2015 (11) TMI 1314 - SC - Income Tax

Deduction of interest paid on borrowed sums from Bank under the provisions of Section 36(1)(iii) disallowed - diversion of loan - loan given to Directors and Sister concern - Held that:- A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent.

On the other hand, the High Court has simply quoted from its own judgment in the case of 'Commissioner of Income Tax-I, Ludhiana v. M/s. Abhishek Industries Limited, Ludhiana' [2006 (8) TMI 123 - PUNJAB AND HARYANA High Court ]. On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure.We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced.

It is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. See 'S.A. Builders Ltd. v. Commissioner of Income Tax [2006 (12) TMI 82 - SUPREME COURT]

It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax.

Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. - Decided in favour of assessee.