Dy Comm of Income-tax, Nashik V. Kiran Agencies, Nashik

ITA 989/PUN/2011

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9931 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 2 month(s) 13 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-10-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 11-10-2012
• Assessment Year: 2008-2009
• Appeal Filed On: 03-08-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: K K OJHA
• Keywords: Business expenditure; Notional interest; Commercial expediency; Capital expenditure

Judgement Text

1 INCOME TAX APPELLATE TRIBUNAL PUNE BENCH B, PUNE BEFORE SHRI SHAILENDRA KUMAR YADAV JUDICIAL MEMBER AND SHRI R.K. PANDA ACCOUNTANT MEMBER ITA NO. 989/PN/2011 (ASSESSMENT YEAR 2008-09) DY. COMMISSIONER OF INCOME TAX, CIRCLE-1, GADKARI CHOWK, OLD AGRA ROAD, NASHIK. .. APPELLANT VS. KARAN AGENCIES, PLOT NO.5A, BEHIND HOTEL NATRAJ, OPP POLICE TRAINING CENTRE, NASHIK PUNE ROAD, NASHIK 422 101. PAN NO. AADFK 2995B .. RESPONDENT ASSESSEE BY : SRI SUNIL GANOO DEPARTMENT BY : SRI K.K. OJHA DATE OF HEARING : 11-10-2012 DATE OF PRONOUNCEMENT : 16 -10-2012 ORDER PER R.K. PANDA, AM : THIS APPEAL FILED BY THE REVENUE IS DIRECTED AGAINS T THE ORDER DATED 20-05- 2011 OF THE CIT(A)-I, NASHIK RELATING TO ASSESSMENT YEAR 2008-09. 2. THE FIRST ISSUE RAISED BY THE REVENUE IN THE GRO UNDS OF APPEAL RELATES TO THE ORDER OF THE CIT(A) IN TREATING THE ETP EXPENSES OF RS.67,49,956/- AS ALLOWABLE DEDUCTION U/S.37(1) OF THE INCOME TAX ACT AS AGAINS T CAPITAL EXPENDITURE TREATED BY THE AO. 3. FACTS OF THE CASE, IN BRIEF, ARE THAT THE ASSESS EE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING OF COUNTRY LIQUOR AND REC TIFIED SPIRIT ON JOB WORK BASIS FOR BMSS AT NASHIK AND KOLHAPUR SUGAR MILLS LTD AT KOLHAPUR. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AO NOTED THAT THE ASS ESSEE HAS CLAIMED RS.67,49,956/- AS ETP EXPENSES UNDER THE HEAD MANUF ACTURING EXPENSES. FROM THE 2 VARIOUS DETAILS FURNISHED BY THE ASSESSEE THE AO NO TED THAT THE EXPENDITURE IS COVERED U/S.30 AND THEREFORE SUCH EXPENSE BEING CAP ITAL IN NATURE CANNOT BE TREATED AS REVENUE IN NATURE. REJECTING THE VARIOUS EXPLAN ATIONS GIVEN BY THE ASSESSEE THE AO HELD THAT THE AMOUNT OF EXPENDITURE OF RS.67,49, 956/- CLAIMED AS ETP EXPENSES HAS TO BE DISALLOWED U/S.30 OF THE INCOME TAX ACT. HE ACCORDINGLY ADDED THE SAME TO THE TOTAL INCOME OF THE ASSESSEE. 