×Latest Case Laws on Income Tax by various Income Tax Appellate Tribunals in India
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10-07-2019, Orbis Power Venture, section 36(1)(iii), 28, 37, Tribunal Kolkata
This appeal by the Revenue against the order dated 28.02.2018 passed by the Commissioner of Income Tax (Appeals)-10, Kolkata [‘CIT(A)’] for Assessment Year 2010-11.
2. Ground No.1 is raised questioning the action of CIT(A) in deleting the additions made by the Assessing Officer on account of payment of interest on borrowed funds in the facts and circumstances of the case.
3. Brief facts of the case are that the assessee is a company and claimed to have engaged in the business of generation, transmission, distribution and supply of electric energy. The assessee filed its return of income declaring a total loss of Rs.6,22,63,231/-. Notice u/s 143(2) of the Act was issued and the Assessing Officer restricted the loss to an extent of Rs.23,693/- (Rs.6,22,23,231/- - Rs.6,22,39,538/- ) vide his order dated 23.01.2013 by making disallowances on account of payment of interest on loan and processing fee to obtain such loan to an extent of Rs.6,12,33,844/- and Rs.10,05,694/- respectively.
4. It is noted during the course of scrutiny proceedings that the Assessing Officer asked the assessee why the interest on secured or unsecured loan amounting to Rs.6,12,33,844/- and processing fee to an extent of Rs.10,05,694/- should not be disallowed as it was not related to business activity and are being in the capital in nature. In reply, it was stated that the assessee paid the said interest on borrowed loans to acquire or purchase of shares of DPSC Ltd vide its written submission dated 10.01.2013. The Assessing Officer found the written submissions are not acceptable and added above said amounts to the total income of the assessee for the reasons as under:
“1. It has been claimed that the assessee is engaged in the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes. But the final accounts submitted by the assessee reveals a picture which is quite contrary to the claim of the assessee. No income has been earned by the assessee in any manner out of the business activities described (generation, transmission, distribution and supply of electrical energy or power) and there is no fixed assets owned by the assessee as per the Audited Balance Sheet as at 31-3-10 filed in course of the hearing of the case. From these two documents it is amply clear that the business of the assessee has not started up to the year ending on 31-03-2010
2. The above observation is also supported by the written submission filed by the assessee on 10th January 2013 where in paragraph 4.'1 it is clearly written that
"……During the relevant assessment year, for the purpose of engaging in the business of power, the assessee had acquired shares of DPSC Ltd, a public limited company, engaged in the similar business that of the assessee.” This means up to 31-3-2010, the assessee, on its own, was not carrying on any business and had not acquired any asset to carry out the business of generation, transmission, distribution and supply of electrical energy or power in forms and manner for public and private purposes Therefore, all the expenses debited in the profit and loss account, including the interest on loan and processing fee paid on such loan partake the character of an expense incurred in a period when the assess was not doing any business.
3. An agreement of share purchase dated 27-01-2010 has been filed in photocopy. On a close look on the papers it is seen that (a) it does not contain all the pages of the agreement, only first two pages on non judicial stamp paper of Rs.100/- and Rs.50/- had been provided along with page no. 16 of 49 of the Agreement; (b) the document is neither registered not notarized; (c) all the terms and conditions are not available from the pages provided and (d) the signature of the lender company, SREI infrastructure Finance Ltd, is not present on any of the pages of the agreement the assessee had chosen to submit in course of the assessment proceedings. Even if it is considered as a valid agreement, a loan seems to have been sanctioned on a security which was not there in the possession of the assessee on the date of signing the agreement because the loan agreement is dated 27-10-2010 and the share purchase agreement is dated 28-10-2010. The demat account statement of the assessee has also not been furnished as a matter of proof in support of the share purchase transactions.
4. The assessee has quoted the provisions of section 36(1)(iii)of the Income Tax Act, 1961 to establish that the interest on loan is allowable as a revenue expenditure. For the sake of convenience, the provisions of the said section is reproduced as below:-
“36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28 –
( i ) and ( ii )******
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :-
Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation – Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause.”
5. The assessee, Orbis Power Venture Private Limited was formed as a private limited company with its main object of business, inter alia, to generate, transmit, use, distribute and supply electrical energy or power in all forms and manner for public and private purposes. Now just by forming a company with the main objective of power generation does not signify that the business has actually been started when the final accounts do not reflect that any such business has been carried out by the assessee in the relevant previous year. By the same token, acquisition of controlling stake in a business by way of purchase of share, even with borrowed capital, does not mean that a business "asset" within the meaning of the proviso to section 36(1)(iii) has been acquired by the assessee for the purpose of carrying out its business. The shareholder of a company and the company itself are two different entities and the business carried on by the company does not indicate that the business is actually carried on by the shareholder. What has been acquired with the fund borrowed from SREI Infrastructure Finance Ltd. here is the shares of DPSC Ltd which is outside the purview of a business asset as clarified in Sec 36(1)(iii)of the l. T. Act, 1961.
6. So the basic criterion for allowing the interest on borrowed fund, which must be utilized for the purpose of business of the assessee, has not been satisfied and more so, in a situation where no business has been carried on by the assessee during the financial year ending on 31-3-2010 either on its own or with the shares acquired from DPSC Ltd. Hence, the interest on loan and the processing fee paid on loan is part of the cost of investment made in the shares of DPSC Ltd and should not be considered as an expenditure laid out either under section 36(1)(iii) or under section 37 of the Act. Hence, these two expenditures are disallowed in full as they are not related to acquisition of any asset acquired for extension of any existing business.
7. In course of the hearing of the case the assessee vide its written submissions dated 20.12.2012 [Para 1.0 submitted that M/s. Orbis Power Venture Pvt. Ltd. has been merged with India Power Corporation Ltd. by virtue of an order of the High Court at Calcutta as per C.P No.854 of 2010. This action of the assessee also establishes the fact beyond doubt that purchase of shares of DPSC Ltd with borrowed fund had not been done in order to carry out any business but it is purely an investment decision. This disentitles the assessee to claim any expenditure towards interest and processing fee paid for the loan taken for the purchase of shares.
8. The assessee has also furnished several case decisions in support of the claim of interest and processing fee as business expenditure, But the facts and circumstances of those cases are different from the instant case and hence, these are not applicable here.
Under the circumstances, the claim of the assessee of interest amounting to Rs.6,12,33,844/- and processing fees of Rs.10,05,694/-are disallowed and the same