Builders Ltd. Vs. Commissioner of Income Tax (Appeals) Chandigarh & Anr  Insc 964 (14 December 2006)
B. Sinha & Markandey Katju
out of Special Leave Petition Nos. 21707-21710/2004) [with CA Nos. 5812 /2006 @
SLP(Civil) Nos. 1300-1301/2005] MARKANDEY KATJU, J.
two appeals involve common questions of law and fact and hence are being
disposed of by a common judgment.
the leading case is that of S.A. Builders [SLP(C) 21707- 21710/2004], we shall
be taking note of the facts of this case.
appeals have been filed against the impugned judgment of the Punjab and Haryana High Court dated
13.5.2004 in Income Tax Appeal Nos. 6, 7, 119 and 120 of 2003, and the judgment
dated 21.5.2004 in ITA No. 117/118 of 2003.
learned counsel for the parties and perused the record.
the course of the proceeding for the relevant assessment year(s), the Assessing
Officer under the Income Tax Act observed that the assessee had transferred a
huge amount of Rs. 82 lakhs to its subsidiary company M/s. SAB Credits Limited
out of the cash credit account of the assessee in which there was a huge debit
balance. He, therefore, held that since the assessee had diverted its borrowed
funds to a sister concern without charging any interest, proportionate interest
relating to the said amount out of the total interest paid to the bank deserved
to be disallowed.
he disallowed a sum of Rs. 5, 66, 729/- .
preferred an appeal to the Commissioner of Income Tax (Appeals) Chandigarh [for short hereinafter referred to
as the CIT(A)], who vide his order dated 15.4.1993 partially accepted the claim
of the assessee.
to the CIT (A), out of the total amount of Rs. 82 lacs advanced by the assessee
in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs.
18 lacs had a clear nexus with the borrowed funds, as the balance amount had
been paid out of the receipts from other parties to whom no interest had been
paid. Accordingly, the CIT(A) directed the Assessing Officer to calculate
disallowance of interest only relating to the sum of Rs. 18 lacs, and the
disallowance was reduced accordingly.
the assessee as well as the Revenue filed appeals before the Income Tax
Appellate Tribunal (hereinafter referred to as the 'Tribunal').
Tribunal by its order dated 20.6.2002 allowed the appeal of the Revenue, and
held that the entire amount of Rs. 82 lacs had been advanced by the assessee by
utilizing the overdraft account, and hence it was of the view that disallowance
made by the Assessing Officer was justified.
the appeal filed by the Revenue was allowed and the appeal field by the assessee
the order of the Tribunal, the assessee filed appeals in the High Court which
were dismissed by the impugned judgment.
assessment year 1991-92, the Assessing Officer noticed that in addition to the
sum of Rs. 82 lacs advanced in the assessment year 1990-91, a further sum of Rs.
37,85,000/- had been advanced to M/s. SAB Credits Ltd which also had a clear
nexus with the amounts borrowed by the assessee on payment of interest.
Accordingly, the Assessing Officer disallowed proportionate interest relatable
to these amounts amounting to Rs. 20,08,836/-.
appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer
that the sum of Rs. 37,85,000/- advanced during assessment year 1990-91, was
relatable to the borrowed funds. However, in view of the findings of her
predecessor in assessment year 1990-91, that out of Rs. 82 lacs advanced during
that year, advance of Rs. 64 lacs had no nexus with the borrowed funds, she
reduced the disallowance from Rs. 20,08,836 to Rs. 10,03,538/- vide her order
dated 28.7.1994. The assessee was granted further relief of Rs. 1,48,464/- by
the CIT(A) vide order dated 6.9.1995 under Section 154 of the Act. On the
cross-appeals filed by the assessee as well as the Revenue, the Tribunal
following its order for assessment year 1990-91, upheld the disallowance as
made by the Assessing Officer. Accordingly, the appeal of the revenue on this
issue was allowed and that of the assessee dismissed.
this decision also, the assessee filed an appeal before the High Court.
impugned judgment dated 13.5.2004, the High Court held that the Tribunal had
recorded a categorical finding of fact that the amount advanced by the assessee
to M/s. SAB Credits Limited by utilizing the overdraft account and that on the
date on which the amount was advanced there was no credit balance in the bank
account of the assessee. The Tribunal further observed that the assessee has
not been able to explain the purpose for which the amount had been advanced to
its sister concern without charging any interest and there was no material on
record to show that the assessee had derived any business benefit by advancing
the interest free amounts to its sister concern.
