Beharilal, A.M. - (1.) THIS appeal of the assessee is directed against the order of the CIT(A)-I, Mumbai, dt. 28th Feb., 2001, for the asst. yr. 1998-99. The assessee is a company belonging to the Mafatlal Group. The main objects of the company are to carry on the business of an investment company and to invest in and acquire and hold, sell or otherwise deal in shares, stocks, debentures, debenture-stocks, bonds, units, obligation and securities issued or guaranteed by Indian or foreign Governments, States, Dominion, Sovereigns, Municipalities or public authorities or bodies or any company corporation, forum or person whether incorporated or established in India or elsewhere. Thus, the main object clause of the company is to carry on business of finance and investments.
(2.) The first three grounds of appeal taken up by the assessee pertain to the disallowance of interest of Rs. 1,74,12,682. The AO observed that the assessee-company has not given out any new finances during the accounting year relevant to assessment year under consideration. However, the company has increased its investments as compared to the earlier assessment years. The AO further noticed from the balance sheet of the company that it has a share capital of Rs. 5,37,50,000 unsecured loans of Rs. 1,30,00,000 and reserves and surplus of Rs. 1,09,77,650. As against this total amount of Rs. 7,77,23,650, the assessee-company has invested Rs. 90,96,60,103 in the share of group companies. Thus, according to the AO, the entire fund available with the company has been mainly invested in the shares of the group companies and group partnership firms only. The AO has also referred to the P&L a/c of the assessee firm and has stated that the assessee is having income from dividend on long-term investments of Rs. 71,19,180 which has been taxed as income from other sources and profit on sale of long-term investments of Rs. 17,06,579 which has been taxed as capital gains. Thus, according to the AO, this income does not include any business income or operational income. He has stated that for earning this type of income, the assessee is not required to do anything special. The AO has also observed that the assessee-company has not carried out any business activity, yet the assessee-company has debited an expense of Rs. 1,76,64,882 out of which the interest paid is Rs. 1,74,12,682. The AO, therefore, concluded that there was no business activity in the case of this company during the assessment year under consideration. The AO referred to the provisions of Section 28 of the Act and has stated that salient features of any business or trade or commerce should be as follows : (i) Regularity of transaction (ii) Objective of earning profit (iii) Application of labour, skill and intelligence (iv) Purchase and sale of goods, etc. (v) Commerce (vi) Any manufacturing activity with profit motive (vii) Letting and exploiting commercial assets. The AO has thus stated that the business connotes any adventure or concern in the nature of trade, commerce or manufacture. The AO has made reference to the definition of business given in Section 2(13) of the Act and has stated that business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. The AO has made reference to the provisions of Section 36(1)(iii) of the Act and has stated that the deduction under Section 36(1)(iii) can be claimed if the following three conditions as laid down by the apex Court in the case of Madhav Prasad Jatia v. CIT (1979) 118 ITR 200 (SC) are satisfied : (i) that the money, i.e., capital must have been borrowed by the assessee; (ii) that it must have been borrowed for the purpose of business; and (iii) that the assessee must have paid interest on the borrowed funds. Thus, the AO has mentioned that the assessee has not carried out any worth-mentioning business activity, thus, according to him the assessee is not eligible to claim interest expenses on funds borrowed for long-term investment and not for the purpose of resale of investment. The AO has further stated that the assessee would get the benefit of indexation in the resale of investments and hence, it would not be entitled for claim of interest. The AO has also mentioned that the assessee-company is investing in its own group companies, therefore, the assessee-company is carrying on the business with itself, which is not business at all.
(3.) DURING the course of assessment proceedings, the assessee-company explained that the assessee-company borrowed money and paid interest on such borrowings, therefore, such interest paid is eligible for deduction under Section 36(1)(iii). According to the assessee, the money has been borrowed, the same has been borrowed for the purpose of business of the assessee. The third condition laid down in Section 36(1)(iii) is also satisfied because the interest has been paid and the same has been claimed as deduction. But according to the AO, the assessee has not fulfilled the main condition that "it must have been borrowed for the purpose of the business". The AG, therefore, came to the conclusion, that the assessee-company was not carrying on any business activity and therefore, it cannot be said that the various amounts invested in the shares of group concerns are advances out of the funds borrowed for the purpose of business. The AO also referred to the decisions of the Gujarat High Court in the case of Sarabhai Sons (P) Ltd v. CIT (1993) 201 ITR 464 (Guj), wherein the High Court has held that when the shares are purchased by the assessee not for earning business income but for other purposes, the expenditure incurred on interest is not allowable. He also referred to another decision of the Gujarat High Court in the case of H.K. (Investment) Co. (P) Ltd. v. CIT (1995) 211 ITR 511 (Guj) wherein the High Court has held that the expenditure incurred on interest should be apportioned between business income and dividend income. He further referred to the decision of the Orissa High Court in the case of Indian Metals & Ferro Alloys Ltd. v. CIT (1992) 193 ITR 344 (On), wherein the High Court has held that the assessee is not entitled to interest under Section 36(1)(iii) in respect of borrowed capital which was invested in subsidiary company. The AO, therefore, disallowed the interest of Rs. 1,74,12,682 paid by the assessee- company on borrowed capital and claimed the same as expenditure incurred for the purpose of its business.;