ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL REVENUE BUILDING V. M/S HINDUSTAN THERMAL PROJECTS LIMITED , DELHI, INDIA

ITA 5336/DEL/2025

AI Insights

The case revolves around an appeal by the Revenue against the decision of the CIT(A)/NFAC, which allowed the interest expenditure claimed by Hindustan Thermal Projects Ltd. for the assessment year 2015-16. The Revenue contended that the interest-bearing funds were diverted for non-business purposes, specifically towards its 100% subsidiary involved in running a power plant. The Tribunal examined the arguments and evidence presented, including the application of the Supreme Court's decision in S.A. Builders Ltd. v. CIT, which emphasized the importance of commercial expediency in determining the allowability of interest on borrowed funds. The Tribunal found that the assessee had demonstrated commercial expediency in its financial dealings with its subsidiary, leading to the dismissal of the Revenue's appeal.

• Counselvise Citation: [2026] 140 COUNSELVISE.COM (IT) 831464 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-01-2026
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Assessment Year: misc
• Appeal Filed On: 29-08-2025
• Other Referred Cases: S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh, Madhav Prasad Jatia v. CIT, Atherton v. British Insulated & Helsby Cables Ltd., Eastern Investments Ltd. v. CIT, CIT v. Chandulal Keshavlal & Co., Phaltan Sugar Works Ltd. v. CWT, Phaltan Sugar Works Ltd. v. CIT, CIT v. Dalmia Cement (Bharat) Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMISH S. GUPT.
• Assessee Lawyers: A.T. PANDA
• Keywords: Set aside; Revenue expenditure; Business expenditure; Commercial expediency; Wholly owned subsidiary
• Section: 143(3); 37; 28

