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Income Tax Appellate Tribunal, CIRCUIT BENCH, VARANASI
Before: SHRI.VIJAY PAL RAO & SHRI RAMIT KOCHAR
IN THE INCOME TAX APPELLATE TRIBUNAL CIRCUIT BENCH, VARANASI (THROUGH VIRTUAL HEARING) BEFORE SHRI.VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ITA Nos.22 & 23/VNS/2020 Assessment Years: 2012-13 & 2013-14 M/s Avantika Infraventures (P) Ltd., v. DCIT, 37, Elgin Road, Civil Lines, Central Circle, Varanasi Allahabad-211001 PAN- AAICA5295N (Appellant) (Respondent) Appellant by: None Respondent by: Sh. R.K. Vishwakarma, CIT DR Date of hearing: 11.10.2022 Date of pronouncement: 13.10.2022 O R D E R SHRI VIJAY PAL RAO, J.M. These two appeals by the assessee are directed against the two separate orders of CIT(A) both dated 10.10.2019 for the assessment years 2012-13 and 2013-14, respectively. 2. None has appeared on behalf of the assessee despite repeated notices were sent through RPAD as well email on the email ID given in Form No. 36. It transpires from the record that after filing this appeal, the assessee has never made its presence and the hearing of these appeals has been adjourned from time to time due to non-appearance on behalf of the assessee. Thus, despite best efforts by sending notices through RPAD as well as on email, the assessee has not turned up to argue the case. Accordingly, the Bench proposes to hear and dispose of these appeals ex parte on the basis of the material available on record.
ITA Nos.22 & 23/VNS/2020 M/s Avantika Infraventures (P) Ltd.
The assessee has raised the common grounds in these appeals. The grounds for the assessment year 2012-13 are reproduced as under:- “1. Because the Ld. CIT (A) has erred on facts and under the law in confirming the disallowance of Rs.12,10,134/- made by the Ld. AO in respect of interest on loan advanced to the sister concern of the assessee. 2. Because the Ld. Lower Authority has erred in making addition of Rs.10,134/- for interest of loan advanced to M/s Tulsiani Construction and Developers (P) Ltd. claiming that the loan has been made out of interest bearing funds. 3. Because the Ld. Lower Authority has also erred in making addition of Rs.12,00,000/- for interest of loan advanced to Grace Infraventure (P) Ltd., without appreciating the fact that the appellant and his sister concern, both are engaged in same nature of business i.e. real estate business and the loan advanced to the sister concern has been utilized for the purchase of land i.e. for business purpose. 4. Because the LD. Lower Authority has erred in making addition to the assessment year in question as the assessment for the year has been completed on the date of search and it is settled law that no addition can be made in case of completed assessment in absence of any incriminating material found during the course of search operation. 5. Because the addition are solely based on hypothetical situations, surmises, conjecture and personal presumptions as well as without proper verification/consideration of material and details available on record, hence the same is liable to be deleted. 6. Because the Ld. AO has also erred in charging interest u/s 234A of IT Act while computing the demand. 7. The assessee craves leave to add/alter any of the grounds of appeal before or at the time of hearing.”
