2013 (10) TMI 1326 - HC - Income Tax

Commercial expediency in giving interest free loans to M/s HMGB which was a joint venture company of the assessee with Hindustan Antibiotics Limited - Held that - CIT (A) and the Tribunal had concluded that there was commercial expediency in giving interest free loan to HMGB and the deduction was admissible under Section 36(1) (iii) of the Act. There is sufficient material to show that the relationship of the assessee with its subsidiary, HMGB was based on commercial expediency and the advancing of the amount was for business purpose. In this regard, we may make a reference to the order of the CIT(A) for assessment year 2004-05 which is also subject mater of appeal before us. The CIT(A) has tabulated the price advantage to the assessee on purchases made from HMGB, an uncontroverted fact, which clearly indicates commercial prudence apart from ensuring continuous and timely supplies. Thus, on the grounds of consistency and commercial expediency, the deduction claimed by the assessee company is in accordance with law and the CIT) (A) correctly allowed the claim of the assessee. In view of the findings of fact recorded by CIT(A) and the Tribunal that there existed commercial expediency in giving interest free loan to HMGB, which findings are not shown to be against the record, no advantage can be derived by the revenue from the pronouncement reported in Abhishek Industries Limited s case (2006 (8) TMI 123 - PUNJAB AND HARYANA High Court). In so far as Motor General Finance Limited 2001 (12) TMI 62 - DELHI High Court and Indian Shavings Products Limited s cases (2003 (3) TMI 33 - RAJASTHAN High Court ) are concerned, these pronouncements were prior to judgment of the Apex Court in S.A.Builders s case (2006 (12) TMI 82 - SUPREME COURT ). Further, on factual matrix therein, no commercial expediency was shown to be existing and therefore, in view of distinguishable circumstances involved, these do not advance the case of the revenue. - Decided in favour of assessee.

Summary

Issues Involved:
1. Applicability of Section 36(1)(iii) of the Income Tax Act, 1961.
2. Determination of commercial expediency for interest-free loans.

Detailed Analysis:

1. Applicability of Section 36(1)(iii) of the Income Tax Act, 1961:

The primary issue was whether the Tribunal was correct in relying on Section 36(1)(iii) of the Income Tax Act, 1961, without considering the fact that the assessee had both borrowed and advanced money, from which it was liable to receive interest income. The assessee company, engaged in manufacturing bulk drugs and intermediates, filed its return for the assessment year 2003-04, declaring a loss. The Assessing Officer disallowed the interest payment of Rs. 76,26,436/- made to its parent company, holding that the expenditure was not incurred for business purposes. This decision was contested by the assessee and subsequently overturned by the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal, which allowed the deduction.

2. Determination of Commercial Expediency for Interest-Free Loans:

The second issue was whether the advances made to Hindustan Max G.B. Limited (HMGB) were for commercial expediency, particularly since the advances pertained to earlier years. The CIT(A) and the Tribunal concluded that there was commercial expediency in giving interest-free loans to HMGB, a joint venture company promoted by the assessee. The CIT(A) noted that HMGB supplied Penicillin G, a critical raw material for the assessee, constituting about 45.56% of total purchases and about 73.93% of total domestic purchases. The advances ensured timely supply and secured the assessee's production schedule.

The Tribunal further elaborated that the advances were made for commercial consideration, as the assessee company was entitled to purchase raw material from HMGB and earned interest at the rate of 16.5% on the advances. Despite writing off part of the interest due to HMGB's losses, the assessee earned Rs. 5.08 crores in interest during the year under consideration, which was offered for tax. The Tribunal emphasized that the borrowings from the parent company were utilized for business purposes, and the relationship with HMGB was based on commercial expediency.

Conclusion:

The High Court upheld the findings of the CIT(A) and the Tribunal, concluding that there was commercial expediency in giving interest-free loans to HMGB. The primary factors considered included the lower cost of raw material from HMGB, assured supply of high-quality raw material, and the interest earned on the advances. The court found no merit in the revenue's appeal and dismissed it, answering the substantial questions of law against the revenue and in favor of the assessee. The court also noted that the judgments relied upon by the revenue did not advance their case, as they were prior to the Supreme Court's judgment in S.A. Builders Limited v. CIT(Appeals) and another, which emphasized examining commercial expediency in such cases.