O R D E R
Per Pramod Kumar, VP:
1. By way of this appeal, the Assessing Officer has challenged correctness of the order dated 27thJanuary 2021 passed by the learned CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act 1961, for the assessment year 2017-18.
2. Grievance of the Assessing Officer raised as follows:
1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in deleting the addition made u/s. 36(1)(iii) without appreciating the fact that the investments made in the shares of M/s. Baramati Tollways Pvt Ltd is out of borrowed funds and the assessee has failed to prove commercial expediency.
1
2. To adjudicate on this grievance, only a few material facts need to be taken note of. The assessee before us is a company engaged in the business of Toll Collection and Repairs & Maintenance of the roads. During the course of the scrutiny assessment proceedings the Assessing Officer noted that the assessee has huge borrowings out of which he made investment in equity capital of M/s. Baramati Tollways Pvt. Ltd. The Assessing Officer was of the view that
"considering that there are no business activity in the assessee company, it cannot be said that there is any commercial expediency or business purpose in investing in the shares of M/s. Baramati Tollways Pvt. Ltd." It was further noted that "the same is purely capital transactions of without any relation to the profit earning or revenue generated". It was in this back drop that the Assessing Officer required the assessee to show cause as to why the interest on the borrowing not be disallowed as the funds have been diverted for non business use. It was submitted by assessee that as held by the Punjab & Haryana High Court in the case of CIT vs. Rockman Cycle Industries Pvt. Ltd 2009 [331 ITR 401], nearly because borrowing cost of investment in the share to sister company yielding dividend less than the interest paid on the borrowings such interest cannot be disallowed. The Assessing Officer further justified the commercial expediency of making investments and submitted that this is to be seen from the point view of the assessee rather than that of the Assessing Officer as to what is commercial expediency. The Assessing Officer was however not impressed to proceeded to disallowance the entire interest payment by the assessee, amounting to Rs. 4,47,93,169/- and while doing so observed as follows:-
3.3 The contentions raised by the assessee are considered but not found acceptable Through the phrase "commercial expediency', as held by many legal pronouncement, is the most important yardstick for the allowability of deduction under Section 36(1)(iii) of Income Tax Act, 1961, the same is not applicable in the case of assessee. There is business purpose and as noticed from the books of account there are no revenues accruing to the assessee. Hence, to say that this investment was to advance some business interest is untenable. The High Court of Delhi, in the case of Punjab Stainless Steel Inds. Vs. CIT 324 IT 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests, which 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 between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". (emphasis supplied).
3.4 The emphasis is always on business interest and business objective. In the case of M/s Rideema Toll Pvt. Ltd.; it is seen that transaction is completely in the
2
nature of investment more so when there are no business operation of the assessee itself. No submission regarding how the same would advance business interest or was because of commercial/contractual necessity has been provided. Further as what stream of revenue this investment helps to generate or support has also not been provided. In the absence of such details it is concluded that the investment made in a corporate vehicle could be for many benefits provided through such structure like limitation of liability, tax-exemption on capital gains or dividend etc. which by themselves don't constitute business purpose or business objective. Considering that the assessee has failed to substantiate as to how the investment in a subsidiary firm was for the purpose of business, interest cost attributable to this investment is hence disallowed u/s 36(1 (iii).
[ Addition of Rs. 4,47,93,169/- u/s. 36(1)(iii)]
3. Aggrieved by the stand so taken by the learned Commissioner assessee carried the matter in appeal before the learned CIT(A). The disallowance was deleted by the learned CIT(A) on the basis of the reasoning as set out below:-
4.3 I have very carefully considered the facts of the case, the findings of the AO and the submissions made by the appellant.
The appellant is a private limited company engaged in business of toll collection, repairs and maintenance of roads. Admittedly the appellant has no operational revenues for the impugned year. The appellant does not have own funds. However it has made borrowings and the borrowed funds have been invested in its 100 % subsidiary. The interest expenditure incurred on the said borrowing in a sum of Rs. 4,47,93,169/- has not been allowed as admissible claim by the AO under section 36 (1)
(iii) of the Act. The appellant has submitted that it has made investment in share capital of its subsidiary out of borrowed capital on considerations of commercial expediency. It is submitted when investment is made by the holding company in its subsidiary it cannot be of commercial expediency.
The appellant has relied upon decision of the Hon'ble Supreme Court in the case of SA Builders Ltd arch the judgment of the this jurisdictional High Court of Bombay in the case of DCIT Vs Midday Multimedia Ltd. Relying on these judgments it is submitted that even if the expenditure has not been incurred under any legal/contractual obligation, the same is allowable on grounds of commercial expediency. Accordingly, the appellant has pleaded that the investment in its wholly owned subsidiary is for the purpose of business and hence interest is allowable u/s 36(1) (iii) of the Act.
