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, department has challenged judgment and order of Tribunal whereby Tribunal has modified order in favour of assessee. 2. This court while admitting appeal on 01.03.2012 framed following substantial question of law:- 1. whether in facts and circumstances of case, ITAT was justified in deleting addition of Rs.3,65,249/- made by Assessing Officer on account of disallowance of cash refunds of tuition fee claimed by assessee? 2. Whether in facts and circumstances of case, ITAT was justified in law in upholding decision of CIT(A) deleting disallowance of Rs.1,31,72,504/- made under Section 40(a)(ia) of Act? 3. Whether in facts and circumstances of case, ITAT was justified in law in upholding 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 appellant contended that tribunal has committed serious error in modifying order of assessing officer on first issue inasmuch as while considering issue AO observed as under:- appellant, however, failed to make up this deficiency even during appeal proceedings. In this view of things, disallowance of Rs.3,65,249/-, being cash refund of fees for which appellant failed to provide necessary and sufficient evidence, is confirmed. Ground 3 (f) is dismissed. 4. She contended that tribunal has seriously committed error in allowing same and wrongly observed as under:- Considering above submissions, we concur with contention of learned A/R that without conducting independent enquiry in matter particularly when complete details of students and refund of fees to them maintained by assessee were made available to AO, AO was not justified in disallowing claimed refund to extent that it was paid in cash which was only Rs.3,65,249/- out of total of refund of Rs.22,40,095/-. We thus while setting aside orders of lower authorities on issue, direct AO to delete addition of Rs.3,65,249/-. Ground no.2 is accordingly allowed. 5. Counsel for respondent contended that refund amount which has been given to students in view of condition and it was given each of individual pursuant to dishouring of catching clause after deducting requisite basic fees which was required to be submitted and same was part of their books of accounts. Considering same, view taken by tribunal is just and proper and first issue is required (3 of 22) [ITA-168/2011] to be answered in favour of assessee. 7. On second issue, counsel for appellant contended that tribunal while considering this issue wrongly relied on 2006-07 circular. 194 (c) deduction has wrongly been made. She has relied upon observations made by AO and CIT (A). 8. Counsel for appellant contended that tribunal has wrongly confirmed order of CIT (A). 9. Counsel for respondent has relied upon 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 Printing of labels on corrugated boxes required any special skill or involved any confidence or secrecy. In circumstances, Tribunal was justified in holding that predominant object underlying contract was one for sale of goods which took contract out of purview of section 194C. 2. CIT v. Deputy Chief Accounts Officer, Markfd Khanna Branch (2008) 304 ITR 17 (P&H) 5. We have considered submissions made by learned Counsel for Revenue. There is no dispute that main purpose of assessee to buy packing material is to obtain goods for purpose of packing of its finished products. factum of such packing material carrying some printed work can only be regarded as work executed by supplier incidental to sale to assessee. This fact of some printing being done as part of supply is of no consequence to contract being essential of sale of chattel. predominant object underlying contracts was sale/purchase of goods and only intention of respondent was to buy packing materials. Admittedly, raw material for (4 of 22) [ITA-168/2011] manufacturing of such packing material was not supplied by respondent. Thus, it was case of sale and not contract for carrying out any work. In case of CIT v. Dabur India Ltd. , 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 Tribunal was justified in holding that predominant object underlying contract was one for sale of goods which took contract out of purview of Section 194C of IT Act, 1961. In BDA Ltd. v. ITO , (the Hon'ble Bombay High Court) held that if manufacturer purchases material on his own and manufactures product as per requirement of specific customer, it is case of sale and not contract for carrying out any work. fact that goods manufactured were according to requirement of 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 impugned order of Tribunal, facts are not in dispute. assessee placed order for supply of printed materials, but stand of Revenue is that as printing was carried out by supplier as per specifications of assessee arrangement would amount to "works contract". case of assessee is that it had entered into contract of purchase/supply simpliciter and entire product is supplied as such; that suppliers are not exclusively supplying such goods to assessee. That assessee does not give any printing contract and there is outright purchase, either by oral or written orders. Tribunal while passing impugned order has placed reliance on Central Board of Direct Taxes Circular No. 715 wherein it is stated by Board that in case of sale no deduction under Section 194C of Act is required. 