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2015 (11) TMI 1314 - SUPREME COURT OF INDIA

2015 (11) TMI 1314 - SUPREME COURT OF INDIA - [2015] 379 ITR 347 (SC) - Deduction of interest paid on borrowed sums from Bank under the provisions of Section 36(1)(iii) disallowed - diversion of loan - loan given to Directors and Sister concern - Held that:- A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well .....

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nditure.We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced.

It is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. See 'S.A. Builders Ltd. v. Commissioner of Income Tax [2006 (12) .....

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tax.

Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. - Decided in favour of assessee. - CIVIL APPEAL .....

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of the Income Tax Act (hereinafter referred to as 'Act'). The aforesaid deduction was disallowed by the Assessing Officer vide his Assesssment Order dated 26.03.1991 on the following two points:- (1) The assessee had advanced a sum of ₹ 1,16,26,128/- to its subsidiary company known as M/s. Hero Fibers Limited and this advance did not carry any interest. According to the Assessing Officer, the assessee had borrowed the money from the banks and paid interest thereupon. Deduction was .....

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t at the rate of 10 per cent, whereas interest payable on the money taken by way of loans by the assessee from the Banks carried interest at the rate of 18 per cent. On that basis, the Assessing Officer held that charging of interest at the rate of 10 per cent from the above mentioned persons and paying interest at much more rate, i.e., at the rate of 18 per cent on the money borrowed by the assessee cannot be treated for the purposes of business of the assessee. We may note here that the assess .....

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deduction was claimed, on the facts of this case, was for business purposes and, therefore, the entire interest paid by the assessee should have been allowed as business expenditure. It would be pertinent to mention that insofar as the advance given to M/s. Hero Fibres Limited is concerned, the case put up by the assessee even before the Assessing Officer was that it had given an undertaking to the financial institutions to provide M/s. Hero Fibres Limited the additional margin to meet the work .....

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t became possible for the financial institutions to advance that loan to M/s. Hero Fibres Limited because of the aforesaid undertaking given by the assessee. It was also mentioned that no interest was to be paid on this loan unless dividend is paid by that company. On that basis, it was argued that the amount was advanced by way of business expediency. CIT (Appeals) accepted the aforesaid plea of the assessee. Insofar as the loan given to its own Directors is concerned at the rate of 10 per cent .....

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id bank account. The aforesaid explanation was also accepted by the CIT (Appeal) arriving at a finding of fact that the loan given to the Directors was not from the borrowed funds. Therefore, interest liability of the assessee towards the Bank on the borrowing which was taken by the assessee had no bearings because otherwise, the assessee had sufficient funds of its own which the assessee could have advanced and it was for the Assessing Officer to establish the nexus between the borrowings and a .....

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High Court vide impugned judgment dated 06.12.2006. Challenging that judgment, special leave petition was filed in which leave was granted and that is how the present appeal comes up for hearing. A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of .....

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w and cannot be countenanced. Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of 'S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another' [2007 (288) ITR 1 (SC)]. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner:- "26. The expression "commercial expediency" is an expression of wide .....

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ould not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case .....

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e expression "for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc." In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.' [2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need .....

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