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TMI Blog2016 (5) TMI 918X X X X Extracts X X X X X X X X Extracts X X X X ..... are that the Assessing Officer made addition of an amount of Rs. 51,23,000/-, amongst other additions and disallowances on account of interest on borrowed funds lent to Swaraj Mazda Limited ( in short 'SML'), a sister concern of the assessee, under section 36(1)(iii) of the Income Tax Act, 1961 (in short 'the Act'), vide his order dated 26.12.1994. Before the CIT (Appeals), the assessee contested the said addition on two counts, viz., the assessee had not incurred any interest cost on the funds lent to SML and also the funds were lent out of commercial expediency. The CIT (Appeals), vide his order dated 13.8.1997, decided the issue in favour of the assessee. The CIT (Appeals) held that since there was no interest occurred on these outlays, the question of disallowance under section 36(1)(iii) of the Act does not arise. Further, it was also held by him that the interest paid on borrowed funds cannot be reduced if the lending was warranted by the business exigency. The Department went in appeal before the I.T.A.T. and the I.T.A.T. dismissed the appeal and decided the issue in favour of the assessee, vide order dated 4.8.2003. It was held that the fact that the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess expediency, so as to come under the ambit of interest allowance under section 36(1)(iii) of the Act. 7. In the remand proceedings, the assessee filed detailed submissions before the Assessing Officer vide its letter dated 18.8.2009, in order to prove the business expediency for lending money to SML. The main argument made by the assessee was that it had to provide written undertakings to the Public Financial Institute (PFI) that it would provide funds to SML against project overrun or cash losses. Since SML had accumulated losses to the tune of Rs. 11.52 crores upto the financial year 1991-92, the funds from assessee have to be given and taken back from time to time. Second argument was that since SML is a customer of PTL who supplies gears to SML, in order to given financial support to its customers is business prudence. Thirdly, it was stated that due to common enquity stakes in SML, the assessee's manufacturing team had open access to various manufacturing facilities and technical offices of Mazda Japan and their suppliers. Various other benefits arrived at because of connection with Mazda Japan were explained by the assessee. It was stated that culture of quality assur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advances in the light of parameters laid down by the Hon'ble Supreme Court in the case of S.A. Builders Pvt. Ltd. (supra). 9. On perusal of the said Remand Report, we see that this opinion of the Assessing Officer is formed on the basis of the fact that in the absence of the copy of such written undertaking, it cannot be said that the assessee was under any obligation to assist the SML financially. Secondly, as regards other benefits derived by the assessee from SML, it was stated that in the absence of any such corroborative evidence, the same is also not proved. 10. The assessee filed a rejoinder to this Remand Report vide its letter dated 6.10.2009 before the I.T.A.T., whereby a para-wise reply to the Remand Report dated 24.9.2009 was given. On perusal of the said letter, we find that in substance, two submissions have been made. Firstly, it was stated that the assessee has provided financial assistance to SML, in its time of need is corroborated by mentioning of the said fact in directors' report of SML for financial year 1990-91. Secondly, as regards other benefits, it was stated that direct and indirect benefits from relationship with subsidiary company need not be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." 13. Before arriving at the above conclusion, the Hon'ble Court has also given two more important findings which we would like to quote here : "23. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commerc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng in the said Companies." 16. Further, perusal of the directors' report of SML, for financial year 1990-91, under the heading 'Finance', it is stated as under : "Despite internal cash generations rising to Rs. 34.5 mil. Company's financial position remained tight for most of the year. Apart from a fluctuating pattern of sales, issues were compounded by substantial increase in working capital needs because of large margins imposed by Reserve Bank of India on imports. Internal generations were also applied towards re-payment of funded interest to the Financial Institutions amounting to Rs. 19.2 mil. Timely and full financial support from Punjab Tractors Ltd. was a major help in tiding over the stiff extra cash requirements. Tight-rein policy pursued over the past several years in respect of capital spending was continued this year as well. Outlays at Rs. 5.8 mil. were entirely on tooling and other areas related to indigenization." 17. From the perusal of above, no doubt remains in our mind that the amount was given to SML by the assessee, interest free, out of business expediency only. The company was going through a bad phase of poor financial health and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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