CIT v. Sahu Enterprises Pvt. Ltd.

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The Tax Publishers2013 TaxPub(DT) 1074 (All-HC) : (2013) 052 (I) ITCL 0083 : (2013) 352 ITR 0008 : (2013) 261 CTR 0319 : (2013) 087 DTR 0221 Income Tax Act, 1961 --Business deduction under section 36(1)(iii) --Interest on borrowed capital Interest-free advances to directors and family members--Assessee-company had given interest-free advances to directors and relatives by borrowing the funds from the market at 20 per cent interest and had claimed deduction of same under section 36(1)(iii). Assessing officer denied the deduction as the funds were used by directors ad relatives of assessee-company for their personal purposes. *Held :* Was justified as it appeared that nothing was available from the record that advances/ loan without interest were ever given for business purposes. It was for the personal use of the director or the family members and after obtaining the loan/advances, the borrower never made any effort to repay the loan amount nor did the assessee-company made any effort to recover the said loan from the borrower. In fact the assessee-company allowed its director and family members to use its funds for their personal benefits,. This could not be intention of the statute which, allowing the payment interest on borrowed funds for business purpose under section. 36(1) (iii) of the Act. Therefore, the interest on borrowed funds could not allowed as deduction. The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners; as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/ partners of the assessee and working solely in the interest of the assessee, would have extended such interest-free advances. Some business objective should be sought to have been 'achieved- by' extending such interest-free advance when: the assessed itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended. Income Tax Act, 1961, Section 36(1)(iii) IN THE ALLAHABAD HIGH COURT DEVI PRASAD SINGH & DR. SATISH CHANDRA JJ. CIT v. Sahu Enterprises Pvt. Ltd. ITA Nos. 55 and 112 of 2005 and 43 of 2006 20 February, 2013 Appellant by : D. D. Chopra Respondent by : Amit Shukla, Pushpila bisht, S. K. Garg and Waseequddin Ahmad JUDGMENT *Satish Chandra J.* All the appeals have been preferred by the Department under section 260A of the Income Tax Act 1961, against the judgment and orders dated 10-11-2004 ; 28-2-2005 ; and 27-5- 2005, passed by the Income Tax Appellate Tribunal, Lucknow Bench, Lucknow, in ITA Appeal Nos. 1446/All/1998 (assessment year 1995-96); 258/All./2000 (assessment year 1995-96) ;and ITA No. 176/Luc./2001 (assessment year 1997-98). 2 Income Tax Appeal No. 55 of 2005 was admitted by this court, vide its order dated July 4, 2005, on the following substantial questions of law framed at SI. Nos. 1 to 4 : '1. Whether, on the facts and in the circumstances of the cases, the learned Income Tax Appellate Tribunal was justified in deleting the disallowance of equivalent of interest on borrowed capital which was debit balances existing in the names of directors and their family members, on the ground that no such disallowance was made by the assessing officer in the assessment years 1991-92 and 1992-93 while ignoring that the omission on the part of the assessing officer to add back the same in the preceding year will not preclude the assessing officer to add back the same on the basis material available on record ? SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1074 (All-HC) : (2013) 052 (I) ITCL 0083 : (2013) 352 ITR 0008 : (2013) 261 CTR 0319 : (2013) 087 DTR 0221

Income Tax Act, 1961

--Business deduction under section 36(1)(iii) --Interest on borrowed capital Interest-free advances to directors and family members--Assessee-company had given interest-free advances to directors and relatives by borrowing the funds from the market at 20 per cent interest and had claimed deduction of same under section 36(1)(iii). Assessing officer denied the deduction as the funds were used by directors ad relatives of assessee-company for their personal purposes. Held : Was justified as it appeared that nothing was available from the record that advances/ loan without interest were ever given for business purposes. It was for the personal use of the director or the family members and after obtaining the loan/advances, the borrower never made any effort to repay the loan amount nor did the assessee-company made any effort to recover the said loan from the borrower. In fact the assessee-company allowed its director and family members to use its funds for their personal benefits,. This could not be intention of the statute which, allowing the payment interest on borrowed funds for business purpose under section. 36(1) (iii) of the Act. Therefore, the interest on borrowed funds could not allowed as deduction.

The commercial expediency would include such purpose as is expected by the assessee to advance its business interest and may include measures taken for preservation, protection or advancement of its business interests. The business interest of the assessee has to be distinguished from the personal interest of its directors or partners; as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/ partners of the assessee and working solely in the interest of the assessee, would have extended such interest-free advances. Some business objective should be sought to have been 'achieved- by' extending such interest-free advance when: the assessed itself is borrowing funds for running its business. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of the mixed funds, which included borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances were extended.

Income Tax Act, 1961, Section 36(1)(iii)

IN THE ALLAHABAD HIGH COURT

DEVI PRASAD SINGH & DR. SATISH CHANDRA JJ.

CIT v. Sahu Enterprises Pvt. Ltd.

ITA Nos. 55 and 112 of 2005 and 43 of 2006

20 February, 2013

Appellant by : D. D. Chopra

Respondent by : Amit Shukla, Pushpila bisht, S. K. Garg and Waseequddin Ahmad

JUDGMENT

Satish Chandra J.

All the appeals have been preferred by the Department under section 260A of the Income Tax Act 1961, against the judgment and orders dated 10-11-2004 ; 28-2-2005 ; and 27-5- 2005, passed by the Income Tax Appellate Tribunal, Lucknow Bench, Lucknow, in ITA Appeal Nos. 1446/All/1998 (assessment year 1995-96); 258/All./2000 (assessment year 1995-96) ;and ITA No. 176/Luc./2001 (assessment year 1997-98).

2 Income Tax Appeal No. 55 of 2005 was admitted by this court, vide its order dated July 4, 2005, on the following substantial questions of law framed at SI. Nos. 1 to 4 :

'1. Whether, on the facts and in the circumstances of the cases, the learned Income Tax Appellate Tribunal was justified in deleting the disallowance of equivalent of interest on borrowed capital which was debit balances existing in the names of directors and their family members, on the ground that no such disallowance was made by the assessing officer in the assessment years 1991-92 and 1992-93 while ignoring that the omission on the part of the assessing officer to add back the same in the preceding year will not preclude the assessing officer to add back the same on the basis material available on record ?