TMI Blog2019 (2) TMI 1912X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue is directed against the order dated 20th January, 2016 of the CIT(A)-7, New Delhi, relating to assessment year 2012-13. 2. The facts of the case, in brief, are that the assessee is a company engaged in the business of transmission of electricity. It filed its return of income declaring total income of ₹ 28,76,36,810/-. Subsequently, the assessee filed its revised return on 28th September, 2012 declaring nil income after claiming unabsorbed depreciation. The case was selected for scrutiny and notices u/s 143(2)/142(1) were issued. The Assessing Officer, during the course of assessment proceedings, asked the assessee to explain the claim of deduction u/s 36(1)(iii) on account of interest and to furnish the information regarding details of investments made as on 31.03.2011 and 31.03.2012 amounting to ₹ 1655.62 lakhs and ₹ 3210.00 lakhs respectively. From the details furnished by the assessee, the Assessing Officer noted that the average investment worked out to ₹ 2,432.81 lakhs. However, no income was generated on these investments although the assessee has incurred expenses on account of administration and other costs and paid substantial intere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore the CIT(A), it was argued that under identical circumstances the CIT(A) in assessee s own case for assessment years 2007-08 and 2010-11 has deleted such disallowances. It was argued that the investments in mutual funds and FDRs were from own funds and not from any borrowed funds. Relying on various decisions including the decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utility Power Ltd., 313 ITR 340 (Bom), it was argued that if there are funds available with the assessee in the form of overdraft/loans then presumption would arise that investment is out of interest free funds generated or available with the company, if interest free funds were sufficient to make investment. It was substantiated before the CIT(A) that the own capital and free reserves at ₹ 50,583.66 lakhs as on 31.03.2012 is much higher than the total investment of ₹ 12,924.00 lakhs as on 31.03.2012. The assessee further argued that the investments in FDRs, etc. should be viewed from the point of view of commercial expediency. Relying on various decisions, it was argued that no disallowance u/s 36(1)(iii) of the IT Act is called for. The assessee, relying on various de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt to meet the investment. The judgment of S A Builders Ltd. v CIT held that what is relevant is whether the amount was advanced as a measure of commercial expediency. The judgment of the Hon 'ble Delhi High Court in the case of CIT v Dalmia Cement Ltd. has held that it should be established that there was nexus between the expenditure and purpose of the business. 6.5. As per section 36(l)(iii) the clause envisages the fulfillment, of three conditions before interest can be allowed as a deduction: (1) There should a borrowing; (2) Capital must have been borrowed for business purposes; and (3) Interest should have been paid or payable in respectthereof. 6.6. Borrowal implies a consensual act: The word 'borrow' has not been defined in the statute and, therefore, its dictionary meaning has to be looked up. The meaning of the word 'borrow' as given in the Shorter Oxford Dictionary is to take (a thing) on security given for its safe return. Since borrowing implies a consensual act by a debtors receiving money from a creditor, it would not cover a case of any and every liability. Borrowing money and payment or interest is a mere commercial transaction. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h. It may have been paid by way of adjustment in accounts by any equivalent mode when the accounts are maintained on the mercantile basis. Interest on borrowed capital is allowable under this clause. 6.10 The issue whether borrowed capital had been actually used for business is one relating to facts and does not give rise to a question of law. Even if it were a question of law, it may not give rise to a substantial question of law where the appellant agrees to pay interest on loan originally treated as interest free. The inference that borrowing is for non-business purposes on the particular facts of the case may be a question of fact. But it may give rise to a question of law where the inference does not follow the facts of the case. 6.11 It is quite apparent that the appellant is not incurring any such expenditure which is not a business expenditure. All expenditure has been incurred for the purpose of business. The appellant had borrowed funds which was for business purposes and was paying interest on these funds. In view thereof, the addition of ₹ 6,45,21,521/- is deleted. The ground of appeal is ruled in favour of the appellant. 3.4. Since the facts are simila ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioned earlier, the Ld. DR did not dispute the facts contended by the Ld. Counsel for assessee. The relevant facts are not in dispute. It is not in dispute that the investments in mutual funds had not started till the time, the assessee started earning operating income from transmission of electricity. It is also not in dispute that the borrowed funds were entirely used by the assessee for investment in fixed assets for the purposes of business. It is further not in dispute that the assessee had adequate interest free funds of its own for making investments in mutual funds. It is, furthermore, not in dispute that there were contractual restrictions imposed on assessee in respect of utilization of borrowed funds; and also, the assessee was liable for payment of substantial amounts of liquidation damages/pre-payment charges in case the assessee made pre-payment of loan repayments. Thus, it is also not in dispute that due to contractual restrictions and liquidation damages/pre-payment charges, as aforesaid; it was neither prudent for the assessee to divert any part of borrowed funds for non-business purposes; nor was it prudent to make pre-payment of loan repayments even if the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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