ASSISTANT COMMISSIONER OF INCOME TAX BHARUCH CIRCLE vs. GUJARAT NARMADA VALLEY FERTILIZERS CO LTD

The appellant-Revenue, being aggrieved by the order

Upon hearing learned advocate Mr. K.M.Parikh appearing for the Revenue and on close perusal of record, it appears that the Assessee-Company advanced its funds TAXAP/310/2010 3/7 therefore disallowed the claim of interest on borrowed fund amounting to Rs. 7,97,83,057/- . reported in [2007] 288 ITR 1 (SC). The test applied by the Apex Court is whether the loan was given by the assessee as a measure of commercial expediency by holding that “the expression “commercial expediency” is one of wide import and includes such expenditure as a prudent business-man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency.” Apex Court also held that “once it is established that there was nexus between the expenditure and purpose of the business, Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the TAXAP/310/2010 4/7 circumstances of the case. No businessman can be compelled to maximize his profits .”

In an appeal before CIT (Appeals) considering the approach of ITAT (Ahmedabad) for the Assessment Year 1995-96, it quashed and set-aside such decision of Assessing Officer by holding thus : “We have considered the rival submissions. On going through the figures in the balance sheet of the assessee company as on 1.4.94 and 31.3.95 we find that the share capital and the reserves and surplus together with the accumulated depreciation would far exceed the loans and advances made to the above said three concerns. The percentage of loans and advances in relation to the own funds of the assessee company would be 0.012% as on 1.4.94 and 0.0135% as on 31.3.95 as per details furnished on page 62 of the paper book. In other words there were sufficient funds available with the company on which no interest was paid and out of which the loans and advances to the above said concerns could be made. There is no clear evidence that the interest bearing loans taken by the assessee company for the purpose of its own business have been diverted for non-business purposes. No direct nexus has been proved either by the A.O. or by the CIT (A) between the interest bearing

Apex Court has held thus: “Under the Income Tax Act, 1961, after amendment of the Act by the Finance Act, 1992, in order that interest paid on borrowings can be allowed as a deduction in computing the business profits, every assessee, including a firm, has to establish, in the first instance, that it was allowable under section 36(1)(iii); and in the case of a firm, further that the amount does not exceed the limit fixed by section 40(b)(iv).”

Basing its decision on aforementioned authority of Munjal Sales Corporation (Supra) and also since the Tribunal in the year 1995-96 had upheld the say of the assessee and the facts in the instant case (for the Assessment Year 2002-03) being identical, it upheld the order of CIT (Appeals ).

Resultantly on having found that Tribunal has rightly satisfied itself that there was sufficient funds available with the assessee-firm no interference is called for. Again, in the past for earlier assessment years, the decision of the Tribunal never came to be challenged by the Revenue, and even if done, the same was not quashed/set aside, with identical facts emerging for Assessment Year 2002-2003 also, contentions raised would have no sustainability. With abovementioned facts and with application of decision of Munjal Sales Corporation (Supra) all other contentions would pale into TAXAP/310/2010 7/7 insignificance and hence, this appeal merits no consideration and is dismissed.