TaxTMI 
TaxTMI 
TaxTMI 
2016 (3) TMI 450
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....cy. Our attention was invited to page 1 of the paper book, containing the status of funds, balance sheet and the capital available with the assessee. The disallowance was argued to be primarily on this count. It was contended that for assessment year 2007-08, while framing assessment u/s 143(3) of the Act (Page 6 of the paper book), no disallowance was made. All the entities were explained to be involved in identical activity and the assessee is holding company of all the entities. Reliance was placed upon the decision in S.A. Builder's case (288 ITR 1) (SC) by claiming that the case of the assessee is identical to the decision pronounce in the aforesaid case. By explaining that ultimate utilization of funds has to be seen. The ld. counsel contended that there is no finding in the assessment order to the fact that the funds were not used or the money was not advanced for business purposes. Our attention was invited to page-5 (Para 2.2.2 of the Impugned order and Page7 of the assessment order). Reliance was placed upon the decision in S.P. Jaiswal Estates (P.) Ltd. vs ACIT (140 ITD 19) (TM) (Kol.), Hero Cycles P. Ltd. vs CIT (379 ITR 347)(SC). It was also explained that the cases re....
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....cation money/loan given to subsidiary/associates concerns, claim to be out of commercial expediency. The assessee advanced interest free loans and share application money to its subsidiaries/sister concern during earlier years. The subsidiaries used these funds for their business purposes, therefore, the interest thereon was claimed as allowable u/s 36(1)(iii) of the Act. The ld. Assessing Officer completed the assessment u/s 143(3) of the Act disallowing Rs. 6,63,78,465/- u/s 36(1)(iii) of the Act on the ground that no business interest of the assessee has been served by granting interest free loans to its subsidiaries. 2.3. On appeal, before the ld. Commissioner of Income Tax (Appeals), the explanation of the assessee could not find favour and thus the stand taken in the assessment order was affirmed. The relevant finding contained in the impugned order is reproduced hereunder for ready reference:- " 2.1.1 In the case, during the course assessment proceedings, the Ld. AO asked the appellant to explain reasons for revising the return of income and why interest expenditure should not be disallowed u/s. 36(1) (ii). In reply, the appellant has revised the return of income to withd....
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....ely. The Ld. AO further observed that the appellant has also given loan @ 14.5% to Shree Vijayraj on21.09.2007 and 24.09.2007 at Rs. 25,00,000/- & Rs. 75,00,000/ - respectively and the rest of the funds of Rs. 36.00 crore was given interest free to the subsidiaries and prior to giving of loan to above parties, it was also" given to subsidiaries only for their own use for share application money or for other purpose. The Ld. AO further held that similar is the position of last years interest bearing fund given to subsidiaries. 2.1.2. The Ld. AO further held that interest bearing funds were not given to subsidiaries, appellant company has earned interest @15% on all funds and in this way,5% interest has been earned. Appellant has borrowed [email protected]% and in this way, there was occurred income to the company and there would have been profit to the company and not loss. The appellant further submitted that no business interest of the company has been served by granting interest free loans to subsidiaries. The Id. AO therefore disallowed appellant's claim of interest at Rs. 6,79,03,542 - 15,25,077 = Rs. 6,63,78,465/ - u/ s. 36(1)(iii) of the Act as was rightly done by the appella....
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.... subsidiaries and these subsidiaries have used these loans/ advances for their own business and not for any non-business purpose and therefore has to be considered as use of funds for its own business out of commercial expediency and therefore even if the borrowed funds are utilized for such advances the assessee is entitled to deduction of interest. The Ld. AR of the appellant further submitted that where a loan is advanced to a subsidiary/sister concern it stands on a different footing than to its directors or their close relatives. In the case of a hundred percent, subsidiary of the company, the profit of the subsidiary belongs to the company and if a higher rate of interest is charged this would go to reduce the profits. If no interest is charged the same amount would be returned in the shape of profits. This aspect has to be kept in view while determining the question whether advancement of a loan is a measure of business expediency. The distinction has to be kept in mind between a case where the loan is used for the purpose of the business and a case of the loan misutilised by giving it interest free or at a nominal interest to directors, their relatives. In the latter situat....
