Interest paid on borrowed funds: Deduction under section 36(1)(iii)
This case delves on the issue whether or not claiming deduction of interest on borrowed funds under section 36(1)(iii) is “commercial expediency”.
Jaipur ITAT held that the advance made by the Assessee was wholly and exclusively for the purposes of business. The expression “for the purpose of business” occurring in section 36(1)(iii) is wider in scope than the expression “for the purpose of making of earning income”. Commercial expediency must be decided from businessman’s point of view. Considering the same, the Tribunal did not find any merit in the disallowance made by the Assessing Officer. Hence, the Assessing Officer was directed to delete the same. See Facts & Key Points.
- The assessee was a private limited company and was engaged in the business of construction and real estate development.
- Return for the A.Y. 2012-13 was filed on 29/09/2012 declaring total income at Rs. 16.79 lakhs. The Assessing Officer completed the assessment under section 143(3)/ 153A of the Act determining total income at Rs. 30.05 lakhs inter alia making the addition of Rs.13.26 lakhs on account of disallowance of interest. Similarly, disallowance of Rs. 26.33 lakhs was made for the A.Y. 2013-14 and Rs. 30.24 lakhs for the A.Y. 2014-15.
- The addition was made by the Assessing Officer exclusively on the basis that the Assessee had made interest free advances to its sister concern whereas this money was advanced for business purposes.
- As per the developing agreement executed between the Assessee and the sister concerns, the Assessee was required to pay interest free refundable security deposit of Rs. 2.21 crores to the owner of the land in lieu of the owner granting license for carrying out the development project.
- Thus, it was held that the advance made by the Assessee was wholly and exclusively for the purposes of business. The development agreements established beyond doubt that the amount advanced to both the concerns was under business agreements, therefore, there was no occasion for making any disallowance of interest.
- Reliance was placed on CIT Vs. Shahibag Entrepreneurs (P) Ltd., R.B. Bansilal Abirchand Spg. & Wvg. Mills Vs. CIT, Madhav Prasad Jatia Vs. CIT, CIT Vs. Sales Megnesite (P) Ltd., and S.A. Builders Ltd. Vs. CIT, wherein it was held that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any capacity other than that of a trader. Purpose need not be to increase profits or to directly benefit the business. The allowance contemplated is not necessarily an allowance for amounts expended to increase profits only, so long as it is for the purpose of the business. It is not also necessary that profits should be earned by such expenditure, nor is it necessary that it should be expended directly for the purposes of business so long as the business indirectly profits. Borrowing must be for the purpose of business: The expression “for the purpose of business” occurring in section 36(1)(iii) is wider in scope than the expression “for the purpose of making of earning income”. Commercial expediency must be decided from businessman’s point of view. Even expenditure incurred voluntarily on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business would be deductible under this section. The question whether it was necessary or commercially expedient or not is a question that has to be decided from the point of view of the businessman and not by the subjective standard of reasonableness of the revenue. The decision relating to section 37 would also be applicable to section 36(1)(iii) because in section 37 also the expression used is ‘for the purpose of business’. It has been consistently held in decision relating to section 37 that the expression ‘for the purpose of business’ includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. The expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.
- Considering the proposition of law laid down in the above judicial pronouncements and applying the same to the facts of the instant case, the Tribunal did not find any merit in the disallowance so made by the Assessing Officer in the A.Y 2012-13, 2013-14 and 2014-15. Hence, the Assessing Officer was directed to delete the same.