TMI Blog2015 (11) TMI 57X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act rather it is vice versa. The assessee has raised the plea for the first time before us that she has given the interest free loan of ₹ 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 ₹ 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 ₹ 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon’ble Supreme Court it the case of S.A Builders (2006 (12) TMI 82 - SUPREME COURT) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opportunity in accordance with the principles of natural justice.However, the interest expenditure paid to SCBL and attributa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal. 3. The facts of the case are that the assessee has filed its return of income on 31.03.2010, declaring total income of ₹ 29,76,148/-, which was selected for scrutiny. During the course of assessment proceedings, the assessing officer observed that assessee has shown Income from other Sources mainly comprising of interest and claimed deduction of interest expenditure as under:- Income from other sources: Interest received from/on Loan 20,57,614 Fixed Deposit 17,99,448 Savings Account 73,275 Taxable Government Bond 7,20,000 46,50,337 Less: Interest Paid on Loan . (-) 16,68,880 Professional Tax . (-) 2,500 Gross Total Income 29,78,957 4. The assessing officer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e borrowing of ₹ 4.09 Crores (total 16.73 Crores) as against ₹ 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 was encashed and the loan was given directly, the assessee would have neither earned interest on FD nor paid interest on the overdraft. This situation is no different in the present scenario since the assessee is earning interest on FD and paying interest on overdraft. Overall the situation is the same either way. Merely because the assessee chooses to maximize his returns by adopting one of the modes of carrying out the transaction, she should not be saddled with tax liabilities which are highly di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 16,68,880/- on the overdraft facility availed by the assessee against the security of FDR of ₹ 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 ₹ 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 interest of ₹ 16,68,880/- is paid to the same bank. The assessee submitted that If the assessee would have desired it could have liquidated the FDRs with the bank and simply released the loans to these two parties namely PMIPL and GPL and hence there would not have been any income which is chargeable to tax. The assessee submitted that similar is the situation here whereby the interest income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 so generated on term deposit has to be offered for taxation without adjusting interest paid on borrowing against the said term deposits. Ld. DR further contended that the decision of Hon ble Supreme Court in the case of ACG Associated Capsules (supra), relied upon by the assessee is not applicable to the facts of present case as the decision is relevant and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aring 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 ₹ 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 ₹ 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 ₹ 98 lacs given to GPL has been given as a measure of commercial expediency as held by the Hon ble Supreme Court it the case of S.A Builders (supra) and hence to that extent we allow the appeal subject to verification by the assessing officer and accordingly set aside the matter to the file of assessing officer for necessary verification as detailed above and the assessee will be given proper and adequate opp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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. 24. No doubt, as held in Madhav Prasad Jatia v. CIT (supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 armchair of the businessman or in the position of th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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