IMPORTANT POINT
In order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The test is commercial expediency.

Headnote:Income Tax Act, 1961 – Section 36(1)(iii) – The expression “for the purpose of business” occurring under the provision is wider in scope than the expression “for the purpose of earning income, profits or gains” and includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby – In order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business – High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company as a measure of commercial expediency and not for earning profit, and if it was, it should have been allowed – Borrowed fund advanced to a third party should be for commercial expediency – Allowing interest thereon depends on the facts and circumstances of the respective case – Once it is established that there was nexus between the expenditure and the purpose of the business, the Revenue cannot decide how much is reasonable expenditure.(Paras 13, 14, 15, 16, 18, 21 and 22)
       AIR 1979 SC 1291; (1925)10 TC 155 (HL); (1951) 20 ITR 1; (1960) 38 ITR 601 – Relied upon.
       (1994) 208 ITR 989; (1995) 215 ITR 582 – Overruled impliedly.
       (2002) 254 ITR 377 – Approved.
       Facts of the case :
       (A)Assessing Officer observing that the assessee had transferred a huge amount of Rs. 82 lakhs to its subsidiary company M/s. SAB Credits Limited out of the cash credit account of the assessee in which there was a huge debit balance, held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed. Accordingly, he disallowed a sum of Rs. 5, 66, 729/-.
       (B)Commissioner of Income Tax (Appeals) Chandigarh, vide his order dated 15.4.1993 partially accepting the claim of the assessee held that out of the total amount of Rs. 82 lacs advanced by the assessee in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs. 18 lacs had a clear nexus with the borrowed funds, as the balance amount had been paid out of the receipts from other parties to whom no interest had been paid. Accordingly, the CIT (A) directed the Assessing Officer to calculate disallowance of interest only relating to the sum of Rs. 18 lacs, and the disallowance was reduced accordingly.
       (C)The Tribunal by its order dated 20.6.2002 allowed the appeal of the Revenue, holding that the entire amount of Rs. 82 lacs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the Assessing Officer was justified. Accordingly, the appeal filed by the Revenue was allowed and the appeal field by the assessee was dismissed.
       (D)In the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of Rs. 82 lacs advanced in the assessment year 1990-91, a further sum of Rs. 37,85,000/- had been advanced to M/s. SAB Credits Ltd which also had a clear nexus with the amounts borrowed by the assessee on payment of interest. Accordingly, the Assessing Officer disallowed proportionate interest relatable to these amounts amounting to Rs.20,08,836/-.
       (E)On appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer that the sum of Rs. 37,85,000/- advanced during assessment year 1990-91, was relatable to the borrowed funds. However, in view of the findings of her predecessor in assessment year 1990-91, that out of Rs. 82 lacs advanced during that year, advance of Rs. 64 lacs had no nexus with the borrowed funds, she reduced the disallowance from Rs.20,08,836 to Rs. 10,03,538/- vide her order dated 28.7.1994. The assessee was granted further relief of Rs. 1,48,464/- by the CIT(A) vide order dated 6.9.1995 under Section 154 of the Act. On the cross-appeals filed by the assessee as well as the Revenue, the Tribunal following its order for assessment year 1990-91, upheld the disallowance as made by the Assessing Officer. Accordingly, the appeal of the revenue on this issue was allowed and that of the assessee dismissed.
       (F)The High Court held that since it stands established that the amount of Rs. 82 lacs and Rs. 37.85 lacs had been advanced by the assessee to its sister concern from out of the overdraft account with the bank in which there was already a debit balance, the order of the Tribunal does not suffer from any factual or legal infirmity. Accordingly, the High Court dismissed the appeal.
       (G)Finding of the Court: High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company as a measure of commercial expediency and not for earning profit, and if it was, it should have been allowed.

JUDGMENT

Markandey Katju, J. - Leave granted.

2. These two appeals involve common questions of law and fact and hence are being disposed of by a common judgment.

3. Since the leading case is that of S.A. Builders [SLP(C) 21707-21710/2004], we shall be taking note of the facts of this case.

These appeals have been filed against the impugned judgment of the Punjab and Haryana High Court dated 13.5.2004 in Income Tax Appeal Nos. 6, 7, 119 and 120 of 2003, and the judgment dated 21.5.2004 in ITA No. 117/118 of 2003.

4. Heard learned counsel for the parties and perused the record. During the course of the proceeding for the relevant assessment year(s), the Assessing Officer under the Income Tax Act observed that the assessee had transferred a huge amount of Rs. 82 lakhs to its subsidiary company M/s. SAB Credits Limited out of the cash credit account of the assessee in which there was a huge debit balance. He, therefore, held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of the total interest paid to the bank deserved to be disallowed. Accordingly, he disallowed a sum of Rs. 5, 66, 729/- .

5. The assessee preferred an appeal to the Commissioner of Income Tax (Appeals) Chandigarh [for short hereinafter referred to as the CIT (A)], who vide his order dated 15.4.1993 partially accepted the claim of the assessee. According to the CIT (A), out of the total amount of Rs. 82 lacs advanced by the assessee in the relevant assessment year to M/s. SAB Credit Limited, only a sum of Rs. 18 lacs had a clear nexus with the borrowed funds, as the balance amount had been paid out of the receipts from other parties to whom no interest had been paid. Accordingly, the CIT (A) directed the Assessing Officer to calculate disallowance of interest only relating to the sum of Rs. 18 lacs, and the disallowance was reduced accordingly.

6. Both the assessee as well as the Revenue filed appeals before the Income Tax Appellate Tribunal (hereinafter referred to as the ‘Tribunal’). The Tribunal by its order dated 20.6.2002 allowed the appeal of the Revenue, and held that the entire amount of Rs. 82 lacs had been advanced by the assessee by utilizing the overdraft account, and hence it was of the view that disallowance made by the Assessing Officer was justified. Accordingly, the appeal filed by the Revenue was allowed and the appeal field by the assessee was dismissed.

7. Against the order of the Tribunal, the assessee filed appeals in the High Court which were dismissed by the impugned judgment. In the assessment year 1991-92, the Assessing Officer noticed that in addition to the sum of Rs. 82 lacs advanced in the assessment year 1990-91, a further sum of Rs. 37,85,000/- had been advanced to M/s. SAB Credits Ltd which also had a clear nexus with the amounts borrowed by the assessee on payment of interest. Accordingly, the Assessing Officer disallowed proportionate interest relatable to these amounts amounting to Rs. 20,08,836/-.

On appeal by the assessee, the CIT(A) upheld the finding of the Assessing Officer that the sum of Rs. 37,85,000/- advanced during assessment year 1990-91, was relatable to the borrowed funds. However, in view of the findings of her predecessor in assessment year 1990-91, that out of Rs. 82 lacs advanced during that year, advance of Rs. 64 lacs had no nexus with the borrowed funds, she reduced the disallowance from Rs. 20,08,836 to Rs. 10,03,538/- vide her order dated 28.7.1994. The assessee was granted further relief of Rs. 1,48,464/- by the CIT(A) vide order dated 6.9.1995 under Section 154 of the Act. On the cross-appeals filed by the assessee as well as the Revenue, the Tribunal following its order for assessment year 1990-91, upheld the disallowance as made by the Assessing Officer. Accordingly, the appeal of the revenue on this issue was allowed and that of the assessee dismissed.

Against this decision also, the assessee

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2006 Supreme(SC) 1299

Cases Referred (5)