ORDER
B.L. Chhibber, Accountant Member
1. The assessee is a Public Limited Company and derives income from hotel business. Seven grounds have been raised by the Revenue in this appeal. The same are disposed of as follows:
2. Ground No. 1 reads as under: –
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in deleting the disallowance of Rs. 50,000 made under Rule 6B of I.T. Rules on the ground that expenditure on presentation articles which do not carry company logo was outside the scope of disallowance under Rule 6B.
3. After hearing both the parties, we hold that the issue stands covered in favour of the assessee by the Order of the Tribunal in the assessee company’s own case for the assessment year 1988-89 vide order dated 9-8-2000 wherein in paras 2 to 5, the disallowance of Rs. 50,000 stands deleted. The case of the assessee further stands supported by the following judgments: –
1. CIT v. Allana Sons (P.) Ltd. [1995] 216 ITR 690 (Bom. )
2. First, ITO v. French Dyes & Chemicals I. (P.) Ltd. [1984] 10 ITD 240 (Mum.) (SB)
3. CIT v. Indian Aluminium Cables Ltd. [1989] 183 ITR 611 (Delhi).
In view of the above, we decline to interfere and dismiss this ground.
4. Ground No. 2 reads as under: –
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that the deduction for proportionate premium should be allowed on pro rata basis without appreciating the fact that the premium is to be paid on the redemption of debentures at the end of 7 years period and no such liability has crystallized during the previous year.
5. We find that this issue also stands covered in favour of the assessee-company by the above-mentioned order (Paras 13 to 17). The case of the assessee also stands fortified by the following cases: –
1. Madras Industrial Investment Corporation Ltd. v. CIT [1997] 225 ITR 802 (SC)
2. National Engg. Industries Ltd. v. CIT [1999] 236 ITR 577 (Cal. )
3. Universal Cables Ltd. v. CIT [2000] 243 ITR 3714 (Cal.).
In view of the above, we decline to interfere and dismiss-thus ground.
6. Ground Nos. 3 & 4 pertain to common issue and read as under: –
3. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in directing to allow deduction under Section 32AB on interest income on advances made to subsidiaries and other companies and to the suppliers holding that such interest is to be treated as business profits and not as income from other sources. ”
“4. On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that interest on advances of Rs. 1,62,55,734 is assessable under the head ‘income from business’ and not under the head ‘income from other sources’ as treated by the Assessing Officer in the Assessment Order.
7. During the course of assessment proceedings, the learned Assessing Officer noted that for claiming deduction under Section 32AB, the assessee had included following two items of income: –
1. Income from investment Rs. 21,59,875
2. Interest on advances Rs. 1,62,55,734
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Rs. 1,84,15,609
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According to the learned Assessing Officer, the aforesaid two items of income are not assessable under the head ‘Income from business or profession’. He observed that since deduction under Section 32AB is available only out of income from business and profession, the aforesaid two items would have to be reduced from profit adopted by the assessee. Accordingly, the Assessing Officer arrived at the profit of Rs. 6,05,30,442 as against the profit of Rs. 7,89,46,051 adopted by the assessee, which according to him, was eligible for deduction under Section 32AB.
8. On appeal, the learned CIT(Appeals) decided the issue in favour of the assessee by observing as under: –
Accordingly, it has to be held that interest income out of advances made to subsidiaries and other companies and to its suppliers from whom interest has been received was of business sic and, therefore, interest income earned on such advances has to be reckoned under the head ‘Income from other sources.
In support of this conclusion, the learned CIT(Appeals) relied upon the decision of the Bombay High Court in the case of CIT v. Favre-Leuba & Co. Ltd. [1979] 120 ITR 898′, and the decision of the Delhi High Court in the case of Addl. CIT v. Snam Progetti S.P.A. v. Addl. CIT [1981] 132 ITR 702.
9. Shri RIS Gill, the learned Departmental Representative strongly supported the order of the learned Assessing Officer. He submitted that the action of the Assessing Officer is justified as the income by way of interest on advances made to its subsidiaries and other customers by the assessee company cannot be treated as income from business. In support of this contention, he relied upon the judgment of the Bombay High Court in the case of Godavari Sugar Mills Ltd. v. CIT [1991] 191 ITR 359, Judgment of the Supreme Court in the case of CIT v. Autokast Ltd. [2001] 248 ITR 1102 and in Tuticorin Alkali Chemicals & Fertilizers Ltd. v. CIT [1999] 227 ITR 1723.
10. Shri Dinesh Vyas, the learned Counsel for the Assessee submitted that in the course of assessee’s business of hoteliers, the assessee company gave advances to its own group companies with which the assessee company had an ongoing business relationship, namely, in the form of earning operating fees for operating the hotel units of these other companies. Moreover, the assessee also gave advances to the suppliers of various commodities and materials required in the course of its hotel business and these advances were kept for ensuring future regular supplies at rates fixed in advance. He submitted that the above operating fees constitute a very substantial part of the assessee’s business income inasmuch as net income of Rs. 6.60 crores out of total profit of Rs. 10.87 crores was earned by the assessee by way of income from operating fees. These, according to the learned Counsel for the assessee, were the advances by the assessee out of pure business and commercial expediency and consequently, interest received by the assessee was clearly assessable as its business income. He further pointed out that all through in the past, the interest from advances had been taxed under the head ‘Income from business’.
11. Without prejudice to the above contentions, the learned Counsel for the assessee submitted that in view of specific provisions contained in Section 32AB(1) read with Sub-section (3), the computation of profits of business is to be made in accordance with the requirements of Parts II and III of Schedule VI of Companies Act and not in accordance with the provisions of Income-tax Act and hence, bifurcation of profits of business of the company in two different heads such as “income from business” or “Income from other sources, etc. ” is not required as is done for computation of income under the I.T. Act. In support of this contention, he relied upon the following cases: –
1. Tata Yodogwa Ltd. v. Dy. CIT[1998] 67 ITD 174 (Pat.)
2. Kelvinator of India ltd. v. Dy. CIT[1999] 105 Taxman (Mag.) 243 (Delhi)
3. Dy. CIT v. G.L. Rexroth Industries Ltd. [1999] 105 Taxman (Mag.) 111 (Ahd.).
12. We have carefully considered the rival submissions in. the light of the material produced before us. In respect of Section 32AB, the observations of the Hon’ble Supreme Court in their recent decision in the case of Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273′ are as under:-
A perusal of Section 32AB, as it stood at the relevant time, shows that if an assessee has a total income including income chargeable to tax under the head “Profits and gains of business or profession” and if the income from such business is derived from an “eligible business” arid if the assessee has out of such income utilized any amount during the previous year for the purpose of new plant or machinery then it is entitled to a set off of a sum equal to 20 per cent. Of the profit of such eligible business as computed in the accounts of the assessee which account has been audited in accordance with Sub-section (5) of Section 32AB.
