P.K. BANSAL, ACCOUNTANT MEMBER 
AND MUKUL KR. SHRAWAT, JUDICIAL MEMBER

ORDER

P.K. Bansal, Accountant Member - This appeal has been filed by the assessee against the order of CIT(A) dated 16.09.2013, for the assessment year 2010-11 by taking the following effective grounds of appeal :—

"1. As regards reopening/reassessment proceedings

1.1 The CIT(A) erred in confirming the initiation of reopening/reassessment proceedings without appreciating the fact that the Assessing Officer had no fresh information & had initiated the reopening/reassessment proceedings merely on the basis of re consideration of the information furnished by the assessee in the return filed & therefore the reopening/reassessment proceedings is arbitrary, unjust, bad in law & deserves to be annulled.

1.2 Without prejudice to the above, the CIT(A) erred both on facts & in law in confirming initiation of reopening/reassessment proceedings u/s 147/148 without properly appreciating the submissions made before him during appeal/proceedings.

1.3 Without prejudice to the above, under the facts and circumstances of the case and judicial pronouncement s on the issue the reopening/reassessment proceedings is arbitrary & unjust.
2. As regards disallowance of interest of Rs. 61,27,362/-:

2.1 That the CIT(A) erred both on facts and in law in confirming the aforesaid disallowance of interest.

2.2 Without prejudice to the above, the assessee has explained in full about the corporate guarantee for bank finance of Agrawal Polyfil Pvt. Ltd. (Appl) and its obligation to extend the loan.

2.3 Without prejudice to the above, the assessee has explained that the amount of share capital & interest free capital/deposits/loans were sufficient to support the loan to APPL.

2.4 Without prejudice to the above, the CIT(A) erred in confirming the aforesaid addition without properly considering & appreciating the submissions made and legal issues raised before him during appeal proceedings."

2. Facts of the case regarding ground no. 1 are that in this case only processing u/s 143(1) was done and no scrutiny assessment u/s 143(3) was framed. Later on the Assessing Officer noted that assessee's claim of interest expense of Rs. 5,25,07,952/- on borrowed funds of Rs. 47,79,55,602/- was hugely disproportionate to the interest income of only Rs. 9,53,696/- on loans and advances given by assessee of Rs. 12,18,66,811/-. The payment of interest was fully claimed in accounts on borrowed funds, interest income was not fully charged on loans and advances given by assessee. Therefore, proceedings u/s 147 by recording reasons u/s 148 were initiated. The copy of the reasons as desired by the assessee was given to him. The assessee went in appeal and challenged initiation of proceedings and the validity of reassessment. The CIT(A) confirmed the validity of initiation of proceeding u/s 147.

3. Ld.Counsel for the assessee contended that the assessee filed its return of income for assessment year 2010-11 inter alia showing the following :—

The Ld.Counsel further contended that no notice for assessment was issued u/s 143(2) for the above referred assessment year till 11.03.2012. Notice u/s 148 dated 09.03.2012 was served on 12.03.2012. The ld. Assessing Officer started the reassessment proceedings without having any fresh information in his possession and merely on the basis of reconsideration of the information furnished by the assessee in the return filed and, therefore, the reassessment proceedings is arbitrary, unjust, bad in law and deserves to be annulled. Detailed written submissions were filed from 4.7.2012 to 13.8.2012 requesting to drop down reassessment proceedings. In response to notice u/s 148, initially a letter was filed on 11.4.2012 requesting the Assessing Officer to treat the return filed on 31.3.2012. The Ld.Counsel for the assessee contended that under the facts and circumstances mentioned above, the ld. Assessing Officer erred in totally ignoring the revised return filed on 31.3.2012, letter dated 11.4.2012 and duplicate return filed on 5.9.2012 and completed the assessment on the basis of original return which is arbitrary, unjust and bad in law and, therefore, deserves to be quashed.

4. The ld. Senior DR, on the other hand, contended that the information disclosed by the assessee consists of only interest claim and interest income. The assessee has not disclosed whether any interest has been received from its subsidiary company whether any loan has been given to its subsidiary company. Therefore, it was not a proper disclosure and it is not a case of merely reconsideration or review of the assessment already completed.