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI BENCH: ‘E’ NEW DELHI BEFORE SHRI SATBEER SINGH GODARA, JUDICIAL MEMBER AND SHRI AMITABH SHUKLA, ACCOUNTANT MEMBER ITA No.5336/Del/2025 Assessment Year: 2015-16 ACIT, Circle-10(1), New Delhi Vs. M/s. Hindustan Thermal Projects Ltd., 616A (16A, Sixth Floor), Devika Tower, Nehru Place, South Delhi PAN: AAFCM6703L (Appellant) (Respondent) ORDER PER SATBEER SINGH GODARA, JM This Revenue’s appeal for assessment year 2015-16, arises against the Commissioner of Income Tax (Appeals)/National Faceless Appeal Centre [in short, the “CIT(A)/NFAC”], Delhi’s DIN and order no. ITBA/NFAC/S/250/2025-26/1078041135(1), dated 30.06.2025 involving proceedings under section 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’). Heard both the parties. Case file perused. Assessee by Sh. A.T. Panda, Adv. Department by Ms. Amish S. Gupt., CIT(DR) Date of hearing 21.01.2026 Date of pronouncement 21.01.2026 Printed from counselvise.com ITA No.5336/Del/2025 2 | P a g e 2. Coming to the Revenue’s sole substantive grievance raised in the instant appeal that the CIT(A) has erred in law and on fact in reversing the assessment findings invoking section 36(1)(iii) interest disallowance of Rs.35 lakhs thereby alleging diversion of interest-bearing funds as non-business purposes, the lower appellate findings under challenge to this effect appear to have accepted the assessee’s stand as under: “In the F.Y. 2011-12, the appellant had issued OCD worth Rs.250 crore to IFCI Ltd carrying coupon rate of 14%. During F.Y.2011-12, the appellant had invested a sum of Rs.147.75 crore as share money in its 100% subsidiary company which is running a 1200 MW plant in MP. During the impugned AY the appellant had paid interest of Rs.35 crore and claim the same as revenue expenditure. Such expenditure has been allowed in the earlier A.Y(s) also. The AO disallowed the same as not being used for purpose of the business and concluded that the said expenditure was not allowable u/s.36(1)(iii), sec 37 or sec 57 of the Act. The AO also distinguished the case laws stated by the appellant. It is a fact that the appellant had borrowed funds the purpose of investment in it 100% subsidiary company which is running a power plant. The question that arises where the amount so borrowed by the appellant should be invested by itself or sister concern or subsidiary. This question has been answered by the Hon’ble Supreme Court in the case of S.A. Builders Ltd. v. Commissioner of Income-tax (Appeals), Chandigarh 288 ITR 1 (SC) it was held: 18. We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest, on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 19. In this connection we may refer to section 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act') which states that \"the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession\" has to be allowed as a deduction in computing the Income-tax under section 28 of the Act. Printed from counselvise.com ITA No.5336/Del/2025 3 | P a g e 20. In Madhav Prasad Jatia v. CIT AIR 1979 SC 1291, this Court held that the expression \"for the purpose of business\" occurring under the provision is wider in scope than the expression \"for the purpose of earning income, profits or gains\", and this has been the consistent view of this Court. 21. In our opinion, the High Court in the impugned judgment, as well as the Tribunal and the Income-tax authorities have approached the matter from an erroneous angle. In the present case, the assessee borrowed the fund from the bank and lent some of it to its sister concern (a subsidiary) on interest free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency. 22. 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. 23. Thus in Atherton v. 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, (supra) has been approved by this Court in several decisions e.g.Eastern Investments Ltd. v. CIT [1951] 20 ITR 1, CIT v. Chandulal Keshavlal & Co. [1960] 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 have been allowed. 25. 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. Printed from counselvise.com ITA No.5336/Del/2025 4 | P a g e 26. No doubt as held in Madhav Prasad Jatia's case (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 Jatia'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. 27. Thus, the ratio of Madhav Prasad Jatia'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. 28. 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. 29. 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] 53 ITR 140 , CIT v. Birla Cotton Spg. & Wvg. Mills Ltd. [1971] 82 ITR 166 etc. 30. The High Court and the other authorities should have examined the purpose for which the assessee advanced the money to its sister concern, and what the sister concern did with this money, in order to decide whether it was for commercial expediency, but that has not been done. 31. It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency. 32. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. CWT [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 Printed from counselvise.com ITA No.5336/Del/2025 5 | P a g e 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.'s case (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. CIT [1995] 215 ITR 585 also does not appear to be correct. 34. We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), 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 much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 35. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. Printed from counselvise.com ITA No.5336/Del/2025 6 | P a g e 36. In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunals and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above. 37. We also make it clear that we are not setting aside the order of the Tribunal or other income-tax authorities in relation to the other points dealt with by these authorities, except the point of deduction of interest on the borrowed funds. In the said decision, the term “Commercial expediency” has been explained as under: 25. 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. Further reference is invited to the decision of ITAT Mumbai in the case of Deputy Commissioner of Income Tax, Circle 7(3)(2), Mumbai v. Piramal Realty (P.) Ltd. [2018] 100 taxmann.com 294 (Mumbai - Trib.) it was held: 20. The next issue in this appeal of the Revenue is against the order of CIT(A) deleting the disallowance of expenses being interest under section 36(1)(iii) of the Act on account of diversion of interest bearing funds as interest free advances to Nariman Infrastructure LLP wherein the assessee company has 50% of stake through its 100% subsidiary of Piramal Commercial Estates LLP and there is commercial expediency in the transaction for advancing this interest free loan. But the AO applying the rate of borrowing at the rate of 11% of amount advanced, disallowed interest of Rs. 9,13,000/- on borrowed funds claimed by assessee under section 36(1)(iii) of the Act. Aggrieved, assessee preferred the appeal before CIT(A), the CIT(A) allowed the claim of the assessee by observing in para 5.3 as under: — \"7. On the facts and in the circumstances of the case and in law, whether the ld. CIT(A) is right in deleting disallowance of Rs. 9,13,000/- made under section 36(1)(iii) of the Act on account of diversion of interest bearing funds as interest free advances to M/s Nariman Infrastructure LLP wherein the assessee company has 50% stake through its 100% subsidiary M/s Piramal Commercial Estates LLP without considering the fact that the Hon'ble Supreme Court in the decision in the case of Addl. CIT v. Tulip Star Hotels Ltd. (2012) 21 Printed from counselvise.com ITA No.5336/Del/2025 7 | P a g e Taxmann.com 97 (SC) held that the decision in the case of SA Builders v. CIT (2012) (208 ITR 1) (SC), which was relied by the Ld. CIT(A), needs consideration. 8. On the facts and in the circumstances of the case and in law, whether the Ld. CIT(A) is right in deleting disallowance of Rs. 9,13,000/- made under section 36(1)(iii) of the Act without appreciating that the assessee company and recipient of the interest free advance M/s Nariman Infrastructure LLP are two different persons for income tax purposes.\" 21. We find that the CIT(A) has considered the submissions of the assessee that the advance of interest free loan have been made only for the purposes of assessee's business and according to its corporate strategy. We find that the assessee is engaged in the business of real estate and its development. For this purpose it has this amount of Rs. 0.83 crores to Nariman Infrastructure LLP as it has a stake of 50% in Nariman Infrastructure LLP through its 100% subsidiary Piramal Commercial Estates LLP. We find that the CIT(A) has clearly observed that this transaction is on account of principle of commercial expediency, which was never contested by Revenue. Hence, we confirm the order of CIT(A) and dismiss this issue of Revenue's appeal. Respectfully following the decisions cited above, it is held that the expenditure of Rs. 35,00,00,000/- is allowable u/s 36(1)(iii) of the Act and therefore, the disallowance made is deleted.” This is what leaves the Revenue aggrieved. 3. We have given out thoughtful consideration to the Revenue’s and assessee’s respective vehement contentions against and in support of the CIT(A)’s above extracted detailed discussion. We find no merit in the Revenue’s instant sole substantive grievance. This is for the precise reason that not only the assessee has all along pleaded and proved its commercial expediency whilst investing the impugned sum in its 100% subsidiary company (running a power plant) but also the very claim is stated to have been accepted Printed from counselvise.com ITA No.5336/Del/2025 8 | P a g e throughout in the very assessment year 2012-13 onwards. Learned CIT(A) has further recorded a categoric finding that the assessee/respondent had borrowed its funds for the purpose of investment in the very subsidiary only. 4. Faced with this situation, we hardly see any reason to interfere with the CIT(A)’s lower appellate discussion holding the assessee to have proved its commercial expediency in making investments with the group company in light of S.A. Builders (supra). The Revenue fails in its instant sole substantive ground as well as in the main appeal therefore. 5. This Revenue’s appeal is dismissed. Order pronounced in the open court on 21st January, 2026 Sd/- Sd/- (AMITABH SHUKLA) (SATBEER SINGH GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 22nd January, 2026. RK/- Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. DR Asst. Registrar, ITAT, New Delhi Printed from counselvise.com "