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TMI Blog2015 (7) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... tal income of E1,02,16,651/-. The case was selected for scrutiny and the original assessment was completed on 22.04.2008 with an addition of E2,46,065/- under the head other expenses. During the financial year 2005-06 pertaining to A.Y. 2006-07 the assessee had paid interest totaling to E56,61,461/- and interest income from firm was received upto 30.11.12006, up on Part IX conversion the capital account of the assessee after allotment of share had become unsecured loan. For this unsecured loan assessee has not received any interest. So, it has become interest free loan to the company. But, assessee was found to have debited interest expenses to the tune of E26,52,520/- in the profit and loss account. As there was reasons to believe that income has escaped assessment within the meaning of sec.147, the case was reopened and notice u/s.148 dated 22.04.2010 was issued. Accordingly, the Assessing Officer recorded the reason for re-opening of assessment as follows:- ''The assessee had shown sundry debtors of 34.70 crores. He admitted interest received from M/s. S.P. Apparels of 1,61,93,186/- vide his letter dated nil filed in this office on 22.04.2008, the assessee explained that he was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Act E26,52,520/- and accordingly interest expenses towards interest free loan is disallowed and brought to tax and the total income is computed as under:- Income as per order u/s.143(3), dated 22.04.2008 1,04,62,716/- Add: Disallowance of interest expenses Towards interest free loan 26,52,500/- &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He also drew our attention to the letter filed before the Assessing Officer on 22.04.2008 which is placed on record at page no.7 of the paper book to suggest that the assessee is having sufficient own funds to advance to the sundry debtors viz M/s. S.P. Apparels Limited wherein the assessee is one of the major shareholder. The assessee has not advanced any interest bearing funds to M/s. S.P. Apparels Limited. Being so, there is no question to disallow the interest payment. The ld. Authorised Representative for assessee submitted that after considering the assessee's letter, the Assessing Officer opted not to disallow any payment of interest at the time of original assessment. He further relied on the judgment of jurisdictional High Court in the case of CIT vs. Ashley Services Ltd 369 ITR 209 (Mad) wherein it was held that a reading of the reasons given for reopening of the assessment showed that it was nothing but a review of the orders passed under section 143(3) relating to the assessment years 1996-97 and 1997-98. Consequently, even though the assessment was reopened within the limitation period of four years, there being no fresh material to disturb the reasoning arrived at for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... escaping assessment.-If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) : ' (emphasis supplied) 5. On going through the changes, quoted above, made to section 147 of the Act, we find that, prior to the Direct Tax Laws (Amendment) Act, 1987, reopening could be done under the above two conditions and fulfilment of the said conditions alone conferred jurisdiction on the Assessing Officer to make a back assessment, but in section 147 of the Act (with effect from April 1, 1989), they are given a go-by and only one condition has remained viz. that where the Assessing Officer has reason to believe that income has escaped assessm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989, has again amended section 147 to reintroduce the expression "has reason to believe" in the place of the words 'for reasons to be recorded by him in writing, is of the opinion'. Other provisions of the new section 147, however, remain the same.' (emphasis supplied)". Applying the said decision to the facts of this case, the proceeding initiated for re-assessment cannot be quashed at the threshold. In the present case the reason reflect the ground that the income as escaped in view of the fact that assessee claimed interest payment of E56,61,461/- which is not allowable. There is no details available on record to indicate what fund was lent to M/s. S.P. Apparels as the assessee advanced a sum of E24,52,61,029/- to M/s. S.P. Apparels Limited Ltd. Further, there was investment of E12 crores in shares. The assessee has not admitted any dividend income from such shares. The claim of the interest paid is not reflected as investment in any business activities or in any income generating assets. Thus, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y be a failure to make a true and full disclosure, if some material for the assessment lay embedded in the evidence which the Revenue could have uncovered but did not, then, it is the duty of the assessee to bring it to the notice of the Assessing Officer. The assessee knows all the material and relevant facts - The Assessing Authority might not. Testing the facts of the present case in the light of the aforesaid principles, as noted hereinabove, the Assessing Officer in the assessment order has not discussed the issue of interest from investment to M/s. S.P. Apparels Limited Ltd. The Assessing Officer while recording the reasons has formed an opinion that excess interest claim was allowed to the assessee and on that reason assessment was re-opened. Further a perusal of the material on record does not indicate that the assessee had drawn the attention of the Assessing Officer to the fact that the reasons mentioned for re-assessment at the time of completion of original assessment. According to the ld. Authorised Representative for assessee it is not necessary for the assessee to point out the above set of facts to the Assessing Officer and that the assessee is entitled to the claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern(eg., 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 measure of commercial expediency. The expression ''commercial expediency'' is one of wide import and includes such expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to sec.37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is '' for the purpose of the business''. ''For the purpose of business'' includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorizes and the courts should examine the purpose for which the assessee advanced the money and w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... suggest that amounts were advanced to the sister concerns to advance some business object. Accordingly, the 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. 