5. We have heard the rival submissions and carefully considered the same. We noted that the proceedings u/s 147 has been initiated by the Assessing Officer by recording the following reasons to believe:—

"On perusal of return of income filed for assessment year 2010-11, it is observed that the assessee has given Loans & advances to the tune of Rs. 12,18,66,811/- and has received loan to the tune of Rs. 47,79,55,602/- . It is also seen that the assessee has claimed interest expenses of Rs. 5,25,07,952/- whereas interest income is shown at Rs. 9,53,696/- only.

Therefore I have reason to believe that the assessee has made interest free advances out of borrowed funds which has resulted in under assessment of income. In order to bring the income escaping assessment issue notice u/s 148 of the Income-tax Act, 1961."

6. Originally, the assessee has submitted the return, which was processed u/s 143(1). The contention of the ld. Authorized Representative before us is that the assessee had made the full disclosure in the original return in respect of the funds advanced to the subsidiary company and no interest has been charged from the subsidiary company and, therefore, the Assessing Officer was not having any fresh information, therefore, the reopening was not valid in law. The reliance was placed in this regard on the decision of Delhi High Court in the case of CIT v. Orient Craft Ltd. [2013] 354 ITR 536/215 Taxman 28/29 taxmann.com 392. We have gone through the case laws as has been relied on before us from both the sides. Before deciding the issue involved, it is expedient to discuss the relevant provisions. The relevant provisions of Sec. 147 are reproduced as under :

"147. If the Assessing Officer has reason to believe that any income chargeable to tax has escaped assessment for any assessment year, he may, subject to the provisions of sections 148 to 153, assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequently in the course of the proceedings under this section, or recompute the loss or the depreciation allowance or any other allowance, as the case may be, for the assessment year concerned (hereafter in this section and in sections 148 to 153 referred to as the relevant assessment year) :

Provided that where an assessment under sub-section (3) of section 143 or this section has been made for the relevant assessment year, no action shall be taken under this section after the expiry of four years from the end of the relevant assessment year, unless any income chargeable to tax has escaped assessment for such assessment year by reason of the failure on the part of the assessee to make a return under section 139 or in response to a notice issued under sub-section (1) of section 142 or section 148 or to disclose fully and truly all material facts necessary for his assessment, for that assessment year:

Provided further that nothing contained in the first proviso shall apply in a case where any income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any assessment year:

Provided also that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.

Explanation 1.-Production before the Assessing Officer of account books or other evidence from which material evidence could with due diligence have been discovered by the Assessing Officer will not necessarily amount to disclosure within the meaning of the foregoing proviso.

Explanation 2.-For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely :-

Explanation 3.-For the purpose of assessment or reassessment under this section, the Assessing Officer may assess or reassess the income in respect of any issue, which has escaped assessment, and such issue comes to his notice subsequently in the course of the proceedings under this section, notwithstanding that the reasons for such issue have not been included in the reasons recorded under sub-section (2) of section 148.

Explanation 4.-For the removal of doubts, it is hereby clarified that the provisions of this section, as amended by the Finance Act, 2012, shall also be applicable for any assessment year beginning on or before the 1st day of April, 2012."

