The Commissioner Of Income Tax-17 v. M/S. P.d. Warehousing Corporation

ASN IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO.5606 OF 2010 The Commissioner of Income Tax-17. ...Appellant. Vs. M/s. P.D. Warehousing Corporation....Respondent. Mr. D .K. Kamwal for the Appellant. Mr. Percy Pardiwalla, Sr. Counsel i/by A .K. Jasani for the Respondent. CORAM : S.J.VAZIFDAR & M.S. SANKLECHA, JJ. DATE : 22[th] June, 2012 PC: This is an appeal by the revenue under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the “said Act”) against the order dated 10[th] February 2010 of the Income Tax Appellate Tribunal (hereinafter referred to as the “Tribunal”) relating to Assessment Years 2004-05 (year ending 31[st] March 2004). Being aggrieved, the revenue has framed the following question of law for consideration of this Court. A.Whether on the facts and in the circumstances of the case and in law the Tribunal is justified in deleting the dis-allowance of Rs.31,13,000/- made by the Assessing Officer u/s. 36(1)(iii) of the Income Tax Act, 1961, without appreciating the fact that interest paid on loans borrowed and utilized for payment to retiring partners is not admissible deduction u/s. 36(1)(iii) of the Act? 2)Mr. Suresh Kumar apspearing for the revenue appellant submits that identical question in Income Tax Appeal No.1287 of 2009 in the matter of M/s. Commissioner of Income Tax Vs. M/s. Parsi Dairy Farm has been admitted and therefore, the aforesaid question in the present appeal also be admitted and be heard along with the above appeal. Mr. Jasani, Advocate appearing for the respondent does not agree with the aforesaid submission and states that the issue arising in the present appeal is different as is evident from the manner in which the question of law has been framed in the matter of M/s.Parsi Dairy Farm in Income Tax Appeal No.1287 of 2009. As the Advocates were not agreed, we decided to consider this appeal for admission. 3)The respondent assessee is a partnership firm dealing in real estate, warehousing etc. In terms of the family arrangement dated 3[rd] May, 2002 read with retirement deed dated 3[rd] May, 2002. the respondent assessee had paid a sum of Rs.4.50 crores to its retiring partners during assessment year 2003-04. The aforesaid amount was paid to the retiring partner out of a loan taken on interest. The respondent-assessee sought a deduction of Rs.31.13 lacs being interest paid during the assessment year 2005-06 on the loan taken to pay the retiring partner. The Assessing Officer disallowed the claim of interest made by the respondent assessee under Section 36(1)(iii)of the said Act on the ground that the amount was not borrowed for the purposes of business and the respondent did not benefit from it. The CIT (Appeals) also upheld the claim of the Assessing Officer. The appeal filed by the respondent assessee before the Tribunal was allowed. The Tribunal took a view that the amount borrowed for the purpose of paying the retiring partner was for the purpose of safeguarding the interest of the firm and consequently was for commercial expediency. The amount paid to the reitring partners was debited to the funds of the firm and consequently the payments were made by the firm out of the borrowed funds on which they had to pay interest. As correctly pointed out by the Advocate for the respondent that in the absence of paying the retiring partners out of borrowed funds, the respondent assessee would have had to sell its assets to pay the retiring partner. Therefore, this borrowing of funds was a commercial decision taken by the partners of the firm bearing in mind various alternatives available to raise funds to pay the retiring partner. 4)The Apex Court in the matter of S. A. Builders Ltd. v. CIT (Appeals) and another reported in 288 ITR 1 held that Section-36(1)(iii) of the said Act allows deduction on account of interest paid in respect of amounts borrowed for the purpose of the business while computing profits and gains from business or profession under Section-28 of the said Act. The court held that the expression “purpose of business” is much wider than the expression “for the purpose of earning profits”. Further, the Apex Court held that once the nexus is established between the expenditure and the purpose of the busness the revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume their role to decide how much is reasonable expenditure having regard to the circumstances of the case. 5)In view of the reasons given by the Tribunal in its order dated 10[th] February, 2010 as well as the decision of the Apex Court in the matter of S.A. Builders Ltd. 288 ITR Page-1, no substantial question of law arises for s consideration by this Court. 6)to costs. In view of the above, the appeal is dismissed. No order as ( M.S. SANKLECHA, J. ) ( S. J. VAZIFDAR, J.)