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TMI Blog2010 (6) TMI 879X X X X Extracts X X X X X X X X Extracts X X X X ..... there was nexus of use of borrowed funds for the purpose of business to claim deduction u/S 36 (i)(iii) of Income Tax Act. 3. That the CIT(A) has not considered our submissions properly in which it was explained in detail about the loan advanced to sister concern for the commercial expediency and nexus of use of borrowed funds for the purpose of business. 3. The only issue in the present appeal is against the disallowance of interest u/s 36(1)(iii) of the Act amounting to ₹ 14,82,695/- . The brief facts of the case are that on the perusal of the balance sheet, the Assessing Officer noted the assessee had made advances to its sister concern and others totaling ₹ 2,31,23,236/- . The learned AR for the assessee was asked to furnish the details of loans and advances made and whether any of the same had been given interest free to the sister concerns for non business purposes. In reply, the assessee furnished the details of loans and advances given. A sum of ₹ 1,23,65,787/- was given to M/s Luxmi Engg. Works, a sister concern of the assessee. As the assessee had paid interest at the rate of 12% on its borrowings, it was asked to explain why proporti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) thus held that in view of the ratio laid down in CIT Vs. Abhishek Industries Ltd (Supra), the disallowance of interest u/s 36(1)(iii) of the Act is upheld. The assessee is in appeal against the aforesaid order of CIT(A). 4. The learned AR for the assessee pointed out that the advances to the sister concern were made on account of commercial expediency. It was pointed out that assessee was supplying sewing machines to M/s Usha International and the sister concern was supplying fans to the said concerns. The assessee in order to save its reputation and goodwill in the market had advanced ₹ 1 Cr interest free to its sister concern. It was further pointed by the learned AR that both the concerns had raised bank loans and the assessee was a guarantor of loan advanced to M/s Luxmi. In case, the assessee was declared NPA, the creditability of the assessee also gets affected. Reliance was placed on the ratio laid down by the Hon'ble Supreme Court S.A. Builder Ltd Vs. CIT (Supra) for the proposition that no disallowance is warranted u/s 36(1) (iii) of the Act where the amounts are advanced, interest free to the sister concern for commercial expediency. Further reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er concern was in danger of being declared as NPA by the bank. In order to ensure the firm not being declared as NPA, the assessee before us had made the said advances to its sister concern. The second plea of the assessee was that both the concerns were supplying its products to M/s Usha International and hence the business expediency. 6. The allowability of interest on borrowed capital wherein interest bearing funds have been advanced interest free to the sister concern was deliberated upon by the Hon'ble Supreme Court in S.A. Builders Vs. CIT (Supra). The ratio laid down by the Hon'ble Supreme Court is as under:- In order to decide whether interest on funds borrowed by the assessee to give an interest free 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. 7. Their lordships further held that for allowing the deduction u/s 36(1)(iii) of the Act of interest paid on amounts borrowed for advancing loans to a sister concern, the authorities shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ern. However, M/s Luxmi Engineering works had gone into huge losses and the bank account was proposed to be declared NPA by the bank. The fear of the assessee was that the amount could have been recovered from its being the guarantor which in turn would have affected its working and in turn its goodwill and reputation in business. In order to safeguard its business interest, the assessee claims to have raised a loan of ₹ 100 lacs from bank and advanced the same to its sister concern 10. The basis for allowing an expenditure in the hands of the assessee is an expenditure incurred for the purpose of business. Applying the ratio of commercial expediency propounded by the Hon'ble Supreme Court in S.A. Builders Vs. CIT (Supra), we find that the intention of the assessee in advancing the said loan interest free to its sister concern is not for the purpose of business. The two concerns were carrying on independent lines of manufacturing and the products manufactured were different by each of the concern. The end products were being supplied to one concern i.e M/s Usha International Ltd. The plea of the assessee in this regard is that the products were being supplied un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up with managed company, if the managed company grew assessee s commission would also grow and consequently the amount given up was a justified expenditure. The Hon'ble High Court and Supreme Court upheld the findings of the ITAT. The Hon'ble Apex Court while approving the order of ITAT made the under mentioned observations:- Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. if the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Limited v. Bruce). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In the said judgement, the Hon'ble Apex Court has noted that where it is obvious that a holding company has a deep interest in a subsidiary and if the holding company advanced borrowed money to a subsidiary and the same is used by the subsidiary for some business purpose, the assessee would be entitled to deduction of interest on its borrowed loans. On the basis of the aforesaid, it is argued by the learned counsel that in this case, subsidy has been provided to MAL to recoup its losses and even if it is said that the subsidy is not for assessee's own business purpose, but it can be said to be for the purposes of MAL s business purposes and thus, the said expenditure would be allowable for deduction u/s 37(1) of the Act because the assessee has deep interest in MAL. We have carefully considered this plea and in our opinion, the case of the assessee has to fail. We are unable to appreciate and nor is there any evidence or pleading set up as to how the money provided to MAL as subsidy has been used by it for its business purposes. As noted earlier, in terms of the judgement of the Hon'ble Apex Court in the case of Chandu Lal Keshav Lal Co. (supra) where the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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