2017 (3) TMI 666 - AT - Income Tax

Interest expenditure on borrowed fund advanced to its sister concern u/s 36(1)(iii) - whether borrowed fund has been advanced in the form of share application money but not as a loan - CIT (Appeals) placing reliance on the decision of the Hon ble Supreme Court in the case of SA Builders Ltd. Vs. CIT 2006 (12) TMI 82 - SUPREME COURT deleted the disallowance - Held that - On perusal of the findings of the Ld. CIT (Appeals), we are of the view that the Ld. CIT (Appeals) has not gone into the aspect of commercial expediency in advancing the money by the Assessee to its sister concerns. As could be seen from the above, it was made very clear by the Hon ble Supreme Court that to consider whether deduction u/s 36(1)(iii) should be allowed on the amount borrowed by Assessee for advancing to sister concern, the authorities and courts should examine the purpose for which the Assessee advanced the money and what the sister concern did with the money. It was also further held that what is relevant is to see whether the amount was advanced as a measure of commercial expediency but not whether the Assessee advanced those for earning profits. The lower authorities have not examined the facts and the above aspect of the matter in this case so as to arrive at a conclusion that there is commercial expediency. The Assessee also did not give any explanation as to how there is a commercial expediency in advancing the money to sister concerns. Therefore, we are of the view that this aspect of the matter has to be re-examined by the Assessing Officer and the Assessee shall furnish all necessary details in this regard. Thus, we restore the matter to the file of the Assessing Officer who shall decide the issue afresh . Appeal of the Revenue allowed for statistical purpose.

Summary

Issues:
1. Whether interest expenditure on borrowed funds advanced to a sister concern can be allowed under section 36(1)(iii) of the IT Act.
2. Whether there was commercial expediency in advancing funds to sister concerns.
3. Whether the decision of the Ld. CIT (Appeals) in deleting the interest disallowance was justified.

Analysis:
Issue 1:
The Revenue filed an appeal against the order of the Ld. CIT (Appeals) for the assessment year 2011-12, specifically challenging the allowance of interest expenditure on borrowed funds advanced to a sister concern under section 36(1)(iii) of the Act. The Assessing Officer disallowed the interest claiming lack of commercial expediency in advancing funds to sister concerns. On appeal, the Ld. CIT (Appeals) relied on the Supreme Court's decision in SA Builders Ltd. Vs. CIT [288 ITR 1], emphasizing the nexus between expenditure and business purpose. The Revenue contended that the Ld. CIT (Appeals) did not assess the commercial expediency aspect. The ITAT observed that the purpose for advancing funds and the sister concern's use of the money are crucial. The ITAT directed a re-examination by the Assessing Officer, requiring the Assessee to provide necessary details to establish commercial expediency.

Issue 2:
The Assessee claimed that advancing funds to a sister concern was for commercial expediency, citing the business of generating electrical power. However, the Assessee failed to address commercial expediency before the Ld. CIT (Appeals). The ITAT noted the importance of demonstrating commercial expediency in advancing funds to sister concerns, as highlighted in the SA Builders case. The ITAT emphasized that commercial expediency, not profit generation, is the key consideration for allowing deductions under section 36(1)(iii). Since the lower authorities did not adequately examine this aspect, the ITAT ordered a fresh assessment by the Assessing Officer.

Issue 3:
The Ld. CIT (Appeals) based the decision to delete the interest disallowance on the SA Builders case without thoroughly analyzing commercial expediency. The Revenue argued that the Ld. CIT (Appeals) overlooked the necessity of establishing commercial expediency. The ITAT concurred with the Revenue's contention and allowed the appeal for statistical purposes, directing a reassessment by the Assessing Officer. The ITAT stressed the need for a detailed examination of commercial expediency in advancing funds to sister concerns to determine the allowance of interest expenditure under section 36(1)(iii) of the IT Act.