORS RE PRESENTING 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 ASS ESSEE MUST HAVE LIKEWISE SOLD GOODS ON CREDIT FREE OF INTEREST. BESIDE S THIS, THE AMOUNTS ADVANCED TO ITS SISTER CONCERNS, ON THE ASSESSEE'S OW N 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 INTE REST AT THE RATE OF 4 PER CENT. ON SUCH COMPUTATION, HE REDUCED THE DISAL LOWANCE OF INTEREST ON BORROWINGS TO THE EXTENT IT WAS DIVERTED T O SISTER CONCERNS. THE VIEW TAKEN BY THE AAC IN THIS REGARD WAS CORRECT. T HE TRIBUNAL WAS NOT JUSTIFIED IN DELETING THE DISALLOWANCE OF INTERE ST 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 Y EAR 1995-96 WHICH ITSELF SHOWS THAT THE CONCERN HAD TAKEN UNSECU RED LOANS, WHICH WAS CONSIDERED AS ONE OF THE MAIN SOURCES OF FUNDS AN D 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 AN D 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 E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 17 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 T HEY ARE PURELY QUESTIONS OF FACT, MUCH LESS A PURE QUESTION OF LAW. BESIDES THE FACT THAT NO QUESTION OF LAW, MUCH LESS A SUBSTANTIAL QU ESTION OF LAW, ARISES IN THE PRESENT CASE, THE OTHER PREDOMINANT FACTORS WHICH WOULD REQUIRE DISMISSAL OF THE APPEAL IS THAT, FROM THE RECORDS NEXU S CAN BE TRACED BETWEEN THE BORROWED FUNDS AND THE INTEREST-FREE ADVANC ES MADE BY THE ASSESSEE AND ITS SISTER-CONCERN. SECONDLY, IT HA S BEEN CLEARLY ESTABLISHED ON RECORD THAT THE ASSESSEE ITSELF HAD TA KEN LOANS WITH INTEREST AND HAD ADVANCED FUNDS BY DIVERSION OR OTHERWI SE 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 T HE ASSESSEE, IS REQUIRED TO BE REPAID AS PER THE FIXED SCHEDULE AGREED T O 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 I N DAY-TO- DAY WORKING OF THE COMPANY AND USUALLY THERE REMAINS A DE BIT 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 INTE REST-FREE BASIS, EVEN IF THE ALLEGED SURPLUS AMOUNT COULD NOT BE REPA ID TO THE FINANCIAL INSTITUTION BEFORE THE SCHEDULED DATE AS FAR AS THE T ERM LOAN IS E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 18 CONCERNED, BUT THE INTEREST BEING PAID BY THE ASSESSE E ON . THE WORKING CAPITAL COULD HAVE CERTAINLY BEEN SAVED TO THAT EXTE NT. 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 NA TURE OF FUNDS BEING PROVIDED TO SISTER-CONCERN WHICH ARE CLOSELY-HELD TO C ARRY ON BUSINESS AND EARN INCOME THERE ON WITHOUT INCURRING ANY COST OF FUND OR WITHOUT EVEN INVESTING ANYTHING. IF THE ASSESSEE HAD TO TRAN SFER THE MONEY IN THE FORM OF INTEREST-FREE LOAN FROM ONE COMPANY TO ANOT HER CLOSE COMPANY, THE SAME COULD VERY WELL BE IN THE MANNER BY INTRODUCING LESS CAPITAL IN ONE COMPANY AND BY INVESTING THE BA LANCE AMOUNT IN THE OTHER COMPANY AS CAPITAL BECAUSE ACCORDING TO THE ASS ESSEE, 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-VI S THE FUNDS DIVERTED TOWARDS SISTER-CONCERN ON INTEREST-FREE BASIS I S 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 C ORRECT. SEC.36(1 )(III) PROVIDES FOR DEDUCTION OF INTEREST ON THE LOANS RAISED FOR BUSINESS PURPOSES. ONCE THE ASSESSEE CLAIMS ANY SUCH DEDUCTI ON IN THE BOOKS OF ACCOUNT, THE ONUS WILL BE ON THE ASSESSEE TO SATISF Y 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 E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 19 FUNDS TO SISTER-CONCERNS OR ANY OTHER PERSON WITHOUT AN Y INTEREST, THERE WOULD BE VERY HEAVY ONUS ON THE ASSESSEE TO BE DISCH ARGED 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-C ONCERNS FOR NON- BUSINESS PURPOSES WITHOUT ANY INTEREST