IND SWIFT LABORATORIES LTD.,CHANDIGARH vs. DCIT, CIRCLE 1(1), CHANDIGARH

आदेश/ORDER

PER A.D.JAIN, VICE PRESIDENT

This is assessee's appeal for the assessment year 2017-18

against the order passed by the ld. Commissioner of Income Tax

(Appeals) NFAC, Delhi dated 30.03.2023.

ITA 350/CHD/2023 A.Y. 2017-18 2

ITA 350/CHD/2023 A.Y. 2017-18 3

(ii) That the above said disallowance has been confirmed rejecting the contention of the assessee that all the necessary conditions for claiming the deduction specified under section 35(1) have been fulfilled and hence the assessee is eligible for claiming the deduction. (iii) Without prejudice to the above, the NFAC has erred in rejecting the alternative contention of the assessee that in case the weighted deduction of scientific research expenditure is not allowable, then at least 100% of the total amount of expenditure incurred by the assessee on account of scientific research shall be allowed under section 35(1) and section 35(2) of the Income Tax Act. 4. (i) On the facts and circumstances of the case, the NFAC has erred both on facts and in law in confirming the disallowance made by the AO of Rs.17,34,03,757/- on account of deduction claimed by the assessee under section 35(2AB) of the Income Tax Act. (ii) Without prejudice to the above, the NFAC has erred in rejecting the alternative contention of the assessee that in case the weighted reduction of scientific research expenditure is not allowable, then at least 100% of the total amount of expenditure incurred by the assessee on account of scientific research shall be allowed under section 35(1) and section 35(2) of the Income Tax Act. 5. Without prejudice to the above, the NFAC has erred both on facts and in law in confirming the action of the AO in making the disallowance of deduction claimed under section 35(1)(i) and section 35(2AB) of the Act ignoring the suo motu disallowance of Rs.10,51,71,451/- made by the assessee on account of research development expenditure claimed in the profit and loss and the said action of the AO will lead to double addition of the same amount in the hands of the assessee. 6. i) On the facts and circumstances of the case the NFAC has erred both on facts and in law in

ITA 350/CHD/2023 A.Y. 2017-18 4

conforming the disallowance of Rs.28,41,81,599/- on account of principal amount of loan waived under the one time settlement (OTS). (ii) That the above said disallowance has been confirmed rejecting the contention of the assessee that the alleged amount is in the nature of capital receipt and accordingly the same is not liable to be taxed. (iii) That the above addition has been confirmed rejecting the detailed submission and explanations submitted by the assessee and the judicial precedents relied upon by the assessee in this regard. (iv) Without prejudice to the above the NFAC has erred in rejecting the contention of the assessee that the AO has wrongly computed the disallowance and considered the entire amount of Rs.28,41,81,599/- as principal ignoring the fact that out of the total disallowance, the amount of Rs.25,85,31,574/- is the amount of principal and the balance amount of Rs.2,56,50,025/- is the interest portion which has already been disallowed separately by the AO.

assessee is against confirmation of addition of Rs.

13,26,09,358/- made by the AO by estimating the notional

interest income, applying the interest rate of 10%, on the loans

and advances and capital advances made by the assessee.

ITA 350/CHD/2023 A.Y. 2017-18 5

assessee, it was seen that the assessee company had made

'long term other loans and advances' of Rs.66,83,69,120/- and

'total short term loans and advances' of Rs.75,37,96,626/-. The

AO communicated to the assessee that it had low income in

comparison to high loans or advances or investment in shares

appearing in the balance sheet. He asked the assessee to

furnish details of all the loans or deposits or advances given or

investment in shares made during the year, including squared

up loans along with details of the nature and amount of income

generated out of each such item, to explain with documentary

proof, whether each income generated out of such items had

been offered for proper taxation, and to also explain the source

of income for the amounts used for loans or advances or

investments.

advances were being attached and investment in shares -

Annexure J; and that further, the company did not have any

squared up loans during the relevant assessment year 2017-

18.

ITA 350/CHD/2023 A.Y. 2017-18 6

found adequate; that the assessee had not offered

commensurate interest income on the loans and advances

made to various parties; that further, it was seen from the

notes to the balance sheet (Note No. VIII) that out of long term

'other loans and advances' of Rs.66. 83 crore, an amount of

Rs.52.53 crore had been advanced to related parties, i.e.,

78.6% of the total amount was given to related parties and an

amount of Rs.14.43 crore had been advanced to others; that

similarly, it was seen from the notes to the balance sheet (Note

No. IX) that out of 'total short term loans and advances' of

Rs.75.37 crore, an amount of Rs.59.41 crore had been

advanced to related parties, i.e., 78.8% of the total amount was

given to related parties, and an amount of Rs.15.96 crore was

given to others; that this bifurcation made it clear that interest

had not been charged at commensurate rates for investments,

loans and advances made to related parties and others; that

this was because the assessee had lent funds mainly to related

parties, and to state factually, around 80% advances and loans

were made to related parties; that this was in contrast to the

reality that the same assessee company had paid huge

ITA 350/CHD/2023 A.Y. 2017-18 7

amounts of interest to the parties from which it had borrowed

funds; that from the snapshot (as reproduced in the

assessment order) taken from the audited accounts of the

assessee, it could be seen that the assessee company had paid

interest rate in the range of 4% to 15% in the case of secured

loans; that a medium rate of interest was about 10% for these

loans; that also, the assessee company had incurred interest of

Rs.52.49 crore on term loans of Rs.666.84 crore, that is, that

the assessee had paid interest on term loans at an average rate

of 7.87% per annum; that it was thus clear that funds lent in

the form of capital advances or investment or loans or

advances had not earned their due income as per the principles

of business, since these funds were mostly given to related

parties; that based on the median rate of interest for borrowed

funds, at 10%, an estimate of interest income that ought to

have accrued to the assessee was being estimated, even though

the market rate of interest might have been at a higher end;

that this was diversion of interest bearing funds to related

parties and others at no cost or at lower cost; that the interest

income of the assessee should have been at Rs.14,22,16,574/-,

i.e., 10% of long term 'other loans and advances' of

ITA 350/CHD/2023 A.Y. 2017-18 8

Rs.66,83,69,120/- and 'total short term loans and advances' of

Rs.75,37,96,626/-; that the assessee had offered only

Rs.96,07,216/- as interest income as per the ITR, and hence,

the remaining amount of Rs.13,26,09,358/-, that is,

Rs.14,22,16,574/- minus Rs.96,07,216/-, was the amount of

interest that the assessee should have charged to the parties to

whom funds had been lent; that the assessee had lent funds

either at no interest rate, or at lower interest rate, as apparent

from the said working; that therefore, an amount of

Rs.13,26,09,358/- was being disallowed from the claim of

interest expenditure of Rs.52.49 crore.

confirmed the addition made by the AO, holding that it was a

recurring issue, following three Tribunal orders in the

assessee's case in earlier years. It was observed that the

Tribunal, in all these three orders, had held that proportionate

interest must be disallowed, as interest-bearing funds had

been diverted to sister concerns; that the Tribunal was already

seized of the issue of business expediency and in deciding the

matter against the assessee, it had followed the decision of the

ITA 350/CHD/2023 A.Y. 2017-18 9

jurisdictional High Court in the case of 'Abhishek Industries',

286 ITR 1 (P&H). It was observed that the assessee had

submitted a chart in the appellate proceedings, to show that all

the advances had been made to sister concerns out of the own

funds of the assessee. It was observed that however, nothing

could be discerned from the chart regarding the financial

position of the assessee at the time when funds were advanced

to related concerns; that this was important, as admittedly, the

assessee's account was NPA with banks, as it had not paid

dues and had gone in OTS; that if the assessee was in financial

distress and its own funds were tied up in business as a going

concern, obviously, borrowed funds would have been used for

lending; that no evidence had been provided to adjudicate

otherwise; and that so, this argument was being rejected. It

was further observed that the assessee had also submitted that

the weighted average rate of interest was 7.49%; that however,

the Tribunal, in its order dated 28/8/2014, passed in ITA

No.746/CHD/2012, had held that the average rate of interest

be worked out and the disallowance be worked out

accordingly.

ITA 350/CHD/2023 A.Y. 2017-18 10

Counsel for the assessee has contended that the ld. CIT(A) has

decided this issue against the assessee for five main reasons:

(i) Absolute reliance on three orders passed by the Tribunal in the assessee's case for the earlier years. (ii) The allegation that no evidence has been furnished regarding the financial position of the assessee at the time when the funds were advanced. (iii) Reliance on the decision of the jurisdictional High Court in the case of 'M/s Abhishek Industries Limited', 286 ITR 1 (P&H). (iv) The account of the assessee was already NPA. (v) The wrong presumption that borrowed funds would have been used for lending.

years, the Tribunal orders were passed ex parte qua the

assessee, for which reason, no evidence or explanation could

be furnished.

assessee became NPA during the assessment year 2013-14 and

thereafter, the assessee started recovering the advances from

ITA 350/CHD/2023 A.Y. 2017-18 11

the related parties and no fresh loans or advances were given

to these related parties.

jurisdictional High Court in the case of 'Abhishek Industries

Limited' (supra) has been overruled by the Hon'ble Supreme

Court in the case of 'Hero Cycles Private Limited' and the

jurisdictional High Court in the case of 'Bright Enterprises

Private Limited', in 2015, i.e., after the orders of the Tribunal

were passed in the case of the assessee; and that therefore, the

decision in 'Abhishek Industries' is no longer good law.

a calculation of the net worth of the assessee and availability

of surplus funds with the assessee for the last 13 years,

starting from FY 2004-05, upto FY 2016-17 has been placed on

record; that from this chart, it is clear that during the financial

year 2004-05, no loan or advance was given by the assessee to

any related party; that the first time loan and advance was

given to related parties, was during FY 2005-06; that in the

financial year 2005-06, own funds available with the assessee

were to the tune of Rs.136.02 crore in excess of investments

ITA 350/CHD/2023 A.Y. 2017-18 12

and loans and advances given to related parties; that the

accounts with the related parties were running accounts and

they kept on changing from year to year; that however, during

all the financial years from FY 2004-05 to 2016-17, the

assessee company had surplus funds in excess of investments

and loans and advances made to related parties, and in none of

the years, the assessee's surplus own funds were less than the

investments or loans and advances made to the related parties;

that during the financial year 2015-16, the borrowings have

been reduced by Rs.69.81 crore and during FY 2016-17, the

borrowings have been further reduced by Rs.121.30 crore,

which clearly shows that no fresh loan or borrowing was taken

during FY 2015-16 and FY 2016-17; that moreover, this shows

that loans were repaid during the assessment years 2016-17

and 2017-18, as the borrowings were reduced in these years;

that during the financial year, the total loans and advances to

related parties were reduced from Rs.122.92 crore to Rs.111.95

crore, which shows that loans of Rs.10.97 crore were received

back from related parties during the assessment year 2017-18,

and no fresh loan or advance was given during the year.

