COMMISSIONER OF INCOME TAX, KOTA V. DASWANI CLASSES LTC.

ITA/168/2011

AI Insights

The case revolves around an appeal by the Commissioner of Income Tax, Kota, challenging the decisions of the ITAT and CIT(A) which favored M/S Daswani Classes LTC. The primary issues contested included the disallowance of cash refunds of tuition fees, the disallowance under Section 40(a)(ia) of the Income Tax Act, and the addition concerning interest-free loans to relatives. The tribunal and CIT(A) had found in favor of the assessee, leading to the department's appeal to the High Court. The High Court, after reviewing the submissions and the relevant legal provisions, upheld the tribunal's decisions, dismissing the appeal by the Commissioner.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 798464 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 17-07-2017
• Assessment Year: misc
• Other Referred Cases: CIT v. Dabur India Ltd., CIT v. Deputy Chief Accounts Officer, Markfd Khanna Branch, Commissioner of Income Tax vs. Girnar Food and Beverage P. Ltd., The Commissioner of Income Tax-TDS vs. Glenmark Pharmaceuticals Ltd., Commissioner of Income Tax vs. Karnataka Power Transmission Corporation Ltd., Commissioner of Income Tax and The Income Tax Officer (TDS) vs. The Bangalore District Cooperative Milk Producers Societies Union Ltd., Commissioner of Income Tax vs. Spice Telecommunications (P.) Ltd., S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals), Chandigarh and Anr., Hero Cycles (P) Ltd. vs. Commissioner of Income Tax (Central), Ludhiana, Commissioner of Income Tax vs. Jugal Kishore Dangayach, Commissioner of Income Tax-7 vs. Reliance Communications Infrastructure Ltd., Bright Enterprises Pvt. Ltd. vs. Commissioner of Income Tax-, Commissioner of Income Tax-2 v. Tata Chemicals Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: SIDDHARTH RANKA
• Assessee Lawyers: PARINITOO JAIN
• Keywords: Disallowance; Income tax appeal; Interest free loans; Modification of Order; Cash Refund of Tuition Fee
• Section: 36 (1) (iii); 40(a)(ia)

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 168 / 2011 COMMISSIONER OF INCOME TAX, KOTA ----Appellant Versus M/S DASWANI CLASSES LTC., 467, DADABARI EXTENSION, KOTA RAJASTHAN. ----Respondent _____________________________________________________ For Appellant(s) : Mrs. Parinitoo Jain For Respondent(s) : Mr. Siddharth Ranka _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 17/07/2017 1. By way of this appeal, the department has challenged the judgment and order of the Tribunal whereby Tribunal has modified the order in favour of the assessee. 2. This court while admitting the appeal on 01.03.2012 framed following substantial question of law:- “1. whether in the facts and circumstances of the case, the ITAT was justified in deleting addition of Rs.3,65,249/- made by the Assessing Officer on account of disallowance of cash refunds of tuition fee claimed by the assessee? 2. Whether in the facts and circumstances of the case, the ITAT was justified in law in upholding the decision of CIT(A) deleting disallowance of Rs.1,31,72,504/- made under Section 40(a)(ia) of the Act? 3. Whether in the facts and circumstances of the case, the ITAT was justified in law in upholding the order of CIT(A) deleting addition of Rs.15,13,715/- on account of interest free loans to relatives?” (2 of 22) [ITA-168/2011] 3. Counsel for the appellant contended that the tribunal has committed serious error in modifying the order of assessing officer on the first issue inasmuch as while considering the issue AO observed as under:- “The appellant, however, failed to make up this deficiency even during the appeal proceedings. In this view of things, disallowance of Rs.3,65,249/-, being cash refund of fees for which the appellant failed to provide necessary and sufficient evidence, is confirmed. Ground 3 (f) is dismissed.” 4. She contended that the tribunal has seriously committed error in allowing the same and wrongly observed as under:- “Considering the above submissions, we concur with the contention of the learned A/R that without conducting independent enquiry in the matter particularly when complete details of students and refund of fees to them maintained by the assessee were made available to the AO, the AO was not justified in disallowing the claimed refund to the extent that it was paid in cash which was only Rs.3,65,249/- out of the total of the refund of Rs.22,40,095/-. We thus while setting aside orders of the lower authorities on the issue, direct the AO to delete the addition of Rs.3,65,249/-. Ground no.2 is accordingly allowed.” 5. Counsel for the respondent contended that the refund amount which has been given to the students in view of the condition and it was given each of the individual pursuant to the dishouring of the catching clause after deducting the requisite basic fees which was required to be submitted and the same was part of their books of accounts. Considering the same, the view taken by the tribunal is just and proper and first issue is required (3 of 22) [ITA-168/2011] to be answered in favour of the assessee. 7. On the second issue, counsel for the appellant contended that the tribunal while considering this issue wrongly relied on 2006-07 circular. The 194 (c) deduction has wrongly been made. She has relied upon the observations made by the AO and CIT (A). 8. Counsel for the appellant contended that tribunal has wrongly confirmed the order of CIT (A). 