TMI Blog2009 (2) TMI 238X X X X Extracts X X X X X X X X Extracts X X X X ..... al accounts, the assessee had paid interest of Rs. 22,93,449 for asst. yr. 1999-2000; Rs. 17,04,648 for the asst. yr. 2000-01 and Rs. 6,36,948 for the asst. yr. 2001-02. The total of such interest amounts paid comes to Rs. 46,35,045. The AO has also noticed that the assessee has advanced interest-free funds to its partners, viz. Shri Raju Mathew and Shri Jacob Mathew by permitting them to overdraw through their current accounts. The AO found that the debit balances in partners' current accounts was Rs. 26,71,515 for the asst. yr. 1999-2000; Rs. 18,04,515 for the asst. yr. 2000-01 and Rs. 57.07 lakhs for the asst. yr. 2001-02. The total amount comes to more than Rs. 1 crore. In view of the above position, AO proposed that the excessive drawings made by the partners should be treated as diversion of interest-bearing funds to interest-free loans which would result in proportionate disallowance of the interest expenditure claimed by the assessee. When this proposal was conveyed to the assessee, it was explained before the AO that there was no such diversion of interest-bearing funds as alleged by the assessing authority and if at all such a case is ultimately made out, the quantum of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... things, this issue was also taken before the CIT(A). The CIT(A) examined the contentions of the assessee in an extensive manner. She found that the assessee firm belonged to the Century Group of concerns which has developed the trade name "Century" through its firms making and distributing feature films and this name developed by those firms was very much necessary to promote the building project of the assessee firm and therefore there is a direct benefit for the assessee firm in using the name of "Century" and therefore transferring the funds to those firms was for business expediency of the assessee and in such circumstances, the AO was not justified in disallowing a part of the claim of interest expenditure made by the assessee firm. The CIT(A) has made a detailed discussion on this issue from pp. 10 to 20 of her order. It is the conclusion of the CIT(A) that the firm, M/s Century Film has helped the assessee in a very extensive manner to bring out its project successful and in fact the firm, M/s Century Films was really instrumental in selling a major portion of the flats offered by the assessee in the market. She, therefore, came to a conclusion that the operational and finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rove that there is any functional nexus between the activities carried on by the assessee firm and the other firms, like M/s Century Films, etc. Therefore, it is necessary to conclude that the funds were advanced by the assessee firm to M/s Century Films for the business purposes of the latter and in such circumstances the assessee cannot plead for the rule of business expediency and canvass acceptance of the case. He submitted that this is a clear case of diversion of interest-bearing funds for non-business purposes and the AO has rightly made the disallowance in the light of the binding decision of the jurisdictional High Court in the case of CIT vs. V.I. Baby Co. 9. Shri V.K. Kurian, the learned chartered accountant, appearing for the respondent assessee, vehemently argued that the partial disallowance of interest made by the assessing authority was quite arbitrary and unfounded. He explained that the assessee firm, M/s Century Towers, could not have come up in building industry unless there was a limelight support of the associate firms like Century Films, which is having a long standing name in the business circle. It is through the contact and influence of M/s Century Fil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. Therefore, the factual position that the assessee has transmitted interest-bearing funds to its partners as interest free advances is not under any doubt. The further follow-up of the transaction of the funds has also been brought on record that the funds overdrawn by the partners have actually been pumped into the funds of associate concerns like M/s Century Films, etc. It is also not under dispute that such funds pumped by the partners in those firms were in fact utilized for the business carried on by those firms like M/s Century Films, etc. 12. Therefore, as a matter of fact, we have to accept the contention of the Revenue that the circle of diversion of interest-bearing loan funds to interest free advances has become complete. 13. It is also true that the assessee has made a claim of deduction attributable to the entire interest expenditure. 14. Therefore, as rightly done by the AO, the pertinent question is that whether the diversion of funds as interest free advances was in fact made for business expediency or any business advantage of the assessee firm so that there is justification in allowing the interest as a deduction as claimed by the assessee? If the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of S.A. Builders Ltd. Commercial expediency is definitely a positive benefit to the assessee carries on a business. Therefore, the basic rule of benefit to the assessee, who diverts the fund is nowhere diluted by the Hon'ble Supreme Court in the case of S.A. Builders Ltd. The Court has held that even for commercial expediency, which is not pinpointable, the claim of an assessee for deducting an expenditure may be justified. 17. Therefore, we have to see that the decision of the Supreme Court in the case of S.A. Builders Ltd. does not topple the basic concepts of the benefits that should accrue to an assessee who diverts interest-bearing funds to others as interest free advances. 18. Ultimately, the simple question is whether the interest free diversion of funds was justified on the facts and circumstances of the case of an assessee carrying on the business? This issue is to be examined on the touchstone of benefits including "commercial expediency". An assessee cannot claim the deduction of an expenditure of interest attributable to the funds transferred to others as interest free advances, just for that. That is why the Hon'ble Supreme Court has held in the case of S.A. B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of commercial expediency unless a functional nexus is established, as reiterated by the Supreme Court in the same judgment itself. The Supreme Court has not discarded the theory of cause and effect while delivering its judgment in the case of S.A. Builders Ltd. 20. In the present case, apart from inheriting the sunshine of the business name of its group concerns 'Century', there is nothing on record to show that there is any nexus between the activities carried on by those associate concerns and the assessee firm and the diversion of funds has served the purpose of the business expediency of the assessee. The argument of the assessee like contacts generated by M/s Century Films and others have helped the assessee firm to carry on its business, etc., is somewhat etymological which does not fit into the regime of IT Act, 1961. 21. In the facts and circumstances of the case. we find that the CIT(A) has grossly erred in deleting the disallowance of Rs. 17,23,568 made by the AO in respect of the interest claim made by the assessee. Therefore, we set aside the order of the CIT(A) on this point and restore the disallowance made by the assessing authority. 22. In result, this app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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