ITA 350/CHD/2023 A.Y. 2017-18 13

advances given to related parties. It is contended that the

loans and advances given to related parties during each of the

financial years have been shown in Column 2, the balance of

total loans and advances at the end of each financial year is

shown in Column 3, net surplus funds after giving of loans and

advances to related parties and other investment at the end of

each financial year, in Column 4, and total surplus funds after

advances to related parties, other investments and other

business advances to related parties at the end of each

financial year, in Column 5. It is contended that these details

prove that during each financial year since FY 2005-06, there

were sufficient own funds available with the assessee every

year and that further, even after reducing the loans and

advances for business to other unrelated parties, sufficient

own funds were available every year with the assessee.

the advance to related parties has been reduced by Rs.1097.46

lacs during the year and after advance to related parties and

other business advances to unrelated parties, the net of

ITA 350/CHD/2023 A.Y. 2017-18 14

surplus funds which remained with the assessee company was

to the tune of Rs.5777.22 lacs during AY 2017-18.

assessee company shows the availability of surplus funds with

the assessee. It has been pointed out that the detail of long

term advances and short term advances is contained in the

paper book, as also is the list of the advances made.

assessee had business dealings, as purchase and sale

transactions, with the related parties, that is, Ind Swift

Limited, to whom advance of Rs.19.70 crore was given,

Halcyon, to whom advance of Rs.37. 36 crore was given and

Assix Biosciences, to whom advance of Rs.2.36 crore was

given.

given to Fortune Constructions for the construction of

buildings for the assessee company; that however, due to the

financial crisis, the construction work of the company had to

be stopped and till the assessment year 2017-18, construction

ITA 350/CHD/2023 A.Y. 2017-18 15

work of Rs.33.61 crore was done by Fortune Constructions for

the assessee company, the details of which have been filed;

that the opening balance of these advances as on 01.04.2011

was Rs.86.32 crores; that the opening balance as at the

beginning of AY 2017-18 was of Rs.53.56 crore, and at the end

of AY 2017-18, it was reduced to Rs.52.53 crore; that this

shows reduction in such loans and advances in the year under

consideration; that copies of account of Fortune Constructions,

the balance sheet of Fortune Constructions and shareholders'

list of Fortune Constructions are on the file; that the assessee

had equity share holding of 47.73% as on 31.03.2017 in

Fortune Constructions, which company constructed flats and

buildings for the assessee, worth Rs.33.61 crore, upto

31.03.2017; that the assets of Fortune Constructions were

mortgaged for restructuring of bank loans of the assessee as

security to the bank of the assessee, in order to help the

assessee in getting loan; that further, corporate guarantee was

also given by Fortune Constructions for loan taken by the

assessee, to help the assessee in its business; that further,

these funds were used by Fortune Constructions for business

purposes and loans and advances were given by the assessee to

ITA 350/CHD/2023 A.Y. 2017-18 16

Fortune Constructions for commercial expediency, in order to

save its investment in Fortune Constructions and to earn profit

on these shares.

of Essix Biosciences shows that the funds were used for

business purposes by the said company; that as at the

beginning of the assessment year 2017-18, the advances stood

at Rs.11.80 crore and at the end of assessment year 2017-18,

they were at Rs.2.36 crore; that this shows reduction in

advance to this company during the year; that as available

from the account of Essix Biosciences, purchases of Rs.289.48

crore were made and sales of Rs.226.67 crore we made with the

assessee; that Essix Biosciences also gave corporate guarantee

for loan taken by the assessee, to help the assessee in its

business.

shows that the funds were used for business purposes by the

said company; that the opening balance in the beginning of

assessment year 2017-18 was of Rs.37.43 crore and the closing

balance at the end of the assessment year 2017-18 was of

ITA 350/CHD/2023 A.Y. 2017-18 17

Rs.37.36 crore; that this shows a reduction in advance to the

said company during the year; that further, the company sold

goods of Rs.402.02 crore and purchased goods of Rs.41.64

crore from the assessee company, as per the copy of account of

Halcyon; that these advances were mainly linked with the sale

of goods by the assessee company to Halcyon; that further, the

assessee company had given bank guarantee of Halcyon in the

bank and Rs.25 crore were recovered forcibly by the State Bank

of India from the assessee as a guarantor, to enforce fulfilment

of the conditions of the guarantee, and the advance of Rs.37.36

crore includes the said sum of Rs.25 crore recovered forcibly

from the assessee by the Bank.

of account of Ind Swift Limited, the opening balance in the

beginning of the assessment year 2017-18 was Rs.19.99 crore

and the closing balance as at the end of the assessment year

2017-18 was Rs.19.70 crore; that this shows reduction in such

loans and advances in this year; that moreover, this advance

was utilised by the company for business purposes; that

further, this company sold goods of Rs.151.24 crore and

ITA 350/CHD/2023 A.Y. 2017-18 18

purchased goods of Rs.186.00 crore from the assessee

company.

moreover, during the assessment year 2017-18, bank loans got

reduced from Rs.622.35 crore to Rs.540.29 crore; that the long

term loans and advances to related parties given by the

company reduced from Rs.53.56 crore to Rs.52.53 crore and

short term loans and advances to related parties reduced from

Rs.69.36 crore to Rs.59.42 crore, which shows that neither any

fresh loan was taken during the year, nor any fresh advance

was given to any of these related parties during this period

and, instead, repayments of loans and advances were received

by the assessee from these related parties during the year.

that these loans were given to the related parties for business

expediency and the funds were utilised by the recipient

companies for business purposes only; that further, neither the

AO, nor the Commissioner has mentioned any reason to declare

that these funds were given for purposes other than business

expediency; that neither authority has proved any direct nexus

ITA 350/CHD/2023 A.Y. 2017-18 19

between the loans taken and the loans given to the related

parties; that all the four recipient companies were doing

sale/purchase/providing services, the details of which have

been filed, to the assessee, to meet the requirements of each

other for the pharmaceutical products manufactured or sold by

them.

Rs.13,26,09,358/- is liable to be deleted and cancelled, which

may be so ordered.

interest were to be disallowed, the total interest charged to the

profit and loss account was of Rs.74.69 crore, as per Note XV

of the balance sheet; that out of this, interest of Rs.65.92 crore

has been disallowed under section 43B, as available from the

income tax return; that it was thus, that net interest of

Rs.8.77 crore was claimed as expense of interest during the

year; that therefore, disallowance, if any, of proportionate

notional interest at Average to Total Assets can be made only

out of the interest of Rs.8.77 crore claimed by the assessee as

interest expenditure during the year; that further, no

ITA 350/CHD/2023 A.Y. 2017-18 20

proportionate notional disallowance can be made from interest

exceeding Rs.8.77 crore claimed on the loans and advances to

the related parties at Average to Total Assets/Funds.

amounting to Rs.30.39 crore were given to unrelated

creditors/suppliers for business purposes; that the learned

CIT(A) has confirmed the disallowance of notional interest on

total loans and advances, including the amount of Rs.30.39

crore given to unrelated parties for business purposes; that no

disallowance can be made on such loans and advances given to

unrelated parties for business purposes; and that therefore,

under any circumstances, no notional interest on advances to

related parties can be disallowed under section 36(1)(iii) of the

Act.

strong reliance on the impugned order in this regard. It has

been contended that as rightly observed by the authorities

below, the assessee has not offered commensurate interest

income on the loans and advances made to various parties;

that as available from the balance sheet of the assessee itself,

ITA 350/CHD/2023 A.Y. 2017-18 21

out of long term other loans and advances of Rs.66.83 crore,

78.6%, amounting to Rs.52.53 crore, had been given to related

parties, whereas the rest of the amount of Rs.14.43 crore had

been given to other parties; that likewise, out of total short

term loans and advances amounting to Rs.75.37 crore, an

amount of Rs.59.41 crore, i.e., 78. 8%, was advanced to related

parties and the remaining sum of Rs.15.96 crore was advanced

to others.

orders passed in the assessee's case in the earlier years, has

held that proportionate interest must be disallowed as interest

bearing funds have been diverted by the assessee to its sister

concerns; that this decision of the Tribunal has rightly been

followed by the learned CIT(A); that as correctly observed by

the CIT(A), nothing is discernible regarding the financial

position of the assessee at the time when the funds were

advanced by the assessee to its related concerns; that this

acquires importance, as admittedly, since the assessee had not

paid its dues and had gone in OTS, the assessee's account was

NPA with banks; that if the assessee was in financial distress

ITA 350/CHD/2023 A.Y. 2017-18 22

and its own funds were tied up in business as a going concern,

obviously, borrowed funds would have been used for lending,

as rightly observed by the learned CIT(A); that no evidence to

the contrary has even till date been brought on record by the

assessee.

dated 28.8.2014, passed in ITA No.746/CHD/2012, has held

that the disallowance should be made on working out the

average rate of interest; that this direction has rightly been

followed by the learned CIT(A).

perused the material brought on record with regard thereto.

The issue is as to whether the addition of Rs.13,26,09,358/-

has correctly been made and confirmed.

business of manufacturing of pharmaceutical products. It had

four associate concerns, with whom, the assessee had business

dealings, since they were selling and purchasing goods from

the assessee, or were providing services to the assessee, to

ITA 350/CHD/2023 A.Y. 2017-18 23

meet the business requirements of each other. Interest free

loans and advances were given to them by the assessee.

interest on the total loans and advances of Rs.142.22 crore,

which also included advances of Rs.30.39 crore made by the

assessee to unrelated parties. The AO observed that out of long

term loans and advances amounting to Rs.66.83 crore, an

amount of Rs.52.53 crore had been advanced to related parties

and Rs.14.43 crore had been advanced to other parties and

that out of total short term loans and advances of Rs.75.37

Crore, Rs.59.41 crore was advanced to related parties and that

the balance Rs.15.96 crore had been advanced to other parties.

As such, the AO was of the view that the total advance to the

related parties was of Rs.111.94 crore and that the amount

advanced to unrelated parties was of Rs.30.39 crore. The

assessing officer made a notional disallowance of

Rs.14,22,16,574/- under the provisions of section 36(1)(iii) of

the Income Tax Act. Out of this amount, interest of

Rs.96,07,216/- stood already disallowed by the assessee itself.

Accordingly, the balance amount of Rs.13,26,09,378/- was

ITA 350/CHD/2023 A.Y. 2017-18 24

notionally disallowed on interest free loans to all parties,

including related parties and other parties. The assessee had

claimed total bank interest of Rs.8.77 crore during the year.

by relying on three earlier years' Tribunal orders in the

assessee's case, which orders had been passed ex parte qua the

assessee, following the decision of the jurisdictional High Court

in the case of 'Abhishek Industries Ltd.', 286 ITR 1 (P&H).

While doing so, the learned CIT(A) observed from the chart of

the last six years submitted by the assessee before them,

showing the availability of surplus own funds with the assessee

during the said last six years, that nothing could be discerned

from the said chart regarding the financial position of the

assessee at the time when the funds were advanced to the

related concerns; that this was important, as admittedly, the

assessee's account was NPA with banks, as it had not paid its

dues and had gone in one-time settlement; that if the assessee

was in financial distress and its own funds were tied up in

business as a going concern, it was obvious that borrowed

funds would have been used for lending; that no evidence had

ITA 350/CHD/2023 A.Y. 2017-18 25

been provided to adjudicate otherwise; and that the Tribunal

had held in its order dated 28.08.2014, passed in ITA No.

746/CHD/2012, that average rate of interest be worked out for

disallowance.

by the Tribunal in its three orders, it is seen, is dated

04.08.2006. The three orders of the Tribunal, which, in turn,

were followed by the Commissioner in the impugned order,

were passed on 18.08.2014 (one order) and on 28.08.2014 (two

orders), respectively.

the view that if the amount is advanced from a mixed account

or share capital or sale proceeds or profits, etc., the same

would not be termed as diversion of borrowed capital, or that

the Revenue had not been able to establish nexus of the funds

advanced to the sister concerns with the borrowed funds, could

not be subscribed to; that once it is borne out from the record

that the assessee had borrowed certain funds on which liability

to pay tax is being incurred and, on the other hand, certain

amounts had been advanced to sister concerns or others

ITA 350/CHD/2023 A.Y. 2017-18 26

without carrying any interest and without any business

purpose, the interest to the extent the advance had been made

without carrying any interest is to be disallowed under section

36(1)(iii) of the Act; and that hence, the assessee will not be

entitled to claim deduction of the interest on the borrowings to

the extent those are diverted to sister concerns or other

persons without interest.

35.01. In 'Bright Enterprises (P) Ltd. Versus Commissioner

of Income Tax, Jalandhar (Punjab)', [2016] 381 ITR 107 (P&H),

vide order dated 15.07.2015, the Honorable jurisdictional High

Court held that the Assessing Officer had observed that no

interest was charged by the assessee on advances made to

sister concern, whereas the assessee had paid interest on the

loans taken from various banks; that the AO observed that had

the assessee not advanced the amount to its sister concern

without charging interest, it would have been left with

sufficient funds to refund the bank loan and the assessee

would not have had to pay interest to the bank; that in arriving

at this conclusion the AO relied on the judgement of the High

Court in 'M/s Abhishek Industries', 286 ITR 1 (P&H).

ITA 350/CHD/2023 A.Y. 2017-18 27

35.02. It was held that the Commissioner had found that the

assessee and its sister concern were in the hotel business and

the advance was as a measure of commercial expediency and

only for the purpose of the business of the sister concern; that

the funds advanced had been used for the purpose of business

of the sister concern; that this plea had been raised by the

assessee along with a copy of the balance sheet of the sister

concern and the AO had not commented adversely on the

assessee's contention that the funds were used by the sister

concern for the purpose of its business; that the Commissioner

had also rightly held that the judgement of the Supreme Court

in 'SA Builders Limited Versus Commissioner of Income Tax

and Another', (2007) 288 ITR 1 SC supported the assessee's

case; that the only adverse finding by the AO was that the

advance did not appear to be for business purposes, as the

assessee company had no business dealing with the company

M/s Kolkata Hotel; that this view was demonstrately not

sustainable; that the Commissioner, therefore, rightly came to

the conclusion that the assessee advanced the amount to its

sister concern on account of commercial expediency and that

the sister concern used the same for the purpose of its

ITA 350/CHD/2023 A.Y. 2017-18 28

business; that it was also found that the advance to the

assessee's sister concern was covered by the capital and

interest free reserve available with the assessee; that

accordingly, supported by precedent, the Commissioner

justifiably presumed that the investment would be out of

interest free funds generated or available with the assessee.

