TMI Blog2016 (2) TMI 632X X X X Extracts X X X X X X X X Extracts X X X X ..... ) (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 and confirmed by the CIT (Appeals) towards the interest paid on loans which, in turn, were advanced to the several companies at lower rate of interest? (3) The respondent assessee is a company registered under the Companies Act, 1956, and was engaged in the business of trading in fabrics as well as shares and securities. For the Assessment Year 199596 the assessee company had filed its return of income declaring loss of ₹ 4,80,562/. The return was processed under scrutiny. One of the issues 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 consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T Vs. Pudukottai Co. Pvt. Ltd. (84 ITR 788) have been rendered in the context of the Indian Income Tax, 1922. Further also the facts and circumstances of the case in those cases were entirely different in as much as the amount borrowed and not been lend to any interested parties as is clearly the case of the assessee. The assessee company 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 circumstances of the case the assessee the above quoted judgments are not applicable to the case of the assessee. 5.10 Still further the reliance of the assessee in the case of Addl. CIT Vs. Laxmi Agency Pvt. Ltd. (supra) is misplaced in the sense that what the Hon'ble Court had held in that case was that the monies should be utilised for the purposes of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 by the Assessing Officer is proper. (7) The assessee carried the matter in further appeal before the Income Tax Appellate Tribunal. The Tribunal allowed the assessee's appeal and reversed the decisions of the Assessing Officer as well as the CIT (Appeals). The Tribunal observed that expression for the purpose of the business used in Section 36(1) (iii) of the Act is wider in scope than the expression for the purpose of earning income . In the opinion of the Tribunal only if the capital borrowed 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 Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y person referred to any clause (b) of Section 40A(2) and the Assessing Officer is of the opinion that the expenditure so incurred is more than the fair market 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 funds at a higher rate while the assessee has advanced the money to its group concerns at a lower rate of interest. The provisions of Section 40A(2) are also not applicable in this case. (8) Learned Senior Counsel for the revenue submitted that the Tribunal has committed serious error in reversing the decisions of the revenue authorities. The facts of the present case were eloquent. The assessee had borrowed funds at a higher rate of interest and advanced the very same funds to other companies at a much lower rate of interest. Nothin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s become clear first that the expression for the purpose of business occurring in Section 36(1)(iii) of the Act has wider import than the expression for the purpose of earning income. This is settled since long. The second aspect is that in S.A. Builders Ltd. (supra) the Supreme Court had applied the principles of commercial expediency in judging the claim of interest. This was made in the background of the interest borrowing funds being diverted by the assessee to its sister concern without charging interest. It was in this background that the Supreme Court observed 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, mostly @ 14% interest. In many cases funds borrowed on the same day were used for making advances. Out of advances of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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