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Income Tax Appellate Tribunal, MUMBAI BENCH “E”, MUMBAI
Before: SHRI R.C. SHARMA & SHRI SANJAY GARG
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the order dated 21.12.2011 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 1998-99.
The assessee has taken the following grounds of appeal:
1. On the facts and in circumstances of the case, the Commissioner of Income Tax (Appeals) – 13, Mumbai [“The CIT(A)”] erred in upholding the action of the Assistant Commissioner of Income Tax – 7(2), Mumbai [‘the AO’] in disallowing premium on redemption of debentures amounting to Rs.1,20,96,000/- on the alleged ground that the Appellant had failed to prove any commercial expediency.
2. He further erred in not following the direction given by the Hon’ble Tribunal in the Appellant’s own case in A.Y. 2001-2002 (ITA No.9424/M/04 dated 19- 12-2007).
3. The Appellant prays that the said disallowance of premium on redemption of debentures be deleted.”
3. This is the second round of appeal before us. The issue raised in this appeal is relating to the disallowance of premium paid on redemption of debentures amounting to Rs.1,20,96,000/- on the ground that the money borrowed by issue of debentures was utilized for giving interest free loans. The contention of the assessee has been that the money was given to sister concerns for business purposes. Whereas the contention of the lower authorities have been that the debentures amount was in fact received by one M/s. Anand Piramal Investments Pvt. Ltd. which was further transferred to the account of the assessee by way of journal entry and that the assessee could not establish the justification of giving interest free loan to the sister concerns out of the borrowed funds. The matter travelled by way of appeal to the Tribunal. The Tribunal vide order dated 27.06.08 restored the matter to the file of the Assessing Officer (hereinafter referred to as the AO) with the following observations: “5. Learned representative for the assessee brought our attention to the decision of the Tribunal in assessee’s own case for the assessment year 2001-02 in dated 19.12.2007. Assessee’s representative submitted, exactly identical issue was remanded back to the file of AO by the Tribunal vide Para 12 of its order, following the decision of the Hon’ble Supreme Court in the case of SA Builders, reported in 288 ITR 1 (SC).
6. Since identical issue has been decided by the Tribunal in assessee’s own case for the year under consideration also we direct the AO to decide the issue afresh as per the direction of the Tribunal for the assessment year 2001-02, contained in Para 12 of the order (cited supra). The appeal by the assessee on this ground is allowed for statistical purposes.”
4. A perusal of above para reveals that the Tribunal had directed the AO to decide the issue as per the directions given in the own case of the assessee for A.Y. 2001-02 as contained in para 12 of the said order. We think it proper to reproduce the para 12 of the Tribunal for A.Y. 2001-02 passed in the own case of the assessee in dated 29.12.07. “12. We have considered the rival submissions and perused the materials on record and have gone through the orders of the authorities below and the judgment of Hon’ble apex court relied upon by the learned AR of the assessee. We find that as per this judgment of Hon’ble apex court, no disallowance is called for on account of advancing loans to sister concerns at nil/normal rate of interest if it is found that these sister concerns has not used these amounts for personal purposes. In view of this, the disallowance of interest on this account is to be deleted if it is found that these sister concerns has not used these amounts for personal purposes. Since, this fact is not on record, we feel that for this limited purpose of verifying this fact that whether these sister concerns have used these funds for purposes or not, the matter should go back to the file of the assessing officer. We, therefore, set aside the order of learned CIT(A) on this issue and restore this matter to the file of the assessing officer with the direction that he should decide this issue in the light of this judgment of Hon’ble apex court rendered in the case of S.A. Builders (Supra) after verifying the facts as to whether these related parties have used these funds advanced by the assessee for personal purposes. If it is found that the funds were not used by these parties for personal purposes, than no disallowance can be made. But if it is found that one or more parties have used for personal purposes any part of the funds so advanced by the assessee, than disallowance should be made to the extent of difference in interest on that amount of loan only. This ground stands allowed for statistical purposes.”
5. In the set aside proceedings, the AO again observed that the assessee did not have sufficient interest free funds to advance the money without charging any interest and that the borrowed funds were given as interest free loans to the related parties during the year which were not used for business purposes but for investments by the said related parties. He, therefore, observed the very purpose of advancing the funds had not been served. He observed that the said related companies to whom the assessee had advanced loan were not in the investment business, hence the interest on the loans raised for investment in shares was not allowable as a business expenditure in the hands of those companies. He, therefore, held that the rational behind the Hon’ble Supreme Court judgment in the case of “S.A. Builders vs. CIT” (2007) 288 ITR 1 (SC) was to allow the interest expenditure on borrowed funds advanced to sister concern and used for business purposes by the related concern was that otherwise the interest would have been allowed as expenditure in the hands of the related concern if the said related concern would have paid the interest to the assessee. He observed that in this case, the interest expenditure was not allowable as business expenditure to the related concern, hence the corresponding interest paid by the assessee on the amount advanced out of borrowed funds to the sister concern was disallowable in the hands of the assessee.
