Section 36(1)(iii) of the income tax Act, 1961 — Business Expenditure — Interest on borrowed Capital- Once it is established that there was nexus between the expenditure and purpose of the busienss (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 cases.[2019] 52 ITCD 135 (BOM)
Facts: Assessee is a private limited company and is engaged in the business of financing. During the scrutiny assessment of the assessee’s return for the assessment year 2008-09. Assessing Officer noticed that the assessee had claimed expenditure of interest paid on borrowed funds. The assessee had also funded its sister concern without charging interest. The Assessing Officer therefore disallowed the interest expenditure. The issue eventually reached the Tribunal. The Tribunal by the impugned judgment held in favour of the assessee.Being aggrieved, revenue went on appeal before High Court.
Held, that it was found that there is no finding by the Assessing Officer that the funds were not utilized for business purposes and secondly, it was noted that advancing loan to the sister-concern was for the purposes of “Commercial Expediency”, thus, we find merit in the contention of the ld. Counsel for the assessee. So far as, the issue of commercial expediency is concerned, the decision has to be taken by the assessee and the Assessing Officer is not expected to sit in the chair of the assessee and to decide the business interest. The assessee is to watch its business interest well. Once it is established that there was nexus between the expenditure and purpose of the busienss (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 his profits.We do not find any error in view of the Tribunal.