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November 18, 2023

Interest expenditure for sum advanced to subsidiary over what is permitted for commercial necessity

Interest expenditure for sum advanced to subsidiary over what is permitted for commercial necessity

Fact and issue of the case

ITA Nos. 5267/Del.2018 and 5509/Del/2018 are cross appeals filed by the assessee and revenue and ITA No. 5268/Del/2018 filed by the assessee are against the order of Ld. CIT(A)-35, New Delhi dated 18.05.2018 and 28.05.2018 against the assessment order passed by Addl. CIT, Special Range-4, New Delhi u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”) for AY 2014-15 & 2015-16 dated 09.09.20 16 and 09.10.2017, respectively.

First we take up the appeals filed by the assessee wherein a common issue is involved in respect of disallowance of interest expenses claimed u/s. 36(1)(iii) of Rs. 1,05,93,760/-. The amount is common in both the appeals relating to the two assessment years i.e. AYs 2014-15 and 2015-16. We will draw the facts from AY 2014-15 and our observations and findings will apply mutatis mutandis to the other appeal also.

Brief facts of the case are that assessee is engaged in the business of call centre operation, maintenance and repairs service, non-technology software services. Assessee filed its return of income on 29.11.2014 reporting a loss of Rs.8,49,36,865/-. During the assessment proceedings, Ld. AO required the assessee to substantiate the claim of interest expenses. Ld.

Observation of the court

We have heard the rival contentions and perused the material available on record. We have gone through the copy of agreement entered into by the assessee with its holding company placed in the paper book. The said agreement is not doubted or controverted by the authorities below. Claim of assessee vide this contract of management consultancy fee has been allowed in the preceding years. We also note that claim of these expenses has not been held to be bogus or sham or disputed by the authorities below.

The only reason for disallowance by the Ld. AO is absence of approval by the Central Government u/s. 297(1) of the Companies Act, 1956. It is important to note that Companies Act, 1956 was substituted by the Companies Act, 2013. The corresponding section which dealt with section 297(1) referred by the Ld. AO is section 188 which is made effective from 01.04.2014. Ld. Counsel has pointed out that requirement of obtaining approval from the Central Government has been done away with. Even otherwise, we note that similar issue has been dealt with extensively by the Coordinate Bench in the decision of Jai Surgicals Ltd. (supra) wherein it has been held that otherwise lawful purpose cannot be deemed to be an office or prohibited by law, contingent upon obtaining or not obtaining the prior approval of Central Government. The Coordinate Bench noted that such expenditure in itself is neither an offence nor prohibited by any law and there is a valid and lawful quid pro quo for the same. We find ourselves in agreement with the decision of the Coordinate Bench.

Considering the facts on record and the substitution of section 188(1) of the Companies Act, 2013 as well as judicial precedent in the case of Jai Surgicals Ltd. (supra), we do not find any reason to interfere with the well reasoned findings given by the Ld. CIT(A) on this issue. Accordingly, ground no. 1 taken by the revenue is dismissed.

On the second issue relating to claim of Rs.22,30, 113/- towards advance to suppliers/deposits written off, assessee has claimed that it had given advances to parties during the normal course of business which subsequently became irrecoverable and hence, were written off. According to the assessee, since the funds were advanced for business purpose, any loss incurred by it on account of non-recoverability is a business loss and is allowable u/s. 37 of the Act. From the submissions made by the Ld. CIT, DR, we note that assessee has not been able to demonstrate as to how these were given wholly and exclusively for the purpose of business of the assessee. The submission of the assessee is general and vague by stating that this pertained to the advances to suppliers in earlier years. In this respect a specific query was raised by the Bench to the Ld. Counsel of the assessee to demonstrate as to how and in which year these advances written off and claimed by the assessee, have been booked as revenue in the past. However, nothing came up in this respect except for general submission. Ld. Counsel also could not establish that these are trade advances and the purpose of giving the same. In absence of correct factual data brought on record, we are inclined to uphold the addition made by the Ld. AO in this respect by setting aside the relief granted by the Ld. CIT(A). Accordingly, ground taken by the revenue on this issue is allowed.

In the result, appeal of the revenue is partly allowed.

Order pronounced in the open court on 19.10.2023.

Read the full order from here


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