M/S Trident Infotech Corporation Limited v. The Commissioner Of Income Tax, Ludhiana And Another

IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH ITA No.228of 2010 (O&M) Date of decision: 27.4.2016 M/s Trident Infotech Corporation Limited Appellant Vs. The Commissioner of Income Tax, Ludhiana and another .Respondent CORAM: HON BLE MR. JUSTICK AJAY KUMAR MITTALHON’ BLE MRS. JUSTICK RAJ RAHUL GAR 1. Whether Reporters of local papers may be allowed to see the judgment?2. To be referred to the Reporters or not?2. To be referred to the Reporters or not? 3. Whether the judgment should be reported in the Digest? Present: Ms. Radhika Suri, Sr. Advocate with Ms. Rinku Dahiya, Advocatefor the appellant-assessee.for the appellant-assessee. Mr. Rajesh Katoch, Advocate for the revenue. Ajay Kumar Mittal,J. 1]The delay in re-filing the appeal 1s condoned. |This appeal has been filed by the appellant-assessee under Section 260A of the Income Tax Act, 1961 (in short, “the Act’) against theorder dated 31.10.2008, Annexure A.4 passed by the Income Tax Appellate Tribunal, Chandigarh Bench, Chandigarh (in short, “the Tribunal”) in ITA No.724/2008, for the assessment year 2004-05, claiming following substantial question of law:- Whether in the facts and circumstances of the case, the ITATwas right in law in upholding the disallowance on account ofinterest claimed under Section 36(1)(111) of the Income TaxAct, 1961 in view of the ratio of the Hon'ble Supreme Court inthe case of |S.A. Builders vs. CIT,(2007) 288 ITR 1?" 3)A few tacts relevant for the decision of the controversyinvolved as narrated in the appeal may be noticed. The appellant-assesseefiled its return for the assessment year 2004-05 declaring a loss of|=38,28,164/-. The return was selected for scrutiny. The Assessing Officerdisallowed the amount ofv45,14,373/- on account of interest claimedunder section 36(1)(111) of the Act vide order dated 28.11.2006, AnnexureA.|l by holding that the assessee had given interest free advances of aamount of an6,94,51,894/- to its sister concern. The Assessing Officerwithout ascertaining the use of these funds by the sister concern disallowedthe proportionate amount of|an45,14,373/- under Section 36(1)(i11) of theAct. Subsequently, an order dated 20.9.2007, Annexure A.2 was issuedunder section 154 of the Act by the Assessing Officer rectifying the orderdated 28.11.2006 by withdrawing the claim of depreciation and businessloss which had been adjusted for the assessment year 2003-04. Aggrievedby the order, the assessee filed appeal before the Commissioner of IncomeTax (Appeals) |CIT(A)|] claiming that the advances made to the sisterconcern were not out of interest bearing funds and the same could not bedisallowed. The CIT(A) rejected the contention of the assessee followingthe judgment of this Court inCIT vs. Abhishek Industries,(2006) 286 ITR1 and dismissed the appeal vide order dated 9.6.2008, Annexure A.3. Stillnot satisfied, the assessee filed appeal before the Tribunal. The TribunalGURBAX SINGH2016.05.10 11:23I attest to the accuracy andintegrity of this documentHigh Court Chandigarh dismissed the appeal vide order dated 31.10.2008, Annexure A.4. Hence theinstant appeal by the assessee dismissed the appeal vide order dated 31.10.2008, Annexure A.4. Hence theinstant appeal by the assessee 4We have heard learned counsel for the parties.5.The issue involved in the present appeal 1s with regard to thedisallowance of interest ofLv45,14,373/- claimed by the assessee undersection 36(1)(111) of the Act. In the light of the judgment of the Apex CourtIn|Hero Cycles (P) Limited vs. CIT, Ludhiana,(2015) 281 CTR 481 andjudgment of this Court inCommissioner of Income Tax vs. KapsonsAssociates,(2016) 381 ITR 204, the matter 1s remanded to the Tribunal todecide afresh in accordance with law. In Hero Cycles (P) Limited'sCase(supra), the Apex Court was considering the issue with regard to interest onborrowed capital (interest free loans). It was held that once it is establishedthat there 1s nexus between the expenditure and purpose of business,revenue cannot justifiably claim to put itself in arm chair of businessman orIn position of Board of Directors and assume role to decide how much 1sreasonable expenditure having regard to the circumstances of the case. Itwas recorded as under:- "26.The expression "commercial expediency" 1s an expression ofwide import and includes such expenditure as a prudentbusinessman incurs for the purpose of business. Theexpenditure may not have been incurred under any legalobligation, but yet it 1s allowable as a business expenditure 1fit was incurred on grounds of commercial expediency,wide import and includes such expenditure as a prudentbusinessman incurs for the purpose of business. Theexpenditure may not have been incurred under any legalobligation, but yet it 1s allowable as a business expenditure 1fit was incurred on grounds of commercial expediency,27. No doubt, as held in Madhav Prasad Jatia v. CIT [1979 (118)ITR 200 (SC)], 1£ the borrowed amount was donated for somesentimental or personal reasons and not on the ground ofcommercial expediency, the interest thereon could not havebeen allowed under section 36(1)(i11) of the Act. In MadhavITR 200 (SC)], 1£ the borrowed amount was donated for somesentimental or personal reasons and not on the ground ofcommercial expediency, the interest thereon could not havebeen allowed under section 36(1)(i11) of the Act. In Madhav Prasad's case [1979 (118) ITR 200 (SC)], the borrowedamount was donated to a college with a view tocommemorate the memory of the assessee's deceased husbandafter whom the college was to be named, it was held by thiscourt that the interest on the borrowed fund 1n such a casecould not be allowed, as it could not be said that it was forcommercial expediency. 