Brief of the Case: ITAT Delhi has held In the case of M/s Chemical Sales and Services vs. ITO that the only condition for claiming deduction under section 36(1 )(iii) is “commercial expediency” of the expenditure incurred and once the said condition is fulfilled, no further factor can be brought in to deny the legitimate claim of deduction. It has not been established by AO that advances are for non – business purposes and as such, disallowance is unsustainable in law.
Facts of the Case: Assessee firm was engaged in the business of trading of chemicals. It was observed by the Assessing Officer that assessee had paid interest of Rs.21,81,286/- on secured loan of Rs.l,72,49,345/-. Assessing Officer found that one of the partner of the firm, M/s Suresh Goel and Sons, HUF had debit balance of its capital as on 31.3.2010 of Rs.81,13,770/- as against the balance of Rs.l4,59,446/- as on 01.04.2009. It was observed that assessee was paying interest on secured loans other than for business purposes and assessee has given interest-free loan of Rs.61,40,000/- to M/s Suresh Goel and Sons, HUF out of its secured loans of Rs.1,17,07,384/-. Which clearly shows that assessee was diverting its interest-bearing funds to non-interest bearing loan to one of its partners for his undue enrichment.
He also found that there is no commercial expediency in diverting interest bearing loan to interest free loans. Thus, he held that loan given to above partner is not allowable either U/S 36(1)(iii) or 37(1) of the Act.
Contention of the Assessee: Ld. Counsel of the assessee stated that the CIT (A) have wrongly disallowed of Rs. 10,54,790/- out of the interest expenses of Rs. 21,81,286/- on the ground that the assessee has allegedly diverted interest bearing funds for non business purposes. He submitted that evidence furnished has arbitrarily been brushed aside. He further submitted that the ClT(A) has failed to appreciate that the assessee firm had advanced fund to one of its partner namely M/s Suresh Goel & Sons HUF for construction of a building on the plot owned by the partners and was to be used by the assessee firm for its business purposes. Also a fair and proper opportunity of being heard is not given to assessee.
Contention of the Revenue: Ld. DR relied upon the orders of the lower authorities.
Held by CIT (A): The CIT (Appeals) disallowed of Rs.10, 54,790/- out of the interest expenses of Rs. 21, 81,286/- on the ground that the assessee has allegedly diverted interest bearing funds for non-business purposes.
Held by ITAT: The assessee had specifically stated that he has running its business activities so far from agricultural property since the inception of the firm and now has to run its business from some commercial place. That is why, funds were given to M/s Suresh Goel & Sons HUF for construction of building on plot for being used as office of the assessee firm. To prove this submission, he also stated that AO may pay visit on the spot to see the construction of the building or in the alternative depute Inspector for necessary verification on the basis of spot enquiry. In view thereof, it was submitted by the Ld. Counsel of the assessee that the purchase of plot and construction of building on it for being used as office of the assessee firm is business activity and interest paid on fund borrowed is for the purpose of business and is allowable as deduction u/s 36(1)(iii) of the Act.
The only condition for claiming deduction under section 36(1 )(iii) is “commercial expediency” of the expenditure incurred and once the said condition is fulfilled, no further factor can be brought in to deny the legitimate claim of deduction. The judgement of the Hon’ble Apex Court in the case of S.A. Builders Ltd. vs. CIT reported in 288 ITR 1 support this contention in which it was held that 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”. Also judgement of the High Court of Madras in the case of CIT vs. Century Flour Mills Ltd reported in 334 ITR 377 wherein Apex Court judgement in the case of SA Builders vs. CIT has been followed and held that where assessee having borrowed money, utilized it as advance to its managing director for purchase of land for business purpose, interest paid on said borrowing was to be allowed as deduction. Also ITAT Chandigarh decision in the case of Dhanna Mal Chatter Sain vs ITO reported in 18 TTJ 552 wherein, the Tribunal has held that it is the onus of Revenue to establish the interest bearing funds have been utilized for non – business purposes and without discharging the onus, no addition/ disallowance can be made under section 36(1)(iii) of the Act. Followings all these decisions, it is held that advances have been made to M/s Suresh Goel & Son (HUF) for the purpose of the business and on account of commercial expediency.
Accordingly, appeal of the assessee allowed.