TMI Blog2011 (9) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... he funds for non business purpose and also for the purpose advances for the purchase of fixed assets. - Held that:- Assessee was not entitled to claim deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest.Appeal of Revenue has been allowed. Deletion addition of Rs. 2,64,480/- by disallowing the expenses incurred on the market survey got conduct from MDRA. - Held that:- In the instant case, the appellant had conducted survey only to improve existing business. The expenditure is thus held to be revenue in nature. The addition of Rs. 264,480/- on this ground is deleted, allowing assessee's appeal. decided in favour of Assessee. - IT APPEAL NO. 1142 (CHANDI.) OF 2010 - - - Dated:- 19-9-2011 - MS. SUSHMA CHOWLA, MEHAR SINGH, JJ. N.K. Saini for the Appellant. Vineet Krishan for the Respondent. ORDER Mehar Singh, Accountant Member. The present appeal filed by the revenue, for assessment year 2006-07, is directed against the order of ld. CIT(A), Chandigarh, dated 14.6.2009, u/s 250(6) of the Income-tax Act (in short 'the Act'). 2. The Revenue has taken the following grounds of appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It would be pertinent to produce the relevant and operative part of the findings of ld. CIT(A), as contained in Para 6 of the impugned appeal: "6 I have considered the rival contentions and I find that this controversy has now been set to rest by the decision of Hon'ble Punjab Haryana High Court in the case of CIT v. M/s Nuchem Ltd. In ITA No. 323 of 2009, following the decision of Hon'ble Apex Court in the case of CIT v. Alom Extrusions Ltd [2009] 227 CTR 417 wherein the Hon'ble Court has observed as under: "Section 43B (Main section) which stood inserted by the Finance Act, 1983 with effect from April 1, 1984 expressly commences with a non obstante clause, the underlying object being to disallow deductions claimed merely by making a book entry based on the mercantile system of accounting. At the same time, section 43B (main section) made it mandatory for the Department to grant deduction in computing the income under section 28 in the year in which tax, duty, cess, etc., is actually paid. However, Parliament took cognizance of the fact that the accounting year of a company did not always tally with the due dates under the Provident Fund Act, Municipal Corporation Act (oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Allied Motors P. Ltd [1997] 224 ITR 677. However, the assessee contended that even though the first proviso came to be inserted with effect from April 1, 1988, it was entitled to the benefit of that proviso because it operated retrospectively from April 1, 1984 when section 43B stood inserted. This is how the question of retrospectively arose in Allied Motors P. Ltd. [1997] 224 ITR 677. This court, in Allied Motors P. Ltd. [1977] 224 ITR 677 held that when a proviso is inserted to remedy unintended consequences and to make the section workable a proviso which supplies an obvious omission in the section and which proviso is required to be read into the section to give the section a reasonable interpretation it could be read as retrospective in operation, particular to give effect to the section as a whole. Accordingly, this court, in Allied Motors P. Ltd. [1997] 224 ITR 677, held that the first proviso was curative in nature, hence retrospective in operation with effect from April 1, 1988. It is important to note once again that, by the Finance Act, 2003, not only the second proviso is deleted but even the first proviso is sought to be amended by bringing about uniformity." 7. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set is put to use will not be allowed as a deduction. 12. The confusion has arisen from the words 'extension of existing business'. To my mind, the AO is of the view that any asset bought for the business will help in increasing the productivity and efficiency of a business and as such can be construed as extending the existing business. Though he has not put it in so many words, but I feel that this thinking has led to this addition in this case. 13. After reading various judgments and provisions of law, I am of the view that since the term 'extension' has not been defined, it will cover normal circumstances which in business circles are regarded as extension of business, for example, creation of additional rooms, wings, facilities, etc. Further, I am of the view that increasing efficiency and productivity by adding a few assets will not tantamount to extension of business. If capital is borrowed to acquire new assets to meet deficiency or to have more of own assets, it cannot be taken as a case of extension of business. In any existing business, some extension/expansion is a normal feature which should not be confused with substantial expansion which probably the world 'exten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction)." A bare perusal of the Text of the proviso to Sec 36(1)(iii) of the Act clearly reveals that this case is covered by the proviso to Sec 36(1)(iii). Further, the issue is also covered by the decision dated 14.7.11, of Hon'ble Jurisdictional High Court, in the case of Power Drugs Ltd. v. CIT [2011] 201 Taxman 194 (Mag.)/13 taxmann.com 56 (Punj. Har.). Relevant part of the decision is reproduced hereunder: "(iv) Whether in facts and circumstances of the case, the authorities below have erred in applying the proviso to Sec 36(1)(iii) of the Act when the disputed amount was subject matter of litigation? "7. Adverting to the second issue relating to disallowances of interest under proviso to Section 36(1)(iii) of the Act on the ground that the assessee had paid the amount of interest relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Ltd. 15. The Ld. 'DR' contended that the advances were not for commercial expediency and the issue is covered by the decision of Hon'ble Jurisdictional High Court, in the case of CIT v. Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj. Har.). The advances were made for the purchase of flats and, hence, not for business purposes. He referred to Para 5.2 of the assessment order. The ld. 'AR' placed reliance on the order of the ld. CIT(A). 16. The AO has dealt with this issue in para 5 of the assessment order. It is observed by the AO that the advances were given to associate and sister concerns, free of interest. The AO after placing reliance on the decision of Hon'ble Jurisdictional High Court in the case of Abhishek Industries Ltd (supra), disallowed the interest. The ld. CIT(A) deleted the addition. 17. We have perused and considered the fact-situation of the case, rival submissions and the orders passed by the lower authorities. The findings of the AO are based on the facts of the case and also on the decision of Hon'ble Jurisdictional High Court in the case of Abhishek Industries Ltd. (supra) cannot be assailed. The decision of the Hon'ble Supreme Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipts and have no separate identification. The only thing sufficient to disallow the interest paid on the borrowings to the extent the amount is lent to a sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had a surplus which, according to it, could not be repaid prematurely to any financial institution, it would either be required to be circulated and utilized for the purpose of business or to be invested in a manner in which it generates income and not diverted towards sister concerns free of interest. This would result in not presenting the true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. There should be nexus between the use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concerns on interest free basis are to be disallowed. If the plea of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company's own funds represented by share capital and that no borrowed funds had been utilized in giving the interest free loans, that the interest-free loans were advanced to the sister concerns before the commencement of production and also after the commencement of production. The Tribunal held in favour of the assessee. On appeal contending, inter alia, that the tax effect in the present case being "nil" as even if the deductions in question were disallowed, no tax would be payable and since by circulars of the Board a limit had been prescribed for filing appeals before the court, the appeal should not be entertained: Held, (i) that the share capital is meant to be used for productive use in the business. If the share capital, according to the assessee, was surplus and it could part with the same to its sister concern for non-business purposes without any interest, there was no need to raise the loans to that extent and the amount of such share capital should have been utilized for the project itself. In case the assessee had not advanced loans to its sister concern on interest-fee basis, even if the alleged surplus amount could not be repaid to the financial institution ..... X X X X Extracts X X X X X X X X Extracts X X X X
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