TMI Blog2022 (1) TMI 283X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has utilized the above interest bearing loans for other purposes by giving loans on interest free. The facts in the cases relied on by the assessee are that notional interest which was not charged by the assessee, but, the issue in the case under consideration is different that the AO has disallowed interest paid on borrowed funds but not on the notional interest income, which was to be received by the assessee. Assessee company is one of the group companies of M/s SCSL and the assessee had advanced to the tune of ₹ 80.78 crores to M/s SCSL. We find that M/s SCSL was involved in a big financial scandal by way of inflating the figures in the balance sheet due to which M/s SCSL involved in various court cases, which are pending. Genuineness of the amounts advanced to such group company by the assessee is doubtful. Therefore, the arguments advanced by the ld. AR of the assessee are not tenable or acceptable and, therefore, we set aside the order of the CIT(A) and restore that of the AO. Accordingly, the addition made by the AO is restricted to ₹ 11,03,57,441/- towards interest only as against the addition of ₹ 11,11,15,463/- made by the AO u/s 36(1)(iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... business. Assessee is having creditors for Rs. / 52.96 Crore. The Assessee advanced an amount of ₹ 80.78 Crore to SCSL on which interest of ₹ 14.54 crore was charged @ 18 percent and same was treated as income accrued under the head business of profession. 1. As per section 36(1)(iii) borrowed funds should be availed for the purpose of business or profession for claiming interest on borrowed fund. In this instant case assessee availed total loan fund amounting to ₹ 150.19 Crore and creditors fund of ₹ 52.96 for giving the advances amounting to ₹ 185.68 Crore to several companies/sister concern and remaining ₹ 17.47 crore for meeting the revenue expenditure. Hence assessee did not utilize to the tune of the borrowed funds for the purpose of business profession. 2. In the assessment order assessing officer charged interest of Rs: 14.54 Crore @18% on tire advances amounting to ₹ 80.78 crore extended to SCSL. But same was not charged on the balance advances of ₹ 104.90 crore to several companies (₹ 185.68 - ₹ 80.78 crore) . Assessee debited interest of ₹ 11.03 crore in the profit and loss account on the borrow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom business and profession, but it has taken term loan for the purpose of business but disbursed it as an unsecured interest free loan, but the interest paid of ₹ 11,11,15,463/ - on term loan has been claimed as expenditure in its P L a/c which is not permitted u/s 36 (1)(iii) of the I.T. Act. Hence, the total interest paid of ₹ 11,11,15,463/- has been disallowed as the assessee has advance the total term loan of ₹ 96,77,11,130/ - as unsecured interest free loan. 3. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A) and objected for the addition by contending as under before the CIT(A). 6.2 i) The addition is totally contrary to the facts and the reasons recorded for reopening the assessment. In the Course of assessment proceedings assessing officer issued a show cause notice dtd.20-12-2010 with reference to the amount of ₹ 80,78,OO,OOO/_ advanced to M/s. SCSL on which no interest was shown to have accrued or received. It was therefore proposed to estimate interest 18% of the said amount (This show cause notice was on page 51 of the paper books). ii) Appellant's reply to the show notice was submitted on 24-12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plained in details as above. Thus, the very basis or foundation for the disallowance is totally wrong. 4. After considering the submissions of the assessee, the CIT(A) deleted the addition of ₹ 11,11,15,463/- made by the AO u/s 36(1)(iii) by observing as under: 6.3 Perused the submissions of the appellant and the observations of the AO In assessment order, along with the decision of ITAT, on the similar Issues. As could be seen from the facts, the appellant company Is one of the group companies of M/s. Satyam computer Services Ltd (SCSL In snort), that had advanced certain amounts to M/s. SCSL and such principal amounts receivable for the year were quantified at ₹ 80.78 crores, which were provided as advances. As against this the loans availed by the company were put at ₹ 150.19 crores. As the funds borrowed held to have not utilized for the business, the entire claim of Interest expenses to the tune of ₹ 11,11,15,463/was disallowed to be added back to the total income/reduced from loss, However, In this regard, it may be relevant to mention that the total advances borrowed during A.Y.2008-09 was put at ₹ 70.00 crores, with total borrowed fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt finalise the suit, the interest rate mentioned therein can be reckoned and income may be taxed for the year, as per the implications of the said court order, on the suit filed by parties. Hence, in alternative way also the income has not accrued to the assessee. Accordingly, the addition of ₹ 11,11,15A63/_ made by the AO held to be unsustainable on this basis as well. 5. Aggrieved by the order of the CIT(A), the revenue is in appeal before the ITAT. 6. Before us, the ld. DR relied on the order of the AO and submitted that the CIT(A) has wrongly relied on the judgments which are not applicable to the facts of the assessee s case. He submitted that there is a direct nexus between the reasons recorded by the AO for reopening of the assessee and the addition made. He submitted that the assessee had taken loan on which interest has been claimed as business expenditure, but the borrowed funds were advanced to others on interest free, which shows that the assessee had not utilized the borrowed funds for the purpose of its business. He submitted that the AO has disallowed the interest on borrowed funds, but, not on the notional income computed on the interest free advanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue s case, the ld. DR relied on the following case law: 8. We have considered the rival submissions and perused the material on record as well as gone through the orders of revenue authorities. The AO has disallowed the interest on advances u/s 36(1)(iii) of the Act on the ground that the assessee has not utilized the borrowed funds for the purpose of its business. The Ld. AR has relied on the decision of the coordinate bench of ITAT, Hyderabad in the group case i.e. M/s SCSL to submit that notional interest cannot be charged in the absence of any agreements between the lenders and borrowers is also not correct because in the case of the assessee, the AO has disallowed the interest u/s 36(1)(iii). The assessee had taken interest bearing loans, but, the same were given to others on interest free. In such circumstances, section 36(1)(iii) is applicable to the case of the assessee and the AO has applied the same and disallowed interest. In this connection, we refer to the paper book at page 111, which is the details of financial charges, which has been disallowed by the AO, as under: 1. Interest paid to GE Capital ₹ 4,48,94,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Section 36(1)(iii) is clear that if the interest paid by the assessee is to be allowed only in respect of capital borrowed for the purpose of business or profession only, whereas, in the case on hand, the assessee has utilized the above interest bearing loans for other purposes by giving loans on interest free. The facts in the cases relied on by the assessee are that notional interest which was not charged by the assessee, but, the issue in the case under consideration is different that the AO has disallowed interest paid on borrowed funds but not on the notional interest income, which was to be received by the assessee. 8.2 The assessee company is one of the group companies of M/s SCSL and the assessee had advanced to the tune of ₹ 80.78 crores to M/s SCSL. We find that M/s SCSL was involved in a big financial scandal by way of inflating the figures in the balance sheet due to which M/s SCSL involved in various court cases, which are pending. Therefore, the genuineness of the amounts advanced to such group company by the assessee is doubtful. Therefore, the arguments advanced by the ld. AR of the assessee are not tenable or acceptable and, therefore, we set aside the o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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