2016 (6) TMI 1346 - AT - Income Tax

Disallowance of interest on borrowed funds - scrutiny assessment - direct nexus between the borrowed funds and the investment in the sister concerns - 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 - Held that - Even if we take for a while, that return benefit is not an essential requirement and it is sufficient if the holding company (assessee) has a deep interest in its subsidiary, the assessee should able to prove that the assessee 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 assessee 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 assessee company and dumping the interest burden on it. Though, the revenue cannot dictate how the business houses should behave, but onus is on them to explain the circumstances, more so when the assessee wants to claim the expenditure attached to it. Therefore we hold that the assessee has failed to establish any commercial expediency for advancing interest-free loans to sister concerns. Under the above facts and circumstances, the disallowance made by the Assessing Officer was rightly confirmed by the CIT(A) and thus, we uphold the order of the ld. CIT(A) and dismiss the ground raised by the assessee.- Decided against assessee.

Summary

Issues Involved:
1. Confirmation of disallowance of interest on borrowed funds amounting to ?61,77,008/-.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance of Interest on Borrowed Funds:

Background:
The assessee filed a return for the assessment year 2008-09, admitting a total loss of ?2,53,18,670/-. The case was selected for scrutiny, and the Assessing Officer (AO) observed that the assessee paid interest of ?61,77,008/- on borrowed funds of ?6,22,20,086/- while providing interest-free loans of ?18,24,93,492/- to sister concerns. The AO disallowed the entire interest, citing that the loans were not used wholly and exclusively for the assessee's business purposes as required under section 36(1)(iii) of the Income Tax Act, 1961.

Assessee's Argument:
The assessee argued that the advances to sister concerns were made out of its own funds (share capital and reserves) and not from borrowed funds. The assessee had total funds of ?53.09 crores on 1.4.2007. The advances were for business purposes, such as purchasing land and meeting construction costs, and should be viewed in light of commercial expediency.

CIT(A) Findings:
The Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance, noting:
- The assessee had sufficient own funds but still borrowed ?6,22,20,086/- while advancing interest-free loans to sister concerns.
- The assessee failed to prove the commercial expediency of the advances.
- The AO's reliance on the decision in Abhishek Industries Ltd vs. CIT (286 ITR 1) was upheld, stating that the onus was on the assessee to prove that the borrowed funds were used for business purposes.
- The jurisdictional High Court's rulings in P.R.M.S. Ramanathan Chettiar v. CIT (72 ITR 534) and M.P.S. Raja v. CIT (105 ITR 295) were cited, emphasizing that interest on borrowed capital is deductible only if used for business purposes.

Tribunal's Decision:
The Tribunal upheld the CIT(A)'s order, dismissing the assessee's appeal. It reiterated:
- Interest paid on borrowed capital is deductible only if the capital is used for business purposes.
- The assessee failed to establish any commercial expediency for advancing interest-free loans to sister concerns.
- The advances did not provide any direct benefit to the assessee's business.
- The assessee did not discharge the onus of proving that the borrowed funds were not diverted for non-business purposes.

Conclusion:
The Tribunal concluded that the disallowance of interest on borrowed funds was justified as the assessee failed to prove that the advances to sister concerns were for business purposes or commercially expedient. The appeal filed by the assessee was dismissed.