DCIT Vs Deloitee Haskins and Sells (ITAT Ahmedabad)
The first controversy that arises for our adjudication whether the interest free advances were given by the assessee to its group concern as a measure of commercial expediency in the given facts and circumstances. The expression “commercial expediency” refers to those transactions/ expenditures which are not required to be incurred under any provisions of the law. But it refers to such expenditure, a prudent businessman incurs for the purpose of business. Such expenditures might not have been incurred under any legal obligation, but the same are allowable as a business expenditure if it was incurred on grounds of commercial expediency.
The “commercial expediency” depends upon the wisdom of the businessman and the Revenue has no role to play to decide as to what is “commercial expediency”. The Revenue cannot occupy the position of the assessee and assume the role to decide whether a particular expenditure is required to be incurred, having regard to the facts and circumstances of the case. There cannot be any compulsion on the assessee to maximize his profit. The income-tax authorities should enter into the shoes of the assessee to see how a prudent businessman would act in the given facts and circumstances. It is because the Revenue does not seem to have understood the market conditions in which businesses are carried on. But at the same time, the Income-tax Department (Revenue), beyond doubt, is not precluded from assuming powers against those who try to circumvent law through unacceptable and prohibited means.
Likewise, the provisions of section 37(1) of the Act does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may be direct or may even indirectly benefit the business in form of increased turnover, better profit, growth, etc. Various courts have held that as long as the expenditure incurred is “wholly and exclusively” for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not. Courts have also held that if the expenditure is incurred for the purposes of the business, incidental benefit to some other person would not take the expenditure outside the scope of Section 37(1) of the Act. Further, it is settled law that the commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure.
FULL TEXT OF THE ITAT JUDGEMENT
The captioned appeal has been filed at the instance of the Revenue against the order of the Learned Commissioner of Income Tax(Appeals)-4, Vadodara, dated 14/09/2017 (in short “Ld. CIT(A)”) arising in the matter of assessment order passed under s. 143(3) of the Income Tax Act, 1961 (here-in-after referred to as “the Act”) relevant to the Assessment Year 2014-15..
2. The Revenue has raised the following grounds of appeal:
1. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in allowing the interest of Rs. 1,92,18,117/- by treating it as business expenditure ignoring the fact on record that the AO had disallowed interest of Rs. 1,92,18,117/- at the rate of 5.81% on interest free loan amounting to Rs.33,07,76,535/- given by the assessee as it agreed and also opening 85 closing balances of advances to DTTIPL were same at the figure of Rs. 68,51,33,061/-. The assessee had not submitted any evidences as to what it had gained from DTTIPL.
2. On the facts and circumstances of the case and in law, the Ld.CIT(A) has erred in deleting the disallowance made u/s 40(a)(ia) of the Act to the tune of Rs. 1,07,83,531/- without considering the fact that the assessee had not proved that the payments were not in nature of room rent but other payments not attracting provisions of TDS. Since the amounts of hotel rent charges hired and paid was on regular basis and hence provisions of TDS U/s 1941 was clearly applicable on it.
3. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary.
Relief claimed in appeal
It is prayed that the order of the CIT (Appeals) be set aside and that of the Assessing Officer be restored.
3. The first issue raised by the Revenue is that ”Ld.CIT (A)” erred in deleting the addition made by the AO on account of interest free advances given by the assessee to its group concerns.
4. Briefly stated fact are that the assessee in the present case is a partnership firm and engaged in the activities of Chartered Accountancy. The AO during the assessment proceedings found that the assessee has incurred interest expenses amounting to Rs. 5,45,63,251/- comprising of interest on borrowing from the bank and on the capital of the partners. At the same time the assessee has extended interest free loans and advances to its group concerns amounting to Rs. 90,19,24,628/- only whereas the partner’s capital funds stand at Rs. 57,11,48,093/- only. Accordingly, the AO was of the view that the assessee has diverted its interest bearing funds amounting to Rs.33,07,76,535/- (90,19,24,628 – 57,11,48,093). As per the AO the assessee on one hand is incurring interest expenses on the borrowed fund and on the other hand, it has provided interest free loans and advances to its group concerns. Accordingly the AO worked out proportionate amount of interest attributable on Rs.33,07,76,535/- being interest free loans and advances over and above the partners capital amounting to Rs. 1,92,18,117/- and disallowed the same by adding to the total income of the assessee.
5. Aggrieved assessee preferred an appeal to the ”Ld.CIT (A)” who deleted the addition made by the AO by observing that the interest free loans and advances were extended as a measure of commercial expediency.
