Utilization of loan as providing financial assistance to group companies cannot raise the question of disallowance of interest on loan

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH “E” NEW DELHI

BEFORE SHRI A.D. JAIN, JUDICIAL MEMBER

AND

SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER

I.T.A. No. 2208/Del/2011

A.Y.: 2001-02

M/s Modi Entertainment Ltd.,

49, Community Centre,

New Friends Colony,

New Delhi - 110025

(PAN: AAACM 8283G)

(Appellant)

Vs.

 DCIT, Circle 5(1),

C.R. BUILDING,

NEW DELHI

(Respondent)

Assessee by: Sh. Ajay Vohra, Adv. & Sh. Rohit Jain, CA

Department by: S h. R.S. Negi, Sr. D.R.

ORDER

PER SHAMIM YAHYA: AM

This appeal by the assessee is directed against the order of the Ld. Commissioner of Income Tax (Appeals) dated 25.2.2011 pertaining to assessment year 2001-02.

2. The grounds raised read as under:-

“1. That the Commissioner of Income Tax (Appeals) erred on facts and in law in confirming the disallowance of interest of Rs. 92,61,100/- made by the assessing officer holding the same to be expenditure incurred for nonbusiness purposes.

1.1 That the Commissioner of Income Tax (Appeals) erred on facts and in law in holding/alleging that the appellant withheld the relevant documents/material, like bank statements and failed to establish that the aforesaid interest expenditure on account of commercial expediency.

2. That without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that out of total interest of Rs.92,61,100, the following amounts could not be said to have been incurred for non-business purposes:

i) interest on late deposit of tax of Rs. 851/-.

ii) bank overdraft charges of Rs. 11,85,235/-.

iii)interest on delayed payments to NDSL Rs. 44,70,796/-

iv) interest on security deposits received from distributors, of Rs. 4,60,229/-.

2.1 That the Commissioner of Income Tax (Appeals) in holding that there was a direct nexus between the payment of interest to NDSL on account of delayed payment and provision of interest free advance to MEN Interactive Network Ltd.

3. That further without prejudice, the Commissioner of Income Tax (Appeals) erred on facts and in law in not appreciating that since the loan was procured from HSBC Bank on 25.01.2001, at best, proportionate interest relatable to Rs. 12,17,140/-, being the amount advanced during the period 25.01.2001 and 31.03.2001 to sister concerns, could have been disallowed, in case any disallowance was required to be made.

4. Without prejudice, that the Commissioner of Income Tax (Appeals) erred on facts and in law in not holding that interest income amounting to Rs. 55,36,506/-, earned by the appellant, during the relevant previous year, was required to be netted off against the above interest expenditure and only the balance amount was disallowable.

The appellant craves leave to add, to alter, amend or vary from the aforesaid grounds of appeal before or at the time of hearing.”

3. In this case, the facts are that the original assessment in this case was completed u/s. 143(3) of the IT Act, 1961 wherein, apart from others, disallowance on account of payment of interest of Rs. 10832532/- was made. Being aggrieved by the order of the Id.AO, the assessee company challenged the same before Ld. CIT (A) which was dismissed by him. Thereafter, the matter was carried in further appeal by the assessee to the ITAT, Delhi. The Tribunal was of the view that the issues raised by the assessee company had not been properly appreciated by the lower authorities and therefore required fresh examination. Accordingly, the matter relating to disallowance of interest of Rs. 10832532/- was set aside by the Tribunal with the directions to examine the issue in the light of judgment of Hon'ble Delhi High Court in the cases of Orissa Cement Ltd and Elmer Havell Electrics & Others. In the light of aforesaid directions of the Hon'ble Tribunal, the impugned assessment order has been framed by the Ld. Assessing Officer.

3.1 A perusal of assessment order reveals that as against Rs. 10832532, the disallowance on account of payment of interest has been restricted to actual expenditure of Rs. 9261100 being payments made to HSBC, bank overdraft charges and payment to NDSL for delayed payment of

purchase consideration. According to the Id. AO, in the course of assessment proceedings the assessee company failed to furnish details of amounts and dates on which interest free loans were given to the subsidiaries and the holding company and also the copy of bank statements and thus prevented him from finding out the immediate source of interest free advances given to related parties and the purpose for which funds were borrowed by the assessee. Accordingly, the subject disallowance was made by him.