7. From reading of this section, it is apparent that this section empowers the AO to assess or re-assess income chargeable to tax if he has 'reason to believe' that income for any assessment year has escaped assessment. This section authorizes the AO not only to re-assess but also to assess the Assessee in respect of an income which escaped assessment. For initiating the proceedings under this section, no doubt there must be 'reason to believe'. 'Reason to believe' would mean cause or justification. If the AO has cause or justification to know or suppose that income has escaped assessment, it can be said that assessing officer has 'reason to believe' that the income has escaped assessment. The Hon'ble Supreme Court in the case of Asstt. CIT v. Rajesh Jhaveri Stock Brokers (P.) Ltd. [2007] 291 ITR 500/161 Taxman 316 has categorically held that processing of the return u/s 143(1) by way of intimation is not an assessment. Initiating action u/s 147 in respect of income escaping assessment where an intimation u/s 143(1) is issued, is covered by the main provision of Sec. 147 as substituted w.e.f. 1.4.1989 and not by the proviso thereto. The only condition to clothe with the jurisdiction u/s 147 in such case is that there must be 'reason to believe' that any income chargeable to tax has escaped assessment. The 'reason to believe' means where there is relevant material on which a reasonable person could have formed the requisite belief. The material need not conclusively prove escapement of income at the stage of the 'reason to believe'. The principle of change of opinion for 'reason to believe' is not applicable as the AO has not to apply his mind while processing return u/s 143(1). Rather AO is bound to accept it if it is otherwise a valid return and does not have any defect. Now, as per the scheme of CBDT, the return has to be processed by the computer and not by AO. In the case of Assessee return has only been processed u/s 143(1), therefore, no question of applying the mind by AO arises while determining the taxable income is concerned. In the absence of bona fide reasons, it is a settled law that without 'reason to believe', the proceedings u/s 147 cannot be initiated. It is not the case of the Assessee that there is no 'reason to believe' or reason to believe are not bonafide. The sufficiency of reasons cannot be entertained by this Tribunal. We have only to see whether there is material to form the 'reason to believe'.

8. We noted that the words 'income chargeable to tax has escaped assessment' has been defined by explanation 2 in Sec. 147 as substituted w.e.f. 1.4.1989. Sub-clause (b) of the explanation is relevant for us. This sub-clause clearly mandates that where income tax return has been filed by the Assessee but no assessment has been made and the AO notices that the Assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it will be deemed to be a case where income chargeable to tax has escaped assessment. In our opinion, explanation 2(b) is clearly applicable in the case of the Assessee in view of the proposition of law as pronounced by the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) as the assessee has duly furnished the return but no assessment u/s 143(3) has been framed by the assessing officer. In the case of the Assessee, we noted that the return for the impugned assessment has been processed u/s 143(1) and issued the intimation. No decision was brought to our knowledge by the ld. Advocate how the explanation 2(b) will not apply in the case of Assessee.

9. No doubt in the case of Orient Craft Ltd. (supra) the Hon'ble Delhi High Court under para 17 while dealing with the specific argument of the Revenue that an intimation cannot be equated to an assessment, took the view that the submission of the ld. DR acted to be self-defeating because if an intimation is not an assessment, then, it can never be subjected to Sec. 147 proceedings as the section covers only an assessment and we wonder if the Revenue would be prepared to concede that position. In our opinion, Sec. 147 authorises the AO not only to re-assess but to assess any income chargeable to tax which has escaped assessment for any assessment year. The word 'chargeable to tax has escaped assessment' is defined under explanation 2 under sub-clause (b). Sub-clause (b) clearly states that where return has been filed but no assessment has been made and the AO notices that the Assessee has understated the income or has claimed excessive loss, deduction, allowance or relief in the return, it shall be deemed to be a case where income chargeable to tax has escaped assessment. We do not find that the explanation 2(b) has been considered by the Hon'ble High Court in this decision while the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) has duly reproduced at pg. 506 explanation 2(b) and has observed that w.e.f. 1.4.1989 the provisions of Sec. 147 underwent substantial and material change. The term 'income chargeable to tax has escaped assessment' was defined u/s 147 prior to 1.4.1989 under explanation 1 to Sec. 147 but that definition was entirely different. No such clause as clause (b) under explanation 2 was there in the deeming provision given under explanation 1 in respect of income escaping assessment under the old section 147. We do not agree that Sec. 147 proceedings could cover only the reassessment. The relevant provisions of explanation 1 to Sec. 147 as it stood prior to 1.4.1989 reads as under :

"Explanation 1. - For the purposes of this section, the following shall also be deemed to be cases where income chargeable to tax has escaped assessment, namely:-

10. We, therefore, do not agree with the submission of the ld. Advocate on this issue and reject the plea advanced in this regard.