4. Commissioner of Income Tax-TDS vs. Glenmark Pharmaceuticals Ltd. (2010) 324 ITR 199 (Bombay) (5 of 22) [ITA-168/2011] 18. contract for sale has hence to be distinguished from contract of work. Whether particular agreement falls within one or other category depends upon object and intent of parties, as evidenced by terms of contract, circumstances in which it was entered into and custom of trade. substance of matter and not form is what is of importance. If contract involves sale of movable property as movable property, it would constitute contract for sale. On other hand, if contract primarily involves carrying on of work involving labour and service and use of materials is incidental to execution of work, contract would constitute contract of work and labour. One of circumstances which is of relevance is whether article which has to be delivered has identifiable existence prior to its delivery to purchaser upon payment of price. If article has identifiable existence prior to its delivery to purchaser, and when title to property vests with purchaser only upon delivery, that is important indicator to suggest that contract is contract for sale and not contract for work. In India, distinction between two categories is elucidated by Sale of Goods Act, 1930. Sub- section (1) of Section 4 provides that contract of sale of goods is contract, whereby seller transfers or agrees to transfer property in goods to buyer for price. Where under contract of sale, property in goods is transferred from seller to buyer, contract is that of sale, but where transfer of property in goods is to take place at future time, or subject to some condition thereafter to be fulfilled, contract is not sale but is agreement to sell. contract of sale is made by offer to buy or sell goods for price and acceptance of offer. Under Section 5(1) contract may provide for immediate delivery of goods or immediate payment of price or postponement of delivery or payment of price by installments.21. Broadly speaking, three situations are involved in manufacture of pharmaceutical products. In first situation, pharmaceutical company itself manufactures pharmaceutical preparations which are sold under its brand name. second situation involves loan licensing where raw materials are supplied by pharmaceutical company to licensee manufacturer who in turn manufactures pharmaceutical product on (6 of 22) [ITA-168/2011] behalf of Company. third situation is one where by agreement between pharmaceutical company and manufacturer, it is manufacturer who procures raw materials and manufactures product under specifications of company and sells end product to Company. In third situation, manufacturer may also affix trade mark or brand name of Company, which in turn markets product. present case relates to third category where admittedly, entire process of manufacturing is carried out by third party with whom assessee has contract. work of manufacture is carried out at establishment of third party manufacturer. raw materials are purchased by third party manufacturer. contract envisages that trade-mark of assessee is to be affixed to goods manufactured by third party. agreement envisages that assessee has developed certain pharmaceutical formulations which it intends to market under specified brand names. assessee agreed to disclose to manufacturer technical information and data relating to manufacture of products in accordance with specifications and standards laid down by assessee. process of manufacturing is to be carried out by manufacturer at its own establishment. assessee has to purchase entire quantity of product manufactured at price to be mutually agreed upon between parties. manufacturer is obligated under terms of agreement to obtain licence to manufacture and to obtain endorsement of Food & Drug Administration on licence. agreement envisages that transaction between parties is on principal to principal basis. assessee is required from time to time to place orders for supply of product in such quantities and at agreed price, which manufacturer has to supply. agreement specifically stipulates that manufacturer will be solely and exclusively responsible for purchase, procurement and storage of raw materials required for manufacture of product. All approvals, licences, permits, permissions and sanctions are to be obtained by manufacturer and to be kept valid during term of contract. agreement envisages that manufacturer is independent contractor and is solely responsible for payment of taxes, duties and (7 of 22) [ITA-168/2011] other impositions, under agreement. property in product is to vest in assessee on delivery of product. manufacturer has undertaken not to sell or supply products which are to be manufactured for assessee to any third party or to undertake manufacture or sale of similar products to any third party. assessee is entitled to inspect facility and to approve goods manufactured. manufacturer is required by terms of agreement to affix trade- mark of assessee on products manufactured, subject to obligation not to use mark upon termination of agreement. On termination of agreement or cessation licences have to be surrendered. 