Case Law Details

Case Name : Late Sh. Jagat Singh Vs ITO (ITAT Chandigarh)
Appeal Number : IT Appeal No.-327/2012
Date of Judgement/Order : 10/08/2015
Related Assessment Year : 2007-08
Courts : All ITAT (1730) ITAT Chandigarh (56)

Brief of the case:

  • The ITAT Chandigarh in the case of Late Sh.Jagat Singh vs. ITO held that the interest paid by assessee on borrowings not allowable as the same were used to finance the sister concern when the crux of transaction results that no direct or indirect benefit accrues to assessee on such loans advanced.
  • Such loans being used to finance sister concern is out of commercial expediency, interest paid thereon not deductible u/s 36(1)(iii).

Facts of the case:

  • The assessee proprietor of a firm dealing in manufacturing and trading of shoes. The return for the assessment year 2007-08 was filed on 29.10.2007 declaring an income of Rs.1,96,650/- . During assessment proceedings, the Assessing Officer noticed that the assessee had advanced an interest free amount of Rs.25,00,000/- to Shri Gurjit Singh on 7.10.2015.
  • It was also not iced that the assessee was paying interest to Bank amounting to Rs.1,49,941/-. It was explained to the Assessing Officer that the amount was utilized for purchasing immovable property , but the AO not iced that this advance was never utilized for the purpose of business and therefore he disallowed interest parallel to bank interest @ 12.25%, on the above said interest free advances.
  • The CIT (Appeals) upheld the disallowance by stating that the assessee had not explained as to how it was commercially expedient to advance such a large amount.
  • Aggrieved assessee is in appeal before the tribunal.

Contention of the Assessee:

  • The assessee contended that commercial expediency was established by the fact that the advance was utilized for the expansion/securing of business of the family and commercial expediency was not affected merely because the advance was given to relative(son).
  • Reliance was placed on the decision of this tribunal in the case of Thukral Regal Shoes Vs. ACIT, in ITA No. 650/Chd/2011.

Contention of the Revenue:

  • The learned departmental representative contended that the amount advanced by assessee to his son was used in acquisition of a property in his own name and in infusing capital in a firm in which he is a partner. The legal heir of assessee failed to prove any direct or indirect benefit accrued to assessee on such loans advanced.
  • Since no commercial expediency of the advance had been established by the assessee, interest relating to the advance was rightly disallowed under section 36(i)(iii) of the Act. Reliance was placed on the decision of the Hon’ble Apex Court in the case of SA Builders Ltd. 288 ITR 1 (SC).

Held by ITAT Chandigarh:

  • The ITAT observed that for claiming deduct ion of interest under sect ion 36(i)(iii) of the Act , the following conditions have to be satisfied :

i) There should be borrowed capital.

ii) Interest must be paid on the borrowed capital

iii) The borrowed capital must be for the purpose of business and profession.

  • In the case of S.A. Builders Ltd., the Hon’ble Supreme Court the expression “used for the purpose of business” includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
  • In the instant case the advance of Rs.25 lacs given to Shri Gurjit Singh by the assessee was partly utilized to purchase a property Sector -14, Panchkula in the name of Shri Gurjit Singh and his brother Shri Harinder Singh. Balance amount was utilized by Shri Gurjit Singh, by introducing capital in his partnership concern M/s Thukral Regal Shoes.
  • None of the investments were made in the name of the assesse, nor it was demonstrated before as to how these investments benefited the assesse. commercial expediency includes such expenditure as a prudent business man incurs for the purpose of business. Some benefit must directly or indirectly accrue to assessee which did not so accrue in the present case.
  • Therefore such an advance does not qualify as advance for commercial expediency of the assessee and, therefore, interest relating to the same does not qualify for deduct ion under sect ion 36(i)(iii) of the Act.
  • In result appeal filed by assessee was dismissed.

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