28. Thus, the ratio of Madhav Prasad Jatia's case [1979 (118) ITR200 (SC)| is that the borrowed fund advanced to a third partyShould be for commercial expediency if it is sought to beallowed under section 36(1 )(111) of the Act 29. In the present case, neither the High Court nor the Tribunalnor other authorities have examined whether the amountadvanced to the sister concern was by way of commercialexpediency. 30. It has been repeatedly held by this court thatthe expression "for the purpose of business" 1s wider 1n scopethan the expression "for the purpose of earning profits" videCIT v. Malayalam Plantations Ltd. [1964 53 ITR 140 (SC),CIT v. Birla Cotton Spinning and Weaving Mills Ltd. [197182 ITR 166 (SC)], etc." In the process, the Court also agreed that the view taken bythe Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.'[2002 (254) ITR 377] wherein the High Court had held thatonce it is established that there is nexus between theexpenditure and the purpose of business (which need notnecessarily be the business of the assessee itself), theRevenue cannot justifiably claim to put itself in the arm-chairof the businessman or in the position of the Board ofDirectors and assume the role to decide how much 1sreasonable expenditure having regard to the circumstances ofthe case. It further held that no businessman can be compelled tomaximize his profit and that the income tax authorities mustput themselves in the shoes of the assessee and see how a In the process, the Court also agreed that the view taken bythe Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd.'[2002 (254) ITR 377] wherein the High Court had held thatonce it is established that there is nexus between theexpenditure and the purpose of business (which need notnecessarily be the business of the assessee itself), theRevenue cannot justifiably claim to put itself in the arm-chairof the businessman or in the position of the Board ofDirectors and assume the role to decide how much 1sreasonable expenditure having regard to the circumstances ofthe case. It further held that no businessman can be compelled tomaximize his profit and that the income tax authorities mustput themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their ownview point but that of a prudent businessman.” 6.|Further, 1n Kapson Associates'scase (supra), while consideringdisallowance of interest under section 36(1)(i11) of the Act, 1t was recordedby this Court as under:- “The Commissioner of Income Tax (Appeals) and theTribunal found as a matter of fact that the company hadinterest free advances from its directors/shareholders and themembers of their families amounting to>v315.11 lakhs asagainst the interest free advances made by the companyageregating toLy219.72 lakhs as on March 31, 2008. In viewthereof, it was rightly inferred that the respondent/assesseehad enough interest free funds which would cover theadvances also made interest free. The matter 1s covered against the appellant in thisregard by our order and judgment dated July 16, 2015 inITA No.413 of 2014, Gurdas Garg vs. CIT(Appeals) [2016] 6 ITR-OL 101 (P&H) where we held as under (page 108):-“It is q little difficult to understand these observations. Ithas not been denied that interest free funds wereavailable. Nor has it been denied that interest freeadvances were made by the appellant. In fact, the latterhas been accepted by the Assessing Officer. Thecontention that the appellant has not established that itwas the interest free funds that were actually advancedas interest free advances is without substance. Moneyhas no identity. So long it 1s established that the interestfree advances are made by an assessee who has adequatefree reserves, it 1s sufficient to establish that theamounts advanced interest free cannot be added to theassessee's income. It was not contended that the interest free advances exceeded the interest free funds availablewith the appellant. Nor was it established that aparticular advance received was in turn advanced by theassessee interest free.’Questions Nos. | to 3 are therefore, answered against theappellant.” 7.In view of the above position of law, the matter 1s remanded tothe Tribunal to decide afresh after hearing the parties in accordance withlaw. The appeal stands disposed of accordingly. (Ajay Kumar Mittal)Judge April 27, 2016;:$; (Raj Rahul Garg)Judge