11. Now, coming to the second submission of the ld. Sr. Advocate that in view of the decision of the Hon'ble Delhi High Court in the case of Orient Craft Ltd. (supra) as given in para 18, there must be fresh tangible material which should have come in the possession of the AO subsequent to the issue of the intimation, we noted this observation of the Hon'ble High Court in that case. We also noted that the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) nowhere took the view that some fresh tangible material should come subsequently in the possession of the AO while taking action u/s 147 after the return is processed u/s 143(1). The Hon'ble Supreme Court while comparing the old provisions of Sec. 147 and the provisions as has been substituted w.e.f. 1.4.1989 has clearly laid down under para 17 of its decision that under the substituted Sec. 147 existence of only the first condition is sufficient. If the AO, for whatever reasons, has reason to believe that income has escaped assessment, it confers jurisdiction to re-open the assessment. It is further stated that both the conditions must be fulfilled if the case falls within the ambit of proviso to Sec. 147. No doubt the ingredients of Sec. 147 are to be fulfilled. The ingredients of Sec. 147 nowhere requires that in case a return is processed u/s 143(1), there must be tangible material which should come to the possession of the AO subsequent to the issue of the intimation. In our opinion, the material which is available with the AO even alongwith the return at the time of the processing of the return can be the basis for 'reason to believe' as in view of clause (b) of explanation 2 it can be deemed that income chargeable to tax has escaped assessment. Clause (b) of explanation 2 does not require that the assessment must precede before taking any action u/s 147.

12. We noted that there is decision of Full Bench of the Hon'ble Delhi High Court in the case of CIT v. Usha International Ltd. [2012] 348 ITR 485/210 Taxman 188/282 taxmann.com 200 which has taken a view contrary to the decision of Orient Craft Ltd. (supra),. Even this decision of full bench has not been referred to in the case of Orient Craft Ltd. (supra).

13. We noted that the Hon'ble Supreme Court in the case of Raymond Wollen Mills Ltd. v. ITO [1999] 236 ITR 34 when a similar question had come before the Hon'ble Supreme Court did not decide the issue whether any new fact came to the knowledge of the ITO after completing the assessment proceedings. But that was not a case of processing the return u/s 143(1). We noted that the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) has discussed the provisions of Sec. 143(1) and 147 in detail as well as the term 'reason to believe' and has categorically held that where the return is processed u/s 143(1) there is no assessment.

14. Sec. 147 has used both the words 'assess' or 'reassess'. This implies that the AO has the power even to make an assessment where earlier no assessment has been made by the AO and there is escapement of assessment. We cannot read the provisions of Sec. 147 in a manner that it can be applied only in a case where the assessment has already been made. In our view, the case of the Assessee is covered by the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) as in that case, the AO had not made any assessment and had not formed any opinion. Therefore, on the basis of the material which is available in the return or alongwith the return with the AO, the AO, in our opinion, in view of explanation 2(b) can take action u/s 147 in a case where the return has been processed u/s 143(1). We are bound to follow the decision of the Hon'ble Supreme Court. Even we noted that the decision of the Hon'ble Delhi High Court is not binding precedents on us in view of the decision of the full bench of Hon'ble Delhi High Court in Usha International Ltd. (supra).

15. Although, we are of the opinion that the issue is duly covered by the decision of the Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) but still we decided to go through the relevant provisions from which the word 'tangible material or information' has been interpreted by the courts while interpreting the provisions of Sec. 147.

16. We noted that initially the provisions for income escaping assessment were brought into the statute by way of Sec. 34 incorporated under the Income Tax Act, 1922. This section reads as under :
"34. Income escaping assessment — (1) If -

17. We noted that Sec. 34 authorises the AO to take action for re-assessment under two situations; the first situation is given in Sec. 34(1)(a) and second is given in Sec. 34(1)(b). Sec. 34(1)(a) empowers the AO to assess or re-assess the escaped income, where the AO has reason to believe, due to the omission or failure of the Assessee to make a return of his income u/s 22 or to disclose fully and truly all the material facts necessary for his assessment. U/s 34(1)(a) 'reason to believe' is qualified by the words 'omission or failure'. Sub-clause (b) applies to a case where there may be no omission or failure but the AO, in consequence of information in his possession, has reason to believe about the escaped income. U/s 34(1)(b) thus the reason to believe for escapement of the income must have arisen in consequence of the information coming in the possession of the AO. The Hon'ble Supreme Court has analysed the word 'information' as used in Sec. 34(1)(b) in the case of Kalyanji Mavji & Co. v. CIT [1976] 102 ITR 287 (SC) and has categorically held in the following manner :

