2011 (7) TMI 33 - HC - Income Tax

Disallowance - Interest free loan to sister concern out of borrowed capitals and traveling expense of spouse - In the case of the assessee for another Assessment Year, has answered the point in the affirmative and against the Revenue, (Vide our order dated March 17, 2011 in I. T. A. no.624 of 2004) - Decided in favour of assessee Regarding interest free loan - It is now settled law that if two alternative reliefs are claimed and the Court grants the alternative one by rejecting the first prayer, a litigant has a right to prefer an appeal for grant of the main relief - It is now a settled law that it is permissible for an assessee to borrow the fund from the bank and lend some of it to its sister concern (a subsidiary) on interest-free loan - Held that it should be presumed that the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount of subsidiaries and there was no justification of adding a sum of Rs.27,200/- as approved by the Tribunal - Decided in the favour of assessee

Summary

Issues Involved:
1. Disallowance of foreign travel expenditure of the spouse of the appellant's Managing Director.
2. Disallowance of interest expenditure related to interest-free loans given to subsidiaries.

Detailed Analysis:

1. Disallowance of Foreign Travel Expenditure:
The first issue revolves around whether the Tribunal was justified in disallowing the foreign travel expenditure of the spouse of the appellant's Managing Director. The appellant argued that the Managing Director's spouse accompanied him on business visits to maintain social customs and reciprocate visits from foreign business associates. The Board of Directors had authorized this expenditure through a resolution. However, the Assessing Officer disallowed the expenditure of Rs.7,44,549/-, a decision upheld by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.

The High Court noted that in a similar case for another Assessment Year, it had ruled in favor of the assessee, allowing such expenditure. Consequently, the High Court adopted the same view, setting aside the disallowance of foreign travel expenditure. The court found the Tribunal's findings arbitrary, unreasonable, and perverse, thus answering the first point in the negative and against the Revenue.

2. Disallowance of Interest Expenditure:
The second issue concerns the disallowance of interest expenditure of Rs.27,220/- on the assumption that interest-free loans to subsidiaries were made out of borrowed funds. The appellant contended that these loans were given out of its internal accruals, not borrowed funds. The Assessing Officer initially disallowed Rs.59,32,575/-, which was later reduced to Rs.27,220/- by the Commissioner of Income-tax (Appeals) based on a calculation provided by the appellant without prejudice to its submissions.

The High Court examined whether the order by the CIT (Appeals) was based on consent. It found that the calculation of interest was provided as desired by the appellate authority and without prejudice to the appellant's submissions. The court emphasized that an alternative submission does not constitute an admission of liability. The Tribunal's affirmation of the CIT (Appeals) order was deemed erroneous as it presumed consent from the appellant.

The High Court reiterated the principle that interest-free loans to subsidiaries can be justified if made for commercial expediency. It noted that the appellant's profits were far in excess of the interest-free loans given, implying that these loans were made out of profits, not borrowed funds. The court cited precedents like S.A. Builders Ltd vs. C.I.T and others, emphasizing that commercial expediency justifies such loans.

The High Court concluded that there was no justification for the Rs.27,220/- disallowance approved by the Tribunal. It set aside the Tribunal's order and directed the Assessing Officer not to deduct any amount from expenditure on the ground of interest-free loans given to subsidiaries when the appellant's profits were far in excess.

Conclusion:
The High Court allowed the appeal, answering both points in the negative and against the Revenue. It set aside the disallowance of foreign travel expenditure of Rs.7,44,549/- and the interest expenditure of Rs.27,220/-. The court found the Tribunal's findings arbitrary and unreasonable, directing the Assessing Officer to not deduct any amount related to the interest-free loans given to subsidiaries. There was no order as to costs.