Bombay High Court

Pr. Commissioner Of Income Tax-7 Mumbai vs Essel Infraprojects Ltd. (Formerly Pan ... on 31 January, 2024

Author: Neela Gokhale

Bench: K. R. Shriram, Neela Gokhale

2024:BHC-OS:1828-DB
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                              IN THE HIGH COURT OF JUDICATURE AT BOMBAY

                                 ORDINARY ORIGINAL CIVIL JURISDICTION

                                 INCOME TAX APPEAL (IT) NO.927 OF 2018

                  Principal Commissioner of Income Tax-7,
                  Mumbai                                             ...Appellant
                        Versus
                  ESSEL Infra Projects Ltd. (Former PAN India
                  Paryatan Ltd.)                                     ...Respondent


                  Ms. Swapna Gokhale for Appellant.
                  Mr. Jay Bhansali for Respondent.


                                       CORAM:         K. R. SHRIRAM &
                                                      DR. NEELA GOKHALE, JJ.

                                       DATED:         31st January 2024
                  PC:-

1. Respondent-Assessee is engaged in the business of operating

amusement park, infrastructure development management and

finance activities. Assessee had given a sum of Rs. 25 crores to one

PAN India Infrastructure Private Limited, its subsidiary. The

Assessing Officer ("AO") took the view that Assessee had diverted the

interest bearing fund by giving interest-free advance and, therefore,

the entire interest claim of Rs. 1,48,10,695/- needs to be disallowed.

This view was not accepted by the Commissioner of Income Tax

(Appeals) ("CIT(A)"), who held that the investment made by

Assessee in its subsidiary was in the course of carrying on its business

and the interest expenditure is not required to be disallowed. It was

held that under Section 36(1)(iii) of the Income Tax Act, 1961 ("the Gaikwad RD 2/9 15-ositxa-927-2018.doc

Act"), interest paid in respect of capital borrowed for the purpose of

business is a permissible deduction in the computation of profits and

gains of business or profession and the investment made by Assessee

being in the course of carrying on its business, interest expenditure is

not required to be disallowed. This was impugned by the Revenue in

the appeal filed before the Income Tax Appellate Tribunal ("ITAT").

At the same time, the CIT(A) confirmed disallowance of Rs.

13,62,536/- that was made by the AO. The AO also had disallowed

certain expenditure that Assessee had incurred in its business

amounting to Rs. 2,76,76,530/- being amount incurred for making

and filing bids for modernization of Mumbai and Delhi Airports. The

AO was of the opinion that the expenses being pre-commencement

expenses for a project considered as new line of business cannot be

shown in the profit and loss account as exceptional item. Assessee

preferred an appeal before the CIT(A) and the CIT(A) concurred with

this view of the AO. Assessee also filed an appeal. There were,

therefore, three appeals filed before the ITAT, one by Assessee for

Assessment Year ("AY") 2006-2007 and two by Revenue for AY 2006-

2007 and AY 2007-2008.

2. The ITAT allowed the appeal filed by Assessee and dismissed

both the appeals filed by the Revenue by a common order

pronounced on 11th January 2017, which is impugned in this appeal

filed under Section 260A of the Act.

Gaikwad RD
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3. The following three substantial questions of law are proposed:

"A. 1. Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in law in allowing the bidding expenditure u/s 37 (1) in the course of carrying of its business activities in furtherance of its business activities, without appreciating the facts that the expenditure is incurred for setting up a new line of business?

2. Whether in the facts and in the circumstances of the case and in law, the Hon'ble ITAT has erred in distinguishing the facts of the case on which the reliance was placed viz., CIT Vs Essar Oil Ltd. (ITA No. 921 of 2006 dated 16.10.2008 - Bombay High Court)?

B. Whether on the facts and in the circumstances of the case and in law, the Hon'ble ITAT is justified in deleting the disallowance of interest on the share application money forwarded to the subsidiary company after holding that it is allowable on the account of commercial expediency without appreciating that the intention of investment in the subsidiary company was to retain/increase the controlling interest therein, which is the capital investment and, therefore, the corresponding interest expense on it is not allowable?

C. Whether on the facts and in the circumstances of the case and in law, the Hon'ble Bombay High Court was justified in holding that applicability of Rule 8D is only prospective in operation and for the year under consideration. It is not applicable?"

(Ms. Gokhale states that in substantial question of law (C) quoted

about the words "the Hon'ble Bombay High Court" should be

corrected to read as "the Tribunal".)

4. As regards the first substantial question of law, we agree with

the conclusion arrived at by the ITAT that even though Assessee might

not have carried infrastructure development business earlier, the fact

that Assessee decided to go into the infrastructure development

Gaikwad RD 4/9 15-ositxa-927-2018.doc

business would not mean that the billing expenses cannot be

disallowed. The ITAT correctly concluded that the expenses having

been incurred by Assessee in the course of carrying on its business,

because objects of the company included 'carrying on business in

infrastructure development', the same has to be allowed as

deduction. On facts, the ITAT came to a conclusion that this

expenditure has been incurred in furtherance of the business

activities of Assessee. The order dated 16 th October 2008 passed by

the Hon'ble Bombay High Court in ITXA (L) No. 921 of 2006 on

which reliance has been placed by the Tribunal, one of the questions

of law was whether the Tribunal was justified in holding that the

preliminary expenses incurred by Assessee prior to the

commencement of its business activity could be a revenue

expenditure. The Court was pleased to uphold the findings of the

Tribunal that it would amount to a revenue expenditure even if

Assessee was not successful in obtaining the bid.

5. Therefore, we find no error in the conclusions arrived at by the

ITAT as regards the first question of law proposed.

6. As regards the second substantial question of law, the Tribunal,

on facts, agreed with the finding arrived at by the CIT(A) that the

amount given by Assessee to its subsidiary was for the purpose of

business of Assessee. The Tribunal has accepted the factual finding of

Gaikwad RD 5/9 15-ositxa-927-2018.doc

the CIT(A) that Assessee being engaged in the business of

'infrastructure development management and finance' in addition to

its 'amusement park and water park', has set up the subsidiary to

which these funds were provided to take up the infrastructure project

on behalf of Assessee. A factual finding has been arrived at that the

finance provided to the wholly owned subsidiary was for its business

of infrastructure and is used for that purpose. It has accepted that

the nexus between the advance of funds and the business of

Appellant/Assessee carried out through the subsidiary stood

established and hence, no disallowance under Section 36(1)(iii) of

the Act was warranted. Therefore, since its a factual finding, we see

no reason to interfere.

7. In fact the same view has been taken by this Court in Vaman

Prestressing Co. Pvt. Ltd. v. Additional Commissioner of Income Tax-

Rg.2(3) & Ors.,1 where paragraph 17 reads as under:

"17. The law on this is settled in as much as in S.A. Builders Ltd. (Supra), the Hon'ble Apex Court was considering an almost identical situation. The assessee in that case had transferred a huge amount of Rs. 82 Lakhs to its subsidiary company out of the Cash Credit account of the assessee in which there was a huge debit balance. The Assessing Officer held that since the assessee had diverted its borrowed funds to a sister concern without charging any interest, proportionate interest relating to the said amount out of total interest paid to the bank deserved to be disallowed and he disallowed a particular sum. The Hon'ble Apex Court held that extending such a loan would fall under the expression used for the purpose of business. If the amount has been advanced as a measure of commercial expediency, the interest on funds borrowed by the assessee should be allowed as deduction under Section 36(1)(iii) of the Act. Paragraph Nos. 19 to 36 of S.A. Builders Ltd. (supra) read as under:

1 2023 SCC OnLine Bom. 1947.

Gaikwad RD 6/9 15-ositxa-927-2018.doc

19. 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.

20. 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.

21. In Madhav Prasad Jantia v. Commissioner of Income Tax U.P. (1979) 3 SCC 634: 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.

22. 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.

23. 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.

24. Thus in Atherton v. British Insulated & Helsby Cables Ltd. (1925) 10 TC 155 (HL), it was held by the House of Lords that in order to claim a deduction, it is enough to show that the money is expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. v. CIT (1951) 20 ITR 1, CIT V. Chandulal Keshavlal & Co. (1960) 38 ITR 601 etc.

25. In our opinion, the High Court as well as the Tribunal and other Income Tax authorities should have approached the question of allowability of interest on the borrowed funds from the above angle. In other

Gaikwad RD 7/9 15-ositxa-927-2018.doc

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.

26. The expression "commercial expediency" is an expression of wide import and includes such expenditure as 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.

27. 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.

28. 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.

29. 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.

30. 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 Spinning & Weaving Mills Ltd. (1971) 82 ITR 166 etc.

31. 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.

32. 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.

33. Learned counsel for the Revenue relied on a Bombay High Court decision in Phaltan Sugar Works Ltd. v. Commissioner of Wealth-Tax (1994) 208 ITR 989

Gaikwad RD 8/9 15-ositxa-927-2018.doc

in which it was held that deduction under Section 36(1)

(iii) can only be allowed on the interest if the assessee borrows capital for its own business. Hence, it was held that interest on the borrowed amount could not be allowed if such amount had been advanced to a subsidiary company of the assessee. With respect, we are of the opinion that the view taken by the Bombay High Court was not correct. The correct view in our opinion was whether the amount advanced to the subsidiary or associated Company or any other party was advanced as a measure of commercial expediency. We are of the opinion that the view taken by the Tribunal in Phaltan Sugar Works Ltd. (supra) that the interest was deductible as the amount was advanced to the subsidiary company as a measure of commercial expediency is the correct view, and the view taken by the Bombay High Court which set aside the aforesaid decision is not correct.

34. Similarly, the view taken by the Bombay High Court in Phaltan Sugar Works Ltd. v. Commissioner of Wealth-Tax (1995) 215 ITR 582 also does not appear to be correct.

35. 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.

36. 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

Gaikwad RD 9/9 15-ositxa-927-2018.doc

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."

(emphasis supplied)

8. As regards the third substantial question of law proposed, we

find that it was not even argued before the Tribunal. Moreover, ITAT

had only noted that the provisions of Rule 8D shall be applicable

from AY 2008-2009 as held in the case of Godrej and Boyce

Manufacturing Company Limited v. DCIT2of this Court. There is

nothing to indicate that the Bombay High Court did not give this

finding. In fact Ms. Gokhale says that the Court in Godrej and Boyce

(supra) has actually held that provisions of Rule 8D shall be

applicable from AY 2008-2009 only.

9. Therefore, in our view, no substantial questions of law arise.

10. Appeal dismissed.