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TMI Blog2015 (11) TMI 342X X X X Extracts X X X X X X X X Extracts X X X X ..... the facts and circumstances of the case, while arising at the 'chargeable income' u/s 29 considering the provisions of Section 36(1)(iii), the disallowance of interest paid to banks is mandatory on the true and correct interpretation of the words 'for the purpose of business?" 3. Section 36(1)(iii) reads as under:- "36. Other deductions.-(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- ...... .......... .......... ....... (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided 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 capitalised 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. Explanation.-Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntention that the funds were used by the sister concern for the purpose of its business. The CIT (Appeals) also rightly held that the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another, (2007) 288 ITR 1 (SC) supported the appellant's case. The only adverse finding by the Assessing Officer was that the advance does not appear to be for business purposes "as the assessee company has no business dealing with the company M/s Kolkata Hotel". This view as we will demonstrate is not sustainable. The CIT (Appeals), therefore, rightly came to the conclusion that the appellant advanced the amount to its sister concern on account of commercial expediency and that the sister concern used the same for the purpose of its business. It was also found that the advance of about Rs. 10.29 crores to the appellant's sister concern was covered by the capital and interest free reserve available with the appellant. Accordingly, supported by precedent, the CIT (Appeals) justifiably presumed that the investment would be out of the interest free funds generated or available with the appellant. 6. The Tribunal rejected the appellant's case and set aside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that by a separate agreement the IHCL had also agreed to sell its 10% share holding to the said purchaser. Further, the purchasers had agreed to make an offer to the residual share holders to purchase their shares. The term "business" was defined in Article-1 to include the entire business of the said unit of ITDC including not merely the various assets but all liabilities and debts as well. Article- 3 reads as follows:- "Article 3 Closing date mechanism 3.1 Deposit Amount (a) The Parties recognize that the Purchaser has furnished to the Government a bank guarantee ("Bank Guarantee") in the form and substance acceptable to the Government covering an amount of Rs. 5 Crores (Rupees Five Crores only) (the "Earnest Amount"). ......... ........... ........... ........... 3.3 On the Closing Date, the following actions shall be taken. b) Simultaneous with the actions envisaged at 3.3(a) above, the Purchaser shall pay the Consideration after due adjustment with the Earnest Amount in the following manner: (i) Rs. 9,33,42,000/- (Rupees Nine Crores Thirty Three Lakhs Forty Two Thousand Only) by way of demand draft drawn in favour of India Tourism Development Corporation Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity, electricity charges and lease rent. 9. Whether the amount of Rs. 10.29 crores was debited to the account of the sister concern in respect of the payment made under Clause 3.3(b) of Article 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Jain rightly pointed out, in the memorandum of appeal, the appellant expressly stated that it had advanced the amount of about Rs. 10.29 crores to its sister concern as a measure of commercial expediency for the purpose of business. In the written submissions, the appellant inter alia stated that the appellant and the sister company were in the hotel business; that the Board of Directors of the two companies was the same; that the appellant purchased th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eals). 13. The commercial expediency in advancing the amount is established beyond doubt. The appellant owns about 89% of the equity capital. A Division Bench of this Court in CIT vs. Marudhar Chemicals & Pharmaceuticals (P) Ltd., (2009) 319 ITR 75 (P&H) held:- "15. Section 36(1)(iii) of the Act provides that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income under section 28 of the Act. The expression "for the purpose of business" has been held to be wider in scope than the expression "for the purpose of earning income, profits or gains". It has been held in S.A. Builders Ltd.'s case (supra) that when the assessee borrowed the fund from the bank and lent some of it to its sister concern as an interest free loan, then the real test to allow the interest as deduction under section 36(1)(iii) of the Act is whether this was done as a measure of commercial expediency. It has been held that in order to claim a deduction, it is enough to show that the money is expended, not on necessity and with a view to direct and immediate benefit, but voluntarily and on account ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this case, the financial assistance was not only prudent but of utmost necessity for without it the subsidiary would have suffered grave financial prejudice. 15. The Tribunal, therefore, erred in coming to the conclusion that the CIT (Appeals) had not considered the judgment of the Supreme Court in the correct perspective. With respect, we find that the Tribunal has not even analyzed the judgment of the Supreme Court in S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and another (supra). 16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs. 10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. 17. The Assessing Officer's view that the advance was not for business purposes as the appellant had no business dealing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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