R.C. Sharma, A.M. - (1.) PRESENT appeal is filed by the assessee against the order of the Commissioner (Appeals) dated 8 -10 -1996, for the assessment year 1993 -94, confirming the action of the assessing officer in disallowing interest of Rs. 7,20,000 on estimate basis out of interest expenditure.
(2.) THE brief facts of the case are that the assessee -company filed its return of income disclosing total loss of Rs. 10,51,424 on 31 -12 -1993, for the assessment year 1993 -94. During the relevant previous year, the assessee -company has paid Rs. 1,20,50,000 to Janapriya Hospitals Corporation Ltd. (now known as Duncan Goenka Hospitals Ltd.) towards contribution to their equity shares capital as co -promoters with its holding company Duncans Industries Ltd. During the year under consideration the allotment of aforesaid shares had not been made and accordingly the assessee -company had shown this amount under the head Advances against Investments . The break -up of the funds utilized for this advance of Rs. 1,20,50,000 was as under :
(3.) THE assessee -company had paid interest of Rs. 7,20,000 during the relevant previous year to M/s. Peerless General Finance and Investment Co. Ltd. on the aforesaid loan of Rs. 45,00,000. The amount of interest paid was claimed as allowable business expenditure under section 36(1)(iii) of the Income Tax Act, 1961. During the course of assessment under section 143(3), the learned Deputy Commissioner disallowed the interest payment of Rs. 7,20,000 with the following observations : The assessee -company in the immediately preceding year has paid a sum of Rs. 1,20,50,000 as advance to M/s. Janapriya Hospital Corpn. Ltd. towards the proposed issue of equity shares in that company. However, no interest has been charged on this advance. The advance had remained outstanding in the whole of the previous year relevant to the assessment year. From the scrutiny of the records, it is found that the assessee has advanced this sum partly out of the borrowed funds. A sum of Rs, 45 lakhs had been taken on loan from Peerless General Finance and Investment Co. Ltd. which had been advanced to the above -mentioned party. The assessee has paid a sum of Rs. 7,20,000 to PGFI as interest on Rs. 45 lakhs which has been advanced to Janapriya Hospital Corpn. Ltd. This interest has been debited to the profit and loss account as business expenses. In view of various court judgments on this point, this interest of Rs. 7,20,000 paid on borrowed fund which was advanced as interest -free advance, is not allowable as business expenditure. In the immediately preceding year also, interest was disallowed on this point which was confirmed in appeal by the Commissioner (Appeals). On the facts and in the circumstances, interest payment of Rs, 7,20,000 to PGFI is disallowed and added to the total income. Aggrieved by the above order, the assessee -company approached to the Commissioner (Appeals). The Commissioner (Appeals) confirmed the disallowance of interest payment and further fortified the Dy. Commissioners action by observing that the interest -free advance given to sister concern was not for business purposes, therefore, interest payment, proportionate to the said advance was not an expenditure of a business nature. The Commissioner (Appeals) also relied on his order for the earlier year in which it was held that the advance had not been materialised into allotment of shares of M/s. Janapriya Hospital Corporation Ltd. even till the time of appeal before him (Aug., 1995). He thus came to the conclusion that it was clear that amount given to M/s Janapriya Hospital Corporation Ltd. without charging any interest, can in noway be called an investment made during the course of the normal business activities of assessee -company. Thus following his earlier order in the assessment year 1992 -93, disallowance of interest of Rs. 7,20,000 was confirmed by the Commissioner (Appeals).;