Wp/947/2014 Of Vaman Prestressing Co. Pvt. Ltd v. The Additional Commissioner Of Income Tax - Rg,2(3), Mumbai And Another

Digitally signedby PURTIPURTIPRASAD1/21PRASADPARABDate:PARAB2023.09.1515:07:17+0530 IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION WRIT PETITION NO. 947 OF 2014 Vaman Prestressing Co. Pvt. Ltd.a Company incorporated under theCompanies Act, 1956 and havingits registered office at 303, Elphinstone House, 17, Marzban Road,Mumbai – 400 001. ….Petitioner V/s.1. The Additional Commissioner ofIncome Tax – Rg 2(3), Mumbaihaving his office at Room No.546,5[th] Floor, Aayakar Bhavan, M.K. Road,Mumbai – 400 020. 2. The Commissioner of Income Tax -2Mumbai having his office at Room No.344, 3[rd] Floor, Aayakar Bhavan, M.K. Road,Mumbai – 400 020. 3. The Union of India,Through the Secretary,Department of Revenue, Ministryof Finance, North Block,New Delhi – 110 001.…Respondents ALONGWITH WRIT PETITION NO. 961 OF 2014 Vaman Prestressing Co. Pvt. Ltd.a Company incorporated under theCompanies Act, 1956 and havingits registered office at 303, Elphinstone House, 17, Marzban Road,Mumbai – 400 001.….Petitioner V/s.1. The Additional Commissioner ofIncome Tax – Rg 2(3), Mumbai having his office at Room No.546,5[th] Floor, Aayakar Bhavan, M.K. Road,Mumbai – 400 020. 2. The Commissioner of Income Tax -2Mumbai having his office at Room No.344, 3[rd] Floor, Aayakar Bhavan, M.K. Road,Mumbai – 400 020. 3. The Union of India,Through the Secretary,Department of Revenue, Ministryof Finance, North Block,New Delhi – 110 001.…Respondents ---- Mr. P.J. Pardiwalla, Senior Advocate a/w Mr. Nitesh Joshi i/b Mr. Atul K.Jasani for Petitioner.Mr. Suresh Kumar for Respondents. ---- CORAM : K.R. SHRIRAM & DR. N.K. GOKHALE, JJ.RESERVED ON : 8[th] SEPTEMBER 2023PRONOUNCED ON : 15[th] SEPTEMBER 2023 ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.) WRIT PETITION NO. 947 OF 2014 1.Petitioner is engaged in the business of manufacture and sale ofprestress concrete sleepers used in laying of railway tracks. As stated in thepetition there is an internal understanding amongst the members ofConcrete Sleeper Manufacturer Association of India that a company having its manufacturing facility in a particular zone will cater to the requirementsof the railways in their own zone, thereby saving on the transportation cost. In the year 2007, Rail Vikas Nigam Limited (RVNL) had awarded petitioner a contract for manufacture and supply of PSC mono block sleepers for broadgauge for ADB funded project of Aligarh to Ghaziabad, 3[rd] Line which is inthe Northern zone. It was also mandated that petitioner should set up anew manufacturing facility at an agreed location. Petitioner thereforeincorporated a new company ICON Sleeper Track Pvt. Ltd. (ICON) on28[th] August 2007 as a subsidiary of petitioner. Petitioner assigned thecontract for the work received from RVNL to ICON for which an assignmentdeed was executed on 19[th] July 2008. ICON has set up a manufacturingfacility for manufacture of PSC sleepers at Sholaka on Northern Railway.For this purpose, petitioner had granted loans and advances and alsoinvested in the share capital of ICON which, as on 31[st] March 2008, stood atRs.7,67,91,417/- and Rs.20,00,000/-, respectively and Rs.8,05,30,529/- andRs.1,00,00,000/- as on 31[st] March 2009, respectively. It is this deploymentof fund to associate concerns which, according to the Revenue, was for anon business purpose. 2.For the first time in the previous year relevant to AssessmentYear 2003-04, Respondent No.1 alleged that the amount deployed bypetitioner towards making investment in extending loans and advances toassociate concerns was out of borrowed funds and made a disallowance ofinterest expenditure incurred on its borrowings on the ground thatborrowed funds to the extent deployed in such activity were not used forthe purpose of its business. Aggrieved by the assessment order, petitionerhad filed an appeal before the Commissioner of Income Tax (Appeals) 2.For the first time in the previous year relevant to AssessmentYear 2003-04, Respondent No.1 alleged that the amount deployed bypetitioner towards making investment in extending loans and advances toassociate concerns was out of borrowed funds and made a disallowance ofinterest expenditure incurred on its borrowings on the ground thatborrowed funds to the extent deployed in such activity were not used forthe purpose of its business. Aggrieved by the assessment order, petitionerhad filed an appeal before the Commissioner of Income Tax (Appeals) (CIT[A]), who held that such deployment of funds were for businesspurpose and that such funds were deployed out of interest free fundsavailable with petitioner. The Revenue’s appeal to the Income Tax AppellateTribunal (ITAT) and to this court have been dismissed where they haveapproved the view taken by the CIT[A], i.e., investments and lending offunds were made for the purpose of petitioner’s business and that the saidinvestments were made out of own funds and not out of borrowed funds. It is petitioner’s case that though petitioner continued to placefunds by way of investing in and granting of loans and advances to the sisterand associate concerns for Assessment Years 2004-05 to 2008-09, theRevenue has not made any disallowance of interest expense in those yearsthereby accepting that the deployment of funds is for business purposeand/or made out of interest free funds. 