The solitary common issue arises in these two appeals for the assessment years 2012-13 and 2013-14 is regarding disallowance of claim of deduction of interest for advancing interest free loan to the sister concerns. During the assessment proceedings under section 153A r.w.s. 143(3), the AO issued a show cause notice to the assessee as to why disallowance under section 36(i)(iii) of the Income Tax Act should not be done in respect of interest deduction claimed on borrowed fund as it was not utilized for the business of the assessee but was used for advancing interest free loan to the sister concerns. The assessee, in reply to show cause has contended that the 2
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loan of Rs. 75 Lac given to M/s Tulsiani Construction and Developers (P) Ltd. and Rs. 1 Crore to M/s Grace Infraventures Limited was for commercial expediency. Therefore, the assessee contended before the AO that no disallowance is called for when the interest free loan was advanced to the sister concerns which were also engaged in the similar business. The assessee relied upon the decision of Hon’ble Supreme Court in the case of S.A. Builders Limited vs. CIT(A), Chandigarh 288 ITR 1. The AO did not accept this contention of the assessee and made the disallowance of Rs. 12,10,134/- as proportionate interest expenditure in respect of the borrowed fund utilized for other than the business purpose of the assessee. The assessee challenged the action of the AO before the CIT(A) but could not succeed. 5. Since, nobody appeared on behalf of the assessee nor any request for adjournment has been filed therefore, we do not have privilege to hear the assessee. However, we find that the assessee has been taking a consistent stand right from the assessment proceedings as well as before the CIT(A) that the amount advanced to the sister concerned are used for business purpose and therefore, there was a commercial expediency in advancing loans to sister concerns. The assessee in the statement of facts as part of Form 35 has stated in para 8 to 11 as under:- “8- The assessee has explained has explained during the assessment proceedings that the amount advanced to Grace Infraventures Pvt. Ltd. of Rs.1 crore have been exclusively used for business purpose. The assessee relied upon the case law of Apex Court in case of S.A. Builders Ltd., wherein it has been held that Section 36(1)(iii) of the Act states that interest paid in respect of capital borrowed for the purpose of business or profession is to be allowed as a deduction in computing taxable income. The expression "for purposes of business or profession" occurring in Section 36(1)(iii) of the Act is wider in scope than the expression "for the purpose of earning income, profits or gains". Accordingly, expenditure voluntarily incurred on the test of commercial expediency is to be allowed as a deduction. It is immaterial if a third party also benefits by the said expenditure. The expression "commercial expediency" is again of wide 3
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import and includes such expenditure incurred for the purpose of business. Therefore, once it is established that there was a nexus between expenditure and purpose of business, which need not be the business of the assessee, deduction under Section 36(1)(iii) of the Act must be allowed. Revenue cannot assume the role and occupy armchair of a businessman to decide whether expenditure was reasonable. The Revenue cannot look at the matter from its own standpoint, but that of a businessman. Money borrowed, even when advanced to a sister concern for some business purpose, would qualify for deduction of interest. 9- Besides, the amount paid to Tulsiani Construction and Developers Pvt. Ltd. of Rs.75 lacs was against the repayment of loan taken from the company of Rs.78 lacs. Hence, there arises no question of disallowance of interest on the said figure. The Ld. Assessing Officer has himself observed in the assessment order passed that there is credit balance in the account of M/s Tulsiani Construction Pvt. Ltd. only for few days at the end of the year. The said advance has been made by the assessee company out of the interest free fund available with the assessee and hence, no disallowance u/s 36(i)(iii) can be made. Besides, as a matter of fact, no interest has been charged by the M/s Tulsiani Construction Pvt. Ltd. on the amount payable by the assessee-company during the year under consideration. Therefore, the assessee-company has also not charged any interest on the amount receivable from the above said company. 10- The assessee also contended during the assessment proceedings that since no incriminating material was unearthed during search, no additions could have been made to income already assessed as the assessment for assessment year in question had already been completed on date of search. The assessee also relied upon the case laws of Delhi High Court as affirmed by Apex Court in support of its contention. 11. However, the Ld. Assessing Officer has summarily brushed aside all the above submissions made by the assessee and facts of the case of the assessee which were available on record and has made addition of Rs.12,10,134/- by disallowance of interest u/s 36(1)(iii) of the Income Tax Act, which is based purely on surmises, conjectures and personal presumptions.”
