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TMI Blog1980 (12) TMI 79X X X X Extracts X X X X X X X X Extracts X X X X ..... cent and 18 per cent respectively. These three persons are also directors of the company. Evidently, therefore they are having substantial interest in the firm as also 50 per cent shareholding in the company. 2. Now coming back to the borrowals made by the company from the firm transpires that there is a regular running account in which the borrowals made by the assessee company from the firm are recorded as also payments whatever made. These borrowals have been going up. In the year under appeal also there are further borrowals and the interest is being paid by the assessee company to the firm. In this year the ITO did not allow the entire interest payable by the assessee to the firm for the following reasons: (1) The assessee's agreement for hiring of the trucks to the firm is colourable transaction (2) The firm owes substantial money to the assessee towards hiring charges on which no interest is paid by the firm to the assessee. In other words, in the hire charges account the firm's account is shown as a debit while at the same time the account of the firm in so for as of the borrowals are concerned there is always a credit and interest is paid on that only. (3) The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reme Court on the point regarding commercial expediency which is reported in (1979) 10 CTR (SC) 283 : (1979) 118 ITR 261 (SC) (Sassoon J. David and Co. P. Ltd. vs. CIT). On the other hand, the ld. Senior Deptl. Rep. very much relied on the order of the ITO. He pointed out that the assessee company has deliberately violated the direction of the Reserve Bank of India by obtaining the money through the medium of the firm and, therefore, the company cannot be heard to say that the money was borrowed for the purpose of business. He has also invited our attention to the provisions of s. 40(c)(1) and argued that the interest cannot be allowed. For this, he very much relied on the fact that the three partners of the firm who own the entire firm were shareholders in the company having substantial interest. He has also relied on the decision of the Madras High Court reported in (1974) 97 ITR 375 (Mad) for the proposition that Tribunal or Court should not countenance a plea by an assessee which shows that the assessee committed illegality or unlawful act. What Mr. Khokar intends to plead is that since the assessee in order to avoid the directions given by the Reserve Bank of India adopted me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see cannot claim deduction on account of the borrowals when the same firm owes money to the assessee. This is what the ITO has stated in his order: "Therefore, it would appeal that the assessee company intentionally did not realise the hire charges instead thought it proper to take interest bearing loans from the said firm. No prudent businessman would leave his money free of interest on party and taken from the same party interest bearing loans. Therefore, it cannot be said that the interest was paid for the purpose of business. It appears that the interest bearing loans from the said firm were shown only to reduce its profits." The finding is attacked by Mr. Sinha on the basis of Cl. 7 of the agreement to which we have made a reference earlier and also in the background as to how the finance were met by the company earlier. We see great force in the submissions of the ld. counsel for the assessee. The company admittedly required funds and there were borrowals. But in view of the directions issued by the Reserve Bank of India to non-banking and non-financial companies which came into force from 1st Jan., 1967 there were certain restrictions regarding deposits from depositors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest paid by company to the partnership firm on account of borrowals is on account of commercial expediency or not. May be that the firm derived advantage in the sense that it is not paying hiring charges and at the same time not paying interest on the outstanding balances. When once the two arrangements are kept distinct and separate, no difficulty arises in understanding and appreciating the claim of the assessee. Thus Cl. 7 cannot be ignored especially when the agreement was found to be genuine. In this connection, we may look to the observations of the Supreme Court in the case cited by Mr. Sinha at pages 275 and 276 of 118 ITR: "We are of the view that the three tests laid down by this Court in the above case, viz., (i)that the payment should have been made as a matter of practise which affected the quantum of salary; (ii) that there was an expectation by the employee of getting a gratuity and (iii) that the sum of money was expended on the ground of commercial expediency and in order indirectly to facilitate the carrying on of the business of the assessee have to be read disjunctively. The fact that somebody other than the assessee is also benefited by the expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X
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