Cit vs Modi Entertainment Ltd.
2014 Latest Caselaw 1892 Del

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

                                         Reserved on: 25th March, 2014
%                                     Date of Decision:15th April, 2014

+      ITA 234/2013

       CIT                                             ..... Appellant
                         Through:    Mr. Sanjeev Sabharwal, Sr.
                                     Standing Counsel.

                         versus

    MODI ENTERTAINMENT LTD.                  ..... Respondent
                   Through: Mr. Ajay Vohra with Ms. Kavita
                            Jha and Ms. Bhoomika Choudhury,
                            Advocates.
CORAM:
MR. JUSTICE S. RAVINDRA BHAT
MR. JUSTICE R.V. EASWAR

R.V. EASWAR, J.

1. The following question of law was framed on 25.3.2014:-

"Whether the Tribunal fell into error in setting aside the disallowance under Section 36(1)(iii) of the Income Tax Act, 1961 to the tune of Rs.31,39,988/- in the circumstances of the case?"

2. Against the assessment to income tax made for the assessment year

2001-02 by order dated 23.2.2004, the assessee filed an appeal which

went up to the Income Tax Appellate Tribunal. The Tribunal set aside the

assessment on two issues :

(1) disallowance of interest under section 14A and

(2) disallowance of interest under section 36(1)(iii),

and remanded the matter to the AO for fresh decision in the light of the

judgments of this Court in CIT. Vs. Orissa Cement Ltd. 258 ITR 365 and

Elmer Havell Electrics vs CIT 277 ITR 549. In the fresh assessment

made, the AO disallowed interest of Rs.51,33,108/- under section 14A

and Rs.37,58,496/- under section 36(1)(iii). So far as the disallowance

under section 14A is concerned, it was made on the footing that the loan

of Rs.13.06 cores taken from Hong Kong Bank at 12.75% interest was

invested in shares of Rs.4.56 cores on which tax-free dividend of Rs.2.15

cores was earned. The disallowance under section 36(1)(iii) was made on

the ground that the assessee had given interest-free advances to its

subsidiaries and two holding companies out of interest-bearing funds,

which were not for the purposes of the business and to that extent the

assessee was not entitled to the deduction. These disallowances were

confirmed by the CIT(Appeals) and in further appeal the Tribunal in its

order dated 15.3.2012 held, so far as disallowance under section 14A is

concerned, that though the disallowance was justified in principle, but

since the investment in the shares was made only on the last day of the

accounting year i.e. on 31.3.2001, the disallowance should be restricted

proportionately for one day only. So far as the disallowance under section

36(1)(iii) is concerned, the Tribunal held that out of the interest of

Rs.92,61,100, interest amounting to Rs.61,20,261/- was clearly allowable

since it represented interest paid on bank overdraft, to suppliers for

delayed payment and on security deposit taken from depositors. This left

a balance of Rs.31,40,839/- (written in the orders as Rs.31,39,988/-). In

respect of this amount the Tribunal found that the interest-bearing funds

were advanced to the subsidiary companies without interest but since the

subsidiary companies were under the same management and were

engaged in similar business of entertainment/distribution of pay channels,

the interest-free advances must be taken to have been given as part of the

corporate or business strategy for expanding the business operations of the

assessee through the subsidiaries. It accordingly directed allowance of the

interest of Rs.31,39,988/-.

3. According to the Tribunal, advancing of such monies to the

subsidiaries was driven by commercial expediency. In support of this

view the Tribunal relied upon the following judgments :

(1) SA Builders v. CIT : 288 ITR 1 (SC)

(2) CIT V. Dalmia Cement (P) Ltd. : 254 ITR 37 (Del.)

(3) CIT V. Bharti Televentures Ltd. : 331 ITR 502 (Del.)

4. Under section 36(1)(iii) the following conditions are required to be

satisfied before the assessee can successfully claim deduction in respect of

interest paid :

(a) The assessee should have borrowed capital;

(b) The borrowing of the capital should be for the purpose of the

business and

(c) Interest should have been paid on the borrowing.

The finding of the Tribunal, applying the judgments of the Supreme Court

and of this Court, is that the advancing of interest-free monies to the

subsidiary companies was driven by business considerations since the

subsidiaries were also engaged in the same business in which the assessee

was engaged. The Tribunal accordingly held that it would be in the

interest of business of the assessee and certainly would be commercially

expedient for the assessee to advance interest-free monies to the

subsidiaries as part of the corporate business strategy to expand its

business operations through its subsidiaries. This finding of fact has not

been disputed. If that is so we do not see how the decision of the Tribunal

can be faulted.

5. The question of law is accordingly answered in the negative, in

favour of the assessee and against the revenue with no order as to costs.

The appeal is accordingly dismissed.

(R.V. EASWAR) JUDGE

(S. RAVINDRA BHAT) JUDGE APRIL 15, 2014 vld