From the averments made in the above submissions of the assessee, it is clear that the assessee is taking only legal plea that the advance given to the sister concerned has been exclusively used for business purpose and therefore, in view of the of the judgment of Hon’ble Supreme Court in the case of S.A. Builder vs. CIT(A) (supra), the interest expenditure on the borrowed fund is allowable deduction as the expenditure voluntarily incurred even by advancing 4
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the interest free loan to the sister concerned to satisfy the test of commercial expediency. The assesssee has contended that money borrowed even when advanced to sister concern for some purpose would qualify for deduction. The second contention has been raised by the assessee that the advance has been made by the assessee company out of interest free funds available with the assessee hence, no disallowance under section 36(i)(iii) can be made. 7. On the other hand, learned CIT DR has submitted that the AO has given the facts in para 5.5 of the assessment order which reveals that the interest free advance was given to the sister concerned directly from the term loan account with PNB therefore, there is no ambiguity about the fact that the interest bearing fund has been used by the assessee in giving interest free advance to the sister concerns. The learned CIT DR has further contended that the assessee has taken only a legal plea but has not brought on record any fact to establish that the interest free loan was advanced by the assessee to the sister concerns for commercial expediency or business purposes. He has relied upon the finding of the AO as well as the learned CIT(A). 8. We have considered the submissions of the assessee as raised before the authorities below as reproduced in the foregoing paras of this order as well as the contention of the learned CIT DR. We have also carefully perused the impugned orders of the authorities below to get the relevant facts on this issue. The AO in para 5.5 has considered the relevant facts and this issue as under:- “Examination of assessee’s Case: 5.5 In the instant case, the assessee has disbursed Rs. 75,00,000/- to M/s Tulsiani Construction and Developers Private Limited and Rs. 1,00,00,000/ to M/s Grace Infraventures Private Limited respectively from its PNB Term Loan Account. i. Whether the loan was provided for business purposes: The first test for allowability of deduction u/s 36(1)(iii) is that, whether the advances disbursed by the company was expressly for the purpose of business and profession. The assessee while responding to question on loans and advances received and given in para 2 arid para 3 respectively of its reply dated 02.11.2018 has failed to state 5
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any reason or establish any relation for advancement of such loan. Again in its reply dated 22.11.2018 the assessee has submitted that, "It is pertinent to mention that the assessee company has received/made interest free loan/advances from Tulsiani Construction & Developers Ltd. Mahesh Naresh Hul. New Tilak Chemist, Anil Kumar Tulsiani...etc whose assessment proceedings are pending with your goodself. Here again, the assessee has not established any nexus between such receipt/payment with its business needs nor any commercial expediency has been highlighted. It was only when, show-cause was issued to the assessee vide order sheet entry dated 22.11.2018, regarding disallowance of interest u/s 36(1)(iii) the assessee submitted that, "Rs. 75,00,000/- was advance to Tulsiani Construction & Developers Limited and Rs. 1,00,00,000/- to Grace Infraventures Private Limited These companies are the sister concern of the assessee and both the amount was used for the purpose of business by the companies. As the said amount has been use for purpose of business only and no disallowance u/s 36(1)(iii) is variant." It is amply clear from the above replies that assessee has tried to evade the question of purpose for which such loan was either advanced or received. The assessee has taken shelter of judicial pronouncement in the case of S.A. Builders vs CIT. Although, the decision is pending for reconsideration before the Hon'ble Supreme Court (as discussed supra), yet, it must be noted the submissions made by the assessee even fails the test of "commercial expediency" laid down in the said judgement and various other judgments. The assessee has failed to highlight any fact or produce any evidence to establish that it was commercially expedient or necessary to advance the loan to its sister concern. As discussed in the superseding para, since the assessee has failed to provide any evidence lest convincing one, it clear fails the test for utilization of funds for business purpose. Therefore, interest on borrowed capital is liable to be disallowed on this count. ii. Source of disbursal of loan amount: From the material available on record, it has been observed that, the assessee has disbursed the said loan(s) from its PNB Term Loan Account. (a) To Grace Infraventures Pvt. Ltd. on 07.04.2011 - Rs. 1,00,00,000/- (b) To Tulsiani Construction and Developers Pvt. Ltd in March 2012 – Rs. 75,00,000/- Apart from the above amount, Rs. 68,00,000/- has been given to M/s Magic Bricks Pvt. Ltd. Total amount of interest claimed by the assessee as per Audit Report is Rs. 40,48,349/-. Therefore, interest at a rate of 12% is being disallowed and added back to the income of the assessee. Calculation of disallowance u/s 36(i)(iii) of the Income Tax Act:
