TMI Blog2010 (5) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... nces to the sister concern. It was noted by the ITAT that no material had been brought to its notice to show that the interest free advances had been given for the purpose of business or that by giving interest free advance, the business of the assessee would be served better. The Tribunal rejected the argument of the assessee that there was business connection. Held that: . The commercial expediency, in our view, would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee firm - Some business objective should be sought to have been achieved by extending such interest free advance when the assessee firm/company itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which included borrowed fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the rate at which interest was being paid by the assessee firm to the bank in CC 40 account. 3. In the appeal filed by the assessee, the CIT(A) held that interest free advances were given out of the cash from account with the bank, which had debit balance, on which the assessee firm was required to pay interest and, therefore, there was a direct nexus between the interest bearing funds borrowed by the assessee and interest free advances given by it to its sister concern. He rejected the explanation that interest free advances were made out of interest free funds available with the assessee firm, as he found that the advances were made out of the overdraft bank account maintained with Punjab Sind Bank. He, accordingly, upheld the disallowance made by the Assessing Officer. 4. In the appeal before the Income Tax Appellate Tribunal, it was submitted by the assessee that the debit balance in the name of the sister concern was much smaller compared to the interest free funds available with the assessee and no disallowance of interest had been made in the earlier year, in respect of debit balance in the account of M/s.Keshoo Ram Industries. 5. In para 2.3.4 of its judgment, the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee realizing overdraft account and, therefore, upheld the disallowance made by the Assessing Officer. The appeal filed by the assessee having been dismissed by the High Court, he approached the Supreme Court, obtaining Special Leave. The Supreme Court was of the view that the approach of the High Court, the Tribunal as well as the Income Tax Authorities was erroneous, since the test in such a case was whether the advances were made as a measure of commercial expediency. The Supreme Court was of the view that the High Court as well as the other authorities should have enquired as to whether the interest free loan to the sister company was given as a measure of commercial expediency. It was observed by the Supreme Court that the expression 'commercial expediency' includes such expenditure as a prudent businessman incurs for the purpose of business, though it may not have been incurred under any legal obligation. Interpreting its earlier decision in the case of Madhav Prasad Jatia v. CIT: (1979) 118 ITR 200 (SC), the Court was of the view that the ratio of its decision in that case was that the borrowed funds, advanced to a third party, should be for commercial expediency if it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cs Others v. Commissioner of Income Tax Another: (2005) 277 ITR 549, the assessee had borrowed funds while giving interest free loan to its sister concern. The Tribunal held that there was no commercial expediency in extending the interest free loan to the sister concern. It was held by this Court that whether there existed any commercial expediency for the assessee to transfer amount in question to one of its sister concerns and whether the funds were advanced from self-generated funds of the assessee and there was a need for that purpose, were questions of fact and the Tribunal was the final fact finding authority in this regard. 9. Thus, the question whether the advances to M/s.Kesho Ram Industries were extended for commercial expediency or not was a question of fact and the Tribunal, which is the final fact finding authority, has returned a finding against the assessee in this regard. The finding recorded by the Tribunal has not been shown to be perverse and, therefore, cannot be interfered with in exercise of jurisdiction under Section 260A of Income Tax Act. 10. During the course of arguments before us, referring to the leadger account of M/s.Kesho Ram Industries, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces were made from the interest free funds available with the firm. It was also submitted before CIT(A) that the debit balance in the account of M/s.Kesho Ram Industries was not only on account of advances made to them but also included debits on account of sale of DEPB licences aggregating to Rs.1.36 crores. A perusal of the order of CIT(A) would show that the case set up by the assessee before him was that it had interest free deposit amounting to Rs.27.47 crores in the account of partners and ex partners, interest free advances to the sister concern of the appellant amounted only to Rs.1.75 crores and the advances were made to the sister concern out of the mixed funds which comprised appellant's own funds, retained profits and other interest free funds available with it. It, thus, appears to us that the appellant did not dispute, before CIT(A) that the amount which it did not realize from M/s.Kesho Ram Industries, to which DEPB licences were transferred by it, were allowed to be retained as advances to M/s.Kesho Ram Industries from the assessee firm. As noted earlier, even before the ITAT, the assessee did not dispute that it had given interest free advances of Rs.1.75 crores t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 298 ITR 298 (SC). In that case it was held by the Tribunal that the assessee had given interest free loan in the assessment year 1992-93, out of its own funds and not from interest bearing loan taken by the firm from the third party and, consequently, the assessee was entitled to claim deduction under Section 36(i)(iii) of the Act. It was observed by the Supreme Court that the Tribunal had held that the loans were given for business purposes. It was further observed that similarly for the assessment year 1993-94, the Tribunal had taken the view that the loans given to the sister concern of the assessee were for business purposes. The loans given by the assessee in August/September, 1991 to its sister concern were wiped out in the assessment year 1997-98. The Court was of the view that once the Tribunal had found that the loans were advanced for business purposes and the interest paid by the assessee did not exceed 18% per annum, the assessee was entitled to deduction under Section 36(1)(iii) read with Section 40(b)(iv) of the Act. As regards a small interest free loan of Rs.5 lakhs extended by the assessee during the assessment year 1995-96, the Court was of the view that since t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