'The word "information" in section 34(1)(b) is of the widest amplitude and comprehends a variety of factors. Nevertheless, the power under section 34(1)(b), however wide it may be, is not plenary because the discretion of the Income-tax Officer is controlled by the words "reason to believe". Information may come from external sources or even from the materials already on record or may be derived from the discovery of new and important matter or fresh facts.
Section 34(1)(b) would apply to the following categories of cases :

Where, however, the Income-tax Officer gets no subsequent information, but merely proceeds to reopen the assessment without any fresh facts or materials or without any enquiry into the materials which form part of the original assessment, section 34(1)(b) would have no application.'

18. From the aforesaid judgement, we noted that the Hon'ble Supreme Court has interpreted that the word 'subsequent information' requires fresh facts and material or if there are existing facts, then, there must be enquiry into the materials available. Thus, we noted that requirement of fresh material or facts has been interpreted by the court because Sec. 34(1)(b) states that the AO has in consequence of information in his possession 'reason to believe'. 'Reason to believe' should have arisen in consequence of the information and as the information cannot be based without material or facts, therefore, it has been interpreted by the Court that there must be fresh facts or tangible material with the AO.

19. We noted that in Sec. 147, as was in existence prior to 1.4.1989, under sub-clause (b) similar language has been used as had been used in Sec. 34(1)(b). For ready reference the said section 147 as was in existence prior to 1.4.1989 is reproduced as under :—
"147. If -

he may, subject to the provisions of sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in sections 148 to 153 referred to as the relevant assessment year)."

20. In this section also, for the purpose of 'reason to believe' it is necessary that the 'reason to believe' must have arisen in consequence of the information in the possession of the AO. The information must precede the reasons to believe if we read the provisions of Sec.147(b). We noted that the Hon'ble Supreme Court had occasion to interpret the word 'information' as used in Sec. 147(b) in the case of CIT v. A. Raman & Co. [1968] 67 ITR 11(SC) as reproduced below :—

'The expression "information" in the context in which it occurs [in section 147(b) of the Income-tax Act, 1961] must mean instruction or knowledge derived from an external source concerning facts or particulars, or as to law relating to a matter bearing on the assessment.

To commence the proceedings for reassessment it is not necessary that on the materials which came to the notice of the Income-tax Officer, the previous order of assessment was vitiated by some error of fact or law.

The High Court exercising jurisdiction under article 226 of the Constitution has power to set aside a notice issued under section 147(b) of the Income-tax Act, 1961, if the condition precedent to the exercise of the jurisdiction does not exist. The court may, in exercise of its powers, ascertain whether the Income-tax Officer had in his possession any information: the court may also determine whether from the information the Income-tax Officer may have reason to believe the income chargeable to tax has escaped assessment. But the jurisdiction of the court extends no further. Whether on the information in his possession, he should commence proceedings for assessment or reassessment, must be decided by the Income-tax Officer and not by the High Court. The Income-tax Officer alone is entrusted with the power to administer the Act: if he has information from which it may be said, prima facie, that he had reason to believe that income chargeable to tax had escaped assessment, it is not open to the High Court exercising powers under article 226 of the Constitution to set aside or vacate the notice for reassessment on a reappraisal of the evidence.

In a petition under article 226 of the Constitution, the taxpayer may challenge the validity of a notice under section 147 of the Income-tax Act, 1961, on the ground that either of the conditions precedent does not exist, but an investigation whether the inferences raised by the Income-tax Officer are "correct or proper" cannot be made.

Jurisdiction of the Income-tax Officer to reassess income arises if he has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment. That information must, it is true, have come into the possession of the Income-tax Office after the previous assessment, but even if the information be such that it could have been obtained during the previous assessment from an investigation of the material on record, or the facts disclosed thereby, or from other enquiry or research into facts or law, but was not in fact obtained, the jurisdiction of the Income-tax Officer is not affected.'