9. Counsel for the respondent has relied upon the following decisions with regard of question No.2:- 1. CIT v. Dabur India Ltd. (2006) 283 ITR 197 (Delhi) “It was nobody’s case that the Printing of the labels on the corrugated boxes required any special skill or involved any confidence or secrecy. In the circumstances, the Tribunal was justified in holding that the predominant object underlying the contract was one for sale of goods which took the contract out of the purview of section 194C.” 2. CIT v. Deputy Chief Accounts Officer, Markfd Khanna Branch (2008) 304 ITR 17 (P&H) “5. We have considered the submissions made by the learned Counsel for the Revenue. There is no dispute that the main purpose of the assessee to buy packing material is to obtain goods for the purpose of packing of its finished products. The factum of such packing material carrying some printed work can only be regarded as the work executed by the supplier incidental to the sale to the assessee. This fact of some printing being done as a part of supply is of no consequence to the contract being essential of a sale of chattel. The predominant object underlying the contracts was sale/purchase of goods and only intention of the respondent was to buy packing materials. Admittedly, the raw material for the (4 of 22) [ITA-168/2011] manufacturing of such packing material was not supplied by the respondent. Thus, it was a case of sale and not a contract for carrying out any work. In the case of CIT v. Dabur India Ltd. , the Hon'ble Delhi High Court held that printing labels on corrugated boxes did not require any special skill or involve any confidence or secrecy and the Tribunal was justified in holding that the predominant object underlying the contract was one for sale of goods which took the contract out of the purview of Section 194C of the IT Act, 1961. In BDA Ltd. v. ITO , (the Hon'ble Bombay High Court) held that if a manufacturer purchases material on his own and manufactures a product as per the requirement of a specific customer, it is a case of sale and not a contract for carrying out any work. The fact that the goods manufactured were according to the requirement of the customer does not mean or imply that any work was carried out on behalf of that customer.” 3. Commissioner of Income Tax vs. Girnar Food and Beverage P. Ltd. (2008) 306 ITR 23 (Gujarat) “As can be seen from the impugned order of the Tribunal, the facts are not in dispute. The assessee placed order for supply of printed materials, but the stand of the Revenue is that as the printing was carried out by the supplier as per specifications of the assessee the arrangement would amount to \"works contract\". The case of the assessee is that it had entered into a contract of purchase/supply simpliciter and the entire product is supplied as such; that the suppliers are not exclusively supplying such goods to the assessee. That the assessee does not give any printing contract and there is outright purchase, either by oral or written orders. The Tribunal while passing the impugned order has placed reliance on the Central Board of Direct Taxes Circular No. 715 wherein it is stated by the Board that in a case of sale no deduction under Section 194C of the Act is required.” 4. The Commissioner of Income Tax-TDS vs. Glenmark Pharmaceuticals Ltd. (2010) 324 ITR 199 (Bombay) (5 of 22) [ITA-168/2011] 18. A contract for sale has hence to be distinguished from a contract of work. Whether a particular agreement falls within one or the other category depends upon the object and intent of the parties, as evidenced by the terms of the contract, the circumstances in which it was entered into and the custom of the trade. The substance of the matter and not the form is what is of importance. If a contract involves the sale of movable property as movable property, it would constitute a contract for sale. On the other hand, if the contract primarily involves carrying on of work involving labour and service and the use of materials is incidental to the execution of the work, the contract would constitute a contract of work and labour. One of the circumstances which is of relevance is whether the article which has to be delivered has an identifiable existence prior to its delivery to the purchaser upon the payment of a price. If the article has an identifiable existence prior to its delivery to the purchaser, and when the title to the property vests with the purchaser only upon delivery, that is an important indicator to suggest that the contract is a contract for sale and not a contract for work. In India, the distinction between the two categories is elucidated by the Sale of Goods Act, 1930. Sub- section (1) of Section 4 provides that a contract of the sale of goods is a contract, whereby a seller transfers or agrees to transfer the property in goods to the buyer for a price. Where under a contract of sale, the property in goods is transferred from the seller to the buyer, the contract is that of sale, but where transfer of property in the goods is to take place at a future time, or subject to some condition thereafter to be fulfilled, the contract is not a sale but is an agreement to sell. A contract of sale is made by an offer to buy or sell goods for a price and the acceptance of the offer. Under Section 5(1) the contract may provide for immediate delivery of the goods or immediate payment of the price or postponement of delivery or payment of the price by installments.21. Broadly speaking, three situations are involved in the manufacture of pharmaceutical products. In the first situation, the pharmaceutical company itself manufactures pharmaceutical