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TMI Blog2016 (6) TMI 1346X X X X Extracts X X X X X X X X Extracts X X X X ..... on 143(2) of the Act was issued on 14.08.2009. 2.1 In the assessment order, the Assessing Officer has observed that the assessee has paid huge interest of Rs.. 61,77,008/- on its borrowed funds of Rs..6,22,20,086/-, while on the other hand it has given interest free loans amounting to Rs..18,24,93,492/- to its sister concerns. The assessee has claimed that there was no direct nexus between the borrowed funds and the investment in the sister concerns and the investment made in the sister concerns were only out of the share capital and reserves and surpluses. The Assessing Officer has not believed that the entire interest as an expenditure incurred was for the assessee's own business. Since the amount advanced to sister concerns was more than the amount borrowed, the entire interest was disallowed holding that the entire interest payment was attributable to the funds diverted to the sister concerns. The Assessing Officer has further observed that the assessee has paid interest on the borrowed funds, but it has not charged any interest on the investments made in the sister concerns. As per section 36(1)(iii) of the Act, the loans raised for business purposes should be used wholl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the purpose of purchase of land and to meet the supply cost for constructions. 8. The advances made to Arun Excello Foundations Pvt. Lid and Arun Fabricators were entirely to meet the expenses in the ordinary course of business. 9. In the case of Arun Constructions, there has been no outflow of funds from the appellant to Arun Constructions. Arun Constructions was paid by Marg Constructions Ltd instead of paying the appellant. Hence, the appellant has debited the account of Arun Constructions in its books and treated the same as advances made. 10. From the above, it is established that the appellant had lent funds to the sister concerns with the sole motive of promoting its business interest and In aiding them to conduct the business activity hassle-free and efficiently." 3.1 After considering the above submissions and by following the decisions in the case of P.R.M.S. Ramanathan Chettiar v. CIT 72 ITR 534 (Mad) and in the case of M.P.S. Raja v. CIT 105 ITR 295 (Mds), the ld. CIT(A) confirmed the disallowance made by the Assessing Officer. 4. On being aggrieved, the assessee is in appeal before the Tribunal and the ld. Counsel for the assessee has reiterated the submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . i) Whether the amount borrowed, on which interest paid by the assessee, was used for the purpose of the assessee, so that interest debited can be allowed as business expenditure? [CIT vs. Calcutta Agency Ltd 19 ITR 191 (SC)] ii) Whether the loans were given by the banks for any specific purpose? iii) Whether there was a "commercial expediency" to advance loans to the concerns including sister concerns? [S.A.Builders Ltd vs. CIT 288 ITR 1 (SC)] iv) Whether there is a nexus between the funds borrowed and the funds advanced. 4.2.2 With regard to the first question, the Id.AR's argument was that since the appellant was having sufficient own funds and the same were used for the purpose of advance to sister concerns, the borrowed funds were used by the appellant for its own business only and the interest debited is a business expenditure. I do not agree with this argument *of the Id. AR. If the argument of the Id. AR is true, then there is no need for borrowals. I have seen the Balance Sheet of the company and found that by the year end 31.3.2008, Rs. 52.17 crores of Reserves and Surpluses were available besides Share Capital of Rs. 91.80 lakhs. No doubt that the Rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sick or not having regular funds and are in dire need of help from the appellant company. They being the group concerns, they could have independently approached the banks for funds on the basis of the financial strength of the appellant company. The same package of loans could have very well been obtained from the banks and individuals by the sister concerns, instead of routing through the appellant company and dumping the interest burden on it. As stated earlier, the revenue can not dictate how the business houses should behave, but onus is on them to explain the circumstances, more so when the appellant wants to claim an expenditure attached to it. Therefore I hold that the appellant in the instant case has failed to establish any commercial expediency for advancing interest-free loans to sister concerns. Hence, the decision of the Hon'ble Supreme Court in the case of S.A Builders Pvt. Ltd (supra) does not come to the rescue of the appellant. 4.2.5 Last but not the least aspect to see is with regard to nexus of funds. The Id.AR has argued that the AO has disallowed interest without establishing nexus between borrowed funds and the amount advanced to sister concerns. With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to claim' deduction of the interest on the borrowings to the extent those were diverted to sister concerns or other persons without interest. [Para 38]. Thus the onus to prove that the borrowed funds have not been diverted is on the appellant. The onus was not discharged by it. It has also not explained why it necessitated to go for borrowings when own funds are available with it. 4.2.6 Above all, the jurisdictional High Court in the cases of P.R.M.S. Ramanathan Chettiar v. CIT( 72 ITR 534) (Mad) and M.P.S.Raja v.CIT (105 ITR 295) (Mad), has held that interest paid on borrowed capital will be allowed as deduction only if the capital was used for the purpose of business. If it is used for a purpose other than that of its own business, then interest to that extent to which capital was so used, will not be allowed. 4.2.7 In view of the above discussion and judicial rulings, I hold that it would be the commercial impropriety to borrow funds bearing interest cost when sufficient own funds are available on hand. It is still improper to advance interest free loans to sister concerns when the company itself needs more money for running its business. Further, it was also notic ..... X X X X Extracts X X X X X X X X Extracts X X X X
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