4. IN APPEAL THE LEARNED CIT(A) FOLLOWING HIS ORDER FOR A.Y. 2007-08 DELETED THE ADDITION. AGGRIEVED WITH SUCH ORDER OF THE CIT (A) THE REVENUE IS IN APPEAL BEFORE US. 5. AFTER HEARING BOTH THE SIDES WE FIND SIMILAR ISS UE HAD COME UP BEFORE THE TRIBUNAL IN ASSESSEES OWN CASE AND THE TRIBUNAL VI DE ITA NO. 03/PN/2011 ORDER DATED 17-07-2012 FOR THE A.Y. 2007-08 DISMISSED THE APPEAL FILED BY THE REVENUE BY HOLDING AS UNDER : 4. CONSIDERING THE ABOVE SUBMISSIONS WE FULLY CONC UR WITH THE VIEW OF THE LD. CIT(A) THAT NO RULE OF UNIVERSAL APPLICATION CAN BE LAID DOWN IN DETERMINING THE ENDURING BENEFIT. THERE IS NO DISPUTE ON FACTS I N THE PRESENT CASE THAT IN THE ASSESSEES BUSINESS, AS DISCUSSED ABOVE, THERE WAS COMMERCIAL EXPEDIENCY TO MAINTAIN THE INFRASTRUCTURE INCLUDING THE LAGOONS IN PROPER FORM AS PER THE STRICT REGULATIONS OF THE GOVT. OF INDIA. REPAIRS AND MAINTENANCE OF THE LAG OONS, THEREFORE, WAS RELATED TO CARRYING ON THE ASSESSEES BUSINESS AND IT MAY BE R EGARDED AS AN INTEGRAL PART OF THE PROFIT EARNING PROCESS. AS PER THE STATE LAWS, THE ASSESSEE WAS OBLIGED TO TREAT THE EFFLUENTS BEFORE ITS DISCHARGE IN THE OPEN AREA. T HIS OPEN AREA IS CALLED LAGOONS AS PER THE CONCISE OXFORD ENGLISH DICTIONARY AS REFERRED B Y THE LD. AR, THE MEANING OF LAGOON IS ARTIFICIAL POOL FOR THE TREATMENT OF EFFLUENT O R TO ACCOMMODATE AN OVERSPILL FROM SURFACE DRAINS. WE THUS FULLY AGREE WITH THE FIND ING OF THE LD. CIT(A) THAT A LAGOON IS ITS NATURE DOES NOT PARTAKE THE CHARACTER OF A BUIL DING TO ATTRACT THE PROVISIONS LAID DOWN U/S.30 OF THE ACT WHICH ARE IN RELATION TO REPAIR F OR BUILDING. THE HONBLE BOMBAY HIGH COURT IN THE CASE OF CIT VS. OXFORD UNIVERSITY PRES S (SUPRA) HAS BEEN PLEASED TO HOLD THAT THE EXPRESSION REPAIR MUST BE UNDERSTOOD IN C ONTRADICTION TO RENEWAL OR RESTORATION AND THE TEST TO BE APPLIED IS TO SEE WHETHER AS A R ESULT OF THE EXPENDITURE WHAT IS BEING DONE AS TO PRESERVE AND MAINTAIN AN ALREADY EXISTIN G ASSET OR WHETHER AS A RESULT OF THE EXPENDITURE A NEW ASSET OR A NEW ADVANTAGE IS BEING BROUGHT INTO EXISTENCE. THE HONBLE COURT WAS PLEASE TO HOLD FURTHER THAT THE M ERE QUANTUM OF EXPENDITURE IS NOT BY ITSELF DECISIVE OF THE QUESTION WHETHER IT IS OF TH E NATURE OF REVENUE OR CAPITAL. IN THAT CASE THE ASSESSEE COMPANY DURING THE ACCOUNTING PER IOD RELEVANT TO THE A.Y. 1963-64 HAD INCURRED AN EXPENDITURE OF RS.59,000/- IN THE FORM OF PAYMENT MADE FOR GUNITING WERE CARRIED IN ITS BUILDING KNOWN AS EXPORT HOUSE AND ALSO A SUM OF RS.3,680/- WAS INCURRED AS FEES PAID TO THE ARCHITECTS IN CONNECTI ON WITH THE GUNITING WORK UNDERTAKEN ON THE ADVICE OF THE ARCHITECT. THE ASSESSEE CLAIM ED BOTH THE ITEMS AS EXPENDITURE INCURRED FOR REPAIRS TO THEIR BUILDING. THE ITO OB SERVED THAT THE REPAIRS IN QUESTION WOULD NOT BE CALLED CURRENT REPAIRS BUT THAT THE ASSESSEE HAD UNDERTAKEN MAJOR STRUCTURAL REPAIRS WHICH HAD THE EFFECT OF THE PROL ONGING THE LIFE OF THE BUILDING ATLEAST 15 3 YEARS AS THE