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TMI Blog2008 (4) TMI 446X X X X Extracts X X X X X X X X Extracts X X X X ..... er of Income-tax (Appeals) in deleting the addition made by the Assessing Officer on account of notional interest on the money advanced by the assessee to their sister concerns, without charging any interest, in contradiction with the judgment of this court in CIT Abhishek Industries Ltd. [2006] 286 ITR 1. 2. In the appeal, filed by the assessee, i.e., I. T. A. No. 553 of 2007, the following substantial question of law has been raised: "Whether, in the facts and circumstances of the case, the Income-tax Appellate Tribunal was right in disallowing the interest under section 36(1)(iii) of the Income-tax Act on interest free loans granted to the sister concern, contrary to the judgment of the hon'ble Supreme Court in S. A. Builders v. CIT [2007] 288 ITR 1?" 3. The brief facts of the four appeals are as under: I. T. A. No. 296 of 2007: 4. This appeal pertains to the M/s. Marudhar Chemicals and Pharmaceuticals Pvt. Ltd., Chennai, the assessee-company, for the assessment years 1997-98. 5. In this case, the assessee-company advanced an amount of Rs. 17,45,000 to the family members of its directors. No interest was charged from any of them, though the assessee-company itself paid in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to establish income, substantially. It was further held that the Assessing Officer had not examined details of borrowed funds, the purpose for which funds were borrowed and the purpose for which the borrowed funds were utilized. It was further held that the Assessing Officer has not examined as to whether the interest-free advances were made by the assessee for business purposes or not. In fact, no finding to the effect that borrowed funds were utilized for non-business purposes was recorded. In view of these findings, it was held that the additions made by the Assessing Officer to the income of the assessee on notional basis were not justifiable. On appeal filed by the Revenue, the Income-tax Appellate Tribunal, Delhi Bench "C", New Delhi, has affirmed the order of the Commissioner of Income-tax (Appeals), Faridabad. I. T. A. No. 553 of 2007: 8. This appeal pertains to Industrial Organics and Pharmaceuticals Ltd., Ludhiana, the assessee company, for the assessment year 1996-97. 9. In this case, the assessee advanced interest-free loan to its two sister concerns, namely M/s. Himalayan Spinning and Weaving Mills Ltd. and M/s. Abhishek Industrial Corporation Ltd. The assessee clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is disallowable under section 36(1)(iii) of the Act. The said ratio is squarely applicable to the facts of the present case. Consequently, the stand of the Revenue deserves to be upheld. The decision of the Tribunal in the assessee's own case for the assessment years 1993-94 and 1994-95 also does not help the assessee since the subsequent decision of the jurisdictional High Court in the case AbhishelcIindustries Ltd. 's case [2006] 286 ITR I has to be applied. In the result, we set aside the order of the Commissioner of Income-tax (Appeals) and restore that of the Assessing Officer." 11. Mr. Yogesh Putney, Advocate, counsel for the Revenue, argued that the controvery raised in the aforesaid appeals has already been answered by this court in AbhishekIindustries Ltd. 's case [2006] 286 ITR 1 in favour of the Revenue. He submitted that under section 36(1)(iii) of the Act, the assessee can claim deduction of interest on loans raised by him for the purposes. Once the assessee claims such deduction the onus lies on him to satisfy the Assessing Officer that whatever loans were raised by him were used for business purpose. In case, during the process of examination, it transpires that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st to the extent of advances without carrying any interest made to the sister concerns or to their directors is to be disallowed. 13. On the other hand, Mr. Anurag Bansal and Ms. Radhika Suri, advocates, counsel for the assessees, submitted that the assessees have advanced loans to their sister concerns or their directors not from the amount borrowed by the assessees from the bank, but from the share working liability, cash credit and the debit balance account, therefore, it was argued that there was no direct nexus between the amount borrowed by the assessees from the bank and the loan advanced to their sister concerns or the directors, as no amount was so advanced by raising an interest bearing loan. Learned counsel for the assessees, while referring to the recent decision of the Supreme Court in S. A. Builders Ltd. 's case [2007] 288 ITR 1, submitted that the real test to determine the question of allowability of interest on borrowed funds is whether this was done as a measure of commercial expediency. Learned counsel submitted that before making addition in this regard, the Assessing Officer is required to record a finding as to whether the interest free loan was given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business. 16. In the light of the aforesaid judgment, we have gone through the impugned orders. In our view, the Income Appellate Tribunal has not examined, considered and decided the matter in accordance with the aforesaid principle of law. In none of these cases, a finding has been recorded as to whether the interest free loan was given by the assessee to their sister concerns or their directors not as a measure of commercial expediency. Before disallowing the question of deduction of interest amount pertaining to the interest free loan advanced to the sister concerns or its directors, it is incumbent on the authorities to record such a finding. Therefore, we are of the opinion that the impugned orders, passed by the Income-tax Appellate Tribunal, are not sustainable and the same are, hereby, set aside. The matter is remitted to the Income-tax Appellate Tribunal to reconsider the matter in the light of the principle laid down by the Supreme Court in S. A. Builders Ltd. 's case [2007] 288 ITR 1 and then decide the matter accordingly. It is made clear that it ..... X X X X Extracts X X X X X X X X Extracts X X X X
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