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TMI Blog2013 (3) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... priate to allow the decision to be changed in the subsequent orders, but in the instant case, it is evident that borrowers i.e. Director and relatives have made no attempt to repay the amount. They utilized the interest free advances for their personal purposes, which has no connection with the business activity of the Company. In other words, the funds were utilized for the purpose of non-business purposes. At the same time, a huge amount has been borrowed @ 20% interest. No attempt was made to reduce the said borrowing. The Commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners, as the case may be. Thus there has to be a nexus between the advancing of funds and business interest of the assessee. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee and working solely in the interest of the assessee, would have exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e preceding years. 3. Whether on the facts and in the circumstances of the cases, the ITAT was justified in confirming the order of the CIT (A) in allowing the interest of Rs.8,11,335/- claimed by the assessee on the borrowed funds even though there is strong evidence of linking these funds with withdrawals for non-business purposes. 4. Whether on the facts and in the circumstances of the cases, the ITAT was justified in holding that the heavy personal withdrawals made by the lineal ascendant of the directors in the past will not be construed as adverse evidence for the purposes of dis-allowance of proportionate interest on borrowed funds merely because the erstwhile proprietorship of such lineal ascendant has since been converted to a private limited company and the said debit balance of such lineal ascendants have got split in the names of various legal heirs. Income Tax Appeal No. 112 of 2005 has been admitted vide order dated 28.09.2005 on the following substantial questions of law: 1. Whether on the facts and in the circumstances of the case, the leaned Income Tax Appellate Tribunal was justified in confirming the order of the CIT (Appeals) in allowing the interest pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess purposes ? In all the Appeals, the facts and circumstances are identical. Hence, all these appeals are decided by this common judgment for the sake of convenience. In all the questions admitted by this Hon'ble Court, the issue is only one i.e. pertaining to interest free advances given to the family members and Director of the assessee company. Sri D. D. Chopra assisted by Sri Ghanshyam Chaudhary learned counsel for the appellant-department submits that in all the assessment years under consideration, the assessee has shown the following loss in its return: Appeal Number A.Y Loss Amount 1. 55/2005 1995-96 Rs.2,03,560/- 2. 112/2005 1996-97 Rs.3,74,870/- 3. 43/2006 1997-98 Rs.6,19.750/- Learned counsel further submits that in the assessment year 1995-96, the assessee has shown interest free advance on amount of Rs.40,56,770/- to its family members and a few of them are the Directors in the assessee company. As per the details given in paragraph 14 for the assessment order for the year 1995-96, interest free advances were given. The recovery of the above mentioned amount was not doubtful. In other words, the loan is not a bed debt. He further submits that with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he death of late Sri S. N. Sahu, the business was taken over by partnership firm namely "Ms/ Sahu Enterprises" and the said debit balances were reflected in the name of legal heirs and family members in the balance sheet. In the year 1991-92, the business was taken over by the respondent company with all the assets and liabilities. Hence, these debit balances appeared in the balance sheet of the respondent-company. He further submits that the A.O. has made the wrong addition for the assessment year 1995-96 of Rs.8,11,355/- on the total interest free advance of Rs.40,56,770/-. But, the CIT (A) has deleted the said amount. The Tribunal also upholds the order of the First Appellate Authority. Learned counsel further submits that it is undisputed that the respondent company had not given or used the borrowed money for non-business purposes. These debit balances were coming from last several years, which were on account of losses and withdrawals incurred by Late Sri S. N. Sahu, who was running the business as his proprietorship. After the said business was taken over by the partnership firm M/s Sahu Theater, these debit balances continued to appear in the account of the legal heirs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nically without applying its mind to earlier facts and circumstances under which a view was taken by the taxman and the facts and circumstances of the assessment year in question calling to depart from earlier view. Where there is a fundamental aspect permeating through different assessment years allowed by the authorities to sustain, it would not be appropriate to change the view in subsequent year except on justifiable ground like change of circumstances or non-consideration of relevant material or statutory provisions, or failure on the part of assessing or appellate authority to exercise jurisdiction for extraneous reason or small amount of revenue involved or other justifiable ground depending on facts of each case." Thus, the aforesaid principle of 'Rule of Consistency" is squarely applicable as there is no change of circumstances or new material on record to show that dis-allowance of interest on debit balance coming from earlier years should be made out of interest paid during the year on the borrowed funds utilized for business purpose. Lastly, he made a request to dismiss the present appeals. We have heard both the parties at length and gone through the material ava ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LLOWED: The Expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits". In the case of CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140 SC and CIT vs. Birla Cotton Spinning and Weaving Mills Ltd. (1971) 82 ITR 166 (SC) it was observed that :- "To consider whether one should allow deduction under section 36(1)(iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that part of interest paid to the Bank could be disallowed to the extent to which money had not been utilized for the purpose of business. The disallowance should be paid by calculating the amount of interest at the same rate at which interest was paid by the Company on the loans borrowed. In the case of CIT vs. Sujanni Textiles (P) Ltd.; (1997) 225 ITR 560 (Madras), the Madras High Court observed that interest paid by an assessee on borrowed funds, which were used for non business purposes, cannot be allowed under section 36 (1)(iii) of the Income Tax Act, 1961. Thus, it appears that nothing is available from the record that advances/loan without interest were ever given for business purposes. It was for the personal use of Director or family members and after obtaining the loan/advances, the borrower never made any effort to repay the loan amount nor did the assessee company made any effort to recover the said loan from the borrower. In fact assessee company allowed its Director and family members to use its funds for their personal benefits. This cannot be intention of the statute which allowing the payment interest on borrowed funds for business purpose under section 36 (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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