2025 (7) TMI 1674 - AT - Income Tax

Disallowance of interest paid on borrowed loans u/sec. 36(1)(iii) - as per revenue loans borrowed from various banks and financial institutions have been diverted to subsidiaries and associates for non-business purposes - HELD THAT - It is well established or well settled position of law from the decisions of various courts including the decision of Hon ble Supreme Court in the case of S.A. Builders 2006 (12) TMI 82 - SUPREME COURT that if loan is advanced to subsidiary or associates in the ordinary course of business for the purpose of commercial expediency then interest cannot be disallowed u/sec.36(1)(iii) of the Income Tax Act 1961. In the present case there is no dispute with regard to the fact that the appellant-company has utilized the borrowed capital from various financial institutions in the form of NCDs CCDs and OFCDs for the purpose of it s business either on it s own or through subsidiaries/ associates. Therefore in our considered view the assessee is eligible for deduction towards interest paid on loans u/sec. 36(1)(iii) of the Income Tax Act 1961. There is no merit in the reasons given by the Assessing Officer for the simple reason that there is no mandate of the law to allow interest or any other expenditure only against income earned for the year under consideration. If any expenditure including interest is incurred for the purpose of business then the said expenditure needs to be allowed even if there is no revenue from operations for the year under consideration. The only requirement is to claim deduction for any expenditure is that such expenditure must be incurred wholly and exclusively for the purpose of business of assessee . In the present case there is no dispute with regard to the fact that the appellant-company has incurred interest expenditure on loan borrowed for the purpose of it s business and therefore in our considered view the appellant-company is entitled for deduction towards interest paid on borrowed loans u/sec.36(1)(iii) of the Income Tax Act 1961. Assessee appeal allowed.

Summary

ISSUES:

Whether delay of 321 days in filing appeal before the Tribunal can be condoned.Whether interest paid on borrowed capital used for advancing loans to subsidiaries/associates qualifies for deduction under Section 36(1)(iii) of the Income Tax Act, 1961.Whether borrowed funds diverted to subsidiaries/associates for non-business purposes disentitle the assessee from claiming interest deduction under Section 36(1)(iii).Whether absence of operational income in the relevant year affects allowability of interest expenditure incurred for business purposes.Whether burden of proof lies on the assessee to establish commercial expediency and nexus between borrowed funds and business purpose for claiming deduction under Section 36(1)(iii).

RULINGS / HOLDINGS:

Delay of 321 days in filing appeal before the Tribunal is condoned based on the principles laid down by the Hon'ble Supreme Court in Collector, Land Acquisition vs. MST Katiji, adopting a liberal and lenient approach in the interest of substantial justice.Interest paid on borrowed capital utilized for advancing loans to subsidiaries/associates engaged in the same line of business qualifies for deduction under Section 36(1)(iii) of the Income Tax Act, 1961, as such utilization constitutes "for the purpose of business" including commercial expediency.Borrowed funds diverted to subsidiaries/associates for business-related purposes, including repayment of existing loans and investments in power projects, do not amount to non-business use; hence, interest on such borrowed capital cannot be disallowed under Section 36(1)(iii).Absence of revenue income from operations in the relevant year does not preclude allowance of interest expenditure if it is incurred wholly and exclusively for the purpose of business.The assessee bears the burden to prove that borrowed funds were used for business purposes and that interest expenditure was incurred with commercial expediency; failure to discharge this burden justifies disallowance, but in the present case, the assessee has successfully discharged this burden.

RATIONALE:

The Court applied the statutory provisions of Section 36(1)(iii) of the Income Tax Act, 1961, which allows deduction of "the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession."The Court relied on established judicial precedents including Madhav Prasad Jatia v. CIT, S.A. Builders Ltd. v. CIT, Hero Cycles (P) Ltd. v. CIT, and CIT v. Tulip Star Hotels Ltd., which elucidate the meaning of "for the purpose of business" and recognize "commercial expediency" as a valid ground for allowance of interest deduction.The Court emphasized that business carried on through subsidiaries or associates within the scope of the assessee's main objects qualifies as business activity for the purpose of Section 36(1)(iii).The Court rejected the Assessing Officer's reasoning based on lack of operational income and diversion of funds without charging interest, holding that the nexus between borrowed funds and business purpose is determinative, not the immediate income generated.The Court followed the Supreme Court's guidance in Collector, Land Acquisition vs. MST Katiji to adopt a lenient approach in condoning delay, recognizing that technicalities should not bar meritorious cases from judicial review.The Court distinguished the facts from case law cited by the Revenue where failure to prove commercial expediency led to disallowance, noting that the assessee here provided relevant evidence and explanations substantiating the business purpose of the borrowings.