4. Upon assessee’s appeal Ld. Commissioner of Income Tax (Appeals) noted the submissions of the assessee, but did not find cogency in the same. Ld. Commissioner of Income Tax (Appeals) inter-alia observed in the present case that it was necessary to examine the claim of the assessee with reference to the bank statement and the fund flow statement. However, the Assessing Officer has recorded a categorical finding that the assessee company failed to produce before him the bank statement, copy of accounts of the subsidiaries and the holding company. Ld. Commissioner of Income Tax (Appeals) observed that it was only because of nonavailability of these relevant documents that the Assessing Officer had no option but to hold that the expenditure on account of interest was not incurred in connection with any business need/ expediency and the same was therefore not allowable to the assessee company. Ld. Commissioner of Income Tax (Appeals) further observed that in the course of appellate proceedings also, the assessee company has again expressed its inability to file the copy of bank statement maintained with HSBC bank and ICICI bank from where the funds had been made available to the group companies and investment had been made with Modi Media (P) ltd. and Cric Live Dot Com (I) (P) Ltd. Therefore, Ld. Commissioner of Income Tax (Appeals) held that in the absence of the relevant documents, he is unable to agree with the assessee company that the entire expenditure of Rs. 9261100/- was incurred in connection with business requirement and no part of it was relatable to the interest free funds made available to the sister concerns and

investment made with Modi Media (P) Ltd. and Cric Live Dot Com (I) (P) Ltd. Ld. Commissioner of Income Tax (Appeals) further opined that assessee has failed to establish that the aforesaid interest expenditure was incurred on account of commercial expediency. Ld. Commissioner of Income Tax (Appeals) further held that assessee paid overdue interest to NDSL on account of purchase of decoder boxes out of interest free funds and simultaneously made interest bearing borrowings from HSBC Bank which were give as interest free advances to sister concern.

5. Against the above order the assessee is in appeal before us.

6. We have heard the rival contentions in light of the material produced and precedent relied upon.

6.1 Assessee submission in this regard are as under:-

“At the outset, it is respectfully submitted that in the cases of Orissa Cement Ltd. (supra) and Elmer Hovel Electrics & Ors: (supra), the Courts have stressed that the question of nexus between the borrowing and interest free advances to sister concerns is a question of fact and that the same must be established on the basis of evidences before an incometax authority disallows any interest paid by the assessee on its own borrowings. In the present case, no such nexus exists for the reasons elaborated as under. It is submitted that the aforesaid amount of Rs.92,6l,000 represented the total interest paid by the appellant during the previous year relevant to the assessment year 2001-02. The detailed break-up of the same is as under:

(i) Total interest paid on HSBC Loan Rs. 31,39,988

(ii) Interest on late deposit of tax Rs. 851

(iii) Bank Overdraft Charges Rs. 11,85,235

(iv) Interest to NDSL for delayed payment Rs. 44,70,796

(decoder boxes supplier)

(v) Interest on security deposit from Rs. 4,64,229

Distributors Total = Rs. 92,61,100

It is, at the outset, respectfully submitted that it is not at all the case of the lower authorities that various interest paid by the appellant (other than interest paid to HSBC Bank) was incurred for the purposes of the business. Even otherwise, there cannot be any dispute regarding allowability of interest paid (i) on bank overdraft, (ii) to supplier for delayed payment, and (iii) on security deposit from distributors. Therefore, out of total interest of Rs.92,61,100, interest expenditure of Rs.61,20,261 (other than interest paid to HSBC Bank and late deposit of tax) was clearly allowable as business deduction. The lower authorities failed to appreciate that disallowance, if any, could have been made only out of interest expenditure of Rs.31 ,39,988, being the interest paid on HSBC loan.