24. submission that contract is not contract of sale because, specifications are provided to manufacturer by purchaser cannot be accepted. That has not been understanding of law at any point of time. fact that purchaser provides specifications to manufacturer has never been construed even by Revenue to be circumstance which should lead to inference that contract is not contract of sale. Firstly, circulars issued by Central Board of Direct Taxes right since 29 May, 1972 consistently took position that furnishing of specifications to manufacturer of goods by purchaser would not detract from contract being regarded as contract for sale so long as property in goods passes upon delivery. consideration which was regarded by Revenue as having relevance was whether material was supplied to contractor by Government, or, as case may be, by specified person. Where material is provided by purchaser and work of fabrication or manufacture is carried out by contractor, agreement would, it was clarified, constitute contract for work. On other hand, where manufacturer produces goods to specifications of purchaser and property passes to purchaser only upon delivery, contract would be regarded as contract of sale if raw material is sourced by manufacturer and is not supplied to him by purchaser. Secondly, consistent view which held field in several High Courts was that contracts where (i) property passes to purchaser upon delivery of goods; and (ii) raw material was sourced by manufacturer and (8 of 22) [ITA-168/2011] was not supplied by purchaser do not fall within scope and ambit of Section 194C. 26. By Finance Act of 2009, which substituted provisions of Section 194C, expression "work" has now been defined in Clause (iv) of substituted explanation. Clauses (a) to (d) are same as Clauses (a) to (d) of erstwhile explanation (III). However, explanation (e) has now been inserted. what has weighed in introduction of Clause (e) to Explanation was on going litigation on 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 ambiguity on question. Clause (e) as introduced contains positive affirmation that expression 'work' will cover manufacturing or supplying product, according to requirement or specification of customer, by using material purchased from such customer. Clause (e) has placed position beyond doubt by incorporating language to effect that expression 'work' shall not include manufacture or supply of product according to requirement or specification of customer by using material which is purchased from person other than such customer. In other words, circumstance that requirements or specifications are provided by purchaser is not regarded by statute as being dispositive of question as to whether contract constitutes contract of work or sale. What is of significance is whether material has been purchased from customer, who orders product. When material is purchased from customer who orders product, it constitutes contract of work while on other hand, where manufacturer has sourced material from person other than customer, it would constitute sale. What is significant is that in using words which Clause (e) uses in explanation, Parliament has taken note of position that was reflected in circulars issued by Central Board of Direct Taxes since 29th May, 1972. judgment of Supreme Court in Associated Cement gave expansive definition to expression work and rejected attempt of assessee in that case to restrict expression work to works contracts. Both before and after judgment of Supreme Court expansive definition of expression 'work' co-existed with Revenue's understanding that contract for sale would not (9 of 22) [ITA-168/2011] be within purview of Section 194C. Revenue always understood Section 194C to mean that though product or thing is manufactured to specifications of customer, agreement would constitute contract for sale, if (i) property in article or thing passes to customer upon delivery; and (ii) material that was required was not sourced from customer / purchaser, but was independently obtained by manufacturer from person other than customer. rationale for this was that where customer provides material, what manufacturer does is to convert material into product desired by customer and ownership of material being of customer, contract essentially involves work of labour and not sale. Parliament recognized distinction which held field both administratively in form of circulars of CBDT and judicially in judgments of several High Courts to which reference has been made earlier. Consequently, principles underlying applicability of Section 194C as construed administratively and judicially in decided cases, find statutory recognition in Explanation. Explanation, therefore, as Memorandum explaining clauses of Finance Bill of 2009 states, was in nature of clarification. Where explanatory provision is brought to remove ambiguity or to clear doubt, it is reflective of law as it has always stood in past. Where, as in present case, explanation is introduced statutorily to adopt understanding of law both in form of circulars of CBDT and in judicial decisions, Parliament must be regarded as having intended to affirm that intent. In present case, intent has held field for over three decades. 31. fact that specifications are provided by assessee to manufacturer / supplier would make no difference to legal position. agreement in present case is on principal to principal basis. manufacturer has his own establishment where product is manufactured. material required in manufacture of article or thing is obtained by manufacturer from person other than assessee. property in articles passes upon delivery of product manufactured. Until delivery, assessee has no title to goods. goods have identifiable existence prior to delivery. (10 of 22) [ITA-168/2011] 32. reason that specification or requirement is enunciated by assessee constitutes matter of business expediency. purchaser who desires to get product, which he intends to sell under his brand name, or trademark, manufactured from third party would be interested in ensuring quality of product. trade-mark has associated with it assurance of quality of goods which are marketed traceable to origin of goods. Associated with trade-mark is goodwill and reputation which is associated with mark. This is particularly so in case of pharmaceutical product where ultimate consumer is legitimately entitled to ensure that her health is not prejudiced by consumption of product not meeting prescribed standards. owner of mark, therefore, introduces specifications to ensure that product meets standards justifiably associated with reputation in mark. specification ensures observance of standards. Similarly, clause relating to exclusivity is not inconsistent with transaction of sale. Here again, much depends upon nature of product. Restrictive covenants of this kind are intended to protect intellectual and other property rights of party which markets its goods by requiring manufacturer to observe norms of specification and exclusivity. law is, therefore, consistent with transaction being regarded as transaction of sale, provided that requirements of contract of sale are met. They are in this case. contract entered into by assessee is not contract for carrying on any work within meaning of Section 194C. 33. For reasons aforesaid, we are of view that Revenue was not justified in treating assessee, as 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 distinct contract, no TDS is deductible under Section 194C as it is not contract for carrying out any work. Carrying out any work is sine qua non to attract Section 194C. contract under which contractor agrees to supply material which may be used by him later in carrying out work (11 of 22) [ITA-168/2011] will not render agreement to supply contract for carrying out any work. In fact, amendments in 2009 explains this position. When they amended definition of "Work" as contained in Explanation to Clause (4) of sub- clause (e). In fact, object and reasons for substituting Section 194C of Act makes it clear that amendment was introduced to bring clarity on 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 product according to requirement or specification of customer by using raw material purchased from person other than such customer as such contract is contract for "sale". This will however not apply to contract which does not entail manufacture or supply of article or thing (e.g., construction contract). It is also proposed to include manufacturing or supplying product according to requirement or specification of customer by using material purchased from such customer, within definition of "work". It is further proposed to provide that in such case TDS shall be deducted on invoice, value excluding value of material purchased from such customer if such value is mentioned separately in invoice. Where material component has not been separately mentioned in invoice, TDS shall be deducted on whole of invoice value. 13. When statute was amended to clarify word "work" under Section 194C by introducing aforesaid clause, it is obvious that amendment is only clarificatory in nature and therefore it is retrospective. Parliament did not intend to change law because of conclusion which resulted in litigation. Parliament though it fit to clarify by way of amendment so that litigation could be avoided. In view of aforesaid clarification and statutory provision, it is clear that "work" did not include manufacturing or supplying product according to requirement upon specification of customer by using raw-materials purchased from person other than such customer, as such contract is contract for sale. Further, it is also clarified (12 of 22) [ITA-168/2011] TDS shall be deducted on invoice value excluding value of material purchase from such customer, if such value is mentioned separately in invoice. It is only in cases where material component has not been separately mentioned in invoice, TDS shall be deducted on whole of invoice value. Therefore, whatever ambiguity which prevailed earlier is clarified. When in composite contract, if invoice is raised, separately mentioning value of material supplied, no deduction is permissible under Section 194C. In case where three separate agreements entered into and one such agreement is agreement for supply of material and because said agreement is part of composite transaction. Section 194C cannot be pressed into service to deduct tax at source. whole object of introducing Section is that it should deduct tax in respect of payments made for works contract. No deduction is permissible in respect of contract for supply of material for carrying out work. In fact, Tribunal by detailed consideration of statutory provisions, various terms of contract, legal position as explained in various judgments has rightly come to conclusion that, transaction in question is not case of composite contract. It is case of distinct contracts and contract for supply of materials is separate distinct contract in respect of which no deduction is permissible under section 194C of Act. 6. Commissioner of Income Tax and Income Tax Officer (TDS) vs. Bangalore District Cooperative Milk Producers Societies Union Ltd. (2013) 357 ITR 676 (Karnataka) Upon thoughtful consideration of submissions made at Bar, we find this Court in KPTCL's case has held that amendment to definition of 'work' U/s. 194C, (7)(iv) of IT Act, is clarificatory in nature and retrospective. In light of said ratio, if facts of this case are read, assessee has not supplied any material. However, tenderer has secured material from other source and has supplied same to assessee. May be in instant case, some of features of works contract may overlap, but however, that should not have been taken as necessary criteria to determine nature of work. explanation 'Works Contract' has definite legal connote. What is (13 of 22) [ITA-168/2011] stated in Section 194C(1) is for "carrying out any works" between contractor and specified person. work is also defined to exclude situation where material is not supplied by assessee. In view of specific definition of work, it is to be held that contract amounts to sale and not works contract. fact that Clause (a) definition of work was amended subsequently and not in statutory book for relevant years in question would not be of consequence because of ratio laid down in KPTCL's case. definition is clarificatory in nature. In that view, question of law is answered against revenue. appeals are dismissed. 7. Commissioner of Income Tax vs. Spice Telecommunications (P.) Ltd. (2014) 369 ITR 72 In present cases, admittedly, assessees did not supply any material whatsoever to manufacturer/supplier for supply of SIM/scratch cards as per their requirement or specification and therefore, transaction cannot be treated as contract for carrying out works within meaning of word "work" used in sub-section (1) of Section 194C of Act, before its amendment. After amendment, it is clarified that definition of word "work" will not include manufacturing or supplying product according to requirement or specification of customer by using material purchased from person other than such customer. If we apply this provision, case of assessees would stand strengthen further. In other words, even if first part of amendment i.e., sub-clause (e) of Clause (iv) of Section 194C is applied, case of assessees would not be covered by said clause since assessees did not supply any material to manufacturers. However, we need not take recourse to amendment. These appeals, in view of aforesaid order of Supreme Court, can be disposed of holding that placing of orders by assessees, in these cases, to manufacturers/suppliers to supply SIM/scratch cards as per their requirements cannot be treated as contract for carrying out works within meaning of sub-section (1) of Section 194C of Act as it existed prior to its amendment. Hence, we answer both substantial questions of law against revenue and in favour of (14 of 22) [ITA-168/2011] assessees and dispose of these appeals. 10. counsel for respondent in support of his submissions on question No.3 relied on 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, High Court as well as Tribunal and other Income Tax authorities should have approached question of allowability of interest on borrowed funds from above angle. In other words, High Court and other authorities should have enquired as to whether interest free loan was given to sister company (which is subsidiary of assessee) as measure of commercial expediency, and if it was, it should have been allowed. expression "commercial expediency" is expression of wide import and includes such expenditure as prudent businessman incurs for purpose of business. 