AND ACCORDINGL Y, THE ASSESSEE SHOULD BE ALLOWED DEDUCTION OF INTEREST BEING PAID O N THE LOANS RAISED BY IT TO THAT EXTENT. EVEN THE PLEA OF NEXUS OF LOA NS RAISED BY THE ASSESSEE WITH THE FUNDS ADVANCED TO THE SISTER-CONC ERNS ON INTEREST- FREE BASIS, MAY BE IT IS PLEADED TO BE OUT OF SALE P ROCEEDS OR SHARE CAPITAL OR DIFFERENT ACCOUNT CANNOT BE ACCEPTED, ENTI RE MONEY IN A BUSINESS ENTITY COMES IN A COMMON KITTY. THE MONIES RECEIVED AS SHARE CAPITAL, AS TERM LOAN, AS WORKING CAPITAL LOAN, AS SA LE PROCEEDS, ETC. DO NOT HAVE ANY DIFFERENT COLOUR. WHATEVER ARE THE RECEIPTS IN THE BUSINESS, THAT HAVE THE COLOUR OF BUSINESS RECEIPTS A ND HAVE NO SEPARATE IDENTIFICATION. SOURCES HAVE NO CONCERN WHATS OEVER. THE ONLY THING SUFFICIENT TO DISALLOW THE INTEREST PAID ON TH E 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, STIL L 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 W OULD RESULT IN NOT PRESENTING TRUE AND CORRECT PICTURE OF THE ACCOUNTS OF T HE ASSESSEE AS AT THE COST BEING INCURRED BY THE ASSESSEE, THE SISTE R-CONCERN WOULD BE ENJOYING THE BENEFITS THEREOF. IT CANNOT POSSIBLY BE HELD THAT THE FUNDS E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 20 TO THE EXTENT DIVERTED TO SISTER-CONCERNS OR OTHER PERSO NS FREE OF INTEREST WERE REQUIRED BY THE ASSESSEE FOR THE PURPOSE O F ITS BUSINESS AND LOANS TO THAT EXTENT WERE REQUIRED TO BE RAISED. TH E THEORY OF DIRECT NEXUS OF THE FUNDS BETWEEN BORROWINGS OF THE FU NDS 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 OW N FUNDS IN THE FORM OF CAPITAL INTRODUCED IN BUSINESS, THAT AGAIN WI LL 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-BUSINES S PURPOSES WITHOUT INTEREST, A PLEA IS SOUGHT TO BE RAISED THAT THE AMOUNT ADVANCED WAS OUT OF ITS CAPITAL, WHICH IN FACT STOO D EXHAUSTED IN SETTING UP OF THE UNIT. SUCH A PLEA MAY BE ACCEPTAB LE 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 C ASE 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 PRIN CIPLES ANALOGOUS THERETO PLACES THE BURDEN IN RESPECT THEREOF UPON THE A SSESSEE, AS THE FACTS ARE WITHIN ITS SPECIAL KNOWLEDGE. HOWEVER, A P RESUMPTION 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 BAN KS AND OTHER FINANCIAL INSTITUTIONS WOULD BE GIVING LOAN TO ITS SUBSIDIARY COMPANIES AND THAT TOO WHEN IT PAYS A HEAVY INTEREST TO ITS LE NDERS, IT WOULD CLAIM E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 21 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 C APITAL OR THAT THE REVENUE HAD NOT BEEN ABLE TO ESTABLISH NEXUS OF THE FUNDS ADVANCED TO THE SISTER-CONCERNS WITH THE BORROWED FUND S. ONCE IT IS BORNE OUT FROM THE RECORD THAT THE ASSESSEE HAD BORROWE D CERTAIN FUNDS ON WHICH LIABILITY TO PAY TAX IS BEING INCURRED AND ON THE OTHER HAND, CERTAIN AMOUNTS HAD BEEN ADVANCED TO SISTER-CO NCERNS OR OTHERS WITHOUT CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTEREST TO THE EXTENT THE ADVANCE HAD BEEN MADE WIT HOUT CARRYING ANY INTEREST IS TO BE DISALLOWED UNDER S. 36(1)(III) OF T HE ACT. SUCH BORROWINGS TO THAT EXTENT CANNOT POSSIBLY BE HELD FOR THE PURPOSE OF BUSINESS BUT FOR SUPPLEMENTING THE CASH DIVERTED WIT HOUT DERIVING ANY BENEFIT OUT OF IT. ACCORDINGLY, THE ASSESSEE WILL N OT BE ENTITLED TO CLAIM DEDUCTION OF THE INTEREST ON THE BORROWINGS TO THE EX TENT THOSE ARE DIVERTED TO SISTER-CONCERNS OR OTHER PERSONS WITHOUT IN TEREST 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 OTH ER HAND, CERTAIN AMOUNTS HAVE BEEN ADVANCED TO SISTER- CONCERNS WITHOU T CARRYING ANY INTEREST AND WITHOUT ANY BUSINESS PURPOSE, THE INTERE ST TO THE EXTENT THE ADVANCE HAD BEEN MADE WITHOUT CARRYING ANY INTERES T IS TO BE DISALLOWED; ONUS IS ON THE ASSESSEE TO PROVE THE NEX US BETWEEN THE BORROWED FUNDS AND THE FUNDS ADVANCED TO OTHERS WITHOU T INTEREST. IN VIEW OF THE FOREGOING, THE ADDITIONS MADE BY THE LD. AO IS ACCORDINGLY UPHELD AND THIS GROUND OF APPEAL IS ACCORDINGLY DISMI SSED. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 22 2.4. IF THE OBSERVATION MADE IN THE ASSESSMENT ORD ER, LEADING TO ADDITION MADE TO THE TOTAL INCOME, CONCL USION DRAWN IN THE IMPUGNED ORDER, MATERIAL AVAILABLE ON RECORD, ASSERTIONS MADE BY THE LD. RESPECTIVE COUNSEL, IF K EPT IN JUXTAPOSITION AND ANALYZED, WE FIND THAT IDENTICAL SUBMISSIONS WERE RAISED BY THE ASSESSEE BEFORE THE LD. FIRST AP PELLATE AUTHORITY. NOW, WE ARE EXPECTED TO DEAL WITH THE O BJECTIONS RAISED BY THE LD. ASSESSING OFFICER AND DEALT WITH BY THE LD. FIRST APPELLATE AUTHORITY. ANOTHER POINT WHICH IS T O BE ADJUDICATED BY US IS WHETHER THERE WAS ANY COMMERC IAL EXPEDIENCY IN ADVANCING THE LOANS TO THE SISTER- CONCERNS/GROUP COMPANIES, WHERE THE ASSESSEE IS A H OLDING 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 COMME RCIAL EXPEDIENCY WAS VERY MUCH THERE IN ADVANCING SUCH LO ANS. FOR THIS PROPOSITION, WE ARE EXPECTED TO ANALYZE THE UT ILIZATION OF SUCH LOANS. WE NOTE THAT THERE IS NO FINDING IN THE ASSESSMENT ORDER THAT SUCH LOANS WERE NOT USED FOR BUSINESS PU RPOSES, WHEREAS, FOR A.Y. 2007-08, WHILE FRAMING THE ASSESS MENT 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 A SSESSMENT YEAR BY THE REVENUE ESTABLISHING THEIR STAND. THUS , ON THE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 23 PRINCIPLE OF CONSISTENCY THE ASSESSEE IS HAVING A G OOD 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 ABSEN CE 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 MATERIA L WAS BROUGHT ON RECORD BY THE REVENUE, THEREFORE, ON THE ISSUE OF CONSISTENCY, WE FIND MERIT IN THE CONTENTION OF THE ASSESSEE. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 24 IN THE FOLLOWING CASES, WHEREIN, INTEREST ON LOAN WAS NOT DISALLOWED IN EARLIER YEARS AND THE LOAN BALANCE WA S BROUGHT FORWARD FROM EARLIER YEAR, IT WAS HELD THAT NO DISA LLOWANCE FOR INTEREST ON SUCH LOAN COULD BE MADE FOR THE SUBSEQU ENT ASSESSMENT YEARS:- I. CIT VS SRIDEV ENTERPRISES (192 ITR 165)(KAR.) II. ITO VS J.M.P. ENTERPRISES (101 ITD 324, 336-337) (A SR) 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 FORTIFI ES 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 COMMER CIAL EXPEDIENCY. THE WORD COMMERCIAL EXPEDIENCY HAS BE EN ANALYZED BY HONBLE APEX COURT IN THE CASE OF S.A. BUILDERS LTD VS CIT (288 ITR 1)(SC). THE RELEVANT PORTION O F THE SAME IS EXTRACTED HEREUNDER FOR READY REFERENCE:- 23. IN OUR OPINION, THE DECISIONS RELATING TO SECTI ON 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' . I T HAS BEEN CONSISTENTLY HELD IN THE DECISIONS RELATING TO SECTI ON 37 THAT THE EXPRESSION ' FOR THE PURPOSE OF BUSINESS' INCLUDES EX PENDITURE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 25 VOLUNTARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT I S IMMATERIAL IF A THIRD PARTY ALSO BENEFITS THEREBY. 