The Principal Commissionerof Income Tax, Panaji v. V. S. Dempo Holding Pvt. Ltd

IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NO.62 OF 2016 THE PRINCIPAL COMMISSIONEROF INCOME TAX, PANAJI. VS V. S. DEMPO HOLDING PVT. LTD. ... Appellant. ... Respondent. Ms. Susan Linhares, Advocatefor the Appellant.Mr. Mihir Nanivadekar with Ms. Vinita Palyekar, Advocatesfor.the Respondent Coram:M.S. SONAK &SMT. M.S. JAWALKAR, JJ.Date: 19[th] July 2021 ORAL ORDER(Per M. S. Sonak, J.) 1.Heard Ms. Linhares for the Appellant, Mr. Mihir Nanivadekarwho appears along with Ms. Vinita Palyekar for the Respondent. 2.In this appeal, the Appellant – Revenue had proposed thefollowing two substantial questions of law:- “A. Whether the Hon'ble ITAT was right in confirmingthe Ld.CIT(A)'s decision in deleting the addition ofRs.70,93,991/- on account of finance charges/interest onborrowed funds relying upon the fresh evidence producedbefore the CIT(A) and ITAT, without affording anopportunity to the Assessing Officer to examine the samethough, the assessee had not been able to prove, withevidence, at the time of the assessment proceeding that theborrowed funds were wholly and exclusively used forbusiness purpose and not diverted to give interest freeadvances to sister concerns? B. Whether the Hon'ble ITAT was right in notappreciating that the addition of Rs.15,37,40,627/- madeon account of interest free loans advanced by the assessee toits subsidiaries, amounts to transfer of income withouttransferring assets u/s. 60 or 61. Also, the transactions hasbeen done to avoid and/ or reduce the tax liability by meansof settlement as per the decision of the Hon'ble SupremeCourt in the Jaiswal (SP) vs. CIT (1197) 224 ITR 619?” 3.This Court, by its order dated 14.06.2017, declined to framethe first substantial question of law by giving reasons therefor whichare to be found in paragraph 4:- “We called upon the learned Counsel appearing for theAppellant to produce the Appeal Memo before the ITITAppeals to ascertain whether such grounds were raisedbefore the ITAT. On perusal of the Memo, we find that nosuch challenge was raised by the Appellants whilst filing anAppeal against the Order of the CIT (Appeals) before thelearned Tribunal. Apart from that, the authenticity of thedocuments was not disputed by the Appellant before theCIT (Appeals) nor before the learned Tribunal. When nosuch contentions were raised before the authorities below,we find that the question of re-appreciating the evidence inthe present Appeal based on the said proposed substantialquestion of law on that count would not at all arise. Hence,the first substantial question of law does not survive.” 4.By the same order dated 14.06.2017, the second substantialquestion of law was framed. 5.This appeal is concerned with the assessment year 2011-12. Theassessee advanced interest-free loans to its subsidiaries in the amountof around Rs.1,32,31,09,867/-. The assessee was then called upon toexplain why interest income should not be taxed in the hands of the assessee given the provisions of sections 60 and 61 of the Income TaxAct, 1961 (I.T. Act). The detailed explanation furnished by theassessee was not accepted by the assessing officer, who, by his orderdated 28.11.2013, ordered the addition of an amount ofRs.15,37,40,627/- to the total income of the assessee under the head“Income from other sources”. 6.The assessee appealed and the Commissioner of Income Tax(Appeals) and by his order dated 28.11.2014, accepted the case of theassessee and ordered the deletion of the amount of Rs.15,37,40,627/-. 7.The Revenue then appealed to the Income Tax AppellateTribunal (ITAT) and the ITAT, by order dated 27.07.2015 dismissedthe Revenue's appeal and upheld the deletion order by CIT(Appeals).Hence, the present appeal on the aforesaid substantial question of law. assessee given the provisions of sections 60 and 61 of the Income TaxAct, 1961 (I.T. Act). The detailed explanation furnished by theassessee was not accepted by the assessing officer, who, by his orderdated 28.11.2013, ordered the addition of an amount ofRs.15,37,40,627/- to the total income of the assessee under the head“Income from other sources”. 6.The assessee appealed and the Commissioner of Income Tax(Appeals) and by his order dated 28.11.2014, accepted the case of theassessee and ordered the deletion of the amount of Rs.15,37,40,627/-. 