ORDER
Chandra Poojari, A.M.
1. These appeals by the Revenue are directed against different orders of the CIT(A) for the above assessment years. The first common ground in these appeals is regarding deletion of addition made towards interest on deposits on credit card holders.
2. The brief facts of the case are that the assessee is engaged in the business of credit card business under the logo “Ready Money” since 1982. The member who joins the scheme is required to deposit funds with the assessee-company. The member may make purchases of consumer durables by using the credit card. The shop owners get their payment directly from trie assessee-company. For using the credit card, the assessee-company collects from the credit card holders finance charges at 16 per cent per annum. At the same time, the assessee is paying interest on deposits to the credit card holders. Meanwhile, the assessee, in order to expand the credit card business, formed wholly owned subsidiary company called M/s Shoppers Investment & Finance Co. Ltd., (hereinafter called SIFCO) and transferred all the amounts due from and to the credit card holders to M/s SIFCO. In return, M/s SIFCO has to pay specified amount of royalty to the assessee w.e.f. 1st July, 1987.
3. During the asst. yr. 1988-89, the assessee claimed deduction of Rs. 20,96,820 towards payment of interest to credit card holders which was denied by the AO for the following reason:
It is no doubt true that the credit cards are issued only to those persons who deposit the money and that the payment of interest on deposits and credit card business are inseparable. But a credit card holder need not have to necessarily use the card and only when it is used finance charges accrue. The deposit of money was made on account of the fact that 50 per cent was immediately returned to the depositors in the form of goods and the balance 50 per cent of the deposit carried interest rate of 26 per cent per annum for five years which is quite attractive. Since the assessee had parted with the emblem Ready Money (which was developed over a period of time) and since the royalty was for use of the same in the credit card business, the assessee’s claim for interest deduction can be considered only from the year in which the royalty income becomes due to the assessee. As already pointed out, the assessee becomes entitled to royalty for the first time for the year ended 30th June, 1988, only since the books of account of SIFCO are closed only on 30th June, 1988, In arriving at this decision I have taken into account the decision of the Mysore High Court in the case of CIT v. United Breweries as directed by the CIT(A) and the arguments of the assessee in its letter dt. 24th March, 1995. Accordingly, the assessee’s claim for deduction of interest is not entertained for the year ended 31st Dec., 1987 relevant to the asst. yr. 1988>89. Since royalty income is assessed on due basis for the assessment year from 1989-90, the assessee’s claim for deduction of interest will be considered for the assessment years from 1989-90 onwards.
Similarly, for the asst. yr. 1989-90, the assessee’s claim of deduction for Rs. 3,22,000 was denied for the above reasons. On appeal, the CIT(A) deleted the addition holding that:
It would appear that on the analogy of the income being assessable on accrual basis, the expenditure relatable to appellant’s business, in the form of the interest claimed must be allowed for the reason that there is no finding of the AO in the orders to the effect that (a) appellant’s business had not commenced and/or (b) appellant’s business had been discontinued. In CIT v. City Ahmedabad Spg. & Wvg. Mfg. Co. (1994) 207 ITR 427 (Guj). It has been held that once it is found that expenditure was bona fide incurred and it related to business activity, it would then become deductible and that business expenditure whether deductible or not would depend upon the relevant provisions of the law and not how the income is earned after incurring that expenditure. In 117 Taxation 37 (Guj) it has accordingly been held that merely because after incurring expenditure income is found to be little or negligible, the expenditure does not become impermissible deduction and that whether business expenditure is deductible or not would depend upon the relevant provisions of the law and not how the income is earned after incurring the expenditure. It has been held that the expenditure claimed as deductible if fund to be bona fide on activities relating to business is allowable as a deduction. From the perusal of the admitted facts it also appears that CIT v. United Breweries (1973) 89 1TR 17 (Mys) is not strictly applicable to the facts of this case since the so-called interest claimed as expenditure does not appear to be interest charged on any loans or advances given by the appellant holding company to wholly owned subsidiary.
Aggrieved, the Revenue is in appeal before us.
4. The learned Departmental Representative submitted that the assessee has transferred the entire assets and liabilities of credit card business for a consideration of royalty w.e.f. 1st July, 1987. After the transfer of the business, this business no longer is the business of the assessee. The assessee is entitled only for royalty income and the assessee cannot claim interest payment to the credit card holders because payment of interest to the credit card holders is the obligation of SIFCO and not the liability of the assessee-company.
