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2016 (5) TMI 918 - AT - Income TaxInterest allowance under section 36(1)(iii) - whether the amount lent to SML by the assessee was on account of some business expediency? - Held that - No doubt remains in our mind that the amount was given to SML by the assessee, interest free, out of business expediency only. The company was going through a bad phase of poor financial health and the assessee had provided it assistance through these funds. Nowhere at any stage from the initiation of assessment proceedings, no allegation has been levied by any of the authorities below that these funds were given out of some personal reason or these funds have been used by SML for any purpose other than business purpose. The purpose for giving funds should not necessarily be immediate or direct benefit to the assessee. In views of this, we do not find any need for the Assessing Officer to do such an exercise. In view of the above, we hold that the amount advanced by the assessee to SML was out of business expediency. - Decided against revenue
Issues Involved:
1. Disallowance of interest on borrowed funds lent to a sister concern under Section 36(1)(iii) of the Income Tax Act, 1961. 2. Business expediency in lending interest-free advances to a sister concern. Issue-wise Detailed Analysis: 1. Disallowance of Interest on Borrowed Funds Lent to Sister Concern under Section 36(1)(iii): The Assessing Officer (AO) made an addition of ?51,23,000/- on account of interest on borrowed funds lent to Swaraj Mazda Limited (SML), a sister concern of the assessee, under Section 36(1)(iii) of the Income Tax Act, 1961. The CIT (Appeals) decided in favor of the assessee, stating that since no interest was incurred on these outlays, disallowance under Section 36(1)(iii) does not arise. The ITAT upheld this decision, but the Department appealed to the High Court, which remanded the matter back to the ITAT to consider the issue of business expediency in light of the Supreme Court judgment in S.A. Builders Vs. CIT. The ITAT directed the AO to re-examine the matter, who, after remand proceedings, maintained that there was no business expediency, and thus, the disallowance should be sustained. 2. Business Expediency in Lending Interest-Free Advances to Sister Concern: The primary issue to adjudicate was whether the amount lent to SML by the assessee was on account of business expediency, qualifying for interest allowance under Section 36(1)(iii). The assessee argued that it had to provide written undertakings to Public Financial Institutions (PFIs) to support SML against project overruns or cash losses. Additionally, SML was a customer of the assessee, and financial support was deemed prudent business practice. The assessee also benefited from the relationship with Mazda Japan through improved manufacturing technology and quality assurance practices. During remand proceedings, the AO examined the submissions and evidence provided by the assessee, including an affidavit from the Managing Director of SML, and concluded that there was no business expediency. The AO's opinion was based on the absence of a written undertaking and lack of corroborative evidence for the benefits claimed by the assessee. The ITAT analyzed the parameters laid down by the Supreme Court in S.A. Builders, which emphasized that the expression "commercial expediency" is broad and includes expenditures incurred for business purposes, even if not under legal obligation. The Supreme Court highlighted that the interest on borrowed funds could be allowed if advanced to a sister concern for business purposes, not necessarily for immediate or direct benefit. The ITAT found that the assessee had provided financial assistance to SML during its poor financial health phase, as evidenced by the auditors' report and directors' report of SML. The ITAT observed that the funds were given out of business expediency, and there was no allegation of personal use of funds by SML. The ITAT also noted that the benefits derived from the relationship with Mazda Japan need not be quantified in exact monetary terms for the deduction to be allowed. Conclusion: The ITAT held that the amount advanced by the assessee to SML was out of business expediency, and no disallowance should be made under Section 36(1)(iii). Consequently, all the appeals of the Revenue were dismissed.
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