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TMI Blog2021 (7) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... nsidered opinion that the disallowance of interest expense on loan taken for purposes of business and against which interest income has been earned and offered to tax is unwarranted and the same qualifies to be allowed u/s.36(1)(iii)/S.37(l). We find equal strength in the argument of the ld. AR and hold that even in the alternative, such an expense qualifies as a deduction u/s.57(iii) against the interest income offered to tax, being an expenditure incurred in relation to earning of the said income as the loan was taken from M/s. OIPL and then given to M/S. ABW Infrastructure. - Decided in favour of assessee. - ITA No.-3409/Del/2018 - - - Dated:- 23-7-2021 - Shri Prashant Maharishi, Accountant Member And Shri K.Narasimha Chary, Judicial Member For the Assessee : Ms. Hashneeta Matta, CA, Sh. Mahesh Kumar, CA For the Revenue : Sh. Ramesh Kumar, SR DR ORDER PER K. NARASIMHA CHARY, JM Aggrieved by the order dated 19.03.2018 passed by the Commissioner of Income Tax (Appeals)-6, Delhi ( Ld. CIT(A) ) in the case of M/s Mason Infrastructure Private Limited ( the assessee ), for the assessment year 2013-14, assessee preferred this appeal challenging the confirm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stly it was submitted before the Ld. CIT(A) that as against the loan that was obtained from OIPL and incurring the interest expense of ₹ 1,35,25,521/-, from lending the amount to M/S. ABW Infrastructure, the assessee and interest amount of ₹ 1,48,38,906/-which was offered to tax. Apart from this, OIPL also offered to tax the interest that was earned from the assessee. Ld. CIT(A), however, dismissed the appeal confirming the order dated 08,03.2016 passed u/s.143(3) of the Act. Aggrieved by such an order of the Ld. CIT(A), assessee preferred this appeal. 4. It is the submission of the Ld. AR that admittedly the assessee has been engaged in the business of real estate where the ask of funds is high and inter-company loans/advances/deposits are routine; that development of real estate projects is typically a collaborative venture between various companies, usually group companies and/or third parties. Since the assessee is holding 11.74 hectare land at Keshwana Rajput village in tehsil and district of Kothputli in the state of Rajasthan, in view of the business prospects the assessee company applied for change in land use of the said land for setting up industrial uni ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 ITR 1 (SC), CIT v. Dalmia Cement Pvt Ltd. (2002) 254 ITR 377 (Del), and PCIT v. Reebok India Company[2018] 98 taxmann.com 413 (Delhi). 7. Per contra, it is the submission on behalf of the Revenue that the Ld. CIT(A) had taken into consideration the proximity of the transactions between OIPL and the assessee and the assessee and the M/S. ABW Infrastructure and is right in observing that the assessee appears to be just a passthrough entity and the conduct for passing the loan amount from OIPL to M/S. ABW Infrastructure and therefore there is no business expediency for the assessee to obtain the loan. Basing on the assessment order, Ld. DR submitted that the loan obtained is disproportionately high to the need to meet the conversion expenditure. Basing on the material available on record, Ld. DR submitted that there is no commercial expediency and the authorities below rightly denied the assessee the claim for deduction of the interest expenditure. 8. We have gone through the record in the light of the submissions made on either side. There is no dispute on the facts pleaded by the assessee. The assessee company holds land admeasuring 11.74 hectare at Village Keshwana Rajput i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc., and at the time M/S. ABW approached the assessee seeking an interest-bearing loan with an underlying security of developed property of M/S. ABW in Gurgaon since the ask of funds is high in real estate business. Assessee denies the observations of the learned Assessing Officer that the assessee M/S. ABW infrastructure is a group company. According to the assessee, M/S. ABW is a real estate developer company, with projects in Delhi NCR, and it is an unrelated third party, not being a sister concern of the assessee company or its group. 11. For the purpose of deciding the business expediency, it is necessary to look into the commercial relation between the parties from whom the loan was taken and to whom the loan was advanced. We are in agreement with the submission of the Ld. AR that there are various types of commercial relationships. A business would typically be prudent in creating relationships outside its group through its investments, particularly since the gestation period and risk, besides the amount invested, in real estate are high. Collaboration is typically preferred as it balances risk and return. All contemplations need not necessarily result in an upfront col ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the revenue, as has been held by the Hon ble Apex Court in the case of CIT v. Walchand Co Pvt Ltd [1967] 65 ITR 381 (SC) on allowability of business expenditure u/s.37(1) of the Income-tax Act, 1961 which corresponds to S.10(2)(xv) of the Indian Income-tax Act, 1922. 14. In the case of CIT v. Dalmia Cement Pvt Ltd. (2002) 254 ITR 377 (Del), Ho'ble jurisdictional High Court of Delhi, on the aspect of the allowability of business expenditure u/s.37(l) and interest on borrowed capital u/s.36(l)(iii) as under held that the jurisdiction of revenue is confined to decide reality of expenditure, namely, whether amount claimed as deduction is factually expended as laid down and whether it is wholly and exclusively for purpose of business and once it is established that there is a nexus between expenditure and purpose of business, revenue cannot justifiably claim to put itself in armchair of a businessman or in position of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if a third party also benefits thereby. 23. Thus in Atherton v. British Insulated and Heisby Cables Ltd. [1925] 10 TC 155 (HL), 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 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. v. CIT r 19511 20 ITR i. CIT v. Chandulai Kesha via I and Co. ri9601 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 ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. vs. Commissioner of Wealth-Tax (1994) 208 ITR 989. in which it was held that deduction under section 36(1)(/7V) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. 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. v. Commissioner of Wealth-Tax f 19951 215 ITR 562, also does no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the expenditure incurred voluntarily and meeting the commercial expediency test is to be allowed as a deduction, and it is immaterial if a third party also benefits by the said expenditure. Further, the Revenue cannot assume the role and occupy the armchair of a businessman to decide whether the expenditure was reasonable. 17. In the case of PCIT v. Reebok India Company[2018] 98 taxmann.com 413 (Delhi), Hon'ble jurisdictional High Court upheld the view taken by a coordinate Bench of this Tribunal and held that the money borrowed to advance the same to a subsidiary for some business purpose would qualify for deduction of interest, so long as the money borrowed is not utilized by the assessee for personal benefit and not for business purpose. 18. In this case, while the loan was granted to a third-party real estate developer M/S. ABW Infrastructure with strategic intent, the loan per se was for the purpose of earning interest income in terms of Agreement for effective and secured deployment of interest-bearing funds, which did not result in acquiring any controlling interest in M/S. ABW Infrastructure. Though the authorities below observed that the immediate lend ..... X X X X Extracts X X X X X X X X Extracts X X X X
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