TaxTMI 
TaxTMI 
2014 (9) TMI 1030
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....ssee had made investment in Fixed Deposits in various banks and had earned interest thereon at the rate of 5 to 8% per annum. The Assessing Officer observed that the assessee had invested huge amounts in the bank in Fixed Deposits at lower rates of interest and was paying much higher interest on unsecured loans. He, accordingly, held that "the interest paid on borrowed funds and interest paid to others to the extent interest paid is more than interest received on fixed deposits, cannot be considered as interest paid for the business purposes, as well as for earning of the interest income. The Assessing Officer, accordingly, invoked the provisions of section 40A(2)(b) read with section 36(iii) of the Act and made disallowance of the difference between the interest paid and interest earned. The assessee carried the matter in appeal before the Commissioner (Appeals), who held that the placing of borrowed funds in fixed deposit was part of the business expediency of the assessee and the interest thereon is allowable in terms of the decision of the Supreme Court in the case of S.A. Builders. He, however, observed that the assessee had admitted receipt of the borrowed funds from transpor....
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....e tax returns of the beneficiaries nor has it recorded any finding as regards revenue neutrality of the transactions. It was urged that the Tribunal has failed to appreciate that the assessee had itself admitted receipt of borrowed funds from transporters at the rate of 15% and from 'goods deposits' at the rate of 13% to 15% as against payment of interest at the rate of 18% to the relatives of the partners. Moreover, the assessee had failed to substantiate that the market rate of interest was 18%. According to the learned counsel, both, the Commissioner (Appeals) as well as the Tribunal failed to appreciate that by borrowing money at higher rate from family members of partners and depositing such money in Bank FDRs, the assessee helped them to earn more income by way of interest than what they would have earned otherwise. Thus, the assessee having failed to discharge the initial onus, the disallowance was correctly made. Under the circumstances, the appeals require to be admitted on the question proposed or as may be formulated by the court. 4. Opposing the appeals, Mr. S. N. Soparkar, Senior Advocate, learned counsel appearing on behalf of the respondent assessee on caveat, dre....
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....res, respectively. The assessee required huge funds for purchase of bidis and for availing such funds from banks it was required to undergo various formalities and certain documents were required to be executed over and above personal collateral securities of the partners. Further, periodical statements such as, stock statement and huge data for securing loans were required by the banks and a number of forms were also required to be submitted. Since such procedures are cumbersome, many a times the partners were not willing to give personal guarantees. In such cases, even after formalities were completed, the assessee was not in a position to avail finance from the bank. Moreover, the banks were charging interest at the rate of 16% to 17%. In these circumstances, the assessee opted for unsecured loans from specified persons and paid interest at the rate of 18% to them. It was the case of the assessee, that the specified persons were in the maximum marginal rate of tax and therefore, there was no revenue loss to the Department while allowing the interest at the rate of 18%. 7. The Commissioner (Appeals) was of the considered view that the funds in fixed deposits were part and parc....
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....t of 15% or 14% which is supported by various decisions mentioned in the order in preceding paras. Since the interest rate paid by the assessee is reasonable, the order of the CIT(A) is reversed and addition is deleted. Thus, assessee's appeals are allowed and Revenue's appeals are dismissed on this ground." 8. In the aforesaid backdrop, the sole question that arises for consideration is about the allowability of the interest on borrowed funds. 9. Before adverting to the merits of the case it may be apposite to refer to the decision of the Supreme Court in S. A. Builders Ltd. v. Commissioner of Income Tax (Appeals) Chandigarh, (2007) 1 SCC 781, wherein it has been held thus: "15. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. Thus in Atherton v. British Insulated & Helsby Cables Ltd. (1925)....