Income Tax Appellate Tribunal - Hyderabad
Srsr Holdings Pvt.Ltd., Hyd., ... vs Dcit, Central Circle-9, Hyd, Hyderabad on 31 July, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "A", HYDERABAD
BEFORE SMT. P. MADHAVI DEVI, JUDICIAL MEMBER
AND SHRI S. RIFAUR RAHMAN, ACCOUNTANT MEMBER
ITA No. 214/Hyd/2015
Assessment Year: 2008-09
SRSR Holdings Pvt. Ltd., Vs. Dy. Commissioner of Income-
Hyderabad. tax, Central Circle - 9,
Hyderabad.
PAN - AAKCS 0134 N
(Appellant) (Respondent)
Assessee by : Shri K.C. Devdas
Revenue by : Shri H. Phani Raju
Date of hearing : 21-06-2017
Date of pronouncement : 31-07-2017
ORDER
PER S. RIFAUR RAHMAN, A.M.:
This is an appeal of the assessee directed against the order of the learned Commissioner of Income-tax(A) - 12, Hyderabad, dated 31-12-2014 for AY 2008-09. At the time of hearing, ld. AR submitted Paper Book - II but on objection from ld. DR, ld. AR withdrew the PB- II and made submission that he will not rely on PB - II.
2. Briefly the facts of the case are that the assessee company is a private limited company which filed its return of income for the AY 2008-09 on 25/09/2008 declaring loss of Rs. 3,36,03,738/-. Scrutiny assessment u/s 143(3) was completed on 20/12/2010 assessing the income at Rs. 65,53,653/- under the head 'income from other sources and carry forward losses claimed was not allowed.
2 ITA No. 214/H/15SRSR Holdings Pvt. Ltd.
2.1 The assessee company had invested in equity shares of Satyam Computer Services Ltd. to the tune of Rs. 2266.23 crores and had dividend income of Rs. 19.50 crores. During the year, it also had fixed deposit and receipt of interest on such fixed deposits of Rs. 65,53,653/-. The assessee claimed dividend as exempt u/s 10(34) of the IT Act.
2.2 As regards the interest income of Rs. 65.53 lakhs, it took it as business income in profit and loss account and adjusted against it the exepenses to the tune of Rs. 4,01,49,652/- and arrived at business loss of Rs. 3,36,03,738/- to be carried forward as per the tax return filed. The AO examined the details of expenses which were as under:
S.NO. Item Amount
i) NCD Issue Expenses
a) DSK Legal - Rs. 5,32,020
b) NCD Legal Fee - Rs. 6,00,000
c) Stamp duty - Rs. 12,22,500
Total 23,54,520
ii) Interest paid on debentures 3,49,89,042
iii) Legal fee 1,00,000
iv) Syndication Fees (DSP) 16,85,400
v) Trusteeship Fee A/c 84,270
vi) Demat Charges 12,45,721
Total 4,04,58,953
2.3 The AO, therefore, held that the above expenses were neither
attributable to the earning of interest income nor attributable to any investment or dividend, hence, he held that the business loss cannot be allowed to be carried forward. He had also observed that notwithstanding the above stand, certain expenses like legal fee, syndication fee etc. were in the nature of commission or brokerage, fees for professional services and were to be allowed only if TDS is done and since these details were not available, they have to be disallowed even otherwise u/s 40(a)(ia). He, therefore, treated the interest income of Rs. 65,53,653/- as income from other sources and assessed the entire interest income as income for the year and subject to tax.
3 ITA No. 214/H/15SRSR Holdings Pvt. Ltd.
3. Aggrieved by the order of the AO, the assessee preferred an appeal before the CIT(A) and filed written submissions wherein it was stated as under:
a) The appellant company has the objective clause of investing funds and earning interest in its Memorandum and Articles of Association. A copy of the same was filed. The AO therefore was incorrect to treat interest income as income from other Sources.
(b) The appellant mobilized funds for pursuing its objects. The funds so mobilized were deployed by way of investment and earned interest income the funds so mobilized have a cost namely the interest paid on the funds mobilized. The appellant therefore had rightly set off the interest payment from the income earned and submitted its return of income on the net amount. The AO was therefore wrong in not only allowing any expenditure to be set off against its interest income of Rs.65.63 lakhs even if he had assessed as income from other sources.
