DEPUTY COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE - 1(4), CHENNAI vs. SHRI. MOOLCHAND KIRAN KUMAR JAIN, CHENNAI

The only ground of appeal raised by the revenue is that the Ld.CIT(A) erred in deleting the disallowance of interest on borrowed capital amounting to Rs.8,67,89,795/- for the A Y 2020- 21 and Rs.9,02,49,084/- for the A Y 2021-22.

Facts of the case: 3. A search and seizure operations U/s.132 of the Act was conducted in the group cases of Lalithaa Jewellery Mart Pvt ltd (LJMPL) on 04.03.2021 and the residential premises of Moolchand Kiran Kumar was also covered. The assessee is a proprietor of AK Exports and promoter of Lalithaa Jewellery Mart Pvt ltd (LJMPL) group. The assessee filed the return of Income for the A Y 2020- 21 declaring total Income of Rs.37,910/-. The assessee filed return Income for the A Y 2021-22 declaring total Income of Rs.1,87,79,210/-. The AO concluded the assessment as under: AY Order Particulars Addition/ disallowance u/s. 153A Addition on account of bad Rs.71,14,31,320/- 2020-21 /143(3) debt written of Disallowance u/s. 36(1)(iii) Rs.12,38,52,364/- :-3-: 5 & 6/Chny/2024 2021-22 u/s. 143(3) Disallowance us. 36(1)(iii) Rs.15,37,46,880/- Aggrieved by the action of the AO, the assessee preferred an appeal before the Ld.CIT(A).

