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The D.C.I.T., Spl. Range, The A.C.I.T. Patiala Versus Punjab Tractors Ltd.

Interest allowance under section 36(1)(iii) - whether the amount lent to SML by the assessee was on account of some business expediency? - Held that:- 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 the assessee had provided it assistance through these funds. Nowhere at any stage from the initiation of assessment proceedings, no allegation has been .....

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against revenue - ITA No. 1031/Chd/1997, ITA No.8/Chd/1998, ITA No.350/Chd/1998, ITA No. 200/Chd/1999, ITA No.603/Chd/2003 - Dated:- 4-4-2016 - Shri H. L. Karwa, Vice President And Ms. Rano Jain, Accountant Member For the Appellant : Shri Manoj Mishra, DR For the Respondent : None ORDER Per Rano Jain, A. M. This bunch of five appeals filed by the Revenue are directed against the separate orders of the learned Commissioner of Income Tax (Appeals), Patiala dated 13.8.1997, 24.10.1997, 9.1.1998, 1 .....

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riefly, the facts of the case are that the Assessing Officer made addition of an amount of ₹ 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 assesse .....

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d 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 assessee had not charged any interest on the amounts due from another concern, would not itself justify in making the addition on notional basis. As against this order the Department preferred an appeal before the Hon'ble High Court. The Hon'ble High Court vide ord .....

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fresh from the view of business expediency. The Assessing Officer sent a Remand Report dated 24.9.2009 to the I.T.A.T. During these remand proceedings, opportunity was given to the assessee who had duly filed submission together with evidences in this regard. After considering all this the Assessing Officer was of the opinion that there was no business expediency with the sister concern, SML, in lending interest free advances in the light of parameters laid down by the Hon'ble Supreme Court .....

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prayed for confirmation of addition made under section 36(1)(iii) of the Act. 5. In these circumstances, the appeal was posted before us for hearing. On the date of hearing, none appeared on behalf of the assessee. The learned D.R. vehemently argued and made submissions on the basis of two Remand Reports filed by the Assessing Officer before the I.T.A.T. 6. We have heard the learned D.R., perused the findings of the authorities below and have taken into consideration all material available on re .....

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de 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 ₹ 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 tha .....

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n of material and saving of time were acquired through interaction with Mazda Japan. The understanding of Mazda DOL System led to savings in storage space reduction in working capital requirement resulting in lesser damages and better quality. Following the concept of Mazda 'First time right' after study, SML resulted into savings on account of losses rejection and lower work in progress. In view of all this, it was submitted that there was business expediency for lending money to SML. 6 .....

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23.9.2009. A statement of Shri Rihal was recorded by the Assessing Officer. As per the Assessing Officer, Shri Rihal reiterated the same contentions as stated by him in his affidavit dated 18.8.2009. Regarding copy of written undertaking, which was not readily available, it was stated that the Auditors' report for financial year 1991-92 at page No.24 clearly mention about this fact. Ledger account of SML to show the sales to SML was filed. The prospectus issued at the time of Public issue of .....

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dering all the abovesaid submissions and evidences, the Assessing Officer in his Remand Report dated 24.9.2009, filed before the I.T.A.T., opined that there was no business expediency with the sister concern in lending interest free 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 ab .....

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al 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 quantified in exact monetary terms. The deduction should be allowed e .....

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have to see the parameters laid down by the Hon'ble Supreme Court in the case of S.A.Builders (supra). The Hon'ble Supreme Court started with the provisions of section 36(I)(iii) of the Act, which state that "the amount of interest paid in respect of capital borrowed for the purposes of business or profession". The judgment of the Apex Court in the case of Madhav Prasad Jatia Vs. CIT (1979) 118 ITR 200 (SC) was analyzed by Lordships. In this judgment, the proposition laid down .....

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nce to another case of Atherton Vs. British Insulated & Helsby Cables Ltd. (1925) 10 TC 155, was also made for the proposition that in order to claim deduction, it is enough to show that money is expended, not out of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. Reference was also made to many other judgments of Hon'ble Apex Court as well as of various .....

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bviously 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, i .....

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t is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 28. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest-free loan to its sister-concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister- concern as a measure of commercial expediency." 14. From the above analysis, what we unde .....

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e, as described above. The first contention of the assessee was that it had to provide undertakings to the PFIs to provide funds to SML in case of project overruns or cash losses. The Assessing Officer in remand proceedings has repeatedly stated that the copy of written undertaking has not been filed before us. However, we observe that even if no such undertaking was given by the assessee, as laid down by the Hon'ble Supreme Court in the case of S.A. Builders (supra), even only if it is prov .....

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n given to All India Financial Institutions and/or Banks to procure funds for Swaraj Mazda Limited and Swaraj Engines Ltd. to meet the shortfall, if any, in financing the capital cost of the respective projects and/or working capital. (b) In accordance with the undertakings given to All India Financial Institutions and/or Banks in connection with Rupee Loans sanctioned to Swaraj Mazda Limited and Swaraj Engines Limited, the Company has agreed not to dispose off its shareholding in the said Compa .....

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