Commissioner Of Income Tax, Kota v. M/S Daswani Classes Ltc., 467, Dadabari Extension, Kota Rajasthan

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 168 / 2011 COMMISSIONER OF INCOME TAX, KOTA ----Appellant Versus M/S DASWANI CLASSES LTC., 467, DADABARI EXTENSION, KOTA RAJASTHAN. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo JainFor Respondent(s) : Mr. Siddharth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGHJudgment 17/07/2017 1. By way of this appeal, the department has challenged thejudgment and order of the Tribunal whereby Tribunal has modifiedthe order in favour of the assessee. 2.This court while admitting the appeal on 01.03.2012 framedfollowing substantial question of law:- “1. whether in the facts and circumstances ofthe case, the ITAT was justified in deletingaddition of Rs.3,65,249/- made by the AssessingOfficer on account of disallowance of cashrefunds of tuition fee claimed by the assessee? 2. Whether in the facts and circumstances of thecase, the ITAT was justified in law in upholdingthe decision of CIT(A) deleting disallowance ofRs.1,31,72,504/- made under Section 40(a)(ia)of the Act? 3. Whether in the facts and circumstances of thecase, the ITAT was justified in law in upholdingthe order of CIT(A) deleting addition ofRs.15,13,715/- on account of interest free loansto relatives?” 3.Counsel for the appellant contended that the tribunal hascommitted serious error in modifying the order of assessing officeron the first issue inasmuch as while considering the issue AOobserved as under:- “The appellant, however, failed to make up thisdeficiency even during the appeal proceedings.In this view of things, disallowance ofRs.3,65,249/-, being cash refund of fees forwhich the appellant failed to provide necessaryand sufficient evidence, is confirmed. Ground 3(f) is dismissed.” 4.She contended that the tribunal has seriously committederror in allowing the same and wrongly observed as under:- “Considering the above submissions, we concurwith the contention of the learned A/R thatwithout conducting independent enquiry in thematter particularly when complete details ofstudents and refund of fees to them maintainedby the assessee were made available to the AO,the AO was not justified in disallowing theclaimed refund to the extent that it was paid incash which was only Rs.3,65,249/- out of thetotal of the refund of Rs.22,40,095/-. We thuswhile setting aside orders of the lowerauthorities on the issue, direct the AO to deletethe addition of Rs.3,65,249/-. Ground no.2 isaccordingly allowed.” 5.Counsel for the respondent contended that the refundamount which has been given to the students in view of thecondition and it was given each of the individual pursuant to thedishouring of the catching clause after deducting the requisitebasic fees which was required to be submitted and the same waspart of their books of accounts. Considering the same, the viewtaken by the tribunal is just and proper and first issue is required to be answered in favour of the assessee. 7.On the second issue, counsel for the appellant contendedthat the tribunal while considering this issue wrongly relied on2006-07 circular. The 194 (c) deduction has wrongly been made.She has relied upon the observations made by the AO and CIT (A). 8.Counsel for the appellant contended that tribunal haswronglyconfirmedtheorderofCIT(A). 9.Counsel for the respondent has relied upon the following decisions with regard of question No.2:- 1. CIT v. Dabur India Ltd. (2006) 283 ITR197 (Delhi) to be answered in favour of the assessee. 7.On the second issue, counsel for the appellant contendedthat the tribunal while considering this issue wrongly relied on2006-07 circular. The 194 (c) deduction has wrongly been made.She has relied upon the observations made by the AO and CIT (A). 8.Counsel for the appellant contended that tribunal haswronglyconfirmedtheorderofCIT(A). 9.Counsel for the respondent has relied upon the following decisions with regard of question No.2:- 1. CIT v. Dabur India Ltd. (2006) 283 ITR197 (Delhi) “It was nobody’s case that the Printing of thelabels on the corrugated boxes required anyspecial skill or involved any confidence orsecrecy. In the circumstances, the Tribunal wasjustified in holding that the predominant objectunderlying the contract was one for sale ofgoods which took the contract out of the purviewof section 194C.” 2. CIT v. Deputy Chief Accounts Officer,Markfd Khanna Branch (2008) 304 ITR 17(P&H) “5. We have considered the submissions madeby the learned Counsel for the Revenue. There isno dispute that the main purpose of theassessee to buy packing material is to obtaingoods for the purpose of packing of its finishedproducts. The factum of such packing materialcarrying some printed work can only beregarded as the work executed by the supplierincidental to the sale to the assessee. This factof some printing being done as a part of supplyis of no consequence to the contract beingessential of a sale of chattel. The predominantobjectunderlyingthecontractswassale/purchase of goods and only intention of therespondent was to buy packing materials.Admittedly, the raw material for the manufacturing of such packing material was notsupplied by the respondent. Thus, it was a caseof sale and not a contract for carrying out anywork. In the case of CIT v. Dabur India Ltd. , theHon'ble Delhi High Court held that printing labelson corrugated boxes did not require any specialskill or involve any confidence or secrecy and theTribunal was justified in holding that thepredominant object underlying the contract wasone for sale of goods which took the contract outof the purview of Section 194C of the IT Act,1961. In BDA Ltd. v. ITO , (the Hon'ble BombayHigh Court) held that if a manufacturerpurchases material on his own andmanufactures a product as per the requirementof a specific customer, it is a case of sale and nota contract for carrying out any work. The factthat the goods manufactured were according tothe requirement of the customer does not meanor imply that any work was carried out on behalfof that customer.” 