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2015 (10) TMI 22 - DELHI HIGH COURT

2015 (10) TMI 22 - DELHI HIGH COURT - [2015] 378 ITR 410 - Expenditure on interest claimed - whether could not be allowed in terms of Section 57 (iii) - Held that:- In the present case, the advancing of loan to SCL was a business decision taken by the Assessee out of commercial expediency. Further, the sanction letter of HSBC made it clear that the Assessee could draw loans up to the sanctioned limit as and when needed. The sanction letter also permitted the Assessee to further utilise the money .....

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2001. The income earned on the loan advanced to SCL was rightly offered to tax by the Assessee as 'income from other sources'. Since the interest paid to HSBC on the loan availed was in the nature of an expenditure wholly and exclusively laid out for the purpose of earning the interest income, it ought to be permitted to be netted against such 'income from other sources' in terms of Section 57 (iii).

There is also merit in the contention of the Assessee that for AY 2003-04, the CIT ( .....

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to be deleted and the netting of the interest paid on the borrowed sum against the interest income earned is allowed. - Decided in favour of assessee. - ITA 334/2014 & CM 10693/2014, ITA 336/2014 & CM 10696/2014 - Dated:- 21-9-2015 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr Kavin Gulati, Senior Advocate with Mr Sachit Jolly, Mr Rahul Sateeja, Mr Gautam Swarup, Mr Rohit Sthalekar and Ms Avi Tandon, Advs For the Respondent : Mr Kamal Sawhney, Senior Standing Counsel with Mr Ragh .....

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'AYs') 2002-03 and 2003-04 respectively. 2. The Assessee is engaged in the business of providing cellular services in the Delhi Region. The Assessee actually commenced its business from June, 2002. During the AY 2002-03 the Assessee availed of financing facilities from the HSBC Bank, Barakhamba Branch, New Delhi. HSBC's sanction letter dated 2nd August 2001, a copy of which has been placed on record, offered the Assessee a combined credit limit of ₹ 340 crores. The fixed rate o .....

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ber 2001, it was resolved that the Assessee would make available to its holding company Sterling Cellular Limited (SCL) a sum of ₹ 100 crores on terms and conditions to be decided by the Director of the Assessee. The Assessee has placed on record a copy of the relevant statement of account which shows that an amount of ₹ 25 crores was availed of by the Assessee as a loan from HSBC at 11.60% interest per annum on 24th December 2001. Immediately thereafter, on that very date, the Asses .....

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s after adjusting interest expenses of ₹ 77.86 lakhs. 5. For AY 2003-04 the Assessee filed its return on 2nd December 2003 declaring a loss of ₹ 2,62,87,59,740. The Assessing Officer (AO) by an order 29th March 2006 noted that for AY 2003-04 the Assessee had received interest in the sum of ₹ 81,00,165 on the loan advanced and had sought to set it off against the interest expenses. Referring to the decision of the Supreme Court in Tuticorin Alkali Chemicals and Fertilizers Ltd. .....

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ssued a notice under Section 148 of the Act on 28th March 2006 in response to which the Assessee stated that the revised return already filed on 2nd December 2003 may be treated as return in compliance with the said notice. The AO by an order dated 29th December, 2006 disallowed the set off on the ground that there was no nexus between the earning of the interest income by the Assessee and the payment of the interest to the bank on the loans borrowed by it for business purposes. The AO observed .....

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ed. The interest earned from advancing of the loan to SCL would be taxed separately as income from other sources. The AO accordingly made an addition of ₹ 78,86,987/- to the income of the Assessee for AY 2002-03. 7. The Assessee took the matter in Appeal to the Commissioner of Income Tax ['CIT (A)']. The CIT (A) by separate orders dated 13th October 2010 for AY 2003-04 and 15th July 2011 for the AY 2002-03 concurred with the corresponding orders of the AO. The CIT (A) held that &qu .....

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nced its business only in June 2002. The ITAT adopted the AO's finding that the Assessee had made a total borrowing of ₹ 598,01,05,218 up to 31st March 2002 and that it was out of the aforementioned total borrowings that a sum of ₹ 25 crores had been advanced and interest earned thereon. The ITAT too observed that the Assessee was not engaged in the business of money lending. The interest income earned by the Assessee was to be considered under the head 'income from other bus .....