13. It is clear from the above observations that deduction under Section 32AB can be availed of in respect of profit of such eligible business as computed in the accounts of the assessee which are audited in accordance with Sub-section (5) of Section 32A. It has further been observed by the Hon’ble Supreme Court that: –
The dispute in the present case is in regard to the question whether the assessee’s investment in the UTI is business, and if so, is it a business which qualifies to be an “eligible business” under Section 32AB? In regard to the first aspect, we must note that the Tribunal as a question of fact based on material on record has come to the conclusion that the investment in the UTI by the assessee-company is in the course of its business and its business of manufacture and sale of tyres and sale and purchase of units of the UTI are common in nature and both the businesses are intertwined and interlaced. This finding accepted by the High Court also. We also find that this business of the assessee-company of buying and selling of units is a business as contemplated under Section 32AB of the Act. The question then is: is it an eligible business under the said section? The term “eligible business” is defined under Sub-section (2) of Section 32AB. As per that definition, all business of an assessee-company will be an eligible business unless it falls under the type of business enumerated in Sub-clauses (a) and (b) of Section 32AB(2)….
14. The Assessing Officer excluded the following items from the income of the assessee for the pyrpose of computing deduction under Section 32AB: –
1. Income from Investment Rs. 21,59,875
2. Interest on advances Rs. 1,62,55,734
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Rs. 1,84,15,609
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These items have been excluded by the Assessing Officer on the ground that these items are income that are not assessable under the head “business or profession”. As pointed out earlier, it is necessary that the income should be income from business or profession for being eligible for deduction under Section 32AB. The Assessing Officer has not examined this aspect while considering the claim of the assessee as to whether the above-mentioned items of income were earned by the assessee-company in the course of its business and its main business and income from investment and interest on advances were common in nature and both the businesses were intertwined and interlaced. Unless these findings are given, the income from investment and income from interest on advances cannot be considered for deduction under Section 32AB.
15. Under the circumstances, in order to examine the claim of the assessee in the light of the decision of the Hon’ble Supreme Court (supra), we restore this issue to the file of the Assessing Officer. Needless to observe that the Assessing Officer, before taking any decision in this respect, shall provide the assessee with reasonable opportunity of being heard. With these directions, we restore this issue to the file of the Assessing Officer.
16. Ground No. 5 reads as under: –
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company.
17. The facts of the case here are that the assessee had charged interest from its subsidiary companies at the rate of 6% which according to the Assessing Officer was much below normal rate of interest paid by the assessee and charged by other parties. It is also stated by the Assessing Officer that the assessee itself claimed huge deduction on account of interest payment. Hence, it was not justified for charging concessional rate of interest on advances to its subsidiaries. The Assessing Officer further held that as the advances to subsidiaries were not made for specific business purpose of the assessee, the money advanced to them could have been utilized to reduce assessee’s own interest liability. In view of the above, the Assessing Officer disallowed the sum of Rs. 25,11,807 being the difference between the interest charged from subsidiary companies and the normal rate of interest.
18. On appeal, the learned CIT(Appeals) deleted the addition observing as under: –
Since the assessee-company is in the business of hoteliering the investment made by the subsidiary in companies with which the assessee-company has operating agreement, the observation of the Assessing Officer that the said advance to the subsidiary was not for specific business purpose of the assessee does not appear to be justified. In view of the ratio of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd., the Assessing Officer’s action of holding that the appellant company ought to have charged interest @ 15% instead of @ 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed.
19. Shri RIS Gill, the learned Departmental Representative strongly supported the order of the Assessing Officer and relied upon the submissions relating to Ground Nos. 3 & 4 above.
20. Shri Dinesh Vyas, the learned Counsel for the assessee reiterated that the company carried on the business as a “hotelier first and a hotelier last” and act of giving advances forms an integral part of composite hoteliering business. He further submitted that the case of the assessee stands covered by the judgment of Bombay High Court in the case of CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723. During the course of hearing, the attention of Shri Vyas was invited to the following judgments of the Hon’ble Bombay High Court: –
1. Shankar Theatres v. CIT[1984] 146 ITR 547
2. CIT v. Doctor & Co. [1989] 80 ITR 627 (Bom. ).
Shri Vyas pointed out that the above two Judgments of the Hon’ble Bombay High Court were not founded on commercial expediency and hence, the ratio laid down in the above cases does not apply to the facts of the assessee’s case. He extensively read from the above two judgments and also drew our attention to the relevant portions of the judgments where the case of Bombay Samachar Ltd., was referred and distinguished.
21. Shri Buta Singh, the learned Departmental Representative submitted that the judgment of Bombay High Court in the case of Bombay Samachar Ltd., (supra) is not applicable and that the subsequent two judgments of the Jurisdictional High Court viz,, Shankar Theatres’ case (supra) and Doctor & Co. ‘s case (supra) were applicable.
22. We have considered the rival submissions and perused the facts on record. From the facts of the case, it is evident that the act of giving advance forms integral part of complete hotelier business which is the core, fundamental and only business of the assessee-company. In fact, from a business point of view, no concession was provided with regard to the advances made to the subsidiary companies which made investment in shares of other companies having business dealings with the assessee-company. This resulted ultimately in assessee being benefited to an immensely larger extent than the concession in the rate of interest. It is the prerogative of the businessman how to run the business and it is not open to the Revenue to prescribe what expenditure an assessee should incur and in what circumstances he should incur. Every businessman knows his interest best-CITv. Dhanrajgiri ji Raja Narosingirji [l973] 91 ITR 544 (SC). In the case of CITv. Premier Auto Finance (P. ) Ltd. [1981] 128 ITR 540′ (Delhi), the assessee, which carried on the business of finance of vehicles had borrowed monies and claimed deduction of interest paid thereon in the computation of its profits. Out of the borrowed monies, the assessee had itself advanced a sum of Rs. 1,02, 003 to another company ‘D’. The Tribunal found that ‘D’ was a dealer in trucks which had an arrangement with a firm in Trivandrurn in respect of certain trucks or vehicles and that the assessee was interested in obtaining the vehicles obtained by ‘D’ from Trivandrurn firm and the assessee was advancing from time to time monies to D which, in turn, was passing on those monies to the Trivandrurn firm and that these transactions were reversed as and when the vehicles were actually delivered to the assessee. There was no agreement with ‘D’ for payment of interest. The Tribunal held that the advances to ‘D’ were for business purposes and held that the interest paid by the assessee on borrowed monies lent to ‘D’ could not be disallowed. On a reference, the Hon’ble Delhi High Court held that the Tribunal had rightly come to the conclusion that the advance to ‘D’ were for business purposes and that there was no justification in disallowing the interest payments.
