TaxTMI 
TaxTMI 
TaxTMI 
2021 (7) TMI 1020
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....ssing Officer found that the assessee had debited an amount of Rs. 1,35,25,521/-in the P&L Account on account of interest expense. Assessee informed that a loan of Rs. 27,69,25,000/-was taken by them from Orris Infrastructure Private Limited (OIPL) a group company, carrying an interest of Rs. 18% per annum as per the agreement entered into. Further, assessee submitted that out of this amount, a sum of Rs. 17 crores was given on loan to M/s M/S. ABW Infrastructure, which also carries interest at 18% per annum. According to the learned Assessing Officer in spite of several opportunities given, assessee failed to submit the business uses details, except stating that they are engaged in the business of buying, selling, constructing properties/land etc. Learned Assessing Officer, therefore, observing that the claim of the assessee regarding interest cost of Rs. 1,35,25,521/- cannot be allowed because under the provisions of the Income Tax Act, 1961 interest expense is allowable as business expenditure only when the assessee incurs it in respect of uses of loan for the purpose of business. 3. Aggrieved by such an action of the learned Assessing Officer, assessee preferred an appeal befo....
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....d the loan from OIPL and therefore, the borrowing was for commercial expediency and the interest expense thereon is an allowable expenditure under section 36 (1)(iii) of the Act. In the alternative it is submitted that since the learned Assessing Officer did not disturb the offering of interest received from M/S. ABW to tax, the interest expense in relation to earning such income from other source could be deducted under section 57 (iii) of the Act. 5. She further submitted that the interest of Rs. 1,35,25,521/- paid by the assessee on the loan availed from M/s. OIPL is an allowable expense because the utilization of the loan from M/s. OIPL is within the commercial mandate as per terms of the Agreement with M/s. OIPL; that such loan has been spent on various business purposes of the assessee, including granting loan to a third-party real estate company driven by strategic interest and earning taxable income by way interest while ensuring utilization of interest-bearing funds; that the interest paid by the assessee to M/s. OIPL has been offered to tax. She, therefore, submitted that the interest of Rs. 1,35,25,521/- paid by the assessee to M/s. OIPL is allowable under section 36(1)....
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....ted 2/4/2009 assessee obtained loan to the tune of Rs. 14,72,25, 000/-whereas the opening balance of the loan amount from OIPL was Rs. 3,37,25,000/- as on 1/4/2012 and the total amount available with the assessee was Rs. 18,09,50,000/-; that the assessee company was approached by M/S. ABW Infrastructure to lend a sum of Rs. 17 crores pending approvals/permission for change in land use while applied for, which were not received during the year under consideration and were awaited. 9. It is not the case of the Revenue that the conversion of the land use is the only one business purpose, which necessitates it to borrow any amounts. According to the assessee, besides the above Rajasthan project, for purposes of its expansion plans in the real estate sector, the assessee approached its sister concern M/s. OIPL for grant of loans of up to Rs. 50 Cr. Agreement dated 01.04.2012 between the assessee and M/s. OIPL at the start of the financial year, could be found a part of the Paperbook. Clauses 1 & 3 of the agreement show that the loan from M/s.OIPL was for various business purposes of the assessee besides the Rajasthan project. 10. In the assessment order, learned Assessing Officer note....
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....business relationships in the real estate sector that may subsequently be converted either into acquisition of property, and in giving confidence in furthering the relationship into a prospective collaboration. It cannot be ignored that the loan was advanced to M/S. ABW Infrastructure at the same rate of interest as was charged by M/s. OIPL to see that the entire transaction would be cost neutral. 12. It remains an undisputed fact that an amount of Rs. 14,72,25, 000/- was taken by the assessee during the year under consideration; that an interest expense of Rs. 1,35,25,521/- was incurred whereas the interest earned was of Rs. 1,48,38,906/- by charging the same at 18% p.a. from M/S. ABW Infrasture and it was offered to tax as income from other sources by the assessee. Revenue also does not dispute that the interest of Rs. 1,35,25,521/- earned by M/s. OIPL at 18% p.a. from the assessee was offered to tax by M/s. OIPL. Reasons recorded by the authorities below for disallowance of interest expenses of Rs. 1,35,25,521/- are that there was no commercial expediency in the loan taken from M/s. OIPL and loan given to M/s. M/S. ABW infrastructure and the land use conversion charges are very....
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....at a part of amount borrowed is not used for purpose of business and held that in such circumstances, disallowance of interest was unjustified. 15. For the sake of completeness, we deem it necessary to extract and refer to the detailed observations of the Hon'ble Apex Court in the case of S.A. Builders Ltd. 158 Taxman 74/288 ITR 1 (SC), which read as follows: "19. In this connection we may refer to section 36(l)(/77) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act1) which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income-tax under section 28 of the Act. 20. In Madhav Prasad Jantia v. Commissioner of Income Tax, U.P., AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax Authorities have approached the matter from an erroneous....
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....the Act. In Madhav Prasad's case (supra), 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. 27. Thus, the ratio of Madhav Prasad Jantia's case (supra) 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(lUf7n of the Act. 28. 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. 29. 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. fl9641 53 ITR 140, CIT v. Birla Cotton Spinning and Weaving Mills Ltd. r 19711 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced....
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....mselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. 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....