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Income Tax Appellate Tribunal, “C” BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI CHANDRA POOJARI
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
This appeal of the assessee is directed against the order of the Commissioner of Income Tax (Appeals)-III, Chennai, dated issue arises for consideration is with regard to disallowance of interest to the extent of `45,81,145/-.
Sh. Philip George, the Ld.counsel for the assessee, submitted that the assessee-company advanced interest free loan on account of demerger to M/s TT Enterprises Pvt. Ltd., M/s TT Trading Pvt. Ltd. and M/s TT Insurance Braking Services Pvt. Ltd. The Assessing Officer disallowed the interest paid by the assessee on the borrowed funds on the ground that the interest expenditures were not used for the business purposes. On appeal by the assessee, the CIT(Appeals) found that the assessee failed to establish the interest free loans given to the group concerns were for business purpose. According to the Ld. counsel, the assessee Referring to the copy of the judgment of Madras High Court in Company Petition Nos.39 and 40 of 2007, TT Enterprises Pvt. Ltd. was demerged by the scheme of arrangement approved by the High Court. The Assessing Officer has taken note of this demerger, however, disallowed the claim of the assessee without appreciating the fact that the amount advanced by the assessee is only for business purpose. When the assessee advanced money on TT Trading Pvt. Ltd. and TT Insurance Braking Services Pvt. Ltd., the CIT(Appeals) may not be correct in saying that the assessee has to establish that the interest free loan was for business purpose.
The fact remains that the interest free loan was advanced due to demerger and the sister concerns, who received money, admittedly used the same for business purposes. It is nobody’s case that the director of recipient company used the money for personal purpose other than its business purpose.
Placing reliance on the judgment of Apex Court in S.A.
Builders Ltd. v. CIT (2007) 288 ITR 1, the Ld.counsel for the assessee submitted that when the assessee advanced money due to commercial expediency to the sister concerns, it has to be construed that the money was used for business purpose. Merely because a third party gets benefit out of such advance, it is immaterial. The Ld.counsel has also placed reliance on the judgment of Madras High Court in CIT v. Tenneco RC India (P.) Ltd. (2013) 217 Taxman 362 and on the judgment of Bombay High Court in CIT v. Reliance Communications Infrastructure Ltd. (2013) 260 CTR 159 and that of the Delhi High Court in CIT v. Dalmia Cement Bharat Ltd. (2011) 330 ITR 595.
On the contrary, Shri A.V. Sreekanth, the Ld. Departmental Representative, submitted that the assessee has not filed any material to substantiate that the interest free loan was given for business purpose of the group concerns. On a query from the Bench, when the Assessing Officer herself found that the loan was advanced on account of demerger of TT Enterprises Ltd., whether the payment made by the assessee on account of demerger is for commercial expediency or not, the Ld. D.R. clarified that before the CIT(Appeals) there was no material, therefore, the CIT(Appeals) has rightly confirmed the addition.
We have considered the rival submissions on either side and perused the relevant material available on record. It is not in dispute that the assessee-company, TT Enterprises Pvt. Ltd., TT Trading Pvt. Ltd. and TT Insurance Braking Services Pvt. Ltd. are sister concerns. The assessee-company advanced money on account of demerger of TT Enterprises Pvt. Ltd. and other loans to TT Trading Pvt. Ltd. and TT Insurance Braking Services Pvt. Ltd. The Assessing Officer disallowed the interest on the borrowed funds at the rate of 12.25% on the ground that the borrowed funds were diverted for non-business purposes.
The question arises for consideration is when the assessee advanced the borrowed funds to the sister concerns due to demerger and loans to TT Trading Pvt. Ltd. and TT Insurance Braking Services Pvt. Ltd., whether such advances can be considered as diversion of funds for non-business purposes? This Tribunal is of the considered opinion that the same cannot be considered to be diversion of funds for non-business purpose. But it has to be considered as advance made to sister concern on commercial expediency.
The Apex Court in S.A. Builders Ltd. (supra) had an occasion to consider this issue elaborately. The Apex Court found that the test in this case is whether the advance was made due to commercial expediency or not. If there was commercial expediency for advancing the money that merely because a third party benefits out of the advance, there cannot be any disallowance of interest.
The Apex Court has found that “for the purpose of business” included expenditure voluntarily incurred for commercial expediency also. The Apex Court further found that the expenditure may not have been incurred under legal obligation but, yet it is an allowable expenditure if it is incurred on the ground of commercial commercial expediency in advancing money by the assessee to other sister concerns. As observed by the Apex Court, the Revenue cannot put itself in the arm-chair of the businessman and assume what is reasonable expenditure and what is not. The Revenue authorities must put themselves in the shoes of the businessman and see how a prudent businessman would act.
When the assessee transferred the borrowed funds to sister concerns for a commercial expediency and not from a point of earning any profit, it does not mean that the assessee has diverted borrowed funds for non-business purpose. A similar view was taken by the Madras High Court in Tenneco RC India (P.) Ltd. (supra) and by the Bombay High Court in Reliance Communications Infrastructure Ltd. and by the Delhi High Court in Dalmia Cement Bharat Ltd. (supra). When the assessee advanced money to its sister concerns and there was no allegation of the Revenue that the money advanced was misused either by the sister concerns or its director for personal benefit of individual beneficiaries, this Tribunal is of the considered opinion that the interest on the borrowed funds has to be allowed as expenditure. In this case, there is no allegation or not even whisper that the recipient concerns have 7 diverted the funds for the benefit of particular individual or director of the concerns. In those circumstances, this Tribunal is unable to uphold the order of the CIT(Appeals). Accordingly, the orders of the lower authorities are set aside and the addition of `45,81,145/- is deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced on 27th November, 2015 at Chennai.