23. In the case before us, the advances were made to the subsidiary companies for business purposes because the subsidiary companies made investment in other companies having business dealings with the assessee firm. In our opinion, the case of the assessee stands on all fours with that of the case decided by the Delhi High Court (supra). We further hold that the case of the assessee also gets support from the Judgment of Bombay High Court in the case of Bombay Samachar Ltd. (supra), relied upon by the learned CIT (Appeals). The Hon’ble High Court has held as under: –
The only conditions required to be satisfied in order to enable the assessee to claim a deduction in respect of interest on borrowed capital under Section 10(2)(iii) are: firstly, that money 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 said amount and claimed it as a deduction. It is not the requirement of the provision that the assessee must further show that the borrowing of the capital was necessary for the business so that if at the time of borrowing, the assessee had sufficient amount of its own, the deduction could not be allowed.
The fact that the assessee had ample resources at its disposal and need not have borrowed, is not a relevant matter for consideration.
24. Now, coming to the subsequent Judgments of the Bombay High Court, viz., (f) Shankar Theatres’ case (supra) and (ii) Doctor & Co. ‘s case (supra), we find that the facts in these cases are distinguishable from the facts of the case of the assessee. First of all, both the Judgments have taken note of the earlier Judgment in the case of Bombay Samachar Ltd. (supra) and have tried to distinguish the same, but none of the Judgments states that the law laid down in the case of Bombay Samachar Ltd. (supra), is no more good law. In the case of Shankar Theatres (supra) at page 146, the Hon’ble High Court has observed as under: –
In the Bombay Samachar Ltd. ‘s case, the admitted position was that the capital borrowed by the assessee from outsiders was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilized for the purposes of advancing loans to any component of the company.
25. Similarly, in Doctor & Co. ‘s case (supra), the Hon’ble Bombay High Court, referred to the case of Bombay Samachar Ltd. (supra) and noted that “the amounts advanced to the sister concerns on the assessee’s own admission, were partly out of borrowed funds”. But none of the two Judgments talk of or take into consideration the commercial expediency of the type which the assessee resorted to. It has not been disputed before us by the Revenue that the advances were made by the assessee-company to the subsidiary companies which made investments in shares of other companies having business dealings with the assessee-company. Thus, the assessee made advances to the subsidiary companies out of commercial expediency/prudence and, accordingly, we hold that the ratio laid down by the Bombay High Court in the cases referred to in para 18 above is not applicable to the facts of the case before us. On the other hand, the issue stands concluded in favour of the assessee by the Judgment of Bombay High Court in the case of Bombay Samachar Ltd. (supra), and in the case of Premier Auto Finance (P. ) Ltd. (supra). Accordingly, we hold that the learned CIT (Appeals) is justified in holding that the advances made for subsidiary companies were for specific business purpose. We, therefore, decline to interfere and dismiss this ground.
26. Ground No. 6 reads as under: –
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that the amount of central subsidy received cannot be deducted from the cost/Written Down Value while calculating depreciation of assets.
27. After hearing both the parties, we hold that the issue stands squarely covered in favour of the assessee by the following judgments: –
1. CIT v. P.J. Chemicals Ltd. [1994] 210 ITR 830′ (SC)
2. CIT v. Coving Poy Oxygen-s [1999] 239 ITR 5432 (Bom.)
3. CIT v. Elys Plastic (P.) Ltd. [1991] 188 ITR 113 (Bom.).
We, accordingly, decline to interfere and dismiss this ground.
28. Ground No. 7 reads as under: –
On the facts and in the circumstances of the case and in law, the learned CIT(Appeals) erred in holding that the Assessing Officer was not justified in estimating 10% of the total receipts in foreign currency as pertaining to foreigners visiting India on business trips and denying the assessee’s claim on the said receipts under Section 80HHD without appreciating the fact that a foreign visitor coming to India on a business trip cannot be considered as a foreign tourist.
29. The assessee claimed deduction in respect of earnings in convertible foreign exchange in respect of services provided to foreign tourists under Section 80HHD. The Assessing Officer held that deduction under Section 80HHD was allowable in respect of income from services provided to foreign tourists only. He, therefore, asked the assessee vide letter dated 12-9-1990 to show that in its claim for deduction under Section 80HHD, it had not included receipts from people visiting India from abroad on business trips. The Assessing Officer held that the assessee had not furnished the required details and he estimated 10% of the total receipts in foreign currency declared by the assessee as being from foreigners visiting India on business trips.
30. On appeal, the learned CIT (Appeals) held that as per Clause (a) of Sub-section (1) of Section 80HHD, the words used are “foreign tourists” and it would not be correct to say that the word “tourist” can only imply to visitors from abroad who have come on pleasure trip. According to the learned CIT (Appeals), it has necessarily to include a visitor from abroad who has come on business trip and he accordingly directed the Assessing Officer to allow deduction under Section 80HHD as claimed by the assessee.
31. Shri RIS Gill, the learned Departmental Representative supported the order of the learned Assessing Officer.
32. Shri Dinesh Vyas, the learned counsel for the Assessee submitted that deduction of 10% on total receipts in foreign exchange receipts with regard to the claim under Section 80HHD is totally unjustified inasmuch as the law does not distinguish between the foreign tourists who come to India for business purposes and foreign tourists who come to India on pleasure trip. In support of this contention, he relied upon Butter Worth’s “Words and Phrases Legally Defined”. He further submitted that even in common parlance, a Government Officer visiting a place outside Headquarters for official purposes is regarded as “on tour”; during such period of visit. Applying both the legal meaning and ordinary meaning of the provisions of Section 80HHD, the learned CIT(Appeals) was justified in deleting the deduction of claim under Section 80HHD of the Act.
33. We have considered the rival submissions and perused the facts on record. Butter Worth’s “Words and ‘Phrases Legally Defined” defines tourist amenities as follows: –
In this Part of this Act (Part I: Tourist Authority and Tourist Boards) ‘tourist amenities and facilities’ means in relation to any country, amenities and facilities for visitors to that country and for other people travelling within it on business or pleasure. [Development of Tourism Act, 1969, Section 2(9)].
A reading of Section 80HHD and the above definition shows that the law does not distinguish between the foreign tourists who come to India for business purposes and foreign tourists who come to India for pleasure. Accordingly, we see no justification in the action of the Assessing Officer in reducing 10% of the total receipts in foreign currency with regard to the claim under Section 80HHD. It is further noted that the Revenue itself on and from the assessment year 1988-89 has not been making above distinction in the assessment order kself and is granting relief under Section 80HHD. Accordingly, we do not find any infirmity in the order of the learned CIT (Appeals) and decline to interfere. This ground accordingly fails and is dismissed.
34. In the result, the appeal filed by the Revenue is allowed in part.
I.P. Bansal, Judicial Member
1. I have carefully gone through the order passed by learned Accountant Member. I agree with the decision in respect of all grounds except ground No. 5.
