Visen Industries Ltd. v. Addl. CIT

SUBSCRIBE FOR FULL CONTENT


The Tax Publishers2012 TaxPub(DT) 2245 (Mum-Trib) : (2012) 136 ITD 0309 : (2012) 148 TTJ 0137 : (2012) 074 DTR 0057 INCOME TAX ACT, 1961 --Business deduction under section 36(1)(iii)--Interest on borrowed capital Interest free funds utilized for investment purpose--Assessee claimed the deduction of interest expenses. Assessee had utilized the funds of Rs. 16,66,31,5 89 by way of share application money for making the investment in shares. As noted by assessing officer assessee made the other investments apart from the above utilisation of Rs. 5,71,000. assessing officer observed that the utilization of the funds by the assessee was not used for day-to-day trading in shares but the borrowed funds are utilized towards investment/strategic purpose. Secondly, the advantage accruing to assessee from this investment was found to be of enduring nature. Accordingly, assessing officer worked out the disallowable interest at Rs. 3,22,23,048. Before Commissioner (Appeals), assessee contended that the share application money invested in wholly owned subsidiary company in the current year was only to the tune of Rs.2.68 crores and the remaining amount of Rs. 13.98 crores was invested in earlier years. The cash flow statement, forming part of the audited financial statement for the current year, was also submitted contending that the investments were made out of surplus and fresh capital infusion. It was also stated that during the current year assessee received a sum of Rs.4.60 crores towards fresh capital, out of which only a sum of Rs.2.68 crores was advanced to its wholly owned subsidiary company by way of share application money. Commissioner (Appeals) was not impressed with the plea of assessee that investments in the share application money was out of the non-interest bearing funds. Held: If assessee succeeds in proving the business purpose then no disallowance of interest could be made notwithstanding the fact that funds utilized were interest free or interest bearing. Since assessee failed to amply prove the business purpose in terms of S.A. Builders Ltd. v. Commissioner (Appeals) 2007 TaxPub(DT) 833 (SC) : (2007) 288 ITR 1 (SC), but succeeded in proving that interest free funds were utilised for subscribing to the share capital of its subsidiary company, therefore, the addition could not be sustained. Merely having interest in subsidiary company is not enough to earn deduction under section 36(1)(iii) if the borrowed interest bearing funds are advanced by the holding company to its subsidiary. Apart from that, the assessee also needs to objectively show that the subsidiary company utilized such funds for its business purpose. In the absence of the assessee having led even an iota of evidence to prove that the subsidiary company utilized the funds received from the assessee-company for its business purpose, no deduction of interest on this count was allowed. It was held that the advances made by the assessee in the earlier year to the subsidiary company should not be considered for the purpose of making disallowance of interest. The sum of Rs. 5.71 lakhs is the amount of investment in Govt, securities/trade investments brought forward from the earlier year. Accordingly, one was left with examining whether Rs. 2.68 crores invested by the assessee in its subsidiary company was out of interest free funds or interest bearing funds. According to the judgment in Reliance Utilities & Power Ltd., if the shareholders' funds and/or other interest free advances are more than the investment, then it has to be presumed that the investments came out of interest free funds available with the assessee. The balance-sheet of the assessee-company shows that the shareholders' fund comprising of share capital, reserve and surplus is Rs. 48.57 crores. As against that, the total investment made by the assessee with its subsidiary company in the shape of share application money is Rs. 16.66 crores, which includes the fresh investments made during the year at Rs.2.68 crores. In such a situation, the presumption, as per Reliance Utilities & Power Ltd. (supra), would squarely apply that the investments were made from interest free funds available and no disallowance of interest can be made. If the profits for the year are more than the amount withdrawn for a non-business purpose, it would mean that such non-business purpose was met out the profits and not out of any funds also borrowed by the assessee. As per the facts of the instant case, it is seen that the amount invested by the assessee in its sister concern during the current year is only Rs. 2.68 crores. As against that, the net cash generated from operating activities during the year itself is Rs. 8.17 crores. Further the net cash generated from operating activities in the immediately preceding year, is Rs. 24.44 crores. Thus, no part of interest can be disallowed as the cash profits available during the year are much more than the amount invested by the assessee in share capital of its subsidiary company during the year. If assessee succeeds in proving the business purpose, i.e., stage (a) then no disallowance of interest could be made notwithstanding the fact that funds utilized were interest free or interest bearing. Section 36(1)(iii) categorically provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession is deductible. So long as the interest bearing funds are used for the business purpose, whether for investment in fixed or circulating capital, the amount of interest shall be allowed as deduction. If answer to stage (a) turns out to be in negative, only then the question of examining the stage (b) arises as to whether investment for non-business purpose was made out of interest free funds. If such investment for non-business purposes is out of interest free funds, then there cannot be disallowance of interest and vice versa. The second stage arises for consideration on the assessee's failure to succeed in the first. As in the instant case, the assessee failed to amply prove the business purpose in terms of S.A. Builders Ltd., but succeeded in proving that interest free funds were utilized for subscribing to the share capital of its subsidiary company, the addition cannot be sustained. (Para 5.8, 7.1, 7.4, 7.9, 8) SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 2245 (Mum-Trib) : (2012) 136 ITD 0309 : (2012) 148 TTJ 0137 : (2012) 074 DTR 0057