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. 17. No doubt, as held in Madhav Prasad Jantia v. CIT (supra), if borrowed amount was donated for some sentimental or personal reasons and not on ground of commercial expediency, interest thereon could not have been allowed under Section 36(1)(iii) of Act. In Madhav Prasad's case (supra), borrowed amount was donated to college with view to commemorate memory of assessee's deceased husband after whom college was to be named. It was held by this Court that interest on borrowed fund in such case could not be allowed, as it could not be said that it was for commercial expediency. Thus, ratio of Madhav Prasad Jantia's case (supra) is that borrowed fund advanced to third party should be for commercial expediency if it is sought to be allowed under Section 36(1)(iii) of Act. 18. In present case, neither High Court nor Tribunal nor other authorities have examined whether amount advanced to sister concern was by way of commercial expediency. It has been repeatedly held by this (15 of 22) [ITA-168/2011] Court that expression "for purpose of business" is wider in scope than expression " for 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 process, Court also agreed that view taken by Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd. : 2002 (254) ITR 377] wherein High Court had held that once it is established that there is nexus between expenditure and purpose of business (which need not necessarily be business of Assessee itself), Revenue cannot justifiably claim to put itself in arm-chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. It further held that no businessman can be compelled to maximize his profit and that income tax authorities must put themselves in shoes of Assessee and see how prudent businessman would act. authorities must not look at matter from their own view point but that of prudent businessman. 3. Commissioner of Income Tax vs. Jugal Kishore Dangayach (2014) 265 CTR 215 (Rajasthan) 11. We have considered arguments advanced by learned counsel for Revenue and in our view this is also finding of fact as recorded by Tribunal as well as CIT(A). It is not disputed that assessee had opening capital of Rs. 1.42 crores at beginning of year and Rs. 1.88 crores at end of year. It is also admitted fact that assessee had trade credits to extent of Rs. 1.57 crores on which no interest was being paid. It is also admitted fact that assessee had received more than Rs. 60 lacs as advance from customers on which no interest was paid. Therefore, when to this magnitude on which no interest was payable, AO was not justified in disallowing interest. Further apart from it assessee has been able (16 of 22) [ITA-168/2011] to prove that assessee had trade dealings with M/s. Tirupati Pulses (P) Ltd. to whom it is alleged by AO that assessee advanced more than Rs. 80 lacs. It is admitted position that assessee made purchases to tune of Rs. 21,24,06,662 from M/s. Tirupati Pules (P) Ltd., which is based on audit report and advances, if any, were towards aforesaid purchases made by respondent/assessee. So there was no occasion for assessee to have charged any interest from concern with whom it had trade dealings, may be concern is related or not, it does not make any difference. Once it had been proved by assessee that it had trade transactions with persons to whom advances are made, then in our opinion, looking to commercial and business expediency, one is not required to charge interest. assessee is to manage its own affairs looking to commercial/business expediency and decide whether to charge interest or not. 21. In view of above facts and circumstances of case, Tribunal has correctly come to conclusion that interest was rightly allowable on basis of 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 impugned order. 4. Commissioner of Income Tax-7 vs. Reliance Communications Infrastructure Ltd. (2012) 260 CTR 159 (Bombay) 9. In S.A. Builders, Assessing Officer had observed that assessee had transferred certain amount to its subsidiary out of cash credit account in which there was debit balance. Assessing Officer found that assessee had diverted its borrowed funds to sister concern without charging any interest and that consequently, proportionate part of interest relating to that amount, out of total interest paid by assessee to Bank, had to be disallowed. CIT(A) had observed that out of total amount advanced by assessee to its subsidiary, only amount of Rs. 18 lakhs had nexus with borrowed funds and he had directed Assessing Officer accordingly to calculate disallowance. Tribunal allowed appeal by Revenue and dismissed appeal of assessee. order was confirmed (17 of 22) [ITA-168/2011] by High Court. Supreme Court observed that Income Tax