2. Ground No. 5 relates to disallowance of a sum of Rs. 25,11,807 made on account of differences between interest charged from subsidiary and normal rate of interest. This ground has been dealt by the learned Accountant Member in his order in paragraphs 14 to 23. The Assessing Officer disallowed this amount with the following observations:
19. Rate of Interest charges from subsidiary companies. -Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concealed rate of interest on advances, to its subsidiaries. As the advance to subsidiaries are not made for any specific business purpose of the assessee, the money is advanced to them could have been utilized to reduce assessee’s own interest liabilities. In view of this, the difference between interest charged from subsidiary and the normal rate of interest coming to Rs. 25,11,807 is disallowed.
3. In an appeal before CIT(A), it was pleaded that through resolution of Board of Directors, the interest was charged at the rate of 6% on loan/ deposits given by assessee to Taj Investment and Finance Limited which is 100% subsidiary of the assessee-company. The subsidiary company made investment in the shares of group itself. The assessee-company earned dividend from its subsidiary company to the extent of Rs. 18.08 lakhs. The subsidiary company utilized the funds advanced for the purpose of purchasing shares of other companies with whom it has entered into operating agreement. Thus, the investment made by the subsidiary company is purely out of commercial expediency and the object was to secure operating agreement for the assessee-company. It was also pointed out before the CIT(A) that the assessee company earned operating fees during the year to the extent of Rs. 6.6 crores and thus the assessee was benefited to immensely larger extent than the concession in the rate of interest charged to subsidiary companies. Reliance was also placed on the decisions in the case of Premier Auto Finance (P.) Ltd. (supra), Bombay Samachar Limited (supra) and Cadbury Fry (India) Ltd. v. ITO [1982] 2 ITD 435 (Bom. ). Relying on these decisions, it was pleaded that the addition was unwarranted. The CIT(A) on consideration of all these submissions deleted the addition with the following observations:
31. I have considered the submissions made. From the submissions of the appellant discussed above, it is noted that the advance made to its 10% subsidiary i. e. Taj Investment and Finance Co. Ltd. was admittedly at concessional rate of 6% on the basis of resolution of the Board of Directors of the appellant-company. There appears substance in the contention of the appellant that the funds were placed at the disposal of the subsidiary company for the purpose of purchasing shares of other companies with whom the assessee has entered into operating agreements. It is significant to note that the quantum of operating fees earned during the year is Rs. 6.6 crores out of the total profit of Rs. 10.87 crores. Therefore, it cannot be said that the appellant did not derive any benefit by advancing loan to its subsidiary company at concessional rate of interest. Since the assessee-company is in the business of hoteliering the investment made by the subsidiary in companies with which the assessee-company has operating agreement, the observations of the Assessing Officer that the said advance to the subsidiary was not for specific business purpose of the assessee does not appear to be justified. In view of the ratio of the decision of the Bombay High Court in the case of CIT v. Bombay Samachar Ltd., the Assessing Officer’s action of holding that the appellant-company ought to have charged interest @ 15% instead of 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed.
4. The order of learned CIT(A) in this regard has been upheld by the learned Accountant Member on the basis of decision in the case of Bombay Samachar Ltd. (supra) and Premier Auto Finance (P. ) Ltd. (supra).
5. During the course of hearing a reference was made to following two decisions of Hon’ble Bombay High Court in the case of Shankar Theatres (supra) and Doctor and Co. (supra).
6. In both the above-mentioned decisions, the Hon’ble High Court has considered the decision in the case of Bombay Samachar Ltd. (supra). In the case of Shankar Theatres (supra), the observations of Hon’ble Bombay High Court regarding decision in the case of Bombay Samachar Ltd. (supra) are as follows:
In the Bombay Samachar Ltd.’s case, the admitted position was that the capital borrowed by the assessee from outsiders. was used by the assessee for the purposes of the business and that no part of the borrowed capital had been utilised for the purposes of advancing loans to any component of the company.
7. Similarly, in the case of Doctor and Co. (supra) the observations of Hon’ble Bombay High Court in this regard are as follows:
Vide paragraph 11 of the order, it found that this court’s decision in Bombay Samachar Ltd. (1969) 74 ITR 723 was not applicable as, in that case, there was a finding that the assessee had not advanced any loans to such parties out of its borrowed funds. In this case, on the assessee’s own admission, at least a part of borrowings was diverted to its sister concerns.
8. In the present case, it is not disputed by the assessee that it diverted borrowed funds to advance loans to its sister concern. Thus, I am of the opinion that the ratio of decision in the case of Bombay Samachar Ltd. (supra) cannot be applied to the facts of the assessee’s case and the ratio of decision in the case of Doctor & Co. (supra) will be applicable. In the said case, it has been held that where the amount are advanced by the assessee to its sister concern and it is out of borrowed funds, the Tribunal was not justified in deleting the disallowance made by the Assessing Officer of the interest to the extent it was payable on the monies borrowed and diverted to sister concern free of interest.
9. Now coming to the facts in the case of Premier Auto Finance (P. ) Ltd. (supra). In the said case, the assessee out of borrowed monies advanced a sum of Rs. 1,02, 003 to another company. The another company was a dealer in trucks which had an arrangement in Trivandrum in respect of certain trucks or vehicles and that the assessee was interested in obtaining the vehicles obtained by the said company from Trivandrum firm and the assessee was advancing from time to time monies to the said company which in turn was passing on those monies to the Trivandrum firm and these transactions were reversed as and when the vehicles were actually delivered to the assessee. There was no agreement with the said company by assessee for paying the interest. In these circumstances, it was held that Tribunal was right in coming to the conclusion that the advances to dealer were for business purpose and there was no justification in disallowing the interest payment. In the said case the assessee was able to establish business purpose, inasmuch as, the assessee was advancing money to another company for the purposes of taking delivery of vehicles. After taking the delivery of vehicles, the assessee was receiving back the money from another company. Thus, the facts of the decision in the case of Premier Auto Finance (P. ) Ltd. (supra) cannot be said to be on all fours to the facts of present case. In the present case no such nexus has been shown. In the present case, the assessee has made simple arguments that by way of advancing monies to its subsidiary company, the assessee was able to earn huge operating fees. There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and CIT(A) was not right in deleting the disallowance following the decision in the cases of Bombay Samachar Limited (supra) and Premier Auto Finance P. Ltd. (supra). In my view, the order of Assessing Officer in this regard has to be upheld.
ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961
B.L. Chhibber, Accountant Member
1. As there is a difference of opinion between the Account Member and the Judicial Member, the matter is being referred to the President of the Income-tax Appellate Tribunal with a request that the following question may be referred to a Third Member or to pass such orders as the President may desire: –
Whether on the facts and in the circumstances of the case, the learned CIT (Appeals) is justified in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company?
THIRD MEMBER ORDER
Vimal Gandhi, President
1. The following question has been referred to me under Section 255(4) of the Income-tax Act, 1961 on account of difference of opinion between the Members, who heard the matter:
Whether, on the facts and in the circumstances of the case, the learned CIT(Appeals) is justified in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company ?