The ld.CIT(A), adjudicated both the appeals on merit and dismissed the assessee’s appeal with respect to addition on account of bad debts written off to the tune of Rs.71.14 crores for the A Y 2020-21 (which has not been questioned by the assessee) and partly allowed the disallowance U/s.36(1)(iii) of the Act, for both the Assessment years holding as under : “9.3.3.1 The AO has made addition u/s 36(1)(13) on the ground that the assessee has invested the borrowed capital for making investments in other entities which have no connection with the business activities of the assessee and also claimed the interest paid on the secured/unsecured loans as expenditure in the P&L. Further, the assessee has not brought out any nexus between the interest bearing capital borrowed vis-a-vis the utilisation of the funds for the purpose of the business of the assessee and failed to explain the commercial expediency behind the transactions. 9.3.3.2 The assessee runs the entity AK Exports as a single proprietorship concern and is in the business of purchase of Eallion, gold and diamond ornaments and sells the same to M/s Lalithaa Jewellery Mart P Ltd. The assessee is also a director/partner in the following group concerns: Sl.N Name Status Nature of the Partners/Directors o activity 1 Akshita Jewellers Firm Jewellery M. Kiran Kumar Manufacturer - Smith 2 Akshita Jewellers Firm Jewellery M. Kiran Kumar, :-4-: 5 & 6/Chny/2024 Manufacturer - D.Padmanaban Smith 3 B B Jewellers Firm Jewellery M. Kiran Kumar, and Manufacturer - D.Padmanavan, Manufacturers Smith Dinesh Soni 4 Bhavya Jewellers Firm Jewellery M. Kiran Kumar, Manufacturer - D.Padmanavan, Smith Dinesh Soni 5 Asita Jewellery Company Jewellery Kasirajan Kumaran, Manufacturing Manufacturer - Sundaresan Vasan Pvt Ltd Smith Ramesh 6 Bhakthi Castle Company Real Estate and M. Kiran Kumar, Pvt Ltd renting service D.Padmanaban 7 Bhavya Homes Company Real Estate and M. Kiran Kumar, Pvt Ltd renting service A. Palani 8 Centigrade Company Real Estate and M. Kiran Kumar, Apparels Pvt LTd renting service Sundaresan Vasan Ramesh 9 Krishkiran Mega Company Real Estate and M. Kiran Kumar, Mall Pvt Ltd renting service A. Palani 10 Lalitha Castle Company Real Estate and M. Kiran Kumar, Pvt Ltd renting service D.Padmanaban 11 Akshita Castle Company Real Estate and M. Kiran Kumar, Pvt Ltd renting service Mohamed Fazulla 12 Lalitha Motors Company Manufacture of body M. Kiran Kumar, Pvt Ltd of motor vehicle Ponnusamy Rajeswaran 13 Shree Ayyappa Company Wholesale dealer n Sundaresan Vasan Jewellery Pvt Ltd bullion, diamond and Ramesh, gold ornament Ravindra Kumar Bothra The flagship company of the group is M/s. Lalitha Jewellery Mart P Ltd (M/s. LIMPL) which runs 32 large format showrooms across south India. Sl.No Investment (FY 2019-20) AY 2020-21 Amount in Rs. 1 Max Life Insurance 1,200,000 2 SBI Life Insurance 11,090,963 3 Star Union 1,974,481 4 Shares Division 3,240,699 5 Global Capital 1,239,727 6 Magnum Trust 6,000,000 7 Raj TV 556,148,491 8 Shares in Akshitha Castle Pvt Ltd 99,990 9 Shares in Asita Jewellery Exporters Pvt Ltd 3,315,849 10 Shares in BB Jeweller Exporters Pvt LTd 41,000 11 Shares in Bhakthi Castle Pvt Ltd 99,990 :-5-: 5 & 6/Chny/2024 12 Shares in Bhavya Homes P Ltd 99,990 13 Shares in Dilip Chhabria Design Pvt Ltd 292,227,711 14 Shares in KrishKiran Mega Mall Pvt Ltd 346,130 15 Shares in Lalitha Jewellery Mart Pvt Ltd 1,281,975,000 16 Shares in Shree Ayyappa Jewellery P Ltd 11,910,000 17 Shares in Centegrade Apparels P Ltd 21,999,780 18 Vertiv Software Labs Pvt Ltd 46,000,000 19 Akshitha Jewellers 96,819 20 BB Jewellers & Manufacturers 9,283,899 21 Bhakthi Jewellers 130,514 22 Bhavya Jewellers 5,118,768 2,253,639,801 Sl.No Investment (FY 2020-21) AY 2021-22 Amount in Rs. 1 Max Life Insurance 1,400,000 2 SBI Life Insurance 11,090,963 3 Star Union 24,66,304 4 Shares Division 3,240,699 5 Global Capital 1,239,727 6 Magnum Trust 6,000,000 7 Raj TV 556,148,491 8 Shares in Akshitha Castle Pvt Ltd 99,990 9 Shares in Asita Jewellery Exporters Pvt Ltd 3,315,849 10 Shares in BB Jeweller Exporters Pvt LTd 41,000 11 Shares in Bhakthi Castle Pvt Ltd 99,990 12 Shares in Bhavya Homes P Ltd 99,990 13 Shares in Dilip Chhabria Design Pvt Ltd 292,227,711 14 Shares in KrishKiran Mega Mall Pvt Ltd 346,130 15 Shares in Lalitha Jewellery Mart Pvt Ltd 1,281,975,000 16 Shares in Shree Ayyappa Jewellery P Ltd 11,910,000 17 Shares in Centegrade Apparels P Ltd 21,999,780 18 Vertiv Software Labs Pvt Ltd 46,000,000 19 Akshitha Jewellers 256,833 20 BB Jewellers & Manufacturers 9,630,995 21 Bhakthi Jewellers 369,486 2,249,958,938 The interest debited in P&L for the respective FYs and the interest disallowed by the AO u/s 36(1)(iii] are as under: FY AY Interest Interest debited to P&L disallowed by AO 2019-20 2020-21 15,37,46,880 12,38,52,364 2020-21 2021-22 14,38,90,173 15,37,46,880 :-6-: 5 & 6/Chny/2024 Total 29,76,37,053 27,75,99,514 9.3.3.3 The issue is whether the disallowance made by the AO u/s. 36(1)(iii) is in order, section 36(1)(iii) of the Act is reopened as under: Other deductions. 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- (i)….. (ii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation. - Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause; As per See 36(1(ii), deduction shall be allowed for the amount o interest paid in respect of capital borrowed for the purposes of business or protection. The Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs. Commissioner of Income Tax (CASE NO. Appeal (civil) 5811 of 2006} dt:14 December, 2005 has settled the issue of disallowance of interest paid us 36(1)(iii) based on commercial expediency for the purpose of business. The relevant paras are reproduced as under: It has been repeatedly held by this Court that the expression "or the purpose of business" is wider in scope than the expression" for the purpose of earning profits" vide CIT Vs. Malayalam Plantations Ltd. (1964) 53 TR 140, CIT Vs Birla Coton Spinning & Weaving Mills 1td (197l) 82 ITR 166 etc. The High Court and the other authorities should have 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. It is true that the borrowed amount in question was rot 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. Leaned counsel for the Revenue relied on a Bombay High :-7-: 5 & 6/Chny/2024 Court decision in Phaltan Sugar Works Lid. Vs. Commissioner of Wealth-Tax (1994) 208 1TR 989 in which it was held that deduction under Section 36(iii) car 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 the subsidiary o associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct. We agree with the view taken by the Delhi High Court in ITO VS. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the 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 arm-chair of the businessmen 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 compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view pent but that of & prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern, It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize these amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here), However, where it is obvious that a holding company has a deep interest in its subsidiary, end hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for :-8-: 5 & 6/Chny/2024 some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. The answer whether the particular expenditure has been commercially expended will depend on the facts and Circumstances of the case as well as the Act. What is to be seen is the purpose for which borrowed money is finally utilized. It the money is utilized in a way that makes commercial sense and helps in running the intended business of the assessee more efficiently, then it can be said that the interest paid in respect of borrowed money has been incurred for the purpose of commercial expediency. 9.3.3.4 In this case, the assessee has made investments in various group concerns as well as in private concerns as tabulated above. The assessee is into the business of purchase of bullion, gold and diamond ornaments and sells the same to M/s Lalithaa Jewellery Mart P Ltd concern: As per the sales registers produced by the assessee for the AYs 2020-21 and 2021-22, it is seen that most of the sales are made to M/s Lalitha Jewellery Mart P Ltd and sales to other parties are very less comparatively. Hence the assessee is mainly doing business with the M/s Lalithaa Jewellery Mart P Ld and therefore the assessee exists for this purpose only. 9.3.3.5 The assessee has invested Rs.128,19,75,000/- in shares of M/s. Lalitha Jewellery Mart Pvt. Ltd (LJMPL); he assessee is a brand ambassador of M/s. Lalitha Jewellery Mart Pvt. Ltd and has earned brand fee of Rs.25,30,00,000/- for the AY 2020-21 and Rs.30,36,00,000 for the AY 2021 22. The brand fee works out to 19.88% of the total value of the stake. The brand fee has been credited into Profit and Loss account and affected as professional income of the appellant. The assessee and M/s LIMPL are in same line of business and majority of the sales of the assessee is to LJMPL only; hence the investments of Rs.128,19,75,000/- in the shares of LJMPL satisfies the principle of commercial expediency. Therefore, the interest paid in respect of these investments is to be allowed as expenditure. 9.3.3.6 The assessee has stated that he is having sufficient own fund to meet out the investment which resulted into generation of exempt income; however, the segregation of borrowed fund and the appellant own funds are not possible due to holding of long period and therefore, the best option if deemed fit for disallowance of expenses is to invoke the provision of section 14A rather than invoking of :-9-: ITA. Nos: 5 & 6/Chny/2024 provision of section 36(1)(iii) of the Act. The argument of the assessee is unacceptable. The investments are not only in share capital, but in debt capital (loans) also. The major investment in the shares of LJMPL has already been excluded on the basis of commercial expediency. As far as other investments are concerned, there also, the assessee claims business expediency. Therefore, section 36(1)(iii) comes into play more here and gains more primacy here to see whether there is business expediency in such investments. In view of the above reasons, section 14A gains no merit in this case and hence, this contention is rejected. 9.3.3.7 On the investments other than M/s LJMPL, the assessee has not established any commercial expediency, Assessee has not made out any case as to how they were helpful for the purpose of business of the assessee. No business relationship has been established by the assessee in respect of these investments. Many of the entities to whom the interest earning monies were advanced or invested are into real estate business, renting service, manufacture of body of moto vehicle, insurance business, media, software, etc and thus, it can be seen there is no business expediency in there. Even where some entities are in the sane jewellery business, he assessee has not established and business expediency with them, as the assessee has business relationship only with LJMPL alone. In view of the foregoing reasons, the interest paid in respect of these investments are not to be allowed as business expenditure of the assessee u/s 36(ii). 9.3.3.8 The argument that the investments would be helpful during the Covid pandemic in view of price fluctuation does not hold water, as the debt capital has been advanced to many entities interest free and had they been invested with bank would have some interest income to the assessee, Thus, there is no commercial expediency in this argument. 9.3.3.8 The assessee further claimed that it had sufficient own funds. This argument is also fallacious. Had there been sufficient own funds, the assessee need not have borrowed funds and paid huge interest. Own funds would have gone into the fixed assets and stock. The assessee has not furnished any one-to-one cash flow statement to show that own funds were invested in the impugned investments. Thus, this argument is also rejected. 9.3.3.9 In view of the above reasons, only proportionate interest :-10-: 5 & 6/Chny/2024 expenses are calculated for disallowance on the non-business investments, other than the investment in LJMPL.