It is further submitted that no disallowance out of interest of Rs.31,39,988 paid on HSBC loan was called for, because of the following reasons:

A. Re: Disallowance of interest pertaining to loans advanced to group companies

.:. The details of loans advanced to group companies are summarized at page 69 of the paper book (part of submissions filed)

.:. The appellant as well as the group companies fell under the category of subsidiary company(ies)/ companies under the same management and were engaged in similar mbusiness of entertainment/ distribution of pay channels. Advances were given to the said group companies as part of the corporate/ business strategy of the appellant to expand the business operations.

Reference, in this regard, may be had to the following:

Performance Review and Future Prospects on page 46;

Subsidiaries Statement on page 47

.:. Aforesaid facts were specifically pointed out before the CIT(A) [refer pages 75 and 82] .

:. The lower authorities further failed to appreciate that since the loans and advances were advanced by the appellant to group companies engaged in the similar businesses out of commercial nexpediency, no part of interest expenditure was disallowable for advancing interest free loans. Reliance, in this regard, is placed on the following decisions:

SA Builders v. CIT: 288 ITR 1 (SC)

CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del.)

CIT V. Bharti Televentures Ltd: 331 ITR 502 (Del.)-Revenue's SLP against this decision has also been dismissed by the Supreme Court

Without prejudice:

.:. The appellant procured loan from HSBC Bank on 25.01.2001 (refer pages 3-4 of the paper book). Prior to the date of receiving loan from HSBC Bank, i.e., on 24.01.2001, out of the total loans and advances of Rs. 4,02,59,673, loans and advances amounting to RS.3,90,42,533 had already been advanced (refer pages 69 of the paper book) .

• :. The lower authorities, thus, failed to appreciate that loans and advances advanced to the group companies between 25.01.2001 and 31.03.2001 (i.e. the period during which HSBC loan was available with the appellant) amounted to RS.12, 17,140 only (refer pages 69-70) .

• :. In the absence of any nexus between borrowed funds no part of interest paid was disallowable even qua advances Rs.12, 17,140 between 25.01.2011 and 31.03.2001 .

• :. Without prejudice, disallowance, if at all, out of total interest payment of RS.31 ,39,988 to HSBC Bank should have been restricted to proportionate interest on advances of RS.12,17,140 only.

B. Re: Disallowance of interest under section 14A of the Act

.:. During the relevant year, the appellant received dividend of Rs.2,15,60,000 on 4,90,000 shares of Walt Disney Consumer Products Private Limited (in short 'Walt Disney') .

• :. The aforesaid shares were received by the appellant on 29^th May, 2000 from M/s. K.K. Modi Investment and Financial Services Limited in part discharge of debt of Rs.49,00,000 due from the said company for last 6-7 years. The appellant, therefore, did not make any investment in shares of the said company (refer page 74) .

• :. It, therefore, clearly follows that no part of loan from HSBC Bank taken much later in January, 2001, was utilized for acquiring shares of Walt Disney and therefore, the question of disallowance of any interest for acquiring shares of the said company could not arise at all.

.:. Apart from the aforesaid, in the impugned assessment order, the AO has observed that investments of RS.2.535 crores were made on 31 st March, 2001 for acquiring shares of Modi Media (P) Ltd and Cric Live Dotcom India (P) Limited .

• :. In this regard, it is submitted that the investment in the shares of these companies were made as part of business/ strategic investment and not for the purpose of earning dividend income, as discussed supra .

• :. Therefore, no part of interest expenditure is disallowable under section 14A of the Act.

.:. In fairness, it is, however, pointed out that the Delhi High Court in the case of Maxopp Investment Ltd. & Ors vs. CIT : 247 CTR 162 has held that even though shares are held for acquiring controlling interest, disallowance can still be made under section 14A of the Act. Being so, even though investments were made by the appellant as a strategic business investment, provisions of section 14A of the Act may, still, be applicable.

• :. Without prejudice, since the above investment of Rs. RS.2.535 crores was undisputedly made on 31.03.2001, disallowance of interest paid to HSBC bank, if at all, could be made only in respect of interest relatable to the said investment on proportionate basis for 1 day only. Reliance, in this regard, is placed on the following decisions:

- Maxopp Investment Ltd. & Ors vs. CIT : 247 CTR 162 (Del.)

