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*      IN THE HIGH COURT OF DELHI AT NEW DELHI

+                 INCOME TAX APPEAL No. 205/2018

                                    Date of decision: 28th September, 2018

       PRINCIPAL COMMISSIONER OF INCOME TAX-7..... Appellant

                           Through: Mr. Asheesh Jain, Sr. Standing Counsel
                           with Mr. Shahrukh Ejaz, Advocate for Income Tax
                           Department.

                           versus

       THE BASTI SUGAR MILLS COMPANY LIMITED..... Respondent

                           Through: Mr. Piyush Kaushik, Advocate.

       CORAM:
       HON'BLE MR. JUSTICE SANJIV KHANNA
       HON'BLE MR. JUSTICE CHANDER SHEKHAR
SANJIV KHANNA, J. (ORAL):

       This appeal by the Revenue under Section 260A of the Income Tax
Act, 1961 ['Act' for short], in the case of The Basti Sugar Mills Company
Limited, ['respondent-assessee' for short] relates to the Assessment year
1999-2000 and arises from the order of the Income Tax Appellate Tribunal
['Tribunal'] dated 18th August, 2017.

2.     This is second round of litigation. By the order dated 24th November,
2010 passed by the Delhi High Court in ITA No. 1248/2007 the issue of
disallowance of Rs. 1,50,04,133/- under Section 36(1)(iii) of the Act was




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remitted to the file of the Assessing Officer in light of the judgment of the
Supreme Court in S.A. Builders LTD versus Commissioner of Income Tax,
(2007) 1 SCC 781.

3.     The Assessment Order on remand observes that the respondent-
assessee had been asked to adduce material to prove that the interest free
advances to sister concerns were out of its own funds and not out of
borrowed capital from the bank on which there was interest liability. This
was necessary to examine the question of "commercial expediency". The
respondent-assessee having expressed their disability to correlate each and
every entry of the advances to the sister concerns with availability of its own
funds, there was failure to justify and explain commercial expediency in
giving interest free advances of Rs.8,33,56,295/- to the sister concerns.
Accordingly, the ratio in S.A. Builders (Supra) would not apply.






4.     Clearly, the Assessing Officer had attempted to ascertain the source of
funds of the amounts given as interest free loans to the sister concerns, in
order to examine and apply the test of "commercial expediency". Unable to
ascertain the details from the respondent-assessee, it was held that the test of
commercial expediency was not satisfied. We would observe that the
Assessing Officer had posed a wrong question and, therefore, his reasoning
is infelicitous and contrary to law. S.A. Builders (Supra) does not require the
respondent-assessee to show that the borrowed funds had not been used for
giving interest free advances or loans to the third party, including sister
concerns. The issue "commercial expediency" is different. The Supreme
Court in S.A. Builders (Supra) had observed that Section 36(1)(iii) of the
Act states that interest paid in respect of capital borrowed for the purpose of




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business or profession is to be allowed as a deduction in computing taxable
income. The expression "for purposes of business or profession" occurring
in Section 36(1)(iii) of the Act is wider in scope than the expression "for the
purpose of earning income, profits or gains". Accordingly, expenditure
voluntarily incurred on the test of commercial expediency is to be allowed
as a deduction. It is immaterial if a third party also benefits by the said
expenditure. The expression "commercial expediency" is again of wide
import and includes such expenditure incurred for the purpose of business.
Therefore, once it is established that there was a nexus between expenditure
and purpose of business, which need not be the business of the assessee,
deduction under Section 36(1)(iii) of the Act must be allowed. Revenue
cannot assume the role and occupy armchair of a businessman to decide
whether expenditure was reasonable. The Revenue cannot look at the matter
from its own standpoint, but that of a businessman. Money borrowed, even
when advanced to a sister concern for some business purpose, would qualify
for deduction of interest. However, if the money borrowed is utilized by the
assessee for personal benefit and not for business purpose, interest paid on
that amount would not satisfy the test of commercial expediency.

5.     There is another glaring error by the Assessing Officer. Instead of
disallowing interest paid on the borrowed fund, the Assessing Officer made
an addition of Rs. 1,50,04,133/- by notionally computing interest @18% p.a.
on Rs.8,33,56,295/- i.e. the interest free advances given by the respondent-
assessee to the sister concerns. This is clearly impermissible and contrary to
law.






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6.     The Commissioner of Income Tax (Appeals) referring to the 'nexus
principle' approved in S.A. Builders (Supra) held that once link between the
expenditure given by way of loans and the purpose of the business was
established, Revenue cannot justifiably assume the role of the assessee to
decide how much was reasonable expenditure having regard to the
circumstances of the case. The test of "commercial expediency" would only
come into play if there was any finding that interest bearing funds had been
diverted for making interest free loans. Interest free loans were given prior
to 1st April, 1998 as per the schedule of secured loans and unsecured loans in
the balance sheet as on 31st March, 1998. The loans taken by the respondent-
assessee were for specific purposes and were duly represented by the value
of stock. He observed that the respondent-assessee during the period relating
to the Assessment Year had sales of Rs.37.16 crores, paid up share capital of
Rs.8.20 crores and reserves of Rs.1.23 crores. He concluded that the
respondent-assessee had furnished ample evidence to show that sufficient
funds were available to give interest free loans. Accordingly, addition of Rs.
1,50,04,133/- was directed to be deleted. The aforesaid factual reasoning
negates and nullifies the factual reasoning given by the Assessing Officer.
7.      Agreeing with the said factual finding and not finding any
justification to upset the facts as found by the first appellate authority, the
Tribunal has dismissed the appeal filed by the Revenue.

8.     Decision of the Supreme court in S.A. Builders(supra) has been
followed in Hero Cycles Private Limited versus Commissioner of Income
Tax (2015) 16 SCC 359 and Munjal Sales Corporation versus
Commissioner of Income Tax and Another (2008) 3 SCC 185. The reasons




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and grounds given in the assessment order cannot be supported and
sustained in view of the ratio of the said decisions.

9.     Recording the aforesaid, we do not find any merit in this appeal and
the same is dismissed, with no order as to costs.




                                               SANJIV KHANNA, J.



                                               CHANDER SHEKHAR, J.

SEPTEMBER 28, 2018
MR




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