3.Petitioner’s investment in ICON by way of share applicationmoney and by granting loans and advances stood at Rs.9,05,30,529/- as on31[st] March 2009. As against this, the interest free funds available stood atRs.10,86,31,647/-. Petitioner filed its return of income on 30[th] September2009 for Assessment Year 2009-10 declaring a total income ofRs.1,79,98,700/-. Intimation was received from the Income Tax Departmentaccepting return of income and granting consequential refund on 21[st] March2011. 4.Thereafter petitioner received a notice dated 18[th] March 2013from Respondent No.1 under Section 148 of the Income Tax Act (the Act)alleging that he had reason to believe that petitioner’s income chargeable totax for Assessment Year 2009-10 has escaped assessment. Petitioner wasalso provided with reasons to believe vide communication dated 15[th] March 2013. The reasons to believe read as under : Date : 15.03.2013 A survey u/s. 133A of the IT Act was conducted in the case ofM/s.Gita Refractories Pvt. Ltd. In this regard information isreceived from ITO, Ward 11(2), Bangalore that M/s. VamanPrestressing Co. Pvt. Ltd. is a group company of M/s. GitaRefractories Pvt. Ltd. During the course of Survey u/s. 133A of theIT Act it was seen that M/s. Vaman Prestressing Pvt. Ltd. hadadvance a loan of Rs.8.05 crores as on 31.03.2009 to associate andsister concerns without charging any interest. Similarly an amountof Rs. 1 Crore as on 31.03.2009 was advanced to sister concernswithout charging interest as share application money. It is alsoseen that the assessee company had borrowed an amount ofRs.6.18 crores as on 31.03.2009 and interest of Rs.1.21 crores ischarged off for A.Y. 2009-10. Considering the above, it is seen thatthe borrowed capital is advanced to sister concerns and associateconcerns without charging any interest. Therefore, interest claimedon borrowed capital is not allowable u/s. 36(1)(iii) of the IT Act. Hence, I have reason to believe that income has escapedassessment within the meaning of section 147 of the I.T. Act. Issue notice u/s. 148 of the I.T. Act. (Abhyuday A Anand, I.R.S) Asstt. Commissioner of Income Tax 2(3) Mumbai 5.Petitioner filed its objections vide its communication dated 13[th]July 2013 and 16[th] October 2013 explaining that the advances to sisterconcern and associate concern have been made by utilizing its own fundsand there are no borrowed capital that was advanced to sister concern. It Hence, I have reason to believe that income has escapedassessment within the meaning of section 147 of the I.T. Act. Issue notice u/s. 148 of the I.T. Act. (Abhyuday A Anand, I.R.S) Asstt. Commissioner of Income Tax 2(3) Mumbai 5.Petitioner filed its objections vide its communication dated 13[th]July 2013 and 16[th] October 2013 explaining that the advances to sisterconcern and associate concern have been made by utilizing its own fundsand there are no borrowed capital that was advanced to sister concern. It was also stated that even for the Assessment Year 2003-04 in petitioner’sown case the Bombay High Court had dismissed the appeal filed by thedepartment where the department had taken similar plea that assessee hasutilized interest bearing funds for the purpose of advancing an amount ofRs.2.20 Crores towards share application money. It was also pointed outthat for Assessment Years 2007-08 and 2008-09 orders have been passedunder Section 143(3) of the Act where, on identical facts, no addition hasbeen made on account of interest in respect of share application money andloans and advances to associate concern as the same have been accepted ashaving been made out of assessee’s own funds and therefore, the reason forforming the belief that income has escaped assessment for Assessment Year2009-10 is incorrect and consequential notice issued under Section 148 ofthe Act is invalid. 6.Petitioner’s objections were rejected by an order dated 27[th]November 2013 without considering any of the submissions of petitioner.Though the submissions have been reproduced in the order it has beenrejected only on the ground that since there was no assessment done in theaforesaid case the department had no occasion to verify the veracity of theclaim made in the income tax return. The Assessing Officer (A.O.)concluded, relying upon Assistant Commissioner of Income-Tax vs. RajeshJhaveri Stock Brokers Pvt. Ltd.[1]that where no regular assessment was done and only summary order under Section 143(1) of the Act was done, the casecan be re-opened under Section 147 of the Act. The A.O. also held that theproceedings of earlier years and findings of the Appellate Authority in theyear 2003-04 or by A.O. in the year 2007-08 and 2008-09 have a bearingonly at the time of assessment to be undertaken in those proceedings andnot on the issuance of notice under Section 148 of the Act as therequirement of law is that the A.O. should have reasons to believe thatincome has escaped assessment and sufficiency of reason is not required forissuance of notice. 7.It is this order dated 27[th] November 2013 along with noticedated 18[th] March 2013 that was issued under Section 148 of the Act, whichare impugned in the petition. Subsequently, a notice under Section 142(1)of the Act was also issued to petitioner. 8.The petition came to be admitted by an order dated 25[th] June2014 and Ad-interim relief was granted. Respondent no.1 was directed notto take further steps pursuant to the notice issued under Section 148 andSection 142(1) of the Act. During the pendency of the petition proceedingsunder Section 153(A) of the Act against petitioner was commenced andassessment order dated 27[th] March 2015 under Section 153(A) read withSection 143(3) of the Act has been passed. By the said assessment order thereturns of petitioner for Assessment Year 2009-10 has been accepted as filed. Pursuant to the leave granted by this court, the petition was amendedon 23[rd] February 2022. No reply has been filed at all either to the petitionas originally filed or to the amended portion. 9.Mr. Pardiwalla submitted as under : (a)The A.O. must have formed belief that assessee’s income chargeable totax has escaped assessment, such belief formed by the A.O. must be basedon relevant material and unless the jurisdictional requirements are fulfilledthe assumption of jurisdiction to reassess petitioner’s income is illegal. filed. Pursuant to the leave granted by this court, the petition was amendedon 23[rd] February 2022. No reply has been filed at all either to the petitionas originally filed or to the amended portion. 9.Mr. Pardiwalla submitted as under : (a)The A.O. must have formed belief that assessee’s income chargeable totax has escaped assessment, such belief formed by the A.O. must be basedon relevant material and unless the jurisdictional requirements are fulfilledthe assumption of jurisdiction to reassess petitioner’s income is illegal. (b)No part of income chargeable to tax has escaped assessment.Petitioner had advanced a loan of Rs.8.05 Crores as on 31[st] March 2009 toassociate and sister concern without charging any interest. Similarly as onthat date an amount of Rs.1 Crore was advanced to the sister concernwithout charging interest as share application money. Petitioner hadborrowed funds which as on 31[st] March 2009 stood at Rs.9.48 Crores and ithad claimed deduction towards interest for Assessment Years 2009-10 ofRs.1.21 Crores. According to Respondent No.1 since the borrowed capital of petitionerwas advanced to sister and associate concern without charging any interest,the interest paid on borrowed capital was not allowable as a deductionunder Section 36(1)(iii) of the Act which showed that petitioner’s incomechargeable to tax as escaped assessment. There is no basis for this belief tobe formed. Similarly stand of Revenue has been rejected by the CIT[A] as well as the ITAT in petitioner’s own case for Assessment Year 2003-04. (c)As held by the Hon’ble Apex Court in S.A. Builders Ltd. Vs.Commissioner of Income Tax (Appeals) and Another[2], in order to decidewhether interest on funds borrowed by the assessee to give an interest freeloan to sister concern should be allowed as a deduction under Section 36(1)(iii) of the Act, one has to enquire whether the loan was given by theassessee as a measure of commercial expediency. The expression“commercial expediency” is one of wide import and includes suchexpenditure as a prudent businessman incurs for the purpose of business.Even if the expenditure may not have been incurred under any legalobligation, yet it is allowable as business expenditure if it was incurred ongrounds of commercial expediency. (d)In S.A. Builders Ltd.(supra) the court held that where there wasnexus between the expenditure and purpose of the business (which neednot necessarily be the business of assessee itself) the A.O. cannot justifiablyclaim to put himself in the arm-chair of the businessman or in the positionof the board of directors and assume the role to decide how much is thereasonable expenditure having regard to the circumstances of the case. In the case at hand the fact that the amount was advanced as interestfree loan to associate concern is not disputed by the Revenue for theAssessment Year 2003-04. The CIT[A] and the ITAT have accepted thatthose were commercial expediency for 2007-08 and 2008-09 as assessment 2 [2007] 288 ITR 1 (SC) orders under Section 143(3) have been passed accepting returns as filedand therefore the commercial expediency could not be disputed. In the case at hand the fact that the amount was advanced as interestfree loan to associate concern is not disputed by the Revenue for theAssessment Year 2003-04. The CIT[A] and the ITAT have accepted thatthose were commercial expediency for 2007-08 and 2008-09 as assessment 2 [2007] 288 ITR 1 (SC) orders under Section 143(3) have been passed accepting returns as filedand therefore the commercial expediency could not be disputed. (e)In Prashant S. Joshi vs. Income Tax Officer and Another[3], the courtheld that the basic postulate which underlines Section 147 of the Act is theformation of belief by the Assessing Officer that any income chargeable totax has escaped assessment for any assessment year. The Assessing Officermust have reasons to believe that such is the case before he proceeds toissue a notice under Section 147 of the Act. The reasons which are recordedby the Assessing Officer for reopening an assessment are the only reasonswhich can be considered when the formation of the belief is impugned. Thetouchstone to be applied is whether there was reason to believe that incomehad escaped assessment. The sufficiency of the evidence or material is notopen to scrutiny by the court but the existence of the belief is the sine quanon for a valid exercise of power. In the facts and circumstances of the caseand as per the law laid down by the court it was impossible for any prudentperson to form a reasonable belief that the income had escaped assessment.The reasons which have been recorded could never have led a prudentperson to form an opinion that income had escaped assessment within themeaning of Section147 of the Act. 10.Mr. Suresh Kumar submitted as under : (a)Since there is no assessment done in the aforesaid case the 3 [2010] 324 ITR 154 (Bom) department had no occasion to verify the veracity of the claim made in theincome tax returns. As held by the Hon’ble Apex Court in Rajesh JhaveriStock Brokers Pvt. Ltd. (supra) where no regular assessment was done andonly summary order under Section 143(1) of the Act was done, the case canbe re-opened under Section 147 of the Act. (b)The proceedings of earlier years and findings of the AppellateAuthority for Assessment Year 2003-04 or by the A.O. in the year 2007-08and 2008-09 have a bearing only at the time of assessment to be undertakenin those proceedings and not on the issuance of notice under Section 148 ofthe Act. This is because the requirement of law is that the A.O. should havereason to believe that the income has escaped assessment and sufficiency ofreason is not required for issuance of notice. (c)Let the proceedings continue further and petitioner can go and makeall submissions. Findings/Conclusions : 11.The law as laid down by the Hon’ble Apex Court in S.A.Builders Ltd.(supra) is very clear that where the loan has been given tosister concern or associate concern of the assessee as a measure ofcommercial expediency by using borrowed funds, the interest on suchborrowed funds should be allowed as deduction under Section 36(1)(iii) ofthe Act. The Hon’ble Apex Court in S.A. Builders Ltd. (supra) has also heldthat the expression “commercial expediency” is one of wide import and includes such expenditure as a prudent businessman incurs for the purposeof business. Even if the expenditure may not have been incurred under anylegal obligation yet it is allowed as business expenditure if it was incurredon grounds of commercial expediency. But what is commercial expediencydepends on facts and circumstances of each case. In fact in S.A. BuildersLtd. (supra) the Hon’ble Apex Court also has put a caveat “We wish to makeit clear that it is not our opinion that in every case interest on borrowed loanhas to be allowed if the assessee advances it to a sister concern. It alldepends on the facts and circumstances of the respective case.” includes such expenditure as a prudent businessman incurs for the purposeof business. Even if the expenditure may not have been incurred under anylegal obligation yet it is allowed as business expenditure if it was incurredon grounds of commercial expediency. But what is commercial expediencydepends on facts and circumstances of each case. In fact in S.A. BuildersLtd. (supra) the Hon’ble Apex Court also has put a caveat “We wish to makeit clear that it is not our opinion that in every case interest on borrowed loanhas to be allowed if the assessee advances it to a sister concern. It alldepends on the facts and circumstances of the respective case.” 12.In Prashant S. Joshi (supra) the Division Bench of this courtheld that the Assessing Officer must have reasons to believe that income hasescaped assessment and at that stage an established fact that income hasescaped assessment is not required. The only question, at the stage ofissuing notice is whether there was relevant material on which a reasonableperson could have formed a requisite belief and whether the materialswould conclusively prove the escapement is not the concern at that stagebecause formation of belief by the Assessing Officer is within the realm ofsubjective satisfaction. The court held that some time the touchstone to beapplied is whether there was reason to believe that income had escapedassessment. The Division Bench also held that the act of taking noticecannot be at the arbitrary whim or caprice of the Assessing Officer and mustbe based on a reasonable foundation. The sufficiency of the evidence or material is not open to scrutiny by the court but the existence of the belief isthe sine qua non for a valid exercise of power. In the facts andcircumstances of that case, the Division Bench held that it was impossiblefor any prudent person to form a reasonable belief that the income hadescaped assessment. 13.In Commissioner of Income Tax vs. Kelvinator of India Ltd.[4]the Hon’ble Apex Court held that the Assessing Officer has power to reopenprovided there is tangible material to come to the conclusion that there isescapement of income from assessment. The reasons must have a live linkwith the formation of the belief. 14.In Export Credit Guarantee Corporation of India Ltd. vs.Additional Commissioner of Income Tax and Others[5],the court held thatwhen an assessment is sought to be reopened within a period of four yearsfrom the end of the relevant assessment years, the test to be applied iswhether there is tangible material to do so. What is tangible is somethingwhich is not illusory, hypothetical or a matter of conjecture. Somethingwhich is tangible need not be something which is new. An Assessing Officerwho has plainly ignored the relevant material and arrived at an assessmentacts contrary to the law. If there is an escapement of income inconsequence, the jurisdictional requirement of Section 147 of the Act would 4 (2010) 320 ITR 561 (SC) 5 (2013) 350 ITR 651 (Bom) be fulfilled on the formation of a reason to believe that income has escapedassessment. 15.Did the A.O. have any tangible material to reopen theassessment in this case is a question which we have to answer. The reasonsto believe is purely on the basis that petitioner has advanced borrowedcapital to sister concern and associate concern without charging any interestand therefore the interest claimed on borrowed capital is not allowableunder Section 36(1)(iii) of the Act. 4 (2010) 320 ITR 561 (SC) 5 (2013) 350 ITR 651 (Bom) be fulfilled on the formation of a reason to believe that income has escapedassessment. 15.Did the A.O. have any tangible material to reopen theassessment in this case is a question which we have to answer. The reasonsto believe is purely on the basis that petitioner has advanced borrowedcapital to sister concern and associate concern without charging any interestand therefore the interest claimed on borrowed capital is not allowableunder Section 36(1)(iii) of the Act. 16.The law on this is settled in as much as in S.A. Builders Ltd.(supra), the Hon’ble Apex Court was considering an almost identicalsituation. The assessee in that case had transferred a huge amount of Rs.82Lakhs to its subsidiary company out of the Cash Credit Account of theassessee in which there was a huge debit balance. The Assessing Officerheld that since the assessee had diverted its borrowed funds to a sisterconcern without charging any interest, proportionate interest relating to thesaid amount out of total interest paid to the bank deserved to be disallowedand he disallowed a particular sum. The Hon’ble Apex Court held thatextending such a loan would fall under the expression used for the purposeof business. If the amount has been advanced as a measure of commercialexpediency, the interest on funds borrowed by the assessee should beallowed as deduction under Section 36(1)(iii) of the Act. Paragraph Nos. 19 to 36 of S.A. Builders Ltd. (supra) read as under : 19. We have considered the submission of the respective parties.The question involved in this case is only about the allowability ofthe interest on borrowed funds and hence we are dealing only withthat question. In our opinion, the approach of the High Court as wellas the authorities below on the aforesaid question was not correct. 20. In this connection we may refer to Section 36(1)(iii) of the In-come Tax Act, 1961 (hereinafter referred to as the 'Act') whichstates that "the amount of the interest paid in respect of capital bor-rowed for the purposes of the business or profession" has to be al-lowed as a deduction in computing the income tax under Section 28of the Act. 21. In Madhav Prasad Jantia vs. Commissioner of Income Tax U.P."-AIR 1979 SC 1291, this Court held that the expression for the purpose of business" occurring under the provision is wider in scopethan the expression "for the purpose of earning income, profits orgains", and this has been the consistent view of this Court. 22. In our opinion, the High Court in the impugned judgment, aswell as the Tribunal and the Income Tax authorities have ap-proached the matter from an erroneous angle. In the present case,the assessee borrowed the fund from the bank and lent some of it toits sister concern (a subsidiary) on interest free loan. The test, in ouropinion, in such a case is really whether this was done as a measureof commercial expediency. 23. In our opinion, the decisions relating to Section 37 of the Actwill also be applicable to Section 36(1)(iii) because in Section 37also the expression used is "for the purpose of business". It has been-consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarilyincurred for commercial expediency, and it is immaterial if a thirdparty also benefits thereby. 24. Thus in Atherton vs. British Insulated & Helsby Cables Ltd(1925)10 TC 155 (HL), it was held by the House of Lords that in or--der to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediatebenefit, but voluntarily and on grounds of commercial expediencyand in order to indirectly to facilitate the carrying on the business.The above test in Atherton's case (supra) has been approved by thisCourt in several decisions e.g. Eastern Investments Ltd. vs.CIT(1951) 20 ITR 1,CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR601 etc. 24. Thus in Atherton vs. British Insulated & Helsby Cables Ltd(1925)10 TC 155 (HL), it was held by the House of Lords that in or--der to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediatebenefit, but voluntarily and on grounds of commercial expediencyand in order to indirectly to facilitate the carrying on the business.The above test in Atherton's case (supra) has been approved by thisCourt in several decisions e.g. Eastern Investments Ltd. vs.CIT(1951) 20 ITR 1,CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR601 etc. 25. In our opinion, the High Court as well as the Tribunal and otherIncome Tax authorities should have approached the question of al-lowability of interest on the borrowed funds from the above angle.In other words, the High Court and other authorities should haveenquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure ofcommercial expediency, and if it was, it should have been allowed. 26. The expression "commercial expediency" is an expression of-wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may nothave been incurred under any legal obligation, but yet it is allowable-as a business expenditure if it was incurred on grounds of commercial expediency. 27. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), ifthe borrowed amount was donated for some sentimental or personal-reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) ofthe Act.In Madhav Prasad's case (supra), the borrowed amount wasdonated to a college with a view to commemorate the memory ofthe assessee's deceased husband after whom the college was to benamed. It was held by this Court that the interest on the borrowedfund in such a case could not be allowed, as it could not be said thatit was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that-the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii)of the Act. 29. In the present case, neither the High Court nor the Tribunal norother authorities have examined whether the amount advanced tothe sister concern was by way of commercial expediency. 30. It has been repeatedly held by this Court that the expression "forthe purpose of business" is wider in scope than the expression " forthe purpose of earning profits" vide CIT vs. Malayalam PlantationsLtd. (1964) 53 ITR 140, CIT vs. Birla Cotton Spinning & WeavingMills Ltd. (1971) 82 ITR 166 etc. 31. The High Court and the other authorities should have examinedthe purpose for which the assessee advanced the money to its sisterconcern, and what the sister concern did with this money, in order todecide whether it was for commercial expediency, but that has notbeen done. 32. It is true that the borrowed amount in question was not utilized-by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that factis not really relevant.What is relevant is whether the assessee ad-vanced such amount to its sister concern as a measure of commercialexpediency. 33. Learned counsel for the Revenue relied on a Bombay High Courtdecision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction underSection 36(1)(iii) can only be allowed on the interest if the assesseeborrows capital for its own business. Hence, it was held that intereston the borrowed amount could not be allowed if such amount hadbeen advanced to a subsidiary company of the assessee. With re- 32. It is true that the borrowed amount in question was not utilized-by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that factis not really relevant.What is relevant is whether the assessee ad-vanced such amount to its sister concern as a measure of commercialexpediency. 33. Learned counsel for the Revenue relied on a Bombay High Courtdecision in Phaltan Sugar Works Ltd. Vs. Commissioner of Wealth-Tax (1994) 208 ITR 989 in which it was held that deduction underSection 36(1)(iii) can only be allowed on the interest if the assesseeborrows capital for its own business. Hence, it was held that intereston the borrowed amount could not be allowed if such amount hadbeen advanced to a subsidiary company of the assessee. With re- spect, we are of the opinion that the view taken by the Bombay HighCourt was not correct. The correct view in our opinion was whetherthe amount advanced to the subsidiary or associated company or anyother party was advanced as a measure of commercial expediency.We are of the opinion that the view taken by the Tribunal in PhaltanSugar Works Ltd (supra) that the interest was deductible as theamount was advanced to the subsidiary company as a measure ofcommercial expediency is the correct view, and the view taken by theBombay High Court which set aside the aforesaid decision is not cor-rect. 34. Similarly, the view taken by the Bombay High Court in PhaltanSugar Works Ltd. vs. Commissioner of Wealth-Tax(1995) 215 ITR582 also does not appear to be correct. 35. We agree with the view taken by the Delhi High Court in CIT vs.Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that once it is es--tablished that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business ofthe assessee itself), the Revenue cannot justifiably claim to put itselfin the arm-chair of the businessman or in the position of the board ofdirectors and assume the role to decide how much is reasonable ex--penditure having regard to the circumstances of the case. No busi-nessman can be compelled to maximize its profit. The income tax au thorities must put themselves in the shoes of the assessee and seehow a prudent businessman would act. The authorities must not look-at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of theborrowed funds to a sister concern from the point of view of com-mercial expediency and not from the point of view whether theamount was advanced for earning profits. 36. We wish to make it clear that it is not our opinion that in everycase interest on borrowed loan has to be allowed if the assessee ad-vances it to a sister concern. It all depends on the facts and circum-stances of the respective case. For instance, if the Directors of the sis-ter concern utilize the amount advanced to it by the assessee fortheir personal benefit, obviously it cannot be said that such moneywas advanced as a measure of commercial expediency. However,money can be said to be advanced to a sister concern for commercial-expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company-has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is usedby the subsidiary for some business purposes, the assessee would, in-our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. (emphasis supplied) 17.In this case, from 2003-04 itself petitioner has been granting loans and advances to sister and associate concerns. Even for Assessment (emphasis supplied) 17.In this case, from 2003-04 itself petitioner has been granting loans and advances to sister and associate concerns. Even for Assessment Years 2004-05 to 2008-09, the Revenue has not made any disallowance ofinterest expense in those years thereby accepting that the deployment offunds is for business purpose. The disallowance made during AssessmentYear 2003-04 has been set aside in appeal by CIT[A] as well as the ITAT.Moreover there can be no other reason but commercial expediency forpetitioner to give loans and advances and capital to ICON. The Revenuecannot justifiably claim to put itself in the arm-chair of the businessman orin the position of the board of directors and assume the role to decide how aprudent businessman should act. The authorities must not look at thematter from their own point of view but that of a prudent businessman.In view of what is recorded above, it is evident that there wasabsolutely no basis to respondent no.1 to form a belief that any incomechargeable to tax has escaped assessment within the meaning of substantiveprovisions of Section 147 of the Act. As held by this court in Prashant S.Joshi (supra) Explanation 2 to Section 147 creates a deeming fiction ofcases where income chargeable