High Court held that since it stands established that the amount of Rs. 82 lacs
and Rs. 37.85 lacs 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 suffer from any factual or legal
infirmity. Accordingly, the High Court dismissed the appeal.
counsel for the appellant-assessee submitted that the High Court has erred in
failing to consider the fact that the appellant had made the advances to its
sister concern by withdrawals from its bank accounts in which there was
sufficient credit balance as the appellant had received payments from its
clients. It is an admitted fact that the appellant had received these payments
from its clients and had deposited these in the account out of which advances
were subsequently made to the sister concern. These deposits/payments/advances
of Rs. 82 lacs as and when received and made by the appellant to its sister
concern, namely, SAB Credits Ltd in the Assessment Year 1990-91 are reproduced
hereunder in a tabular form:
Date Ch. No.
Name of Bank Course of funds 16.9.1989 683366 24.00 lacs State Bank of Patiala,
CC Account Amount received from R.C.I., Hyderabad, a client 25.9.1989 684404
18.00 lacs -do- From cash credit account (Debit balance account) 27.12.1989
676546 20.00 lacs -do- From Indian Acrylics Ltd., a client 12.01.1990 476582
20.00 lacs -do- -do- Rs. 82.00 lacs ---------------- Learned counsel for the
appellant submitted that a perusal of the above tabular statement makes it
apparent that such payments as claimed were in fact received and deposited.
Thus, there is no direct nexus between the amount borrowed by the appellant-assessee
from the bank and the loans advanced by the appellant-assessee to its sister
concern, as no amount was so advanced by raising an interest bearing loan.
counsel submitted that the High Court has erred in not considering the
categorical finding of the CIT(A) in this regard. He further stated that the
CIT(A) in its order dated 15.4.1993 had given a clear finding of fact that
except a sum of Rs. 18 lacs there was no clear nexus between the amount
received on interest and the interest free advance made to M/s. SAB Credits
Limited. He further stated that the amount of Rs. 24 lacs, 20 lacs and 20 lacs
respectively, were not paid out of the cash credit account but were paid out of
the receipts from other parties to whom no interest had been paid. The amount
of Rs. 18 lacs was paid out of the cash credit account because there was a
debit balance of Rs. 18 lacs on that date and, therefore, a clear nexus is
proved in respect of the amount of Rs. 18 lacs in the interest bearing loans
and interest free advances. On this view, the CIT(A) held that the Assessing
Officer should have only disallowed interest relatable to Rs. 18 lacs and not
the entire amount of Rs. 82 lacs.
counsel for the appellant submitted that even this disallowance of Rs. 18 lacs
by the CIT(A) was erroneous and the entire sum of Rs. 82 lacs should have been
paragraph 35-41 of its order the Tribunal has considered in detail the question
of allowability of the interest amount on the borrowed funds.
Tribunal was of the view that the assessee had given an advance of Rs. 82 lacs
to its sister concern without charging any interest. The Tribunal further
observed that there was no material on record to show that the assessee derived
any business advantage by advancing an interest free amount of Rs. 82 lacs to
its sister concern. It referred to several decisions in support of the view
which it took.
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.
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.
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 earning income, profits or gains", and this has been the consistent
view of this Court.
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
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.
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.
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.
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.
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 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.
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.
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
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
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.
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.
is relevant is whether the assessee advanced such amount to its sister concern
as a measure of commercial expediency.
counsel for the Revenue relied on a Bombay High Court (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.
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
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.
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.
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.
also make it clear that we are not setting aside the order of the Tribunal or
other Income Tax authorities in relation to the other points dealt with by
these authorities, except the point of deduction of interest on the borrowed