35.03. It was observed that the Tribunal had rejected the

assessee's case and had set aside the order of the

Commissioner only on the basis that the Commissioner had not

taken the decision of the Honorable Supreme Court in the case

of 'SA Builders Limited Versus CIT', 288 ITR 1 (SC) in the right

spirit; that the Tribunal had held that the assessee had

nowhere established the measure of commercial expediency

either before the AO, or before the Commissioner, and not even

before the Tribunal; that the Tribunal had held that there was

nothing on record that the money so advanced by the assessee

to its sister concern had been used as a measure of commercial

experience; that the Tribunal had held that in the facts and

circumstances of the case, the Commissioner had wrongly

interpreted and relied on the decision of the Honorable

ITA 350/CHD/2023 A.Y. 2017-18 29

Supreme Court in the case of 'SA Builders Limited Versus CIT',

which, in fact, went against the assessee.

35.04. It was observed that with a view not to leave any

room for doubt and to arrive at a satisfaction about the

correctness of the assessee's claim, the agreement under which

the assessee had purchased the shares of its sister concern

had been directed to be produced; that from the agreement

produced, it stood established that M/s Kolkatta Hotels Private

Limited was a sister concern of the assessee by virtue of the

assessee holding 88.75% of its equity shares; that the assessee

had invested a huge amount of about Rs.18 crore in the sister

concern; that the assessee and its sister concern were in the

same business; that for the point under consideration, it might

not have made any difference even if they were not in the same

business; that however, the fact that they were in the same

business was a further aspect in the assessee's favour; that the

parties had admitted that the assessee had advanced a sum of

about Rs.10.29 crore to the assessee's sister concern free of

interest; and that the share purchase agreement indicated that

ITA 350/CHD/2023 A.Y. 2017-18 30

the assessee had to pay various amount towards discharging

the liabilities of the sister concern.

35.05. It was held that whether the amount of Rs.10.29 crore

was debited to the account of the sister concern in respect of

the payment made under the share purchase agreement or

whether the amount was actually paid to the sister concern

and was used by it for the purpose of business, was in

material; that either way, the amount was used for the

business of the sister concern; that it was not even suggested

advance was used by the sister concern for any purpose other

than for the purposes of its business; and that such a case had

also not been raised before their Lordships.

35.06. It was held that doubt, if any, was set at rest by the

memorandum of appeal and the written submissions filed by

the assessee before the Commissioner; that in the

memorandum of appeal, the assessee expressly stated that it

had advanced the amount of Rs.10.29 crore to its sister

concern as a measure of commercial expediency for the

purpose of business; that in the written submissions, the

assessee, inter alia, stated that the assessee and the sister

ITA 350/CHD/2023 A.Y. 2017-18 31

concern were in the hotel business; that the board of directors

of the two companies was the same; that the assessee

purchased the shares of the sister company as an investment

and that the investment and advances were made for the

purposes of business; that from the order of the Commissioner,

it was evident that the department never contended that the

amounts were not advanced for commercial expediency; that it

was also not contended that the amounts advanced were used

by the sister company for any purpose other than for the

purpose of its business; and that indeed, such a case was not

even advanced before the Tribunal.

35.07. It was held that the Tribunal's observation that there

was nothing on record that the money advanced by the

assessee to its sister company had been used as a measure of

commercial expediency was not justified; that the assessee had

furnished comments in this regard; that the assessee had

expressly stated that the amount had been utilised for

commercial activity; that this assertion was never denied; that

the assessee was not required to do anything further to

establish its assertion that its sister company had utilised the

ITA 350/CHD/2023 A.Y. 2017-18 32

amount for the purposes of its business; that the finding of the

Tribunal was not based on any material; and that it was

important to note that the Tribunal had not even suggested

that such a case was put to the assessee and that despite the

same, the assessee failed to establish the same.

35.08. It was held that the view of the Tribunal that the

Commissioner had not considered the decision of the Supreme

Court in 'SA Builders Limited' (supra) in the "right spirit" and

that the Commissioner had wrongly interpreted the judgement,

was not well founded; that in 'SA Builders' (supra), the

Supreme Court had observed that it was true that the borrowed

amount in question was not utilised by the assessee in its own

business, but had been advanced as interest free loan to its

sister concern; that however, that fact was not really relevant;

and that what was relevant was whether the assessee advanced

such amount to its sister concern as a measure of commercial

expediency.

35.09. It was held that it was precisely this test which was

applied by the Commissioner.

ITA 350/CHD/2023 A.Y. 2017-18 33

35.10. It was held that the commercial expediency in

advancing the amount was established beyond doubt.

35.11. It was observed that in 'CIT versus Marudhar

Chemicals & Pharmaceuticals (P) Limited', (2009) 319 ITR 75

(P&H), it had been held that section 36(1)(iii) of the Act

provides that the amount of interest paid in respect of capital

borrowed for the purposes of business or profession has to be

allowed as a deduction in computing the income under section

28 of the Act; that the expression " for the purpose of

business" has been held to be wider in scope than the

expression "for the purpose of earning income, profits or

gains"; that it has been held in 'SA Builders Limited' (supra)

that when the assessee borrowed the fund from the bank and

lent some of it to its sister concern as an interest free loan,

then the real test to allow the interest as deduction under

section 36(1)(iii) the Act is whether this was done as a measure

of commercial expediency; that it has been held that in order to

claim a deduction, it is enough to show that the money is

expanded, not on necessity and with a view to direct and

immediate benefit, but voluntarily and on account of

ITA 350/CHD/2023 A.Y. 2017-18 34

commercial expediency and in order to indirectly facilitate the

carrying on of the business; that the expression "commercial

expediency" is an expression of wide import and includes such

expenditure as a prudent businessman incurs for the purpose

of business; that 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; that in 'SA Builders Limited' (supra), it was held

that in order to decide whether it was for commercial

expediency, the authorities and the courts should have

examined the purpose for which the assessee advanced money

to its sister concern and what the sister concern did with the

money; that it was further held that it is not relevant whether

the assessee has utilised the borrowed amount in its own

business or has advanced the same as interest free loan to its

sister concern; and that what is relevant is whether the

amount so advanced was as a measure of commercial

expediency or not; and that it is not necessary that the amount

so advanced is earning profit or not, but there must be some

nexus between the expenses and the purpose of business.

ITA 350/CHD/2023 A.Y. 2017-18 35

35.12. It was observed that it was important to note that

'Marudhar Chemicals' (supra) followed the judgement of the

Supreme Court in 'SA Builders' (supra); that in 'Marudhar

Chemicals' (supra), in fact, after remanding the matter, the

Tribunal was expressly directed to consider the matter in the

light of the principles laid down by the Supreme Court in 'SA

Builders' (supra).

35.13. It was held that the assessee's case met each of the

tests stipulated in 'Marudhar Chemicals' (supra); that in fact,

it met a higher test; that when a holding company invests

amounts for the purpose of the business of its subsidiary, it

must, of necessity, be held to be an expense on account of

commercial expediency; that a financial benefit of any nature

derived by the subsidiary on account of the amounts advanced

to it by the holding company would not merely indirectly, but

directly, benefit its holding company; that in the case before

their Lordships, the subsidiary had to be funded to a large

extent, for otherwise, it would not have survived; that if it had

not survived and had gone into liquidation, the assessee would

have suffered directly on account of an erosion of its entire

ITA 350/CHD/2023 A.Y. 2017-18 36

investment in the subsidiary; that in that case, the financial

assistance was not only prudent, but was of utmost necessity,

for without it, the subsidiary would have suffered financial

prejudice.

35.14. It was held that the Tribunal, therefore, had erred in

coming to the conclusion that the Commissioner had not

considered the judgement of the Supreme Court in 'SA

Builders' (supra) in the correct perspective; that it was found

that the Tribunal had not even analyzed the judgement of the

Supreme Court in 'SA Builders' (supra).

35.15. It was observed that the funds or reserves of the

assessee were sufficient to cover the interest free advance of

Rs10.29 crore made by it to its sister company; that their

Lordships were entirely in agreement with the judgement of the

Bombay High Court in 'Commissioner of Income Tax versus

Reliance Utilities & Power Limited', (2009) 313 ITR 340 (Bom),

that if there are interest free funds available, a presumption

would arise that investment would be out of the interest free

funds generated or available with the company, if the interest

free funds were sufficient to meet the investment.

ITA 350/CHD/2023 A.Y. 2017-18 37

35.16. It was held that the AO's view that the advance was

not for business purposes, as the assessee had no business

dealings with the sister company, was erroneous; that

commercial expediency in advancing loans does not arise only

on account of there being transactions directly between the

holding company and the subsidiary company, or between the

group companies inter se; that the two companies may even be

in a different line of business; that it would make no

difference; that it would still be commercially expedient for one

group company to advance amounts to another group company

if, for instance, as a result thereof, the former benefits; that in

the case before their Lordships, there would be a direct benefit

on account of the advances made by the assessee to the sister

company, if the same improved the financial health of the

sister company and made it a viable enterprise; that it was not

necessary that the advance resulted in a positive tangible

benefit; and that so long as the amount was advanced with

that view in mind, or with any commercially expedient view in

mind, that was sufficient. The assessee was held to be entitled

to the deduction under section 36(1)(iii).

ITA 350/CHD/2023 A.Y. 2017-18 38

(supra) was referred to.

37.1 In 'Hero Cycles (P) Ltd. Versus Commissioner of Income

Tax (Central), Ludhiana', [2015] 379 ITR 347 (SC), order dated

05.11.2015, passed by the Honorable Supreme Court, the

assessee had claimed deduction under section 36(1)(iii), of

interest paid on sums borrowed from banks. The AO disallowed

the claim. It was observed that the assessee had advanced

money to its subsidiary company and this advance did not

carry any interest. According to the AO, the assessee had

borrowed money from the banks and had paid interest thereon.

It was observed that deduction was claimed as business

expenditure, but substantial money out of the loans taken from

the bank was diverted by giving advance to the sister concern,

on which, no interest was charged by the assessee. The AO

concluded that therefore, money borrowed, on which interest

was paid, was not for business purposes and no deduction

could be allowed. The AO observed that in addition, the

assessee had also given advances to its own directors, on

which, the assessee charged interest at the rate of 10%,

ITA 350/CHD/2023 A.Y. 2017-18 39

whereas interest payable on the money taken by way of loans

by the assessee from the banks carried interest at the rate of

18%. On that basis, the AO held that charging interest at the

rate of 10% from the directors and paying interest at a much

more rate of 18% on the money borrowed by the assessee could

not be treated for the purposes of business of the assessee. The

assessee had claimed deduction of interest in the sum of

Rs.20,53,120/-. The AO, however, calculated the figures and

disallowed the claim to the extent of Rs.16,39,010/-.

Commissioner set aside the order of the AO, holding that the

interest paid by the assessee, of which, deduction was claimed,

on the facts of the case, was for business purposes and,

therefore, the entire interest paid by the assessee should have

been allowed as business expenditure.

37.2. The Honorable Supreme Court observed that in so far as

regards the advance given by the assessee to its sister concern,

the case put up by the assessee even before the AO was that it

had given an undertaking to the financial institutions to

provide to the sister concern, M/s Hero Fibres Limited, the

additional margin to meet the working capital for meeting any

ITA 350/CHD/2023 A.Y. 2017-18 40

cash losses; that it was further explained that the assessee

company was promoter of its sister concern and since it had

the controlling share in the said company, that necessitated

giving of such an undertaking to the financial institutions; that

the amount was, therefore, advanced in compliance of the

stipulation laid down by the three financial institutions under

a loan agreement which was entered into between the sister

concern and the said financial institutions and it became

possible for the financial institutions to advance that loan to

the sister concern because of the said undertaking; that it was

also mentioned that no interest was to be paid on this loan

unless dividend was paid by that company. It was observed

that it was on that basis, that it was argued that the amount

was advanced by way of business expediency.

37.3. It was observed that the Commissioner accepted the

said plea of the assessee.

37.4. It was observed that in so far as regards the loan given

by the assessee to its own directors at the rate of 10%, the

explanation of the assessee was that this loan was never given

out of any borrowed funds; that the assessee had demonstrated

ITA 350/CHD/2023 A.Y. 2017-18 41

that on the date when the loan was given to the directors, there

was a credit balance in the account of the assessee, from

where, the loan was given; that it was demonstrated that even

after the encashment of checks of Rs.34 lakhs in favour of the

directors by way of loan, there was a credit balance of

Rs.4,95,670/- in the said bank account; that the said

explanation was also accepted by the Commissioner, arriving at

a finding of fact that the loan given to the directors was not

from the borrowed funds; that therefore, interest liability of the

assessee towards the banks on the borrowing which was taken

by the assessee had no bearing, because otherwise, the

assessee had sufficient funds of its own which the assessee

could have advanced and it was for the AO to established the

nexus between the borrowings and the advances to prove that

the expenditure was for non-business purposes, which the AO

failed to do.