24. THUS IN ATHERTON V. BRITISH INSULATED AND HELSBY CABLES LTD. [1925] 10 TC 155, IT WAS HELD BY THE HOUSE OF LORDS THAT IN ORDER TO CLAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS E XPENDED, NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE BE NEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCIAL EXPEDIENCY AN D IN ORDER TO INDIRECTLY TO FACILITATE THE CARRYING ON THE BUSINESS. THE ABOVE TEST IN ATHERTON' S CASE [1925] 10 TC 155 (HL) HAS BEEN APPRO VED BY THIS COURT IN SEVERAL DECISIONS, E.G., EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1, CIT V. CHANDULAL KESHAVLAL AND CO. [1960] 38 ITR 601, ETC. 25. IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIB UNAL AND OTHER INCOME-TAX AUTHORITIES SHOULD HAVE APPROACHED THE QU ESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER WORDS, THE HIGH COURT AND OTHER AUTHORITIES SHOULD HAVE ENQUIRED AS TO WHETHER THE INTEREST FREE LOAN WAS GIVEN TO THE SISTER COMPANY (WHICH IS A SUBSIDIARY OF THE ASSESSEE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLOWED. 26. THE EXPRESSION ' COMMERCIAL EXPEDIENCY' IS AN EXP RESSION OF WIDE IMPORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUS INESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALL OWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. 27. NO DOUBT, AS HELD IN MADHAV PRASAD JATIA V. CIT [1979] 118 ITR 200 (SC), IF THE BORROWED AMOUNT WAS DONATED FOR SOME SENT IMENTAL OR PERSONAL REASONS AND NOT ON THE GROUND OF COMMERCIAL EX PEDIENCY, THE INTEREST THEREON COULD NOT HAVE BEEN ALLOWED UNDER SE CTION 36(1)(III) OF THE ACT. IN MADHAV PRASAD' S CASE [1979] 118 ITR 200 (SC), THE BORROWED AMOUNT WAS DONATED TO A COLLEGE WITH A VIEW TO COMMEMORATE THE MEMORY OF THE ASSESSEE' S DECEASED H USBAND AFTER WHOM THE COLLEGE WAS TO BE NAMED. IT WAS HELD BY TH IS COURT THAT THE INTEREST ON THE BORROWED FUND IN SUCH A CASE COULD NOT BE ALLOWED, AS IT COULD NOT BE SAID THAT IT WAS FOR COMMERCIAL EXPEDIE NCY. 28. THUS, THE RATIO OF MADHAV PRASAD JATIA' S CASE [1 979] 118 ITR 200 (SC) IS THAT THE BORROWED FUND ADVANCED TO A THIRD PART Y SHOULD BE FOR COMMERCIAL EXPEDIENCY IF IT IS SOUGHT TO BE ALLOWED UNDER SECTION 36(1)(III) OF THE ACT. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 26 29. IN THE PRESENT CASE, NEITHER THE HIGH COURT NOR THE TRIBUNAL NOR OTHER AUTHORITIES HAVE EXAMINED WHETHER THE AMOUNT ADV ANCED TO THE SISTER CONCERN WAS BY WAY OF COMMERCIAL EXPEDIENCY. 30. IT HAS BEEN REPEATEDLY HELD BY THIS COURT THAT TH E EXPRESSION ' FOR THE PURPOSE OF BUSINESS' IS WIDER IN SCOPE THAN THE EXPRESSION ' FOR THE PURPOSE OF EARNING PROFITS' VIDE CIT V. MALAYALAM PLA NTATIONS LTD. [1964] 53 ITR 140 (SC), CIT V. BIRLA COTTON SPINNING AND WEAVING MILLS LTD. [1971] 82 ITR 166 (SC), ETC. 31. THE HIGH COURT AND THE OTHER AUTHORITIES SHOULD HA VE EXAMINED THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY T O ITS SISTER CONCERN, AND WHAT THE SISTER CONCERN DID WITH THIS MON EY, IN ORDER TO DECIDE WHETHER IT WAS FOR COMMERCIAL EXPEDIENCY, BUT T HAT HAS NOT BEEN DONE. 32. IT IS TRUE THAT THE BORROWED AMOUNT IN QUESTION WA S NOT UTILIZED BY THE ASSESSEE IN ITS OWN BUSINESS, BUT HAD BEEN ADVA NCED AS INTEREST FREE LOAN TO ITS SISTER CONCERN. HOWEVER, IN OUR OPINIO N, THAT FACT IS NOT REALLY RELEVANT. WHAT IS RELEVANT IS WHETHER THE ASSESSEE ADVANCED SUC H AMOUNT TO ITS SISTER CONCERN AS A MEASURE OF COMMERCIAL EXPEDIENCY. 