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ns of Mr. Kavin Gulati, learned Senior counsel for the Assessee and Mr. Kamal Sawhney, learned Senior Standing Counsel for the Revenue. 11. Before discussing the facts of the case, it may be noticed that the provision in the Income Act, 1922 ('1922 Act'), corresponding to Section 57 (iii) of the Act, was Section 12. In Eastern Investments Limited v. Commissioner of Income-Tax (1951) 20 ITR 1 the Appellant was an investment company originally formed for acquiring, holding and otherwise de .....

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ntly needed by the executors of Lord Cable, an agreement was reached between the Administrator and the company under which the latter agreed to reduce its share capital of ₹ 50 lakhs by taking over from Mr. Scott the 50,000 shares at the rate of ₹ 100 per share. Mr. Scott on his part agreed to receive debentures of the face value of ₹ 50 lakhs carrying interest @ 5% per annum issued by the company which were redeemable at the option of the registered holder at any time. The com .....

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that the expenditure was a profitable one or that in fact any profit was earned. It was enough to show that "the money was expended not of necessity and with a view to a direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business." It was further held that the mere fact that the conversion had the effect of diminishing the taxable income of the company was not a proper consi .....

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ppellant's legitimate commercial undertakings in order indirectly to facilitate the carrying on of its business." 13. Analysing the clauses of the agreement in question in that case, the Supreme Court in Eastern Investments Limited (supra) held as under: "The matter is clearly "writ in the bond". Moreover, we do not think that this inquiry is relevant, for we are dealing with a question of income-tax and not judging the legality or propriety of the transaction on an appli .....

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d when the Court is deciding a question under Section 12 (2) of the Income Tax Act." 15. Subsequently in Commissioner of Income Tax v. Rajendra Prasad Moody (1978) 115 ITR 519 the Supreme Court addressed the question whether interest paid on money borrowed for investment in shares would be allowable as expenditure under Section 57 (iii) even where such shares had not yielded any dividend during the relevant AY. The Supreme Court explained that while Section 37 (1) of the 1961 Act provided f .....

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d fructify into any benefit by way of return in the shape of income." The Supreme Court answered the question urged in the affirmative, i.e., in favour of the Assessee and against the Revenue. 16. In S.A. Builders Limited v. Commissioner of Income Tax (Appeals) Chandigarh (2007) 1 SCC 781, the Assessee company had advanced loans to its subsidiary without charging any interest. The loans were transferred out of the cash-credit account of the Assessee in which there was a debit balance. The A .....

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matter to the ITAT for a fresh decision, the Supreme Court in S.A. Builders Limited (supra) explained that expression 'commercial expediency' was of wide import and included "such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency." In the said case, what was relevant was "whether the .....

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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. No businessman can be compelled to maximise 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 f .....

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the order of the ITAT which permitted the netting of the interest paid from the gross interest earned on the FDRs. It observed that "the interest paid was expenditure laid out and expended wholly and exclusively for the purpose of making or earning the interest income." 19. In Tuticorin Alkali (supra), which has been relied upon by the Revenue, the facts were that during the financial years relevant to AYs 1982-83 and 1983-84, although the Assessee company had not commenced its busine .....

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against the income assessable as 'income from other sources'. Importantly, it was noted that the company had "chosen not to keep its surplus capital idle, but has decided to invest it fruitfully" and that "the fruits of such investment will clearly be of revenue nature." It was held that the expenditure incurred by the company for the purpose of setting up its business in the pre-operative phase cannot be allowed as deduction, nor can it be adjusted against any other .....

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perly entered into as a part of the Assessee's legitimate commercial undertaking in order indirectly to facilitate the carrying on of its business. (ii) The expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. In other words, if it is such expenditure as a prudent businessman would incur for the purpose of business. (iii) Once it is established that there was nexus between the ex .....

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n borrowed would not be permitted to be netted against such interest income in the pre-operative phase. 21. The Court notes that the Revenue was under a basic misconception that the Assessee was using a part of its 'surplus' borrowed funds to advance a loan to SCL, its holding company. As already noticed, the Assessee had not advanced a sum of ₹ 25 crores from the surplus funds already borrowed by it for the purpose of setting up its business. The facts of this case are, therefore, .....

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