Pr. Commissioner Of Income Tax, Alwar v. M/S. Lord Chloro Alkali Limited Fromerly Known As Moli Alkalieslimited, Sp-460, Mia, Alwar

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 38 / 2017 Pr. Commissioner of Income Tax, Alwar. ----Appellant Versus M/s. Lord Chloro Alkali Limited Fromerly Known As Moli AlkaliesLimited, SP-460, MIA, Alwar. ----Respondent _____________________________________________________ For Appellant(s) : Ms. Parinitoo Jain For Respondent(s) : Mr. Siddharth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE VIJAY KUMAR VYAS Order 20/11/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal haspartly allowed the appeal preferred by the assessee and dismissedthe appeal of department modifying the order of CIT(A). 2.This Court while admitting the appeal on 05.07.2017framed following substantial questions of law:- “5. Whether the Tribunal was legally justified inreversing the findings of the CIT(A) and deletingthe addition made on account of disallowance forpayments made for donation but debited underthe head of publicity expenses for which noevidence was produced to show that the samewas incurred wholly and exclusively for thepurpose of business? 6. Whether the Tribunal was legally justified inversing the findings of the CIT(A) and deletingthe addition of Rs.21,96,755/- made on accountof interest payment to its sister concerns andother group companies at lover rate than it hadto pay to the borrowers? 7. Whether the Tribunal was legally justified inreversing the findings of the CIT(A) and deletingthe addition of Rs.82,67,790/- made u/s.40A(3)on cash payments being not covered under Rule6DD(g) specifically when the Tribunal hasconfirmed a disallowance of Rs.50,000/- in A.Y.1995-96 assessee’s own case? 8. Whether the Tribunal was legally justified inreversing the findings of the CIT(A) and deletingthe addition of Rs.3,02,000/- made on accountof repairs and maintenance specifically when the assessee failed to furnish the details of suchexpenses out of total expenses of Rs.79.19 lacsdebited in the profit and loss account?” 3.Counsel for the respondent has taken us to the order of ITAT wherein it has been observed as under:- “16.3 I have perused the assessment orderasas submission of the assessee, the assesseehimself admitted that he has not produced theevidences for expenses before the AO andbefore me also. By making cross chequepayment does not establish that the expenditureincurred wholly an exclusively for the purpose ofbusiness. The nature of the expenses weredonation and no evidence of souvenier havebeen filed. The disallowance is also reasonableout of 10.34 lac total expenses. Therefore, theaddition is confirmed.” 48. We have heard the rival contentions of boththe parties and perused the material availableon the record. It is not in dispute that theamount of Rs.1 lac has been paid to EquestrianFederation of India and other amounts havebeen paid to Shri Jawahar Jain educationInstitute and Pooja Samiti and other trust tosupport their educational and social activities.The ld. AR has submitted its inability to submitthe supporting documentation in view of the factthat the assessee has become a sick companyand the matter is pretty old. Given that thegenuineness of the expenditure has not beendoubted and the payments has been made bycheque, we delete the disallowance of Rs.2 lacsout of the publicity expenses.” view taken by the CIT(A). 4.We have heard counsel for the appellant. 5.In view of the observations which are made by theTribunal in para 48 reproduced above, more particularly regardingexpenses of the payment which was made by A/c Payee Chequeand Audit Report was that the payment was made and thereforethere is no question of verifying document. In that view of thematter, the view taken by the Tribunal is required to be accepted. view taken by the CIT(A). 4.We have heard counsel for the appellant. 5.In view of the observations which are made by theTribunal in para 48 reproduced above, more particularly regardingexpenses of the payment which was made by A/c Payee Chequeand Audit Report was that the payment was made and thereforethere is no question of verifying document. In that view of thematter, the view taken by the Tribunal is required to be accepted. 6.The first issue is answered in favour of assessee andagainst the department. 7.Counsel for the respondent has taken us to the order ofCIT(A) wherein it has been observed as under:- “21.3 I have perused the assessment order aswell as submission of the assessee and caserelied upon, the AO had given detailed findingson page 24 to 27 and has established the nexusbetween borrowed fund and amount advance tothe group company/concerns. This issue wasalso involved in AY 1995-96. The Hon’ble ITAThad confirmed the addition in ITANO.224/JP/1999 AY 1995-96 order dated31.12.2007. The assessee’s claimed that thisamount has been advanced from the sharecapital and reserve and advances has no bearingas shares capital at Rs.29.53 Crore, were issuedat the time of initial period of incorporationbefore 17 years. Therefore, the above addition isconfirmed. 