TMI Blog2006 (12) TMI 82X X X X Extracts X X X X X X X X Extracts X X X X ..... ord. 5. During 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. Accordingly, he disallowed a sum of Rs. 5, 66, 729/- . 6. The assessee preferred an appeal to the Commissioner of Income Tax (Appeals) Chandigarh (for short hereinafter referred to as the Commissioner of Income-tax (Appeals)), who vide his order dated April 15, 1993 partially accepted the claim of the assessee. According to the Commissioner of Income-tax (Appeals), out of the total amount of Rs. 82 lakhs advanced by the assessee in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs. 18 lakhs had a clear nexus with the borrowed funds, as the balance amount had been paid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missed. 11. Against this decision also, the assessee filed an appeal before the High Court. 12. In the impugned judgment dated May 13, 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. 13. The High Court held that since it stands established that the amount of Rs. 82 lakhs and Rs. 37.85 lakhs 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. 14. Learned c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but were paid out of the receipts from other parties to whom no interest had been paid. The amount of Rs. 18 lakhs was paid out of the cash credit account because there was a debit balance of Rs. 18 lakhs on that date and, therefore, a clear nexus is proved in respect of the amount of Rs. 18 lakhs in the interest bearing loans and interest free advances. On this view, the Commissioner of Income-tax (Appeals) held that the Assessing Officer should have only disallowed interest relatable to Rs. 18 lakhs and not the entire amount of Rs. 82 lakhs. 17. Learned counsel for the appellant submitted that even this disallowance of Rs. 18 lakhs by the Commissioner of Income-tax (Appeals) was erroneous and the entire sum of Rs. 82 lakhs should have been allowed. 18. In paragraph 35-41 of its order the Tribunal has considered in detail the question of allowability of the interest amount on the borrowed funds. The Tribunal was of the view that the assessee had given an advance of Rs. 82 lakhs 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to facilitate the carrying on the business. The above test in Atherton's case [1925]10 TC 155 (HL) 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. 25. 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. 26. 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. 27. No doubt, as held in Madhav Prasad Jatia vs. CIT (supra) [1979] 118 ITR 200 (SC), if the bo ..... 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 [1994] 208 ITR 989 (Bom) 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. 34. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. CIT [1995] 215 ITR 582 also does not appear to be correct. 35. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (B.) 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 posit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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