2011 (5) TMI 1022 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by AO for not charging interest on loans and advances given to Directors and Subsidiaries.
2. Whether the loans and advances were given out of business expediency or non-business consideration.

Summary:

Issue 1: Deletion of Addition for Not Charging Interest on Loans and Advances

The Department appealed against the order of the CIT(A) which deleted the addition of Rs. 13,61,450/- made by the AO for not charging interest on loans and advances given to Directors and Subsidiaries. The AO had disallowed the interest paid on loans taken on a pro-rata basis, considering the advances as a diversion of funds. The CIT(A) deleted the disallowance, stating that the AO did not establish that the interest-bearing loans were diverted to partners/parties without charging interest. The CIT(A) found that the advances were financed from self-sources without any cost, and the company had a zero-cost surplus fund of Rs. 4,00,96,959/- as on 31.3.2006.

Issue 2: Business Expediency vs. Non-Business Consideration

The Department argued that the loans and advances were prejudicial to the interest of the assessee-company as no interest was charged, citing the auditors' report. The assessee contended that the advances were out of business expediency. The Tribunal noted that the amount of Rs. 49,38,930/- given to Shri A.S. Bhatia was treated as a loan by the assessee-company and was not recovered, thus considered as a diversion of funds for non-business consideration. The Tribunal held that the interest attributable to this amount should be disallowed.

Regarding the amount of Rs. 2,19,82,821/- given to Punjab Biotechnology Park Ltd., the Tribunal found that it was given out of business expediency as the subsidiary was set up in pursuance of a joint collaboration agreement for developing a biotechnology park. The Tribunal directed the AO not to disallow any interest attributable to the loans given to the subsidiary company.

Conclusion:

The appeal filed by the Department was partly allowed. The Tribunal directed the AO to re-compute the disallowance of interest attributable to the amount given to Shri A.S. Bhatia and not to disallow any interest for the amount given to Punjab Biotechnology Park Ltd.

Order pronounced on 13th May 2011.