2011 (1) TMI 148 - AT - Income Tax

Disallowance of Interest - The AO worked out the interest @ 12% on the closing balance of Rs. 1,81,06,555 amounting to Rs. 21,62,787 and disallowed the same from the total interest expenses and added the same to the total income of the assessee - Supreme Court in the case of S.A. Builders Ltd. v. CIT (2006 -TMI - 3364 - SUPREME COURT)has observed that the expression for the purpose of business includes expenditure voluntarily incurred for commercial expediency and it is immaterial if a third party also benefits thereby. The Hon ble Supreme Court further observed that the expression commercial expediency is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency. the expenditure incurred towards advertisement for and on behalf of holding company are undoubtedly on grounds of commercial expediency inasmuch as the assessee undoubtedly would be benefited by making advertisement of the brand name Adidas to augment and promote sale effected by the assessee in the notified territories - Accordingly the appeal of the assessee is allowed

Summary

Issues:
Appeal against disallowance of interest payment by the assessee.

Analysis:
The assessee, a subsidiary of a holding company, incurred expenditure on brand promotion debited to the holding company, leading to an outstanding balance. The Assessing Officer (AO) disallowed interest payment of Rs. 21,72,787 out of the total interest paid, considering it non-business-related. The CIT(A) upheld the disallowance, stating the interest-free advance to the holding company was not justified for business purposes. The Tribunal noted the advertisement expenditure incurred by the assessee was based on commercial expediency and business interest. Referring to the S.A. Builders case, the Tribunal held the expenditure towards advertisement was allowable as business expenditure, reversing the lower authorities' decision. The appeal was allowed, directing the AO to modify the assessment order accordingly.

In conclusion, the Tribunal reversed the disallowance of interest payment by the assessee, emphasizing the commercial expediency and business interest behind the advertisement expenditure incurred, as per the S.A. Builders case. The decision favored the assessee, highlighting the justifiability of the interest-free advance provided to the holding company for business purposes.