TaxTMI 
TaxTMI 
2009 (2) TMI 504
X X X X Extracts X X X X
X X X X Extracts X X X X
....irm. Interest-free funds given by the assessee to that company. The Assessing Officer disallowed Rs. 38,31,920 and Rs. 17,11,417 proportionate interest claim of the assessee on the ground that the assessee has given interest-free funds to its sister/group concern. The CIT(A) has confirmed the disallowances made by the Assessing Officer. 3. The contention of the assessee is that advances were given for the purpose of business in accordance with commercial expediency. The learned AR has relied upon the judgment of Apex Court in the case of S.A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 . The other contentions of the assessee are that interest funds were given out of interest-free funds available with the assessee. The alternate contention of the assessee is that netting benefit may be allowed. During the hearing, the learned AR tried to demonstrate that his submissions by filing chart but same are subject to verification. 4. We have heard the learned representatives of the parties and perused record. The crux of the matter to be considered by us is in respect of allowability of interest expenditure under section 36(1)(iii) of the Act where interest bearing borrowed funds and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t not used in the business cannot be regarded as a business expenditure as the business does not derive any benefit by the outgoing by way of interest on an amount which is no longer in the business, but had been diverted from the business. This provision, therefore, cannot be construed as enabling an assessee to burden the business with interest even while taking the amount initially borrowed for the business, but subsequently taken out of the business by diverting it as interest-free loans to sister concerns and relatives or for personal use. 4.3 The amount borrowed for the business remains a liability for the business till its discharge. The fact that the amount borrowed may have been invested in the purchase of machinery or utilised as working capital or used in any other way does not in any way affect the liability for repayment of the amount borrowed. So long as the money borrowed is used in the business, interest paid on such borrowing is a proper charge on the business and is allowable as expenditure. Under section 36(1)(iii) of the Act, amounts diverted not being used for the purposes of the business, interest relating to the amount diverted out of the business cannot be ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....for its personal purposes and not business purposes claim deduction of the interest paid on the borrowing. In any case if the assessee takes stand that it is business expediency then, heavy burden lies on the assessee to prove such contention and said contention is to be examined by applying deferent criteria. 4.4 A real problem arises in cases where funds are pumped out of business which are comprised of both type of funds, borrowed as well as own funds for non-business purposes. In all such cases where mixed funds are used for both business and other than business purposes, there is no presumption that moneys used for other purposes came out of borrowed funds. It can be said that interest-free funds given are out of own funds to the extent of capital and reserves, and this proposition is supported by the decision of Hon'ble Andhra Pradesh High Court in the case of CIT v. Gopikrishna Murlidhar[1963] 47 ITR 469 and in the said case their Lordships accepted the contention that the assessee is entitled to withdraw from capital. The Facts of that case are that the assessee is a Hindu undivided family carrying on business on an extensive scale with a capital of nearly Rs. 20,00,000 (t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Hon'ble Supreme Court in CIT v. UP State Industrial Development Corpn. [1997] 225 ITR 703. Thus such problem can be resolved by analyzing statement of accounts and in particular balance-sheet. Where details of own capital, borrowed funds and interest-free funds given or utilized for other purposes are available. There is no much difficulties in examination of right to replace own capital to borrow funds in case of individual and partnership firm. But in the case of company, capital is fund of public/shareholders which is managed by the Board of Directors. In the case of company there are certain restrictions under the Companies Act in use of capital/fund for personal benefits. Such replacement is required to be authorized by proper resolution and must be in conformity with the provisions of Companies Act and rules and regulations of regulatory bodies. Same are required to reflect in the financial statements prepared on the basis of audited books of account. The auditor is also required to point out such replacement/utilization of funds. If funds are diverted in contravention of statutory provisions, then same may be subject to legal and penal consequences under the Companies Act....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r giving interest-free funds only can be presumed that the interest-free loans are given in conformity with above discussion. The commercial expediency is also required to be established by the assessee by furnishing relevant material based on which it can be said that interest-free funds given to sister concern are in conformity with provisions of Companies Act and provisions of regulatory bodies. Before disallowing such interest the Assessing Officer is duty bound to examine those material as enough power in this regard provided in IT Act. Needless to mention that the Assessing Officer should record all such facts clearly by passing a speaking order. Since in the case under consideration, such complete details are not found on record we, therefore, remit both the grounds of appeal to the file of Assessing Officer to decide the issue afresh in accordance with law keeping in above discussion and guidelines. The Assessing Officer is further directed that though the CIT(A) has also directed that netting claim also be examined, whether the same is allowable in accordance with law or not has to be found out by the Assessing Officer. The Assessing Officer will decide the issue afresh af....