2. The facts of the case are detailed in the proposed orders of the learned Members. All the same, for disposal of the question referred to me, it is necessary to set few of them, as per the following paragraphs.
3. The assessee is a public limited company and derives income from hotel business. Several hotels in which the assessee is carrying on its business under the name “Taj” are not owned by the assessee, but operated by it under agreements for which the assessee receives operating fee. Out of total profits of Rs. 10.87 crores, Rs. 6.6 crores accounts for “operation fee”.
4. On scrutiny of account, the Assessing Officer found that the assessee had advanced funds to its subsidiary company, Taj Investments & Finance Ltd. and had charged interest only at the rate of 6% on advances, whereas the assessee had received and paid interest to others at much higher rate. Accordingly, the assessee was asked to justify payment of interest at a low rate. The assessee, vide its reply dated 3-2-1992, stated before the Assessing Officer as under:
The Companies Act imposes certain restrictions on investments by a public company into the shares of other public companies.
Your assessee company operates several hotels belonging to other companies as a hotel operator and earns substantial fees therefrom.
Out of the annual net profit before tax of Rs. 1087.4 lakhs, Rs. 656.44 represents receipts by way of operating fees from various hotels operated by the Indian Hotels Co. Limited which are treated as part of the famous Taj Chain.
It is purely with a view to ensure continuity in the operating agreements which is immense business value to the assessee-company, that the assessee-company has via its wholly owned subsidiary invested Rs. 264.06 lakhs in the shares of various concerns, only a small fraction of which may represent investments in shares of the companies not operated by the assessee-company, yet having sufficiently intimate nexus of business interest.
It is for this reason that the assessee-company has advanced monies to Taj Investments and Finance Co. Limited whose balance sheet appears at page 52 of the full printed Accounts. A reference to this will reveal that the investment block of Rs. 264 lakhs matches, in value, the aggregate of issued capital and unsecured loans.
It is, therefore, purely out of commercial expediency and motivation that advances have been given by the assessee-company to its subsidiary at the concessional rate of interest.
Your kind attention is invited to the decision of the Bombay Bench ‘A’ of the Hon’ble IT AT in the case of Cadbury Fry (India) Limited v. ITO 2 ITD 435 wherein the assessee-company had made interest-free advances to its wholly owned subsidiary company which was supplying major portion of the raw materials required by the assessee, and it also paid interest on bank overdrafts with no nexus established between the two. The ITO, with whom the Commissioner (Appeals) agreed, disallowed substantial portion of the interest on overdrafts claimed by the assessee as deduction on the ground that the interest-free loan advanced to the subsidiary could not be said to be in the assessee’s business interest. The Hon’ble Tribunal held that the act of advancing interest-free loan to ensure regular supply of raw materials which form substantial part of the assessee’s requirements could be said to have been factually established, it was not obligatory on the part of the assessee to recover interest on such advances – CIT v. Bombay Samachar Ltd. 74 ITR 723 (Bombay). That apart, no specific advance was made out of borrowed funds and it was not open to the revenue authorities to question a businessman’s prudence not to charge interest, in the interest of ensuring regular supply of raw materials which was not found to be mala fide. The disallowance was thus not justified in law.
The above analogy of regularity of supply of raw materials is wholly analogous to the assessee-company’s business interest of earning operating fees from various hotels, which is one of the highly lucrative activities of the assessee’s hoteliering business. In this view of the matter, it is submitted that the assessee-company would be fully justified in even advancing money wholly free of interest with a view to secure continuity of its operating fees by having sufficient shareholding in the shares of the companies whose hotels, the assessee-company is operating.
In the instant case, the assessee-company has chosen to charge interest at the rate of 6% which, it is submitted, is not in any way unreasonable having regard to the substantial income by way of operating fees derived by the assessee-company in the course of its business of hoteliering.
We, therefore, submit that no addition can be made to the returned income of the assessee for the difference between the normal rate of interest and the rate of interest actually charged by the assessee-company to its wholly owned subsidiary.
Finally, it is submitted that as assessee cannot be said to make profit from itself and a wholly owned subsidiary is virtually itself and, therefore, the Indian Hotels Co. Limited cannot be said to make profit from itself i. e. Taj Investments and Finance Co. Limited.
5. The Assessing Officer did not find force in the above contentions and made an addition of Rs. 25,11,807 with the following observations:
19. Rate of interest charges from Subsidiary Companies:
Assessee has charged interest from its subsidiary companies @ 6% which is much below normal rate of interest paid by assessee or charged from other parties. The assessee itself is claiming huge deduction on account of interest payments. In view of this, it is not justified for charging concessional rate of interest on advances to its subsidiaries. As the advances to subsidiaries are not made for any specific business purpose of the assessee, the money is advanced to them could have been utilized to reduce assessee’s own interest liabilities. In view of this, the difference between interest charged from subsidiary and the normal rate of interest coming to Rs. 25,11,807 is disallowed.
6. The assessee impugned above disallowance in appeal before the CIT (Appeals) and contended that disallowance was unjustified having regard to the submissions made before the Assessing Officer as per letter dated 3-2-1992. The assessee had explained that advance was made to the subsidiary company so that the said company acquires shares of companies with which the assessee had contracts to earn operating fees. It was further explained that on account of restrictions of investment by a public limited company in the shares of other public limited companies, the assessee was obliged to hold shares of such companies through its subsidiary company. It was accordingly explained that interest at the rate of 6% was charged as a measure of business expediency.
7. The learned CIT (Appeals) accepted the claim of the assessee and deleted the addition made with the following observations:
31. I have considered the submissions made. From the submissions of the appellant discussed above, it-is noted that the advance made to its 100% subsidiary i.e. Taj Investments and Finance Co. Ltd. was admittedly at concessional rate of 6% on the basis of resolution of the Board of Directors of the appellant-company. There appears substance in the contention of the appellant that the funds were placed at the disposal of the subsidiary company for the purpose of purchasing shares of other companies with whom the assessee has entered into operating agreements. It is significant to note that the quantum of operating fees earned during the year is Rs. 6.6 crores out of the total profit of Rs. 10.87 crores. Therefore, it cannot be said that the appellant did not derive any benefit by advancing loan to its subsidiary company at concessional rate of interest. Since the assessee-company is in the business of hoteliering the investment made by the subsidiary in companies with which the assessee-company has operating agreement, the observations of the Assessing Officer that the said advance to the subsidiary was not for specific business purpose of the assessee does not appear to be justified. In view of the ratio of the decision of the Bombay High Court in the case of CTTv. Bombay Samachar Ltd. the Assessing Officer’s action of holding that the appellant-company ought to have charged interest @ 15% instead of 6% and adding the balance cannot be sustained. Accordingly, the addition of Rs. 25,11,807 is directed to be deleted. This ground is allowed.