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....isallowance can be made u/s 36 (1) (iii). The appellant further placed reliance on the decision of jurisdictional Bombay High Court in the case of Reliance Utilities and Power Ltd. (313 ITR 340) and held that proposition laid down by this decision is squarely applicable to the facts of the case of the assessee. The Ld. AO has disallowed entire interest cost of Rs. Rs. 6.64 crores (6.79 - 0.13) debited to profit & Loss Account. The Ld. AR of the appellant further submitted that the following the above decision of Reliance Utilities (supra) the Ld. AO at the most can disallow interest in proportion to interest free advances/ share application money given to subsidiaries/ associate concerns outstanding at the year end and interest free funds of Rs. 40.37 Crores available to the assessee as explained above. The Ld. AR of the appellant further observed that Ld. AO has also observed that had the interest bearing funds were not given to subsidiaries, assessee company could have earned interest @ 15% on all funds and by this way 0.5% of interest could have been earned i.e. 15 % charged by the assessee on one of the advances less 14.5 % charged on borrowed funds. It was held in various deci....
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....f law has been elaborated by the various courts wherein it has been held that if the assessee borrowed funds and then divert the same to its sister concern for non business purpose or for the purpose of carrying on their business purpose, the same cannot be said to be given for the purposes of assessee's own business and the proportionate interest on such advancing of loan need to be disallowed. In the case of Marolia & Sons vs. CIT(1981) 129 ITR 475 (ALL), the Hon'ble Allahabad High Court relying heavily on the decisions of Milapchand R. Shah vs. CIT (1965) 58 ITR 525 (Mad) and Roopchand Chabildass & Sons vs. CIT (1967) 63 ITR 166 (Mad) has held that if the capital borrowed is not utilised for the purposes of the business, the assessee will not be entitled to deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partners for their personal use or utilisation, the firm would not be entitled to claim deduction on the amount diverted for utilization for other purposes or by other persons. It appears to be settled that an assessee-firm cannot be entitled to claim deduction under cl. (iii) of sub-so (1) of ....
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....rpose of business or profession of the assessee. Rs. 10 lakhs 'invested' in A Ltd. being in substance and reality an amount advanced to the Bombay company for use of financing the construction undertaken by it cannot be said to be an amount which formed part of the capital borrowed for the purpose of the assessee's business. The Tribunal was not right in deleting the disallowance of interest attributable to borrowers diverted to I Ltd. through A Ltd. 2.3.4. In the case of CIT V Is. Motor General Finance Ltd (2002) 173 CTR (Del) 123 wherein the Hon'ble Delhi High Court has held that the assessee is a financing company. Whether it borrows a huge sum of money, cash balance in its own account may show a huge account and the same may not be determinative of the question as to whether the said amount was earned by way of profit or not. Normally a financing company would not grant any interest free loan. The assessee despite several opportunities granted, did not produce the relevant documents. An adverse inference, therefore, should have been drawn against the assessee. There cannot be any doubt whatsoever that the nexus between the amount paid by way of advance to a s....
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....on, were at least partly out of borrowed funds. Accordingly, he computed the amount available to the assessee out of its capital on an average basis and the loans advanced to the sister concerns on interest at the rate of 4 per cent. On such computation, he reduced the disallowance of interest on borrowings to the extent it was diverted to sister concerns. The view taken by the AAC in this regard was correct. The Tribunal was not justified in deleting the disallowance of interest maintained by the AAC. 2.3.6. In the case of Elmer Havell Electrics & Ors. V / s. CIT (2005) 277 ITR 549 (Del), while following the decision of CIT vs. Tin Box Co. (2003) 182 CTR (Del), the Hon'ble Delhi High Court has held that the assessee had placed on record the fund-flow statement for the year 1995-96 which itself shows that the concern had taken unsecured loans, which was considered as one of the main sources of funds and still had opted to give loan to the extent of Rs. 34,42,850 to its sister-concern. Whether there existed any commercial expediency for the assessee to transfer the said amount to one of its sister-concerns or not, is primarily a question of fact. The contention that the funds....
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....suggest that amounts were advanced to sister-concern to advance some business object. Rather, the same is in the nature of funds being provided to sister-concern which are closely-held to carry on business and earn income there on without incurring any cost of fund or without even investing anything. If the assessee had to transfer the money in the form of interest-free loan from one company to another close company, the same could very well be in the manner by introducing less capital in one company and by investing the balance amount in the other company as capital because according to the assessee, it had share capital funds of its own which could be given to other sisterconcern. It is not, at all, possible to accept such a plea raised by the assessee. 2.3.8. The Hon'ble High Court further held that as far as the issue of establishment of nexus of the funds borrowed vis-a-vis the funds diverted towards sister-concern on interest-free basis is concerned, the stand of. the assessee that the onus of proving the nexus of funds available with the assessee with the funds advanced to the sisterconcerns without interest is on the Revenue is not correct. Sec.36(1 )(iii) provides f....