3. Commissioner of Income Tax vs. GirnarFood and Beverage P. Ltd. (2008) 306 ITR23 (Gujarat) “As can be seen from the impugned order of theTribunal, the facts are not in dispute. Theassessee placed order for supply of printedmaterials, but the stand of the Revenue is thatas the printing was carried out by the supplier asper specifications of the assessee thearrangement would amount to "works contract".The case of the assessee is that it had enteredinto a contract of purchase/supply simpliciterand the entire product is supplied as such; thatthe suppliers are not exclusively supplying suchgoods to the assessee. That the assessee doesnot give any printing contract and there isoutright purchase, either by oral or writtenorders. The Tribunal while passing the impugned orderhas placed reliance on the Central Board ofDirect Taxes Circular No. 715 wherein it is statedby the Board that in a case of sale no deductionunder Section 194C of the Act is required.” 4. The Commissioner of Income Tax-TDSvs. Glenmark Pharmaceuticals Ltd. (2010)324 ITR 199 (Bombay) The Tribunal while passing the impugned orderhas placed reliance on the Central Board ofDirect Taxes Circular No. 715 wherein it is statedby the Board that in a case of sale no deductionunder Section 194C of the Act is required.” 4. The Commissioner of Income Tax-TDSvs. Glenmark Pharmaceuticals Ltd. (2010)324 ITR 199 (Bombay) 18. A contract for sale has hence to bedistinguished from a contract of work. Whether aparticular agreement falls within one or theother category depends upon the object andintent of the parties, as evidenced by the termsof the contract, the circumstances in which itwas entered into and the custom of the trade.The substance of the matter and not the form iswhat is of importance. If a contract involves thesale of movable property as movable property, itwould constitute a contract for sale. On theother hand, if the contract primarily involvescarrying on of work involving labour and serviceand the use of materials is incidental to theexecution of the work, the contract wouldconstitute a contract of work and labour. One ofthe circumstances which is of relevance iswhether the article which has to be deliveredhas an identifiable existence prior to its deliveryto the purchaser upon the payment of a price. Ifthe article has an identifiable existence prior toits delivery to the purchaser, and when the titleto the property vests with the purchaser onlyupon delivery, that is an important indicator tosuggest that the contract is a contract for saleand not a contract for work. In India, thedistinction between the two categories iselucidated by the Sale of Goods Act, 1930. Sub-section (1) of Section 4 provides that a contractof the sale of goods is a contract, whereby aseller transfers or agrees to transfer theproperty in goods to the buyer for a price.Where under a contract of sale, the property ingoods is transferred from the seller to the buyer,the contract is that of sale, but where transfer ofproperty in the goods is to take place at a futuretime, or subject to some condition thereafter tobe fulfilled, the contract is not a sale but is anagreement to sell. A contract of sale is made byan offer to buy or sell goods for a price and theacceptance of the offer. Under Section 5(1) thecontract may provide for immediate delivery ofthe goods or immediate payment of the price orpostponement of delivery or payment of theprice by installments.21. Broadly speaking, threesituations are involved in the manufacture ofpharmaceutical products. In the first situation,the pharmaceutical company itself manufacturespharmaceutical preparations which are soldunder its brand name. The second situationinvolves loan licensing where the raw materialsare supplied by the pharmaceutical company tothe licensee manufacturer who in turnmanufactures a pharmaceutical product on behalf of the Company. The third situation is onewhere by an agreement between apharmaceutical company and a manufacturer, itis the manufacturer who procures the rawmaterials and manufactures the product underthe specifications of the company and sells theend product to the Company. In the thirdsituation, the manufacturer may also affix thetrade mark or brand name of the Company,which in turn markets the product. The presentcase relates to the third category whereadmittedly, the entire process of manufacturingis carried out by a third party with whom theassessee has a contract. The work ofmanufacture is carried out at the establishmentof the third party manufacturer. The rawmaterials are purchased by the third partymanufacturer. The contract envisages that thetrade-mark of the assessee is to be affixed tothe goods manufactured by the third party. The agreement envisages that