8. The revenue being aggrieved brought the issue in appeal before the Tribunal. After hearing both the parties, the learned Accountant Member, as per his proposed order, upheld the view taken by the learned CIT (Appeals) in the impugned order. He held that act of giving advances forms integral part of hoteliers’ business. In that light, no concession was provided with regard to advances made to the subsidiary company, which made investment in shares of other public limited companies having business dealing with the assessee-company. This way the assessee was benefited to a large extent and was compensated for the concession in the rate of interest allowed. The learned Accountant Member further observed that it was the prerogative of the businessman how to run his business and it was not open to the revenue to prescribe what expenditure the assessee should incur and in what circumstances. The learned Accountant Member for the above view relied upon and followed the decision of the Hon’ble Delhi High Court in the case of Premier Auto Finance (P. ) Ltd. (supra) and the decision of Bombay Samachar Ltd’s. case (supra). As regards the case of Shankar Theatres (supra) and Doctor & Co. (supra), the decisions cited by the revenue during the course of hearing of the appeal, the learned Accountant Member held the view that above decisions were distinguishable on facts and were not applicable to the present case. In the light of the decision of the Hon’ble Bombay High Court in the case of Bombay Samachar Ltd. (supra) and of the Delhi High Court in the case of Premier Auto Finance (P. ) Ltd. (supra), the learned Accountant Member confirmed the order of the learned CIT (Appeals) in his proposed order.
9. The learned Judicial Member did not agree with the view taken by the learned Accountant Member. He took into account the decisions in the case of Shankar Theatres and Doctor & Co. (supra) with relevant portions extracted in his proposed order. The learned Judicial Member observed that it was not disputed by the assessee that it had diverted borrowed funds to advance loans to its subsidiaries (wrongly stated as sister concern). In these circumstances, the decision of the Bombay High Court in the case of Bombay Samachar Ltd. (supra) was not applicable, but the ratio of the decision in the case of Doctor & Co. (supra) was to be applied. The learned Judicial Member further held that the decision in the case of Premier Auto Finance (P. ) Ltd. (supra) was not applicable to the facts of the case as in the cited case, the assessee was able to establish that advances were made for business purposes. The learned Judicial Member further observed, “In the present case no such nexus has been shown. In the present case, the assessee has made simple arguments that by way of advancing monies to its subsidiary company, the assessee was able to earn huge operating fee. There is no material on record to support this contention that the assessee was able to earn large operating fees only due to the fact that it advanced monies to its subsidiary for a concessional rate of interest. In absence of such material and nexus, the disallowance made by Assessing Officer amount in question is justified and the CIT(A) was not right in deleting the disallowance…” With the above observations, the learned Judicial Member restored the order of the Assessing Officer in his proposed order.
10. On account of above difference, the matter has been referred to me under Section 255(4) of the Income-tax Act, 1961. I have heard Shri Boota Singh, the learned Departmental Representative for the revenue and Shri Dinesh Vyas, Senior Advocate on behalf of the assessee. I have also perused the proposed orders of the learned Members and other materials on record, to which my attention was drawn. Shri Boota Singh strongly relied upon the proposed order of the learned Judicial Member. He submitted that the assessee diverted borrowed funds on which it had to pay interest at the rate of 15%. No borrowed fund was diverted in the case of Bombay Samachar (supra) and, therefore, the said decision has no application. In fact, he submitted, the matter in issue is fully covered against the assessee as per the decisions of the Hon’ble Bombay High Court in the case of Doctor & Co. (supra) and Shankar Theatres (supra) and the decision of the Delhi High Court in the case of Premier Auto Finance (P. ) Ltd. (supra) is distinguishable on facts. The learned Departmental Representative read out all the decisions referred to in the proposed orders of the learned Members. Shri Boota Singh further argued that no case of commercial expediency was proved by the assessee with reference to any material on record. The assessee justified the deduction claimed under Section 37(1) of the Act by showing that loan was given as a matter of commercial expediency, but, in fact, the provisions of Section 36(1)(m) of the Act were applicable in this case and the case was to be proved under the above section by the assessee which was not done. The learned Departmental Representative also relied upon and brought to my notice the decision of the Hon’ble Bombay High Court in the case of Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989, wherein Their Lordships have held as under:
Section 36(1)(iii) of the Income-tax Act, 1961, provides for deduction for payment of interest only if the assessee borrows capital for its own business. The business of the subsidiary company cannot be considered in law as the business of the assessee. The finding of the Tribunal based on commercial expediency appears to us to be incorrect. The fact remains that the moneys borrowed were utilised for business of the subsidiary company and not for the business of the assessee as such. In this view of the matter, we hold that the Tribunal was not justified in holding that the interest on loans borrowed for advancing to its subsidiary company was allowable under Section 36(1)(iii) of the Income-tax Act, 1961. The plain language of Section 36(1)(iii) of the Income-tax Act, 1961, militates against the submissions urged on behalf of the assessee.
The learned Departmental Representative further relied on the decision of the Mysore High Court in the case of CITv. United Breweries [1973] 89 ITR 17, wherein Their Lordships have held as under:
The business of a subsidiary company can be regarded as the business of the parent-company if in addition to the control of capital, it has functional control over its subsidiary. There was no material to come to the conclusion that the assessee-company carried on its business through the agency of its subsidiaries and that the business carried on by the subsidiaries is not their own but of assessee-company. Hence interest on such portion of borrowed capital which is lent to the subsidiary company is not allowable.
He next relied upon the decision of the Kerala High Court in the case of CITv. V.I. Baby & Co. [2002] 254 ITR 2482, wherein disallowance of interest on borrowed funds was upheld on account of diversion of funds for non-business purposes. Lastly, he relied upon the decision of the Allahabad High Court in the case of CITv. H.R. Sugar Factory (P. ) Ltd. [1991] 187 ITR 3633 to support the proposed order of the learned Judicial Member.
11. Shri Dinesh Vyas, Senior Advocate appearing for the assessee, opposed the above submissions. He referred to the letter dated 3-2-1992 filed before the Assessing Officer, wherein the circumstances under which the amount was advanced to the subsidiary company were explained. Shri Dinesh Vyas submitted that none of the facts stated by the assessee in the said letter were challenged by the Assessing Officer. Therefore, the observations made by the learned Judicial Member to the effect that borrowed funds were utilized to advance loans to the subsidiary company and that there was no nexus between these loans and business of the assessee were factually incorrect. Out of the net profit of Rs. 1087.4 lakhs, Rs. 657.44 lakhs represented receipts by way of operating fees. It was clearly stated in the said letter that the assessee-company made advances to the subsidiary company to ensure continuity in the operating agreements and to derive benefit from such agreements. Thus concessional rate of interest was allowed only as a measure of commercial expediency, which was to serve the business purposes of the assessee. The facts stated in the said letter were not challenged by the Assessing Officer and were supported by the entries made in the balance-sheet, to which reference was made in the letter. The assessee’s contention that no specific advance was made out of borrowed funds and it was not open to the revenue authorities to question a businessman’s prudence not to charge interest was also not challenged.