33. LEARNED COUNSEL FOR THE REVENUE RELIED ON A BOMBAY HIGH COURT DECI SION IN PHALTAN SUGAR WORKS LTD. V. CWT [1994] 2 08 ITR 989 IN WHICH IT WAS HELD THAT DEDUCTION UNDER SECTION 36(1) (III) CAN ONLY BE ALLOWED ON THE INTEREST IF THE ASSESSEE BORROWS CAPITA L FOR ITS OWN BUSINESS. HENCE, IT WAS HELD THAT INTEREST ON THE BO RROWED AMOUNT COULD NOT BE ALLOWED IF SUCH AMOUNT HAD BEEN ADVANC ED TO A SUBSIDIARY COMPANY OF THE ASSESSEE. WITH RESPECT, WE ARE OF THE OPINION THAT THE VIEW TAKEN BY THE BOMBAY HIGH COURT WAS NOT CORRECT. T HE CORRECT VIEW IN OUR OPINION WAS WHETHER THE AMOUNT ADVANCED TO THE SUBSIDIARY OR ASSOCIATED COMPANY OR ANY OTHER PARTY WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. WE ARE OF THE OPINION THAT THE VIEW TAKEN BY THE TRIBUNAL IN PHALTAN SUGAR WORKS LTD. [1994] 208 IT R 989 (BOM) THAT THE INTEREST WAS DEDUCTIBLE AS THE AMOUNT WAS ADVANC ED TO THE SUBSIDIARY COMPANY AS A MEASURE OF COMMERCIAL EXPEDIEN CY IS THE CORRECT VIEW, AND THE VIEW TAKEN BY THE BOMBAY HIGH C OURT WHICH SET ASIDE THE AFORESAID DECISION IS NOT CORRECT. 34. SIMILARLY, THE VIEW TAKEN BY THE BOMBAY HIGH COU RT IN PHALTAN SUGAR WORKS LTD. V. CIT [1995] 215 ITR 582 ALSO DOES NOT APPEAR TO BE CORRECT. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 27 35. WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH C OURT IN CIT V. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 THAT ONC E IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE AND THE PURPOSE OF THE BUSINESS (WHICH NEED NOT NECESSARILY BE THE BUSINESS OF THE ASSESSEE ITSELF), THE REVENUE CANNOT JUSTIFIABLY CLAIM TO PU T ITSELF IN THE ARM- CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BO ARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. NO BUS INESSMAN CAN BE COMPELLED TO MAXIMIZE HIS PROFIT. THE INCOME-TAX AUT HORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. THE AUTHORITIES MUST NOT LOOK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINE SSMAN. AS ALREADY STATED ABOVE, WE HAVE TO SEE THE TRANSFER OF T HE BORROWED FUNDS TO A SISTER CONCERN FROM THE POINT OF VIEW OF C OMMERCIAL EXPEDIENCY AND NOT FROM THE POINT OF VIEW WHETHER TH E AMOUNT WAS ADVANCED FOR EARNING PROFITS. 36. WE WISH TO MAKE IT CLEAR THAT IT IS NOT OUR OPINI ON THAT IN EVERY CASE INTEREST ON BORROWED LOAN HAS TO BE ALLOWED IF THE AS SESSEE ADVANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPECTIVE CASE. FOR INSTANCE, IF THE DIRECTORS OF THE SISTER CONCERN UTILIZE THE AMOUNT ADVANCED TO IT BY THE ASSESSEE F OR THEIR PERSONAL BENEFIT, OBVIOUSLY IT CANNOT BE SAID THAT SUCH MONE Y WAS ADVANCED AS A MEASURE OF COMMERCIAL EXPEDIENCY. HOWEVER, MONEY CAN BE SAID TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIRCUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOW EVER, WHERE IT IS OBVIOUS THAT A HOLDING COMPANY HAS A DEEP INT EREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDING COMPANY ADVANCE S BORROWED MONEY TO A SUBSIDIARY AND THE SAME IS USED BY THE SU BSIDIARY FOR SOME BUSINESS PURPOSES, THE ASSESSEE WOULD, IN OUR OPINIO N, ORDINARILY BE ENTITLED TO DEDUCTION OF INTEREST ON ITS BORROWED LOA NS. 37. IN VIEW OF THE ABOVE, WE ALLOW THESE APPEALS AN D SET ASIDE THE IMPUGNED JUDGMENTS OF THE HIGH COURT, THE TRIBUNALS A ND OTHER AUTHORITIES AND REMAND THE MATTER TO THE TRIBUNAL FOR A FRESH DECISION, IN ACCORDANCE WITH LAW AND IN THE LIGHT OF THE OBSERV ATIONS MADE ABOVE. 38. WE ALSO MAKE IT CLEAR THAT WE ARE NOT SETTING ASI DE THE ORDER OF THE TRIBUNAL OR OTHER INCOME-TAX AUTHORITIES IN RELATION TO THE OTHER POINTS DEALT WITH BY THESE AUTHORITIES, EXCEPT THE POINT OF DEDUCTION OF INTEREST ON THE BORROWED FUNDS. E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 28 IF THE AFORESAID DECISION FROM HONBLE APEX COURT I S ANALYZED IT CLEARLY SAYS THAT IN ORDER TO DECIDE WH ETHER INTEREST ON FUNDS BORROWED BY THE ASSESSEE TO GIVE AN INTERE ST FREE LOAN TO A SISTER CONCERN (E.G., A SUBSIDIARY OF THE ASSE SSEE) 