the assessee hasdeveloped certain pharmaceutical formulationswhich it intends to market under specified brandnames. The assessee agreed to disclose to themanufacturer technical information and datarelating to the manufacture of the products inaccordance with the specifications and standardslaid down by the assessee. The process ofmanufacturing is to be carried out by themanufacturer at its own establishment. Theassessee has to purchase the entire quantity ofthe product manufactured at a price to bemutually agreed upon between the parties. Themanufacturer is obligated under the terms of theagreement to obtain a licence to manufactureand to obtain the endorsement of the Food &Drug Administration on the licence. Theagreement envisages that the transactionbetween the parties is on a principal to principalbasis. The assessee is required from time totime to place orders for the supply of theproduct in such quantities and at the agreedprice, which the manufacturer has to supply. Theagreement specifically stipulates that themanufacturer will be solely and exclusivelyresponsible for the purchase, procurement andstorage of raw materials required for themanufacture of the product. All approvals,licences, permits, permissions and sanctions areto be obtained by the manufacturer and to bekept valid during the term of the contract. Theagreement envisages that the manufacturer isan independent contractor and is solelyresponsible for payment of taxes, duties and other impositions, under the agreement. Theproperty in the product is to vest in the assesseeon delivery of the product. The manufacturerhas undertaken not to sell or supply theproducts which are to be manufactured for theassessee to any third party or to undertake themanufacture or sale of similar products to anythird party. The assessee is entitled to inspectthe facility and to approve the goodsmanufactured. The manufacturer is required bythe terms of the agreement to affix the trade-mark of the assessee on the productsmanufactured, subject to the obligation not touse the mark upon the termination of theagreement. On the termination of the agreementor cessation the licences have to besurrendered. 24. The submission that the contract is not acontract of sale because, specifications areprovided to the manufacturer by the purchasercannot be accepted. That has not been theunderstanding of the law at any point of time.The fact that the purchaser providesspecifications to the manufacturer has neverbeen construed even by the Revenue to be acircumstance which should lead to the inferencethat the contract is not a contract of sale. Firstly,the circulars issued by the Central Board ofDirect Taxes right since 29 May, 1972consistently took the position that furnishing ofspecifications to the manufacturer of goods bythe purchaser would not detract from a contractbeing regarded as a contract for sale so long asthe property in the goods passes upon delivery.The consideration which was regarded by theRevenue as having relevance was whether thematerial was supplied to the contractor by theGovernment, or, as the case may be, by aspecified person. Where the material is providedby the purchaser and the work of fabrication ormanufacture is carried out by the contractor, theagreement would, it was clarified, constitute acontract for work. On the other hand, where amanufacturerproducesgoodstothespecifications of the purchaser and the propertypasses to the purchaser only upon delivery, thecontract would be regarded as a contract of saleif the raw material is sourced by manufacturerand is not supplied to him by the purchaser.Secondly, the consistent view which held thefield in several High Courts was that contractswhere (i) property passes to the purchaser uponthe delivery of the goods; and (ii) the rawmaterial was sourced by the manufacturer and was not supplied by the purchaser do not fallwithin the scope and ambit of Section 194C.26. By the Finance Act of 2009, whichsubstituted the provisions of Section 194C, theexpression "work" has now been defined inClause (iv) of the substituted explanation.Clauses (a) to (d) are the same as Clauses (a)to (d) of the erstwhile explanation (III).However, explanation (e) has now been inserted.what has weighed in the introduction of Clause(e) to the Explanation was on going litigation onthe question as to whether TDS was deductibleon outsourcing contracts. Clause (e) wasintroduced "to bring clarity on this issue" or, inother words, to remove the ambiguity on thequestion. Clause (e) as introduced contains apositive affirmation that the expression 'work'will cover manufacturing or supplying a product,according to the requirement or specification ofa customer, by using material purchased fromsuch a customer. Clause (e) has placed theposition beyond doubt by incorporating languageto the effect that the expression 'work' shall notinclude manufacture or supply of a productaccording to the requirement or specification ofa customer by using material which is purchasedfrom a person other than such customer. Inother words, the circumstance that therequirements or specifications are provided bythe purchaser is not regarded by the statute asbeing dispositive of the question as to whether acontract constitutes a contract of work or sale.What is of significance is whether material hasbeen purchased from the customer, who ordersthe product. When the material is purchasedfrom the customer who