ITA No. 4136/Del/2013
“1. On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the disallowance of Rs.50,41,892/- on account of royalty and of Rs.82,85,000/- on account of dvertisement expenses, made u/s 40A(2)(b) of the I.T. Act, 1961.
2. The appellant craves leave to add, alter or amend any ground of appeal raised above at the time of hearing.
ITA No. 4024/Del/2013
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad both in the eye of law and on facts.
2. On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the action of A.O. in disallowing an amount of Rs.1,00,20,920/- out of interest paid to Anant Raj Industries.
3.(i) On the facts and circumstances of the case, the learned CIT(A) has erred both on facts and in law in confirming the disallowance of interest despite the fact that the interest is being paid only on the unpaid amount of consideration for fixed assets.
(ii) That the learned CIT(A) has erred both on facts and in law in rejecting the contention of the assessee that the interest is paid only on amount borrowed for business purposes and there is a direct nexus between the amount borrowed and interest paid thereon.
4. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”
2. The relevant facts of the case are that the assessee who in the year under consideration was engaged in the business of educational activities declared an income of Rs.2,11,15,617/-. The case was selected for scrutiny after issuance of notice u/s 143(2). In the course of the assessment proceedings, the assessee was required to explain the allowability of interest expenses in view of the fact that the assessee had given interest free advance and loans to its sister concerns. In view of thereof, the assessee was required to explain why expenses on interest on loan be allowed as an expenditure when there is a diversion of funds to Planman Group of Companies by the assessee. Considering the reply of the assessee which has been extracted in page 2 & 3 of the assessment order, the AO concluded that the assessee has failed to prove commercial expediency for advancing these loans to its sister concern. Accordingly, the interest on borrowed capital to the extent of the same was held to be for non-business purposes and an addition by way of a disallowance was made. The specific reasoning of the AO, considering the explanation of the assessee is reproduced hereunder for ready-reference:-
“The contention of the assessee is not acceptable, since, on one side they are paying the interest against mortgage of property amounting Rs.118 crore and simultaneously on the other side they have paid loan and advances to the following companies in which the directors has substantial interest as interest free, as under:-
Planman Consulting (P.) Ltd. 2,53,23,387/-
Planman MArcom (P) Ltd. 94,88,890/-
Planman Media (P.) Ltd. 9,88,00,000/-
1336,12,277/-
Besides, assessee is paying interest on loan amounting to Rs.88,500,000/-.”
2.1. In support of the view taken, reliance was placed upon the following decisions:-
(i) CIT-I, Ludhiana V vs ABhishek Industries Ltd. [2006] 156 TAXMAN 257 (Punj. & Har.);
(ii) K.Somasundaram & Brothers v. CIT [1999] 238 ITR 939 (MAD.);
(iii) CIT v. H.R.Sugar Factory (P.) Ltd. [1991] 187 ITR 363; and
(iv) CIT vs V.I.Baby & Co. [2002] 123 TAXMAN 894 (Ker.).
2.2. In view of the above judicial precedent the proportionate disallowance of interest was worked out in the following manner resulting in Rs.1,00,20,920/-:-
“Therefore, in view of the above discussions and principle laid down in various judicial pronouncements, the proportionate interest is being disallowed as:
85,00,000/- X 13,36,12,277/- = 1,00,20,920/-
118,00,00,000/-”
2.3. Apart from the above addition, the AO in the course of the assessment proceedings observed that royalty to the extent on Rs.10,08,37,857/- was paid to M/s Planman Consulting India (P.) Ltd. and Rs.16.57 crore as advertisement expenses to M/s Planman Media (P.) Ltd.(both these companies were under the same management). Accordingly he required the assessee to explain and justify the payment of royalty as well as advertisement payments to the said companies. The reply of the assessee has been extracted in para 5 by the AO. Rejecting the same, the AO invoking section 40A(2) made a disallowance of 5% of the amount booked for want of commercial expediency and reasonableness of the payments thereby resulting in the additions of Rs.50,41,892/- and Rs. 82,85,000/- on account of 5% of royalty payment and 5% of advertisement expenses respectively.
