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TMI Blog2010 (5) TMI 901X X X X Extracts X X X X X X X X Extracts X X X X ..... served that the assessee had made investments in shares of companies, mainly group companies totaling to ₹ 2,86,41,100/- as per balance sheet as on 31st March, 2001. The AO also observed that share capital and reserve and surplus stood at ₹ 6,59,21,888/-. The AO has also mentioned that after excluding investments in shares the assessee was required a sum of ₹ 7,91,26,253/- as against net worth held as on 31st March, 2001 totaling to ₹ 6,59,21,888/-. The AO accordingly worked out funds required for business and ₹ 2.00 Crores. The AO also observed that total funds borrowed by the assessee were ₹ 4.87 Crores and after reducing ₹ 2.00 Crores being estimated required business funds, he worked out funds not utilized for business purpose at ₹ 2.87 Crores. The AO by applying interest rate @ 15% computed the amount disallowed at ₹ 43,05,000/-. 4. Addition was challenged before the learned CIT(A) and it was submitted that amounts were borrowed by the assessee for the purpose of business and, therefore, interest paid on it are allowable as business expenditure. The assessee relied upon the decision of the Hon'ble Supreme Court in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rrowed money, a presumption can arise that money lent even free of interest come out of own money . It was submitted that method of computation of disallowance made by the AO is not scientific as unsecured loans carried interest rate of 12% and not 15% as presumed by the AO. When funds are borrowed and utilized for business purpose, there is no reason to vary the interest expense as claimed by an assessee. The AO has not established that any borrowed funds were utilized either for giving interest free loans or for non-business purpose, therefore, no interest can be disallowed. The assessee relied upon several decisions of the Tribunal in support of the contention. The assessee also relied upon the decision of the Hon'ble Gujarat High Court in the case of Shree Digvijay Cement Company Ltd. Vs CIT 138 ITR 45 (Guj) wherein it was held that the assessee company has made investments in shares partly out of borrowed funds but in absence of establishing the nexus no part of the interest can be disallowed . It was submitted that since the assessee company had sufficient own funds to invest in shares of the companies, therefore, no interest should be disallowed. It was submitted that i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi Swiss Refills (P) Ltd. Vs ITO 85 ITD 59 (Bom) in which it was held that the deduction cannot be allowed when the amount was diverted to sister concerns and assessee did not produce any evidence to show that it had sufficient funds/non-interest bearing funds . The learned DR submitted that investments have been made to have controlling interest in the companies in which investments were made. Therefore, it would indicate that borrowed funds were not utilized for the purpose of business. The learned DR also relied upon the decision of the Hon'ble Kerala High Court in the case of CIT Vs V. I. Baby Co. 123 Taxman 894 as is relied upon by the AO in which it was held that if cash balance was available the borrowing itself was not for the purpose of business. An assessee with liquidity cannot claim that, it can give interest free advances to the parties and others than the borrowed funds such borrowing would not be for the purpose of business but for supplementing the cash diverted by the assessee without any benefit to the assessee. Under the circumstances, nexus theory does not hold good. Disallowance of interest was upheld being interest free advances to the partners and per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndings of the learned CIT(A). The decisions cited by the learned DR are distinguishable on facts. The Hon'ble Supreme Court in the case of S. A. Builders Vs CIT and Another 288 ITR 1 (SC) held that In order to decide whether interest on funds borrowed by the assessee to give an interest loan to a sister concern (e. g. a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure as a prudent business-man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to section 37 will also be applicable to section 36(1) (iii) because in section 37 also the expression used is for the purpose of the business . For the purpose of business includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby . Wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... how the Department proved a nexus between the borrowings and withdrawals made by the partners. It was obligatory on the part of every appellate authority to point out by good and acceptable reasoning as to how the facts and circumstances of one case happened to be different from other cases. It was improper to close the doors to a litigant by a casual treatment of some statements moving towards a conclusion that the precedents on which such litigant relied were different from his case. Therefore, the Tribunal was not justified in law in disallowing the interest on the entire debit balances, including the opening balances of the partners . ITAT Chandigarh Bench A (Third Member) in the case of Malwa Cotton Spinning Mills Vs ACIT 89 ITD 65 (Chd) (TM) held as under: Section 36(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment years 1992- 93 and 1993-94 - Whether where assessee's own capital and current year's profits are substantially more than interest-free advances given by it to its sister concerns, it proves absence of any nexus between funds borrowed on interest and such interest-free advances - Held, yes - Whether no disallowance out o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.36 Crores during this year as against the investments in the financial year ended as on 31st March, 2000 and 31st March, 2001. It was submitted that disallowance cannot be made during this year for investments made in earlier years. The investment in earlier years was made in the business interest of the company and as per Memorandum of Association the assessee is authorized to make such investments. It was contended that no amount of funds of the company was diverted to the benefit of any director or his relatives or any other persons connected with the director or other persons. It was, therefore, submitted that disallowance of part of the interest is unjustified. It was also contended that the assessee paid interest on funds borrowed from the parties other than bank @9%. Therefore, disallowance of the interest by applying 15% interest is inappropriate. It was submitted that the learned CIT(A) deleted the additions of similar nature in the assessment year 2001-02. 12. The learned CIT(A) on consideration of the submissions noted that the share capital, reserves and surplus of the assessee amounted to ₹ 6.57 Crores; whereas investment in the fixed and current business a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 960/Ahd/2004. The Hon'ble Supreme Court in the case of Radhasoami Satsang (supra), therefore, clearly applies because the consistency shall have to be maintained by the Income Tax Authorities. The Hon'ble M. P. High Court in the case of CIT Vs Godavari Corporation Ltd. 156 ITR 835 (MP) also held that though it is true that the principles of res judicata do not apply, the rule of consistency would apply . Since it is admitted fact that facts are same as considered in earlier year, therefore, following the same reason for decision in ITA No.2960/Ahd/2004, we set aside the orders of the authorities below and delete the entire addition. 14. As a result, the appeal of the assessee is allowed. ITA No.163/Ahd/2007: (By assessee) ITA No.653/Ahd/2007: (By Revenue) 15. Both the cross appeals are directed against the order of the learned CIT(A)-V, Ahmedabad dated 15-11-2006 for assessment year 2003-04. The assessee challenged the disallowance of interest to the extent of ₹ 19,28,304/- out of disallowance made by the AO in a sum of ₹ 32,13,839/-. The Revenue challenged the order of the learned CIT(A) in restricting the disallowance of interest @9% instead of 15% ..... X X X X Extracts X X X X X X X X Extracts X X X X
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