37.5. It was observed that the department challenged the

order of the Commissioner before the Tribunal; that the

Tribunal upheld the view of the Commissioner and dismissed

the appeal of the department.

ITA 350/CHD/2023 A.Y. 2017-18 42

37.6. It was observed that however, the High Court had

allowed the appeal filed by the department.

the High Court had not at all discussed the facts which were

established on record, pertaining to the interest free advance

given by the assessee to M/s Hero Fibres Limited, as well as

loans given to its own directors on interest at the rate of 10%.

It was observed that on the other hand, the High Court had

simply quoted from its own judgement in the case of

'Commissioner of Income Tax-I, Ludhiana versus M/s Abhishek

Industries Limited, Ludhiana', ITA No.110 of 2005, decided

on 04.08.2006 . It was observed that it was on that basis, that

the High Court held that when loans were taken from the

banks for the purposes of business, on which, interest was

paid, the interest thereon could not be claimed as business

expenditure.

37.8. It was observed that so far as regards loans given by the

assessee to its sister concern or subsidiary Company, law in

this behalf has been recapitulated by the Supreme Court in the

case of 'SA Builders Limited versus Commissioner of Income

ITA 350/CHD/2023 A.Y. 2017-18 43

Tax and Another', [2007] 288 ITR 1 SC. It was observed that

after taking note of and discussing on the scope of commercial

expediency in 'SA Builders Limited' (supra), the legal position

was summed up as follows. 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. No doubt, as held in 'Madhav Prasad Jatia versus

CIT', [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, interest thereon could

not have been allowed under section 36(1)(iii)II of the Act. In

Madhav Prasad's case 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 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 is that the borrowed fund advanced to a

ITA 350/CHD/2023 A.Y. 2017-18 44

third party should be for commercial expediency if it is sought

to be allowed under section 36(1)(iii) of the Act.

37.9. It was observed that in that case ('Hero Cycles') neither

the High Court, nor the Tribunal, nor the other authorities

had examined whether the amount advanced to the sister

concern was by way of commercial expediency.

37.10. It was observed that it has been repeatedly held by the

Supreme Court that the expression 'for the purpose of

business' is wider in scope than the expression 'for the purpose

of earning profits'. The following case laws were cited:

० 'CIT versus Malayalam Plantations Limited', [1964] 53 ITR 140 (SC) ० 'CIT versus Birla Cotton Spinning and Weaving Mills Limited', [1971] 82 ITR 166 (SC).

37.11. It was noted that the process, the Supreme Court also

agreed that the view taken by the Delhi High Court in 'CIT

versus Dalmia Cement (B.) Limited', [2002] 254 ITR 377

(Delhi), 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

ITA 350/CHD/2023 A.Y. 2017-18 45

business of the assessee itself, the Revenue cannot justifiably

claim to put itself in the armchair 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 was observed that it was

further held that no businessman can be compelled to

maximize his profit and that the income tax authorities must

put themselves in the shoes of the assessee and see how a

prudent businessman would act; and that the authorities must

not look at the matter from their own view point, but that of a

prudent businessman.

37.12. It was held that applying the said ratio to the facts of

the case, it was manifest that the advance given by the

assessee to its sister concern 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, the sister

concern, to meet the working capital for meeting any cash

losses.

ITA 350/CHD/2023 A.Y. 2017-18 46

37.13. It was noted that subsequently, the assessee company

had off-loaded its shareholding in M/s Hero Fibres Limited to

various companies of the Oswal Group and at that time, the

assessee company not only refunded back the entire loan given

to M/s Hero Fibres Limited by the assessee, but this was

refunded with interest; and that in the year in which the said

interest was received, the same was shown as income and

offered for tax.

37.14. It was held that in so far as regards the loans to the

directors, it could not be disputed by the Revenue that the

assessee had a credit balance in the bank account when the

said advance of Rs.34 lakhs was given; that remarkably, as

observed by the Commissioner in his order, the company had

reserve surplus to the tune of almost Rs.15 crore and,

therefore, the assessee company could, in any case, utilise

those funds for giving advance to its directors. The Appeal was

allowed.

० As per 'Abhishek Industries' (dated 04.08.2006) (supra), borrowal with interest and advance without

ITA 350/CHD/2023 A.Y. 2017-18 47

interest would invite disallowance under section 36(1)(iii) of interest to the extent of interest not taken.

० Post 'Abhishek Industries' (supra), according to 'Bright Enterprises' (dated 24.7.2015) (supra) [on having considered 'Abhishek Industries' (supra) and having followed 'SA Builders' (supra)], to allow the interest as deduction under section 36(1)(iii), the real test is that it was commercial expediency which necessitated the advance being made; that there must be some nexus between the expenditure and the purpose of business; that when a company invests amounts for the purpose of the business of its subsidiary, it must of necessity be held to be an expense on account of commercial expediency; that a financial benefit of any nature derived by the subsidiary on account of the amount advanced to it by the holding company would, not merely indirectly, but directly, benefit its holding company; that there would be a direct benefit on account of the advance made, if it improves the financial health of the sister or subsidiary company and makes it a viable enterprise; that it is not necessary that the advance results in a positive tangible benefit; and that so long as the amount is advanced with that view in mind, or

ITA 350/CHD/2023 A.Y. 2017-18 48

with any other commercially expedient view in mind, that is sufficient.

० on the authority of the Honorable Supreme Court in 'Hero Cycles' (supra), [having considered 'Abhishek Industries' (supra) and following 'SA Builders' (supra)], the expenditure is to be allowed as a business expenditure, if it was incurred as a prudent and commercially expedient business expenditure, even though maybe not under any legal obligation.

० 'Abhishek Industries' (supra), therefore, stands overruled by 'Hero Cycles' (supra).

Court lays down the law as it always was. However, since 'Hero

Cycles' (supra), dated 05.11.2015 was not available at the time

when the Commissioner passed his order, on 30.03.2023, he

did not have the benefit thereof. However still, 'Bright

Enterprises' (supra) dated 24.07.2015 was also not available,

and both 'Bright Enterprises' (supra) and 'Hero Cycles' (supra)

lay down the commercial expediency test for allowance of

interest expenditure under section 36(1)(iii).

ITA 350/CHD/2023 A.Y. 2017-18 49

contending that the learned Commissioner went wrong in

passing his order following ex parte orders passed by the

Tribunal, and thereby, wrongly applying 'Abhishek Industries'

(supra).

41.1. So far as regards the issue of the financial position of

the assessee at the time when the funds were advanced, It is

seen that as per the chart filed by the assessee before us, that

is, the chart showing net loans and advances given by the

assessee to related parties during each financial year from FY

2004-05 to FY 2016-17, the assessee advanced loan to related

parties for the first time during the financial year 2005-06.

This chart shows net loans and advances given by the assessee

to related parties during the thirteen financial years. It shows

the balance of total loans and advances at the end of each

financial year. It shows the net surplus funds after loans and

advances to related parties and other investment at the end of

each financial year. It also shows the total surplus funds after

advances to related parties, other investments and other

business advances to related parties at the end of each

ITA 350/CHD/2023 A.Y. 2017-18 50

financial year. For ready reference, this chart is reproduced

below.

Financial Net Advance to Advance to Net surplus Fund Net surplus Fund after Year Related Related after advances to advances to related Parties Parties at end related parties & parties, other during the Year of other Investments Investments & other the Year business advances to unrelated parties (5) (4) (1) (2) (3) 2004-05 0 0 10741.76 8458.32 2005-06 1388.52 1388.52 16175.69 13402.73 2006-07 1927.18 3315.7 15513.18 12336.89 2007-08 -51.73 3263.97 17730.47 12186.44 2008-09 -966.93 2.297.04 22098.48 18623.97 2009-10 -131.00 2166.04 31100.98 24650.79 2010-11 6492.32 8658.36 36740.51 34486.49 2011-12 1514.10 10172.46 46902.90 42929.94 2012-13 -3341.70 6830.76 39572.21 36784.56 2013-14 1727.58 8558.34 26497.75 23429.17 2014-15 1946.39 10504.73 14109.37 11033.99 2015-16 1787.69 12292.42 8093.30 5676.09 2016-17 -1097.46 11194.96 8803.93 5777.22

41.2. It is available from these details that during each of the

financial years since FY 2005-06, there were sufficient own

funds available with the assessee. It is also seen that as rightly

contended, even after reducing the loans and advances for

business to unrelated other parties, there was availability of

sufficient own funds with the assessee every year. Particularly,

it is seen that during the financial year under consideration,

i.e., FY 2016-17, the total loans and advances to related

ITA 350/CHD/2023 A.Y. 2017-18 51

parties got reduced from Rs.122.92 crore to Rs.111.95 crore. In

other words, loans of Rs.10.97 crore were received back by the

assessee from related parties during the assessment year 2017-

18 and no fresh loan or advance was given out, as rightly

contended. This remains undisputed. It also remains

unchallenged that in FY 2005-06, the surplus own funds

available with the assessee were Rs.136.02 crore in excess of

investments and loans or advances given to related parties. The

accounts with related parties were running accounts. They

kept on changing from year to year. However, during all the

financial years from FY 2004-05 to FY 2016-17, the assessee

company had surplus funds in excess of investments and loans

and advances to related parties. In none of the years, the

surplus own funds available with the assessee were less than

its investments or loans and advances to related parties.

During FY 2015-16, the borrowings had been reduced by

Rs.69.81 crore and during FY 2016-17, relevant to the year

under consideration, the borrowings were further reduced by

Rs.121.30 crore. This clearly shows that no fresh loan or

borrowing was there during FY 2015-16 and FY 2016-17. This

also shows that loans were repaid during the assessment years

ITA 350/CHD/2023 A.Y. 2017-18 52

2016-17 and 2017-18, as the borrowings were reduced in these

years. To reiterate, loans amounting to Rs.10.97 crore were

returned to the assessee by related parties during the

assessment year 2017-18 and no fresh loans or advances were

made during the year.

41.3. Therefore, as depicted in the chart, it is rightly

contended that during the year under consideration, the

advances made by the assessee to related parties stood reduced

by Rs.1,097.46 lacs. Accordingly, the net surplus own funds

available with the assessee company, after the advance given to

related parties and the other business advances made over to

unrelated parties, was of Rs.5,777.22 lakhs. The balance sheet

of the assessee company (APB-16) shows the surplus funds

available with the assessee. The detail of the long term

advances made is at APB-22. The back side of APB-22 contains

the details of the short term advances given. A consolidated list

of all such advances made is to be found at APB-61-65.

Limited, of Rs.37.36 crore to Halcyon, and of Rs.2.36 crore to

Essix Biosciences. APB-84 contains the summary of purchase

ITA 350/CHD/2023 A.Y. 2017-18 53

and sale. It has been stated that the assessee had business

dealings as purchase and sale transactions with the related

parties. This is undisputed.

given to Fortune Construction for construction of buildings of

the assessee company, but due to a financial crisis, the

construction work had to be stopped and till AY 2017-18,

construction work of Rs.33.61 crore had been done by Fortune

Construction for the assessee. Such detail is verifiable from

APB-84. Then, as seen at APB-96, that is, a part of the copy of

account (APB–96-163) of Fortune Construction Limited in the

books of the assessee company from 01.04.2011 to 31.03.2017,

the opening balance of these advances as on 01.04.2011 was of

Rs.86.32 crore. APB-160 shows that the opening balance as at

the beginning of AY 2017-18 was of Rs.53.56 crore. As per

APB-163, at the closing of AY 2017-18, the advances got

reduced to Rs.52.53 crore. Therefore, obviously, as rightly

submitted, there was a reduction in such loans and advances

during the year under consideration. APB 86-95 contain the

balance sheet of Fortune Construction Limited. Its List of

ITA 350/CHD/2023 A.Y. 2017-18 54

Shareholders as on 31.03.2017 finds place at APB–85. It is

undisputed that the assessee company had a shareholding of

47.73% in Fortune Construction as on 31.03.2017. Assets of

Fortune Construction were mortgaged for restructuring of bank

loans of the assessee as security to the bank of the assessee,

as seen from the copy of the Restructuring Proposal approved

under the CDR System, APB–66-80, at APB-73, to help the

assessee in getting loan. Further, as seen from APB–73,74 and

backside of 74, a corporate guarantee was also given by

Fortune Construction for the loan taken by the assessee

company to help the assessee in its business. Then,

undisputedly again, the funds were used by Fortune

Construction for its business purposes. Hence, the loans and

advances given by the assessee to Fortune construction were

evidently advanced for commercial expediency, as they were

made over in order to save the investment of the assessee in

Fortune Construction and to earn profit on its shares.

sheet is at APB 164-178. As per the copy (APB 179–205) of

account of Essix Biosciences Limited in the books of the

ITA 350/CHD/2023 A.Y. 2017-18 55

assessee company, for AY 2017-18, at particular page APB-194,

advances as at the beginning of AY 2017-18 were at Rs.11.80

crore. APB–205 shows that as at the end of AY 2017-18, the

advances stood at Rs.2.36 crore. Now, this clearly shows that

there was a reduction in the advances made by the assessee to

this company during the year. The Summary of Purchase and

Sale (APB–84) shows that purchases of Rs.289.48 crore and

sales of Rs.226.67 crore were made by this company with the

assessee company. The copy of Restructuring Proposal

approved under the CDR System, at APB 74 and back side of

APB 74 also shows that Essix Biosciences had also given a

corporate guarantee for loan taken by the assessee, to help the

assessee in its business.

