Bombay H.C : the interest bearing loans obtained by the assessee from Canara Bank were diverted to settle the liability of its sister concern

High Court Of Bombay

CIT vs. Neelkanth Synthetics & Chemicals (P) Ltd.

Section 36(1)(iii)

Asst. Year 1997-98

F.I. Rebello & R.S. Mohite, JJ.

IT Appeal No. 1359 of 2008

9th February, 2009

Counsel appeared :

Suresh Kumar, for the Appellant : S.N. Inamdar & Atul Jasani, for the Respondent


by the court :

The questions of law as framed in this appeal are as follows :

“(a) Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was justified in deleting the disallowance made of Rs. 17,08,511 on account of interest expenses without appreciating the fact that the interest bearing loans obtained by the assessee from Canara Bank were diverted to settle the liability of its sister concern ?

(b) Whether on the facts and circumstances of the case and in law, the Hon’ble Tribunal was justified in upholding the order of the CIT(A) and allowing the interest amount of Rs. 17,08,511 under s. 36(1)(iii) of the IT Act without appreciating the fact that the assessee-company did not utilize the loan fund for the purpose of its business ?”

2. The brief facts of the case are that the assessee-company had two directors by name Rajkumar Surekha and his wife Kusum Surekha. These two directors were also the trustees of two trusts, i.e., Pankaj Beneficiary Trust and Pooja Beneficiary Trust respectively. These two trusts had purchased some property at Raheja Centre independently and thereafter given them on lease to the assesseecompany vide lease deed dt. 1st July, 1989 for a period of 12 years on a lease rent of Rs. 20,000 per month. However, no lease rent was paid by the assessee to the trusts nor was it provided for in the books of account. It was the case of the assessee that there was an oral understanding that no rent was to be paid. By a further agreement dt. 26th May, 1993, these two premises were subleased to Canara Bank at Rs. 2,26,800 per month inclusive of water charges and taxes. No deposit was taken from the bank at the time of sub-lease. That prior to the agreement entered into between the assessee and the bank both these premises had been offered as collateral security for raising finance from the Canara Bank by a sister concern of the assessee-company, i.e., M/s Bihareeji International Ltd. Due to heavy losses incurred by this sister concern, they could not repay the loan and thus the two premises were liable to be disposed of by Canara Bank for realisation of the loan amount. In these circumstances, a settlement was reached between the assessee-company and the bank whereby a loan was advanced by the bank in the name of the assessee-company which was partly used to settle the liability of Bihariji International Ltd. The balance amount of the loan was allowed to the assessee to be withdrawn at the interest rate of 22.25 per cent, per annum. The assessee did not charge any interest from its sister concern Bihareeji International Ltd.

On the assessee’s return for the asst. yr. 1997-98 the AO concluded that the amount received from the bank had not been utilised for the purpose of business of the assessee-company and accordingly interest paid on this amount to the bank was disallowed and added to the income of the assessee. The CIT(A) deleted the disallowance of interest expenditure and the Tribunal dismissed the appeal of the Revenue and confirmed the finding of the CIT(A).

From the reasoning given by the CIT(A) and the Tribunal, we find that both the authorities have concurrently proceeded on the footing that any expenditure incurred for protecting the business asset held by an assessee for its business or any expenses incurred for the protection and maintenance of the business premises would be an allowable expenditure. Reliance has been placed on several judgments including the judgment of the Supreme Court in the case of CIT vs. Finlay Mills Ltd. (1951) 20 ITR 475 (SC), as well as the judgment of this Court in the case of Addl. CIT vs. Putco (P) Ltd. (1982) 28 CTR (Bom) 256 : (1983) 140 ITR 740 (Bom). It is seen that but for the borrowing of the funds, the assessee would not have been able to retain the business premises which would have been sold by the bank in the course of the recovery of its loan for which the said premises were given as collateral security. It was only to retain these business premises that the appellant had to borrow the funds from the bank and as such interest payable on the borrowing for retaining the premises would be an allowable deduction under s. 36(1)(ii) because the said loans were used for the purpose of retaining the business premises which was necessary to carry on the business activities of the appellant. It may be noted that the AO has accepted the income received by the assessee from the leased premises as rental income and assessed it as income from other sources. In such circumstances, the finding is that in order to safeguard interest of the lease premises and also to bail out its sister concern, the loan was obtained from the bank. It is a finding that the intention of the assessee was to safeguard its leased premises for the purpose of business and it cannot but be said to be in the interest of its business.

In our view, the findings are reasonable and cannot be said to be perverse and the questions of law as framed therefore, do not arise. The appeal is therefore, summarily dismissed.

[Citation : 330 ITR 463]

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