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Judgment
The present appeal has been filed by the assessee against the order of ld. CIT(A)-35, New Delhi dated 21.05.2018.
Following grounds have been raised by the assessee:
“1(i). That on the facts and circumstances of the case, CIT(A) was not justified in confirming reassessment u/s. 147 even though the same was without recording of proper satisfaction and approval of the CIT in terms of provisions of sec. 151 of the I.T. Act, 1961.
(ii) That in the absence of existence of any fresh information or tangible material, there is no ground or basis for assuming jurisdiction u/s. 148.
That the issue is fully covered and CIT(A) has totally disregard the appellate order for preceding year where substantial part of the claim was accepted by the CIT(A) and as such disallowance confirmed by the CIT(A) is highly arbitrary and uncalled for.
3(i) That in any case, CIT(A) was not justified in confirming disallowance of Rs. 39,13,269/- u/s. 36(1)(iii) of the IT Act, 1961 without proper appreciation of facts and legal principles.
(ii) That in the absence of any nexus between borrowed funds and interest free advances, there is no ground or basis for any disallowance in terms of sec.36(1)(iii).”
Facts taken from the order of ld. CIT(A) are as under:
During the instant year, the following interest-free advances have been made by the assessee company to the following parties disallowed the interest as under:
i) New United Service Station
Rs .3 ,95,532/-
ii) Gautam Auto (P) Ltd .
Rs .24,80,893/-
iii) R.K. Force Motors (P) Ltd .
Rs .10,36,844/-
Total
Rs .39,13,269/-
The AO observed that during the year, the assessee had paid interest on borrowed funds amounting to Rs.3,42,29,900/-debited in Profit & Loss Account and as per Balance Sheet, there was no surplus funds available with the assessee company, out of which interest-free advances could be made.
In the Assessment Order the AO has stated that assessee company has diverted its funds on which it was paying the Interest. Due to interest free advance of such substantial amount, the assessee company has one side lost its interest income from the loans given to sister concerns and on the other side has to incur interest expenses. Thus, the AO conducted this interest expense is directly related to interest free loans given to its related parties.
Therefore, the AO disallowed interest expense of Rs.39,13,269/- corresponding to interest free loans/ advances given to sister concerns of the assessee company u/s 36(1)(iii) of the I.T. Act, 1961.
During the proceedings before the ld. CIT(A), the AR of the assessee has submitted details about the financial position of the company. The ld. CIT(A) held that as per provisions of section 36(1)(iii) of the Act, the interest on loan raised by the assessee for business purpose is available as a business deduction. If the assessee makes a claim to deduction in terms of Section 36 for the purpose of computation of income referred to in section 28, it has to place materials in support of his claim of entitlement to the deduction. Section (1)(iii) relates to the amount of interest paid on capital borrowed for the purpose of his business, profession or vacation. The ld. CIT(A) held that,
“The appellant has to satisfy the assessing authority that he is entitled to obtain deduction in accordance with the taxing statute. The principle equally applies in case of deductions calmed. Once the appellant claims any such interest as deduction in their books of account the onus is always on the appellant to satisfy the Assessing Officer that whatever loans were raised by the appellant were for the purpose of business. If in the process of examination of genuineness of such deduction, it transpires that the appellant has advanced certain. funds to sister concerns or in this case to its staff, charging no interest, there would be a very heavy onus on the appellant to discharge before the Assessing Officer to the effect that in spite of outstanding loans which the appellant is incurring liability to pay interest, there would be sufficient justification to advance the loans to sister concerns or in this case to its staff, for non-business purpose without charging any interest.
The expression "Commercial Expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under legal obligation but yet it is allowable as business expenditure if it was incurred on the ground of commercial expediency.
Coming to the legal precedents on the issue, it is seen that the Hon'ble Supreme Court in S.A. Builders Ltd. Vs CIT (288 ITR 1) has held that the correct approach to the issue of grant of deduction u/s 36(1)(iii) would be to examine whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. It was held that if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes (which need not necessarily be the business of the assessee itself), the assessee would, ordinarily be entitled to deduction of interest on its borrowed loans. Having laid down the test for determination of the allow ability of deduction u/s 36(1)(vii) the Apex Court set aside the matter to be decided afresh. This decision of the Supreme Court overruled a host of High Court decisions to the contrary which gave a limited interpretations to the scope of the phrase "for the purposes of business or profession" used in section 36(1)(iii), This decision overruled the Bombay High Court decisions in the case of Phaltan Sugar Works Ltd. reported in 208 ITR 989 and 215 ITR 582, and approved the Delhi High Court decision in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377.