authorities, Tribunal as well as High Court had approached matter from erroneous perspective. Supreme Court held that where assessee had borrowed funds from Bank and lent some of them to subsidiary as interest free loan, test to be applied is whether this was matter of commercial expediency. expression "commercial expediency", held Supreme Court, is expression of wide import and includes such expenditure as prudent businessman incurs for purpose of business. expenditure, which is commercially expedient, may not be incurred under legal obligation, but so long as it meets requirement of commercial expediency, it has to be allowed. However, Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if assessee advanced money to sister concern. Where amount is advanced to sister concern, for personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted Supreme Court, where holding company "has deep interest in its subsidiary advances borrowed money to subsidiary and same is used by subsidiary for some business purposes, assessee would.. ordinarily be entitled to deduction of interest on its borrowed loans." Supreme Court accordingly set aside all orders passed by authorities below including judgment of Tribunal and of High Court and remanded matter for fresh decision. 10. In present case, there is finding of fact by CIT(A) and by Tribunal that as matter of fact, borrowed funds were not used by assessee for purposes of investment in shares of its wholly owned subsidiary Reliance Infocomm Ltd. or for making advances to Reliance Industries Ltd. But independent of that, in view of decision of Supreme Court in S.A. Builders what is significant is as to whether investment and advances made were commercially expedient and for purpose of business. In this regard, assessee had pointed out before CIT(A) that it is engaged in business of providing telecommunication infrastructure which mainly consists of Pan India Fibre Optic Network. Reliance Infocomm Ltd. is wholly owned subsidiary of assessee which is engaged in (18 of 22) [ITA-168/2011] business of providing telecommunication services. assessee made investments in equity shares of its subsidiary and claimed that this was with view to provide integrated telecommunication services. case of assessee was that those investments were to ensure utilization of telecommunications infrastructure of subsidiary and was strategic investment for furthering business prospects in area of providing telecommunication services. As regards advance which was made by assessee to Reliance Industries Ltd. (RIL) assessee pointed out to CIT(A) that it was required to import equipment under EPCG Scheme. obligations under EPCG Scheme were required to be backed by bank guarantees which in turn demanded security for issuance of guarantees. assessee entered into arrangement with RIL to which it advanced sum of Rs. 476 crores against which RIL provided counter guarantees to financial institutions equivalent to three times amount of margin kept by assessee with RIL. Now, having regard to this factual background, both CIT(A) and Tribunal held that investments made in wholly owned subsidiary and money advanced to RIL were for furthering business of assessee. findings of both CIT(A) and of Tribunal are consistent with judgment of Supreme Court in S.A. Builders. Where assessee, as in present case, has significant interest in business of subsidiary and utilizes even borrowed money for furthering its business connection, there is no reason or justification to make disallowance in respect of deduction which is otherwise available under Section 36(1)(iii). Counsel appearing on behalf of Revenue submits that there is distinction between advance, which is payment handed over to some one as loan and investment which is money placed into financial schemes, shares or property with expectation of making profit. 4. We are unable to accept that such distinction will have any legal consequence in so far as entitlement of assessee to claim deduction under Section 36(1)(iii) is concerned. In present case, when assessee advanced amount to RIL that was with view to furthering business of assessee. RIL in turn was to execute counter guarantees in (19 of 22) [ITA-168/2011] favour of financial institutions for benefit of discharge of EPCG obligations by assessee. That was security for guarantees which those institutions were required to execute under EPCG Scheme. funds which were invested in wholly owned subsidiary were again for purposes of business of assessee. There is evidently significant interest of assessee in business of its subsidiary since both assessee and subsidiary are engaged in providing telecommunication services. Consequently, we are not inclined to interfere with order of Tribunal. There is finding of fact that interest free funds borrowed are not utilised for purposes of both transactions. But quite apart from that, finding is 4 Compact Oxford Reference Dictionary pages 11 and 436 that funds were deployed as matter of commercial expediency and to further business of assessee. latter finding is independent of whether borrowed funds were or were not utilized, for in view of judgment of Supreme Court held, fact that borrowed funds were utilized for making investments or, as case may be, for making advances would not disentitle assessee to deduction so long as business expediency exists. Consequently, we answer questions of law as framed in affirmative. 