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 PRUD ENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY NOT HAVE BEEN INCURRED UNDER ANY LE GAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXP ENDITURE IF IT WAS INCURRED ON GROUNDS OF COMMERCIAL EXPEDIENCY. DECISIONS RELATING TO SECTION 37 WILL ALSO BE APPLI CABLE TO SECTION 36(1)(III) BECAUSE IN SECTION 37 ALSO THE E XPRESSION 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 TH IRD PARTY ALSO BENEFITS THEREBY. WHILE COMING TO THIS CONCLUS ION, THE HONBLE 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. CHANDU LAL KESHAVLAL AND CO. [1960] 38 ITR 601 (SC) FOLLOWED . THE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 29 EXPRESSION FOR THE PURPOSE OF BUSINESS IS WIDER I N 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 HONBLE APEX COURT FURTHER OBSERVED AS UNDER:- TO CONSIDER WHETHER ONE SHOULD ALLOW DEDUCTION UND ER 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 EXAM INE THE PURPOSE FOR WHICH THE ASSESSEE ADVANCED THE MONEY AND WHAT THE SISTER CONCERN DID WITH THE MONE Y. 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 REL EVANT. 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 F OR EARNING PROFITS. XXXXXXXXXXXXXXXX WHILE COMING TO THE AFORESAID CONCLUSION, THE HONB LE 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 W ORKS LTD. V. CIT [1995] 215 ITR 582 (BOM). IF THE AFORESAID RATIO LAID DOWN BY HONBLE APEX CO URT 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 UTILI ZED FOR E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 30 BUSINESS PURPOSES AND SECONDLY, WE NOTE THAT ADVANC ING LOAN TO THE SISTER-CONCERN WAS FOR THE PURPOSES OF COMM ERCIAL EXPEDIENCY, THUS, WE FIND MERIT IN THE CONTENTION OF THE LD. COUNSEL FOR THE ASSESSEE. SO FAR AS, THE ISSUE OF C OMMERCIAL EXPEDIENCY IS CONCERNED, THE DECISION HAS TO BE TAK EN BY THE ASSESSEE AND THE ASSESSING OFFICER IS NOT EXPECTED TO SIT IN THE CHAIR OF THE ASSESSEE AND TO DECIDE THE BUSINESS IN TEREST. THE ASSESSEE IS TO WATCH ITS BUSINESS INTEREST WELL. ON CE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPEND ITURE 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 BUSINES SMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME T HE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING RE GARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN B E COMPELLED TO MAXIMIZE HIS PROFITS. 2.6. NOW, WE SHALL ANALYZE SECTION 36(1)(III), WHI CH DEALS IN INTEREST ON BORROWED CAPITAL. BY THE FINANCE ACT , 2003, A NEW PROVISO WAS INSERTED W.E.F. 01/04/2004 TO SECTI ON 36(1)(III) TO SECURE AND PROVIDE THAT NO SUCH DEDUC TION SHALL BE ALLOWED IN RESPECT OF ANY AMOUNT OF INTEREST PAID, IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET FOR EX TENSION OF EXISTING BUSINESS OR PROFESSION (WHETHER CAPITALIZE D IN THE BOOKS OF ACCOUNTS OR NOT) AND SUCH AMOUNT OF INTERE ST IS FOR THE PERIOD BEGINNING FROM THE DATE ON WHICH THE CAP ITAL WAS BORROWED FOR ACQUISITION OF THE ASSESSEE TILL THE D ATE ON WHICH SUCH ASSET WAS FIRST PUT TO USE. THE DEPARTMENTAL CIRCULAR E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 31 NO.7 OF 2003 DATED 05/09/2003 ALSO ELUCIDATE DATE O N THIS POINT. WE NOTE THAT SECTION 36(1)(III) IS A CODE BY ITSELF. IT MAKES NO DISTINCTION BETWEEN MONEY BORROWED TO ACQU IRE A CAPITAL ASSET OR A REVENUE ASSET. ALL THAT THE SECT ION REQUIRES IS THAT THE ASSESSEE MUST BORROWED CAPITAL AND THE PUR POSE 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 T HE USER OF THE ASSET, WHICH COMES INTO EXISTENCE AS A RESULT OF BO RROWED 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 SEC TION 36(1)(III) ACTUAL COST OF AN ASSET HAS NOT RELEVANC Y. OUR VIEW FIND SUPPORTS FROM THE DECISIONS DCIT VS CORE HEALT H CARE LTD. (2008) 298 ITR 194, 199 (SC) AND RATIO LAID DO WN IN GUJARAT STATE FERTILIZER & CHEMICALS LTD. VS ACIT ( 2009) 313 ITR 244, 246 (DEL.). 