2012 (8) TMI 1054 - AT - Income Tax

Summary

Issues involved: Disallowance of interest on loans and foreign exchange loss claimed u/s 37(1).

Disallowance of interest on loans:
The appellant claimed deduction of interest on loans, but the AO observed that the appellant had advanced interest-free loans to its subsidiary company. The AO made a proportionate disallowance of interest, which was reduced by the CIT(A) to &8377; 4,24,844. The Tribunal noted that the money was advanced for business purposes and that the subsidiary company utilized the funds for business. Citing the case of S.A. Builders vs. CIT, the Tribunal held that no disallowance of interest can be made if interest-free loans are used for business purposes. Consequently, the addition of &8377; 4.24 lakh was deleted.

Foreign exchange loss claimed u/s 37(1):
The appellant claimed a deduction of &8377; 1,24,520 as a foreign exchange loss on a loan given to its Singapore company. The AO disallowed this claim u/s 37(1), which was upheld in the first appeal. However, the Tribunal referred to the judgment in CIT v. Woodward Governor India (P) Ltd. and held that the loss on account of foreign exchange fluctuation is an allowable expenditure u/s 37(1) in the year of accrual. Since the Tribunal reversed the decision on the first ground, the appellant was entitled to the deduction for the foreign exchange loss as well.

In conclusion, the appeal was allowed, and the additions of both disallowance of interest on loans and foreign exchange loss were deleted.