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For Grace Infraventure: Proportionate Disallowance : (12*1,00,00,000/-) 100 = Rs. 12,00,000/- For Tulsiani Construction and Developers Pvt. Ltd.: On perusal of term loan account and ledger of Tulsiani Construction and Developers Pvt. Ltd. maintained by the assessee it was observed that, both debit and credit entries exists and it was only in March that a sum of 51 Lakhs was given to the assessee. Therefore, a proportionate disallowance on this amount has been made. Proportionate Disallowance a) (Rs. 12x25,00,000/-) x 1 x 8 100 12 30 = Rs. 6,667/- b) (Rs. 12x26,00,000/-) x 1 x 4 100 12 30 = Rs. 3,467/- c) Total Disallowance in case of TCDL Rs. 10,134/- Therefore, total disallowance on account of section 36(i)(iii) of the Act, turns out to be Rs. 12,10,134/-. In light of the facts presented in preceding paras, proportionate amount is being disallowed and added back to the income of the assessee. Penalty proceedings u/s 271(1)(c) of the Income Tax Act, 1961, is being initiated separately for concealment of income.” 9. Thus, it is clear that the AO has stated the fact that the assessee advanced the interest free loan to the sister concerns which was disbursed from PNB term loan account. This fact has not been disputed by the assessee as the amount was disbursed directly from PNB loan account. Therefore, the contention of the assessee that the assessee was having sufficient interest free fund for advancing the loan to the sister concerned is contrary to the facts on record. Even otherwise, this fact of advancing the loan to the sister concerns from the PNB term loan is based on independent evidence of term loan account of the assessee with PNB.
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The next contention of the assessee is that the interest free loan was advanced to the sister concerned for business purpose and commercial expediency has been considered by the CIT(A) in its finding in para 7 and 8 as under:- “7. Through these grounds of appeal the appellant has objected to the proportionate disallowance of Interest paid on borrowed funds by the AO. The appellant has contended that the Money was used for business purpose by M/s Grace Infraventures (P) Itd and M/s Tulsiyani Construction Pvt. Ltd. It was contended that the appellant had sufficient Interest free funds at its disposal to advance the amount to M/s TCPL. During the course of assessment proceedings the AO noted that the appellant had disbursed interest free advances of Rs. 51,00,000/- and Rs. 1,00,00,000/- to M/s Tulsiyani constructions and M/s Grace infraventures Pvt. Ltd. respectively. The advance remained outstanding till the end of financial year under consideration. The AO disallowed proportionate amount of Interest u/s 36(1)(vil) of the Act. I have perused the assessment order of the AO and the submissions made by the appellant in this regard. It is pertinent to examine the provisions of section 36(1)(vii) of the Act. A bare reading of Section 36(1)() is as follows: "36(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in Section 28- (1) and (ii)** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation- Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause." The expression "for the purpose of business" occurs in Section 36(1)() and also in Section 37(1). A similar expression with different wording also occurs in Section 57(1) which reads as "for the purpose of making or earning income". This issue came up for consideration before the Supreme Court and the Hon'ble Supreme Court while giving judgment in the case of Madhav 8
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Prasad Jatia V. CIT, (SC) 118 ITR 200 has established that the expression occurring in Section 36(1)(i) is wider in scope than the expression occurring In Section 57(ii). Thus, meaning thereby that the scope for allowing a deduction under Section 36(1)(i) would be much wider than the one available under Section 57(iii). This phrase, as held by many legal pronouncement, is the most Important yardstick for the allowability of deduction Under Section 36(1)(ii) of Income Tax Act, 1961. While explaining the meaning of this phrase the Hon'ble Supreme Court in the case of S. A. Builders Ltd. Vs. CIT(A), Chandigarh reported in 288 ITR 1 has used the word "commercial expediency". By using this phrase Hon'ble Supreme Court has given a new dimension and clarified the concept further. In the judgment the Supreme Court has defined commercial expediency as "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". Further, following this judgment the High Court of Delhi, In the case of Punjab Stainless Steel Inds. Vs. CIT 324 ITR 396, has further elaborated "The commercial expediency would include such purpose as is expected by the assessee to advance its business Interest and may include measures taken for preservation, protection or advancement of its business interests, which