(APB-208-230) shows that the funds were used by this

company for business purposes. The opening balance at the

beginning of AY 2017-18 was of Rs.37.43 crore. The closing

balance of AY 2017-18 was Rs.37.36 crore, as available at APB-

266 forming part of the copy of account of M/s Halcyon Life

Sciences Private Limited in the books of the assessee company,

ITA 350/CHD/2023 A.Y. 2017-18 56

for the period from 01.04.2012 to 31.03.2017 (APB 243-266).

This, again, shows a reduction in the advances made by the

assessee to the said company during the year. The Summary of

Purchase and Sale (APB-84) shows that this company sold

goods of Rs.402.02 crore to the assessee and purchased goods

of Rs.41.64 crore from the assessee. The advances were mainly

linked to the sale of goods to this company by the assessee.

Further, the assessee company had given a bank guarantee for

Halcyon. An amount of Rs.25 crore was recovered forcibly by

the bank from the assessee as such guarantor, to fulfill the

conditions of the guarantee. As rightly stated, the advance of

Rs.37.36 crore includes the said amount of Rs.25 crore

recovered forcibly by the bank from the assessee. APB 232-242

is a copy of the sanction letter of the bank in this regard. APB-

231 is the account statement which shows the said transfer of

the amount of Rs. 25 crore. APB 234 shows the corporate

guarantee of the assessee. The ledger account of Halcyon for

the period from 01.04.2012 to 13.03.2013, relevant portion at

APB-245 shows a debit entry of Rs 25 crore on 04.06.2012 with

the recital of Fund Transfer Through RTGS, by way of Bank

Journal. These documents show that the corporate guarantee

ITA 350/CHD/2023 A.Y. 2017-18 57

of the assessee, given for M/s Halcyon was recovered by SBI

from the bank account of the assessee.

Its copy of account is placed at APB 298-307. It is seen that

the opening balance at the beginning of assessment year 2017-

18 was Rs.19.99 crore, as available from the account, at APB

crore, as seen at APB 307. Therefore, the loans and advances

got reduced in the year under consideration. Moreover, this

advance was utilised for business purposes. Then, as available

from the Summary of Purchase and Sale, at APB 84, this

company sold goods of Rs.151.24 crore and purchased goods of

Rs.186.00 crore from the assessee company.

loans in question were given by the assessee to related parties

for business expediency and these funds were utilized by the

recipient companies for business purposes. Then, neither of

the assessing authorities has shown the funds to have been

advanced for any purpose other than business expediency. No

direct nexus has been proved between the loan taken by the

ITA 350/CHD/2023 A.Y. 2017-18 58

assessee and those given to the related parties. All the

recipient companies were doing sale/purchase with/providing

services to the assessee company to meet each others’

requirements for the pharmaceutical products manufactured or

sold by them. The details of all these sales purchases and

services have been delineated in the summary of Sale &

Purchases, at APB 84.

and advances to unrelated parties, amounting to Rs.30.39 Cr.

As available from the APB-22 and backside of APB 22, these

advances were also made for business purposes. The assessing

authorities have, however, disallowed notional interest on

these advances also. This, again, is not sustainable. The

advances having been made for business purposes, no

disallowance with regard thereto can be made u/s 36(1)(iii) of

the Act.

Another’ 288 ITR 1 [S.C.] (supra), the assessee transferred

Rs.82 lacs to its subsidiary company out of the cash credit

account of the assessee without charging any interest. The

ITA 350/CHD/2023 A.Y. 2017-18 59

Assessing Officer disallowed proportionate interest claimed by

the assessee on this amount. The Hon'ble Apex Court decided

this issue, holding that “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,

yet it is allowable as a business expenditure if it was incurred on

grounds of commercial expediency” ; that it has been repeatedly

held by the Hon'ble Supreme Court that “the expression “for the

purpose of business’ is wider in scope than the expression “for the

purpose of earning profits’ vide CIT Vs Malayalam Plantations Ltd.

(1964) 53 ITR 140 (S.C), CIT Vs Birla Cotton Spinning & Weaving

Mills Ltd. (1971) 82 ITR 166 (S.C.), etc. The Hon'ble Supreme

Court further held that no businessman can be compelled to

maximize his profit; that the Income-tax authorities must put

themselves in the shoes of the assessee and see how a prudent

businessman would act; that the authorities must not look at

the matter from their own viewpoint but that of a prudent

businessman; that the Court has 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

ITA 350/CHD/2023 A.Y. 2017-18 60

the amount was advanced for earning profits'; and that their

Lordships wished to make it clear that it was not their 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; 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). The Hon'ble Supreme Court opined that where it was

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 ordinarily be

entitled to deduction of interest on its borrowed loans.

Industries Ltd.’ 410 ITR 466 (S.C.), the ground of appeal raised

by the Revenue before the Apex Court was :

ITA 350/CHD/2023 A.Y. 2017-18 61

"Whether the high court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction u/s 36(l)(iii), when the interest would not have been payable to banks, if funds were not provided to subsidiaries."

50.1 The Hon'ble apex court has decided holding that the

High Court had noted the finding of the Tribunal that the

interest free funds available to the assessee were sufficient to

meet its investment, hence, it could be presumed that the

investments were made from the interest free funds available

with the assessee. The Tribunal had also followed its own order

for Assessment Year 2002-03. Therefore, there was no reason

to interfere with the judgment of the High Court in regard to

the first question. Accordingly, the appeals were dismissed in

regard to the first question.

50.2 In ‘Hero Cycles (P) Ltd vs Commissioner of Income Tax’

[2015] 379 ITR 347 (S.C.) the assessee had advanced a sum of

Rs.1,16,26,128/- to its subsidiary company without any

interest. The AO alleged that substantial money out of the

loans taken from the bank was diverted by giving advance to

subsidiary on which no interest was charged. The judgement

of M/s Abhishek Industries was overruled. The Hon'ble

ITA 350/CHD/2023 A.Y. 2017-18 62

Supreme Court held that it could not be disputed by the

Revenue that the assessee had a credit balance in the bank

account when the advance of Rs.34 lacs was given. Their

Lordships observed that the CIT(A) in his order had stated that

the company had reserve/surplus to the tune of almost 15

crores and the assessee company could utilize those funds for

giving advance to its Directors.

50.3 In ‘Bright Enterprises Pvt Ltd vs Commissioner of

Income Tax’ [2016] 381 ITR 107 (P&H) the assessee advanced

Rs. 14,08,25,185/- to its sister concern without charging any

interest and stated that sister concern did not appear to be for

business purposes as the assessee company had no business

dealing with sister concern. The judgement of M/s Abhishek

Industries was overruled. Hon'ble Punjab & Haryana High

Court held as under: ‘Para 9

"Whether the amount of Rs. 10.29 crores were debited to the account of the sister concern in respect of the payment made under Clause 3.3(b) of Article 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern

ITA 350/CHD/2023 A.Y. 2017-18 63

for any purpose other than for the purposes of its business nor was such a case raised before us. Para 16:

As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs.10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340; para-10; that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment. Para 17 "The assessing officer's view that the advance was not for business purposes as the appellant had no business dealings with the sister concern is erroneous. Advancing loans does not arise only on account of there being transactions directly between the holding company and the subsidiary company or between the group companies inter se. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one group company to advance amounts to another group company, if, for instance, as a result thereof the former benefits. In the present case, as we have already demonstrated, there would be a direct benefit on account of the advance made by the appellant to its sister company if the same improves the financial health of the sister company and makes it a viable enterprise. We hasten to add that it is not necessary that the advance results in a positive tangible benefit. So long as the amount is advanced with that view in mind or with any other commercially expedient view in mind that is sufficient."

50.4 In ‘Commissioner of Income Tax Vs Marudhar Chemicals

& Pharmaceuticals (P) Ltd.’ (2009) 319 ITR 75 (P&H) (supra)

the assessee company advanced Rs.17,45,000/- to family

ITA 350/CHD/2023 A.Y. 2017-18 64

members of the Directors without any interest, though the

assessee company paid interest on the borrowings. In this

appeal, judgement of M/s Abhishek Industries was considered.

The Hon'ble Supreme Court noted that Section 31(1)(iii) of the

Act provides that “the amount of the interest paid in respect of

capital borrowed for the purposes of the business or profession”

has to be allowed as a deduction in computing the income under

Section 280 of the Act. It was further noted by the Apex Court

that the expression “for the purpose of business” had been held

to be wider in scope than the expression "for the purpose of

earning income, profits or gains"; that as held in ‘S.A. Builders

Ltd.'s case, when the assessee borrowed the fund from the bank

and lent some of it to its sister concern as an interest free loan,

then the real test to allow the interest as deduction under sec.

36(l)(iii) of the Act is whether this was done as a measure of

commercial expediency. It has been held that in order to claim a

deduction, it is enough to show that the money is expended, not

on necessity and with a view to direct and immediate benefit,

but voluntarily and on account of commercial expediency and

in order to indirectly facilitate the carrying on

the business; that the expression "commercial expediency" is

ITA 350/CHD/2023 A.Y. 2017-18 65

an expression of wide import and includes such expenditure as

a prudent businessman incurs for the purpose of business. The

Hon'ble Supreme Court held that the expenditure may not have

been incurred under any legal obligation, but yet it was

allowable as a business expenditure if it was incurred on the

grounds of commercial expediency. In S.A. Builders Ltd.'s case,

it was held that in order to decide whether it was for

commercial expediency, the authorities and the courts should

have examined the purpose for which the assessee advanced

money to its sister concern and what the sister concern did

with the money. It was further held that it is not relevant

whether the assessee has utilized the borrowed amount in its

own business or has advanced the same as interest free loan to

its sister concern, but the relevant was whether the amount so

advanced was a measure of commercial expediency or not. It

was not necessary that the amount so advanced was earning

profit or not but there must be some nexus between the

expenses and the purpose.

50.5 In ‘IDS Infotech Ltd. vs Deputy Commissioner of

Income Tax’, 181 TTJ (CHD) 2017) (ITAT Chandigarh Bench),

ITA 350/CHD/2023 A.Y. 2017-18 66

the assessee had made investment of Rs.16623000/- in its

subsidiary without charging any interest and paying interest to

the bank on the loans. The ITAT, Chandigarh Bench decided

the ground as under :

Para 7

“We would like to refer certain observations made by the Hon'ble Supreme Court in the case of S.A Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74. In this case, while interpreting the meaning of the word 'commercial expediency', the Hon'ble Apex Court held as under:

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 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."

Para 8

In view of the above, we observe that even the Hon'ble Supreme Court has endorsed the view that since a holding

ITA 350/CHD/2023 A.Y. 2017-18 67

company has a deep interest in its subsidiary and if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee is entitled to deduction of interest on the borrowed funds. In the present case, there is no dispute about the fact that the amounts have been advanced t the wholly owned subsidiaries of the assessee company and there is no fact brought on record by any of the lower authorities that the amounts have been used by these subsidiary companies for any purpose other than their business purposes. In view of this, we are inclined to hold that the amounts given to subsidiary companies were on account of commercial expediency. Therefore, no disallowance invoking the provisions of section 36(l)(iii) of the Act can be made in this case. The ground No.l raised by the assessee is allowed.”

50.6 In ‘Commissioner of Income Tax vs Dalmia Cement

(Bharat) Ltd’, 330 ITR 595 (High Court of Delhi), the assessee

company advanced interest free Loan of Rs. 40 lakhs to its

subsidiary and paid interest to the banks on the borrowings.