- CIT v. Hero Cycles: 323 ITR 518 (P&H)

- CIT v. Reliance Utlities & Power Ltd : 313 ITR 340 (Born.)

C. Re: Disallowance of interest on amount receivable from M/s K.K. Modi Investment and Financial Services Ltd

.:. In the assessment order, the AO' has simply observed that Since an amount of Rs.2,94,78,400 was due from M/s K.K. Modi Investment and Financial Services Limited, holding company of the appellant, interest paid was disallowable.

• :. The AO failed to appreciate that the aforesaid amount was due as on 31st March, 2000, which, too, got reduced to Nil as on 31st March, 2001. That being so, since the loan from HSBC Bank was received in January, 2001, the question of utilizing the same for giving loan to the parent company and consequent disallowance of any part of interest paid to HSBC Bank could not arise at all.

.:. Even otherwise, it is respectfully submitted that since no disallowance was made in the earlier years on the above amount, carried forward as opening balances it is not open to the Department to make any disallowance on account of interest [refer recent Delhi High Court in the case of CIT v. Givo Ltd.: ITA No. 941/2010 (Del.), copy attached herewith as Annexure] It is also of utmost importance to note that during the year under consideration, the appellant earned interest income of Rs.55,36,506, which far exceeded the interest paid on HSBC loan amounting to RS.31,39,988. Kind attention, in this regard, is invited to the following:

- Profit & Loss Account read with Schedule 13 - pages 54 and 59 of the paper book;

- Cash and bank balance ofRs.6.19 crores as on 31.03.2001- pages 53 and 57

- Submissions filed before CIT(A) - pages 81 to 83 of the paper book

The lower authorities failed to consider the aforesaid huge interest income, which far exceeded interest paid to HSBC Bank. For the reasons discussed above, it is submitted that the assessing officer erred in disallowing interest expenditure of Rs.92,61,100.

Whether Revenue can question the commercial justification of borrowings?

In Madhav Prasad latia v. CIT: 118 ITR 200, the Supreme Court held that the following conditions needs to be satisfied for allowability of interest:

a) that money (capital) must have been borrowed by the assessee,

b) that it must have been borrowed for the purpose of business, and

c) that the assessee must have paid interest on the said amount and claimed it as a deduction.

It is respectfully submitted that it is a settled position of law that it is not for the Revenue to dictate to the businessman how to carryon business. Various Courts have, repeatedly, held in the following cases that reasonableness of the expenditure has to be seen from the point of view of businessman and that the Revenue cannot seek to put itself in the armchair of the businessman:

- CIT vs. Walchand & Co.: 65 ITR 381(SC)

- J.K. Woollen Manufacturers vs. CIT: 72 ITR 612(SC)

- Aluminium Corporation of India Ltd. vs. CIT: 86 ITR 11 (SC)

- CIT vs. Panipat Woollen & General Mills Co. Ltd.: 103 ITR 666(SC)

- S.A. Builders Ltd. vs CIT: 288 ITR 1 (SC) approving CIT v. Dalmia Cement (P.) Ltd: 254 ITR 377 (Del.)

- CIT vs. Padmani Packaging (P) Ltd.: 155 Taxman 268 (Del.)

Applying the aforesaid principle, it has been held by the Courts that where borrowed funds have been used for the purposes of business, interest thereon is allowable deduction in terms of section 36(1)(iii) of the Act; it is not open to the Revenue to contend that since the assessee had interest free funds of its own, there was no necessity to borrow money:

- Amma Bai Hajee Issa v. CIT: 56 ITR 186 (MP)

- Ram Kishan Oil Mills v. CIT: 56 ITR 186 (MP)

- CIT vs. Bombay Samachar Limited: 74 ITR 723(Bom)

- Regal Theatre vs. CIT : 225 ITR 205 (Del.)

