TMI Blog2016 (6) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company and dumping the interest burden on it. Though, the revenue cannot dictate how the business houses should behave, but onus is on them to explain the circumstances, more so when the assessee wants to claim the expenditure attached to it. Therefore we hold that the assessee has failed to establish any commercial expediency for advancing interest-free loans to sister concerns. Under the above facts and circumstances, the disallowance made by the Assessing Officer was rightly confirmed by the CIT(A) and thus, we uphold the order of the ld. CIT(A) and dismiss the ground raised by the assessee.- Decided against assessee. - I.T.A.No.1145/Mds/2014 - - - Dated:- 15-6-2016 - Shri Chandra Poojari, Accountant Member And Shri Duvvuru RL Reddy, Judicial Member For The Appellant : Shri B. Ramakrishnan, C.A. For The Respondent : Shri A.V. Sreekanth, JCIT ORDER PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) I, Chennai, dated 18.03.2014 relevant to the assessment year 2008-09. The only ground raised in the appeal of the assessee is with regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the business of Civil Construction. During the financial year 2007-08, the assessee borrowed funds for business purpose from financial institutions and others and incurred interest expenditure of ₹ 61,77,008/- on the above loans. 2. During the same year, the appellant out of business Interest, made interest free advance to its sister concerns and as on 31.3.2008, the total value of advances was as under: Particulars Advance L T Arun Excello Really Pvt. 2,46,00,00 Arun Excello Foundations Pvt. 4,23.21,17 Anrn Fabricators 1,25,35,48 Arun Constructions 30,36,839 Total 18,24,93,4 3. The AO contended that the assessee advanced the borrowed funds to the sister concerns (without interest) and hence disallowed the entire Interest on borrowed funds amounting to Rs. 61,77,008/- claimed u/s.36(1)(iii). 4. It is submitted that the appellant had made the above advances made to the sister concerns out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7;.18,24,93,492/- to its sister concerns. The assessee claimed that there was no direct nexus between the borrowed funds and the investment in the sister concerns and the investment made in the sister concerns were only out of the share capital and reserves and surpluses. The Assessing Officer has observed that since the assessee has not utilized the loans obtained for its business purposes wholly and exclusively, in view of the section 36(1)(iii) of the Act, he disallowed the entire interest paid by the assessee. After considering the detailed submissions of the AR of the assessee, the ld. CIT(A) has observed as under: 4.2 I have carefully considered the facts of the case and the submissions made by the Id. AR. I have also gone through the decisions relied on by the Id.AR and the AO. The AO has disallowed the entire interest since the amount advanced to sister concern is more than the amount borrowed. She relied on the decision of Abhishek Industries Ltd (supra). The main reason for disallowance was that the appellant has diverted the fund without charging the interest whereas on the other hand it paid interest on its borrowings. She felt that, had the amount not been diver ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o when it has an interest burden of ₹ 61,77,008 on such borrowals. Further, the whole funds will be in a common kitty and the appellant can not substantiate this fact as it can not separate clearly what funds have gone and where. 4.2.3 With regard to the purpose of loans taken, it is noticed from the schedules of the Balance Sheet that some of the loans were meant for vehicles and some are without any specific purpose, especially with regard to unsecured loans. It was also noticed that some of the loans borrowed from banks were for purchase of motor vehicles. The appellant could not explain why it has not bought them from own funds. Whether own funds were not available at that point of time due to diversion of funds was also not explained. Therefore, the argument of the AO is well taken as the appellant would not have gone for borrowings had the funds were not diverted to sister concerns. 4.2.4 With regard to commercial expediency as was stated in the case of S.A. Builders(supra), the !d.AR has submitted in its written submissions that advance to L T Arun Excello Realty Pvt. Ltd. was made for the purpose of purchase of land and to meet the supply cost for constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sister concerns without interest was on the revenue was not correct. Section 36(1)(iii) provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of account, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, still there was justification to advance loans to sister concerns for non-business purposes without any Interest and, accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. Even the plea of nexus of loans raised by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther individuals, I confirm the addition made by the AO. The ground is dismissed. 6. From the above findings of the ld. CIT(A), it is very clear that interest paid on borrowed capital will be allowed as deduction only if the capital was used for the purpose of business. If it is used for a purpose other than that of its own business, then interest to that extent to which capital was so used, will not be allowed. So far as commercial expediency is concerned, as stated in the case of S.A. Builders(supra), the advance to L T Arun Excello Realty Pvt. Ltd. was made for the purpose of purchase of land and to meet the supply cost for constructions; to Arun Excello Foundations Pvt. Ltd and Arun Fabricators it was entirely to meet the expenses in the ordinary course of business. Similarly in the case of Arun Constructions, there has been no outflow of funds from the assessee to Arun Constructions. Arun Constructions was paid by Marg Constructions Ltd instead of paying the appellant. Hence, the assessee has debited the account of Arun Constructions in its books and treated the same as advances made. It is clear from the above that in none of the above cases the assessee company is f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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