REPAIRS RESULTED IN EXTENSION OF THE P ERIOD OF SERVICEABLENESS OF THE ASSET AND IN THE CREATION OF AN ENDURING BENEFIT THE EXPENDIT URE WAS A CAPITAL EXPENDITURE. THE HONBLE HIGH COURT HELD THAT SINCE GUNITING, A PROC ESS OF CEMENT PLASTERING, WAS CARRIED OUT UNDER PRESSURE AND IS PARTICULARLY RECOMMENDED WHERE THERE ARE CRACKS ETC. AND THE ORDINARY PLASTERING DO NOT LAST, BY EMPLOYING THIS METHOD, WHICH WAS NOTHING BUT AN IMPROVED METHOD OF PLASTERING OF REPAIR WORK, ALL T HAT THE ASSESSEE HAD DONE WAS TO PRESERVE AND MAINTAIN AN ALREADY EXISTING ASSET. N O NEW ASSET OR NO NEW ADVANTAGE AS SUCH COULD BE SAID TO HAVE BEEN BROUGHT INTO EXISTE NCE BY REASON OF EXPENDITURE INCURRED FOR THE GUNITING WORK. AS A RESULT OF GUNITING WOR K DONE, THE ASSESSEE HAD NOT CHANGED THE NATURE OF THE ASSET, THE BUILDING AS A WHOLE AN D THE SAME IN NO WAY INCREASED THE ACCOMMODATION OR EARNING CAPACITY OF THE BUILDING, IN THAT SENSE, NO ADVANTAGE OF ENDURING BENEFIT HAD BEEN BROUGHT INTO EXISTENCE. THE HONBLE COURT WAS PLEASED TO HOLD THAT SIMPLY BECAUSE OF REPAIRS THE LIFE OF THE BUILDING WAS PROLONGED FOR ATLEAST 15 YEARS, IT COULD NOT BE SAID THAT THE EXPENDITURE WA S IN THE NATURE OF A CAPITAL EXPENDITURE. THEREFORE, THE EXPENDITURE WAS HELD TO BE A REVENUE IN NATURE AND WERE ALLOWABLE DEDUCTIONS. LIKEWISE IN THE CASE OF CIT VS. CHOWGU LE AND CO. PVT. LTD. (SUPRA), HEAVY EXPENDITURE WAS INCURRED ON THE REPLACEMENT OF PART OF A SHIP. IT WAS HELD THAT NO NEW ASSET WAS CREATED HENCE THE EXPENDITURE WAS DEDUCTA BLE. IN THE PRESENT CASE AS WELL BY INCURRING EXPENDITURE IN REPAIRING OF THE ALREADY E XISTED LAGOON, THE ASSESSEE HAS NOT CREATED A NEW ASSET, THEREFORE, IN OUR VIEW AS PER THE RATIO LAID DOWN IN THE ABOVE CITED DECISIONS, THE CLAIMED EXPENDITURE INCURRED ON THE REPAIR AND MAINTENANCE OF THE LAGOONS IS DEDUCTABLE EXPENDITURE. THE LD. CIT(A) WAS THUS JUSTIFIED IN ALLOWING THE SAME. THE SAME IS UPHELD. THE ISSUE IS THUS DECID ED IN FAVOUR OF THE ASSESSEE. 5. CONSEQUENTLY APPEAL IS DISMISSED. 6. RESPECTFULLY FOLLOWING THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE AND IN ABSENCE OF ANY DISTINGUISHING FEATURES BROUGHT T O OUR NOTICE WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT(A). ACCORDINGLY, W E UPHOLD THE ORDER OF THE CIT(A) ON THIS ISSUE AND THE GROUNDS RAISED BY THE REVENUE ARE DISMISSED. 