S.A. BUILDERS LTD. versus COMMISSIONER OF INCOME TAX (APPEALS) CHANDIGARH AND ANR.

Citation: [2006] SUPP. 10 S.C.R. 1077 · Decided: 14-12-2006 · Supreme Court of India · Bench: S.B. SINHA · Disposal: Appeal(s) allowed
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Judgment (excerpt)

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S.A. BUILDERS LTD. 
v. 
COMMISSIONER OF INCOME TAX (APPEALS) 
CHANDIGARH AND ANR. 
DECEMBER 14, 2006 
[S.B. SINHA AND MARKANDEY KA TJU, JJ.] 
Income Tax Act, 1961-Sections 36(i)(iii) and 37-Borrowed funds 
A 
B 
lent to sister concern without charging interest, for commercial expediency- C 
Held, interest paid on borrowed funds not disal/owable. 
Words and Phrases-Expression 'commercial expendiency'-Meaning 
of-Discussed. 
The question which arose for consideration in these appeals is D 
whether the Tribunal and High Court was justified in disallowing interest 
on borrowed funds on the ground that the assessee transferred same to 
its sister concern without charging any interest. 
Allowing the appeals and remitting the matter to the Tribunal for 
fresh consideration, the Court. 
HELD: 1. The assessee borrowed the funds from the banks and lent some 
of it to its sister concern (a subsidiary) on interest free loan. The test in such 
E 
a case is whether this was done as a measure of commercial expediency. To 
claim a deduction, it is· enough to show that the· money is expended, not of 
necessity and with a view to direct and immediate benefit, but voluntarily and F 
on grounds of commercial expediency and to facilitate the carrying on the 
business. The High Court as well as the Tribunal and other Income Tax 
authorities should have approached the question of allowability of interest on 
the borrowed funds from this angle. (1082-H; 1083-A, B, C, D, E) 
Atherton v. British Insulated & Helsby Cables Ltd., (1925) lO TC 155 G 
(HL), referred to. 
Eastern Investments Ltd. v. CIT, (1951) 20 ITR 1 and C/Tv. Chandulal 
Keshavlal and Co., (1960) 38 ITR 601, referred to. 
1077 
H 
1078 
SUPREME COURT REPORTS [2006] SUPP. 10 S.C.R. 
A 
2. The expression "commerical expediency" is of wide import and 
includes such expenditure as a prudent businessman incurs for the purpose 
of business. The expenditure may not have been incurred any legal 
obligation, but yet it is allowable as business expenditure if it was incurred 
on grounds of commercial expediency. [1083-F) 
B 
CIT v. Malayalam Plantations Ltd, (1964) 53 ITR 140, CIT v. Bir/a 
Cotton Spinning & Weaving Mills Ltd, (1971) 82 ITR 166, referred to. 
3. The High Court and the other authorities should have examined 
the purpose for which the assessee advanced the money to its sister 
concern, and what the sister concern did with this money, in order to 
c decide whether it was for commercial expediency, but that has not been 
done. It is true titat the borrowed amount in question was not utilized by 
the assessee in its own business, but had been advanced as interest free 
loan to its sister concern. However, that fact is not really relevant. What 
is relevant is whether the assessee advanced such amount to its sister 
D concern as a measure of commercial expediency. (1084-D-E) 
Phaltan Sugar Works Ltd v. Commissioner of Wealth-Tax, (1994) 208 
ITR 989 and CIT v. Dalmia Cement (Bhart) Ltd., (2002) 254 ITR 377 
referred to. 
E 
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 581 l of2006. 
From the Final Judgment and Order dated 13.5.2004 of the High Court 
of Punjab and Haryana at Chandigarh in LT.A. Nos. 6, 7, 119 and 120/2003. 
Nidhesh Gupta, Vinod Shukla, Deepak Goel and S. Janani for the 
F Appellant. 
G 
Ravindra Srivastava, Ranvir Chandra, Shilpa Singh and B. V. Balaram 
Das for the Respondents. 
The Judgment of the Court was delivered by 
MARKANDEY KATJU, J. Leave granted. 
These two appeals involve common questions of law and fact and 
hence are being disposed of by a common judgment. 
H 
Since the leading case is that of S.A. Builders [SLP(C) 21707-21710/ 
...... 
... 
S.A. BUILDERS LTD. v. COMMNR. OF INCOME TAX (APPEALS) CHANDIGARH [KATJU, J.) 
1079 
2004], we shall be taking note of the facts of this case. 
A 
These appeals have been filed against the impugned judgment of the 
Punjab and Haryana High Court dated 13.5.2004 in Income Tax Appeal Nos. 
6, 7, 119 and 120 of 2003, and the judgment dated 21.5.2004 in ITA No. 
117/118 of2003. 
Heard learned counsel for the parties and perused the record. 
B 
During the course of the proceeding for the relevant assessment year 
(s), the Assessing Officer under the Income Tax Act observed that the assessee 
had transferred a huge amount of Rs. 82 lakhs to its subsidiary company M/ 
s. SAB Credits Limited out of the cash credit account of the assessee in C 
which there was a huge debit balance. He, therefore, held that since the
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