O/TAXAP/1166/2011 ORDER IN HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1166 of 2011 With TAX APPEAL NO. 538 of 2017 With TAX APPEAL NO. 539 of 2017 DY COMMISSIONER OF INCOME TAX,BHARUCH CIRCLE, BHARUCH....Appellant(s) Versus EUPHORIC PHARMACEUTICALS PVT LTD....Opponent(s) MR KM PARIKH, ADVOCATE for Appellant(s) No. 1 MR TEJ SHAH, ADVOCATE for Opponent(s) No. 1 CORAM: HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MR.JUSTICE BIREN VAISHNAV Date : 28/08/2017 ORAL ORDER (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. In Tax Appeals No. 538 and 539 of 2017, Revenue has disputed judgement of Tribunal deleting disallowance of interest on lending of sister concern by respondent- assessee. While taking-up hearing of these tax appeals, learned counsel for Revenue pointed out that in case of this very assessee, such issue was being admitted by this Court in Tax Appeal No. 1166 of 2011 in following terms: 1. We have heard Mr. K. M. Parikh, learned counsel Page 1 of 5 Downloaded on : Sat Aug 10 14:48:58 IST 2019 O/TAXAP/1166/2011 ORDER appearing for appellant. 2. Admit. We formulate substantial question of law as under : Whether on facts and in circumstances of case, Tribunal was right in law in deleting disallowance of interest on account of diversion of interest bearing fund by assessee to its sister concern on ground that said advances were made for assessee's own business interest ? 3. Issue notice to respondent. Paper book be filed within three months. 2. We had, therefore, ordered all three tax appeals to be notified together for hearing. 3. We have heard learned counsel for Revenue of these tax appeals. We may record facts from Tax Appeal No. 1166 of 2011. respondent-assessee had filed return of income for assessment year 2006-07. One of issues arising out of such return was interest expenses on borrowed funds. Assessing Officer noticed that part of funds were diverted for funding sister concern. He disallowed expenditure, upon which, assessee approached CIT (Appeals) who deleted disallowance, upon which, Revenue approached Tribunal. Tribunal noted that sister concern Euphoric Laboratory Prvt Ltd. was exclusively making sales on behalf of assessee in earlier year for which, it was also paid commission. During period relevant to assessment year, sister concern could not recover sales collection. Page 2 of 5 Downloaded on : Sat Aug 10 14:48:58 IST 2019 O/TAXAP/1166/2011 ORDER Assessing Officer, therefore, charged interest on outstanding balance in account of assessee and added sum to return of income. Tribunal confirmed view of CIT (Appeals) inter alia on grounds that sister concern, to whom funds were transferred, was exclusively in promoting sales of assessee's products. It is also continuously incurring losses and assessee had, therefore, financed various expenses to concerns which was also in interest of assesse's own business. Tribunal was, therefore of opinion that there was commercial justification in assessee doing so. Tribunal relying on decision of Supreme Court in case of S.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) amd anr reported in 288 ITR 1 confirmed view of CIT (Appeals) making following further observations: 8. We find that disallowance is not justified in view of fact that said sister concerns to whom funds are transferred are exclusively engaged in promoting sales of assessee's products. Further, these concerns were continuously incurring losses on account of inadequate margin allowed to them by assessee. Hence, assessee had to finance various business expenses of these concerns on interest of assessee's own business. Hence, there was no question of charging interest to them as advances were for assessee's own business interest. We find that there is commercial justification for advances given and hence disallowance of interest on account of diversion of funds is not justified as per decision of Suprme Court in case of S.A. Builders Ltd. (supra). Page 3 of 5 Downloaded on : Sat Aug 10 14:48:58 IST 2019 O/TAXAP/1166/2011 ORDER 4. It can thus be seen that CIT (Appeals) as well as Tribunal both, after examining facts on record, found that there was sound commercial expenses in assessee financing activities of sister concern, who was acting as sales agent of assessee and was otherwise in dire financial constraint. Supreme Court in case of S.A.Builders Ltd vs. Commissioner of Income Tax (Appeals) amd anr (supra) had made following observations: 23. In our opinion, decisions relating to Section 37 of Act will also be applicable to Section 36(1)(iii) because in Section 37 also expression used is "for purpose of business". It has been consistently held in decisions relating to Section 37 that expression "for purpose of business" includes expenditure voluntarily incurred for commercial expediency, and it is immaterial if third party also benefits thereby. Thus in Atherton vs. British Insulated & Helsby Cables Ltd (1925)10 TC 155, it was held by House of Lords that in order to claim deduction, it is enough to show that money is expended, not of necessity and with view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly to facilitate carrying on business. above test in Atherton s case (1925)10 TC 155, has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1, CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 etc. 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 Page 4 of 5 Downloaded on : Sat Aug 10 14:48:58 IST 2019 O/TAXAP/1166/2011 ORDER 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. 5. These principals were reiterated by Supreme Court in cases of Hero Cycles P. Ltd vs. Commissioner of Income Tax reported in 379 ITR 347 holding that advance to subsidiary pursuant to undertaking given to financial institution by assessee to provide additional margin to subsidiary to meet working capital for meeting cash losses could not be disallowed as business expenditure. 6. Under circumstances, we hold question framed in Tax Appeal No. 1166 of 2011 against Revenue. Resultantly, all three tax appeals are dismissed. (AKIL KURESHI, J.) (BIREN VAISHNAV, J.) Jyot i Page 5 of 5 Downloaded on : Sat Aug 10 14:48:58 IST 2019 Dy Commissioner of Income-tax, Bharuch Circle, Bharuch v. Euphoric Pharmaceuticals Pvt. Ltd