At, High Court of Andhra Pradesh
By, THE HONOURABLE MR. JUSTICE L. NARASIMHA REDDY & THE HONOURABLE MR. JUSTICE T. SUNIL CHOWDARY
For the Appellant: S.R. Ashok, Learned Standing Counsel for Income Tax. For the Respondent: A.V. Krishna Koundinya, Advocate.
Common Judgment: (L. Narasimha Reddy, J.)
The respondent is a private limited company and is assessed to tax. For the assessment years 1992-93 it claimed the deduction of the component of interest on the loans borrowed for its business. The assessing officer disallowed the deduction on the ground that the respondent lent and advanced substantial amounts to its sister concern, without charging interest. Aggrieved by the order of assessment, the respondent filed appeal before the Commissioner of Appeals. The Commissioner allowed the appeal through order, dated 31.01.1996. The said order was challenged by the Revenue before the Visakhapatnam Bench of the Income Tax Appellate Tribunal by filing ITA No.1248 of 1996 and 806 of 1997. The Tribunal dismissed the appeals through common order dated 11.02.2002. Hence these appeals under Section 260(A) of the Income Tax Act.
Sri S.R. Ashok, learned senior counsel appearing for the appellant, submits that once the respondent did not dispute that it has advanced amounts to its sister concern, a presumption has to be drawn to the effect that the amount borrowed by it from a bank was not for the purpose of its business. He contends that non-levy of interest on the amount advanced by the respondent to its sister concern is nothing but a camouflage to pass on the amount borrowed by it to its sister concern and in that view of the matter, it cannot be said that the amount was, in fact, borrowed for the benefit of its sister concern itself and thereby the respondent is not entitled to claim deduction of interest.
Sri A.V. Krishna Koundinya, learned counsel for the respondent, on the other hand, submits that the Revenue failed to establish that there was any nexus or link between the amount borrowed by the respondent from the financial institution on the one hand and the amount advanced by it to its sister concern on the other hand. He submits that the Commissioner and the Tribunal have taken correct view of the matter and no interference is warranted with the order under appeal.
The Act permits deduction of component of interest on the loans borrowed by an assessee, provided, the amount was borrowed for the purpose of business. If it emerges that the amount was borrowed for any purpose other than the business, the deduction of interest becomes impermissible.
The respondent borrowed certain amounts from a financial institution and claimed the deduction of interest paid thereon. The assessing officer did not dispute the factum of borrowing of loan or the liability to pay interest. However, he refused to permit deduction on the ground that the respondent has advanced substantial amount to its sister concern without levying interest. From that fact, the assessing officer inferred that the amount from the financial institution was not borrowed by the respondent for its business and on the other hand, the real beneficiary is the sister concern.
The conclusion of the assessing officer could have been approved or upheld, if only he was able to demonstrate that what was advanced by the respondent to its sister concern was nothing but the amount borrowed from the financial institution. It is only then that the respondent deserves to be treated as a mere intermediary and his claim for deduction of interest becomes liable to be rejected. However, no such effort was made by the assessing officer.
The law does not prohibit an assessee, or for that matter any individual, to borrow amount from one source and to lend amount to another, though the quantum may not be the same.
It is not uncommon that even where an entrepreneur is possessed of resources to establish a business undertaking, borrowing of the amount for that very purpose may prove to be beneficial to him. The benefits include subsidy or waiver of interest depending on the nature of the activity and the schemes that are in force at the relevant point of time.
Once it emerges that the assessing officer did not record any fi
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nding to the effect that the respondent has borrowed the amount on interest and straight away passed on it to the sister concerned, without levying interest, there was no way he could have disallowed the interest. We do not find any basis to interfere with the order of the Tribunal. The appeals are, accordingly, dismissed. There shall be no order as to costs. Miscellaneous applications filed in these appeals shall stand disposed of.