TaxTMI 
TaxTMI 
TaxTMI 
2025 (7) TMI 1674
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....ficer, the assessee could not file the appeal before the Tribunal within the due date. He submitted that, he intends to settle the dispute under Vivad Se Vishwas Scheme and after multiple attempts, he got the mobile no. of the concerned officer and thereafter, he came to know that the appeal filed before the learned CIT(A) was already dismissed in the month of February, 2024. Thereafter, the assessee immediately engaged the Counsel to file an appeal before the Tribunal. In this process, there is a delay of 321 days in filing the appeal before the Tribunal which is neither intentional nor wanton, but, due to the circumstances beyond the control of the assessee. The Learned Counsel for the Assessee, accordingly, pleaded that the delay of 321 days in filing the appeal before the Tribunal may please be condoned in the interest of substantial justice. 3. Shri B Bala Krishna, learned CIT-DR, on the other hand, strongly opposed for condonation of the delay of 321 days in filing the appeal before the Tribunal. He submitted that, the reasons furnished by the assessee are vague and, therefore, he submitted that, the delay in filing the appeal before the Tribunal should not be condoned. 4. ....
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....ee-company is currently developing 2 large and medium sized power projects through it's subsidiaries and associates. The Assessing Officer further noted that, the assessee-company has paid interest on various loans including No Convertible Debentures [in short "NCDs"], Compulsory Convertible Debentures [in short "CCDs"] and Optionally Fully Convertible Debentures [in short "OFCDs"]. However, the loans borrowed from various banks and financial institutions have been diverted to subsidiaries and associates for non-business purposes. Therefore, the Assessing Officer called-upon the assessee to explain as to why interest paid on borrowed loans shall not be disallowed u/sec. 36(1)(iii) of the Act. 6. The Assessing Officer after considering the submissions of the assessee and also taking note of various facts observed that, although, the assessee claims to have utilized borrowed capital for the purpose of it's business, but, failed to substantiate it's claim with relevant evidences. The Assessing Officer further observed that, the assessee has borrowed loans from various financial institutions and has diverted loans borrowed for the purpose of business to it's subsidiaries/associates fo....
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.... Limited & ECL Finance Ltd 16% 20,46,24,979/- No convertible debentures (NCD) 2. IFCI Ltd NCC Infrastructure Holding Ltd. 15.6% 4 67,44,333/- Compulsorily Convertible debentures (CCD) 3. Capital Fortunes Ventures P Ltd Capital Fortunes Pvt Ltd D.V. Chalam 9% 89,32,500/- Optionally Fully Convertible debentures (OFCD) Total 26,03,01,812/- All the loans are stated to be in the nature of debenture only and the company has paid interest to the debenture holders as per the coupon rate of the instrument. During the year, the company has made investment of Rs. 153,86,65,722/- which is utilized for the subsidiary namely Sembcorp Energy India Limited (Formerly Thermal Powertech Corporation India Limited) and on which the interest of Rs. 26,03,01,812/- has been paid. iv. There is no distinction in section 36(1)(iii) between 'capital borrowed for revenue purpose' and 'capital borrowed for capital purpose' and the assessee entitled to claim interest paid on borrowed capital provided that capital is used for business purpose in irrespective of what may be result of using such borrowed capital. In the assessee's case the loan has bee....
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....ounting to Rs. 26,03,01,812/- is disallowed u/s. 36(1)(iii) of the Act and added back to the income of the assessee. The assessee company borrowing funds by issuing debentures and transferring the same funds by way of loans/advances to sister concerns/subsidiary without charging any interest. The basic principle of computation of income and expenditure is, there should always be a nexus to the income earned u/s 28 and expenditure incurred u/s 36 of I.T. Act. The explanation on diversion of funds cannot be accepted. Hence, it is proposed to consider the expenditure on the interest it to be treated as disallowance from. Therefore, the interest expenses of Rs. 26,03,01,812/- is disallowed and added to the income of the assessee. After perusal of the order and the nature of addition it is found to be a fit case for initiation of proceedings u/s. 270A for under-reporting of income. [Addition: Rs. 26,03,01,812/-]" 6. On being aggrieved by the assessment order passed by the Assessing Officer, the assessee preferred an appeal before the learned CIT(A). Before the learned CIT(A), the case was listed for three occasions i.e., on 07.09.2023, 10.01.2024 and 23.01.2024. There was no response f....
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.... above, it is clear that lending of money to its subsidiaries is not the business activity of the assessee. (ii) In view of the above discussion, it is evident that the capital/loan advanced by the assessee is not for the purpose of its own business. Instead, the assessee borrowed the capital for the benefit of its subsidiaries. Hence, the financial expenses incurred by the assessee on such borrowed capital is not allowable as deduction u/s. 36(1)(ii) of the Act. It is pertinent here to reproduce the provisions of u/s. 36(1)(iii) of the Act as follows : "the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession " From the above, it is clear that the finance cost would be allowable u/s. 36(1)(ii) of the Act, only if the said expenditure is incurred for the business of the assessee. Hence the financial charges claimed by the assessee is not allowable u/s. 36(1)(iii) of the Act. (iii) In the current FY the company has borrowed money from various companies and paid interest thereon as following :- Sr. no. Particulars Rate of interest Amount paid Nature of Debt 1. Edelweiss Commodities Services Limited & ECL Finance Ltd ....
