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TMI Blog2017 (11) TMI 1673X X X X Extracts X X X X X X X X Extracts X X X X ..... to provide exception in respect of such payment which is required to be made in cash or absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. Therefore, the cash payments recovered under section proviso to s. 40A(3) and r.6DD(h). AO is directed to delete the addition. Addition on account of repairs and maintenance - Held that:- AO has not challenged the veracity of the claim or the incurrence of the expenditure for the purpose of the business. In light of that we hereby delete the disallowance. - D.B. Income Tax Appeal No. 38/2017 - - - Dated:- 20-11-2017 - Mr. K.S. Jhaveri And Mr. Vijay Kumar Vyas JJ. For the Appellant(s) : Ms. Parinitoo Jain For the Respondent(s) : Mr. Siddharth Ranka ORDER 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has partly allowed the appeal preferred by the assessee and dismissed the appeal of department modifying the order of CIT(A). 2. This Court while admitting the appeal on 05.07.2017 framed following substantial questions of law:- 5. Whether the Tribunal was legally justified in reversing the findings ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the genuineness of the expenditure has not been doubted and the payments has been made by cheque, we delete the disallowance of ₹ 2 lacs out of the publicity expenses. and the Tribunal seriously committed an error in reversing the view taken by the CIT(A). 4. We have heard counsel for the appellant. 5. In view of the observations which are made by the Tribunal in para 48 reproduced above, more particularly regarding expenses of the payment which was made by A/c Payee Cheque and Audit Report was that the payment was made and therefore there is no question of verifying document. In that view of the matter, the view taken by the Tribunal is required to be accepted. 6. The first issue is answered in favour of assessee and against the department. 7. Counsel for the respondent has taken us to the order of CIT(A) wherein it has been observed as under:- 21.3 I have perused the assessment order as well as submission of the assessee and case relied upon, the AO had given detailed findings on page 24 to 27 and has established the nexus between borrowed fund and amount advance to the group company/concerns. This issue was also involved in AY 1995-96. The Hon ble ITAT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Alkalies Ltd. Vs ACIT funds and the amount advances to the sister concern and the same findings could not been controverted by the assessee. Further, the ld. AO has submitted that the assessee had advanced funds as a measure of commercial expediency to the group companies. In this regard the assessee has submitted before the Assessing officer that it gave advances to the companies mentioned in letter No. 961 temporarily as a financial support in order to meet the statutory liabilities and dues towards salary of employees, workers and other expenses to these companies with the clear understanding that the same will be refunded back to the company. It was submitted that most of the companies are sick companies and financial support was given on account of business responsibilities and to protect the goodwill in the market as these companies are under the same management. Regarding bank guarantee for Modi Cement, the Assessing officer noted that the assessee company arranged a bank guarantee for ₹ 5 crores in favour of IDBI by depositing ₹ 5 crores with the bank as FD and such arrangement was made as rehabilitation package of M/s Modi Cement. A further sum of ₹ 5 cr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ors are not excluded. The genuine and bona fide transactions are not taken out of the sweep of the Section. It is open to the assessee to furnish to the satisfaction of the assessing officer the circumstances under which the payment in the manner prescribed in Section 40A(3) was not practicable or would have caused genuine difficulty to the payee. 2. CIT vs. Chaudhary and Co. [1991] 217 ITR 431 (Allahabad) , wherein it has been observed as under: We may mention that the object of Section 40A(3) was that fictitious amounts should not be claimed as revenue expenditure. The intention of Section 40A(3) was not that cash payment can never be allowed as deduction. The terms of section 40A(3) are not absolute. 3. Walfard Transport vs. CIT (240 ITR 902) CIT vs. Chrome Leather (235 ITR 708) , wherein it has been observed as under: where the transaction was found to be genuine and the identity of the payee was established, a liberal view of compelling and mitigating circumstances should be taken. 