Subsequent to this decision of the Apex Court, the Dept, filed an SLP against the Delhi High Court's decision in Addl. CIT vs Tulips Star Hotels Ltd. reported in 338 ITR 482 wherein the High Court had held that the interest liability on loans borrowed to acquire the equity capital of a subsidiary company which was in the same line of business was allowable deduction u/s 36(l)(iii). While admitting the SLP of the Department, the Supreme Court vide order dated 30.4.2012 directed that the earlier view of the Court in S.A. Builders Ltd. vs CIT should be referred for reconsideration to another Bench of the Court.
Based on these decisions of the Apex Court, it needs to be examined whether the amounts in question that were advanced to sister concerns without any interest were justified by reasons of commercial expediency or not. The appellant has provided justification in very casual and mechanical manner in its written submissions filed during appellate proceedings. In yet another case- CIT v. Walchand & Co. (P.) Ltd.[1967] 65 ITR 381 (SC) it was observed that yardstick will have to be taken from the businessman point of view but the businessman must be a prudent businessman), the tax authorities are still entitled to examine the business expediency. This was the ratio of the Punjab and Haryana High Court decision in CIT vs Rockman Cycle Industries Pvt. Ltd. reported in 326 ITR 291 as well as the apex Court decision in SA Builders case (supra).
Accordingly, the interest expenditure incurred by the appellant that have been claimed u/s 36(1)(iii), cannot be allowed.
The ld. CIT(A) also held that the decision taken in A.Y. 2014-15 is not being followed in the instant year, considering the details as filed before the undersigned for the instant year. I find no reason to interfere with the AO's order on this issue. Appeal on this ground is dismissed.
Heard the arguments of both the parties and perused the material available on record.
The following facts emerge.
Chart showing Maximum amount outstanding from the related parties subject matter of disallowance u/s 36(1)(iii) as per Assessment Order.
Name of the party
AY 2015-16
AY 2014-15
New United Service Station Gautam
Nil
11 ,75 ,78 ,768
Auto P. Ltd.
2 ,14,00 ,000
2,14,00 ,000
R K Force Motors P. Ltd.
86,07 ,035
86 ,07 ,035
Total
3, 00, 07,035
14, 75,85,803
(1) No fresh advances paid during the year. In fact, the assessee has recovered advances paid earlier as evident from Balance Sheet.
(2) The CIT(A) in the immediately preceding year AY 2014-15 deleted the disallowance u/s 36(1)(iii) by holding that the assessee company has interest free own funds to the extent of Rs.13,61,74,207/-.
(3) No appeal has been filed against order of CIT(A) for AY 2014-15 by revenue and assessee.
(4) During the year under reference, interest free funds were to the extent of Rs. 6,18,06,863/- as per order of CIT(A).
For the sake of brevity, the chart showing availability of Interest free funds is reproduced as under:
S. No.
Particulars
AY 2015-16
AY 2014-15
1
Share Capital
77,00,000
77,00,000
2
Short term borrowings (Interest free) [Note 5]
i.From Directors
ii.Froma Share Holder
iii.Relatives of the Directors
3,16,99,413
8,10,000
3,30,000
24,84,350
8,10,000
2,03,30,000
From the above, it can be concluded that while the total interest free funds available to the assessee were to the tune of Rs.4.04 Cr. The maximum amount due from the related parties was Rs.3.39 Cr.
Hence, keeping in view the orders of the Hon’ble Supreme Court in the case of Hero Cycles (379 ITR 345) and the judgment of Hon’ble Supreme Court in the case of CIT Vs. Reliance Utilities & Power Ltd. vide order dated 09.01.2009 which has been passed after examining the judgments of Hon’ble Calcutta High Court in the case of Woolcombers of India Ltd. (134 ITR 219) and East India Pharmaceutical Works Ltd. Vs. CIT (224 ITR 627) held that where an assessee has his own funds as well as borrowed funds, a presumption can be made that the advances for non-business purposes have been made out of the own funds and that the borrowed funds have not been used for this purpose.
Accordingly, the disallowance of the interest on the borrowed funds is not justified.
In the result, the appeal of the assessee is allowed.