5. The learned Counsel for the assessee, on the other hand, submitted that SIFCO is a 100 per cent subsidiary of the assessee-company and this fact had been accepted by the AO. When the entire credit card business was transferred to SIFCO the whole of the credit card advances along with the liabilities also were transferred. SIFCO continued the business which was hitherto carried on by the assessee. Since the same business was continued by the subsidiary company with the assets and liabilities transferred by the holding company whether there had been income or not the interest relating to the liabilities had to be allowed as if the business of the subsidiary company is the business of the holding company as held in the case of United Breweries (supra) relied on by the AO. He further submitted that the Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody v. CIT has held that there need not be any income for allowing the interest provided the particular source had been built up with the borrowed funds and the business for which the borrowals had been made had actually commenced. The case law relied on by the AO in Triveni Engineering Works v. CIT (1987) 167 CTR 742 (All) states that the funds borrowed ought to have been used for business purpose only. When the entire credit card business was transferred to SIFCO with all assets and liabilities and when the same business was continued by the subsidiary company it cannot be said that the borrowed funds had not been used in business by the subsidiary company. The emblem of “Ready Money” was transferred to SIFCO by a separate agreement one year after the transfer of the credit card business with all assets and liabilities. The learned Counsel for the assessee contended that the AO had confused the royalty and the interest allowable on the borrowals. Royalty was paid for using the emblem as it was the registered trade mark and none can use the said registered trade mark without proper authorization and this authorization was subsequently reached and hence the royalty was due from 1989-90 onwards. Royalty has nothing to do with the allowance of interest on borrowals transferred lock stock and barrel to the subsidiary company by the holding company even prior to the agreement on the emblem “Ready Money”.
6. We have heard the rival submissions and perused the material on record. As per Section 2(28A) of the IT Act:
‘interest’ means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized.
Further, a reading of Section 36(1)(iii) reveals that interest payable on capital borrowed is allowable as a deduction. Once the amount borrowed for the purpose of business and interest paid thereon such interest is allowable as deduction. In other words, the assessee must have borrowed money and such borrowal should be for the purpose of business and the assessee must have paid interest on it. The borrowal means taking anything on security with an intention to return safely. Thus borrowal means an element of refund or repayment is there. In the case of borrowals, there should be two parties, borrower and lender. In the absence of relationship between the borrower and lender, it cannot be said that interest is allowable as deduction.
7. In the light of the above discussion, if we analyze the facts, from 1st July, 1987, all the existing credit card business along with the amount due to the credit card holders and due from the credit card holders were transferred to subsidiary company viz., SIFCO. Therefore, the assessee is entitled only for royalty for using the logo “Ready Money”. As seen from records, the assessee is not entitled for payment of interest to the credit card holders. It is the onus of SIFCO. The only expenditure wholly and exclusively incurred by the assessee-company for the purpose of business is allowable as expenditure unless it is a capital expenditure or personal expenditure.
8. In the present case, the interest claimed to have been paid by the assessee was not for the purpose of business as the credit card business of the assessee was already transferred to SIFCO and the assessee was no longer in the business of credit card. It already ceased to be the business of the assessee. The relationship between the credit card holders and the assessee is not that of debtor and creditor. The money due to the credit card holders cannot be said to be borrowed in the credit card business. Similarly, the interest paid to the credit card holders also cannot be said to be on money borrowed for the purpose of business because SIFCO has failed to pay the interest to the credit card holders and the assessee claimed to have paid that interest to the credit card holders, it cannot be said that it is the liability of the assessee to incur. The interest paid only for the purpose of business of the assessee is allowable and the interest paid other than the assessee’s business cannot be allowed.
9. We further make it clear that we are not disallowing the payment of interest because the assessee has not earned the income from credit card business but because the assessee is not liable to pay interest on credit card business. Merely because the assessee has called the payment as ‘interest’, it does not automatically make such payment deductible as interest. There should be obligation on the part of the assessee to incur such expenditure. If any expenditure is incurred for any extra commercial consideration, it cannot be allowed as interest. In view of the above discussion, we are of the considered opinion that the assessee is not entitled for deduction as claimed. Accordingly, we reverse the order of the CIT(A) and restore that of the AO. This ground of the Revenue is allowed.
10. The Revenue has taken one more ground in ITA No. 1058/98 that the CIT(A) has erred in holding that interest relating to the amount due from M/s SIFCO at Rs. 26,49,969 is allowable business expenditure.
11. The learned Departmental Representative submitted that the CIT(A) ought to have appreciated that the assessee-company and SIFCO are separate entities and that the ratio of the decision of the Allahabad High Court in the case of Triveni Engineering Works v. CIT (supra) is applicable to the assessee’s case.
12. The learned Counsel for the assessee, on the other hand, submitted that the sum of Rs. 26,49,969 due from SIFCO to the assessee-company also arose on account of the transfer of the borrowed funds by the assessee. The relationship between the assessee and the SIFCO is a business relationship. Whether SIFCO paid the interest due on the sum or not, it is the duty of the assessee to pay the interest in respect of this sum to the depositors as the sums were traceable to borrowals from public. He relied on the judgment of the Hon’ble Supreme Court in the case of CIT v. Rajendra Prasad Moody (supra) and the case of United Breweries (supra).
13. For the reasons discussed in the preceding paragraphs, we are of the opinion that the assessee is not liable to pay any interest to these loans as the credit card business is no more the business of the assessee and the assessee is entitled for royalty only since all the assets and liabilities of credit card business were transferred to SIFCO. As such, the interest incurred by the assessee, if any, cannot constitute as business expenditure. Accordingly, we reverse the order of the CIT(A) on this issue and restore that of the AO. The Revenue succeeds on this issue also.
14. In the result, the appeals filed by the Revenue are allowed.