preparations which are sold under its brand name. The second situation involves loan licensing where the raw materials are supplied by the pharmaceutical company to the licensee manufacturer who in turn manufactures a pharmaceutical product on (6 of 22) [ITA-168/2011] behalf of the Company. The third situation is one where by an agreement between a pharmaceutical company and a manufacturer, it is the manufacturer who procures the raw materials and manufactures the product under the specifications of the company and sells the end product to the Company. In the third situation, the manufacturer may also affix the trade mark or brand name of the Company, which in turn markets the product. The present case relates to the third category where admittedly, the entire process of manufacturing is carried out by a third party with whom the assessee has a contract. The work of manufacture is carried out at the establishment of the third party manufacturer. The raw materials are purchased by the third party manufacturer. The contract envisages that the trade-mark of the assessee is to be affixed to the goods manufactured by the third party. The agreement envisages that the assessee has developed certain pharmaceutical formulations which it intends to market under specified brand names. The assessee agreed to disclose to the manufacturer technical information and data relating to the manufacture of the products in accordance with the specifications and standards laid down by the assessee. The process of manufacturing is to be carried out by the manufacturer at its own establishment. The assessee has to purchase the entire quantity of the product manufactured at a price to be mutually agreed upon between the parties. The manufacturer is obligated under the terms of the agreement to obtain a licence to manufacture and to obtain the endorsement of the Food & Drug Administration on the licence. The agreement envisages that the transaction between the parties is on a principal to principal basis. The assessee is required from time to time to place orders for the supply of the product in such quantities and at the agreed price, which the manufacturer has to supply. The agreement specifically stipulates that the manufacturer will be solely and exclusively responsible for the purchase, procurement and storage of raw materials required for the manufacture of the product. All approvals, licences, permits, permissions and sanctions are to be obtained by the manufacturer and to be kept valid during the term of the contract. The agreement envisages that the manufacturer is an independent contractor and is solely responsible for payment of taxes, duties and (7 of 22) [ITA-168/2011] other impositions, under the agreement. The property in the product is to vest in the assessee on delivery of the product. The manufacturer has undertaken not to sell or supply the products which are to be manufactured for the assessee to any third party or to undertake the manufacture or sale of similar products to any third party. The assessee is entitled to inspect the facility and to approve the goods manufactured. The manufacturer is required by the terms of the agreement to affix the trade- mark of the assessee on the products manufactured, subject to the obligation not to use the mark upon the termination of the agreement. On the termination of the agreement or cessation the licences have to be surrendered. 24. The submission that the contract is not a contract of sale because, specifications are provided to the manufacturer by the purchaser cannot be accepted. That has not been the understanding of the law at any point of time. The fact that the purchaser provides specifications to the manufacturer has never been construed even by the Revenue to be a circumstance which should lead to the inference that the contract is not a contract of sale. Firstly, the circulars issued by the Central Board of Direct Taxes right since 29 May, 1972 consistently took the position that furnishing of specifications to the manufacturer of goods by the purchaser would not detract from a contract being regarded as a contract for sale so long as the property in the goods passes upon delivery. The consideration which was regarded by the Revenue as having relevance was whether the material was supplied to the contractor by the Government, or, as the case may be, by a specified person. Where the material is provided by the purchaser and the work of fabrication or manufacture is carried out by the contractor, the agreement would, it was clarified, constitute a contract for work. On the other hand, where a manufacturer produces goods to the specifications of the purchaser and the property passes to the purchaser only upon delivery, the contract would be regarded as a contract of sale if the raw material is sourced by manufacturer and is not supplied to him by the purchaser. Secondly, the consistent view which held the field in several High Courts was that contracts where (i) property passes to the purchaser upon the delivery of the goods; and (ii) the raw material was sourced by the manufacturer and (8 of 22) [ITA-168/2011] was not supplied by the purchaser do not fall within the scope and ambit of Section 194C. 26. By the Finance Act of 2009, which substituted the provisions of Section 194C, the expression \"work\" has now been defined in Clause (iv) of the substituted explanation. Clauses (a) to (d) are the same as Clauses (a) to (d) of the erstwhile explanation (III). However, explanation (e) has now been inserted. what has weighed in