TaxTMI 
TaxTMI 
2016 (3) TMI 450
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....ounts were advanced for commercial expediency. 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)(S....
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....allowed u/s 36(1)(iii) of the Act, while filing the original return as share application 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 di....
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....6.2007 was utilized for investment towards earning interest income at 15% and 12% respectively. 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. 6,79,03,54....
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....rent company and therefore it has deep interest in the business of its subsidiaries situated at different places all over India. Further, the assessee being a holding company has deep interest in the business of 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 mi....
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....4. Without prejudice to the above, the Ld. AR of the appellant further submitted that no interest is disallowable u/s 36 (l)(iii), alternatively from the above chart it is very much clear that interest free funds available with the assessee at the end of the year was Rs. 40.37 crores on which no disallowance 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....
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....e appellant in its own working in the original return of income has made disallowance of Rs. 6,79,79,03,542/ -. In computation of income the appellant had shown an income 'of Rs. 15,25,077/- pertaining to the funds invested for earning interest income including interest on I.T. refunds. 2.3.2. I find that the position of 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 pu....
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....tice the facts which had been set out in the draft assessment order and has also erred in adopting the wrong approach for the purpose of deciding as to whether the amount disallowed was a sum which could properly fall within the ambit of s. 36(1)(iii). The amount disallowed was the amount paid on amounts borrowed, but, not used for the purpose 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 o....
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....alue of the goods purchased to whom no interest was paid, were also available for the purpose of advancing money to the sister 'concerns was rightly rejected by AAC for the reason that the assessee must have likewise sold goods on credit free of interest. Besides this, the amounts advanced to its sister concerns, on the assessee's own admission, 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 ta....
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.... to the financial institution before the scheduled date as far as the term loan is concerned, but the interest being paid by the assessee on . the working capital could have certainly been saved to that extent. It can very well be held that borrowing of the funds by the company to that extent was not for the purpose of business and there is nothing on record to 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....
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....h it generates income and not that it is diverted towards sister-concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister-concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister-concerns 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, w....
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....t and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed; onus is on the assessee to prove the nexus between the borrowed funds and the funds advanced to others without interest. In view of the foregoing, the additions made by the Ld. AO is accordingly upheld and this ground of appeal is accordingly 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 subsidiarie....
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....held that no disallowance for interest on such loan could be made for the subsequent assessment years:- i. CIT vs Sridev Enterprises (192 ITR 165)(Kar.) ii. ITO vs J.M.P. Enterprises (101 ITD 324, 336-337) (Asr) iii. Escorts Ltd. vs ACIT (104 ITD 427, 512-513)(Del.) iv. Malwa Cotton Spinning Mills vs ACIT (89 ITD 65, 94- 95)(Chd)(TM) v. CIT vs Industrial Cables (India) Ltd. 209 CTR (P & H) 167 vi. Sushee Hi Tech Construction Pvt. Ltd. vs DCIT (2013) 33 taxman.com 236 (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" . ....
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....8. Thus, the ratio of Madhav Prasad Jatia' s case [1979] 118 ITR 200 (SC) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this court that the expression " for the purpose of business" is wider in scope than the expression " for 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 ....
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....ncy and not from the point of view whether the amount was advanced for earning profits. 36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern 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 authoriti....
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....ssee 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 point of view whether the amount was advanced for earning profits. xxxxxxxxxxxxxxxx While coming to the aforesaid conclusion, the Hon'ble Apex Court duly considered the decisions in CIT v. DALMIA CEMENT (B.) LTD. [2002] 254 ITR 377 (Delhi) approved. PHALTAN SUGAR WORKS LTD. v. CWT [1994] 208 ITR 989 (Bom) 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 fa....
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....) and ratio laid down in Gujarat State Fertilizer & Chemicals Ltd. vs ACIT (2009) 313 ITR 244, 246 (Del.). 2.7. We shall analyze the meaning of interest. The essence of interest is that it is payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had used his money, or conversely, the loss is suffered because he had not that use. The general idea is that he is entitle to compensation for the deprivation (Westminister Bank Ltd. vs Riches, (1947) 28 TC 159, 189(HL). It may be noted that the definition of "interest" in section 2(28A) means "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.....
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....the claim of the interest is not allowable. But for such disallowance, a finding of fact, based on relevant material, is necessary as was held in CIT vs R.K. Metal Works 112 ITR 445 (Punjab). In Veecumsess vs CIT (1996) 220 ITR 185, 190 (SC), their lordship of the Apex Court have taken a view that when the assessee carries on more than one business and one business is transferred or closed and if loan was taken earlier for the business, which subsequently closed, but if the management is common, the interest paid on that loan cannot be denied, though one of the lines of the business or any branch of the business is closed for which the loan had been taken. 2.10 It is true that no allowance no sham 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 bif....