In view of the aforesaid, the conclusion drawn by the CIT (A) while questioning the commercial justification of the appellant in advancing interest free advances and simultaneously making borrowings, is patently erroneous. The order of the CIT (A) affirming the order of the assessing officer is, therefore, legally and factually unsustainable.”

6.2 The Ld. Departmental Representative on the other hand relied on the orders of the authorities below.

6.3 We have carefully considered the submissions and perused the records. We find that the break-up of the amount of Rs. 92,61,000/- is as under:-

(i) Total interest paid on HSBC Loan Rs. 31,39,988

(ii) Interest on late deposit of tax Rs. 851

(iii) Bank Overdraft Charges Rs. 11,85,235

(iv) Interest to NDSL for delayed payment Rs. 44,70,796

(decoder boxes supplier)

(v) Interest on security deposit from Rs. 4,64,229

Distributors Total = Rs. 92,61,100

6.4 In this regard, assessee’s contention has sufficient cogency that it is not the case of the authorities below that various interest paid by the assessee (other hand interest paid to HSBC bank) was incurred not for the purpose of the business. Even otherwise, there cannot be any dispute regarding allowability of interest paid (i) on bank overdraft, (ii) to supplier for delayed payment, and (iii) on security deposit from distributors. Therefore, out of total interest of Rs. 92,61,100/-, interest expenditure of Rs. 61,20,261/- (other than interest paid to HSBC bank and late deposit of tax) was clearly allowable as business deduction. Assessee has further submitted that no disallowance out of interest of Rs. 31,39,988/- paid to HSBC loan was called for. This is for the reason that loans were advanced to group companies which fell under the category of subsidiary companies under the same management and were engaged in similar business of entertainment / distribution of pay channels. Advances were given to the said group companies as part of the corporate / business strategy of the assessee to expand the business operations. Assessee’s further submission is that lower authorities further failed to appreciate that since the loans and advances were advanced by the assessee to group companies engaged in the similar business out of commercial expediency, no part of interest expenditure was disallowable for advancing interest free loans. Assessee has placed reliance on the following cases:-

- SA Builders vs. C.I.T. : 288 ITR 1 (SC)

- C.I.T. vs. Dalmia Cement (P) Ltd. : 254 ITR 377 (Del.)

- C.I.T. vs. Bharti Televentures Ltd. 331 ITR 502 (Del)

6.5 In our considered opinion, there is considerable cogency in the assessee’s submission as above. Hence, in our considered opinion, since the advances were given to the group companies and subsidiary companies out of commercial expediency, no disallowance of interest in this regard is called for.

7. As regards the amount due from M/s K.K. Modi Investment and Financial Service Ltd., holding company of the assessee, it is noted that the amount was due as on 31st March, 2000, which too got reduced to nil as on 31.3.2001. Hence the averment of the assessee is correct that since the loan from HSBC bank was received in January, 2001, the question of utilizing the same for giving loan to parent company and consequent disallowance of any interest paid to HSBC bank does not arise. This is more so when no disallowance in this regard have been made in earlier years.

8. As regards disallowance of interest u/s. 14A of the IT Act. Assessee has itself conceded that as held by the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. & Ors. vs. C.I.T. 247 CTR 162 even though shares are held for acquiring controlling interest, disallowance can still be made under section 14A of the Act. Hence, assessee has conceded that even though investments were made by the assessee as a strategic business investment, provisions of section 14A of the Act may, still, be applicable. Further, we find considerable cogency in the assessee’s submission, that the above investment of Rs. 2.535 crores in this regard was made on 31.3.2001. Hence, disallowance of interest paid to HSBC bank, could be made only in respect of interest relatable to the said investment on proportionate basis for one day only.

9. In the result, the appeal filed by the Assessee stands partly allowed.

Order pronounced in the open court on 15/3/2012.

                                          Sd/-                                        Sd/-

                                   [A.D. JAIN]                   [SHAMIM YAHYA]

                              JUDICIAL MEMBER   ACCOUNTANT MEMBER

Date 15/3/2012

“SRBHATNAGAR”

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT (A)

5. DR, ITAT

TRUE COPY

By Order,

Assistant Registrar,

ITAT, Delhi Benches