7.The Revenue then appealed to the Income Tax AppellateTribunal (ITAT) and the ITAT, by order dated 27.07.2015 dismissedthe Revenue's appeal and upheld the deletion order by CIT(Appeals).Hence, the present appeal on the aforesaid substantial question of law. 8.Ms. Linhares submits that in this case, there is no material toestablish any commercial expediency, which prompted the assessee toadvance interest-free loans to its subsidiaries. Relying on S.A.Builders Ltd. vs. CIT[1], she submits that in the absence of anymaterial about commercial expediency, the interest which might haveaccrued to the assessee were the assessee to charge interest on the loanadvanced, is liable to be taxed in the hands of the assessee. Ms.Linhares submitted that even the decision in S.P. Jaiswal vs. CIT[2]supports such a contention. Based on these two decisions and hercontention that no commercial expediency has been established by the 1AIR 2007 SC 535 21997(3) Supreme 48 assessee in this matter, Ms. Linhares submitted that the substantialquestion of law as framed may be answered in favor of the Revenue. 9.Mr. Mihir Nanivadekar, learned Counsel for the Respondentdefended the impugned orders made by the CIT (Appeals) and theITAT based on the reasoning reflected therein. He submitted that inthe facts of this case, commercial expediency has been established bythe assessee. He submitted that in any case, the issue of commercialexpediency might have been involved if the assessee had itself raisedany loans to provide interest-free loans to its subsidiaries and thereafterclaimed the interest payable by the assessee as deductions. He submitsthat the material on record points out to the reserve of Rs.1,000crores, held by the assessee as well as the fact that the subsidiaries havenot earned any interest as such from the interest-free loan advanced bythe assessee. He relied on several decisions, including the decision inCIT-7 vs. Reliance Communications Infrastructure Limited[3], tosubmit that this appeal may be dismissed. 10.Mr. Nanivadekar also relied on The Principal Commissionerof Income Tax vs. Sesa Resources Ltd. (Earlier known as VSDempo & Co Pvt Ltd)4, decided on 16.08.2017, in which, theDivision Bench of this Court, has rejected the Revenue's contentionthat even notional interest can be assessed to tax or that the grant ofinterest-free loans was not based on any commercial expediency. Mr.Nanivadekar pointed out that it is precisely the loan transactions thatare involved in the present appeal that was considered by the Division 3(2012) 21 Taxmann 118 (Bom)4Tax Appeal No.57 of 20164Tax Appeal No.57 of 2016 Bench in Tax Appeal No. 57/2016. He submits that this is anadditional reason as to why this appeal should be dismissed. 11.The rival contentions now fall for our determination. 10.Mr. Nanivadekar also relied on The Principal Commissionerof Income Tax vs. Sesa Resources Ltd. (Earlier known as VSDempo & Co Pvt Ltd)4, decided on 16.08.2017, in which, theDivision Bench of this Court, has rejected the Revenue's contentionthat even notional interest can be assessed to tax or that the grant ofinterest-free loans was not based on any commercial expediency. Mr.Nanivadekar pointed out that it is precisely the loan transactions thatare involved in the present appeal that was considered by the Division 3(2012) 21 Taxmann 118 (Bom)4Tax Appeal No.57 of 20164Tax Appeal No.57 of 2016 Bench in Tax Appeal No. 57/2016. He submits that this is anadditional reason as to why this appeal should be dismissed. 11.The rival contentions now fall for our determination. 12.In this case, both the CIT (Appeals) and ITAT have recordedconcurrent findings of fact that the loans advanced by the assessee toits subsidiaries were not sham transactions or paper transactions, butfurther, such loans were advanced for reasons of commercialexpediency. These findings have been confirmed by the DivisionBench deciding Tax Appeal No. 57/2016 since the loan transactions inthe said appeal were the very loan transactions that were the subjectmatter of the present appeal. That apart, the CIT (Appeals) in thepresent case, has recorded certain findings of fact, which are borne outfrom the evidence on record. For instance, CIT (Appeals) has recordeda finding that the subsidiary companies to whom the assessee hadadvanced the loans have not earned any interest income therefrom.There is a finding that the assessee is the holding company and hasmajor stakes in the subsidiary to whom these interest-free loans cameto be advanced. There is a finding that the source of subsidiaries'income is not ‘interest’. There is a finding that the assessee had reservesof over Rs.1,000 crores. Based on all these findings of fact, the CIT(Appeals) has concluded that the loans were advanced for commercialexpediency. 13.The ITAT, upon considering the contentions of the Revenuehas affirmed the findings of fact recorded by the CIT (Appeals). Thus,in this case, there are concurrent findings of fact that are themselves based on the material on record. Therefore, even if we proceed on thebasis that the commercial expediency test is indeed required to beapplied to the case at hand, such test stands fulfilled based on theconcurrent findings of fact recorded by the two authorities. 