orders the product, itconstitutes a contract of work while on the otherhand, where the manufacturer has sourced thematerial from a person other than the customer,it would constitute a sale. What is significant isthat in using the words which Clause (e) uses inthe explanation, Parliament has taken note ofthe position that was reflected in the circularsissued by the Central Board of Direct Taxes since29th May, 1972. The judgment of the SupremeCourt in Associated Cement gave an expansivedefinition to the expression work and rejectedthe attempt of the assessee in that case torestrict the expression work to works contracts.Both before and after the judgment of theSupreme Court the expansive definition of theexpression 'work' co-existed with the Revenue'sunderstanding that a contract for sale would not be within the purview of Section 194C. TheRevenue always understood Section 194C tomean that though a product or thing ismanufactured to the specifications of acustomer, the agreement would constitute acontract for sale, if (i) The property in the articleor thing passes to the customer upon delivery;and (ii) The material that was required was notsourced from the customer / purchaser, but wasindependently obtained by the manufacturerfrom a person other than the customer. Therationale for this was that where a customerprovides the material, what the manufacturerdoes is to convert the material into a productdesired by the customer and ownership of thematerial being of the customer, the contractessentially involves work of labour and not asale. Parliament recognized the distinction whichheld the field both administratively in the formof circulars of the CBDT and judicially in thejudgments of several High Courts to which areference has been made earlier. Consequently,the principles underlying the applicability ofSection 194C as construed administratively andjudicially in decided cases, find statutoryrecognition in the Explanation. The Explanation,therefore, as the Memorandum explaining theclauses of the Finance Bill of 2009 states, was inthe nature of a clarification. Where anexplanatory provision is brought to remove anambiguity or to clear a doubt, it is reflective ofthe law as it has always stood in the past.Where, as in the present case, an explanation isintroduced statutorily to adopt an understandingof the law both in the form of the circulars of theCBDT and in judicial decisions, Parliament mustbe regarded as having intended to affirm thatintent. In the present case, the intent has heldthe field for over three decades. 31. The fact that the specifications are providedby the assessee to the manufacturer / supplierwould make no difference to the legal position.The agreement in the present case is on aprincipal to principal basis. The manufacturerhas his own establishment where the product ismanufactured. The material required in themanufacture of the article or thing is obtainedby the manufacturer from a person other thanthe assessee. The property in the articles passesupon the delivery of the product manufactured.Until delivery, the assessee has no title to thegoods. The goods have an identifiable existenceprior to delivery. 31. The fact that the specifications are providedby the assessee to the manufacturer / supplierwould make no difference to the legal position.The agreement in the present case is on aprincipal to principal basis. The manufacturerhas his own establishment where the product ismanufactured. The material required in themanufacture of the article or thing is obtainedby the manufacturer from a person other thanthe assessee. The property in the articles passesupon the delivery of the product manufactured.Until delivery, the assessee has no title to thegoods. The goods have an identifiable existenceprior to delivery. 32. The reason that a specification orrequirement is enunciated by the assesseeconstitutes a matter of business expediency. Apurchaser who desires to get the product, whichhe intends to sell under his brand name, ortrademark, manufactured from a third partywould be interested in ensuring the quality ofthe product. The trade-mark has associated withit an assurance of the quality of the goods whichare marketed traceable to the origin of thegoods. Associated with the trade-mark is thegoodwill and reputation which is associated withthe mark. This is particularly so in the case of apharmaceutical product where the ultimateconsumer is legitimately entitled to ensure thather health is not prejudiced by the consumptionof a product not meeting prescribed standards.The owner of a mark, therefore, introducesspecifications to ensure that the product meetsthe standards justifiably associated with thereputation in the mark. The specification ensuresthe observance of standards. Similarly, a clauserelating to exclusivity is not inconsistent with atransaction of sale. Here again, much dependsupon the nature of the product. Restrictivecovenants of this kind are intended to protectthe intellectual and other property rights of aparty which markets its goods by requiring amanufacturer to observe norms of specificationand exclusivity. The law is, therefore, consistentwith the transaction being regarded as atransaction of sale, provided that therequirements of a contract of sale are met. Theyare in this case. The contract entered into by theassessee is not a contract for carrying on anywork within the meaning of Section 194C. 33. For the reasons aforesaid, we are of the viewthat the Revenue was not justified in treatingthe assessee, as an assessee in default.” 