22.3 I have perused the assessment order aswell as submission of the assessee, theassessment order for the AY1995-96 as well asCIT(A) order have been verified, it is found thatthe assessee gave loan Rs.4.35 lac to GM ModiHospital and Research Centre and MedicalScience for Rs.14.85 lac given to Modi ARELimited. The assessee had admitted that nointerest had been charged on both the loans.Therefore, AO disallowed Rs.3,45,600/- @ 18%out of interest. The loan is remained during theyear under consideration. The assessee did not raise this issue in appeal before the CIT(A). Thefacts are similar. Therefore, the action of the AOis justified. The appeal on this ground isdismissed. 22.3 I have perused the assessment order aswell as submission of the assessee, theassessment order for the AY1995-96 as well asCIT(A) order have been verified, it is found thatthe assessee gave loan Rs.4.35 lac to GM ModiHospital and Research Centre and MedicalScience for Rs.14.85 lac given to Modi ARELimited. The assessee had admitted that nointerest had been charged on both the loans.Therefore, AO disallowed Rs.3,45,600/- @ 18%out of interest. The loan is remained during theyear under consideration. The assessee did not raise this issue in appeal before the CIT(A). Thefacts are similar. Therefore, the action of the AOis justified. The appeal on this ground isdismissed. 50. We have heard the rival contentions andperused the material available on the record.From the perusal of the records, it is noted thatthe assessee company has raised interestbearing fresh secured loans to the extent of Rs.3.2 crores. The details of interest has increasedto Rs. 9.84 crores as against 6.06 crores lastyear and credit of interest has increased to0.014 crores. As per the AO, the increase ininterest liability is on account of advances givenat concessional rate of interest or utilizing thefunds for taking the FDR for revival of ModiCement Ltd. This is evident from the facts thattotal of secured and unsecured loans during theyear are Rs.72.01 crores as against Rs. 63.79crores last year. As against this, the assesseeclaimed that this amount has been advancedfrom the share capital and reserves and surplusaccount. Regarding the assessee's contention, ldCIT(A) has given his finding stating that loansand advances given by the assessee has nobearing to the share capital of Rs. 29.53 croreswhich was raised some 17 years back as thesame has already been eroded given that theassessee has become a sick company. Ld CIT(A)has further held that the necessary nexus hasbeen established between the borrowed 53 ITA382 & 420/JP/2011_ M/s Lord Chloro AlkaliesLtd. Vs ACIT funds and the amount advances tothe sister concern and the same findings couldnot been controverted by the assessee. Further,the ld. AO has submitted that the assessee hadadvanced funds as a measure of commercialexpediency to the group companies. In thisregard the assessee has submitted before theAssessing officer that it gave advances to thecompanies mentioned in letter No. 961temporarily as a financial support in order tomeet the statutory liabilities and dues towardssalary of employees, workers and otherexpenses to these companies with the clearunderstanding that the same will be refundedback to the company. It was submitted thatmost of the companies are sick companies andfinancial support was given on account ofbusiness responsibilities and to protect thegoodwill in the market as these companies areunder the same management. Regarding bankguarantee for Modi Cement, the Assessingofficer noted that the assessee company arranged a bank guarantee for Rs. 5 crores infavour of IDBI by depositing Rs. 5 crores withthe bank as FD and such arrangement was madeas rehabilitation package of M/s Modi Cement. Afurther sum of Rs. 5 crores pledged with thebank in a non-lien fixed deposit a/c, out of thefunds raised from the promoters. It was furthernoted that the inspection team of the companies54 ITA 382 & 420/JP/2011_ M/s Lord ChloroAlkalies Ltd. Vs ACIT department requiredassessee company as to why such funds to theextent of Rs. 10 crores are blocked torehabilitate to M/s Modi Cement Ltd. It wassubmitted that Modi Cement Ltd. is groupcompany and on account of moral responsibility,the company extended all possible support forrehabilitation. However, the explanation given bythe assessee company was not foundsatisfactory by the AO. In this regard referenceof the Bench was drawn to the recent decision ofHon'ble Supreme Court in the case