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....23,53,224/- on which the assessee has shown to have incurred interest aggregating to Rs. 26,03,01,812/-, which is claimed to have been incurred in the normal course of its business. The submission of the assessee is considered but the same is found to be not acceptable in view of the fact that the said borrowed funds of Rs. 2,40,23,53,224/- on which interest of Rs. 26,03,01,812/- is claimed to have been incurred, have been diverted towards financial assets, which have increased from Rs. 7,00,67,51,696/ (as on 31.03.2017) to Rs. 10,12,00,47,226/- (as on 31.03.2018). Further, in its submission, the assessee has admitted that the proceeds of Rs. 220 Crores of debenture are primarily used for closing the earlier loan of Rs. 198.49 Crores and the remaining amount has been used for other purposes and that the amount of Rs. 7,41,33,668/- was diverted towards loans given to Gayatri Hotels and Theatres Pvt Ltd. From the submission of the assessee, it is not exactly clear as to how the interest expenditure of Rs. 26,03,01,812/- has been incurred by the assessee in its normal course of business. (vi) In view of the above discussion, interest expenditure related to debentures amounting to ....
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....ing from the date on which the capital was borrowed for acquisition of the asset fill the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." 8.5. The sub section has three important words or phrases that are core to understanding of this Section i.e. (i) Interest, (ii) Borrowed and, (iii) For the purpose of business or profession. (i) Meaning of "Interest" The definition of "interest" in Section 2(28A) means "interest payable in any manner in respect of any moneys borrowed or debt incurred". But for Section 36(1)(ii), "interest" is restricted to that on money borrowed and not on debt incurred. In simple words, the essence of interest is that it is a payment which becomes due because the creditor has not had his money at his disposal. It may be regarded either as representing the profit he might have made if he had had the use of his money, or conversely, the loss he suffered because he had not that use. The ....
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.... "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 sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". 8.6 Thus, for allowance of a claim for deduction of interest under this provision following three conditions are there: (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have paid interest on the....
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....ered decision that the appellant failed to discharge its initial burden to prove that the interest on borrowed funds which were used for commercial expediency. Though the facts show that the borrowed funds were used purpose of increasing financial assets despite the appellant company was engaged in the business to development, Construction and operation of power, was for. In view of the ratio laid down in the above judicial pronouncements, I am of the considered opinion that the interest paid to the tune of Rs. 26,03,01,812/- to three entities as mentioned in para 4.1 (iii) of order is not deductible within the provision of section 36(1)(iii) of the Act. Ground nos. 1 to 5, are dismissed. 7. CA, K C Devdas, Learned Counsel for the Assessee, referring to the evidences submitted before the Assessing Officer and the learned CIT(A) submitted that, the appellant has borrowed loans in the form of NCDs, CCDs and OFCDs from various financial institutions for the purpose of it's business for development, construction and operation of power projects on it's own or through it's subsidiaries/associates. The loans borrowed from financial institutions has been utilized for the purpose of it's b....
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....ilders Ltd., vs., CIT [2007] 288 ITR 1 (SC); (iii) Hero Cycles (P) Ltd., vs., CIT [2015] 379 ITR 347 (SC) and (iv) CIT vs., Tulip Star Hotels Ltd., [2011] 338 ITR 482 (Del.) (HC). 8. Shri B Bala Krishna, learned CIT-DR, on the other hand, supporting the order of the learned CIT(A) submitted that, the appellant-company has borrowed various loans from financial institutions and given loans to it's subsidiaries/associates without charging any interest. The appellant-company has not proved commercial expediency or nexus between loans given to it's subsidiaries and advantage derived from it's business. Further, the appellant has borrowed loans and repaid existing loan. The appellant-company has also diverted part of loan funds to other group companies which are not in similar line of business. Since, the appellant-company could not establish commercial expediency or business necessity to explain loans given to it's subsidiaries/associates, the Assessing Officer has rightly disallowed the interest paid on said loans u/sec.36(1)(iii) of the Income Tax Act, 1961 because, the appellant-company has diverted borrowed capital for non- business purposes. In this regard, he relied upon the deci....
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....usiness of the appellant-company and there is a commercial expediency in advancing loan to subsidiary company. Therefore, in our considered view, the Assessing Officer having noticed the fact that, loan borrowed from various financial institutions has been utilized for the purpose of business of the appellant- company, erred in disallowing interest paid on said loan u/sec.36(1)(iii) of the of the Income Tax Act, 1961, on the ground that, the appellant-company has diverted borrowed funds for the purpose of non-business purposes of the appellant-company. 10. Coming back to the legal proposition on this issue. It is well established or well settled position of law from the decisions of various courts including the decision of Hon'ble Supreme Court in the case of S.A. Builders vs., CIT (supra) that, if loan is advanced to subsidiary or associates in the ordinary course of business for the purpose of commercial expediency, then, interest cannot be disallowed u/sec.36(1)(iii) of the Income Tax Act, 1961. The Hon'ble Supreme Court has defined the phrase "for the purpose of business or commercial expediency" as an expression of wide import and includes such expenditure as a prudent busine....
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.... the purpose of business of the assessee on it's own or through it's subsidiaries/associates. As long as the money is utilized for the purpose of business, then, interest paid on said loans should be allowed as deduction u/sec. 36(i)(iii) of the Income Tax Act, 1961. This legal position is further supported by the decision of Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd., vs., CIT (supra) and Judgment of Hon'ble Delhi High Court in the case of CIT vs., Tulip Star Hotels Ltd., (supra). The sum and substance of the ratio laid down by various courts is that, in order to claim deduction for interest paid on borrowed capital, the borrowed capital must be utilized for the purpose of business of the assessee. 11. In the present case, there is no dispute with regard to the fact that, the appellant-company has utilized the borrowed capital from various financial institutions in the form of NCDs, CCDs and OFCDs for the purpose of it's business either on it's own or through subsidiaries/ associates. Therefore, in our considered view, the assessee is eligible for deduction towards interest paid on loans u/sec. 36(1)(iii) of the Income Tax Act, 1961. 12. Coming back to the observ....