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.

2. The following Grounds have been raised:

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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.

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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.

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(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.

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.

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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.

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.

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.

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.

The issue is as to whether the addition of Rs.13,26,09,358/- has correctly been made and confirmed.

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.

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 that average rate of interest be worked out for disallowance.

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).

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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.

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', 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).

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

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.

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.

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

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.

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.

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.

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

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.

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’, 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’, 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.

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.

ITA 350/CHD/2023 A.Y. 2017-18 98

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.

Order pronounced on 04.06.2024.