6. In appeal before the Ld. CIT(A), the assessee explained that the loans were advanced to Artimis Investments Pvt. Ltd., Bacchus Investments Pvt. Ltd., Melody Investments, Pvt. Ltd. and Swift Investments Pvt. Ltd. The assessee produced the memorandum of association of the above companies to show that the main business of these companies was making investments in other companies and that the loan given by the assessee was utilized by the said companies for their business purpose only. The Ld. CIT(A), however, held that the assessee could not establish his own business expediency to advance interest free loan to the sister concerns. He observed that the said loan was not advanced by the assessee for the business purposes of the assessee, hence the same was rightly disallowed by the AO. Aggrieved by the order of the Ld. CIT(A), the assessee has come in appeal before us.
7. We have considered the rival submissions of both the parties. We find that the Tribunal, vide para 12 of the order dated 19.12.07 for A.Y. 2001-02, has restored the matter to the file of the AO with the direction that he should decide this issue in the light of the judgment of the Hon’ble Apex Court rendered in the case of “S.A. Builders vs. CIT” (supra) and after verifying the facts as to whether these related parties have used the funds advanced by the assessee for personal purposes or for business purposes. If it is found that the funds were not used by these parties for personal purposes, then no disallowance should be made. However, if any fund was found to be utilized for personal purposes, then the disallowance of interest to that extent be made. The Tribunal, following the said order in the case of the assessee for the year under consideration i.e. A.Y. 1998-99, has directed the AO to decide the issue for the year under consideration as per direction of the Tribunal for A.Y. 2001- 02. So, the Tribunal has directed the AO to decide the issue as per the guidelines laid down by the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra) and further to find out whether the fund was used by the sister concerns for business purpose or not. We find that since the sister concerns were in the business of investment in other companies, hence the assessee has proved that the loan was used by the sister concerns for their business purposes. However, a perusal of the decision of the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra) reveals that the Hon’ble Supreme Court has categorically held that what is to be seen as to whether the assessee has advanced loan to its sister concern or to a subsidiary as a measure of commercial expediency? The Hon’ble Supreme Court, while referring to section 37 of the Act, has held that the expression “for the purpose of business” includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also gets benefitted thereby. The Hon’ble Supreme Court further explained the expression “commercial expediency” as under: “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.”
The Hon’ble Supreme Court thereafter considering the various aspects of the matter has concluded as under:
“We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the 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. No businessman can be compelled to maximize its profit. 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. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
“We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.”
A perusal of the above conclusion reveals that though as per the provisions of section 37, it is not necessary that the loan amount should be exclusively used in the business of the assessee. However, the requirement is that it should be used for the purpose of the business which need not necessarily be the business of the assessee itself. What is to be seen is that the transfer of borrowed funds to a sister concern was out of commercial expediency. The Hon’ble Supreme Court thereafter wished to make it clear that the order of the Hon’ble Supreme Court should not be interpreted as that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends upon the facts and circumstances of the respective case. The two conditions which are to be fulfilled are that the loan should be advanced out of commercial expediency and secondly the sister concern should use the loan for its business purpose and not for the personal purpose of its directors or partners etc. The Hon’ble Supreme Court thereafter held in the said case that since the sister concern was a subsidiary of the assessee company and the assessee company being the holding company had a deep interest in its subsidiary, hence the loan advanced to subsidiary was out of commercial expediency.
Now coming to the facts of the case in hand. The lower authorities neither in the first round nor in the second round have examined the first limb of the proposition of law laid down by the Hon’ble Supreme Court in the “S.A. Builders vs. CIT” (supra) case as to whether the loan advanced to sister concern by the assessee was out of the commercial expediency or not. Though, in the set aside proceedings, the assessee has demonstrated that the loan was used by the sister concern for its business purpose, however no document or explanation has been submitted to show that the loan advanced by the assessee to its sister concern was out of commercial expediency. This issue requires examination at the hands of the AO. We feel pained but are forced to restore the matter again back to the file of the AO to record a finding as to whether the loan advanced by the assessee to its sister concerns was out of commercial expediency or not. If it is found that the loan advanced by the assessee to its sister concerns was out of business requirement or commercial expediency, though it may not be for the purpose of earning of profit, then as per the law laid down by the Hon’ble Supreme Court in the case of “S.A. Builders vs. CIT” (supra), the interest expenditure will be an allowable expenditure under section 37 of the Act. The matter is restored to the file of the AO to look into this limited aspect only. Needless to say that the AO will give proper opportunity to the assessee to present its case.
With the above observations, the appeal of the assessee is treated as allowed for statistical purposes.
Order pronounced in the open court on 28.10.2015.