the introduction of Clause (e) to the Explanation was on going litigation on the question as to whether TDS was deductible on outsourcing contracts. Clause (e) was introduced \"to bring clarity on this issue\" or, in other words, to remove the ambiguity on the question. Clause (e) as introduced contains a positive affirmation that the expression 'work' will cover manufacturing or supplying a product, according to the requirement or specification of a customer, by using material purchased from such a customer. Clause (e) has placed the position beyond doubt by incorporating language to the effect that the expression 'work' shall not include manufacture or supply of a product according to the requirement or specification of a customer by using material which is purchased from a person other than such customer. In other words, the circumstance that the requirements or specifications are provided by the purchaser is not regarded by the statute as being dispositive of the question as to whether a contract constitutes a contract of work or sale. What is of significance is whether material has been purchased from the customer, who orders the product. When the material is purchased from the customer who orders the product, it constitutes a contract of work while on the other hand, where the manufacturer has sourced the material from a person other than the customer, it would constitute a sale. What is significant is that in using the words which Clause (e) uses in the explanation, Parliament has taken note of the position that was reflected in the circulars issued by the Central Board of Direct Taxes since 29th May, 1972. The judgment of the Supreme Court in Associated Cement gave an expansive definition to the expression work and rejected the attempt of the assessee in that case to restrict the expression work to works contracts. Both before and after the judgment of the Supreme Court the expansive definition of the expression 'work' co-existed with the Revenue's understanding that a contract for sale would not (9 of 22) [ITA-168/2011] be within the purview of Section 194C. The Revenue always understood Section 194C to mean that though a product or thing is manufactured to the specifications of a customer, the agreement would constitute a contract for sale, if (i) The property in the article or thing passes to the customer upon delivery; and (ii) The material that was required was not sourced from the customer / purchaser, but was independently obtained by the manufacturer from a person other than the customer. The rationale for this was that where a customer provides the material, what the manufacturer does is to convert the material into a product desired by the customer and ownership of the material being of the customer, the contract essentially involves work of labour and not a sale. Parliament recognized the distinction which held the field both administratively in the form of circulars of the CBDT and judicially in the judgments of several High Courts to which a reference has been made earlier. Consequently, the principles underlying the applicability of Section 194C as construed administratively and judicially in decided cases, find statutory recognition in the Explanation. The Explanation, therefore, as the Memorandum explaining the clauses of the Finance Bill of 2009 states, was in the nature of a clarification. Where an explanatory provision is brought to remove an ambiguity or to clear a doubt, it is reflective of the law as it has always stood in the past. Where, as in the present case, an explanation is introduced statutorily to adopt an understanding of the law both in the form of the circulars of the CBDT and in judicial decisions, Parliament must be regarded as having intended to affirm that intent. In the present case, the intent has held the field for over three decades. 31. The fact that the specifications are provided by the assessee to the manufacturer / supplier would make no difference to the legal position. The agreement in the present case is on a principal to principal basis. The manufacturer has his own establishment where the product is manufactured. The material required in the manufacture of the article or thing is obtained by the manufacturer from a person other than the assessee. The property in the articles passes upon the delivery of the product manufactured. Until delivery, the assessee has no title to the goods. The goods have an identifiable existence prior to delivery. (10 of 22) [ITA-168/2011] 32. The reason that a specification or requirement is enunciated by the assessee constitutes a matter of business expediency. A purchaser who desires to get the product, which he intends to sell under his brand name, or trademark, manufactured from a third party would be interested in ensuring the quality of the product. The trade-mark has associated with it an assurance of the quality of the goods which are marketed traceable to the origin of the goods. Associated with the trade-mark is the goodwill and reputation which is associated with the mark. This is particularly so in the case of a pharmaceutical product where the ultimate consumer is legitimately entitled to ensure that her health is not prejudiced by the consumption of a product not meeting prescribed standards. The owner of a mark, therefore, introduces specifications to ensure that the product meets the standards justifiably associated with the reputation in the mark. The specification ensures the observance of standards. Similarly, a clause relating to exclusivity is not inconsistent with a transaction of sale. Here again, much depends upon the nature of the product. Restrictive covenants of this kind are intended to protect the intellectual and other property rights of a party which markets its goods by requiring a manufacturer to observe norms of specification and exclusivity. The law is, therefore, consistent with the transaction being regarded as a transaction of sale, provided that the requirements of a contract of sale are met. They are in this case. The contract entered into by the assessee is not a contract for carrying on any work within the meaning of Section 194C. 33. For the reasons aforesaid, we are of the view that the Revenue was not justified in treating the assessee, as an assessee in default.” 