TaxTMI 
TaxTMI 
2016 (2) TMI 632
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....sessment Year 199596 the assessee company had filed its return of income declaring loss of Rs. 4,80,562/. The return was processed under scrutiny. One of the issues examined by the Assessing Officer during such assessment was with respect to the assessee's claim of deduction of interest under Section 36(1)(iii) of the Income Tax Act, 1961, ('the Act' for short). The Assessing Officer noticed that during the year under consideration, the assessee had borrowed huge amounts from various group companies and had, in turn, advanced large amounts to certain companies. On the interest paid by the assessee on the borrowings so made, the claim of deduction of interest was made under Section 36(1)(iii) of the Act. The Assessing Officer called for the details of the borrowings and the lendings of the assessee company during the relevant period. The Assessing Officer noticed that the amount borrowed by the assessee company was at an interest rate much higher than the rate of interest on which the assessee company had made lendings to other companies. The Assessing Officer found that the company had borrowed a sum of Rs. 25.30 crores (rounded off) from various group companies, out of....
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....ase of the assessee. Therefore, on the facts and circumstances of the case the assessee the above quoted judgments are not applicable to the case of the assessee. 5.10 Still further the reliance of the assessee in the case of Addl. CIT Vs. Laxmi Agency Pvt. Ltd. (supra) is misplaced in the sense that what the Hon'ble Court had held in that case was that the monies should be utilised for the purposes of the assessee's business. In the case of the assessee what has been found is that the monies have not been really utilized for the purposes of the assessee's business and assessee company has in a way acted as conduit by advancing of loans to other companies as becomes clear from AnnexA. Hence, the said case is not applicable to the facts & circumstances of the case of the assessee." (6) The assessee carried the matter in appeal before the CIT (Appeals). CIT (Appeals) concurred with the view of the Assessing Officer and rejected the appeal in the following terms: "12. After going through the facts of this issue, I am of the opinion that the action of the Assessing Officer in this case is absolutely justified. In the present case, the situation is not one of the genuin....
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....t of the business then the assessee's claim for interest could be disallowed. The Tribunal recorded that the Assessing Officer had in fact allowed part of the interest claimed by the assessee. Once the Assessing Officer allowed such deduction on the only funds so borrowed, the Assessing Officer could not have made disallowance of part of the interest applying the principles of Section 40A(2) of the Act. The Tribunal observed as under: "5.1 In view of these facts we are of the view that the chart prepared by the assessee in respect of interest is based on nominal working and does not represent interest actually received and paid by the assessee. Section 36(1)(iii) allows the deduction in respect of the amount of interest paid in respect of capital borrowed for the purpose of the business or profession. There is no dispute that the assessee has borrowed the funds. There is no dispute that the assessee has paid the interest during the year on the funds so borrowed. The word "for the purpose of the business" is wider in scope than the expression 'for the purpose of earning income'. Thus, the interest paid on borrowed capital will be allowed as deduction only if the capita....
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....ction 40A(2) are also not applicable in this case." (8) Learned Senior Counsel for the revenue submitted that the Tribunal has committed serious error in reversing the decisions of the revenue authorities. The facts of the present case were eloquent. The assessee had borrowed funds at a higher rate of interest and advanced the very same funds to other companies at a much lower rate of interest. Nothing was brought on record to suggest that such advances were made for the purpose of business. No business expediency was demonstrated for making such advances at a concessional rate of interest. He drew our attention of the decision of the Supreme Court in the case of S.A. Builders Ltd. Vs. Commissioner of IncomeTax (Appeals) & Anr., [2007] 288 ITR 1 (SC) to point out that in such decision the Supreme Court while allowing the claim of the assessee of deduction of interest when interest free advances were made to the sister concerns observed that whether the interest free advance made by the assessee to the sister concern was for the purpose of business or not is also a question of fact to be judged on the basis of evidence on record. (9) None appeared for the assessee though served. ....
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.... not disturbed by the Tribunal, the assessee, during year under consideration, borrowed Rs. 25.30 crores from various group companies at a higher interest rate, in most cases @ 21%. Amount of Rs. 16.88 crores out of such funds was advanced to the various companies, mostly @ 14% interest. In many cases funds borrowed on the same day were used for making advances. Out of advances of Rs. 16.88 crores, Rs. 15.08 crores was made to various companies having common address at Jammu. By assessee's own account when such advances were made these borrowing companies were completely unrelated, however, subsequently these companies merged with the group companies of Lalbhai Group. At no stage the assessee pointed out any business expediency in making advances at a lower interest rate than the rate at which the assessee company had borrowed the money. It is undoubtedly true that Section 36(1)(iii) of the Act permits deduction of interest paid on capital borrowed for the purpose of business or profession and the expression "for the purpose of business" is seen wider than the expression "for the purpose of earning income". Nevertheless the assessee had to point out the business expediency whic....