Interest diversion and policy-violating commission payments were held non-deductible in business expenditure claims.

Delhi HC held that interest on borrowed funds was not deductible where the assessee failed to establish that the borrowings were not diverted for interest-free advances to a subsidiary and others; the burden lay on the assessee to show the requisite factual nexus and business purpose, so the disallowance was sustained. It also held that commission or market-supervision payments made after abolition of the sole-selling agency were not allowable as business expenditure because the arrangement was found to be designed to defeat Government policy and circumvent the statutory abolition of sole-selling agencies; expenditure incurred under such a policy-violating arrangement could not be treated as deductible.

---

---

Issues: (i) Whether interest on borrowed funds was allowable where the assessee had made interest-free advances to a subsidiary and others. (ii) Whether commission or market-supervision payments made after abolition of the sole-selling agency were deductible as business expenditure.

Issue (i): Whether interest on borrowed funds was allowable where the assessee had made interest-free advances to a subsidiary and others.

Analysis: Allowability of interest on borrowings depended on whether the borrowed funds were in fact diverted for non-business advances. The factual nexus between the borrowings and the advances had to be established from the material on record. The burden to show that the advances were made out of non-borrowed funds or that the borrowings were not so diverted lay on the assessee, especially because the relevant facts were within its special knowledge. In the absence of proof that the interest-bearing loans were not used for the interest-free advances, the claim could not be sustained.

Conclusion: The interest disallowance was rightly sustained and the issue was decided against the assessee.

Issue (ii): Whether commission or market-supervision payments made after abolition of the sole-selling agency were deductible as business expenditure.

Analysis: Once the arrangement was found to have been entered into with the object of defeating the Government policy and circumventing the abolition of sole-selling agencies for cement, the expenditure ceased to be allowable. A payment that is made under an arrangement contrary to statutory policy and public policy cannot be legitimised by allowing a part of it as reasonable or by treating it as business expenditure. The statutory or policy violation was decisive, and no part of such expenditure could be allowed.

Conclusion: The deduction was not allowable and the issue was decided against the assessee.

Final Conclusion: Both referred questions were answered in favour of the Revenue, with the assessee failing on both the interest-disallowance and the commission-deduction claims.

Ratio Decidendi: Interest on borrowed funds is not deductible unless the assessee establishes the requisite nexus and business purpose of the borrowings, and expenditure incurred under an arrangement designed to defeat statutory policy or public policy is not allowable as business expenditure.

---