4. CIT vs. Raja Pal Automobiles [2010] (320 ITR 185 (All.)) , wherein it has been observed as under: Where Tribunal has held that the assessee has fully explained the details ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce realization took longer time and such payments should be made only in cash in their bank account-If assessee would not make cash payment and make cheque payments alone, it would have received recharge vouchers delayed by 4/5 days which would severely affect its business operation- Assessee, therefore, made cash payment-Whether in view of above, no disallowance under section 40A(3) was to be made in respect of payment made to principal- Held, yes [Paras 21 to 23] 9.Hero Cycles Pvt. Ltd. v. CIT (2015) 379 ITR 347 (SC) , wherein it has been observed as under: Once it is established that there is nexus between the expenditure and the purpose of 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 position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit and that the revenue authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a cash credit account in which there was a debit balance. The Assessing Officer found that the assessee had diverted its borrowed funds to a sister concern without charging any interest and that consequently, a proportionate part of the interest relating to that amount, out of the total interest paid by the assessee to the Bank, had to be disallowed. The CIT(A) had observed that out of the total amount advanced by the assessee to its subsidiary, only an amount of ₹ 18 lakhs had a nexus with borrowed funds and he had directed the Assessing Officer accordingly to calculate the disallowance. The Tribunal allowed the appeal by the Revenue and dismissed the appeal of the assessee. The order was confirmed by the High Court. The Supreme Court observed that the Income Tax authorities, the Tribunal as well as the High Court had approached the matter from an erroneous perspective. The Supreme Court held that where the assessee had borrowed funds from a Bank and lent some of them to a subsidiary as an interest free loan, the test to be applied is whether this was a matter of commercial expediency. The expression commercial expediency , held the Supreme Court, is an expression of wid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equipment under the EPCG Scheme. The obligations under the EPCG Scheme were required to VBC 13/15 itxa3155.09-28.3 be backed by bank guarantees which in turn demanded security for the issuance of guarantees. The assessee entered into an arrangement with RIL to which it advanced a sum of ₹ 476 crores against which RIL provided counter guarantees to financial institutions equivalent to three times the amount of the margin kept by the assessee with RIL. 12. Now, having regard to this factual background, both the CIT(A) and the Tribunal held that the investments made in the wholly owned subsidiary and the money advanced to RIL were for furthering the business of the assessee. The findings of both the CIT(A) and of the Tribunal are consistent with the judgment of the Supreme Court in S.A.Builders. Where the assessee, as in the present case, has significant interest in the business of the subsidiary and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make a disallowance in respect of the deduction which is otherwise available under Section 36(1)(iii). Counsel appearing on behalf of the Revenue submits that there is a di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Tribunal. 10. The CIT (Appeals) was, therefore, entirely justified in coming to the conclusion that the amount was advanced by the appellant to its sister concern on account of commercial expediency and that the advance was used by its sister concern for the purposes of its business. The additional facts further establish the findings. 11. The Tribunal's observation that there is nothing on record that the money advanced by the appellant to its sister company had been used as a measure of commercial expediency, was not justified. The appellant furnished all the documents in this regard. The appellant expressly stated that the amounts had been utilized for commercial activity. This assertion was never denied. The appellant was not required to do anything further to establish its assertion that its sister company had utilized the amounts for the purposes of its business. The finding of the Tribunal is not based on any material. 18. In the circumstances, the question of law is answered in favour of the appellant and against the department. The order of the Tribunal is set aside. The appellant shall be entitled to the deduction under Section 36(1)(iii). 13.CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expression commercial expediency is an expression of wide import and includes such expenditure as a prudent 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. 17. No doubt, as held in Madhav Prasad Jantia v. CIT (supra), if the borrowed amount was donated for some sentimental or personal reasons and not on the ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 18. In the presen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s (P) Ltd. To whom it is alleged by the AO that the assessee advanced more than ₹ 80 lacs. It is an admitted position that the assessee made purchases to the tune of ₹ 21,24,06,662 from M/s. Tirupati Pules (P) Ltd., which is based on the audit report and advances, if any, were towards the aforesaid purchases made by the respondent/assessee. So there was no occasion for the assessee to have charged any interest from a concern with whom it had trade dealings, may be the concern is related or not, it does not make any difference. Once it had been proved by the assessee that it had trade transactions with