TaxTMI 
TaxTMI 
2016 (6) TMI 1346
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....lected for scrutiny and notice under section 143(2) of the Act was issued on 14.08.2009. 2.1 In the assessment order, the Assessing Officer has observed that the assessee has paid huge interest of Rs.. 61,77,008/- on its borrowed funds of Rs..6,22,20,086/-, while on the other hand it has given interest free loans amounting to Rs..18,24,93,492/- to its sister concerns. The assessee has claimed that there was no direct nexus between the borrowed funds and the investment in the sister concerns and the investment made in the sister concerns were only out of the share capital and reserves and surpluses. The Assessing Officer has not believed that the entire interest as an expenditure incurred was for the assessee's own business. Since the amount advanced to sister concerns was more than the amount borrowed, the entire interest was disallowed holding that the entire interest payment was attributable to the funds diverted to the sister concerns. The Assessing Officer has further observed that the assessee has paid interest on the borrowed funds, but it has not charged any interest on the investments made in the sister concerns. As per section 36(1)(iii) of the Act, the loans rai....
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....r profession is an allowable expenditure. 7. Advance to L& T Arun Excello Realty Pvt. Ltd was made for the purpose of purchase of land and to meet the supply cost for constructions. 8. The advances made to Arun Excello Foundations Pvt. Lid and Arun Fabricators were entirely to meet the expenses in the ordinary course of business. 9. In the case of Arun Constructions, there has been no outflow of funds from the appellant to Arun Constructions. Arun Constructions was paid by Marg Constructions Ltd instead of paying the appellant. Hence, the appellant has debited the account of Arun Constructions in its books and treated the same as advances made. 10. From the above, it is established that the appellant had lent funds to the sister concerns with the sole motive of promoting its business interest and In aiding them to conduct the business activity hassle-free and efficiently." 3.1 After considering the above submissions and by following the decisions in the case of P.R.M.S. Ramanathan Chettiar v. CIT 72 ITR 534 (Mad) and in the case of M.P.S. Raja v. CIT 105 ITR 295 (Mds), the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. ....
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.... 4.2.1 With regard to disallowance of notional interest on diversion of funds for non- business purposes, the following issues are to be kept in mind. i) Whether the amount borrowed, on which interest paid by the assessee, was used for the purpose of the assessee, so that interest debited can be allowed as business expenditure? [CIT vs. Calcutta Agency Ltd 19 ITR 191 (SC)] ii) Whether the loans were given by the banks for any specific purpose? iii) Whether there was a "commercial expediency" to advance loans to the concerns including sister concerns? [S.A.Builders Ltd vs. CIT 288 ITR 1 (SC)] iv) Whether there is a nexus between the funds borrowed and the funds advanced. 4.2.2 With regard to the first question, the Id.AR's argument was that since the appellant was having sufficient own funds and the same were used for the purpose of advance to sister concerns, the borrowed funds were used by the appellant for its own business only and the interest debited is a business expenditure. I do not agree with this argument *of the Id. AR. If the argument of the Id. AR is true, then there is no need for borrowals. I have seen the Balance S....
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....irement and it is sufficient if the holding company (appellant) has a deep interest in its subsidiary, the appellant should able to prove that the appellant's subsidiary sister companies are sick or not having regular funds and are in dire need of help from the appellant company. They being the group concerns, they could have independently approached the banks for funds on the basis of the financial strength of the appellant company. The same package of loans could have very well been obtained from the banks and individuals by the sister concerns, instead of routing through the appellant company and dumping the interest burden on it. As stated earlier, the revenue can not dictate how the business houses should behave, but onus is on them to explain the circumstances, more so when the appellant wants to claim an expenditure attached to it. Therefore I hold that the appellant in the instant case has failed to establish any commercial expediency for advancing interest-free loans to sister concerns. Hence, the decision of the Hon'ble Supreme Court in the case of S.A Builders Pvt. Ltd (supra) does not come to the rescue of the appellant. 4.2.5 Last but not the least asp....
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....1)(iii). Such borrowings to that extent cannot possibly be held for the purpose of business but for supplementing the cash diverted without deriving any benefit out of it. Accordingly, the assessee would not be entitled to claim' deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest. [Para 38]. Thus the onus to prove that the borrowed funds have not been diverted is on the appellant. The onus was not discharged by it. It has also not explained why it necessitated to go for borrowings when own funds are available with it. 4.2.6 Above all, the jurisdictional High Court in the cases of P.R.M.S. Ramanathan Chettiar v. CIT( 72 ITR 534) (Mad) and M.P.S.Raja v.CIT (105 ITR 295) (Mad), has held that interest paid on borrowed capital will be allowed as deduction only if the capital was used for the purpose of business. If it is used for a purpose other than that of its own business, then interest to that extent to which capital was so used, will not be allowed. 4.2.7 In view of the above discussion and judicial rulings, I hold that it would be the commercial impropriety to borrow fund....