The main legal point established is that the disallowance of expenditure must be justified by demonstrating that the expenditure was not for business purposes, and that the entire borrowed funds were utilized for the purpose of business.

BADAR DURREZ AHMED, J.

1. This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as ‘the said Act’) is directed against the order passed by the Income Tax Appellate Tribunal in ITA 1808/Del/2012 pertaining to the assessment year 2008-09.

2. The substantial question of law, which arises for our consideration in this appeal, is as follows:-

“Whether the Income Tax Appellate Tribunal as also the Commissioner of Income Tax (Appeals) had not erred in law and / or on facts in deleting the disallowance on discount and interest on borrowing through commercial papers and Non-Convertible Debentures (NCDs) amounting to Rs. 10,79,75,982/-?”

3. The Assessing Officer, by virtue of the assessment order dated 29.12.2010, disallowed expenditure to the tune of Rs.10,79,75,982/- on the ground that the expenditure was not for business purposes. The said figure of Rs. 10,79,75,982/- had two components. The first component was the discount on commercial paper amounting to Rs. 8,45,75,982/-. The second component was the amount of Rs. 2.34 crores which was interest on non-convertible debentures.

4. The Assessing Officer had required the assessee to explain these expenditures. The respondent/assessee submitted that A & M Publications Limited had merged with the respondent/assessee with effect from 01.04.2007, consequent upon an order passed by this Court on 28.08.2008. It was explained by the respondent/assessee that the commercial paper was issued on 01.11.2006 by the respondent/assessee and A & M Publications Limited to give effect to the Company Law Board’s order dated 07.08.2006 for payment of Rs. 160 crores to Ajay Aggarwal and others. It was further pointed out that the expenses incurred on commercial paper pertaining to the assessment year 2006-07 had been booked under respective accounting heads in both the companies (i.e., the respondent/assessee company and A & M Publications Limited) in the financial year 2006-07. The discount on commercial paper issued by the respondent/assessee was Rs. 4,22,87,991/- and the discount on commercial paper issued by A & M Publications Limited was Rs. 4,22,87,991/- resulting in a total of Rs. 8,45,75,982/-. Since there was a shortage of funds, the non-convertible debentures had also been issued. The Assessing Officer observed that in the proceedings before the Company Law Board, a prayer had been made on the part of the Amar Ujala Group to buy the entire shareholding of Shri Ajay Aggarwal in the said companies. The latter agreed to sell the entire shareholding of 34.33% in both the companies for a total sale consideration of Rs.16 crores being the fair market price of the shares. After this, the Amar Ujala group was to have complete control of the companies and Shri Ajay Aggarwal and others connected with him would not have any relationship with the said companies in any manner after receiving the full and final consideration. According to the Assessing Officer, the shares of Shri Ajay Aggarwal and others were bought by the respondent/assessee and the transaction was purely one of acquisition of shares and had no bearing on the business being carried out ordinarily by the respondent/assessee. The Assessing Officer also observed that during the year in question, the respondent/assessee and A & M Publications Limited had merged as per the directions of this Court and there was no cross holding of shares in the Amar Ujala group, as there existed only one combined entity and that the shares bought by the Amar Ujala group were its internal holding. Consequently, the Assessing Officer held that the expenditure was not for the business purposes and, therefore, disallowed the discount on commercial paper amounting to Rs. 8,45,75,982/- and added it back to the total income of the respondent/assessee. The interest amount of Rs. 2.34 crores on non-convertible debentures which had been issued to repay the commercial papers, which, in turn, according to the Assessing Officer, had been take