Hon'ble Delhi High Court has decided as under:

Para 6

(i) We may straightway refer to the Supreme Court judgment in S.A. Builders Ltd (Supra). In the said case almost on the similar facts, the High Court had affirmed the findings of the ITO and ITAT and disallowed the interest with respect to the loan advanced to the sister concern. The Supreme Court noted this position in its judgment as under: "The High Court held that since it stands established that the amounts of Rs.82 lakhs and Rs.37.85 lakhs had been advanced by the assessee to its sister concern from out of the overdraft account with the bank in which there was already a debit balance, the order of the Tribunal does not

ITA 350/CHD/2023 A.Y. 2017-18 68

suffer from any factual or legal infirmity. Accordingly, the High Court dismissed the appeal" (Placitum 13, Pg 7) (ii). Before the Supreme Court, the issue which arose was whether loan given by the assessee company to its sister concern would disentitle the assessee company from debiting the interest paid to the banks as revenue expenditure. The Supreme Court held that the loan was given for the business purposes and in this regard held at placitum 35 and 36 as under: "We agree with the view taken by the Delhi High Court in CIT Vs. Dalmia Cement (B.) 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 his 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 out 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

ITA 350/CHD/2023 A.Y. 2017-18 69

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.".

(iii). The Supreme Court further relied upon the concept of 'for the purpose for business' and held as under in placitum 20 to 23 of the judgment at page 7 of the report as under:

"In this connection we may refer to Section 36(l)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the "Act") which states that "the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession" has to be allowed as a deduction in computing the income under Section 28 of the Act. In Madhav Prasad Jatia Vs. CIT (1979) 118 ITR 200(SC); AIR 1979 SC 1291, this Court held that the expression " for the purpose of business" occurring under the provision is wider in scope than the expression " for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the income- tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) as interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(l)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in the decisions relating to Section 37 that the expression " for the purpose of business" includes expenditure voluntarily incurred for

ITA 350/CHD/2023 A.Y. 2017-18 70

commercial expediency, and it is immaterial if a third party also benefits thereby."

(iv). The supreme Court further held at placitum 26 at page 8 of the report 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". Para 10

We, therefore, answer the reference by holding that the Tribunal was correct in holding that no portion of the interest paid by the assessee on its borrowed funds can be disallowed on the ground that a portion thereof has been diverted to subsidiary company and that that the Assessing Officer was not justified in disallowing the assessee company in debiting the interest paid to the bank as a revenue expenditure merely because it had given further loan of Rs.40,00,000/- to its subsidiary company.”

50.7 In ‘PCIT v. E City Investments and Holdings Company

(P.) Ltd.’, (2020) 117 taxmann.com 123 (Bom.)(HC) SLP of the

Revenue is dismissed vide ‘PCIT v. E City Investments And

Holdings Company (P.) Ltd.’, (2020) 272 Taxman 90 (SC)], the

assessee funded its sister concern without charging interest

and AO disallowed such interest expenditure. The Hon'ble

Bombay High Court held that there was no finding by the AO

that the funds were not utilized for business purposes and that

ITA 350/CHD/2023 A.Y. 2017-18 71

advancing loans to the sister concern was for purpose of

‘Commercial Expediency’. Thus, the Court found merit in the

contention of the ld. Counsel for the assessee. The Court

further observed that AO was not expected to sit in the chair of

assessee and to decide the business interest and the assessee

was to watch its business interest. The Court held that when

the nexus between the expenditure and purpose of the

business was established, the Revenue could not justifiably

claim to put itself in the position of the Board of Directors to

assume the role of the Board to decide regarding expenditure.

It was further held that no businessman could be compelled to

maximize his profit.

50.8 In ‘CIT vs Reliance Utilities & Power Ltd.’, 313 ITR 340

(BOM), the Hon'ble Bombay High Court given its findings as

under :

Para 6

"If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Wool combers of India Ltd. (supra) where a similar issue had

ITA 350/CHD/2023 A.Y. 2017-18 72

arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Wool comber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there are funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and the Tribunal". Therefore, it is established from our aforesaid submission that the appellant in this case has given advances to related parties and no notional interest should be disallowed u/ 36(l)(iii) as: • The loans and advances were given for commercial expediency. • The company has surplus funds during all the previous years since AY 2005-06 to AY 2017-18 and first time Loans & advances to related parties were given in AY 2006-07. • Part of these loans and advances were received back during the year. • The borrowings of the appellant reduced substantially during the year. • No fresh loans were given during the year. • The appellant has business dealings with these Companies, who utilized these funds for business purposes.

ITA 350/CHD/2023 A.Y. 2017-18 73 • Expenses of Interest were claimed as Rs. 8.77 Cr instead of Rs. 74.69Cr wrongly considered by the Ld. CIT(A) for making notional disallowance of interest. • Loans and advances of Rs. 30.39 Cr were given to Unrelated other parties for business purposes out of total loans and advances of Rs. 142.22 Cr and no interest should be disallowed on these Advances of Rs. 30.39 Cr. 51. To summarize, from the above discussion, it is patent that

the loans and advances under consideration were all given for

commercial expediency. The assessee company had sufficient

surplus funds during all the concerned previous years, since

assessment year 2005-06 to assessment year 2017-18. For the

first time, loans and advances were made to the related parties

in assessment year 2006-07. Part of these loans and advances

were received back by the assessee during the year. The

borrowings made by the assessee got substantially reduced

during the year under consideration. No fresh loans or

advances have been shown to have been given out by the

assessee during the year under consideration. The companies

to whom the amounts were advanced had business dealings

with the assessee. These companies utilized the funds

advanced to them by the assessee, for business purpose only.

The assessee claimed interest expenditure at Rs.8.77 Cr and

not at Rs.74.69 Cr, as wrongly considered by the ld. CIT(A) for

ITA 350/CHD/2023 A.Y. 2017-18 74

making notional disallowance of interest. So far as regards

loans and advances to unrelated parties, such loans and

advances amounting to Rs.30.39 Cr, out of total loans and

advances of Rs.142.22 Cr. These loans and advances were also

given for business purposes. Therefore, no interest ought to

have been disallowed on these advances of Rs.30.39 Cr. The

authorities below erred in placing absolute reliance on the

three orders passed by the Tribunal in the assessee's case for

the earlier years. These Tribunal orders were passed ex-parte

qua the assessee. The financial position of the assessee while

making the advances stands established, as discussed. The

decision of the jurisdictional High Court in the case of ‘M/s

Abhishek Industries Ltd.’ (supra) was wrongly relied on. The

account of the assessee was already a non performing asset or

NPA. The addition was made on a wrong presumption that

borrowed funds would have been utilized for advancing the

loans.

51.1 Therefore, finding sufficient merit therein, Ground No. 2

raised by the assessee is accepted. The addition of

Rs.13,26,09,358/- representing alleged estimated notional

ITA 350/CHD/2023 A.Y. 2017-18 75

interest income of the assessee on the loans and advances and

capital advances made by the assessee, is deleted.

assessee claimed deduction of Rs.11,44,84,484/- u/s 35(1)(i) of

the Act. The AO, vide notice dated 03.02.2021, issued u/s

142(1) of the Act, asked the assessee to furnish the details of

the expenditure claimed; as to whether the expenditure had

been made for in-house research, or paid to some outside

agencies; that if the research was an in-house research, to

specify the nature of the expenditure, as to whether it was

revenue or capital in nature; that if it was expenditure revenue

in nature, the details of employees engaged in the specific

research and their educational qualifications and the quantum

of salary paid, payments made for purchase of material used in

the specific research and details of the party to whom the said

payments had been made, the date of purchase and

justification, specifying the use of the material for the specific

research; that if the expenditure was capital in nature, to

provide the date of purchase of the asset and to specify the use

of the asset for the scientific research, to provide the details of

ITA 350/CHD/2023 A.Y. 2017-18 76

any asset bought for scientific purpose, sold out during the

year, to provide the details of the payments made to

Association or Institution for carrying out the research and the

Letter of Approval of the Association or Institution, by the

prescribed authority; and to provide the details of the

payments made to the company for carrying out the research

and the Letter of Approval by the prescribed authority to the

company and the MOA of the company.

52.1 The assessee responded by stating that for the

expenditure claimed u/s 35(2AB), the Statutory Auditor

Certificate had been attached as Annexure ‘O’ (1) and all the

expenditure had been made for in-house research; that in

respect of in-house research, the details of the revenue

expenditure, Derabassi, were attached as Annexure ‘O’ (b)(i)

and Annexure ‘O’ (b) (ii); that for the capital expenditure,

details thereof; that during the assessment year, no asset was

sold, bought for scientific purpose; and that all the research

made in their in-house and so, no payments were made to any

Association or Institution or company for carrying out

research. The AO observed that the assessee had furnished a

ITA 350/CHD/2023 A.Y. 2017-18 77

Calculation Sheet for deduction u/s 35(2AB); that no

documents and calculation for deduction u/s 35(1), amounting

to Rs.11,44,84,484/- had been provided; that various details

and documents remained unfurnished, even though these were

asked for expressly through notice u/s 142(1); that on perusal

of the Auditor’s Report u/s 35(2AB), it was noticed that the

amount of Revenue Expenditure on which deduction u/s

35(2AB) was not claimed, was only of Rs.10.29 Cr, whereas the

assessee had claimed deduction of Rs.11.44 Cr u/s 35(1)(i).

The AO observed that on ‘Open Source Investigation’, profiles

of several employees employed at Ind Swift , Derabassi ( as

submitted by the assessee) were checked and it was found that

most of them were engaged in quality control, management or

marketing. The AO observed that it was very clear that the

assessee's Derabassi Plant was engaged in scientific research

and starting from top, all employees employed there, were

engaged in quality control activities, management activities

and marketing activities and that therefore, the Derabassi

Plant was not engaged in scientific research, as required u/s

35(1)(i) of the Act. The AO observed that as per Section 43(4),

‘Scientific Research’ means any activities for the extension of

ITA 350/CHD/2023 A.Y. 2017-18 78

knowledge in the fields of natural or applied science including

agriculture, animal husbandry or fisheries; that ‘expenditure

incurred on scientific research’ includes all expenditure

incurred for the prosecution or provision of facilities for the

prosecution of scientific research, but do not include any

expenditure incurred in the acquisition of rights in, or arising

out of, scientific research; that scientific research related to a

business or class of business includes any scientific research

which may lead to or facilitate an extension of that business

or, all businesses of that class clause, and any scientific

research of a medical nature which has a special relation to

the welfare of workers employed in that business or all

businesses of that class. The AO observed that violation of

the provisions of Section 35 (1)(i) read with Section 43 of the

Act had taken place in the case and, therefore, deduction u/s

35(1) was not admissible. It was held that in the absence of

necessary evidentiary documents and calculation for deduction

u/s 35(1) amounting to Rs.11,44,84,484/- and violation of

provisions of Section 35(1)(i) read with Section 43, the whole

deduction was being disallowed. As such, the amount of

ITA 350/CHD/2023 A.Y. 2017-18 79

Rs.11,44,84,484/- was added to the total income of the

assessee.

52.2 The ld. CIT(A) dealt with together, issues of deduction

claimed u/s 35(1)(i), at Rs.11,44,84,484/-, deduction claimed

by the assessee amounting to Rs.17,34,03,757/-, u/s 35(2AB)

and Research and Development Expenditure claimed at

Rs.10,51,71,451/-.

52.3 The ld. CIT(A) placed reliance on Tribunal orders passed

ex-parte qua the assessee in the earlier years. The ld. CIT(A)

accepted the assessee's plea that a suo-moto disallowance in

the computation of taxable income of the assessee had been

made by the assessee, of an amount of Rs.10,51,71,451/- who

had claimed an amount of Rs.11,44,84,484/- as expenditure

u/s 35(1)(i) and weighted deduction of srs17,34,03,757/- u/s

35(2AB) amounting to a total claim of deduction of

Rs.28,78,88,241/-. The ld. CIT(A) directed the AO to verify

these expenses and to allow them to the extent of suo-moto

disallowance u/s 35(1)(i).

ITA 350/CHD/2023 A.Y. 2017-18 80

erred in confirming the disallowance of the claim of

Rs.11,44,84,484/- u/s 35(1)(i), on the alleged basis that the

Derabassi Plant of the assessee was not engaged in scientific

research, as required in Section 35(1)(i), rejecting the

contention of the assessee that all the necessary conditions for

claiming the deduction specified u/s 35(1) stand fulfilled,

making the assessee eligible for claiming the deduction.

reliance on the impugned order in this regard. It has been

contended that no evidence regarding the claims made had

been submitted before the authorities below, or before the ITAT

in the earlier years; that Certificate as required by the Income

Tax Act had also not been filed; and that therefore, the ld.

CIT(A) cannot be said to have erred in directing the AO to

verify the expenses and to allow the same to the extent of the

suo-moto disallowance made by the assessee.

recognized as an in-house R&D Unit in Mohali. The same goes for

its Derabassi Unit as well. The approval has been accorded upto

ITA 350/CHD/2023 A.Y. 2017-18 81

31.03.2017, by the Department of Scientific and Industrial

Research, Government of India, vide letter dated 01.04.2014

(APB 323), as required under Rule 6(1) of the IT Rules, 1962.