10. We have heard both the parties and perused the material on record. In the present case, admittedly the assessee has advanced a sum of E24,52,61,029/- to M/s. S.P. Apparels Limited and also made investment of E12 crores in shares from which the assessee has not derived any interest/dividend from these loans or from shares. At the same time, the assessee claimed an expenditure towards interest of E56,61,461/-. Due to this reasoning, the Assessing Officer disallowed proportionate interest of E26,52,520/-. The claim of the assessee before us is that there was enough interest free funds available with the assessee to make advance to M/s. S.P. Apparels Limited and also to make investment in shares. Further, the facts shows that the assessee has incurred interest expenditure of E56,61,461/-. In our opinion, if the interest free funds are available with the assessee, it is the duty of the assessee to establish the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concern free of interest. This would result in not presenting 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. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for nonbusiness purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 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 concern on interest free basis are to be disallowed. 12. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t paid on the capital borrowing to the extent of the amounts diverted can no longer be an item of expenditure which can be claimed for deduction as an item of business expenditure. If the amounts diverted was subsequently brought back into the business and utilised in the business, the assessee could thereafter claim the interest paid as a deduction. But so long as the diversion continues the assessee would be disentitled. 14.1 In the case of Commissioner of Income-Tax v. M.S. Venkateswaran 222 ITR 163, the Madras High Court accepting the plea of the Revenue held as under (Page 168): The facts on record would clearly go to show that the father of the assessee had definitely diverted a portion of the borrowed capital for his own purposes and not for business purposes. In such a case, it cannot be said that there can be a presumption that a part of the capital would have been diverted for non-business purposes not from the borrowed capital but from the capital contributed by the assessee. In the absence of such an element in the facts arising in the present case, we are unable to subscribe to the view of the Tribunal that the assessee is entitled to deduction under Section 36(1)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the nexus between the amount paid by way of advance to a sister concern and the fund available at the relevant time in the assessee's hands must be found out from the advances taken by the assessee. The onus to prove that it is entitled to (deduction) in this regard was on the assessee. It was to be proved that a bonafide loan had been granted in favour of a sister concern. It was, therefore, its duty to place requisite materials on record''. 14.5 This aspect of the matter has also been considered in the case of CIT v. H.R. Sugar Factory Pvt. Ltd., 187 ITR 363, wherein the Allahabad High Court held (page 370): ''The court cannot shut its eyes to realities. What has actually happened is visible to the naked eye. The assessee, a private limited company closely held by three family groups, is made to lend huge amounts (up to 23 lakhs of rupees as per the compromise arrived at between the assessee and the directors/ shareholders in the civil suits referred to above) at a very low rate of interest and the entire difference of interest is being charged to the assessee. The assessee is not a finance company. It is engaged in the manufacture of sugar. No business purpose of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax, and Phaltan Sugar Works Ltd. v. Commissioner of Income-Tax 215 ITR 582 (Bom). 14.10 In the case of Elmer Havell Electrics and Ors. v. Commissioner of Income-Tax and Anr. 277 ITR 549, the Delhi High Court, while rejecting the appeal of the assessee on the issue of disallowance of interest on interest free advances made to sister concern, observed that the assessee itself had taken loan with interest and had advanced funds by diversion or otherwise to its sister concern free of interest. Taking this and other findings by the Tribunal into consideration, the appeal was dismissed. 14.11 In Commissioner of Income Tax v. Sujanni Textiles (P) Ltd. , 225 ITR 560, the Madras High Court disallowed the interest on the borrowed capital to the extent the same was advanced to the Directors without interest. 14.12 In Indian Metals & Ferro Alloys Ltd. v. Commissioner of Income Tax (1992) 193 ITR 344, Orissa High Court held as under (page 348): ''The determinative question in a case of this nature is the source from which the assessee makes investments or advances. Where an assessee seeks to deduct certain items from his business profits, the onus of proving the same falls on him. The burde ..... X X X X Extracts X X X X X X X X Extracts X X X X
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