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TMI Blog2023 (9) TMI 848X X X X Extracts X X X X X X X X Extracts X X X X ..... e aforesaid case the department had no occasion to verify the veracity of the claim made in the income tax returns and all those points only have a bearing at the time of assessment to be undertaken in the proceedings and not on the issuance of notice u/s 148 - We fail to understand why these decisions could not have been taken at this stage itself so that the AO, having regard to the law laid down by the courts and on the submissions made by petitioner, could have discharged the notice u/s 148 of the Act. There is no reason to postpone it to the assessment proceedings stage. - K.R. SHRIRAM DR. N.K. GOKHALE, JJ. For the Petitioner : Mr. P.J. Pardiwalla, Senior Advocate a/w Mr. Nitesh Joshi i/b Mr. Atul K. Jasani. For the Respondents : Mr. Suresh Kumar. ORAL JUDGMENT : (PER : K.R. SHRIRAM, J.) WRIT PETITION NO. 947 OF 2014 1. Petitioner is engaged in the business of manufacture and sale of prestress concrete sleepers used in laying of railway tracks. As stated in the petition there is an internal understanding amongst the members of Concrete Sleeper Manufacturer Association of India that a company having its manufacturing facility in a particula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of loans and advances to the sister and associate concerns for Assessment Years 2004-05 to 2008-09, the Revenue has not made any disallowance of interest expense in those years thereby accepting that the deployment of funds is for business purpose and/or made out of interest free funds. 3. Petitioner s investment in ICON by way of share application money and by granting loans and advances stood at Rs. 9,05,30,529/- as on 31st March 2009. As against this, the interest free funds available stood at Rs. 10,86,31,647/-. Petitioner filed its return of income on 30th September 2009 for Assessment Year 2009-10 declaring a total income of Rs. 1,79,98,700/-. Intimation was received from the Income Tax Department accepting return of income and granting consequential refund on 21st March 2011. 4. Thereafter petitioner received a notice dated 18th March 2013 from Respondent No. 1 under Section 148 of the Income Tax Act (the Act) alleging that he had reason to believe that petitioner s income chargeable to tax for Assessment Year 2009-10 has escaped assessment. Petitioner was also provided with reasons to believe vide communication dated 15th March 2013. The reasons to believe read as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for Assessment Year 2009-10 is incorrect and consequential notice issued under Section 148 of the Act is invalid. 6. Petitioner s objections were rejected by an order dated 27th November 2013 without considering any of the submissions of petitioner. Though the submissions have been reproduced in the order it has been rejected only on the ground that since there was no assessment done in the aforesaid case the department had no occasion to verify the veracity of the claim made in the income tax return. The Assessing Officer (A.O.) concluded, relying upon Assistant Commissioner of Income-Tax vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. 2007 (291) ITR 500 (SC) that where no regular assessment was done and only summary order under Section 143(1) of the Act was done, the case can be re-opened under Section 147 of the Act. The A.O. also held that the proceedings of earlier years and findings of the Appellate Authority in the year 2003-04 or by A.O. in the year 2007-08 and 2008-09 have a bearing only at the time of assessment to be undertaken in those proceedings and not on the issuance of notice under Section 148 of the Act as the requirement of law is that the A.O. should have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... formed. Similarly stand of Revenue has been rejected by the CIT[A] as well as the ITAT in petitioner s own case for Assessment Year 2003-04. (c) As held by the Hon ble Apex Court in S.A. Builders Ltd. Vs. Commissioner of Income Tax (Appeals) and Another [2007] 288 ITR 1 (SC), in order to decide whether interest on funds borrowed by the assessee to give an interest free loan to sister concern should be allowed as a deduction under Section 36(1) (iii) of the Act, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency. The expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. Even if the expenditure may not have been incurred under any legal obligation, yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. (d) In S.A. Builders Ltd. (supra) the court held that where there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of assessee itself) the A.O. cannot justifiably claim to put himself in the arm-chair of the businessman or in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the A.O. in the year 2007-08 and 2008-09 have a bearing only at the time of assessment to be undertaken in those proceedings and not on the issuance of notice under Section 148 of the Act. This is because the requirement of law is that the A.O. should have reason to believe that the income has escaped assessment and sufficiency