The Commissioner of Income Tax I vs Agrawal Indotex Ltd.

Heard on the question of admission.

Brief facts of the case are that the assessee made advances to its subsidiary concern. The amount has been taken out of Cash Credit Account of the assessee maintained by the State Bank of India, Andhari Branch, Mumbai, which has maximum fund. The assessee has also given a corporate guarantee to the Bank. At the time of scrutiny, the Assessing Officer observed that the assessee had received loan of Rs. 47,79,55,602/- and had given loans and advances of Rs. 12,18,66,811/-. In the return of the income tax, the assessee claimed interest expenses of Rs. 5,25,07,952/-, whereas interest income was of Rs. 9,53,696/- only was shown. It was found that the assessee had given interest free loans and advances to its sister concern M/s. Agrawal Polyfil Private Limited of Rs. 8,21,61,933/- out of borrowed fund. During the year, the sister concern had repaid loan of Rs. 1,31,36,933/-.

The Assessing Officer was of the view that the assessee had given advances to its sister concern namely M/s. Agrawal Polyfil Private Limited out of the borrowed fund, and therefore, he disallowed the interest paid by the assessee to the bank on the basis of the product method, which worked out at Rs. 61,27,362/-.

The assessee went in appeal before the Commissioner of Income Tax (Appeals). The learned Commissioner affirmed the order of the Assessing Officer by observing that the sister concern M/s. Agrawal Plyfil Private Limited got registered with BIRF on 09.12.2012. Hence, rejected the contention of the appellant as no interest could be claimed from a sick unit, as the unit was not sick in year 2010-11.

Learned Income Tax Appellate Tribunal, Indore, relying on the decision of the Supreme Court in the cases of Assistant Commissioner of Income Tax Vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd., AIR 2007 SC 2163 : (2007) 210 CTR 30 : (2007) 291 ITR 500 : (2007) 8 JT 494 : (2007) 8 SCALE 396 : (2007) 7 SCR 765 : (2007) 2 UJ 725 : (2007) AIRSCW 3812 : (2007) 4 Supreme 606 ; Kalyanji Mavji and Co. Vs. Commissioner of Income Tax , West Bengal-II, AIR 1976 SC 203 : (1976) 102 ITR 287 : (1976) 1 SCC 985 : (1976) 2 SCR 966 ; Commissioner of Income Tax, Gujarat Vs. A. Raman and Company, AIR 1968 SC 49 : (1968) 67 ITR 11 : (1968) 1 SCR 10 ; and S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals), Chandigarh and Another, AIR 2007 SC 482 : (2007) 208 CTR 207 : (2006) 206 CTR 631 : (2007) 288 ITR 1 : (2006) 14 SCALE 60 : (2007) 1 SCC 482 : (2007) 158 TAXMAN 74 has given the following reasoning while allowing the appeal of the assessee. Paragraphs No. 24 and 25 of the order dated 19.09.2014 passed by the ITAT, Indore are relevant which reads, as under:--

"24. We have heard the rival submissions and carefully considered the same along with the orders of tax authorities below. The main crux of the argument of the assessee is that the loan was advanced for business consideration. The assessee company has sufficient capital/deposit to advance the loan. So far as the contention that the assessee company had sufficient capital/deposit etc. to advance the loan, the onus is upon the assessee to prove that it had sufficient capital and free reserve to advance the loan to the subsidiary company. No such evidence was brought to our knowledge except that the advance has been given out of the cash credit account, which has mixed fund both interest bearing as well as non-interest bearing. We, therefore, dismiss this contention of the learned Authorized Representative. In respect of the other contention, we find force and we noted that the assessee has given the corporate guarantee to the Bank for the debts of Agarwal Polyfil Private Limited and the assessee has advanced loan to Agarwal Polyfil Private Limited to clear the over dues with State Bank of India in which the assessee company had given the corporate guarantee. If the assessee would not have given the loan, bankers would have encashed the corporate guarantee and assessee may be in trouble. The business expediency due to the corporate guarantee demands such loan to be given to the subsidiary company, which ultimately has become sick company. We have gone through the decision of Hon''ble Supreme Court on which both the parties have relied upon. We noted that in this decision Hon''ble Supreme Court has interpreted the word ''for the purpose of business'' as given under Section 37 of the Income Tax Act, 1961, and took the view that the decision relating to Section 37 will also be applicable to Section 36(1)(iii) because in Section 37 the expression used is ''for the purpose of business''. It has been consistently held in decisions in respect of Section 37 that expression ''for the purpose of business'' includes expenditure incurred voluntarily due to commercial expediency and it is immaterial if a third party also get benefited by this. Ultimately under para 35 of the order, the Hon''ble Supreme Court held as under:--

"It is not in every case that 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. Where holding company, has a deep interest in its subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans."

In our opinion, the case of the assessee is duly covered by the decision of the Hon''ble Supreme Court, because M/s. Agarwal Polyfil Private Limited is a subsidiary company of the assessee and assessee has given corporate guarantee for the debts of the subsidiary company to the Bankers due to commercial expediency. Commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purposes of the business. The expenditure would have been incurred under any legal obligation but yet such expenditure is allowable as a business expenditure if it was incurred on the ground of commercial expediency. The facts of this case, in our opinion, clearly suggest that the debt loans has been advanced by the assessee due to commercial expediency. The assessee has given the corporate guarantee. We, therefore, set aside the order of the learned CIT(A) and delete the dis-allowance. Thus, this ground is allowed."

The Apex Court in the case of S.A. Builders Limited v. CIT (Appeals) (supra) has held that to consider whether one should be allow deduction under Section 36(1)(iii) of the Income Tax Act, 1961 of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That borrowed money is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits.

In the case in hand, it is not disputed that the assessee has deep interest in its subsidiary/sister concern M/s. Agrawal Plyfil Private Limited and the amount is used by the sister concern for business purpose, we are of the view that the learned Income Tax Appellate Tribunal has rightly allowed the appeal of the assessee.

On due consideration of the aforesaid and in view of the law laid down by the Apex Court in the case of S.A. Builders Limited v. CIT (Appeals) (supra), we are of the view that no substantial question of law is arising in this appeal.

Income Tax Appeal No. 04/2015 has no merit and is accordingly dismissed.