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18 Business expenditure — Interest on
borrowings — Assessee has to establish, in the first instance, its right to
claim deduction under one of the Sections between S. 30 to S. 38, and in the
case of a firm if it claims special deduction, it has also to prove that it is
not disentitled to claim deduction by reason of applicability of S. 40(b)(iv).
[Munjal Sales Corporation v. CIT, (2008) 298 ITR 298
(SC)]
In August/September, 1991, the appellant-assessee granted
interest-free advances to its sister concerns, which were disallowed by the
Department on the ground that the said advances were not given from the firm’s
own funds but from interest-bearing loans taken by the assessee-firm from third
parties. Accordingly, the assessee’s claim for deduction u/s. 36(1)(iii) was
disallowed by the Department for the A.Y. 1992-93. However, the Tribunal deleted
the disallowance saying that the assessee had given such advance from its own
funds. In the next A.Y. 1993-94 , the same situation look place. During the A.Y.
1994-95, no further advances were made by the assessee-firm in favour of its
concerns. However, during the A.Y. 1995-96, a small interest-free loan of Rs.5
lakhs was advanced by the assessee-firm to its sister concern and during the
year in question, the assessee had profits of Rs.1.91 crores. The said
advance/loan got finally repaid in the A.Y. 1997-98. For the A.Y. 1994-95, the
Department disallowed the claim for deduction u/s.40(b)(iv) saying that in this
case there was diversion of funds by raising of interest-free loans. The
Assessing Officer did not accept the submission of the assessee that advance(s)
made by the assessee were out of the income of the firm. According to the
Assessing Officer, the said interest-free advances to sister concerns were out
of monies borrowed by the firm from third parties on payment of interest, hence
the assessee was not entitled to deduction u/s.40(b) of the 1961 Act. This view
was confirmed by the Tribunal. For the A.Ys. 1995-96 and 1996-97, the Tribunal
held that during the said years, no interest-free advances to sister concerns
were made and, therefore, there was no nexus between ‘interest-bearing loans’
taken and ‘interest-free advances’. However, the Tribunal found that there was
no material to show that advances were made to sister concerns out of the firm’s
own income and, therefore, the assessee was not entitled to deduction
u/s.40(b)(iv) of the 1961 Act. The Supreme Court after analysing the scheme of
the Act and in particular the provision of S. 36(1)(iii) and S. 40(b), held that
every assessee, including a firm, has to establish, in the first instance, its
right to claim deduction under one of the Sections between S. 30 to S. 38 and in
the case of the firm, if it claims special deduction, it has also to prove that
it is not disentitled to claim deduction by reason of applicability of S.
40(b)(iv). The Supreme Court on the facts held that for the A.Y. 1992-93 and the
A.Y. 1993-94, the Tribunal held that the loans given to the sister concerns were
out of the firm’s funds and that were advanced for business purposes. Once it is
found that the loans granted in August/September, 1991 continued up to A.Y.
1997-98 and that the said loans were advanced for business purposes and that
interest paid thereon did not exceed 18/12 per cent per annum, the assessee was
entitled to deductions u/s.36(1)(iii) read with S. 40(b)(iv) of the 1961 Act.
Further, the Supreme Court observed that during A.Y. 1995-96, apart from the
loan given in August/September, 1991, the assessee advanced interest-free loan
to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there
was nothing on record to show that the loans were given to the sister concern by
the assessee-firm out of its own funds and, therefore, it was not entitled to
claim deduction u/s.36(1)(iii). The Supreme Court held that finding of the
Tribunal was thus erroneous. The opening balance as on April 1, 1994, was
Rs.1.91 crores, whereas the loan given to the sister concern was a small amount
of Rs.5 lakhs. According to the Supreme Court, the profits earned by the
assessee during the relevant year were sufficient to cover the impugned loan of
Rs.5 lakhs. The Supreme Court accordingly allowed the appeal.
