AI Drafter 
TaxTMI 
TaxTMI 
2020 (3) TMI 1022
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....98 respectively. 3. The Tax Appeals came to be admitted vide order dated 4th December 2007 for the consideration of the following substantial question of law: "Whether, in the facts and circumstances of the case, the Income Tax Appellate Tribunal was right in law in holding that interest paid by the assessee on borrowed capital to the extent it was utilised for purchasing shares was deductible neither under Section 36(1)(iii) nor under Section 57(iii) of the Act?" 4. For the sake of convenience, the Tax Appeal No.1626 of 2007 is treated as the lead appeal. 5. This Tax Appeal under Section 260A of the Income Tax Act, 1961 (for short, 'the Act, 1961'] is at the instance of the assessee and is directed against the order passed by the Income Tax Appellate Tribunal, Ahmedabad Bench 'A'', Ahmedabad dated 15th December 2006 in the ITA No.1549/Ahd/2000 for the A.Y. 1996-97. 6. The assessee is in the business of real estate. With the intention to expand the business of real estate, it created a housing arm in the name and style of International Housing Finance Corporation Limited [for short, 'IHFC']. The purpose to create such a housing finan....
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....of business. (vii) Capital borrowed for the purpose of investment and not for the purpose of business does not qualify to be categorized as capital for the purpose of business. 8. The assessee went in appeal before the CIT(A). While allowing the appeal filed by the assessee, the CIT(A) took the view that the interest cannot be allowed to the appellant under 36(1)(iii) of the Act, but the same should be allowed under Section 57(iii) of the Act. We may quote the relevant observations made in the order passed by the CIT(A): "22 The contention of the appellant has been carefully considered. From the facts admitted by the appellant it is clear that he had maintained two separate accounts in its books for dealings with I.H.F.C. Ltd. It had paid interest of Rs. 16,49,090/on the current account @ 22%. The borrowings in the current account had been utilised for the purpose of appellant's regular business. One of the reasons for disallowing interest was that the funds borrowed had been invested in acquiring shares of the I.H.F.C. Ltd. Therefore, interest paid on such funds could not be allowed. Taking the above finding of the A.O. to its logical conclusion, the interest ....
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....i) of the I.T. Act. Accordingly, out of total disallowance of Rs. 85,09,342/on account of interest paid to I.H.F.C. Ltd, the disallowance to the extent of Rs. 30,17,274/alone is retained. The appellant gets relief of Rs. 54,92,068/. However, out of relief of Rs. 54,92,068/interest of Rs. 16,49,090/only would be considered against income from business. Balance of interest would be allowed as deduction to be set off against income from other sources." 9. The Revenue challenged the deletion of Rs. 54,92,068/by filing appeal before the ITAT (even though in the remand report, the Jt. CIT conceded that the deduction under Section 57(iii) of the Act, 1961 is applicable). In this regard, we may quote the observations of the CIT(A) as contained in para 14 of the order: "14. However, interest on borrowed capital used for purchase of share was allowable expenditure u/s 57(iii). The Supreme Court in the case of CIT vs. Rajendraprasad Mody (1978) 115 ITR 519 (SC) had held that irrespective of receipt of dividend or not, interest on borrowed capital used for purchase of shares was for the purpose of earning dividend. Therefore, interest on borrowed funds was to be allowed u/....
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.... of Assessing Officer dated 6.10.99, a copy of which has been placed before us in the paper book at pages 4155. It has been the contention of the assessee right from the beginning that the intention of the assessee to invest in the shares of IHFCL was to have controlling interest in the said company so that contact of IHFCL with the same line, of business can be exploited. This contention also found part of the submission of assessee as recorded in the report under the head "contention of the assessee". Thus it cannot be disputed the assessee that its intention to invest in the shares of IHFCL, was to have controlling interest in IHFCL. It has already been pointed out that it is not the business of assessee to keep controlling interest or management over companies. Thus the purpose of assessee in purchasing the shares of IHFCL was not for the purpose of assessee's business which is only sale and purchase of land Thus the money borrowed by assessee for purchasing the shares of IHFCL cannot be said to be for the purpose of business or profession of the assessee. It was only for the purpose of having control over the IHFCL. The main condition for allowability of interest unde....