On a consideration of the matter, it is seen that the appellant had made borrowings
3
on which interest is incurred and such sums have been invested in its own subsidiary company. There is no dispute that the holding company has invested borrowed funds in its subsidiary. The subsidiary also seem to be in business of tollways. It is a fact that being a holding company it gains control over the subsidiary with investment in shares of the subsidiary. Viewed from this perspective, it can be seen that the holding company has made investment in furtherance of its business interest. When both the holding company and subsidiary are in the business of toll collection, such an investment is a strategic investment to wrest control over the subsidiary. The immediate advantage derived may not be in money terms; wresting control over the Board of Directors of the subsidiary is an advantage in itself in furtherance of business interest of the holding company especially when both the holding and subsidiary are in same line of business. That being so, it is held that there is nexus between expenditure and purpose of business.
It has been repeatedly held by various courts that the expression used in section 36(1) (iii) "for the purpose of business" is wider in scope than the expression " for the purpose of earning profits"
For this proposition reliance is placed on the Judgment of the Hon'ble Supreme Court in the case of CIT vs Malayalam Plantations Ltd 53 IT 140 and CIT Vs Birla Cotton Spinning and Weaving Mills Ltd 82 IT 166. It therefore follows that even in the event of no profit/revenue immediately emanating from investment, such investment is dictated by commercial expediency; no business man can be compelled to maximize profits.
The Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd Vs CIT (Central) in Civil Appeal No 514/2008 has held that when the assessee has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business no disallowance can be made under section 36(1) (iii). In the said case the Hon'ble Supreme Court upheld the finding of the lower authorities that when the interest paid by assessee of which deduction was claimed, on the facts of the case ,was for business purpose, the entire interest paid by assessee should be allowed as business expenditure. It has been observed by the Hon'ble Supreme Court that it was for the AO to establish nexus between the borrowing and advancing to prove that expenditure was for non-business purpose which Assessing Officer failed to do. The Hon'ble Supreme Court has also cited from the judgment of the Delhi High Court in CIT Vs Dalmia Cement Ltd 254 ITR 377 and agreed with the view that once it is established there is nexus between expenditure and purpose of business (which need not necessarily be business of assessee itself ) the test of commercial expediency is satisfied.
In view of the facts on the case and the judicial precedents, investment in its subsidiary company by the appellant was out of commercial expediency. Therefore, interest expenditure of Rs. 4,47,93,169/- is allowable expenditure under section 36 (1)
4
(iii) of the Act. Thus, the disallowance of the interest u/s 36(1) (iii) made by the AO is deleted.
Accordingly, Ground nos. 1 and 2 are allowed
4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position.
5. We have noted that the investments are made by the assessee company in the ordinary course of its business. There is no dispute about the fact that the said investments have been made in equity shares of another company in materially similar line of activity. It is only elementary that as long as the funds borrowed the assessee are used for the purposes of business, the interest thereon will constitute an admissible deduction u/s. 36(1)(iii) of the Act. An investment in equity of another company is materially different in nature and character from an interest free advance or loan to another company. The question of diversion of funds for non- business purposes would only come into play in the case of the latter and not for in the case of investment in another company. The very foundation of the impugned disallowance therefore is vitiated in law, as it proceed on the basis that investment in share capital of another company would amount to diversion of funds for non-business purpose. Whether such an investment yields returns in the present year or not does not make a difference. It is pertinent bear in mind fact that in the present case interest disallowance has been made on the premises that investment in share capital of another company amounts to diverting the borrowed funds for the business of another company but then as we noted earlier an equity investment as inherently and materially different vis-a-vis an interest free loan and advance. That distinction has been lost side of. In our considered view, therefore, learned CIT(A) was indeed justified in deleting the disallowance of interest. We approve the conclusion arrived by the learned CIT(A) and decline to interfere in the matter.
6. In the result, this appeal is dismissed. Pronounced in the open court today on the 09thday of February 2022.
Sd/- Sd/-
Kuldip Singh Pramod Kumar
(Judicial Member) (Vice President)
Mumbai, dated the 09th day of February 2022.
Copies to: (1) The Appellant (2) The respondent
(3) CIT (4) CIT(A)
(5) DR (6) Guard File
5
By order True Copy Assistant Registrar/Sr.PS Income Tax Appellate Tribunal Mumbai benches, Mumbai
6