5. Commissioner of Income Tax vs. Karnataka Power Transmission Corporation Ltd. (2012) 21 Taxmann.com 473 (Karnataka) “21. It is not in dispute that in respect of agreement for supply, which is a distinct contract, no TDS is deductible under Section 194C as it is not a contract for carrying out any work. Carrying out any work is a sine qua non to attract Section 194C. A contract under which a contractor agrees to supply material which may be used by him later in carrying out the work (11 of 22) [ITA-168/2011] will not render the agreement to supply a contract for carrying out any work. In fact, the amendments in 2009 explains this position. When they amended the definition of \"Work\" as contained in Explanation to Clause (4) of sub- clause (e). In fact, the object and reasons for substituting Section 194C of the Act makes it clear that the amendment was introduced to bring clarity on the issue which reads as under: Clarification regarding \"work\" under Section 194C. There is ongoing litigation as to whether TDS is deductible under Section 194C on outsourcing contracts and whether outsourcing constitutes work or not. To bring clarity on this issue, it is proposed to prove that \"work\" shall not include manufacturing or supplying a product according to the requirement or specification of a customer by using raw material purchased from a person other than such customer as such a contract is a contract for \"sale\". This will however not apply to a contract which does not entail manufacture or supply of an article or thing (e.g., a construction contract). It is also proposed to include manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from such customer, within the definition of \"work\". It is further proposed to provide that in such a case TDS shall be deducted on the invoice, value excluding the value of material purchased from such customer if such value is mentioned separately in the invoice. Where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. 13. When the statute was amended to clarify the word \"work\" under Section 194C by introducing the aforesaid clause, it is obvious that the amendment is only clarificatory in nature and therefore it is retrospective. The Parliament did not intend to change the law because of conclusion which resulted in litigation. The Parliament though it fit to clarify by way of amendment so that the litigation could be avoided. In view of the aforesaid clarification and the statutory provision, it is clear that \"work\" did not include manufacturing or supplying a product according to the requirement upon specification of a customer by using raw-materials purchased from a person other than such customer, as such a contract is a contract for sale. Further, it is also clarified (12 of 22) [ITA-168/2011] TDS shall be deducted on the invoice value excluding the value of material purchase from such customer, if such value is mentioned separately in the invoice. It is only in cases where the material component has not been separately mentioned in the invoice, TDS shall be deducted on the whole of the invoice value. Therefore, whatever ambiguity which prevailed earlier is clarified. When in a composite contract, if an invoice is raised, separately mentioning the value of the material supplied, no deduction is permissible under Section 194C. In a case where three separate agreements entered into and one such agreement is agreement for supply of material and because the said agreement is a part of a composite transaction. Section 194C cannot be pressed into service to deduct tax at source. The whole object of introducing the Section is that it should deduct tax in respect of payments made for a works contract. No deduction is permissible in respect of contract for supply of material for carrying out work. In fact, the Tribunal by a detailed consideration of the statutory provisions, the various terms of the contract, the legal position as explained in the various judgments has rightly come to the conclusion that, the transaction in question is not a case of composite contract. It is a case of the distinct contracts and the contract for supply of materials is a separate distinct contract in respect of which no deduction is permissible under section 194C of the Act.” 6. The Commissioner of Income Tax and The Income Tax Officer (TDS) vs. The Bangalore District Cooperative Milk Producers Societies Union Ltd. (2013) 357 ITR 676 (Karnataka) “Upon thoughtful consideration of the submissions made at the Bar, we find this Court in KPTCL's case has held that amendment to definition of 'work' U/s. 194C, (7)(iv) of the IT Act, is clarificatory in nature and retrospective. In the light of the said ratio, if the facts of this case are read, the assessee has not supplied any material. However, the tenderer has secured the material