TMI Blog2022 (2) TMI 1357X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of another company would amount to diversion of funds for non-business purpose. Whether such an investment yields returns in the present year or not does not make a difference. It is pertinent to bear in mind fact that in the present case interest disallowance has been made on the premise that investment in share capital of another company amounts to diverting the borrowed funds for the business of another company but then as we noted earlier an equity investment as inherently and materially different vis-a-vis an interest-free loan and advance. That distinction has been lost sight of. In our considered view, therefore, CIT(A) was indeed justified in deleting the disallowance of interest. We approve the conclusion arrived by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial expediency or business purpose in investing in the shares of M/s. Baramati Tollways (P) Ltd. It was further noted that the same is purely capital transactions of without any relation to the profit earning or revenue generated . It was in this backdrop that the AO required the assessee to show-cause as to why the interest on the borrowing not be disallowed as the funds have been diverted for non business use. It was submitted by assessee that as held by the Punjab Haryana High Court in the case of CIT us. Rockman Cycle Industries (P) Ltd. (2011) 238 CTR (P H) 363 : (2011) 51 DTR (P H) 169 : (2009) 331 ITR 401 (P H), nearly (merely) because borrowing cost of investment in the shares to sister company yielding dividend less than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/company would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest-free advances when the assessee-firm/company itself is borrowing funds for running its business . 3.4 The emphasis is always on business interest and business objective. In the case of M/s. Rideema Toll (P) Ltd., it is seen that transaction is completely in the nature of investment, mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have own funds. However, it has made borrowings and the borrowed funds have been invested in its 100 per cent subsidiary. The interest expenditure incurred on the said borrowing in a sum of Rs. 4,47,93,169 has not been allowed as admissible claim by the AO under section 36(1)(iii) of the Act. The appellant has submitted that it has made investment in share capital of its subsidiary out of borrowed capital on considerations of commercial expediency. It is submitted when investment is made by the holding company in its subsidiary, it cannot be of commercial expediency. The appellant has relied upon decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. and the judgment of this jurisdictional High Court of Bomba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld that there is nexus between expenditure and purpose of business. It has been repeatedly held by various Courts that the expression used in section 36(1)(iii) for the purpose of business is wider in scope than the expression for the purpose of earning profits For this proposition reliance is placed on the judgment of the Hon'ble Supreme Court in the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 (SC) and CIT vs. Birla Cotton Spinning Weaving Mills Ltd. (1971) 82 ITR 166 (SC). It therefore, follows that even in the event of no profit/revenue immediately emanating from investment, such investment is dictated by commercial expediency; no businessman can be compelled to maximize profits. The Hon'ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 36(1)(iii) of the Act. Thus, the disallowance of the interest under section 36(1)(iii) made by the AO is deleted. Accordingly, ground Nos. 1 and 2 are allowed. 4. We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of applicable legal position. 5. We have noted that the investments are made by the assessee-company in the ordinary course of its business. There is no dispute about the fact that the said investments have been made in equity shares of another company in materially similar line of activity. It is only elementary that as long as the funds borrowed by the assessee are used for the purposes of business, the interest thereon will constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X
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