(c) Supporting documents like bank statement and ledger copies were filed to intimate the nexus between the borrowals of funds and utilization of the same for making fixed deposits.
the appellant therefore submitted that the fixed deposits with the banks having emanated out of borrrowal of funds by way of non convertible debenture loans from Birla Mutual Funds, the claimed interest expenditure is to be allowed."
4. After considering the submissions of the assessee and after examining the expenses claimed by the assessee, the CIT(A) observed that out of the total claim of Rs. 4,04,58,953/-, the expenses to following extent were allowable:
a) Interest Rs. 1,05,94,863
b) NCD issue expenses Rs. 5,78,152
c) Syndication fee & legal fee Rs. 4,38,458
Total Rs. 1,16,11,473
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4.1 CIT(A) observed that the amount is available to the assessee to set off against its interest income of Rs. 65,53,653/- and as a result of allowing of such expenditure, total income for the assessee for the 4 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
year is Nil and the balance expenditure is allowed to be carried forward as business loss. He concluded that the quantified expenses however are to be allowed subject to payment of TDS on these amounts as per section 40(a)(ia), which may be verified while giving effect to his order.
5. Aggrieved by the order of the CIT(A), the assessee is in appeal before us contending that "the order of the CIT(A) having found as a matter of fact that the assessee was carrying on business erred in restricting the claim of business expenditure to Rs. 1,16,11,473/- as against Rs. 4,04,58,953/- is wholly unsustainable both on facts and in law."
6. Ld. AR submitted that interest income earned by the assessee is part of business income as the assessee company is formed to carry on the business of investment of funds and earning interest as per the Memorandum and Articles of Association, however, the AO treated the interest income as 'income from other sources'. He submitted that during this year, the assessee has borrowed money from the financial companies and lent the same to its sister concerns. Since the object of the company is to carry on the business of sourcing funds and lending, interest income earned should be treated as part of business income. He further submitted that even for the sake of argument if assessee considers the treatment of interest income as income from business, the AO should have allowed the related expenditure of earning of such income, which he miserably failed to consider.
6.1 Ld. AR submitted that AO did not allow business expenditure of the assessee, which is bonafide business expenditure, which was necessary to carry on the activities of the assessee. He submitted that the main expenditure is payment of interest for the funds received from Birla Mutal Funds, some funds were lent to its sister 5 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
concerns as the same were advanced to its sister concerns on commercial expediency as all the sister concerns, namely, M/s Amaravthi, Bangar, Pavitravati & Vamadeva are of group concerns as the shareholders of the assessee company are also the shareholders of other related concerns. The funds given as advance to these sister concerns are for the purpose of business and it amounts to commercial expediency. He heavily relied on the decision of Hon'ble Supreme Court in the case of SA Builders Ltd. Vs. CIT, [2007] 288 ITR 1 and Hero Cycles Ltd., 379 ITR 347 (SC), as per which, the funds given to the sister concerns/subsidiary companies are considered to be on commercial expediency. Therefore, the interest expenditure in fact pertains to the business expenditure of the assessee and, therefore, it is bonafide business expenditure of the assessee. He, therefore, submitted that CIT(A) has treated the expenditure as business expenditure of the assessee and he has allowed partial expenditure, which is not proper. He submitted that whole expenditure should be allowed as business expenditure, which is done on commercial expediency. Ld. AR brought to our notice statement showing the funds mobilisation from Birla Mutual Funds and diversion of funds to its sister concerns and subsequent recovery from the sister concerns, which is placed as part of paper book at pages 6 to 8 of Paper Book - I. 6.2 For the other expenses, like NCD issue expenses, syndication fees and legal fees, he submitted that all these expenditures are incurred to mobilize the funds from financial institutions, which is part of the revenue expenditure. He further submitted that CIT(A) has opined that the income and expenditure of the assessee are relating to business for which he has given a finding in para 6.1 of his order and further stated that the expenditure can be allowed as business expenditure. He remitted the matter back to the file of the AO to verify whether the assessee has followed the provisions of section 40(a)(ia) of the Act, which gives an impression that CIT(A) has considered the 6 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
activities of the assessee as relating to business. He submitted that all the expenditures should be allowed to set off against the income of the assessee and in case of shortfall, it should be allowed to carry forward.
7. Ld. DR besides relying on the order of the AO, submitted that lending of funds to sister concerns cannot be considered as commercial expediency, which is the important finding in the case of SA Builders (supra). He submitted that mere advance to sister concerns cannot be treated as on commercial expediency as terms and situation of the lending will differ case to case. He strongly supported the views taken by the AO.
