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Issues Involved:
1. Disallowance of interest expenditure amounting to Rs. 3,25,25,750. Issue-wise Detailed Analysis: Disallowance of Interest Expenditure: Background and Facts: The assessee appealed against the order of the CIT(A), which disallowed interest expenditure of Rs. 3,25,25,750 for the assessment year 1997-98. The Assessing Officer (AO) found that the assessee had given an interest-free loan of Rs. 16.56 crores to its sister concern, Stallion Shox Ltd. (SSL), while it had borrowed secured loans amounting to Rs. 23 crores. The AO concluded that the borrowed funds were not utilized for the business purposes of the assessee but were diverted to SSL, leading to the disallowance of the interest expenditure. Assessee's Contentions: The assessee argued that SSL was a sick company under the Board for Industrial and Financial Reconstruction (BIFR) and was in the process of rehabilitation. The assessee contended that the investment in SSL was to eliminate competition and improve SSL's financial health, which would ultimately benefit the assessee's business. The assessee emphasized that the investment should be considered as made for the purpose of its business. Revenue Authorities' Findings: The AO, relying on the judgments of the Bombay High Court in Phaltan Sugar Works Ltd. v. CWT and the Madras High Court in K. Somasundaram & Bros. v. CIT, disallowed the interest expenditure, stating that it was not for the business operations of the assessee. The CIT(A) upheld the AO's decision, emphasizing that SSL and the assessee were separate legal entities and the business of the subsidiary could not be considered as the business of the parent company. Tribunal's Analysis: The Tribunal noted that for an interest expenditure to be deductible under Section 36(1)(iii), three conditions must be met: 1. There should be a borrowing of capital. 2. The capital must have been borrowed for business purposes. 3. Interest should have been paid or payable in respect thereof. The Tribunal found that the first and third conditions were met, but the dispute was whether the borrowed capital was utilized for the assessee's business purposes. It was observed that by the end of March 1997, SSL was an independent legal entity, and the assessee was not supposed to own SSL's liability. The Tribunal concluded that the assessee failed to establish that the interest-free loan to SSL was for its business purposes. The investment of Rs. 10 crores in SSL's equity was considered for the business object, and no disallowance was made on that amount. Case Laws Cited: The Tribunal distinguished the present case from the cases cited by the assessee, such as Indian Hotels Co. Ltd., Kejriwal Enterprises, and others, stating that the facts of those cases were different. The core principle from the cited cases was that if borrowed capital is utilized for business purposes, the interest expenditure is deductible. However, in the present case, the borrowed capital was not used for the assessee's business but was diverted to SSL. Alternative Submission: The assessee alternatively argued that the allocation of interest expenses was incorrect, as it had sufficient own funds. The CIT(A) scrutinized the annual accounts and found that the assessee did not have enough internal funds to advance to SSL and concluded that the borrowed funds were diverted to SSL. The Tribunal upheld the CIT(A)'s findings, rejecting the alternative submission. Conclusion: The Tribunal rejected the appeal regarding the disallowance of interest expenditure, affirming the CIT(A)'s decision that the borrowed funds were not utilized for the assessee's business purposes. The appeal was partly allowed, but the specific ground of disallowance of interest expenditure was not accepted.
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