INCOME TAX ACT, 1961

--Business deduction under section 36(1)(iii)--Interest on borrowed capital Interest free funds utilized for investment purpose--Assessee claimed the deduction of interest expenses. Assessee had utilized the funds of Rs. 16,66,31,5 89 by way of share application money for making the investment in shares. As noted by assessing officer assessee made the other investments apart from the above utilisation of Rs. 5,71,000. assessing officer observed that the utilization of the funds by the assessee was not used for day-to-day trading in shares but the borrowed funds are utilized towards investment/strategic purpose. Secondly, the advantage accruing to assessee from this investment was found to be of enduring nature. Accordingly, assessing officer worked out the disallowable interest at Rs. 3,22,23,048. Before Commissioner (Appeals), assessee contended that the share application money invested in wholly owned subsidiary company in the current year was only to the tune of Rs.2.68 crores and the remaining amount of Rs. 13.98 crores was invested in earlier years. The cash flow statement, forming part of the audited financial statement for the current year, was also submitted contending that the investments were made out of surplus and fresh capital infusion. It was also stated that during the current year assessee received a sum of Rs.4.60 crores towards fresh capital, out of which only a sum of Rs.2.68 crores was advanced to its wholly owned subsidiary company by way of share application money. Commissioner (Appeals) was not impressed with the plea of assessee that investments in the share application money was out of the non-interest bearing funds. Held: If assessee succeeds in proving the business purpose then no disallowance of interest could be made notwithstanding the fact that funds utilized were interest free or interest bearing. Since assessee failed to amply prove the business purpose in terms of S.A. Builders Ltd. v. Commissioner (Appeals) 2007 TaxPub(DT) 833 (SC) : (2007) 288 ITR 1 (SC), but succeeded in proving that interest free funds were utilised for subscribing to the share capital of its subsidiary company, therefore, the addition could not be sustained.

Merely having interest in subsidiary company is not enough to earn deduction under section 36(1)(iii) if the borrowed interest bearing funds are advanced by the holding company to its subsidiary. Apart from that, the assessee also needs to objectively show that the subsidiary company utilized such funds for its business purpose. In the absence of the assessee having led even an iota of evidence to prove that the subsidiary company utilized the funds received from the assessee-company for its business purpose, no deduction of interest on this count was allowed. It was held that the advances made by the assessee in the earlier year to the subsidiary company should not be considered for the purpose of making disallowance of interest. The sum of Rs. 5.71 lakhs is the amount of investment in Govt, securities/trade investments brought forward from the earlier year. Accordingly, one was left with examining whether Rs. 2.68 crores invested by the assessee in its subsidiary company was out of interest free funds or interest bearing funds. According to the judgment in Reliance Utilities & Power Ltd., if the shareholders' funds and/or other interest free advances are more than the investment, then it has to be presumed that the investments came out of interest free funds available with the assessee. The balance-sheet of the assessee-company shows that the shareholders' fund comprising of share capital, reserve and surplus is Rs. 48.57 crores. As against that, the total investment made by the assessee with its subsidiary company in the shape of share application money is Rs. 16.66 crores, which includes the fresh investments made during the year at Rs.2.68 crores. In such a situation, the presumption, as per Reliance Utilities & Power Ltd. (supra), would squarely apply that the investments were made from interest free funds available and no disallowance of interest can be made. If the profits for the year are more than the amount withdrawn for a non-business purpose, it would mean that such non-business purpose was met out the profits and not out of any funds also borrowed by the assessee. As per the facts of the instant case, it is seen that the amount invested by the assessee in its sister concern during the current year is only Rs. 2.68 crores. As against that, the net cash generated from operating activities during the year itself is Rs. 8.17 crores. Further the net cash generated from operating activities in the immediately preceding year, is Rs. 24.44 crores. Thus, no part of interest can be disallowed as the cash profits available during the year are much more than the amount invested by the assessee in share capital of its subsidiary company during the year. If assessee succeeds in proving the business purpose, i.e., stage (a) then no disallowance of interest could be made notwithstanding the fact that funds utilized were interest free or interest bearing. Section 36(1)(iii) categorically provides that the amount of interest paid in respect of capital borrowed for the purpose of business or profession is deductible. So long as the interest bearing funds are used for the business purpose, whether for investment in fixed or circulating capital, the amount of interest shall be allowed as deduction. If answer to stage (a) turns out to be in negative, only then the question of examining the stage (b) arises as to whether investment for non-business purpose was made out of interest free funds. If such investment for non-business purposes is out of interest free funds, then there cannot be disallowance of interest and vice versa. The second stage arises for consideration on the assessee's failure to succeed in the first. As in the instant case, the assessee failed to amply prove the business purpose in terms of S.A. Builders Ltd., but succeeded in proving that interest free funds were utilized for subscribing to the share capital of its subsidiary company, the addition cannot be sustained. (Para 5.8, 7.1, 7.4, 7.9, 8)