TMI Blog2022 (10) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... d commercial expediency - Giving deep thought on the contention of the assessee regarding the commercial expediency for granting interest free loan to the sister concerns but we could not find a single fact in support of the said contention of the assessee. The assessee has not uttered a single word before the AO as well as before the CIT(A) to show that there were business transactions between the assessee and these two sister concerns which has necessitated to advance interest free loan to the sister concerns. Therefore, in the absence of any reference to any business transaction between the assessee and the sister concerns, the plea of commercial expediency cannot be accepted. The assessee has miserably failed to establish a case of commercial expediency or business exigency in granting interest free loan to the sister concerns by utilizing the borrowed fund. As decided in SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX [ 2006 (12) TMI 82 - SUPREME COURT] held that if the interest free loan given to the sister concern has been advanced as a measure of commercial expediency, than the interest on the borrowed fund used for advancing the loan to the sister concern is an all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. 2. Because the Ld. Lower Authority has erred in making addition of Rs.10,134/- for interest of loan advanced to M/s Tulsiani Construction and Developers (P) Ltd. claiming that the loan has been made out of interest bearing funds. 3. Because the Ld. Lower Authority has also erred in making addition of Rs.12,00,000/- for interest of loan advanced to Grace Infraventure (P) Ltd., without appreciating the fact that the appellant and his sister concern, both are engaged in same nature of business i.e. real estate business and the loan advanced to the sister concern has been utilized for the purchase of land i.e. for business purpose. 4. Because the LD. Lower Authority has erred in making addition to the assessment year in question as the assessment for the year has been completed on the date of search and it is settled law that no addition can be made in case of completed assessment in absence of any incriminating material found during the course of search operation. 5. Because the addition are solely based on hypothetical situations, surmises, conjecture and personal presumptions as well as without proper verification/consideration of material and details availabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the amount advanced to Grace Infraventures Pvt. Ltd. of Rs.1 crore have been exclusively used for business purpose. The assessee relied upon the case law of Apex Court in case of S.A. Builders Ltd., wherein it has been held that Section 36(1)(iii) of the Act states that interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction in computing taxable income. The expression for purposes of business or profession occurring in Section 36(1)(iii) of the Act is wider in scope than the expression for the purpose of earning income, profits or gains . Accordingly, expenditure voluntarily incurred on the test of commercial expediency is to be allowed as a deduction. It is immaterial if a third party also benefits by the said expenditure. The expression commercial expediency is again of wide import and includes such expenditure incurred for the purpose of business. Therefore, once it is established that there was a nexus between expenditure and purpose of business, which need not be the business of the assessee, deduction under Section 36(1)(iii) of the Act must be allowed. Revenue cannot assume the role and occupy armchair of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure voluntarily incurred even by advancing the interest free loan to the sister concerned to satisfy the test of commercial expediency. The assesssee has contended that money borrowed even when advanced to sister concern for some purpose would qualify for deduction. The second contention has been raised by the assessee that the advance has been made by the assessee company out of interest free funds available with the assessee hence, no disallowance under section 36(i)(iii) can be made. 7. On the other hand, learned CIT DR has submitted that the AO has given the facts in para 5.5 of the assessment order which reveals that the interest free advance was given to the sister concerned directly from the term loan account with PNB therefore, there is no ambiguity about the fact that the interest bearing fund has been used by the assessee in giving interest free advance to the sister concerns. The learned CIT DR has further contended that the assessee has taken only a legal plea but has not brought on record any fact to establish that the interest free loan was advanced by the assessee to the sister concerns for commercial expediency or business purposes. He has relied upon the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved. The assessee has taken shelter of judicial pronouncement in the case of S.A. Builders vs CIT. Although, the decision is pending for reconsideration before the Hon'ble Supreme Court (as discussed supra), yet, it must be noted the submissions made by the assessee even fails the test of commercial expediency laid down in the said judgement and various other judgments. The assessee has failed to highlight any fact or produce any evidence to establish that it was commercially expedient or necessary to advance the loan to its sister concern. As discussed in the superseding para, since the assessee has failed to provide any evidence lest convincing one, it clear fails the test for utilization of funds for business purpose. Therefore, interest on borrowed capital is liable to be disallowed on this count. ii. Source of disbursal of loan amount: From the material available on record, it has been observed that, the assessee has disbursed the said loan(s) from its PNB Term Loan Account. (a) To Grace Infraventures Pvt. Ltd. on 07.04.2011 - Rs. 1,00,00,000/- (b) To Tulsiani Construction and Developers Pvt. Ltd in March 2012 Rs. 75,00,000/- Apart from the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan to the sister concerns which was disbursed from PNB term loan account. This fact has not been disputed by the assessee as the amount was disbursed directly from PNB loan account. Therefore, the contention of the assessee that the assessee was having sufficient interest free fund for advancing the loan to the sister concerned is contrary to the facts on record. Even otherwise, this fact of advancing the loan to the sister concerns from the PNB term loan is based on independent evidence of term loan account of the assessee with PNB. 10. The next contention of the assessee is that the interest free loan was advanced to the sister concerned for business purpose and commercial expediency has been considered by the CIT(A) in its finding in para 7 and 8 as under:- 7. Through these grounds of appeal the appellant has objected to the proportionate disallowance of Interest paid on borrowed funds by the AO. The appellant has contended that the Money was used for business purpose by M/s Grace Infraventures (P) Itd and M/s Tulsiyani Construction Pvt. Ltd. It was contended that the appellant had sufficient Interest free funds at its disposal to advance the amount to M/s TCPL. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the allowability of deduction Under Section 36(1)(ii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word commercial expediency . By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further. In the judgment the Supreme Court has defined commercial expediency as an expression of wide import and includes such expenditure as a prudent businessman Incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency . Further, following this judgment the High Court of Delhi, In the case of Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated The commercial expediency would include such purpose as is expected by the assessee to advance its business Interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal Interest of its directors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. In the present case also, the funds are mixed funds and the assessee could not establish any commercial expediency and hence, in our considered opinion, this issue is squarely covered against the assessee by this judgment of Hon'ble Delhi High Court and respectfully following the same, this issue is decided against the assessee . The Hon'ble ITAT Hyderabad in the case of Ravindra Singh Arora Vs. ACIT (2012) 53 SOT 124 (Hyderabad) in regard to disallowance of interest u/s.36(1)(iii) has held as under: 37. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the. Assessing Officer that whatever loans were raised by the assessee, the some 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital Introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non- business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds: This 'would depend on facts of each case.. 40. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying, any interest is to be disallowed under Section 36(1)(a) of the Act. 8. In this case the appellant has not submitted any explanation regarding the purpose of advancing Interest free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s below on the aforesaid question was not correct. 19. In this connection we may refer to Section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter referred to as the 'Act') which states that the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession has to be allowed as a deduction in computing the income tax under Section 28 of the Act. 20. In Madhav Prasad Jantia vs. Commissioner of Income Tax U.P. AIR 1979 SC 1291, this Court held that the expression for the purpose of business occurring under the provision is wider in scope than the expression for the purpose of earning income, profits or gains , and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income Tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140, CIT vs. Birla Cotton Spinning Weaving Mills Ltd (1971) 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 34. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously 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, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 35. In view of the above, we allow these appeals and set aside the impugned judgments of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