12. Shri Dinesh Vyas further argued that a distinction has to be made between the diversion of borrowed funds in the case of a company for use of directors or their family concerns/personal relations and those diverted purely for business purposes. Interest payment can be disallowed in the case of former situation where there is personal use of funds, but not in the case of latter situation, where the funds are utilized for business purposes. In the present case, the funds were utilied for business purposes for giving concessional loans to a subsidiary company, who was buying shares of hotels, with whom the assessee had agreements for earning operational fees. The Assessing Officer did not deny the fact that loans advanced helped the assessee in earning operational fees. He accordingly stated that the two decisions relied upon by the learned Judicial Member and the other decisions cited by the learned Departmental Representative during the course of hearing, were not applicable to the facts of the present case. In the decided cases, borrowed funds were admittedly diverted for personal use of directors or their family members and there was personal and non-business use of funds. But in the present case, funds had been utilized for advancing loans to the subsidiary company for purposes of business. Shri Dinesh Vyas further pointed out that the transaction of advancing loans gave return of 13 to 14% to the assessee as per the following calculation:
(i) In the shape of interest @ 6% Rs. 16,00,000.00
(ii) Dividend (about 7 to 8%) Rs. 18,08,000.00
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Rs. 34,08,000.00
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Thus loans were advanced to make the subsidiary company earn profit so as to give reasonable return to the assessee, besides earning operational fees which was the main income of the assessee. Shri Dinesh Vyas also relied upon the following decisions:
1. Cadbury Fry (India) Ltd. 's case (supra)
2. Tata Chemicals Ltd. v. Dy. CIT 72 ITD 1 (Mum. )
3. Bombay Samachar Ltd. 's case (supra)
4. CITv. Pudukottai Co. (P. ) Ltd. [1972] 84 ITR 788 (Mad. )
5. Dhanrajgiriji Raja Narasingiriji's case (supra)
6. Favre-Leuba & Co. Ltd. 's case (supra)
7. Snam Progetti S.P.A. 's case (supra)
8. D & H Secheron Electrodes (P. ) Ltd. v. CIT [1983] 142 ITR 528' (MP)
9. Shankar Theatres' case (supra)
10. Doctor & Co. 's case (supra)
11. CIT v. Rajeeva Lochan Kanoria [1994] 208 ITR 6162 (Cal. )
12. CIT v. Jardine Henderson Ltd. [1994] 210 ITR 9813 (Cal. )
13. CIT v. Tata Chemicals Ltd. [2002] 256 ITR 3954 (Bom. )
14. Kejriwal Enterprises v. CIT [2003] 260 ITR 341 (Cal. ).
He in particular referred to the decision of the Tribunal in the case of Tata Chemicals Ltd. (supra), wherein it was observed as under:
The investments had been made in the course of the business. The fact that they were tax-free bonds did not mean that the interest attributable to the capital borrowed for purchasing them had to be disallowed. In the course of the business, a company may have to park the funds in investments as a matter of prudence. It is essentially a business decision. So long as the investment in the tax-free bonds has been made in the course of the business, the interest is allowable notwithstanding that the income from the bonds is not taxable.
The assessee highlighted certain salient points. Firstly, it had been stated that the investment was made out of own funds and not borrowed funds as the capital expenditure incurred was more than the amount borrowed. Secondly, it had been pointed out that all the receipts, including sale proceeds and borrowings both for capital expenditure and for working capital had been deposited in the cash credit account and from this account the payments, both for capital expenditure and revenue expenditure had been effected. When own funds and borrowings had been mixed, it could not be presumed that investment in tax-free bonds came out of borrowed funds. Thirdly, the profits of the company-cash profits were substantial as also its free reserves, a substantial part of which was on account of share premium. Fourthly, it had been stated that in the past twelve years, the gross block of the company had increased from Rs. 67 crore to Rs. 698 crore. The borrowings were for both capital expenditure and working capital. This showed that for incurring capital expenditure, in addition to borrowings, internal cash accruals had also been utilized. Fifthly, it had been pointed out that during the year, no fresh borrowings were made. It had also been submitted that the investment in tax-free bonds was ‘to have liquidity, income and appreciation in the value’.
As held by several High Courts, where there is a mixed funds consisting both own funds and borrowed funds it cannot be assumed that a payment for non-business purpose came out of borrowed funds.
At any rate, having regard to the facts as well as the legal position enunciated by the Supreme Court in the case of CIT v. Indian Bank Ltd. [1965] 56 ITR 77 as well as the other judgments of the High Courts it was not possible to view the investments in the tax-free bonds as representing a utilization of the borrowed capital for non-business purposes. Therefore, the disallowance of Rs. 20.35 crores was deleted. The interest claimed could not be allocated in the manner done by the Assessing Officer. The amount had to be considered and allowed under the head ‘Business’.
13. Shri Dinesh Vyas further pointed out that the aforesaid decision was approved by the Bombay High Court in Tata Chemicals Ltd. ‘s case (supra). Further the Special Leave Petition filed by the Revenue against the decision of the Bombay High Court was not admitted by the Supreme Court as per their order dated 28th March, 2004, a cutting from Economic Times of aforesaid date was filed before me in proof of this claim.
14. I have carefully considered the rival submissions of the parties in the light of material available on record. The short question involved here is whether the assessee, on the facts and circumstances of the case, was justified in charging interest at 6% or a higher rate of interest should have been charged to give extra income of Rs. 25,11,807, the amount added in the income of the assessee. When asked by the Assessing Officer to justify the rate of interest charged, the assessee made a detailed submission as per letter dated 3-2-1992. The assessee further placed on record copy of balance-sheet of the subsidiary company to contend that charging of interest at 6% was fully justified and was an act of business prudence carried on account of business expediency. The detailed submissions of the assessee has been reproduced in the earlier part of this order.
15. The Assessing Officer in a short order, which has also been reproduced, disallowed Rs. 25,11,807 by observing that the assessee himself was paying and charging interest from other parties at much higher rates. Therefore, there was no, justification to charge interest at concessional rate on advances made to its subsidiary company. The short order passed by the Assessing Officer is apparently erroneous as he did not bother to take into account all the circumstances as also the background in which loan was advanced by the assessee. He did not consider pecuniary and other advantages received by the assessee on advancement of loan. The purpose for which exercise of advancement was carried was also not taken into account. Although it is not specifically stated, but the Assessing Officer appears to have been influenced by the decision of the Hon’ble Allahabad High Court in the case of H.R. Sugar Factory Ltd. (supra). This is clear from the short finding recorded by the Assessing Officer. The above referred case was also relied upon by the learned Departmental Representative during the course of hearing before me. In the said case, the company had advanced huge loans to its directors @ 5% whereas the assessee made huge borrowings from banks at a much higher rate. Later on dispute arose between the assessee and its directors and under a settlement the directors were permitted to draw more loans on much lower interest of 2. 5%. No business purpose was to be served on account of advances made to the directors. “The amount of interest paid each year, payable on account of the loans to directors is very substantial and this fact cannot be glossed over” as noted by Their Lordships. In the above peculiar circumstances, Their Lordships upheld the disallowance of interest under Section 36(1)(m) for use of borrowed funds for non-business purposes. They further observed that if money was not advanced to directors, it would have been available to the assessee for its business purposes and to that extent it might not have been necessary to borrow from the banks.