5. Commissioner of Income Tax vs.Karnataka Power Transmission CorporationLtd. (2012) 21 Taxmann.com 473(Karnataka) “21. It is not in dispute that in respect ofagreement for supply, which is a distinctcontract, no TDS is deductible under Section194C as it is not a contract for carrying out anywork. Carrying out any work is a sine qua non toattract Section 194C. A contract under which acontractor agrees to supply material which maybe used by him later in carrying out the work will not render the agreement to supply acontract for carrying out any work. In fact, theamendments in 2009 explains this position.When they amended the definition of "Work" ascontained in Explanation to Clause (4) of sub-clause (e). In fact, the object and reasons forsubstituting Section 194C of the Act makes itclear that the amendment was introduced tobring clarity on the issue which reads as under:Clarification regarding "work" under Section194C. will not render the agreement to supply acontract for carrying out any work. In fact, theamendments in 2009 explains this position.When they amended the definition of "Work" ascontained in Explanation to Clause (4) of sub-clause (e). In fact, the object and reasons forsubstituting Section 194C of the Act makes itclear that the amendment was introduced tobring clarity on the issue which reads as under:Clarification regarding "work" under Section194C. There is ongoing litigation as to whether TDS isdeductible under Section 194C on outsourcingcontracts and whether outsourcing constituteswork or not. To bring clarity on this issue, it isproposed to prove that "work" shall not includemanufacturing or supplying a product accordingto the requirement or specification of a customerby using raw material purchased from a personother than such customer as such a contract is acontract for "sale". This will however not applyto a contract which does not entail manufactureor supply of an article or thing (e.g., aconstruction contract). It is also proposed toinclude manufacturing or supplying a productaccording to the requirement or specification ofa customer by using material purchased fromsuch customer, within the definition of "work". Itis further proposed to provide that in such acase TDS shall be deducted on the invoice, valueexcluding the value of material purchased fromsuch customer if such value is mentionedseparately in the invoice. Where the materialcomponent has not been separately mentionedin the invoice, TDS shall be deducted on thewhole of the invoice value. 13. When the statute was amended to clarify theword "work" under Section 194C by introducingthe aforesaid clause, it is obvious that theamendment is only clarificatory in nature andtherefore it is retrospective. The Parliament didnot intend to change the law because ofconclusion which resulted in litigation. TheParliament though it fit to clarify by way ofamendment so that the litigation could beavoided. In view of the aforesaid clarificationand the statutory provision, it is clear that"work" did not include manufacturing orsupplying a product according to therequirement upon specification of a customer byusing raw-materials purchased from a personother than such customer, as such a contract isa contract for sale. Further, it is also clarified TDS shall be deducted on the invoice valueexcluding the value of material purchase fromsuch customer, if such value is mentionedseparately in the invoice. It is only in caseswhere the material component has not beenseparately mentioned in the invoice, TDS shallbe deducted on the whole of the invoice value.Therefore, whatever ambiguity which prevailedearlier is clarified. When in a composite contract,if an invoice is raised, separately mentioning thevalue of the material supplied, no deduction ispermissible under Section 194C. In a case wherethree separate agreements entered into and onesuch agreement is agreement for supply ofmaterial and because the said agreement is apart of a composite transaction. Section 194Ccannot be pressed into service to deduct tax atsource. The whole object of introducing theSection is that it should deduct tax in respect ofpayments made for a works contract. Nodeduction is permissible in respect of contractfor supply of material for carrying out work. Infact, the Tribunal by a detailed consideration ofthe statutory provisions, the various terms ofthe contract, the legal position as explained inthe various judgments has rightly come to theconclusion that, the transaction in question isnot a case of composite contract. It is a case ofthe distinct contracts and the contract for supplyof materials is a separate distinct contract inrespect of which no deduction is permissibleunder section 194C of the Act.” 6. The Commissioner of Income Tax andThe Income Tax Officer (TDS) vs. TheBangaloreDistrictCooperativeMilkProducers Societies Union Ltd. (2013) 357ITR 676 (Karnataka) “Upon thoughtful consideration of thesubmissions made at the Bar, we find this Courtin KPTCL's case has held that amendment todefinition of 'work' U/s. 194C, (7)(iv) of the ITAct, is clarificatory in nature and retrospective.In the light of the said ratio, if the facts of thiscase are read, the assessee has not supplied anymaterial. However, the tenderer has secured thematerial from other source and has supplied