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TMI Blog2015 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... se on Overdraft. Therefore, mode of lending should not prejudice the Appellant's claim of deduction. 3.1 In alternative and without prejudice to above, the Appellant is in the business of money lending and consequently, interest paid of Rs. 16,68,880/- be allowed as a deduction u/s 36(1)(iii) of I. T. Act, 1961." 2. The assessee has filed the appeal late by 1 day and in support of which the assessee has filed application for condonation of delay and affidavit along with medical certificate to support her contention for delay of 3 days due to medical reasons due to the illness of the assessee from the period from 29th December 2012 to 4th January 2013. The assessee counsel submitted that delay is of 1 day and not 3 day as per affidavit submitted as the appeal ought to have been filed on 4th January 2013 but was filed on 7th January 2013, the 5th and 6th January 2013 being Saturday and Sunday were holidays. We accept the contentions of the assessee and condone the delay in filing appeal. 3. The facts of the case are that the assessee has filed its return of income on 31.03.2010, declaring total income of Rs. 29,76,148/-, which was selected for scrutiny. During the course of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on cannot be accepted . The assessing officer relied upon the decision of Hon'ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. 286 ITR 1 (P&H) and disallowed the claim of deduction of interest of Rs. 16,68,880/- on overdraft paid to the SCBL u/s 57 of the Income Tax Act,1961 (Hereinafter called "the Act"). 5. Aggrieved, the assessee carried the matter in appeal before CIT(A) and submitted as under : "That the assessee had sufficient own funds of Rs. 12.43 crores and interest free borrowing of Rs. 4.09 Crores (total 16.73 Crores) as against Rs. 13.32 Crores of interest free investments and loans. Thus, where there are funds available which are interest free and interest bearing, then a presumption would arise that interest would be out of interest free funds generated or available with the company, provided that they are sufficient to meet such investments. That the assessee had desired to give a short term interest free loan to the 2 companies. However, as there were no funds immediately available, an overdraft was taken so that there would be no penal charges for pre-mature encashment of FD and also continue to earn high interest rate. If the FD w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and hence the presumption of decision of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. (Supra ) is rebutted. He also held that the assessee's own fund are invested with other four parties from whom the interest is being received of Rs. 20,55,355/- and assessee has also invested its own funds in FDR of Rs. 2 crores with SCBL. The CIT(A) held that decision of CIT v. Abhishek Industries Limited 286 ITR 1 is squarely applicable to the case of the assessee. The CIT(A), therefore, upheld the disallowance of claim of the deduction of interest of Rs. 16,68,880/- paid by the assessee to SCBL . 7. Aggrieved by the order of CIT(A), the assessee is in appeal before us. 8. The assessee contended before us that interest is being paid to Saraswat Cooperative Bank Ltd of Rs. 16,68,880/- on the overdraft facility availed by the assessee against the security of FDR of Rs. 2 crores on which interest has been earned by the assessee and offered for taxation. The assessee submitted that it has netted the interest income from FDR of Rs. 16.14 lacs as the interest income is generated out of FDR on the security of which the overdraft facility is availed against which the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or earning such income and not vice versa. The LD DR stated that facts of the present case are different. He stated that in the case in hand, the interest is earned on the FDR and the said FDR's are used by the assessee for the purpose of availing the overdraft facility on which the interest is expended and hence the interest is not expended for the purpose of earning income rather it is vice versa and hence netting of interest cannot be done as has been done by the assessee in the return of income filed with Revenue. The Ld DR contended that the assessee has diverted the interest bearing funds secured as overdraft from SCBL for non business purposes to these companies ie PMIPL and GPL free of interest. The Ld DR contended that the assessing officer has rightly made the disallowance which is confirmed by the CIT(A). He also stated that as per the decision of Hon'ble Supreme Court in the case of CIT Vs. V. Gopinathan [(2001)248 ITR 449], whereby the Hon'ble Supreme Court has clearly held that expenditure can only be allowed u/s 57(iii) of the Act, if the same is expended to earn the income and not vice-versa as there is no provisions under the Act for allowing so and the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s on which interest of Rs. 16,68,880 has been paid to SCBL. The said amount so overdrawn from SCBL of Rs. 1.87 crores is directly utilized by the assessee to give interest free loans of Rs. 98 lacs to PMIPL and Rs. 92 lacs to GFL, thus revenue has proved direct nexus of grant of interest free loans out of interest bearing overdrawn amount from SCBL and the reliance of the assessee on the case of Reliance Utilities and Power Limited (supra ) is misconceived as the presumption therein is rebutted. The assessee has raised the plea for the first time before us that she has given the interest free loan of Rs. 98 lacs to GPL as a measure of commercial expediency because she is the Director of the said company. However the said plea has not been verified by the authorities below. We, therefore, hold that to the extent of borrowing made from SCBL for lending to GPL of Rs. 98 lacs, the interest attributable thereof paid to SCBL shall be allowable to be set off against the interest income if the assessee is able to prove before the assessing officer that the said interest free loan of Rs. 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh Insulated & Helshy Cables Ltd. (1925) 10 Tax Cases 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 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. v. CIT (1951) 20 ITR 1 (SC), CIT v. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC) etc. 22. In our opinion, the High Court as well as the Tribunal and other IT authorities should have approached the question of allow ability 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. 23. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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. 30. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. CIT (1995) 215 ITR 582 (Bom) also does not appear to be correct. 31. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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