persons to whom advances are made, then in our opinion, looking to the commercial and business expediency, one is not required to charge the interest. The assessee is to manage its own affairs looking to the commercial/business expediency and decide whether to charge interest or not. 21. In view of above facts and circumstances of the case, the Tribunal has correctly come to the conclusion that the interest was rightly allowable on the basis of the facts found and which have been referred to hereinabove. We do not find any question of law much less substantial question ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee would.. ordinarily be entitled to deduction of interest on its borrowed loans. The Supreme Court accordingly set aside all the orders passed by the authorities below including the judgment of the Tribunal and of the High Court and remanded the matter for a fresh decision. 10. In the present case, there is a finding of fact by the CIT(A) and by the Tribunal that as a matter of fact, borrowed funds were not used by the assessee for the purposes of investment in the shares of its wholly owned subsidiary Reliance Infocomm Ltd. or for making advances to Reliance Industries Ltd. But independent of that, in view of the decision of the Supreme Court in S.A. Builders what is significant is as to whether the investment and the advances made were commercially expedient and for the purpose of business. In this regard, the assessee had pointed out before the CIT(A) that it is engaged in the business of providing telecommunication infrastructure which mainly consists of a Pan India Fibre Optic Network. Reliance Infocomm Ltd. is a wholly owned subsidiary of the assessee which is engaged in the business of providing telecommunication services. The assessee made investments in the quit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... security for the guarantees which those institutions were required to execute under the EPCG Scheme. The funds which were invested in the wholly owned subsidiary were again for the purposes of the business of the assessee. There is evidently a significant interest of the assessee in the business of its subsidiary since both the assessee and the subsidiary are engaged in providing telecommunication services. Consequently, we are not inclined to interfere with the order of the Tribunal. There is a finding of fact that interest free funds borrowed are not utilised for the purposes of both the transactions. But quite apart from that, the finding is 4 Compact Oxford Reference Dictionary pages 11 and 436 that the funds were deployed as a matter of commercial expediency and to further the business of the assessee. The latter finding is independent of whether borrowed funds were or were not utilized, for in view of the judgment of the Supreme Court held, the fact that borrowed funds were utilized for making investments or, as the case may be, for making advances would not disentitle the assessee to the deduction so long as business expediency exists. Consequently, we answer the questions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. The appellant furnished all the documents in this regard. The appellant expressly stated that the amounts had been utilized for commercial activity. This assertion was never denied. The appellant was not required to do anything further to establish its assertion that its sister company had utilized the amounts for the purposes of its business. The finding of the Tribunal is not based on any material. It is important to note that the Tribunal had not even suggested that such a case was put to the appellant or its authorized representative and that despite the same the appellant failed to establish the same. 18. In the circumstances, the question of law is answered in favour of the appellant and against the department. The order of the Tribunal is set aside. The appellant shall be entitled to the deduction under Section 36(1)(iii). 6. Commissioner of Income Tax-2 v. Tata Chemicals Ltd., (2016) 75 Taxmann.com 228 (Bombay) Re. Question (4) (a) The impugned order of the Tribunal has allowed the Respondent Assessee's appeal before it on the issue raised herein by following its decision rendered in respect of the same Respondent Assessee for the Assessment Year 1985-86. (b) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ground of commercial expediency, the interest thereon could not have been allowed under Section 36(1)(iii) of the Act. In Madhav Prasad's case (supra), the borrowed amount was donated to a college with a view to commemorate the memory of the assessee's deceased husband after whom the college was to be named. It was held by this Court that the interest on the borrowed fund in such a case could not be allowed, as it could not be said that it was for commercial expediency. 28. Thus, the ratio of Madhav Prasad Jantia's case (supra) is that the borrowed fund advanced to a third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of the Act. 29. In the present case, neither the High Court nor the Tribunal nor other authorities have examined whether the amount advanced to the sister concern was by way of commercial expediency. 