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Income Tax Appellate Tribunal, DELHI BENCH SMC NEW DELHI
Before: SHRI B.P. JAIN
ORDER This appeal of the assessee arises from the order of learned CIT(A)-I, Gurgaon, vide order dated 14.10.2016 for the assessment year 2013-14. 2. The assessee has raised the following grounds of appeal.
2.1 Ground No.4 is general in nature, therefore, do not require any adjudication. Grounds No.1, 2 and 3 relates to one issue, i.e., disallowance u/s.36(1)(iii) of the Act.
The brief facts of the case are that the assessee has paid interest amounting to Rs.37,53,220/- to the bank on the borrowed capital. In the profit and loss account, the assessee has debited net interest of Rs.33,87,491/- and shown the interest received amounting to Rs.3,65,729/-. The assessee has given interest free advances to the persons referred u/s.40A(2)(b) of the Act for which the list has been reproduced by the Assessing Officer at page 2 of his order and accordingly the interest attributable to such advances @12% per annum which worked out to Rs.21,30,898/- has been disallowed by the Assessing Officer.
Learned CIT(A) confirmed the action of the Assessing Officer by holding as under: “4.4 I have carefully considered the appellant’s submissions. The appellant has primarily raised two contentions with regard to the disallowance made by the Assessing Officer. (i) Most of the advances were given during the year out of interest free advances and therefore no disallowance on this account is called for. (ii) Some of the advances were given in the earlier years and as such no disallowance can be made with regard to the advances given in the earlier years.
4.5 Each of the aforesaid contentions is being discussed as under:-
(i) Most of the advances were given during the year out of interest free advance and therefore no disallowance on this account is called for.
As regards this issue, keeping in view the facts of the case, the appellant's submissions and the case laws relied upon by the appellant, the A.O is directed to give credit for the interest free advances received by the appellant during the year and recompute the disallowance u/s 36(1)(iii) accordingly. (ii) Some of the advances were given in the earlier years and as such no disallowance can be made with regard to the advances given in the earlier years.
The appellant's contentions on this issue is legally not tenable. Reliance in this regard is also placed on the decision dated 4.1.2012 of Hon'ble ITAT Chandigarh in in the case of Mis Jamna Auto Ind~ries Ltd., Vs. The J.C.I.T.,and ITA No.418/Chd/2011 in the case of D.C.I.T., Vs. Mis Jamna Auto Industries Ltd. The Hon'ble ITA T held as under:
17. Coming to the facts of the present case the issue is to be looked into in view of the ratio laid down by the Jurisdictional High Court in CIT Vs. Abhishek Industries Ltd. (supra). The plea of the learned A.R. for the assessee was that some of the said advances were made in the earlier years, against which no interest was disallowed in the aforesaid years, though the assessments were completed under section 143(3) of the Act, hold no force. Even where the interest free advances were made in the earlier year and the assessee incurs the liability of interest expenditure on secured loans in the later years, the interest relatable to such interest freee advances is to be disallowed in view of the principle laid down by the Hon'ble Punjab & Haryana High Court in CIT Vs. Abhishek Industries Ltd. (supra).
4.6 Reliance in this regard is also placed on the following decisions of the Hon'ble IT AT Chandigarh:
(i) DCIT Vs Orbit Resorts (P) Ltd decision dated 19.9.2011 (ii) Rakesh Jain Vs ITO ITA No.37/ChdI2011, decision dated 21.06.2011 4.7 This contention of the appellant is accordingly rejected. The grounds of appeal filed by the appellant are partly allowed.”
5. I have heard the rival contentions and perused the facts of the case. It was argued by the learned counsel for the assessee, Mr. Gautam Jain, Adv. that the decision of Hon’ble Punjab and Haryana High Court in the case of CIT vs. Abhishek Industries Ltd. reported in 286 ITR 1 (P &H) is no longer a good law in view of the decision of Hon’ble Supreme Court in the case of Hero Cycles Pvt. Ltd. vs. CIT reported in 379 ITR 347. The relevant decision in the case of Hero Cycles Pvt. Ltd. is reproduced hereinbelow: “A perusal of the order passed by the High Court would reveal that the High Court has not at all discussed the aforesaid facts which were established on record pertaining to the interest free advance given to M/s. Hero Fibres Limited as well as loans given to its own Directors at interest at the rate of 10 per cent. On the other hand, the High COUli has simply quoted from its own judgment in the case of 'Commissioner of Income Tax-I, Ludhiana v. M/s. Abhishek Industries Limited, Ludhiana' [ITA No. 110/2005 decided on 04.08.2006]. On that basis, it has held that when loans were taken from the banks at which interest was paid for the purposes of business, the interest thereon could not be claimed as business expenditure. We are of the opinion that such an approach is clearly faulty in law and cannot be countenanced. Insofar as loans to the sister concern/ subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of 'S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another' [2007 (288) ITR 1 (SC)]. After taking note of and discussing on the scope of commercial expediency, the Court summed up the legal position in the following manner:- "26. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency.