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 amount of Rs. 10.29 crores was debited to account of sister concern in respect of payment made under Clause 3.3(b) of Article 3.1 of share purchase agreement or whether amount was actually paid to sister concern and used by it for purpose of business, is immaterial. Either way amount was used for business of sister concern. It is not even suggested that advance was used by sister concern for any purpose other than for purposes of its business. Nor was such case raised before us. doubt, if any, is set at rest by memorandum of appeal and written submissions filed by appellant before CIT (Appeals). As Mr. Jain rightly pointed out, in (20 of 22) [ITA-168/2011] memorandum of appeal, appellant expressly stated that it had advanced amount of about Rs. 10.29 crores to its sister concern as measure of commercial expediency for purpose of business. In written submissions, appellant inter alia stated that appellant and sister company were in hotel business; that Board of Directors of two companies was same; that appellant purchased shares of sister company as investment and that investment and advances were made for purposes of business. From order of CIT (Appeals), it is evident that department never contended that amounts were not advanced for commercial expediency. Nor was it contended that amounts advanced were used by sister company for any purpose other than for purpose of its business. Indeed, such case was not even advanced before Tribunal. 10. CIT (Appeals) was, therefore, entirely justified in coming to conclusion that amount was advanced by appellant to its sister concern on account of commercial expediency and that advance was used by its sister concern for purposes of its business. additional facts further establish findings. 11. Tribunal's observation that there is nothing on record that money advanced by appellant to its sister company had been used as measure of commercial expediency, was not justified. appellant furnished all documents in this regard. appellant expressly stated that amounts had been utilized for commercial activity. This assertion was never denied. appellant was not required to do anything further to establish its assertion that its sister company had utilized amounts for purposes of its business. finding of Tribunal is not based on any material. It is important to note that Tribunal had not even suggested that such case was put to appellant or its authorized representative and that despite same appellant failed to establish same. 18. In circumstances, question of law is answered in favour of appellant and against department. order of Tribunal is set aside. appellant shall be entitled to 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) impugned order of Tribunal has allowed Respondent Assessee's appeal before it on issue raised herein by following its decision rendered in respect of same Respondent Assessee for Assessment Year 1985-86. (b) grievance of Revenue before us is that interest attributable to interest free advance of funds made to its subsidiaries out of interest bearing funds cannot be allowed as deduction u/s 36(1)(iii) of Act in view of decision of this court in Phaltan Sugar Works Ltd. v. CWT (1994) 208 ITR 989/72 Taxman 325 (Bom.). This reliance upon decision of this Court in Phaltan Sugar Works Ltd. (Supra) is of no avail as it has been overruled by Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1/158 Taxman 74 holding that test of commercial expediency is to be applied. (c) Mr. Suresh Kumar, learned Counsel appearing for Revenue, states that nothing is available on record to indicate any challenge in appeal by Revenue to order of Tribunal for A.Y. 1985-86. impugned order merely relies upon its order for Assessment Year 1985-86. (d) In above view, we proceed on basis that Revenue has accepted Tribunal's order for Assessment Year 1985-86. Further, no distinguishing features in subject Assessment Year to that existing in Assessment Year 1985-86 have been pointed out. Therefore, question as raised herein does not give rise to any substantial question of law. Thus, not entertained. 11. Considering evidence on record, we are of opinion that view taken by tribunal in view of clarification issued in 2006 which was part of tribunal judgment in 2009 we are in complete agreement with view taken by tribunal. (22 of 22) [ITA-168/2011] 12. Hence, issues are answered in favour of assessee and against department. 13. appeal stands dismissed. (INDERJEET SINGH),J. (K.S. JHAVERI),J. Bmg/81. Commissioner of Income-tax, Kota v. Daswani Classes Ltc