Borrowed money invested in equity &  Disallowance of interest expenses under section 36(1)(iii)

Short Overview  Where the assessee diverted borrowed funds towards investment in a company but did not collect any interest on money so invested then the AO was justified in making the disallowance of interest on borrowed capital particularly in view of the fact that the assessee failed to prove that there was any commercial expediency in making the investment that company.

Assessee had borrowed funds from banks and other entities and paid interest thereon. He further noticed that assessee had made investments in other company WISPL without collecting interest from them. Hence, AO disallowed proportionate interest expenditure in assessment year 2011-12 and a certain sum in assessment year 2012-13. CIT(A) noticed that assessee had given two separate loan/investment and assessee had collected interest from the one of the loans. Accordingly, he deleted interest disallowance relating to the loan on which interest was received from the company. CIT(A) noticed that assessee could not establish commercial expediency in making the investment in the said company. Accordingly, he confirmed interest disallowance in respect of remaining amount of loans.

It is held that  No material was placed on record by the assessee to contradict the findings recorded by CIT(A) on this issue concerned, accordingly, there was no reason to interfere with order passed by CIT(A) on this issue in both the assessment years.

Decision: Against the assessee.

IN THE ITAT, BANGALORE BENCH

N.V. VASUDEVAN, V.P. & B.R. BASKARAN, A.M.

Four Seasons Wines Ltd. v. Dy. CIT

ITA Nos. 2567 & 2568/Bang/2017

8 March, 2021

Appellant by: None

Respondent by: R. Premi, Departmental Representative

ORDER

B.R. Baskaran, A.M.

The appeals filed by the assessee are directed against the orders passed by the learned Commissioner (Appeals)-3, Bengaluru and they relate to the assessment years 2011-12 & 2012-13.

2. None appeared on behalf of the assessee. We notice that the Registry has sent notice of hearing by registered post on an earlier occasion and the same has been returned back by the postal department with the noting “left”. Hence, the bench has directed the revenue to serve the notice. Learned Commissioner (Departmental Representative), vide hisLetter, dated 4-3-2021, has reported to the Tribunal that the notice has been served upon the assessee. Under these circumstances, we are constrained to proceed to dispose of these appeals ex parte, without the presence of the assessee.

3. Since common issues are urged in these appeals, both the appeals were heard together and are being disposed of by this common order for the sake of convenience.

4. We heard learned Departmental Representative and perused the record. The assessee is engaged in the business of manufacture and sale of wines.

5. The first common issue urged in both the years relate to disallowance of interest expenditure under section 36(1)(3) of the Income Tax Act,1961 (‘the Act’ for short). The facts relating to the same are stated in brief. The assessing officer noticed that the assessee has borrowed funds from banks and other entities and paid interest thereon. He further noticed that the assessee has made investments in other companies namely Wines Society of India (P) Limited (WSIPL) and other companies without collecting interest from them. Hence the assessing officer disallowed proportionate interest expenditure of Rs. 24 lakhs in assessment year 2011-12 and Rs. 41.04 lakhs in assessment year 2012-13. In the appellate proceedings, the learned Commissioner (Appeals) noticed that the assessee has given two separate loan/investment in M/s. WSIPL and the assessee has collected interest from the one of the loans. Accordingly he deleted interest disallowance relating to the loan on which interest was received. The learned Commissioner (Appeals) noticed that the assessee could not establish commercial expediency in making the investment in WSIPL. Accordingly, he confirmed interest disallowance in respect of remaining amount of loans in both the years under consideration.

6. Before us, no material was placed by the assessee to contradict the findings recorded by learned Commissioner (Appeals) on this issue. Accordingly, we do not find any reason to interfere with the order passed by learned Commissioner (Appeals) on this issue in both the years under consideration.

7. The next common issue relates to disallowance of advertisement expenses in both the years. The assessing officer noticed that the assessee has incurred huge amount of expenses on these advertisement expenses. In assessment year 2011-12, the turnover of the assessee was Rs. 14.91 crores while the advertisement expenses were Rs. 7.09 crores, which worked out to 50% of the sales. In assessment year 2012-13, the advertisement expenses incurred by the assessee worked out to 40% of the turnover. The assessing officer took the view that the assessee has not proved the nexus between advertisement expenses incurred by it and the commercial expediency in incurring the same. Accordingly, he took the view that a portion of advertisement expenses needs to be disallowed. Accordingly, he disallowed 25% of the advertisement expenses incurred by the assessee in both the years under consideration, which worked out to Rs. 1.77 crores and Rs. 2.38 crores respectively in assessment year 2011-12 and 2012-13. The learned Commissioner (Appeals) also confirmed the same.

8. We heard learned Departmental Representative on this issue and perused the record. From the orders passed by the tax authorities, we notice that the assessee has explained the object behind incurring huge advertisement expenses. It was explained that per person consumption of wine in India was only 10ml. per year, while the global per capital consumption of wine is 4.50 ltrs. Accordingly, considering the huge opportunity, the assessee has incurred huge advertisement expenses. It was also submitted that the assessee’s market share is increasing every year and within a short span of 4 years, it has reached 2nd position in terms of market share. We notice that the above said explanation was not convincing to both the tax authorities.