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....ion 36(1)(iii) or alternatively under Section 57(iii) of the Act, 1961. The remand report was called for from the Revenue on the issue wherein it was submitted that Section 36(1)(iii) may not be applicable, but the interest is allowable under Section 57(iii) of the Act. 16. Mr. Soparkar submitted that the following was the rationale for borrowing and purchasing the shares of the IHFC Limited: "1 To retain the controlling interest in the company. Prior to the public issue of IHFC limited, the family of the firm owned all the issued shares of IHFC Ltd. They wanted to retain the controlling stake even after the public issue. After the public issue the shareholding became 49.87% from 100%. 2 It was also decided that the assessee firm and B. Nanji Construction P Ltd issues the shares of IHFC Ltd. Assessee came to hold 30 lakhs shares of IHFC Ltd. 3 The partners and family of the assessee firm were also the Directors in the company. 4 Assessee is a real estate developer and IHFC gives housing loans. Business activity of both the entities have synergy for mutual benefit. Prospective customers of the assessee could get credit facilities from IHFC on p....
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....the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28 (i) and (ii) ***** (iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation : Recurring subscriptions paid periodically by shareholders or subscribers in Mutual Benefit Societies which fulfill such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;" 24. The subsection has three important words or phrases that are important for the purpose of understanding the provision viz. (i) Interest, (ii) Capital Borrowed and, (iii) For the purpose of business or profession. In the following par....
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.... been borrowed for the purpose of business. (iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. 25. The Supreme Court in the case of S. A. Builder Ltd (supra) had the occasion to consider Section 36(1)(iii) at length. In S. A. Builder (supra), in the course of assessment proceedings, the Assessing Officer found that the assessee had advanced huge amounts as interest free loans out of its cash credit account in which there was a huge credit balance. The Assessing Officer disallowed the proportionate interest relating to the said amount out of the total interest paid to the bank, holding that the assessee had diverted its borrowed funds to its sister concern without charging any interest. On appeal, the Commissioner (Appeals) accepted the partial claim of the assessee on the ground that out of the total amount advanced by the assessee only certain sum had a clear nexus with borrowed funds, as the balance amount had been paid out of the receipts from other parties to whom no interest had been paid. However, on the cross appeals, the Tribunal allowed the revenue's appeal. On the assessee's appeal....
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....r to indirectly facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1, CIT vs. Chandulal Keshavlal and Co. (1960) 38 ITR 601 etc. 24. In our opinion, the High Court as well as the Tribunal and other Income Tax Authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other words, the High Court and other authorities should have enquired as to whether the interest free loan was given to the sister company (which is a subsidiary of the assessee) as a measure of commercial expediency, and if it was, it should have been allowed. 25. The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. 26. No doubt, as held in Madhav Prasad Jantia vs. CIT (supra), if the borrowed amount was dona....
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..... With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct. 33. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1995) 215 ITR 582, also does not appear to be correct. 34. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377, that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the posit....
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....he interest paid claimed as expenditure and the business of the assessee the purpose of business need not be the business of the assessee, for the deduction under Section 36(1)(iii) of the Act to be allowed. Further, the Revenue cannot assume the role and occupy the armchair of a businessman to decide whether the expenditure was reasonable. The Revenue cannot look at the matter from its own standpoint, but opinion and decision of a businessman on the "business expediency" matters. The money borrowed even when advanced to a subsidiary for some business purpose would qualify for deduction of interest. However, if the money borrowed is utilised by the assessee for personal benefit and not for business purpose, the interest paid on that money would not satisfy the test of "commercial expediency". [See (2018) 409 ITR 587 (Delhi)]. 27. In the context of the present case, the purpose for borrowing and purchasing shares of IHFC Ltd was as under: "1. To retain the controlling interest in the company. Prior to the public issue of IHFC limited, the family of the firm owned all the issued shares of IHFC Ltd. They wanted to retain the controlling stake even after the public issue....
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....diency, the authorities and the courts should have examined the purpose for which the assessee advanced money to its sister concern and what the sister concern did with the money. It was further held that it is not relevant whether the assessee has utilized the borrowed amount in its own business or has advanced the same as interest free loan to its sister concern. What is relevant is whether the amount, so advanced was as a measure of commercial expediency or not. It is not necessary that the amount so advanced is earning profit or not but there must be some nexus between expenses and the purpose of business." 30. It is important to note that the Division Bench in arriving at its aforenoted conclusion followed the judgment of the Supreme Court in S.A. Builders Ltd. (supra). The Division Bench, in fact, after remanding the matter, expressly directed the Tribunal to consider the matter in the light of the principles laid down by the Supreme Court in S.A. Builders Ltd. (supra). 31. We shall now consider Section 57(iii) of the Act, 1961, which reads thus: "Deductions 57. The income chargeable under the head "Income from other sources" shall be computed after ma....