21. From the provisions of Sec. 34(1)(b) and 147(b) which were under the Income Tax Act prior to 1.4.1989 it is apparent that for arriving at 'reason to believe' that income chargeable to tax has escaped assessment it was necessary that the AO must have information in his possession prior to arriving at reasons to believe that income escaped assessment. This information has been interpreted by the courts from time to time in the form of tangible fresh material or facts but when we looked into the provisions of Sec. 147 which has been substituted w.e.f. 1.4.1989, we noted that there are drastic changes in this section. Now, the only condition which requires to be fulfilled is that the AO must have 'reason to believe' that any income chargeable to tax has escaped assessment. This section does not talk that 'reason to believe' must be based or must have been in consequence of information coming into the possession of the AO. Therefore, in our opinion, for taking action u/s 147 the 'reason to believe' can be based on the basis of the material available with the AO on the basis of the return filed by the Assessee. Requirement of new material or fresh tangible material coming in the possession of the AO as a pre-requisite condition for re-assessment is applicable only where he had made an assessment earlier. This will not be applicable if no assessment was originally made and AO is going to proceed with assessment u/s 147 for the first time. It may also be noted that Sec.147 does not deal only with the cases of re-assessment but also with the assessment for the first time. The courts have from time to time interpreted the word 'reason to believe' to mean that the AO must have cause or justification. At the stage of initiation of the proceedings it is not required that the AO must establish the escapement of the income. The only question is whether there was relevant material on which a reasonable person could have formed the requisite belief. The scope and effect of Sec.147 as substituted w.e.f. 1.4.1989 is substantially different from the provisions as stood prior to such substitution. The court has interpreted from time to time that there must be bona fide reason to believe. Where the AO has applied his mind to the material available with him, he cannot be permitted to review the assessment in the garb of 'reason to believe'. The Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) has categorically taken the view at pg. 509 that the intimation u/s 143(1) cannot be treated to be an order of assessment. The AO is bound to accept the return as has been filed by the Assessee and process it. Since the AO is bound to process the return without making any addition thereon, no question of application of mind by the AO arises. Therefore, it cannot be said that the AO has applied his mind and if the AO is taking action u/s 147 on the basis of the material available on record for escapement of the income as per the definition given under explanation 2(b), in our opinion, it cannot be said that such an action is illegal and without jurisdiction. The Hon'ble Supreme Court in the case of Rajesh Jhaveri Stock Brokers (P.) Ltd. (supra) further held that there being no assessment u/s 143(1) of the Act, the question of change of opinion does not arise. The Hon'ble Supreme Court also held that Sec. 147 permitted the AO to assess or re-assess the income chargeable to tax when he has reason to believe income escaping assessment. The mere failure to take steps u/s 143(3) would not render the AO powerless to initiate proceedings u/s 147 of the Act even when intimation u/s 143(1) had been issued. Thus, with the amendment brought to Sec. 147 of the Act on and from 1.4.1989 and the elucidation on the scope of the authority and jurisdiction of the officer u/s 147 of the Act, we are of the firm view that the proceedings initiated by the AO u/s 147 are valid and the AO could have taken the action u/s 147 on the basis of the material available and filed alongwith the return. There is no need of any fresh tangible material for coming to the 'reason to believe' that the income has escaped assessment in view of explanation 2 clause (b) of Sec. 147. In view of the aforesaid discussion the ground no.1 stands dismissed.

22. Ground no.2 relates to the disallowance of interest of Rs. 61,27,362/-.

23. The facts relating to this ground is that the assessee made the advances to its subsidiary concern. The amount has been taken out of cash credit account of the assessee maintained by State Bank of India, Andheri Branch, Mumbai, which has mixed fund. The assessee has also given the corporate guarantee to the Bank. The Assessing Officer was of the view that the assessee has given advances to its sister concerns M/s. Agrawal Polyfil Limited out of the borrowed funds and, therefore, he disallowed interest paid by the assessee to the Bank calculated on the basis of product method worked out at Rs. 61,27,362/-. The assessee went in appeal before the CIT(A). The ld. CIT(A) confirmed the order of the Assessing Officer by observing as under :—

