Crescent Organics (P.) Ltd. Vs Deputy Commissioner of Income Tax

B.P. Colabawalla, J.@mdashThis Appeal under Section 260A of the Income-tax Act, 1961 has been filed by the Appellant/Assessee challenging the order dated 28th February, 2011 passed by the Income Tax Appellate Tribunal (for short "ITAT"), insofar as the ITAT upheld the findings of the Assessing Officer and the Commissioner of Income-tax (Appeals) in (i) disallowing the foreign travel expenses incurred by the Appellant/Assessee and (ii) disallowing interest expenses incurred on borrowed funds under Section 36(1)(iii) of the Act. Mr. Gandhi, the learned counsel appearing on behalf of the Appellant/Assessee submitted that the ITAT had erred in upholding the dis-allowance of Rs. 27,87,772/- in respect of interest paid on borrowed funds that were used for investment purposes in a sister concern of the Appellant/Assessee. He further submitted that the ITAT also erred in disallowing 10% of the foreign travel expenses incurred by the Appellant/Assessee. In his submission, therefore, this Appeal gives rise to the following substantial questions of law and read as under:--

"(A) Whether, on the facts and the circumstances of the case, and in law, the Tribunal erred in disallowing foreign travel expenses?

(B) Whether, on the facts and the circumstances of the case, and in law, the Tribunal erred in disallowing interest expenses u/s. 36(1)(iii) of the Act?

(C) Without prejudice to the above ground, whether, on the facts and the circumstances of the case, and in law, the Tribunal erred in not upholding the alternative submission of the Appellant and disallowing the interest expenses u/s. 57 of the Act?"

2. The brief facts of the case are that the Appellant/Assessee is a consignment agent, indenting agent and is also engaged in the business of trading in different types of chemicals. In the course of its business, the Appellant/Assessee had its indenting business with one "M/s. Sasol" in the Middle East, as their principle indenting agent. It is the case of the Appellant/Assessee that since they needed a presence in the Middle East market, it was found expedient to set up operations in Middle East, so as to procure the material from the said region. Towards this purpose of expansion, the Appellant/Assessee acquired a controlling interest in a company called "Kemsol Ltd", which was a company incorporated in the British Virgin Islands having its branch office at Dubai and was engaged in the similar line of the business as that of the Appellant. For the purpose of acquiring/making investment in the shares of Kemsol Ltd., the Appellant borrowed funds from its shareholders and Directors, amounting to Rs. 2,23,20,000/- on which interest liability amounting to Rs. 10,80,781/- was incurred by the Appellant/Assessee. The Appellant/Assessee also made investment in the shares of other companies, namely "Bhushan Steel Strips Ltd" and "Raipur Alloys and Steel Ltd" from their non interest bearing funds.

3. A return of income for the Assessment Year 2005-2006 was filed by the Appellant on 26th October 2005 disclosing a total income of Rs. 3,21,55,460/-. The income was arrived at after deducting amongst others, the expenses on foreign travel of Rs. 36,60,906/- and interest expenses in the sum of Rs. 27,87,772/-. The said return of income was selected for scrutiny and thereafter the Assessing Officer passed the assessment order under Section 143(3) of the Act. As far as interest and foreign travel expenses are concerned, the Assessee was called upon to explain the same. After considering the explanation and the documents submitted by the Assessee, the Assessing Officer took the view that the expenses for traveling to the Middle East by the Directors and auditors of the Appellant/Assessee was virtually meant for the incorporation of Kemsol Ltd., and that the Appellant/Assessee had failed to prove that these expenses were incurred for its own business affairs. Hence, the Assessing Officer disallowed 20% of the total travelling expenses and added back same to the total income of the Appellant/Assessee. As far as disallowance of interest paid on borrowed funds is concerned, the Assessing Officer found that the Assessee had made a fresh investment of Rs. 3,57,96,450/- in 15,00,000 equity shares of Kemsol Ltd. and that the said investment was made, out of the borrowed funds of the Assessee. The Assessing Officer held that the Appellant/Assessee had failed to prove and/or establish the "commercial expediency" in making the investment in shares of M/s. Kemsol Ltd. He therefore disallowed the deduction claimed under section 36(1)(iii) on account of interest paid in the sum of Rs. 27,87,772/-.

4. Being aggrieved by the assessment order, the Appellant/Assessee preferred an Appeal to the Commissioner of Income-tax (Appeals) who confirmed both the aforesaid disallowances made by the Assessing Officer. Being aggrieved thereby, the Appellant/Assessee filed an Appeal before the ITAT. The ITAT, whilst dealing with the dis-allowance for foreign travel expenses, considered all the material on record as set out in paragraph Nos. 11.1, 11.2, 11.3, & 11.4 (wrongly again numbered as 11.3) of the impugned order. After considering all the factual aspects, ITAT was of the opinion that the disallowances of foreign travel expenses ought to be restricted to 10% instead of 20% as held by the Assessing Officer. With reference to the disallowance of the deduction of Rs. 27,87,772/- claimed in relation to the interest paid, the ITAT held that the investment of Rs. 3,57,96,450/- in the share capital of Kemsol Ltd. was not an amount advanced in the course of the business of the Appellant/Assessee, but an investment directly made with the borrowed funds. The ITAT therefore held that the interest paid thereon could not be allowed as a deduction under Section 36(1)(iii) of the Act. To that extent, the order of the Commissioner of Income-tax (Appeals) and the Assessing Officer was upheld. However, the amount of interest paid on the borrowed amount needed to be ascertained. The Assessing Officer had disallowed the amount of Rs. 27,87,772/-, the calculation of which could not be ascertained since the entire amount had been disallowed. In view thereof, the ITAT, for the purpose of quantification of interest that ought to be disallowed under Section 36(1)(iii) of the Act, restored the matter back to the file of the Assessing Officer for deciding the same after giving due opportunity to the Assessee. The Appellant/Assessee being aggrieved by this order has filed the present Appeal before us.