3. These additions were challenged in appeal before the CIT(A). The CIT(A) upheld the action of the AO in making disallowance u/s 36(1)(iii) in respect of the interest liability. Aggrieved by which the assessee is in appeal before us. Qua the addition on account of disallowance of royalty expenses and advertisement expenses, considering the explanation of the assessee the additions were deleted. Aggrieved by this the Revenue is in appeal in the present proceedings.
4. In the light of the above facts, Ld. SR. DR relied heavily upon the findings of the AO qua the departmental ground wherein referring to para 5 of the assessment order, it was his submission that in the facts where both the companies were admittedly under the same management, the assessee’s explanation accepted by the CIT(A) in paras 6.3 & 6.4 on facts should be reversed, as in the facts of the present case, excessive and unreasonable payment has been made to the associate concern and the AO is empowered to exercise his judgement in a reasonable and fair manner and the disallowance of 5% of the expenses claimed is a very reasonable disallowance and on facts, it should be upheld.
5. The Ld. AR, on the other hand, inviting attention to the explanation offered by the assessee before the AO which has been extracted in para 5 of the said order submitted that in appeal before the CIT(A), these facts were again relied upon. The submissions have been extracted in the impugned order.
Supporting his stand that the additions by way of disallowance of Royalty and advertisement expenses on facts was not warranted, attention was invited to the submissions extracted in para 5.3 & 5.4 of the order and referring to the same, it was submitted that none of these facts and finding have been assailed by the Ld. Sr. DR. Referring to the same, it was reiterated that the assessee is engaged in the business of providing, establishing, promoting, maintaining, educational solutions, conducting periodical or regular courses, short term courses for educational purposes through educational and management institutions, companies and other entities by entering into agreement for the said purposes has not been disputed or rebutted. Similarly the fact that it was already engaged in the conduction of courses in collaboration of a number of foreign universities in order to run the business more profitably and expand the sphere of the business for which purpose it was decided to engaged the Planman Consulting India Pvt. Ltd. (PCIPL), a company pioneer in the field of consultancy and for on the job training. The payment it was submitted was for providing on the job training and consultancy in running the assessee’s educational institutions more effectively and efficiently so that profit earning is enhanced.
The payment it was stated was made for the said purpose in order to make the team more efficient and enable the assessee’s company to use their skills efficiently and prudently for education and allied purposes.
5.1. Similarly qua the advertisement expenses, the payment it was submitted is not in dispute. The payment has been made exclusively for business purposes of the assessee and is for inserting the advertisements in the dailies and at times in magazines also. The fact that advertisements have been inserted it was submitted is also not in doubt. In this background where is the occasion for the Revenue to consider an adhoc disallowance simply because the booking of advertisements is done by an associate concern. The loans have been advanced for meeting this expenditure and no effort has been made to demonstrate that the payments are excessive or unreasonable. It was argued that as per record there is no allegation that an element of personal nature attached to the said expenditure. No cogent material has been brought in either by the AO or the Sr. DR to justify invoking the provisions of section 40A(2).
