The main legal point established in the judgment is that the expression 'for the purpose of business' in Section 36(1)(iii) of the Income Tax Act, 1961, is wider in scope than the expression 'for the purpose of earning income', but the assessee must demonstrate business expediency for making advances at a lower rate of interest to claim interest deduction.

Akil Abdul Hamid Kureshi, J.

1. The appeal is filed by the revenue challenging judgment of the Income Tax Appellate Tribunal dated 31.07.2006.

2. After hearing the learned Senior Counsel for the revenue, we modify the substantial question of law for the purpose of this tax appeal as under:

"Whether on the facts and circumstances of the case, the Appellate Tribunal was right in deleting the additions made by the Assessing Officer and confirmed by the CIT (Appeals) towards the interest paid on loans which, in turn, were advanced to the several companies at lower rate of interest?"

3. The respondent assessee is a company registered under the Companies Act, 1956, and was engaged in the business of trading in fabrics as well as shares and securities. For the Assessment Year 1995-96 the assessee company had filed its return of income declaring loss of Rs. 4,80,562/-. The return was processed under scrutiny. One of the issues examined by the Assessing Officer during such assessment was with respect to the assessee's claim of deduction of interest under Section 36(1)(iii) of the Income Tax Act, 1961, ('the Act' for short). The Assessing Officer noticed that during the year under consideration, the assessee had borrowed huge amounts from various group companies and had, in turn, advanced large amounts to certain companies. On the interest paid by the assessee on the borrowings so made, the claim of deduction of interest was made under Section 36(1)(iii) of the Act. The Assessing Officer called for the details of the borrowings and the lendings of the assessee company during the relevant period. The Assessing Officer noticed that the amount borrowed by the assessee company was at an interest rate much higher than the rate of interest on which the assessee company had made lendings to other companies. The Assessing Officer found that the company had borrowed a sum of Rs. 25.30 crores (rounded off) from various group companies, out of which a sum of Rs. 16.88 crores (rounded off) was advanced to other companies.

4. The Assessing Officer noted that out of the said sum of Rs. 16.88 crores, a sum of Rs. 15.80 crores was lent to various companies having a common address at 77, Kali Javi Thavi, Jammu. The assessee pointed out that when such advances were made the assessee company had no connection with the said companies, however, conceded that later on these companies had merged with the group companies of Lalbhai Group, to which the assessee company belonged.

Under such scenario, the Assessing Officer questioned the advances made by the assessee company to various companies at a rate of interest lesser than what the assessee company had paid on its own borrowings. The Assessing Officer found that the same amount borrowed by the assessee company came to be advanced on the same day at a lower rate of interest.

5. In view of such facts the Assessing Officer came to the conclusion that the assessee company had merely acted as a conduit and there was no business expediency on the part of the assessee company in making such advances at a lower interest rate. He therefore concluded that the money borrowed by the assessee company had not been utilized for the purpose of assessee's business. The Assessing Officer disallowed the differential portion of interest and added a sum of Rs. 91.41 lacs (rounded off), against such disallowance making the following observations:

"5.9. The other two cases as quoted by the assessee i.e. Brilla Gwalior Pvt. Ltd. v. CIT 44 ITR 847) and decision of Madras High Court in the case of CIT v. Pudukottai Co. Pvt. Ltd. 84 ITR 788) have been rendered in the context of the Indian Income Tax, 1922. Further also the facts and circumstances of the case in those cases were entirely different in as much as the amount borrowed and not been lend to any interested parties as is clearly the case of the assessee. The assessee company has merely acted as a conduit as discussed later and in any case no business expendency or reasons c