The Ld.DR, assailed the impugned action of the ld.CIT(A) and stated that the Ld.CIT(A) has erred in allowing the interest as expenditure U/s.36(1)(iii) proportionately towards investment made on shares of the private limited, which is not for the purpose of business as clearly stated by the AO in the assessment order and prayed for setting aside the order and to confirm the order of the AO.

Per contra, the Ld. Counsel for the assessee, referring to the financials statements of the assessee submitted that, the assessee has acquired shares in the private limited company to have control over the business i.e. commercial expediency and shown that the such investment has been made strategically over the number of years from 1999 to 2021. The assessee has :-11-: 5 & 6/Chny/2024 acquired about 1,17,12,806 shares in the Company LJMPL, amounting to Rs.128.19 Crores.

The Ld.counsel took us through the provisions of U/s.36(1)(iii) along with the Explanation of three important words/ phrases that are core to understanding of sub-section (iii) i.e. (i)Interest, (ii) borrowed and (iii) for the purpose of business or profession, which provides for claiming the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession and stated that, the AO has not understood the concept of business/commercial expediency in terms of investment made in shares to have a controlling stake and the relevant investments are ‘business investment’ and ‘not Non- business investment’.

The ld.Counsel reiterated that these investments have been made in various group concerns. The Ld. Counsel relied on the following decisions held in favour of the assessee to show that the expenditure of interest is allowable U/s.36(1)(iii) of the Act, when there is a ‘business expediency’ of taking control over the :-12-: 5 & 6/Chny/2024 company and its operations by holding the controlling stake (Shares) in the company. (i) SA builders Ltd Vs. CIT(A) [2007] 288 ITR 1, (SC) – Wherein their lordships decided the issue of allowability of interest, based on the investment or amount advanced on the measure of commercial expediency.

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 any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.

No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression " for the purpose of earning profits"

The High Court and the other authorities should have 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.

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 the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.

Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct.