2.7. WE SHALL ANALYZE THE MEANING OF INTEREST. TH E ESSENCE OF INTEREST IS THAT IT IS PAYMENT WHICH BEC OMES DUE BECAUSE THE CREDITOR HAS NOT HAD HIS MONEY AT HIS D ISPOSAL. IT MAY BE REGARDED EITHER AS REPRESENTING THE PROFIT H E MIGHT HAVE MADE IF HE HAD USED HIS MONEY, OR CONVERSELY, THE LOSS IS SUFFERED BECAUSE HE HAD NOT THAT USE. THE GENERAL I DEA IS THAT HE IS ENTITLE TO COMPENSATION FOR THE DEPRIVATION ( WESTMINISTER BANK LTD. VS RICHES, (1947) 28 TC 159, 189(HL). IT MAY BE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 32 NOTED THAT THE DEFINITION OF INTEREST IN SECTION 2(28A) MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY M ONIES BORROWED OR DEBT INCURRED.. . IN THE CONTEXT AND COLLOCATION OF SECTION 36(1)(III) INTEREST IS RESTRICTED TO THA T OWN MONEY BORROWED AND NOT ON DEBT INCURRED. WHAT IS ALLOWAB LE AS DEDUCTION U/S 36(1)(III) IS ANY SUM PAID BY WAY OF INTEREST IN THE COMMERCIAL SENSE. THERE CANNOT BE STRAIT JACKE T 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 THA T, 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 P ROPOSITION 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) E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 33 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 BOR ROWED MONEY WERE UTILIZED FOR NON-BUSINESS PURPOSES. AS WAS HEL D 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 BORROWE D FUNDS IS NOT A RELEVANT MATTER FOR CONSIDERATION. ALL THAT IS GERMANE IS WHETHER THE BORROWING WAS, OR WAS NOT, FOR THE PURP OSES 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 BUSIN ESS. SUBSEQUENTLY, IT WAVED INTEREST IN RESPECT OF CERTA IN SUCH LOANS. IT WAS HELD THAT THE SUBSEQUENT WAVER DID NO T ALTER THE NATURE OF LOANS. THE RATIO LAID DOWN IN GLENEBURN ESTATE LTD. VS STATE OF TAMILNADU 240 ITR 719 (MAD.) SUPPORTS T HE 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 M AKING OR EARNING INCOME OCCURRING IN SECTION 57(III). THU S, THE SCOPE FOR ALLOWING A DEDUCTION U/S 36(1)(III) IS MU CH 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 J ATIA VS CIT) 118 ITR 200 (SC), OR FOR PAYING TAX LIABILITY (KISHANCHAND E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 34 CHELARAM VS CIT) 114 ITR 654 (BOM.), OR ARE GIVEN O VER TO PARTNERS FOR THEIR PERSONAL USE, THE CLAIM OF THE I NTEREST IS NOT ALLOWABLE. BUT FOR SUCH DISALLOWANCE, A FINDING OF FACT, BASED ON RELEVANT MATERIAL, IS NECESSARY AS WAS HELD IN C IT 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 W HEN THE ASSESSEE CARRIES ON MORE THAN ONE BUSINESS AND ONE BUSINESS IS TRANSFERRED OR CLOSED AND IF LOAN WAS TAKEN EARL IER FOR THE BUSINESS, WHICH SUBSEQUENTLY CLOSED, BUT IF THE MAN AGEMENT IS COMMON, THE INTEREST PAID ON THAT LOAN CANNOT BE DENIED, THOUGH ONE OF THE LINES OF THE BUSINESS OR ANY BRAN CH OF THE BUSINESS IS CLOSED FOR WHICH THE LOAN HAD BEEN TAKE N. 2.10 IT IS TRUE THAT NO ALLOWANCE NO SHAM OR COLOR ABLE TRANSACTION IS PERMISSIBLE. IF THE OBJECT OF THE B ORROWING IS ILLUSORY OR COLORABLE AND NOT GENUINELY FOR THE BUS INESS PURPOSES, THEN THE PROVISION HAS NO APPLICATION. TO BE ADMISSIBLE AS AN ALLOWANCE UNDER THE SECTION INTERE ST 