has to be distinguished from the personal Interest of its directors or partners, as the case may be. In other words, there has to be a nexus between the advancing of funds and business interest of the assessee-firm. The appropriate test in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". Thus, for allowance of a claim for deduction of Interest under this provision following three conditions are there: (i) The money, that is capital, must have been borrowed by the assessee (ii) It must have been borrowed for the purpose of business. (iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an Item of expenditure. The above mentioned three conditions have been established legally by Supreme Court judgment in the case of Madhav Prasad Jatia Vs. CIT, (1979) 118 ITR 200 (SC). The Hon'ble Supreme Court has also delved into the case where there would be mixed fund at the disposal of the assessee. It further clarifies that under 9
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Section 36(1)(i) the ultimate use of the fund is Important. It may not be relevant as to whether the advances have been extended out of the borrowed funds or out of mixed funds which Include borrowed funds. The test to be applied in such cases is not the source of the funds but the purpose for which the advances are extended. One Important case law on this issue is Punjab Stainless Steel Ltd. 324 ITR 396 (Delhi High Court), the Ahmedabad Bench of ITAT has also followed this principle in Inamulhaq S. Iraki Vs. Addl. CIT, Range-2, Ahmedabad in ITA No. 243/Ahd/201 1 for A.Y. 2007-08 dated 31.01.2012. In this judgment the Hon'ble ITAT has squarely followed Hon'ble Delhi High Court decision Punjab Stainless Steel Ltd. 324 ITR 396, the relevant para (11) is reproduced below for the sake of ready reference. "We find that as per this judgment of Hon'ble Delhi High Court, where mixed funds are used for the purpose of giving Interest free advances, the only relevant test is as to whether such interest free advances are due to commercial expediency or not. In the present case also, the funds are mixed funds and the assessee could not establish any commercial expediency and hence, in our considered opinion, this issue is squarely covered against the assessee by this judgment of Hon'ble Delhi High Court and respectfully following the same, this issue is decided against the assessee". The Hon'ble ITAT Hyderabad in the case of Ravindra Singh Arora Vs. ACIT (2012) 53 SOT 124 (Hyderabad) in regard to disallowance of interest u/s.36(1)(iii) has held as under: 37. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the. Assessing Officer that whatever loans were raised by the assessee, the some were used for business purposes. If In the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee Is Incurring liability to pay interest, there was justification to advance loans to sister concerns for non business purposes without any Interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. 38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do not have any different colour. Whatever are the receipts in the business, that have the colour of business receipts and have no separate identification. Sources has no concern whatsoever. The only thing sufficient to disallow the interest paid on the borrowing to the extent the amount is 10
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lent to sister concern without carrying any interest for non-business purposes would be that the assessee has some loans or other interest bearing debts to be repaid. In case the assessee had some surplus amount which, according to it, could not be repaid prematurely to any financial institution, still the same is either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that it is diverted towards ITA No.891/PN/2013 sister concern free of interest. This would result in not presenting true and correct picture of the accounts of the assessee as at the cost being incurred by the assessee, the sister concern would be enjoying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loons to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 39. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital Introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is diverted to sister concerns for non- business purposes without interest, a plea is sought to be raised that the amount advanced was out of its capital, which in fact stood exhausted in setting up of the unit Such a plea may be acceptable at a stage when no loans had been raised by the assessee at the time of disbursement of funds: This 'would depend on facts of each case.. 40. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others 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)(a) of the Act." 8. In this case the appellant has not submitted any explanation regarding the purpose of advancing Interest free advance to its sister concern. It was submitted that the money advanced by the appellant was used by M/s Grace Infraventures Ltd. for purchase of land and that both the entities are engaged in the same line of business. However the appellant has falled to establish the 'commercial expediency' for which the said amount was given and as to how the business of the appellant company was preserved, protected or advanced from the same. The appellant has relied upon the aforesaid judgment in support of his contention, however these judgments are, in fact are against the 11