27. No doubt, as held in Madhav Prasad Jatia v. Cl'I' [1979 (118) ITR 200 (SC)], if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under section 36(1 )(iii) of the Act. In Madhav Prasad s case [1979 (118) ITR 200 (SC)], the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named, it was held by this court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency.
Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR 200 (SC)] is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under section 36(1)(iii) of the Act.
In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency.
It has been repeatedly held by tills court that the expression "for the purpose of business" is wider in scope than the expression "for the purpose of earning profits" vide CITv.Malayalam Plantations Ltd. [1964 53 ITR 140 (SC), CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [1971 82 ITR 166 (SC)], etc." In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd. '[2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the 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 circumstances of the case. It further held that no businessman can be compelled to maximize ills profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. Applying the aforesaid ratio to the facts of tills case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses”
The decision in the case of Munjal Sales Corpn. vs. CIT reported in 298 ITR 298 was also relied upon the decision of Hon’ble Supreme Court of India and relevant decision in paragraph 17 is reproduced hereinbelow: “17. One aspect needs to be mentioned during the assessment year 1995-96, apart from the loan given in August/September 1991, the assessee advanced interest- free loan to its sister concern amounting to Rs. 5 lakhs. According to the Tribunal, there was nothing on record to show that the loans were given to the sister concern by the assessee- firm out of its Own Funds and, therefore, it was not entitled to claim deduction under section 36(1)(iii). This finding is erroneous. The Opening Balance as on 1-4-1994 was Rs. 1.91 crores whereas the loan given to the sister concern was a small amount of Rs. 5 lakhs. In our view, the profits earned by the assessee during the relevant year were sufficient to cover the impugned loan of Rs. 5 lakhs.”
From the facts of the present case and the decisions of Hon’ble Supreme Court referred to hereinabove essentially there has to be a commercial expediency or there has to be interest free funds with the assessee and the decision of Abhishek Industries is not a good law in view of the decision of Hon’ble Apex Court referred to hereinabove. Since, the earlier year advances have been accepted in the preceding years and no interest on the same has been disallowed, therefore, no disallowance in the impugned year can be made in view of the decision of Hon’ble Karnataka High Court in the case of Sridev Enterprises reported in 92 ITR 165 where the relevant decision is reproduced hereinbelow: "We are in agreement with the view expressed by the Appellate Tribunal. The status of the amount outstanding from Nalanda on the first day of the accounting year is the amount that stood outstanding on the last day of the previous accounting year and, therefore, its nature and status cannot be different on the first day of the current accounting year from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deduction were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years is the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from that finding in respect of the said amounts advanced during the previous year would result in a contradictory finding; it will not be equitable to permit the Revenue to take a different stand now in respect of the amounts which were the subject-matter of previous years' assessments; consistency and definiteness of approach by the Revenue is necessary in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the Revenue as a good debt in a particular year cannot subsequent be held by it have become bad prior to that year."
The said decision has also been followed by Hon’ble Jurisdictional High Court in the case of CIT vs. Givo Ltd in (Del) dated 27.7.2010 and the relevant decision is reproduced hereinbelow:
"4. We are of the opinion that as in past assessment years, the interest expenditure had been allowed, it was not open to the Assessing Officer to disallow the said expenditure in the year under consideration. The Karnataka High Court in Commissioner of Income Tax vs. Sridev Enterprises, (1991) 192 ITR 165 has held that a departure from a finding in respect of deductions permitted during the past years would result in a contradictory finding.
We are also of the view that it would not be equitable to permit the Revenue to take a different stand in respect of expenses which were the subject matter of previous years' assessments. In our opinion, consistency and definiteness of approach by the Revenue is necessary in the matter of recognizing the nature of an account maintained by the assessee so that the basis of a concluded assessment is not ignore without actually reopening the assessment.”
In the circumstances and facts of the case and the decision relied upon no disallowance u/s.36(1)(iii) can be made and the disallowance so made is directed to be deleted and order of the learned CIT(A) is reversed.