corporate and professional update december 16, 2015

CORPORATE AND PROFESSIONAL UPDATE DECEMBER 16, 2015

CIT Vs. Shri Kapil Kumar Agarwal, I.T.A. No. 12 of 2015, Date of Decision: 04.11.2015, High Court of P & H

Whether to avail the benefit of Section 54F of the Income Tax Act, 1961, is it required to utilize the sale proceeds of the original capital asset only for the purchase of the new asset.

Held_No

The AO denied the benefits of Section 54F for the reason that assessee did not entirely source the amount invested in new assets from capital gain receipts and investment was made after taking a loan from his employer.

The assessee contended that due to the non-availability of sales consideration at the time of investment he made the investment out of the loan amount.

Hon’ble High Court followed the decision of the Kerala High Court in the case of ITO vs K.C. Gopalan (1999) 107 Taxman 591 (Ker.) wherein it was held that no provision is made by the statute that the assessee should utilize the amount which he obtained by way of sale consideration for the purpose of meeting the cost of the new asset.

Further, it was held that the law permits utilization of capital gain within the specified time, the assessee may use such funds for other purposes and may find resources from another source for investment in time. The appeal is dismissed.

Hero Cycles (P) Ltd. Vs. CIT, C.A. No. 514 of 2008, Date of Judgement: 05.11.2015, Supreme Court of India

Interest paid on borrowed sums further advanced to the subsidiary company for purpose of facilitating the subsidiary in meeting out its working capital requirement is allowable as business expenditure u/s 36(1)(iii) of Income Tax Act, 1961.

Held_Yes

The AO disallowed the interest paid on the borrowed amount utilized for giving advance to its subsidiary company stating that that money borrowed was not used for business purposes.

Whereas the assessee contended that the amount was advanced in compliance with the stipulations laid down by the financial institutions to which undertaking was given by the assessee for the purpose of providing additional margin to the subsidiary company to meet the working capital for meeting any cash losses.

Hon’ble Supreme Court applied the view taken by Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. 2002 (254) ITR 377 wherein the High Court had held that “once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case”.

Held that_the advance to the subsidiary company became imperative as business expediency in view of the undertaking given to the financial institutions by the assessee. The appeal of the assessee is allowed.

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