Hindalco Industries Co. v. Commissioner Of Income-Tax

1. Heard Sri Vinod Upadhaya, advocate, assisted by Sri R.S. Agarwal, Advocate, for the assessee and Sri Shubham Agarwal for the Revenue.

2. This is a reference under section 256(2) of the Income-tax Act, 1961 (hereinafter referred to as “Act 1961”). The dispute relates to the assessment year 1989-90. The following question has been referred to be answered by this court by the Income-tax Appellate Tribunal (hereinafter referred to as “Tribunal”).

“Whether on the facts and in the circumstances of the case clis-allowance of the interest paid by the assessee on its borrowed funds in excess of 12 per cent, was justified under section 36(1) of the Income-tax Act, 1961, only because the assessee company had utilised its own funds to advance loans at a lower rate of interest to sister concern.

3. The assessee borrowed and had taken loan to the tune of Rs. 2,31,22,000. It paid interest to the bank and others to the tune of Rs. 68,07,000. The rate of interest paid to the bank was 16 per cent, whereas the rate of interest to other deposits ranges between 11 per cent, to 16 per cent.

4. The Assessing Officer came to the conclusion that market rate of interest was 16 per cent, yet the assessee advanced loan to the sister subsidiary company at a lesser rate of 6 per cent, or 12 per cent. The difference between interest, i.e., market rate and the rate at which loan advanced to sister company, was disallowed. It has been affirmed by the Commissioner of Income-tax (Appeals) (hereinafter referred to as “GIT(A)”) on the ground that the assessee was not a financing company, had it not advanced loan, money could have been available to the assessee for its own business purpose and to that extent it may not have borrowed from banks. It disallowed the difference of interest under section 36(1)(iii) of Act 1961, and upheld by the Tribunal also.

5. From the record, we find that it is not the case of the Revenue authorities that loan advanced to sister subsidiary company was for non business purpose. The Tribunal has recorded a finding concurrent with the Commissioner of Income-tax (Appeals) that no direct link could be established between borrowing and lending and it is also not the case that loan was not advanced for commercial expediency of the sister subsidiary companies. But on mere fact that the assessee company was a profit making company, itself has paid higher rate of interest hence it was not justified to advance loan on lower rate of interest, hence difference has been disallowed under section 36(1)(iii) of 1961 Act. The moot question is whether this approach of the Revenue is justified.

6. Section 36 talks of permissible deductions. One of such deduction under section 36(1)(iii) reads as under:

“the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession:

Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date, on which such asset was first put to use, shall not be allowed as deduction.”

7. It talks of interest in respect to capital borrowed for the purpose of business or profession.

8. There is nothing on record to show that loan advanced to the sister subsidiary was not in respect of capital borrowed for the purpose of business or profession.

9. This provision came up for consideration in S.A. Builders Ltd. v. CIT (Appeals), [2007] 288 ITR 1 (SC). The court held that the tern “for the purpose of business” is wider in scope than the expression “for the purpose of earning profits” and relied on its earlier decisions in Commr. Of Income Tax v. Malayalam Plantations Ltd., [1964] 53 ITR 140 (SC) and CIT v. Birla Cotton Spinning and Weaving Mills Ltd., [1971] 82 ITR 166 (SC). It held that if borrowed amount is donated for sentimental or personal reasons and not on the ground of commercial expediency, interest thereon would not be allowed under section 36(1)(iii) of the 1961 Act, but if it is advanced to a third party for commercial expediency it must be allowed and for that purpose reliance was placed on Madhav Prasad Jatia v. CIT, [1979] 118 ITR 200 (SC). The court referred to the following expression discussing scope of “commercial expediency” and said (page 8 of 288 ITR):

“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 has been allowable as a business expenditure if it was incurred on grounds of commercial expediency.” In S.A. Builders Ltd. v. CIT (Appeals) (supra) the court held that true test is, whether the amount advanced to subsidiary or associated company or any other party was advanced as a measure of commercial expediency. If so, interest was deductible.

10. Recently in Hero Cycles P. Ltd. v. CIT, [2015] 379 ITR 347 (SC), the matter has been discussed and the court agreeing with, the Delhi High Court judgment in CIT v. Dalmia Cement (B.) Ltd., [2002] 254 ITR 377 (Delhi), has observed:

“Once it is established that there was a nexus between the expenditure and the purpose of business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume’ the said role to decide how much is reasonable expenditure having regard to the circumstances of the case. The court also observed that no businessman can be compelled to maximise his profits and the income-tax authority must put themselves in the shoes of assessee and see how a prudent business-iman would act. The authorities must not look into the matter from their own point of view but that of a prudent businessman.”

11. In the present case, financial condition of the sister concern was not good and to help those, for their smooth running, loan was advanced and a lesser rate of interest was charged. Both the sister companies are subsidiary of the assessee and there is nothing per se adverse. For the welfare and proper functioning of the sister companies, the assessee in its wisdom, if decided to advance loan so that ultimately the sister company may function properly, the assessee being holding company would also be benefitted. Thus, the loan advanced to sister companies was for commercial expediency and not for any charity, sentimental or personal reasons.

12. We therefore, answer the question in favour of assessee and hold that assessee was entitled for deduction of interest under, section 36(1)(iii) and the view taken by the Tribunal otherwise is not correct. Reference is answered accordingly and stands disposed of.