IN THE HIGH COURT OF HIMACHAL PRADESH, SHIMLA I.T.A No. 31 of 2005 alongwith ITA Nos.32,33,34 and 35 of 2005. Date of decision: 12.10.2009 ITA Nos.31 to 35 of 2005 Commissioner of Income Tax …. Appellant Versus M/s.Shivalik Agro Poly Products Pvt. Ltd. ….. Respondent Coram: The Hon’ble Mr. Justice Deepak Gupta, J. The Hon’ble Mr.Justice V.K.Ahuja, J. Whether approved for reporting? No For the appellant: Mr.Vinay Kuthiala, Advocate (in all the appeals). For the respondent: M/s.Vishal Mohal and Surinder Sharma, Advocate (in all the appeals). _____________________________________________________ Deepak Gupta, J.(Oral) These five appeals are being disposed of by this common judgment since they arise out of one common order passed by the Income Tax Appellate Tribunal dated 24th September, 2004. These appeals relate to the assessment years 1986-87, 1987-88, 1988-89, 1989-90 and 2 1990-91 and have been admitted on the following identical questions of law:- “i) Whether the ITAT was right in law holding that the CIT(A) should have followed the order passed by the ITAT in appeal No.ITA 285/Chandi/94 dated 17.11.1999 in the assessee’s case, whereas the facts for the A.Y. 1990-91 are clearly distinguishable from that of A.Y. 1991-92 since an ad hoc addition was made for the A.Y. 1991-92, while in the A.Y. 1990-91, which is under consideration, the addition was made after properly calculating incidental amount of interest chargeable on the advances made to the sister concerns. ii) Whether the ITAT was right in law holding that there was no nexus between interest- bearing loans and interest-free advances made by the assessee, especially when the advances were given to the sister concerns when there was already a debit balance in the Over Draft Account and this debit balance was further increased after making interest-free advances to the sister concerns, particularly when there were no business transactions with the sister concerns. iii) Whether in ITAT was right in law holding that it is necessary to establish a nexus between the amounts borrowed on 3 interest and amounts advanced free of interest on the facts of this case, particularly when there are various decisions to the contrary.” Briefly stated the facts of the case are that the assessee-M/s.Shivalik Agro Poly Products Pvt. Ltd. during the assessment years in question had advanced interest free loans to a number of sister concerns. According to the revenue, these loans had been advanced out of the funds received by the assessee from the over draft limits available to it from the banks. The revenue contends that since the asssessee has advanced the loans, not out of its own funds, but out of the funds borrowed from the financial institutions, it is not entitled to claim deduction of interest paid on the amounts advanced as interest free loans to the sister concerns. It is further contended that these advances were not made for the business of the assessee and as such, no deduction could be claimed in terms of Section 36(1)(iii) of the Income Tax Act. The entire dispute in question is totally covered by the judgment of the Apex Court delivered in S.A.Builders Ltd. v. Commissioner of Income Tax (Appeals) 4 and another, 2007(288), ITR 1 (SC) wherein the Apex Court held as follows:- “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) as 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. xxx xxxx xxx 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 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 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. 27-31 xxx xxxx xxx 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. 33-34 xxx xxxx xxx 35. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bhart) Ltd. (2002) 254 ITR 377 that 5 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 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.” In view of the aforesaid law laid down by the Apex Court, it is clear that the question whether the funds advanced by the assessee had been received as advance from the financial institutions or are its own funds is totally immaterial to decide the issue whether it is entitled to claim deduction for the interest paid on this amount. The only question to be considered is whether the amounts advanced to the sister concerns were 6 advanced by way of commercial expediency or not? This question has not been considered in light of the law laid down by the Apex Court in the aforesaid judgment by the Assessing Authorities. We, therefore, partly allow the appeals and set aside the order of the Income Tax Appellate Tribunal to the limited extent that it shall now decide whether the advances were made to the sister concerns by way of commercial expediency or not. The source of the funds will be totally irrelevant for deciding the question as to whether the assessee is entitled to claim deductions. Sh.Vishal Mohan, learned counsel for the assessee has urged that the Assessing Officer himself in the assessment years relating to the later years has placed reliance on the judgment of the Apex Court passed in S.A Builders’ supra and has accepted the plea of the assessee and allowed the deductions of interest even on the amounts advanced as interest free loans to the sister concerns. Mr.Vishal Mohan further submits that the principles of constructive resjudicata are applicable to this case also. The question whether the principle of “commercial expediency” as laid down by the Apex Court is applicable to this case or not is a pure question of 7 fact. This has to be decided by the Tribunal and we cannot embark on a fact finding mission to decide this question. The Tribunal while deciding these questions shall also take into consideration the plea of the assessee that the case is covered by the principles of constructive resjudicata. The appeals are disposed of in the aforesaid terms. No order as to costs. ( Deepak Gupta ) Judge October 12, 2009 (V.K.Ahuja) (m) Judge