thesame to the assessee. May be in the instantcase, some of the features of works contractmay overlap, but however, that should not havebeen taken as necessary criteria to determinethe nature of work. The explanation 'WorksContract' has a definite legal connote. What is stated in the Section 194C(1) is for "carrying outany works" between the contractor and specifiedperson. The work is also defined to exclude thesituation where the material is not supplied bythe assessee. In view of the specific definition ofwork, it is to be held that contract amounts tosale and not works contract. The fact that Clause(a) the definition of work was amendedsubsequently and not in the statutory book forthe relevant years in question would not be ofconsequence because of the ratio laid down inKPTCL's case. The definition is clarificatory innature. In that view, the question of law isanswered against the revenue. The appeals aredismissed.” 7. Commissioner of Income Tax vs. SpiceTelecommunications (P.) Ltd. (2014) 369ITR 72 “In the present cases, admittedly, the assesseesdid not supply any material whatsoever to themanufacturer/supplier for the supply ofSIM/scratch cards as per their requirement orspecification and therefore, the transactioncannot be treated as a contract for carrying outworks within the meaning of the word "work"used in sub-section (1) of Section 194C of theAct, before its amendment. After theamendment, it is clarified that the definition ofthe word "work" will not include themanufacturing or supplying a product accordingto the requirement or specification of a customerby using material purchased from a person otherthan such customer. If we apply this provision,the case of the assessees would standstrengthen further. In other words, even if thefirst part of the amendment i.e., sub-clause (e)of Clause (iv) of Section 194C is applied, thecase of the assessees would not be covered bythe said clause since the assessees did notsupply any material to the manufacturers.However, we need not take recourse to theamendment. These appeals, in view of theaforesaid order of the Supreme Court, can bedisposed of holding that placing of orders by theassessees,inthesecases,tothemanufacturers/suppliers to supply SIM/scratchcards as per their requirements cannot betreated as contract for carrying out works withinthe meaning of sub-section (1) of Section 194Cof the Act as it existed prior to its amendment.Hence, we answer both the substantial questionsof law against the revenue and in favour of the assessees and dispose of these appeals.” 10.The counsel for the respondent in support of his submissions on question No.3 relied on the following decisions. 1. S.A. Builders Ltd. vs. Commissioner ofIncome Tax (Appeals), Chandigarh and Anr.(2007) 288 ITR 1 (SC) assessees and dispose of these appeals.” 10.The counsel for the respondent in support of his submissions on question No.3 relied on the following decisions. 1. S.A. Builders Ltd. vs. Commissioner ofIncome Tax (Appeals), Chandigarh and Anr.(2007) 288 ITR 1 (SC) “16. In our opinion, the High Court as well asthe Tribunal and other Income Tax authoritiesshould have approached the question ofallowability of interest on the borrowed fundsfrom the above angle. In other words, the HighCourt and other authorities should haveenquired as to whether the interest free loanwas given to the sister company (which is asubsidiary of the assessee) as a measure ofcommercial expediency, and if it was, it shouldhave been allowed. The expression "commercialexpediency" is an expression of wide import andincludes such expenditure as a prudentbusinessman incurs for the purpose of business.The expenditure may not have been incurredunder any legal obligation, but yet it is allowableas a business expenditure if it was incurred ongrounds of commercial expediency. 17. No doubt, as held in Madhav Prasad Jantia v.CIT (supra), if the borrowed amount wasdonated for some sentimental or personalreasons and not on the ground of commercialexpediency, the interest thereon could not havebeen allowed under Section 36(1)(iii) of the Act.In Madhav Prasad's case (supra), the borrowedamount was donated to a college with a view tocommemorate the memory of the assessee'sdeceased husband after whom the college wasto be named. It was held by this Court that theinterest on the borrowed fund in such a casecould not be allowed, as it could not be said thatit was for commercial expediency. Thus, theratio of Madhav Prasad Jantia's case (supra) isthat the borrowed fund advanced to a third partyshould be for commercial expediency if it issought to be allowed under Section 36(1)(iii) ofthe Act. 18. In the present case, neither the High Courtnor the Tribunal nor other authorities haveexamined whether the amount advanced to thesister concern was by way of commercialexpediency. It has been repeatedly held by this Court that the expression "for the purpose ofbusiness" is wider in scope than the expression "for the purpose of earning profits" vide CIT v.Malayalam Plantations Ltd. , CIT v. Birla CottonSpinning & Weaving Mills Ltd. etc.” 2. Hero Cycles (P) Ltd. vs. Commissioner ofIncome Tax (Central), Ludhiana (2015) 379ITR 347 “13. In the process, the Court also agreed thatthe view taken by the Delhi High Court in 'CIT v.Dalmia Cement (B.) Ltd. : 2002 (254) ITR 377]wherein the High Court had held that once it isestablished that there is nexus between theexpenditure and the purpose of business (whichneed not necessarily be the business of theAssessee itself), the Revenue cannot justifiablyclaim to put itself in the arm-chair of thebusinessman or in the position of the Board ofDirectors and assume the role to decide howmuch is reasonable expenditure having regard tothe circumstances of the case. It further heldthat no businessman can be compelled tomaximize his profit and that the income taxauthorities must put themselves in the shoes ofthe Assessee and see how a prudentbusinessman would act. The authorities mustnot look at the matter from their own view pointbut that of a prudent businessman.” 