from other source and has supplied the same to the assessee. May be in the instant case, some of the features of works contract may overlap, but however, that should not have been taken as necessary criteria to determine the nature of work. The explanation 'Works Contract' has a definite legal connote. What is (13 of 22) [ITA-168/2011] stated in the Section 194C(1) is for \"carrying out any works\" between the contractor and specified person. The work is also defined to exclude the situation where the material is not supplied by the assessee. In view of the specific definition of work, it is to be held that contract amounts to sale and not works contract. The fact that Clause (a) the definition of work was amended subsequently and not in the statutory book for the relevant years in question would not be of consequence because of the ratio laid down in KPTCL's case. The definition is clarificatory in nature. In that view, the question of law is answered against the revenue. The appeals are dismissed.” 7. Commissioner of Income Tax vs. Spice Telecommunications (P.) Ltd. (2014) 369 ITR 72 “In the present cases, admittedly, the assessees did not supply any material whatsoever to the manufacturer/supplier for the supply of SIM/scratch cards as per their requirement or specification and therefore, the transaction cannot be treated as a contract for carrying out works within the meaning of the word \"work\" used in sub-section (1) of Section 194C of the Act, before its amendment. After the amendment, it is clarified that the definition of the word \"work\" will not include the manufacturing or supplying a product according to the requirement or specification of a customer by using material purchased from a person other than such customer. If we apply this provision, the case of the assessees would stand strengthen further. In other words, even if the first part of the amendment i.e., sub-clause (e) of Clause (iv) of Section 194C is applied, the case of the assessees would not be covered by the said clause since the assessees did not supply any material to the manufacturers. However, we need not take recourse to the amendment. These appeals, in view of the aforesaid order of the Supreme Court, can be disposed of holding that placing of orders by the assessees, in these cases, to the manufacturers/suppliers to supply SIM/scratch cards as per their requirements cannot be treated as contract for carrying out works within the meaning of sub-section (1) of Section 194C of the Act as it existed prior to its amendment. Hence, we answer both the substantial questions of law against the revenue and in favour of the (14 of 22) [ITA-168/2011] assessees and dispose of these appeals.” 10. The counsel for the respondent in support of his submissions on question No.3 relied on the following decisions. 1. S.A. Builders Ltd. vs. Commissioner of Income Tax (Appeals), Chandigarh and Anr. (2007) 288 ITR 1 (SC) “16. 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. 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. 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 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. It has been repeatedly held by this (15 of 22) [ITA-168/2011] 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. , CIT v. Birla Cotton Spinning & Weaving Mills Ltd. etc.” 2. Hero Cycles (P) Ltd. vs. Commissioner of Income Tax (Central), Ludhiana (2015) 379 ITR 347 “13. In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd. : 2002 (254) ITR 377] wherein the High Court had held that 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 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. It further held that no businessman can be compelled to maximize his profit and that 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.” 3. Commissioner of Income Tax vs. Jugal Kishore Dangayach (2014) 265 CTR 215 (Rajasthan) “11. We have considered the arguments advanced by the learned counsel for the Revenue and in our view this is also a finding of fact as recorded by the Tribunal as well as CIT(A). It is not disputed that the assessee had an opening capital of Rs. 1.42 crores at the beginning of the year and Rs. 1.88 crores at the end of the year. It is also an admitted fact that the assessee had trade credits to the extent of Rs. 1.57 crores on which no interest was being paid. It is also an admitted fact that the assessee had received more than Rs. 60 lacs as advance from the customers on which no interest was paid. Therefore, when to this magnitude on which no interest was payable, the AO was not justified in disallowing interest. Further apart from it the assessee has been able (16 of 22) [ITA-168/2011] to prove that the assessee had trade dealings with M/s. Tirupati Pulses (P) Ltd. to whom it is alleged by the AO that the assessee advanced more than Rs. 80 lacs. It is an admitted position that the assessee made purchases to the tune of Rs. 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 of law which could be said to emerge out of this case. We find no illegality or perversity in the impugned order.” 4. The Commissioner of Income Tax-7 vs. Reliance Communications Infrastructure Ltd. (2012) 260 CTR 159 (Bombay) “9. In S.A. Builders, the Assessing Officer had observed that the assessee had transferred a certain amount to its subsidiary out of 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 Rs. 