9911796707
TMI Blog2022 (10) TMI 605X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee with PNB. Interest free loan was advanced to the sister concerned for business purpose and commercial expediency - Giving deep thought on the contention of the assessee regarding the commercial expediency for granting interest free loan to the sister concerns but we could not find a single fact in support of the said contention of the assessee. The assessee has not uttered a single word before the AO as well as before the CIT(A) to show that there were business transactions between the assessee and these two sister concerns which has necessitated to advance interest free loan to the sister concerns. Therefore, in the absence of any reference to any business transaction between the assessee and the sister concerns, the plea of commercial expediency cannot be accepted. The assessee has miserably failed to establish a case of commercial expediency or business exigency in granting interest free loan to the sister concerns by utilizing the borrowed fund. As decided in SA BUILDERS LTD. VERSUS COMMISSIONER OF INCOME-TAX [ 2006 (12) TMI 82 - SUPREME COURT] held that if the interest free loan given to the sister concern has been advanced as a measure of commercial expediency, than ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. 2. Because the Ld. Lower Authority has erred in making addition of Rs.10,134/- for interest of loan advanced to M/s Tulsiani Construction and Developers (P) Ltd. claiming that the loan has been made out of interest bearing funds. 3. Because the Ld. Lower Authority has also erred in making addition of Rs.12,00,000/- for interest of loan advanced to Grace Infraventure (P) Ltd., without appreciating the fact that the appellant and his sister concern, both are engaged in same nature of business i.e. real estate business and the loan advanced to the sister concern has been utilized for the purchase of land i.e. for business purpose. 4. Because the LD. Lower Authority has erred in making addition to the assessment year in question as the assessment for the year has been completed on the date of search and it is settled law that no addition can be made in case of completed assessment in absence of any incriminating material found during the course of search operation. 5. Because the addition are solely based on hypothetical situations, surmises, conjecture and personal presumptions as well as without proper verification/consideration of material and details available on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nced to Grace Infraventures Pvt. Ltd. of Rs.1 crore have been exclusively used for business purpose. The assessee relied upon the case law of Apex Court in case of S.A. Builders Ltd., wherein it has been held that Section 36(1)(iii) of the Act states that interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction in computing taxable income. The expression "for purposes of business or profession" occurring in Section 36(1)(iii) of the Act is wider in scope than the expression "for the purpose of earning income, profits or gains". Accordingly, expenditure voluntarily incurred on the test of commercial expediency is to be allowed as a deduction. It is immaterial if a third party also benefits by the said expenditure. The expression "commercial expediency" is again of wide import and includes such expenditure incurred for the purpose of business. Therefore, once it is established that there was a nexus between expenditure and purpose of business, which need not be the business of the assessee, deduction under Section 36(1)(iii) of the Act must be allowed. Revenue cannot assume the role and occupy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure voluntarily incurred even by advancing the interest free loan to the sister concerned to satisfy the test of commercial expediency. The assesssee has contended that money borrowed even when advanced to sister concern for some purpose would qualify for deduction. The second contention has been raised by the assessee that the advance has been made by the assessee company out of interest free funds available with the assessee hence, no disallowance under section 36(i)(iii) can be made. 7. On the other hand, learned CIT DR has submitted that the AO has given the facts in para 5.5 of the assessment order which reveals that the interest free advance was given to the sister concerned directly from the term loan account with PNB therefore, there is no ambiguity about the fact that the interest bearing fund has been used by the assessee in giving interest free advance to the sister concerns. The learned CIT DR has further contended that the assessee has taken only a legal plea but has not brought on record any fact to establish that the interest free loan was advanced by the assessee to the sister concerns for commercial expediency or business purposes. He has relied upon the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has taken shelter of judicial pronouncement in the case of S.A. Builders vs CIT. Although, the decision is pending for reconsideration before the Hon'ble Supreme Court (as discussed supra), yet, it must be noted the submissions made by the assessee even fails the test of "commercial expediency" laid down in the said judgement and various other judgments. The assessee has failed to highlight any fact or produce any evidence to establish that it was commercially expedient or necessary to advance the loan to its sister concern. As discussed in the superseding para, since the assessee has failed to provide any evidence lest convincing one, it clear fails the test for utilization of funds for business purpose. Therefore, interest on borrowed capital is liable to be disallowed on this count. ii. Source of disbursal of loan amount: From the material available on record, it has been observed that, the assessee has disbursed the said loan(s) from its PNB Term Loan Account. (a) To Grace Infraventures Pvt. Ltd. on 07.04.2011 - Rs. 1,00,00,000/- (b) To Tulsiani Construction and Developers Pvt. Ltd in March 2012 - Rs. 75,00,000/- Apart from the above amount, R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO. The appellant has contended that the Money was used for business purpose by M/s Grace Infraventures (P) Itd and M/s Tulsiyani Construction Pvt. Ltd. It was contended that the appellant had sufficient Interest free funds at its disposal to advance the amount to M/s TCPL. During the course of assessment proceedings the AO noted that the appellant had disbursed interest free advances of Rs. 51,00,000/- and Rs. 1,00,00,000/- to M/s Tulsiyani constructions and M/s Grace infraventures Pvt. Ltd. respectively. The advance remained outstanding till the end of financial year under consideration. The AO disallowed proportionate amount of Interest u/s 36(1)(vil) of the Act. I have perused the assessment order of the AO and the submissions made by the appellant in this regard. It is pertinent to examine the provisions of section 36(1)(vii) of the Act. A bare reading of Section 36(1)() is as follows: "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (1) and (ii)** (iii) the amount of the interest paid in respect of capital borrowed for the purposes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laborated "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, which has to be distinguished from the personal Interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. 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-firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". Thus, for allowance of a claim for deduction of Interest under this provision following three conditions are there: (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee Is Incurring liability to pay interest, there was justification to advance loans to sister concerns for non business purposes without any Interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. 38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout any business purpose, the interest to the extent the advance had been made without carrying, any interest is to be disallowed under Section 36(1)(a) of the Act." 8. In this case the appellant has not submitted any explanation regarding the purpose of advancing Interest free advance to its sister concern. It was submitted that the money advanced by the appellant was used by M/s Grace Infraventures Ltd. for purchase of land and that both the entities are engaged in the same line of business. However the appellant has falled to establish the 'commercial expediency' for which the said amount was given and as to how the business of the appellant company was preserved, protected or advanced from the same. The appellant has relied upon the aforesaid judgment in support of his contention, however these judgments are, in fact are against the appellant. In view of the above and following the ratio of Judgments discussed above, find that the appellant has failed the test of establishing commercial expediency as envisaged by the Hon'ble Apex court regarding the interest free advance provided by the appellant, furthermore the source of funds for providing the advance is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 35. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above." 12. The Hon'ble Supreme Court has held that if the interest free loan given to the sister concern has been advanced as a measure of commercial expediency, than the interest on the borrowed fund used for advancing the loan to the sister concern is an allowable deduction. However, it is also made clear that it does not mean that in every case, interest on borrowed fund has to be allowed if the assessee advances to the sister concern. It all depends on the facts and circumstances of the respective case. Therefore, the said decision of Hon'ble Supreme Court would not help the case of the assessee when the assessee has not brought any fact on record to establish that there was a commercial expediency ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