We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), :-14-: ITA. Nos: 5 & 6/Chny/2024 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. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company 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. (ii) B Nanji & co., Vs. DCIT [2020] 194 DTR 390 – (Guj) “37 The appellant assessee had borrowed the capital to purchase the shares of the IHFC Ltd so as to have effective control of the IHFC Ltd in order to expand its real estate business. Thus, the investment in share was nothing but the expansion of business of the assessee. Therefore, all the conditions necessary for deduction under Section 36(1)(iii) were prima facie satisfied by the appellant assessee. The CIT(A) was, therefore, not justified to allow deduction under :-15-: 5 & 6/Chny/2024 Section 57(iii) of the Act as the appellant assessee did not borrow the capital for earning dividend or for making profit and gains. The dominant purpose of the appellant assessee to borrow the capital was to acquire the shares to have effective control over the IHFC Ltd so as to expand the business of the assessee. In that view of the matter, the CIT(A) was not justified in granting deduction of interest paid by the assessee under Section 57(iii) of the Act. But the assessee is entitled to deduction of interest paid on capital borrowed for investment in the shares of IHFC for the purpose of expansion for its business under Section 36(1)(iii) of the Act.” (iii) Trimex Ind.Pvt Ltd Vs.ACIT – dated 15/02/2023 – Chennai Tribunal “12. Having heard both the sides and considered relevant material available on record, we find that the assessee has made investment in shares with subsidiary companies. We further noted that, subsidiary companies are also involved in similar kind of business that the assessee was carrying out. From the details filed by the assessee, we find that there is a business expediency in investment made with subsidiary companies for strategic business purpose. Therefore, we are of the considered view that, the AO cannot invoke provisions of section 36(1)(iii) of the Act and disallow interest paid on borrowed capital, merely for the reason that the assessee had used interest bearing funds to make investments in subsidiary companies. This view is fortified by the decision of Hon’ble Jurisdictional High Court of Madras in the case of CIT vs KEC International Ltd (Supra), where the Hon’ble Madras High Court held that, interest paid on borrowed funds utilized for investment in group companies for strategic business purpose cannot be disallowed u/s. 36(1)(iii) of the Act. A similar view has been taken by the co-ordinate bench of ITAT, Chennai in the case of G.E.T. Water Solutions Pvt Ltd vs ACIT (Supra), where the Tribunal after considering relevant facts held that, once the assessee establishes the business connection for commercial expediency, then the assessee is at liberty to deal with its finances, in accordance with its requirements and the AO cannot sit in arms chair of the businessman to decide its business affairs and direct how to deploy its funds. As long as :-16-: ITA. Nos: 5 & 6/Chny/2024 the assessee establishes the business connection, then it is free to deal with its affairs in accordance with its requirements. In this case, there is no dispute with regard to the fact that investments made by the assessee with its subsidiary companies gives business advantage to the assessee, because the assessee company and subsidiary companies are in similar line of business. As regards, case laws relied upon by the CIT(A) in the case of Empee Holdings Ltd vs DCIT (Supra), we find that the ratio laid down by Hon’ble High Court of Madras in the said case is not applicable to facts of this case, because in the said case the question of law answered by the Hon’ble Madras High Court is on the issue on re-opening of assessment u/s. 147 of the Act, but not on the issue of disallowance on interest u/s. 36(1)(iii) of the Act, for interest free advances to group companies for non-business purpose. Therefore, we are of the considered view that the case laws relied upon by the Ld. CIT(A) has no application to the facts of the present case.” (iv) Gujarat Nippon enterprises Pvt Ltd Vs. ITO - dated 01/02/2022 – Ahmedabad Tribunal “10. We have heard the rival contention of both the parties and perused the materials available on record. Admittedly, the borrowed fund has been invested by the assessee by acquiring the shares of 5 different companies which are capable of generating only dividend income which is exempt from the tax. 10.1 The question that requires to be adjudicated whether the investment was made by the assessee to have controlling interest in the companies. In this regard ITA no.410/AHD/2017 A.Y. 2005-06 we find that the assessee during the assessment proceedings vide letter dated 04/12/2007 before the AO contended as under: “Regarding loans granted by the assessee, the assessee company has given advances to five tooth brush companies as a business strategy to have controlling stake in their business and so that interest has not been charged on the same.” 10.2 The above submission of the assessee has actually been translated in reality which is evident from the order of :-17-: ITA. Nos: 5 & 6/Chny/2024 the Hon'ble Gujarat High Court. All the aforesaid companies were amalgamated with the assessee. The relevant extract of the judgment of Hon'ble Gujarat High Court is placed on pages 36 to 54 of the PB. 10.3 We note that the Hon'ble Bombay in the case of PCIT v/s E-City Investment and Holdings Company (P.) Ltd. reported in 117 taxmann.com 123 has held as under: '2. Respondent-assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee's return for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee. The Tribunal referred to and relied upon the decision of the Supreme Court in case of S.A. Builders Ltd. v.CIT 228 ITR 1 (SC) and concluded as under: -- "If the aforesaid ratio laid down by Hon'ble Apex Court is analyzed by keeping the same in juxtaposition with the facts of the present appeal, firstly, we find that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, we note that advancing loan to the sister-concern was for the purposes of "Commercial Expediency", thus, we find merit in the contention of the ld. Counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. 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 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. No businessman can be compelled to maximize his profits."

