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January 23, 2023

Scholarship payments to students who are not affiliated with the company are not permitted

by CA Shivam Jaiswal in Income Tax

Scholarship payments to students who are not affiliated with the company are not permitted

Fact and issue of the case

The assessee is one of the holding companies of Dabur India Ltd. and is also an NBFC carrying on its business of financing and investment. During the year under consideration, the assessee had paid an interest of Rs.4,68,52,493/-, the details whereof have been mentioned at page 3 of the assessment order. On the credit side, the assessee had declared interest income including interest on tax free bond at Rs.5,48,76,739/-. The Assessing Officer had found that the assessee had also shown the loans and advances amounting to Rs. 310.39 crore as on 31st March 2016 as against Rs.250.10 crore as on 31st March 2015.

The Assessing Officer disallowed the total interest paid amounting to Rs. 4,68,52,493/- on the ground that the assessee had made various interest free advances. Had the assessee charged interest from those parties, being an NBFC the interest income would have been more than whatever has been paid by the assessee and accordingly disallowed the whole of the interest paid by the assessee.

During the year under consideration the share capital and reserves, which are interest free capital, were available at Rs.530.91 crore which was more than the interest free advances made by the assessee.

It is a settled proposition of law as also held by various High Courts and the Hon’ble Supreme Court from time to time that where an assessee is enjoying interest free funds more than interest free advances, then there is a presumption that the interest free advances have been made out of the interest free funds available with the assessee and in that situation no interest paid by the assessee can be disallowed.

> South India Bank Ltd. vs. CIT 438 ITR 1 (SC)

> CIT vs. Gujarat Reclaim & Rubber Products Ltd. 383 ITR 236 (Bom)

> CIT vs. Reliance Utilities 8s Power Ltd. 313 ITR 340 (Bom)

> CIT vs. Kapsons Associates 381 ITR 204 (P&H)

> CIT vs. HDFC Bank Ltd. 366 ITR 505 (Bom)

> CIT vs. Prem Heavy Engg Works P. Ltd. 285 ITR 554 (All)

In the case of the appellant also, the ITAT in Assessment Years 2008-09 and 2009-10 also held the same and deleted the disallowances made by the Assessing Officer out of the interest.

Observation of the case

In the case of dividend from Dabur India Ltd., the assessee has not incurred any expenses at all because the assessee is one of the holding companies of Dabur India Ltd. and only a dividend warrant has been issued and deposited. Hence no expenses should be said to have been incurred by the assessee. The AO is directed to re-compute the disallowance taking into consideration the dividend yielding investments and to exclude PMS charges for computation of disallowance u/s 14A. The appeal of the assessee on this ground is allowed. Subscription expenses:

It was submitted by the ld. AR that the assessee is NBFC and engaged in the business of financing and investment which requires not only economic analysis about the financial sector but also requires a firsthand knowledge about various financial sectors for the purpose of investment. Having in mind such future requirement as well as the expansion, the assessee had sponsored a meritorious student Miss Vinne Vandal to study in California University under the Faculty of Economics. Miss Vinne Vandal is not a relative of any director of the company, but the sponsorship has been made on account of commercial expediency keeping in mind to have such type of person in its business.

Time and again the issue arose before the courts whether the foreign educational expenses of the children of the director or their relatives are allowable as an expenditure or not. In the following cases, the courts have held that if the expenses have been incurred on account of commercial expediency keeping in mind the nature of business carried out by the assessee, then such expenses deserve to be allowed.

Service charges paid to Dabur Securities:

Dabur Securities Pvt. Ltd. is one of the group companies and carries out all the accounting works, secretarial charges, taxation work – whether direct or indirect – TDS work as well as the voucher reconciliation for all the group companies involved in finance. Whatever the expenses Dabur Securities incur, the same are allocated amongst the group companies in the ratio of turnover. Such expenses have also been incurred in the preceding year and no disallowances have ever been made. Copy of the agreement between the assessee and Dabur Securities has been placed at page 102 of the paper book. In subsequent years also, no disallowances have been made even after enquiry.

Having gone through the facts on record, we hereby hold that the services charges paid is an allowable expenditure.

Read the full order from here



The tribunal has ruled in favour of the assessee and dismiss the appeal.

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