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TMI Blog2011 (2) TMI 1488X X X X Extracts X X X X X X X X Extracts X X X X ..... l was not borrowed for the purposes of acquisition of new assets for which the interest has been disallowed by the assessing authority." "b) That the inference drawn by the Ld. CIT(A) that 60% of the funds employed for making the above referred advance emanated out of own funds and the remaining 40% emanated out of borrowed funds is contrary to fats and bad in law." "2 That alternatively and without prejudice to the above assessee hereby disputes quantum of the addition." 2. The assessee-company is engaged in the business of running hospitals under the brand name "Metro". The assessee filed its return of income for the year under appeal on 30.11.2006 returning total income at ₹ 4,69,80,320/-. The return was processed u/s 143(1) of Income-tax Act. It was subsequently selected for scrutiny. During the course of scrutiny, the AO noticed that the assessee has taken secured loans amounting to ₹ 23.91 crores on which interest amounting to ₹ 1,37,61, 301/- has been paid. The AO proceeded to examine the utilization of funds during the year under appeal and noticed that the assessee has given interest-free advance amounting to ₹ 1,23,57,172/- to M/s Metro Speci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessment order: "The assessee has also given an advance of ₹ 1,23,57,172/- to its associate concern M/s Metro Specialties Ltd and in its reply dated 15.12.2008 it has been simply stated that the same has been given out of commerciality. The assessee in its reply dated 15.12.2008 has also relied upon the order of Hon'ble Supreme Court in the case of M/s S.A. Builders, 288 ITR 1 where the Hon'ble Supreme Court had held that if the assessee had advanced interest free loan to its sister concern or its subsidiary as a measure of its commercial expediency, what is to be seen is 'business purpose' and what the sister concern did with the money advanced. In the present case, the assessee has failed to explain the exact nature/purpose of business expediency and as to how the funds were used by M/s Metro Speciality Hospital Ltd. In fact as per copy of balance sheet of this company furnished by the assessee, an amount of ₹ 1,11,20,000/- has been invested by it in mutual funds as on 31.3.2006 and amount of ₹ 1,24,68,547/- has been invested for the purchase of some land. There are no operational receipts of the company as on 31.3.2006 and there is only a short term c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... talized. In Para 50, the Ld. CIT(A) went on to observe that: "50 The assessee is having a common pool of funds. The assessee has also utilized funds for the purpose of business. To determine the component of interest on a fair basis, the quantum of borrowed funds for the purpose of advances for acquisition of asset, the ratio of 7:3 can be taken for capitalization of interest. That means, the assessee has utilized own funds and also utilized borrowed funds for the purpose of acquisition of assets. The amount which is to be capitalized is determined as under: Amount to be capitalized: (7/10)(x) ₹ 24,21,587/-= ₹ 16,95,110/- The assessee gets the relief of ₹ 24,21,587/- (-) ₹ 16,95,110/- = ₹ 7,26,477/- " 22 Hon'ble ITAT Bench in Appeal No. 1057/Chandigarh/2008 in assessee's own case for Assessment Year 2005-06 held as under: "The nexus theory has been disapproved by the Hon'ble jurisdictional High Court. Therefore, the plea taken by the assessee to come out of the proviso to section 36(1)(iii) of the Act, on the basis of the nexus theory, in our view, is liable to be decided against the assessee following the judgment of Hon'ble Punjab & H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the assessee. 8. In reply, the ld. DR supported the suggestions made by the learned authorized representative for the assessee. 9. We have heard both the parties. The Hon'ble jurisdictional High Court has held in Abhishek Industries (supra) that the Tribunal being the last fact finding authority, a higher responsibility is cast by the Legislature on it to decide the cases by recoding complete facts and on the basis of the law laid down by the Supreme Court/High Court and not what the Tribunal decides on the particular issue. Keeping in view the aforesaid observations, it is considered necessary to briefly touch upon the relevant facts and the law applicable thereto. 10. Section 36(1)(iii) allows deduction of the amount of interest paid in respect of capital borrowed for the purposes of business or profession. However, proviso to clause (iii) of sub-section (1) of section 36 (inserted with effect from 1.4.2004 by the Finance Act 2003) disallows deduction in respect of any amount of interest paid, in respect of capital borrowed for acquisition of an asset for extension of business or profession (whether capitalized in the books or not). 11. The assessee has raised un-secured lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards sister concerns free of interest. This would result in not presenting the true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction u/s 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concerns on interest free basis are to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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