TaxTMI 
TaxTMI 
2022 (10) TMI 605
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....on record. 3. The assessee has raised the common grounds in these appeals. The grounds for the assessment year 2012-13 are reproduced as under:- "1. Because the Ld. CIT (A) has erred on facts and under the law in confirming the disallowance of Rs.12,10,134/- made by the Ld. AO in respect of interest on loan advanced to the sister concern of the assessee. 2. Because the Ld. Lower Authority has erred in making addition of Rs.10,134/- for interest of loan advanced to M/s Tulsiani Construction and Developers (P) Ltd. claiming that the loan has been made out of interest bearing funds. 3. Because the Ld. Lower Authority has also erred in making addition of Rs.12,00,000/- for interest of loan advanced to Grace Infraventure (P) Ltd., without appreciating the fact that the appellant and his sister concern, both are engaged in same nature of business i.e. real estate business and the loan advanced to the sister concern has been utilized for the purchase of land i.e. for business purpose. 4. Because the LD. Lower Authority has erred in making addition to the assessment year in question as the assessment for the year has been completed on the date of search and it is settled law that ....
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....t advanced to the sister concerned are used for business purpose and therefore, there was a commercial expediency in advancing loans to sister concerns. The assessee in the statement of facts as part of Form 35 has stated in para 8 to 11 as under:- "8- The assessee has explained has explained during the assessment proceedings that the amount advanced to Grace Infraventures Pvt. Ltd. of Rs.1 crore have been exclusively used for business purpose. The assessee relied upon the case law of Apex Court in case of S.A. Builders Ltd., wherein it has been held that Section 36(1)(iii) of the Act states that interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction in computing taxable income. The expression "for purposes of business or profession" occurring in Section 36(1)(iii) of the Act is wider in scope than the expression "for the purpose of earning income, profits or gains". Accordingly, expenditure voluntarily incurred on the test of commercial expediency is to be allowed as a deduction. It is immaterial if a third party also benefits by the said expenditure. The expression "commercial expediency" is again of wide import an....
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....ssee is taking only legal plea that the advance given to the sister concerned has been exclusively used for business purpose and therefore, in view of the of the judgment of Hon'ble Supreme Court in the case of S.A. Builder vs. CIT(A) (supra), the interest expenditure on the borrowed fund is allowable deduction as the expenditure voluntarily incurred even by advancing the interest free loan to the sister concerned to satisfy the test of commercial expediency. The assesssee has contended that money borrowed even when advanced to sister concern for some purpose would qualify for deduction. The second contention has been raised by the assessee that the advance has been made by the assessee company out of interest free funds available with the assessee hence, no disallowance under section 36(i)(iii) can be made. 7. On the other hand, learned CIT DR has submitted that the AO has given the facts in para 5.5 of the assessment order which reveals that the interest free advance was given to the sister concerned directly from the term loan account with PNB therefore, there is no ambiguity about the fact that the interest bearing fund has been used by the assessee in giving interest free adv....
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....he purpose of business by the companies. As the said amount has been use for purpose of business only and no disallowance u/s 36(1)(iii) is variant." It is amply clear from the above replies that assessee has tried to evade the question of purpose for which such loan was either advanced or received. The assessee has taken shelter of judicial pronouncement in the case of S.A. Builders vs CIT. Although, the decision is pending for reconsideration before the Hon'ble Supreme Court (as discussed supra), yet, it must be noted the submissions made by the assessee even fails the test of "commercial expediency" laid down in the said judgement and various other judgments. The assessee has failed to highlight any fact or produce any evidence to establish that it was commercially expedient or necessary to advance the loan to its sister concern. As discussed in the superseding para, since the assessee has failed to provide any evidence lest convincing one, it clear fails the test for utilization of funds for business purpose. Therefore, interest on borrowed capital is liable to be disallowed on this count. ii. Source of disbursal of loan amount: From the material available on record, ....
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....to the sister concerns from the PNB term loan is based on independent evidence of term loan account of the assessee with PNB. 10. The next contention of the assessee is that the interest free loan was advanced to the sister concerned for business purpose and commercial expediency has been considered by the CIT(A) in its finding in para 7 and 8 as under:- "7. Through these grounds of appeal the appellant has objected to the proportionate disallowance of Interest paid on borrowed funds by the AO. The appellant has contended that the Money was used for business purpose by M/s Grace Infraventures (P) Itd and M/s Tulsiyani Construction Pvt. Ltd. It was contended that the appellant had sufficient Interest free funds at its disposal to advance the amount to M/s TCPL. During the course of assessment proceedings the AO noted that the appellant had disbursed interest free advances of Rs. 51,00,000/- and Rs. 1,00,00,000/- to M/s Tulsiyani constructions and M/s Grace infraventures Pvt. Ltd. respectively. The advance remained outstanding till the end of financial year under consideration. The AO disallowed proportionate amount of Interest u/s 36(1)(vil) of the Act. I have perused the ass....
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....iency as "an expression of wide import and includes such expenditure as a prudent businessman Incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". Further, following this judgment the High Court of Delhi, In the case of Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business Interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal Interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be soug....
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.... interest u/s.36(1)(iii) has held as under: 37. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the. Assessing Officer that whatever loans were raised by the assessee, the some were used for business purposes. If In the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee Is Incurring liability to pay interest, there was justification to advance loans to sister concerns for non business purposes without any Interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. 38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do....
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....a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds: This 'would depend on facts of each case.. 40. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying, any interest is to be disallowed under Section 36(1)(a) of the Act." 8. In this case the appellant has not submitted any explanation regarding the purpose of advancing Interest free advance to its sister concern. It was submitted that the money advanced by the appellant was used by M/s Grace Infraventures Ltd. for purchase of land and that both the entities are engaged in the same line of business. However the appellant has falled to establish the 'commercial expediency' for which the said amount was given and as to how the business of the appellant company was preserved, protected or advanced from the same. The appellant has relied upon the aforesaid judgme....
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....rt 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 angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155 (HL), it was h....
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....tedly 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 vs. Malayalam Plantations Ltd. (1964) 53 ITR 140, CIT vs. Birla Cotton Spinning & Weaving Mills Ltd (1971) 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital....