Commissioner of Income Tax-I vs AIMS Chemicals Pvt. Ltd.

K.S. Jhaveri, J.—By way of this appeal, the appellant-revenue has challenged the order dated 22.02.2005 passed by the Income Tax Appellate Tribunal [for short "the Tribunal"] in ITA No. 1839/Ahd/2003, whereby the appeal filed by the assessee was partly allowed by the Tribunal.

The facts, in brief, are that the assessee filed its return for the Assessment Year 1998-99. The Assessing Officer, after scrutiny, made disallowance of Rs. 17,38,362/- being interest expenditure on the ground that the assessee had given interest free advances to the parties. The Assessing Officer noted that funds of Rs. 169.54 lacs advanced by the assessee were for non-business purposes and held that said advances were diversion of interest bearing funds. Against the said order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals). The CIT(A) vide order dated 30.01.2003 partly allowed the appeal of the assessee. Being aggrieved and dissatisfied with the order of the CIT(A), the assessee again filed an appeal before the Tribunal. The Tribunal vide impugned order dated 22.02.2005 partly allowed the said appeal. Hence, this appeal is filed at the instance of the revenue.

While admitting this appeal on 11.10.2006, the Court had formulated the following substantial question of law:-

"Whether on facts and in the circumstances of the case and in law, Appellate Tribunal was right in deleting the disallowance of interest of Rs. 17,38,362/- being on interest free advances/loans ?"

Learned advocate for the appellant revenue has stated that the question of law involved in this appeal is already concluded by the Apex Court in favour of the assessee and against the revenue in the case of S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, .

We have heard learned advocate appearing for the appellant-revenue and perused the material on record. We have also perused the decision relied on by learned advocate for the appellant-revenue and find that the issue involved in this appeal is already concluded by the Apex Court. It is relevant to reproduce paragraph Nos. 35 to 37 of the said decision, which read as under:-

We agree with the view taken by the Delhi High Court in Commissioner of Income Tax Vs. Dalmia Cement (B.) Ltd., that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), 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 the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was 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 used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.

In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above.

Since the question of law involved in this appeal is already concluded by the Apex Court, no elaborate reasons are required to be assigned by us for disposing this appeal. In that view of the matter, we are of the considered opinion that the present appeal deserves to be dismissed and the same is accordingly dismissed. The question of law raised in this appeal is answered in favour of the assessee and against the revenue. Accordingly, we hold that the Tribunal was right in deleting the disallowance of interest of Rs. 17,38,362/- being on interest free advances/loans.