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....rns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. The theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes cannot be accepted. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under s. 36(1)(iii). If the plea of the assessee is accepted that the interest-free advances made to the sisterconcerns for non- business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister-concerns for non-business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit. Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds. 2.3.9. .....
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.... dismissed." 2.4. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that identical submissions were raised by the assessee before the ld. First Appellate Authority. Now, we are expected to deal with the objections raised by the ld. Assessing Officer and dealt with by the ld. First Appellate Authority. Another point which is to be adjudicated by us is whether there was any "commercial expediency" in advancing the loans to the sisterconcerns/ group companies, where the assessee is a holding company. The assessee utilized the funds available with it for giving loans/share application to its subsidiaries/group companies, where the assessee is a holding company. It is also noted that all these group companies are also doing identical activities. Before us, the stand of the assessee is that commercial expediency was very much there in advancing such loans. For this proposition, we are expected to analyze the utilization of such loans. We note that there is no finding in the asses....
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....Hyd. Trib.). The ratio laid down in above cases squarely fortifies the case of the assessee, thus, on this count, we find merit in the submissions of the ld. counsel for the assessee. 2.5. Now, we shall analyze whether there is commercial expediency. The word "Commercial Expediency" has been analyzed by Hon'ble Apex Court in the case of S.A. Builders Ltd vs CIT (288 ITR 1)(SC). The relevant portion of the same is extracted hereunder for ready reference:- " 23. 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 the 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. 24. Thus in Atherton v. British Insulated and Helsby Cables Ltd. [1925] 10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily ....
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....the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. [1964] 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971] 82 ITR 166 (SC), etc. 31. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 32. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 33. Learned counsel for the Revenue relied on a Bombay High Court deci sion in Phaltan Sugar Works Ltd. v. CWT [1994] 208 ITR 989 in which it was held that deduction under section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had....
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....n for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 37. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 38. We also make it clear that we are not setting aside the order of the Tribunal or other Income-tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds." If the aforesaid decision from Hon'ble Apex Court is analyzed it clearly says that in order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) sho....
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....m) and overruled the decision in PHALTAN SUGAR WORKS LTD. v. CIT [1995] 215 ITR 582 (Bom). If the aforesaid ratio laid down by Hon'ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister-concern was for the purposes of "Commercial Expediency", thus, we find merit in the contention of the ld. counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the c....
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...."interest payable in any manner in respect of any monies borrowed or debt incurred....." . In the context and collocation of section 36(1)(iii) interest is restricted to that own money borrowed and not on debt incurred. What is allowable as deduction u/s 36(1)(iii) is any sum paid by way of interest in the commercial sense. There cannot be strait jacket formula as was held in CIT vs Hindustan Condutors Pvt. Ltd. (1999) 240 ITR 762, 768-69, 770 (Bom.) and CIT vs Sarswati Chemical and allied Industries Pvt. ltd. (2001) 249 ITR 235, 238 (Del.). For allowance of claim for deduction of interest, under these provision, all that is necessary is that, firstly, the money, that is capital, must have been borrowed by the assessee, secondly, it must have been borrowed for the purpose of business and thirdly, the assessee must have paid interest on the (so-called borrowed) amount. Our proposition get support from the following decisions:- i. Madhav Prasad Jatia vs CIT (1979) 118 ITR 200 (SC) ii. Addl. CIT vs Laxmi Agents Pvt. ltd. (1980) 125 ITR 227 (Guj.) iii. Marolia & Sons vs CIT (129 ITR 475)(All.) iv. Regal Theater vs CIT (225 ITR 205)(Del.) v. CIT vs Bombay Samachar Ltd. (74 ITR....
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.... or colorable transaction is permissible. If the object of the borrowing is illusory or colorable and not genuinely for the business purposes, then the provision has no application. To be admissible as an allowance under the section interest must be paid in respect of the capital borrowed. Where the money borrowed have been utilized for "business purposes" and also earning income under the residuary head "income from other sources" the interest paid on money so borrowed should be bifurcated proportionately between the "business income" and "income from other sources" (H.K. Investment Pvt. ltd. vs CIT 211 ITR 511, 514 (Guj.). However, in the present case, the facts are entirely different as the assessee advanced the funds to its subsidiaries for "business exigencies", wherein, the assessee is a holding company, thus, it is not a colorable device. 2.11 In the case of CIT vs Reliance Communication Infrastructure Ltd. (2012) 207 taxman 219 (Bom.), the Hon'ble jurisdictional High Court vide order dated 28/03/2012, considering the decision in S.A. Builders Ltd. vs CIT (2007) 288 ITR 1(SC) held that if there is a business purpose, while advancing money to its sister concern, the disallow....