TMI Blog2015 (9) TMI 896X X X X Extracts X X X X X X X X Extracts X X X X ..... nrelated with business of an assessee.In the case before us,the assessee has done the same thing.It wants to shift the burden of its generosity in form of claiming an untenable claim.In our opinion there was no commercial expediency in the transactions entered in to by the assessee i.e. non charging of interest from WCPL,PBIPL and others was necessitated by any business consideration. The assessee had failed to establish existence of commercial expediency. The FAA has given a categorical finding of fact that there was no direct nexus between the borrowings of the funds and diversion thereof for non-business purposes. He had dealt with each and every of the four parties to whom loans were advanced and had given a categorical finding of fact that the transactions in question were not guided by commercial expediency.In our opinion,his order does not suffer from any legal or factual infirmity as far as first direction of the Tribunal in concerned. Considering the second direction of the Tribunal availability of funds has been discussed by the FAA. In our opinion,availability of funds from partners’ account has be seen in light of the principle laid down by the Hon’ble Apex Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the above loans and held that the same was disallowable from the interest expenditure. Accordingly,the disallowance was restricted to the extent of the interest debited, since the interest chargeable computed by the AO exceeded the interest expenditure. He disallowed interest of ₹ 86,80,915/vide order dated 28.02.2006. Aggrieved by this order, assessee had preferred an appeal before the First Appellate Authority(FAA),who,vide his order dated 10.07.2006 dismissed the assessee's appeal.The assessee challenged the order before the Tribunal.On 15.07.2011,while deciding the appeal no.5727/Mum/2006,the Tribunal held as under: 5. We have heard.the rival submissions. The learned counsel for the assessee submitted before us that funds were given to the sister concern purely out of commercial expediency. It was also submitted by him that the assessee had sufficient interest free funds; and therefore, it cannot be said that borrowed funds were utilized for giving interest free loans. In this regard, learned counsel for the assessee relied on the decision of Hon'ble Bombay High Court in the case of Reliance Power Utility, 312 ITR. With regard to commercial expediency of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e firm till 7thFebruary,that there was no provision for either paying interest on capital account or charging interest on debit balance of the partners. He directed the assessee to furnish the copy of the capital account of SPM and a copy of the partnership deed.It filed filed a copy of the capital accounts of the partners as on 31.03.2003,vide its letter dated 23.12.201. He found that SPM's capital account was squared up as on 31.03.2003.The AO held that sum of ₹ 63,09,174/was standing to debit of SPM in the books of the assessee as on 31.03.2009,that it represented the retired partner s capital account,that it was a loan account. He further observed that even if it was accepted that the said balance represented his capital account the assessee's contention that there was no provision for either paying interest on capital account or charging interest on debit balance of the partners was not correct in view of class VII of the deed of Partnership dated 07. 02.2003. He reproduced the clause that read as under: The partner shall be entitled to a simple interest @ 12% per annum or at such other rate as may be laid down in section 40(b) of the I. T. Act 1961 from time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t collect from the parties to whom the assessee advanced loans,that the reply of the assessee had been produced by the AO in the assessment order,that perusal of the reply submitted by it during the setaside proceedings revealed that interest was not be collected with regard to the amounts advanced to its associate/sister concerns as they were in not in sound financial conditions. He further held that that the fact of safeguarding the reputation of the partner by advancing loan to WCPL was not established,that it was not clear as to how advancing of loan was beneficial to the assesseefirm, that advancing interest free loans to WCPL was not beneficial to the business of the assessee,that the transaction lacked commercial expediency. Coming to amount of loan advanced to Priya Blue Industries(P) Ltd.(PBIPL)the FAA observed that the assessee argued that one of the partners of the assessee firm,Sanjay Mehta,was also one of the directors of PBIPL,that he was having differences with another partner,namely Umesh Mehta,that with much difficulty the principal amount could be collected,that the assessee had contended that had the assessee firm insisted for interest it would have adversely aff ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was benefited by not charging interest from them,that commercial expediency was not proved by the assessee, that the FAA had given up working of fund flow, that the assessee had not proved the onus cast upon it by the Tribunal on both the counts. 5. We have perused the material before us.We find that basic issues to be decided are as to whether assessee had advanced the amounts in question to its associate concerns namely WECL,PBIPL,SSC and SM free of interest out of commercial expediency, (ii) and, whether there were enough interest free surplus funds to advance the amounts,that the AO and the FAA, in the second round of litigation,deliberated upon both the aspects as directed by the Tribunal and held that claim made by the assessee had to be rejected. Before proceedings further we would like to mention certain principles governing the allowing/disallowing interest expenditure claimed by an assessee and same can be narrated as under: i. Section 36(1)(iii) of the Act provides for deduction of interest on loans raised for business purposes.Once an assessee claims deduction under the head interest paid in the books of account, the onus will be on him to satisfy the AO that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interestfree advance when the assessee 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 the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. vi. E quity and law are strangers to each other and on that count the provisions of law cannot be applied.The courts have also dealt with the argument of the assessee that the expenditure whether to incur or not it is upto the assessee to decide and it cannot be forced by the Revenue to dictate terms.It has been held that the assessee is absolutely free to decide its financial affairs to suit its business needs,but, the Revenue also had the responsibility to see that there is no revenue leakage, wrong or excess claim made by the assessee, that is precisely the purpose and intention of the legislature.Once the said principle is accepted then it has be held that if the assessee advances loans bearing interest to others without charging interest the AO is not unjustified in disallowing the same in absence of commercial ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the burden of its generosity in form of claiming an untenable claim.In our opinion there was no commercial expediency in the transactions entered in to by the assessee i.e. non charging of interest from WCPL,PBIPL and others was necessitated by any business consideration.In other words, the assessee had failed to establish existence of commercial expediency. The FAA has given a categorical finding of fact that there was no direct nexus between the borrowings of the funds and diversion thereof for nonbusiness purposes. He had dealt with each and every of the four parties to whom loans were advanced and had given a categorical finding of fact that the transactions in question were not guided by commercial expediency.In our opinion,his order does not suffer from any legal or factual infirmity as far as first direction of the Tribunal in concerned. Now we would take up the second direction of the Tribunal. Availability of funds has been discussed by the FAA.In our opinion,availability of funds from partners account has be seen in light of the principle laid down by the Hon ble Apex Court in the case of Reliance Utility (supra). For the limited purpose of calculation,we are remitt ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
