TaxTMI 
TaxTMI 
2014 (7) TMI 388
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....see company was also in the business of manufacture and sale of bulk drugs and drug intermediates and was in developing stage having good orders. The assessee thought it prudent to get the conversion done through Nitya Laboratories Limited under an exclusive arrangement and accordingly Nitya Laboratories Limited has been carrying out job works exclusively to the assessee company. In this process the assessee has to take care of various requirements including payment to creditors, clearing institutional loans and making investment in capital expenditure according to the production requirement and product mix as required and decided by the assessee company from time to time. 4. The AR submitted that from time to time the assessee made on account payments to Nitya Laboratories Limited to take care of its working capital requirements since the total manufacturing facility of Nitya Laboratories Limited is used by the assessee and Nitya Laboratories Ltd is not having any working capital facility and advances were made to make capital equipment additions to suit assessee's manufacturing requirement and to take care of payments to outside parties including banks and financial institut....
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....ow statement, bank statement and ledger copies, etc. The CIT(A) observed that the assessee made only general submission. The CIT(A) further observed that the fact M/s. Nitya Laboratories Ltd. got amalgamated with the assessee w.e.f. 1.4.2009 has no implication on the book results of the assessee for the year under consideration. The CIT(A) did not accept the argument that interest free loans were advanced to the sister concern which ultimately got amalgamated with the assessee-company. The CIT(A) held that there is no commercial expediency in advancing Rs. 1522.09 lakhs against job work charges payable of Rs. 860 lakhs. The CIT(A) pointed out that the AO has stated that from the cash flow statement, the net cash generated from operation is Rs. 6,62,23,724. The CIT(A) further observed that each assessee is separate entity and in the name of commercial expediency one entity cannot transfer its interest bearing funds to another concern. The CIT(A) concluded that in the case of the assessee interest bearing funds had been transferred to the sister concern and it was not the case of the assessee transferring 'reserves and surplus' and, therefore, in such a situation interest pay....
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....s. 11. On the other hand, the learned DR, while supporting the order of the CIT(A), submitted that the AO has noted that during the year the assessee availed working capital loan from the banks to the extent of Rs. 22,67,03,073/- and when surplus funds are available, there was no need for the assessee to borrow heavily from banks and pay interest of Rs. 3,76,62,677/- and bill discounting charges of Rs. 1,67,84,059/- and the average rate of interest paid on working capital loans was about 16.6%. There is no commercial expediency in borrowing heavily from banks and advancing interest free amounts to another concern. The AO has also observed that even tax payment was postponed by the assessee and major part of tax is paid in several installments for few years after the end of the financial year. Therefore, it was held by the AO that the funds advanced to M/s Nitya Laboratories Ltd are linked with borrowed funds and from the cash flow statement, the net cash generated from operations were seen to be Rs. 6,62,23,724/- and no prudent businessman would advance funds at his own cost to another business entity, that too free of interest and accordingly, the AO calculated interest at 16.6% ....
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....gation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1)(iii) because in section 37 also the expression used is 'for the purpose of the business". "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose of which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the....