14.The ITAT has also relied on the decision of the Gauhati HighCourt in Highways Construction Co. (P.) Ltd. vs. Commissionerof Income-tax5, in which it is held that where there are no findings offact to the effect that any interest had actually been collected by theassessee but was not reflected in the accounts, there was no provisionempowering the Income Tax authorities to include in the income,interest, which was neither due nor collected. The addition of amountsas notional interest was therefore not justified. In the present case aswell there is no such finding. Only notional income is sought to beincluded in the income and taxed. 15.The decision in S.P. Jaiswal (supra) is distinguishable because inthat case, the father had advanced a loan to his own children, andinterest was earned by the children on the loan so advanced. There wasalso evidence that the father had himself taken loans to be able toadvance such loans to his children. Even the Revenue, in the said case,had contended that these transactions were merely paper adjustmentsintended to reduce the tax liability and there was factually no loan assuch which could be said to have been advanced. The Hon'ble ApexCourt, also accepted that these were only paper transactions. Therecan be no comparison between the factual situation in Jaiswal (supra)and the factual situation in the present case. The CIT (Appeals) and ITAT have quite correctly distinguished Jaiswal (supra) as beinginapplicable to the facts of the present case. ITAT have quite correctly distinguished Jaiswal (supra) as beinginapplicable to the facts of the present case. 16.S.A. Builders (supra) takes the view that it is not in every casethat interest on a borrowed loan has to be allowed if the assesseeadvances it to a sister concern. It all depends on the facts andcircumstances of the respective case. For instance, if the directors ofthe sister concern utilize the amount advanced to it by the assessee fortheir personal benefit, obviously it cannot be said that the money soadvanced is a measure of commercial expediency. However, money canbe said to have been advanced to a sister concern for commercialexpediency in many other circumstances. Where a holding company,has a deep interest in its subsidiary, and the holding company advancesborrowed money to a subsidiary and the same is used by the subsidiaryfor some business purpose, the holding company would ordinarily beentitled to a deduction on the interest of the borrowed loans. 17.In the present case, there are findings of fact that the assessee isthe holding company and has a deep interest in its subsidiary. Besides,there is material on record that the loans that were advanced to thesubsidiaries were not from the borrowed monies. It is also not the casewhere the assessee had claimed any deductions on the interest paid forborrowing the monies to advance interest-free loans to its subsidiaries.Rather, the material on record suggests that the assessee had reserves ofover Rs.1,000 crores and further, even the subsidiaries, did not deriveany interest income as such from out of these interest-free advancesreceived from the assessee. All these circumstances do establish a case of commercial expediency even applying the principles laid down inS.A. Builders (supra). Therefore, based on S.A. Builders (supra), thereis no case made out to interfere with the view taken by the CIT(Appeals) and the ITAT. 18.The assessee, has quite rightly relied on RelianceCommunication (supra) which has after considering S.A. Builders(supra) held that the expression “commercial expediency” is anexpression of wide import and includes such expenditure as a prudentbusinessman incurs for business. An expenditure, which iscommercially expedient, may not be incurred under a legal obligation,but so long as it meets the requirement of commercial expediency, ithas to be allowed. In the present case, there is not even any allegationthat the interest-free loans advanced by the assessee were utilized forthe personal benefit of the directors of the sister concern. 19.As noted earlier, the Revenue, had urged that substantialquestion of law (A) be framed, but this request was declined by thisCourt by a speaking order dated 14.06.2017. 20.As a result, the substantial question of law as framed is requiredto be answered against the Revenue and in favor of the assessee. 21.This appeal fails and is hereby dismissed. There shall be noorder as to costs. SMT. M.S. JAWALKAR, J. jfd/- M.S. SONAK, J.