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2016 (2) TMI 632 - GUJARAT HIGH COURT

2016 (2) TMI 632 - GUJARAT HIGH COURT - TMI - Addition on interest paid on loans - loan advanced to the several companies at lower rate of interest - Held that:- We do not find that the Assessing Officer applied the principles analogous to Section 40A(2) of the Act by holding that the interest paid by the assessee was excessive. In fact the Assessing Officer applied the deduction to the extent the rate of interest at which the advances were made by the assessee. However, the action of the assess .....

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FOR THE OPPONENT : RULE SERVED BY DS ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) (1) The appeal is filed by the revenue challenging judgment of the Income Tax Appellate Tribunal dated 31.07.2006. (2) After hearing the learned Senior Counsel for the revenue, we modify the substantial question of law for the purpose of this tax appeal as under: Whether on the facts and circumstances of the case, the Appellate Tribunal was right in deleting the additions made by the Assessing Officer a .....

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examined by the Assessing Officer during such assessment was with respect to the assessee's claim of deduction of interest under Section 36(1)(iii) of the Income Tax Act, 1961, ('the Act' for short). The Assessing Officer noticed that during the year under consideration, the assessee had borrowed huge amounts from various group companies and had, in turn, advanced large amounts to certain companies. On the interest paid by the assessee on the borrowings so made, the claim of deducti .....

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ff) from various group companies, out of which a sum of ₹ 16.88 crores (rounded off) was advanced to other companies. (4) The Assessing Officer noted that out of the said sum of ₹ 16.88 crores, a sum of ₹ 15.80 crores was lent to various companies having a common address at 77, Kali Javi Thavi, Jammu. The assessee pointed out that when such advances were made the assessee company had no connection with the said companies, however, conceded that later on these companies had merg .....

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e conclusion that the assessee company had merely acted as a conduit and there was no business expediency on the part of the assessee company in making such advances at a lower interest rate. He therefore concluded that the money borrowed by the assessee company had not been utilized for the purpose of assessee's business. The Assessing Officer disallowed the differential portion of interest and added a sum of ₹ 91.41 lacs (rounded off), against such disallowance making the following o .....

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mpany has merely acted as a conduit as discussed later and in any case no business expendency or reasons could be advanced by the assessee for borrowing at higher rate and lending the same amount on the same day at a lower rate. Further also the nexus regarding the borrowing of funds at a higher rate and lending of the same on the same date itself to another interested parties / group concerns at a lower rate has clearly been established in the case of the assessee. Therefore, on the facts and c .....

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es of the assessee's business and assessee company has in a way acted as conduit by advancing of loans to other companies as becomes clear from AnnexA. Hence, the said case is not applicable to the facts & circumstances of the case of the assessee. (6) The assessee carried the matter in appeal before the CIT (Appeals). CIT (Appeals) concurred with the view of the Assessing Officer and rejected the appeal in the following terms: 12. After going through the facts of this issue, I am of the .....

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th on the same date. But the rates of interest are unfairly disproportionate for which there is no justification. One can understand advancing of money at lower rate if the same is for the purposes of assessee's business. But in the present case, the moneys are not borrowed for assessee's business but these are borrowed for some body else's benefits. In the present case, the Assessing Officer has been able to establish that the moneys have not been really utilized for the purpose of .....

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he appellate order. If one care to go through the case law cited, no doubt remains in any body's mind as to what the final finding should be on an issue like this. The Assessing Officer has done well by preparing a complete chart in this regard. In the chart all relevant details find place. A mere glance at the chart clarifies the whole proposition by bringing out on record the fact that the moneys have not been really used for the purposes of business and the claim to the extent disallowed .....

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wed is used for a purpose other than that of the business then the assessee's claim for interest could be disallowed. The Tribunal recorded that the Assessing Officer had in fact allowed part of the interest claimed by the assessee. Once the Assessing Officer allowed such deduction on the only funds so borrowed, the Assessing Officer could not have made disallowance of part of the interest applying the principles of Section 40A(2) of the Act. The Tribunal observed as under: 5.1 In view of th .....

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funds so borrowed. The word for the purpose of the business is wider in scope than the expression 'for the purpose of earning income'. Thus, the interest paid on borrowed capital will be allowed as deduction only if the capital was borrowed and used for the purpose of business and if it is used for the purpose other than the business then the interest to the extent to which the capital was so used will not be allowed, The Assessing Officer has allowed the deduction of the interest on al .....

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e Assessing Officer has accepted that the assessee has borrowed the funds for the purpose of the business. Under the section, in our opinion, the Assessing Officer does not have any power to decide the rate of interest at which the deduction should be allowed to the assessee. Once he has accepted that the assessee has borrowed the funds for the purpose of the business. The Assessing Officer cannot allow part of the interest incurred by the assessee on the capital borrowed. The Assessing Officer .....

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t value of the goods, services or facilities for which the payment is made. For this the finding is to be given that the assessee has incurred the expenditure on the persons as fall within Clause (b) of Section 40A (2). In this case no such finding has been mentioned by the Assessing Officer that the assessee has borrowed the funds from the person as referred to in Clause (b) of Section 40A(2). The Assessing Officer has disallowed the expenditure on the basis that the assessee has borrowed the f .....

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a much lower rate of interest. Nothing was brought on record to suggest that such advances were made for the purpose of business. No business expediency was demonstrated for making such advances at a concessional rate of interest. He drew our attention of the decision of the Supreme Court in the case of S.A. Builders Ltd. Vs. Commissioner of IncomeTax (Appeals) & Anr., [2007] 288 ITR 1 (SC) to point out that in such decision the Supreme Court while allowing the claim of the assessee of dedu .....

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ection 36(1)(iii) of the Act. As is well known, Section 36(1)(iii) of the Act permits deduction in computing income of the assessee of the amount of interest paid in capital borrowed for the purpose of business or profession. (11) In this context the Supreme Court in the case of S.A. Builders Ltd. (supra) had reiterated that the expression for the purpose of business occurring in the said provision is wider in scope than the expression for the purpose of earning profits . Supreme Court opined th .....

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diency, in the said case the Supreme Court made it clear that it is not as if in every case interest on borrowed loan has to be allowed if it is made to a sister concern and it would depend on the facts and circumstances of each case. If such amount is utilized by the directors of the sister concern for their personal benefit, obviously it cannot be said that money was advanced for commercial expediency. (12) Two things thus become clear - first that the expression for the purpose of business oc .....

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ed that what has to be seen is whether transfer of funds to a sister concern on the ground of commercial expediency. (13) The facts in this case are some what peculiar. As recorded by the Assessing Officer and which facts are not disturbed by the Tribunal, the assessee, during year under consideration, borrowed ₹ 25.30 crores from various group companies at a higher interest rate, in most cases @ 21%. Amount of ₹ 16.88 crores out of such funds was advanced to the various companies, m .....

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s at a lower interest rate than the rate at which the assessee company had borrowed the money. It is undoubtedly true that Section 36(1)(iii) of the Act permits deduction of interest paid on capital borrowed for the purpose of business or profession and the expression for the purpose of business is seen wider than the expression for the purpose of earning income . Nevertheless the assessee had to point out the business expediency which prompted the assessee to make advances at a lower rate of in .....

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