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 (17 of 22) [ITA-168/2011] 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 wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. An expenditure, which is commercially expedient, may not be incurred under a legal obligation, but so long as it meets the requirement of commercial expediency, it has to be allowed. However, the Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if the assessee advanced the money to a sister concern. Where the amount is advanced to a sister concern, for the personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted the Supreme Court, where a holding company \"has a deep interest in its subsidiary advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the 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 (18 of 22) [ITA-168/2011] the business of providing telecommunication services. The assessee made investments in the equity shares of its subsidiary and claimed that this was with a view to provide integrated telecommunication services. The case of the assessee was that those investments were to ensure the utilization of the telecommunications infrastructure of the subsidiary and was a strategic investment for furthering business prospects in the area of providing telecommunication services. As regards the advance which was made by the assessee to Reliance Industries Ltd. (RIL) the assessee pointed out to the CIT(A) that it was required to import equipment under the EPCG Scheme. The obligations under the EPCG Scheme were required to 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 Rs. 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. 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 distinction between an advance, which is a payment handed over to some one as a loan and an investment which is money placed into financial schemes, shares or property with the expectation of making a profit. 4. We are unable to accept that such a distinction will have any legal consequence in so far as the entitlement of the assessee to claim a deduction under Section 36(1)(iii) is concerned. In the present case, when the assessee advanced an amount to RIL that was with a view to furthering the business of the assessee. RIL in turn was to execute counter guarantees in (19 of 22) [ITA-168/2011] favour of financial institutions for the benefit of the discharge of the EPCG obligations by the assessee. That was a 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 of law as framed in the affirmative. The appeal shall accordingly stand disposed of. There shall be no order as to costs.” 5. Bright Enterprises Pvt. Ltd. vs. Commissioner of Income Tax- (1016) 381 ITR 107 (P&H) “9. Whether the amount of Rs. 10.29 crores was debited to the account of the sister concern in respect of the payment made under Clause 3.3(b) of Article 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Jain rightly pointed out, in the (20 of 22) [ITA-168/2011] memorandum of appeal, the appellant expressly stated that it had advanced the amount of about Rs. 10.29 crores to its sister concern as a measure of commercial expediency for the purpose of business. In the written submissions, the appellant inter alia stated that the appellant and the sister company were in the hotel business; that the Board of Directors of the two companies was the same; that the appellant purchased the shares of the sister company as an investment and that the investment and advances were made for the purposes of business. From the order of the CIT (Appeals), it is evident that the department never contended that the amounts were not advanced for commercial expediency. Nor was it contended that the amounts advanced were used by the sister company for any purpose other than for the purpose of its business. Indeed, such a case was not even advanced before 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. 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 (21 of 22) [ITA-168/2011] 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) The grievance of the Revenue before us is that the interest attributable to interest free advance of funds made to its subsidiaries out of interest bearing funds cannot be allowed as a deduction u/s 36(1)(iii) of the Act in view of the decision of this court in Phaltan Sugar Works Ltd. v. CWT (1994) 208 ITR 989/72 Taxman 325 (Bom.). This reliance upon the decision of this Court in Phaltan Sugar Works Ltd. (Supra) is of no avail as it has been overruled by the Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1/158 Taxman 74 holding that the test of commercial expediency is to be applied. (c) Mr. Suresh Kumar, learned Counsel appearing for the Revenue, states that nothing is available on record to indicate any challenge in appeal by the Revenue to the order of the Tribunal for A.Y. 1985-86. The impugned order merely relies upon its order for Assessment Year 1985-86. (d) In the above view, we proceed on the basis that the Revenue has accepted the Tribunal's order for the Assessment Year 1985-86. Further, no distinguishing features in the subject Assessment Year to that existing in the Assessment Year 1985-86 have been pointed out. Therefore, the question as raised herein does not give rise to any substantial question of law. Thus, not entertained.” 11. Considering the evidence on record, we are of the opinion that the view taken by the tribunal in view of clarification issued in 2006 which was part of tribunal judgment in 2009 we are in complete agreement with the view taken by the tribunal. (22 of 22) [ITA-168/2011] 12. Hence, the issues are answered in favour of the assessee and against the department. 13. The appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Bmg/81. "