3. Commissioner of Income Tax vs. JugalKishore Dangayach (2014) 265 CTR 215(Rajasthan) 3. Commissioner of Income Tax vs. JugalKishore Dangayach (2014) 265 CTR 215(Rajasthan) “11. We have considered the argumentsadvanced by the learned counsel for theRevenue and in our view this is also a finding offact as recorded by the Tribunal as well asCIT(A). It is not disputed that the assessee hadan opening capital of Rs. 1.42 crores at thebeginning of the year and Rs. 1.88 crores at theend of the year. It is also an admitted fact thatthe assessee had trade credits to the extent ofRs. 1.57 crores on which no interest was beingpaid. It is also an admitted fact that theassessee had received more than Rs. 60 lacs asadvance from the customers on which nointerest was paid. Therefore, when to thismagnitude on which no interest was payable,the AO was not justified in disallowing interest.Further apart from it the assessee has been able to prove that the assessee had trade dealingswith M/s. Tirupati Pulses (P) Ltd. to whom it isalleged by the AO that the assessee advancedmore than Rs. 80 lacs. It is an admitted positionthat the assessee made purchases to the tune ofRs. 21,24,06,662 from M/s. Tirupati Pules (P)Ltd., which is based on the audit report andadvances, if any, were towards the aforesaidpurchases made by the respondent/assessee. Sothere was no occasion for the assessee to havecharged any interest from a concern with whomit had trade dealings, may be the concern isrelated or not, it does not make any difference.Once it had been proved by the assessee that ithad trade transactions with persons to whomadvances are made, then in our opinion, lookingto the commercial and business expediency, oneis not required to charge the interest. Theassessee is to manage its own affairs looking tothe commercial/business expediency and decidewhether to charge interest or not. 21. In view of above facts and circumstances ofthe case, the Tribunal has correctly come to theconclusion that the interest was rightly allowableon the basis of the facts found and which havebeen referred to hereinabove. We do not findany question of law much less substantialquestion of law which could be said to emergeout of this case. We find no illegality orperversity in the impugned order.” 4. The Commissioner of Income Tax-7 vs.Reliance Communications InfrastructureLtd. (2012) 260 CTR 159 (Bombay) “9. In S.A. Builders, the Assessing Officer hadobserved that the assessee had transferred acertain amount to its subsidiary out of a cashcredit account in which there was a debitbalance. The Assessing Officer found that theassessee had diverted its borrowed funds to asister concern without charging any interest andthat consequently, a proportionate part of theinterest relating to that amount, out of the totalinterest paid by the assessee to the Bank, had tobe disallowed. The CIT(A) had observed that outof the total amount advanced by the assessee toits subsidiary, only an amount of Rs. 18 lakhshad a nexus with borrowed funds and he haddirected the Assessing Officer accordingly tocalculate the disallowance. The Tribunal allowedthe appeal by the Revenue and dismissed theappeal of the assessee. The order was confirmed by the High Court. The Supreme Court observedthat the Income Tax authorities, the Tribunal aswell as the High Court had approached thematter from an erroneous perspective. TheSupreme Court held that where the assesseehad borrowed funds from a Bank and lent someof them to a subsidiary as an interest free loan,the test to be applied is whether this was amatter of commercial expediency. Theexpression "commercial expediency", held theSupreme Court, is an expression of wide importand includes such expenditure as a prudentbusinessman incurs for the purpose of business.An expenditure, which is commerciallyexpedient, may not be incurred under a legalobligation, but so long as it meets therequirement of commercial expediency, it has tobe allowed. However, the Supreme Court heldthat it is not in every case that interest onborrowed loans would have to be allowed if theassessee advanced the money to a sisterconcern. Where the amount is advanced to asister concern, for the personal benefit of itsdirectors, for instance, it would not qualify to beregarded as commercial expediency. However,noted the Supreme Court, where a holdingcompany "has a deep interest in its subsidiaryadvances borrowed money to a subsidiary andthe same is used by the subsidiary for somebusiness purposes, the assessee would..ordinarily be entitled to deduction of interest onits borrowed loans." The Supreme Courtaccordingly set aside all the orders passed bythe authorities below including the judgment ofthe Tribunal and of the High Court andremanded the matter for a fresh decision. 