Sonia Gokani, J.:— To briefly state, the facts are that for the assessment year 2001–02, during the course of the assessment proceedings, it was noticed by the Assessing Officer that the company had incurred heavy interest expenses to the tune of Rs. 59,83,543 and, on the other hand, it had given interest-free loans to R.R Family Trust (Kashiram Textiles Ltd.) to the tune of Rs. 1.05 crores and to Sagar Textile Mills to the tune of Rs. 18.40 crores. On calling for the explanation for interest-free loans and duly considering the submissions of both sides, the Assessing Officer disallowed the interest to the extent of Rs. 18,66,000 of the interest-free loans advanced to both the parties on the ground that the same was not incurred for business expenses.
2. This decision of the Assessing Officer came to be challenged before the Commissioner of Income-tax (Appeals), which set aside the order of the Assessing Officer and deleted the addition of Rs. 18,66,000. It sought to rely on the precedent decision of the Appellate Tribunal given in the case of Torrent Financiers v. Asst. CIT reported in [2001] 73 TTJ 624 (Ahd). The Revenue challenged the same before the Income-tax Appellate Tribunal, which upheld the order of the Commissioner of Income-tax (Appeals). The impugned order came to be challenged in the present tax appeal proposing the following question of law which had been admitted earlier, vide order dated February 11, 2008, as substantial question of law for consideration of this court:
“Whether the Appellate Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income-tax (Appeals) deleting the disallowance of Rs. 18,66,000 made by the Assessing Officer on the ground that the assessee had given interest-free loans to associate concerns out of interest bearing funds?”
3. Though notice has been served to the respondent, no one has contested the same. On hearing learned counsel, Mr. Manish Bhatt, and on closely examining the paper-book produced in this case, this appeal is decided.
4. As can be noted from the order of the Tribunal, the Assessing Officer disallowed the interest solely on the ground that the assessee had given interest-free loans to the associate concerns, viz., R.R Family Trust and Sagar Textile Mills and this disallowance, in appeal the Commissioner of Income-tax (Appeals) deleted by holding that the amount advanced to both R.R Family Trust and Sagar Textiles Mils were not given during the year under consideration, but the same was given in the earlier years. The Commissioner of Income-tax (Appeals) had also taken note of the fact that there was sufficient funds available with the assessee-respondent on which there was no interest liability that had been incurred. In such circumstances, relying on the case of Torrent Financiers (supra), it found that the disallwoance was not justifiable.
5. The Tribunal on noting these details, in terms held that there was nothing contrary that could be brought on record by the Department. The assessee's equity share capital Rs. 3.85 cores and reserve and surplus of Rs. 5.52 crores also were noted by the Tribunal. It found that the interest-free funds available with the assessee was far greater than the loan advanced to the sister concerns and as a corollary to that, it concluded that the borrowed money was not utilized for the purpose of advance to the sister concerns, as had been noted by the Assessing Officer. What had weighed with the Tribunal is the fact that the entire interest-free funds included owner's own capital and accumulated profits and other interest-free credits and loans and if the total interest-free advances including the debit balance of the partners did not exceed the total interest-free funds available with the assessee, interest was not disallowable merely on account of the utilization of the funds for non-business purposes.
6. Thus, as can be seen the Tribunal actually relied on the findings given in case of Torrent Financiers (supra) and furthermore there was nothing contrary that could be brought on record by the Department for it to hold otherwise. Factually, it found huge funds were available without any interest liability with the assessee and that there was no evidence to hold that the borrowed money was utilized for the purpose of advance to the sister concerns. All these aspects cumulatively led the Tribunal to hold that the disallowance made only on the ground that advances were given out of the borrowed funds, holding the assessee ineligible for allowance of interest by the Assessing Officer of the sum of Rs. 18.66 lakhs was not sustainable.
7. The Tribunal has correctly approached the issue which has been proposed in the present tax appeal. When there was no evidence brought on record by the Department for the Tribunal to hold otherwise than what has been concluded by way of any material, we hold that the issue is appropriately concluded in favour of the assessee and against the Revenue. We may refer to the judgment of the apex court at this stage given in case of S.A Builders Ltd. v. CIT reported in [2007] 288 ITR 1 (SC) where the question was whether interest on funds borrowed by the assessee to give an interest-free loan to sister concern should be allowed as deduction and the apex court ruled thus (pages 7 and 8):
“We have considered the submission of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and, hence, we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct….
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) on interest-free loan. The test, in our opinion, in such a case is really whether this was done as a measure of commercial expediency…
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….
We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 (Delhi), that 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/’
8. Accordingly, the question is answered in favour of the assessee by the apex court. In this tax appeal it is to be specified here that considering the material on record and keeping in view substantial interest-free funds and business expediency that the Commissioner of Income-tax (Appeals) and the Tribunal held the issue in favour of the assessee.
9. There is absolutely no perversity in such findings. On the contrary, they are conforming to the well laid down guiding principle on the subject. In the premise, the question of law needs to be answered in favour of assessee and against the Revenue. The tax appeal is dismissed accordingly and stands disposed of.