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TMI Blog2020 (12) TMI 1401X X X X Extracts X X X X X X X X Extracts X X X X ..... isallowance of proportionate interest - HELD THAT:- Assessee has granted funds to subsidiaries as well as other parties whose land was being used for development. AO has disallowed the interest portion which was attributable to the funds granted to subsidiary companies. When the funds have been granted to subsidiary companies for the purpose of business, the business expediency is established. Case of S.A. Builders [ 2006 (12) TMI 82 - SUPREME COURT] is directly applicable. It is also not disputed that assessee has granted funds to the various parties whose land was being used for development by the assessee. Hence once the business expediency is established no disallowance on account of diversion of interest-bearing funds is permissible. Hence no infirmity in the order of learned CIT(A). Accordingly we uphold the same - Decided against revenue. - Shri Shamim Yahya (AM) Shri Ramlal Negi (JM) For the Assessee : Shri Vijay Kumar G. Subramaniyan. For the Department : Ms. Swati Patrawala. ORDER PER SHAMIM YAHYA (AM):- This appeal by the Revenue is directed against order of learned CIT(A) dated 13/9/2017 and it pertains to assessment year 2014-15. 2. The grounds of appeal read as unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The assessing officer has issue: mentioned that appellant submitted a letter dated 02/12/2016 stating interest of Rs. 0.72 crores has been netted off with interest expenses and capitalised. The assessing officer rejected the contention of the appellant observing that appellant had deposited unutilised funds and earned interest thereon. The assessing officer held there was no direct connection between interest paid and interest received. Holding the interest received as revenue receipt, the assessing officer brought it to tax as income from other sources relying on Tuticorin Alkali Chemicals Fertilizers Ltd vs CIT (SC). 4. Upon assessee s appeal learned CIT(A) deleted the addition holding as under :- The facts and circumstances of the case indicate that the fixed deposits were created for availing banking facilities for business. Therefore, it is seen that there is a nexus between the deposits made out of business necessity and the interest earned on term deposits temporarily made to reduce interest burden on funds borrowed for purchase of land. The funds had to be put in FDs as there was delay in acquisition of land. It is also noted that rate of interest on term loans taken and O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... yes VBC Industries Ltd. Vs. DCIT (2011) 44 SOT 55 (Visk) (URO) Interest arising from deposits made out of business funds lying idle, is income from business and not from other sources CIT Vs. Tirupati Woolen Mills Ltd. (1992) 193 ITR 252 (Cal) Upon the peculiar facts of the case, it was held that the interest accrued on short term deposits of the company, made out of the business funds available with the company, before the same were utilized for actual business, should be treated as Business Income. CIT Vs. Tamil Nadu Dairy Development Corporation Ltd. (1995) 216 ITR 536 (Mad) Idle amounts were deposited with the bank or given on temporary loans until such time as they were required for construction. Thus, interest was earned on these amounts. In due course the assessee's appeal was considered by the Tribunal and the Tribunal recorded a finding that the entire interest sprang from the business activity of the assessee and did not arise out of any independent activity. This Court held that the aforesaid interest was assessable as income from business and affirmed the correctness of the view of the Tribunal that the interest so earned was Income from business . CIT Vs. Paramoun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng officer rejected the explanation offered by the appellant and disallowed proportionate interest to subsidiaries by observing, it is clear that the assessee is diverging interest-bearing loans to interest free loans to its associate/subsidiary concerns. The assessee is in the business of construction and development activity and not of advancing loans. Hence these funds have not been advanced for any business exigencies. No prudent business would pay interest on borrowing without getting any return from advancing these interest-bearing funds so as to mitigate/reduce the burden of interest paid. 10. Upon assessee s appeal learned CIT(A) deleted the addition by holding as under :- In the first instance, it is noted that the assessing officer has not disputed the facts relevant to the issue. He has not disputed that the impugned advances were made to wholly owned subsidiaries of the appellant who actually owned the parcels of land on which development/construction was being done by the appellant company. The assessing officer has also not disputed that the appellant obtained Rs. 425 crore bank loan from Oriental Bank for purchase of assets through e-auction. The copy of loan sanctio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed that the Income Tax authorities, the Tribunal as well as the High Court had approached the matter from an erroneous perspective. The Supreme Court held that where the assessee had borrowed funds from a Bank and lent some of them to a subsidiary as an interest free loan, the test to be applied is whether this was a matter of commercial expediency. The expression commercial expediency , held the Supreme Court, is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. An expenditure, which is commercially expedient, may not be incurred under a legal obligation, but so long as it meets the requirement of commercial expediency, it has to be allowed. However, the Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if the assessee advanced the money to a sister concern. Where the amount is advanced to a sister concern, for the personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted the Supreme Court, where a holding company has a deep interest in its subsidiary advances borrowed money to a subsidiary ..... X X X X Extracts X X X X X X X X Extracts X X X X
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