9. We notice that the assessee has incurred the advertisement expenditure according to its wisdom/strategy from the point of view of the businessman. It is a well settled proposition of law that the tax authorities cannot sit in the arm chair of the businessman and decide the manner of conducting the business of the assessee. We notice from the assessment order that it is not the case of the assessing officer that advertisement expenses incurred by the assessee are not genuine/bogus. The assessing officer has formed the view that the advertisement expenses are hugevis-a-vis its Sales revenue. In our view, it should not be the reason for making estimated disallowance. Under these set of facts, we are of the view that the assessing officer was not justified in disallowing part of advertisement expenditure on estimated basis and the learned Commissioner (Appeals) was not justified in confirming the same. Accordingly, we set aside the order passed by learned Commissioner (Appeals) on this issue in both the years under consideration and direct the assessing officer to delete the disallowance in both the years under consideration.

10. The assessee has urged one more issue in assessment year 2013-14, which relates to disallowance of business promotion expenses. We heard learned Departmental Representative on this issue and perused the record. The assessing officer noticed that the business promotion expenses of Rs. 13.07 lakhs incurred by the assessee was in the nature of capital expenditure and the same has resulted in creation of an asset of enduring nature. Accordingly, he disallowed the business promotion expenses treating the same as capital expenditure. Before learned Commissioner (Appeals), the assessee furnished breakup details of business promotion expenses as given below :–

Sl. No.	Particulars	Amount in Rs.
1.	Import pass fees	78,658
2.	Trade sampling	1,450
3.	Hologramer charges	1,27,963
4.	Demurrage charges	3,08,029
5.	Cash discount	9,794
6.	Business promotion and others	7,82,046

11. The assessee also furnished additional evidences in support of the above expenses. Hence, learned Commissioner (Appeals) called for a remand report from assessing officer, wherein the assessing officer expressed the view that item no. 1 to 6 mentioned in the table aggregating to Rs. 5,25,894 is revenue in nature. With regard to the remaining amount of Rs. 7,82,046, the assessing officer submitted as under :–

12. Regarding the business promotion and others (item 6) of Rs. 7,82,046, the following facts are relevant.

The assessee company had launched four season range only in 2008-09 and in a short span of 4 years, the company achieved considerable market share.

Promotional expenses had been incurred for the purpose of expanding the existing business, not as part of day to day business activities.

Business promotion expenses helped the assessee to increase the revenue earning capacity

12. The learned Commissioner (Appeals) directed the assessing officer to delete the addition of Rs. 5,25,894 mentioned in sl.nos.1 to 5 of the table (referred above), since the assessing officer himself has accepted the same as revenue in nature. With regard to remaining amount of Rs. 7,82,046, the learned Commissioner (Appeals) took the view that 25% of the same may be treated as capital in nature. However, he sustained addition of Rs. 5,86,535 out of the above said amount of Rs. 7,82,046 and deleted the balance amount of Rs. 1,95,571. Aggrieved the assessee has filed this appeal before us.

13. We heard learned Departmental Representative and perused the record. The learned Commissioner (Appeals) has discussed about the details of expenditure of Rs. 7,82,046 as under :–

“6.4 A perusal of the details of the business promotion expenses shows that it includes expenditure on purchase of bottle stand for display, expenditure on display and testing in wine festivals, press table for rooms, purchase of glass corner, shower curtains, soap dispenser, bathroom fittings, artificial stones, crockery, flower vase etc., in addition to expenditure on various meetings, travel to various places including abroad, food expenses and travel expenses of various guests. Thus, it cannot be said that the entire expenditure of Rs. 7,82,046 is revenue in nature. A part of the expenditure relates to purchase of assets and another part of the expenditure, which has been incurred for various business meetings can be said to have been incurred for business promotion. The expenditure on business promotion can partly be considered as of revenue nature and partly capital in nature. While discussing the issue of expenditure on advertisement, 25% of the expenditure has been treated as capital in nature. Since the appellant is in the initial stage of its business and admits (para 5.1) that it was incurring expenditure to make its presence felt in the market, an expenditure of 25% of Rs. 7,82,046 is treated as capital in nature. So, an addition of Rs. 5,86,535 is sustained and disallowance of balance amount of Rs. 1,95,511 is deleted. Thus the appellant gets a relief of Rs. 7,21,405. Considering the above, the ground of the appeal 7 of the appellant is partly allowed.”

A perusal of the above said observations of learned Commissioner (Appeals) would show the nature of expenses incurred by the assessee are towards purchase of certain articles, which are for promoting the business of the assessee. In our view, those kind of articles would not give rise to creation of asset of enduring nature. Accordingly, we are of the view that the learned Commissioner (Appeals) was not justified in sustaining addition of part of business promotion expenses. Accordingly, we set aside the order passed by learned Commissioner (Appeals) on this issue and direct the assessing officer to delete the disallowance of entire amount of business promotion expenses.

14. In the result, both the appeals of the assessee are partly allowed.