5. Mr. Gandhi, the learned counsel appearing on behalf of the Appellant/Assessee submitted that the Appellant/Assessee had acquired 60% of the shares in M/s. Kemsol Ltd., which was a company that had a branch office in Dubai and carrying on a similar business to that of the Appellant/Assessee. The purpose of acquiring a substantial stake in M/s. Kemsol Ltd. was to have a greater foot hold in the Middle East enabling the Appellant/Assessee to increase its trading business in the Middle East as also in India. He submitted that the investment in M/s. Kemsol Ltd. by the Appellant/Assessee was shown as trade investments in the books of the Appellant/Assessee and was a prudent business strategy adopted by the Appellant/Assessee. In view thereof, he submitted that the authorities below had erred in disallowing the interest paid on the borrowed funds that were used for the purpose of acquiring a majority stake in M/s. Kemsol Ltd. He submitted that the payment of interest on the borrowed funds was for the purpose of the Assessee''s business and therefore, deductible under Section 36(1)(iii) of the Act. On the same parity of reasoning, he submitted that the foreign travel expenses incurred by the Appellant/Assessee to the Middle East were for the purposes of the business of the Appellant/Assessee, and therefore, the ITAT ought not to have disallowed 10% of the foreign travel expenses as that was done mainly on account of travel to the Middle East.

6. On the other hand, Mr. Pinto, the learned counsel appearing on behalf of the Revenue relied upon the orders passed by the authorities below. He submitted that this Appeal does not give rise to any substantial question of law and the findings rendered by the authorities below are pure findings of fact which under no circumstances can be said to be perverse or vitiated by any error of law apparent on the face of the record. Mr. Pinto submitted that in the facts of the present case, the borrowed funds were diverted purely for investment purposes and the interest paid thereon was not entitled to be deducted under Section 36(1)(iii) of the Act. In view thereof, Mr. Pinto submitted that the Appeal does not raise any substantial questions of law and ought to be dismissed.

7. With the help of the learned counsel appearing on behalf of the Appellant/Assessee as well as the Revenue, we have perused the Memo of Appeal and the Annexures thereto as well as the orders passed by the Assessing Officer, Commissioner of Income-tax (Appeals) and the ITAT.

8. On going through the orders of the authorities below, we find that on both the aforesaid issues, disallowances have been made purely on findings of fact. The ITAT whilst dealing with the disallowance of interest on borrowed funds that were utilized for investment in M/s. Kemsol Ltd., held that it was an admitted fact that the unsecured loans from Directors and shareholders had been taken for acquiring 60% of the shares of M/s. Kemsol Ltd. and interest of Rs. 10,80,781/- was paid on such unsecured loans. The Tribunal after examining the entire factual matrix, came to the conclusion that the interest paid on the borrowals utilized for investments in a foreign company namely M/s. Kemsol Ltd. could not be allowed as deduction as the same was not in the course of Appellant/Assessee''s business. The ITAT came to the aforesaid conclusion also on the basis that there was no evidence placed on record by the Assessee to support the argument of commercial expediency in acquiring 60% of the shares of M/s. Kemsol Ltd. and this aspect was even considered by the authorities below, and thereafter, rejected. This is more so when one takes into account that the Appellant/Assessee already had an indenting agent in the Middle East, namely M/s. Sasol. It is in these circumstances, that the ITAT came to the conclusion that the interest paid on borrowed funds was not for the purpose of the business of the Appellant/Assessee. In this factual backdrop, we are of the view that the ITAT was correct in its approach, both legally and factually in passing the order that it did. In the facts of the present case, the view taken by the ITAT is certainly a possible one. We do not find that the order of the ITAT is either perverse or vitiated by any error of law apparent on the face of the record, that requires our interference.

