| COURT: | Supreme Court |
| CORAM: | A.K. Sikri J., Rohinton Fali Nariman J. |
| SECTION(S): | 36(1)(iii) |
| GENRE: | Domestic Tax |
| CATCH WORDS: | business expenditure, Interest |
| COUNSEL: | S. Ganesh |
| DATE: | November 5, 2015 (Date of pronouncement) |
| DATE: | November 26, 2015 (Date of publication) |
| AY: | 1988-89 |
| FILE: | Click here to download the file in pdf format |
| CITATION: | |
| S. 36(1)(iii): Law on when interest expenditure on loans diverted to sister concerns and directors can be allowed as business expenditure explained | |
(i) Insofar as loans to the sister concern / subsidiary company are concerned, law in this behalf is recapitulated by this Court in the case of ‘S.A. Builders Ltd. v. Commissioner of Income Tax (Appeals) and Another’ [2007 (288) ITR 1 (SC)]. Once it is established that there is nexus between the expenditure and the purpose of 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. It further held that no businessman can be compelled to maximize his profit and that 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.
(ii) Applying the aforesaid ratio to the facts of this case as already noted above, it is manifest that the advance to M/s. Hero Fibres Limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assessee to the effect that it would provide additional margin to M/s. Hero Fibres Limited to meet the working capital for meeting any cash loses. It would also be significant to mention at this stage that, subsequently, the assessee company had off-loaded its share holding in the said M/s. Hero Fibres Limited to various companies of Oswal Group and at that time, the assessee company not only refunded back the entire loan given to M/s. Hero Fibres Limited by the assessee but this was refunded with interest. In the year in which the aforesaid interest was received, same was shown as income and offered for tax.
(iii) Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its Directors.
(CIT v. Dalmia Cement (B.) Ltd [2002 (254) ITR 377] referred)
Logically well concluded decision.Hats off.
OFFHAND: A welcome verdict, well reasoned and founded on sound logic. long awaited though.The enactment replete with/ subjected to varying kind of controversies=s, on widely / mutually distinct factual matrix of numerous cases, has now been broadly interpreted; rightly so,- the thus far maligned provisions, by the apex court construing, in its wisdom, invoking and applying the very basic and fundamental principle of ‘commercial expediency’, which has been historically. time and again, reiterated,and well established. It is only expected that,at least at this late hour the Revenue will realize its folly and make speedy amends to the hardship meted out to taxpayers for too long to be taken in the stride.
Foot Note: To repeat, may you refer once again, the analytical study attempted / the view points aired in the published article titled – Section 14 A of Inconme-tax Act – in Interpretation of -A Critique” – (2009)14 CPT pg. 819-825.
I totally agree with you Shri VSwami. Way back in the late 1970s , while applying provisions of section 104 of income tax act 1961 relating to income tax on undistributed income of certain companies( now omitted by F.A. 1987, w.e.f.1-4-1988) we used to be told to put ourselves in the shoes of the businessmen. A lot of litigation will be avoided if AOs put them in the shoes of businessmen while applying the law and appreciate ” commercial expediency “.
There is a history behind the word FUCK.It is the most versatile word in the English language.Just Google and you will get to know the versatility of the word.It was the costom that for a normal act of the human nature one had to obtain permission of the King.The CBDT abrogated all the assessing powers of the erstwhile ITO and conferred it on the direct recruit officers.The king realised the folly and have givenup, and conferred that right back to the citizens to do what the nature ordained.But the CBDT has not.If it does how does it get the dow !!!!
A matter that needs lot of thought. Having got used to the luxury it is difficult to give up.
I AM THANK FULL TO THE CREATOR THAT THE STRUCTURE OF THE CELL HE CREATED MILLIONS OF YEARS BACK IS STILL PERFECTLY FUNCTIONING.THAT IS THE RESULT OF METICULOUS THOUGHT WITHOUT ANY SELFISH ENDS IN MIND.WHEN ‘SWARTH ‘ENTERS A CREATION WITH ULTERIOR THOUGHTS DEFECTS WILL TURN IN REGULARLY. LIKE THE HOLY TEXTS WHICH ARE TINKERED BY HUMANS LOOSES ITS VALUE SO ALSO APPLICATION OF THE PROVISIONS DISHONEST INTENTIONS LEAVES A LOT TO BE DESIRED FROM THE ADMINISTRORS.LIKE WHAT SWAMY HINTED IN THE LAST SENTENCE OF HIS COMMENT
Instant
Should regard be had to the last amendment of Rule 8D made effective from June 1 2016 (refer the write-up recently displayed @ Taxguru.com), the indelible impression anyone- concerned and conversant with the topic- is expected to have been left with cannot be in its favor. To put it differently, through the referred amendment there has been no indication of any legislative attempt at simplifying the law.Instead, that is sensed to be replete with scope for a fresh spate of controversy and dispute, likely to prove inconclusive.
For viewpoints shared to that effect,may look up the comment vide Post on Facebook.