8. Considered the rival submissions and perused the material facts on record. As per the assessment order, assessee has earned interest income, which was treated by the AO as 'income from other sources'. However, as per the Memorandum and Articles of Association, assessee is carrying on the business of investment of funds and earning interest. Considering the above objective clause, we find that the main objective of the assessee as well as during AY under consideration, assessee has taken loan from financial institutions and lent the money to its sister concerns and accordingly earned interest income by parking the surplus funds in fixed deposit. It shows that assessee has earned the income by lending the money and whatever surplus at its disposal were deposited in the banks as fixed deposit. The same can be considered as made for the purpose of business, hence, interest income can be considered as income from business. Our view is supported by the decision of Hon'ble Madras High Court in the case of CIT v. Tamil Nadu Dairy Development Corporation Ltd. [1995] 216 ITR 535 wherein it was held as under:
"The term "business" is a word of very wide connotation and by no means determinate in its scope and has to be considered with reference to each particular kind of activity and occupation of the person concerned. Upon the peculiar facts of this case, the 7 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
interest accrued on short-term deposits of the assessee-company which were made out of the business funds available with assessee-company before the same were utilised for actual business and, as such, the same is incidental to the business activity of the assessee-company and as such, the interest on the short-term deposits should be treated as business income.--CIT vs. Calcutta National Bank Ltd. (1959) 37 ITR 171 (SC) followed."
8.1 Coming to the issue of interest expenditure, according to the assessee, the funds were advanced to its sister concerns, which amounts to commercial expediency as the same was lent to its close associate entities, for which the assessee heavily relied on the decision of the Hon'ble Supreme Court in the case of SA Builders (supra). On careful reading of this decision, we find it appropriate to produce some of the observations of the Apex Court as under:
"32. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans."
8.2 As per the above decision, assessee can advance interest free loans to its sister concerns, which can be treated as commercial expediency wherein the lending company should have 'deep interest' in the sister concerns/subsidiary, the same used by such subsidiary for some business purposes, then, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans too. However, in the given case, ld. AR submitted that assessee has given loan to its sister concerns. They are related to assessee being common shareholders but assessee does not have a direct interest on such subsidiary company except by having common shareholders in such 8 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
other concerns. In our considered view, such sister concerns having common shareholders cannot be treated as having deep interest for the simple reason that holding company advances money or making investment in such subsidiary companies, which has direct hold on the performance of such subsidiary companies or well being of the subsidiary companies. Earning of such subsidiary company will have direct impact on the holding company's interest as well as holding company can plough-back the profit of such company by way of dividend. Whereas in the case of related concern, which is related merely because it has common shareholders, the assessee company can never be able to claim nor plough-back the profits of such related concern, therefore, it cannot be considered as having a deep interest in such related concern. Therefore, we cannot hold that assessee has incurred interest expenditure on commercial expediency. In our view, interest expenditure cannot be treated as business expenditure and, therefore, assessee cannot claim the interest expenditure as business expenditure and cannot be allowed to carry forward.
8.3 Coming to other expenditure like NCD, legal fees, the disallowances of which were partly confirmed by CIT(A), we find that all these expenses were incurred by the assessee to mobilize the funds for the purpose of taking loans from financial institutions. This expenditure can be treated as revenue expenditure of the business when the assessee proves that the whole sourcing of funds was done only for the purpose of its own business and not for the loans taken for other related business concerns in which it has no interest or hold. In the given case, all the funds were sourced mainly with the object of financing sister concerns for their own benefit. Since the assessee has not brought on record any transaction, which it has done for its own purpose, in our view, even this expenditure cannot be claimed as business expenditure of the assessee. In view of the above 9 ITA No. 214/H/15 SRSR Holdings Pvt. Ltd.
observations, we uphold the order of the CIT(A) on this issue and dismiss the grounds raised by the assessee.
9. In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 31 st July, 2017.
Sd/- Sd/-
(P. MADHAVI DEVI) (S. RIFAUR RAHMAN)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, Dated: 31 st July, 2017.
Kv
Copy to:-
1) SRSR Holdings Pvt. Ltd., Plot No. 80, Road No. 9, Jubilee Hills, Hyderabad.
2) DCIT, Central Circle - 9, Church Building, Tilak Road, Hyderabad.
3) CIT(A) - 12, Hyderabad 4 CIT(Central), Hyderabad
5) The Departmental Representative, I.T.A.T., Hyderabad.
6) Guard File