The assessee claimed expenditure of Rs.20,11,86,362/-, as

incurred on Research & Development at its two units during

the year. Out of this, expenditure of Rs.11,44,84,484/- was

claimed as expenditure allowable u/s 35(1) of the Act. On the

balance amount of Rs.8,67,01,878/-, weighted deduction u/s

35(2AB) of the Act was claimed. In response to the notice

issued by the AO, the assessee submitted detail of revenue

expenditure at Derabassi and detail of capital expenditure. It

was stated that during the year, no assets were either sold or

bought for scientific purposes. It was also stated that all the

research was made in-house and so, no payment was made to

any Association or Institution or company for carrying out

research. The AO, at page 9 of the assessment order, has

admitted the assessee having filed details of its in-house R&D

Expenses, i.e., details of revenue expenditure at Derabassi and

details of capital expenditure at R&D. No query regarding any

employee of the assessee at Derabassi was put to the assessee.

The Computation Chart filed by the assessee stands

ITA 350/CHD/2023 A.Y. 2017-18 82

reproduced by the ld. CIT(A) at page 75 of the impugned order.

It remains undisputed that in the earlier years which were

before the Tribunal, the orders with regard to which were

passed by the ITAT ex-parte qua the assessee, the issue of

deduction u/s 35(1)(i) was not present. Moreover, the suo-

moto disallowance made by the assessee u/s 35(1)(i) amounting

to Rs.10,51,71,451/- has also not been disputed by the

Department. As available from APB-313 to 315, as per the

certificate of the statutory auditors of the assessee, the

assessee claimed expenditure u/s 35(2AB) on R&D

expenditure, eligible for weighted deduction, to the tune of

Rs.967.80 lacs. However, the assessee claimed weighted

deduction u/s 35(2AB) on the expenditure, to the extent of

Rs.867.92 lacs. The balance amount of Rs.93,13,033/- was

claimed as revenue expenditure on R&D u/s 35(1)(i). The

back-side of APB-4 shows that the assessee's auditor certified

deduction u/s 35(1) amounting to Rs.11,44,84,484/-, in Form

3CD. This has not been called in question by the Revenue

authorities. Moreover, at page 12 of the assessment order, the

AO has himself mentioned the assessee to be eligible for

deduction u/s 35(2AB) corresponding to expenditure of

ITA 350/CHD/2023 A.Y. 2017-18 83

Rs.9,67,80,521/-, i.e., Rs.1.21 Cr capital expenditure and

Rs.8.45 Cr revenue expenditure. The assessee, however, has

mentioned in Form 3CD and the ITR, claimed expenditure of

Rs.8,67,01,878/- u/s 35(2AB). Hence, the balance amount

was claimed u/s 35(1)(i). Weighted deduction was not allowed

on this claim.

Development expenditure amounting to Rs.93,13,033/- be

allowed to the assessee, subject to verification thereof by the

AO. Accordingly, Ground No. 3 is accepted.

has confirmed disallowance made by the AO, amounting to

Rs.17,34,03,757/- on account of deduction claimed u/s

35(2AB) of the Act.

calculations and deductions claimed u/s 35(2AB) and Forms

3CK, 3CL, 3CM and 3CLA; that the assessee had not submitted

details of expenditure and necessary documentary evidence in

support of the various expenditures; and that in the absence of

ITA 350/CHD/2023 A.Y. 2017-18 84

documentary proof with regard to expenditure, the assessee's

eligibility of the quantum of deduction claimed u/s 35(2AB)

could not be verified. It was observed that the assessee had

only furnished an Auditor’s Certificate with calculations, from

which, the assessee was eligible to deduction u/s 35(2AB)

corresponding to expenditure of Rs.9,67,80,521/-, i.e., Rs.1.21

Cr capital and Rs.8.45 Cr revenue; that however, contrary to

this, the assessee mentioned in the Tax Audit Report and in

the Income Tax Return, that the expenditure was of

Rs.8,67,01,878/-; and that the assessee had, therefore, made

different filing for different statutory purposes; that the

assessee had claimed deduction u/s 35(2AB) amounting to

Rs.17,34,03,757/-, i.e., 2 x 86701878. It was observed that

violation of the provisions of Section 35(2AB) read with Section

43 of the Act had taken place and therefore, deduction u/s

35(2AB) was not admissible. The AO, thus, added an amount

of Rs.17,34,03,757/- to the total income of the assessee,

disallowing the deduction claimed u/s 35(2AB).

deduction on the basis of Tribunal orders for the earlier years

ITA 350/CHD/2023 A.Y. 2017-18 85

passed ex-parte qua the assessee and for the reason that the

requisite certificate 3CL was not available with the assessee.

The ld. CIT(A) held that the assessee had not fulfilled the

conditions for the deduction claimed.

60.1 We have considered the rival contentions in this regard,

in the light of the material placed before us. Section 35(2AB)

of the Act provides that where a company, engaged in the

business of bio-technology or in any business or manufacture

or production of any article or thing, not being an article or

thing specified in the list of Eleventh Schedule incurs any

expenditure on scientific research (not being expenditure in the

nature of cost of any land or building) or in-house research

and development facility as approved by the prescribed

authority, then, they shall be allowed a deduction of a sum

equal to two times of the expenditure so incurred. Therefore,

evidently, the deduction of two times of the expenditure

incurred shall be allowed if the requirement of the Section

stands fulfilled. The requirements have been elaborated in

Rule 6. Rule 6 (7A) was substituted by the Income Tax 17th

Amendment), Rules 2016, w.e.f. 01.07.2016, from assessment

ITA 350/CHD/2023 A.Y. 2017-18 86

year 2017-18. Thereunder, the approval and quantification of

expenditure incurred on in-house R&D and eligibility for

weighted deduction u/s 35(2AB) stands assigned to the

authority prescribed, i.e., the Ministry of Scientific &

Industrial Research, Government of India. The requisite

approval stands granted, as discussed herein above, as also

those of the requisite conditions stands fulfilled. Reliance on

the orders of the Tribunal in the earlier years is not apt, as

rightly contended. In those years, there was no approval from

the Ministry of Scientific and Industrial Research, in Form

3CL. In the year under consideration, on the other hand all

these prescribed conditions stand fulfilled and the approvals

from the specified authority have been granted, as per the

provisions of Rule 6(7A) of the Rules, which came into effect

from 01.07.2016. APB 310-311 are eloquent in this regard.

The assessee is right in contending that the benefit of the

deduction cannot be denied to the assessee for circumstances

beyond its control, i.e., bureaucratic delay. The fulfillment of

the conditions is evident from :

The required application to be submitted in form 3CK (Rule 6(4)), - which was submitted on 19.09.2017.

ITA 350/CHD/2023 A.Y. 2017-18 87

(ii) The prescribed authority shall, if satisfied, pass order in writing in form 3CM (Rule 6(5A)), - approval of which was received on 24.07.2014 with effect from 01.04.2014 to 31.03.2017 .

(iii) The prescribed authority shall submit its report for approval of in-house research and development facility in part -A of form 3CL (Rule 6(7A)(b)(i)),

The prescribed Authority shall quantify the expenditure incurred on In-House research and development eligible for weighted deduction u/s 35 (2AB), in Part-B of Form 3CL (Rule 6(7A)(b)(ii)), - which was submitted during the appellate proceedings.

(iv) The assessee shall maintain a separate account for each approved facility, which shall be audited and report on form 3CLA shall be furnished to the Department of Scientific and Industrial research. (Rule 7A(c)), - which was submitted with the Department of Scientific and Industrial research by the auditors of the company. 60.2 Further-more, the statutory auditors of the assessee

company have also certified the claim of the assessee u/s

35(2AB) on the eligible amount of Rs.867.01 Cr. This is

available at the back-side of APB-4, i.e., Point No. 19 of Form

3CD. Besides, the assessee has also claimed weighted

deduction u/s 35(2AB) on the said amount of Rs.867.01 Cr in

its Income Tax Return, as certified and approved by the

prescribed authority and the statutory auditors, respectively.

The certificate issued, i.e., Form 3CL (APB 310-311) shows the

assessee to have claimed weighted deductions at twice the

amount of Rs.867.01 Cr, i.e., Rs.1734.03 lacs, in the Income

ITA 350/CHD/2023 A.Y. 2017-18 88

Tax Return. The deduction is, thus, liable to be restricted to

the claim of Rs.1734.03 lacs, as against weighted deduction

equal to two times of Rs.867.92 Cr approved and certified by

the prescribed authority in Form 3CL.

60.3 In this regard, in ‘Eicher Motors Ltd vs CIT’, 398 ITR 51 of

2017, Hon'ble Delhi High Court held that the R&D expenditure

claimed by the assessee, ought to have been allowed and there

was no question of remanding the matter to the AO for

returning a finding on whether the expenditure was of revenue

or capital nature because under Section 35(2AB) of the Act,

both revenue and capital expenditure were allowable in their

entirety excluding expenditure in the nature of cost of any land

or building. The Hon'ble High Court further pointed out that

there was no purpose in analyzing whether the expenditure was

of revenue or capital nature.

60.4 In ‘Maruti Suzuki India vs Union of India & ANR’, 397

ITR 728 of 2017, Hon'ble Delhi High Court held as under :

Para 10

"The DSIR granted approval in Form 3CL dt. 9th March, 2015 for AY 2011-12 in respect of the entire R&D expenditure of Rs. 391.17 crores, incurred by the petitioner. This certification, though certifying the entire

ITA 350/CHD/2023 A.Y. 2017-18 89

R&D expenditure of the petitioner for asst. yr. 2011-12, also gave reference of the Gurgaon R&D Centre. This error could have occurred as the subject line of the petitioner's application dt. 31st Oct., 2011 merely mentioned the Gurgaon R&D Centre and not the Rohtak Centre, though the auditor's report attached therewith properly delineated the expense for both the Centers. Since, by then, the petitioner's Rohtak R&D Centre was accorded recognition by the DSIR, on 26th March, 2015"

Para 41

"Sec. 35(2AB) clearly provides that any expenditure incurred by a party on its R&D facility except, insofar as it relates to land and building is liable to be allowed to be claimed as deduction (twice the amount of expenditure). A perusal of the scheme of the Act especially ss. 35(2AB), 35A and 35AB reveals in no uncertain terms, that the purpose behind these provisions is to provide Impetus for research, development of new technologies, obtaining patent rights, copyrights and know-how".

60.5 In ‘CIT vs Sun Pharma Industries Ltd’ 250 taxman 270

of 2017, Hon'ble High court Gujrat held as under :

"Scientific research expenditure-Failure by Prescribed Authority to furnish Form 3CL— R&L facility set up by assessee having been approved by Prescribed Authority and necessary approval granted in proscribed from; merely because the prescribed authority failed to send intimation in Form 3CL, would not be reason enough to deprive the assessee's claim of deduction u/s 35(2AB)"

60.6 In ‘CIT vs Sandan Vikas (India) Ltd’, 335 ITR 117 of 2011,

the Hon'ble Delhi High held that the Tribunal had considered R.6(5)

and Form No. 3CM and concluded that a plain and harmonious

reading of the Rule and the Form clearly suggested

ITA 350/CHD/2023 A.Y. 2017-18 90

that once the facility was approved, the entire expenditure on

development of research and development facility had to be

allowed for weighted deduction as provided by Section 35(2AB).

The Hon'ble Court further observed that the Tribunal had

considered the legislative intention behind the enactment and

had observed that to boost the research and development

facility, the Legislature had provided provision to encourage

the development of the facility by providing deduction of

weighted expenditure. The Hon'ble High Court stated that

what was stated to be promoted was development of the

facility, and the intention of the Legislature by making the

amendment was very clear that the entire expenditure incurred

by the assessee on development of the facility had to be

allowed for the purpose of weighted deduction.

60.7 In ‘CIT vs Claris Lifesciences Ltd.’ 326 ITR 251, the

Hon'ble Gujrat High Court observed that the Tribunal had

considered R.6(5) and Form No. 3CM and concluded that a

plain and harmonious reading of the Rule and the Form clearly

suggested that once the facility was approved, the entire

expenditure so incurred on development of research and

ITA 350/CHD/2023 A.Y. 2017-18 91

development facility had to be allowed for weighted deduction

as provided by s.35AB(2). The Hon'ble Court further mentioned

that they were in full agreement with the reasoning given by

the Tribunal and were of the view that there was no scope for

any other interpretation and also that the assessee was

entitled to claim weighted deduction in respect of the entire

expenditure incurred under s.35AB(2) of the Act by the

assessee.

