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2015 (11) TMI 1314 - SC - Income TaxDeduction of interest paid on borrowed sums from Bank under the provisions of Section 36(1)(iii) disallowed - diversion of loan - loan given to Directors and Sister concern - Held that - A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent. On the other hand, the High Court has simply quoted from its own judgment in the case of 'Commissioner of Income Tax-I, Ludhiana v. M/s. Abhishek Industries Limited, Ludhiana' 2006 (8) TMI 123 - PUNJAB AND HARYANA High Court . On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure.We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced. It is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. See 'S.A. Builders Ltd. v. Commissioner of Income Tax 2006 (12) TMI 82 - SUPREME COURT It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax. Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of ₹ 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors. - Decided in favour of assessee.
Issues:
1. Disallowance of deduction claimed by the assessee on interest paid on borrowed sums. 2. Disallowance of deduction due to diversion of borrowed money to subsidiary company without interest. 3. Disallowance of deduction due to difference in interest rates charged on loans given to directors and borrowed funds. 4. Appeal against the order of the Commissioner of Income Tax (Appeals). 5. Challenge of the order of the Income Tax Appellate Tribunal (ITAT) by the Department/Revenue. 6. Appeal before the High Court and subsequent appeal to the Supreme Court. Issue 1: Disallowance of deduction claimed by the assessee on interest paid on borrowed sums: The assessee claimed a deduction of interest paid on borrowed sums under Section 36(1)(iii) of the Income Tax Act for the Assessment Year 1988-1989. The Assessing Officer disallowed the deduction partially, leading to an appeal by the assessee. The Commissioner of Income Tax (Appeals) reversed the Assessing Officer's decision, allowing the entire interest paid as a business expenditure. However, the High Court, in a subsequent appeal, disallowed the deduction. The Supreme Court held that the High Court's approach was faulty in law and reinstated the ITAT's decision, emphasizing the concept of commercial expediency in allowing business expenditures. Issue 2: Disallowance due to diversion of borrowed money to subsidiary company without interest: The Assessing Officer disallowed the deduction based on the assessee advancing a significant sum to its subsidiary company without charging any interest, despite borrowing money from banks and paying interest on it. The High Court upheld the disallowance without considering the commercial expediency aspect. The Supreme Court, referring to previous rulings, highlighted that the borrowed fund advanced to a third party should be for commercial expediency to be allowed as a deduction under Section 36(1)(iii) of the Act. The Court found that the advance to the subsidiary company was imperative for business expediency, as it fulfilled obligations to financial institutions and was eventually repaid with interest. Issue 3: Disallowance due to difference in interest rates charged on loans given to directors and borrowed funds: The Assessing Officer disallowed the deduction based on the difference in interest rates charged on loans given to directors and borrowed funds. The CIT (Appeal) accepted the explanation that the loan to directors was not from borrowed funds but from the company's credit balance. The Supreme Court agreed with this finding, emphasizing that the Revenue failed to establish a nexus between the borrowings and advancements to prove non-business purposes. The Court held that the Revenue cannot dictate how a businessman should manage expenses and must consider the perspective of a prudent businessman. Issue 4: Appeal against the order of the Commissioner of Income Tax (Appeals): The CIT (Appeals) allowed the entire interest paid by the assessee as a business expenditure. The High Court overturned this decision, leading to a further appeal. The Supreme Court reinstated the ITAT's decision, emphasizing the need for commercial expediency in business expenditures and rejecting the High Court's faulty legal approach. Issue 5: Challenge of the order of the Income Tax Appellate Tribunal (ITAT) by the Department/Revenue: The Department/Revenue challenged the ITAT's decision, which upheld the CIT (Appeals) order allowing the deduction. The Supreme Court upheld the ITAT's decision, emphasizing the importance of commercial expediency in determining business expenditures and rejecting the Revenue's challenge. Issue 6: Appeal before the High Court and subsequent appeal to the Supreme Court: The High Court allowed the Revenue's appeal, which was further challenged in a special leave petition before the Supreme Court. The Supreme Court granted leave and set aside the High Court's decision, reinstating the ITAT's order. The Court emphasized the need to consider commercial expediency and the perspective of a prudent businessman in allowing business expenditures. This detailed analysis covers the various issues involved in the legal judgment, highlighting the key arguments, decisions, and legal principles applied by the Supreme Court in resolving the appeal.
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