of HeroCycles Pvt. Ltd. 94 CCH 0097 wherein it washeld as follows: " Applying the aforesaid ratio (laid down in caseof S.A. Builders ltd 288 ITR 1(SC)) to the factsof this case as already noted above, it ismanifest that the advance to M/s Hero Fibreslimited became imperative as a businessexpediency in view of the undertaking given tothe financial institutions by the assesee to theeffect that it would provide additional margin toM/s Hero Fibres Limited to meet the workingcapital for meeting any cash loses." In light of decision of Hon'ble Supreme court incase of Hero cycles, the bank guarantee for Rs.5 crores in favour of IDBI by depositing Rs. 5crores with the bank as FD became imperativeas a business expediency 55 ITA 382 &420/JP/2011_ M/s Lord Chloro Alkalies Ltd. VsACIT as part of the rehabilitation package of M/sModi Cement which is one of the groupcompanies. Similarly, the assessee hassupported the other group companies whichwere also going through the financial andliquidity crunch in order to meet the statutoryliabilities and dues towards salary of employees,workers and other expenses and has thussatisfied the test of commercial expediency inrespect of other loan and advances as well. Inlight of that, we delete the disallowance of Rs21,96,755/-. In the result, ground of theassessee is allowed.” 8.Counsel for the respondents has relied upon following decisions: 1. Attar Singh Gurmuks Singh Vs. ITO [1991]191 ITR 667 (SC): wherein it has been observedas under:- The terms of Section 40A(3) are not absolute.Consideration of business expediency and otherrelevant factors are not excluded. The genuineand bona fide transactions are not taken out ofthe sweep of the Section. It is open to theassessee to furnish to the satisfaction of theassessing officer the circumstances under whichthe payment in the manner prescribed in Section40A(3) was not practicable or would havecaused genuine difficulty to the payee. 2. CIT vs. Chaudhary and Co. [1991] 217 ITR431 (Allahabad), wherein it has been observed asunder: We may mention that the object of Section40A(3) was that fictitious amounts should not beclaimed as revenue expenditure. The intention ofSection 40A(3) was not that cash payment cannever be allowed as deduction. The terms ofsection 40A(3) are not absolute. 3. Walfard Transport vs. CIT (240 ITR 902) &CIT vs. Chrome Leather (235 ITR 708), whereinit has been observed as under: where the transaction was found to be genuineand the identity of the payee was established, aliberal view of compelling and mitigatingcircumstances should be taken. 4. CIT vs. Raja Pal Automobiles [2010] (320ITR 185 (All.)), wherein it has been observed asunder: 2. CIT vs. Chaudhary and Co. [1991] 217 ITR431 (Allahabad), wherein it has been observed asunder: We may mention that the object of Section40A(3) was that fictitious amounts should not beclaimed as revenue expenditure. The intention ofSection 40A(3) was not that cash payment cannever be allowed as deduction. The terms ofsection 40A(3) are not absolute. 3. Walfard Transport vs. CIT (240 ITR 902) &CIT vs. Chrome Leather (235 ITR 708), whereinit has been observed as under: where the transaction was found to be genuineand the identity of the payee was established, aliberal view of compelling and mitigatingcircumstances should be taken. 4. CIT vs. Raja Pal Automobiles [2010] (320ITR 185 (All.)), wherein it has been observed asunder: Where Tribunal has held that the assessee hasfully explained the details of payment made incash. The entire evidence in the form of bills,cash memos, etc., has also been furnished bythe assessee. Looking into the business of theassessee and also the nature of itemspurchased, it cannot be disputed that theassessee had to make the payments in cashunderunavoidableandexceptional circumstances. Tribunal was justified in deletingdisallowance under section 40A(3). 5. Harshila Chordia vs. CIT [2008] 298 ITR 349 (RAJ), wherein it has been observed as under: Where genuineness of transaction and identity ofpayee were established and explanation ofassessee for making cash remittances wasacceptable in the light of modus operandi ofassessee’s business, payments in cash could notbe disallowed. 6. Sri Laxmi Satyanarayana Oil Mill v. CIT(2014) 49 taxmann.com 363 (AndhraPradesh), wherein it has been observed as under: Whether since assessee had placed proof ofpayment of consideration for its transaction toseller, and later admitted payment and therewas no doubt genuineness of payment, nodisallowance could be made under section40A(3). 