The Ld. counsel asserted that, these decisions are applicable to the case on hand based on the facts and circumstances of the assessee and prayed to dismiss the appeal of the revenue by confirming the impugned order of the Ld.CIT(A).

Having heard both the sides and considered relevant material on record, we find that the assessee has made investments in shares of the group companies. The provisions of U/s.36(1)(iii) of the Act, deals with deduction of Interest paid on borrowed capital. As per the said provision, if interest paid on borrowed capital is not utilized for the purpose of business, then same cannot be allowed as deduction. In this case, the AO disallowed the entire interest paid on borrowed capital for the reason of diversion of interest bearing funds to group companies as his personal investment. The assessee before the AO explained that the investment made in group companies to derive substantial business advantage which is with commercial expediency and hence the question of disallowance of interest U/s.36(1)(iii) of the Act, does not arise. We further noted that, out of these investments, as rightly observed by the Ld.CIT(A), the assessee has made investment in Lalithaa Jewellery Mart Pvt ltd (LJMPL), which is involved in the similar kind of business that the assessee also carrying out. Based on the nature of business carried on by both the assessee and Lalithaa Jewellery Mart Pvt ltd (LJMPL) and other business transactions between them, we find that there is a business expediency in investment made by the :-20-: 5 & 6/Chny/2024 assessee in acquiring the shares of the above company for strategic business purpose. Therefore, we are of the considered view that, the Ld.CIT(A) has rightly allowed the portion of interest paid as eligible expenditure by properly analyzing the commercial expediency of the investment. We do not countenance the action of the AO in disallowing the entire interest paid, merely for the reason that the assessee had used interest bearing funds to make investment in acquiring shares of the Company as per the provisions of Section 36(1)(iii) of the Act. This view is supported by the decisions of various courts (Supra), where the courts are held that, Interest paid on borrowed funds utilized for investment in group companies for strategic business purpose with commercial expediency cannot be disallowed U/s.36(1)(iii) of the Act.

In this view of matter and considering the facts of this case and also respectfully following the decisions relied by the assessee, we are of the considered view that the Ld.CIT(A) has rightly allowed the interest paid on borrowed funds, which is utilized for the investment in the shares of the company LJMPL as :-21-: 5 & 6/Chny/2024 an expenditure U/s.36(1)(iii) of the Act, and thus we dismiss the appeal of the revenue.

In the result, both the appeals of the revenue are dismissed.