9. We shall now deal with the judgments, the reliance on which was placed by Mr. Gandhi. The reliance placed by Mr. Gandhi on the judgment of this Court in the case of Commissioner of Income Tax Vs. Srishti Securities (P.) Ltd., is wholly misplaced. The ratio of the said judgment clearly states that the only enquiry to be made is whether the payment of interest was in respect of capital borrowed for the purpose of the assessee''s business or profession. Such amount borrowed, if for the purpose of business or profession, may be utilized for the purpose of acquisition of stock in trade or for the purpose of acquisition of capital assets. In the facts of that case there was no dispute that the interest paid on the capital borrowed was utilized for the Assessee''s business. The question was therefore answered in favour of the Assessee. The fact situation before us is totally different. In the present case, the authorities below have come to a categorical finding that the funds borrowed were not utilized for the purposes of the business of the Appellant/Assessee but for acquiring 60% of the shares of a foreign company (M/s. Kemsol Ltd). From the findings of the Authorities below it is clear that acquiring the shares in Kemsol Ltd. was not for the purpose of the business of the Appellant/Assessee. In this view of the matter, the said judgment has no application to the facts of the present case and is clearly distinguishable on facts.

10. Similarly, the reliance placed on the judgment of this Court in the case of CIT v. Phil Corpn. Ltd. [2011] 202 Taxman 368/14 taxmann.com 58, is also wholly misplaced. The facts in that case were that the Assessee company made investment in shares of its subsidiary company from the bank overdraft provided to the Assessee to have control over its subsidiary being an integral part of its business. It is in these circumstances that this Court held that the interest paid by the Assessee attributable to the said borrowings was allowable as deduction under Section 36(1)(iii) of the Act. As noted above, such is not the case before us. M/s. Kemsol Ltd. admittedly was not a subsidiary of the Appellant/Assessee and neither were the borrowed funds used for the purposes of the business of the Appellant/Assessee. This judgment also therefore has no application to the facts of the present case.

11. Similarly, the reliance placed on the judgment of this Court in the case of The Commissioner of Income Tax-7 Vs. M/s. Reliance Communications Infrastructure Ltd., , is also misplaced. In the facts of that case the assessee company which was engaged in the business of providing telecommunication infrastructure made investments in the equity shares of its subsidiary with a view to provide integrated telecommunication services as the latter was engaged in the business of providing telecommunication services. In view of this factual backdrop, the CIT (Appeals) as well as the ITAT held that the investments made by the Assessee Company in its subsidiary were for furthering the business interests of the Assessee. It is in view of these concurrent findings of fact that this Court held that there was no justification to disallow the deduction, which was otherwise eligible under Section 36(1)(iii) of the Act. In the present case, the concurrent findings of fact of the lower authorities are against the Appellant/Assessee and as noted above, these concurrent findings can in no way said to be perverse or vitiated by error of law apparent on the face of the record.

12. Lastly, the reliance placed on the judgment of the Supreme Court in the case of Deputy Commissioner of Income Tax, Ahmedabad Vs. Core Health Care Ltd., , is also of no assistance to the Appellant/Assessee. In the facts of that case the borrowed funds on which interest was paid was used for installing new machinery. We fail to see, how this judgment comes to the assistance of the Appellant. In the facts of that case it was the contention of the department that the Assessee was not entitled to treat interest on borrowings as revenue expenditure. According to the department, in view of Explanation 8 to Section 43(1) of the Act, the assessee was not entitled to claim deduction of interest paid on borrowings, particularly, when the machines were not put to use during the assessment year under consideration. According to the department, the provisions of Section 36(1)(iii) of the Act, were required to be harmoniously construed along with the provisions of Explanation 8 to Section 43(1). It is this issue that was considered by the Hon''ble Supreme Court. In this scenario, the Supreme Court held that the interest on moneys borrowed for the purposes of business is a necessary item of expenditure in a business. The Supreme Court held that for allowance of a claim for deduction of interest under the said section, all that was necessary was that: (i) the money i.e., capital must have been borrowed by the assessee; (ii) it must have been borrowed for the purpose of business; and (iii) the assessee must have paid interest on the borrowed amount. The Hon''ble Supreme Court held that all that is germane is whether the borrowing was, or was not, for the purpose of business. In fact to our mind, this judgment in the facts situation before us is directly against the Appellant. In the facts situation before us, the authorities below have come to a categorical finding that the investment made in M/s. Kemsol Ltd. from borrowed funds was not for the purpose of business of the Appellant/Assessee. In this view of the matter, this judgment of the Supreme Court is of no assistance to the Appellant/Assessee.

13. On the same parity of reasoning, we find that the foreign travel expenses to the Middle East also have to be disallowed, as the same were not for the business purpose of the Appellant/Assessee. The approach of the ITAT in restricting the disallowance of the foreign travel expenses to 10% of the amount claimed by the Appellant/Assessee, in our view, is more than a reasonable approach. It cannot be said to be vitiated either on the ground of perversity or error of law apparent on the face of the record. In view thereof, we find that the ITAT did not misdirect itself in passing the order that it did in relation to disallowing a part of the foreign travel expenses.

14. As far as ground (C) is concerned, we find that the same does not arise for consideration before us in view of the fact that the same was never raised or argued before the authorities below. The same is clear from the Memorandum of Appeal annexed at Page Nos. 190 and 191 of the Appeal Paper Book as well as the order of the ITAT. We have not allowed Mr. Gandhi, to argue and raise this point before us as the same was never raised or argued before the authorities below. For all the aforesaid reasons, we are of the view that the Appeal raises no substantial question of law. The Appeal is devoid of any merit. The same is, therefore, dismissed. No order as to costs.