7. Gurdas Garg v. CIT [2015] 63 taxmann.com289 (Punjab & Haryana), wherein it has beenobserved as under: Section 40A(3) of the Income Tax Act 1961,read with rule 6DD of the Income Tax Rules,1962-Business disallowance-Cash paymentsexceeding prescribed limits (Genuineness oftransactions)-During assessement proceedingsAssessing Officer noted that assessee, who wasengaged in trading in properties, made certaintransactions in cash in excess of Rs. 20,000 anddisallowed same under section 40A(3) –Whether since genuineness of said transactionshad not been disbelieved by authorities below, itmade out a case of business expediency andcould not be disallowed under section 40A(3)-Held, yes [Paras 4,5,6,7,8,9 and 10] [In favourof assessee] 8. Anupam Tele Services v. ITO, [2014] 43taxmann.com 199 (Gujarat), wherein it has beenobserved as under: Section 40A(3) of the Income -tax Act, 1961,read with rule 6DD of the Income-tax Rules,1962-Business disallowance- Cash paymentexceeding prescribed limits (Rule 6DD(j))- Assessment Year 2006-07- Assessee wasworking as an agent of Tata Tele ServicesLimited for distributing mobile cards andrecharge vouchers- Principal company Tatainsisted that cheque payment from assessee’sco-operative bank would not do, since realizationtook longer time and such payments should bemade only in cash in their bank account-Ifassessee would not make cash payment andmake cheque payments alone, it would havereceived recharge vouchers delayed by 4/5 dayswhich would severely affect its businessoperation- Assessee, therefore, made cashpayment-Whether in view of above, nodisallowance under section 40A(3) was to bemade in respect of payment made to principal-Held, yes [Paras 21 to 23] 9.Hero Cycles Pvt. Ltd. v. CIT (2015) 379 ITR347 (SC), wherein it has been observed as under: 9.Hero Cycles Pvt. Ltd. v. CIT (2015) 379 ITR347 (SC), wherein it has been observed as under: “Once it is established that there is nexusbetween the expenditure and the purpose ofbusiness (which need not necessarily be thebusiness of the assessee itself), the revenuecannot justifiably claim to put itself in the arm-chair of the businessman or in the position of theBoard of Directors and assume the role to decidehow much is reasonable expenditure havingregard to the circumstances of the case. Nobusinessman can be compelled to maximize hisprofit and that the revenue authorities must putthemselves in the shoes of the assessee and seehow a prudent businessman would act. Theauthorities must not look at the matter from theirown view point but that of a prudentbusinessman.” 10.CIT v. Jugal Kishore Dangayach (2014) 265CTR 215 (Rajasthan), wherein it has beenobserved as under: “12. 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 the assessee 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 ableto 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. 22.In view of above facts and circumstances ofthe case, the Tribunal had correctly come to theconclusion that the interest was rightly allowableon the basis of the fact found.” 11.CITv.RelianceCommunications Infrastructure Ltd. (2012) 260 CTR 159(Bombay), wherein it has been observed as under: 10. 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. The expression "commercial expediency", heldthe Supreme Court, is an expression of wideimport and includes such expenditure as aprudent businessman incurs for the purpose ofbusiness. 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 aholding company "has a deep interest in itssubsidiary advances borrowed money to asubsidiary and the same is used by thesubsidiary for some business purposes, theassessee would ordinarily be entitled todeduction of interest on its borrowed loans. 11. 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 VBC 12/15itxa3155.09-28.3 for making advances toReliance Industries Ltd. But independent of that,in view of the decision of the Supreme Court inS.A.Builders what is significant is as to whetherthe investment and the advances made werecommercially expedient and for the purpose ofbusiness. In this regard, the assessee hadpointed out before the CIT(A) that it is engagedin the business of providing telecommunicationinfrastructure which mainly consists of a PanIndia Fibre Optic Network. Reliance InfocommLtd. is a wholly owned subsidiary of the assesseewhich is engaged in the business of providingtelecommunication services. The assessee made investments in the equity shares of its subsidiaryand claimed that this was with a view to provideintegrated telecommunication services. The caseof the assessee was that those investments weretoensuretheutilizationofthetelecommunications infrastructure of thesubsidiary and was a strategic investment forfurthering business prospects in the area ofproviding telecommunication services. Asregards the advance which was made by theassessee to Reliance Industries Ltd. (RIL) theassessee pointed out to the CIT(A) that it wasrequired to import equipment under the EPCGScheme. The obligations under the EPCGScheme were required to VBC 13/15itxa3155.09-28.3 