to tax has escaped assessment. Clause (b)deals with a situation “where a return of income has been furnished by theassessee but no assessment has been made and it is noticed by the A.O. thatthe assessee has understated the income or has claimed excessive loss,deduction, allowance or relief in the return.” For the purpose of Clause (b)to Explanation 2, the Assessing Officer must notice that the assessee hasunderstated his income or has claimed excessive loss, deduction, allowanceor relief in the return and taking of such notice must be consistent with the provisions of the applicable law. It cannot be at the arbitrary whim orcaprice of the Assessing Officer and must be based on a reasonablefoundation. Though the sufficiency of the evidence or material is not opento scrutiny by the court but the existence of the belief is the sine qua non fora valid exercise of power. Paragraph No. 20 of Prashant S. Joshi (supra)reads as under : 20. For all these reasons, it is evident that there was absolutely nobasis for the first respondent to form a belief that any incomechargeable to tax has escaped assessment within the meaning of thesubstantive provisions ofsection 147. Explanation 2 to section 147creates a deeming fiction of cases where income chargeable to taxhas escaped assessment. Clause (b) deals with a situation “where areturn of income has been furnished by the assessee but no assess-ment has been made and it is noticed by the Assessing Officer thatthe assessee has understated the income or has claimed excessiveloss, deduction, allowance or relief in the return.” For the purposeof clause (b) to explanation 2, the Assessing Officer must noticethat the assessee has understated his income or has claimed exces-sive loss, deduction, allowance or relief in the return. The taking ofsuch notice must be consistent with the provisions of the applicablelaw. The act of taking notice cannot be at the arbitrary whim orcaprice of the Assessing Officer and must be based on a reasonablefoundation. The sufficiency of the evidence or material is not opento scrutiny by the Court but the existence of the belief is the sinequa non for a valid exercise of power. In the present case, havingregard to the law laid down by the Supreme Court it was impossiblefor any prudent person to form a reasonable belief that the incomehad escaped assessment.The reasons which have been recordedcould never have led a prudent person to form an opinion that in-come had escaped assessment within the meaning of section 147.In these circumstances, the petition shall have to be allowed by set-ting aside the notice under section 148. (emphasis supplied) 19.In the present case, having regard to the law laid down by the (emphasis supplied) 19.In the present case, having regard to the law laid down by the Hon’ble Apex Court in S.A. Builders Ltd. (supra) it was impossible for anyprudent person to form a reasonable belief that the income had escapedassessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessmentwithin the meaning of Section147 of the Act. 20.Even when those points were raised in the objections to thereopening notice filed by petitioner, Respondent No.1 instead of dealingwith the objections and submissions simply dismissed the same by sayingthat since there was no assessment done in the aforesaid case thedepartment had no occasion to verify the veracity of the claim made in theincome tax returns and all those points only have a bearing at the time ofassessment to be undertaken in the proceedings and not on the issuance ofnotice under Section 148 of the Act. We fail to understand why thesedecisions could not have been taken at this stage itself so that the A.O.,having regard to the law laid down by the courts and on the submissionsmade by petitioner, could have discharged the notice dated 18[th] March 2013issued under Section 148 of the Act. There is no reason to postpone it tothe assessment proceedings stage. 21.In these circumstances, the petition shall have to be allowed bysetting aside the notice under Section 148 of the Act as well as theimpugned order dated 27[th] November 2013. 22.Rule is made absolute accordingly. There shall be no order as tocosts.costs. 23.Petition disposed. WRIT PETITION NO. 961 OF 2014 24.The facts and circumstances in this case are almost identical tothat in Writ Petition No. 947 of 2014 except it pertains to the AssessmentYear 2010-11 and the amounts vary. The reasons to believe there isescapement of income from assessment is identical to that in the WritPetition No. 947 of 2014 except that the amounts vary. 25.Rule was issued in this petition also on 25[th] June 2014. 26.Our discussion and conclusion in Writ Petition No. 947 of 2014will squarely apply here also. Hence, Rule is made absolute. No order as tocosts. 27.Petition disposed. (DR. N.K. GOKHALE, J.) (K.R. SHRIRAM, J.)