TaxTMI 
TaxTMI 
2013 (8) TMI 744
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....erage rate of interest paid comes to 16.9% whereas the average rate of interest received is @ 13.25%. The details of the same are noted in the assessment order. The difference, i.e., 3.66% was deemed to have not been paid for business purposes. Addition of Rs.38,79,887/- was accordingly made. The addition was challenged before the ld. CIT(A) and written submission of the assessee is reproduced in the appellate order, in which it was briefly pointed out that the AO has considered only 48 parties for working out the average rate of interest whereas the assessee paid interest to 329 parties. Therefore, the AO has not considered 281 parties for working out the correct rate of interest. Average rate of interest computed by the AO is, therefore, not correct. The maximum amount of advance has been given out of the funds taken @ 12%, 15% and 18%. It was pointed out that the rate of interest charged is also same. Therefore, averaging formula is incorrect. It was submitted that no borrowed funds have been diverted. Allegations of the AO are not supported by any material. Complete details were filed to show that the addition is wholly unjustified. The assessee also relied upon certain decisio....
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....2008) 298 ITR 298 (SC) in which, the Hon'ble Punjab & Haryana High Court has upheld the disallowance of interest claimed under section 36(1){iii)of the Act by placing reliance on its judgment in the case of C/f Vs. Abhishek Industries Ltd. (supra) but the Hon'ble Supreme Court deleted this addition by holding that the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan given to the sister concern. Therefore, in order to examine the nexus of loan given during the year with the borrowed funds, I have decided to examine the ledger account of the parties from whom the loan was taken and to whom the loan was given with bank ledger and the utilisation of loan taken in the business of the assessee and the purpose of loan given. 9.5. As per the ledger account, all the loans given at the rate of interest ranging from 12% to 18% have been found to be given out of fund borrowed at 12% to 18% after it was deposited in the current account of the assessee{appellant) with SBI (current account no. 10415000290) , SIF Branch, Kalanala Bhavnagar and during the year under consideration, such loans are given to only two parties i.e. M/s Neuromed Imaging C....
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....oan to this party, except giving a general explanation that there is inter-banking account with the sister concerns from whom / to advance taken/given as and when needed for business purposes of either concerns and interest charged/paid at the similar rate. For giving of loans to sister concern without explaining any apparent business purpose, it has been only explained by the Ld. AR that the business of the assessee is not financing but is of ship breaking and the surplus funds during the idle period had been advanced to reduce the burden of interest and this is a practice throughout in the past accepted by the department. As no apparent business purpose of giving loan to M/s Neuromed Imaging Centre Pvt. ltd. was explained, I have examined the source of giving of loan to this party to find out as to how by giving loan to this party, the assessee(appellant) has reduced its burden of paying interest. As per the Bank Ledger, the assessee(appellant) has given two loans to this party. The first amount of Rs.1,00,00,000/- has been paid on 04.07.2008 and the second amount of Rs. 90,00,000/- has been paid on 08.07.2008 and these two amounts remained with this party for about six months ti....
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....ence, interest on this borrowed fund should not be allowed u/s 36(1)(iii) at differential rate of interest till this fund was repaid to the assessee in January 2009. 9.8. The second amount of Rs.90,00,000/- was paid on 08.07.2009 and before making this payment, the assessee(appellant) received an amount of Rs. 1,00,00,0001- on 07.07.2008 from its partner Shri Rishab Kumar Jain on which, interest is paid at 9% and hence , if this fund is given to M/s Neuromed Imaging Centre Pvt. Ltd. at 12%, it would result into reducing the interest burden of the assessee(appellant) and hence, as explained by the Ld. AR , it would serve the business expediency of the assessee(appellant). Therefore, no interest is required to be disallowed for giving of Rs.90,00,000/- to M/s Neuromed Imaging Centre Pvt. Ltd. 9.9. In view of my above finding, interest u/s 36(1)(iii) is required to be disallowed on account of giving of loan of Rs.1,00,00,000/- to M/s Neuromed Imaging Centre Pvt. Ltd. out of funds borrowed at the rate of interest of 15% and 18% as discussed in para 9.7. Such disallowance is computed as under: (i) Interest to be disallowed on funds of Rs. 72,00,000/- borrowed at the rate of 18% As t....
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....n 36(1)(iii) of the Act. Section 36(1)(iii) provides that the amount of the interest paid in respect of capital borrowed for the purposes of the business is allowable expenses for computing the business income. It is not the case of the A.O. that the borrowed fund was not utilised for the purposes of business. The Apex Court in the case of DCIT vs. Core Health Care Limited, 298 ITR 194 (SC) laid down law that interest paid for the purpose of business under section 36(1)(iii) of the Act, though it may be for the purpose of expansion of the existing business. In the case under consideration, the case of the A.O. is that there is a loss on account of interest paid and received. The CIT(A) has also wrongly accepted the A.O.'s view without considering the section 36(1)(iii) of the Act. The loss in the interest account was on account of different rates charged from different parties on loans and advances taken and loans and advances given. For allowing deduction under section 36(1)(iii), it is to be seen whether conditions stated in section 36(1)(iii) has been satisfied or not. In the case under consideration, we find that the assessee has satisfied all the conditions that the borrowed f....