7. THE SECOND ISSUE RAISED BY THE REVENUE IN THE GR OUNDS OF APPEAL RELATES TO THE ORDER OF THE CIT(A) IN DELETING THE ADDITION OF RS.13,43,750/- MADE BY THE AO U/S.36(1)(III) OF THE INCOME TAX ACT. 8. FACTS OF THE CASE, IN BRIEF, ARE THAT FROM THE V ARIOUS DETAILS FURNISHED BY THE ASSESSEE DURING THE COURSE OF ASSESSMENT PROCEEDING S THE AO NOTED THAT THE ASSESSEE HAS ADVANCED AN AMOUNT OF RS.107.05 LAKHS TO ITS SISTER CONCERN KARAN BOTTLING COMPANY PVT. LTD. FOR SUPPLY OF MACHINERY FOR NEW BOTTLING UNIT OF GROUP. ON BEING QUESTIONED BY THE AO IT WAS SUBMIT TED THAT THE ADVANCE HAS BEEN GIVEN TO THE SISTER CONCERN WITHOUT ANY INTEREST FO R THE PURPOSE OF SUPPLY OF THE SAID MACHINERY. RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF 4 S.A. BUILDERS VS. CIT REPORTED IN 288 ITR1 THE AO W AS OF THE OPINION THAT SUCH ADVANCE CANNOT BE CONSIDERED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. REJECTING THE VARIOUS EXPLANATION S GIVEN BY THE ASSESSEE THE AO DISALLOWED AN AMOUNT OF RS.13,43,750/- BEING INTERE ST @12.5% ON THE AMOUNT ADVANCED TO THE SISTER CONCERN U/S.36(1)(III) OF TH E INCOME TAX ACT. 9. BEFORE THE CIT(A) IT WAS SUBMITTED THAT THE ASSE SSEE FIRM IS ONE OF THE PROMOTERS OF THE ASSOCIATE FIRM M/S. KARAN BOTTLING COMPANY PVT. LTD. AND SOME ADVANCES WERE TO BE PAID FOR SET UP OF THE PROJECT. THE AMOUNT OF RS. 107.05 LAKHS HAS BEEN APPROPRIATED AS SHARE APPLICATION MONEY IN F.Y. 2009-10 AND EQUITY SHARES HAVE BEEN ALLOTTED TO THE PARTNERSHIP FIRM. THE ADVANCE WAS IN NATURE OF TRADE ADVANCE AND NOT FOR PERSONAL BENEFIT OF THE P ARTNERS OR FAMILY MEMBERS AND THEREFORE THE SAME SHOULD BE TREATED AS BUSINESS IN VESTMENT AND NO DISALLOWANCE OF INTEREST SHOULD BE MADE. IT WAS FURTHER SUBMITTED THAT THERE WAS NO DIVERSION OF FUNDS FOR NON BUSINESS PURPOSE AND THE FUNDS HAVE B EEN USED FOR THE EXPANSION OF THE BUSINESS AND THE ADVANCES HAVE BEEN SUBSEQUENTL Y CONVERTED INTO SHARE APPLICATION MONEY IN THE NEW COMPANY M/S. KARAN BOT TLING COMPANY PVT. LTD. IT WAS FURTHER SUBMITTED THAT THE ASSESSEE HAD SHOWN I NTEREST INCOME OF RS.102.38 LAKHS AND PAID INTEREST AMOUNT OF RS.54.37 LAKHS AN D THUS THERE HAS BEEN NET INTEREST EARNING AND THE QUESTION OF INTEREST BEARI NG FUNDS BEING DIVERTED FOR NON BUSINESS PURPOSE DOES NOT ARISE. IT WAS SUBMITTED THAT THE ASSESSEE HAS NOT CLAIMED ANY DEDUCTION OF INTEREST PAID TO KARAN BOTTLING CO MPANY PVT. LTD. SINCE THEY ARE NOT HAVING ANY CREDIT BALANCE WITH THE COMPANY. IT WAS ALSO SUBMITTED NO BORROWED FUND HAS BEEN DIVERTED TO KARAN BOTTLING C OMPANY PVT. LTD. FOR WHICH THERE WILL BE DISALLOWANCE OF INTEREST U/S.36(1)(II I). THE DECISIONS RELIED ON BY THE AO WERE ALSO DISTINGUISHED AND IT WAS SUBMITTED THA T THEY ARE NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE. 5 10. BASED ON THE ARGUMENTS ADVANCED BY THE ASSESSEE THE LEARNED CIT(A) DELETED THE ADDITION. WHILE DOING SO, HE NOTED THA T THERE IS NO DIVERSION OF FUNDS BY THE ASSESSEE TO KARAN BOTTLING COMPANY PVT. LTD. SINCE THE AMOUNT OF