The aforesaid decisions, as noted earlier, was rendered on the peculiar circumstances where there was extraordinary abuse of borrowed funds by the directors of the company for their personal and non-business purposes. No business purpose of the company was served in that case. I find no similarity of facts to apply the above decision to the case in hand.
16. The Revenue as well as the learned Judicial Member placed further reliance on the decisions of the Hon’ble Bombay High Court in the case of Shankar Theatres (supra) and also in the case of Doctor & Co. (supra). In the aforesaid decisions borrowed funds were diverted and advanced to partners of the firm and to sister concern. The interest paid was disallowed as not having been utilized for purpose of business by the assessee. In both the cases no question was raised and no claim was made that advances were made for purposes of business and, therefore, the question involved in the present case was not at all considered in those cases. The cited cases are, therefore, distinguishable and are not applicable to the case in hand. It is wrong to hold that the assessee here has not established that advances were made for purposes of business. In fact, facts stated by the assessee were not challenged by the Assessing Officer. The only question raised being that interest at a rate higher than 6% should have been charged, legal justification of the above stand is under dispute.
17. In my view the decisions of the IT AT Mumbai Bench in the case of Cadbury Fry India Ltd. (supra) and also in the case of Tata Chemicals Ltd. (supra) are relevant and applicable, as facts in the above cases are quite close to the facts involved in the case in hand. In the case of Cadbury Fry India Ltd. (supra), the facts noted are as under:
The assessee-company had made interest-free advances to its wholly-owned subsidiary company which had supplied major portion of the raw materials required by the assessee, and, had also paid interest on bank overdrafts, with no nexus established between the two. The ITO, with whom the Commissioner (Appeals) agreed, disallowed substantial portion of interest on overdrafts claimed by the assessee as deduction on the ground that the interest-free loan advanced to subsidiary could not be said to be in the assessee’s business interest.
After considering the facts, the Bench observed as under:
The act of advancing interest-free loan to ensure regular supply of raw-materials which formed substantial part of the assessee’s requirements could be said to have been made in the course of the assessee’s business. Once this had been factually established, it was not obligatory on the part of the assessee to recover interest on such advances-CIT v. Bombay Samachar Ltd. [1969] 74 ITR 723 (Bom.). That apart, no specific advance was made out of borrowed funds and it was not open to the revenue authority to question a businessman’s prudence not to charge interest, in the interest of ensuring regular supply of raw-materials, which was not found to be mala fide. The disallowance made was thus not justified in law.
The relevant observations from the decision in the case of Tata Chemicals Ltd. (supra), have already been reproduced above.
It has to be appreciated that the case where loan is advanced to a subsidiary like the assessee, stands on a different footing than advance made to a sister-concern or by a company to its directors or their close relatives. In the case of 100% subsidiary of the company, the profit of the subsidiary belongs to the company and if a higher rate of interest is charged, this would go down to reduce the profit. If no interest is charged the same amount would be returned in the shape of profit. This aspect has to be kept in view while determining the question whether advancement of loan is a measure of business expediency. I further find force in the submission of the assessee’s learned counsel that the distinction has to be kept in mind, of a case, where loan is used for purpose of business, and of case of loan misutilized by giving it interest-free or at a nominal interest to its directors, their relations and other sister concerns. In the latter situation, interest can be disallowed, but not in the case where advances are made to a subsidiary company for purposes of business.
18. In the present case, the assessee has elaborately explained that on account of restrictions on investment in its hands to buy shares of other public limited companies from whom the assessee was receiving operation fees, the subsidiary company was used to buy above shares and for that purpose loan was advanced to the subsidiary. It was a measure of business prudency. The loan advanced helped the assessee to earn substantial amount of operating fees. In fact, it was more than 60% of total receipts. This was besides dividend to be received from the subsidiary. Having regard to all the circumstances and benefits to the parties, it was agreed that interest on advance be charged @ 6% per annum. This advance was made wholly and exclusively for the purpose of business and to earn income. I find lot of force in the above submissions. In fact the revenue authorities did not challenge above facts/background which clearly showed that advance was made for purpose of business. It was a measure of business prudency.
19. The other argument accepted by the learned Accountant Member and advanced before me was that the revenue authorities are not justified in prescribing how and in what manner the assessee should carry his business. Every assessee is master of his own affairs and is entitled, under the law, to take decision which would suit his interests. In the case of CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 Their Lordships noted the facts of the case as under: –
So far as the disallowance of part of interest is concerned it was submitted that when funds were available, the assessee without any reason permitted it to be continued with the CDL and paid interest to the financial institutions without charging anything from the CDL. The Tribunal did not accept the stand and held that the conclusions of the Commissioner of Income-tax (Appeals) were in order. On being moved for reference, the questions as set out above have been referred for the opinion of this court.
Their Lordships observed as under: –
An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term “commercial expediency” is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue [See CIT v. Walchand and Co. (P. ) Ltd. [1967] 65 ITR 381 (SC); J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 (SC); Aluminimum Corporation of India Ltd. v. CIT [1972] 86 ITR 11 (SC) and CIT v. Panipat Woollen and General Mills Co. Ltd. [1976] 103 ITR 66 (SC)].
Above principles are fully applicable to the facts of the present case. Further there is nothing to show that agreement to advance loan was not bona fide entered into of was intended to divert income belonged to the assessee. The Assessing Officer while disallowing and making the addition in dispute, did not keep above legal principles in mind and applied subjective standards. The disallowance made is unjustified. I agree with the learned Accountant Member and uphold the deletion of the disallowance.
For the aforesaid reasons I agree with the view taken by the learned Accountant Member.
Let the case be placed before the Division Bench for passing an appropriate order.
ORDER
I.P. Bansal, Judicial Member
1. As there was difference of opinion between the Accountant Member and Judicial Member, the following question was referred for the consideration of the Third Member: –
Whether, on the facts and in the circumstances of the case, the learned CIT(Appeals) is justified in deleting the addition of Rs. 25,11,807 being disallowance on account of concessional rate of interest charges on advances made to the subsidiary company ?
2. The Honourable President, ITAT, Shri Virnal Gandhi, sitting as Third Member by his opinion dated 17th June, 2004 has concurred with the views of the Accountant Member and has answered the question in the affirmative. In accordance with the majority view, the issue stands decided in favour of the assessee and against the revenue.