TMI Blog2010 (5) TMI 708X X X X Extracts X X X X X X X X Extracts X X X X ..... rve and surplus stood at Rs. 6,59,21,888. The Assessing Officer has also mentioned that after excluding investments in shares the assessee required a sum of Rs. 7,91,26,253 as against net worth held as on March 31, 2001 totalling to Rs. 6,59,21,888. The Assessing Officer accordingly worked out the funds required for business at Rs. 2 crores. The Assessing Officer also observed that the total funds borrowed by the assessee were Rs. 4.87 crores and after reducing Rs. 2 crores being estimated required business funds, he worked out funds not utilised for business purpose at Rs. 2.87 crores. The Assessing Officer by applying the interest rate at 15 percent computed the amount disallowed at Rs. 43,05,000. Addition was challenged before the learned Commissioner of Incometax (Appeals) and it was submitted that the amounts were borrowed by the assessee for the purpose of business and, therefore, interest paid on them are allowable as business expenditure. The assessee relied upon the decision of the hon'ble Supreme Court in the case of Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC). It was also submitted that investments in shares were made by the assessee-company long back and not in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest come out of own money". It was submitted that the method of computation of disallowance made by the Assessing Officer is not scientific as unsecured loans carried interest rate of 12 percent and not 15 percent as presumed by the Assessing Officer. When funds are borrowed and utilised for business purpose, there is no reason to vary the interest expense as claimed by an assessee. The Assessing Officer has not established that any borrowed funds were utilised either for giving interest-free loans or for non-business purpose, therefore, no interest can be disallowed. The assessee relied upon several decisions of the Tribunal in support of the contention. The assessee also relied upon the decision of the hon'ble Gujarat High Court in the case of Shree Digvijay Cement Co. Ltd. v. CIT [1982] 138 ITR 45 (Guj) wherein it was held that "the assessee-company has made investments in shares partly out of borrowed funds but in the absence of establishing the nexus no part of the interest can be disallowed". It was submitted that since the assessee-company had sufficient own funds to invest in shares of companies, therefore, no interest should be disallowed. It was submitted that investmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision in the case of Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 (Bom) in which it was held that "borrowed capital advanced to subsidiary companies interest not deductible". He has also relied upon the order of the Bombay Bench of the Income-tax Appellate Tribunal in the case of Sanghvi Swiss Refills P. Ltd v. ITO [2003] 85 ITD 59 (Mumbai) in which it was held that "the deduction cannot be allowed when the amount was diverted to sister concerns and assessee did not produce any evidence to show that it had sufficient funds/non-interest bearing funds". The learned Departmental representative submitted that investments have been made to have controlling interest in the companies in which investments were made. Therefore, it would indicate that borrowed funds were not utilised for the purpose of business. The learned Departmental representative also relied upon the decision of the hon'ble Kerala High Court in the case of CIT v. V. I. Baby and Co. [2002] 254 ITR 248 (Ker) ; 123 Taxman 894 as is relied upon by the Assessing Officer in which it was held that "if cash balance was available the borrowing itself was not for the purpose of the business. An assessee with liquidi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rth of Rs. 6.59 crores and that investment stood at Rs. 2.86 crores. It would prove that the abovestated investments in shares have been made out of own funds of the assessee. The Assessing Officer has thus not established that any borrowed funds were utilised either for giving interest-free loans or for non-business purpose. Therefore, no part of the interest can be disallowed in this matter. Since the Assessing Officer has failed to prove any nexus between the borrowed funds and the investments made for non-business purpose, we do not find any justification to interfere with the findings of the learned Commissioner of Income-tax (Appeals). The decisions cited by the learned Departmental representative are distinguishable on facts. The hon'ble Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC) held that (headnote) "In order to decide whether interest on funds borrowed by the assessee to give an interest-free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -tax (Appeals) held that the Department failed to establish a direct nexus between the borrowings and the withdrawals made by the partners and that the order of the Assessing Officer was not sustainable. The Tribunal held that the order of the Commissioner of Income-tax (Appeals) was incorrect and erroneous and confirmed the order of the Assessing Officer. On a reference : Held, that when the Tribunal was to dislodge the order passed by the appellate authority it was obligatory on the part of the Tribunal to demonstrate as to how the findings recorded by the appellate authority were not consistent with the facts and the provisions of law. It was obligatory on the part of the Tribunal to demonstrate as to how the Department proved a nexus between the borrowings and withdrawals made by the partners. It was obligatory on the part of every appellate authority to point out by good and acceptable reasoning as to how the facts and circumstances of one case happened to be different from other cases. It was improper to close the doors to a litigant by a casual treatment of some statements moving towards a conclusion that the precedents on which such litigant relied were different from his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rking capital and other business requirements. The interest paid on such borrowed funds is deductible under section 36(1)(iii) of the Income-tax Act. It was submitted that the assessee has interest-free funds comprising of share capital, reserves and surplus worked out to Rs. 6,57,59,011 as on March 31, 2002. Whereas total investments in shares of the group companies worked out to Rs. 2,36,16,100 as on that date and, therefore, it cannot be said that any part of the borrowed fund was diverted for investment in shares of other group companies. It was stated that the investment in shares of group companies was made since the financial year 1994-95 and no investment in shares of these companies was made in the year under consideration. In fact, the assessee's investment in shares of these companies has come down to Rs. 2.36 crores during this year as against the investments in the financial year ended as on March 31, 2000 and March 31, 2001. It was submitted that disallowance cannot be made during this year for investments made in earlier years. The investment in earlier years was made in the business interest of the company and as per memorandum of association the assessee is authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking a contrary view in the assessment year in question. The submissions of the learned Departmental representative are same as have been argued in earlier appeal. The assessee in the written submissions reiterated the same submissions and it is reiterated that no investment has been made in the assessment year in question and that the investment as compared to the earlier years have come down. It is also stated that as per the decision of the hon'ble Supreme Court in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321 (SC) ; 100 CTR 267 the consistency has to be maintained without making further addition on the same issue. On consideration of the rival submissions we are of the view that the learned Commissioner of Income-tax (Appeals) was not justified in making proportionate disallowance of the interest. It is an admitted fact that no investment has been made in the shares of group companies in the assessment year under appeal. The Assessing Officer has also not brought any evidence on record if there was any nexus between the borrowed funds and the amount invested in the shares of other companies. On identical facts we have confirmed the order of the learned Commissio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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