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Income Tax Appellate Tribunal, “SMC” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of CIT(A)-8, Mumbai, in appeal Nos. CIT(A)-8/IT-692/14-15 dated 16-12-2016. The Assessment was framed by DCIT Circle-3(1)(2), Mumbai for the A.Y. 2012-13 vide order dated 31-01-2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the addition made by the AO on account of disallowance of interest on loan taken for the purposes of business diverted towards sister concern as share application money. For this assessee has raised following ground No.1: -
M/s. Global World Power Projects Pvt. Ltd. (A.Y:2012-13) “1. Whether Ld. CIT(A) erred in deleting the addition made by the AO under section 36(1)(iii) of the Act without appreciating the fact that the assessee has diverted the loan taken for business towards sister concern as share application money.”
At the outset, the learned Sr. DR fairly conceded that this issue is covered by the Tribunals decision in assessee’s own case for immediately preceding year for AY 2011-12 in dated 10/03/2017. I find that the exactly identical issues, wherein disallowance of interest paid on same unsecured loan was diverted for the purpose of acquiring of share of sister concerns and for that purpose paid share application money and Tribunal set aside the issue back to the file of AO for fresh adjudication by following the decision of Hon’ble Supreme Court in the case of SA Builders Vs. CIT 288 ITR 1(SC) and for this tribunal observed as under: -
“6. We have heard the rival submissions, perused the orders of the authorities below and the decisions relied on. The Assessing Officer while completing the assessment required the Assessee to furnish explanation as to why the interest incurred by the Assessee on unsecured loans should not be disallowed u/s 36(1)(iii) for the reason that the Assessee borrowed huge amounts and advanced Rs.148 crores to its sister concerns in the form of share application money. It appears that the Assessee has not offered any explanation or valid reason and it was not established by the Assessee of any commercial expediency in advancing amounts to its sister concerns. Therefore, the Assessing Officer invoking the provisions of section M/s. Global World Power Projects Pvt. Ltd. (A.Y:2012-13) 36(1)(iii) of the Act disallowed interest of Rs.33,53,425/- incurred by the Assessee on unsecured loans.
It was the submission of the Assessee before Ld. CIT (Appeals) that the Assessee engaged in the business of generating, transmitting, distributing and supplying electrical power. The Assessee Company borrowed funds from Bright Impex and Agencies Private Limited and advanced the same as share application money to Bajaj Energy Private Limited which was at that time setting up the power generating plant of 450MW in the state of Uttar Pradesh. It was submitted that the Assessee company incurred interest expenditure on the borrowed funds and claimed the same as business expenditure u/s 36(1)(iii) of the Act. The Assessee never addressed the aspect of commercial expediency even before the Ld. CIT (Appeals). The Ld. CIT (Appeals) placing reliance on the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. Vs. CIT [288 ITR 1] deleted the disallowance. On perusal of the findings of the Ld. CIT (Appeals), we are of the view that the Ld. CIT (Appeals) has not gone into the aspect of commercial expediency in advancing the money by the Assessee to its sister concerns. The Hon’ble Supreme Court in the case of SA builders observed as under:
“In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern(eg., a subsidiary of the assessee) should be allowed as a deduction under section 36(1)(iii) of the Income:-tax Act,
M/s. Global World Power Projects Pvt. Ltd. (A.Y:2012-13)
1961, one has to enquire whether the loan was given by the assessee as measure of commercial expediency. The expression "expediency" is one of wide import and includes such expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. Decisions relating to sec.37 will also be applicable to section 36(1) (iii) because in section 37 also the expression used is "for the purpose of the business' "For the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
To consider whether one should allow deduction under section 36(1) (iii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorizes and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assess in its own business but had been advanced as interest free loans to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board
M/s. Global World Power Projects Pvt. Ltd. (A.Y:2012-13) of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be completed to maximize his profits.”
As could be seen from the above, it was made very clear by the Hon’ble Supreme Court that to consider whether deduction u/s 36(1)(iii) should be allowed on the amount borrowed by Assessee for advancing to sister concern, the authorities and courts should examine the purpose for which the Assessee advanced the money and what the sister concern did with the money. It was also further held that what is relevant is to see whether the amount was advanced as a measure of commercial expediency but not whether the Assessee advanced those for earning profits. The lower authorities have not examined the facts and the above aspect of the matter in this case so as to arrive at a conclusion that there is commercial expediency. The Assessee also did not give any explanation as to how there is a commercial expediency in advancing the money to sister concerns. Therefore, we are of the view that this aspect of the matter has to be reexamined by the Assessing Officer and the Assessee shall furnish all necessary details in this regard. Thus, we restore the matter to the file of the Assessing Officer who shall decide the issue afresh in the light of our above observations and in accordance with law after giving adequate opportunity of being heard to the Assessee.”
Respectfully, following the Tribunal’s decision in assessee’s own case as referred above, we also set aside the orders of CIT(A) and that of M/s. Global World Power Projects Pvt. Ltd. (A.Y:2012-13) the AO and remand the matter back to the file of AO for fresh adjudication in term of decision of Tribunal in dated 10/03/2017. The appeal of revenue is allowed for statistical purposes.
In the result, the appeal of Revenue is allowed for statistical purposes.
Order pronounced in the open court on 27-09-2017.