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....Mad.). This High Court in Virmati Ramkrishna vs. CIT (1981) 131 ITR 659, has laid down the following propositions in respect of deduction of an expenditure under sec. 57(iii) of the Act (See also Eastern Investments Ltd. vs. CIT (1951)20 ITR 1 (SC), Seth R. Dalmia vs. CIT (1977) Taxation 49(3)57, 110 ITR 644 (SC) : (1) in order to decide whether an expenditure is a permissible deduction u/s. 57(iii), the nature of the expenditure must be examined. (2) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee; (3) the expenditure must have been laid out or expended wholly and exclusively for the purpose of making or earning "income from other sources"; (4) the purpose of making or earning such income must be the sole purpose for which the expenditure must have been incurred, that is to say, the expenditure should not have been incurred for such purpose as also for another purpose, or for a mixed purpose; (5) the distinction between purpose and motive must always be borne in mind in this connection, for, what is relevant is the manifest and immediate purpose and not the motive or personal conside....
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....ations : "The determination of the question before us turns on the true interpretation of S. 57 (iii) and it would, therefore, be convenient to refer to that section, but before we do so, we may point out that S. 57 (iii) occurs in a fasciculus of sections under the heading 'Income From Other Sources'. Section 56 which is the first in this group of sections enacts in subsec. (1) that income of every kind which is not chargeable to tax under any of the heads specified in S. 14, Items A to E shall be chargeable to tax under the head 'Income From Other Sources' and subsec. (2) includes in such income various items, one of which is 'dividends'. Dividend on shares is thus income chargeable under the head 'Income From Other Sources'. Section 57 provides for certain deductions to be made in computing the income chargeable under the head "Income From Other Sources" and one of such deductions is that set out in Cl. (iii) which reads as follows : "Any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income." The expenditure to be d....
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....) to suggest that the purpose for which the expenditure is made should fructify into any benefit by way of return in the shape of income. The plain natural construction of the language of S. 57 (iii) irresistibly leads to the conclusion that to bring a case within the section, it is not necessary that any income should in fact have been earned as a result of the expenditure. It may be pointed out that an identical view was taken by this Court in Eastern Investments Ltd. v. Commissioner of Income-tax, 20 ITR 1 : (AIR 1951 SC 278) where interpreting the corresponding provision in S. 12 (2) of the Income-tax Act, 1922 which was ipsissima verba in the same terms as Section 57 (iii), Bose, J., speaking on behalf of the Court observed : "It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned". It is indeed difficult to see how, after this observation of the Court, there can be any scope for controversy in regard to the interpretation of S. 57 (iii). 4. It is also interesting to note that, according to the Revenue, the expenditure would disqualify for deduction only if no income results from such expenditure in a parti....
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....ary to such language. 6. This view which we are taking is clearly supported by the observations of Lord Thankerton in Hughes v. Bank of New Zealand, (1938) 6 ITR 636 where the learned Law Lord said : "Expenditure in the course of the trade which is unremunerative is none the less a proper deduction, if wholly and exclusively made for the purposes of the trade. It does not require the presence of a receipt on the credit side to justify the deduction of an expense. " We find that the same view has been taken by the Madras High Court in Appa Rao v. Commr. of Income tax, (1962) 46 ITR 511 and Mohamed Ghouse v. Commr. of Income-tax, (1963) 49 ITR 127 the Bombay High Court in Ormerods (India) Private Ltd. v. Commr. of Income-tax, (1959) 36 ITR 329, the Allahabad High Court in Chhail Beharilal v. Commissioner of Income-tax, (1960) 39 ITR 696, the Madhya Pradesh High Court in Commissioner of Income-tax v. Dr. Fida Husain G. Abbasi, (1969) 71 ITR 314, the Kerala High Court in M. N. Ramaswamy Iyer v. Commr. of Income-tax, (1969) 71 ITR 218 and the Orissa High Court in Commissioner of Income-tax v. Gopal Chand Patnaik, 111 ITR 86 : (1976 Tax LR 443). This view is em....