be backed by bank guaranteeswhich in turn demanded security for theissuance of guarantees. The assessee enteredinto an arrangement with RIL to which itadvanced a sum of Rs.476 crores against whichRIL provided counter guarantees to financialinstitutions equivalent to three times the amountof the margin kept by the assessee with RIL. 12. Now, having regard to this factualbackground, both the CIT(A) and the Tribunalheld that the investments made in the whollyowned subsidiary and the money advanced toRIL were for furthering the business of theassessee. The findings of both the CIT(A) and ofthe Tribunal are consistent with the judgment ofthe Supreme 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 availableunder Section 36(1)(iii). Counsel appearing onbehalf of the Revenue submits that there is adistinction between an advance, which is apayment handed over to some one as a loan andan VBC 14/15 itxa3155.09-28.3 investmentwhich is money placed into financial schemes,shares or property with the expectation ofmaking a profit. 4 We are unable to accept thatsuch a distinction will have any legalconsequence in so far as the entitlement of theassessee to claim a deduction under Section36(1)(iii) is concerned. In the present case,when the assessee advanced an amount to RILthat was with a view to furthering the businessof the assessee. RIL in turn was to executecounter guarantees in favour of financial institutions for the benefit of the discharge ofthe EPCG obligations by the assessee. That wasa security for the guarantees which thoseinstitutions were required to execute under theEPCG Scheme. The funds which were invested inthe wholly owned subsidiary were again for thepurposes of the business of the assessee. Thereis evidently a significant interest of the assesseein the business of its subsidiary since both theassessee and the subsidiary are engaged inproviding telecommunication services. 13.There fore, the order of the Tribunal wasjustifiable and deserved to be upheld.” 12. Bright Enterprises Pvt. Ltd. v. CIT (2016)381 ITR 107 (P&H), wherein it has been observedas under: “9. 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 thememorandum of appeal, the appellant expresslystated that it had advanced the amount of aboutRs. 10.29 crores to its sister concern as ameasure of commercial expediency for thepurpose of business. In the written submissions,the appellant inter alia stated that the appellantand the sister company were in the hotelbusiness; that the Board of Directors of the twocompanies was the same; that the appellantpurchased the shares of the sister company as aninvestment and that the investment andadvances were made for the purposes ofbusiness. From the order of the CIT (Appeals), itis evident that the department never contendedthat the amounts were not advanced forcommercial expediency. Nor was it contendedthat the amounts advanced were used by thesister company for any purpose other than forthe purpose of its business. Indeed, such a casewas not even advanced before the Tribunal. 10. The CIT (Appeals) was, therefore, entirelyjustified in coming to the conclusion that theamount was advanced by the appellant to itssister concern on account of commercialexpediency and that the advance was used by itssister concern for the purposes of its business.The additional facts further establish the findings. 11. The Tribunal's observation that there is 10. The CIT (Appeals) was, therefore, entirelyjustified in coming to the conclusion that theamount was advanced by the appellant to itssister concern on account of commercialexpediency and that the advance was used by itssister concern for the purposes of its business.The additional facts further establish the findings. 11. The Tribunal's observation that there is nothing on record that the money advanced bythe appellant to its sister company had beenused as a measure of commercial expediency,was not justified. The appellant furnished all thedocuments in this regard. The appellantexpressly stated that the amounts had beenutilized for commercial activity. This assertionwas never denied. The appellant was notrequired to do anything further to establish itsassertion that its sister company had utilized theamounts for the purposes of its business. Thefinding of the Tribunal is not based on anymaterial. 18. In the circumstances, the question of law isanswered in favour of the appellant and againstthe department. The order of the Tribunal is setaside. The appellant shall be entitled to thededuction under Section 36(1)(iii).” 