of reason is not required for issuance of notice. (c) Let the proceedings continue further and petitioner can go and make all submissions. Findings/Conclusions : 11. The law as laid down by the Hon ble Apex Court in S.A. Builders Ltd. (supra) is very clear that where the loan has been given to sister concern or associate concern of the assessee as a measure of commercial expediency by using borrowed funds, the interest on such borrowed funds should be allowed as deduction under Section 36(1)(iii) of the Act. The Hon ble Apex Court in S.A. Builders Ltd. (supra) has also held that the expression commercial expediency is one of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. Even if the expenditure may not have been incurred under any legal obligation yet it is allowed as business ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her there is tangible material to do so. What is tangible is something which is not illusory, hypothetical or a matter of conjecture. Something which is tangible need not be something which is new. An Assessing Officer who has plainly ignored the relevant material and arrived at an assessment acts contrary to the law. If there is an escapement of income in consequence, the jurisdictional requirement of Section 147 of the Act would be fulfilled on the formation of a reason to believe that income has escaped assessment. 15. Did the A.O. have any tangible material to reopen the assessment in this case is a question which we have to answer. The reasons to believe is purely on the basis that petitioner has advanced borrowed capital to sister concern and associate concern without charging any interest and therefore the interest claimed on borrowed capital is not allowable under Section 36(1)(iii) of the Act. 16. The law on this is settled in as much as in S.A. Builders Ltd. (supra), the Hon ble Apex Court was considering an almost identical situation. The assessee in that case had transferred a huge amount of Rs. 82 Lakhs to its subsidiary company out of the Cash Credit Account of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stently 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. 24. Thus in Atherton vs. British Insulated Helsby 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 to 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 Co. (1960) 38 ITR 601 etc. 25. 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 (whi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee advanced such amount to its sister concern as a measure of commercial expediency. 33. Learned counsel 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)(iii) 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. 34. Similarly, the vi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest expense in those years thereby accepting that the deployment of funds is for business purpose. The disallowance made during Assessment Year 2003-04 has been set aside in appeal by CIT[A] as well as the ITAT. Moreover there can be no other reason but commercial expediency for petitioner to give loans and advances and capital to ICON. The Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how a prudent businessman should act. The authorities must not look at the matter from their own point of view but that of a prudent businessman. In view of what is recorded above, it is evident that there was absolutely no basis to respondent No. 1 to form a belief that any income chargeable to tax has escaped assessment within the meaning of substantive provisions of Section 147 of the Act. As held by this court in Prashant S. Joshi (supra) Explanation 2 to Section 147 creates a deeming fiction of cases where income chargeable to tax has escaped assessment. Clause (b) deals with a situation where a return of income has been furnished by the assessee but no assessment has been mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In these circumstances, the petition shall have to be allowed by setting aside the notice under section 148. (emphasis supplied) 18. In the present case, having regard to the law laid down by the Hon ble Apex Court in S.A. Builders Ltd. (supra) it was impossible for any prudent person to form a reasonable belief that the income had escaped assessment. The reasons which have been recorded could never have led a prudent person to form an opinion that income had escaped assessment within the meaning of Section 147 of the Act. 19. Even when those points were raised in the objections to the reopening notice filed by petitioner, Respondent No. 1 instead of dealing with the objections and submissions simply dismissed the same by saying that since there was no assessment done in the aforesaid case the department had no occasion to verify the veracity of the claim made in the income tax returns and all those points only have a bearing at the time of assessment to be undertaken in the proceedings and not on the issuance of notice under Section 148 of the Act. We fail to understand why these decisions could not have been taken at this stage itself so that the A.O., having ..... X X X X Extracts X X X X X X X X Extracts X X X X
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