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2020 (1) TMI 1040 - HC - Income TaxBenefit u/s 36(1)(iii) denied - expenditure on borrowals - HELD THAT:- From perusal of Section 36(1)(iii) of the Act, it is evident that 3 conditions have to be complied with namely, money must have been borrowed by the assessee, it must have been borrowed for the purpose of business and the assessee must have paid the interest on the aforesaid amount and claimed it as deduction. In the instant case, the Assessing Authority, by an order dated 31.03.2000 has held that the assessee mainly supplies its finished products to its sister concern which is engaged in the manufacturing of plywood, boards, etc. and exports to foreign countries as well as enjoys the benefit of deduction under Section 80HHC of the Act. On perusal of the books of accounts, it has been held that against the supply of finished products, the assessee firm does not directly collect the sale proceeds from the sister concern. Instead of using the sale bill pertaining to sister concern, the assessee has availed of the letter of credit discounting with the banks and has availed of the loan and has paid interest on the bank credit. Commissioner of Income Tax (Appeals) has upheld the aforesaid finding and has held that the assessee has tried to give the whole arrangement a colour of business expediency falling within the purpose and nexus to business. But on a close scrutiny, it is evident that it is nothing but shouldering the interest burden on itself, thereby diverting the benefit in favour of the sister concern. It has further been held that where the borrowing is illusory or colourable, the interest paid on such borrowings is not allowable. No prudent businessman pays interest on the payment to his creditors and at the same time does not charge corresponding interest on the delayed payment from its debtor. It has further been held that the aforesaid arrangement has been made with an object to circumvent the provisions of the Act to facilitate its sister concern to rest on the shoulders of the appellant. It has also been held that the appellant has deliberately created an artificial and colourable devise for reducing its income offered for taxation through an arrangement of letter of credit and thus, the deduction claimed by the assessee on account of interest paid to the bank and also to its creditors are not allowable. The aforesaid findings of fact have been recorded by the Assessing Authority, the Commissioner of Income Tax (Appeals) as well as the Income Tax Appellate Tribunal. The Tribunal has assigned cogent reasons for not treating the borrowings as business expenditure incurred during the course of business which is evident from paragraph 6.2 of the order passed by the Tribunal. Therefore, the first substantial question of law does not arise for consideration in this appeal. All the authorities have assigned cogent reasons which has been stated supra and have rejected the claim of the appellant filed under Section 36(1)(iii) of the Act Rejecting the claim u/s 36(1)(iii) towards the payment of interest on borrowing - second substantial question of law is based on incorrect factual finding inasmuch as the Assessing Authority, Appellate Authority as well as the Tribunal have doubted the genuineness of such a transaction and therefore, the substantial question of law as framed in the absence of any dispute with regard to genuineness of the transaction, whether the Tribunal was justified in rejecting the claim under Section 36(1)(iii) also does not arise for consideration. The Supreme Court in the case of SA BUILDERS LIMITED [2006 (12) TMI 82 - SUPREME COURT] has held that it is not in every case that interest on borrowed loan has to be allowed. If the assessee advances it to the sister concern, it all depends on the facts and circumstances of the respective case. Therefore, the question of genuineness of the transaction can be examined in the fact situation of the case. The aforesaid question has been examined in detail by the authorities under the Act by assigning reasons. Deduction under Section 80HHC - It is once again reiterated that all the authorities under the Act have assigned valid and cogent reasons which is evident from perusal of the orders passed by them. Therefore, by no stretch of imagination, it can be held that the sister concern of the appellant is eligible for more deduction under Section 80HHC of the Act on mere surmise and conjectures. The finding that the sister concern is eligible for more deduction under Section 80HHC of the Act is based on mere surmise and conjectures also does not arise for consideration. Accordingly, the aforesaid question of law is answered against the assessee and in favour of the revenue.
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