RS.107.05 LAKHS GIVEN AS LOAN WAS CONVERTED INTO SH ARE APPLICATION MONEY AND SHARES WERE ALLOTTED IN SUBSEQUENT YEAR. THE AMOUN T SO ADVANCED WAS FOR SUPPLY OF MACHINERY FOR NEW BOTTLING UNIT OF GROUP CONCERN AND THE FIRM M/S. KARAN AGENCIES HAS BENEFITED BY PROCURING MACHINERY FOR I TS NEW BOTTLING UNIT. ACCORDING TO THE LEARNED CIT(A) FOR ALLOWING INTERE ST EXPENDITURE U/S.36(1)(III), 3 CONDITIONS ARE REQUIRED, I.E. (A) MONEY, I.E. CAPIT AL MUST HAVE BEEN BORROWED BY THE ASSESSEE; (B) IT MUST HAVE BEEN BORROWED FOR THE PU RPOSE OF BUSINESS AND (C) THE ASSESSEE MUST HAVE PAID INTEREST ON THE BORROWED AM OUNT. IF ALL THESE 3 CONDITIONS ARE FULFILLED, IT IS NOT POSSIBLE TO MAKE PART DISA LLOWANCE UNLESS THERE IS A FINDING OF FACT THAT A PART OF CAPITAL BORROWED WAS NOT UTILIS ED FOR THE PURPOSE OF BUSINESS. HE OBSERVED THAT THE ASSESSEE HAS NOT ASKED FOR ANY DE DUCTION OF THE INTEREST ON THE BORROWED CAPITAL. THE AO WHILE DECIDING THE ISSUE HAD APPLIED STRAIGHT JACKET FORMULA BY CALCULATING INTEREST @12.5% ON THE AMOUN T OF RS.107.05 LAKHS ADVANCED TO M/S.KARAN BOTTLING COMPANY PVT. LTD. TH AT WAS CONVERTED INTO SHARE APPLICATION MONEY AND SHARES ALLOTTED IN SUBSEQUENT YEAR. HE FURTHER NOTED THAT THE AO HAS NOT CONSIDERED EARNING OF INTEREST OF RS. 10 2.38 LAKHS AND PAYMENT OF INTEREST AMOUNT OF RS.54.37 LAKHS AND THEREFORE THE RE IS NET INTEREST INCOME IN THE INSTANT CASE. THEREFORE, THERE IS NO APPLICATION O F SECTION 36(1)(III) IN THE CASE OF THE ASSESSEE. HE ACCORDINGLY HELD THAT THE AOS AC TION IN CALCULATING NOTIONAL INTEREST ON THE AMOUNT ADVANCED TO THE SISTER CONCE RN AND ADDING THE SAME TO THE TOTAL INCOME IS UNWARRANTED. HE FURTHER NOTED THAT THE AO HAS NOT GIVEN ANY FINDING THAT THE ASSESSEES OTHER BORROWINGS WAS NO T USED FOR THE PURPOSE OF BUSINESS. THE LEARNED CIT(A) HELD THAT EVEN WHEN T HE ASSESSEE HAS BORROWED 6 MONEY FOR INVESTMENT INSPITE OF THE FACT THAT FUNDS WERE AVAILABLE AT HIS DISPOSAL OR MONEY BORROWED ON INTEREST FOR THE PURPOSE OF BUSIN ESS BUT CERTAIN MONEY WERE ADVANCED TO DIRECTORS WITHOUT CHARGING ANY INTEREST , INTEREST WAS HELD TO BE AN ALLOWABLE DEDUCTION IN THE COMPUTATION OF COMPANIES INCOME AS NO-CORRELATION WAS ESTABLISHED. FOR THIS PROPOSITION HE RELIED ON THE DECISION REPORTED IN 74 ITR 723 (BOMBAY) AND 61 ITR 480 (MADRAS). HE FURTHER N OTED THAT IT IS NOT THE CASE OF THE AO THAT THE ASSESSEE HAS BORROWED MONEY AND UTI LISED FOR NON BUSINESS PURPOSE. HE ACCORDINGLY DELETED THE SAME. AGGRIEV ED WITH SUCH ORDER OF CIT(A) THE REVENUE IS IN APPEAL BEFORE US. 11. WE HAVE CONSIDERED THE RIVAL ARGUMENTS MADE BY BOTH THE SIDES, PERUSED THE ORDERS OF THE AO AND THE CIT(A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE HAVE ALSO CONSIDERED THE VARIOUS DECI SIONS CITED BY BOTH THE SIDES. WE FIND THE AO DISALLOWED AN AMOUNT OF RS.13,43,750 /- U/S.36(1)(III) ON THE GROUND THAT THE ASSESSEE HAS ADVANCED INTEREST FREE AMOUNT OF RS.107.05 LAKHS TO ITS SISTER CONCERN KARAN BOTTLING COMPANY PVT. LTD. FROM THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE AO WE FIND IT WAS CLAIME D BY THE ASSESSEE THAT THE SAID ADVANCE WAS GIVEN FOR SUPPLY OF MACHINERY FOR NEW B OTTLING UNIT OF GROUP. WE FIND BEFORE THE CIT(A) IT WAS ALSO SUBMITTED THAT T HE AMOUNT WAS CONVERTED INTO SHARE SUPPLICATION MONEY IN THE COMPANY KARAN BOTTL ING COMPANY PVT. LTD. AND SHARES WERE ALLOTTED IN SUBSEQUENT YEAR. WE FIND F ROM THE SUBMISSIONS MADE BEFORE THE AO AS WELL AS THE CIT(A) THAT THE ASSESS EE HAD EARNED INTEREST INCOME OF RS.102.38 LAKHS AND PAID INTEREST OF RS.54.37 LA KHS AND THEREFORE THERE IS NET INTEREST INCOME. UNDER THESE CIRCUMSTANCES, WE ARE OF THE CONSIDERED OPINION THAT THERE IS NO APPLICATION OF SECTION 36(1)(III) IN TH E CASE OF THE ASSESSEE. THE HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS REPORTED IN 288 ITR 1 HAS HELD THAT INTEREST ON MONEY BORROWED FROM BANK AND LENT TO SI STER CONCERN WITHOUT CHARGING 7 INTEREST IS ALLOWABLE IF THE SAME IS HAS BEEN MADE AS A MEASURE OF COMMERCIAL EXPEDIENCY. WE FIND THE HONBLE SUPREME COURT HAS HELD AS UNDER : THUS IN ATHERTON V. BRITISH INSULATED AND HELSBY C ABLES LTD. [1925] 10 TC 155, IT WAS HELD BY THE HOSE OF LORDS THAT IN ORDER TO C LAIM A DEDUCTION, IT IS ENOUGH TO SHOW THAT THE MONEY IS EXPENDED, NOT OF NECESSITY AND WI TH A VIEW TO DIRECT AND IMMEDIATE BENEFIT, BUT VOLUNTARILY AND ON GROUNDS OF COMMERCI AL EXPEDIENCY AND IN ORDER TO INDIRECTLY TO FACILITATE THE CARRYING ON THE BUSINE SS. THE ABOVE TEST IN ATHERTONS CASE [1925] 10 TC 155 (HL) HAS BEEN APPROVED BY THIS COU RT IN SEVERAL DECISIONS, E.G. EASTERN INVESTMENTS LTD. V. CIT [1951] 20 ITR 1, CIT V. CHA NDULAL KESHAVLAL AND CO. ]1960] 38 ITR 601, ETC. IN OUR OPINION, THE HIGH COURT AS WELL AS THE TRIBU NAL AND OTHER INCOME-TAX AUTHORITIES SHOULD HAVE APPROACHED THE QUESTION OF ALLOWABILITY OF INTEREST ON THE BORROWED FUNDS FROM THE ABOVE ANGLE. IN OTHER WORD S, 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 ASSESS EE) AS A MEASURE OF COMMERCIAL EXPEDIENCY, AND IF IT WAS, IT SHOULD HAVE BEEN ALLO WED. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRES SION 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 AN Y LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS A BUSINESS EXPENDITURE IF IT WAS INCUR RED ON GROUND OF COMMERCIAL EXPEDIENCY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . WE AGREE WITH THE VIEW TAKEN BY THE DELHI HIGH COUR T IN CIT V. DALMIS CEMENT (B.) LTD. [2002] 254 ITR 377 THAT ONCE IT IS ESTABL ISHED 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 JUSTIFI ABLY 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 RE GARD TO THE CIRCUMSTANCES OF THE CASE. NO BUSINESSMAN CAN BE COMPELLED TO MAXIMIZE HIS 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 LO OK AT THE MATTER FROM THEIR OWN VIEW POINT BUT THAT OF A PRUDENT BUSINESSMAN. AS ALREAD Y 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 T HE AMOUNT WAS ADVANCED FOR EARNING PROFITS. 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 ADV ANCES IT TO A SISTER CONCERN. IT ALL DEPENDS ON THE FACTS AND CIRCUMSTANCES OF THE RESPE CTIVE 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 SAI D TO BE ADVANCED TO A SISTER CONCERN FOR COMMERCIAL EXPEDIENCY IN MANY OTHER CIR CUMSTANCES (WHICH NEED NOT BE ENUMERATED HERE). HOWEVER, WHERE IT IS OBVIOUS THA T A HOLDING COMPANY HAS A DEEP INTEREST IN ITS SUBSIDIARY, AND HENCE IF THE HOLDIN G 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 ENTIT LED TO DEDUCTION OF INTEREST ON ITS BORROWED LOANS. IN VIEW OF THE ABOVE, WE ALLOW THESE APPEALS AND SE T ASIDE THE IMPUGNED JUDGMENTS OF THE HIGH COURT, THE TRIBUNALS AND OTHE R 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. 8 12. SINCE IN THE INSTANT CASE MONEY WAS ADVANCED TO A SISTER CONCERN FOR SUPPLY OF MACHINERY WHICH WAS SUBSEQUENTLY BEEN CONVERTED TO SHARE APPLICATION MONEY IN THE COMPANY KARAN BOTTLING COMPANY PVT. LTD, THE REFORE, THE AMOUNT SO ADVANCED IN OUR OPINION WILL AMOUNT TO COMMERCIAL E XPEDIENCY. THEREFORE, IN VIEW OF THE DECISION CITED ABOVE WE ARE OF THE CONS IDERED OPINION THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING NOTIONAL INTEREST U/S. 36(1)(III) OF THE INCOME TAX ACT, ESPECIALLY WHEN THERE WAS NOTHING BEFORE THE AO THA T AMOUNT BORROWED ON INTEREST HAS BEEN DIVERTED TO THE SISTER CONCERN FREE OF INT EREST. IN THIS VIEW OF THE MATTER AND IN VIEW OF THE DETAILED ORDER PASSED BY THE LEA RNED CIT(A) WE FIND NO INFIRMITY IN THE SAME. ACCORDINGLY, THE SAME IS UPHELD. THE GROUNDS RAISED BY THE REVENUE ON THIS ISSUE ARE DISMISSED. 13. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. PRONOUNCED IN THE OPEN COURT ON THIS THE 16 TH DAY OF OCTOBER, 2012. SD/- SD/- (SHAILENDRA KUMAR YADAV) (R.K. PANDA) JUDICIAL MEMBER ACCOUNTANT MEMBER PUNE DATED: THE 16 TH OCTOBER 2012 SATISH COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE 2. DEPARTMENT 3. CIT(A)-I, NASHIK 4. THE D.R, B PUNE BENCH 5. GUARD FILE BY ORDER // TRUE COPY // SENIOR PRIVATE SECRETARY ITAT, PUNE BENCHES, PUNE