"6.1 The appeal failed to controvert the finding of Assessing Officer that advances to sister concern were given from cash credit account of assessee maintained with SBI, Andheri Branch, Mumbai. Assessee has also admitted this fact in its submission dated 10.09.2013 before the CIT(A) stating that they made provisional advance to sister concern as per detailed correspondence with BOI and SBI and also gave "corporate guarantee" to banks on behalf of sister concern. Hence, a direct nexus is established between borrowals by assessee of interest bearing funds from banks and non-interest bearing advances given to sister concern. In such circumstances when direct nexus is proved, disallowance of interest expense is upheld in case of Madhav Prasad Jatia (SC) 118 ITR 200 and Abhishek Industries Limited, (P&H) 286 ITR 1. Even in case of S. A. Builders Limited, (SC) 288 ITR 1, it was held that if borrowed funds were diverted to sister concern, it could be disallowed if assessee failed to establish commercial expediency and assessee has failed to prove the same before under signed, especially when the two had no business transactions.

6.2 Since the sister concern Agarwal Polyfil P.Ltd. got registered with BIFR only on 09.12.2012, hence appellant's argument on this count also fails that no interest could be claimed from a sick unit, as the unit was not sick in the year under consideration, i.e. assessment year 2010-11. Hence, reliance of appellant on the decision of M. Ethurajan, (2009) 142 Taxman 708 (Mad.) will not help them, because sister concern was not sick in this year.

6.3 In view of the aforesaid discussion, since interest bearing bank loan was advanced to sister concern as interest free advance, hence disallowance of proportionate interest of Rs. 61.27 lakhs u/s 36(1)(iii) of the Income-tax Act, is upheld. Ground no. (2) of appeal is dismissed."

24. We have heard the rival submissions and carefully considered the same along with the orders of tax authorities below. The main crux of the argument of the assessee is that the loan was advanced for business consideration. The assessee company has sufficient capital/deposit to advance the loan. So far as the contention that the assessee company had sufficient capital/deposit etc. to advance the loan, the onus is upon the assessee to prove that it had sufficient capital and free reserve to advance the loan to the subsidiary company. No such evidence was brought to our knowledge except that the advance has been given out of the cash credit account, which has mixed fund both interest bearing as well as non-interest bearing. We, therefore, dismiss this contention of the ld. Authorized Representative. In respect of the other contention, we find force and we noted that the assessee has given the corporate guarantee to the Bank for the debts of Agarwal Polyfil Private Limited and the assessee has advanced loan to Agarwal Polyfil Private Limited to clear the over dues with State Bank of India in which the assessee company had given the corporate guarantee. If the assessee would not have given the loan, bankers would have encashed the corporate guarantee and assessee may be in trouble. The business expediency due to the corporate guarantee demands such loan to be given to the subsidiary company, which ultimately has become sick company. We have gone through the decision of Hon'ble Supreme Court on which both the parties have relied. We noted that in this decision Hon'ble Supreme Court has interpreted the word 'for the purpose of business' as given u/s 37 of the Income-tax Act, 1961, and took the view that the decision relating to Section 37 will also be applicable to Section 36(1)(iii) because in Section 37 the expression used is ' for the purpose of business'. It has been consistently held in decisions in respect of Section 37 that the expression ' for the purpose of business' includes expenditure incurred voluntarily due to commercial expediency and it is immaterial if a third party also get benefited by this. Ultimately under para 35 of the order, the Hon'ble Supreme Court held as under :—

"It is not in every case that interest on borrowed loan has to be allowed if the assessee advances it to, a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances. Where holding company, has a deep interest in its subsidiary for some business purposes, the holding company would ordinarily be entitled to deduction of interest on its borrowed loans."

25. In our opinion, the case of the assessee is duly covered by the decision of the Hon'ble Supreme Court, because M/s. Agarwal Polyfil Private Limited is a subsidiary company of the assessee and assessee has given corporate guarantee for the debts of the subsidiary company to the Bankers due to commercial expediency. Commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purposes of the business. The expenditure would have been incurred under any legal obligation but yet such expenditure is allowable as a business expenditure if it was incurred on the ground of commercial expediency. The facts of this case, in our opinion, clearly suggest that the debt loans has been advanced by the assessee due to commercial expediency. The assessee has given the corporate guarantee. We, therefore, set aside the order of the ld. CIT(A) and delete the disallowance. Thus, this ground is allowed.

26. In the result, the appeal is partly allowed.