10. In the present case, there is a finding of factby the CIT(A) and by the Tribunal that as amatter of fact, borrowed funds were not used bythe assessee for the purposes of investment inthe shares of its wholly owned subsidiaryReliance Infocomm Ltd. or for making advancesto Reliance Industries Ltd. But independent ofthat, in view of the decision of the SupremeCourt in S.A. Builders what is significant is as towhether the investment and the advances madewere commercially expedient and for thepurpose of business. In this regard, the assesseehad pointed out before the CIT(A) that it isengaged in the business of providingtelecommunication infrastructure which mainlyconsists of a Pan India Fibre Optic Network.Reliance Infocomm Ltd. is a wholly ownedsubsidiary of the assessee which is engaged in the business of providing telecommunicationservices. The assessee made investments in theequity shares of its subsidiary and claimed thatthis was with a view to provide integratedtelecommunication services. The case of theassessee was that those investments were toensure the utilization of the telecommunicationsinfrastructure of the subsidiary and was astrategic investment for furthering businessprospects in the area of providingtelecommunication services. As regards theadvance which was made by the assessee toReliance Industries Ltd. (RIL) the assesseepointed out to the CIT(A) that it was required toimport equipment under the EPCG Scheme. Theobligations under the EPCG Scheme wererequired to be backed by bank guarantees whichin turn demanded security for the issuance ofguarantees. The assessee entered into anarrangement with RIL to which it advanced asum of Rs. 476 crores against which RILprovided counter guarantees to financialinstitutions equivalent to three times the amountof the margin kept by the assessee with RIL. Now, having regard to this factual background,both the CIT(A) and the Tribunal held that theinvestments made in the wholly ownedsubsidiary and the money advanced to RIL werefor furthering the business of the assessee. Thefindings of both the CIT(A) and of the Tribunalare consistent with the judgment of theSupreme Court in S.A. Builders. Where theassessee, as in the present case, has significantinterest in the business of the subsidiary andutilizes even borrowed money for furthering itsbusiness connection, there is no reason orjustification to make a disallowance in respect ofthe deduction which is otherwise available underSection 36(1)(iii). Counsel appearing on behalfof the Revenue submits that there is adistinction between an advance, which is apayment handed over to some one as a loan andan investment which is money placed intofinancial schemes, shares or property with theexpectation of making a profit. 4. We are unable to accept that such adistinction will have any legal consequence in sofar as the entitlement of the assessee to claim adeduction under Section 36(1)(iii) is concerned.In the present case, when the assesseeadvanced an amount to RIL that was with a viewto furthering the business of the assessee. RIL inturn was to execute counter guarantees in favour of financial institutions for the benefit ofthe discharge of the EPCG obligations by theassessee. That was a security for the guaranteeswhich those institutions were required toexecute under the EPCG Scheme. The fundswhich were invested in the wholly ownedsubsidiary were again for the purposes of thebusiness of the assessee. There is evidently asignificant interest of the assessee in thebusiness of its subsidiary since both theassessee and the subsidiary are engaged inprovidingtelecommunicationservices.Consequently, we are not inclined to interferewith the order of the Tribunal. There is a findingof fact that interest free funds borrowed are notutilised for the purposes of both thetransactions. But quite apart from that, thefinding is 4 Compact Oxford ReferenceDictionary pages 11 and 436 that the funds weredeployed as a matter of commercial expediencyand to further the business of the assessee. Thelatter finding is independent of whetherborrowed funds were or were not utilized, for inview of the judgment of the Supreme Courtheld, the fact that borrowed funds were utilizedfor making investments or, as the case may be,for making advances would not disentitle theassessee to the deduction so long as businessexpediency exists. Consequently, we answer thequestions of law as framed in the affirmative.The appeal shall accordingly stand disposed of.There shall be no order as to costs.” 5. Bright Enterprises Pvt. Ltd. vs.Commissioner of Income Tax- (1016) 381ITR 107 (P&H) “9. Whether the amount of Rs. 10.29 crores wasdebited to the account of the sister concern inrespect of the payment made under Clause3.3(b) of Article 3.1 of the share purchaseagreement or whether the amount was actuallypaid to the sister concern and used by it for thepurpose of business, is immaterial. Either waythe amount was used for the business of thesister concern. It is not even suggested that theadvance was used by the sister concern for anypurpose other than for the purposes of itsbusiness. Nor was such a case raised before us. The doubt, if any, is set at rest by thememorandum of appeal and the writtensubmissions filed by the appellant before the CIT(Appeals). As Mr. Jain rightly pointed out, in the “9. Whether the amount of Rs. 10.29 crores wasdebited to the account of the sister concern inrespect of the payment