TaxTMI 
TaxTMI 
2016 (4) TMI 1127
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....ourse of assessment proceedings, while scrutinizing the Balance Sheet of the assessee company, the AO noticed that the assessee company has invested Rs. 3,28,08,080/- in M/s. Mascot Footcare, Noida and Rs. 1,45,76,154/- in M/s. Mascot Udhyog, Noida. The assessee had shown a profit of Rs. 8,01,141/- from the above two firms under the head Other Income in Schedule 8 of the profit & loss account. It is also noticed that Mrs. Kamlesh Lakhani, Mr. K.C. Lakhani and Mr. Gunjan Lakhani, directors of the assessee company are also the partners in the above two companies i.e. M/s. Mascot Footcare and M/s. Mascot Udhyog, Noida. The aggregate rate of return from the investment of the assessee company in the above two firms is 1.69%. Whereas the assessee is paying interest on unsecured loan from Shri Gunjan Lakhani @ 12% and interest to Punjab National Bank @12%. Hence on one side the assessee had invested huge amounts in the firm, in which directors of the firm are partners, at a very low rate of return, on the other hand the assessee company is having loans on which it is paying interest @ 12% which is very much higher than the rate of return from these investments. The AO further observed tha....
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....sessee's submissions, at pages 4 to 6 of his order. He concluded that in view of above discussion and carefully considering the reply of the assessee, an amount of Rs. 48,85,314/- is added to the income of the assessee by way of disallowance of interest on unneeded loans, as it is clear that if the assessee would not have kept the capital invested there would have no requirement of the loans. 3. Being aggrieved by the order of AO, assessee carried the matter before ld. CIT (Appeals), who has upheld the action of the AO by observing as under :- " 4.3. I have perused the assessment order as well as submissions made by the appellant and find that a disallowance of Rs. 48,85,314/- out of the interest payments made by the appellant on loans has been made by the AO on the ground of mis-utilization of interest bearing funds. The AO has stated that an amount of Rs. 3.28 crores stands invested as capital in M/s. Mascot Footcare and amount of Rs. 1.45 crores stands invested as capital in M/s. Mascot Udhyog. The profits earned on the investment made by the company is only 1.69% and the rate of interest paid by the appellant at 12% is much higher and therefore a disallowance @ 10.31% on the....
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....m related persons, whereas the funds of the company have been parked in other concerns where such related persons are holding substantial interest. Hon'ble Kerala High Court has held in the case of CIT vs. Accelerated Freeze Drying Pvt. Ltd. 324 ITR 316 that interest paid is not deductible as money was given to sister concern without interest. Further, Hon'ble Allahabad High Court has in the case of CIT vs. Sahu Enterprises Pvt. Ltd. 352 ITR 008 has held that onus is on assessee to prove utilization of borrowed funds for the purposes of business. Interest was held not allowable u/s 36(1)(iii) of the IT Act. Accordingly, I uphold the action of the AO in making the disallowance and confirm the addition of Rs. 48,85,314/- out of the interest payments on loans claimed by the company." 4. Now the assessee is before us. 4.1. We have heard the rival contentions of both the parties and perused the material available on the record. The only point raised in the appeal in the aforesaid matter is with regard to the disallowance of Rs. 48,85,314/-out of interest of Rs. 1,91,99648/-paid by the appellant to the bank as well as to the other parties. It was contended by the ld AR for the assessee....
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....rd is that the assessee has made investments in M/s Mascot Footcare and M/s Mascot Udyog prior to the assessment year 1999-2000 and the said investment made by the assessee in those years have increased many folds on account of the profit, interest etc. to the tune of Rs. 47,38,4234/-. Moreover it is also an admitted position that out of the said available funds, the said concerns had invested in Ms Lakhani India Ltd. The assessment year in which the investments were made in the equity share of M/s Lakhani India Ltd, by M/s Mascot Udyog were as under :- 1995-96 Rs. 24378150 1996-97 Rs. 351110 2001-02 Rs. 237144 Total Rs. 24966404 Thus it is clear that no investment were made in M/s Lakhani India Ltd in the year under consideration. The assessing officer had failed to prove the nexus between the interest paid to the related parties and bankers and the investment made by the assessee in the current assessment year. No new investments were made by the assessee in the year under consideration. 4.5. In our view the assessee was able to establish that he had incurred the expenditure wholly and exclusively for the purpose of business and therefore there is no justification for t....
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....urred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1)(iii) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. 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 ....