New Page 2
5 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 the firm if it claims special deduction, it has also to prove that it is not
disentitled to claim deduction 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
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 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.