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appellant. In view of the above and following the ratio of Judgments discussed above, find that the appellant has failed the test of establishing commercial expediency as envisaged by the Hon'ble Apex court regarding the interest free advance provided by the appellant, furthermore the source of funds for providing the advance is not relevant as per the ratio of the judgment made in the case of Punjab Stainless Steel Ltd. 324 ITR 396 (Delhi High Court), accordingly the addition made by the AD of Rs. 12,10,134/- is upheld.” 11. We have also given a deep thought on the contention of the assessee regarding the commercial expediency for granting interest free loan to the sister concerns but we could not find a single fact in support of the said contention of the assessee. The assessee has not uttered a single word before the AO as well as before the CIT(A) to show that there were business transactions between the assessee and these two sister concerns which has necessitated to advance interest free loan to the sister concerns. Therefore, in the absence of any reference to any business transaction between the assessee and the sister concerns, the plea of commercial expediency cannot be accepted. The assessee has miserably failed to establish a case of commercial expediency or business exigency in granting interest free loan to the sister concerns by utilizing the borrowed fund. The Hon’ble Supreme Court in the case in the case of S.A. Builder Limited vs. CIT(A) has observed in para 18 to 36 as under:-
“18. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 19. In this connection we may refer to Section 36(1)(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 tax under Section 28 of the Act. 20. In Madhav Prasad Jantia vs. Commissioner of Income Tax U.P. 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 12
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earning income, profits or gains", and this has been the consistent view of this Court. 21. 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) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1, CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other Income Tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. 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. 26. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), 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 13
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named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 27. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 28. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 29. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression " for the purpose of earning profits" vide CIT vs. Malayalam Plantations Ltd. (1964) 53 ITR 140, CIT vs. Birla Cotton Spinning & Weaving Mills Ltd (1971) 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction under Section 36(1)(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 32. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct.
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We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.” 34. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. 35. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above.”
The Hon’ble Supreme Court has held that if the interest free loan given to the sister concern has been advanced as a measure of commercial expediency, than the interest on the borrowed fund used for advancing the loan to the sister concern is an allowable deduction. However, it is also made clear that it does not mean that in every case, interest on borrowed fund has to be allowed if the assessee advances to the sister concern. It all depends on the facts and circumstances of the respective case. Therefore, the said decision of 15
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Hon’ble Supreme Court would not help the case of the assessee when the assessee has not brought any fact on record to establish that there was a commercial expediency or business exigency in advancing the interest free loan to the sister concerns. In view of the above discussion and having regard to the facts and circumstances of the case, we do not find any error or illegality in the impugned order of the CIT(A). 13. The issue for the assessment year 2013-14 is identical and also based on the identical facts being the same amount of loan and advances for Assessment Year 2012-13 was continue for the next assessment year. Accordingly, the solitary common issue is decided against the assessee. 14. In the result, the appeals of the assessee for the Assessment Years 2012-13 and 2013-14 are dismissed. Order pronounced in virtual court proceedings on 13.10.2022 at Allahabad, U.P.
Sd/- Sd/- [RAMIT KOCHAR] [VIJAY PAL RAO] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED: 13/10/2022 Allahabad/Varanasi Sh Copy forwarded to: 1. Appellant-M/s Avantika Infraventure (P) Ltd. 2. Respondent-DCIT, Central Circle, Varanasi 3. CIT(A) 4. CIT 5. DR By order Sr. P.S.