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 FRO M OTHER SOURCES THE INTEREST PAID ON MONEY SO BORROWED SHO ULD BE BIFURCATED PROPORTIONATELY BETWEEN THE BUSINESS IN COME AND INCOME FROM OTHER SOURCES (H.K. INVESTMENT PVT. L TD. VS CIT 211 ITR 511, 514 (GUJ.). HOWEVER, IN THE PRESENT CA SE, THE FACTS ARE ENTIRELY DIFFERENT AS THE ASSESSEE ADVANC ED THE FUNDS E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 35 TO ITS SUBSIDIARIES FOR BUSINESS EXIGENCIES, WHER EIN, THE ASSESSEE IS A HOLDING COMPANY, THUS, IT IS NOT A CO LORABLE DEVICE. 2.11 IN THE CASE OF CIT VS RELIANCE COMMUNICATION INFRASTRUCTURE LTD. (2012) 207 TAXMAN 219 (BOM.), T HE HONBLE JURISDICTIONAL HIGH COURT VIDE ORDER DATED 28/03/20 12, CONSIDERING THE DECISION IN S.A. BUILDERS LTD. VS C IT (2007) 288 ITR 1(SC) HELD THAT IF THERE IS A BUSINESS PURP OSE, WHILE ADVANCING MONEY TO ITS SISTER CONCERN, THE DISALLOW ANCE OF INTEREST CANNOT BE SUSTAINED, SUPPORTS THE CASE OF THE ASSESSEE. THE HONBLE HIGH COURT FURTHER HELD THAT THERE WOULD NOT BE ANY DIFFERENCE IN THE LEGAL POSITION W HETHER 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 A SSESSEE, THEN NO DISALLOWANCE CAN BE MADE IN THE HANDS OF TH E ASSESSEE. THE HONBLE 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 CAP ITAL, WHEREIN, ADVANCES WERE MADE TO SUBSIDIARIES, PURSUA NT TO UNDERTAKING GIVEN TO FINANCIAL INSTITUTIONS BY ASSE SSEE TO PROVIDE ADDITION MARGIN TO SUBSIDIARY TO MEET WORKI NG CAPITAL FOR MEETING CASH LOSSES, IT WAS HELD THAT THE ADVAN CES WERE OUT OF BUSINESS EXPEDIENCY, THEREFORE, INTEREST PAI D ON BORROWING NOT TO BE DISALLOWED U/S 36(1)(III) OF TH E ACT. IT IS NOTEWORTHY THAT WHILE COMING TO THIS CONCLUSION, TH E HONBLE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 36 APEX COURT APPLIED THE DECISION ALREADY TAKEN IN S. A. BUILDERS LTD. VS CIT (SUPRA) AND ALSO CONSIDERED IN MADHAV P RASAD CASE (1979) 118 ITR 200 (SC), CIT VS MALAYALAM PLANTATIO N LTD. (1964) 53 ITR 140 (SC), CIT VS BIRLA COTTON SPINNIN G AND WEAVING MILLS LTD. (1971) 82 ITR 166 (SC) AND CIT V S 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)(T RIB.)(TM). 2.12 TO SUM UP THE MATTER, IN THE LIGHT OF THE AFO RESAID JUDICIAL PRONOUNCEMENT AND THE FACTUAL MATRIX AVAIL ABLE ON RECORD, WE FIND THAT THE MONEY WAS ADVANCED BY THE ASSESSEE HOLDING COMPANY TO ITS SUBSIDIARIES FOR BUSINESS E XPEDIENCY, 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 A SSESSEE HAS SIGNIFICANT INTEREST IN THE BUSINESS OF SUBSIDIARIE S, AS THESE SUBSIDIARIES ARE IN SAME BUSINESS AS THAT OF ASSESS EE. IT IS FURTHER NOTED THAT MAJOR PORTION OF THE AMOUNTS WER E INVESTED IN THE EARLIER YEARS. NO DISALLOWANCE HAS BEEN MAD E IN ASSESSMENT YEAR 2007-08 OR EARLIER. THUS, KEEPING I N VIEW, THE LEGAL POSITION AS DISCUSSED ABOVE AND FACTS OF THIS CASE, IT CAN BE SAID THAT AMOUNT INVESTED IN THE SUBSIDIARIES CO MPANY WAS ARISING OUT OF COMMERCIAL EXPEDIENCY AND WAS THUS F OR THE PURPOSE OF BUSINESS OF THE ASSESSEE. THEREFORE, WE REVERSE E-CITY INVESTMENT & HOLDINGS COMPANY PVT. LTD. ITA NO.8382/MUM/11 37 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 SD/- SD/- ( ASHWANI TANEJA ) (JOGINDER SINGH) ' # / ACCOUNTANT MEMBER $ # / JUDICIAL MEMBER MUMBAI; ' DATED : 03/02/2016 F{X~{T? P.S/. .. !%$&'()(*& / COPY OF THE ORDER FORWARDED TO : 1. )*+, / THE APPELLANT 2. -.+, / THE RESPONDENT. 3. / / 0! ( )* ) / THE CIT, MUMBAI. 4. / / 0! / CIT(A)- , MUMBAI 5. 2'3-! , / )*%) 4 , / DR, ITAT, MUMBAI 6. 56 / GUARD FILE. ! / BY ORDER, .2*!-! //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI