Commissioner Of Income Tax vs M/S Basti Sugar Mills Co. (Ltd)
2010 Latest Caselaw 4076 Del

                                                               R-199

*            IN THE HIGH COURT OF DELHI AT NEW DELHI

                           ITR No. 89 OF 1993

%                                          Date of Decision: 01.09.2010.

COMMISSIONER OF INCOME TAX                             . . . Appellant

                        Through :       None

                             VERSUS

M/S BASTI SUGAR MILLS CO. (LTD)                          . . .Respondent

                        Through:        Ms. Prem Lata Bansal, Advocate

CORAM :-

      HON'BLE MR. JUSTICE A.K. SIKRI
      HON'BLE MS. JUSTICE REVA KHETRAPAL

      1.     Whether Reporters of Local newspapers may be allowed
             to see the Judgment?
      2.     To be referred to the Reporter or not?
      3.     Whether the Judgment should be reported in the Digest?

A.K. SIKRI, J. (ORAL)

1. The following two questions are referred for opinion of this Court at

the instance of the revenue:-

"1. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that a sum of Rs, 2,28,273/- was not disallowable out of interest claimed by the assessee by ignoring the material fact that the assessee had not charged any interest from its sister concern?

2. Whether on the facts and in the circumstances of the case, the ITAT was correct in law in holding that a sum of Rs. 2,25286/- representing amount transferred to the mollases storages fund account was an allowable deduction by ignoring the material fact that this was actually a provision?"

2. The facts regarding question no.1 are that the assessee company

borrowed large sums of money from banks and others and paid a huge

interest of about Rs. 66,00,000/- on these borrowings. The assessee also

gave interest-free loans and advances to its sister-concerns details of

which are mentioned in the order of the Assessing officer and of the

Commissioner of Income-tax (appeals). Calculating the interest @ 16.5%

on the average balances of these 8 or 9 parties, the assessing officer

added an amount of Rs. 2,28,273/- to the income of the assessee. The

Commissioner of Income Tax (Appeals) observed that there was no co-

relation between the sums borrowed and the amounts advanced as loans.

She also found that on identical facts, the Tribunal in the assessee's own

case for assessment year 1977-78 vide order dated 3.11.1983 had

deleted the addition and thereafter aggrieved of that order, the revenue

filed appeal before the Tribunal. The Tribunal, inter alia, found that the

revenue was not able to establish any nexus between the amount

borrowed by the assessee company on interest and the amounts

advanced by the assessee to its sister-concerns. In fact major parties

from whom interest was not charged were the same as in assessment

year 1977-78 for which the Tribunal held that there was no warrant for

adding any notional or deemed interest. Even in respect of other parties,

a finding of fact was recorded that balances were old and no new loans

had been advanced in the year under consideration. This is when it is

found that there was no nexus between the money borrowed by the

assessee from the banks and utilized for its own business purpose and the

money which was given by the assessee to its sister-concerns as interest

free loans and advances in the earlier years, question of disallowing the

interest claimed by the assessee on the money borrowed by it would not

arise. This issue is now squarely covered by the judgment of Supreme

Court in the case of S.A. Builders Ltd. Vs. Commissioner of Income

Tax (Appeals And Another, 288 ITR 1 where the Supreme Court

observed as under:-

"In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern ( e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (iii) of the Income tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expendiency. The expression "commercial expediency is one 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 business expenditure if it was incurred on grounds of commercial expediency"

3. This question is, therefore, decided in the affirmative i.e. in favour of

the assessee and against the revenue.

4. In so far as the second question is concerned, that also stands

determined by the judgment of the Supreme Court in the case of 269 ITR

397-398 in favour of the assessee.

5. Both the questions are answered accordingly.

(A.K. SIKRI) JUDGE

(REVA KHETRAPAL) JUDGE SEPTEMBER 1, 2010 skb