30. It has been repeatedly held by this Court that the expression for the purpose of business is wider in scope than the expression for the purpose of earning profits vide CIT v. Malayalam Plantations Ltd. [1964]53ITR140(SC) , CIT v. Birla Cotton Spinning Weaving Mills Ltd. [1971]82ITR166(S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ending 25.07.1995, preamended Rule 6DD(j) will be applicable. The ld. AR has submitted that these payments are in the nature of freight and cartage payments which are required to be made to the drivers on the spot and it is not practical to make payments by crossed cheques. Further, in the tax audit report the 60 ITA 382 420/JP/2011_ M/s Lord Chloro Alkalies Ltd. Vs ACIT auditors have given their remarks stating that the factory is situated in the backward area and the payments to the transporters have to be made in cash because such persons are not having banking facility around the factory area. In our view, the same proves genuineness of the transactions, the identity of the payee as well as the business expediency to make payment in cash in the backward area where the payee are not having the banking facility. Further looking at the intent of introduction of section 40A(3) which was to curb and reduce the possibilities of black money circulation in economy and taking into consideration the decision of Hon'ble Gujarat High Court in case of Anupam Tele Services (supra) and Hon'ble Rajasthan High court in case of Smt. Harshila Chordia (supra) wherein it was held that exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tax Act, 1961, is that a fictious amount should not be claimed as revenue expenditure. The intention of section 40A(3) was not that cash payment can never be allowed as a deduction. The terms of section 40A(3) are not absolute. 4. Walfare Transport v/s CIT (240 ITR 902) CIT vs. Chrome Leather (235 ITR 708) observed as under : Where a transaction was found to be genuine and the identity of the payee was established, a liberal view of compelling and mitigating circumstances should be taken. 5. CIT vs. Raja Pal Automobiles [2010] (320 ITR 185 (All.)) observed as under: Where Tribunal had held that assessee had fully explained details of payment made in cash, entire evidence in form of bills, cash memos, etc., had also been furnished by assessee, and looking into business of assessee and also nature of items purchased, it could not be disputed that assessee had to make payments in cash under unavoidable and exceptional circumstances, Tribunal was justified in deleting disallowance under section 40A(3). 6. Harshila Chordia vs. CIT [2008] 298 ITR 349 (Raj) observed as under: Where genuineness of transaction and identity of payee were established and explanation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m, on the total cost of project, the assessee was entitled to 1 per cent commission for having transferred his right in favour of the subcontractor. According to the assessee, though it had received the payments form the Government, 99 per cent of the amount had been passed to the sub-contractor in cash and therefore, the said amount had to be considered as an amount paid to the sub-contractor by the assessdee. The contention of the assessee was rejected by the Assessing Officer on the ground that, since the amount was paid in cash the same had to be considered as an expenditure and the assessee was not entitled to claim any deduction. The Tribunal as well as the Commissioner (Appeals) on facts held that it was not an expenditure claimed by the assessee, but it was a payment made to the sub-contractor pursuant to an agreement. Held that, both the authorities, on facts, had held that as the assessee being a principal contractor had passed on the amount to the sub-contractor, such amount, could not be treated as an expenditure. Thus, section 40A(3) could not be said to be attracted to such payment in cash. 7. The transactions which has taken place are stock in trade and vil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f section 40A(3) is not to disallow genuine payments and the r.6DD has to be interpreted keeping in view of the object of the main provision. The second proviso to s. 40A(3) refers to the nature and extent of banking facilities available, considerations of business expediency and other relevant factors, which means that the object of the legislature is not to make disallowance of such cash payments which have to be compulsorily made by the assessee in view of absence of banking facilities at the place of payment. In the present case, even if it assumed that the payment was made at the District headquarter, the admitted position is that the sellers did not have any bank accounts at such town and they did not reside or carry on any business or farming activity at such town. It would be too much to expect that the appellant-company would be able to compel the villagers to open bank accounts at the town which ultimately they will not be able to operate as they do not reside at such town. If such a myopic view is taken regarding the interpretation of r.6DD(h), the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genui ..... X X X X Extracts X X X X X X X X Extracts X X X X
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