(Per : Honourable Mr.Justice Akil Kureshi)
1. In Tax Appeals No. 538 and 539 of 2017, the Revenue has disputed the judgement of the Tribunal deleting disallowance of interest on the lending of the sister concern by the respondent assessee. While taking-up hearing of these tax appeals, learned counsel for the Revenue pointed out that in case of this very assessee, such an issue was being admitted by this Court in Tax Appeal No. 1166 of 2011 in following terms:
"1. We have heard Mr. K. M. Parikh, learned counsel appearing for the appellant.
2. Admit. We formulate the substantial question of law as under :
"Whether on the facts and in the circumstances of the case, the Tribunal was right in law in deleting disallowance of interest on account of diversion of interest bearing fund by the assessee to its sister concern on the ground that said advances were made for assessee's own business interest ?
3. Issue notice to respondent. Paper book be filed within three months."
2. We had, therefore, ordered all the three tax appeals to be notified together for hearing.
3. We have heard learned counsel for the Revenue of these tax appeals. We may record facts from Tax Appeal No. 1166 of 2011. The respondent-assessee had filed the return of income for the assessment year 2006-07. One of the issues arising out of such return was the interest expenses on borrowed funds. The Assessing Officer noticed that part of the funds were diverted for funding a sister concern. He disallowed the expenditure, upon which, the assessee approached the CIT (Appeals) who deleted the disallowance, upon which, the Revenue approached the Tribunal. The Tribunal noted that the sister concern Euphoric Laboratory Prvt Ltd. was exclusively making sales on behalf of the assessee in earlier year for which, it was also paid commission. During the period relevant to the assessment year, the sister concern could not recover the sales collection. The Assessing Officer, therefore, charged interest on the outstanding balance in the account of the assessee and added a sum to the return of income. The Tribunal confirmed the view of the CIT (Appeals) inter alia on the grounds that the sister concern, to whom the funds were transferred, was exclusively in promoting sales of the assessee's products. It is also continuously incurring losses and the assessee had, therefore, financed various expenses to the concerns which was also in the interest of the assesse's own business. The Tribunal was, therefore of the opinion that there was commercial justification in the assessee doing so. The Tribunal relying on the decision of Supreme Court in case of S.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) amd anr reported in 288 ITR 1 confirmed the view of the CIT (Appeals) making following further observations:
"8. We find that the disallowance is not justified in view of the fact that the said sister concerns to whom funds are transferred are exclusively engaged in promoting sales of the assessee's products. Further, these concerns were continuously incurring losses on account of inadequate margin allowed to them by the assessee. Hence, assessee had to finance various business expenses of these concerns on the interest of assessee's own business. Hence, there was no question of charging interest to them as the advances were for assessee's own business interest. We find that there is commercial justification for the advances given and hence disallowance of interest on account of diversion of funds is not justified as per decision of Suprme Court in case of S.A. Builders Ltd. (supra)."
4. It can thus be seen that CIT (Appeals) as well as the Tribunal both, after examining facts on record, found that there was sound commercial expenses in the assessee financing activities of the sister concern, who was acting as sales agent of the assessee and was otherwise in dire financial constraint. The Supreme Court in case of S.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) amd anr (supra) had made following observations:
"23. In our opinion, the decisions relating to Section 37 of the Act will also be applicable to Section 36(1)(iii) because in Section 37 also the expression used is "for the purpose of business". It has been consistently held in decisions relating to Section 37 that the expression "for the purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby.
Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155, it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (1925)10 TC 155, has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1, CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 etc.
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.
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."
5. These principals were reiterated by the Supreme Court in cases of Hero Cycles P. Ltd vs. Commissioner of Income Tax reported in 379 ITR 347 holding that advance to subsidiary pursuant to undertaking given to financial institution by the assessee to provide additional margin to subsidiary to meet working capital for meeting cash losses could not be disallowed as business expenditure.
6. Under the circumstances, we hold the question framed in Tax Appeal No. 1166 of 2011 against the Revenue. Resultantly, all the three tax appeals are dismissed.