60.8 In ‘Tejas Network Ltd vs DCIT & ANR’, 233 Taxman

426 of 2015, the Hon'ble High Court of Karnataka observed

that the AO was precluded from examining the correctness or

otherwise of the certificate issued by the prescribed authority

on the ground that it was either being contrary to facts or

contrary to the express provisions of the Act. The Hon'ble

Court further observed that when the assessee filed the report,

as indicated under s. 35(2AB) before AO, and sought

allowability of such expenditure, the AO would be exceeding

his jurisdiction if he examined that the certificate issued by

the prescribed authority was within the parameters of the

statutory provisions of the Act.

ITA 350/CHD/2023 A.Y. 2017-18 92

60.9. The ITAT Bangalore Bench in ‘M/s Natural Remedies

Pvt. Ltd. Vs ACIT’, ITA No.704/BANG/2020 vide order dated

01.01.2021 held as under :

Para 8

"The assessee has in-house Research and Development facilities which is approved by the Department of Scientific and Industrial Research (DSIR) and was entitled to deduction u/s 35(2AB) of the IT. Act. The Assessing Officer disallowed the deduction to the extent of Rs.43,12,042 on the ground that DSIR has not approved the expenditure in Form 3CL".

Para 8.2

"The Rules 6(7A) of the IT Act 1962 was amended by the Finance Act, 2016 with effect from 01.07.2016, wherein it provided that prescribed authority has to furnish electronically its report (i) in relation to approval of in- house R&D facility in Part A of Form No.3CL, and ii) quantifying the expenditure incurred in in-house R&D facility by the company during the previous year and eligible for weighted deduction under subsection (2AB) of section 35 of the I.TAct in Part B of Form No.3CL. In other words, the quantification of expenditure has been prescribed vide IT (Tenth Amendment) Rules, 2016 with effect from 01.07.2016 only. Prior to this amendment, no such power was with DSIR".

Para 8.5

"we hold that in the present case since the deduction is with reference to assessment year 2016-2017 (where the law applicable is the 1st day of April, 2016), which is prior to the Income Tax (Tenth Amendment) Rules, 2016,

ITA 350/CHD/2023 A.Y. 2017-18 93

with effect from 01.07.2016 of Rule 6(7A) of the I.TRules, deduction u/s 35(2AB) of the I.T.Act has to be allowed on the basis of the expenditure as recorded by the assessee in the books of account. Admittedly, the Assessing Officer has not disputed the correctness of the claim of expenditure incurred on Scientific Research. The contention of the DR that the amendment to Rule 6(7A) is procedural cannot be-accepted, since the amended rule stipulates a condition that apart from approval of in-house R&D facility of assessee, the expenditure also has to be quantified by the prescribed authority for weighted deduction u/s 35(2AB) of the I.T.Act". Therefore, the amended Rule 6(7) effect the substantive right of the assessee and cannot be termed merely as procedural.

60.10. The ITAT Bangalore Bench in ‘ Micro Labs Ltd. Vs ACIT’,

ITA No. 4/BANG/2014 vide order dated 04/01/2023 held as under :

"Clause (b) to Rule 6(7A) has been substituted by Income- tax (Tenth Amendment) Rules, 2016 w.e.f. 1st July, 2016, under which the prescribed authority has to furnish electronically its report (i) in relation to approval of in- house R&D facility in part A of Form No. 3CL and (i) quantifying the expenditure incurred on in-house R&D facility by the company during the previous year and eligible for weighted deduction under sub-s. (2AB) of s. 35 of the Act in part B of Form No. 3CL. In other words, the quantification of expenditure has been prescribed vide Income-tax (Tenth Amendment) Rules, 2016 w.e.f. 1st July, 2016. Prior to this amendment, no such power was with DSIR i.e. after approval of facility. Under the amended provisions, beside maintaining separate accounts of R&D facility, copy of audited accounts have to be submitted to the prescribed authority. These amendments to Rule 6(7A) are w.e.f. 1st July, 2016 i.e. under the amended rules, the prescribed authority as in part A give approval of the facility and in part B quantify the expenditure eligible for deduction under s. 35(2AB) of the act.

ITA 350/CHD/2023 A.Y. 2017-18 94

In this regard, as rightly pointed out, such aspect stands confirmed by sub-r. (7A) of r. 6 of IT Rules, as within subsisting (now amended w.e.f. 1st July, 2016, to provide for quantification of expenditure as well. The Finance Act, 2015 as amended to sub-s. (3) of s. 35 w.e.f. 1st April, 2016, providing for furnishing of reports in the manner to be prescribed. It is, thus, w.e.f. 1st April, 2016 that the provision has been made for approval of quantum of expenditure, for the first time". Therefore, the weighted deduction at two Times of the Expenditure on Research and development approved & certified by the prescribed authority as per Sec 35(2AB) in Rules 6 & 6(7A) should be allowed, as the assessee has fulfilled the conditions of Sec 35 (2AB) & relevant Rules 6 & 6(7A) of IT Rules during the year under considerations.

which, no contra decision has been cited before us, Ground

Nos. 4 and 5 are accepted.

funds from Private Sector Banks, i.e., CSB Bank Ltd. During

the year, the assessee got a One Time Settlement (OTS) with the

Bank, where under, the Bank waived off the principal amount of

loan of Rs.28,41,81,599/-.According to the assessee, the said loan

of the bank was a capital liability and it was never claimed as an

expenditure. The AO added the principal amount of the loan

waived, observing that the capital receipt on account of loan

account waived off amounting to Rs. 28,41,81,599/- needed to

be adjusted into fixed cost of assets for which the said loan

ITA 350/CHD/2023 A.Y. 2017-18 95

was used. The AO further observed that loan waver was

treated as capital receipt and no effect was provided on cost of

tangible or intangible assets as evident from schedules on

Depreciation. Therefore, loan waiver of Rs. 28,41,81,599/- was

disallowed and added to total income of the assessee.

Thereafter, the assessee submitted reply on 17.04.2021 and

quoted the judgement of the Hon'ble Supreme Court in the case

of ‘CIT vs Mahindra and Mahindra Ltd.’, wherein the Hon'ble

Apex Court had held that such waiver of principal amount of

loan could not be added u/s 41(1) and Section 28 (iv) of the

Act. The AO, then, mentioned at Pg. 17 of his order that,

"Regarding loan waiver, assessee has submitted some case laws

but same were found distinguishable and that as per section

2(24)(xviii) waiver by a body or agency is included in income."

62.1 The ld. CIT(A) held that the second limb of the argument was

with respect to taxability under 2(24)(xviii) and from perusal of the

same, it could be seen that the amount of Rs.28,41,81,599 was

within the ambit of taxation. Section 2(24)(xviii) was bought in on

the Statue Book by FA, 2016, wef 01/04/2016. The ld. CIT(A) further

held that the Section was to be applied in the year in which the

ITA 350/CHD/2023 A.Y. 2017-18 96

waiver/concession event had occurred. The Pune ITAT, in the

case of ‘Shapers India (P.) Ltd. vs DCIT’, 130 taxmann.com

409, dated 17/09/2021, lucidly explained the concept. The ld.

CIT(A) further mentioned that the logic behind Section

2(24)(xviii) was simple and clear that if the assessee had

received any subsidy or grant or waiver or concession or

reimbursement etc. in respect of an asset, which was otherwise

a capital receipt and further the same could not be reduced

from the actual cost of the asset or the w.d.v., then it should

be subjected to tax as an income of such year.

62.2 The ld. CIT(A) further observed that it was being run

through taxpayer funded monies; that all nationalised banks were

considered as 'State' under Article 12 of the Constitution of India

for the purpose of entertaining of proceedings under Article 226 of

the Constitution and for enforcement of fundamental rights under

the Constitution. Thus, CRB was included in the definition within

Section 2(24)(xviii). The ld. CIT(A) noted that it was also a

fact that the OTS was granted to the assessee for

Rs.28,41,81,599, which it had characterized to be capital in

ITA 350/CHD/2023 A.Y. 2017-18 97

nature; and that further, it was not the argument of the

assessee that the said amount had already been reduced from

the actual cost. The ld. CIT(A) held that an amount of

Rs.28,41,81,599 was to be taxed in AY 2017-18 as revenue

following section 2(24)(xviii).

62.3 The assessee contends that the disallowance has

wrongly been confirmed rejecting the assessee's contention

that the amount was in the nature of a capital receipt which

was not liable to be taxed.

62.4 A without prejudice argument has been raised that the

ld. CIT(A) has wrongly rejected the assessee's contention that

the AO had wrongly computed the disallowance and had

considered the entire amount of Rs.28,41,81,599/- as

principal, ignoring the fact that out of the total disallowance,

the amount of Rs.25,85,31,574/- is the amount of principal

and the balance amount of Rs.2,56,50,025/- is the interest

portion, which has already been disallowed separately by the AO.

order.

ITA 350/CHD/2023 A.Y. 2017-18 98

provisions of Section 2(24)(xviii) of the Act, it is available that

the amount of Rs.28,41,81,599/- is taxable; that Section

2(24)(xviii) was brought on the Statute Book by FA 2016, w.e.f.

01.04.2016; that as per the Section, if the assessee has

received any subsidy or grant or waiver or concession or

reimbursement, etc., in respect of any asset which is otherwise

a capital receipt and further, the same cannot be reduced from

the actual cost of the asset or the WDV, then it should be

subject to tax as an income of such year.

64.1 This, however, is not in consonance with the provisions

of Section 2(24)(xviii), which provides as follows :

“Assistance in the form of subsidy or grant or cash incentive or duty draw back or waiver or concession or reimbursement (by whatever name called) by the Central Government or a State Government or any authority or Body or Agency in cash or kind to the assessee.” 64.2 The above apart, the lender bank, undeniably, was a private

Bank, not either Central Government, or a State Government, or

any authority, or any Body, or any Agency. Therefore, as rightly

contended, under the provisions of Section 2(24)(xviii)

ITA 350/CHD/2023 A.Y. 2017-18 99

of the Act, waiver of loan cannot be added. It has not been

shown to be otherwise.

64.3 It is also to be seen that as per the decision of the

Hon'ble Supreme Court in the case of ‘CIT Vs Mahindra &

Mahindra Ltd.’, 96 taxmann.com 32 (S.C.), dated 24.04.2018,

relied on by the ld. CIT(A). The waiver of the principal amount

of a loan from a private bank cannot be taxed as income.

However, post ‘Mahindra & Mahindra’, Section 28 was amended

to bring to tax such a waiver of loan. However, such

amendment is prospective, to be effective from assessment year

2024-25. It is, therefore, not applicable retrospectively. The

contention of the assessee, in this regard is also correct.

64.4 Therefore, in view of the above discussion, the waiver of

the principal amount of loan cannot be treated as income

under Sections 2(24)(xviii), 28(iv) and 41(1) of the Act. The ld.

CIT(A) has clearly erred in holding the said waiver of loan to be

taxable under the provisions of Section 2(24)(xviii) of the Act.

As observed hereinabove, the lender is a private bank and not

a Government, either Central or State, or a Body, or an Agency.

Waiver of capital liability by a private Bank,

ITA 350/CHD/2023 A.Y. 2017-18 100

can, therefore, not to be treated as income. “Bank” does not

stand included in the provisions of Section 2(24)(xviii) of the

Act as applicable.

64.5 In this regard, in ‘Mahindra & Mahindra’ (supra), it has

been held as follows :

"On a plain reading of Section 28 (iv) of the IT Act, prima facie, it appears that for the applicability of the said provision, the income which can be taxed shall arise from the business or profession. Also, in order to invoke the provision of Section 28 (iv) of the IT Act, the benefit which is received has to be in some other form rather than in the shape of money. In the present case, it is a matter of record that the amount of Rs. 57,74,064/- is having received as cash receipt due to the waiver of loan. Therefore, the very first condition of Section 28 (iv) of the IT Act which says any benefit or perquisite arising from the business shall be in the form of benefit or perquisite other than in the shape of money, is not satisfied in the present case." 65. In view of the above, the assessee's grievance by way of

Ground No.6 is justified. It is accepted. The disallowance of

Rs.28,41,81,599/- is, therefore, deleted.

Order pronounced on 04.06.2024.

(KRINWANT SAHAY) (A.D.JAIN ) ACCOUNTANT MEMBER VICE PRESIDENT “Poonam”

ITA 350/CHD/2023 A.Y. 2017-18 101 आदेश क� �ितिलिप अ�ेिषत/ Copy of the order forwarded to : अपीलाथ�/ The Appellant 1. ��यथ�/ The Respondent 2. आयकर आयु�/ CIT 3. िवभागीय �ितिनिध, आयकर अपीलीय आिधकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 4. गाड� फाईल/ Guard File 5.

आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar