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TMI Blog2016 (8) TMI 604X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure should have been incurred for the purpose of making or earning such income shows that the object of spending or the end or aim or the intention of such spending was for earning the interest income. In the light of legal provisions, the claim cannot be allowed under the provisions of sec.57(iii) of the Act. It is not only the excess of expenditure but entire interest expenditure incurred on borrowings made from Union bank of India is not allowable. Considering alternative submissions that interest expenditure should be allowed as deduction u/s 36(1)(iii) of the Act. One of the requirements for allowance of interest paid on capital borrowed is that the amount should be borrowed for the purpose of business. It is no doubt that the law is quite settled to the extent that the taxing authorities cannot question the necessity of the borrowing but the onus lies on the assessee to prove that the borrowings have been made for the purpose of business. The contention of the assessee that the borrowings were made for the purpose of purchasing land for its business purpose from its sister concern i.e. PEP was disbelieved by the AO. The fact that the payments were made to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance of ₹ 81,95,426/- be deleted. Interest levied under section 234B be deleted. (ii)The appellant prays accordingly. 3. Briefly facts of the case are as under: The assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of building. Return of income for the assessment year 2009-10 was filed on 29/09/2009 declaring income of ₹ 5,34,23,338/-. After processing the return of income u/s 143(1) of the Income-tax Act, 1961 [ the Act for short], the case was selected for scrutiny by issuing statutory notice u/s 143(2) of the Act and finally the assessment was completed u/s 143(3) vide order dated 30/11/2011 at a total income of Rs,6,16,18,764/-. While doing so, the Assessing Officer [AO] disallowed a sum of ₹ 81,95,42/6 being excess of interest expenditure over interest earned on the loans procured from Union Bank of India on the ground that interest bearing funds of the assessee-company were diverted for non-business purpose. 4. Being aggrieved, an appeal was filed before the ld. CIT(A), who vide impugned order, confirmed the addition. It was contended before the ld. CIT(A) that interest expenditur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s PEPPL. The same are reproduced as under: Letter dtd: 30/09/2008 from West Palm Developments Pvt. Ltd., to Prestige Estates Projects Pvt. Ltd. 'Please refer to our discussions evincing interest in purchasing property bearing Sy.No.2/1D of whitefield village Sy.Nos.160, 157/Ps and 42 of Pattandur Agrahara village, in all measuring 9 acres We are enclosing herewith our cheque bearing nos.163251 163252, drawn on the Union Bank, dated 30/09/2008 and 13/10/2008, for ₹ 18,50,00,000/- and ₹ 15,00,00,000/-respectively, totalling to ₹ 33,50,00,000/- as advance pending finalization of sale value and completing the due diligence with respect to the said property. Once we mutually agree on the final sale value and after we are satisfied with your title to the same, the above amount may be treated as part payment of the sale consideration unti1 then it can be held as earnest money deposit carrying no interest. Letter, dtd: 03/10/2008, from Prestige Group to M/s West Palm Developments Pvt. Ltd., Bangalore. 'This has reference to your letter dated 30/09/2008 and we hereby acknowledge receipt of payment of ₹ 33,50,00,000/(Rupees Thirty Three C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the advances were given for the purchase of the property. when the assessee vehemently argued that the loss had arisen due (to) timing difference in the accrual of income and accrual of interest payment on bank loan, it is silent on the interest free loan given to M/s PEPPL; had the assessee charged interest on the said loan to M/s PEPPL, the loss situation would not have been incurred by the assessee. Hence, the claim of the assessee is rejected since the loss of ₹ 81,95,426/- was arrived (at) only because of the interest free loan given to the substantial shareholder, M/s PEPPL. This amounts to diversion of funds and the payment of interest to the extent of ₹ 81,95,426/-, which caused loss under the head income from other sources, is not for the purpose of business. Hence this sum is disallowed u/s 37 of IT Act and the same is added back to the total income. (Addition: ₹ 81,95,426/-) 3.6 It is clear from the sequence of events marshalled by the AO that the whole exercise of advancing money to M/s PEPPL for the ostensible purpose of purchase of property and getting back the money on ie ground that it was not economical to acquire the property in view o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that initially borrowed funds were utilised for the purpose of giving advance to M/s. Prestige Estate Projects Pvt. Ltd.[ PEP for short] for purchase of properties situated at Whitefield owned by it. However, the transaction did not materialise, the same was returned by PEP and this amount was then utilised for the purpose of lending to shareholders at higher rate of interest than the rate charged by the banks. He submitted that the AO has rejected the correspondence between the assessee-company and PEP on mere surmises and conjectures. He submitted that loss has arisen due to timing difference from the date of borrowal from the bank to the date of lending to shareholders. He submitted that interest liability is clearly allowable u/s 57(iii) of the Act. 4.2 On the other hand, learned Departmental Representative submitted that the whole transaction is a sham transaction. The amounts were borrowed for the purpose of advancing it to sister concern free of interest and therefore the purpose of borrowing is not for business purpose and therefore interest expenditure is not allowable. The correspondence between the assessee-company and PEP is only an after-thought and self ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the nature of personal expenses of the assessee. iv. It should be incurred in the accounting year and not in any prior or subsequent year. There is no dispute about the fact that the assessee had satisfied condition Nos.(ii), (iii) and (iv). Satisfaction of the first conditions viz., whether incurred wholly and exclusively for the purpose of earning income has to be examined in the light of the facts surrounding the present case. According to the assesseecompany, money was borrowed from Union bank of India only for the purpose of purchasing the land from its sister concern viz., PEP for its business purpose. Therefore, borrowings were made only for the purpose of business. Therefore, it is clear that the borrowings were not made for the purpose of earning interest income in the form of loans advanced to directors of the company. The Hon ble Supreme Court in the case of Vijay Laxmi Sugar Mills Ltd. Vs. CIT (191 ITR 641) had laid down that for allowance of an expenditure under the provisions of sec.57(iii), the expenditure should have been incurred for the purpose of earning such income. The Hon ble Supreme Court also explained that the expenditure should have been incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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