DCIT CIR 3(1)(2), MUMBAI vs. GLOBAL WORLD POWER PROJECTS P. LTD, MUMBAI

The only ground of appeal in the Revenue’s appeal is that the Ld. CIT (Appeals) erred in allowing the interest expenditure on borrowed fund advanced to its sister concern u/s 36(1)(iii) of the Act without appreciating the fact that the borrowed fund has been advanced in the form of share application money but not as a loan.

3. Briefly stated, the facts are that the Assessing Officer while completing the assessment u/s 143(3) of the Act noticed from the profit and loss account of the Assessee that the Assessee has claimed interest expenditure amounting to Rs.33,53,425/- on the borrowed funds. The Assessing Officer also noticed from the balance sheet that the Assessee has advanced funds to the tune of Rs.148 crores to its sister concerns in the form of share application money. Therefore, the Assessee was required to explain as to why interest paid on unsecured loans should not be disallowed under the provisions of section 36(1)(iii) of the IT Act as the same were found to be diverted for share application money of sister concerns. However, the Assessee has not offered any explanation or valid reason for the money advanced to sister concerns. It is the finding of the Assessing Officer that the Assessee has not been able to establish any commercial expediency while advancing such huge amount in the form of share application money. Therefore, since the Assessee advanced funds to the tune of Rs.148 crores in the form of share application money which are not yielding any returns to the Assessee and at the same time, the Assessee has been incurring substantial amount on account of interest on unsecured loans, the Assessing Officer disallowed such interest u/s 36(1)(iii) of the Act. On 3 Global World Power Projects Ltd. Assessee the Ld. CIT (Appeals) deleted the disallowance relying on the decision of the Hon’ble Supreme Court in the case of SA Builders Ltd. Vs CIT [288 ITR 1]. The Ld. CIT (Appeals) allowed the claim of the Assessee holding that in view of Supreme Court’s decision once there is nexus between the expenditure and the purpose of the business is established, the Revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. He further held that one has to see that the transfer of borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view of whether the amount is advanced for earning profit. Against this order, the revenue is in appeal before us.

The Ld. DR drew our attention to the findings of the Assessing Officer and submits that inspite of the Assessing Officer calling for explanation from the Assessee as to why the interest paid on unsecured loans should not be disallowed invoking the provisions of section 36(1)(iii) of the Act as the Assessee has diverted the borrowed funds to sister concerns and invested as share application money and at the same time Assessee was incurring interest expenditure on such borrowed funds, the Assessee did not file any explanation. Further it has not been established any commercial expediency in advancing such huge amount to sister concerns. The Ld. DR further inviting our attention to the findings of the Ld. CIT (Appeals) submits that the Ld. CIT (Appeals) simply relying on the decision of 4 Global World Power Projects Ltd. Supreme Court in the case of SA Builders Ltd. (supra) allowed the claim of the Assessee. The Ld. DR submits that the Ld CIT (Appeals) has not examined as to whether the amounts advanced by the Assessee were for the commercial expediency of the business or not. The Assessee also did not give any explanation as to how the funds invested were in the interest of the Assessee’s business. The Ld. DR relied on the following decisions in support of his submissions. 1) Ganjam Trading Co. Pvt. Ltd. Vs. DCIT in ITA No. 932/Mum/2006 and ITA No. 1382/ Mum /2007 dated 20.7.2012 and 2) R Sundararajan Vs. DCIT in ITA No.1666/Mds/2013 dated 25.06.2015. Therefore, he submits that the Ld.CIT (Appeals) is not justified in allowing claim of the Assessee by deleting interest disallowance made by the Assessing Officer.

The Ld. AR strongly places reliance on the orders of the Ld. CIT (Appeals) and the decision of the Supreme Court in the case of SA Builders Ltd. (supra).

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 5 Global World Power Projects Ltd. any commercial expediency in advancing amounts to its sister concerns. Therefore, the Assessing Officer invoking the provisions of section 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, 1961, one has to enquire whether the loan was given by the assessee as measure of commercial expediency. The expression "commercial 6 Global World Power Projects Ltd. 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 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 7 Global World Power Projects Ltd. 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 re- examined 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.

In the result, appeal of the Revenue is allowed for statistical purpose.