2017 (2) TMI 221

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....61"). The dispute relates to the assessment year 1989-90. The following question has been referred to be answered by this court by the Income-tax Appellate Tribunal (hereinafter referred to as "Tribunal"). "Whether on the facts and in the circumstances of the case dis allowance of the interest paid by the assessee on its borrowed funds in excess of 12 per cent. was justified under section 36(1) of the Income-tax Act, 1961, only because the assessee company had utilised its own funds to advance loans at a lower rate of interest to sister concern." 3. The assessee borrowed and had taken loan to the tune of Rs. 2,31,22,000. It paid interest to the bank and others to the tune of Rs. 68,07,000. The rate of interest paid to the bank w....

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....e difference has been disallowed under section 36(1)(iii) of 1961 Act. The moot question is whether this approach of the Revenue is justified. 6. Section 36 talks of permissible deductions. One of such deduction under section 36(1)(iii) reads as under : "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not) ; for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to....

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.... has been allow able as a business expenditure if it was incurred on grounds of commercial expediency." 10. In S. A. Builders Ltd. v. CIT (Appeals) (supra) the court held that true test is, whether the amount advanced to subsidiary or associated company or any other party was advanced as a measure of commercial expediency. If so, interest was deductible. 11. Recently in Hero Cycles P. Ltd. v. CIT [2015] 379 ITR 347 (SC), the matter has been discussed and the court agreeing with the Delhi High Court judgment in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi), has observed : "Once it is established that there was a nexus between the expenditure and the purpose of business, the Revenue cannot justifiably claim to put i....