6. The ”Ld.CIT (A)” also found that there was no loss to the Revenue for not charging interest by the assessee from the group concerns as the assessee and other group concerns were paying the taxes at the maximum marginal rate.
7. Being aggrieved by the order of the ”Ld. CIT (A)” the revenue is in appeal before us.
8. Both the Ld. DR and Ld. AR before us vehemently supported the order of the authorities below to the extent as favorable to them.
9. We have heard the rival contentions of both the parties and perused the relevant materials available on record. In the case on hand, the AO has made the proportionate disallowance of the interest expenses claimed by the assessee on account of interest free advances given by the assessee in the earlier year to its group companies. As per the AO, the assessee on one hand was charging interest expenses on the borrowed fund and on the other hand the assessee has advanced interest-free loans to its associated concern. Thus, the AO made the proportionate disallowance of the interest expenses amounting to Rs. 1,92,18,117/- only. However, the learned CIT (A) found that the assessee and group concerns are engaged in the similar line of activities and belongs to global professional network. The assessee was also availing the professional services from the group concerns to which the interest free advances were provided. Therefore, there was the commercial expediency in advancing interest-free loan by the assessee to its group concern. The learned CIT (A) besides the above also found that the assessee and the group concerns are paying the taxes on the maximum marginal rate and therefore there would not have been any impact on the Government Exchequer even in a situation if the assessee charges interest on the interest-free advances given to the group concern. Accordingly, there was no loss to the revenue for not charging any interest by the assessee from the group concern on the interest-free advances given to them. Thus, the learned CIT (A) was pleased to delete the addition made by the AO.
9.1 The first controversy that arises for our adjudication whether the interest free advances were given by the assessee to its group concern as a measure of commercial expediency in the given facts and circumstances. The expression “commercial expediency” refers to those transactions/ expenditures which are not required to be incurred under any provisions of the law. But it refers to such expenditure, a prudent businessman incurs for the purpose of business. Such expenditures might not have been incurred under any legal obligation, but the same are allowable as a business expenditure if it was incurred on grounds of commercial expediency.
9.2 The “commercial expediency” depends upon the wisdom of the businessman and the Revenue has no role to play to decide as to what is “commercial expediency”. The Revenue cannot occupy the position of the assessee and assume the role to decide whether a particular expenditure is required to be incurred, having regard to the facts and circumstances of the case. There cannot be any compulsion on the assessee to maximize his profit. The income-tax authorities should enter into the shoes of the assessee to see how a prudent businessman would act in the given facts and circumstances. It is because the Revenue does not seem to have understood the market conditions in which businesses are carried on. But at the same time, the Income-tax Department (Revenue), beyond doubt, is not precluded from assuming powers against those who try to circumvent law through unacceptable and prohibited means.
9.3 Likewise, the provisions of section 37(1) of the Act does not curtail or prevent an assessee from incurring an expenditure which he feels and wants to incur for the purpose of business. Expenditure incurred may be direct or may even indirectly benefit the business in form of increased turnover, better profit, growth, etc. Various courts have held that as long as the expenditure incurred is “wholly and exclusively” for the purpose of business, the Assessing Officer cannot by applying of his own mind, disallow whole or a part of the expenditure. The Assessing Officer cannot question the reasonableness by putting himself in the arm-chair of the businessman and assume status or character of the assessee and that it is for the assessee to decide whether the expenses should be incurred in the course of his business or profession or not. Courts have also held that if the expenditure is incurred for the purposes of the business, incidental benefit to some other person would not take the expenditure outside the scope of Section 37(1) of the Act. Further, it is settled law that the commercial expediency of a businessman’s decision to incur a particular expenditure cannot be tested on the touchstone of strict legal liability to incur such expenditure.
9.4 In the backdrop of the above stated discussion, we note that the assessee was availing the services from the group concerns including M/S DTTIPL as evident from the MOU dated 1 April 2011 which is placed on pages 166 to 168 of the paper book. The relevant clause of the MOU reads as under:
This memorandum of understanding (MOU) is made on this the first day of April 201 1 by and between;
Deloitte Haskins & Sells, (Registration Number 117364W), firm of practicing Chartered Accountants, registered with the Institute of Chartered Accountants of India (1CA1), having its office at 31. Nutan Bharat Soceity, Near M.K. High School, Aikapuri,’; Baroda – 390 007 (hereinafter referred to as DHS B) .;
And
Deloitte louche Tohmatsu India Private Limited, having its office at 12, Dr. Annie Besant Road, Worli, Mumbai -400 018 (hereinafter referred to as DTTIPL)
Scope of Work
Whereas DTTIPL provides, among others, the following services to its clients