6. We have heard the rival submissions and perused the material available on record. It is worthwhile to extract the explanation offered by the assessee to the AO to justify the payment of royalty and advertisement expenses to the associate concerns in the same management from the assessment order itself:-
“Justification for claiming Royalty expense as revenue expenditure:
The assessee company international Institute of Planning & Management Pvt. Ltd. (IIPMPL) is engaged in the business of providing, establishing, promoting, maintaining, educational solutions, conducting periodical or regular courses, short term courses for educational purposes through educational and management institutions, companies and other entities by entering into agreements for the purpose. The company is already engaged in conduction of courses in collaboration of a number of foreign universities such as University of California and others. The company was incorporated in 2006. To run the business more profitably and enlarging the sphere of business it was decided to engaged the Planman Consulting India Pvt. Ltd. (PCIPL), a company pioneer in the field of consultancy and on job training. The PCIPL was engaged to provide on job training and consultancy in running our educational and management institutions more effectively and efficiently, so that, our company can earn more profit. The PCIPL is a leading company in imparting knowledge based consultancy. They are considered as an expert in knowledge domain more particularly with their dynamic and intellectual director namely Shri Arindam Choudhary. It was decided that the PCIPL will provide on job training which with make our team more efficient and use their skill in a prudent, competent, efficient and timely manner for education and allied purposes so as to provide the monetary advantage to the company either today or tomorrow.....................
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Advertisement expenses: The advertisements are inserted invariably in dailies so as to attract prospective students for enrolment in various courses. The advertisements are mostly inserted in daily newspaper across India. Sometimes these advertisements are also inserted in magazines.....................”
6.1. A perusal of the impugned order also shows that the said explanation was further elaborated by the assessee as per paras 5.3 & 5.5 of the impugned order:-
“5.3. Regarding the disallowance of Royalty made under Section 40A(2)(b), the appellant furnished the following submissions:-
........Our company international Institute of Planning and Management Pvt. Ltd. (IIPML) is engaged in the business of providing, establishing, promoting, maintaining, education solutions, conducting periodical or regular courses, short term courses for educational purposes through educational and management institutions, companies and other entities by entering into agreements for the purpose. The company is already engaged in conducting of courses in collaboration of a number of foreign universities such as University of California and others. The company was incorporated in 2006. To run the business more profitably and enlarging the sphere of business it was decided to engage the Planman Consulting India Pvt. Ltd. (PCIPL), a company pioneer in the field of consultancy and on job training. The PCIPL was engaged to provide on job training and consultancy in running our educational and management institutions more effectively and efficiently, so that, our company can earn more profit. The PCIPL is a leading company in imparting knowledge based consultancy. They are considered as an expert in knowledge domain more particularly with their dynamic and intellectual director namely Shri Arindam Choudhary. It was decided that the PCIPL will provide on job training which with make our team more efficient and use their skill in a prudent, competent, efficient and timely manner for education and allied purposes so as to provide the monetary advantage to the company either today or tomorrow.
The special features of such an engagement can be summarized as under:
* The consultancy/on job training was provided by experts and experienced professionals of PCIPL for increasing the efficiency of workforce of our company IIPMPL, so as to increase their earning capacity.
* It was decided to make annual payment (royalty) based on the formula of 5% of total receipts. Considering this, the payment of Rs.10,08 crore was made to PCIPL.
* The above expenditure was incurred to bring profits and monetary advantage to the company.
* The above expenditure was incurred for promoting the business prospects of the company.
* The company deducted tax at source (TDS) on such payments.
* The recipient company PCIPL has shown such receipts as its business income.
* By incurring such expenses the company has not acquired an intangible assets of the nature know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature...”
3.5.It is clearly from the above that the assessee made payment of royalty wholly and exclusively for the business purposes. The assessing officer has nowhere doubted the genuineness of the agreement as well as the fact of actual payment of royalty. There is no personal nature attached to the said expenses. The assessing officer has made disallowance by invoking the provisions of section 40A(2) of the Act. The provisions of said section does not permit the Assessing Officer to make disallowance just for the sake of making a disallowance. Nowhere he has been able to bring on record any excess payment made to the said company....”
6.2. Similarly qua the advertisement expenses, the relevant extract from the impugned order is reproduced hereunder:-
“5.5. Regarding the disallowance under Section 40A(2)(b) out of advertisement expenses, the appellant made the following submissions:-
........An amount of Rs.16.57 crores was paid during the year by the assessee to Planman Consulting India (P.) Ltd. It is not in dispute that the assessee made payment of advertisement wholly and exclusively for the business purposes. The Assessing Officer has nowhere doubted the genuineness and the fact of actual payment of advertisement. There is no the genuineness and the fact of actual payment of advertisement. There is no personal nature attached to the said expenses. The assessing officer has made disallowance by invoking the provisions of Section 40A(2) of the Act. The provisions of said section does not permit the Assessing Officer to make disallowance just for the sake of making a disallowance. Nowhere he has been able to bring on record any excess payment made to the said company. The AO has to bring certain cogent material on record to show that the payment made by the assessee is unreasonable. For this, he has to bring certain comparable instances to prove the same. This exercise, the AO somehow choses to skip and just made an adhoc disallowance.........”
6.3. It is in the above factual background that the CIT(A) decided the issue in favour of the assessee holding as under in paras 6.3 and 6.4 of the impugned order:-
6.3 “Regarding the Ground No.6 relating to payment of Royalty expenses, the appellant furnished before me the copy of the agreement between the appellant and Planman Consulting (P) Ltd.(PClPL}. The details of the agreement show that the said PCIPL was providing job training and consultancy services in running the education institution of the appellant more effectively. Details of various experts/professionals engaged by the PCIPL were also furnished before me. I find that the company had deducted TDS on all such payments. It is also undisputed that that the AD has also not cast doubts on the genuineness of the payment to PClPL. The AD had disallowed 5% of the royalty expenses invoking the provisions of Section 40A(2) in an adhoc manner. In order to make disallowance under same provision, the onus is on the AD to prove that such expenditure is excessive or unreasonable having regard to the fair market value for the goods, services or facilities or the legitimate needs of the business of the assessee or the benefit derived by them. On careful perusal of the assessment order, I find that the AD has in no way compared the reasonableness of the payment with respect to fair market value of the services provided by the PCIPL vis-a-vis outside parties. The AD also did not observe that the services provided by the PClPL were not for the benefit of the appellant and the benefit derived by the appellant was not commensurate. Moreover, since the said company i.e. PClPL and its Directors were charged to maximum marginal rate, there could not be an angle of tax avoidance either. It was not the case that the said PCIPL may have been claiming any losses in its return against which such payment would have been set off. Keeping in view the above, I hold that the AD was not justified in making an adhoc disallowance under Section
40A(2)(b) without satisfying the necessary conditions under that provision. Under the circumstances, the addition made by making disallowance of 5% of royalty expenses is deleted.
6.4 Regarding the payment of Rs.16.57 crores made to M/s Planman Media (P) Ltd., the appellant filed copy of Ledger Account, Audited Balance Sheet, Income Tax Return of that company and its P&L A/C. The appellant also furnished copies of invoices and bills in respect of the advertisement expenses. I find that during the current year that company had shown gross total income of Rs.2.48 crores. It was informed that the said company is publishing the following magazines:
- Business & Economy (weekly)
- 4 PS Business and Marketing (fortnightly)
- The Sunday Indian - English (weekly)
- The Sunday Indian - Regionals (weekly)
It was informed that IIPM had published full advertisement in these magazines from time to time. Relevant vouchers of the same and also the copies of the relevant publications were also shown to me during the appellate proceedings. I find that the Ld. AO has also not raised the issue of genuineness of such expenses. On careful consideration, I find that the appellant has charged the advertisement expenses in respect of publication in the above four magazines published by M/s Planman Media (P) Ltd. at the same rate at which it charged from outside parties. The AO could not make a case that such expenses did not bring any commensurate benefit to the appellant or the rates were excessive compared to the fair market value. In view of the same, the addition made by the AO on adhoc basis is not justified.”
6.4. In support of the decision, reliance was placed upon the decisions of the Jurisdictional High Court:-
(i) Casio India Ltd. (ITA No.10 of 2011);
(ii) CIT vs Citi Financial Consumer Fin. Ltd. (ITA No.-1820 of 2010);
(iii) Swatch Group (India) (ITA No.-871/2011);
(iv) CIT vs Salora International Ltd. (308 ITR 199)
6.5. In the context of the above facts and circumstances where admittedly in the case of royalty expenses, the assessee has received on the job training with the stated aim of improving its efficiency and effectively expand its growth with the enhancement of team efficiency and capability for the growth of the business sphere of the educational institution. The incurring of expenses has not been doubted. No effort let alone a cogent discussion in the order has been made by the AO nor any arguments have been advanced by the Revenue to justify how it has been concluded that the expenses were unreasonable and excessive. In the absence of any justification for making a 5% disallowance of the total expenses for royalty, we find no good reason to vary the finding arrived at in the impugned order. The finding of the CIT(A) in absence of any material to the contrary accordingly is upheld. Similarly qua the advertisement expenses it is seen that the fact on record is that advertisement have been inserted for propagating the business of the assessee is not in doubt. The mere fact that the booking of advertisement expenses has been done through the associate concern instead of the assessee directly by itself does not create any ground for making a disallowance. There is no evidence that in the magazines of the assessee there is a variance in the rates for the assessee as compared to outsiders. There should be some evidence on the basis of which the action of the AO can be held to be justified to show that the expenses are unreasonable or excessive. In the absence of any such evidence, an adhoc disallowance of 5% has rightly been rejected by the CIT(A). Being satisfied by the reasoning and finding, the departmental ground is dismissed.
7. Addressing the only issue agitated by the assessee in its appeal, Ld. AR submitted that the addition has been made on account of disallowance of proportionate interest expenditure in respect of the advance of Rs.13.36 crores made to the sister concern out of the interest paid to M/s Anant Raj Industries relying upon certain decisions. Inviting attention to the assessment order it was submitted that in response to this specific query made by the AO, the assessee had given a detailed reply stating that the property from which the business of the assessee is running was purchased for Rs.151 crore in September 2008. The specific property in Vill.-Shahoorpur, Tehsil-Hauz Khas, New Delhi it has been stated was purchased alongwith building and structure thereon. Out of this amount Rs.33 crore were paid as a down payment and on the balance of amount of Rs.118 crore, it was submitted payment is settled as per instalments comprising of two components namely principal and interest. The unpaid amount at the year end, it was submitted was reflected as secured loan from M/s Anant Raj Industries Ltd. in the balance sheet. The scheme it was pointed out is similar to what is offered by banks on housing loans where instalments are paid wherein a portion of the same is adjusted towards principal and a portion of it is adjusted towards interest. It was submitted that it has not been doubted by the Revenue that the said property has been used for the purposes of assessee’s business, it is a matter of record that the assessee in the year under consideration has functioned from the said premises. It was argued that it was also a matter of record that the assessee has returned an income from the business conducted in the year under consideration from the said premises. The business purposes, it was submitted stands established and has not even been disputed by the AO as he has only made a part disallowance. The loans advanced to the sister concerns it was submitted was out of the revenue generated by the assessee from its business and has not been taken as a loan. In the said background it was argued the Revenue cannot dictate to the assessee how to spend its money. It was his submission that there is no legal precedent on the basis of which the Revenue can presume to dictate to the assessee that it should first pay off M/s Anant Raj Industries and then consider advancing loans to its sister concern. It was his submission that how the assessee chooses to utilise its funds as per judicial precedent cannot be dictated by the AO. It was submitted that the facts are crystal clear and there is no dispute on the aspect that no loan has been raised by the assessee from the bank for advancing the loans to its sister concern. The loans were advanced to the sister concern for business purpose was advanced from its own revenues generated in the year under consideration. This position on a specific query was not disputed by the Ld. Sr. DR also. In these circumstances, the finding of the CIT(A) it was submitted is a factual finding which is full of mistakes and is an arbitrary finding. It was submitted that the Revenue is barred to make out a case that had the interest free advance not been made to the sister concern, the payment of interest to M/s Anant Raj Industries would have reduced. Attention was invited to similar arguments before the CIT(A). In these circumstances, reliance was placed upon SA Builders Ltd. vs CIT 288 ITR 1 (SC)(2006); ACIT vs Gillete Diversified Operation P. Ltd. & Others 2015 (4) TMI 49. The relevant extracts from the said decision extracted in the synopsis filed in support of assessee’s ground were also relied upon.
8. The Ld. Sr. DR, on the other hand, relied upon the consistent finding of the orders of the AO and the CIT(A) on the basis of which it was his submission that no doubt the assessee has not taken any loan from the bank but the fact remains that had the available funds been utilized for making payment towards the purchase of the specific land and building then the interest component of the payment would have been reduced.
9. We have heard the rival submissions and perused the material available on record. Before we address the same, it is considered appropriate to extract the justification and explanation offered by the assessee before the AO in support of its claim which has been extracted in the earlier part of this order also. For ready-reference, the same is reproduced again from the assessment order:-
“The assessee company purchased land situated in the revenue estate of village shahoorpur, Tehsil Hauz Khas, New Delhi together with building and structures raised thereon from Anant Raj Industries Ltd. The above property was purchased for Rs.151 crore in September 2008. Out of the above amount Rs.33 crore was paid initially as down payment and balance amount of Rs.118 crore was to be paid in instalments. The instalments were comprising of two components principal and interest. The unpaid amount at the year end was reflected as secured loan from Anant Raj Industries Ltd. in the balance sheet. The scheme was similar to the purchase of an assets on lease/hire where payments are made in monthly instalments termed EMIs. The above premises is being used by our company for running its educational institution which is the prime object of the business of the company.
From the above discussion following points emerge:
* The company purchased on immovable property/capital assets, which is being used for the purpose of business of the company.
* The above asset was acquired by making part payment initially and balance amount is being paid annually.
* The company is paying interest on the unpaid balance at the year end under a scheme of EMIs comprising of principal and interest.
* The interest expenditure was incurred after the commencement of the business. The expenditure is not for any private or domestic purpose of the assessee company. It is in the capacity of a person carrying on business that this interest is paid.
* The payment of interest was for the purposes of the business of the assessee company, because in the event of failure to pay interest accruing due, the Anant Raj Industries Ltd. would enforce the lien, and the business of the assessee company would come to an end and that in any event the expenditure was necessary on grounds of business expediency and incurred in order directly or indirectly to facilitate the carrying on of business.
* The transaction of acquisition of the assets is closely related to the commencement and carrying on of the business. Interest paid on amount remaining due is in the normal course and is expended for the purpose of the business, which is carried on in the year of account. Interest is paid for the purpose of the business, it is laid out and expended wholly and exclusively for that purpose.
* The amount appearing in the balance sheet under the head secured loan from Anant Raj Industries Ltd. is infact unpaid principal amount at the year end towards such property.
* The unpaid amount of a capital assets cannot be termed as borrowed capital in cash and as there is no amount of loan receipt in cash the question of diversion of funds does not arise at all.
* The scheme of purchase/business expenditure is to be looked into from the point of wise prudent, pragmatic and ethical business man. The present scheme allowed the company to manage it cash flow and liquidity in effective and efficient manner.
The above discussion make it clear that the interest payment was towards the unpaid amount of capital assets and same was incurred wholly and exclusively for the purpose of business. Therefore, the interest on unpaid principal amount of capital assets is a business expenditure allowable u/s 37(1) of the IT Act.
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9.1. On considering the impugned order also it is seen that similar explanation has been reiterated in para 5.2 of the impugned order which is extracted hereunder:-
"------Our company purchased land situated in the revenue estate of village Shahoorpur, Tehsil Hauz Khas, New Delhi together with building and structures raised thereon from Anant Raj Industries Ltd. The above property was purchased for Rs.151 crore in September, 2008. Out of the above amount Rs.33 crore was paid initially as down payment and balance amount of Rs.118 crore was to be paid in instalments. The instalments were comprising of two components principle and interest. The unpaid amount at the year end was reflected as secured loan from Anant Raj Industries Ltd. in the balance sheet. The scheme was similar to the purchase of an asset on lease/hire where payments are made in monthly instalments termed EMls. The above premise is being used by our company for running its educational institution which is the prime object of the business of the company-----.” “----- The above discussion made it clear that the interest payment was towards the unpaid amount of capital assets and same was incurred wholly and exclusively for the purpose of business. Therefore, the interest on unpaid principle amount of capital assets is a business expenditure allowable under Section 37(1) of the I. T. Act.
The issue of alloability of interest as revenue expenditure on outstanding balance of principle amount of asset purchased have been settled long back by various courts in their judgments. Some of the case laws relevant on this issue are as under:
• Interest paid on outstanding balance of purchase consideration is deductible-Bombay steam Navigation Co. (1953) (P) Ltd. Vs. ClT (1965) 56
ITR 52(SC)
•Rahim Khatoon Vs. ClT (1987) 167 ITR 697 (AP).
· Expenditure on interest paid/payable on the unpaid purchase price of plant and machinery is deductible - Circular letter F.No.10/92/64-IT{A-1}, dated Sept.13, 1965 · Interest on deferred payment for purchase of machinery is allowable as a revenue expenditure - CIT Vs Sivakami Mills Ltd. {1997} 227 ITR465/95 Taxman 73 {SC}-------"
9.2. In the afore-mentioned peculiar facts and circumstances of the case, we find where admittedly no loan from any bank has been raised by the assessee for advancing loans to its sister concerns as the funds so advanced are generated from assessee’s own revenues. These facts are not disputed by the Revenue. Accordingly in the face of these admitted facts, we find that there is no legal precedent on the basis of which the claim of the Revenue can be held to be justified on facts. Infact legal precedent is to the contrary. The purchase of a specific property on instalment payment from which business of the assessee has been conducted is a matter of record. The business purpose of the purchase of the specific property is accepted by the AO as part of the payments towards M/s Anant Raj Industries and only proportionate disallowance is made on the ground that had the amounts not been advanced to the sister concern, the same would have reduced the interest component of the purchase price. The Courts have repeatedly held that the tax authorities cannot sit in the chair of the businessman and dictate how the business is to run. The decision of the Hon’ble Madras High Court relied upon in the case of K. Somasundaram & Bros. Vs. CIT (1999) is distinguishable on facts as apart from other reasons it is not a case where the funds are self-generated as in the facts of that case there is a borrowing of funds from the bank. On a similar reasoning, the decision in the case of CIT vs V.I. Baby & Co. [2002] referred to Kerala High Court is also distinguishable as the assessee firm therein advanced loans to partners and relatives which were admittedly not for business purposes the borrowing from the banks in those facts where the assessee is not a beneficiary of the investments made by the partners the disallowance of interest in proportionate to the advances made has been upheld. The facts, it is seen are entirely distinguishable as not only, no loan has been taken from the bank the loans advanced to the sister concern has been advanced for business considerations. In these circumstances, the decisions relied upon by the AR infact are fully applicable. For ready-reference, relevant finding from the decision of the Apex Court in the case of SA Builders Ltd. (cited supra):-
"We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (Bharat) Ltd. [2002] 254 ITR 377 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 businessmen 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."
9.3. Accordingly, in view of the detailed finding on facts and law which we have brought out above, we hold that the appeal of the assessee deserves to be allowed. Ordered accordingly.
10. In the result, the appeal of the Revenue is rejected and the appeal of the assessee is allowed.
The order is pronounced in the open court on 10th of June 2015.
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