Case Law Details
PCIT Vs Reebok India Company (Delhi High Court)
The Supreme Court in A. Builders Ltd. Versus Commissioner of Income Tax (Appeals) Chandigarh And Another, (2007) 1 SCC 781, had interpreted section 36(1)(iii) of the Act to observe that interest paid on capital borrowed for the purpose of business is to be allowed as a deduction in computing taxable income. The expression “for purposes of business or profession” occurring in Section 36(1)(iii) of the Act is wider in scope than the expression “for the purpose of earning income, profits or gains”. Accordingly, expenditure voluntarily incurred and meeting the “commercial expediency” test is to be allowed as a deduction. It is immaterial if a third party also benefits by the said expenditure. The expression “commercial expediency” is again of wide import and is satisfied once it is established that there was a connection and nexus between the interest paid claimed as expenditure and the business of the assessee. Purpose of business need not be the business of the assessee, for deduction under Section 36(1)(iii) of the Act to be allowed. Further, Revenue cannot assume the role and occupy armchair of a businessman to decide whether expenditure was reasonable. The Revenue cannot look at the matter from its own standpoint, but opinion and decision of a businessman on “business expediency” matters. Money borrowed even when advanced to a subsidiary for some business purpose would qualify for deduction of interest. However, if the money borrowed is utilised by the assessee for personal benefit and not for business purpose, interest paid on that money would not satisfy the test of “commercial expediency”. In the context of the present case the unsecured loans were not used for personal purpose. Merely because non-interest-bearing advances were given to third parties, would not justify a finding that the test of “commercial expediency” was not satisfied. Interest free advances were preferred to the parties connected with the business of the respondent/assessee. Money taken on loan was not diverted for non business purpose. The findings of the Tribunal are in accordance with the law.
FULL TEXT OF THE HIGH COURT ORDER / JUDGMENT
This appeal by the Revenue under Section 260A of the Income Tax Act, 1961, in the case of Reebok India Company relates to the Assessment Year 2011-12 and arises from the order of the Income Tax Appellate Tribunal (Tribunal, for short) in ITA No. 954/Del/2016.
2. The present appeal raises only one question/issue which relates to disallowance of part interest paid on unsecured loans of Rs.502.69 crores as the respondent-assessee had advanced Rs.172.59 crores to third parties on which no interest was charged and received. The Assessing Officer had accordingly proportionately disallowed an amount of Rs.23.60 crore from the interest of Rs.68.75 crores/- paid by the respondent-assessee.
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