13.CIT v. Bharti Televentures Ltd. (2011) 331ITR 502 (Delhi), wherein it has been observed asunder: “12. In the instant case, from the order of theCIT(A) and that of ITAT, as reproduced above, inparagraphs 3 and 6, we note that the assesseewas maintaining a bank account with mixedcommon funds in which all deposits andwithdrawals were made. There was no specificinstance noted by the Assessing Officer inrespect of any direct nexus between theborrowed fund and the said advances made tothe subsidiaries. The Assessing Officer had madegeneral observations without going into thedepth of the matter and without pointing out anyspecific instance where an interest bearingborrowing was advanced to the subsidiaries orestablishing that the borrowings made by theappellant were not for business purposes. Boththe appellate authorities below were of the viewthat the assessee had explained the sources ofthe advances and investments made to thesubsidiaries, which could not be linked to theborrowed funds and that the advances weremade out of the assessee‟s own capital. At therelevant time the assessee was found to behaving an adequate non-interest bearing fund byway of Share Capital and Reserves. Evenotherwise, the advances were found to be madeto the subsidiaries for business considerationswhich is nothing but the commercial expediencyof assessee. That being the factual position reflected from the record of the assessee, theonus that laid on it stood discharged.” and also on the decision of this Court in D.B. Income Tax AppealNo.168/2011, Commissioner of Income Tax vs. M/s DaswaniClasses LTC., decided on 17.7.2017, wherein it has been observedas under: reflected from the record of the assessee, theonus that laid on it stood discharged.” and also on the decision of this Court in D.B. Income Tax AppealNo.168/2011, Commissioner of Income Tax vs. M/s DaswaniClasses LTC., decided on 17.7.2017, wherein it has been observedas under: 10. The counsel for the respondent in support ofhis submissions on question No.3 relied on thefollowing decisions. 1. S.A. Builders Ltd. vs.Commissioner of Income Tax (Appeals),Chandigarh and Anr. (2007) 288 ITR 1 (SC) “16.In our opinion, the High Court as well as theTribunal and other Income Tax authorities shouldhave approached the question of allowability ofinterest on the borrowed funds from the aboveangle. In other words, the High Court and otherauthorities should have enquired as to whetherthe interest free loan was given to the sistercompany (which is a subsidiary of the assessee)as a measure of commercial expediency, and if itwas, it should have been allowed. Theexpression "commercial expediency" is anexpression of wide import and includes suchexpenditure as a prudent incurs for the purposeof business. The expenditure may not have beenincurred under any legal obligation, but yet it isallowable as a business expenditure if it wasincurred on grounds 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 thisCourt 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) 379 ITR347 “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 (which need 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 to the 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 point but that of a prudent businessman.” 3. Commissioner of Income Tax vs. Jugal KishoreDangayach (2014) 265 CTR 215(Rajasthan) need 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 to the 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 point but that of a prudent businessman.” 3. Commissioner of Income Tax vs. Jugal KishoreDangayach (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 ableto prove that the assessee had tradedealingswith M/s. Tirupati Pulses (P) Ltd. Towhom it is alleged by the AO that the assesseeadvanced more than Rs. 80 lacs. It is anadmitted position that the assessee madepurchases to the tune of Rs. 21,24,06,662 fromM/s. Tirupati Pules (P) Ltd., which is based onthe audit report and advances, if any, weretowards the aforesaid purchases made by therespondent/assessee. So there was no occasionfor the assessee to have charged any interestfrom a concern with whom it had trade dealings,may be the concern is related or not, it does notmake any difference. Once it had been provedby the assessee that it had trade transactionswith persons to whom advances are made, thenin our opinion, looking to the commercial andbusiness expediency, one is not required tocharge the interest. The assessee is to manageitsownaffairslookingtothecommercial/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 Infrastructure Ltd.(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 owned 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 owned subsidiary of the assessee which is engaged inthe business of providing telecommunicationservices. The assessee made investments in thequity 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 in 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 in turn was to execute counter guarantees infavour 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