2017 (3) TMI 666

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....sister concern u/s 36(1)(iii) of the Act without appreciating the fact that the borrowed fund has been advanced in the form of share application money but not as a loan. 3. Briefly stated, the facts are that the Assessing Officer while completing the assessment u/s 143(3) of the Act noticed from the profit and loss account of the Assessee that the Assessee has claimed interest expenditure amounting to Rs. 33,53,425/- on the borrowed funds. The Assessing Officer also noticed from the balance sheet that the Assessee has advanced funds to the tune of Rs. 148 crores to its sister concerns in the form of share application money. Therefore, the Assessee was required to explain as to why interest paid on unsecured loans should not be disallowed....

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....sister concern from the point of view of commercial expediency and not from the point of view of whether the amount is advanced for earning profit. Against this order, the revenue is in appeal before us. 4. The Ld. DR drew our attention to the findings of the Assessing Officer and submits that inspite of the Assessing Officer calling for explanation from the Assessee as to why the interest paid on unsecured loans should not be disallowed invoking the provisions of section 36(1)(iii) of the Act as the Assessee has diverted the borrowed funds to sister concerns and invested as share application money and at the same time Assessee was incurring interest expenditure on such borrowed funds, the Assessee did not file any explanation. Further i....

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....ssessee on unsecured loans should not be disallowed u/s 36(1)(iii) for the reason that the Assessee borrowed huge amounts and advanced Rs. 148 crores to its sister concerns in the form of share application money. It appears that the Assessee has not offered any explanation or valid reason and it was not established by the Assessee of any commercial expediency in advancing amounts to its sister concerns. Therefore, the Assessing Officer invoking the provisions of section 36(1)(iii) of the Act disallowed interest of Rs. 33,53,425/- incurred by the Assessee on unsecured loans. 7. It was the submission of the Assessee before Ld. CIT (Appeals) that the Assessee engaged in the business of generating, transmitting, distributing and supplying el....

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....t is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to sec.37 will also be applicable to section 36(1) (iii) because in section 37 also the expression used is "for the purpose of the business' "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. To consider whether one should allow deduction under section 36(1) (iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorizes and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borro....